advancedbatteryform10k123108.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________

FORM 10-K
 

 
x
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
      For the fiscal year ended December 31, 2008.
   
        OR
 
 o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
Commission File No. 0-13337

ADVANCED BATTERY TECHNOLOGIES, INC,
(Name of Small Business Issuer in its Charter)

Delaware
22-2497491
(State or other jurisdiction
(I.R.S. Employer ID Number)
 of incorporation or organization)
  

21 West 39th Street, Suite 2A, New York, NY 10018
(Address of principal executive offices)

Issuer's Telephone Number, including Area Code: 212-391-2752

Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value per share

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 406 of the Securities Act.    Yes __ No ü
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes __ No ü
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ü   No __

 
 
 

Indicate by check mark disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained,  to the best of registrant's  knowledge,  in definitive proxy or information  statements incorporated  by reference  in Part III of this Form 10-K or any  amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
 
Large accelerated filer o Accelerated filer x Non-accelerated filer o Small reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No ü
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was sold, or the average bid and ask prices of such common equity, as of a specified date within the past 60 days.

The aggregate market value of the Registrant’s common stock, $.001 par value, held by non-affiliates as of March 12, 2009 was $ 78,590,584.

As of March 12, 2009 the number of shares outstanding of the Registrant’s common stock was 54,662,067 shares, $.001 par value.

DOCUMENTS INCORPORATED BY REFERENCE: None


 
 
 

FORWARD-LOOKING STATEMENTS: NO ASSURANCES INTENDED

In addition to historical information, this Annual Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of Advanced Battery Technologies.  Whether those beliefs become reality will depend on many factors that are not under Management’s control.  Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in the section entitled “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.
 

PART 1

ITEM 1                     BUSINESS

Advanced Battery Technologies, Inc. is a holding company with one subsidiary:   Cashtech Investment Limited, a British Virgin Islands corporation.  Cashtech Investment Limited is also a holding company with only one subsidiary:  Heilongjiang ZhongQiang Power-Tech Co., Ltd., a China limited liability company (“ZQ Power-Tech”).  Advanced Battery Technologies also owns a 49% interest in Beyond E-Tech, Inc., a Texas corporation that distributes cellular telephones in the United States.

ZQ Power-Tech

ZQ Power-Tech is a limited liability company that was organized under the laws of the People’s Republic of China in August 2002.  ZQ Power-Tech’s offices and manufacturing facility are located in northern China, in the Province of Heilongjiang, in the Economy & High-Tech Development Zone of Shuangcheng, which is a suburb of Harbin.  The location is approximately 1,000 km northeast of Beijing.

The Harbin Institute of Technology is one of the leading technological institutions in Asia.  Two of its engineering professors now serve on ZQ Power-Tech’s Scientific Advisory Board, along with a professor of engineering at the China Engineering Academy.  This close association with the Harbin Institute of Technology provides ZQ Power-Tech with a rich source of technological talent, such that ZQ Power-Tech’s research staff is filled by experienced engineers, many with masters and Ph.D degrees.

ZQ Power-Tech designs, manufactures and markets rechargeable polymer lithium-ion (“PLI”) batteries.  PLI batteries produce a relatively high average of 3.8 volts per cell, which makes them attractive in terms of both weight and volume.  Additionally, they can be manufactured in very thin configurations and with large footprints.  PLI cells can be configured in almost any prismatic shape, and can be made thinner than 0.0195 inches (0.5 mm) to fill virtually any shape efficiently.  This combination of power and versatility makes rechargeable PLI batteries particularly attractive for use in consumer products such as portable computers, personal digital assistants (PDA’s) and cellular telephones.

 
1
 

ZQ Power-Tech’s batteries combine high-energy chemistry with state-of-the-art polymer technology.  Every battery component is solid, which means that there are no liquids that need to be contained by bulky, heavy cell housings.  The result is a safe, thin, lightweight rechargeable battery with a wide operating temperature range.  Similar to lithium-ion prismatic rechargeable cells, the ZQ Power-Tech polymer cells do not exhibit a memory problem.  This means that they can be recharged at any state of charge, without first having to be completely discharged.

At the present time, ZQ Power-Tech produces only one finished product.  This is a cordless miner’s lamp equipped with a rechargeable PLI battery.  ZQ Power-Tech has sold its miner’s lamps to an agency of the Chinese government for several years, but recently expanded its market to private industry.  In 2006 ZQ Power-Tech received an order from a Hong Kong-based mining company for 450,000 battery cells for mine lamps, to be delivered over a three year period.  As a result of the expanded marketing, ZQ Power-Tech has installed a production line dedicated to mine lamps, which has a production capacity of 100,000 lamps per year.  During 2008 the miner’s lamp business yielded $10,777,298 in revenue (23.9% of total revenue) and $5,455,282 in net income (33.9% of total net income).

All of ZQ Power-Tech’s other sales and pending contracts are for battery cells, which are sold on an OEM basis as a component of a finished product.  Among ZQ Power-Tech’s current customers are companies that use our batteries in cell phones, companies that use them in laptop computers, and a company that uses our batteries in its digital cameras.  One unique market for ZQ Power-Tech’s batteries opened when, in August 2007, they were successfully tested by oceanographers in deep sea drilling equipment utilized by the China National Oceanographic Institute.  The fastest-growing market for ZQ Power-Tech’s batteries, however, has been the manufacturers of battery-powered vehicles.

Vehicle Batteries

During the summer of 2005, ZQ Power-Tech signed a cooperation agreement with the Beijing Institute of Technology to participate in the development of an all-electric bus using ZQ Power-Tech rechargeable batteries.  To enhance the potential use of that battery, ZQ Power-Tech entered into a development and supply relationship with Altair Nanotechnologies, Inc. of Reno, Nevada.  During 2005 Altair supplied ZQ Power-Tech with nano-structured lithium spinel electrode materials that ZQ Power-Tech has successfully tested in its vehicle batteries.  The inclusion of these nanomaterials in ZQ Power-Tech’s batteries has significantly increased the power delivery and reduced the time required for recharge.  ZQ Power-Tech is currently conducting research and development activities aimed at exploiting the technological advantages that the Altair nanomaterials can provide throughout ZQ Power-Tech’s catalog of batteries.

 
2
 

The development of ZQ Power-Tech’s vehicle battery technologies has opened the door for a variety of relationships, with the result that ZQ Power-Tech is developing a significant presence in the growing market for vehicle batteries.  The initial success of this venture was marked, in the summer of 2004, by a $21 million order to supply 3.7 volt PLI battery sets for electric cars manufactured by Aiyingsi Company of Taiwan.  Aiyingsi and ZQ Power-Tech cooperated on development for two years, until in January 2006 Aiyingsi completed initial testing of ZQ Power-Tech batteries in thirty electric bicycles and motorcycles, and announced that it was satisfied with the results.  Initial shipments under the order were made during 2006 and have continued to date.

