DFEL China TMK Battery Systems Inc (PK)

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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

For the quarterly period ended: June 30, 2010

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

For the transition period from ____________ to _____________

Commission File No. 333-139660

CHINA TMK BATTERY SYSTEMS INC.
(Name of Small Business Issuer in Its Charter)

Nevada	98-0506246
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

Sanjun Industrial Park
No. 2 Huawang Rd., Dalang Street
Bao'an District, Shenzhen 518109
People's Republic of China
(Address of principal executive offices)

(86) 755 28109908
(Registrant’s telephone number, including area code)

     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 [   ]

     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 [    ]             No [    ]

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]	Accelerated filer [   ]
Non-accelerated filer [   ]	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 [   ]             No [ X ]

The number of shares outstanding of each of the issuer’s classes of common equity, as of August 13, 2010 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	36,888,000

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TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS.	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.	18
ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.	26
ITEM 4.	CONTROLS AND PROCEDURES.	26
PART II	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	27
ITEM 1A.	RISK FACTORS.	27
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	27
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	27
ITEM 4.	(REMOVED AND RESERVED).	27
ITEM 5.	OTHER INFORMATION.	27
ITEM 6.	EXHIBITS.	28

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PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

CHINA TMK BATTERY SYSTEMS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

Contents	Page(s)
Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009	2
Consolidated Statements of Income and Other Comprehensive Income for the three and six months ended June 30, 2010 and 2009 (unaudited)	3
Consolidated Statements of Changes in Equity for six months ended June 30, 2010 (unaudited)	4
Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)	6
Notes to the Consolidated Financial Statements (unaudited)	7

1

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China TMK Battery Systems Inc. and Subsidiaries
Consolidated Balance Sheets

		June 30,			December 31,
		2010			2009
		(Unaudited)
Assets
Current Assets
Cash and cash equivalents	$	926,786		$	185,590
Trade receivables, net		7,028,619			2,909,234
Advances to suppliers		248,931			215,689
VAT recoverable		505,770			34,660
Inventories, net		5,663,856			3,973,697
Due from related parties					15,204
Prepaid expenses and other receivables		99,137			-
Restricted cash					438,780
Total current assets		14,473,099			7,772,854
Property, equipment and construction in progress, net		12,690,024			11,039,703
Advances for property and equipment purchase		17,590,198			16,930,020
Restricted cash		352,488			263,268
Deposit for business acquisition		3,185,452			-
Other assets		98,699			50,804
Total Assets	$	48,389,960		$	36,056,649
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable	$	3,962,136		$	1,832,737
Accrued liabilities and other payable		323,955			519,129
Customer deposits		266,847			179,272
Wages payable		481,522			556,189
Corporate tax paya bl e		28,704			216,443
Short-term bank loan		3,763,789			4,722,660
Current portion of long-term bank loans		1,236,981			2,451,700
Deferred revenue		18,504			36,854
Due to related parties		1,423,363			17,691
Total current liabilities		11,505,801			10,532,675
Long-term bank loans		10,009,827			9,236,953
Deferred tax liabilities		596,454			593,977
Derivative liability		1,883,117			-
Total Liabilities		23,995,199			20,363,605
Stockholders' Equity
Preferred stock, $0.001 par value, 10,000,000 shares            authorized, none issued and outstanding at March 31, 2010            and December 31, 2009		-			-
Common stock, $0.001 par value, 300,000,000 shares authorized,            34,171,000 and 25,250,000 shares issued and outstanding            at March 31, 2010 and December 31, 2009, respectively		36,888			25,250
Common stock subscribed, 2,717,250 shares at March 31, 2010					-
Additional paid-in capital		10,518,662			1,193,591
Accumulated other comprehensive income		437,617			365,187
Subscription receivables					-
Statutory reserves		1,038,988			1,038,988
Retained earnings (unrestricted)		12,362,606			13,070,028
Total stockholders' equity		24,394,761			15,693,044
Total Liabilities & Stockholders' Equity	$	48,389,960		$	36,056,649

The accompanying notes are an integral part of these consolidated financial statements.

2

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China TMK Battery Systems Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)

		For the Six Months Ended						For the Three Months Ended
		June 30,			June 30,
		2010			2009			2010			2009
Revenue	$	30,019,190		$	21,278,432		$	16,754,718		$	11,377,776
Cost of Goods Sold		(23,481,135	)		(16,078,400	)		(13,375,438	)		(8,589,595	)
Gross Profit		6,538,055			5,200,032			3,379,280			2,788,181
Operating Costs and Expenses
Selling expenses		732,806			396,304			498,088			204,916
Depreciation		66,579			58,398			49,074			5,618
General and administrative		2,634,622			565,182			811,643			296,056
Research and development		493,394			237,760			328,150			125,751
Total operating expenses		3,927,401			1,257,644			1,686,955			632,341
Income from operations		2,610,654			3,942,388			1,692,325			2,155,840
Other income (expenses):
Interest expense, net		(486,790	)		(312,165	)		(244,883	)		(92,913	)
Other expense, net		(60,355	)		(678	)		26			(81	)
Change in fair value of embedded derivative		(664,373	)		-			1,060,860			-
Total other income (expenses)		(1,211,518	)		(312,843	)		816,003			(92,994	)
Income before income taxes		1,399,136			3,629,545			2,508,328			2,062,846
Income taxes		(596,558	)		(537,390	)		(238,383	)		(302,337	)
Net income	$	802,578		$	3,092,155		$	2,269,945		$	1,760,509
Earnings per share - basic	$	0.02		$	0.12		$	0.06		$	0.07
Weighed-average shares outstanding, basic		33,175,227			25,250,000			36,111,714			25,250,000
Earnings per share - diluted	$	0.02		$	0.12		$	0.06		$	0.07
Weighed-average shares outstanding, diluted	$	33,833,547			25,250,000		$	36,551,841			25,250,000

The accompanying notes are an integral part of these consolidated financial statements.

3

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China TMK Battery Systems Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Six Months Ended June 30, 2010
(Unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

4

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China TMK Battery Systems Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)

		For the Six Months Ended June 30,
		2010			2009
Net income	$	802,578		$	3,092,155
Other comprehensive income, net of tax:
Unrealized gain on foreign currency translation		72,430			(10,704	)
Comprehensive income	$	875,008		$	3,081,451

The accompanying notes are an integral part of these consolidated financial statements.

5

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China TMK Battery Systems Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)

		For the Six Months Ended
		June 30,
		2010			2009
Cash Flows From Operating Activities
Net income	$	802,578		$	3,092,155
Adjustments to reconcile net income to net cash        provided by operating activities:
Depreciation expense		405,482			194,468
Common stocks for services provided		856,250
Deferred income		(18,350	)
Change in fair value of embedded derivative		664,373
Changes in operating assets and liabilities:
Trade receivables		(4,119,385	)		(3,585,167	)
Advance to suppliers		(33,242	)		(134,813	)
Inventories, net		(1,690,159	)		(137,438	)
Account payable - trade		2,129,399			262,641
Accrued liabilities and other payables		(195,174	)		103,989
Customer deposits		87,575			150,244
Other assets		(47,895	)		(11,814	)
Prepaid expenses and other receivables		(99,137	)		-
Wages payable		(74,667	)		105,874
Various taxes payable		(658,849	)		149,797
Net cash used in (provided by) operating activities		(1,991,201	)		189,936
Cash Flows From Investing Activities
Change in restricted cash		349,560			(302,433	)
Purchases and advances for property and equipment purchase		(2,626,277	)		(6,039,184	)
Deposit for Hualian acquisition		(3,185,452	)		-
Collection of advances/loans - related parties		15,204			10,806
Advances/loans - related parties		-			-
Collection of short-term loan receivable		-			1,173,520
Net cash used in investing activities		(5,446,965	)		(5,157,291	)
Cash Flows From Financing Activities
Borrowing from bank notes					2,931,400
Repayment of bank notes					(1,069,961	)
Borrowing from bank loans		3,157,422			9,320,237
Repayment of bank loans		(4,624,782	)		(4,458,876	)
Net proceeds from share issuance		9,699,203			-
Distribution to owners		-			(1,476,622	)
Distribution to former owners		(1,504,180	)		-
Proceeds from related parties		1,421,235			385
Repayment to related parties		(17,691	)		(8,610	)
Net cash provided by financing activities		8,131,207			5,237,953
Effect of exchange rate changes on cash		48,155			(14,234	)
Net increase (decrease) in cash and cash equivalents		741,196			256,364
Cash and cash equivalents, beginning of period		185,590			186,463
Cash and cash equivalents, end of period	$	926,786		$	442,827
		-			-
Supplemental disclosure information:
Income taxes paid	$	784,297		$	443,384
Interest paid	$	486,920		$	312,615

The accompanying notes are an integral part of these consolidated financial statements.

