UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2015
[ ] 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. 001-32898
CHINA BAK BATTERY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
(State or Other Jurisdiction of Incorporation or
Organization)
88-0442833
(I.R.S. Employer Identification No.)
BAK Industrial Park, Meigui Street
Huayuankou Economic Zone
Dalian City, Liaoning Province,
China, 116422 People’s Republic of China
(Address of Principal Executive Offices)
(86)(411)-3918-5985
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001 per share
Name of each exchange on which registered
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes [ ] No [X]
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 during the preceding 12 months (or for such shorter period that the registrant was required to
submit and post such files)
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K. [X]
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 [ ]
Non-Accelerated Filer [ ]
(Do not check if a smaller reporting company)
Accelerated Filer [ ]
Smaller reporting company [X]
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Act)
Yes [ ] No [X]
As of March 31, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate market value of the shares of the
registrant’s common stock held by non-affiliates (based upon the closing sale price of such shares as reported on The NASDAQ Global Market) was
approximately $30.6 million. Shares of the registrant’s common stock held by each executive officer and director and by each person who owns 10% or more of
the outstanding common stock have been excluded from the calculation in that such persons may be deemed to be affiliates of the registrant. This determination
of affiliate status is not necessarily a conclusive determination for other purposes.
There were a total of 17,145,493 shares of the registrant’s common stock outstanding as of January 8, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CHINA BAK BATTERY, INC.
Annual Report on Form 10-K
TABLE OF CONTENTS
PART I
Item 1.
Business.
Item 1A.
Risk Factors.
Item 1B.
Unresolved Staff Comments.
Item 2.
Properties.
Item 3.
Legal Proceedings.
Item 4.
Mine Safety Disclosures.
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations.
Item 7A.
Quantitative And Qualitative Disclosures About Market Risk.
Item 8.
Financial Statements And Supplementary Data.
Item 9.
Changes In And Disagreements With Accountants On Accounting And Financial Disclosure.
Item 9A.
Controls And Procedures.
Item 9B.
Other Information.
Item 10.
Directors, Executive Officers And Corporate Governance
Item 11.
Executive Compensation.
PART III
Item 12.
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters.
Item 13.
Certain Relationships And Related Transactions, And Director Independence.
Item 14.
Principal Accounting Fees And Services.
Item 15.
Exhibits, Financial Statement Schedules.
PART IV
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48
48
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Use of Terms
Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:
INTRODUCTORY NOTE
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“Company”, “we”, “us” and “our” are to the combined business of China BAK Battery, Inc., a Nevada corporation, and its consolidated
subsidiaries;
“BAK Asia” are to our Hong Kong subsidiary, China BAK Asia Holdings Limited;
“Dalian BAK Trading” are to our PRC subsidiary, Dalian BAK Trading Co., Ltd.;
“Dalian BAK Power” are to our PRC subsidiary, Dalian BAK Power Battery Co., Ltd;
“China” and “PRC” are to the People’s Republic of China;
“RMB” are to Renminbi, the legal currency of China;
“U.S. dollar”, “$” and “US$” are to the legal currency of the United States;
“SEC” are to the United States Securities and Exchange Commission;
“Securities Act” are to the Securities Act of 1933, as amended; and
“Exchange Act” are to the Securities Exchange Act of 1934, as amended.
On December 27, 2013, Dalian BAK Power, a wholly owned subsidiary of BAK Asia, was incorporated in Dalian. As described below, Dalian BAK Power is
engaged in manufacturing and selling new energy high power lithium batteries.
Special Note Regarding Forward Looking Statements
Statements contained in this report include “forward-looking statements” within the meaning of such term in Section 27A of the Securities Act and Section 21E
of the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual financial or
operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking
statements made in this report generally are based on our best estimates of future results, performances or achievements, predicated upon current conditions and
the most recent results of the companies involved and their respective industries. Forward-looking statements may be identified by the use of forward-looking
terminology such as “may,” “will,” “could,” “should,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “potential,” “opportunity”
or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. Potential risks
and uncertainties include, among other things, such factors as:
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our ability to continue as a going concern;
our ability to remain listed on a national securities exchange;
our ability to timely complete the construction of our Dalian facilities and commence full commercial operations;
our anticipated growth strategies and our ability to manage the expansion of our business operations effectively;
our future business development, results of operations and financial condition;
our ability to fund our operations and manage our substantial short-term indebtedness;
our ability to maintain or increase our market share in the competitive markets in which we do business;
our ability to keep up with rapidly changing technologies and evolving industry standards, including our ability to achieve technological
advances;
our ability to diversify our product offerings and capture new market opportunities;
our ability to obtain original equipment manufacturer, or OEM, qualifications from brand names;
our ability to source our needs for skilled labor, machinery and raw materials economically;
uncertainties with respect to the PRC legal and regulatory environment;
other risks identified in this report and in our other reports filed with the SEC, including those identified in “Item 1A. Risk Factors” below.
Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to
advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking
statements made in this report speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-
looking statements to reflect changes in our expectations or future events.
1
ITEM 1.
BUSINESS.
Overview of Our Business
PART I
Our Dalian manufacturing facilities began its partial commercial operations in July 2015. We are now engaged in the business of developing, manufacturing and
selling new energy high power lithium batteries, which are mainly used in the following applications:
•
•
•
Electric vehicles (“EV”), such as electric cars, electric buses, hybrid electric cars and buses;
Light electric vehicles (“LEV”), such as electric bicycles, electric motors, sight-seeing cars; and
Electric tools, energy storage, uninterruptible power supply, and other high power applications.
We have received most of the operating assets, including customers, employees, patents and technologies of our former subsidiary, BAK International (Tianjin)
Ltd. (“BAK Tianjin”). Such assets were acquired in exchange for a reduction in receivables from our former subsidiaries that were disposed in June 2014. We
have outsourced and will continue to outsource our production to BAK Tianjin or other manufacturers until our Dalian manufacturing facility can fulfill our
customers’ needs. For the fiscal year ended September 30, 2015, Dalian BAK Power purchased batteries of approximately of $10.5 million from BAK Tianjin
and $1.2 million from other manufacturers.
We generated revenues of $13.9 million and $123.0 million for the fiscal years ended September 30, 2015 and 2014, respectively. We had a net profit of $37.8
million in 2014 and a net profit of $15.9 million in 2015 As of September 30, 2015, we had an accumulated deficit of $125.9 million and net assets of $21.7
million. We had a working capital deficiency and accumulated deficit from recurring net losses in prior years and short-term debt obligations maturing in less
than one year as of September 30, 2015.
In October 2014, we received from Dalian government a subsidy of RMB46.2 million for the costs of land use rights to be used to construct the new
manufacturing site over the land use rights. In August 2014, we also obtained a one-year bank loan of RMB30 million. The short term bank loan was bearing a
fixed interest rate at 7.80% per annum and was guaranteed by Mr. Xiangqian Li (“Mr. Li”), our CEO, and Shenzhen BAK Battery Co., Ltd., our former
subsidiary (“Shenzhen BAK”). In June 2015, we received banking facilities from Bank of Dandong to provide a maximum loan amount of $12.6 million and
bank acceptance and letters of credit of $5.0 million to June 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li and Ms. Xiaoqiu Yu, Mr
Li’s wife. The facilities were also secured by our Dalian site’s prepaid land use rights, buildings, constructions in progress, machinery and equipment and
pledged deposits. Under the banking facilities, on June 25, 2015 we borrowed a one-year term bank loan of RMB50 million (approximately $7.9 million),
bearing fixed interest at 7.84% per annum under the banking facilities. On August 18, 2015, we repaid the loan of RMB30 million upon maturity and borrowed
a new one-year term loan of RMB30 million ($4.7 million) bearing fixed interest at 7.84% per annum. As of September 30, 2015, we had unutilized committed
banking facilities of $1.8 million. We plan to renew these loans upon maturity, and plan to raise additional funds through bank borrowings and equity financing
in the future to meet our daily cash demands, if required.
In the meanwhile, due to the growing environmental pollution problem, the Chinese government is currently providing vigorous support to the new energy
facilities and vehicles. It is expected that we will be able to secure more potential orders from the new energy market, especially from the electric car market.
We believe with that the booming market demand in high power lithium ion products, we can continue as a going concern and return to profitability.
Our Corporate History and Structure
We conduct our current business through the following two wholly-owned operating subsidiaries in China that we own through BAK Asia:
•
•
Dalian BAK Trading, located in Dalian, China, incorporated on August 14, 2013, which focuses on the wholesale of lithium batteries and
lithium batteries’ materials, import & export business and related technology consulting service; and
Dalian BAK Power, located in Dalian, China, incorporated on December 27, 2013, which focuses on the development and manufacture of high-
power lithium batteries.
Almost all of our business operations are conducted primarily through our Chinese subsidiaries. The chart below presents our current corporate structure:
2
Our Products
The use of new materials have enabled the configuration of high-power lithium battery cells to contain much higher energy density and higher voltage and have
a longer life cycle and shorter charge time than other types of lithium-based batteries. These special attributes, coupled with intrinsic safety features, are suitable
for batteries used for high-power applications, such as electric cars, electric bicycles, electric tools, energy storage and UPS.
We believe high power lithium batteries represent the main direction of the development of new energy vehicle technologies according to the “12th Five-Year
Plan” published by the Chinese government.
Our Dalian manufacturing facilities focus on the development and manufacture of high power lithium batteries, for use in the following end applications:
Battery Cell Type
High-power lithium battery
End applications*
Electric bus [6,000-20,000]
Electric car [1,500-3,5000]
Hybrid electric vehicle [500-2000]
Light electric vehicle [10-150]
Cordless power tool [10-30]
Uninterruptible power supply [30-300]
Energy Storage [>300 ]
* Bracketed numbers denote number of cells per particular battery.
Key High Power Lithium Battery Applications
End-product applications that are driving the demand for high power lithium batteries include electric vehicles, such as electric cars, electric buses, hybrid
electric cars and buses; light electric vehicles, such as electric bicycles, electric motors, sight-seeing cars; and electric tools, energy storage, uninterruptible
power supply, and other high power applications.
Electric Vehicles
An electric vehicle, sometimes referred to as an electric drive vehicle, uses one or more electric motors for propulsion. Electric vehicles include electric cars,
electric buses, electric trains, electric lorries, electric airplanes, electric boats, and hybrid electric vehicles, plug in hybrid electric vehicles and electric
spacecraft. Electric cars and electric buses are propelled by one or more electric motors powered by rechargeable battery packs. Electric cars and buses have the
potential to significantly reduce city pollution by having zero tail pipe emissions. Electric cars and buses are also expected to have less dependence on oil. World
governments are pledging significant funds to fund the development of electric vehicles and their components due in part to these advantages. Due to these
factors and a lithium battery’s relatively environmentally-friendly, light-weight and high-capacity features, the demand for lithium batteries in the field of
electric cars and buses is increasing.
3
Due to such recent trends as renewed concerns relating to the availability and price of oil, increased legal fuel-efficiency requirements and incentives, and
heightened interest in environmentally-friendly or “green” technologies, hybrid electric vehicles are likely to continue to attract substantial interest from vehicle
manufacturers and consumers. Hybrid electric vehicles include automobiles, trucks, buses, and other vehicles that combine a conventional propulsion system
with a rechargeable energy storage system to achieve better fuel economy than conventional vehicles. As these vehicles tend to be large and heavy, their
rechargeable energy storage system generally consists of a large quantity of rechargeable high-power lithium cells.
The year 2014 was seen as the first real year for the development of China's new energy vehicle industry by many industry insiders. In 2015, the production and
sales of new energy vehicles had explosive growth. According to China Association of Automobile Manufacturers, from January to October 2015, the
production of new energy vehicles reached 181,225 units - up 270 percent year-on-year; and sales reached 171,145 units - up 390 percent year-on-year. As the
core mechanism for new energy vehicles, the power battery industry has also recently welcomed an unprecedented growth. According to the Development
Program for the Energy Efficient and New Energy Vehicle Industry 2012-2020 designed by the State Council of the PRC, some major objectives are: to
enthusiastically advance innovation in power battery technologies; scientifically plan the industrial layout; focus on developing power battery industry clusters;
and actively promote the mass production of power batteries. With the recent introduction of a number of supporting policies, the production of power batteries
for vehicles has grown remarkably.
Light Electric Vehicles
Light electric vehicles include bicycles, scooters, and motorcycles, with rechargeable electric motors. Due to their relatively small size and light design,
approximately 10-150 high-power lithium cells can be used to power light electric vehicles. The electric bicycle market in China is huge. According to Ministry
of Industry and Information Technology of China (MIIT), in the first half of calendar year 2015, the sales of lithium battery-powered electric bicycles is about
12.3 million units.
Energy Storage
Energy storage mainly means storage of electric energy by battery, inductor, and capacitor. Battery energy storage is mainly used for storage of emergency
supply, battery car, and redundant energy of power plants.
Electric Tools
Electric tools such as drills, saws and grinders are used for both commercial and personal use. Due to high power requirements, many electric tools have
historically used small combustion engines, used heavier nickel metal hydride batteries or relied on external power sources. Manufacturers of electric tools, such
as Milwaukee Electric Tool Corporation, Stanley Black & Decker, Inc., the Bosch Group, Metabowerke GmbH and Rigid Tool Company have begun to use
lithium-ion technology. The market for portable high-powered electric tools is rapidly growing and has prompted many users, both commercial and personal, to
replace or upgrade their current power tools.
Uninterruptible Power Supplies
A UPS provides emergency power from a separate source when utility power is not available. The most common type of battery used in UPS is Sealed Lead-
Acid, however, due to the lithium battery’s relatively small size, light design and environmentally-friendly features, the demand for lithium batteries in this
industry is increasing.
Revenue by Products
Before June 30, 2014, we derived our revenues from BAK International and its subsidiaries which produced prismatic cells, cylindrical cells, lithium polymer
cells and high-power lithium batteries. Since July 1, 2014, our revenue has been mainly from Dalian BAK Power for sale of batteries manufactured by BAK
Tianjin under outsourcing arrangements. The following table sets forth the breakdown of our net revenues by each battery type during the last two fiscal years.
Prismatic cells
Aluminum-case cells
Battery packs
Cylindrical cells
Lithium polymer cells
High-power lithium battery cells
Total
Year Ended September 30,
2014
Amount
% of Net
Revenues
2015
Amount
% of Net
Revenues
(in thousands of U.S. dollars, except percentages)
24,486
61,800
9,278
17,146
10,304
123,014
$
$
4
19.91%
50.24%
7.54%
13.94%
8.37%
100.00%
$
$
-
-
-
-
13,904
13,904
-
-
-
-
100.00%
100.00%
Sales and Marketing
We plan to build an extensive sales and service network in China, highlighted by our presence in the regions where China’s main EV and LEV productions is
located, such as Beijing, Shandong Province, Guangdong Province, Sichuan Province and three provinces in Northeast China. We intend to gradually establish
post-sales service offices in these areas to serve brand owners and pack manufacturers in each designated area as currently our marketing department at
headquarters is responsible for our promoting efforts. In doing so, our sales staff works closely with our customers to understand their needs and provide
feedback to us so that we can better address their needs and improve the quality and features of our products.
We also engage in marketing activities such as attending industry-specific conferences and exhibitions to promote our products and brand name. We believe
these activities are conducive in promoting our products and brand name among key industry participants.
Suppliers
The primary raw materials used in the manufacture of lithium-ion batteries include electrode materials, cases and caps, foils, electrolyte and separators. Cost of
these raw materials is a key factor in pricing our products. We believe that there is an ample supply of most of the raw materials we need in China. We are
seeking to identify alternative raw material suppliers to the extent there are viable alternatives and to expand our use of alternative raw materials.
We aim to maintain multiple supply sources for each of our key raw materials to ensure that supply problems with any one supplier will not materially disrupt
our operations. In addition, we strive to develop strategic relationships with new suppliers to secure a stable supply of materials and introduce competition in our
supply chain, thereby increasing our ability to negotiate better pricing and reducing our exposure to possible price fluctuations.
For the fiscal year ended September 30, 2015, our key raw material suppliers were as follows:
Materials
Ternary
Cathode materials
Anode materials
BMS
Solvent NMP
Electrolyte
Aluminum foil
Cases and caps
Copper sheet
Copper foil
Main Suppliers
Henan Cologne New Energy Co., Ltd.
Huzhou Chuangya Power Battery Material Co., Ltd
Tianjin Bate New Energy Technology Co Ltd
Advanced Lithium Energy Techology (Shanghai) Co., Ltd.
Chang’s Ascending Enterprise Co., Ltd.
Shenzhen Hangsheng Electronics Co., Ltd
MYJ Chemical Co., Ltd.
Dongguan Shanshan Battery Material Co., Ltd
Dalian Star Technology Co., Ltd.
Changzhou Wujinzhongrui Electric Co., Ltd
Dalian Desen Metal Products Co.,Ltd
Lingbao Wason Copper Foil Co., Ltd
We source our manufacturing equipment both locally and from overseas, based on consideration of their cost and function. Our key equipment as of September
30, 2015 was purchased from the following suppliers:
Instruments
Boilor
Coating machine
Heat exchanger unit
Automatic heat shrinkable tube machine
Inkjet printer
Automatic welding machine
High and low voltage switch
Air conditioner unit
Transformer
Main Suppliers
Dalian Huipu Electrical Equipment Co., Ltd
Shenzhen Katop Automation Technology Co.,Ltd.
Dalian Vickers Heating Technology Development Co., Ltd.
DongGuan DeSheng Automation Equipment Limited Companu
Domino Coding Limited
Shenzhen Styler Electronics Co. Ltd.
Dalian Red Star Switch Co., Ltd.
Dalian Hengsheng Air Conditioning Equipment Co. Ltd.
Zhuanghe Xinghua Electric Appliance Co., Ltd.
5
Intellectual Property
On August 25, 2014, we entered into an intellectual property rights use agreement with Shenzhen BAK, pursuant to which we are authorized to use Shenzhen
BAK’s registered logo, trademarks and patents for a period of 5 years for free from June 30, 2014. As of June 30, 2014, Shenzhen BAK had registered 80
trademarks in the PRC, including BAK in both English and in Chinese characters as well as its logo, and had registered 49 trademarks in the United States,
European Union, Korea, Russia, Taiwan, India, Canada and Hong Kong. As of September 30, 2015, Shenzhen BAK had registered 522 patents in the PRC and
other countries relating to battery cell materials, design and manufacturing processes. We have registered the following Internet and WAP domain name:
www.cbak.com.cn.
As of September 30, 2015, Dalian BAK Power has 17 patents including 15 utility model patents and 2 patents for invention in the PRC. These patents were
acquired by BAK Asia, from an unrelated third party at RMB1 and contributed as paid up capital of Dalian BAK Power.
We also have unpatented proprietary technologies for our product offerings and key stages of the manufacturing process. Our management and key technical
personnel have entered into agreements requiring them to keep confidential all information relating to our customers, methods, business and trade secrets during
their terms of employment with us and thereafter and to assign to us their inventions, technologies and designs they develop during their term of employment
with us.
We have institutionalized our efforts to safeguard our intellectual property rights by establishing an internal department that includes professionals such as
attorneys, engineers, information managers and archives managers responsible for handling matters relating to our intellectual property rights. We have
published internally a series of rules to protect our intellectual property rights.
Seasonality
According to the market demands, we usually experience seasonal peaks during the months of October to March for electric vehicle markets, and during the
months of May to October for light electric markets. Also, at various times during the year, our inventories may be increased in anticipation of increased
demand for consumer electronics. The period from the end of September to February tends to be seasonally low sales months due to plant closures for National
Day holiday and the Chinese New Year in the PRC.
Customers
We have many well-known customers, including electric vehicle manufacturers, such as Jiangxi Anyuan Tourist Bus Co., Ltd, Shandong Tangjun Electric Co.,
Ltd, Chery Automobile Co. Ltd., and we have also been actively developing new EV customers, and have sent samples to the following EV manufacturers for
test: Dandong Huanghai Bus Co., Ltd, Shandong Xindayang Electric Vehicle Co., Ltd, Sichuan Yema Automobile Co., Ltd; and electric bicycle manufacturers,
such as Taiwan Taibag Co., Ltd, Tianjin FSD Bicycles Co., Ltd, , Shenzhen Xidesheng Bicycle Co., Ltd., and Gamma Bicycle Co., Ltd, and battery pack
manufacturers, such as Guangdong Pisen Electronics Co., Ltd., Sichuan Pisen Electric Co., Ltd, Shenzhen Max Technology Co., Ltd, Dongguan Large
Electronics Co., Ltd, and manufacturers in UPS and other applications, such as Emerald Battery Technologies Co., Ltd., Robotics Technology Ltd. We believe
that we will continue to increase our revenue and market share as we gradually increase our high-power batteries production as the demand for these batteries
has been increasing.
6
Geography of Sales
Before June 30, 2014, we sold our products domestically and internationally. Thereafter, we sell high-power lithium battery primarily to customers in China.
The following table sets forth certain information relating to our total revenues by location of our customers for the last two fiscal years.
Mainland China
Taiwan
Hong Kong, China
India
Others
Total
Competition
Year Ended September 30,
2014
Amount
% of Net
Revenues
2015
Amount
% of Net
Revenues
(in thousands of U.S. dollars, except percentages)
$
$
106,488
2,953
5,337
1,979
6,257
123,014
86.57%
2.40%
4.33%
1.61%
5.09%
100.00%
$
$
13,904
-
-
-
-
13,904
100.00%
-
-
-
-
100.00%
We face intense competition from high-power lithium battery makers in China, as well as in Korea and Japan for each of our product types. The following table
sets forth our major competitors for the EV market and LEV market as of September 30, 2015:
Product Type
EV battery
Competitors
Japan:
Korea:
China:
LEV battery
China:
Panasonic Corporation
Samsung Electronics Co., Ltd.
Tianjin Lishen Battery Joint-stock Co., Ltd
Amperex Technology Limited
BYD Co. Ltd
Tianneng Power International Limited
Chaowei Power Holdings Limited
Phylion Battery Co., Ltd
We believe that we are able to leverage our low-cost advantage to compete favorably with our competitors. Compared to Korean and Japanese battery makers,
we are able to source our needs for skilled labor and raw materials locally and economically. Compared to Chinese battery makers, we believe we have higher
consistency and safety in product quality, which enables us to compete favorably with local competitors.
Research and Development
The R&D of next-generation advanced lithium battery and its key materials – characterized by high energy density, high security, long-lasting life, and low cost
– as well as the training of related technical talents, have become a major demand in the development of advanced electric vehicles in China. We have reached
strategic cooperation agreements with Dalian Institute of Chemical Physics of Chinese Academy of Sciences ("DICP"), Dalian University of Technology,
Dalian Maritime University and Dalian Jiaotong University. Under the agreements, these institutions and us will jointly research and develop the next-
generation key technologies and materials with an aim to produce the most powerful battery worldwide.
We have an advanced R&D center in Dalian, receiving almost all the R&D achievements, R&D equipment and staff of BAK Tianjin. BAK Tianjin began its
R&D manufacturing and distribution of high-power lithium battery and battery modules in December 2006, for use in electric cars, electric bicycles, UPS, and
other applications.
During the fiscal years ended September 30, 2014 and 2015, our expenditures for research and development activities were $4.0 million and $1.0 million,
respectively, or 3.2% and 7.2% of net revenues, respectively.
Environmental Compliance
As we conduct our manufacturing activities in China, we are subject to the requirements of PRC environmental laws and regulations on air emission, waste
water discharge, solid waste and noise. The major environmental regulations applicable to us include the PRC Environmental Protection Law, the PRC Law on
the Prevention and Control of Water Pollution and its Implementation Rules, the PRC Law on the Prevention and Control of Air Pollution and its
Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste Pollution, and the PRC Law on the Prevention and Control of Noise
Pollution. We aim to comply with environmental laws and regulations. We have built environmental treatment facilities concurrently with the construction of
our manufacturing facilities, where waste air, waste water and waste solids we generate can be treated in accordance with the relevant requirements. We
outsource our disposal of solid waste we generate in the Dalian facility to a third party contractor. Certain key materials used in manufacturing, such as cobalt
dioxide, electrolyte and separators, have proven innocuous to worker’s health and safety as well as the environment. We are not subject to any admonitions,
penalties, investigations or inquiries imposed by the environmental regulators, nor are we subject to any claims or legal proceedings to which we are named as a
defendant for violation of any environmental law or regulation. We do not have any reasonable basis to believe that there is any threatened claim, action or legal
proceedings against us that would have a material adverse effect on our business, financial condition or results of operations.
Employees
We had a total of approximately 422 employees as of September 30, 2015. The following table sets forth the number of our employees by function.
Function
Production
Research and development
Sales and marketing
General and administrative
Total
Number
278
44
3
97
422
Our employees are not represented by a labor organization or covered by a collective bargaining agreement. We have not experienced any work stoppages. We
believe we maintain good relations with our employees.
7
ITEM 1A.
RISK FACTORS.
RISKS RELATED TO OUR BUSINESS
Our failure to timely complete the construction of our Dalian facility and commence its full commercial operations could negatively affect our business
operations.
We are currently constructing our Dalian facility and relocating most of the operating assets, including machinery and equipment, as well as the customers,
employees, patents and technologies from BAK Tianjin to the Dalian facility. We have completed the construction of two plants of the Dalian facility and their
commercial operation began in July 2015. The remaining part of the facility is expected to be completed by June 2016, but we cannot give assurance that the
construction will be completed as scheduled or, without cost overrun. Even if the construction is completed on a timely basis, we cannot give assurance that the
full commercial operation can begin as we expected. In addition, we may not be able to attract a sufficient number of skilled workers to meet the needs of the
new facility. If we experience delays in construction or commencement of the full commercial operations, increased costs or lack of skilled labor, or other
unforeseen events occur, our business, financial condition and results of operations could be adversely impacted. Operating results could also be unfavorably
impacted by start-up costs until production at the new facility reaches planned levels.
Our independent registered auditors have expressed substantial doubt about our ability to continue as a going concern
Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with our financial statements included in this report
which states that the financial statements were prepared assuming that we would continue as a going concern. As discussed in Note 1 to the consolidated
financial statements included with this report, we had a working capital deficiency, accumulated deficit from recurring losses in prior years and short-term debt
obligations as of September 30, 2015. These conditions raise substantial doubt about our ability to continue as a going concern. As disclosed under Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Development” and Note 1 to the consolidated financial
statements, our Dalian manufacturing facilities began partial commercial operations in July 2015 which focus on production and sale of the new energy high
power batteries for use in electric vehicles, light electric vehicles and other high power applications. In fiscal 2015, we obtained advances of $9.8 million from
potential investors and converted these loans to common stock in September 2015. On June 22, 2015, we entered into a banking facility letter with Bank of
Dandong to provide loans and bank acceptances up to a total amount of $17.6 million with the term expiring on June 22, 2016. As of September 30, 2015, we
had unutilized committed banking facilities of $1.8 million. We plan to renew our bank borrowings upon maturity and raise additional funds through bank
borrowings and equity financing in the future to meet our daily cash demands. However, there can be no assurance that we will be successful in obtaining the
financing. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We rely on a few battery suppliers to fulfill our customers’ orders. If we fail to effectively manage our relationships with, or lose the services of these
suppliers and we cannot substitute suitable alternative suppliers, our operations would be materially adversely affected.
We have been actively working with the existing customers of BAK Tianjin to transfer their orders to Dalian BAK Power. Before the production at our Dalian
facility can completely fulfill our customers orders, we expect to continue to generate part of our revenues by outsourcing our customers’ orders to BAK Tianjin
and a few other suppliers.
Although we are negotiating on the terms of the outsourcing arrangements with BAK Tianjin and other suppliers, there is no assurance that we will be able to
enter into written contracts with BAK Tianjin and other suppliers. If our business relationship with BAK Tianjin and other suppliers changes negatively or their
financial condition deteriorates, or their operating environment changes, our business may be harmed in many ways. BAK Tianjin and other suppliers may
unilaterally terminate battery supply to us or increase the prices. As a result, we are not assured of an uninterrupted supply of high power lithium batteries of
acceptable quality or at acceptable prices from BAK Tianjin and other suppliers. We may not be able to substitute suitable alternative contract manufacturers in
a timely manner on commercially acceptable term or at all. We may be forced to default on the agreements with our customers. This may negatively impact our
revenues and adversely affect our reputation and relationships with our customers, causing a material adverse effect on our financial condition, results of
operations and prospects.
Our business depends on the growth in demand for electric vehicles, light electric vehicles, electric tools, energy storage, UPS, and other high-power electric
devices.
As the demand for our products is directly related to the market demand for high-power electric devices, a fast growing high-power electric devices market will
be critical to the success of our business. In anticipation of an expected increase in the demand for high-power electric devices such as electric vehicles, light
electric vehicles, electric tools, energy storage and UPS in the next few years, we have built our Dalian manufacturing facilities. However, the markets we have
targeted, primarily those in the PRC, may not achieve the level of growth we expect. If this market fails to achieve our expected level of growth, we may have
excess production capacity and may not be able to generate enough revenue to obtain our profitability.
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If we cannot continue to develop new products in a timely manner, and at favorable margins, we may not be able to compete effectively.
