China Lithium Technologies Inc. - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - China Lithium Technologies Inc.	Financial_Report.xls
EX-31.2 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER - China Lithium Technologies Inc.	ex31-2.htm
EX-32.2 - SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER - China Lithium Technologies Inc.	ex32-2.htm
EX-32.1 - SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER - China Lithium Technologies Inc.	ex32-1.htm
EX-31.1 - RULE 13A-14(A)/ 15D-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER - China Lithium Technologies Inc.	ex31-1.htm

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2011

Commission File No: 000-53263

CHINA LITHIUM TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

NEVADA	41-1559888
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer ID No)

15 West 39th Street Suite 14C, New York, NY 10018

(Address of principal executive office) (Zip Code)

Registrant's telephone number: 212-391-2688

_______________________________________

Former name, former address and former fiscal year,

(if changed since last report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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 x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) Yes o No o

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 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 o	Non-accelerated filer o	Smaller reporting company x
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of common stock, $0.001 par value per share, outstanding as of February 21, 2012 was 16,659,811.

	TABLE OF CONTENTS	Page

	PART I - FINANCIAL INFORMATION

Item 1:	Financial Statements	1

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	29

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4:	Controls and Procedures	35

PART II - OTHER INFORMATION

Item 1:	Legal Proceedings	36

Item 1A:	Risk Factors	36

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3:	Defaults Upon Senior Securities	36

Item 4:	Removed and Reserved	36

Item 5:	Other Information	36

Item 6:	Exhibits	36

CHINA LITHIUM TECHNOLOGIES, INC

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011

(UNAUDITED)

		PAGE



CONSOLIDATED FINANCIAL STATEMENTS:

	CONSOLIDATED BALANCE SHEETS	2 & 3
	CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME	4
	CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY	5
	CONSOLIDATED STATEMENTS OF CASH FLOWS	6 & 7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8 - 28

CHINA LITHIUM TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

ASSETS	December 31, 2011		June 30, 2011
	(Unaudited)
Current Assets:
Cash and Cash Equivalents	$	2,810,322	$	2,649,523
Accounts Receivable		5,377,033		5,612,622
Other Accounts Receivable		57,070		54,413
Advance to Suppliers		32,932		29,180
Inventories		2,001,193		972,867
Prepaid Expenses		912,141		417,133

Total Current Assets		11,190,692		9,735,739


Property, Plant and Equipment, net		711,981		777,732
Patent and Other Intangibles, net		63,422		68,396
Total Fixed Assets-net		775,404		846,128


Total Assets	$	11,966,096	$	10,581,867

" Continued on next page"

"The accompanying notes are an integral part of these financial statements"

CHINA LITHIUM TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY	December 31, 2011		June 30, 2011
	(Unaudited)
Current Liabilities:
Accounts Payable		954,739		870,204
Advance from Customers		3,208		3,159
Payroll Payable		114,263		79,878
Taxes Payable		261,549		438,532
Other Accounts Payable		13,920		2,044
Accrued Expenses		70,000		71,089
Loans from Shareholders		299,938		283,638
Short-term Loans		80,000		80,000
Warranty Accrual		270,718		198,611

Total Current Liabilities		2,068,334		2,027,155

Total Liabilities		2,068,334		2,027,155

Stockholders' Equity:
Preferred Stock, par value $0.001, 20,000,000 shares authorized;
0 share issued and outstanding as of December 31 and June 30, 2011		-		-
Common Stock, par value $0.001, 780,000,000 shares authorized;
16,659,811 and 21,659,811 shares issued and outstanding, including
1,050,000 unvested restricted stock award, as of December 31 and
June 30, 2011, respectively		16,659		21,659
Additional Paid in Capital		1,720,354		1,532,021
Reserved Funds		1,043,916		1,043,916
Retained Earnings		6,331,443		5,369,454
Accumulated Other Comprehensive Income		785,389		587,661

Total Stockholders' Equity		9,897,761		8,554,712

Total Liabilities and Stockholders' Equity	$	11,966,096	$	10,581,867

"The accompanying notes are an integral part of these financial statements"

CHINA LITHIUM TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(UNAUDITED)

	For the Three Months Ended December 31,				For the Six Months Ended December 31,
	2011		2010		2011		2010
			(Restated)				(Restated)

Revenues	$	3,719,851	$	4,268,090	$	7,491,083	$	7,972,767
Cost of Goods Sold		2,230,426		2,766,523		4,436,683		5,167,177

Gross Profit		1,489,425		1,501,567		3,054,400		2,805,590

Operating Expenses:
Manufacturing Expenses		106,533		54,350		214,735		116,835
R & D Expenses		100,053		19,675		239,812		39,995
Sales Expenses		159,391		134,882		294,155		384,736
General and Administrative Expenses		525,975		203,226		948,283		1,048,605

Total Operating Expenses		891,952		412,133		1,696,985		1,590,171

Income from Operations		597,473		1,089,434		1,357,415		1,215,419

Other Income (Expenses):
Interest Income (Expense), net		4,182		8,127		9,366		11,631
Other Income (Expense)		-		771		62		590

Total Other Income (Expenses)		4,182		8,898		9,428		12,220

Income before Income Taxes		601.655		1,098,332		1,366,843		1,227,639

Provision for Income Taxes		178,488		333,028		404,854		549,076

Net Income		423,167		765,304		961,989		678,563

Other Comprehensive Income:
Unrealized Gain (Loss) on Foreign Currency Translation		125,854		103,284		197,728		201,969

Comprehensive Income	$	549,021	$	868,588	$	1,159,716	$	880,532

Earnings Per Common Share:
Basic	$	0.03	$	0.04	$	0.06	$	0.03
Diluted	$	0.03	$	0.04	$	0.06	$	0.03

Weighted Average Common Share:
Basic		15,609,811		21,012,270		16,026,478		21,012,270
Diluted		15,885,462		21,012,270		16,063,949		21,012,270

"The accompanying notes are an integral part of these financial statements"

CHINA LITHIUM TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

														Accumulated
	Preferred Stock				Common Stock						Additional			Other										Total
											Paid in			Comprehensive		Retained			Reserved			Comprehensive		Stockholders'
	Shares		Amount		Shares			Amount			Capital			Income		Earnings			Funds A			Income		Equity
Balance - June 30, 2009 (Restated)		-	$	-		19,151,875		$	19,151		$	139,293		$	71,387	$	2,690,492		$	-				$	2,920,323

Reverse acquisition equity adjustments						1,007,936			1,008			113,478													114,486
Net income																	2,428,966						2,428,966		2,428,966
Retained earning to reserved funds																	(467,186	)		467,186					-
Foreign currency translation gain															27,207								27,207		27,207
Comprehensive Income																							2,456,173
Balance - June 30, 2010 (Restated)		-	$	-		20,159,811		$	20,159		$	252,771		$	98,594	$	4,652,271		$	467,186				$	5,490,982

Common stock compensation on September 2, 2010												717,000													717,000
Restricted common stock issued to employees						1,500,000			1,500			1,648,500													1,650,000
Deferred stock-based compensation expense												(1,086,250	)												(1,086,250	)
Net income																	1,293,912						1,293,912		1,293,912
Retained earning to reserved funds																	(576,730	)		576,730					-
Foreign currency translation gain															489,067								489,067		489,067
Comprehensive Income																							1,782,980
Balance - June 30, 2011		-	$	-		21,659,811		$	21,659		$	1,532,021		$	587,661	$	5,369,454		$	1,043,916				$	8,554,712

Stock cancellation						(5,000,000	)		(5,000	)		5,000													-
Amortization of stock-based compensation												183,333													183,333
Net income																	961,989						961,989		961,989
Foreign currency translation gain															197,728								197,728		197,728
Comprehensive Income																							1,159,716
Balance - December 31, 2011 (Unaudited)		-	$	-		16,659,811		$	16,659		$	1,720,354		$	785,389	$	6,331,443		$	1,043,916				$	9,897,761
																					A
Footnote A (Reserved Funds):	Restrictive retained earnings for the benefit of employees

"The accompanying notes are an integral part of these financial statements"

CHINA LITHIUM TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended December 31,
Cash Flows From Operating Activities:	2011			2010
				(Restated)