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1: DESCRIPTION OF BUSINESS AND ORGANIZATION

China TMK Battery System Inc. (“TMK US”, or “the Company”) (formerly Deerfield Resource, Ltd.) was incorporated under the laws of the State of Nevada on June 21, 2006. On February 10, 2010, we entered into and closed the Share Exchange Agreement with Leading Asia, a BVI company, and its sole stockholder, Unitech, a BVI company, pursuant to which we acquired 100% of the issued and outstanding capital stock of Leading Asia in exchange for 25,250,000 shares of our common stock, par value $0.001, which constituted 90.18% of our issued and outstanding capital stock on a fully-diluted basis as of and immediately after the consummation of the transactions contemplated by the Share Exchange Agreement.

In connection with the reverse acquisition of Leading Asia, Deerfield also entered into the Cancellation Agreement with United Fertilisers, its controlling stockholder, whereby United Fertilisers agreed to the cancellation of 272,250,000 shares of China TMK's common stock owned by it. As a condition precedent to the consummation of the Share Exchange Agreement, on February 10, 2010, China TMK also entered into a termination and release agreement with ASK Prospecting & Guiding Inc., pursuant to which Deerfield terminated that certain Mineral Claim Purchase Agreement, dated as of October 10, 2006. On February 10, 2010, Deerfield Resources, Ltd. changed its name to "China TMK Battery Systems Inc." to more accurately reflect its new business operations.

The transaction has been treated as a recapitalization of Leading Asia and its subsidiaries, with China TMK Battery Systems Inc. (the legal acquirer of Leading Asia and its subsidiaries, including the consolidation of the TMK Power Industries Ltd.) considered the accounting acquiree, and Leading Asia whose management took control of China TMK Battery Systems Inc. (the legal acquiree of Leading Asia) considered the accounting acquirer. The Company did not recognize goodwill or any intangible assets in connection with the transaction. All costs related to the transaction are being charged to operations as incurred. The 25,250,000 shares of common stock issued to the shareholders and designees of China TMK BVI in conjunction with the Share Exchange have been presented as outstanding for all periods. The historical consolidated financial statements include the operations of the accounting acquirer for all periods presented.

TMK US, through its wholly-owned subsidiary in the People’s Republic of China (“PRC”), is engaged in the research, development, production, marketing and sales of environment-friendly batteries including nickel metal hydride batteries.

TMK US and its subsidiaries - Leading Asia Pacific Investment Limited, Good Wealth Capital Investment Limited, TMK Power Industries (SZ) Co., Ltd., and Borou Industrial Co., Ltd – are collectively referred to as the “Company.”

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Basis of preparation

The consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation SX. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. These consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2009 and notes thereto contained in our Registration Statement on Form S-1 filed with the United States Securities and Exchange Commission (the “SEC”) on May 24, 2010. Interim results are not necessarily indicative of the results for the full year.

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

b. Foreign currency translation

The functional currency of the Company is Renminbi (“RMB”). The Company maintains its financial statements using the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.

For financial reporting purposes, the financial statements of TMK Shenzhen and Borou, which are prepared in RMB, are translated into the Company’s reporting currency, United States Dollars (“USD”). Balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using the average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income (loss) in stockholder’s equity.

The exchange rates used for foreign currency translation were as follows (USD$1 = RMB):

The exchange rates used for foreign currency translation were as follows (USD$1 = HKD):

c. Reclassifications

Certain amounts in the consolidated financial statements for the prior year have been reclassified to conform to the presentation of the current year for the comparative purposes.

d. Recently issued accounting pronouncements

In January 2010, the FASB issued ASU No. 2010-6, Improving Disclosures About Fair Value Measurements, that amends existing disclosure requirements under ASC 820 by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchase, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU is effective for the first quarter of 2010, except for the requirement to provide level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which is effective beginning the first quarter of 2011. Since this standard impacts disclosure requirements only, its adoption will not have a material impact on the Company’s consolidated results of operations or financial condition.

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 3: ACQUISITION

In January 4, 2010, the Company entered into a Memorandum of Understanding (MOU) with Shenzhen DongFang Hualian Technology Ltd. (“Hualian”). The Company paid overall $3.2 million as deposit during January through June 2010, which shall be withdrawn based upon the MOU if Hualian fails the legal and financial due diligence which are currently in the process and are expected to be completed by the end of the third quarter of 2010. In addition, the Company can withdraw the $3.2million deposit if the 2009 net profit of Hualian is less than $4,105,080 (RMB 28 million).

NOTE 4: ADVANCES FOR PROPERTY AND EQUIPMENT PURCHASE

Advances for property and equipment purchase consist of the following:

		June 30, 2010			December 31,
					2009
Advances for Property Purchase (1 unit located in Shihao Mansion)	$	3,036,721		$	3,024,108
Advances for Equipment Purchase (4 vendors as of 6/30/2010 and 2 vendors as of 12/31/2009)		2,857,504			2,989,816
Advances for Property Purchase (3rd, 5th and 6th floor located in Jinli Building)		11,695,973			10,916,096
Total Advances for Property Purchase	$	17,590,198		$	16,930,020

The Company entered into two agreements to purchase equipment from two vendors in 2009 and three agreements to purchase equipment from four vendors during six months ended June 30, 2010. Based on the agreements, the Company is required to pay certain deposits prior to equipment delivery date. The remaining price is to be paid after trial-run of the equipment within certain acceptance period. The ownership of equipment will be transferred to the Company upon the receipt of full purchase price.

The Company is in the process of acquiring several properties and has entered into various property purchase agreements starting year 2009. These agreements generally require the Company to make installment payments and the title and possession transfer to the Company upon the final payment. For the properties listed in the table above, the final payment had not been made by June 30, 2010 and December 31, 2009 and as a result, the payments made through those respective dates were not recorded as properties. No depreciation was recorded related to these advances.

NOTE 5: SHORT-TERM BANK LOANS

Short term bank loans consist of the following:

		June 30, 2010			December 31, 2009
Bank Loans borrowed by TMK Shenzhen
Bank of China Shenzhen Branch	$	1,766,357		$	2,382,500
Bank of Ningbo Shenzhen Branch		1,174,960			1,170,080
Bank Loans borrowed by Borou
Bank of Ningbo Shenzhen Branch		822,472			1,170,080
Short-term loans	$	3,763,789		$	4,722,660

On August 24, 2009, Borou obtained a one-year term loan in the amount of $1,170,080 (RMB 8,000,000) from Bank of Ningbo Shenzhen Branch ("BN") bearing interest at approximately 6.37% with maturity date on August 23, 2010. The loan is personally guaranteed by Mr. Wu, Henian and Mr. Tu Jun and secured by Mr. Zhuang, Zehao's personal property. According to the loan agreement, BN has right to request Borou to repay the outstanding debt in full immediately if the Company does not meet any of the following: (a) Borou should repay 30% of principal within 6 months of receipt of the first borrowing; (b) Within term of loan, Borou should maintain certain amounts of cash deposits and cash withdrawals with the bank on monthly basis of not less than 30% of its revenue; (c) The Company as a whole (Borou and TMK Shenzhen)’s total loans should not exceed $19,013,800 (RMB 130,000,000); (d) The Company as a whole (Borou and TMK Shenzhen)'s total revenue including VAT tax should not be less than $51,191,000 (RMB 350,000,000); (e) Borou cannot distribute any dividend or pledge using its assets, cannot add any additional borrowing within loan period; (f) Borou's total revenue including VAT tax should be maintained at not less than $51,191,000 (RMB 350,000,000). Borou has met all of the above requirements and has repaid principal and interests due through March 2010, except item (f) BN has not requested Borou to pay off this loan, however, Borou was not able to obtain a waive letter from BN.