The battery industry has been notable for the pace of innovations in product life, product design and applied technology. We and our competitors have made,
and continue to make, investments in research and development with the goal of further innovation. The successful development and introduction of new
products and line extensions face the uncertainty of customer acceptance and reaction from competitors, as well as the possibility of cannibalization of sales of
our existing products. In addition, our ability to create new products and line extensions and to sustain existing products is affected by whether we can:
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develop and fund research and technological innovations;
receive and maintain necessary intellectual property protections;
obtain governmental approvals and registrations;
comply with governmental regulations; and
anticipate customer needs and preferences successfully.
The failure to develop and launch successful new products could hinder the growth of our business and any delay in the development or launch of a new product
could also compromise our competitive position. If competitors introduce new or enhanced products that significantly outperform ours, or if they develop or
apply manufacturing technology which permits them to manufacture at a significantly lower cost relative to ours, we may be unable to compete successfully in
the market segments affected by these changes.
Our efforts to develop products for new commercial applications could fail.
Although we are involved with developing certain products for new commercial applications, we cannot provide assurance that acceptance of our products will
occur due to the highly competitive nature of the business. There are many new product and technology entrants into the marketplace, and we must continually
reassess the market segments in which our products can be successful and seek to engage customers in these segments that will adopt our products for use in
their products. In addition, these companies must be successful with their products in their markets for us to gain increased business. Increased competition,
failure to gain customer acceptance of products, the introduction of competitive technologies or failure of our customers in their markets could have a further
adverse effect on our business.
Our future success depends on the success of manufacturers of the end applications that use our products.
As we expand to the battery markets for global electric vehicles, light electric vehicles, electric tools, energy storage, UPS and other high-power electric devices,
our future success depends on whether end-application manufacturers are willing to use batteries that incorporate our products. To secure acceptance of our
products, we must constantly develop and introduce more reliable and cost-effective battery cells with enhanced functionality to meet evolving industry
standards. Our failure to gain acceptance of our products from these manufacturers could materially and adversely affect our future success.
Even if a manufacturer decides to use batteries that incorporate our products, the manufacturer may not be able to market and sell its products successfully. The
manufacturer’s inability to market and sell its products successfully, whether from lack of market acceptance or otherwise, could materially and adversely affect
our business and prospects because this manufacturer may not order new products from us. If we cannot achieve the expected level of sales, we will not be able
to make sufficient profits to offset the expenditures we have incurred to expand our production capacity, nor will we be able to grow our business. Accordingly,
our business, financial condition, results of operations and future success would be materially and adversely affected.
Our failure to keep up with rapid technological changes and evolving industry standards may cause our products to become obsolete and less marketable,
resulting in loss of market share to our competitors.
The lithium-based battery market is characterized by changing technologies and evolving industry standards, which are difficult to predict. This, coupled with
frequent introduction of new products and models, has shortened product life cycles and may render our products obsolete or unmarketable. Our ability to adapt
to evolving industry standards and anticipate future standards will be a significant factor in maintaining and improving our competitive position and our
prospects for growth. To achieve this goal, we have invested and plan to continue investing significant financial resources in our R&D infrastructure. R&D
activities, however, are inherently uncertain, and we might encounter practical difficulties in commercializing our research results. Accordingly, our significant
investment in our R&D infrastructure may not bear fruit. On the other hand, our competitors may improve their technologies or even achieve technological
breakthroughs that would render our products obsolete or less marketable. Therefore, our failure to effectively keep up with rapid technological changes and
evolving industry standards by introducing new and enhanced products may cause us to lose our market share and to suffer a decrease in our revenue.
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A change in our product mix may cause our results of operations to differ substantially from the anticipated results in any particular period.
Our overall profitability may not meet expectations if our products, customers or geographic mix are substantially different than anticipated. Our profit margins
vary among products, customers and geographic markets. Consequently, if our mix of any of these is substantially different from what is anticipated in any
particular period, our profitability could be lower than anticipated.
We may be subject to declining average selling prices, which may harm our revenue and gross profits.
Consumer electronics such as electric vehicles, light electric vehicles, electric tools, energy storage, UPS are subject to declines in average selling prices due to
rapidly evolving technologies, industry standards and consumer preferences. As a result, manufacturers of these electronic devices expect us as suppliers to cut
our costs and lower the price of our products in order to mitigate the negative impact on their own margins. We have reduced the price of some of our electric
bike batteries in the past in order to meet market demand and expect to continue to face market-driven downward pricing pressures in the future. Our revenue
and profitability will suffer if we are unable to offset any declines in our average selling prices by developing new or enhanced products with higher selling
prices or gross profit margins, increasing our sales volumes or reducing our costs on a timely basis.
We may face impairment charges if economic environments in which our businesses operate and key economic and business assumptions substantially
change.
Assessment of the potential impairment of property, plant and equipment and other identifiable intangible assets is an integral part of our normal ongoing review
of operations. Testing for potential impairment of long-lived assets is dependent on numerous assumptions and reflects our best estimates at a particular point in
time, which may vary from testing date to testing date. The economic environments in which our businesses operate and key economic and business
assumptions with respect to projected product selling prices and materials costs, market growth and inflation rates, can significantly affect the outcome of
impairment tests. Estimates based on these assumptions may differ significantly from actual results. Changes in factors and assumptions used in assessing
potential impairments can have a significant impact on both the existence and magnitude of impairments, as well as the time at which such impairments are
recognized. Future changes in the economic environment and the economic outlook for the assets being evaluated could also result in impairment charges. Any
significant asset impairments would adversely impact our financial results.
We experience fluctuations in quarterly and annual operating results.
Our quarterly and annual operating results have fluctuated in the past and likely will fluctuate in the future. The demand for our products is driven largely by the
demand for the end-product applications that are powered by our products. Accordingly, the rechargeable battery industry is affected by market conditions that
are often outside our control. Our results of operations may fluctuate significantly from period to period due to a number of factors, including seasonal variations
in consumer demand for batteries and their end applications, capacity ramp up by competitors, industry-wide technological changes, the loss of a key customer
and the postponement, rescheduling or cancellation of large orders by a key customer. As a result of these factors and other risks discussed in this section,
period-to-period comparisons should not be relied upon to predict our future performance.
We may not be able to substantially increase our manufacturing output in order to maintain our cost competitiveness.
We believe that our ability to provide cost-effective products is one of the most significant factors that contributed to our past success and will be essential for
our future growth. We believe this is one of our competitive advantages over our Japanese and Korean competitors. We need to increase our manufacturing
output to a level that will enable us to substantially reduce the cost of our products on a per unit basis through economies of scale. However, our ability to
substantially increase our manufacturing output is subject to significant constraints and uncertainties, including:
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the need to raise significant additional funds to purchase and prepay raw materials or to build additional manufacturing facilities, which we may
be unable to obtain on reasonable terms or at all;
delays and cost overruns as a result of a number of factors, many of which may be beyond our control, such as increases in raw material prices
and problems with equipment vendors;
delays or denial of required approvals by relevant government authorities;
diversion of significant management attention and other resources; and
failure to execute our expansion plan effectively.
If we are unable to increase our manufacturing output because of any of the risks described above, we may be unable to maintain our competitive position or
achieve the growth we expect. Moreover, even if we expand our manufacturing output, we may not be able to generate sufficient customer demand for our
products to support our increased production output.
Maintaining our manufacturing operations will require significant capital expenditures, and our inability or failure to maintain our operations would have
a material adverse impact on our market share and ability to generate revenue.
We had capital expenditures of approximately $19.0 million and $12.9 million in fiscal years 2014 and 2015, respectively. We may incur significant additional
capital expenditures as a result of unanticipated expenses, regulatory changes and other events that impact our business. If we are unable or fail to adequately
maintain our manufacturing capacity or quality control processes, we could lose customers and there could be a material adverse impact on our market share and
our ability to generate revenue.
We may incur significant costs because of the warranties we supply with our products and services.
With respect to the sale of our battery products from fiscal 2016, we typically offer warranties against any defects due to product malfunction or workmanship
for a period of six months-to-five years from the date of purchase, including a period of six to twelve months for battery cells, and a period of twelve to twenty
seven months for battery modules for electric bicycles, and a period of three years to five years for battery modules for electric vehicles. We will provide a
reserve for these potential warranty expenses, which is based on an analysis of historical warranty issues. There is no assurance that future warranty claims will
be consistent with past history, and in the event we experience a significant increase in warranty claims, there is no assurance that our reserves will be sufficient.
This could have a material adverse effect on our business, financial condition and results of operations.
We do not have insurance coverage against damages or losses of our products. Defects in our products could result in a loss of customers and decrease in
revenue, unexpected expenses and a loss of market share.
We have not purchased product liability insurance to provide against any claims against us based on our product quality. We expect that we will purchase
product liability insurance in fiscal year 2016. If we fail to purchase product liability insurance, defects in our products could result in a loss of customers and
decrease in revenue, unexpected expenses and a loss of market share, and any of our products are found to have reliability, quality or compatibility problems, we
will be required to accept returns, provide replacements, provide refunds, or pay damages. As the insurance policy imposes a ceiling for maximum coverage and
high deductibles, we may not be able to obtain from the insurance policy a sufficient amount to compensate our customers for damages they suffered attributable
to the quality of the products. Moreover, the insurance policy also excludes certain types of claims from its coverage, and if any of our customers’ claims against
us falls into those exclusions, we would not receive any amount from the insurance policy at all. In either case, we may still be required to incur substantial
amounts to indemnify our customers in respect of their product quality claims against us, which would materially and adversely affect the results of our
operations and severely damage our reputation.
We may not be able to accurately plan our production based on our sales contracts, which may result in excess product inventory or product shortages.
Our sales contracts typically provide for a non-binding, three-month forecast on the quantity of products that our customers may purchase from us. We typically
have only a 30-day to 60 lead time to manufacture products to meet our customers’ requirements once our customers place orders with us. To meet the short
delivery deadline, we generally make significant decisions on our production level and timing, procurement, facility requirements, personnel needs and other
resources requirements based on our estimate in light of this forecast, our past dealings with such customers, market conditions and other relevant factors. Our
customers’ final purchase orders may not be consistent with our estimates. If the final purchase orders substantially differ from our estimates, we may have
excess product inventory or product shortages. Excess product inventory could result in unprofitable sales or write-offs as our products are susceptible to
obsolescence and price declines. Producing additional products to make up for any product shortages within a short time frame may be difficult, making us
unable to fill out the purchase orders. In either case, our results of operation would fluctuate from period to period.
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We historically depended on third parties to supply key raw materials and components to us. Failure to obtain a sufficient supply of these raw materials and
components in a timely fashion and at reasonable costs could significantly delay our production and shipments, which would cause us to breach our sales
contracts with our customers.
We historically purchased from Chinese domestic suppliers certain key raw materials and components such as electrolytes, electrode materials and import
separators, a key component of battery cells, from foreign countries. We purchased raw materials and components on the basis of purchase orders. In the
absence of firm and long-term contracts, we may not be able to obtain a sufficient supply of these raw materials and components from our existing suppliers or
alternates in a timely fashion or at a reasonable cost. If we fail to secure a sufficient supply of key raw materials and components in a timely fashion, it would
result in a significant delay in our production and shipments, which may cause us to breach our sales contracts with our customers. Furthermore, failure to obtain
sufficient supply of these raw materials and components at a reasonable cost could also harm our revenue and gross profit margins.
Fluctuations in prices and availability of raw materials, particularly LiFePO4 and Ni, Co, Mn, could increase our costs or cause delays in shipments, which
would adversely impact our business and results of operations.
Our operating results could be adversely affected by increases in the cost of raw materials, particularly LiFePO4 and Ni, Co, Mn, the primary cost component of
our battery products, or other product parts or components. Our average purchase price of LiFePO4 and Ni, Co, Mn were $29.1 per kilogram and $10.1 per
kilogram during the years ended September 30, 2014 and 2015, respectively. The price of LiFePO4 and Ni, Co, Mn is not stable as most output of cobalt is
conducted in unstable or developing countries such as the Democratic Republic of the Congo, and we cannot predict the price trend. If the price increases, it will
negatively impact our financial results in years ahead. We historically have not been able to fully offset the effects of higher costs of raw materials through price
increases to customers or by way of productivity improvements.
A significant increase in the price of one or more raw materials, parts or components or the inability to successfully implement price increases/ surcharges to
mitigate such cost increases could have a material adverse effect on our results of operations.
We mainly manufacture and market lithium-based battery cells. If a viable substitute product or chemistry emerges and gains market acceptance, our
business, financial condition and results of operations will be materially and adversely affected.
We mainly manufacture and market lithium-based batteries. As we believe that the market for lithium-based batteries has good growth potential, we have
focused our R&D activities on exploring new chemistries and formulas to enhance our product quality and features while reducing cost. Some of our
competitors are conducting R&D on alternative battery technologies, such as fuel cells. If any viable substitute product emerges and gains market acceptance
because it has more enhanced features, more power, more attractive pricing, or better reliability, the market demand for our products may be reduced, and
accordingly our business, financial condition and results of operations would be materially and adversely affected.
Manufacturing or use of our products may cause accidents, which could result in significant production interruption, delay or claims for substantial
damages.
Due to the high energy density inherent in lithium-based batteries, our batteries can pose certain safety risks, including the risk of fire. Although we incorporate
safety procedures in the research, development, manufacture and transportation of batteries that are designed to minimize safety risks, the manufacture or use of
our products may still cause accidents. Any accident, whether occurring at the manufacturing facilities or from the use of our products, may result in significant
production interruption, delays or claims for substantial damages caused by personal injuries or property damages.
We face intense competition from other battery manufacturers, many of which have significantly greater resources.
The market for batteries used in electric vehicles and light electric vehicles is intensely competitive and is characterized by frequent technological changes and
evolving industry standards. We expect competition to become more intense. Increased competition may result in declines in average selling prices, causing a
decrease in gross profit margins. We have faced and will continue to face competition from manufacturers of traditional rechargeable batteries, such as lead-acid
batteries other manufacturers of lithium-ion batteries, as well as from companies engaged in the development of batteries incorporating new technologies. Other
manufacturers of high-power lithium batteries currently include Panasonic Corporation, Samsung Electronics Co., Ltd., BYD Co. Ltd., Tianjin Lishen Battery
Joint Stock Co., Ltd., Amperex Technology Limited, BYD Co. Ltd and Chaowei Power Holdings Limited.
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Many of these existing competitors have greater financial, personnel, technical, manufacturing, marketing, sales and other resources than we do. As a result,
these competitors may be in a stronger position to respond quickly to market opportunities, new or emerging technologies and evolving industry standards.
Many of our competitors are developing a variety of battery technologies, such as lithium polymer and fuel cell batteries, which are expected to compete with
our existing product lines. Other companies undertaking R&D activities of solid-polymer lithium-ion batteries have developed prototypes and are constructing
commercial scale production facilities. It is possible that our competitors will be able to introduce new products with more desirable features than ours and their
new products will gain market acceptance. If our competitors successfully do so, we may not be able to maintain our competitive position and our future success
would be materially and adversely affected.
We are dependent on a limited number of customers for a significant portion of our revenues and this dependence is likely to continue.
We have been dependent on a limited number of customers for a significant portion of our revenue. Our top five customers accounted for approximately 40.8%
and 83.8% of our revenues for the years ended September 30, 2014 and 2015, respectively. Dependence on a few customers could make it difficult to negotiate
attractive prices for our products and could expose us to the risk of substantial losses if a single dominant customer stops purchasing our products. We expect
that a limited number of customers will continue to contribute a significant portion of our sales in the near future. Our ability to maintain close relationships with
these top customers is essential to the growth and profitability of our business. If we fail to sell our products to one or more of these top customers in any
particular period, or if a large customer purchases fewer of our products, defers orders or fails to place additional orders with us, or if we fail to develop
additional major customers, our revenue could decline, and our results of operations could be adversely affected.
We do not have long-term purchase commitments from our customers, which may result in significant uncertainties and volatility with respect to our
revenue from period to period.
We do not have long-term purchase commitments from our customers and the term of our sales contracts with our customers is typically one year or less.
Furthermore, these contracts leave certain major terms such as price and quantity of products open to be determined in each purchase order. These contracts also
allow parties to re-adjust the contract price for substantial changes in market conditions. As a result, if our customers hold stronger bargaining power than us or
the market conditions are in their favor, we may not be able to enjoy the price downside protection or upside gain. Furthermore, our customers may decide not to
continue placing purchase orders with us in the future at the same level as in prior periods. As a result, our results of operations may vary from period to period
and may fluctuate significantly in the future.
We extend relatively long payment terms to some large customers.
As is customary in the industry in the PRC, we extend relatively long payment terms to some large customers. As a result of the size of many of our orders,
these extended terms may adversely affect our cash flow and our ability to fund our operations out of our operating cash flow. In addition, although we attempt
to establish appropriate reserves for our receivables, those reserves may not prove to be adequate in view of actual levels of bad debts. The failure of our
customers to pay us timely would negatively affect our working capital, which could in turn adversely affect our cash flow.
Our customers often place large orders for products, requiring fast delivery, which impacts our working capital. If our customers do not incorporate our products
into their products and sell them in a timely fashion, for example, due to excess inventories, sales slowdowns or other issues, they may not pay us in a timely
fashion, even on our extended terms. Our customers’ failure to pay may force us to defer or delay further product orders, which may adversely affect our cash
flows, sales or income in subsequent periods.
We face risks associated with the marketing, distribution and sale of our products internationally, and if we are unable to effectively manage these risks,
they could impair our ability to expand our business abroad.
For the years ended September 30, 2014 and 2015, we derived 13.4% and nil, respectively, of our sales from outside the PRC mainland. We still deem overseas
market as an important revenue source for us, and have been actively exploring overseas customers. The marketing, international distribution and sale of our
products expose us to a number of risks, including:
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fluctuations in currency exchange rates;
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difficulty in engaging and retaining distributors that are knowledgeable about, and can function effectively in, overseas markets;
increased costs associated with maintaining marketing efforts in various countries;
difficulty and cost relating to compliance with the different commercial and legal requirements of the overseas markets in which we offer our
products;
inability to obtain, maintain or enforce intellectual property rights; and
trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and
make us less competitive in some countries.
Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if
we lost their services.
Our future success heavily depends on the continued service of our senior executives and other key employees. In particular, we rely on the expertise and
experience of our Chairman, Chief Executive Officer, President Mr. Xiangqian Li, our Interim Chief Financial Officer, Mr. Wenwu Wang, and our Interim
Chief Technology Officer, Dr. Jian Lin. If one or more of our other senior executives are unable or unwilling to continue to work for us in their present
positions, we may encounter similar problems, but on a compounded basis. Moreover, if any of our current or former senior executives joins a competitor or
forms a competing company, we may lose customers, suppliers, know-how and key personnel. Each of our executive officers has entered into an employment
agreement with us, which contains non-competition and confidentiality clauses. However, if any dispute arises between our current or former executive officers
and the Company, it is hard to predict the extent to which any of these agreements could be enforced in China, where these executive officers reside, in light of
the uncertainties with China’s legal system.
We have experienced significant management changes which could increase our control risks and have a material adverse effect on our ability to do
business and our results of operations.
Since February 2009, we have had a number of changes in our senior management, including multiple changes in our Chief Financial Officer. The magnitude of
these past and expected changes and the short time interval in which they have occurred or are expected to occur, particularly during the ongoing economic and
financial crisis, add to the risks of control failures, including a failure in the effective operation of our internal control over financial reporting or our disclosure
controls and procedures. Control failures could result in material adverse effects on our financial condition and results of operations. It may take time for the
new management team to become sufficiently familiar with our business and each other to effectively develop and implement our business strategies. This
turnover of key management positions could further harm our financial performance and results of operations. Management attention may be diverted from
regular business concerns by reorganizations.
The success of our business depends on our ability to attract, train and retain highly skilled employees and key personnel.
Because of the highly specialized, technical nature of our business, we must attract, train and retain a sizable workforce comprising highly skilled employees
and other key personnel. Since our industry is characterized by high demand and intense competition for talent, we may have to pay higher salaries and wages
and provide greater benefits in order to attract and retain highly skilled employees or other key personnel that we will need to achieve our strategic objectives.
As we are still a relatively young company and our business has grown rapidly, our ability to train and integrate new employees into our operations may not
meet the requirements of our growing business. Our failure to attract, train or retain highly skilled employees and other key personnel in numbers that are
sufficient to satisfy our needs would materially and adversely affect our business.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause our loss of significant
rights and inability to continue providing our existing product offerings.
Our success also depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third
parties. The validity and scope of claims relating to lithium-ion battery technology patents involve complex scientific, legal and factual questions and analysis
and, therefore, may be highly expensive and time-consuming. If there is a successful claim of infringement against us, we may be required to pay substantial
damages to the party claiming infringement, develop non-infringing technologies or enter into royalty or license agreements that may not be available on
acceptable terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis would harm our business.
Protracted litigation could result in our customers, or potential customers, deferring or limiting their purchase or use of our products until resolution of such
litigation. Parties making the infringement claim may also obtain an injunction that can prevent us from selling our products or using technology that contains
the allegedly infringing contents. Any intellectual property litigation could have a material adverse effect on our business, results of operation and financial
condition.
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We can make no assurance that we will continue to get authorization from Shenzhen BAK to use its intellectual property rights when the current intellectual
property rights use agreement with Shenzhen BAK expires, nor can we make assurance that we can get the authorization at a favorable price, which could
harm our business and competitive position.
We lack intellectual property rights for the business we operate. As of September 30, 2015, Dalian BAK Power only owns 17 patents including 15 utility model
patents and 2 patents for invention in the PRC. On August 25, 2014, we entered into an intellectual property rights use agreement with Shenzhen BAK under
which we are authorized to use Shenzhen BAK’s registered logo, trademarks and patents for a period of 5 years for free from June 30, 2014. As of June 30,
2014, Shenzhen BAK owned 462 registered patents in PRC and 60 registered patents in other countries, 80 registered trademarks in PRC and 49 registered
trademarks in the United States, European Union, Korea, Russia, Taiwan, Canada, India and Hong Kong that cover various categories of goods and services. We
cannot provide assurance that we will continue to get authorization from Shenzhen BAK to use its intellectual property rights when the current intellectual
property rights use agreement with Shenzhen BAK expires, nor can we make assurance that we can get the authorization at a favorable price, which could harm
our business and competitive position.
We do not hold the property ownership rights for facilities located in the PRC. Our manufacturing activities could be adversely affected if we lose the
facilities that we do not have property ownership rights.
We have obtained land use rights for our Dalian manufacture facilities, but have not yet obtained the property ownership of the Dalian manufacture facilities
including its plants, office building, warehouse, and related supporting facilities. We expect that we will obtain the property ownership rights by March 2016. If
we lose our Dalian facility due to the lack of the property ownership, our manufacturing activities will be adversely impacted.
Compliance with environmental regulations can be expensive, and our failure to comply with these regulations may result in adverse publicity and a
material adverse effect on our business.
As a manufacturer, we are subject to various PRC environmental laws and regulations on air emission, waste water discharge, solid waste and noise. Although
we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these
regulations at all times as the PRC environmental legal regime is evolving and becoming more stringent. Therefore, if the PRC government imposes more
stringent regulations in the future, we will have to incur additional substantial costs and expenses in order to comply with new regulations, which may
negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations in material aspects, we may suffer
from negative publicity and may be required to pay substantial fines, suspend or even cease operations. Failure to comply with PRC environmental laws and
regulations may materially and adversely affect our business, financial condition and results of operations.
To the extent we ship our products outside of the PRC, or to the extent our products are used in products sold outside of the PRC, they may be affected by the
following: The transportation of non-rechargeable and rechargeable lithium batteries is regulated by the International Civil Aviation Organization, or ICAO, and
corresponding International Air Transport Association, or IATA, Pipeline & Hazardous Materials Safety Administration, or PHMSA, Dangerous Goods
Regulations and the International Maritime Dangerous Goods Code, or IMDG, and in the PRC by General Administration of Civil Aviation of China and
Maritime Safety Administration of People’s Republic of China. These regulations are based on the United Nations, or UN, Recommendations on the Transport
of Dangerous Goods Model Regulations and the UN Manual of Tests and Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA
hazardous goods regulations. New regulations that pertain to all lithium battery manufacturers went into effect in 2003, 2004, and 2009, and 2010. The
regulations require companies to meet certain testing, packaging, labeling and shipping specifications for safety reasons. We comply with all current PRC and
international regulations for the shipment of our products, and will comply with any new regulations that are imposed. We have established our own testing
facilities to ensure that we comply with these regulations. If we were unable to comply with the new regulations, however, or if regulations are introduced that
limit our ability to transport our products to customers in a cost-effective manner, this could have a material adverse effect on our business, financial condition
and results of operations.
We do not have insurance coverage against damages or losses of our Dalian facilities.
We currently have insurance for our pledged machinery and equipment located at our Dalian facilities. We expect we will purchase related insurance for the
buildings when we obtain the property ownership certificate after the construction is completed. If we were to suffer any losses or damages to any of the
facilities before the purchase of insurance, our business, financial condition and results of operations would be materially and adversely affected.
We have identified material weaknesses in our internal control over financial reporting. If we fail to remediate the material weaknesses or maintain an
effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor
confidence and the market price of our shares may be adversely affected.
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To implement Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404, the SEC adopted rules requiring public companies to include a report of
management on the company’s internal control over financial reporting in their annual reports on Form 10-K. Under current law, we are subject to the
requirement that we maintain internal controls and that management perform periodic evaluation of the effectiveness of the internal controls, assuming our filing
status remains as a smaller reporting company. A report of our management is included under Item 9A of this Annual Report on Form 10-K. Our management
has identified the following material weakness in our internal control over financial reporting: we did not have appropriate policies and procedures in place to
evaluate the proper accounting and disclosures of key documents and agreements, and there was insufficient accounting personnel with an appropriate level of
technical accounting knowledge and experience in the application of accounting principles generally accepted in the United States of America, or U.S. GAAP,
commensurate with our financial reporting requirements. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. We have taken measures and plan to continue to take measures to remedy this material weakness. However, the
implementation of these measures may not fully address the material weakness in our internal control over financial reporting. Our failure to address any control
deficiency could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements
and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our
business, financial condition, results of operations and prospects, as well as the trading price of our shares, may be materially and adversely affected.
If we become directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend
significant resources to investigate and resolve the matter which could harm our business operations, stock price and reputation and could result in a loss of
your investment in our stock, especially if such matter cannot be addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed so-called reverse
merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies,
such as the SEC. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of
effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of
fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in
value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions, and
are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will
have on our Company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true
or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time
consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations
will be severely and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the SEC and our other public pronouncements are not subject to the scrutiny of any regulatory bodies
in the PRC. Accordingly, our public disclosure should be reviewed in light of the fact that no governmental agency that is located in China where
substantially all of our operations and business are located have conducted any due diligence on our operations or reviewed or cleared any of our
disclosures.
We are regulated by the SEC and our reports and other filings with the SEC are subject to SEC review in accordance with the rules and regulations promulgated
by the SEC under the Securities Act and the Exchange Act. Unlike public reporting companies whose operations are located primarily in the United States,
however, substantially all of our operations are located in China. Since substantially all of our operations and business take place in China, it may be more
difficult for the Staff of the SEC to overcome the geographic and cultural obstacles that are present when reviewing our disclosures. These same obstacles are
not present for similar companies whose operations or business take place entirely or primarily in the United States. Furthermore, our SEC reports and other
disclosures and public pronouncements are not subject to the review or scrutiny of any PRC regulatory authority. For example, the disclosure in our SEC reports
and other filings are not subject to the review of China Securities Regulatory Commission, a PRC regulator that is tasked with oversight of the capital markets in
China. Accordingly, you should review our SEC reports, filings and our other public pronouncements with the understanding that no local regulator has done
any due diligence on our company and with the understanding that none of our SEC reports, other filings or any of our other public pronouncements has been
reviewed or otherwise been scrutinized by any local regulator.
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Our auditors, based in Hong Kong, China, like other independent registered public accounting firms operating in China and to the extent their audit clients
have operations in China, is not permitted to be subject to full inspection by the Public Company Accounting Oversight Board and, as such, you may be
deprived of the benefits of such inspection.
Our independent registered public accounting firms that issued the audit reports included in our annual reports filed with the SEC, as auditors of companies that
are traded publicly in the United States and a firm registered with the US Public Company Accounting Oversight Board (United States), or PCAOB, are required
by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional
standards.
However, our operations are solely located in the PRC, a jurisdiction where PCAOB is currently unable to conduct inspections without the approval of the PRC
authorities. Our independent registered public accounting firm, like others operating in China (and Hong Kong, to the extent their audit clients have operations
in China), is currently not subject to inspection conducted by the PCAOB. Inspections of other firms that the PCAOB has conducted outside China have
identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve
future audit quality. The inability of the PCAOB to conduct full inspections of auditors operating in China makes it more difficult to evaluate our auditors’ audit
procedures or quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections.
Proceedings instituted by the SEC against five PRC-based accounting firms could result in financial statements being determined to be not in compliance
with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted proceedings under Rule 102(e)(1)(iii) of the SEC’s Rules of Practice against five PRC-based accounting firms, alleging
that these firms had violated U.S. securities laws and the SEC’s rules and regulations thereunder by failing to provide to the SEC the firms’ work papers related
to their audits of certain PRC-based companies that are publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the authority to deny to any
person, temporarily or permanently, the ability to practice before the SEC who is found by the SEC, after notice and opportunity for a hearing, to have willfully
violated, or willfully aided and abetted the violation of, any such laws or rules and regulations. On January 22, 2014, an initial administrative law decision was
issued, sanctioning four of these accounting firms and suspending them from practicing before the SEC for a period of six months. The sanction will not take
effect until there is an order of effectiveness issued by the SEC. In February 2014, four of these PRC-based accounting firms filed a petition for review of the
initial decision. In February 2015, each of these four accounting firms agreed to a censure and to pay fine to the SEC to settle the dispute with the SEC. The
settlement stays the current proceeding for four years, during which time the firms are required to follow detailed procedures to seek to provide the SEC with
access to Chinese firms' audit documents via the CSRC. If a firm does not follow the procedures, the SEC would impose penalties such as suspensions, or
commence a new, expedited administrative proceeding against the non-compliant firm or it could restart the administrative proceeding against all four firms.