Net Income	$	961,989		$	678,563
Adjustments to Reconcile Net Income to Net Cash
(Used) Provided by Operating Activities:
Depreciation and Amortization Expenses		85,790			42,264
Stock-based Compensation Expenses		183,333			907,385
(Increase) or Decrease in Current Assets:
Accounts Receivable		235,589			(870,229	)
Inventories		(1,028,326	)		(436,189	)
Prepaid Expenses		(495,008	)		(9,734	)
Advance to Suppliers		(3,752	)		(10,152	)
Other Accounts Receivable		(2,657	)		(8,506	)
Increase or (Decrease) in Current Liabilities:
Accounts Payable		84,535			(395,327	)
Advance from Customers		49			99
Taxes Payable		(176,982	)		109,048
Payroll Payable		34,385			7,668
Warranty Accrual		72,107			53,229
Other Accounts Payable		11,875			417
Accrued Expenses		(1,089	)		1,346

Net Cash (Used) Provided by Operating Activities		(38,163	)		69,882

Cash Flows From Investing Activities:

Purchases of Property, Plant and Equipment		(2,500	)		(126,835	)
Purchases of Intangible Assets		-			(2,119	)

Net Cash (Used) Provided by Investing Activities		(2,500	)		(128,954	)

"Continued on next page"

"The accompanying notes are an integral part of these financial statements"

CHINA LITHIUM TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	For the Six Months Ended December 31,
Cash Flows From Financing Activities:	2011		2010
			(Restated)

Proceeds from (Payments to) Shareholders		16,300		49,915

Net Cash (Used) Provided by Financing Activities		16,300		49,915

Effect of Exchange Rate Changes on Cash and Cash Equivalents		185,162		192,499

Increase in Cash and Cash Equivalents		160,799		183,342

Cash and Cash Equivalents - Beginning Balance		2,649,523		2,761,427

Cash and Cash Equivalents - Ending Balance	$	2,810,322	$	2,944,769

Supplemental Disclosures of Cash Flow Information:

Cash Paid During the Six Months for:
Interest Paid	$	-	$	-
Income Taxes Paid	$	502,048	$	462,618

Non-Cash Investing and Financing Activities:

Common Stock Issued for Services	$	-	$	717,000
Issued 1,500,000 Restricted Common Stock to Employees	$	-	$	1,650,000

"The accompanying notes are an integral part of these financial statements"

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

The Company was incorporated as Sweet Little Deal, Inc. in 1986 under the laws of the State of Minnesota. On October 10, 1991, the Company changed its name to Physicians Insurance Services, Ltd. On July 23, 2008, the Company held a shareholder meeting approving a migratory merger to Nevada and changed its name to PI Services, Inc., which became effective January 12, 2009. On May 6, 2010, PI Services, Inc. changed its name to China Lithium Technologies, Inc. (the “Company”) to reflect the reverse merger of Sky Achieve Holdings, Inc. (“Sky Achieve") into the Company, which became effective on June 2, 2010.

On March 19, 2010 the Company acquired all of the outstanding capital stock of Sky Achieve, a British Virgin Islands limited liability corporation registered in November, 2009 (the “Share Exchange”). Pursuant to ASC 805-10-55-12 et seq., Sky Achieve is deemed to be the acquirer in the Share Exchange, as the prior owner of Sky Achieve obtained the largest portion of the voting rights in the combined entity, and the assets and earnings of Sky Achieve substantially exceeded those of PI Services. The effect of the Share Exchange is such that a reorganization of the entities has occurred for accounting purposes and is deemed to be a reverse merge recapitalization of Sky Achieve. The financial statements presented in this report are those of Sky Achieve and its subsidiaries, including their VIEs, as if the Share Exchange had been in effect retroactively for all periods presented.

Sky Achieve was organized on November 5, 2009 under the laws of British Virgin Islands. It had no business activity from its inception until January 5, 2010. On January 5, 2010, Sky Achieve obtained control over the business of Beijing Guoqiang Science and Technology Development Co., Ltd (“Beijing Guoqiang”) by entering into five agreements with and the equity owners of Beijing Guoqiang. The agreements are designed to transfer to Sky Achieve all of the responsibilities for management of the operations of Beijing Guoqiang, as well as all of the benefits and all of the risks that arise from the operations of Beijing Guoqiang. The relationship is purely contractual, however, so the rights and responsibilities of Sky Achieve with respect to Beijing Guoqiang are ultimately dependent on the willingness of the courts of the PRC to enforce the agreements. For accounting purposes, Beijing Guoqiang is deemed to be a variable interest entity with respect to Sky Achieve, and its balance sheet accounts and financial results are consolidated with the accounts and results of Sky Achieve for financial reporting purposes.

The Company issued 19,151,875 shares of its common stock to the shareholders of Sky Achieve. Those shares represented 95 % of the outstanding shares of the Company. Mr. Kun Liu, the Chairman of Beijing Guoqiang purchased additional 1% of the outstanding shares of the Company simultaneously with the share exchange. As a result of these transactions, persons associated with Beijing Guoqiang owned securities that represented 96% of the equity in the Company as of the completion of the Share Exchange.

Beijing Guoqiang designs, manufacturers and markets Polymer Lithium-ion Battery Modules, Lithium-ion Battery Chargers, Lithium-ion Battery Management Systems as well as other Lithium-ion Battery Management Devices essential to proper power utilization ("PLI Battery Products"). During December of 2009, the Company set up two manufacturing facilities in Hangzhou and Guangzhou to produce power and battery charger.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION (continued)

Reverse stock split

On June 2, 2010, the Company implemented a 1-for 2.2 reverse split of its common stock. All enumerations herein of numbers of common shares or per share amounts have been adjusted as needed to give retroactive effect to the reverse stock split.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

The accompanying audited consolidated financial statements include China Lithium Technologies, Inc. and its wholly owned subsidiary, Sky Achieve Holdings, Inc., as well as its variable interest entity, Beijing Guoqiang Global Science and Technology Development Co, Ltd. All significant inter-company transactions and balances have been eliminated in the consolidation.

Variable interest entity

The accounts of Beijing Guoqiang have been consolidated with the accounts of the Company because Beijing Guoqiang is a variable interest entity with respect to Sky Achieve, which is a wholly-owned subsidiary of the Company. Sky Achieve is party to five agreements dated January 5, 2010 with the owners of the registered equity of Beijing Guoqiang and with Beijing Guoqiang. In summary, the five agreements contain the following terms:

	●	Consulting Services Agreement and Operating Agreement. These two agreements provide that Sky Achieve will be fully responsible for the management of Beijing Guoqiang, both financial and operational. Sky Achieve has assumed responsibility for the debts incurred by Beijing Guoqiang and for any shortfall in its registered capital. In exchange for these services and undertakings, Beijing Guoqiang pays a fee to Sky Achieve equal to the net profits of Beijing Guoqiang. In addition, Beijing Guoqiang pledges all of its assets, including accounts receivable, to Sky Achieve. Meanwhile, Beijing Guoqiang’s shareholders pledged the equity interests of Beijing Guoqiang to Sky Achieve to secure the payment of the Fee.

	●	Proxy Agreement. In this agreement, the shareholders of Beijing Guoqiang granted an irrevocable proxy to the person designated by Sky Achieve to exercise the voting rights and other rights of shareholder.

	●	Option Agreement. In this agreement, the shareholders of Beijing Guoqiang granted to Sky Achieve the right to purchase all of their equity interest in the registered capital of Beijing Guoqiang or the assets of Beijing Guoqiang. The option may be exercised whenever the transfer is permitted under the laws of the PRC. The purchase price shall be equal to the original paid-in price of the Purchased Equity Interest by the Transferor, unless the applicable PRC laws and regulations require appraisal of the equity interests or stipulate other restrictions on the purchase price of equity interests. The agreement also contains covenants designed to prevent any material change occurring in the legal or financial condition of Beijing Guoqiang without the consent of Sky Achieve.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

●

Equity Pledge Agreement. In this agreement, Beijing Guoqiang shareholders agree to pledge all the equity interest in Beijing Guoqiang to Sky Achieve as security for the performance of the obligation under the Consulting Services Agreement and the payment of Consulting Services Fees under each agreement.

Sky Achieve may terminate the agreements at will. Beijing Guoqiang may only terminate the agreements if (a) there is an unremedied breach by Sky Achieve, (b) the operations of Sky Achieve are terminated, (c) Beijing Guoqiang loses its business license, or (d) circumstances arise that materially and adversely affect the performance or objectives of the Agreement. The Consulting Services Agreement, under which all revenues are assigned from Beijing Guoqiang to Sky Achieve, and the Equity Pledge Agreement have no expiration date. The other three agreements terminate on January 5, 2020 unless extended by the parties.