During 2006 ZQ Power-Tech expanded its relationship with Aiyingsi Company to include development of the world’s first “nanopowered” electric scooter.   Late in the summer, the Zhong Qiang Institute of Research tested the scooter prototype and found that it could cover 28 miles at up to 18.75 mph with a single 15-minute charge.  The potential market for this “alternative” vehicle is broad, including delivery services, surveillance and commuter uses.  The environment-friendliness of this technology and other similar technologies used by ZQ Power-Tech were the reason stated by The Organizing Committee of China Innovative Entrepreneur Awards Organization for naming our Chairman, Fu Zhiguo, “China’s Outstanding Entrepreneur” in December 2006.

More recent milestones in the growth of ZQ Power-Tech’s presence in the low emissions vehicle industry have been:

Ø  
In July 2006 ZQ Power-Tech received its first commercial order for bus batteries, as a Chinese bus manufacturer ordered five PLI battery packages.

Ø  
In March 2007 ZQ Power-Tech signed a sales contract with Beijing Guoqiang Global Technology Development Co. Ltd. to supply a total of 3,000 PLI battery sets for use in electric garbage trucks that were designed for the 2008 Olympics.  Shipments commenced in May 2007 and continued until February 2008.  The full contract was valued at $10,000,000.

Ø  
In July 2007 ZAP, a manufacturer of zero emissions vehicles located in the U.S., placed an order to pay $5.168 million for ZQ Power-Tech batteries for use in ZAP’s vehicles.

Ø  
In March 2008 ZQ Power-Tech announced that it had collaborated with Wuxi Angell on the development of an electric hybrid motorcycle that utilizes ZQ Power-Tech batteries.  Three versions of the hybrid motorcycle were introduced to the U.S. market in February 2009.

Ø  
In October 2008 ZQ Power-Tech signed a five year sales agreement with Veken USA Co. Ltd., a China-based manufacturer.  Under the contract ZQ Power-Tech will provide lithium-ion polymer batteries for use in hybrid scooters distributed by Veken in Europe and the U.S.  Wuxi Angell will be responsible for assembling the scooters.

 
3
 

Contract to Acquire Wuxi Angell

In light of the rapid expansion of the market for battery-powered vehicles, in October 2008 the Company’s subsidiary, Cashtech Investment Limited, entered into an agreement to acquire a 55% equity interest in Wuxi Angell.  In exchange for that equity, Cashtech will pay to Wuxi Angell 25 million RMB (approximately $3.65 million) and Advanced Battery Technologies will issue two million shares of its common stock.  The acquisition will be completed after satisfactory due diligence and an audit of Wuxi Angell’s financial statements under US GAAP.  Management anticipates completing the acquisition in the first half of 2009.

Investment in Cell Phone Distributor

In December 2008 Advanced Battery Technologies purchased a 49% equity interest in Beyond E-Tech, Inc., a corporation located in Texas that distributes cellular telephones manufactured in China to its order by Flying Technology Development Co. and Lenovo China.  The purchase price for the shares was $1.5 million cash.  The purchase agreement provided that as long as Advanced Battery Technologies remains a shareholder of Beyond E-Tech, all phones sold by Beyond E-Tech would be powered by ZQ Power-Tech batteries.  Although Beyond E-Tech has only recently begun operations, Advanced Battery Technologies’ management considers the investment a reasonable means of securing a dedicated customer and a potential for ancillary profits.

Backlog

ZQ Power Tech’s backlog of sales orders totaled approximately $63,622,049 on March 12, 2009, including $55,944,157 for delivery within the current fiscal year.  On March 26, 2008, our backlog of orders totaled approximately $49,169,000.

Marketing

ZQ Power-Tech has focused its marketing activities in  China, with the majority of our sales continuing to be made directly by our marketing department.  However we have recently begun to establish relationships with sales representatives in other  major markets.  Our plan is to significantly expand our market presence now that our facilities have reached an operating level sufficient to service a much higher level of sales.

Environmental Regulation

ZQ Power-Tech’s operations produce no significant quantity of effluent or air-borne pollution.  Therefore ZQ Power-Tech does not incur any significant cost as a result of the environmental regulations of the Chinese government.

 
4
 

Intellectual Property

ZQ Power-Tech owns seven Chinese patents, which are patents on:
 

- 
A cellular phone battery pole plate.
- 
A polymer lithium-ion battery and its production method.
- 
A large capacity polymer lithium-ion battery and its production method.
- 
An ultra-thin polymer lithium-ion battery for a miner’s lamp and its production method.
- 
A walkie-talkie lithium-ion battery and its production method.
- 
A mobile phone battery and its production method.
- 
a nano material lithium ion battery and its production process.

We also hold one US patent (Patent No. 6,994,737 B2), which covers a high capacity polymeric lithium-ion cell and its production method.

During 2003 ZQ Power Tech spent $493,114 on research and development as it completed the formulae for its polymer lithium-ion batteries.  From 2004 through 2006, however, our resources were focused toward implementing the assembly lines needed to introduce our products to the market on a mass scale.  Research and development expenditures in those three years were only $393,727 in total, including $181,257 in 2006.  With the build-out of our initial facility completed, our cash and management personnel were again be focused on research, specifically, the development of a second-generation product line and the utilization of nanomaterials in our batteries.  During 2007, therefore, our research and development expenses grew to $383,871.  In 2008, however, the growth of demand for our products again focused our attention on expansion of our facilities.  Research and development expenses in 2008, therefore, were only $4,463.

The technology utilized in producing polymer lithium-ion batteries is widely available throughout the world, and is utilized by many competitors, both great and small.  ZQ Power-Tech’s patents give it some competitive advantage with respect to certain products.  However, the key to competitive success will be ZQ Power Tech’s ability to deliver high quality products in a cost-efficient manner.  This, in turn, will depend on the quality and efficiency of the assembly lines that we have been developing at our plant in Harbin.

Employees

Advanced Battery Technologies has 4 employees, all of whom are involved in administration in our New York office.  ZQ Power-Tech has 905 employees. 28 are involved in administration, 30 are involved in marketing, and 40 are involved in research and development and related technology services.  The remainder is employed in production capacities.  None of our employees belongs to a collective bargaining unit.

