CBAK Energy Technology, Inc.
Annual Report 2016

Plain-text annual report

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, 2016 [ ] 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, China, 116450 (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, 2016 (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 $25.8 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 19,600,469 shares of the registrant’s common stock outstanding as of January 9, 2017. 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. Item 3. Item 4. Item 5. Item 6. Item 7. Properties. Legal Proceedings. Mine Safety Disclosures. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion And Analysis Of Financial Condition And Results Of Operations. PART II Item 7A. Quantitative And Qualitative Disclosures About Market Risk. Item 8. Item 9. Financial Statements And Supplementary Data. 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 i 2 9 27 27 28 28 29 30 30 39 39 39 39 41 42 47 50 53 53 55 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 • • • • • • • • • • “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. 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: • • • • • • • • • • • • • 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 its 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: (cid:122) Electric vehicles (“EV”), such as electric cars, electric buses, hybrid electric cars and buses; (cid:122) Light electric vehicles (“LEV”), such as electric bicycles, electric motors, sight-seeing cars; and (cid:122) 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 other manufacturers until our Dalian manufacturing facility can fulfill our customers’ needs. For the fiscal year ended September 30, 2016, Dalian BAK Power purchased batteries of approximately of $2.7 million from BAK Tianjin. We generated revenues of $10.4 million and $13.9 million for the fiscal years ended September 30, 2016 and 2015, respectively. We had a net loss of $12.7 million in 2016 and a net profit of $15.9 million in 2015. As of September 30, 2016, we had an accumulated deficit of $139.8 million and net assets of $15.1 million. We had a working capital deficiency and accumulated deficit from recurring net losses and short-term debt obligations maturing in less than one year as of September 30, 2016. On June 14, 2016, we renewed our banking facilities from Bank of Dandong for loans with a maximum amount of RMB130 million (approximately $19.5 million), including three-year long-term loans and three-year revolving bank acceptance and letters of credit bills for the period from June 13, 2016 to June 12, 2019. The banking facilities were guaranteed by Mr. Yunfei Li (“Mr. Li”), our CEO, and Ms. Qinghui Yuan, Mr. Li’s wife, Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, Shenzhen BAK Battery Co., Ltd., our former subsidiary (“Shenzhen BAK”). The facilities were also secured by part of our Dalian site’s prepaid land use rights, buildings, construction in progress, machinery and equipment and pledged deposits. Under the banking facilities, from June to September 2016, we borrowed various three-year term bank loans that totaled RMB126.8 million (approximately $19.0 million), bearing fixed interest at 7.2% per annum. We also borrowed a series of revolving bank acceptance totaled $0.6 million from Bank of Dandong under the credit facilities, and bank deposit of 50% was required to secure against these bank acceptance bills. On July 6, 2016, we obtained banking facilities from Bank of Dalian for loans with a maximum amount of RMB10 million (approximately $1.5 million) and bank acceptance bills of RMB40 million (approximately $6.0 million) to July 2017. The banking facilities were guaranteed by Mr. Li, our CEO, and Ms. Qinghui Yuan, Mr. Li’s wife, and Shenzhen BAK. Under the banking facilities, on July 6, 2016 we borrowed one year short-term loan of RMB10 million (approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum. We also borrowed revolving bank acceptance totaled $6.0 million, and bank deposit of 50% was required to secure against these bank acceptance bills. In June 2016, we received advances in the aggregate of $2.9 million from Mr. Jiping Zhou and Mr. Dawei Li. These advances were unsecured, non-interest bearing and repayable on demand. On July 8, 2016, we received further advances of $2.6 million from Mr. Jiping Zhou. On July 28, 2016, to convert these advances into equity interests in our Company, we entered into securities purchase agreements with Mr. Jiping Zhou and Mr. Dawei Li to issue and sell an aggregate of 2,206,640 shares of our common stock, at $2.5 per share, for an aggregate consideration of approximately $5.52 million. On August 17, 2016, we issued these shares to the investors. 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. 2 To promote the development of new energy electric vehicles, in April 2015, the central government of China issued Notice of Financial Support Policies for the Promotion of New Energy Vehicles in 2016-2020, which regulated favorable government subsidies for the new energy electric vehicles for years from 2016 to 2020. It led to the explosive growth in the production and selling of new electric vehicles in 2015. However, in January 2016, as it was reported that there were widespread frauds involved in obtaining government subsidies, the central government launched investigations among the electric vehicles industry. Before the completion of the investigation, the subsidies for 2015 were ceased to be granted to the manufacturers of electric vehicles, and it was said that the subsidies policy for 2016 to 2020 would be revised accordingly. Due to the continued investigation and unclear government policies, almost all the new energy electric vehicle manufacturers suspended or decreased the production and selling of electric vehicles in 2016. Accordingly, the production and selling of power batteries for use in electric vehicles dramatically decreased in 2016. In November 2016 the central government announced the result of investigation, including the list of manufacturers of electric vehicles who committed alleged frauds and the related penalties. On December 29, 2016, the Ministry of Finance of China finally issued the revised subsidy policy named Notice of Revision to Financial Support Policies for the Promotion of New Energy Vehicles in 2016-2020, which revised the subsidies standard to be based on cost and technology of the power batteries, and set up the maximum amount of the subsidies from the central and local governments. The revised subsidy policy