In sum, the agreements transfer to Sky Achieve all of the benefits and all of the risk arising from the operations of Beijing Guoqiang, as well as complete managerial authority over the operations of Beijing Guoqiang. Sky Achieve is the guarantor of all of the obligations of Beijing Guoqiang. By reason of the relationship describe in these agreements, Beijing Guoqiang is a variable interest entity with respect to Sky Achieve because the following characteristics in ASC 810-10-15-14 are present:

	●	The holders of the equity investment in Beijing Guoqiang lack the direct or indirect ability to make decisions about the entity’s activities that have a significant effect on the success of Beijing Guoqiang, having assigned their voting rights and all managerial authority to Sky Achieve. (ASC 810-10-15-14(b)(1)).

	●	The holders of the equity investment in Beijing Guoqiang lack the obligation to absorb the expected losses of Beijing Guoqiang, having assigned to Sky Achieve all revenue and responsibility for all payables. (ASC 810-10-15-14(b)(2)).

	●	The holders of the equity investment in Beijing Guoqiang lack the right to receive the expected residual returns of Beijing Guoqiang, having granted to Sky Achieve all revenue as well as an option to purchase the equity interests at a fixed price. (ASC 810-10-15-14(b)(3)).

Because the relationship between Beijing Guoqiang and Sky Achieve is entirely contractual, the Company’s interest in Beijing Guoqiang depends on the enforceability of those agreements under the laws of the PRC. We are not aware of any judicial decision as to the enforceability of similar agreements under PRC law. However, as the owners of the registered equity of Beijing Guoqiang are our Chairman and one close associate, we do not believe that there is a significant risk that Beijing Guoqiang will seek to terminate the relationship or otherwise breach the agreements. Accordingly, we believe that consolidation of the financial statements of Beijing Guoqiang with those of the Company is appropriate.

The following table summarizes the effects of consolidating Beijing Guoqiang with China Lithium Technologies and its subsidiary:

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

	China Lithium Technologies and Subsidiaries			Beijing Guoqiang			Consolidation
Balance Sheet – December 31, 2011
Current Assets	$	101,415		$	11,188,203		$	11,190,692
Property, Plant and Equipment		-			711,981			711,981
Total Assets		374,345			11,963,606			11,966,096

Current Liabilities		563,529			1,604,124			2,068,334
Total Liabilities		563,529			1,604,124			2,068,334
Stockholders’ Equity		(189,184	)		10,359,482			9,897,761

Statement of Operations – Six Months Ended December 31, 2011
Revenue		-			7,491,083			7,491,083
Gross Profit		-			3,054,400			3,054,400
Operating Income (Loss)		(252,818	)		1,609,838			1,357,415
Net Income (Loss)		(252,968	)		1,214,563			961,989

Statement of Cash Flow – Six Months Ended December 31, 2011
Net Cash (Used) Provided by Operating Activities		(65,582	)		18,444			(38,163	)
Net Cash (Used) Provided by Investing Activities		-			(2,500	)		(2,500	)
Net Cash (Used) Provided by Financing Activities	$	25,275			-		$	16,300

Reclassification

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no effect on reported total assets, liabilities, stockholders’ equity or net income.

Cash and cash equivalent

For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Trade accounts receivable

Trade accounts receivable are stated at net realizable value, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables.

The Company determines the allowance based on historical write-off experience, customer specific facts and current crisis on economic conditions. Bad debt expense is included in the general and administrative expenses.

Outstanding account balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

Inventories

Inventories are initially stated at the level of the original cost. The cost of inventories is determined using first-in first-out cost method, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In case of finished goods and work in progress, cost includes an appropriate share of production overhead based on normal operating capacity.

The Company regularly reviews the cost of inventories against their estimated fair market value and records a lower of cost or market write-down for inventories that have cost in excess of estimated market value.

Advances to suppliers

The Company makes advances to certain vendors for inventory purchases. The advances to suppliers were $32,932 and $29,180 as of December 31, 2011 and June 30, 2011 respectively.

Property, plant and equipment

Property, plant and equipment are stated at cost, net of accumulated depreciation. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized. Depreciation and amortization are provided using the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets as follows:

Buildings and improvements		20-42 years
Machinery and equipment		5-15 years
Motor vehicles		5-7 years

Leasehold improvements are amortized using the straight-line method over the term of the leases or the estimated useful lives, whichever is shorter.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of long-lived assets

The Company accounts for long-lived assets in accordance with ASC 360 “Accounting for the Impairment of Disposal of Long-Lived Assets”, which became effective January 1, 2002. Under ASC 360, the Company reviews long-term assets for impairment whenever events or circumstances indicate that the carrying amount of those assets may not be recoverable. The Company has not incurred any losses in connection with the adoption of this statement.

Revenue recognition

The Company recognizes revenue on product sales when each of the following conditions has been satisfied:

	●	Persuasive evidence of a sales arrangement exists in the form of a written contract or an order and acknowledge.

	●	The sales price has been fixed and made determinable by sales contract and/or invoice.

	●	The product has been delivered to the customer’s warehouse – unless other terms for delivery have been specified in the contract – at which time the customer takes ownership and the risk of loss passes to the customers.

	●	Payment has been received or the Company determines that collection of the related receivable is probable. Probability of collection is determined based on recurrent visits by the Company’s sales staff and accounting staff to the customer’s premises to assess the health of the customer’s business.

	●	The 15 day right of return that we afford to customers has expired.

Net sales of products represent the invoiced value of goods, net of Value Added Taxes (“VAT”), sales returns, trade discounts and allowances. The Company is subject to VAT which is levied on the majority of the products of the Company at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the Company in addition to the invoiced value of purchases to the extent not refunded for export sales. Our standard contract allows customers, within 15 days after delivery, to return for cash or exchange products with which they are not satisfied. Shipping charges on the return are allocated between the customer and the Company based on relative fault. We do not recognize revenue until the 15 day right of return has expired. After the 15 days has expired, the Company provides customers with no additional post-delivery rights, except as set forth in its product warrant. We record a provision for warranty claims, which is based on historical warranty claims data and represents the Company’s best estimate of warranty claims it will experience.

Cost of goods sold

Cost of goods sold consists primarily of material, and related expenses, which are directly attributable to the production of products. The Company presents cost of goods sold and manufacturing expenses separately in the income statement.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of estimates

In preparing the financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements, as well as the reported amounts of revenues and expenses during the reporting year. Significant estimates, required by management, include the recoverability of long-lived assets and valuation allowances for receivables. Actual results could differ from those estimates.

Concentration of credit risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist of cash and cash equivalents and accounts and other receivables. As of December 31, 2011 and June 30, 2011, substantially all of the Company’s cash and cash equivalents were held by major banks located in the PRC of which the Company’s management believes high credit quality banks. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on account receivable.

Foreign currency translation

The functional currency of Beijing Guoqiang is Chinese Renminbi (“RMB”). For financial reporting purposes, RMB has been translated into United States Dollars ("USD") as the reporting currency. Assets and liabilities are translated at the exchange rates at the balance sheet date, equity accounts are translated at historical exchange rates, and income and expenses items are translated using the average rate for the period. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders' equity as "Accumulated other comprehensive income." Gains and losses resulting from foreign currency translation are included in accumulated other comprehensive income.

RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the “PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of exchange quoted by the PBOC. Translation of amounts from RMB into US dollar has been made at the following exchange rates for the respective years:

December 31, 2011
Balance sheet		RMB 6.3654 to US $1.00
Statement of income and other comprehensive income		RMB 6.3776 to US $1.00

June 30, 2011
Balance sheet		RMB 6.4634 to US $1.00
Statement of operations and comprehensive income		RMB 6.6254 to US $1.00

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

The Company accounts for income tax under the provisions of FASB ASC 740 "Accounting for Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, whenever necessary, against net deferred tax assets when it is more likely than not that some portion or the entire deferred tax asset will not be realized. There are no deferred tax amounts as of December 31, 2011 and June 30, 2011.

Fair value of financial instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, advances to suppliers, other receivables, accounts payable, accrued expenses, taxes payable, payroll and other loans payable. Management has estimated that the carrying amounts approximate their fair value due to the short-term nature.

Commitments and contingencies

Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.

Intangible assets

Intangible assets mainly consist of patents. Patents have being amortized using the straight-line method over the 10 years. Other intangible assets have being amortized using the straight-line method over the 5 years. The Company also evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows.

Comprehensive income

Comprehensive income is defined to include changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. Comprehensive income includes net income and the foreign currency translation gain, net of tax.