 
5
 

ITEM 1A                   RISK FACTORS

Investing in our common stock involves a significant degree of risk. You should carefully consider the risks described below together with all of the other information contained in this Report, including the financial statements and the related notes, before deciding whether to purchase any shares of our common stock. If any of the following risks occurs, our business, financial condition or operating results could materially suffer. In that event, the trading price of our common stock could decline and you may lose all or part of your investment.

We may be unable to gain a substantial share of the market for batteries.
 
We have only one product line, rechargeable polymer lithium-ion batteries.  We began marketing our batteries in the Spring of 2004, and only began to report substantial revenue at the end of 2005.  There are many companies, large and small, involved in the market for rechargeable batteries.  Some of our existing and potential competitors have longer operating histories and significantly greater financial, technical, marketing and other resources.  It will be difficult for us to establish a reputation in the market so that manufacturers chose to use our batteries rather than those of our competitors.  Unless we are able to expand our sales volume significantly, we will not be able to improve the efficiency of our operation.

Our business and growth will suffer if we are unable to hire and retain key personnel that are in high demand.
 
Our future success depends on our ability to attract and retain highly skilled engineers, technical, marketing and customer service personnel, especially qualified personnel for our operations in China. Qualified individuals are in high demand in China, and there are insufficient experienced personnel to fill the demand.  Therefore we may not be able to successfully attract or retain the personnel we need to succeed.

We may not be able to adequately protect our intellectual property, which could cause us to be less competitive.
 
We are continuously designing and developing new technology. We rely on a combination of copyright and trade secret laws and restrictions on disclosure to protect our intellectual property rights. Unauthorized use of our technology could damage our ability to compete effectively.  In China, monitoring unauthorized use of our products is difficult and costly.  In addition, intellectual property law in China is less developed than in the United States and historically China has not protected intellectual property to the same extent as it is protected in other jurisdictions, such as the United States. Any resort to litigation to enforce our intellectual property rights could result in substantial costs and diversion of our resources, and might be unsuccessful.

We may have difficulty establishing adequate management and financial controls in China and in complying with U.S. corporate governance and accounting requirements.
 
 
6
 

The People’s Republic of China has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
 
We are also subject to the rules and regulations of the United States, including the SEC, the Sarbanes-Oxley Act of 2002 and the rules and regulations of the NASDAQ Stock Market.  We expect to incur significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC and requirements in connection with the continued listing of our common stock on the NASDAQ Stock Market. If we cannot assess our internal control over financial reporting as effective, or our independent registered public accountants are unable to provide an unqualified attestation report on such assessment, investor confidence and share value may be negatively impacted.
 
Most of our assets are located in China, any dividends or proceeds from liquidation are subject to the approval of the relevant Chinese government agencies.
 
Our assets are predominantly located inside China. Under the laws governing Foreign-invested Entities in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payment will be subject to the decision of the board of directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well the foreign exchange control. This may generate additional risk for our investors in case of dividend payment or liquidation.

We have limited business insurance coverage.
 
The insurance industry in China is still at an early stage of development. Insurance companies in China offer limited business insurance products, and do not, to our knowledge, offer business liability insurance. As a result, we do not have any business liability insurance coverage for our operations. Moreover, while business disruption insurance is available, we have determined that the risks of disruption and cost of the insurance are such that we do not require it at this time. Any business disruption, litigation or natural disaster might result in substantial costs and diversion of our resources.

Our operations are international, and we are subject to significant political, economic, legal and other uncertainties (including, but not limited to, trade barriers and taxes that may have an adverse effect on our business and operations.
 
We manufacture all of our products in China and substantially all of the net book value of our total fixed assets is located there. However, we sell our products to customers outside of China as well as domestically. As a result, we may experience barriers to conducting business and trade in our targeted markets in the form of delayed customs clearances, customs duties and tariffs. In addition, we may be subject to repatriation taxes levied upon the exchange of income from local currency into foreign currency, as well as substantial taxes of profits, revenues, assets or payroll, as well as value-added tax. The markets in which we plan to operate may impose onerous and unpredictable duties, tariffs and taxes on our business and products.  Any of these barriers and taxes could have an adverse effect on our finances and operations.

 
7
 

Environmental compliance and remediation could result in substantially increased capital requirements and operating costs.
 
Our operating subsidiary, ZQ Power-Tech, is subject to numerous Chinese provincial and local laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Our consolidated business and operating results could be materially and adversely affected if ZQ Power-Tech were required to increase expenditures to comply with any new environmental regulations affecting its operations.
 
We may be required to raise additional financing by issuing new securities with terms or rights superior to those of our shares of common stock, which could adversely affect the market price of our shares of common stock. 
 
We may require additional financing to fund future operations, develop and exploit existing and new products and to expand into new markets. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of common stock, which could adversely affect the market price and the voting power of shares of our common stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of common stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.
 
The NASDAQ Capital Market may delist our common stock from trading on its exchange, which could limit investors’ ability to effect transactions in our common stock and subject us to additional trading restrictions.
 
Our common stock is listed on the NASDAQ Capital Market. We cannot assure you that our common stock will continue to be listed on the NASDAQ Capital Market in the future.  If the NASDAQ Capital Market delists our common stock from trading on its exchange, we could face significant material adverse consequences including:
 
·  
a limited availability of market quotations for our common stock;
 
·  
a limited amount of news and analyst coverage for our company; and
 
·  
a decreased ability to issue additional securities or obtain additional financing in the future.
 
 
8
 
 
 We do not intend to pay any cash dividends on our common stock in the foreseeable future and, therefore, any return on your investment in our common stock must come from increases in the fair market value and trading price of our common stock.
 
We have never paid a cash dividend on our common stock.  We do not intend to pay cash dividends on our common stock in the foreseeable future and, therefore, any return on your investment in our common stock must come from increases in the fair market value and trading price of our common stock.
 
Our international operations require us to comply with a number of U.S. and international regulations.
 
We need to comply with a number of international regulations in countries outside of the United States. In addition, we must comply with the Foreign Corrupt Practices Act, or FCPA, which prohibits U.S. companies or their agents and employees from providing anything of value to a foreign official for the purposes of influencing any act or decision of these individuals in their official capacity to help obtain or retain business, direct business to any person or corporate entity or obtain any unfair advantage. Any failure by us to adopt appropriate compliance procedures and ensure that our employees and agents comply with the FCPA and applicable laws and regulations in foreign jurisdictions could result in substantial penalties or restrictions on our ability to conduct business in certain foreign jurisdictions. The U.S. Department of The Treasury’s Office of Foreign Asset Control, or OFAC, administers and enforces economic and trade sanctions against targeted foreign countries, entities and individuals based on U.S. foreign policy and national security goals. As a result, we are restricted from entering into transactions with certain targeted foreign countries, entities and individuals except as permitted by OFAC which may reduce our future growth.
 