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 5: SHORT-TERM BANK LOANS (CONTINUED)

On August 21, 2009, TMK Shenzhen obtained a one-year term loan in the amount of $1,170,080 (RMB 8,000,000) from Bank of Ningbo Shenzhen Branch ("BON") bearing interest at approximately 6.37% with maturity date on August 20, 2010. The loan is personally guaranteed by Mr. Wu, Henian and secured by Mr. Zhuang, Zehao's personal property. According to the loan agreement, BN has right to request TMK Shenzhen to repay the outstanding debt in full immediately if the Company does not meet any of the following: (a) the Company cannot distribute any bonus or dividend; (b) The total financing amount cannot exceed $19,013,800 (RMB 130,000,000) and the total revenue should not be less than $51,191,000 (RMB 350,000,000), the revenue defined here includes VAT tax). As of the filing date, the Company is not in violation of any requirements stated above.

On June 18, 2008, TMK Shenzhen entered into a credit agreement with Bank of China Shenzhen Branch (“BOC”) to obtain a line of credit in the amount of $2,787,109 (RMB 19,000,000). The loan bears interest at approximately 5.346% per annum and matured on June 18, 2010. The loan is personally guaranteed by Mr. Wu, Henian.

The unused line of credit amounted to $0 and $403,957 at June 30, 2010 and December 31, 2009, respectively.

NOTE 6: LONG-TERM BANK LOANS

Long term bank loans consist of the following:

		June 30, 2010			December 31, 2009
DBS Bank	$	1,847,128		$	2,181,753
China Construction Bank Shenzhen Branch		3,524,880			4,387,800
Bank of China Shenzhen Branch		5,874,800			5,119,100
Less current portion		(1,236,981	)		(2,451,700	)
Long -term portion	$	10,009,827		$	9,236,953

On November 13, 2009, TMK Shenzhen obtained a 3-year term loan from DBS Bank (China) Limited Shenzhen Branch (“DBS”) in the amount of $2,237,778 (RMB 15,300,000) bearing interest at approximately 130% of the prevailing prime rate at the time of the loan (approximately 7.02% per annum) paid monthly. The loan can only be used for equipment purchase (RMB 11,318,500) and working capital purpose (RMB 3,981,500). DBS requires the Company to deposit $438,780 (RMB 3,000,000) as security (refunded to the Company in 6 months as the company made payments on timely basis). Based on agreement, DBS has right to request the Company to repay the outstanding balance immediately if the Company does not meet any of the following: (a) the Company should provide audited financial within six months of year-end; (b) the Company cannot pledge its account receivables to any other third parties without DBS permission; (c) the Company's account receivable settlements (cash collections) should be maintained at $5,850,400 (RMB 40,000,000) annually and $1,462,600 (RMB 10,000,000) quarterly. The Company did not violate any of the above covenants at June 30, 2010.

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 6: LONG-TERM BANK LOANS (CONTINUED)

On August 05, 2009, Borou obtained a 3-year term loan from Bank of China Shenzhen Branch (“BOC”) in the amount of $5,850.400 (RMB 40,000,000) bearing interest at approximately 110% of the prevailing prime rate at the time of the loan (approximately 5.94% per annum) paid monthly. As of December 31, 2009, $5,119,100 (RMB 35,000,000) was received in August 2009 and the remaining $731,100 (RMB 5,000,000) was received in January 2010. Pursuant to the loan agreement, the loan can only be used for working capital purpose (RMB 20,000,000) and fixed asset purchase purpose (RMB 20,000,000). If violated, a penalty will be charged at 100% of interest rate on the violated amount. The loan is guaranteed by TMK Shenzhen and secured by Mr. Wu Henian, Mr. Huang Junbiao, and Mr. Wang Zongfu's ownerships in TMK Shenzhen. In addition, the loan is secured by property owned by Deli Investment Limited Co. with fair value of $2,925,200 (RMB 20,000,000) and one of Borou’s properties with fair value of $2,925,200 (RMB 20,000,000). Based on loan agreement, BOC also has right to request the Company to repay the outstanding balance immediately if Borou does not meet any of the following: (a) Borou cannot distribute any bonus or dividend if it incurs an after-tax loss, or its pretax net income is not significant enough to pay for its prior year' loss. Any pretax net income should be used to pay off principal and interests; (b) Borou should pay off the Bank before it pays off borrowing from its shareholders and other debt; (c) Fixed assets purchase loan can only be used for equipment purchase. The proceeds will be sent to equipment vendor directly. Any new equipment purchased under the loan should be added to bank collateral 30 days after payment is made; (d) Prior to loan payoff date, Borou should maintain monthly purchase settlements of not less than $1,170,080 (RMB 8,000,000) with the bank (note purchase settlements are accounted for as the total of each cash-in and cash-out transaction amounts). Borou did not violate any of the above covenants as at June 30, 2010. In accordance with the loan agreement, Borou also agreed to pay $175,512 (RMB 1,200,000) of bank charge in 3 years with annual bank charge of $58,504 (RMB 400,000) made prior to August 30 each year.

On December 30, 2008, TMK Shenzhen obtained a three-year term loan from China Construction Bank Shenzhen Branch (“CCB”) in the amount of $4,400,698 (RMB 30,000,000) bearing interest at approximately 105% of the prevailing prime rate at the time of the loan (approximately 5.67% per annum and subject to adjustment every 12 months) paid monthly. Pursuant to the loan agreement, the principal needs to be made at a fixed amount of $146,260 (RMB 1,000,000) starting from the 13 ^th month until maturity date. In the event the Company defaulted on the loan, the interest rate will be increased to 150% of prime rate. In addition, the loan should be used for working capital purpose only. If violated, the interest rate will be increased to 200% of prime rate and the penalty will be computed at 11.34% of violated amount. The terms of the loan also called for a deposit of $263,268 (RMB 1,800,000) to Shenzhen General Chamber of Commerce to secure the loan until the term loan repaid in full. The loan with CCB is personally guaranteed by Mr. Wang, Zongfu and Mr. Huang, Junbiao and secured by Ms. Tu, Lanzhen (CEO’s Wife)'s personal property with fair value of $440,070 (RMB 3,000,000) and the Company's equipment with fair value of $2,938,302 (RMB 20,030,700). The Company did not violate any of the above covenants as of June 30, 2010.