Statement of cash flows

In accordance with Accounting Standards Codification, ASC 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Reserved funds

In accordance with the PRC’s Company Laws, entities organized in the PRC must make appropriations from their after-tax profits as reported in their PRC statutory accounts to non-distributable reserves, namely statutory surplus reserve and statutory common welfare fund. The Company’s VIE, Beijing Guoqiang, is required to allocate at least 10% of its after-tax profits to the statutory surplus reserve until the reserve reaches 50% of the entity’s registered capital. Appropriation to the statutory common welfare fund is 5% to 10% of its after-tax profits as reported in the PRC statutory accounts. Effective from January 1, 2006, under the revised PRC Company Laws, appropriation to the statutory surplus reserve and common welfare reserve is no longer mandatory. However the Company from time to time allocates funds to such reserves for its future development.

Stock-based compensation

The Company adopted the provisions of ASC 718, “stock compensation,” which establishes the accounting for employee stock-based awards. Under the ASC 718, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (i.e. the vesting period of the grant). The fair value of shares granted is deemed to be the closing traded price of our common stock on the date of grant.

Generally shares issued to employees will be vested over a requisite service period. These shares will be amortized over the vesting period in accordance with ASC 718. The average vesting period for the shares issued to date has been 4.54 years, based on the terms of the employment agreements under which the stock was awarded. The stock-based compensation expenses were $183,333 and $907,385 for the six months ended December 31, 2011 and 2010, respectively.

Research and development costs

Research and development costs are expensed as incurred. The salaries of engineers and technical staff in our research and development division are included in research and development expense. The expenses were $239,812 and $39,995 for the six months ended December 31, 2011 and 2010, respectively.

Basic and diluted earnings per share

Earnings per share are calculated in accordance with the ASC 260, “Earnings per share.” Basic net earnings per share are based upon the weighted average number of common shares outstanding, but excluding shares issued as compensation that have not yet vested. Diluted net earnings per share are based on the assumption that all unvested shares have vested. Dilution is computed by applying the treasury stock method. Under this method, awards of non-vested shares to be issued to employees under a share-based compensation arrangement are considered options for purposes of computing diluted EPS, which are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Recently issued accounting standards

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income. Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the impact of adopting this statement on the Company’s financial statements.

3. INVENTORIES

The components of inventories at December 31, 2011 and June 30, 2011 are as follows:

	December 31, 2011		June 30, 2011
Raw Materials	$	789,509	$	515,457
Work in Process		506,883		206,585
Finished Goods		702,938		248,991
Low Value Items		1,863		1,835
Total		2,001,193	$	972,867

As of December 31 and June 30, 2011, the Company has not recorded any reserve for inventory obsolescence.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

4. PROPERTY, PLANT AND EQUIPMENT

A summary of property, plant and equipment at December 31 and June 30, 2011 are as follows:

	December 31, 2011			June 30, 2011
Building and Improvement	$	138,903		$	136,796
Machinery and Equipment		806,534			791,836
Motor Vehicle		55,613			54,770
Less: Accumulated Depreciation		(289,069	)		(205,670	)
Total Property and Equipment, net	$	711,981		$	777,732

Depreciation expenses for the six months ended December 31, 2011 and 2010 were $79,795 and $37,113, respectively.

5. PATENT AND OTHER INTANGIBLES

The net book value of intangible assets as of December 31and June 30, 2011 was comprised of the following:

	December 31, 2011			June 30, 2011
Intangible Assets	$	116,689		$	114,919
Less: Accumulated Amortization		(53,267	)		(46,523	)
Total Intangible Assets, net	$	63,422		$	68,396

Amortization expenses for the six months ended December 31, 2011 and 2010 were $5,994 and $5,151 respectively.

Based upon current assumptions, the Company expects that, during the next five years, its intangible assets will be amortized according to the following schedule:

Balance at June 30,	Amount
2012	$	6,015
2013		12,031
2014		12,031
2015		11,775
2016		11,262
Thereafter		10,308
Total	$	63,422

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

6. ACCOUNTS RECEIVABLE

Accounts receivable are uncollateralized, non-interest bearing customer obligations typically due under terms requiring payment from the invoice date. Payments of accounts receivable are allocated to the specific invoices identified on the customer’s remittance advice or, if unspecified, are applied to the oldest unpaid invoices. As of December 31 and June 30, 2011, accounts receivable and allowance for doubtful account as follow:

	December 31, 2011			June 30, 2011
Accounts Receivable	$	5,510,839		$	5,639,078
Less: Allowance for Doubtful Accounts		(133,806	)		(26,456	)
Total Accounts Receivable, net	$	5,377,033		$	5,612,622

7. ACCOUNTS PAYABLE

The Company has accounts payable related to the purchase of inventory. The amount of $954,739 and $870,204 as of December 31, 2011 and June 30, 2011 respectively, represent the accounts payable by the Company to the suppliers.

8. ACCRUED EXPENSES AND OTHER PAYABLE

Accrued expenses consist of audit fee and the payroll taxes for the current year. As of December 31, 2011 and June 30, 2011, the balance was $70,000 and $71,089, respectively. Other accounts payable consists of miscellaneous items. As of December 31, 2011 and June 30, 2011, the balances were $13,920 and $2,044, respectively.

9. WARRANTY ACCRUAL

The Company provides its customers a 2 years warranty on all products sold. In anticipation of warranty repairs, the Company accrues 1% of the sales amount as a “Warranty Accrual.” The Company believes that the accrual is adequate based on its historical warranty experience. If the goods sold have no quality problems within 2 years, the Company reverses the warranty accrual. As of December 31, 2011 and June 30, 2011, the warranty accrual was $270,718 and $198,611 respectively.

For six months ended December 31, 2011, the company paid $6,259 directly for warranty claims. Also, the company accrued $62,530 as the warranty accrual with respect to sales during the period.

For six months ended December 31, 2010, the company paid $6,201 directly for warranty claims. Also, the company accrued $51,879 as the warranty accrual with respect to sales during the period.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

10. LOANS FROM SHAREHOLDERS

The Company borrowed funds from Kun Liu, its Chief Executive Offices, to pay expenses incurred in the United States office. The first loan of $45,459 was made on April 20, 2010, followed by additional $254,479 loans that brought the balance to $299,938, which was the amount due from the Company to Kun Liu as of December 31, 2011. No portion of the loans has been repaid. The loans are interest-free and due on demand. The Company expects to continue to borrow funds from Kun Liu to pay its U.S. expenses until it obtains Dollars from a financing transaction or secures approval for a conversion of Renminbi to Dollars.

11. SHORT-TERM LOANS

In February and April 2011, the Company borrowed two separate loans with $40,000 each from a private party, to pay expenses incurred in the United States office. These loans are interest-free and due on demand. The Company expects to repay whole amount of these two loans within one year.

12. STOCKHOLDERS’ EQUITY

On July 14, 2011, one of the Company’s directors and principal shareholders, Mr. Qiang Fu, resigned from his position as a member of the Company’s Board of Directors. In connection with his resignation, Mr. Qiang Fu surrendered to the Company his five million (5,000,000) shares of the Company’s common stock, representing approximately 23% of the outstanding shares. The Company retired all these five million (5,000,000) shares immediately after Mr. Fu’s resignation.

As of December 31, 2011, 780,000,000 shares have been authorized and 16,659,811 shares are outstanding. The Company implemented a 1-for-2.2 reverse split on June 2, 2010. Retroactive effect is being given to the reverse split in these financial statements. Income statements have retroactively used the new outstanding shares to calculate the EPS. Stated capital in the stockholders’ equity section has been reduced accordingly.

13. STOCK-BASED COMPENSATION

On September 2, 2010, a principal shareholder of the Company transferred 358,500 shares of common stock to the Company’s employees in recognition of prior years’ services. The Company has recorded the transfer as a contribution to the Company’s capital and a stock-based compensation expense, valued by the closing stock price of $2.00 at the date of transfer, since these shares were fully-vested and non-forfeitable. The contribution to capital and compensation cost recorded in related to this transfer during the year ended June 30, 2011 was $717,000.

On October 6, 2010, the Company adopted the 2010 Stock Award Plan (the “2010 Plan”). The purpose of the Plan is to promote the success and enhance the value of the Company by linking the personal interests of the participants of the Plan (the "Participants") to those of the Company's stockholders, and by providing the Participants with an incentive for outstanding performance. The Company has reserved 3,000,000 shares of common share for the options and awards under the 2010 Plan.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

13. STOCK-BASED COMPENSATION (continued)

Subject to the terms and provisions of the 2010 Plan, the Board of Directors, at any time and from time to time, may grant shares of stock to eligible persons in such amounts and upon such terms and conditions as the Board of Directors shall determine.