All of our assets are located in China and changes in the political and economic policies of the PRC government could have a significant impact upon what business we may be able to conduct in the PRC and accordingly on the results of our operations and financial condition.
 
Our business operations may be adversely affected by the current and future political environment in the PRC. The Chinese government exerts substantial influence and control over the manner in which we must conduct our business activities. Our ability to operate in China may be adversely affected by changes in Chinese laws and regulations, including those relating to taxation, import and export tariffs, raw materials, environmental regulations, land use rights, property and other matters. Under the current government leadership, the government of the PRC has been pursuing economic reform policies that encourage private economic activity and greater economic decentralization. There is no assurance, however, that the government of the PRC will continue to pursue these policies, or that it will not significantly alter these policies from time to time without notice.
 
 
9
 

Our operations are subject to PRC laws and regulations that are sometimes vague and uncertain. Any changes in such PRC laws and regulations, or the interpretations thereof, may have a material and adverse effect on our business.
 
Our principal operating subsidiary, ZQ Power-Tech, is considered a foreign invested enterprise under PRC laws, and as a result is required to comply with PRC laws and regulations. Unlike the common law system prevalent in the United States, decided legal cases have little value as precedent in China. There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including but not limited to the laws and regulations governing our business and the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy or criminal proceedings. The Chinese government has been developing a comprehensive system of commercial laws. However, because these laws and regulations are relatively new, and because of the limited volume of published cases and judicial interpretation and their lack of force as precedents, interpretation and enforcement of these laws and regulations involve significant uncertainties. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses. If the relevant authorities find us in violation of PRC laws or regulations, they would have broad discretion in dealing with such a violation.
 
The scope of our business license in China is limited, and we may not expand or continue our business without government approval and renewal, respectively.
 
Our principal operating subsidiary, ZQ Power-Tech, is a wholly foreign-owned enterprise organized under PRC law, commonly known as a WFOE. A WFOE can only conduct business within its approved business scope, which ultimately appears on its business license. In order for us to expand our business beyond the scope of our license, we will be required to enter into a negotiation with the authorities for the approval to expand the scope of our business. We cannot assure you that ZQ Power-Tech will be able to obtain the necessary government approval for any change or expansion of our business scope.
 
We may never pay any dividends to our stockholders.
 
We have not paid any cash dividends on shares of our common stock. We currently intend to retain all available funds and future earnings, if any, to support our operations and finance the growth and development of our business. Our board of directors does not intend to distribute dividends in the foreseeable future. The declaration, payment and amount of any future dividends, if any, will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements, and other factors the board of directors considers relevant. There is no assurance that future dividends will be paid, and if dividends are paid, there is no assurance with respect to the amount of any such dividend.

 
10
 
 
Our business development, future performance, strategic plans, and other objectives would be hindered if we lost the services of our Chairman.
 
Fu Zhiguo is the Chief Executive Officer of Advanced Battery Technologies and of our operating subsidiary, ZQ Power-Tech.  Mr. Fu is responsible for strategizing not only our business plan but also the means of financing it.  Mr. Fu has also, from time to time, provided his personal funds to meet the working capital needs of ZQ Power-Tech.  If Mr. Fu were to leave Advanced Battery Technologies or become unable to fulfill his responsibilities, our business would be imperiled.  At the very least, there would be a delay in the development of Advanced Battery Technologies until a suitable replacement for Mr. Fu could be retained.

ITEM 1B                   UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2                      PROPERTIES

The People’s Republic of China has given ZQ Power-Tech a lease to use the 72,000 square meter campus in Harbin, China where ZQ Power-Tech’s offices and manufacturing facility are located.  The campus is 24 km from the nearest airport.  The nearest port is Da Lian.  The lease expires in September 2043.  ZQ Power-Tech is not required to pay any rental for the property as long as it continues to utilize the property for manufacturing.

During 2004 ZQ Power-Tech commenced an ongoing program of expanding its production facility.  In 2006 it completed Building A and Building B, 30,000 square feet of manufacturing capacity, which in 2008 ZQ Power-Tech upgraded, so that those two buildings now have a production capacity of approximately $50,000,000 per year, depending on the specific products being produced.   Due to the rapid increase in the Company’s sales, in 2008 Management also began to develop additional assembly lines in Building C and Building D.   These additional lines are expected to be ready for trial production in April 2009 and commercial production in June 2009.  The modifications of the existing lines and addition of new lines is expected to provide ZQ Power-Tech’s an increase of 165% in production capacity by 2010.

In November 2003 ZQ Power-Tech received ISO9001 certification pertaining to Manufacturing and Quality Control Approval.

ITEM 3                     LEGAL PROCEEDINGS

Susquehanna Financial Group, LLLP v. Advanced Battery Technologies, Inc.  In September Susquehanna Financial Group, LLLP (“SFG”) commenced this action in the Court of Common Pleas of Montgomery County, Pennsylvania (Civil Action No. 08-25505).  SFG alleges that it was party to two contracts with the Company, pursuant to which SFG alleges that it was entitled to serve as financial advisor with respect to any offering of securities by the Company completed prior to March 2009.  SFG alleges that the Company failed to afford SFG the opportunity to serve as financial advisor in connection with the private placement by the Company in August 2008.  SFG alleges that it is entitled to damages in the amount of $1,359,872.46 and a warrant to purchase 81,882 share of the Company’s common stock exercisable at $8.00 per share.  The Company has answered the Complaint, and has denied that SFG was entitled to serve as financial advisor in connection with the August 2008 private placement by reason of the fact that SFG had terminated its agreements with the Company, had waived any continuing rights under the contracts, and had acted in bad faith in connection with the services it undertook to perform for the Company.

 
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ITEM 4                     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

PART II

ITEM 5             MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Market Information

Since February 26, 2008, the Company’s common stock has been listed on the NASDAQ Capital Market under the symbol “ABAT.”  From October 9, 2007 until February 26, 2008 the common stock was listed on The American Stock Exchange.  Prior to listing on The American Stock Exchange, the Company’s common stock was quoted on the OTC Bulletin Board.
 
Set forth below are the high and low bid prices for each of the eight quarters in the past two fiscal years.  During the period when the common stock was quoted on the OTC Bulletin Board, the reported bid quotations reflect inter-dealer prices without retail markup, markdown or commissions, and may not necessarily represent actual transactions.
 