On June 22, 2010, TMK Shenzhen entered into a three-year term loan agreement with Shanghai Bank Shenzhen Branch (“SB”) in the amount of $7,343,500 (RMB 50,000,000) bearing interest at approximately 5.508% paid monthly. Pursuant to the loan agreement, the Company is required to make principal payment at a fixed amount of $293,380 (RMB 2,000,000) starting from the 13th month (after the receipt of first loan proceeds) until maturity date on June 28, 2013. In addition, the Company is required to pay $14,669 (RMB 100,000) per annum as service consulting charge. The loan is personally guaranteed by Mr. Wu, Henian and secured by property owned by Dongguan Yikang Metal Material Ltd. According to the loan agreement, SB has right to request TMK Shenzhen to repay the outstanding debt in full immediately if the Company does not meet any of the following: (a) the purpose of loan is to purchase raw materials, bank’s written consent is needed for any change of purpose; (b) TMK Shenzhen needs to pay off all the required interests, service charges and principle repayments on time; (c) the Company should provide annual audited financial to SB prior to April 30; (d) The Borrower shall obtain written approval before providing a guarantee or pledge its primary assets for any third party; (e) the Company should notify the Bank of any significant corporate changes in writing 30 days in advance; (f) the Company should notify the Bank of any related parties transactions with amount exceeding 10% of its net assets.

11

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 6: LONG-TERM BANK LOANS (CONTINUED)

As of the filling date, the Company has received full amount of 7,343,500from SB with the first loan proceeds received on July 2, 2010.

The terms of the long-term bank loans require the Company to maintain a deposit at the bank to secure the loans as follows:

		June 30, 2010			December 31, 2009
DBS Bank	$	-		$	438,780
Total Current Portion	$	-		$	438,780
China Construction Bank	$	352,488		$	263,268
Total Non-current Portion	$	352,488		$	263,268

NOTE 7: RELATED PARTY TRANSACTIONS

Due from related parties

Due from related party consists of the following:

		June 30, 2010			December 31, 2009
Liu, Xiangjun	$	-		$	15,204
	$	-		$	15,204

The above amount due from Liu, Xiangjun represents advance for regularly business expense to be paid by her on behalf of the Company. The amount is non-secured, non-interest bearing, and is considered to be short-term. As of the date of this filing, in anticipation of being a U.S. public company, the due from balance has been repaid and no loans to Liu, Xiangjun are outstanding.

Due to related party

Due to related party consists of the following:

		June 30, 2010			December 31, 2009
Wu, Henian	$	876,262		$	-
Wang, Zongfu		365,143			-
Huang, Junbiao		181,298			-
Li, Guifang		385			-
Q-Lite Industrial Co., Ltd		-			17,691
Tu, Jun		275			-
Total	$	1,423,363		$	17,691

Ms. Yu, Zhengfei, Mr. Wang, Zongfu’s wife, holds 25% ownership of Q-Lite Industrial Co., Ltd. (“Q-Lite”). During the six months ended June 30, 2010 and for the year ended December 31, 2009, the Company sold products to Q-Lite in the amounts of $166,924 and $346,047 respectively.

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 8: INCOME TAX

Leading Asia is registered in BVI and under the current laws of the BVI, is not subject to income taxes.

Good Wealth is a holding company registered in Hong Kong and has no operating profit for tax liabilities.

TMK Shenzhen is registered in PRC and has tax advantages granted by local government for corporate income taxes and sales taxes commencing 2005.

Borou is registered in PBC and is subject to regular corporate income tax rate. The assessment of its tax liabilities is combined with that of TMK Shenzhen.

The effective tax rate for the Company for the six months ended June 30, 2010 and 2009 was 42.6% and 14.8%, respectively. The effective tax rate for the Company for the three months ended June 30, 2010 and 2009 was 9.5% and 14.7%, respectively. The difference between the effective tax rate and the tax rate prevalent in the United States is due to the fact that 100% of our operations are located and taxed in PRC.

Various Taxes

The Company is subject to pay various taxes such as Value Added Tax (VAT), City Development Tax, and Education tax to the local government tax authorities. The VAT collected on sales is netted against the taxes paid for purchases of cost of goods sold to determine the amounts payable and refundable. The City Development Tax and Education Tax are expensed as general and administrative expense.

NOTE 9 - PRIVATE PLACEMENT

On February 10, 2010, concurrently with the close of the Share Exchange, the Company conducted a private placement transaction (the “Private Placement”) pursuant to which the Company sold an aggregate of 5,486,000 shares of common stock at $1.25 per share (the shares were sold in 54.86 units, each of which included 100,000 shares of common stock and 50,000 detachable common stock warrants with a five year maturity). As a result, the Company received gross proceeds in the amount of approximately $6.9 million. Warrants are five year term from date of issuance, exercisable on a “cash payable” basis, callable if the common stock closing bid price is at least $3.00 and the average trading volume at least 100,000 shares for 15 consecutive trading days and an effective registration is in place. At the closing of the private placement, the Company paid a cash fee of $445,738, or 6.5% of the gross proceeds received from the sale of the securities as placement agent commission, of which $351,488 was paid to Hudson Securities, Inc (“Hudson”), and $87,750 and $6,500 was paid to SHP Securities, LLC (“SHP”) and Williams Financial Group, respectively, at the direction of Hudson. The Company incurred $108,810 in other fees and costs. As partial consideration for placement agent service provided, the Company also issued warrants for the purchase of an aggregate of 658,320 shares of its common stock, exercisable for a period of five years at an exercise price of $1.25 per share of which 553,020 warrants were issued to Hudson and its designees and 105,300 warrants were issued to SHP Securities LLC, at the direction of Hudson. The fair value of the warrants issued to Hudson and SHP Securities is calculated based upon the Black Scholes model and historical stock price/volatility of stocks prices of comparable trading companies. In connection with the private placement, the Company also issued to Hayden Communications International, Inc. (“Hayden”), an investor relations consulting firm, 125,000 shares of Common Stock as partial consideration for the consulting services provided by Hayden.

The Company issued warrants for the purchase of an aggregate of 658,320 shares of its common stock, exercisable for a period of five years at an exercise price of $1.25 per share, of which 553,020 warrants were issued to Hudson and its designees and 105,300 warrants were issued to SHP Securities LLC, at the direction of Hudson. In connection with the private placement, the Company also issued to Hayden Communications International, Inc. (“Hayden”), an investor relations consulting firm, 125,000 shares of Common Stock as partial consideration for the consulting services provided by Hayden.

13

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 9 - PRIVATE PLACEMENT (CONTINUED)

In addition, the Company evaluated the warrants under ASC 815 to determine whether there is embedded feature included in the warrant agreements that should be recorded as derivative liability, see Note 11 for further discussion.

On March 27, 2010, the Company entered into common share subscription agreements with multiple employees to raise around $3.4 million capital in exchange for 2.7 million shares of common stock (at par value $0.001) . By June 30, 2010, all shares subscribed have been paid and these shares are registered on April 27, 2010.

NOTE 10- COMMON STOCK WARRANTS

In connection with the private placement, the Company had 2,743,000 shares of common stock issuable upon the exercise of five-year warrants issued to the investors in the private placement with exercise price of $1.60 per share. In addition, the Company granted Hudson and SHP a five-year warrant for the purchase of an amount of shares equal to 8% of the number of securities issued in the private placement. The warrants have an exercise price of $1.25 per share, are currently exercisable and expire on February 9, 2015. The Company agreed to register the 3,401,320 shares of common stock underlying the warrants in a Registration Statement. The Registration Statement was filed on May 24, 2010.

A summary of the Company’s warrant activities for the six months ended June 30, 2010 is as follows:

					Weighted average
		Number of Warrants			Exercise Price
December 31, 2009		-		$	N/A
Private placement investors		2,743,000		$	1.60
Hudson Securities, Inc.		553,020		$	1.25
SHP Securities LLC		105,300			1.25
June 30, 2010		3,401,320		$	1.53

NOTE 11 - DERIVATIVE LIABILITIES

In June 2008, the FASB finalized ASC 815-15, "Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity's Own Stock". The EITF lays out a procedure to determine if an equity-linked financial instrument (or embedded feature) is indexed to its own common stock. The EITF is effective for fiscal years beginning after December 15, 2008. Pursuant to the Subsequent Equity Sales section under warrant agreement the Company granted, if and whenever on or after the date of inception and through the earlier to occur of (i) eighteen months from the date hereof and (ii) date that there is an effective registration statement on file with the Securities and Exchange Commission covering the resale of all of the Warrant Stock and all of the shares of common stock issued in the offering, the Company issues or sells any shares of common stock or securities convertible into common stock for a consideration per share of common stock less than the then current Exercise Price, then, the Exercise Price shall be multiplied by a fraction. Because of the reset provision, the warrant agreement is considered not indexed to the Company’s stock and therefore the 3,401,320 warrants were determined to be derivative liability under ASC 815-15 and ASC 815-20. The fair value of these warrants at the inception of the private placement was $1,218,744.