The Board of Directors shall have the authority to determine all matters relating to the stock to be granted under the 2010 Plan, including selection of the individuals to be granted awards, the number of share, the date of termination of the stock awards, vesting schedules and all other terms and conditions thereof.

The Company issued 1,500,000 shares provided in the Plan in the form of grants of restricted common stock on October 18, 2010, valued by using our closing stock price of $1.10 on that date. As of December 31, 2011, 30% of those shares (450,000 shares) had been vested and no share had been cancelled. A summary of the status of the Company’s unearned stock compensation under the 2010 Plan is presented below:

Unearned Stock Compensation as of June 30, 2011	$	1,086,250
Unearned Stock Compensation Granted		-
Compensation Expense Recognized in Earnings		(183,333	)
Unearned Stock Compensation as of December 31, 2011	$	902,917

The following table shows amortization of unearned stock compensation relating to the 2010 Plan:

As of June 30,	Amortization
2012		160,417
2013		330,000
2014		247,500
2015		165,000
Total Amortization	$	902,917

14. INCOME TAXES

The Company has cumulative undistributed earnings of foreign subsidiaries of $9,301,088 as of December 31, 2011. These undistributed earnings are included in consolidated retained earnings and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if we concluded that such earnings will be remitted in the future.

The Company’s VIE, Beijing Guoqiang, is registered and operates in Beijing, PRC. In accordance with the relevant tax laws and regulations of PRC, Beijing Guoqiang is subject to income tax at an effective rate of 25% from January 1, 2008 on income reported in the statutory

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

14. INCOME TAXES (continued)

financial statements after appropriated tax adjustments. Because there is no income tax in the British Virgin Islands, Sky Achieve is not subject to taxation in its domicile.

The Company had no uncertain tax positions as of December 31, 2011 and June 30, 2010. The following table sets forth the components of the Company’s income before income tax expense and components of income tax expense for the six months ended December 31, 2011 and 2010:

	December 31, 2011			December 31, 2010
				(Restated)
China Pre-tax Income (Loss)	$	1,619,811		$	2,193,783
BVI Pre-tax Income (Loss)		(25	)		-
Domestic Pre-tax Income (Loss)		(252,943	)		(966,144	)
Total Pre-tax Income (Loss)	$	1,366,843		$	1,227,639

	December 31, 2011		December 31, 2010
			(Restated)
China Income Tax Expense	$	404,854	$	549,076
Domestic Income Tax Expense		-		-
Total Current Income Tax Expense	$	404,854	$	549,076

A reconciliation of tax at United States federal statutory rate to provision for income tax recorded in the financial statements is as follows:

	December 31, 2011			December 31, 2010
				(Restated)
U.S. Statutory Income Tax Rate		34.00	%		34.00	%
Foreign Income not Recognized in the U.S.		(34.00	%)		(34.00	%)
China Statutory Income Tax Rate		25.00	%		25.00	%
Other Items (a)		4.62	%		19.73	%
Effective Consolidated Current Income Tax Rate		29.62	%		44.73	%

(a). The 4.62% and 19.73% represents $252,943 (including $183,333 stock-based compensation expense) and $966,144 (including $907,385 stock-based compensation expense) of corporate expenses incurred by the Company’s US office that are not subject to PRC income tax for the six months ended December 31, 2011 and 2010.

The Company was incorporated in the United States. It incurred net operating losses for U.S. income tax purposes for the six months ended December 31, 2011. Net operating loss carry forwards for United States income tax purposes amounted to $462,039 as of December 31, 2011, which may be available to reduce future periods’ US taxable income. These carry forwards will expire, if not utilized, beginning in 2030 through 2031. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to Company's limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at December 31, 2011 for the temporary difference related to the loss carry-forwards. Management reviews this valuation allowance periodically and makes adjustments as warranted.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

14. INCOME TAXES (continued)

There is also a deferred tax asset of $67,055 as of December 31, 2011 resulting from the temporary difference with respect to the grant of unvested common stock to employees in October 2010.

As of December 31 and June 30, 2011, the deferred tax assets/ (liabilities) and the related valuation allowance were as follows:

	December 31, 2011			June 30, 2011
U.S. Holding Company Net Operating Loss Carry-forward	$	224,148		$	359,094
China Other Deferred Tax Assets		-			-
Less: Valuation Allowance		(224,148	)		(359,094	)
Net		-			-

15. EARNINGS PER SHARE

Earnings per share is determined by dividing net income for the periods by the weighted average number of both basic and diluted shares of common stock and common stock equivalents outstanding pursuant to ASC 260, “Earnings Per Share.” The following are the calculations for earnings per share for the three months ended December 31, 2011 and 2010:

	For the Three Months Ended
	December 31, 2011		December 31, 2010
Basic Earnings per Share
Net Income	$	423,167	$	765,304
Weighted Average Number of Common Share Outstanding - Basic		15,609,811		21,012,270
Earnings per Share – Basic	$	0.03	$	0.04

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

15. EARNINGS PER SHARE (continued)

	For the Three Months Ended
	December 31, 2011		December 31, 2010
Diluted Earnings per Share
Net Income	$	423,167	$	765,304
Weighted Average Number of Common Share Outstanding - Basic		15,609,811		21,012,270
Effect of Diluted Securities - Unvested Shares		275,651		-
Weighted Average Number of Common Share Outstanding - Diluted		15,885,462		21,012,270
Earnings per Share –Diluted	$	0.03	$	0.04

	For the Six Months Ended
	December 31, 2011		December 31, 2010
Basic Earnings per Share
Net Income	$	961,989	$	678,563
Weighted Average Number of Common Share Outstanding - Basic		16,026,478		21,012,270
Earnings per Share – Basic	$	0.06	$	0.03

	For the Six Months Ended
	December 31, 2011		December 31, 2010
Diluted Earnings per Share
Net Income	$	961,989	$	678,563
Weighted Average Number of Common Share Outstanding - Basic		16,026,478		21,012,270
Effect of Diluted Securities - Unvested Shares		37,471		-
Weighted Average Number of Common Share Outstanding - Diluted		16,063,949		21,012,270
Earnings per Share –Diluted	$	0.06	$	0.03

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

16. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC, and by the general state of the PRC's economy.

The Company's operations in the PRC are subject to specific considerations and significant risks not typically associated with companies in the North America and Western Europe. These include risks associated with, among others, the political, economic and legal environments and foreign currency exchange. The Company's results may be adversely affected by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The future profitability of the Company is dependent upon the Company's abilities to secure service contracts and maintain the operating expense at a competitive level.

Concentration of credit risk

Financial instruments that potentially subject to significant concentrations of credit risk consist of cash and cash equivalents. As of December 31, 2011 and June 30, 2011, substantially all of the Company’s cash and cash equivalents were held by major banks which located in the PRC. The Company’s management believes that there are remote chances the Company will loss money on those banks. With respect to accounts receivable, the Company extends credit based on an evaluation of the customer’s financial condition and customer payment practices to minimize collection risk on account receivables.

The major customers which represented more than 5% of total Accounts Receivable as follows:

	December 31, 2011					June 30, 2011
Customer Name	Amount		%			Amount		%
Hebei Aoguan Power Technology Co., Ltd	$	292,787		5.31	%		*		*
Hebei Xinyuzhou Electronic Bicycle Co., Ltd		277,564		5.04	%		*		*
Beijing Fuerxuan Technology Co., Ltd		*		*			521,675		9.25	%
Beijing Lianneng Power Technology Co., Ltd		*		*			376,519		6.68	%
Beijing Meiyina Vehicle Manufacturing Co., Ltd		*		*			300,120		5.32	%
Shandong Expressway Co. Ltd (Fujian Branch)		*		*			286,288		5.08	%

* Less than 5% of total accounts receivable as of December 31, 2011 and June 30, 2011.