   
Bid
  
Quarter Ending
  
High
    
Low
  
March 31, 2007
   $ 2.03     $ .60  
June 30, 2007
   $ 3.13     $ 1.21  
September 30, 2007
   $ 5.98     $ 2.51  
December 31, 2007
   $ 9.45     $ 3.17  
                 
March 31, 2008
   $ 5.50     $ 3.50  
June 30, 2008
   $ 6.40     $ 2.99  
September 30, 2008
   $ 6.00     $ 2.99  
December 31, 2008
   $ 3.40     $ 1.17  
 
 
12
 

(b) Shareholders

Our shareholders list contains the names of 342 registered stockholders of record of the Company’s Common Stock.
 
(c)  Dividends

The Company has never paid or declared any cash dividends on its Common Stock and does not foresee doing so in the foreseeable future.  The Company intends to retain any future earnings for the operation and expansion of the business.  Any decision as to future payment of dividends will depend on the available earnings, the capital requirements of the Company, its general financial condition and other factors deemed pertinent by the Board of Directors

 
(d)  Securities Authorized for Issuance Under Equity Compensation Plans

The information set forth in the table below regarding equity compensation plans (which include individual compensation arrangements) was determined as of December 31, 2008.

 
Number of securities to be issued upon exercise of outstanding options, warrants and rights
 
Weighted average exercise price of outstanding options, warrants and rights
Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders
0
N.A.
0
Equity compensation plans not approved by security holders
0
N.A.
1,480,000(1)
                              Total
0
N.A.
1,480,000
___________________________
 
(1)
In 2006 the Board of Directors adopted the 2006 Equity Incentive Plan.  The Plan authorizes the Board to issue up to 8,000,000 common shares during the ten year period of the Plan.  The shares may be awarded to employees or directors of Advanced Battery Technologies or its subsidiaries as well as to consultants to those entities.  The shares may be awarded as outright grants or in the form of options, restricted stock or performance shares.  1,480,000 shares remain available for issuance under the plan.

(e)  Sale of Unregistered Securities
 
Advanced Battery did not effect any unregistered sales of equity securities during the 4th quarter of 2008.

 
13
 


 (f) Repurchase of Equity Securities
 
The following table sets forth information regarding the Company’s repurchase of shares of its common stock during the 4th quarter of 2008.

Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
Maximum Number of Shares that May Yet Be Purchased Under Plans or Programs
October 1, 2008- October 31, 2008
0
N.A.
0
4,000,000
November 1, 2008 – November 30, 2008
0
N.A.
0
4,000,000
December 1, 2009 – December 31, 2008
119,510
$  2.47
119,510
3,880,490
Total
  
$  2.47
119,510
3,880,490
 
(1)  
In December 2008 the Board of Directors announced a stock repurchase program under which the Company may purchase up to 4 million shares of its common stock.  Purchases will be made, from time to time, in the open market, depending on several factors, including price, prevailing market conditions, and other investment opportunities.  The program will expire on November 30, 2009.

ITEM 6                      SELECTED FINANCIAL DATA

   
2008
    
2007
    
2006
    
2005
    
2004
  
Revenue
   $ 45,172,111     $ 31,897,618     $ 16,329,340     $ 4,222,960     $ 1,191,509  
Net Income/(Loss)
   $ 16,096,120     $ 10,205,406     $ 8,040,752     $ (157,637 )   $ (2,349,704 )
Net Income/(Loss) Per Share – Diluted
   $ 0.31     $ 0.21     $ 0.17     $ (0.01 )   $ (0.23 )
Total Assets
   $ 77,752,231     $ 38,723,210     $ 22,521,982     $ 17,158,364     $ 11,540,316  
Long-Term Debt
     --     $ 411,263     $ 384,413       --     $ 1,214,925  
Shareholders’ Equity
   $ 76,454,596     $ 36,476,504     $ 23,206,350     $ 9,086,632     $ 5,614,788  
Shareholders’ Equity Per Share
   $ 1.40     $ 0.73     $ 0.47     $ 0.22     $ 0.23  

 
14
 

 
ITEM 7
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
 
 Near the end of 2004, ZQ Power-Tech obtained the financing needed to complete additional factory facilities at ZQ Power-Tech’s campus in Heilongjiang.  Between 2004 and the end of 2005, the number of employees at our facility increased from 300 to, currently, 905, as we more than doubled our production capacity to its current level of $45 million per year.  We now have two buildings (“A” and “B”) in full production.  As our revenues in 2008 reached $45 million and continue to grow, the need to outfit buildings “C” and “D” so as to double our production capacity became apparent.  Toward that end, during 2008 we completed an equity placement to obtain the capital necessary for the expansion.

Our business continued to grow in 2008, as both revenue and net income increased by over 42%.  The current worldwide recession will make it difficult for us to match that growth rate in 2009.  On the other hand, we are supplementing our growth-through-new-customers by making strategic alliances that will capture new markets for us.  Specifically, at the end of 2008 we purchased a 49% interest in Beyond E-Tech, a cell phone distributor, which will provide us a dedicated customer for our cell phone batteries.  And we expect in the first half of 2009 to acquire a 55% interest in Wuxi Angell, a leading manufacturer of battery-powered motorbikes and scooters.  These alliances will help us to offset the effects of the recession.

Revenues: In 2008 we realized $45,172,111 in revenues, an increase of 42% compared to the $31,897,618 in revenue that we achieved in 2007. As a result of competition, our prices have remained relatively stable.  Our growth has been almost entirely the result of increased unit sales.  A number of factors contributed to the increase in revenue from 2007 to 2008.  Primary among them were:
 
·  
New Customers.  Our revenue in 2008 included $10,331,311 sold to customers that had not purchased from us in prior years.  This expansion of our customer base is primarily a result of the efforts of our growing network of independent sales agents.
·  
Vehicle Batteries.  Our sales of batteries for use in motorized vehicles increased by 70% from 2007 to 2008.  We expect growth in this area to continue, primarily due to our expanding relationship with Wuxi Angell.
·  
Miner’s Lamps.  Our one end product, our miner’s lamp, has fueled a significant portion of our growth.  In 2008 our sales of miner’s lamps and batteries for miner’s lamps totaled $10,777,298, compared to $5,534,798 in 2007.