While these issues raised by the proceedings are not specific to our auditor or to us, they potentially affect equally all PCAOB-registered audit firms based in
China and all businesses based in China (or with substantial operations in China) with securities listed in the United States. Depending upon the final outcome,
public companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC,
which may result in SEC’s revocation of the registration of their shares under the Exchange Act. Such a determinate would cause the immediate delisting of our
Common Stock from the NASDAQ Stock Market, and the effective termination of the trading market for our securities in the United States, which would likely
have a significant adverse effect on the value of our securities. Moreover, although our independent registered public accounting firm was not named as a
defendant in the above SEC administrative proceedings, any negative news about the proceedings against these audit firms may erode investor confidence in
China-based, US public companies, including us, and the market price of our shares may be adversely affected.
We face risks related to general domestic and global economic conditions and to the recent credit crisis.
The current uncertainty arising out of domestic and global economic conditions, including the recent disruption in credit markets, poses a risk to the economies
in which we operate that has impacted demand for our products and services, and may impact our ability to manage normal relationships with our customers,
suppliers and creditors. If the current situation deteriorates significantly, our business could be materially negatively impacted, including such areas as reduced
demand for our products and services from a slow-down in the general economy, or supplier or customer disruptions resulting from tighter credit markets. In
addition, terrorist activities may cause unpredictable or unfavorable economic conditions and could have a material adverse impact on the Company’s operating
results and financial condition.
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RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in the economic and political policies of the PRC government could have a material and adverse effect on our business and operations.
We conduct substantially all our business operations in China. Accordingly, our results of operations, financial condition and prospects are significantly
dependent on economic and political developments in China. China’s economy differs from the economies of developed countries in many aspects, including
the level of development, growth rate and degree of government control over foreign exchange and allocation of resources. While China’s economy has
experienced significant growth in the past 30 years, the growth has been uneven across different regions and periods and among various economic sectors in
China. We cannot assure you that China’s economy will continue to grow, or that if there is growth, such growth will be steady and uniform, or that if there is a
slowdown, such slowdown will not have a negative effect on its business and results of operations.
The PRC government exercises significant control over China’s economic growth through the allocation of resources, control over payment of foreign currency-
denominated obligations, implementation of monetary policy, and preferential treatment of particular industries or companies. Certain measures adopted by the
PRC government may restrict loans to certain industries, such as changes in the statutory deposit reserve ratio and lending guidelines for commercial banks by
the People’s Bank of China, or PBOC. These current and future government actions could materially affect our liquidity, access to capital, and ability to operate
our business.
The global financial markets experienced significant disruptions in 2008 and the United States, Europe and other economies went into recession. Since 2012,
growth of the Chinese economy has slowed down. The PRC government has implemented various measures to encourage economic growth and guide the
allocation of resources. Some of these measures may benefit the overall PRC economy but may also have a negative effect on us. Our financial condition and
results of operation could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable
to us. In addition, any stimulus measures designed to boost the Chinese economy, may contribute to higher inflation, which could adversely affect our results of
operations and financial condition.
Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us.
We conduct substantially all of our business through our operating subsidiaries in China. Our operating subsidiaries are generally subject to laws and regulations
applicable to foreign investments in China and, in particular, laws applicable to foreign-invested enterprises, or FIEs. The PRC legal system is based on written
statutes, and prior court decisions may be cited for reference, but have limited precedential value. Since 1979, a series of new PRC laws and regulations have
significantly enhanced the protections afforded to various forms of foreign investments in China. However, since the PRC legal system continues to rapidly
evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties
for you and us. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Moreover, most of our executive officers and directors are residents of China and not of the United States, and substantially all the assets of these persons are
located outside the United States. As a result, it could be difficult for investors to affect service of process in the United States or to enforce a judgment obtained
in the United States against our Chinese operations and subsidiaries.
The PRC government exerts substantial influence over the manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state
ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs,
environmental regulations, land use rights, property, and other matters. We believe that our operations in China are in material compliance with all applicable
legal and regulatory requirements. However, the central or local governments of the jurisdictions in which we operate may impose new, stricter regulations or
interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or
interpretations.
Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally
planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or
particular regions thereof and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.
We rely on dividends and other distributions on equity paid by our subsidiaries for our cash needs.
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We are a holding company, and we conduct all of our operations through our PRC subsidiaries. We rely on dividends and other distributions on equity paid by
our PRC subsidiaries for our cash needs, including the funds necessary to pay dividends and other cash distributions to our stockholders, to service any debt we
may incur and to pay our operating expenses. Current regulations in the PRC permit payment of dividends only out of accumulated profits as determined in
accordance with PRC accounting standards and regulations. According to the articles of association of our PRC subsidiaries, each of our PRC subsidiaries is
required to set aside at least 10% of its after-tax profit based on the PRC accounting standards and regulations each year to its statutory general reserve, until the
balance in the reserve reaches 50% of the registered capital of the company. Funds in the reserve are not distributable to us in forms of cash dividends, loans or
advances. In addition, if our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay
dividends or make other distributions to us, which in turn will adversely affect our available cash. Any limitations on the ability of our PRC subsidiaries to
transfer funds to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.
Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively.
The majority of our sales will be settled in RMB and U.S. dollars, and any future restrictions on currency exchanges may limit our ability to use revenue
generated in RMB to fund any future business activities outside China or to make dividend or other payments in U.S. dollars. Although the Chinese government
introduced regulations in 1996 to allow greater convertibility of the RMB for current account transactions, significant restrictions still remain, including
primarily the restriction that foreign-invested enterprises may only buy, sell or remit foreign currencies after providing valid commercial documents, at those
banks in China authorized to conduct foreign exchange business. In addition, conversion of RMB for capital account items, including direct investment and
loans, is subject to governmental approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account
items. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the RMB in the future.
In addition, the Notice of the General Affairs Department of the State Administration of Foreign Exchange on the Relevant Operating Issues concerning the
Improvement of the Administration of Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, issued by the PRC State
Administration of Foreign Exchange (“SAFE”), and effective as of August 29, 2008 (“Circular 142”), regulates the conversion by foreign-invested enterprises of
foreign currency into RMB by restricting how the converted RMB may be used. Circular 142 requires that RMB converted from the foreign currency-dominated
capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the relevant government authority and may not be
used to make equity investments in PRC, unless specifically provided otherwise. SAFE further strengthened its oversight over the flow and use of RMB funds
converted from the foreign currency-dominated capital of a foreign-invested enterprise. The use of such RMB may not be changed without approval from
SAFE, and may not be used to repay RMB loans if the proceeds of such loans have not yet been used. Any violation of Circular 142 may result in severe
penalties, including substantial fines.
Fluctuations in exchange rates could adversely affect our business and the value of our securities.
The value of our securities will be indirectly affected by the foreign exchange rate between the U.S. dollar and RMB and between those currencies and other
currencies in which our sales may be denominated. Appreciation or depreciation in the value of the RMB relative to the U.S. dollar would affect our financial
results reported in U.S. dollar terms without giving effect to any underlying change in our business or results of operations. Fluctuations in the exchange rate
will also affect the relative value of any dividend we issue that will be exchanged into U.S. dollars, as well as earnings from, and the value of, any U.S. dollar-
denominated investments we make in the future.
Since July 2005, the RMB has no longer been pegged to the U.S. dollar. However, the PBOC regularly intervenes in the foreign exchange market to limit
fluctuations in RMB exchange rates and achieve policy goals. Following the removal of the U.S. dollar peg, the RMB appreciated more than 20% against the
U.S. dollar over the following three years. From July 2008 to June 2010, the RMB traded within a narrow range against the U.S. dollar. On April 16, 2012, the
PBOC announced a policy to expand the maximum daily floating range of RMB trading prices against the U.S. dollar in the inter-bank spot foreign exchange
market from 0.5% to 1%. On March 17, 2014, the People’s Bank of China announced a policy to further expand the maximum daily floating range of RMB
trading prices against the U.S. dollar in the inter-bank spot foreign exchange market to 2%. In the long term, the RMB may appreciate or depreciate more
significantly in value against the U.S. dollar or other foreign currencies, depending on the market supply and demand with reference to a basket of currencies.
Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging
transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not
be able to successfully hedge our exposure at all. In addition, our foreign currency exchange losses may be magnified by PRC exchange control regulations that
restrict our ability to convert RMB into foreign currencies. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
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Failure to comply with PRC regulations relating to the investment in offshore special purpose companies by PRC residents may subject our PRC resident
stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’
ability to distribute profits to us or otherwise materially adversely affect us.
On July 14, 2014, SAFE issued the Circular on Relevant Issues Relating to Domestic Residents’ Investment and Financing and Roundtrip Investment through
Special Purpose Vehicles (“Circular 37”), which replaced the Circular 75, promulgated by SAFE on October 21, 2005. Circular 37 requires PRC residents to
register with local branches of SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas
investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in
Circular 37 as a “special purpose vehicle.”
We have notified substantial beneficial owners of our company who we know are PRC residents to comply with the registration obligation. However, we may
not be aware of the identities of all our beneficial owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot
assure you that all of our PRC resident beneficial owners will comply with Circular 37. The failure of our beneficial owners who are PRC residents to register or
amend their SAFE registrations in a timely manner pursuant to Circular 37 or the failure of future beneficial owners of our company who are PRC residents to
comply with the registration procedures set forth in Circular 37 may subject such beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure
to register or amend the registration may also limit our ability to contribute additional capital to our PRC subsidiaries or receive dividends or other distributions
from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE. These risks may have a material adverse
effect on our business, financial condition and results of operations.
The M&A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult
for us to pursue growth through acquisitions in China.
On August 8, 2006, six PRC regulatory agencies, including the China Securities Regulatory Commission, promulgated the Provisions Regarding Mergers and
Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rule, which became effective on September 8, 2006. The M&A Rule establishes
additional procedures and requirements that could make some acquisitions of Chinese companies by foreign investors more time-consuming and complex,
including requirements in some instances that the PRC Ministry of Commerce be notified in advance of any change-of-control transaction and in some
situations, require approval of the PRC Ministry of Commerce when a foreign investor takes control of a Chinese domestic enterprise. The regulations prohibit a
transaction at an acquisition price obviously lower than the appraised value of the PRC business or assets and in certain transaction structures, require that
consideration must be paid within defined periods, generally not in excess of a year. The regulation also limits our ability to negotiate various terms of the
acquisition, including aspects of the initial consideration, contingent consideration, holdback provisions, indemnification provisions and provisions relating to
the assumption and allocation of assets and liabilities. Transaction structures involving trusts, nominees and similar entities are prohibited. Government
approvals will have expiration dates by which a transaction must be completed and reported to the government agencies. In the future, we may grow our
business in part by acquiring complementary businesses, although we do not have any plans to do so at this time. The M&A Rule also requires PRC Ministry of
Commerce antitrust review of any change-of-control transactions involving certain types of foreign acquirers. On February 3, 2011, the Circular on Establishing
the Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors was promulgated by the General Office of the State
Council, which went into effect on March 4, 2011. On August 25, 2011, the Ministry of Commerce issued the corresponding implementation rules. According to
these rules, a foreign investor’s acquisitions of Chinese companies in the fields of military, important agricultural products, energy and resources, infrastructure,
transport service, key technology and major equipment manufacturing, and other restricted fields requires security review by a ministerial panel established and
governed under the direction of the State Council and led by the National Development and Reform Commission and Ministry of Commerce. Complying with
the requirements of the M&A Rule to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval
from the PRC Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or
maintain our market share.
Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon
U.S. laws, including the federal securities laws or other foreign laws against us or our management.
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All of our current operations are conducted in China. Moreover, most of our current directors and officers are nationals or residents of China. All or a substantial
portion of the assets of these persons are located outside the United States and in the PRC. As a result, it may not be possible to effect service of process within
the United States or elsewhere outside China upon these persons. In addition, uncertainty exists as to whether the courts of China would recognize or enforce
judgments of U.S. courts obtained against us or such officers and/or directors predicated upon the civil liability provisions of the securities laws of the United
States or any state thereof, or be competent to hear original actions brought in China against us or such persons predicated upon the securities laws of the United
States or any state thereof.
Under the Enterprise Income Tax Law, we may be classified as a “resident enterprise” of China. Such classification will likely result in unfavorable tax
consequences to us and our non-PRC shareholders.
On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28, 2007, the State
Council of China passed its implementing rules, which took effect on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de
facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for
enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over
the production and operations, personnel, accounting, and properties” of the enterprise.
On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled
Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application
of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an
offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior
management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies
or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at
least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate
of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC shareholders. However, it remains
unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax
from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts
of each case.
We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of
25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on
financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its
implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be
subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect
to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that
future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on
dividends we pay to our non-PRC shareholders and with respect to gains derived by our non-PRC stockholders from transferring our shares.
Heightened scrutiny of acquisition transactions by PRC tax authorities may have a negative impact on Chinese company’s business operations and its
acquisition strategy.
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698,
effective on January 1, 2008, and the Announcement on Several Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC Resident
Enterprises , or SAT Announcement 7, effective on February 3, 2015, issued by the SAT, if a non-resident enterprise transfers the equity interests of or similar
rights or interests in overseas companies which directly or indirectly own PRC taxable assets through an arrangement without a reasonable commercial purpose,
but rather to avoid PRC corporate income tax, the transaction will be re-characterized and treated as a direct transfer of PRC taxable assets subject to PRC
corporate income tax. SAT Announcement 7 specifies certain factors that should be considered in determining whether an indirect transfer has a reasonable
commercial purpose. However, as SAT Announcement 7 is newly issued, there is uncertainty as to the application of SAT Announcement 7 and the
interpretation of the term “reasonable commercial purpose.”
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Under SAT Announcement 7, the entity which has the obligation to pay the consideration for the transfer to the transferring shareholders has the obligation to
withhold any PRC corporate income tax that is due. If the transferring shareholders do not pay corporate income tax that is due for a transfer and the entity
which has the obligation to pay the consideration does not withhold the tax due, the PRC tax authorities may impose a penalty on the entity that so fails to
withhold, which may be relieved or exempted from the withholding obligation and any resulting penalty under certain circumstances if it reports such transfer to
the PRC tax authorities.
Although SAT Announcement 7 is generally effective as of February 3, 2015, it also applies to cases where the PRC tax treatment of a transaction that took
place prior to its effectiveness has not yet been finally settled. As a result, SAT Announcement 7 could be determined by PRC tax authorities to be applicable to
the historical reorganization, and it is possible that these transactions could be determined by PRC tax authorities to lack a reasonable commercial purpose. As a
result, the transfer of shares by certain shareholders to other parties could be subject to corporate income tax of up to 10% on capital gains generated from such
transfers, and PRC tax authorities could impose tax obligations on the transferring shareholders or subject us to penalty if the transferring shareholders do not
pay such obligations and withhold such tax.
SAT Announcement 7 and its interpretation by relevant PRC authorities clarify that an exemption provided by SAT Circular 698 for transfers of shares in a
publicly-traded entity that is listed overseas is available if the purchase of the shares and the sale of the shares both take place in open-market transactions.
However, if a shareholder of an entity that is listed overseas purchases shares in the open market and sells them in a private transaction, or vice-versa, PRC tax
authorities might deem such a transfer to be subject to SAT Circular 698 and SAT Announcement 7, which could subject such shareholder to additional
reporting obligations or tax burdens. Accordingly, if a holder of the Company’s common stock purchases such common stock in the open market and sells them
in a private transaction, or vice-versa, and fails to comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities may take actions, including
requesting to provide assistance for their investigation or impose a penalty on it, which could have a negative impact on the company’s business operations.
We may be exposed to liabilities under the Foreign Corrupt Practices Act and Chinese anti-corruption laws, and any determination that we violated these
laws could have a material adverse effect on our business.
We are subject to the Foreign Corrupt Practice Act (“FCPA”), and other laws that prohibit improper payments or offers of payments to foreign governments and
their officials and political parties by U.S. persons and issuers as defined by the statute, for the purpose of obtaining or retaining business. We have operations,
have agreements with third parties, and make most of our sales in China. The PRC also strictly prohibits bribery of government officials. Our activities in China
create the risk of unauthorized payments or offers of payments by the employees, consultants, sales agents, or distributors of our subsidiaries, even though they
may not always be subject to our control. It is our policy to implement safeguards to discourage these practices by our employees. However, our existing
safeguards and any future improvements may prove to be less than effective, and the employees, consultants, sales agents, or distributors of our subsidiaries may
engage in conduct for which we might be held responsible. Violations of the FCPA or Chinese anti-corruption laws may result in severe criminal or civil
sanctions, and we may be subject to other liabilities, which could negatively affect our business, operating results and financial condition. In addition, the U.S.
government may seek to hold our subsidiaries liable for successor liability FCPA violations committed by companies in which we invest or that we acquire.
The implementation of the new PRC employment contract law and increases in the labor costs in China may hurt our business and profitability.
China adopted a new Labor Contract Law, effective on January 1, 2008, and issued its implementation rules, effective on September 18, 2008. The Labor
Contract Law and related rules and regulations impose more stringent requirements on employers with regard to, among others, minimum wages, severance
payment and non-fixed-term employment contracts, time limits for probation periods, as well as the duration and the times that an employee can be placed on a
fixed-term employment contract. Due to the limited period of effectiveness of the Labor Contract Law and its implementation rules and regulations, and the lack
of clarity with respect to their implementation and potential penalties and fines, it is uncertain how they will impact our current employment policies and
practices. In particular, compliance with the Labor Contract Law and its implementation rules and regulations may increase our operating expenses. In the event
that we decide to terminate some of our employees or otherwise change our employment or labor practices, the Labor Contract Law and its implementation rules
and regulations may also limit our ability to effect those changes in a manner that we believe to be cost-effective or desirable, and could result in a material
decrease in our profitability.
22
RISKS RELATED TO OUR COMMON STOCK
Numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly.
There are numerous factors, many of which are beyond our control, may cause the market price of our common stock to fluctuate significantly. These factors
include:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our earnings releases, actual or anticipated changes in our earnings, fluctuations in our operating results or our failure to meet the expectations of
financial market analysts and investors;
changes in financial estimates by us or by any securities analysts who might cover our shares;
speculation about our business in the press or the investment community;
significant developments relating to our relationships with our customers or suppliers;
stock market price and volume fluctuations of other publicly traded companies and, in particular, those that are in the our industries;
customer demand for our products;
investor perceptions of the our industry in general and our company in particular;
the operating and stock performance of comparable companies;
general economic conditions and trends;
major catastrophic events;
announcements by us or our competitors of new products, significant acquisitions, strategic partnerships or divestitures;
changes in accounting standards, policies, guidance, interpretation or principles;
loss of external funding sources;
sales of our shares, including sales by our directors, officers or significant shareholders; and
additions or departures of key personnel.
Securities class action litigation is often instituted against companies following periods of volatility in their share price. This type of litigation could result in
substantial costs to us and divert our management’s attention and resources. Moreover, securities markets may from time to time experience significant price
and volume fluctuations for reasons unrelated to operating performance of particular companies. For example, in July 2008, the securities markets in the United
States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the
price of our shares and other interests in our company at a time when you want to sell your interest in us.
If we fail to comply with the continued listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for
our shares and make obtaining future debt or equity financing more difficult for us.
Our common stock is traded and listed on the NASDAQ Global Market under the symbol “CBAK.” The common stock may be delisted if we fail to maintain
certain NASDAQ listing requirements. On May 25, 2012, we received a letter from NASDAQ indicating that for the last 30 consecutive business days, the bid
price of our common stock closed below the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5450(a)(1) for continued inclusion on
the NASDAQ Global Market. After we effected a one-for-five reverse split on October 26, 2012, we regained compliance with the minimum bid price
requirement for continued listing set forth in NASDAQ Listing Rule 5450(a)(1). On June 5, 2013, we received another letter from NASDAQ indicating that for
the last 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share. We again regained compliance within a
short period of time. As of January 8, 2016, the closing price of our common stock was $2.34 per share.
We cannot ensure you that the Company will continue to comply with the requirements for continued listing on the NASDAQ Global Market in the future. If
our common stock loses its status on The NASDAQ Global Market and we are not successful in obtaining a listing on The NASDAQ Capital Market, our
common stock would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our common stock could be
more difficult because smaller quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be
reduced. In addition, in the event our common stock is delisted, broker-dealers have certain regulatory burdens imposed upon them, which may discourage
broker-dealers from effecting transactions in our common stock, further limiting the liquidity of our common stock. These factors could result in lower prices
and larger spreads in the bid and ask prices for our common stock. Such delisting from the NASDAQ Global Market and continued or further declines in our
share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly increase the
ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
23
If we were delisted from NASDAQ, we may become subject to the trading complications experienced by “Penny Stocks” in the over-the-counter market.
Delisting from NASDAQ may cause our shares of common stock to become the SEC’s “penny stock” rules. The SEC generally defines a penny stock as an
equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to specific exemptions. One such
exemption is to be listed on NASDAQ. Therefore, were we to be delisted from NASDAQ, our common stock may become subject to the SEC’s “penny stock”
rules. These rules require, among other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure
document, (ii) disclosure of market quotations, if any, (iii) disclosure of the compensation of the broker and its salespersons in the transaction and (iv) monthly
account statements showing the market values of our securities held in the customer’s accounts. A broker would be required to provide the bid and offer
quotations and compensation information before effecting the transaction. This information must be contained on the customer’s confirmation. Generally,
brokers are less willing to effect transactions in penny stocks due to these additional delivery requirements. These requirements may make it more difficult for
shareholders to purchase or sell our shares. Because the broker, not us, prepares this information, we would not be able to assure that such information is
accurate, complete or current.
Our directors and executive officers, collectively, own approximately 21.9% of our outstanding common stock and may be able to control our management
and affairs.
Mr. Xiangqian Li, our president and chief executive officer and chairman of our board, and our other executive officers and directors beneficially owns an
aggregate of 21.9% of our outstanding common stock. As a result, our directors and executive officers, acting together, may be able to control our management
and affairs, including the election of directors and approval of significant corporate transactions, such as mergers, consolidation, and sale of all or substantially
all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger,
consolidation or other business combination involving us, even if such a change of control would benefit our stockholders.
Provisions in our articles of incorporation and bylaws could entrench our board of directors and prevent a change in control.
Our articles of incorporation provide that special meetings of the stockholders can only be called by our president or any other executive officer, or the board of
directors, or any member thereof, the record holder or holders of at least 10% of all shares entitled to vote at the meeting, or the president or secretary at the
written request of our stockholders holding not less than 30% of all shares issued, outstanding and entitled to vote. In addition, our bylaws and/or our articles of
incorporation (i) allow vacancies in the board of directors to be filled by a majority of the remaining directors, though less than a quorum, (ii) provide that no
contract or transaction between us and one or more of our directors or officers is void if certain criteria are met, (iii) provide that our bylaws may be amended or
appealed at any meeting of the board of directors at which a quorum is present, by the affirmative vote of a majority of the directors present at such meeting, and
(iv) provide that at an annual meeting, our stockholders elect a board of directors and transact such other business as may properly be brought before the
meeting; by contrast, at a special meeting, our stockholders may transact only the business for the purposes specified in the notice of the meeting unless all of
our stockholders entitled to vote are present at the special meeting and consent.
In addition, our board of directors may cause us to issue our authorized but unissued shares of common stock in the future without stockholders’ approval. These
additional shares may be utilized for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and
employee benefit plans. The existence of authorized but unissued shares of common stock could render more difficult or discourage an attempt to obtain control
of a majority of our common stock by means of a proxy contest, tender offer, merger or otherwise.
Collectively, these provisions may have the effect of entrenching our existing board members, discouraging or preventing a transaction including a change in
control transaction where such transaction would be beneficial to our stockholders.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.
24
ITEM 2.
PROPERTIES.
We are close to complete the construction of our Dalian site with facilities measuring 40,100 square meters comprising manufacturing facilities, warehousing
and packaging facilities and administrative offices at the BAK Industrial Park in Dalian. Of that space, approximately 26,437 square meters are manufacturing
facilities. We have completed the construction of a power battery manufacturing plant and a power battery packing plant in Dalian which started commercial
production in July 2015. We believe that these facilities will meet our recent business needs as well as the needs of our expanded operations in the future.
The following table sets forth the breakdown of our facilities as of September 30, 2015 based on use:
Facility
Dalian BAK Power facilities
Usage
Manufacturing
R&D and administrative
Warehousing
Other facilities
Total
Area (m2 )
31,202
3,231
4,765
902
40,100
We currently do not have insurance for our buildings located at our Dalian facilities, which are under construction. We expect we will purchase related
insurance for these buildings after the construction is completed and the property ownership certificates are obtained.
ITEM 3.
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 an adverse effect on our business,
financial condition or operating results:
An individual named Steven R. Ruth filed suit against China BAK Battery, Inc. in United States District Court for the Western District of Texas on August 15,
2013 alleging breach of contract. China BAK Battery, Inc. did not receive notice of this lawsuit and the plaintiff sought a default judgment, which the court
granted in January 2014. Accordingly, the court entered judgment in favor of Mr. Ruth in the amount of $553,773.51 inclusive of costs and attorneys’ fees (the
“First Judgment”).
Subsequent to the entry of the First Judgment, Mr. Ruth has made efforts to have the judgment enforced in Canada. On September 19, 2014, Mr. Ruth also filed
a second complaint in the United States District Court for the Western District of Texas. On November 12, 2014, a second default judgment was entered against
China BAK Battery, Inc. in the amount of $553,773.51 for the First Judgment plus an additional $7,550 in attorneys’ fees. The second judgment is inclusive of
the amounts ordered in the First Judgment. BAK International thereafter agreed to indemnify China BAK Battery, Inc. from any expenses, losses and damages
that were incurred and will incur to China BAK Battery, Inc. due to the lawsuit filed by Mr. Ruth.
ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
25
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
PART II
Market Information
Our common stock is listed on The NASDAQ Global Market under the symbol “CBAK.”
The following table sets forth the quarterly high and low sales prices of a share of our common stock as reported by NASDAQ for the periods indicated. These
prices do not include retail markup, markdown or commission and may not represent actual transactions.
Year Ended September 30, 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Year Ended September 30, 2014
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Closing Prices(1)
High
3.44
3.52
4.67
3.23
4.19
3.52
4.46
2.90
$
$
$
$
$
$
$
$
Low
1.79
1.75
3.12
1.58
2.51
2.04
1.55
1.95
$
$
$
$
$
$
$
$
(1) The above table sets forth the range of high and low closing prices per share of our common stock as reported by Yahoo! Finance for the periods indicated.
Approximate Number of Holders of Our Common Stock
As of January 8, 2016, there were approximately 45 holders of record of our common stock, which does not include the number of stockholders holding shares
of our common stock in “street name”.
Dividend Policy
We have never declared or paid any dividends, nor do we have any present plan to pay any cash dividends on our common stock in the foreseeable future. We
currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
As we are a holding company, we rely on dividends paid to us by our subsidiaries in the PRC through our Hong Kong subsidiary, BAK Asia. In accordance with
its articles of association, each of our subsidiaries in the PRC is required to allocate to its statutory general reserve at least 10% of its respective after-tax profits
determined in accordance with the PRC accounting standards and regulations. Each of our subsidiaries in the PRC may stop allocations to its general reserve if
such reserve has reached 50% of its registered capital. Allocations to the reserve can only be used for making up losses and other specified purposes and may
not be paid to us in the form of loans, advances, or cash dividends. Dividends paid by our PRC subsidiaries to BAK Asia, our Hong Kong subsidiary, will not be
subject to Hong Kong capital gains or other income tax under current Hong Kong laws and regulations because they will not be deemed to be assessable income
derived from or arising in Hong Kong. Such dividends, however, may be subject to a 10% withholding tax in the PRC.
Our board of directors has discretion on whether to pay dividends unless the distribution would render us unable to repay our debts as they become due, as
provided in Chapter 78.288 of the Nevada Revised Statutes. Even if our board of directors decides to pay dividends, the form, frequency and amount will
depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the
board of directors may deem relevant.
26
Securities Authorized for Issuance Under Equity Compensation Plans
See Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Securities Authorized for Issuance Under
Equity Compensation Plans.”
Recent Sales of Unregistered Securities
We have not sold any equity securities during the 2015 fiscal year that were not previously disclosed in a quarterly report on Form 10-Q or a current report on
Form 8-K that was filed during the 2015 fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made during the fiscal year of 2015.
ITEM 6.
SELECTED FINANCIAL DATA.
Not applicable.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial
information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See
“Special Note Regarding Forward Looking Statements” above for certain information concerning those forward looking statements. Our financial statements
are prepared in U.S. dollars and in accordance with U.S. GAAP.