The major vendors which represented more than 5% of total Accounts Payable as follows:

	December 31, 2011					June 30, 2011
Vendor Name	Amount		%			Amount		%
Heilongjiang Zhongqiang Power Tech Ltd	$	779,530		81.65	%	$	649,625		74.65	%
Guangzhou Fanyubaiyun Electronic Co., Ltd		50,148		5.25	%		103,538		11.90	%
Guangzhou Zengchen Electronic Co., Ltd		*		*			50,371		5.79	%

* Less than 5% of total accounts payable as of December 31, 2011.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

16. CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS (continued)

The major clients which represented 5% and more of the total sales for the three and six months ended December 31, 2011 and 2010 are as follows:

	For the Three Months Ended
Customer Name	December 31, 2011					December 31, 2010
Customer Name	Amount		%			Amount		%
Fuzhou Tong'an Electronic Technology Co. Ltd	$	270,208		7.26	%		*		*
Beijing Lidehuafu Electronic Tech Co. Ltd		195,611		5.26	%		*		*
Shandong Expressway Co. Ltd (Fujian Branch)		*		*			563,691		13.21	%
Saiensi Energy Technology Co. Ltd		*		*			275,322		6.45	%
Beijing Renyuxin Trading Co., Ltd		*		*			261,233		6.12	%
Beijing Anhualianhe Power Tech Co., Ltd		*		*			221,165		5.18	%

* Less than 5% of total sales for the three months ended December 31, 2011 and 2010.

	For the Six Months Ended
Customer Name	December 31, 2011					December 31, 2010
Customer Name	Amount		%			Amount		%
Hebei Aoguan Power Technology Co., Ltd	$	446,271		5.94	%		*		*
Beijing Zhongxinlian Digital Co., Ltd		389,099		5.18	%		*		*
Tianjin Aofeiya Bicycle Manufacturing Co., Ltd		382,659		5.09	%		*		*
Beijing Lidehuafu Electronic Tech Co. Ltd		377,396		5.02	%		*		*
Shandong Expressway Co. Ltd (Fujian Branch)		*		*			714,812		8.99	%
Beijing Renyuxin Trading Co., Ltd		*		*			409,403		5.15	%

* Less than 5% of total sales for the six months ended December 31, 2011 and 2010.

The major vendors which represented more than 5% of the total purchases for the three and six months ended December 31, 2011 and 2010:

	For the Three Months Ended
Vendor Name	December 31, 2011					December 31, 2010
Vendor Name	Amount		%			Amount		%
Heilongjiang Zhongqiang Power Tech Ltd	$	1,470,295		59.81	%	$	1,429,481		44.49	%
Beijing Anhualianhe Power Tech Co., Ltd		517,624		21.06	%		1,168,868		36.38	%
Guangzhou Fanyubaiyun Electronic Co., Ltd		280,274		11.40	%		205,227		6.39	%

	For the Six Months Ended
Vendor Name	December 31, 2011					December 31, 2010
Vendor Name	Amount		%			Amount		%
Heilongjiang Zhongqiang Power Tech Ltd	$	3,223,141		60.87	%	$	2,764,246		51.37	%
Guangzhou Fanyubaiyun Electronic Co., Ltd		531,468		10.04	%		312,088		5.80	%
Beijing Anhualianhe Power Tech Co., Ltd		518,690		9.80	%		1,627,262		30.24	%

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

17. RELATED PARTY TRANSACTIONS

A significant portion of the Company’s raw materials were purchased from Heilongjiang Zhongqiang Power Tech Co., Ltd (Heilongjiang ZQPT), which is a subsidiary of Advanced Battery Technologies, Inc (ABAT). Mr. Qiang Fu, who was one of the Company’s directors until July 14, 2011, is an immediate family member of the CEO of ABAT, who has exclusive control over the business of Heilongjiang ZQPT. For the six months ended December 31, 2011, purchases from Heilongjiang ZQPT totaled $3,223,141, or 60.87% of the total purchases for the six months then ended. For the six months ended December 31, 2010, purchased from Heilongjiang ZQPT totaled $2,764,246, or 51.37% of the total purchases for the six months then ended. As of December 31, 2011, the total amount due to Heilongjiang ZQPT was $779,530, or 81.65% of the total accounts payable. As of June 30, 2011, the total amount due to Heilongjiang ZQPT was $649,625, or 74.65% of the total accounts payable.

18. RESTATEMENT

We have restated the Consolidated Statements of Changes in Stockholders’ Equity for the year ended June 30, 2010. The reason for the restatement is that the Consolidated Statements of Changes in Stockholders’ Equity as originally issued failed to properly account for the reverse merger of Sky Achieve Holdings into the Company in March 2010. Pursuant to ASC 805-40-45-1, the Consolidated Statements of Changes in Stockholders’ Equity of the Company after the reverse merger should reflect the historic capital structure of Sky Achieve Holdings (the accounting acquirer) adjusted to reflect the legal capital of the Company prior to the reverse merger. As a result of the restatement, the shares issued to the prior owners of Sky Achieve Holdings in the reverse merger and the capital associated with the shares issued in the reverse merger are shown as outstanding in the balance at June 30, 2009 and thereafter, and the shares of the public company outstanding at the time of the reverse merger and the capital associated with those shares are shown as issued at the time of the reverse merger. The effect of the restatement on the Consolidated Statements of Changes in Stockholders’ Equity is shown below:

		As Originally Reported		As Restated
6/30/2009 Balance	Common Stock - Shares		1,007,936		19,151,875
	Common Stock - Amount	$	1,008	$	19,151
	Additional Paid-in Capital	$	157,436	$	139,293
	Common Stock - Shares		19,151,875		1,007,936
	Common Stock - Amount	$	19,151	$	1,008
Issuance of Common Stock/Reverse Acquisition Adjustments*	Additional Paid-in Capital	$	72,352	$	113,478
6/30/2010 Balance	Additional Paid-in Capital	$	229,788	$	252,771
	Total Stockholders’ Equity	$	5,467,999	$	5,490,982

* The effects of the reverse merger on shareholders’ equity were identified as “issuance of common stock” in our original filing and are identified as “reverse acquisition equity adjustment” in the amended filing.

CHINA LITHIUM TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2011 AND 2010

(UNAUDITED)

18. RESTATEMENT (continued)

We have restated the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended December 31, 2010 and accompanying notes. The reason for the restatement is that we failed to exclude the unvested shares when calculating the weighted average shares and the accumulated tax effect for our US office when calculating tax expenses. In the restatement, we excluded the unvested shares from the calculation of weighted average shares. The restatement had the following effects on the Company’s financial statements as of December 31, 2010 and for the quarters then ended:

	As Originally Reported		As Restated
Provision for Income Taxes – Three Months Ended December 31, 2010	$	285,431	$	333,028
Provision for Income Taxes – Six Months Ended December 31, 2010	$	322,230	$	549,076
Net Income – Three Months Ended December 31, 2010	$	812,900	$	765,304
Net Income – Six Months Ended December 31, 2010	$	905,410	$	678,563
Diluted Weighted Average Common Shares – Three Months Ended December 31, 2010		21,359,811		21,012,270
Diluted Weighted Average Common Shares – Six Months Ended December 31, 2010		20,759,811		21,012,270
Diluted EPS – Six Months Ended December 31, 2010	$	0.04	$	0.03

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Forward Looking Statements

The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, the realization of which may cause the prediction implicit in the forward-looking statements to be unrealized. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as "may", "will", "should", "expect", "plan", "intend", "anticipate", "believe", "estimate", "predict", "potential" or "continue", the negative of such terms or other comparable terminology. Actual events or results may differ materially. We disclaim any obligation to publicly update these statements, or disclose any difference between its actual results and those reflected in these statements.

Overview

We are holding company incorporated in the State of Nevada. Through our operating entity in China, we design, manufacture and market polymer lithium-ion battery modules, lithium-ion battery chargers, lithium-ion battery management systems as well as other lithium-ion battery management devices essential to proper power utilization.

Our PLI battery products 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. However, one of the bottleneck problems in the existing lithium-ion battery industry is the battery capacity loss. Through years of efforts in research and development, we developed an efficient battery management system in a way to balance the process of charging and discharging of multiple lithium-ion battery cells and adjust the charging frequency to the change of temperature of the ambient environment. We also incorporated the battery management system in our design of lithium-ion battery module and battery pack.