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 11 - DERIVATIVE LIABILITIES (CONTINUED)

At June 30, 2010, the derivative liability was valued at $1,883,117 using the Multinomial Lattice models. The $664,373 change in fair value is reported in the Company’s consolidated statement of operations as a loss on derivatives.

The fair value hierarchy for the Company’s derivative liability accounted for at fair value was:

NOTE 12: REVENUE INFORMATION AND GEOGRAPHIC INFORMATION

The Company believes that it operates in one business segment (research, development, production, marketing and sales of electronic products) and in one geographical segment (China), as all of the Company’s current operations are carried out in China.

The geographic information for revenue is as follows:

		Six Months Ended June 30,
		2010			2009
United States	$	84,535		$	57,924
Ukraine		81,726			-
Sweden		261,810			89,360
Korea		22,184			3,506
Japan		21,087			19,354
Germany		114,483			143,080
Australia		7,491			13,176
UK		-			66,555
Taiwan		72,932			5,120
Hong Kong		687,045			289,937
China		28,665,897			20,586,860
Peru		-			3,560
Total	$	30,019,190		$	21,278,432

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 13 - RECONCILIATION OF EARNINGS PER SHARE

	Six Months Ended June 30,							Three Months Ended June 30,
		2010			2009			2010			2009
Numerator
Net income available to common stockholders	$	802,578		$	3,092,155		$	2,269,945		$	1,760,509
Denominator:
Weighted-average shares outstanding for earnings per share, basic		33,175,227			25,250,000			36,111,714			25,250,000
Effect of dilutive securities:
Common stock warrants		658,320			-			400,127			-
Weighted-average shares outstanding for earnings per share, diluted		33,833,547			25,250,000			36,511,841			25,250,000
Net income per share:
Basic	$	0.02		$	0.12		$	0.06		$	0.07
Diluted	$	0.02		$	0.12		$	0.06		$	0.07

NOTE 14: LEASE COMMITMENT

The Company planned to expand production capacity and signed an agreement with Shenzhen Xutang Economics and Business Ltd. (“Xutang”) at the end of March, 2010 to lease the A3 plant building (a four-storey building), A5 plant building (a four-storey building), C1 dorm (a six-storey building), and office building (a three-storey) located in Zhongcheng Industry Park, Shenzhen. The lease term is for five years from April 1, 2010 to March 31, 2015 with monthly lease payments for around $24,000. The leased premises are currently under remodeling and are expected to be completed in the third quarter of 2010.

NOTE 15: RESTATEMENT

On August 16, 2010, the Company discovered the following errors in the Form 10-Q it filed on May 24, 2010:

	A.	The Company issued 3,401,320 warrants in connection with its private placement on February 10, 2010. The warrants contain reset features that should be valued as a derivative liability in accordance with ASC 815. The Company failed to record Derivative Liability and related Additional Paid-in Capital at inception date. In addition, the Company failed to record the change in fair value of derivative liability between inception date and March 31, 2010.
	B.	The weighted average number of common shares outstanding is being restated to correct a clerical error.

The following is a summary of items affected by the corrections described above:

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China TMK Battery System, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 15: RESTATEMENT (CONTINUED)

		Originally
		Filed			Adjustment			Restated
March 31, 2010
Derivative liability	$	-			2,943,977		$	2,943,977	A
Total Liabilities		21,906,078			2,943,977			24,850,055
Stockholders' Equity
Additional paid-in capital		11,737,406			(1,218,744	)		10,518,662	A
Retained earnings (unrestricted)		11,817,894			(1,725,233	)		10,092,661	A
Total stockholders' equity		23,622,079			(2,943,977	)		20,678,102
Total Liabilities & Stockholders' Equity	$	45,528,157					$	45,528,157

		Originally
		Filed			Adjustment			Restated
Three Months Ended March 31, 2010
Other income (expenses):
Change in fair value of embedded derivative		-			(1,725,233	)		(1,725,233	) A
Total other expenses		(302,288	)		(1,725,233	)		(2,027,521	)
Income before income taxes		616,041			(1,725,233	)		(1,109,192	)
Net income	$	257,866			(1,725,233	)	$	(1,467,367	)
Comprehensive income	$	290,084			(1,725,233	)	$	(1,435,149	)
Weighted average shares outstanding
Basic		26,472,055			3,734,056			30,206,111	B
Diluted		26,849,979			4,460,335			31,310,314	B
Earnings per share - Basic	$	0.01			(0.06	)	$	(0.05	) A, B
Earnings per share - Diluted	$	0.01			(0.06	)	$	(0.05	) A, B

		Originally
		Filed			Adjustment			Restated
Three Months Ended March 31, 2010
Cash Flows From Operating Activities
Net income	$	257,866			(1,725,233	)	$	(1,467,367	) A
Adjustments to reconcile net income to net cash               provided by operating activities:
Change in fair value of embedded derivative		-			1,725,233			1,725,233	A
Net cash used in (provided by) operating activities		(1,147,250	)					(1,147,250	)
Net cash used in investing activities		(5,874,237	)					(5,874,237	)

Net cash provided by financing activities		6,970,904						6,970,904
Effect of exchange rate changes on cash		154,354						154,354
Net increase (decrease) in cash and cash equivalents		103,771						103,771
Cash and cash equivalents, beginning of period		185,590						185,590
Cash and cash equivalents, end of period	$	289,361					$	289,361

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

This report contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Description of Business,” “Risk Factors,” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” of our Current Report on Form 8-K filed on February 12, 2010. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements.

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference and filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Use of Terms

Except where the context otherwise requires and for the purposes of this report only:

• the “Company,” “we,” “us,” and “our” refer to the combined business of China TMK Battery Systems Inc., a Nevada corporation (formerly, Deerfield Resources, Ltd.), and its wholly owned subsidiaries, Leading Asia Pacific Investment Limited, or “Leading Asia,” a BVI company, Good Wealth Capital Investment Limited, or “Good Wealth,” a Hong Kong company, and Shenzhen TMK Power Industries Ltd., or “TMK,” a PRC limited company, as the case may be;
• “BVI” refers to the British Virgin Islands;
• “Exchange Act” refers the Securities Exchange Act of 1934, as amended;
• “Hong Kong” refers to the Hong Kong Special Administrative Region of the People's Republic of China;
• “PRC,” “China,” and “Chinese,” refer to the People's Republic of China;
• “Renminbi” and “RMB” refer to the legal currency of China;
• “SEC” refers to the Securities and Exchange Commission;
• “Securities Act” refers to the Securities Act of 1933, as amended; and
• “U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States. Throughout this report, we have converted RMB to USD as follows:

June 30, 2010
Balance sheet	RMB 6.80874 to US$1.00
Statement of income and comprehensive income	RMB 6.81710 to US$1.00
June 30, 2009
Balance sheet	RMB 6.82454 to US$1.00
Statement of income and comprehensive income	RMB 6.82268 to US$1.00

Overview

We were incorporated under the laws of the State of Nevada on June 21, 2006. We were originally formed as an exploration stage company to engage in the search for mineral deposits or reserves. From inception through September 2007, we conducted preliminary exploration activities on certain properties in White Bay, Newfoundland, Canada, on which we held six gold mining claims, pursuant to the Claim Purchase Agreement. Our activities included the conduct of preliminary geological mapping and trenching on the properties, which determined that there were no economic quantities of minerals or reserves whatsoever on any of the properties. From September 2008 through to the date of our reverse acquisition, discussed below, we were a shell company with no operations and our sole purpose was to locate and consummate a merger or acquisition with a private entity. As a result of the reverse acquisition transaction, discussed below, we terminated the Claim Purchase Agreement and are now engaged in the design, development, manufacture and sale of environmentally-friendly nickel-metal hydride cell, or Ni-MH, rechargeable batteries in China, through our wholly owned PRC subsidiary, TMK.