Overview
We are engaged in the developing, manufacturing and selling of new energy high power lithium batteries, which are mainly used in the following applications:
•
•
•
Electric vehicles (“EV”), such as electric cars, electric buses, hybrid electric cars and buses;
Light electric vehicles (“LEV”), such as electric bicycles, electric motors, sight-seeing cars; and
Electric tools, energy storage, uninterruptible power supply, and other high power applications.
We generated revenues from the manufacture and sale of high power lithium batteries of $123.0 million and $13.9 million for the fiscal years ended September
30, 2014 and 2015, respectively, and net losses from continuing operations of $26.7 million and net profit of $14.0 million during the same years, respectively.
However, we believe that our operations will yield long-term growth of revenues with the expected expansion of our manufacturing capabilities in the coming
years.
We have completed the construction of a power battery manufacturing plant and a power battery packing plant of our Dalian facilities which started commercial
production in July 2015. We have received and been utilizing most of BAK Tianjin’s operating assets relocated to our Dalian facilities, including its machinery
and equipment for battery production and battery pack production, customers, management team and technical staff, patents and technologies. BAK Tianjin is
one of the major manufacturers of high power lithium batteries in China which started operations in 2008, and has many well-known customers in EV, LEV and
other high power applications. We have also purchased and will purchase more machinery and equipment to expand our manufacturing capabilities. In addition,
we have outsourced and will continue to outsource our production to other manufacturers until our Dalian manufacturing facility can fulfill our customers’
needs. For the fiscal year ended September 30, 2015, Dalian BAK Power purchased batteries of approximately $10.5 million from BAK Tianjin and $1.2
million from other manufacturers.
During the fiscal year 2015, we received advances of approximately $9.8 million from certain investors and entered into a Debt Conversion Agreement with
these investors on September 29, 2015 to convert these loans into an aggregate 4,376,731 shares of our common stock.
In June 2015, we entered into a banking facility letter with Bank of Dandong to provide a maximum loan amount of $12.6 million and bank acceptance and
letters of credit of $5.0 million to June 22, 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li and Ms. Xiaoqiu Yu, Mr. Li’s wife. The
facilities were also secured by pledged deposits and our Dalian site’s buildings, construction in progress, land use rights and machinery and equipment. On June
25, 2015, we borrowed RMB50 million (approximately $7.9 million), one-year term bank loan bearing fixed interest at 7.84% per annum under the banking
facilities. In August 18, 2015, we borrowed RMB30 million (approximately $4.7 million) one-year term bank loan bearing fixed interest at 7.84% per annum
under the banking facilities. As of September 30, 2015, we had unutilized committed banking facilities of $1.8 million. We plan to renew these loans upon
maturity, and plan to raise additional funds through banks borrowings and equity financing in the future to meet our daily cash demands, if required.
27
In the meanwhile, due to the growing environmental pollution problem, the Chinese government is currently providing vigorous support to the new energy
facilities and vehicles. It is expected that we will be able to secure more potential orders from the new energy market, especially from the electric car market.
We believe with that the booming future market demand in high power lithium ion products, we can continue as a going concern and return to profitability.
Financial Statement Presentation
Net revenues. Our net revenues represent the invoiced value of our products sold, net of value added taxes, or VAT, sales returns, trade discounts and
allowances. We are subject to VAT, which is levied on most of our products at the rate of 17% on the invoiced value of our products. Provision for sales returns
are recorded as a reduction of revenue in the same period that revenue is recognized. The provision for sales returns represents our best estimate of the amount
of goods that will be returned from our customers based on historical sales return data.
Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the sale of
goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17% of the gross
sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to some or all of
the refund of VAT that it has already paid or borne. Our imported raw materials that are used for manufacturing exported products and deposited in bonded
warehouses are exempt from import VAT.
Cost of revenues. Cost of revenues consists primarily of material costs, employee remuneration for staff engaged in production activity, share-based
compensation, depreciation and related expenses that are directly attributable to the production of products. Cost of revenues also includes write-downs of
inventory to lower of cost or market. Cost of revenues from the sales of battery packs includes the fees we pay to pack manufacturers for assembling our
prismatic cells into battery packs.
Research and development expenses. Research and development expenses primarily consist of remuneration for R&D staff, share-based compensation,
depreciation and maintenance expenses relating to R&D equipment, and R&D material costs. For the years ended September 30, 3014 and 2015, we recorded
research and development expenses of $3,981,163 and $1,001,889, respectively.
Sales and marketing expenses. Sales and marketing expenses consist primarily of remuneration for staff involved in selling and marketing efforts, including
staff engaged in the packaging of goods for shipment, advertising cost, depreciation, share-based compensation and travel and entertainment expenses. We do
not pay slotting fees to retail companies for displaying our products, engage in cooperative advertising programs, participate in buy-down programs or similar
arrangements.
General and administrative expenses. General and administrative expenses consist primarily of employee remuneration, share-based compensation,
professional fees, insurance, benefits, general office expenses, depreciation, liquidated damage charges and bad debt expenses.
Government grant income. We present the government subsidies received as income unless the subsidies received are earmarked to compensate a specific
expense, which have been accounted for by offsetting the specific expense, such as research and development expense, interest expenses and removal costs.
Unearned government subsidies received are deferred for recognition until the criteria for such recognition could be met. Grants applicable to land are amortized
over the life of the depreciable facilities constructed on it. For research and development expenses, we match and offset the government grants with the expenses
of the research and development activities as specified in the grant approval document in the corresponding period when such expenses are incurred.
Finance costs, net. Finance costs consist primarily of interest income and interest on bank loans and other short term loans, net of capitalized interest.
Income tax expenses. Our subsidiaries in PRC are subject to an income tax rate of 25%. Our former subsidiaries BAK Canada, BAK Europe, BAK India and
BAK International, and our current Hong Kong subsidiary BAK Asia—are subject to a profits tax in their respective countries at rates of 38%, 25%, 30%,
16.5% and 16.5%, respectively. However, because we did not have any assessable income derived from or arising in those countries and regions, these entities
had not paid any such tax.
28
Results of Operations
The following table sets forth key components of our results of operations for the years indicated, both in dollars and as a percentage of our revenue.
(All amounts, other than percentages, in thousands of U.S. dollars)
Year Ended September 30,
2014
2015
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development expenses
Sales and marketing expenses
General and administrative expenses
(Recovery of) provision for doubtful accounts
Total operating expenses
Operating loss
Finance costs, net
Government grant income
Other income (expense), net
(Loss) profit before income tax and discontinued operations
Income tax expenses
Net (loss) profit from continuing operations, net of tax
Income from discontinued operations, net of tax
Net profit
$
$
$
123,014
(113,455)
9,559
3,981
4,504
12,358
(639)
20,204
(10,645)
(16,800)
75
665
(26,705)
(16)
(26,721)
64,497
37,776
$
13,904
(12,954)
950
1,002
135
3,330
132
4,599
(3,649)
-
23,103
(91)
19,363
(5,321)
14,042
1,831
15,873
Change
$
(109,110)
100,501
(8,609)
(2,979)
(4,369)
(9,028)
771
(15,605)
6,996
16,800
23,028
(756)
46,068
(5,305)
40,763
(62,666)
(21,903)
%
(88.7)
(88.6)
(90.1)
(74.8)
(97.0)
(73.1)
(120.7)
(77.2)
(65.7)
(100.0)
30,704.0
(113.7)
(172.5)
33,156.2
(152.6)
(97.2)
(58.0)
Net revenues. Net revenues were $13.9 million for the year ended September 30, 2015, as compared to $123.0 million for the fiscal year of 2014, a decrease of
$109.1 million, or 88.7% . The decrease was primarily attributable to the disposal of BAK International and its subsidiaries that manufactured prismatic,
cylindrical and lithium polymer cells. After June 30, 2014, we only generated revenue from sales of high-power lithium battery cells.
The following table sets forth the breakdown of our net revenues by battery cell type.
(All amounts in thousands of U.S. dollars)
Prismatic cells
Aluminum-case cells
Battery packs
Cylindrical cells
Lithium polymer cells
High-power lithium battery cells
Total
Year Ended September 30,
2015
2014
Change
$
%
$
$
24,486
61,800
9,278
17,146
10,304
123,014
$
$
-
-
-
-
13,904
13,904
$
$
(24,486)
(61,800)
(9,278)
(17,146)
3,600
(109,110)
(100.0)
(100.0)
(100.0)
(100.0)
34.9
(88.7)
The following table sets forth the breakdown of our net revenues from reconditioned and normal products for the year ended September 30, 2014. We did not
generate any sales from reconditioned products during the year ended September 30, 2015.
(All amounts in thousands of U.S. dollars)
Prismatic cells
Aluminum-case cells
Battery packs
Cylindrical cells
Lithium polymer cells
High-power lithium battery cells
Total
Year Ended September 30, 2014
Reconditioned
sales
Normal sales
Total sales
$
$
18,708
8,545
-
12,782
-
40,035
$
$
5,778
53,255
9,278
4,364
10,304
82,979
$
$
24,486
61,800
9,278
17,146
10,304
123,014
29
The following table sets forth certain information related to high-power lithium battery cells for the years ended September 30, 2014 and 2015, respectively.
(All amounts in thousands of U.S. dollars other than percentages)
Sales revenue
Cost of sales
Gross profit
Year ended September 30,
2015
2014
Change
$
%
$
$
10,304
(8,784)
1,520
$
$
13,904
(12,954)
950
$
$
3,600
(4,170)
(570)
34.9
47.5
(37.5)
Cost of revenues. Cost of revenues decreased to $13.0 million for the year ended September 30, 2015, as compared to $113.5 million for fiscal year 2014, a
decrease of $100.5 million, or 88.6% . Included in cost of revenues were write downs of obsolete inventories of $8.8 million for the year ended September 30,
2014 and $0.2 million for the year ended September 30, 2015. We write down the inventory value whenever there is an indication that it is impaired. However,
further write-downs may be necessary if market conditions continue to deteriorate. Also, as we disposed of the major subsidiaries which generated most of our
sales in 2014, our sales revenue and cost of sales decreased substantially in fiscal 2015.
Gross profit. Gross profit for the year ended September 30, 2015 was $1.0 million, or 6.8% of net revenues as compared to a gross profit of $9.6 million, or
7.8% of net revenues, for fiscal year 2014. Upon the partial commencement of our production facilities in our new Dalian site in July 2015, inefficiency was
inevitably caused by the operation of the newly installed machinery and newly hired production staff. As a result, gross profit margin in fiscal 2015 was lower
than that of fiscal 2014.
Research and development expenses. Research and development expenses decreased to $1.0 million for the year ended September 30, 2015, as compared to
$4.0 million for fiscal year 2014, a decrease of $3.0 million, or 74.8% . This decrease was mainly because we only carried out quality control and did not incur
any overseas sales or conduct any R&D projects after the disposal of BAK International. Therefore, no certification fees were incurred for overseas sales and
less materials were consumed for R&D projects in fiscal year 2015.
Sales and marketing expenses. Sales and marketing expenses decreased to $0.1 million for the year ended September 30, 2015, as compared to $4.5 million for
fiscal year 2014, a decrease of $4.4 million, or 97.0%, primarily due to our disposal of former subsidiaries which contributed most of our prior period expense.
As a percentage of revenues, sales and marketing expenses have decreased to 1.0% for the year ended September 30, 2015, from 3.7% for the same period in
2014, primarily because we did not expand our sales team at the Dalian site as of September 30, 2015. We expanded our sales team at the Dalian site to a
headcount of 17 employees in October 2015.
General and administrative expenses. General and administrative expenses decreased to $3.3 million for the year ended September 30, 2015, as compared to
$12.4 million for fiscal year 2014, a decrease of $9.0 million, or 73.1% . The decrease was mainly because of the reduction of headcount and operating expenses
after the disposal of BAK International and the reduction of depreciation expense of office buildings after the disposal of BAK International.
Operating loss. As a result of the above, our operating loss totaled $3.6 million for the year ended September 30, 2015, as compared to $10.6 million for the
fiscal year 2014, a decrease of $7.0 million or 65.7% .
Finance costs, net. Finance costs, net, decreased to nil for the year ended September 30, 2015, as compared to $16.8 million for the prior year, a decrease of
$16.8 million, or 100.0% . As we are in the process of constructing our Dalian site, interest expenses incurred on borrowings were capitalized as construction in
progress during the year ended September 30, 2015. In the prior year, we incurred interest expense on our bank borrowings and loans from unrelated third
parties.
Government grant income. Government grant income increased to $23.1 million for the year ended September 30, 2015, as compared to $75,000 for the same
period last year. This was mainly due to the recognition of the subsidy of $23.1 million from the Management Committee of Dalian Economic Zone granted to
finance the projected operating loss incurred during the move and construction of our new facilities in Dalian.
Income tax expense. Income tax expense was approximately $5.3 million for the fiscal year 2015 primarily due to the income tax impact of the government
subsidies recognized, as compared to $16,000 income tax expense for 2014.
Income from discontinued operations, net of tax. Income from discontinued operations, net of tax was $1.8 million for the year ended September 30, 2015 as
compared to $64.5 million for 2014. Income from discontinued operations, net of tax, represents the income from the leasing and management of our Research
and Development Centre of our former subsidiary in Shenzhen. During the year ended September 30, 2014, this operation generated net income of $3.1 million.
We recorded an accounting profit of $61.3 million on disposal of BAK International and its subsidiaries, which was mainly related to the market value
appreciation of our Research and Development Centre. Income from discontinued operations in 2015 represents an adjustment to the gain on disposal of
subsidiaries from discontinued operations previously recorded in fiscal 2014. Upon the disposal, our former subsidiaries owed us a sum of $17.8 million. We
evaluated the collectability of the remaining amount and determined that $1.8 million should be impaired and offset against the gain on disposal of subsidiaries
from discontinued operations for the year ended September 30, 2014. During fiscal 2015, we determined that $1.8 million was recoverable. The recovery was
treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations in 2015.
30
Net profit. As a result of the foregoing, we had a net profit of $15.9 million for the year ended September 30, 2015, compared to a net profit of $37.8 million for
the year ended September 30, 2014.
Liquidity and Capital Resources
Before the foreclosure of the pledged ownership of BAK International, we had historically financed our liquidity requirements from a variety of sources,
including short-term bank loans, other short-term loans and bills payable under bank credit agreements, factoring of bills receivable to banks and issuance of
capital stock. For fiscal 2015, we were primarily financed by short-term bank loans and funds from new investors.
As of September 30, 2015, we had cash and cash equivalents of $6.8 million. Our total current assets were $19.6 million and our total current liabilities were
$34.5 million, resulting in a net working capital deficiency of $15.0 million. These factors raise substantial doubts about our ability to continue as a going
concern.
During the fiscal year of 2015, we received advances of approximately $9.8 million from certain investors and entered into a Debt Conversion Agreement with
these investors on September 29, 2015 to convert these loans into an aggregate 4,376,731 shares of our common stock. In June 2015, we entered into a banking
facility letter with Bank of Dandong to provide a maximum loan amount of $12.6 million and bank acceptance and letters of credit of $5.0 million with a term
expiring on June 22, 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li and Ms. Xiaoqiu Yu, Mr. Li’s wife. The facilities were also
secured by pledged deposits and our Dalian site’s buildings, constructions in progress, land use rights and machinery and equipment. On June 25, 2015, we
borrowed RMB50 million (approximately $7.9 million), one-year term bank loan bearing fixed interest at 7.84% per annum under the banking facilities. On
August 18, 2015, we borrowed RMB30 million (approximately $4.7 million) one-year term bank loan bearing a fixed interest at 7.84% per annum under the
banking facilities. As of September 30, 2015, we had unutilized committed banking facilities of $1.8 million. We may require additional cash to complete the
construction of the new Dalian manufacturing facilities. We may also require additional cash due to changing business conditions or other future developments,
including any investments or acquisitions we may decide to pursue. We plan to renew these loans upon maturity, and plan to raise additional funds through bank
borrowings and equity financing in the future to meet our daily cash demands, if required. However, there can be no assurance that we will be successful in
obtaining this financing. If our existing cash and bank borrowing are insufficient to meet our requirements, we may seek to sell equity securities, debt securities
or borrow from lending institutions. We can make no assurance that financing will be available in the amounts we need or on terms acceptable to us, if at all.
The sale of equity securities, including convertible debt securities, would dilute the interests of our current shareholders. The incurrence of debt would divert
cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and
our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects
may suffer.
In the meanwhile, due to the growing environmental pollution problem, the Chinese government is currently providing vigorous support to the new energy
facilities and vehicle. It is expected that we will be able to secure more potential orders from the new energy market, especially from the electric car market. We
believe with that the booming future market demand in high power lithium ion products, we can continue as a going concern and return to profitability.
31
The following table sets forth a summary of our cash flows for the periods indicated:
(All amounts in thousands of U.S. dollars)
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of the year
Cash and cash equivalents at end of the year
Operating Activities
Year Ended September 30,
2015
2014
$
$
(29,299) $
(17,544)
33,785
51
(13,007)
13,999
992
$
(2,037)
(5,502)
13,344
(34)
5,771
992
6,763
Net cash used in operating activities was $2.0 million in the year ended September 30, 2015, as compared with net cash used in operating activities of $29.3
million in fiscal year 2014. The decrease of $27.3 million in net cash used in operating activities was mainly attributable to changes in trade accounts and bills
payable.
Investing Activities
Net cash used in investing activities decreased to $5.5 million in fiscal 2015, from $17.5 million in fiscal 2014. Such change was mainly attributable to the
reduction of payment for capital expenditure of $6.1 million and receipt of deferred government grant of $7.4 million in 2015.
Financing Activities
Net cash provided by financing activities was $13.3 million in fiscal 2015, compared with net cash provided by financing activities of $33.8 million in fiscal
2014. Such change was mainly attributable to a reduction of advance from other payables.
As of September 30, 2015, the principal amounts outstanding under our credit facilities and lines of credit were as follows:
(All amounts in thousands of U.S. dollars)
Short-term credit facilities:
Bank of Dandong
Maximum amount
available
Amount borrowed
$
17,620
$
15,784
On June 22, 2015, our subsidiary, Dalian BAK Power entered into a banking facility letter with Bank of Dandong to provide a maximum loan amount of $12.6
million (RMB80 million) and bank acceptance and letters of credit of $5.0 million (RMB60 million) with a term expiring on June 22, 2016. The banking
facilities were guaranteed by Shenzhen BAK, Mr. Li and Ms. Xiaoqiu Yu, Mr. Li’s wife. The facilities were also secured by our Dalian site’s buildings,
constructions in progress, land use rights and machinery and equipment. We are required to place 50% and 20% bank deposit prior to issuance of bills payable
and letters of credit, respectively. Loans of $12.6 million (RMB80 million), bills payable of $3.2 million (RMB20.3 million) were outstanding as of September
30, 2015. We have unutilized committed banking facilities of $1.8 million.
32
Capital Expenditures
We incurred capital expenditures of $12.9 million and $19.0 million in fiscal years 2015 and 2014, respectively. Our capital expenditures in 2015 were used
primarily to construct our Dalian facility. The table below sets forth the breakdown of our capital expenditures by use for the periods indicated.
(All amounts in thousands of U.S. dollars)
Purchase of property, plant and equipment and construction in progress
Purchase of land use right
Purchase of intangible assets
Total capital expenditure
Year Ended September 30,
2015
2014
$
$
9,796
9,139
16
18,951
$
$
12,852
-
29
12,881
We estimate that our total capital expenditures in fiscal year 2016 will reach approximately $47.2 million. Such funds will be used to construct a new plant with
6 product lines and a new warehouse.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and commercial commitments as of September 30, 2015:
(All amounts in thousands of U.S. dollars)
Payments Due by Period
Contractual Obligations
Short-term bank loans
Bills payable
Advances from related parties
Advances from unrelated third parties
Capital injection to Dalian BAK Power and Dalian BAK Trading
Capital commitments for construction of buildings
Capital commitments for purchase of equipment
Future interest payment on short- term bank loans
Total
Total
12,586
3,198
106
79
15,554
1,820
69
706
34,118
$
$
$
$
Less than
1 year
1-3
years
3-5
years
More than
5 years
12,586
3,198
106
79
15,554
1,820
69
706
34,118
$
$
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
Other than the contractual obligations and commercial commitments set forth above, we did not have any other long-term debt obligations, operating lease
obligations, capital commitments, purchase obligations or other long-term liabilities as of September 30, 2015.
Off-Balance Sheet Transactions
We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which
we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit,
liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as shareholders’
equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity,
market risk or credit support to us or engages in leasing, hedging or research and development services with us.
33
Critical Accounting Policies
Our consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that
affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the
reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience,
knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable
assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an
integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher
degree of judgment than others in their application.
When reviewing our financial statements, the following should also be considered: (1) our selection of critical accounting policies, (2) the judgment and other
uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the
following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.
We consider the following to be the most critical accounting policies:
Revenue Recognition
We recognize revenue on product sales when products are delivered and the customer takes ownership and assumes risk of loss, collection of the relevant
receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
Net sales of products represent the invoiced value of goods sold, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. We are subject
to VAT which is levied on the majority of our products at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the
invoiced value of sales and input VAT is borne by us in addition to the invoiced value of purchases to the extent not refunded for export sales. Provision for
sales returns are recorded as a reduction of revenue in the same period that revenue is recognized. The provision for sales returns, which is based on historical
sales returns data, is our best estimate of the amount of goods that will be returned from our customers.
Impairment of Long-lived Assets
Long-lived assets, which include property, plant and equipment, prepaid land use rights and intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is
our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical write-off
experience, customer specific facts and economic conditions.
Outstanding accounts receivable balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is determined using the weighted average cost method, and includes expenditure
incurred in acquiring the inventories and bringing them to their existing location and condition. In case of finished goods and work in progress, cost includes an
appropriate share of production overhead based on normal operating capacity.
34
We regularly review the cost of inventories against their estimated fair market value and record a lower of cost or market write-down for inventories that have
costs in excess of estimated market value.
Government Grants
Our subsidiaries in China receive government subsidies from local Chinese government agencies in accordance with relevant Chinese government policies. In
general, we present the government subsidies received as income unless the subsidies received are earmarked to compensate a specific expense, which have
been accounted for by offsetting the specific expense, such as research and development expense, interest expenses and removal costs. Unearned government
subsidies received are deferred for recognition until the criteria for such recognition could be met.
Grants applicable to land are amortized over the life of the depreciable facilities constructed on it. For research and development expenses, we match and offset
the government grants with the expenses of the research and development activities as specified in the grant approval document in the corresponding period
when such expenses are incurred.
Changes in Accounting Standards
Please refer to note 2 to our consolidated financial statements, “Principal Activities, Basis of Presentation and Organization –Recently Issued Accounting
Standards,” for a discussion of relevant pronouncements.
Exchange Rates
The financial records of our PRC subsidiaries are maintained in RMB. In order to prepare our financial statements, we have translated amounts in RMB into
amounts in U.S. dollars. The amounts of our assets and liabilities on our balance sheets are translated using the closing exchange rate as of the date of the
balance sheet. Revenues, expenses, gains and losses are translated using the average exchange rate prevailing during the period covered by such financial
statements. Adjustments resulting from the translation, if any, are included in our cumulative other comprehensive income in our stockholders’ equity section of
our balance sheet. All other amounts that were originally booked in RMB and translated into U.S. dollars were translated using the closing exchange rate on the
date of recognition. Consequently, the exchange rates at which the amounts in those comparisons were computed varied from year to year.
The exchange rates used to translate amounts in RMB into U.S. dollars in connection with the preparation of our financial statements were as follows:
Balance sheet items as of September 30
Amounts included in the statement of income and comprehensive loss and statement of cash flows for the years
ended September 30
6.1382
6.1469
6.3564
6.2224
RMB per U.S. Dollar
2014
2015
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The full text of our audited consolidated financial statements begins on page F-1 of this annual report.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief
executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2015.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that
such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating and implementing possible controls and procedures.
35
Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer.
Based upon, and as of the date of this evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and
procedures were ineffective as of September 30, 2015.
Management’s Annual Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Internal control over financial
reporting refers to the process designed by, or under the supervision of, our chief executive officer and chief financial officer, and effected by our board of
directors, management and other personnel, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. GAAP, and includes those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S.
GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of September 30, 2015. In making this assessment, management used
the framework set forth in the report entitled Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
Based on this evaluation and as a result of the material weakness discussed below, our chief executive officer and interim chief financial officer concluded that
the Company’s disclosure controls and procedures as of September 30, 2015 were not effective because of the following material weakness in our internal
control over financial reporting has been identified:
–
–
We did not have appropriate policies and procedures in place to evaluate the proper accounting and disclosures of key documents and
agreements.
We do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the
application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements.
In order to cure the foregoing material weakness, we have taken or are taking the following remediation measures:
–
–
We are in the process of hiring a permanent chief financial officer with significant U.S. GAAP and SEC reporting experience. Mr. Wenwu
Wang was appointed by the Board of Directors of the Company as the Interim Chief Financial Officer on August 28, 2014.
We plan to make necessary changes by providing training to our financial team and our other relevant personnel on the U.S. GAAP accounting
guidelines applicable to our financial reporting requirements.
36
We intend to complete the remediation of the material weaknesses discussed above as soon as practicable but we can give no assurance that we will be able to
do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in
our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies
our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weakness that we have identified, and
material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them
as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.
Changes in internal control over financial reporting
Except for the matters described above, there were no changes in our internal controls over financial reporting during the fourth quarter of our fiscal year ended
September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION.
We have no information to disclose that was required to be disclosed in a report on Form 8-K during the fourth quarter of fiscal year 2015, but was not reported.
37
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following sets forth the name and position of each of our current executive officers and directors.
PART III
NAME
Xiangqian Li
Chunzhi Zhang
Martha C. Agee
Jianjun He
Guosheng Wang
Jian Lin
Wenwu Wang
AGE
47
53
60
43
43
38
34
POSITION
Chairman of the Board and Chief Executive Officer
Director
Director
Director
Director
Interim Chief Technology Officer
Interim Chief Financial Officer
Xiangqian Li has served as the chairman of our board, our president and chief executive officer since January 20, 2005. He has been a director of BAK
International Limited, or BAK International, our former Hong Kong incorporated subsidiary, since November 2004. Mr. Li is the founder and has served as the
chairman of the board of Shenzhen BAK Battery Co., Ltd., or Shenzhen BAK, our former indirect wholly owned subsidiary, since its inception in August 2001,
and served as Shenzhen BAK’s general manager since December 2003. From June 2001 to June 2003, Mr. Li was the chairman of Huaran Technology Co.,
Ltd., a PRC-incorporated company engaged in the car audio business. Mr. Li received a bachelor’s degree in thermal energy and power engineering from the
Lanzhou Railway Institute, China and a doctorate degree in quantitative economics from Jilin University in China.
Chunzhi Zhang has served as our director since June 25, 2007. Since mid-2005, Mr. Zhang has served as General Manager of AASTOCKS.com, Ltd.,
Shenzhen Branch, a software integration and one-stop system solutions provider for financial markets in China. From 2003 through mid-2005, Mr. Zhang served
as General Manager of Shenzhen Sharemax Management Co., Ltd, where he was involved in both private equity business and asset management. From 1998
through 2003, Mr. Zhang served as General Manager of Haixing Security Brokerage Co., Ltd, Shenzhen Branch, involved in securities trading and asset
management. Prior to joining Haixing Security Brokerage, from 1985 to 1996, Mr. Zhang served as senior Management in Hong Kong for China Resources
Holding Co., Ltd., a China central government-owned enterprise. Mr. Zhang received his bachelor degree in Economy from Jilin University in 1985 and MBA
degree from University of Wales in the United Kingdom. Mr. Zhang is also a distinguished finance lecturer at the Graduate School in Shenzhen of Tsinghua
University.
Martha C. Agee has served as our director since November 15, 2012. Since 1997, Ms. Agee has been a senior lecturer of business law at Hankamer School of
Business of Baylor University where she teaches courses in the Legal Environment of Business, International Business Law, and Healthcare Law & Ethics for
graduate and undergraduate students. Prior to that, Ms. Agee practiced law from 1988 to 1996. Ms. Agee obtained her bachelor’s degree in Accounting in 1976
and Juris Doctorate degree in 1988 from Baylor University.
Jianjun He has served as our director since November 4, 2013. Mr. He has more than 15 years experience in accounting and finance and is an associate member
of the Chinese Institute of Certificate Public Accounts. Mr. He has been the Managing Director of Jilin Cybernaut Lvke Investment and Management Co., Ltd.,
an investment consulting firm in China, since January 1, 2013. From June 30, 2009 to December 31, 2012, Mr. He served as the Chief Financial Officer of THT
Heat Transfer Technology, Inc. (Nasdaq: THTI) (“THT Heat”), a provider of heat exchangers and heat exchange solutions in China. Mr. He was the Chief
Financial Officer of Siping City Juyuan Hanyang Plate Heat Exchanger Co. Ltd, a wholly owned subsidiary of THT Heat from 2007 to December 2012. From
1999 to 2007, Mr. He worked as senior financial officer in Jilin Grain Group, a state-owned enterprise engaged in the grain processing and trading business. Mr.
He graduated from Changchun Taxation College in 1995 with a Bachelor’s degree in Auditing and obtained a Master’s degree from Jilin University in 2005.