RESULTS OF OPERATION

Total Revenues

The following table shows the revenues attributable to each of our product lines:

	3 months ended Dec 31, 2011		3 months ended Dec 31, 2010		Change		Percentage
Battery Safety System		1,180,323		2,166,819		(986,496)		-45.53%
Battery Module		1,523,506		937,549		585,957		62.50%
Battery Pack		-		40,106		(40,106)		-100.00%
Electric Vehicle Battery		56,019		570,229		(514,210)		-90.18%
Power		810,616		461,377		349,239		75.69%
Chargers		149,386		92,021		57,365		62.34%
Total Revenue		3,719,851		4,268,090		(548,239)		-12.85%

	6 months ended Dec 31, 2011		6 months ended Dec 31, 2010		Change		Percentage
Battery Safety System		2,841,870		4,283,592		(1,441,722)		-33.66%
Battery Module		2,290,328		1,781,760		508,568		28.54%
Battery Pack		-		104,845		(104,845)		-100.00%
Electric Vehicle Battery		117,517		837,992		(720,475)		-85.98%
Power		2,009,702		787,559		1,222,143		155.18%
Chargers		231,666		177,019		54,647		30.87%
Total Revenue		7,491,083		7,972,767		(481,684)		-6.04%

Total revenues for the quarter ended December 31,2011were $3,719,851 as compared to total revenues of $4,268,090 for the quarter ended December 31, 2010, a decrease of $548,239 or approximately 12.85%. Our total revenues for the six months ended December 31, 2011 were $7,491,083, as compared to total revenues of $7,972,767 for the six months ended December 31, 2010, a decrease of $481,684 or approximately 6.04%. The decrease in the revenues during the periods under review was primarily due to the reduction of the sales, which typically occurs one month prior to the Chinese spring festival. Since the spring festival in 2012 started as early as January 23, 2012, it caused the slow sales in December 2011; while it was not the case in December 2010 because spring festival for the year of 2011 did not start until Mid-February 2011.

Moreover, during the three and six months ended December 31, 2011, we also adjusted slightly our product composition by shifting our efforts to market more profitable products such as battery module, power and chargers,. As a result, we reduced our sales of electric vehicle battery from $570,229 during the three months ended December 31, 2010 to $56,019 during the same quarter of 2011, a decrease of $514,210 . We also discontinued our sales of battery pack since July 1, 2011, which produced 0 revenues during the three months ended December 2011 as compared to $ 40,106 during the same quarter ended December 2010.

Cost of Goods Sold; Gross Profit

Gross profit for the quarter ended December 31, 2011was $1,489,425, as compared to $1,501,567 for the quarter ended December 31, 2010. Our gross margin ratio increased from 35% to 40%. Likewise, Our gross profit for the six months ended December 31, 2011 was $3,054,400 as compared to $2,805,590 for the six months ended December 31,2010. Our gross margin ratio for this period also increased from 35% to 40.77%. The Gross profit ratio increase was primarily attributable to an adjustment that we made in our product structure since the beginning of this fiscal year.. Started from July 1, 2011, we discontinued the sales of battery packs, which had a margin of 10% and reduced sales of electrical vehicle batteries (13% profit margin). In their place we increased our sales of products with a higher profit margin, including power supplies (50% gross profit margin), battery modules (37% gross profit margin), and chargers (25% gross profit margin). At the same time, we kept improving our production technology to lower the cost of goods sold. For the three months ended December 31, 2011, the cost of goods sold was 60% of revenues compared to 64.8% of the same period in 2010. During the six months ended December 31, 2011, the cost of goods sold was 59% of the total revenues as compared to 64.8% of the six months ended December 31, 2010.

Operating Expenses

Total operating expenses for the quarter ended December 31, 2011were $891,952, an increase of $479,819 or approximately 32%, from total operating expenses in the quarter ended December 31, 2010.

The primary reason for the increase in operating expenses, however, was the increase in general and administrative expenses from $203,226 during the quarter ended December 31 2010 to $525,975 during the quarter ended December 31, 2011. The increase was due to the allocation of our stock-based compensation expenses. We also issued 1,500,000 shares to six of our most important employees in October 2010. The shares vest over a five year period, and we will recognize the expense related to the shares over that the five-year period. As a result of that transaction, we recognized a compensation expense of $183,333 in this quarter. The general and administrative expenses also included the amortization of our intangible assets, accrued warranty, and the U.S. office expenses.

Our manufacturing expenses - which consist of factory overhead (utilities, depreciation, salaries and insurance of manufacturing personnel) and subcontracting expenses - increased by $52,183. We purchased a small amount of equipment for our Beijing and Guangzhou plants, Due to the inflation in china, the labor cost also increased. The research and development (“R&D”) expenses include all the cost of research and development and salaries of R & D professionals, increased by $80,378. Both of these increases reflect our efforts to expand our presence in the Chinese battery market. We expect that incremental increases in both of these categories will continue in the future.

Income Before Income Taxes

Due to the decrease of total sales and the increase in operating expenses our income from operations decreased to $597,473 for the quarter ended December 31,2011, $491,961 less than income from operations in the quarter ended December 31, 2010. During the quarter ended December 31, 2011, we added to income from operations an additional $4,182 in net interest income. This gave us a pre-tax income of $601,655 for the quarter ended December 31, 2011, compared to $1,098,332 for the quarter ended December 31, 2010.

Income Taxes

Our operating company pays income tax at the Chinese national rate of 25%. During the quarter ended December 31, 2011, our operations in China produced a taxable income of $1,619,811, as a result of which we accrued $404,854 in income tax. The effective consolidated income tax rate was 29.62%, as the $252,943 domestic pre-tax loss and $25 BVI pre-tax income we incurred, which left us $1,366,843 of total pre-tax income. By comparison, our effective tax rate for the quarter ended December 31, 2010was 44.73%, as we had a large domestic loss from our U.S. publicly-held parent company due to the stock-based compensation.

Net Income

As a result of these factors, we reported a net income of $423,167 for the quarter ended December 31, 2011, approximately 11.38% of the total revenue as compared to net income of $765,304 for the quarter ended December 31, 2010, approximately 17.93% of the total revenue. This translated to a basic and diluted net income per common share of $0.03 and $0.04 for the quarters ended December 31, 2011 and 2010, respectively.

During the six months ended December 31, 2011, we reported a net income of $961,989, approximately 12.84% of the total revenue as compared to net income of $678,563 for the quarter ended December 31, 2010, approximately 8.51% of the total revenue. This translated to a basic and diluted net income per common share was $0.06 and $0.03 for the six months ended December 31, 2011 and 2010 respectively.

Other Comprehensive Income

The functional currency of our subsidiaries and affiliate operating in the PRC is the RMB. The financial statements of our subsidiaries and affiliate are translated into U.S. dollars using yearend rates of exchange for assets and liabilities, and average rates of exchange (for the year) for revenues, costs, and expenses. Net gains and losses resulting from foreign exchange transactions are included in the consolidated statements of operations. As a result of these translations, which are a non-cash adjustment, we reported a foreign currency translation gain of $125,854 for the quarter ended December 31, 2011as compared to $103,284 for the fiscal year of 2010. This non-cash gain increased our reported comprehensive income.

LIQUIDITY AND CAPITAL RESOURCES

After our shareholders made the initial contribution of our registered capital, the growth of our business has been funded, primarily, by the revenues resulted from our business operations. Our working capital as of December 31, 2011 totaled $9,122,358, an increase of $1,413,774 from our $7,708,584 in working capital as of June 30, 2011.

As of December 31, 2011, our accounts receivable, net of allowance for doubtful accounts, was $5,377,033 as compared to $5,612,622 as of June 30, 2011, a decrease of $235,589. Despite the reduction, our accounts receivable continue to represent over four months of sales. This high account receivable was partially due to the favorable payment terms we provided to new customers in recent periods an incentive to initiate a relationship with us. Our standard payment terms are 0/60/90 days from delivery. To some of our significant new customers, however, we offered payment terms of 60/90/120 days, albeit on their initial orders only. Since we have had a number of new customers during the past two quarters, this promotion contributed to the increased level of our accounts receivable. In addition, after examining our accounts receivable level, we decided to give some of our clients an extension of paying term. Since January 23 was the Chinese traditional spring festival, some of our clients would pay off their bills after the Chinese new Year, and we agreed on that and extend ed the payment term even longer. As of December 31, 2011, $1,751,241 of our accounts receivable had been outstanding for more than 90 days, which was approximately 32.57% of the total account receivable. The chart below shows the breakdown of our accounts receivable according to the age of the receivable as of December 31, 2011:

Period	Amount		Percentage
Up to 30 days	$	1,433,922		26.67	%
“ 60 days	$	1,201,523		22.35	%
“ 90 days	$	990,347		18.42	%
“ 120 days	$	891,349		16.58	%
Over 120 days	$	859,892		15.99	%
Total	$	5,377,033		100	%

As of December 31, 2011, our inventories totaled $2,001,193, as compared to $972,867 as of June 30, 2010, an increase of $1,028,326. We increased the amounts of raw materials, work in process as well as finished goods. Almost the whole January and February are holiday season for Chinese New Year, the manufactory in next quarter will dropdown a lot. In order to get prepared for next quarter’s sales, we doubled our inventory of the normal level we kept for the inventory. We kept using the ABC inventory management system to control our inventory level. Under our “ABC inventory management” system, we classified the components used for our products by availability and price sensitivity. We maintained low or no inventories of commonly available components and purchased them as needed. On the other hand, we purchased components with long delivery cycles when prices appeared low, and kept them in stock to assure availability. The increase of work in process occurred as a result of our current production strategy. We kept an amount of work in process in order to shorten the period before we coulddeliver finished goods, thereby shortening the period from receiving the order to delivering the goods to the customer and collecting the money. Because the raw material market environment has recently changed, some of our raw materials have become difficult to obtain, resulting in not only price increases, but also a shortage of supplies. In response to this market condition, we have tried to collect more raw materials while the price was low, and we increased the inventory stocking level of our work in process and finished goods. We expect our inventory will go back to its previous level in the near future.