also raised the standard and threshold for the quality of electric vehicles and power batteries, confirmed the responsibility of the manufacturers of electric vehicles, and strengthened the penalty system. In March 2015, the Ministry of Industry and Information Technology of China (the “MIIT”) issued the Requirements of the Industry Standards for the Auto Power Storage Batteries ("Requirements"), which are applicable to auto power battery manufacturers located in China. In order to be certified as qualified manufacturers under Requirements, manufacturers are required to be examined by quality inspecting agencies appointed by Administration of Quality Inspection under Requirements after the manufacturers have obtained the following reports and certificates: 1. Environmental Acceptance Report; 2. Fire Acceptance Report; 3. New National Standard Certificate of Power Battery: GB/T 31484-2015, GB/T 31485-2015 and GB/T 31486-2015; 4. OHSAS 18001 Occupational Health and Safety Management System; 5. ISO14001 Environmental Management System; and 6. Occupational Health Report Occupational Health Report. We have obtained all the above listed required reports and certificates. While we believe that we meet all of the conditions listed under the Requirements, there is no assurance that the certification will be granted to us by the MIIT. During the transition period in 2015 and the beginning of 2016, electric automobile manufacturers were able to obtain subsidies from the governments even though their power battery suppliers were not as qualified manufacturers under the Requirements. Subsequent to that period and prior to obtaining the certification from the MIIT, we have been cooperating with Shenzhen BAK, our former subsidiary, or other qualified companies under the Requirements, by selling our key materials to those battery manufacturers for them to manufacture, pack, test and use their own process produce and sell end products in compliance with the Requirements to electric automobile manufacturers. From September 2016, the MIIT ceased to certify auto power battery manufacturers under the Requirements. Also it is reported that the compliance with Requirements will not be deemed as a precondition for qualified manufacturers of power batteries for use in electric vehicles. In the newly issued Notice of Revision to Financial Support Policies for the Promotion of New Energy Vehicles in 2016-2020, compliance with the Requirements was not listed as a precondition for qualified manufacturers of power batteries to be used in electric vehicles to obtain government subsidies. 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: 3 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 uninterruptible power supply, or 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 * Bracketed numbers denote number of cells per particular battery. Key High Power Lithium Battery Applications 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 ] 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. 4 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. After explosive growth in 2015, the production and sales of new energy vehicles continued to grow tremendously in 2016. According to China Association of Automobile Manufacturers, from January to October 2016, the production of new energy vehicles in China reached 355,000 units - up 77.9 percent year-on-year; and sales in China reached 337,000 units - up 82.2 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 MIIT, from January to September 2016, the production of electric bicycles in China was 22.6 million units, up 4.6% year-on-year. 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. Starting from October 2015, we generated revenues from high-power lithium battery cells manufactured by Dalian BAK Power as well as batteries outsourced from BAK Tianjin and other manufacturers. The following table sets forth the breakdown of our net revenues by product types: 5 Year Ended September 30, 2015 % of Net Revenues Amount 2016 % of Net Revenues Amount (in thousands of U.S. dollars, except percentages) $ $ - - 13,904 13,904 - - 100.00 100.00 $ $ 6,488 553 3,328 10,369 62.57 5.33 32.10 100.00 High-power lithium batteries used in: Electric vehicles Light electric vehicles Uninterruptable supplies Total 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, 2016, our key raw material suppliers were as follows: Materials NCM Cathode materials Anode materials BMS Solvent NMP Electrolyte Aluminum foil Cases and caps Copper sheet Copper foil NCM Cathode materials Main Suppliers Shenzhen Tianjiao Technology, Co., Ltd. Huzhou Chuangya Power Battery Material Co., Ltd Chang’s Ascending Enterprise Co., Ltd. Shenzhen Klclear Technology Co., Ltd. MYJ Chemical Co., Ltd. Dongguan Shanshan Battery Material Co., Ltd Shanghai Huxin Aluminum Foil Products Co., Ltd Changzhou Wujinzhongrui Electric Co., Ltd Dalian Desen Metal Products Co.,Ltd Lingbao Wason Copper Foil Co., Ltd Shenzhen Tianjiao Technology, Co., Ltd. Huzhou Chuangya Power Battery Material 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, 2016 was purchased from the following suppliers: 6 Instruments Winder Charge and Discharge Equipment Electrode Preparing Machine Laser welding machine Infusing Machine Coating Machine Automatic Line Machine Vacuum Oven Dehumidifier Intellectual Property Main Suppliers Kaido Manufacturing Co., Ltd. Zhejiang Hangke Technologies Co., Ltd Zhuhai Higrand Electronic Technology Inc. United Winners Laser Co., Ltd. Kinlo Technology & System (Shenzhen) Co. Ltd. Shenzhen Haoneng Technology Co., Ltd. Shenzhen Zhongji Automation Co., Ltd. Wujiang Jiangling Equipment Co., Ltd Hangzhou Dry Air Treatment Equipment Co., Ltd. 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 obtained as of June 30, 2014 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 June 30, 2014, 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, 2016, Dalian BAK Power has 20 patents including 18 utility model patents and 2 patents for invention in the PRC. 17 of these patents were acquired by BAK Asia, from an unrelated third party at RMB1 and were 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 Pingxiang Anyuan Tourist Bus Co., Ltd., Ltd, Shandong Tangjun Electric Co., Ltd, Chery Automobile Co. Ltd., FAW Bus and Coach Co., Ltd., Dongfeng Special Automobile Co., Ltd., Dongfeng Xiangyang Touring Car 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 Yangzhou Fengwei New Energy Technology Co., Ltd., 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. 