Guosheng Wang has served as our director since August 1, 2014. Since June 2014, Mr. Wang has been in charge of the construction of facilities of the
Company’s subsidiary, Dalian BAK Power Battery Co., Ltd (“Dalian BAK”) and the relocation of assets and equipment of BAK International (Tianjin) Limited
(“BAK Tianjin”) to Dalian BAK. Prior to that, Mr. Wang served as vice president of operations of BAK Tianjin since May 2013, where he was managing the
Quality Department, Purchase Department, Equipment Department and HR Department. From May 2010 to May 2013, Mr. Wang served as manager of
Equipment Department of BAK Tianjin. From March 2008 to May 2010, he served as Director of No. 1 Manufacture Department of BAK Tianjin. Mr. Wang
began his career working as an engineer at Harbin Railway Transportation Equipment Co., Ltd in 1994. Mr. Wang obtained his bachelor’s degree in mechanical
manufacturing engineering and equipment from Lanzhou Jiaotong University in July 1994.
38
Jian Lin has served as our Interim Chief Technical Officer since April 17, 2014. He served as Vice Director of R&D Centre of Shenzhen BAK from March
2012 to April, 2014, where he was responsible for the overall R&D activities of Shenzhen BAK. From October 2009 to February 2012, he worked for
Postdoctoral R&D Station of Shenzhen BAK, which was co-established by Shenzhen BAK and Xiamen University, where he focused on the research of high
performance liquid electrolytes for Li-ion battery. From August 2008 to September 2009, he worked as R&D scientist for U.S. Brady (Beijing) R&D Center. Dr.
Lin has extensive knowledge of lithium-ion battery technologies and holds three patents relating to lithium-ion technology. Dr. Lin received a doctorate degree
in polymer science and engineering from Case Western Reserve University, where he focused on novel lithium salts and polymer electrolyte
membranes/separators for lithium batteries.
Wenwu Wang has served as our Interim Chief Financial Officer since August 28, 2014. He has served as the financial controller of Dalian BAK Power since
April 2014, and served as the vice financial manager of Shenzhen BAK from August 2013 to June 2014. Mr. Wang has been our consolidation and financial
reporting manager since September 2012. From November 2010 to September 2012, he served as the financial manager of BAK India. From October 2008 to
November 2010, Mr. Wang was account receivable supervisor of Shenzhen BAK and consolidation and financial reporting assistant of the Company. Mr. Wang
received a bachelor’s degree in Accounting from Southwest University in China.
There are no agreements or understandings for any of our executive officers or director to resign at the request of another person and no officer or director is
acting on behalf of nor will any of them act at the direction of any other person.
Directors are elected until their successors are duly elected and qualified.
Director Qualifications
Directors are responsible for overseeing the Company’s business consistent with their fiduciary duty to shareholders. This significant responsibility requires
highly-skilled individuals with various qualities, attributes and professional experience. The Board believes that there are general requirements for service on the
Company’s Board of Directors that are applicable to all directors and that there are other skills and experience that should be represented on the Board as a
whole but not necessarily by each director. The Board and the Nominating and Corporate Governance Committee of the Board consider the qualifications of
directors and director candidates individually and in the broader context of the Board’s overall composition and the Company’s current and future needs.
Qualifications for All Directors
In identifying and evaluating nominees, the Nominating and Corporate Governance Committee may consult with the other Board members, management,
consultants, and other individuals likely to possess an understanding of the Company’s business and knowledge of suitable candidates. In making its
recommendations, the Nominating and Corporate Governance Committee assesses the requisite skills and qualifications of nominees and the composition of the
Board as a whole in the context of the Board's criteria and needs. In evaluating the suitability of individual Board members, the Nominating and Corporate
Governance Committee may take into account many factors, including general understanding of marketing, finance and other disciplines relevant to the success
of a publicly traded company in today’s business environment; understanding of the Company’s business and technology; the international nature of the
Company’s operations; educational and professional background; and personal accomplishment. The Nominating and Corporate Governance Committee
evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can best perpetuate the success of the
Company’s business and represent stockholder interests through the exercise of sound judgment, using its diversity of experience. The Nominating and
Corporate Governance Committee also ensures that a majority of nominees would be “independent directors” as defined under the applicable rules of the SEC
and The NASDAQ Stock Market LLC.
Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole
39
In its assessment of each potential candidate, including those recommended by stockholders, the Nominating and Corporate Governance Committee considers
the nominee’s judgment, integrity, experience, independence, understanding of the Company’s business or other related industries and such other factors the
Nominating and Corporate Governance Committee determines are pertinent in light of the current needs of the Board. The Nominating and Corporate
Governance Committee also takes into account the ability of a Director to devote the time and effort necessary to fulfill his or her responsibilities to the
Company.
The Board and the Nominating and Corporate Governance Committee require that each Director be a recognized person of high integrity with a proven record
of success in his or her field. Each Director must demonstrate innovative thinking, familiarity with and respect for corporate governance requirements and
practices, an appreciation of multiple cultures and a commitment to sustainability and to dealing responsibly with social issues. In addition to the qualifications
required of all Directors, the Board assesses intangible qualities including the individual’s ability to ask difficult questions and, simultaneously, to work
collegially.
The Board has identified particular qualifications, attributes, skills and experience that are important to be represented on the Board as a whole, in light of the
Company’s current needs and business priorities. The Company’s services are performed in various countries and in significant areas of future growth located
outside of the United States. Accordingly, the Board believes that international experience or specific knowledge of key geographic growth areas and diversity
of professional experiences should be represented on the Board. In addition, the Company’s business is multifaceted and involves complex financial
transactions. Therefore, the Board believes that the Board should include some Directors with a high level of financial literacy and some Directors who possess
relevant business experience as a Chief Executive Officer or President. Our business involves complex technologies in a highly specialized industry. Therefore,
the Board believes that extensive knowledge of the Company’s business and industry should be represented on the Board.
The Board and the Nominating and Corporate Governance Committee do not have a specific diversity policy, but consider diversity of race, ethnicity, gender,
age, cultural background and professional experiences in evaluating candidates for Board membership. Diversity is important because a variety of points of view
contribute to a more effective decision-making process.
Summary of Qualifications of Directors
Set forth below is a narrative disclosure that summarizes some of the specific qualifications, attributes, skills and experiences of our directors. For more detailed
information, please refer to the biographical information for each director set forth above.
Mr. Li, has extensive senior management experience in the industry in which we operate, having served as our Chief Executive Officer and Chairman since
January 2005 and as the Chief Executive Officer or Chairman of various other companies since 2001.
Mr. Zhang, Chair of the Compensation Committee, is experienced in securities analysis and investment. Mr. Zhang has accumulated this experience in
managerial positions in firms in the securities industry since 1998. Mr. Zhang received his bachelor degree in Economy from Jilin University in 1985.
Ms. Agee, Chair of the Audit Committee, was previously a Certified Public Accountant, worked as Chief Accountant for political sub-division for five and a
half years and worked as Supervisor of Accounting for a large retail chain where the responsibilities included hiring, training, and supervision of accounting
staff; preparation and analysis of 17 monthly financial statements and quarterly consolidated financial statements; budgeting, and internal auditing.
Mr. He, Chair of the Nominating and Corporate Governance Committee, has more than 15-year experience in accounting and finance and is an associate
member of the Chinese Institute of Certificate Public Accounts.
Mr. Wang, has served with the Company since 2003 and brings to the Board extensive experience in all aspects of our business and industry and strong
management and technical skills.
Family Relationships
There are no family relationships among our directors or officers.
40
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has, during the past ten years:
•
•
•
•
•
•
been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor
offences);
had any bankruptcy petition filed by or against the business or property of the person, or of any partnership, corporation or business association
of which he was a general partner or executive officer, either at the time of the bankruptcy filing or within two years prior to that time;
been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or
federal or state authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting, his involvement in any type of
business, securities, futures, commodities, investment, banking, savings and loan, or insurance activities, or to be associated with persons
engaged in any such activity;
been found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or
vacated;
been the subject of, or a party to, any federal or state judicial or administrative order, judgment, decree, or finding, not subsequently reversed,
suspended or vacated (not including any settlement of a civil proceeding among private litigants), relating to an alleged violation of any federal
or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies including, but
not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-
and-desist order, or removal or prohibition order, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any
business entity; or
been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self- regulatory organization (as
defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity
Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its
members or persons associated with a member.
Board Composition and Committees
Our board of directors is comprised of Xiangqian Li, Chunzhi Zhang, Martha C. Agee, Jianjun He and Guosheng Wang.
Chunzhi Zhang, Martha Agee and Jianjun He each serves on our board of directors as an “independent director” as defined by as defined by Rule 5605(a)(2) of
the NASDAQ Listing Rules. Our board of directors has determined that Martha Agee possesses the accounting or related financial management experience that
qualifies her as financially sophisticated within the meaning of Rule 5605(c)(2)(A) of the NASDAQ Listing Rule and that she is an “audit committee financial
expert” as defined by the rules and regulations of the SEC.
Our board of directors currently has three standing committees which perform various duties on behalf of and report to the board of directors: (i) audit
committee, (ii) compensation committee and (iii) nominating and corporate governance committee. Each of the three standing committees is comprised entirely
of independent directors. From time to time, the board of directors may establish other committees.
Audit Committee
Our Audit Committee consists of three members: Martha C. Agee, Chunzhi Zhang and Jianjun He. Pursuant to the determination of our Board of Directors, Ms.
Agee serves as the chair of the Audit Committee and as our Audit Committee financial expert as that term is defined by the applicable SEC rules. Each director
who has served or is serving on our Audit Committee was or is “independent” as that term is defined under the NASDAQ listing rules for Audit Committee
members at all times during their service on such Committee.
The Audit Committee oversees our accounting and financial reporting processes and the audits of the financial statements of our Company. The Audit
Committee is responsible for, among other things:
•
•
the appointment, compensation, retention and oversight of the work of the independent auditor;
reviewing and pre-approving all auditing services and permissible non-audit services (including the fees and terms thereof) to be performed by
the independent auditor;
41
•
•
•
•
•
reviewing and approving all proposed related-party transactions;
discussing the interim and annual financial statements with management and our independent auditors;
reviewing and discussing with management and the independent auditor (a) the adequacy and effectiveness of the Company’s internal controls,
(b) the Company’s internal audit procedures, and (c) the adequacy and effectiveness of the Company’s disclosure controls and procedures, and
management reports thereon;
reviewing reported violations of the Company’s code of conduct and business ethics; and
reviewing and discussing with management and the independent auditor various topics and events that may have significant financial impact on
the Company or that are the subject of discussions between management and the independent auditors.
Compensation Committee
Our Compensation Committee consists of three members: Martha C. Agee, Chunzhi Zhang and Jianjun He, with Mr. Zhang serving as chair. Each director who
has served or is serving on our Compensation Committee was or is “independent” as that term is defined under the NASDAQ listing rules at all times during
their service on such Committee.
The purpose of our Compensation Committee discharge the responsibilities of the Company’s Board of Directors relating to compensation of the Company’s
executives, to produce an annual report on executive compensation for inclusion in the Company’s proxy statement, if required, and to oversee and advise the
Board on the adoption of policies that govern the Company’s compensation programs, including stock and benefit plans. Our chief executive officer may not be
present at any Compensation Committee meeting during which his compensation is deliberated. The Compensation Committee is responsible for, among other
things:
•
•
•
•
•
reviewing and approving the compensation structure for corporate officers at the level of corporate vice president and above;
overseeing an evaluation of the performance of the Company’s executive officers and approve the annual compensation, including salary, bonus,
incentive and equity compensation, for the executive officers;
reviewing and approving chief executive officer goals and objectives, evaluate chief executive officer performance in light of these corporate
objectives, and set chief executive officer compensation consistent with Company philosophy;
making recommendations to the Board regarding the compensation of board members;
reviewing and making recommendations concerning long-term incentive compensation plans, including the use of equity-based plans. Except as
otherwise delegated by the Board of Directors, the Compensation Committee will act on behalf of the Board of Directors as the “Committee”
established to administer equity- based and employee benefit plans, and as such will discharge any responsibilities imposed on the
Compensation Committee under those plans, including making and authorizing grants, in accordance with the terms of those plans.
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee consists of three members: Martha C. Agee, Chunzhi Zhang and Jianjun He, with Mr. He serving as
chair. Each director who has served or is serving on our Nominating and Corporate Governance Committee was or is “independent” as that term is defined
under the NASDAQ listing standards at all times during their service on such Committee.
The purpose of the Nominating and Corporate Governance Committee is to determine the slate of director nominees for election to the Company’s Board of
Directors, to identify and recommend candidates to fill vacancies occurring between annual shareholder meetings, and to review the Company’s policies and
programs that relate to matters of corporate responsibility, including public issues of significance to the Company and its members. The Nominating and
Corporate Governance Committee is responsible for, among other things:
•
•
•
annually presenting to the Board a list of individuals recommended for nomination for election to the Board at the annual meeting of
stockholders, and for appointment to the committees of the Board;
annually reviewing the composition of each committee and present recommendations for committee memberships to the Board as needed; and
annually evaluating and reporting to the Board of Directors on the performance and effectiveness of the Board of Directors to facilitate the
directors fulfillment of their responsibilities in a manner that serves the interests of the Company’s shareholders.
42
Code of Business Ethics and Conduct
We have adopted a Code of Business Ethics and Conduct relating to the conduct of our business by our employees, officers and directors. We intend to maintain
the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business, including those relating to doing
business outside the United States. During the fiscal year ended September 30, 2014, there were no amendments to or waivers of our Code of Business Ethics
and Conduct. If we effect an amendment to, or waiver from, a provision of our Code of Business Ethics and Conduct, we intend to satisfy our disclosure
requirements by posting a description of such amendment or waiver on our Internet website at www.cbak.com.cn or via a current report on Form 8-K.
Section 16(A) Beneficial Ownership Reporting Compliance
Under U.S. securities laws, directors, certain executive officers and persons beneficially owning more than 10% of our Common Stock must report their initial
ownership of the Common Stock, and any changes in that ownership, to the SEC. The SEC has designated specific due dates for these reports. Based solely on
our review of copies of such reports filed with the SEC and written representations of our directors and executive offers, we believe that all persons subject to
reporting filed the required reports on time in fiscal year 2015.
ITEM 11.
EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table sets forth information concerning all compensation awarded to, earned by or paid to Xiangqian Li, our Chief Executive Officer for services
rendered in all capacities during fiscal years 2015 and 2014. No other executive officers received total compensation in excess of $100,000 in either fiscal year.
Name and Principal Position
Xiangqian Li, President, Chief Executive Officer
Year
2015
2014
Salary ($)(1)
21,214
39,044
Stock
Awards
($)
Option
Awards ($)
-
-
-
-
Total ($)
21,214
39,044
(1) The amounts reported in this table have been converted from RMB to U.S. dollars based on the average conversion rate between the U.S. dollar and RMB
for the applicable fiscal year, or $1.00 to RMB 6.2224 (fiscal year 2015 exchange rate), $1.00 to RMB6.1469 (fiscal year 2014 exchange rate).
Summary of Employment Agreements
The base salary shown in the Summary Compensation Table is described in each named executive officer’s respective employment agreement. The material
terms of those employment agreements are summarized below.
We entered into employment agreements with three-year initial terms with our named executive officers with standard employment agreements. We entered into
the employment agreements with Mr. Li and Mr. Wenwu Wang on October 1, 2014 and September 30, 2014, respectively. Each of our standard employment
agreements is automatically extended by a year at the expiration of the initial term and at the expiration of every one-year extension, until terminated in
accordance with the termination provisions of the agreements, which are described below.
Our standard employment agreement permits us to terminate the executive’s employment for cause, at any time, without notice or remuneration, for certain acts
of the executive, including but not limited to a conviction or plea of guilty to a felony, negligence or dishonesty to our detriment and failure to perform agreed
duties after a reasonable opportunity to cure the failure. An executive may terminate his employment upon one month’s written notice if there is a material
reduction in his authority, duties and responsibilities or if there is a material reduction in his annual salary before the next annual salary review. Furthermore, we
may terminate the executive’s employment at any time without cause by giving one month’s advance written notice to the executive officer. If we terminate the
executive’s employment without cause, the executive will be entitled to a termination payment of up to three months of his or her then base salary, depending on
the length of such executive’s employment with us. Specifically, the executive will receive salary continuation for: (i) one month following a termination
effective prior to the first anniversary of the effective date of the employment agreement; (ii) two months following a termination effective prior to the second
anniversary of the effective date; and (iii) three months following a termination effective prior to or any time after the third anniversary of the effective date. The
employment agreements provide that the executive will not participate in any severance plan, policy, or program of the Company.
43
Our standard employment agreement contains customary non-competition, confidentiality, and non-disclosure covenants. Each executive officer has agreed to
hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use, except as required in the performance
of his duties in connection with the employment, any confidential information, technical data, trade secrets and know-how of our company or the confidential
information of any third party, including our affiliated entities and our subsidiaries, received by us. The executive officers have also agreed to disclose in
confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice and to assign all right, title and interest in them to
us. In addition, each executive officer has agreed to be bound by non-competition restrictions set forth in his or her employment agreement. Specifically, each
executive officer has agreed not to, while employed by us and for a period of one year following the termination or expiration of the employment agreement,
•
•
•
approach our clients, customers or contacts or other persons or entities, and not to interfere with the business relationship between us and such
persons and/or entities;
assume employment with or provide services as a director for any of our competitors, or engage in any business which is in direct or indirect
competition with our business; or
solicit the services of any of our employees.
Outstanding Equity Awards at Fiscal Year-End 2015
The following table sets forth information concerning the fiscal 2015 year-end value of restricted shares granted to our Interim Chief Financial Officer, Wenwu
Wang. No other executive officers received unexercised options or stock that has not vested or equity incentive plan awards that remained outstanding as of the
end of the fiscal year 2015.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
Name
Number of
securities
underlying
unexercised
options (#)
exercisable
Number of
securities
underlying
unexercised
options (#)
unexercisable
Option
exercise
price ($)
Option
expiration
date
Number of
shares or
units of
stock that
have not
vested (#)
Stock
Awards
Market
value of
shares or
units of
stock that
have not
vested (#)
Option
Awards
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
Equity
incentive
plan
awards:
Number of
unearned
shares,
units or
other
rights that
have not
vested (#)
Equity
incentive
plan
awards:
Market or
payout
value of
unearned
shares,
units or
other
rights that
have not
vested ($)
Wenwu
Wang
-
--
-
-
-
-
-
41,667*
107,640
* On June 30, 2015, our Interim Chief Financial Officer, Wenwu Wang was granted 50,000 restricted shares of the Company’s common stock, par value $0.001,
under the 2015 Equity Incentive Plan (the “2015 Plan”). The restricted shares vest over a three year period in 12 equal quarterly installments with the first
vesting date on June 30, 2015.
Compensation of Directors
Under our Compensation Plan for Non-Employee Directors, or the Directors Plan, each eligible non-employee director of the Company may receive an annual
retainer fee. Pursuant to the Directors Plan, the annual retainer fee under the Directors Plan is subject to adjustments determined by our Board from time to time.
Each independent director is also eligible to be granted 5,000 restricted shares of our common stock for serving as a director.
44
In December 2010, our Board of Directors unanimously approved a change in the annual retainer fee for independent directors in accordance with the Directors
Plan. Effective January 1, 2011, our independent directors will be paid an annual retainer fee of $45,000. As was previously our policy, the chair of the Audit
Committee will continue to receive an additional $5,000 in recognition of the added responsibility of this position. In connection with this change, the Board
unanimously determined that the independent directors will no longer receive an annual issuance of restricted shares under the Directors Plan. Each of the
independent directors has waived all rights to such annual issuances, including with respect to 2,500 of the shares that were to be issued to each of the
independent directors during calendar year 2011 in connection with their grants on July 1, 2010.
Effective October 1, 2012, each of our independent directors will be paid an annual retainer fee of $61,000. The chair of the Audit Committee will receive an
additional $9,000 in recognition of the added responsibility of this position.
In June 2013, due to the financial situation of the Company, each of the independent directors agreed to reduce their annual retainer fee to $20,000, effective
from the quarter ended June 30, 2013.
On June 30, 2015, each of our independent directors was granted 30,000 restricted shares of the Company’s common stock, par value $0.001, under the 2015
Plan. The restricted shares vest over a three year period in 12 equal quarterly installments with the first vesting date on June 30, 2015.
The following table sets forth the total compensation earned by our non-employee directors during our fiscal year ended September 30, 2015:
Name
Chunzhi Zhang
Martha C. Agee
Jianjun He
Fees Earned
or
Paid in
Cash ($)
20,000
20,000
20,000
Stock
Awards ($)
Total ($)
32,616
32,616
32,616
52,616
52,616
52,616
We do not maintain a medical, dental or retirement benefits plan for the directors.
Except as disclosed in this annual report, we have not compensated, and will not compensate, our non-independent directors, Mr. Xiangqian Li and Mr.
Guosheng Wang, for serving as our directors, although they are entitled to reimbursements for reasonable expenses incurred in connection with attending our
board meetings.
The directors may determine remuneration to be paid to the directors with interested members of the Board refraining from voting. The Compensation
Committee will assist the directors in reviewing and approving the compensation structure for the directors.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS.
Securities Ownership of Certain Beneficial Owners and Management
The following table sets forth information known to us with respect to the beneficial ownership of our Common Stock as of the close of business on January 8,
2015 (the “Reference Date”) for: (i) each person known by us to beneficially own more than 5% of our voting securities, (ii) each named executive officer, (iii)
each of our directors and nominees, and (iv) all of our executive officers and directors as a group:
Names of Management and Names
of Certain Beneficial Owners (1)
Xiangqian Li
Chunzhi Zhang (4)
Martha C. Agee (4)
Jianjun He (4)
Guosheng Wang (5)
Wenwu Wang (6)
Amount and Nature of
Beneficial Ownership (1)
Number (2)
3,760,557
Percent (3)
21.9%
11,000
*
7,500
*
7,500
*
12,500
*
12,500
*
All executive officers and directors as a group (6 persons)
3,811,557
22.2%
45
*
Denotes less than 1% of the outstanding shares of Common Stock.
(1)
(2)
(3)
(4)
(5)
(6)
The number of shares beneficially owned is determined under Securities and Exchange Commission (“SEC”) rules, and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power, and also any shares which the individual has the right to acquire within 60 days of the
Reference Date, through the exercise or conversion of any stock option, convertible security, warrant or other right (a “Presently Exercisable” security).
Including those shares in the table does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those
shares.
Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that
person’s spouse) with respect to all shares of Common Stock listed as owned by that person or entity.
A total of 17,145,493 shares of Common Stock are considered to be outstanding on the Reference Date. For each beneficial owner above, any Presently
Exercisable securities of such beneficial owner have been included in the denominator, pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act
of 1934, as amended, or the Exchange Act.
On June 30, 2015, each of our independent directors was granted 30,000 restricted shares of the Company’s common stock, par value $0.001, under the
2015 Plan. The restricted shares vest over a three year period in 12 equal quarterly installments with the first vesting date on June 30, 2015. On June 25,
2007, Mr. Zhang was granted 1,000 shares of restricted Common Stock. On August 6, 2008, Mr. Zhang was granted an additional 1,000 shares of
restricted Common Stock on the same terms as those governing the June 25, 2007 grant. On June 26, 2009, Mr. Zhang was granted an additional 1,000
shares of restricted Common Stock, on the same terms as those governing the June 25, 2007 and August 6, 2008 grants. On July 1, 2010, Mr. Zhang was
granted an additional 1,000 shares of restricted Common Stock on the same terms as those governing the June 25, 2007, August 6, 2008, and June 26,
2009 grants. On January 19, 2011, Mr. Zhang waived the receipt of 500 shares of the July 1, 2010 grant in consideration of an additional quarterly
payment by the Company of $6,250 on or about January 6, 2011 pursuant to the increase, effective January 1, 2011, of each of the directors’ annual
retainer fee under the Company’s Stock Option Plan by $25,000 in lieu of each director’s receipt of restricted shares under the Stock Option Plan.
On June 30, 2015, Mr. Guosheng Wang was granted 50,000 restricted shares of the Company’s common stock, par value $0.001, under the 2015 Plan.
The restricted shares vest over a three year period in 12 equal quarterly installments with the first vesting date on June 30, 2015.
On June 30, 2015, Mr. Wenwu Wang was granted 50,000 restricted shares of the Company’s common stock, par value $0.001, under the 2015 Plan. The
restricted shares vest over a three year period in 12 equal quarterly installments with the first vesting date on June 30, 2015.
Changes in Control
There are no arrangements known to us, including any pledge by any person of our securities, the operation of which may at a subsequent date result in a change
in control of the Company.
Securities Authorized for Issuance Under Equity Compensation Plans
Stock Option Plan and Compensation Plan for Non-Employee Directors
46
The following table sets forth certain information about the securities authorized for issuance under our Stock Option Plan and our Compensation Plan for Non-
Employee Directors as of September 30, 2015. Options exercisable for all of the securities shown in column (a) below were granted under our Stock Option
Plan.
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities Weighted-average
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
4,200
exercise price of
outstanding
options, warrants
and rights
(b)
$ 14.05
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a))
(c)
222,401(1)
-
4,200
-
$ 14.05
-
222,401(1)
*All information in and below this table gives retroactive effect to our one-for-five reverse stock split effected on October 26, 2012.
(1) Includes 86,500 shares of restricted stock that were available for future issuance under our Compensation Plan for Non-Employee Directors and 135,901
shares of restricted stock that were available for future issuance under our Stock Option Plan, as of September 30, 2015.
2015 Equity Incentive Plan
The following table sets forth certain information about the securities authorized for issuance under our 2015 Plan as of September 30, 2015.
Equity compensation plans approved by security holders
Equity compensation plans not approved by security holders
Total
Number of securities Weighted-average
to be issued upon
exercise of
outstanding options,
warrants and rights
(a)
-
exercise price of
outstanding
options, warrants
and rights
(b)
-
Number of securities
remaining available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a))
(c)
9,310,000(1)
-
-
-
-
-
9,310,000(1)
On June 12, 2015, shareholders of the Company approved the 2015 Plan for Employees, Directors and Consultants of the Company and its Affiliates. The
maximum aggregate number of Shares that may be issued under the Plan is ten million (10,000,000) Shares.
On June 30, 2015, pursuant to the 2015 Plan, the Compensation Committee of the Company’s Board of Directors granted an aggregate of 690,000 restricted
shares of the Company’s common stock to certain employees, officers and directors of the Company. In accordance with the vesting schedule of the grant, the
restricted shares will vest in twelve equal quarterly installments on the last day of each fiscal quarter beginning on June 30, 2015 and ending on March 31, 2018.
47
As of September 30, 2015, 32,498 vested shares were issued, and 657,502 shares were to be issued upon vesting. Under the 2015 Plan, 9,310,000 shares still
remained available for future issuance.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
We obtained a one-year banking facilities of $18.9 milion from Bank of Dandong. The banking facilities were guaranteed by Mr. Xiangqian Li, the Company’s
CEO and his wife, Ms. Xiaoqiu Yu, and Shenzhen BAK, our former subsidiary. Mr. Li did not receive and is not entitled to receive any consideration for the
above-referenced guarantees. We are not independently obligated to indemnify any of those guarantors for any amounts paid by them pursuant to any guarantee.
After the disposal of BAK International and prior to the completion of construction of the new manufacturing site in Dalian, we generated our revenues from
sale of batteries via subcontracting the production to BAK Tianjin, a former subsidiary. For the years ended September 30, 2014 and 2015, we purchased
inventories of $3.3 million and $10.5 million from BAK Tianjin.
During the years ended September 30, 2014 and 2015, the Company purchased machinery and equipment from BAK Tianjin totaled $4.3 million and $6.8
million, respectively.
For the years ended September 30, 2014 and 2015, we generated revenue of
•
•
•
•
$18,030 and $1,377,004 from Shenzhen BAK, respectively;
$98,459 and $1,470,579 from BAK Tianjin, respectively;
nil and $17,063, respectively from Zhengzhou BAK Battery Co., Ltd, a company with the common director of Mr. Xiangqian Li, the
Company’s CEO; and
nil and $298,983, respectively from Tianjin BAK New Energy.
For the years ended September 30, 2014 and 2015, we purchased inventories of $19,411 and $395,593, respectively from Tianjin BAK New Energy, a company
with the common director of Mr. Li, the Company’s CEO.
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five fiscal years.
Director Independence
Chunzhi Zhang, Martha C. Agee and Jianjun He each serves on our board of directors as an “independent director” as defined by Rule 5605(a)(2) of the
NASDAQ Listing Rule.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES.
Independent Registered Public Accounting Firm’s Fees and Services
Audit Fees
Crowe Horwath (HK) CPA Limited (“Crowe Horwath”) has billed us $392,000 and $228,000 in the aggregate for the fiscal years ended September 30, 2014 and
2015, respectively, for professional services rendered for the audit of our fiscal years 2014 and 2015 annual financial statements, including reviews of the
interim financial statements included in our quarterly reports on Form 10-Q and assistance with the Securities Act filings.
Audit-Related Fees
We did not engage Crowe Horwath to provide assurance or related services during the last two fiscal years.
Tax Fees
48
We did not engage our principal accountants to provide tax compliance, tax advice or tax planning services during the last two fiscal years.
All Other Fees
We did not engage our principal accountants to render services to us during the last two fiscal years, other than as reported above.