As of December 31, 2011, our advances to suppliers were $32,932 as compared to $29,180 as of June 30, 2011, a slight increase of $3,752.

As of December 31, 2011, our prepaid expenses were $912,141 as compared to $417,133 as of June 30, 2011, an increase of $199,931. The increase primarily occurred as a result of additional 1.2 million RMB ($198,669) prepaid to Beijing Ruiqingzhihua Technologies, Inc., with which we are jointly developing the 24v/600Ah battery pack technology. The whole development project is estimated to cost 5 million RMB ($781,250).

During the quarter ended December 31, 2011, there were no significant changes in our property and equipment or intangible assets.

As of December 31, 2011, we had a non-interest-bearing loan of $299,938 from Mr. Liu, our CEO. We incurred the loan over the past two years in order to obtain Dollars for the purpose of paying the expenses of our U.S. office. Since the process of converting Chinese Renminbi into Dollars is time and effort-consuming, we expect to continue to borrow U.S. Dollars from Mr. Liu for this purpose until we complete our financing in the U.S. that provides us Dollars.

With regards toour sales decrease during this period, the sales tax and other related tax decreased as well, As a result, our taxes payable at December 31, 2011 was $261,549 as compared to $438,532 as of June 30, 2011.

Despite net income of $961,989 for the three months ended December 31, 2011, our operations used $38,163 in cash. The primary reasons for the discrepancy were the increases in inventory ($1,028,326) and prepaid expenses ($495,008), as discussed above. In addition, there was a decrease of $176,983 on taxes payable,Also, a $183,333 stock-based compensation occurred from operating activities. Partially offsetting these cash uses, our accounts receivable, decreased by $235,589. In other words, this negative cash yield from operations was a result of management allocation of resources, and is not indicative of the liquidity of our operations. In the future, we expect to manage our resources better to make our operations cash positive.

Restrictions on Dividends and Other Cash Transfers

All of our business operations are carried out by Beijing GuoQiang, and all of our cash assets are held by that entity. To date, our U.S. parent corporation has paid its expenses by taking loans from Kun Liu, our Chief Executive Officer. In the future, in order for the U.S. parent corporation to continue its operations without depending on such loans or to pay dividends to our shareholders, we will have to transfer funds from Beijing GuoQiang through Sky Achieve and then to China Lithium Technologies, our U.S. parent corporation. Our ability to transfer funds in this manner will limited by two factors:

Statutory Reserves. The Company Law of the PRC applicable to Chinese companies with foreign ownership provides that net income can be distributed as dividends only after:

Cumulative prior years’ losses have been recouped;

10% of after tax income has been allocated to a statutory surplus reserve until the reserve amounts to 50% of the company’s registered capital;

10% of after tax income has been allocated to a statutory common welfare fund, which is established for the purpose of providing employee facilities and other collective benefits to the company’s employees; and

allocations have been made to the discretionary surplus reserve, if such a reserve is approved at the meeting of the equity owners.

Currency Conversion. The Yuan is not freely convertible into Dollars. The State Administration of Foreign Exchange (“SAFE”) administers foreign exchange dealings and requires that they be conducted though designated financial institutions. Foreign Investment Enterprises, such as Beijing GuoQiang, may purchase foreign currency from designated financial institutions in connection with current account transactions, including profit repatriation.

These factors will limit the amount of funds that we can transfer from Beijing GuoQiang to China Lithium Technologies and may delay any such transfer. In addition, upon repatriation of earnings of Beijing GuoQiang to the United States, those earnings may become subject to United States federal and state income taxes. We have not accrued any U.S. federal or state tax liability on the undistributed earnings of our foreign subsidiary because those funds are intended to be indefinitely reinvested in our international operations. Accordingly, taxes imposed upon repatriation of those earnings to the U.S. would reduce the net worth of the Company.

Effects of Consolidation

The financial statements presented in this Report consolidate the financial statements of China Lithium Technologies, Inc. with the financial statements of its subsidiary, Sky Achieve Holdings, Inc. Also consolidated are the financial statements of an entity, Beijing GuoQiang Global Science and Technology Development Co, Ltd., the legal owners of which are our Chairman, Kun Liu, and certain associates. The financial statements of Beijing GuoQiang are consolidated with our financial statements because Beijing GuoQiang is a variable interest entity with respect to Sky Achieve, which is a wholly-owned subsidiary of China Lithium Technologies. Sky Achieve is a party to five agreements dated January 5, 2010 with the owners of the registered equity of Beijing GuoQiang and with Beijing GuoQiang. The agreements transfer to Sky Achieve all of the benefits and all of the risk arising from the operations of Beijing GuoQiang, as well as complete managerial authority over the operations of Beijing GuoQiang.

The following table summarizes the effects of consolidating Beijing GuoQiang with China Lithium Technologies and its subsidiary:

	China Lithium Technologies and Subsidiaries			Beijing Guoqiang			Consolidation
Balance Sheet – December 31, 2011
Current Assets	$	101,415		$	11,188,203		$	11,190,692
Property, Plant and Equipment		-			711,981			711,981
Total Assets		374,345			11,963,606			11,966,096

Current Liabilities		563,529			1,604,124			2,068,334
Total Liabilities		563,529			1,604,124			2,068,334
Stockholders’ Equity		(189,184	)		10,359,482			9,897,761

Statement of Operations – Six Months Ended December 31, 2011
Revenue		-			7,491,083			7,491,083
Gross Profit		-			3,054,400			3,054,400
Operating Income (Loss)		(252,818	)		1,609,838			1,357,415
Net Income (Loss)		(252,968	)		1,214,563			961,989

Statement of Cash Flow – Six Months Ended December 31, 2011
Net Cash (Used) Provided by Operating Activities		(65,582	)		18,444			(38,163	)
Net Cash (Used) Provided by Investing Activities		-			(2,500	)		(2,500	)
Net Cash (Used) Provided by Financing Activities	$	25,275			-		$	16,300

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 3. Quantitative and Qualitative Disclosures about Market Risk

A smaller reporting company is not required to provide the information required by this Item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer, Liu Kun, and Principal Financial Officer, Fang Chun Ping, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were not effective. The weaknesses in the Company’s controls and procedures consisted of (a) a lack of expertise in identifying and addressing accounting issues under U.S. Generally Accepted Accounting Principles among the personnel in the Company’s accounting department, which has resulted in certain errors in accounting identified in Note 15 to the Consolidated Financial Statements, (b) a lack of expertise among Company personnel with regard to the disclosure requirements arising under the Rules of the Securities and Exchange Commission, and (c) inadequate review by management personnel of the Company’s reports prior to filing.

Changes in Internal Controls over Financial Reporting.

During the three months ended December 31, 2011, there has been no change in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the Company is a party.

Item 1A. Risk Factors

There have been no material changes from the risk factors included in our Annual Report on Form 10-K for the year ended June 30, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Removed and Reserved

Item 5. Other Information

None

Item 6. Exhibits

31.1		Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
31.2		Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer
101.ins		XBRL Instance
101.sch		XBRL Schema
101.cal		XBRL Calculation
101.def		XBRL Definition
101.lab		XBRL Label
101.pre		XBRL Presentation

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

	CHINA LITHIUM TECHNOLOGIES, INC.


DATE: February 21, 2012	By:	/s/ Kun Liu
		Kun Liu, Chairman and Chief Executive Officer (Principal Executive Officer)


	By:	/s/ Chunping Fang
		Chunping Fang, Chief Financial Officer (Principal Financial Officer, Principal Accounting Officer)

China Lithium Technologies Inc. - FORM 10-Q - February 21, 2012

Attached files

China Lithium Technologies Inc. Reports