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We produce and sell high-rate SC, C, D, and F Ni-MH batteries primarily to manufacturers that produce mechanical devices to clients worldwide. Our products are commonly used to power vacuum cleaners and other household electrical appliances; cordless power tools; medical devices; light electric vehicles, such as bicycles, electric vehicles and hybrid electric vehicles; light fittings, battery-operated toys, telecommunications, traffic control, and traffic lighting applications; and personal portable electronic devices, such as digital cameras, portable media players, portable gaming devices and PDAs. We are actively seeking opportunities to expand into the Lithium-Ion battery space through leveraging our lithium battery patent and those of our customers who purchase both nickel-metal hydride and Lithium-Ion batteries, and opportunities to design and distribute batteries for use in telecommunications, traffic control, and traffic lighting applications. We have developed and sent working prototypes of both nickel-metal hydride battery and Lithium-Ion battery to some of our customers for testing and expect to roll out new products before the end of 2010. More recently, we have developed a working prototype of a hybrid electric vehicle battery pack and are producing sample cells for testing an electric vehicle battery pack. To expand our business into the hybrid electric vehicle and electric vehicle markets, we plan to establish an advanced power battery research and development center, set up a battery-production base for small scale testing, production and establishing a cooperation application demonstration point with 1-3 vehicle producers to lay a solid foundation for the approval of the project and for the support of the government. To date, we have entered into letters of intent with two automobile companies in China for the sale of our hybrid electric vehicle battery packs.

We conduct all of our operations in Shenzhen City, China, in close proximity to China's electronics manufacturing base and its rapidly growing market. Our access to China's supply of low-cost skilled labor, raw materials, machinery and facilities enables us to price our products competitively in an increasingly price-sensitive market. In addition, we have automated key stages of our manufacturing process to be able to produce high-quality battery cells that consistently meet the stringent requirements of our customers.

Second Quarter of 2010 Financial Performance Highlights

The following are some financial highlights for the three months ended June 30, 2010:

• Revenue : Revenue increased $5.4 million, or 47.3%, to $16.8 million for the three months ended June 30, 2010, from $11.4mil for the same period in 2009.
• Income from operations : Income from operations decreased $0.5 million, or 21.5%, to $1.7 million for the three months ended June 30, 2010, from $2.2 million for the same period in 2009.
• Net income : Net income increased $0.5 million, or 28.9%, to $2.3 million for the three months ended June 30, 2010, from $1.8 million for the same period in 2009.
• Fully diluted net income per share : Fully diluted net income per share was $0.06 for the three months ended June 30, 2010, as compared to $0.07 for the same period in 2009.

Results of Operations

The following table sets forth key components of our results of operations during the three month periods ended June 30, 2010 and 2009, respectively, both in dollars and as a percentage of our net sales. As the acquisition of Leading Asia, Good Wealth and TMK was entered into on February 10, 2010 and acquisition of Borou on July 14, 2009 and during the periods indicated such entities were the only entities in our combined business that had operations, the results of operations below refer only to that of Leading Asia, Good Wealth, Borou and TMK.

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For the Three-Month Periods Ended June 30, 2010 and 2009 (Unaudited)

		For the Three Months Ended
		June 30,
		2010						2009
					% of						% of
					Revenue						Revenue
Revenue		16,754,718			100.0%			11,377,776			100.0%
Cost of Goods Sold		(13,375,438	)		(79.8%	)		(8,589,595	)		(75.5%	)
Gross Profit		4,108,537			20.2%			2,788,181			24.5%
Operating Costs and Expenses
Selling expenses		498,088			3.0%			204,916			1.8%
Depreciation		49,074			0.3%			5,618			0.0%
General and administrative		811,643			4.8%			296,056			2.6%
Research and development		328,150			2.0%			125,751			1.1%
Total operating expenses		1,686,955			10.1%			632,341			5.6%
Income from operations		1,692,325			10.1%			2,155,840			18.9%
Other income (expenses):
Interest expense		(244,883	)		(1.5%	)		(92,913	)		(0.8%	)
Change in fair value of Embedded derivative		1,060,860			6.3%			-			0.0%
Other income, net		26			0.0%			(81	)		(0.0%	)
Total other income (expenses)		816,003			4.9%			(92,994	)		(0.8%	)
Income before income taxes		2,508,328			15.0%			2,062,846			18.1%
Income taxes		(238,383	)		(1.4%	)		(302,337	)		(2.7%	)
Net income		2,269,945			13.5%			1,760,509			15.5%

Sales Revenue . Our sales revenue increased to $16.8 million in the three months ended June 30, 2010 from $11.4 million in the same period in 2009, representing a 47.3% increase period-over-period. The increase in revenue is due to the increase in customer demand.

Cost of Sales . Our cost of sales increased $4.8 million, or 55.7%, to $13.4 million in the three months ended June 30, 2010 from $8.6 million in the same period in 2009. The increase of cost of sales is mainly due to growth of sales revenue. In addition, the Company made additional bonus payments to its employees as a consideration of their contributions to the Company’s growth in the past few years. The Company does not expect same type of payments in next two years.

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Gross Profit and Gross Margin . Our gross profit increased $0.6 million, or 21.2%, to $3.4 million in the three months ended June 30, 2010 from $2.8 million in the same period in 2009. The increase of gross profit is primarily due to growth of sales revenue. Our gross margin is 20.2% in second quarter of 2010 compared to 24.5% in the same period last year.

Selling expenses, Our selling expenses, were $0.5 million for the three months ended June 30, 2010, an increase of $0.3 million, or 143.1%, compared to $0.2 million for the same period in 2009. The increase was primarily due to an increase in sales compensation including sales commission as a percentage of sales revenue and marketing activities.

Administrative Expenses . Our administration expense was $0.3 million in the three months ended June 30, 2010 and 0.8 million in the same period in 2009. The increase is related to $0.5 million one-time welfare paid to employees (excluding management level) as a consideration of their efforts to the Company’s going public activity. The Company does not expect any welfare payments in next two years. Excluding this factor, the administration expense is consistent with costs incurred in the same period of prior year.

Research and Development Expenses . Our research and development expenses consist of the costs associated with research and development personnel and expense in research and development projects. Our research and development expenses increased 161.0%, to $0.3 million in the three months ended June 30, 2010 from $0.1 million in the same period in 2009 due to the increase of R&D personnel. The company deemed that future growth would depend on increased investment in R&D.

Operating Expense Operating expense was 1.7 million in the three months ended June 30, 2010 compare to $0.6 million in the same period last year. It is due to increase in selling expense and R&D investment as a result of revenue growth as well as welfare payments made in second quarter.

Change in Fair Value of Embedded Derivative We granted a total of 3,401,320 warrants in connection with our private placement in February 2010. Due to the reset provision included in our warrant agreements, embedded feature of warrants is classified as derivative liability. The gain from change in fair value of derivative liability represents the difference of fair value between March 31, 2010 and June 30, 2010.

Income Before Income Taxes . Our income before income taxes increased by $0.4 million, or 21.6%, to $2.5 million in the three months ended June 30, 2010 from $2.1 million in the same period in 2009. The increase of income before income taxes is due to increase of sales revenue as well as gain in fair value of derivative liability offset by increase in administration expense, selling expense and R&D investment.