Pre-Approval Policies and Procedures
All auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for the Company by our independent auditor must
be approved by the Audit Committee in advance, except non-audit services (other than review and attestation services) if such services fall within exceptions
established by the SEC. The Audit Committee will pre-approve any permissible non-audit services to be provided by the Company’s independent auditors on
behalf of the Company that do not fall within any exception to the pre-approval requirements established by the SEC. The Audit Committee may delegate to one
or more members the authority to pre-approve permissible non-audit services, but any such delegate or delegates must present their pre-approval decisions to the
Audit Committee at its next meeting. All of our accountants’ services described above were pre-approved by the Audit Committee or by one or more members
under the delegate authority described above.
49
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
PART IV
The financial statements are set forth under Item 8 of this annual report on Form 10-K. Financial statement schedules have been omitted since they are either not
required, not applicable, or the information is otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is incorporated herein by reference.
50
FINANCIAL STATEMENTS
CHINA BAK BATTERY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED
SEPTEMBER 30, 2015 AND 2014
TABLE OF CONTENTS
Contents
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of September 30, 2014 and 2015
Consolidated Statements of Operations and Comprehensive Income for the years ended September 30, 2014 and 2015
Consolidated Statements of Changes in Shareholders’ Equity for the years ended September 30, 2014 and 2015
Consolidated Statements of Cash Flows for the years ended September 30, 2014 and 2015
Notes to the Consolidated Financial Statements
F-1
Page(s)
F-2
F-3
F-4
F-5
F-6
F-7-F-32
Report of Independent Registered Public Accounting Firm
Crowe Horwath (HK) CPA Limited
To the Board of Directors and Shareholders of
China BAK Battery, Inc.
We have audited the accompanying consolidated balance sheets of China BAK Battery, Inc. and its subsidiaries (the “Company”) as of September 30, 2015 and
2014, and the related consolidated statements of operations and comprehensive (loss) income, changes in shareholders' equity and cash flows for each of the
years in the two-year period ended September 30, 2015. These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required
to have, nor were we engaged to perform, an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company
and its subsidiaries as of September 30, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the two-year
period ended September 30, 2015, in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1
to the consolidated financial statements, the Company has a working capital deficiency, accumulated deficit from recurring net losses and significant short-term
debt obligations maturing in less than one year as of September 30, 2015. All these factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in Note 1 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Crowe Horwath (HK) CPA Limited
Hong Kong, China
January 13, 2016
F-2
China BAK Battery, Inc. and Subsidiaries
Consolidated balance sheets
As of September 30, 2014 and 2015
(In US$)
Note
2014
2015
Assets
Current assets
Cash and cash equivalents
Pledged deposits
Trade accounts and bills receivable, net
Inventories
Prepayments and other receivables
Receivable from former subsidiaries, net
Prepaid land use rights, current portion
Deferred tax assets, current portion
Total current assets
Property, plant and equipment, net
Construction in progress
Prepaid land use rights, non-current
Intangible assets, net
Total assets
Liabilities
Current liabilities
Trade accounts and bills payable
Taxes payable
Short-term bank loans
Other short-term loans
Accrued expenses and other payables
Deferred government grants, current
Total current liabilities
Deferred government grants, non-current
Deferred tax liabilities, non-current
Total liabilities
Commitments and contingencies
Shareholders' (deficit) equity
Common stock $0.001 par value; 500,000,000 (2014: 20,000,000)
authorized; 12,856,301 (2014: 12,763,803) issued and 12,712,095
(2014: 12,619,597) outstanding as of September 30, 2015
Donated shares
Additional paid-in capital
Accumulated deficit
Accumulated other comprehensive loss
Less: Treasury shares
Total shareholders' (deficit) equity
Total liabilities and shareholder's equity
3
4
5
6
7
10
15
8
9
10
10
11
12
13
14
14
15
19
$
$
$
$
991,519
-
1,013,641
2,648,098
589,864
7,261,089
183,048
-
6,762,745
1,519,601
4,771,958
3,057,575
2,552,658
686,514
176,764
43,175
12,687,259
19,570,990
124,255
22,187,315
8,969,352
-
22,274,820
13,039,373
8,455,231
26,818
43,968,181
$
63,367,232
$
-
-
4,887,426
5,552,117
13,427,130
24,437,131
4,910,717
5,108,878
12,585,740
184,755
11,569,981
181,510
48,303,804
34,541,581
-
-
7,014,114
142,650
48,303,804
41,698,345
12,763
14,101,689
127,438,362
(141,796,196)
(25,631)
(269,013)
(4,066,610)
12,856
14,101,689
138,036,080
(125,922,270)
(492,858)
25,735,497
(4,066,610)
(4,335,623)
21,668,887
$
43,968,181
$
63,367,232
See accompanying notes to the consolidated financial statements.
F-3
China BAK Battery, Inc. and Subsidiaries
Consolidated statements of operations and comprehensive (loss) income
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Research and development expenses
Sales and marketing expenses
General and administrative expenses
Recovery of (provision for) doubtful accounts
Total operating expenses
Operating loss
Finance cost, net
Government grant income
Other income (expenses), net
(Loss) profit before income tax and discontinued operations
Income tax expenses
(Loss) profit before discontinued operations, net of tax
Income from discontinued operations, net of tax
Net profit
Other comprehensive income
– Release of foreign currency translation adjustment upon disposal of subsidiaries
– Foreign currency translation adjustment
Comprehensive (loss) income
(Loss) earnings per share - Basic
– From continuing operations
– From discontinued operations
(Loss) earnings per share - Diluted
– From continuing operations
– From discontinued operations
Weighted average number of shares of common stock:
– Basic
– Diluted
Note
21
2014
$
$
123,014,080
(113,454,395)
9,559,685
2015
13,904,414
(12,954,553)
949,861
(3,981,163)
(4,504,410)
(12,357,721)
639,390
(20,203,904)
(10,644,219)
(16,800,404)
74,532
665,053
(26,705,038)
(16,475)
(26,721,513)
64,497,429
(1,001,889)
(135,468)
(3,329,763)
(131,745)
(4,598,865)
(3,649,004)
-
23,103,427
(91,219)
19,363,204
(5,320,515)
14,042,689
1,831,237
37,775,916
15,873,926
(39,008,449)
1,071,881
(37,936,568)
-
(467,227)
(467,227)
(160,652) $
15,406,699
(2.12) $
5.11
2.99
$
(2.12) $
5.11
2.99
$
1.10
0.14
1.25
1.09
0.14
1.23
12,619,597
12,619,597
12,718,388
12,881,121
9, 11, 12
14
15
1
17
17
17
$
$
$
$
$
See accompanying notes to the consolidated financial statements.
F-4
China BAK Battery, Inc. and Subsidiaries
Consolidated statements of changes in shareholders’ equity
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
Common stock issued
Number
of shares
Amount
Donated
Shares
Additional
paid-in
capital
Statutory
reserves
Accumulated
deficit
Accumulated
other
comprehensive
income
Treasury shares
Number
of shares
Amount
Total
shareholders’
equity
12,763,803
$
12,763
$ 14,101,689
$ 127,349,617
$ 7,786,157
$ (226,366,718)
$
37,910,937
(144,206)
$ (4,066,610)
$ (43,272,165)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
88,745
-
12,763,803
$
12,763
$ 14,101,689
$ 127,438,362
$
-
-
92,498
-
-
-
-
-
-
93
-
-
-
-
-
-
750,167
(93)
9,847,644
-
-
-
-
-
-
-
-
-
-
37,775,916
-
(7,786,157)
46,794,606
(39,008,449)
-
-
-
1,071,881
-
-
-
-
-
-
-
-
37,775,916
-
88,745
1,071,881
$ (141,796,196)
$
(25,631)
(144,206)
$ (4,066,610)
$
(4,335,623)
15,873,926
-
-
-
15,873,926
-
-
-
-
-
-
-
(467,227)
-
-
-
-
-
-
-
-
750,167
-
9,847,644
(467,227)
12,856,301
$
12,856
$ 14,101,689
$ 138,036,080
$
-
$ (125,922,270)
$
(492,858)
(144,206)
$ (4,066,610)
$ 21,668,887
See accompanying notes to the consolidated financial statements.
F-5
Balance as of
October
1, 2013
Net profit
Loss of control of
BAK
International
Share-based
compensation
for
employee
stock awards
Foreign currency
translation
adjustment
Balance as of
September
30, 2014
Net profit
Share-based
compensation
for
employee
and director
stock awards
Common stock
issued
Shares to be
issued (Note
1)
Foreign currency
translation
adjustment
Balance as of
September
30, 2015
China BAK Battery, Inc. and subsidiaries
Consolidated statements of cash flows
For the years ended September 30, 2014 and 2015
(In US$)
Cash flows from operating activities
Net profit
Income from discontinued operations, net of tax
Adjustments to reconcile net profit to net cash used in operating activities:
Depreciation and amortization
(Recovery of) provision for doubtful debts
Waiver of interest
Write-down of inventories
Share-based compensation
Deferred government grants
Deferred tax liabilities
Exchange loss (gain)
Changes in operating assets and liabilities:
Trade accounts and bills receivable
Inventories
Prepayments and other receivables
Trade receivables from former subsidiaries
Trade accounts and bills payable
Accrued expenses and other payables
Income taxes payable
Deferred income
Other long-term payables
Net cash used in continuing operations
Net cash provided by discontinued operations
Net cash used in operating activities
Cash flows from investing activities
Disposal of subsidiaries, net of cash disposed of $4,163,555
Decrease (increase) in pledged deposits
Repayment from former subsidiaries
Deferred government grant
Purchases of property, plant and equipment and construction in progress
Acquisitions of land use rights
Purchase of intangible assets
Net cash used in continuing operations
Net cash used in discontinued operations
Net cash used in investing activities
Cash flows from financing activities
Proceeds from borrowings
Repayment of borrowings
Advances from investors (Note 1)
Borrowings from unrelated parties
Repayment to unrelated parties
Borrowings from related party
Repayment to related party
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning of year
Cash and cash equivalents at the end of year
Non-cash transactions:
Purchase of inventories offset against receivables from former subsidiaries
Purchase of property, plant and equipment (inclusive of VAT) offset against receivables
from former subsidiaries
Payment of construction in progress offset against receivables from former subsidiaries
Advance from an unrelated third party offset against consideration from disposal of
subsidiaries
Waiver of interest offset against consideration from disposal of subsidiaries
Bills receivable discounted to banks
Removal expenditures offset against government grants
Depreciation expenses offset against government grants
Accounts receivable offset against advance from a related company
Receivable from a former subsidiary offset against advance from a related company
Transfer of construction in progress to property, plant and equipment
Cash paid during the period for:
Income taxes
2014
2015
$
37,775,916
(64,497,429)
$
15,873,926
(1,831,237)
8,257,676
(639,390)
8,347,735
8,752,543
88,745
-
-
255,146
(14,827,964)
8,629,658
(9,161,926)
-
(22,708,363)
5,850,921
-
(245,887)
1,207,894
(32,914,725)
3,615,638
(29,299,087)
(4,163,555)
7,990,705
876,240
-
(9,795,663)
(9,139,447)
(15,825)
(14,247,545)
(3,296,571)
(17,544,116)
96,494,997
(178,695,284)
-
137,689,207
-
650,735
(22,354,791)
33,784,864
51,232
(13,007,107)
13,998,626
991,519
3,295,456
4,268,397
558,577
83,812,839
8,347,735
913,517
-
-
-
-
-
-
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
508,945
131,745
-
221,172
750,167
(23,103,427)
101,617
(200,078)
(4,349,352)
(107,512)
132,777
(801,608)
5,016,470
400,375
5,218,898
-
-
(2,037,122)
-
(2,037,122)
-
(1,552,326)
-
7,416,752
(12,851,944)
-
(28,586)
(7,016,104)
1,514,183
(5,501,921)
12,856,775
(4,821,290)
9,847,644
1,601,311
(6,355,104)
3,747,800
(3,532,828)
13,344,308
(34,039)
5,771,226
991,519
6,762,745
615,706
6,831,398
-
-
-
-
1,003,027
66,169
349,810
401,774
22,944,570
-
Interest, net of amounts capitalized
$
8,452,669
$
-
See accompanying notes to the consolidated financial statements.
F-6
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
1.
Principal Activities, Basis of Presentation and Organization
Principal Activities
China BAK Battery, Inc. (“China BAK”) is a corporation formed in the State of Nevada on October 4, 1999 as Medina Copy, Inc. The Company changed its
name to Medina Coffee, Inc. on October 6, 1999 and subsequently changed its name to China BAK Battery, Inc. on February 14, 2005. China BAK and its
subsidiaries (hereinafter, collectively referred to as the “Company”) are principally engaged in the manufacture, commercialization and distribution of a wide
variety of standard and customized lithium ion (known as "Li-ion" or "Li-ion cell") high power rechargeable batteries. Prior to the disposal of BAK International
Limited (“BAK International”) and its subsidiaries (see below), the batteries produced by the Company were for use in cellular telephones, as well as various
other portable electronic applications, including high-power handset telephones, laptop computers, power tools, digital cameras, video camcorders, MP3 players,
electric bicycles, hybrid/electric vehicles, and general industrial applications. After the disposal of BAK International and its subsidiaries on June 30, 2014, the
Company will focus on the manufacture, commercialization and distribution of high power lithium ion rechargeable batteries for use in cordless power tools,
light electric vehicles, hybrid electric vehicles, electric cars, electric buses, uninterruptable power supplies and other high power applications.
The shares of the Company traded in the over-the-counter market through the Over-the-Counter Bulletin Board from 2005 until May 31, 2006, when the
Company obtained approval to list its common stock on The NASDAQ Global Market, and trading commenced that same date under the symbol "CBAK".
Basis of Presentation and Organization
On November 6, 2004, BAK International, a non-operating holding company that had substantially the same shareholders as Shenzhen BAK Battery Co., Ltd
(“Shenzhen BAK”), entered into a share swap transaction with the shareholders of Shenzhen BAK for the purpose of the subsequent reverse acquisition of the
Company. The share swap transaction between BAK International and the shareholders of Shenzhen BAK was accounted for as a reverse acquisition of
Shenzhen BAK with no adjustment to the historical basis of the assets and liabilities of Shenzhen BAK.
On January 20, 2005, the Company completed a share swap transaction with the shareholders of BAK International. The share swap transaction, also referred to
as the “reverse acquisition” of the Company, was consummated under Nevada law pursuant to the terms of a Securities Exchange Agreement entered by and
among China BAK, BAK International and the shareholders of BAK International on January 20, 2005. The share swap transaction has been accounted for as a
capital-raising transaction of the Company whereby the historical financial statements and operations of Shenzhen BAK are consolidated using historical
carrying amounts.
Also on January 20, 2005, immediately prior to consummating the share swap transaction, BAK International executed a private placement of its common stock
with unrelated investors whereby it issued an aggregate of 1,720,087 shares of common stock for gross proceeds of $17,000,000. In conjunction with this
financing, Mr. Xiangqian Li, the Chairman and Chief Executive Officer of the Company (“Mr. Li”), agreed to place 435,910 shares of the Company's common
stock owned by him into an escrow account pursuant to an Escrow Agreement dated January 20, 2005 (the “Escrow Agreement”). Pursuant to the Escrow
Agreement, 50% of the escrowed shares were to be released to the investors in the private placement if audited net income of the Company for the fiscal year
ended September 30, 2005 was not at least $12,000,000, and the remaining 50% was to be released to investors in the private placement if audited net income of
the Company for the fiscal year ended September 30, 2006 was not at least $27,000,000. If the audited net income of the Company for the fiscal years ended
September 30, 2005 and 2006 reached the above-mentioned targets, the 435,910 shares would be released to Mr. Li in the amount of 50% upon reaching the
2005 target and the remaining 50% upon reaching the 2006 target.
Under accounting principles generally accepted in the United States of America (“US GAAP”), escrow agreements such as the one established by Mr. Li
generally constitute compensation if, following attainment of a performance threshold, shares are returned to a company officer. The Company determined that
without consideration of the compensation charge, the performance thresholds for the year ended September 30, 2005 would be achieved. However, after
consideration of a related compensation charge, the Company determined that such thresholds would not have been achieved. The Company also determined
that, even without consideration of a compensation charge, the performance thresholds for the year ended September 30, 2006 would not be achieved.
F-7
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
1.
Principal Activities, Basis of Presentation and Organization (continued)
Basis of Presentation and Organization (continued)
While the 217,955 escrow shares relating to the 2005 performance threshold were previously released to Mr. Li, Mr. Li executed a further undertaking on
August 21, 2006 to return those shares to the escrow agent for the distribution to the relevant investors. However, such shares were not returned to the escrow
agent, but, pursuant to a Delivery of Make Good Shares, Settlement and Release Agreement between the Company, BAK International and Mr. Li entered into
on October 22, 2007 (the “Li Settlement Agreement”), such shares were ultimately delivered to the Company as described below. Because the Company failed
to satisfy the performance threshold for the fiscal year ended September 30, 2006, the remaining 217,955 escrow shares relating to the fiscal year 2006
performance threshold were released to the relevant investors. As Mr. Li has not retained any of the shares placed into escrow, and as the investors party to the
Escrow Agreement are only shareholders of the Company and do not have and are not expected to have any other relationship to the Company, the Company
has not recorded a compensation charge for the years ended September 30, 2005 and 2006.
At the time the escrow shares relating to the 2006 performance threshold were transferred to the investors in fiscal year 2007, the Company should have
recognized a credit to donated shares and a debit to additional paid-in capital, both of which are elements of shareholders’ equity. This entry is not material
because total ordinary shares issued and outstanding, total shareholders’ equity and total assets do not change; nor is there any impact on income or earnings per
share. Therefore, previously filed consolidated financial statements for the fiscal year ended September 30, 2007 will not be restated. This share transfer has
been reflected in these financial statements by reclassifying the balances of certain items as of October 1, 2007. The balances of donated shares and additional
paid-in capital as of October 1, 2007 were credited and debited by $7,955,358 respectively, as set out in the consolidated statements of changes in shareholders’
equity.
In November 2007, Mr. Li delivered the 217,955 shares related to the 2005 performance threshold to BAK International pursuant to the Li Settlement
Agreement; BAK International in turn delivered the shares to the Company. Such shares (other than those issued to investors pursuant to the 2008 Settlement
Agreements, as described below) are now held by the Company. Upon receipt of these shares, the Company and BAK International released all claims and
causes of action against Mr. Li regarding the shares, and Mr. Li released all claims and causes of action against the Company and BAK International regarding
the shares. Under the terms of the Li Settlement Agreement, the Company commenced negotiations with the investors who participated in the Company’s
January 2005 private placement in order to achieve a complete settlement of BAK International’s obligations (and the Company’s obligations to the extent it has
any) under the applicable agreements with such investors.
Beginning on March 13, 2008, the Company entered into settlement agreements (the “2008 Settlement Agreements”) with certain investors in the January 2005
private placement. Since the other investors have never submitted any claims regarding this matter, the Company did not reach any settlement with them.
Pursuant to the 2008 Settlement Agreements, the Company and the settling investors have agreed, without any admission of liability, to a settlement and mutual
release from all claims relating to the January 2005 private placement, including all claims relating to the escrow shares related to the 2005 performance
threshold that had been placed into escrow by Mr. Li, as well as all claims, including claims for liquidated damages relating to registration rights granted in
connection with the January 2005 private placement. Under the 2008 Settlement Agreement, the Company has made settlement payments to each of the settling
investors of the number of shares of the Company’s common stock equivalent to 50% of the number of the escrow shares related to the 2005 performance
threshold these investors had claimed; aggregate settlement payments as of June 30, 2015 amounted to 73,749 shares. Share payments to date have been made in
reliance upon the exemptions from registration provided by Section 4(2) and/or other applicable provisions of the Securities Act of 1933, as amended. In
accordance with the 2008 Settlement Agreements, the Company filed a registration statement covering the resale of such shares which was declared effective by
the SEC on June 26, 2008.
Pursuant to the Li Settlement Agreement, the 2008 Settlement Agreements and upon the release of the 217,955 escrow shares relating to the fiscal year 2006
performance threshold to the relevant investors, neither Mr. Li or the Company have any obligations to the investors who participated in the Company’s January
2005 private placement relating to the escrow shares.
As of September 30, 2015, the Company had not received any claim from the other investors who have not been covered by the “2008 Settlement Agreements”
in the January 2005 private placement.
As the Company has transferred the 217,955 shares related to the 2006 performance threshold to the relevant investors in fiscal year 2007 and we also have
transferred 73,749 shares relating to the 2005 performance threshold to the investors who had entered the “2008 Settlement Agreements” with us in fiscal year
2008, pursuant to “Li Settlement Agreement” and “2008 Settlement Agreements”, neither Mr. Li nor the Company had any remaining obligations to those
related investors who participated in the Company’s January 2005 private placement relating to the escrow shares.
F-8
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
1.
Principal Activities, Basis of Presentation and Organization (continued)
Basis of Presentation and Organization (continued)
On August 14, 2013, Dalian BAK Trading Co., Ltd (“Dalian BAK Trading”) was established as a wholly owned subsidiary of China BAK Asia Holding
Limited (“BAK Asia”) with a registered capital of $500,000 (Note 19(i)). Pursuant to Dalian BAK Trading’s articles of association and relevant PRC
regulations, BAK Asia was required to contribute the capital to Dalian BAK Trading on or before August 14, 2015. Up to the date of this report, the Company
has contributed $100,000 to Dalian BAK Trading in cash.
On December 27, 2013, Dalian BAK Power Battery Co., Ltd (“Dalian BAK Power”) was established as a wholly owned subsidiary of BAK Asia with a
registered capital of $30,000,000 (Note 19(i)). Pursuant to Dalian BAK Power’s articles of association and relevant PRC regulations, BAK Asia was required to
contribute the capital to Dalian BAK Power on or before December 27, 2015. Up to the date of this report, the Company has contributed $14,846,344 to Dalian
BAK Power through injection of a series of patents and cash of $9,846,344.
The Company’s consolidated financial statements have been prepared under US GAAP.
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those estimates. This basis of accounting differs in certain material respects from that
used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and
the relevant financial regulations applicable to enterprises with limited liability established in the PRC or Hong Kong. The accompanying consolidated financial
statements reflect necessary adjustments not recorded in the books of account of the Company's subsidiaries to present them in conformity with US GAAP.
The equity interest of BAK International and its wholly owned subsidiaries, namely Shenzhen BAK, BAK Battery (Shenzhen) Co., Ltd. (“BAK Battery”), BAK
International (Tianjin) Ltd. (“BAK Tianjin”), Tianjin Chenhao Technological Development Limited (a subsidiary of BAK Tianjin established on May 8,
2014,“Tianjin Chenhao”), BAK Battery Canada Ltd. (“BAK Canada”), BAK Europe GmbH (“BAK Europe”) and BAK Telecom India Private Limited (“BAK
India”) (collectively the “Disposal Group”) was disposed of effective on June 30, 2014 as a result of the foreclosure by Mr. Jinghui Wang (“Mr. Wang”), an
unrelated third party, after Shenzhen BAK failed to repay the loans to Mr. Wang on March 31, 2014. The consolidated financial statements were consolidated up
to the date of disposal. The Company recorded a gain on disposal of subsidiaries of $61.3 million, which was mainly related to the market value appreciation of
the Company’s Research and Development Centre in Shenzhen.
After the disposal of BAK International Limited and its subsidiaries effective on June 30, 2014, and as of September 30, 2014 and 2015, the Company’s
subsidiaries consisted of: i) China BAK Asia Holdings Limited (“BAK Asia”), a wholly owned limited liability company incorporated in Hong Kong on July 9,
2013; ii) Dalian BAK Trading Co., Ltd. (“Dalian BAK Trading”), a wholly owned limited company established on August 14, 2013 in the PRC; and iii) Dalian
BAK Power Battery Co., Ltd. (“Dalian BAK Power”), a wholly owned limited liability company established on December 27, 2013 in the PRC.
The Company continued its business and continued to generate revenues from sale of batteries via subcontracting the production to BAK Tianjin, a former
subsidiary before the completion of construction and operation of its facility in Dalian. BAK Tianjin is now a supplier of the Company and the Company does
not have any significant benefits or liability from the operating results of BAK Tianjin except the normal risk with any major supplier.
F-9
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
1.
Principal Activities, Basis of Presentation and Organization (continued)
Basis of Presentation and Organization (continued)
Pursuant to a memorandum of understanding with the buyer of the Company’s former subsidiaries dated August 20, 2014, Mr. Li remains as a director of BAK
International, Shenzhen BAK, BAK Battery and BAK Tianjin until Shenzhen BAK’s full settlement of its bank loans of $59.9 million expiring on various dates
through March 2015 and then Shenzhen BAK renewed the bank loans with Agricultural Bank of China of $66.1 million (RMB420 million) expiring on April
14, 2016. On May 20, 2015, BAK Asia New Energy Holding Limited (formerly known as “Asia Zhi Li New Energy Holding Limited”), the shareholder of
BAK International Limited agreed to indemnify Mr. Li from any loss as a result of the default of repayment of bank loans by Shenzhen BAK.
The Company had a working capital deficiency, accumulated deficit from recurring net losses incurred for prior years and short-term debt obligations as of
September 30, 2014 and 2015. These factors raise substantial doubts about the Company’s ability to continue as a going concern.
In June and July 2015, the Company received advances of approximately $9.8 million from the following potential investors, who are independent from the
Company and independent from each other:
Mr. Shibin Mao
Mr. Dawei Li
Mr. Ping Shen
Mr. Shangdong Liu
Ms. Lijuan Wang
Mr. Jiping Zhou
$
$
2,227,148
1,499,967
1,499,967
1,599,968
1,500,000
1,520,594
9,847,644
Pursuant to the loan agreements with the investors executed on September 29, 2015, the loans were interest bearing at 20% per annum and secured by all the
assets of Dalian BAK Power in China. Advances of $9,466,985 were repayable by September 30, 2015 and an advance of $380,659 was repayable by December
7, 2015.
On September 29, 2015, the Company entered into a Debt Conversion Agreement with these investors. Pursuant to the terms of the Debt Conversion
Agreement, each of the creditors agreed to convert existing loan principal of $9,847,644 into an aggregate 4,376,731 shares of common stock of the Company
(“the Shares”) at a conversion price of $2.25 per share. The closing price as of September 29, 2015 was $2.22, which was slightly lower than the conversion
price of $2.25. There was no expense associated with the conversion.
Pursuant to supplemental agreements also executed on September 29, 2015, if the loans were converted into equity before October 30, 2015, the investors will
waive their entitlements to all the interest accruing on the loans.
Upon receipt of the Shares on October 16, 2015, the creditors released the Company from all claims, demands and other obligations relating to the Debts. The
amount of $9,847,644 was classified as shares to be issued under additional paid-in capital as of September 30, 2015.
As such, no interest was recognized by the Company on the advances from investors pursuant to the supplemental agreements with investors and the Debt
Conversion Agreement.
On June 22, 2015, Dalian BAK Power entered into a banking facility letter with Bank of Dandong to provide a maximum loan amount of $18.9 million
(RMB120 million) to June 22, 2016. The banking facilities include $12.6 million (RMB80 million) short term loans and $6.3 million (RMB40 million) bank
acceptance. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li, and his wife, Ms. Xiaoqiu Yu. The facilities were also secured by Dalian BAK
Power’s buildings, construction in progress, prepaid land use rights and machineries and pledged deposits. On June 25, 2015, the Company borrowed $7.9
million (RMB50 million) from Bank of Dandong for a period from June 25, 2015 to June 22, 2016, bearing fixed interest at 7.84% per annum. The Company
borrowed another loan of $4.7 million (RMB30 million) with a fixed interest rate at 7.84% per annum for the period from August 18, 2015 to June 10, 2016. In
September 2015, the Company applied to Bank of Dandong to revise the bank acceptance facilities of $6.3 million (RMB40 million) into $3.1 million (RMB20
million) bank acceptance and $1.9 million (RMB12 million) letter of credit. As of September 30, 2015, the Company had unutilized committed banking
facilities of $1.8 million. The Company plans to raise additional funds through bank borrowings and equity financing in the future to meet its daily cash
demands if required.
However, there can be no assurance that the Company will be successful in obtaining further financing. The Company believes that with the significant
reduction of liabilities and disposal of traditionally low margin battery business after the foreclosure of BAK International Limited, it can continue as a going
concern and return to profitability.
F-10
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
1.
Principal Activities, Basis of Presentation and Organization (continued)
Basis of Presentation and Organization (continued)
The accompanying consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which
contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty related to the Company’s ability to continue as a going concern.
Discontinued operations
The Company had also been engaged in property leasing and management of its Research and Development Centre in Shenzhen since its completion in July
2013. Following the disposal of BAK International and in subsidiaries on June 30, 2014, the Company no longer engaged in property leasing and management.
Thus, this business is accounted for as discontinued operations in the accompanying consolidated financial statements for all periods presented. Accordingly,
assets and liabilities, revenues and expenses and cash flows related to the property leasing and management business have been appropriately reclassified in the
accompanying consolidated financial statements as discontinued operations for all periods presented.