7 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. Year Ended September 30, 2015 % of Net Revenues Amount 2016 % of Net Revenues Amount (in thousands of U.S. dollars, except percentages) $ $ 13,904 - - - - 13,904 100.00 - - - - 100.00 $ $ 9,017 457 413 258 224 10,369 86.96 4.41 3.98 2.49 2.16 100.00 Mainland China Europe PRC Taiwan Korea Israel Total Competition 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, 2016: Product Type EV battery Competitors Japan: Korea: China: LEV battery China: Panasonic Corporation Samsung Electronics Co., Ltd. LG Chemical Tianjin Lishen Battery Joint-stock Co., Ltd Contemporary Amperex Technology Co., Limited BYD Co. Ltd Hefei Guoxuan Hi-Tech Power Energy Co., Ltd Amperex Technology Limited 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, 2015 and 2016, our expenditures for research and development activities were $1.0 million and $1.9 million, respectively, or 7.2% and 18.1% of net revenues, respectively. 8 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 631 employees as of September 30, 2016. 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 357 93 14 167 631 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. 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 we have relocated 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. We are currently constructing two more plants and have completed their civil work and the product lines are expected to be completed by June 2017, 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 and short-term debt obligations as of September 30, 2016. 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 June and July 2016, we obtained advances with an aggregate amount of $5.5 million from potential investors and converted these loans to common stock in August 2016. On June 14, 2016, we renewed our banking facilities from Bank of Dandong to provide loans and bank acceptances up to a total amount of $19.5 million with a term expiring on June 12, 2019. On July 6, 2016, we obtained banking facilities from Bank of Dalian to provide loans and bank acceptances up to a total amount of $7.5 million with a term expiring in July 2017. As of September 30, 2016, we had unutilized committed banking facilities of $0.2 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. 9 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. 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. 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. 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: • • • • • 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. 10 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. 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. 11 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: (cid:122) 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; (cid:122) 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; (cid:122) delays or denial of required approvals by relevant government authorities; (cid:122) diversion of significant management attention and other resources; and (cid:122) 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. 12 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 $12.9 million and $5.9 million in fiscal years 2015 and 2016, 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 2017. 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 15- day 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. 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. 13 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 $10.1 per kilogram and $12.2 per kilogram during the years ended September 30, 2015 and 2016, 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, Hefei Guoxuan Hi-Tech Power Energy Co., Ltd and Chaowei Power Holdings Limited. 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. 14 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 83.8% and 78.9% of our revenues for the years ended September 30, 2015 and 2016, 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, 2015 and 2016, we derived nil and 13.0%, 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: • • • • • • fluctuations in currency exchange rates; 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. 15 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. Yunfei 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. 16 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, 2016, Dalian BAK Power only owns 20 patents including 18 utility model patents and 2 patents for invention in the PRC. During fiscal year 2016, Dalian BAK Power obtained 3 patents. 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 2017. 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, 2010 and 2013. 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 sufficient insurance coverage against damages or losses of our Dalian facilities. We currently have insurance for our pledged machinery and equipment and completed constructions of buildings located at our Dalian facilities. We do not have insurance for our constructions in progress of buildings. 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. 17 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. 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. In September 2016, we implemented training on internal control and enterprise risk management. In November 2016, we implemented training on U.S. GAAP accounting guidelines. 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. 18 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. 19 We may be adversely affected by the outcome of litigation against us in China. On July 7, 2016, Shenzhen Huijie Purification System Engineering Co., Ltd (“Shenzhen Huijie”), one of the Company’s contractors, filed a lawsuit against Dalian BAK Power in the Peoples’ Court of Zhuanghe City, Dalian for the failure to pay pursuant to the terms of the contract and entrusted part of the project of the contract to a third party without their prior consent. The plaintiff sought a total amount of $1,263,722 (RMB 8,430,792), including construction costs of $0.9 million (RMB6.3 million, which we already accrued for at June 30, 2016), interest of $30,689 (RMB0.2 million) and compensation of $0.3 million (RMB1.9 million). On September 7, 2016, upon the request of Shenzhen Huijie for property preservation, the Court froze Dalian BAK’s bank deposits totaling $1,263,722 (RMB 8,430,792) for a period of one year. Although we believe that the plaintiff's claims for interest and compensation are without merit and we are vigorously defending ourselves, there is no assurance that we will be successful in the lawsuit. In the event that plaintiff prevails in the lawsuit, unfavorable court judgment could have an adverse effect on our business, financial condition and results of operations. 