The growth in our battery business has been accompanied by a reorientation in the relative importance of different battery sizes.  When we first entered the battery business in 2003 and following years, the bulk of our sales were small capacity batteries, primarily those used in consumer electronic devices.  Our growth, however, has been propelled by customers for our medium capacity batteries (used for electric scooters, electric bicycles, power tools, miners’ lamps, searchlights, etc.) and large capacity batteries (used for electric sanitation vehicles, stationary applications, and other large scale battery applications).  In 2008, the contribution of batteries in these categories to our total revenues was:
 
·
Small Capacity Batteries.
$4,727,223 (10.5%)
·
Medium Capacity Batteries:
$16,200,079 (35.9%)
·
Large Capacity Batteries:
$13,467,511 (29.8%)
·
Other
$10,777,298 (23.8%)

 
15
 


Gross Profit. Our cost of revenues consists of the cost of raw materials, production costs and production overhead.  In 2008, although our revenue increased by 42%, our cost of goods sold increased by only 28%, from $18,039,861 to $23,122,610.  This disparity permitted resulted from the efforts of our production staff to achieve a more efficient use of raw materials, and from our ongoing program of improving the efficiency of our production techniques.  The result was an improvement in our gross margin from 43% in 2007 to 49% in 2008.

The current global recession has caused a widespread and dramatic drop in the cost of raw materials, including the metals that we utilize in our batteries.  We expect this situation will permit us to maintain the level of gross margin that we achieved in 2008.  If the recession results in diminished sales, however, our gross margin is likely to suffer, as a reduction in sales would be likely to reduce the efficiency of our production operations.

Operating Expenses: The Company’s operating expenses fell by 11%, from $3,667,101 in 2007 to $3,267,872 in 2008.   The decrease is primarily due to a one-time compensation charge of $893,896, arising from a bonus granted to management during the quarter ended March 31, 2007.  In addition, we quelled our aggressive research and development programs in 2008, while we focused on expanding our production facility, and this reduced our expenditures for research and development by $379,408.  After eliminating these two factors, we realized an increase of $502,332 (21%) from 2007 to 2008.  The increase reflected expenses relating to the expansion of our manufacturing facility as well as expenses incurred by our U.S. offices, including the expense attributable to the Company’s listing on the NASDAQ Capital Market in March 2008. We expect that future increases in our selling, general and administrative expense will be roughly proportional to the increase in our revenues.  This will occur because the efficiencies that we are realizing from our expanded operations will be partially offset by the expenses of the US office.

Included in our general and administrative expense during 2008 was $908,713 attributable to amortization of the market value of stock that we granted to employees or consultants, primarily during 2004.  This non-cash expense resulted from our use of stock during our early years to incentivize key individuals.  The market value of the stock at the time it was issued is being amortized over the term of the employee’s or consultant’s services, thus:
 
·  
In the case of employees, the period of amortization is based on a vesting schedule included in the employees’ contracts.  The average vesting period for the employees is 18.5 years.  To date, no one of the employees of ZQ Power-Tech who received stock awards has terminated employment; so the amortization has been proportional to that schedule.
·  
In the case of consultants, the period of amortization is based on the term of the consulting contracts, although amortization will be accelerated if the consulting relationship ceases.  Again, to date, the consultants who received stock have remained involved in the Company’s affairs, so there has been no acceleration of amortization.

 
16
 

At December 31, 2008 there remained $5,737,795 in unamortized stock compensation on the Company’s books.  The amortization of this sum will contribute to our operating expenses as described above.

At the end of 2008 we purchased, for $1.5 million, 49% of the equity in Beyond E-Tech, Inc., a Texas corporation recently organized to engage in distributing cellular telephones in the United States.  The acquisition has been recorded an “investment in unconsolidated entity” on our balance sheet, and our participation in that business will be accounted for through the equity method.  Because Beyond E-Tech incurred a net loss of approximately $185,000 in 2008, the value of our investment was reduced on our balance sheet by 49% of that sum – i.e. $90,707 – and we incurred “other expenses” in that amount.  In addition, at year-end we performed a valuation of our investment by estimating future undiscounted net cash flows that can be expected from Beyond E-Tech.  That estimate indicated that our carrying cost for the investment exceeded its value by $371,743.  Accordingly, we also reduced the book value of the investment by that amount, and recorded an addition to operating expense in that amount.  In the future, our gain or loss on the investment will be determined by similar allocations of the income or loss incurred by Beyond E-Tech.

The Company’s revenue less expenses produced a pre-tax income of $18,818,527 for 2008 and a pre-tax income of $10,205,406 in 2007.  As a result of Chinese tax laws that reward foreign investment in China, ZQ Power-Tech was entitled to exemption from income taxes during 2006 and 2007.  So for 2007, the Company’s pre-tax income was identical to its net income, representing $.25 basic earnings per share and $.21 per share fully diluted.  Currently and through 2010, ZQ Power-Tech is entitled to a 50% tax abatement, which results in an effective corporate tax rate of approximately 12.5%.  After taxes of $2,722,407 realized in 2008, our net income for 2008 was $16,096,120, an increase of 58% over 2007.  This 2008 income represented $.37 basic earnings per share and $.31 fully diluted.

Our business operates primarily in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars.  The conversion of our accounts from RMB to Dollars results in translation adjustments.  While our net income is added to the retained earnings on our balance sheet; the translation adjustments are added to a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.  During 2008, the effect of converting our financial results to Dollars was to add $2,912,481 to our accumulated other comprehensive income.

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
 
In the fall of 2005 we returned to full production, shipping $4,222,960 of product in that year.  Our growth continued through 2006 and 2007, as we recorded $16,329,340 in revenue for 2006 and $31,897,618 in revenue for 2007.

 
17
 

ZQ Power-Tech realized a 43% gross margin on its sales in 2007, as contrasted with a 55% gross margin on sales in 2006.  In general, our gross margin ratio depends considerably upon which of ZQ Power-Tech’s products are dominating sales.  During 2007 a larger portion of our sales involved vehicle batteries, which have a lower gross margin than batteries for electronic batteries.

Our selling, general and administrative expense increased from 2006 to 2007 at a rate somewhat in excess of the increase in our revenues.  While our revenues increased by 95% from 2006 to 2007, our selling, general and administrative expenses increased by 131%, from $1,423,621 to $3,283,230.  One factor that swelled the increase was the expense attributable to the Company’s listing on the American Stock Exchange during 2007, including legal and consulting expenses and listing fees.  In addition, considerable effort and expense was expended in connection with the Company’s efforts to obtain the financing necessary to implement production in our Building “C” and Building “D.”

Included in our general and administrative expense in 2007 was $939,338 attributable to amortization of the market value of stock that we granted to employees or consultants, primarily during 2004.  This non-cash expense resulted from our use of stock during our early years to incentivize key individuals.  At December 31, 2007 there remained $6,939,377 in unamortized stock compensation on the Company’s books.  This sum will be amortized over the expected duration of the employment or service of the recipients of the shares.

