Variant View Research Responds to Advanced Battery Technologies

| About: Advanced Battery (ABAT)

On 4/6/2011, Advanced Battery Technologies (OTCPK:ABAT) issued a press release responding to our research report titled "Advanced Battery Technologies (OTCPK:ABAT): The Most Egregious Chinese RTO."

We present, side-by-side, excerpts from ABAT's response and statements from their official filings. ABAT's response contains numerous false and misleading statements which directly contradict its filings. We have provided links to these filings to make it convenient for the reader to verify our claims.

In our report, we noted that Chairman Fu now owns the company's key subsidiary, which ABAT had previously claimed ownership of.

We wrote:

If the filings are accurate, the Chairman transferred ownership of the company's sole operating subsidiary to himself without explanation or compensation. If the filings are inaccurate, then the company is guilty of misrepresenting itself as previously owning 100% of HLJ ZQPT.

Excerpt from ABAT response on 4/6/2011:

[HLJ ZQPT] has been owned by 16 investors, including Chairman Fu, since … 2002. In 2004 the owners of Heilongjiang ZQPT transferred all of the benefits and obligations of ownership of Heilongjiang ZQPT to Harbin ZQPT, a subsidiary of ABAT. Under U.S. GAAP, the transfer of those benefits and obligations meant that the balance sheet and financial results of Heilongjiang ZQPT must be consolidated with those of ABAT as if it were a subsidiary. Thus, for accounting purposes, ABAT reported in its SEC filings from 2004 to 2009 that it "owned" Heilongjiang ZQPT.

[Throughout this article, ellipses refer to an omitted clause, and emphasis has been added to excerpts by this author.]

Excerpt from ABAT's FY 2004 10-K filing:

Mr. Fu also owns 30% of the outstanding stock of ZQ Power-Tech, and was responsible for structuring the transaction in which Advanced Battery Technologies acquired its 70% of ZQ Power-Tech.

Excerpt from ABAT's FY 2007 10-K filing:

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"). Prior to January 2006, Cashtech Investment Limited owned 70% of the capital stock of ZQ Power-Tech. In January 2006 our Chairman, Fu Zhiguo, transferred the remaining capital stock of ZQ Power Tech to Cashtech Investment Limited, so that it now owns 100% of ZQ Power-Tech.

In its prior filings, ABAT explicitly claimed ownership of "100% of ZQ Power-Tech [HLJ ZQPT]". It also explicitly claimed that the ownership of HLJ ZQPT was through "stock." It did not truthfully present HLJ ZQPT as a VIE, as other companies using VIE structures have done for years.

We reiterate that it is not a question of consolidation or accounting. Regardless of whether a company consolidates an entity or not, it cannot claim to own a entity that it does not own.

We interpret ABAT's response as an admission that it misled investors in its SEC filings from 2004 through 2008 regarding the true ownership of HLJ ZQPT.

In our report, we stated that ABAT misleads investors into thinking that it makes electric cars.

Excerpt from ABAT's Response, 4/6/2011:

No person reading our SEC filings or looking at our website in good faith could draw the conclusion that ABAT manufactures electric cars.

Excerpts from ABAT's 10-K filing:

Since 2002, Wuxi ZQ has been engaged in the design, development, manufacture and marketing of electric- and hybrid-powered two wheel vehicles, as well as electric-powered agricultural transport vehicles and sport utility e-vehicles... [Wuxi ZQ] is engaged in the business of manufacturing and distributing electric vehicles

The company regularly refers to its business as an "electric vehicle" business in its press releases and filings. This is highly likely to mislead Western investors whose idea of an electric vehicle is a Tesla, not a bicycle with a small electric motor attached.

However, even if we were generous enough to say that it is legitimate to refer to bicycles as 'electric vehicles,' there are numerous explicit references to cars and sport utility vehicles in the company's website and filings.

Partial screenshot of ABAT's website, taken on 3/30/2011:

click to enlarge

The company's website, ZQPT.COM, explicitly stated "electric cars."

Note that the company changed the text on 4/6/2011 to read "electric vehicle." However, the company did a poor job of scrubbing its site for references to electric cars. As of the morning of 4/6/2011, this page still has a claim that Wuxi is producing 'the electric four-wheel car series.' Another page still has an "electric cars" button.

As of 4/6/2011, the old image of "Electric cars" can be found in the Google cache or in aGoogle image search. A screenshot of the old website is also available in my initial report on ABAT dated 3/28/2011.

The site contains no images of SUVs or agricultural vehicles. We don't believe that the company is selling any real sport utility vehicles for $3,400 or less, as it claims in its 10-K.

In our report, we stated that ABAT overpaid for Wuxi Angell by spending $22 million on the acquisition.

Excerpt from ABAT's Response, 4/6/2011:

The purchase price paid by ABAT for Wuxi ZQ was $12.87 million (cf: ABAT 2009 10-K, Note 3 to the Financial Statements), not $22 million.

Excerpt from ABAT's 8-K/A filing:

In exchange for the equity in Wuxi Angell, ABAT agreed to pay U.S.$3,640,000 and 70 million Chinese Renminbi (approx. $10,248,902) in cash. In addition, Advanced Battery Technologies, Inc. issued three million shares of its common stock to the sellers.

Units (mn) U.S.D per unit U.S.D (mm)
U.S.D payment 3.64 1.00 3.64
RMB payment 70.00 0.15 10.20
ABAT Shares 3.00 2.64 7.92
Total 21.76

Excerpt from ABAT's FY 2009 10-K filing (footnote 3):

We looked at the 2009 10-K which ABAT references. Strangely, footnote 3 claims that the total purchase price is $9.87 million, not $12.87 million as it now claims. ABAT seems very confused about the purchase price it paid for the Wuxi acquisition. Of these three prices that ABAT has claimed at various times, at least two must be fictional.