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. 20 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. 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. 21 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. 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 anti-trust 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. 22 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. 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. 23 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.” 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. 24 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. 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. 25 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 9, 2017, the closing price of our common stock was $1.65 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. 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 16.1% of our outstanding common stock and may be able to control our management and affairs. Mr. Yunfei Li, our president and chief executive officer and chairman of our board, and our other executive officers and directors beneficially own an aggregate of 16. 1% 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. 26 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. ITEM 2. PROPERTIES. We have completed the construction of the facilities in our Dalian site with a total area of 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 are also in the progress to construct two more buildings with a total area of 29,908 square meters including a manufacturing plant and a warehouse of finished goods. 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, 2016 based on use: Facility Constructions completed Constructions in progress Dalian BAK Power facilities Usage Manufacturing R&D and administrative Warehousing Other facilities Subtotal Manufacturing Warehousing Subtotal Total Area (m2 ) 31,202 3,231 4,765 902 40,100 16,908 13,000 29,908 70,008 We currently have insurance for the completed constructions. We expect we will purchase related insurance for the remaining buildings after the construction is completed and the property ownership certificates are obtained. 27 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 $553,774 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 China BAK Battery, Inc. in the amount of $553,774 for the First Judgment plus an additional $7,550 in attorneys’ fees (the “Second Judgment”). 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. On December 30, 2015, Mr. Ruth, China BAK Battery, Inc., BAK International Limited, Shenzhen BAK Battery Co., Ltd. and Shenzhen BAK Power Battery Co., Ltd. entered into a settlement and release agreement, pursuant to which, among others, the parties irrevocably released and forever discharged each other from and against any and all liabilities, claims, actions, cause of actions and damages, including any and all claims against the parties in the First Judgement, the Second Judgement and certain recognition action commenced by Mr. Ruth in the Supreme Court of British Columbia of Canada. On May 6, 2016, the Supreme Court of British Columbia issued a consent dismissal order upon the applications of the parties and dismissed the recognition action. On July 7, 2016, Shenzhen Huijie Purification System Engineering Co., Ltd (“Shenzhen Huijie”), one of our contractors, filed a lawsuit against Dalian BAK Power in the Peoples’ Court of Zhuanghe City, Dalian for the failure to pay pursuant to the terms of the contract and entrusted part of the project of the contract to a third party without their prior consent. The plaintiff sought a total amount of $1,263,722 (RMB8,430,792), including construction costs of $0.9 million (RMB6.3 million), interest of $30,689 (RMB0.2 million) and compensation of $0.3 million (RMB1.9 million), which we already accrued for as of September 30, 2016. On September 7, 2016, upon the request of Shenzhen Huijie, the Court froze Dalian BAK’s bank deposits totaling $1,263,722 (RMB 8,430,792) for a period of one year. We intend to vigorously defend ourselves in this lawsuit. ITEM 4. MINE SAFETY DISCLOSURES. Not applicable. 28 ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY PART II SECURITIES. 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, 2016 First Quarter Second Quarter Third Quarter Fourth Quarter Year Ended September 30, 2015 First Quarter Second Quarter Third Quarter Fourth Quarter Closing Prices(1) High Low $ $ $ $ $ $ $ $ 3.75 2.65 2.98 3.08 3.44 3.52 4.67 3.23 $ $ $ $ $ $ $ $ 2.21 2.00 2.28 2.11 1.79 1.75 3.12 1.58 (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 9, 2017, there were approximately 46 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. 29 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 2016 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 2016 fiscal year. Purchases of Equity Securities No repurchases of our common stock were made during the fiscal year of 2016. 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 $13.9 million and $10.4 million for the fiscal years ended September 30, 2015 and 2016, respectively, and net profit from continuing operations of $14.0 million and net loss of $12.7 million during the same years, respectively. 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 had been 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, 2016, Dalian BAK Power purchased batteries of approximately $2.7 million and $5.6 million from BAK Tianjin and Shenzhen BAK, respectively. During the fiscal year 2016, we received advances of approximately $5.5 million from certain investors and on July 28, 2016, we entered into securities purchase agreements with these investors and converted such loans into equity interests by issuing 2.2 million shares of our common stock to these investors on August 17, 2016. In June 2016, we renewed our banking facilities from Bank of Dandong for loans in a maximum amount of $19.5 million including three-year long-term loans and three-year revolving bank acceptance and letters of credit bills for the period from June 13, 2016 to June 12, 2019. The banking facilities were guaranteed by Mr. Yunfei Li (“Mr. Li”), our CEO, Ms. Qinghui Yuan, Mr. Li’s wife, Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, and Shenzhen BAK. The facilities were also secured by part of our Dalian site’s prepaid land use rights, buildings, construction in progress, machinery and equipment and pledged deposits. Under the banking facilities, from June to September 2016, we borrowed various three-year term bank loans that totaled RMB126.8 million (approximately $19.0 million), bearing fixed interest at 7.2% per annum. We also borrowed a series of revolving bank acceptance totaled $0.5 million from Bank of Dandong under the credit facilities. 