In January 2006 the Company acquired the minority interest in its subsidiary, ZQ Power-Tech, resulting in 100% ownership.  At that time it recorded $2,050,204 as goodwill, representing the excess of the purchase price it paid over the fair value of the assets associated with the minority interest.  At the end of 2006, management determined that the goodwill was impaired and took a write-off in that amount.  Early in 2008, however, management revisited that decision, and concluded that its decision to write-off the goodwill had not conformed to generally accepted accounting standards.  For that reason, the Company’s balance sheet and statement of operations for the year ended December 31, 2006 have been restated in this Report to reflect the reversal of the impairment charge.  The primary result of the restatement has been to increase both total assets at December 31, 2006 and net income for 2006 by $2,050,204.

The Company’s revenue less expenses produced a pre-tax income of $10,205,406 in 2007, compared to a net income of $7,133,390 in 2006.  As a result of Chinese tax laws that reward foreign investment in China, ZQ Power-Tech was entitled to exemption for income taxes during 2006 and 2007, followed by a 50% abatement from 2008 to 2010.  Our net income for 2007, therefore, was identical to our pre-tax income, representing $0.25 per share.  On the other hand, our net income for 2006 was increased, when the Government of China refunded to us $907,362 that we had paid in excess of our tax liability for prior years.  With that addition, our net income for 2006 came to $8,040,752, or $.21 per share.

Our business operates primarily in Chinese Renminbi, but we report our results in our SEC filings in U.S. Dollars.  The conversion of our accounts from RMB to Dollars results in translation adjustments.  While our net income is added to the retained earnings on our balance sheet; the translation adjustments are added to a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.  During 2007, the effect of converting our financial results to Dollars was to add $2,125,410 to our accumulated other comprehensive income.

 
18
 

Liquidity and Capital Resources

Until December 2004, the development and initial operations of ZQ Power-Tech were financed primarily by contributions to capital made by Zhiguo Fu, the Company’s Chairman.  On December 1, 2004, ZQ Power-Tech entered into a Loan Agreement with China Financial Bank, and received a loan of 20 million RMB (approximately $2.4 million).  The Loan Agreement, as amended, required that the principal be paid in a balloon in November 2007. During 2006, however, we repaid the loan.  During 2008 we repaid our other long-term debt, a $411,263 note payable to the Finance Bureau of the City of Shuangcheng.  Therefore at December 31, 2008 our only loan was a $17,236 liability to our Chairman for funds he has deposited into the accounts of our US office.

Our revenue in 2007 reached a level equal to approximately 69% of the annual production capacity of our manufacturing plant.  With sales growing by 42% in 2008, the need for expansion was obvious.  Of the four factory buildings on our campus in the City of Harbin, two (Building “C” and Building “D”) remain unused.  Our plan is the utilize our available capital resources to fund the purchase of inventory and other working capital requirements of an expansion, while obtaining additional capital for equipment through the sale of equity.

In August 2008 we completed a private placement to eight investment funds of 5,058,834 shares of common stock and five year warrants to purchase 2,276,474 shares of common stock at $5.51 per share.  The net proceeds that we realized from the offering were approximately $20,356,480. We are currently applying a portion of those funds to implement two new assembly lines in Buildings C and D.

At December 31, 2008 the Company had a working capital balance of $49,991,602, an improvement of $30,242,228 from our working capital balance at December 31, 2007.  The primary reasons for the improvement in working capital were the private placement in August and the net income realized during the year.  In addition, the Company has made a concerted effort to collect aged accounts receivable.  As a result, although sales grown by 42% in 2008, our accounts receivable balance was reduced by $1,002,020 during 2008.

ZQ Power-Tech has sufficient liquidity to fund its near-term operations and to fund the working capital demands of an expansion of its operations.  The proceeds of our recent equity offering will enable us to purchase the equipment needed to expand our operations.  If we determine that additional funds are needed, we have available $16,635,843 in property, plant and equipment, which ZQ Power-Tech owns free of liens.  Based on the substantial backlog of orders that ZQ Power-Tech has accumulated, it believes that secured financing will be available to it on favorable terms if needed

 
19
 

Based upon the financial resources available to ZQ Power-Tech, management believes that it has sufficient capital and liquidity to sustain operations for the foreseeable future.

Application of Critical Accounting Policies

In preparing our financial statements we are required to formulate working policies regarding valuation of our assets and liabilities and to develop estimates of those values.  In our preparation of the financial statements for 2008, there were three estimates made which were (a) subject to a high degree of uncertainty and (b) material to our results.  They were:

·  
The first was our determination, detailed in Note 20 to the Financial Statements, that we had no need of a reserve for warranty costs.  The primary reason for the determination was the fact that we have received no warranty claims to date.
 
·  
The second was our determination, detailed in Note 14 to the Financial Statements, to amortize the stock compensation that we gave to our employees in 2005 and 2006 over an average of 18.5 years.  The determination was based on the senior status of the employees, the vesting period under their employment contracts, and our expectation that they will remain employed by ZQ Power-Tech for at least that period.
 
·  
The third was our determination, detailed in Note 7 to the Financial Statements, to record an impairment loss on our investment in Beyond E-Tech.  The determination was based on Beyond E-Tech’s projection of cash flows for the next five years.

We made no material changes to our critical accounting policies in connection with the preparation of financial statements for 2008.

Impact of Accounting Pronouncements

There were no recent accounting pronouncements that have had a material effect on the Company’s financial position or results of operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Our operating subsidiary, ZQ Power-Tech, carries on business exclusively in Chinese Renminbi.  Therefore it does not have any derivative instruments or other financial instruments that are market risk sensitive.
 
ITEM 8                      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
20
 
 
ADVANCED BATTERY TECHNOLOGIES, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


Report of Independent Registered Public Accounting Firm
22
   
Consolidated Balance Sheets as of December 31, 2008 and 2007
23
   
Consolidated Statements of Income and Other Comprehensive Income for the years ended December 31, 2008, 2007 and 2006
  24
   
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2008, 2007 and 2006
  25
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
  26
 
 
Notes to Consolidated Financial Statements
27
 
 
 
21
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Advanced Battery Technologies, Inc.
 
 
We have audited the accompanying consolidated balance sheets of Advanced Battery Technologies, Inc. (the “Company”) as of December 31, 2008 and 2007, and the related consolidated statements of income and comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2008. We have also audited the Company’s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission. (COSO).The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audit of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
 
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Advanced Battery Technologies, Inc. as of December 31, 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
/s/ BAGELL, JOSEPHS, LEVINE & COMPANY, L.L.C.
Bagell, Josephs, Levine & Company, L.L.C.
Marlton, NJ 08053
March 12, 2009

 
22
 

ADVANCED BATTERY TECHNOLOGIES, INC.
  