Income Taxes . We incurred $0.2 million income tax expenses in the three months ended June 30, 2010, as compared to $0.3 million in the same period in 2009. The income tax expense decreased compared to the same period in 2009 due to the fact that the gain of $1.0 million from change in fair value of derivative liability was incurred on US shell company level therefore was not subject to any income taxes.

Net Income . Net income was $2.3 million for the three months ended June 30, 2010, an increase of $0.5 million, or 28.9%, compared to $1.8 million for the same period in 2009.

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For the Six-Month Periods Ended June 30, 2010 and 2009 (Unaudited)

	For the Six Months Ended
	June 30,
		2010			% of			2009			% of
					Revenue						Revenue
Revenue		30,019,190			100.0%			21,278,432			100.0%
Cost of Goods Sold		(23,481,135	)		(78.2%	)		(16,078,400	)		(75.6%	)
Gross Profit		7,267,312			21.8%			5,200,032			24.4%
Operating Costs and Expenses
Selling expenses		732,806			2.4%			396,304			1.9%
Depreciation		66,579			0.2%			58,398			0.3%
General and administrative		2,634,622			8.8%			565,182			2.7%
Research and development		493,394			1.6%			237,760			1.1%
Total operating expenses		3,927,401			13.7%			1,210,559			5.7%
Income from operations		2,610,654			8.7%			3,942,388			18.5%
Other income (expenses):
Interest expense		(486,790	)		(1.6%	)		(312,165	)		(1.5%	)
Change in market value of Embedded derivative		(664,373	)		(2.2%	)		-			0.0%
Other income, net		(60,355	)		(0.2%	)		(678	)		(0.0%	)
Total other expenses		(1,211,518	)		(4.0%	)		(312,843	)		(1.5%	)
Income before income taxes		1,399,136			4.7%			3,629,545			17.1%
Income taxes		(596,558	)		(2.0%	)		(537,390	)		(2.5%	)
Net income		802,578			2.7%			3,092,155			14.5%

Sales Revenue . Our sales revenue increased to $30.0 million in the six months ended June 30, 2010 from $21.3 million in the same period in 2009, representing a 41.1% increase period-over-period. The increase in revenue is due to the increase in customer demand.

Cost of Sales . Our cost of sales increased $7.4 million, or 46.0%, to $23.5 million in the six months ended June 30, 2010 from $16.1 million in the same period in 2009. The increase of cost of sales is consistent with growth rate of sales revenue. In addition, the Company made additional bonus payments to its employees as a consideration of their contributions to the Company’s growth in the past few years in second quarter.. The Company does not expect same type of payments in next two years.

Gross Profit and Gross Margin . Our gross profit increased $1.3 million, or 25.7%, to $6.5 million in the six months ended June 30, 2010 from $5.2 million in the same period in 2009. The increase of gross profit is primarily due to growth of our sales revenue. Our gross margin is 21.8% in second quarter of 2010 compared to 24.4% in the same period last year.

Selling expenses, Our selling expenses, were $0.7 million for the six months ended June 30, 2010, an increase of $0.3 million, or 84.9%, compared to $0.4 million for the same period in 2009. The increase was primarily due to an increase in sales compensation including sales commission as a percentage of sales revenue and marketing activities.

Administrative Expenses . Our administration expenses increased $2.1 million, or 366.2%, to $2.6 million in the six months ended June 30, 2010 from $0.6 million in the same period in 2009. The increase is primarily due to $1.77 million of merger cost incurred in the first quarter of 2010 in connection with TMK's reverse acquisition. In addition, the Company paid $0.5 million one-time welfare to employees (excluding management level) as a consideration of their efforts to the Company’s going public activity. The Company does not expect any welfare payments in next two years. Excluding these two factors, our administration expenses would show a decrease trend.

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Research and Development Expenses . Our research and development expenses consist of the costs associated with research and development personnel and expense in research and development projects. Our research and development expenses increased 107.5%, to $0.5 million in the six months ended June 30, 2010 from $0.2 million in the same period in 2009 due to the increase in R&D personnel. The company is committed to increase R&D investment to fuel future growth.

Operating Expense Operating expense was $3.9 million in the six months ended June 30, 2010 compare to $1.3 million in the same period last year. The increase is primarily due to $1.77 million of merger cost incurred in second quarter in 2010 in connection with TMK's reverse acquisition as well as welfare payments made in second quarter. Excluding these factors, the increase rate of operation expense is lower than the growth rate of revenue.

Change in Fair Value of Embedded Derivative We granted a total of 3,401,320 warrants in connection with our private placement in February 2010. Due to the reset provision included in our warrant agreements, embedded feature of warrants is classified as derivative liability. The loss from change in fair value of derivative liability is the difference of fair value between February 10, 2010 (inception) and June 30, 2010.

Income Before Income Taxes . Our income before income taxes decreased by 33.8%, to $2.6 million in the six months ended June 30, 2010 from $3.9 million in the same period in 2009. Revenue increase for the first six months ended in 2010 was mainly offset by one- time $1.77 million merger cost and loss of $0.7 million from change in fair value of derivative liability as well as additional welfare and bonus payments made in second quarter.

Income Taxes . We incurred $0.6 million income tax expenses in the six months ended June 30, 2010, as compared to $0.5 million in the same period in 2009. The income taxes increased in the six months ended June 30, 2010 vs. same period in 2009 even though income before income taxes decreased in the six months ended June 30, 2010 vs. same period in 2009. The reason was that merger cost of $1.77 million and loss of $0.7 million from change in fair value of derivative liability were incurred on US shell company level which was not subject to any income taxes.

Net Income . Net income was $0.8 million for the six months ended June 30, 2010, a decrease of $2.3 million, or 74%, compared to $3.1 million for the same period in 2009.

Liquidity and Capital Resources

As of June 30, 2010, we had cash and cash equivalents of $0.93 million, primarily consisting of cash on hand and demand deposits. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report. To date, we have financed our operations primarily through cash flows from operations, augmented by short-term bank borrowings and equity contributions by our stockholders.

The following table sets forth a summary of our cash flows for the periods indicated:

Cash Flow
(all amounts in U.S. dollars)

		For the Six Months Ended
		June 30,
		2010			2009
Net cash used in (provided by) operating activities		(1,991,201	)		189,936
Net cash used in investing activities		(5,446,965	)		(5,157,291	)
Net cash provided by financing activities		8,131,207			5,237,953
Effect of exchange rate changes on cash		48,155			(14,234	)
Net increase in cash and cash equivalents		741,196			256,364

Cash and cash equivalents, beginning of period		185,590			186,463
Cash and cash equivalents, end of period	$	926,786		$	442,827

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Operating activities

Net cash used in operating activities was $2.0 million for the six months ended June 30, 2010, as compared to $0.2 million net cash provided by operating activities for the same period in 2009. The decrease in net cash provided in operating activities was primarily due to decrease in net income and increase in inventories and AR. The decrease is partially offset by the increase in accounts payable.

Investing activities

Net cash used in investing activities for the six months ended June 30, 2010 was $5.4 million, as compared to $5.2 million net cash used in investing activities for the same period of 2009. The increase of net cash used in investing activities was mainly attributable to the deposit for Hualian acquisition offset by the decrease of purchase and advance for property and equipment purchase.

Financing activities

Net cash provided by financing activities for the six months ended June 30, 2010 was $8.1 million, as compared to $5.2 million net cash provided by financing activities for the same period of 2009. The increase of net cash provided by financing activities was mainly attributable to completion of two private placements in the first and second quarter of 2010. The increase is partially offset by the decrease in bank loans and payment to former owners in six months ended June 30, 2010.