30 On July 6, 2016, we obtained banking facilities from Bank of Dalian for loans in a maximum amount of RMB10 million (approximately $1.5 million) and bank acceptance bills of RMB40 million (approximately $6.0 million) to July 2017. The banking facilities were guaranteed by Mr. Li, our CEO, Ms. Qinghui Yuan, Mr. Li’s wife, and Shenzhen BAK. Under the banking facilities, on July 6, 2016 we borrowed one year short-term loan of RMB10 million (approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum. We also borrowed revolving bank acceptance totaled $6.0 million. As of September 30, 2016, we had unutilized committed banking facilities of $0.2 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. 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. These consolidated financial statements have been prepared assuming we 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 our ability to continue as a going concern. 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. Research and development expenses. Research and development expenses primarily consist of remuneration for R&D staff, share-based compensation, depreciation and R&D material costs. For the years ended September 30, 2015 and 2016, we recorded research and development expenses of $1,001,889 and $1,879,869, 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. 31 General and administrative expenses. General and administrative expenses consist primarily of employee remuneration, share-based compensation, professional fees, insurance, benefits, general office expenses, depreciation and liquidated damage charges. 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 Hong Kong subsidiary BAK Asia is subject to profits tax at a rate of 16.5%. However, because we did not have any assessable income derived from or arising in Hong Kong, BAK Asia had not paid any such tax. 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, 2015 2016 Change $ % Net revenues Cost of revenues Gross profit (loss) Operating expenses: Research and development expenses Sales and marketing expenses General and administrative expenses Provision for doubtful accounts Total operating expenses Operating loss Government grant income Other (expense) income, net Profit (loss) before income tax and discontinued operations Income tax expense Net profit (loss) from continuing operations, net of tax Income from discontinued operations, net of tax Net profit (loss) $ $ 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 $ 10,369 (12,100) (1,731) 1,880 995 4,738 2,779 10,392 (12,123) - 143 (11,980) (672) (12,652) - (12,652) (3,535) 854 (2,681) 878 860 1,408 2,647 5,793 (8,474) (23,103) 234 (31,343) 4,649 (26,694) (1,831) (28,525) (25.42) 6.59 (282.21) 87.62 637.04 42.28 2,005.30 125.96 (232.23) (100.00) 257.14 (161.87) 87.37 (190.10) (100.00) (179.71) Net revenues. Net revenues were $10.4 million for the fiscal year ended September 30, 2016, as compared to $13.9 million for the fiscal year of 2015, a decrease of $3.5 million, or 25.4% . 32 The following table sets forth the breakdown of our net revenues by end-product applications derived from high-power lithium batteries. (All amounts, other than percentage, in thousands of U.S. dollars) High power lithium batteries used in: Electric vehicles Light electric vehicles Uninterruptable supplies Year ended September 30, 2015 2016 Change $ % $ $ - - 13,904 13,904 $ $ 6,488 553 3,328 10,369 6,488 553 (10,576) (3,535) 100.00 100.00 (76.06) (25.42) Net revenues from sales of batteries for electric vehicles were $6.5 million for the fiscal year ended September 30, 2016, as compared to nil for fiscal year 2015. We started producing batteries for electric vehicles in our Dalian facilities at the end of fiscal year 2015. Our revenue from sales of batteries for electric vehicles for the fiscal year 2016 was negatively affected by the delay in the announcement of the government subsidy policy for new energy vehicles in 2016 and our application for the eligible manufacturers of MIIT as discussed above. Net revenues from sales of batteries for light electric vehicles was $0.6 million for the fiscal year ended September 30, 2016, as compared nil for fiscal year 2015. Net revenues from sales of batteries for uninterruptable supplies was $3.3 million for the fiscal year ended September 30, 2016, as compared $13.9 million for fiscal year 2015, a decrease of $10.6 million, or 76.1% . We focused on manufacturing of batteries for electric vehicles in fiscal 2016 and therefore sales of batteries for uninterruptable power supplies decreased significantly. Cost of revenues. Cost of revenues decreased to $12.1 million for the year ended September 30, 2016, as compared to $13.0 million for fiscal year 2015, a decrease of $0.8 million, or 6.6% . Included in cost of revenues was a write down of inventories of $0.2 million and $0.4 million for the years ended September 30, 2015 and 2016, respectively. 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. Gross profit (loss). Gross loss for the year ended September 30, 2016 was $1.7 million, or 16.7% of net revenues as compared to a gross profit of $1.0 million, or 6.8% of net revenues, for fiscal year 2015. Our new Dalian facilities commenced manufacturing activities in July 2015. Inefficiency was inevitable due to the operation of the newly installed machinery and newly hired production staff. As a result, we incurred a gross loss for fiscal year 2016. Research and development expenses. Research and development expenses increased to $1.9 million for the year ended September 30, 2016, as compared to $1.0 million for fiscal year 2015, an increase of $0.9 million, or 87.6% . This increase was mainly because the materials and consumables used in research and development increased by $0.8 million for fiscal year 2016 compared with fiscal year 2015. We put more resources on developing batteries and modules to fulfill the demand of electric vehicles manufacturers to achieve more orders. Sales and marketing expenses. Sales and marketing expenses increased to $1.0 million for the year ended September 30, 2016, as compared to $0.1 million for fiscal year 2015, an increase of $0.9 million, or 634.7%, primarily due to the increase in salary and wages, product warranty