CONSOLIDATED BALANCE SHEETS
  
             
             
ASSETS
  
   
December 31,
  
   
2008
    
2007
  
             
Current assets:
            
Cash and cash equivalents
   $ 32,746,155     $ 2,704,823  
Accounts receivable, net
     14,708,078       16,026,604  
Inventories, net
     1,748,115       1,159,474  
Loan receivable
     1,600,000       -  
Other receivables
     240,726       84,950  
Advance to suppliers
     246,163       1,608,967  
Total Current Assets
     51,289,237       21,584,818  
                 
Property, plant and equipment, net of accumulated depreciation of $2,803,788 as of December 31, 2008 and $2,016,275 as of December 31, 2007
     16,635,843       13,243,236  
Total Fixed Assets
     16,635,843       13,243,236  
                 
Other assets:
                
Investment in unconsolidated entity
     1,037,550       -  
Investment advance
     3,000,000       -  
Security deposit
     6,000       6,000  
Deposit for long-term assets
     1,748,363       -  
Intangible assets, net
     1,548,158       1,563,037  
Goodwill
     2,487,080       2,326,119  
Total other assets
     9,827,151       3,895,156  
                 
Total Assets
   $ 77,752,231     $ 38,723,210  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
  
                 
Current liabilities:
                
Accounts payable
   $ 415,850     $ 406,454  
Customer deposits
     80,479       75,116  
Accrued expenses and other payables
     784,070       618,173  
Loan from officers
     17,236       735,700  
Total Current Liabilities
     1,297,635       1,835,444  
                 
Long-term liabilities:
                
Note payable
     -       411,263  
                 
Total Liabilities
     1,297,635       2,246,707  
                 
Commitments and Contingencies
                
                 
Stockholders' Equity
                
Common stock, $0.001 par value, 60,000,000 shares authorized; 54,781,577 shares issued and 54,662,067 shares outstanding as of December 31, 2008 and 49,688,998 shares issued and outstanding as of December 31, 2007
     54,782       49,689  
Additional paid-in-capital
     39,289,991       18,029,891  
Accumulated other comprehensive income
     6,012,475       3,099,994  
Retained earnings
     31,393,050       15,296,930  
Less: Cost of treasury stock (119,510 shares)
     (295,702 )     -  
Total Stockholders' Equity
     76,454,596       36,476,504  
                 
Total Liabilities and Stockholders' Equity
   $ 77,752,231     $ 38,723,210  

 
23
 

ADVANCED BATTERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND OTHER COMPREHENSIVE INCOME
                   
                   
   
YEAR ENDED DECEMBER 31,
  
   
2008
    
2007
    
2006
  
         
(Restated)
    
(Restated)
  
                   
Revenues
   $ 45,172,111     $ 31,897,618     $ 16,329,340  
                         
Cost of Goods Sold
     23,122,610       18,039,861       7,344,642  
                         
Gross Profit
     22,049,501       13,857,757       8,984,698  
                         
Operating Expenses
                        
Research & Development expenses
     4,463       383,871       181,257  
Selling, general and administrative
     3,263,409       3,283,230       1,423,621  
                         
Operating income
     18,781,629       10,190,656       7,379,820  
                         
Other Income (Expenses)
                        
Interest income (expenses)
     124,487       14,750       (237,148 )
Equity (loss) from unconsolidated entity
     (90,707 )     -       -  
Other income (expenses)
     3,118       -       (9,282 )
Total other income (expenses)
     36,898       14,750       (246,430 )
                         
Income Before Income Taxes
     18,818,527       10,205,406       7,133,390  
                         
Provision for Income Taxes (Benefit)
     2,722,407       -       (907,362 )
                         
Net Income
   $ 16,096,120     $ 10,205,406     $ 8,040,752  
                         
Other Comprehensive Income
                        
Foreign currency translation adjustment
     2,912,481       2,125,410       844,251  
                         
Comprehensive Income
   $ 19,008,602     $ 12,330,816     $ 8,885,003  
                         
Earnings per share
                        
Basic
   $ 0.37     $ 0.25     $ 0.21  
Diluted
   $ 0.31     $ 0.21     $ 0.17  
                         
Weighted average number of common shares outstanding
                        
Basic
     43,493,492       40,924,452       37,474,371  
Diluted
     51,671,992       49,677,285       46,569,371  

 
24
 

ADVANCED BATTERY TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 and 2006
                                                       
                                                       
                                                       
                     
Accumulated
Other
    
Unearned
                          
   
Common Stock
    
Additional
    
Comprehensive
    
Stock-based
    
Treasury Stock
    
 Retained
    
Comprehensive
        
   
Shares
    
Par Value
    
Paid in Capital
    
Income
    
Compensation
    
at Cost
    
Earnings (Deficit)
    
Income (loss)
    
Total
  
                                                       
Balance at January 1,2006
     25,337,116     $ 25,337     $ 12,343,864     $ 130,333     $ (1,905,933 )         $ (2,949,228 )         $ 7,644,373  
                                                                     
Stock issued for acquisition of minority interests
     11,780,594       11,781       5,878,516                                           5,890,297  
                                                                     
Stock issued for acquisition of a patent
     4,400,000       4,400       -                                           4,400  
                                                                     
Stock issued for consulting services
     60,000       60       (60 )                                         -  
                                                                     
Stock issued under employee equity incentive plan
     8,050,000       8,050       5,198,950               (5,207,000 )                         -  
                                                                     
Reclassification from unearned
stock-based compensation
to additional paid-in capital on
adoption of FAS 123R
       (7,112,933 )             7,112,933                           -  
                                                                     
Comprehensive income (loss)
                                                                    
Net income for the year
                                                   8,040,752       8,040,752       8,040,752  
Other comprehensive income, net of tax
                                                        
Foreign currency translation adjustments
               844,251                             844,251       844,251  
Comprehensive income (loss)
                                                           8,885,003          
                                                                       
Amortization of prepaid consulting expenses
       357,335                                             357,335  
                                                                    -  
Amortization of stock-based compensation
       424,942                                             424,942  
                                                                       
Balance December 31, 2006 (Restated)
     49,627,710       49,628       17,090,614       974,584       -       -       5,091,524       -       23,206,350  
                                                                         
Stock issued under employee equity incentive plan
     61,288       61       70,939               (71,000 )                             -  
                                                                         
Reclassification from unearned
stock-based compensation
to additional paid-in capital on
adoption of FAS 123R
       (71,000 )             71,000                               -  
                                                                         
Comprehensive income (loss)
                                                                        
Net income for the year
                                                     10,205,406       10,205,406       10,205,406