In our report, we stated that the purported acquisition of Shenzhen ZQ in early 2011 was most likely a sham transaction because of Chairman Fu's connection to Shenzhen ZQ.

Excerpt from ABAT's Response, 4/6/2011:

Until we acquired it in January 2011, the registered owner of the registered equity of Shenzhen ZQ was Wang Changhe. He is the person to whom the purchase price for Shenzhen ZQ was paid.

The Variant View report notes that our Chairman, Fu Zhiguo, is identified as an officer and legal representative of Shenzhen ZQ in that company's government registration. That is correct. In order to register the acquisition of Shenzhen ZQ by Harbin ZQPT with the provincial government, Mr. Wang, the seller, gave Mr. Fu a power of attorney to represent the company before the government. This was solely an administrative convenience, as the purchase of Chinese companies cannot be completed without government registration performed in person.

The Shenzhen AIC registration filing which ABAT says we are "correct" about is dated 2008. This was definitely not an "administrative convenience" to facilitate a 2011 transaction.

More information about the Shenzhen ZQ transaction can be found in our follow-up report here. Essentially, Shenzhen ZQ, which the company now claims to have purchased in 2011, was actually purchased in 2008.

Excerpt from Defendant ABAT's court filing, dated 12/7/2009:

Plaintiff's Employment Contract was executed contemporaneously with [ABAT's] acquisition of Huang's father's company, Shenzhen Shengxi Science and Technology Co., Ltd. ("Shenzhen SST"), by ABAT's Chief Executive Officer, Fu. See Compl., ¶ 7 & Ex. A. Curiously, the Complaint refers to Shenzhen SST as "Luke Battery Corp.," Compl., ¶ 6 & Ex. A - a name appearing nowhere in the Acquisition Agreement. The company was then renamed Shenzhen Zhongqiang Energy Science and Technology Co. Ltd., a name sometimes rendered in English as "Shenzhen ABAT" or "SABAT." Fu Decl., ¶ 10.

The names in the U.S. court filing match the names in the 2008 Shenzhen AIC filing. As the court filings show, ABAT had purchased this company from a Mr. Huang for $1 million in 2008, not from Mr. Wang for $20 million in 2011.

The announcement of a second acquisition for the same company that ABAT already owned seems to be a device for the Chairman to funnel $20 millon of shareholder funds into his own pocket.

In our report, we stated that ABAT's $4.8 million loan from Chairman Fu appeared to be fabricated because it did not appear on the balance sheet.

Excerpt from ABAT's Response, 4/6/2011:

Variant View's other point is that the loan does not appear on the balance sheet in the 2005 10-K. To which we respond: "Of course it doesn't. It was satisfied in January of that year."

ABAT implies that the loan was taken off the balance sheet in 2005 when it was repaid. Unfortunately for ABAT, the purported $4.8 million loan does not appear on their 2004 10-K balance sheets either. (Our report initially included the 2004 10-K balance sheets also, but they were inadvertently deleted during editing.)

Excerpt from ABAT's FY 2004 10-K balance sheet:

None of the footnotes indicated in the liabilities section make any reference to the purported loan.

We reiterate our belief that this purported loan never existed in the first place. We don't believe that Chairman Fu would lend money to the company without a written contract and without properly disclosing it in the balance sheets.

The company claims that a loan contract was signed in January 2005 "acknowledging" a loan that was made many years prior, and that the loan was repaid in January 2005. We simply don't find this claim credible, in light of the lack of balance sheet disclosure. This was not a small loan that could have been overlooked. $4.8 million is greater than the total liabilities disclosed by the company at year end 2004. It remains far more likely that the agreement was fabricated.

In our report, we noted that John Leo was the promoter of both ABAT and the CYXI fraud.

Excerpt from ABAT's Response, 4/6/2011:

The RTO occurred in 2004. John Leo had no relationship with ABAT after February 2005 other than as a relatively small shareholder.

Excerpt from ABAT's Correspondence with SEC Staff, 9/11/2006:

Excerpt from ABAT's Correspondence with SEC Staff, 11/14/2006:

[T]he value of the shares was properly accounted for as a prepaid expense, to be amortized over the expected duration of Mr. Leo's relationship with the Company.

ABAT was claiming to the SEC in late 2006 that it expected a 10-year relationship with John Leo. Now it is claiming that their relationship ended in February 2005. At least one of these two claims must be false.

In our report, we estimated that Chairman Fu has sold approximately 28 million shares of ABAT since 2004.

Excerpt from ABAT's Response, 4/6/2011:

Chairman Fu has never owned more than the 9,149,730 shares (options included) he currently owns.

Excerpts from ABAT's FY 2005 10-K filing:

In consideration of Mr. Fu's transfer of the interest in ZQ Power-Tech, the Company issued 11,780,594 shares of common stock to Mr. Fu... In consideration of Mr. Fu's transfer of the patent to ZQ Power-Tech, Advanced Battery issued 4,400,000 shares of common stock to Mr. Fu.

Excerpt from ABAT's FY 2004 10-K filing:


We interpret ABAT's response on the subsidiary ownership question as an admission that it misled investors in its SEC filings from 2004 through 2008 by falsely representing its VIE entity as a wholly-owned subsidiary.

The company's responses continue to mislead investors with statements that can be easily disproven by checking them against the company's prior filings with securities regulators and the U.S. federal court system.

Disclosure: Variant View Research and its affiliates are "short" ABAT via its common stock and options. We intend to profit from our short positions by covering, hedging, or otherwise unwinding them at lower stock prices. We reserve the right to add to or reduce our short positions at any time, and we do not intend to disclose these transactions, either before or after they are made. Persons suspected or accused of crimes are presumed innocent until proven guilty in a court of law.