expense, travelling expenses by $0.2 million, $0.2 million and $0.2 million, respectively, for the year ended September 30, 2016 as compared with the same period 2015. We recruited more sales and marketing stuff to develop customers in fiscal year 2016. In fiscal 2016, we made provision for warranty expenses of $0.2 million according to our after sale service maintenance policy on electric vehicle battery products. We also incurred $0.2 million in travelling and promotion expenses for our overseas sales during fiscal 2016 while we did not have overseas sales in fiscal 2015. As a percentage of revenues, sales and marketing expenses have increased to 9.6% for the year ended September 30, 2016, from 1.0% for the same period in 2015. General and administrative expenses. General and administrative expenses increased to $4.7 million for the year ended September 30, 2016, as compared to $3.3 million for fiscal year 2015, an increase of $1.4 million, or 42.3% . The increase in general and administrative expenses was mainly because we expanded our administrative and management teams after we commenced our commercial operations in Dalian. As a result, the salary and wages including share based compensation expense, increased $1.2 million for the year ended September 30, 2016 as compared with 2015. 33 Provision for doubtful accounts. Provision for doubtful accounts increased to $2.8 million for the year ended September 30, 2016, as compared to $0.1 million for the fiscal year 2015, an increase of $2.7 million, or 2005.3%. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Operating loss. As a result of the above, our operating loss totaled $12.0 million for the year ended September 30, 2016, as compared to $3.7 million for the fiscal year 2015, an increase of $8.4 million or 232.2%. Government grant income. Government grant income decreased to nil for the fiscal year ended September 30, 2016, as compared to $23.1 million for the same period last year. The government grant income in 2015 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 costs and the projected operating loss incurred due to the relocation to our new facilities in Dalian in fiscal year 2015. Income tax expense. Income tax expense was approximately $672,000 for the fiscal year 2016, primarily due to the significantly uncertain tax position arose from the subsidies granted by the local government to the Company’s PRC subsidiary, as compared to income tax expense of $5.3 million income tax expense for 2015. Income tax expense in fiscal 2015 was mainly due to the income tax impact of the government subsidies recognized. Income from discontinued operations, net of tax. Income from discontinued operations, net of tax was nil for the fiscal year ended September 30, 2016 as compared to $1.8 million for 2015. 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. Net profit (loss). As a result of the foregoing, we had a net loss of $12.7 million for the year ended September 30, 2016, compared to a net profit of $15.9 million for the year ended September 30, 2015. Liquidity and Capital Resources We had 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, advance from our related and unrelated parties, investors and issuance of capital stock. We incurred a net loss of $12.7 million in fiscal 2016. As of September 30, 2016, we had cash and cash equivalents of $2.0 million. Our total current assets were $32.3 million and our total current liabilities were $47.6 million, resulting in a net working capital deficiency of $15.3 million. These factors raise substantial doubts about our ability to continue as a going concern. During the fiscal year of 2016, we received advances of approximately $5.5 million from certain investors. We entered into securities purchase agreements with these investors on July 28, 2016 and converted such loans into equity interests by issuing an aggregate of 2,206,640 shares of our common stock to the investors on August 17, 2016. On June 14, 2016, we renewed our banking facility letter from Bank of Dandong for loans in a maximum amount of RMB130.0 million (approximately $19.5 million), including three-year long-term loans and three-year revolving bank acceptance and letters of credit bills for the period from June 13, 2016 to June 12, 2019. The banking facilities were guaranteed by Mr. Li, our CEO, Ms. Qinghui Yuan, Mr. Li’s wife, Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, and Shenzhen BAK. The facilities were also secured by part of our Dalian site’s prepaid land use rights, buildings, construction in progress, machinery and equipment and pledged deposits. Under the banking facilities, from June to September 2016, we borrowed various three-year term bank loans that totaled RMB126.8 million (approximately $19.0 million), bearing fixed interest at 7.2% per annum. As of September 30, 2016, we also borrowed a series of revolving bank acceptance totaled $0.5 million from Bank of Dandong under the credit facilities (50% pledged deposit was required). On July 6, 2016, we entered into a banking facility letter with Bank of Dalian for loans in a maximum amount of RMB10 million (approximately $1.5 million) and bank acceptance bills of RMB40 million (approximately $6.0 million) expiring July 2017. The banking facilities were guaranteed by Mr. Li, our CEO, Ms. Qinghui Yuan, Mr. Li’s wife, and Shenzhen BAK. Under the banking facilities, on July 6, 2016 we borrowed one year short-term loan of RMB10 million (approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum. We also borrowed revolving bank acceptance totaled $6.0 million (50% pledged deposit was required). 34 As of September 30, 2016, we had unutilized committed banking facilities of $0.2 million. We are currently expanding our product lines and manufacturing capacity in our Dalian plant, which require more funding to finance the expansion. 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, if required, 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. 