We believe that our cash on hand and cash flow from operations will meet part of our present cash needs and we will require additional cash resources, including loans, to meet our expected capital expenditure and working capital for the next 12 months. We may, however, in the future, require additional cash resources due to changed business conditions, implementation of our strategy to ramp up our marketing efforts and increase brand awareness, or acquisitions we may decide to pursue. If our own financial resources are insufficient to satisfy our capital requirements, we may seek to sell additional equity or debt securities or obtain additional credit facilities. The sale of additional equity securities could result in dilution to our stockholders. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Financing may not be available in amounts or on terms acceptable to us, if at all. Any failure by us to raise additional funds on terms favorable to us, or at all, could limit our ability to expand our business operations and could harm our overall business prospects.

Inflation

Inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future. However, our management will closely monitor the price change in travel industry and continually maintain effective cost control in operations.

Off Balance Sheet Arrangements

We do not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital expenditures or capital resources that is material to an investor in our securities.

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introduction.

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Significant Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make assumptions, estimates and judgments that affect the amounts reported, including the notes thereto, and related disclosures of commitments and contingencies, if any. We have identified certain accounting policies that are significant to the preparation of our financial statements. These accounting policies are important for an understanding of our financial condition and results of operation. Critical accounting policies are those that are most important to the portrayal of our financial conditions and results of operations and require management's difficult, subjective, or complex judgment, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Certain accounting estimates are particularly sensitive because of their significance to financial statements and because of the possibility that future events affecting the estimate may differ significantly from management's current judgments. We believe the following critical accounting policies involve the most significant estimates and judgments used in the preparation of our financial statements:

Revenue recognition

The Company generates revenues from the sales of environment-friendly batteries including nickel metal hydride batteries. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectability is reasonably assured. Sales are presented net of VAT. No return allowance is made as products returns are insignificant based on historical experience.

Use of estimates

The preparation of financial statements in conformity with generally accepted accounting principles, or GAAP, in the United States of American. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting year. Because of the use of estimates inherent in the financial reporting process, actual results could differ from those estimates.

Accounts receivable

Accounts receivables are recognized and carried at original invoiced amount less an allowance for uncollectible accounts, as needed. The Company uses the aging method to estimate the valuation allowance for anticipated uncollectible receivable balances. Under the aging method, bad debts percentages determined by management based on historical experience as well as current economic climate are applied to customers' balances categorized by the number of months the underlying invoices have remained outstanding. The valuation allowance balance is adjusted to the amount computed as a result of the aging method. When facts subsequently become available to indicate that the amount provided as the allowance was incorrect, an adjustment which classified as a change in estimate is made.

Impairment of long-lived assets

The Company accounts for impairment of plant and equipment and amortizable intangible assets in accordance with ASC 360, “Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of”, which requires the Company to evaluate a long-lived asset for recoverability when there is event or circumstance that indicate the carrying value of the asset may not be recoverable. An impairment loss is recognized when the carrying amount of a long-lived asset or asset group is not recoverable (when carrying amount exceeds the gross, undiscounted cash flows from use and disposition) and is measured as the excess of the carrying amount over the asset's (or asset group's) fair value.

Comprehensive income

The Company reports comprehensive income, its components, and accumulated balances in its financial statements. Accumulated other comprehensive income represents the accumulated balance of foreign currency translation adjustments. No other items of comprehensive income are present.

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Foreign currency

The functional currency of the Company is RMB. The Company maintains its financial statements using the functional currency. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency at rates of exchange prevailing at the balance sheet dates. Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Exchange gains or losses arising from foreign currency transactions are included in the determination of net income (loss) for the respective periods.

For financial reporting purposes, the financial statements of the Company, which are prepared in RMB, are translated into the Company's reporting currency, USD. Balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using the average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in accumulated other comprehensive income (loss) in stockholder's equity.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not Applicable.

ITEMS 4 AND 4A(T). CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are not effective as of June 30, 2010 due to the deficiencies described below.

These deficiencies consisted of inadequate staffing and supervision that could lead to the untimely identification and resolution of accounting and disclosure matters and failure to perform timely and effective reviews. In addition, there are deficiencies in the recording and classification of accounting transactions and a lack of personnel with expertise in US generally accepted accounting principles and US Securities and Exchange Commission rules and regulations.

Deficiencies in our controls and procedures have led to restatements of our financial statements. In August 2010, we discovered that our financial statements for the three months ended March 31, 2010 should not be relied upon due to an error in accounting for warrants issued by the Company in connection with our private placement. On February 10, 2010, the Company issued warrants to both investors and private placement agent. The Warrants terms included rights to purchase shares of stock at various exercise prices per share and subject to adjustment for share issuances (dilutive reset). The Warrants contain reset features (subject to adjustment for dilutive share issuances) and based on the guidance of ASC 815-15 and ASC 815-20, the warrants should be valued as a derivative liability. The Company failed to record Derivative Liability and related Additional Paid-in Capital at inception date. In addition, the Company failed to record the change in fair value of derivative liability between inception date and March 31, 2010.

We are seeking to improve our controls and procedures in an effort to remediate these deficiencies through improving supervision, education, and training of our accounting staff. We will also seek third-party financial consultant to review and analyze our financial statements and assist us in improving our reporting of financial information. Management plans to enlist additional qualified in-house accounting personnel and third-party accounting personnel to ensure that management will have adequate resources in order to attain complete reporting of financial information disclosures in a timely matter.

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Changes in Internal Control over Financial Reporting

Due to the implementation of the remedial measures described above, there were changes in our internal controls over financial reporting during the first half of fiscal 2010 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal proceedings set forth below, we are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

ITEM 1A. RISK FACTORS.

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

We have not sold any equity securities during the quarter ended June 30, 2010 which sale was not previously disclosed in a current report on Form 8-K filed during that period.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

On May 1, 2010, the Board of Directors appointed Mr. Jin Hu to serve as our Chief Financial Officer. Mr. Hu is a CPA certified in Virginia with a diverse background in corporate finance, accounting and investment with leading companies in a variety of industries. Prior to joining us, Mr. Hu acted as financial controller with Johnson & Johnson in Beijing from June 2009 to April 2010, where he worked closely with senior management to drive the Multiple Specialty pharmaceutical business unit with 60% sales growth rate and over 100% net profit growth rate in 2009. Prior to that, he served, from August 2008 to January 2009, as an internal consultant with Citigroup in New York to conduct research on industry trends and to evaluate new services to company clients, and from May 2006 to May 2008, worked at Ernst & Young in Washington D.C to perform both financial and IT auditing for clients including Capital One, NASDAQ, Marriott, and United States Department of Health and Human Services. Mr. Hu also served, from November 2003 to May 2006, as a member of the corporate finance team at McKesson Corporation, and worked, from September 2000 to November 2003, as a senior analyst at Stock-Trak Inc. in Atlanta. Mr. Hu earned his Masters Degree in Business Administration from Cornell University, and a dual Masters Degree in Computer Information Systems and Accounting from Georgia State University. He studied in a university in China for three years and then transferred to Louisiana Tech University where he received his Bachelors Degree in accounting.

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Other than the item reported above, we have no information to include that was required to be but was not disclosed in a report on Form 8-K during the period covered by this Form 10-Q. There have been no material changes to the procedures by which security holders may recommend nominees to our Board of Directors.

ITEM 6. EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit
Number	Description
31.1	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

     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 TMK BATTERY SYSTEMS INC.
Dated: August 16, 2010	/s/ Henian Wu
	Henian Wu
	Chairman
	( Principal Executive Officer )
Dated: August 16 , 2010	/s/ Jin Hu
	Jin Hu
	Chief Financial Officer
	(Principal Financial Officer and Principal Accounting Officer)

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EXHIBIT INDEX

Exhibit
Number	Description
31.1	Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certifications of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certifications of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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