The following table presents the net assets of the Disposal Group as of June 30, 2014 (date of disposal):
Cash and cash equivalents
Pledged deposits
Trade accounts receivable, net
Inventories
Prepayments and other receivables
Property, plant and equipment, net
Construction in progress
Prepaid land use rights, net
Intangible assets, net
Short-term bank loans
Accounts and bills payable
Accrued expenses and other payables
Other short term loans
Payable to the Company (Note)
Deferred revenue
Other long-term payables
Rental deposits
Deferred tax liabilities
Net assets of BAK International and subsidiaries upon disposal
Consideration received in the form of :
Offset against loans from Mr. Wang
Waiver of interest accruing up to June 30, 2014
Impairment on receivable from the Disposal Group (Note)
Gain on disposal of subsidiaries
Carrying amount
4,163,555
119,382
63,539,165
39,941,073
25,975,982
153,341,607
11,900,752
21,950,651
583,662
(63,181,988)
(100,364,485)
(24,864,086)
(53,406,103)
(17,844,674)
(7,215,622)
(23,834,320)
(1,144,121)
(769,357)
28,891,073
(83,812,839)
(8,262,566)
(63,184,332)
1,836,580
(61,347,752)
$
$
Note: As of September 30, 2014, management of the Company evaluated the collectability of the amount due from the Disposal Group and determined that
$1.8 million should be impaired (Note 7).
The following table presents the components of discontinued operations in relation to the property leasing and management business reported in the consolidated
statement of operations and comprehensive (loss) income for the years ended September 30, 2014 and 2015:
Net revenues
Cost of revenues
Gain on disposal of subsidiaries
Recovery of doubtful accounts (Note 7)
Income from discontinued operations, net of tax
F-11
2014
4,069,147
(919,470)
3,149,677
61,347,752
-
64,497,429
$
$
2015
-
-
-
-
1,831,237
1,831,237
$
$
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
2.
Summary of Significant Accounting Policies and Practices
(a) Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and its subsidiaries up to the date of disposal. All significant
intercompany balances and transactions have been eliminated prior to consolidation.
(b) Cash and Cash Equivalents
Cash consists of cash on hand and in banks excluding pledged deposits. The Company considers all highly liquid debt instruments, with initial terms of less than
three months to be cash equivalents. As of September 30, 2014 and 2015, there were no cash equivalents.
(c) Trade Accounts and Bills Receivable
Trade accounts and bills receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and sales returns. The allowance for doubtful
accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing trade accounts receivable. The Company determines
the allowance based on historical write-off experience, customer specific facts and economic conditions.
Outstanding accounts receivable balances are reviewed individually for collectability. Account balances are charged off against the allowance after all means of
collection have been exhausted and the potential for recovery is considered remote.
(d) Inventories
Inventories are stated at the lower of cost or market. The cost of inventories is determined using the weighted average cost method, and includes expenditures
incurred in acquiring the inventories and bringing them to their existing location and condition. In case of finished goods and work in progress, the cost includes
an appropriate share of production overhead based on normal operating capacity.
The Company regularly reviews the cost of inventories against their estimated fair market value and records a lower of cost or market write down for inventories
that have costs in their excess of estimated market value.
(e) Property, Plant and Equipment
Property, plant and equipment (except construction in progress) are stated at cost less accumulated depreciation and impairment charges. Depreciation is
calculated based on the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the assets as
follows:
Buildings
Machinery and equipment
Office equipment
Motor vehicles
5-35 years
5-12 years
1-12 years
5-8 years
The cost and accumulated depreciation of property, plant and equipment sold are removed from the consolidated balance sheets and resulting gains or losses are
recognized in the consolidated statements of operations and comprehensive loss.
Construction in progress mainly represents expenditures in respect of the Company’s corporate campus, including offices, factories, warehouses and research
and development facilities, under construction. All direct costs relating to the acquisition or construction of the Company’s corporate campus and equipment,
including interest charges on borrowings, are capitalized as construction in progress. No depreciation is provided in respect of construction in progress.
A long-lived asset to be disposed of by abandonment continues to be classified as held and used until it is disposed of.
(f) Prepaid Land Use Rights
Land use rights are carried at cost and amortized on a straight-line basis over the period of rights of 50 years.
F-12
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
2.
Summary of Significant Accounting Policies and Practices (Continued)
(g) Foreign Currency Transactions and Translation
The reporting currency of the Company is the United States dollar (“US dollar”). The financial records of the Company’s PRC operating subsidiaries are
maintained in their local currency, the Renminbi (“RMB”), which is the functional currency. The financial records of the Company’s subsidiaries established in
other countries are maintained in their local currencies. Assets and liabilities of the subsidiaries are translated into the reporting currency at the exchange rates at
the balance sheet date, equity accounts are translated at historical exchange rates, and income and expense items are translated using the average rate for the
period. The translation adjustments are recorded in accumulated other comprehensive income (loss) under shareholders’ equity.
Monetary assets and liabilities denominated in currencies other than the applicable functional currencies are translated into the functional currencies at the
prevailing rates of exchange at the balance sheet date. Nonmonetary assets and liabilities are remeasured into the applicable functional currencies at historical
exchange rates. Transactions in currencies other than the applicable functional currencies during the period are converted into the functional currencies at the
applicable rates of exchange prevailing at the transaction dates. Transaction gains and losses are recognized in the consolidated statements of operations and
comprehensive (loss) income.
RMB is not a fully convertible currency. All foreign exchange transactions involving RMB must take place either through the People’s Bank of China (the
“PBOC”) or other institutions authorized to buy and sell foreign exchange. The exchange rates adopted for the foreign exchange transactions are the rates of
exchange quoted by the PBOC, which are determined largely by supply and demand. Translation of amounts from RMB into US dollars has been made at the
following exchange rates for the respective years:
September 30, 2015
Balance sheet, except for equity accounts
Income statement and cash flows
September 30, 2014
Balance sheet, except for equity accounts
Income statement and cash flows
(h) Intangible Assets
RMB 6.3564 to
US$1.00
RMB 6.2224 to
US$1.00
RMB 6.1382 to
US$1.00
RMB 6.1469 to
US$1.00
Intangible assets are stated in the balance sheet at cost less accumulated amortization and impairment, if any. The costs of the intangible assets are amortized on
a straight-line basis over their estimated useful lives. The respective amortization periods for the intangible assets are as follows:
Computer software
(i) Impairment of Long-lived Assets
10 years
Long-lived assets, which include property, plant and equipment, prepaid land use rights and intangible assets, are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash
flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
F-13
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
2.
Summary of Significant Accounting Policies and Practices (Continued)
(j) Revenue Recognition
The Company recognizes revenue on product sales when products are delivered and the customer takes ownership and assumes risk of loss, collection of the
relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable.
Net sales of products represent the invoiced value of goods sold, net of value added taxes (“VAT”), sales returns, trade discounts and allowances. The Company
is subject to VAT which is levied on the majority of the products of Shenzhen BAK, BAK Battery, BAK Tianjin, Dalian BAK Trading and Dalian BAK Power
at the rate of 17% on the invoiced value of sales. Output VAT is borne by customers in addition to the invoiced value of sales and input VAT is borne by the
Company in addition to the invoiced value of purchases to the extent not refunded for export sales. Provision for sales returns are recorded as a reduction of
revenue in the same period that revenue is recognized. The provision for sales returns, which is based on historical sales returns data, is the Company’s best
estimate of the amount of goods that will be returned from its customers.
(k) Cost of Revenues
Cost of revenues consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the
production of products. Write-down of inventories to lower of cost or market is also recorded in cost of revenues.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be
realized. Deferred tax assets and liabilities are measured using enacted tax rates applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of operations and
comprehensive loss in the period that includes the enactment date.
The impact of an uncertain income tax positions on the income tax return must be recognized at the largest amount that is more likely than not to be sustained
upon audit by the relevant tax authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Interest
and penalties on income taxes will be classified as a component of the provisions for income taxes.
(m) Research and Development and Advertising Expenses
Research and development and advertising expenses are expensed as incurred. Research and development expenses consist primarily of remuneration for
research and development staff, depreciation and maintenance expenses of research and development equipment and material costs for research and
development. For the years ended September 30, 2014 and 2015, the Company recorded research and development expenses of $3,981,163 and $1,001,889,
respectively.
Advertising expenses, included in sales and marketing expenses were insignificant for the years ended September 30, 2014 and 2015.
F-14
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
2.
Summary of Significant Accounting Policies and Practices (Continued)
(n) Bills Payable
Bills payable represent bills issued by financial institutions to the Company’s vendors. The Company’s vendors receive payments from the financial institutions
directly upon maturity of the bills and the Company is obliged to repay the face value of the bills to the financial institutions.
(o) Government Grants
The Company’s subsidiaries in China receive government subsidies from local Chinese government agencies in accordance with relevant Chinese government
policies. In general, the Company presents the government subsidies received as part of other income unless the subsidies received are earmarked to compensate
a specific expense, which have been accounted for by offsetting the specific expense, such as research and development expense, interest expenses and removal
costs. Unearned government subsidies received are deferred for recognition until the criteria for such recognition could be met.
Grants applicable to land are amortized over the life of the depreciable facilities constructed on it. For research and development expenses, the Company
matches and offsets the government grants with the expenses of the research and development activities as specified in the grant approval document in the
corresponding period when such expenses are incurred.
(p) Share-based Compensation
The Company adopted the provisions of ASC Topic 718 which requires the Company to measure and recognize compensation expenses for an award of an
equity instrument based on the grant-date fair value. The cost is recognized over the vesting period (or the requisite service period) on graded-vesting method.
ASC Topic 718 also requires the Company to measure the cost of a liability classified award based on its current fair value. The fair value of the award will be
remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period are recognized as
compensation cost over that period. Further, ASC Topic 718 requires the Company to estimate forfeitures in calculating the expense related to stock-based
compensation.
The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Valuation Model. The expected volatility was based on the
historical volatilities of the Company’s listed common stocks in the United States and other relevant market information. The Company uses historical data to
estimate share option exercises and employee departure behavior used in the valuation model. The expected terms of share options granted is derived from the
output of the option pricing model and represents the period of time that share options granted are expected to be outstanding. Since the share options once
exercised will primarily trade in the U.S. capital market, the risk-free rate for periods within the contractual term of the share option is based on the U.S.
Treasury yield curve in effect at the time of grant.
(q) Retirement and Other Postretirement Benefits
Contributions to retirement schemes (which are defined contribution plans) are charged to cost of revenues, research and development expenses, sales and
marketing expenses and general and administrative expenses in the statement of operations and comprehensive loss as and when the related employee service is
provided.
(r) (Loss) Earnings per Share
Basic (loss) earnings per share is computed by dividing net loss by the weighted average number of ordinary shares outstanding during the year. Diluted (loss)
earnings per share is computed by dividing net (loss) earnings by the sum of the weighted average number of ordinary shares outstanding and dilutive potential
ordinary shares during the year.
F-15
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
2.
Summary of Significant Accounting Policies and Practices (Continued)
(s) Use of Estimates
The preparation of the consolidated financial statements in accordance with US GAAP requires management of the Company to make a number of estimates and
assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates. Significant items subject to
such estimates and assumptions include the recoverability of the carrying amount of long-lived assets; valuation allowance for obsolete inventories, receivables
and deferred tax assets and valuation of share-based compensation expense. Actual results could differ from those estimates.
(t) Segment Reporting
The Company uses the “management approach” in determining reportable operating segments. The management approach considers the internal organization
and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining
the Company’s reportable segments. Management, including the chief operating decision maker, reviews operating results solely by monthly revenue of Li-ion
rechargeable batteries (but not by sub-product type or geographic area) and operating results of the Company and, as such, the Company has determined that the
Company has one operating segment as defined by ASC Topic 280 “Segment Reporting”.
(u) Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments, litigation, fines and penalties and other sources are recorded when it is probable that a
liability has been incurred and the amount of the assessment can be reasonably estimated.
(v) Recently Issued Accounting Standards
In April 2014, the FASB issued ASU 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting
Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes the threshold for reporting discontinued operations and adds
new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a strategic shift that has (or will have) a major effect on an
entity’s operations and financial results.” The standard is required to be adopted by public business entities in annual periods beginning on or after December 15,
2014, and interim periods within those annual periods. Entities may “early adopt” the guidance for new disposals. The Company does not expect that the
adoption will have a material impact on its consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" which clarifies and improves the principles for
recognizing revenue and develops a common revenue standard for United States generally accepted accounting principles (U.S. GAAP) and International
Financial Reporting Standards (IFRS) that among other things, improves comparability of revenue recognition practices and provides more useful information to
users of financial statements through improved disclosure requirements. The amendments in ASU 2014-09 are effective for annual reporting periods beginning
after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. In August 2015, the FASB issued ASU No.
2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendment in this ASU defers the effective date of ASU No.
2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU
2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is
permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period. The Company
is currently reviewing the effect of this guidance on its revenue recognition.
In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718)" which provides explicit guidance on the treatment of awards
with performance targets that could be achieved after the requisite service period. The amendments in ASU 2014-12 are effective for annual periods and interim
periods within those annual periods beginning after December 15, 2015. The Company does not expect that the adoption will have a material impact on its
consolidated financial statements.
In June 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going concern (Subtopic 205-40) which provides guidance to an
organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly
provided by organizations today in the financial statement footnotes. This guidance in ASU 2014-15 is effective for annual periods ending after December 15,
2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for
which the financial statements have not previously been issued. The Company does not expect that the adoption will have a material impact on its consolidated
financial statements.
F-16
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
2.
Summary of Significant Accounting Policies and Practices (Continued)
(v) Recently Issued Accounting Standards (Continued)
In November 2014, FASB issued Accounting Standards Update No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in
a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force).The
amendments permit the use of the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate, or OIS) as a benchmark interest rate for
hedge accounting purposes. Public business entities are required to implement the new requirements in fiscal years (and interim periods within those fiscal
years) beginning after December 15, 2015. All other types of entities are required to implement the new requirements in fiscal years beginning after December
15, 2015, and interim periods beginning after December 15, 2016. The Company does not expect the adoption of ASU 2014-16 to have a material impact on its
consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02 "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis
that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and
interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company is
currently in the process of evaluating the impact of the adoption of ASU 2015-02 on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs”, which changes the presentation of debt issuance costs in
the financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than
as an asset. Amortization of the costs will continue to be reported as interest expense. The guidance is effective for annual reporting periods beginning after
December 15, 2016, with early adoption permitted. The guidance will be applied retrospectively to each period presented. The adoption of this standard update
is not expected to have any impact on the Company's financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory, which requires an entity to measure inventory within the scope at the lower of cost and net realizable
value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. The effective date for the standard is for fiscal years beginning after December 15, 2016. Early adoption is permitted. The Company does not
expect the adoption of ASU 2015-11 to have a material impact on its consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the amendments eliminate the
requirement to retrospectively account for those adjustments. For public business entities, the amendments are effective for fiscal years beginning after
December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years
beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied
prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not
been issued. The Company does not expect the adoption of ASU 2015-16 to have a material impact on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are
not expected to have a material impact on the Company’s consolidated financial statements upon adoption.
3.
Pledged Deposits
Pledged deposits as of September 30, 2014 and 2015 consisted of the following:
Pledged deposits with bank for:
Bills payable
Letters of credit
F-17
2014
2015
$
$
- $
-
- $
1,461,757
57,844
1,519,601
China BAK Battery, Inc. and subsidiaries
Notes to the consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
4.
Trade Accounts and Bills Receivable, net
Trade accounts and bills receivable as of September 30, 2014 and 2015 consisted of the following:
Trade accounts receivable
Less: Allowance for doubtful accounts
Bills receivable
An analysis of the allowance for doubtful accounts is as follows:
Balance at beginning of year
Gross provision for the year
Reversal for the year:-
Recoveries by cash
Recoveries by return of products from customers
(Credited) debited to consolidated statements of
comprehensive (loss) income
Disposal of subsidiaries
Foreign exchange adjustment
Balance at end of year
5.
Inventories
Inventories as of September 30, 2014 and 2015 consisted of the following:
Raw materials
Work in progress
Finished goods
2014
1,013,641 $
-
1,013,641
-
1,013,641 $
2015
4,792,416
(122,115)
4,670,301
101,657
4,771,958
2014
17,734,802 $
4,745,933
2015
-
124,745
(4,368,429)
(1,015,359)
(637,855)
(16,866,605)
(230,342)
-
-
-
124,745
-
(2,630)
122,115
2014
9,187 $
-
2,638,911
2,648,098 $
2015
712,713
1,441,368
903,494
3,057,575
$
$
$
$
$
During the years ended September 30, 2014 and 2015, write-downs of obsolete inventories to lower of cost or market of $8,752,543 and $221,172,
respectively, were charged to cost of revenues.
6.
Prepayments and Other Receivables
Prepayments and other receivables as of September 30, 2014 and 2015 consisted of the following:
Value added tax recoverable
Prepayments to suppliers
Deposits
Staff advances
Prepaid operating expenses
Others
Less: Allowance for doubtful accounts
An analysis of the allowance for doubtful accounts is as follows:
Balance at beginning of year
Provision for the year
Recovery for the year
Disposal of subsidiaries
Foreign exchange adjustment
Balance at end of year
F-18
2014
$
570,577 $
-
-
5,028
2,750
11,509
2015
1,719,062
447,430
154,892
42,718
195,556
-
589,864
-
589,864 $
2,559,658
(7,000)
2,552,658
2014
1,980,914 $
23,536
(25,071)
(1,939,682)
(39,697)
-
2015
-
7,000
-
-
-
7,000
$
$
$
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
7.
Receivables from Former Subsidiaries
Receivable from former subsidiaries as of September 30, 2014 and 2015 consisted of the following:
Shenzhen BAK
BAK Tianjin
Allowance for doubtful debts
Carrying amount
2014
2015
$
$
1,856,356
7,261,089
9,117,445
(1,856,356)
7,261,089
$
$
62,963
623,551
686,514
-
686,514
Upon disposal of the Disposal Group in June 2014, the Disposal Group owed the Company a sum of $17.8 million (Note 1), which was settled in full
during the year September 30, 2015. Management of the Company evaluated the collectability of the remaining amount and determined that $1.8 million
should be impaired and offset against the gain on disposal of subsidiaries from discontinued operations for the year ended September 30, 2014. During
the year ended September 30, 2015, the Company determined that $1.8 million was recoverable. The recovery was treated as an adjustment to the gain
on disposal of subsidiaries from discontinued operations for the year ended September 30, 2015.
The balances at September 30, 2015 arise from trade transactions in year (Note 20).
There amounts are interest-free, unsecured and repayable on demand.
Subsequent to September 30, 2015, the Company made further advance of approximately RMB40 million ($6.3 million) to Tianjin BAK. These
advances, which were made with the approval by the Board of Directors, were interest-free, unsecured and fully repaid in January 2016.
8.
Property, Plant and Equipment, net
Property, plant and equipment as of September 30, 2014 and 2015 consisted of the following:
Buildings
Machinery and equipment
Office equipment
Motor vehicles
Accumulated depreciation
Carrying amount
2014
-
-
19,999
118,821
138,820
(14,565)
124,255
$
$
2015
18,440,000
4,020,238
37,050
147,197
22,644,485
(369,665)
22,274,820
$
$
Depreciation expense for the years ended September 30, 2014 and 2015 is included in the consolidated statements of operations as follows:
Cost of revenues
Research and development expenses
Sales and marketing expenses
General and administrative expenses
2014
2015
$
$
4,706,625
396,926
84,194
2,496,549
7,684,294
$
$
225,355
68,991
-
68,911
363,257
The Company has not yet obtained the property ownership of the buildings in its Dalian manufacture facilities with a carrying amount of $18,318,313 as
of September 30, 2015. The management expects that they will obtain the property ownership rights by March 2016.
The Company believes that there was no impairment of its property, plant and equipment for the years ended September 30, 2014 and 2015.
During the years ended September 30, 2014 and 2015, the Company purchased machinery and equipment from BAK Tianjin in the amount of $4.3
million and $6.8 million (inclusive of VAT) respectively.
F-19
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
9.
Construction in Progress
Construction in progress as of September 30, 2014 and 2015 consisted of the following:
Construction in progress
Prepayment for acquisition of property, plant and equipment
Carrying amount
2014
21,760,746
426,569
22,187,315
$
$
2015
13,009,922
29,451
13,039,373
$
$
Construction in progress as of September 30, 2014 and 2015 is mainly comprised of capital expenditures for the construction of the facilities and
production lines of Dalian BAK Power.
For the years ended September 30, 2014 and 2015, the Company capitalized interest of $388,798 and $527,104, respectively, to the cost of construction
in progress.
10.
Prepaid Land Use Rights, net and Intangibles Assets, net
(a)
Prepaid Land Use Rights, net
Prepaid land use rights as of September 30, 2014 and 2015 consisted of the followings:
Prepaid land use rights
Accumulated amortization
Less: Classified as current assets
2014
2015
9,152,400
-
9,152,400
(183,048)
8,969,352
$
$
$
8,838,220
(206,225)
8,631,995
(176,764)
8,455,231
$
$
$
Pursuant to a land use rights acquisition agreement dated August 10, 2014, the Company acquired the rights to use a piece of land with an area of
153,832 m2 in Dalian Economic Zone for 50 years up to August 9, 2064, at a total consideration of $8,349,000 (RMB53.1 million). Other incidental
costs incurred totaled $489,000 (RMB3.1 million).
Amortization expenses of the prepaid land use rights were $418,720 and $210,666 for the years ended September 30, 2014 and 2015, respectively.
(b)
Intangible Assets, net
Intangible assets as of September 30, 2014 and 2015 consisted of the followings:
Computer software at cost
Accumulated amortization
2014
2015
-
-
-
$
$
27,984
(1,166)
26,818
$
$
Amortization expenses were $154,662 and $1,191 for the years ended September 30, 2014 and 2015, respectively.
F-20
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
11.
Short-term Bank Loans
As of September 30, 2014 and 2015, the Company had short term bank borrowings of $4,887,426 and $12,585,740, respectively.
On August 13, 2014, the Company borrowed $4,887,426 (RMB30 million) from Bank of Dandong for a period from August 19, 2014 to August 18,
2015, bearing interest at 7.8% per annum. The loan was guaranteed by Mr. Xiangqian Li, the Company’s CEO and Shenzhen BAK, a former subsidiary
of the Company.
Under the banking facilities granted by Bank of Dandong on June 22, 2015 (Note 1), the Company borrowed a loan of $7,866,088 (RMB50 million)
from Bank of Dandong for a period from June 25, 2015 to June 22, 2016, bearing fixed interest at 7.84% per annum. On August 18, 2015, the Company
repaid the loan of RMB30 million upon maturity and borrowed a new loan of $4,719,652 (RMB30 million) with a fixed interest rate at 7.84% per
annum for the period from August 18, 2015 to June 10, 2016.
The banking facilities were guaranteed by Mr. Xiangqian Li, the Company’s CEO and his wife, Ms. Xiaoqiu Yu, and Shenzhen BAK, a former
subsidiary of the Company. The facilities were also secured by the Company’s assets with the following carrying amount:
Pledged deposits (note 3)
Prepaid land use rights (note 10)
Machinery and equipment
Buildings
Construction in progress
2014
-
-
-
-
-
-
$
$
2015
1,519,601
8,631,995
3,831,790
13,120,083
6,228,371
33,331,840
$
$
As of September 30, 2015, the Company had unutilized committed banking facilities of $1.8 million.
During the years ended September 30, 2014 and 2015, interest of $5,737,093 and $527,104, respectively, was incurred on the Company's bank
borrowings.
12.
Other Short-term Loans
Other short-term loans as of September 30, 2014 and 2015 consisted of the following:
Advance from related parties
Tianjin BAK New Energy Research Institute Co., Ltd (“Tianjin New
Energy”)
Mr. Xiangqian Li, the Company’s CEO
–
–
Advances from unrelated third parties
Ms. Longqian Peng
–
Mr. Mingzhe Li
–
Mr. Shengdan Qiu
–
Mr. Yunfei Li
–
Note
2014
2015
(a)
(b)
(c)
$
$
$
651,657
-
651,657
162,915
382,848
4,354,697
-
4,900,460
5,552,117
$
6,094
100,000
106,094
-
-
-
78,661
78,661
184,755
(a)
The Company received an advance from Tianjin New Energy, a related company under the common control of Mr. Xiangqian Li, the
Company’s CEO, which was unsecured, non-interest bearing and repayable on demand. For the years ended September 30, 2014 and 2015, the
Company generated revenue of nil and $298,983 from Tianjin New Energy, and the related trade receivables was offset against the advance
from Tianjin New Energy as of September 30, 2015.
(b)
Advances from Mr. Xiangqian Li, the Company’s CEO, was unsecured, non-interest bearing and repayable on demand.
(c)
Advances from unrelated third parties was unsecured, non-interest bearing and repayable on demand.
During the years ended September 30, 2014 and 2015, interest of $11,452,109 and nil, respectively, was incurred on the Company’s other short-term
loans.
F-21
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
13.
Accrued Expenses and Other Payables
Accrued expenses and other payables as of September 30, 2014 and 2015 consisted of the following:
Construction costs payable
Liquidated damages (note)
Equipment purchase payable
Customer deposits
Accrued staff costs
Other payables and accruals
2014
10,935,000
1,210,119
536,239
143,524
65,978
536,270
13,427,130
$
$
2015
8,625,828
1,210,119
611,833
260,015
444,249
417,937
11,569,981
$
$
Note: On August 15, 2006, the SEC declared effective a post-effective amendment that the Company had filed on August 4, 2006, terminating the
effectiveness of a resale registration statement on Form SB-2 that had been filed pursuant to a registration rights agreement with certain
shareholders to register the resale of shares held by those shareholders. The Company subsequently filed Form S-1 for these shareholders. On
December 8, 2006, the Company filed its Annual Report on Form 10-K for the year ended September 30, 2006 (the “2006 Form 10-K”). After
the filing of the 2006 Form 10-K, the Company’s previously filed registration statement on Form S-1 was no longer available for resale by the
selling shareholders whose shares were included in such Form S-1. Under the registration rights agreement, those selling shareholders became
eligible for liquidated damages from the Company relating to the above two events totaling approximately $1,051,000. As of September 30,
2014 and 2015, no liquidated damages relating to both events have been paid.
On November 9, 2007, the Company completed a private placement for the gross proceeds to the Company of $13,650,000 by selling 3,500,000
shares of common stock at the price of $3.90 per share. Roth Capital Partners, LLC acted as the Company’s exclusive financial advisor and
placement agent in connection with the private placement and received a cash fee of $819,000. The Company may have become liable for
liquidated damages to certain shareholders whose shares were included in a resale registration statement on Form S-3 that the Company filed
pursuant to a registration rights agreement that the Company entered into with such shareholders in November 2007. Under the registration
rights agreement, among other things, if a registration statement filed pursuant thereto was not declared effective by the SEC by the 100th
calendar day after the closing of the Company’s private placement on November 9, 2007, or the “Effectiveness Deadline”, then the Company
would be liable to pay partial liquidated damages to each such investor of (a) 1.5% of the aggregate purchase price paid by such investor for the
shares it purchased on the one month anniversary of the Effectiveness Deadline; (b) an additional 1.5% of the aggregate purchase price paid by
such investor every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until the earliest of the effectiveness of the
registration statement, the ten-month anniversary of the Effectiveness Deadline and the time that the Company is no longer required to keep
such resale registration statement effective because either such shareholders have sold all of their shares or such shareholders may sell their
shares pursuant to Rule 144 without volume limitations; and (c) 0.5% of the aggregate purchase price paid by such investor for the shares it
purchased in our November 2007 private placement on each of the following dates: the ten-month anniversary of the Effectiveness Deadline and
every thirtieth day thereafter (prorated for periods totaling less than thirty days), until the earlier of the effectiveness of the registration statement
and the time that the Company no longer is required to keep such resale registration statement effective because either such shareholders have
sold all of their shares or such shareholders may sell their shares pursuant to Rule 144 without volume limitations. Such liquidated damages
would bear interest at the rate of 1% per month (prorated for partial months) until paid in full.
On December 21, 2007, pursuant to the registration rights agreement, the Company filed a registration statement on Form S-3, which was
declared effective by the SEC on May 7, 2008. As a result, the Company estimated liquidated damages amounting to $561,174 for the
November 2007 registration rights agreement. As of September 30, 2014 and 2015, the Company had settled the liquidated damages with all the
investors and the remaining provision of approximately $159,000 was included in other payables and accruals.
F-22
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
14.
Deferred Government Grants
Deferred government grants as of September 30, 2014 and 2015 consist of the following:
Total government grants
Less: Current portion
Non-current portion
2014
24,437,131
(24,437,131)
-
$
$
2015
7,195,624
(181,510)
7,014,114
$
$
In September 2013, the Management Committee of Dalian Economic Zone Management Committee (the “Management Committee”) provided a
subsidy of RMB150 million to finance the costs incurred in moving the Company’s facilities to Dalian, including the loss of sales while the new
facilities were being constructed. For the year ended September 30, 2015, the Company recognized nil and $23,103,427 as income after offset of the
related removal expenditures of $1,003,027. No such income or offset was recognized in fiscal 2014.
On October 17, 2014, the Company received a subsidy of RMB46,150,000 pursuant to an agreement with the Management Committee dated July 2,
2013 for costs of land use rights and to be used to construct the new manufacturing site in Dalian. Part of the facilities had been completed and
commenced to operate in July 2015 and the Company has initiated amortization on a straight-line basis over the estimated useful lives of the depreciable
facilities constructed thereon. The Company expects that the remaining facilities will be completed and put into operation by fiscal 2016. For the years
ended September 30, 2014 and 2015, the Company offset government grants of nil and $66,169 against depreciation expenses of the Dalian facilities,
respectively.
15.
Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities
(a)
Income taxes in the consolidated statements of comprehensive loss(income)
The Company’s provision for income taxes consisted of:
PRC income tax:
Current
Deferred
United States Tax
2014
2015
$
$
16,475
-
16,475
$
$
5,218,898
101,617
5,320,515
China BAK is subject to a statutory tax rate of 35% under United States of America tax law. No provision for income taxes in the United States or
elsewhere has been made as China BAK had no taxable income for the years ended September 30, 2014 and 2015.
Hong Kong Tax
BAK Asia and BAK International are subject to Hong Kong profits tax rate of 16.5% . The two companies did not incur any assessable profits arising in
or derived from Hong Kong for the years ended September 30, 2014 and 2015 and accordingly no provision for Hong Kong profits tax was made in
these periods.
PRC Tax
The Company’s subsidiaries in China are subject to enterprise income tax at 25% for the years ended September 30, 2014 and 2015. The Enterprise
Income Tax Law in China grants preferential tax treatment to High and New Technology Enterprises (“HNTEs”). Under this preferential tax treatment,
HNTEs can enjoy an income tax rate of 15% for three years, but need to re-apply after the end of the three-year period. Dalian BAK Power is in the
process of applying to be recognized as an HNTE.
Canada States Tax
BAK Canada was subject to a statutory tax rate of 38% under Canada tax law. No provision for income taxes in Canada has been made as BAK Canada
had no taxable income for the year ended September 30, 2014.
German States Tax
BAK Europe was subject to a 25% statutory tax rate under Germany tax law. No provision for income taxes in Germany has been made as BAK Europe
had no taxable income for the year ended September 30, 2014.
India Tax
BAK India was subject to a 30% statutory tax rate under India tax law. No provision for income taxes in India has been made as BAK India had no
taxable income for the year ended September 30, 2014.
F-23
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
15.
Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities (continued)
A reconciliation of the provision for income taxes determined at the statutory income tax rate to the Company's income taxes is as follows:
(Loss) profit before income tax - continuing operations
United States federal corporate income tax rate
Income tax credit computed at United States statutory corporate income tax rate
Reconciling items:
Valuation allowance on deferred tax assets
Rate differential for PRC earnings
Non-deductible expenses
Share based payments
Income tax expenses
(b)
Deferred tax assets and deferred tax liabilities
2014
(26,705,308) $
35%
(9,346,763)
6,227,021
2,574,746
530,410
31,061
16,475
$
$
$
2015
19,363,204
35%
6,777,121
70,664
(2,100,342)
310,514
262,558
5,320,515
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of September 30, 2014 and 2015
are presented below:
Deferred tax assets
Trade accounts receivable
Inventories
Property, plant and equipments
Valuation allowance
Deferred tax assets, current portion
Net operating loss carried forward
Valuation allowance
Deferred tax assets, non-current
Deferred tax liabilities, non-current
Property, plant and equipment
2014
2015
$
$
$
$
$
-
-
-
-
-
12,534,160
(12,534,160)
-
-
$
$
$
$
$
32,979
54,127
5,976
(49,907)
43,175
12,470,938
(12,470,938)
-
142,650
As of September 30, 2014 and 2015, the Company’s U.S. entity had net operating loss carry forwards of $35,318,443, of which $102,293 was available
to reduce future taxable income which will expire in various years through 2035 and $35,216,150 was available to offset capital gains recognized
through 2020 and the Company’s PRC subsidiaries had net operating loss carry forwards of $690,821 and $437,933, respectively, which will expire in
various years through 2020. Management believes it is more likely than not that the Company will not realize these potential tax benefits as these
operations will not generate any operating profits in the foreseeable future. As a result, a valuation allowance was provided against the full amount of
the potential tax benefits.
The Company did not provide for deferred income taxes and foreign withholding taxes on the cumulative undistributed earnings of foreign subsidiaries
as of September 30, 2014 and 2015 of approximately of nil and $14.2 million, respectively. The cumulative undistributed earnings of foreign
subsidiaries were included in accumulated deficit and will continue to be indefinitely reinvested in international operations. Accordingly, no provision
has been made for U.S. deferred taxes or applicable withholding taxes, related to future repatriation of these earnings, nor is it practicable to estimate the
amount of income taxes that would have to be provided if management concluded that such earnings will be remitted in the future.
As of September 30, 2014 and 2015, the Company had no material unrecognized tax benefits which would favorably affect the effective income tax
rates in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve
months. No interest or penalties relating to income tax matters have been imposed on the Company during the years ended September 30, 2014 and
2015, and no provision for interest and penalties is deemed necessary as of September 30, 2014 and 2015.
According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to
computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which
are not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax
evasion.
F-24
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
16.
Share-based Compensation
(i)
Options
The Company grants share options to officers and employees and restricted shares of common stock to its non-employee directors as rewards for their
services.
Stock Option Plan
In May 2005, the Board of Directors adopted the China BAK Battery, Inc. 2005 Stock Option Plan (the “Plan”). The Plan originally authorized the
issuance of up to 800,000 shares of the Company’s common stock, pursuant to stock options granted under the Plan, or as grants of restricted stock. The
exercise price of options granted pursuant to the Plan must be at least equal to the fair market value of the Company’s common stock at the date of the
grant. Fair market value is determined at the discretion of the designated committee on the basis of reported sales prices for the Company’s common
stock over a ten-business-day period ending on the grant date. The Plan will terminate on May 16, 2055. On July 28, 2008, the Company’s stockholders
approved certain amendments to the Plan, including an amendment increasing the total number of shares available for issuance under the Plan to
1,600,000. On June 17, 2015, the Company’s stockholders approved an amendment to Section 1.7 of the Plan that if an option terminates without being
wholly exercised, new options or restricted stock may be granted hereunder covering the number of shares to which such option termination relates.
Section 1.7 of the Plan currently provides that only new options may be granted in this case.
On June 22, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase
385,640 shares of the Company’s common stock to certain key employees, officers and consultants with an exercise price of $14.05 per share and a
contractual life of 7 years. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in
twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.
A summary of share option plan activity for these options as of September 30, 2014 and 2015 is presented below:
Outstanding as of October 1, 2013
Exercised
Cancelled
Forfeited
Outstanding as of September 30, 2014
Exercised
Cancelled
Forfeited
Outstanding as of September 30, 2015
Exercisable as of September 30, 2015
Number of
shares
136,560
-
-
(132,360)
4,200
-
-
-
4,200
4,200
$
$
$
$
Weighted
average
exercise price
per share
14.05
Weighted
average
remaining
contractual term
2.7 years
Aggregate
intrinsic
value (1)
14.05
1.7 years
14.05
14.05
0.7 years
0.7 years
$
$
-
-
(1)
The intrinsic values of option at September 30, 2015 was zero since the share market value of common stock of $2.31 was lower than the
exercise price of the option of $14.05 per share.
The weighted average grant-date fair value of options granted on June 22, 2009 was $12.30 per share. The Company recorded non-cash share-based
compensation expense of $65,147 and nil for the years ended September 30, 2014 and 2015, respectively.
The fair value of the above option awards granted on June 22, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model
that uses the following assumptions.
Expected volatility
Expected dividends
Expected life
Risk-free interest rate
F-25
111.03%
Nil
7 years
3.69%
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
16.
Share-based Compensation (continued)
(i)
Options (continued)
On April 8, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase
20,000 shares of the Company’s common stock to certain key management with an exercise price of $12.15 per share and a contractual life of 7.5 years.
In accordance with the vesting provisions of the grants, the options will become vested and exercisable in eight equal installments beginning on each
quarter after September 30, 2010.
A summary of share option plan activity for these options during the years ended September 30, 2014 and 2015 is presented below:
Outstanding as of October 1, 2013
Exercised
Cancelled
Forfeited
Outstanding as of September 30, 2014 and 2015
Exercisable as of September 30, 2014 and 2015
$
Weighted
average
exercise
price per share
12.15
-
-
12.15
-
-
Number of
shares
20,000
-
-
(20,000 )
-
-
Weighted
average
remaining
contractual term
4 years
Aggregate
intrinsic
value
3.45 years
-
-
$
$
-
-
No non-cash share-based compensation expense was recognized for the year ended September 30, 2014.
(ii)
Restricted Shares
Restricted shares granted on June 22, 2009
Pursuant to the Plan and in accordance with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors, the Compensation
Committee of the Company’s Board of Directors recommended and approved the grant of 100,000 restricted shares to the Chief Executive Officer, Mr.
Li with a fair value of $14.05 per share on June 22, 2009. In accordance with the vesting schedule of the grant, the restricted shares will vest in twenty
equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009. As of September 30, 2014 and 2015, 100,000 shares
were vested and 40,000 and 100,000 shares, respectively, were issued to Mr. Li.
The Company recorded non-cash share-based compensation expense of $23,598 and nil for the years ended September 30, 2014 and 2015, respectively,
in respect of the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.
Restricted shares granted on June 30, 2015
On June 12, 2015, the shareholders of the Company approved the China BAK Battery, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) for
Employees, Directors and Consultants of the Company and its Affiliates. The maximum aggregate number of Shares that may be issued under the Plan
is ten million (10,000,000) Shares.
On June 30, 2015, pursuant to the 2015 Plan, the Compensation Committee of the Company’s Board of Directors granted an aggregate of 690,000
restricted shares of the Company’s common stock, par value $0.001, to certain employees, officers and directors of the Company with a fair value of
$3.24 per share on June 30, 2015. In accordance with the vesting schedule of the grant, the restricted shares will vest in twelve equal quarterly
installments on the last day of each fiscal quarter beginning on June 30, 2015 (i.e. last vesting period: quarter ended March 31, 2018).
The Company recorded non-cash share-based compensation expense of $750,167 for the year ended September 30, 2015, in respect of the restricted
shares granted on June 30, 2015, of which $614,267, $86,976 and $48,924 were allocated to general and administrative expenses, research and
development expenses and sales and marketing expenses, respectively. As of September 30, 2015, 115,000 shares were vested, and there was
unrecognized stock-based compensation of $1,485,433 associated to the above restricted shares. As of September 30, 2015, 32,498 vested shares were
issued. Up to the approval date of these financial statements, a further 56,667 vested shares were issued.
As the Company itself is an investment holding company which is not expected to generate operating profits to realize the tax benefits arising from its
net operating loss carried forward, no income tax benefits were recognized for such stock-based compensation cost under the stock option plan for the
years ended September 30, 2014 and 2015.
F-26
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
17.
(Loss) Earnings Per Share
The following is the calculation of (loss) earnings per share:
Net (loss) profit from continuing operations
Income from discontinued operations
Net profit
Weighted average shares used in basic computation (note)
Dilutive effect of unvested restricted shares
Weighted average shares used in diluted computation
(Loss) earnings per share – Basic
From continuing operations
From discontinued operations
(Loss) earnings per share – Diluted
From continuing operations
From discontinued operations
2014
(26,721,513) $
64,497,429
37,775,916
$
12,619,597
-
12,619,597
2015
14,042,689
1,831,237
15,873,926
12,718,388
162,733
12,881,121
(2.12) $
5.11
2.99
$
(2.12) $
5.11
2.99
$
1.10
0.14
1.24
1.09
0.14
1.23
$
$
$
$
$
$
Note:
Including (i) nil and 82,502 vested restricted shares granted pursuant to the 2015 Plan not yet issued as of September 30, 2014 and 2015,
respectively; and (ii) nil and 4,376,731 shares to be issued to the investors as of September 30, 2014 and 2015, respectively, on conversion of
loans pursuant to the Debt Conversion Agreement on September 29, 2015 (Note 1).
For the year ended September 30, 2014 and 2015, the outstanding 4,200 stock options were anti-dilutive and excluded from diluted (loss) earnings per
share.
18.
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and
unobservable inputs when measuring fair value. Certain current assets and current liabilities are financial instruments. Management believes their
carrying amounts are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their
expected realization and, if applicable, their current interest rates are equivalent to interest rates currently available. The three levels of valuation
hierarchy are defined as follows:
•
•
•
Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, pledged deposits, trade accounts and bills receivable, other
receivables, balances with former subsidiaries, short-term loans and other payables approximate their fair values because of the short maturity of these
instruments or the rate of interest of these instruments approximate the market rate of interest.
F-27
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
19.
Commitments and Contingencies
(i)
Capital Commitments
As of September 30, 2014 and 2015, the Company had the following contracted capital commitments:
For construction of buildings
For purchases of equipment
Capital injection to Dalian BAK Power and Dalian BAK TradingNote
2014
4,348,995
1,073,596
25,400,000
30,822,591
$
$
2015
1,819,977
68,718
15,553,656
17,442,351
$
$
Note:
Initially, BAK Asia was required to pay the remaining capital within two years, of the date of issuance of the subsidiary’s business license
according to PRC registration capital management rules. According to the revised PRC Companies Law which became effective on March 2014,
the time requirement of the registered capital contribution has been abolished. As such, BAK Asia has its discretion to consider the timing of the
registered capital contributions.
(ii)
Litigation
From time to time, the Company 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 proceeding set forth below, the Company is currently not aware of any such legal proceedings or claims that the Company
believe will have an adverse effect on our business, financial condition or operating results.
An individual named Steven R. Ruth filed suit against China BAK Battery, Inc. in United States District Court for the Western District of Texas in 2013
alleging breach of contract. The Company did not receive notice of this lawsuit and the plaintiff sought a default judgment, which the court granted in
January 2014. Accordingly, the court entered judgment in favor of Mr. Ruth in the amount of $553,774 inclusive of costs and attorneys’ fees (the “First
Judgment”).
Subsequent to the entry of the First Judgment, Mr. Ruth has made efforts to have the judgment enforced in Canada. On September 19, 2014, Mr. Ruth
also filed a second complaint in the United States District Court for the Western District of Texas. On November 12, 2014, a second default judgment
was entered against the Company in the amount of $553,774 for the First Judgment plus an additional $7,550 in attorneys’ fees. The second judgment is
inclusive of the amounts ordered in the First Judgment. BAK International thereafter agreed to indemnify the Company from any expenses, losses and
damages that were incurred and will be incurred by the Company due to the lawsuit filed by Mr. Ruth.
F-28
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
20.
Concentrations and Credit Risk
(a)
Concentrations
The Company had the following customers that individually comprised 10% or more of net revenue for the years ended September 30, 2014 and 2015 as
follows:
Tinno Mobile Technology Company Limited
Sichuan Pisen Electronics Co., Ltd
Guangdong Pisen Electronics Co., Ltd
BAK Tianjin
2014
2015
$
13,278,638
*
*
*
$
10.79%
*
*
*
*
6,036,173
2,252,816
1,470,579
*
43.41%
16.20%
10.58%
*
Comprised less than 10% of net revenue for the respective period.
The Company had the following customers that individually comprised 10% or more of accounts receivable as of September 30, 2014 and 2015 as
follows:
Sichuan Pisen Electronics Co., Ltd.
Guangdong Pisen Electronics Co., Ltd.
2014
2015
$
*
569,444
*
56.17%
$
3,146,177
763,738
65.93%
16.01%
After the disposal of BAK International (Note 1) and prior to the completion of the new manufacturing site in Dalian, the Company generated its
revenues from sale of batteries via subcontracting the production to BAK Tianjin, a former subsidiary. For the years ended September 30, 2014 and
2015, the Company purchased inventories of $3.3 million and $10.5 million from BAK Tianjin.
For the years ended September 30, 2014 and 2015, the Company generated revenue of
–
–
–
–
$18,030 and $1,377,004 from Shenzhen BAK, respectively;
$98,459 and $1,470,579 from BAK Tianjin, respectively;
nil and $17,063 from Zhengzhou BAK Battery Co., Ltd, a company with the common director of Mr. Li, the Company’s CEO; and
nil and $298,983 from Tianjin New Energy (Note 12).
For the years ended September 30, 2014 and 2015, the Company purchased inventories of $19,411 and $395,593 from Tianjin BAK New Energy, a
company with the common director of Mr. Li, the Company’s CEO.
(b)
Credit Risk
As of September 30, 2014 and 2015, substantially all of the Company’s cash and cash equivalents and pledged deposits were held by major financial
institutions located in the PRC, which management believes are of high credit quality.
For the credit risk related to trade accounts receivable, the Company performs ongoing credit evaluations of its customers and, if necessary, maintains
reserves for potential credit losses. Historically, such losses have been within management’s expectations.
F-29
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
21.
Segment Information
The Company used to engage in one business segment, the manufacture, commercialization and distribution of a wide variety of standard and
customized lithium ion rechargeable batteries for use in a wide array of applications. The Company manufactured five types of Li-ion rechargeable
batteries: aluminum-case cell, battery pack, cylindrical cell, lithium polymer cell and high-power lithium battery cell. The Company’s products are sold
to packing plants operated by third parties primarily for use in mobile phones and other electronic devices. Starting from the three months ended
December 31, 2013 and until June 30, 2014, the Company was also engaged in the business segment of property lease and management (see Note 1).
Net revenues from continuing operations for the years ended September 30, 2014 and 2015 were as follows:
Net revenues by product:
Prismatic cells
Aluminum-case cells
Battery packs
Cylindrical cells
Lithium polymer cells
High-power lithium battery cells
Net revenues by geographic area:
PRC Mainland
PRC Taiwan
Hong Kong, China
India
Others
2014
2015
$
$
$
$
24,486,486
61,799,998
9,277,848
17,145,635
10,304,113
123,014,080
2014
106,488,197
2,952,745
5,337,486
1,978,668
6,256,984
123,014,080
$
$
$
$
-
-
-
-
13,904,414
13,904,414
2015
13,904,414
-
-
-
-
13,904,414
Substantially all of the Company’s long-lived assets are located in the PRC.
22.
China BAK Battery, Inc. (Parent Company)
Under PRC regulations, subsidiaries in PRC (“the PRC subsidiaries”) may pay dividends only out of their accumulated profits, if any, determined in
accordance with PRC GAAP. In addition, the PRC subsidiaries are required to set aside at least 10% of their after tax net profits each year, if any, to
fund the statutory general reserve until the balance of the reserves reaches 50% of their registered capital. The statutory general reserves are not
distributable in the form of cash dividends to the Company and can be used to make up cumulative prior year losses, if any, and may be converted into
share capital by the issue of new shares to shareholders in proportion to their existing shareholdings, or by increasing the par value of the shares
currently held by them, provided that the reserve balance after such issue is not less than 25% of the registered capital. As of September 30, 2014 and
2015, additional transfers of $15,250,000 and $15,250,000 were required for Dalian BAK Power and Dalian BAK Trading before the statutory general
reserve reached 50% of the registered capital of the PRC subsidiaries, respectively. As of September 30, 2014 and 2015, there was no appropriation
from retained earnings and set aside for statutory general reserves by the PRC subsidiaries. BAK Dalian did not have after tax net profits since its
incorporation and therefore no appropriation was made to fund its statutory general reserve as of September 30, 2014 and 2015. Dalian BAK Power had
after tax profits of nil and $15,769,742 in fiscal 2014 and 2015, respectively.
Schedule I of Article 504 of Regulation SX requires the condensed financial information of the registrant (Parent Company) to be filed when the
restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.
For purposes of this test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of
consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent
company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign
government, etc.).
F-30
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
22.
China BAK Battery, Inc. (Parent Company) (continued)
SCHEDULE I – CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CHINA BAK BATTERY, INC.
PARENT COMPANY STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2015
REVENUE, net
OPERATING EXPENSES:
Salaries and consulting expenses
General and administrative
Total operating expenses
LOSS FROM OPERATIONS
OTHER INCOME (EXPENSE)
LOSS ATTRIBUTABLE TO PARENT COMPANY
EQUITY IN EARNINGS OF SUBSIDIARIES
NET INCOME AVAILABLE TO SHAREHOLDERS
CHINA BAK BATTERY, INC.
PARENT COMPANY BALANCE SHEETS
AS OF SEPTEMBER 30, 2014 AND 2015
ASSETS
CURRENT ASSETS:
Other receivables
Total current assets
Interests in subsidiaries
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses and other payables
Total current liabilities
Interests in subsidiaries
SHAREHOLDERS' EQUITY
Total liabilities and shareholders' equity
F-31
2014
2015
-
$
-
(190,286)
(812,355)
(1,002,641)
(1,002,641)
-
(1,002,641)
38,778,557
37,775,916
2014
7,000
7,000
-
7,000
1,637,684
1,637,684
2,704,939
(4,335,623)
7,000
$
$
$
$
$
(711,214)
(932,632)
(1,643,846)
(1,643,846)
-
(1,643,846)
17,517,772
15,873,926
2015
-
-
23,279,070
23,279,070
1,610,183
1,610,183
-
21,668,887
23,279,070
$
$
$
$
$
$
China BAK Battery, Inc. and subsidiaries
Notes to consolidated financial statements
For the years ended September 30, 2014 and 2015
(In US$ except for number of shares)
22.
China BAK Battery, Inc. (Parent Company) (continued)
CHINA BAK BATTERY, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income available to shareholders
Adjustments to reconcile net income to net cash used in operating activities:
Equity in earnings of subsidiaries
Provision for doubtful debts
Share based compensation
Change in operating assets and liabilities
Accrued expenses and other payable
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in interest in subsidiaries
Net cash provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash provided by financing activities
CHANGE IN CASH
CASH, beginning of year
CASH, end of year
2014
2015
$
37,775,916 $
15,873,926
(38,778,557)
-
88,745
266,034
(647,862)
(17,517,772)
7,000
750,167
(27,501)
(914,180)
647,862
647,862
914,180
914,180
-
-
-
$
-
$
-
-
-
-
The condensed parent company financial statements have been prepared using the equity method to account for its subsidiaries. Refer to the
consolidated financial statements and notes presented above for additional information and disclosures with respect to these financial statements.
F-32
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: January 13, 2016
SIGNATURES
CHINA BAK BATTERY, INC.
By:
By:
/s/ Xiangqian Li
Xiangqian Li
Chief Executive Officer
/s/ Wenwu Wang
Wenxu Wang
Interim Chief Financial Officer
In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Signature
/s/ Xiangqian Li
Xiangqian Li
/s/ Wenwu Wang
Wenxu Wang
/s/ Guosheng Wang
Guosheng Wang
/s/ Chunzhi Zhang
Chunzhi Zhang
/s/ Martha C. Agee
Martha C. Agee
/s/ Jianjun He
Jianjun He
Title
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date
January 13, 2016
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
January 13, 2016
Director
Director
Director
Director
January 13, 2016
January 13, 2016
January 13, 2016
January 13, 2016
Exhibit No. Description
3.1
Articles of Incorporation of the registrant (incorporated by reference to Exhibit 3.1 to the registrant’s Annual Report on Form 10-K filed on
December 8, 2006)
EXHIBIT INDEX
3.2
3.3
3.4
4.1
4.2
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
By-laws of the registrant (incorporated by reference to Exhibit 3.2 to the registrant’s Annual Report on Form 10-K filed on December 19, 2007)
Certificate of Change Pursuant to NRS 78.209 filed by the Company on October 22, 2012 (incorporated by reference to Exhibit 3.1 to the
registrant’s Current Report on Form 8-K filed on October 26, 2012)
Certificate of Amendment to Articles of Incorporation filed by the Company on June 23, 2015 (incorporated by reference to Exhibit 3.1 to the
registrant’s Current Report on Form 8-K filed on June 26, 2015)
China BAK Battery, Inc. Stock Option Plan (incorporated by reference to Exhibit 10.1 to the registrant’s Quarterly Report on Form 10-Q filed
on August 22, 2006)
Amendment No. 1 to the China BAK Battery, Inc. Stock Option Plan (incorporated by reference to Exhibit 4.1 to the registrant’s Quarterly
Report on Form 10-Q filed on August 8, 2008)
Amendment No. 2 to the China BAK Battery, Inc. Stock Option Plan (incorporated by reference to Appendix B to the registrant’s Definitive
Proxy Statement on Schedule 14A filed April 24, 2015)
China BAK Battery, Inc. 2015 Equity Incentive Plan (incorporated by reference to Appendix D to the registrant’s Definitive Proxy Statement on
Schedule 14A filed April 24, 2015).
Form of Debt Conversion Agreement (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on October
5, 2015)
Form of Director and Officer Indemnification Agreement (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form
8-K filed on January 3, 2011)
English Translation of Loan Agreement, dated December 17, 2013, by and between Shenzhen BAK and Mr. Jinghui Wang (incorporated by
reference to Exhibit 10.12 to the registrant’s Annual Report on Form 10-K filed on January 14, 2014)
Corporate Guarantee, dated January 14, 2014, by and between BAK International and Mr. Jinghui Wang (incorporated by reference to Exhibit
10.13 to the registrant’s Annual Report on Form 10-K filed on January 14, 2014).
Corporate Guarantee, dated January 14, 2014, by and between China BAK Battery, Inc. and Mr. Jinghui Wang (incorporated by reference to
Exhibit 10.14 to the registrant’s Annual Report on Form 10-K filed on January 14, 2014).
Share Mortgage, dated January 14, 2014, by and among China BAK Battery, Inc., BAK International and Mr. Jinghui Wang (incorporated by
reference to Exhibit 10.15 to the registrant’s Annual Report on Form 10-K filed on January 14, 2014).
English Translation of Loan Agreement, dated January 8, 2014, by and between Shenzhen BAK and Mr. Jinghui Wang (incorporated by
reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on March 14, 2014).
Corporate Guarantee, dated March 10, 2014, by and between BAK International and Mr. Jinghui Wang (incorporated by reference to Exhibit
10.2 to the registrant’s Current Report on Form 8-K filed on March 14, 2014).
Corporate Guarantee, dated March 10, 2014, by and between China BAK Battery, Inc. and Mr. Jinghui Wang (incorporated by reference to
Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on March 14, 2014).
10.10
Further Share Mortgage, dated March 10, 2014, by and among China BAK Battery, Inc., BAK International, Shenzhen BAK and Mr. Jinghui
Wang (incorporated by reference to Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on March 14, 2014).
Exhibit No. Description
10.11
Summary of Intellectual Property Rights License Agreement entered into by and among Shenzhen BAK Battery Co., Ltd. (the “Licensor”),
China BAK Battery, Inc. (the “Licensee 1”) and Dalian BAK Power Battery Co., Ltd (the “Licensee 2”), dated August 25, 2014 (incorporated
by reference to Exhibit 10.20 to the registrant’s Annual Report on Form 10-K filed on January 13, 2015).
14.1
21.1
23.1*
31.1*
31.2*
32.1*
32.2*
99.1
Code of Business Conduct and Ethics of the registrant (incorporated by reference to Exhibit 14.1 to the registrant’s Quarterly Report on Form
10-Q filed on August 22, 2006)
List of subsidiaries of the registrant (incorporated by reference to Exhibit 21.1 to the registrant’s Annual Report on Form 10-K filed on January
13, 2015).
Consent of Crowe Horwath (HK) CPA Limited
Certifications of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of Interim Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certifications of Interim Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Deed of Waiver and Release, dated July 4, 2014, by and among, Shenzhen BAK, the Company, BAK International and Mr. Wang (incorporated
by reference to Exhibit 99.1 to the registrant’s Quarterly Report on Form 10-Q filed on August 19, 2014).
101*
Interactive data files pursuant to Rule 405 of Regulation S-T.
* Filed herewith
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-148253, No. 333-151678 and No. 333-151985) and
the Registration Statements on Form S-8 (No. 333-137747, No. 333-153649, No. 333-153650 and No. 333-205218) of China BAK Battery, Inc. (the
“Company”) of our report dated January 13, 2016, relating to the Company's consolidated financial statements (which report expresses an unqualified opinion
with an emphasis paragraph on the substantial doubt about the Company's ability to continue as a going concern), which appears in this Annual Report on Form
10-K of the Company for the year ended September 30, 2015.
/s/ Crowe Horwath (HK) CPA Limited
Crowe Horwath (HK) CPA Limited
Hong Kong, China
January 13, 2016
I, Xiangqian Li, certify that:
CERTIFICATIONS
EXHIBIT 31.1
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of China BAK Battery, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: January 13, 2016
/s/ Xiangqian Li
Xiangqian Li
Chief Executive Officer
(Principal Executive Officer)
I, Wenwu Wang, certify that:
CERTIFICATIONS
EXHIBIT 31.2
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of China BAK Battery, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15
(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)
b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal
control over financial reporting.
Date: January 13, 2016
/s/ Wenwu Wang
Wenwu Wang
Interim Chief Financial Officer
(PrincipalFinancial and Accounting Officer)
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
The undersigned, Xiangqian Li, the Chief Executive Officer of CHINA BAK BATTERY, INC. (the “Company”), DOES HEREBY CERTIFY that:
1. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (the “Report”), fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement this 13th day of January, 2016.
/s/ Xiangqian Li
Xiangqian Li
Chief Executive Officer
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to China BAK Battery, Inc. and will be retained by China BAK Battery,
Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made
before or after the date hereof, regardless of any general incorporation language in such filing.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.2
The undersigned, Wenwu Wang, the Interim Chief Financial Officer of CHINA BAK BATTERY, INC. (the “Company”), DOES HEREBY CERTIFY
that:
1. The Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 (the “Report”), fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934; and
2. Information contained in the Report fairly presents, in all material respects, the financial condition and results of operation of the Company.
IN WITNESS WHEREOF, the undersigned has executed this statement this 13th day of January, 2016.
/s/ Wenwu Wang
Wenwu Wang
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to China BAK Battery, Inc. and will be retained by China BAK Battery,
Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
The forgoing certification is being furnished to the Securities and Exchange Commission pursuant to § 18 U.S.C. Section 1350. It is not being filed for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made
before or after the date hereof, regardless of any general incorporation language in such filing.