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 increase (decrease) 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 2016 (2,037) $ (5,502) 13,344 (34) 5,771 992 6,763 $ (13,888) (9,114) 18,511 (319) (4,810) 6,763 1,953 $ $ Net cash used in operating activities was $13.9 million in the year ended September 30, 2016, as compared with net cash used in operating activities of $2.0 million in fiscal year 2015. The increase of $11.9 million was mainly attributable to our net loss of $12.7 million and an increase of inventories of $14.4 million, offset by an increase in trade accounts and bills payable of $5.5 million and an increase in payables to our former subsidiaries of $5.1 million. Investing Activities Net cash used in investing activities increased to $9.1 million in fiscal 2016, from $5.5 million in fiscal 2015. The net cash used in investing activities for the year ended September 30, 2016 mainly consisted of the net cash payments of $5.9 million to construct the Dalian facilities, including construction and purchase of equipment. The net cash used in investing activities for the year ended September 30, 2015 was mainly attributable to a net cash payment of $12.9 million to construct the Dalian facilities, offset by the receipt of government grant of $7.4 million. Financing Activities Net cash provided by financing activities was $18.5 million in fiscal 2016, compared with net cash provided by financing activities of $13.3 million in fiscal 2015. In fiscal 2016, we obtained bank loans of $19.4 million, borrowed $4.3 million from related and unrelated parties, and issued common stock for $5.5 million, offset by repayment of short term bank borrowings of $10.7 million. In fiscal 2015, we received $12.9 million of short term bank loans, $5.3 million other short term loans from related and unrelated parties, and $9.8 million from investors, offset by repayment of short term bank borrowings of $4.8 million and an repayment of $9.9 million to related and unrelated parties. 35 As of September 30, 2016, the principal amounts outstanding under our credit facilities and lines of credit were as follows: (All amounts in thousands of U.S. dollars) Long-term credit facilities: Bank of Dandong Short-term credit facilities: Bank of Dandong Bank of Dalian Total Maximum amount available Amount borrowed $ $ $ 19,179 $ 19,007 307 7,495 $ 7,802 307 7,495 7,802 26,981 $ 26,809 For the fiscal year 2016, we obtained $5.5 million from the issuance of 2,206,640 shares of common stock to certain investors. Capital Expenditures We incurred capital expenditures of $5.9 million and $12.9 million in fiscal years 2016 and 2015, respectively. Our capital expenditures in 2016 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 intangible assets Total capital expenditure Year Ended September 30, 2015 2016 $ $ 12,852 29 12,881 $ $ 5,927 - 5,927 We estimate that our total capital expenditures in fiscal year 2017 will reach approximately $23.5 million. Such funds will be used to construct a new plant with 2 product lines and a new warehouse and battery module packing lines. Contractual Obligations and Commercial Commitments The following table sets forth our contractual obligations and commercial commitments as of September 30, 2016: Contractual Obligations Short-term bank loans Long-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 bank loans Total $ $ (All amounts in thousands of U.S. dollars) Total Less than 1 year Payments Due by Period 1-3 years 3-5 years More than 5 years 1,499 19,006 10,886 4,306 85 9,896 3,303 470 3,767 53,218 $ $ 1,499 - 10,886 4,306 85 9,896 3,303 470 1,443 31,888 $ $ 36 - 19,006 - - - - - - 2,324 21,330 $ $ - - - - - - - - - - $ $ - - - - - - - - - - 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, 2016. 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. 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. 37 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 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. 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. Share-based Compensation We adopted the provisions of ASC Topic 718 which requires us 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). ASC Topic 718 also requires us 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 us 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 our listed common stocks in the United States and other relevant market information. We use 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. 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. 38 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 6.3564 6.2224 6.6714 6.5325 RMB per U.S. Dollar 2015 2016 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. The disclosure required under this section was previously reported as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, on a Current Report on Form 8-K filed with the Securities and Exchange Commission on September 29, 2016. 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 Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. 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 our Interim 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. Management conducted its evaluation of disclosure controls and procedures under the supervision of our Chief Executive Officer and our Interim 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, 2016. 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 our Interim 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: 39 • • • 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, 2016. 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 our Interim Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of September 30, 2016 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. In September 2016, we implemented training on internal control and enterprise risk management. In November 2016, we implemented training on U.S. GAAP accounting guidelines. 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, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 40 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 2016, but was not reported. 41 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 Yunfei Li J. Simon Xue Martha C. Agee Jianjun He Guosheng Wang Jian Lin Wenwu Wang AGE 50 62 61 44 44 39 35 POSITION Chairman of the Board and Chief Executive Officer Director Director Director Director Interim Chief Technology Officer Interim Chief Financial Officer Yunfei Li has served as the chairman of our board, our president and chief executive officer since March 1, 2016. Mr. Li has more than 20 years management experience in industries of real estate development, battery and new energy. Since May 2014, he has been Vice President of the Company’s subsidiary, Dalian BAK Power in charge of the company’s construction of manufacturing facilities, government relationship and development of new customers. From May 2010 to May 2014, Mr. Li held management positions of various new energy development and real estate development companies in China. Prior to that, he was Director of Construction Department, Director of Comprehensive Management Department and Assistant to President of Shenzhen BAK Battery Co., Ltd., a former subsidiary of the Company, from March 2003 to May 2010. Mr. Li holds a Bachelor’s degree in Civil Engineering from Liao Yuan Vocational Technical College. J. Simon Xue has served as our director since February 1, 2016. Dr. Xue has approximately 40 years’ experience in nuclear chemistry, solid state chemistry, superconductivity and materials for Lithium ion batteries. Within his research career, he has spent 21 years in the research and development of Lithium ion battery. Dr. Xue is currently the Senior Director of National Institute for Low-&-Clean Energy in China and a member of National “Thousand Talent” Plan and a member of Expert Committee for “Chinese Industrial Association of Power Sources.” Prior to that, Dr. Xue was a director of Altair Nanotechnologies Inc., a Delaware company, between August 2011 and April 2012. From 2010 to 2011, he served as the chief executive officer of Yintong Energy Co., Ltd., a subsidiary of Canon Investment Holdings Ltd. Dr. Xue has also held positions at Ultralife, Duracell, B&K Electronics Co., Ltd., Valence Energy-Tech (Suzhou) Co., A123 Systems Inc. and International Battery Inc. He enjoys an extensive reputation in the whole product chain of lithium ion battery in China, including materials, equipment, cell manufacturing and testing. He has authored or co-authored over 50 scientific articles, 12 patents relevant to battery chemistry and materials and participated, presented and hosted more than 30 battery or material related international conferences. Dr. Xue completed his Ph.D. program in Solid State Chemistry in McMaster University in 1992. 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. 42 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. 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. 43 Qualifications, Attributes, Skills and Experience to be Represented on the Board as a Whole 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 and has held management positions of various new energy development and real estate development companies in China.. Dr. Xue, Chair of the Compensation Committee, has approximately 40 years’ experience in nuclear chemistry, solid state chemistry, superconductivity and materials for Lithium ion batteries. Within his research career, he has spent 21 years in the research and development of Lithium ion battery. 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. 44 Family Relationships There are no family relationships among our directors or officers. 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 Yunfei Li, J. Simon Xue, Martha C. Agee, Jianjun He and Guosheng Wang. J. Simon Xue, 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, J. Simon Xue 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: 45 • • • • • • • 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; 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 eviewing 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, J. Simon Xue and Jianjun He, with Mr. Xue 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, J. Simon Xue 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; 46 • • 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. 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 2016. ITEM 11. EXECUTIVE COMPENSATION. Summary Compensation Table The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officer received total annual salary and bonus compensation in excess of $100,000. Name and Principal Position Yunfei Li, President, Chief Executive Officer (2) Wenwu Wang, Interim Chief Financial Officer Xiangqian Li, former President and Chief Executive Officer (2) Year 2016 2015 2016 2015 2016 2015 Salary ($)(1) 92,044 - 48,531 49,300 9,185 21,214 Stock Awards ($)(3) 24,300 - 54,000 27,000 - Option Awards ($) Total ($) - - - 116,344 - 102,531 76,300 9,185 21,214 (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 6.5325 (fiscal year 2016 exchange rate), $1.00 to RMB6.2224 (fiscal year 2015 exchange rate). (2) Mr. Yunfei Li became our President and Chief Executive Officer on March 1, 2016 upon the resignation of Mr. Xiangqian Li. (3) The stock awards consisted of restrict shares granted on June 30, 2015, which are vested and exercisable in twelve equal quarterly installment with the first vesting date of June 30, 2015 and with a fair value of $3.24. 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. 47 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. Yunfei Li and Mr. Wenwu Wang on March 1, 2016 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. 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, (cid:122) 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; (cid:122) 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 (cid:122) solicit the services of any of our employees. Outstanding Equity Awards at Fiscal Year-End 2016 The following table sets forth the equity awards outstanding at September 30, 2016 for each of our named executive officers. 48 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR- END Name Yunfei Li Wenwu Wang, Interim Chief Financial Officer Number of securities underlying unexercised options (#) exercisable Number of securities underlying unexercised options (#) unexercisable Option Awards Equity incentive plan awards: Number of securities underlying unexercised unearned options (#) Option exercise price ($) Option expiration date Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested ($) 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 (#) Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#) - - - - 165,000* 45,000# 371,250 101,250 * On June 30, 2015, Mr. Li was granted 30,000 restricted shares of the Company’s common stock, par value $0.001, under the 2015 Equity Incentive Plan of the Company (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 April 19, 2016, pursuant to the 2015 Plan, the Company granted Mr. Li an aggregate of 150,000 restricted shares of the Company’s common stock. The restricted shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. # On June 30, 2015, Mr. 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 April 19, 2016, pursuant to the 2015 Plan, the Company granted Mr. Wang an aggregate of 20,000 restricted shares of the Company’s common stock. The restricted shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. 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. 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. 49 On June 30, 2015, each of our independent directors was granted 30,000 restricted shares of the Company’s common stock, par value $0.001, under the 2015 Plan. The restricted shares vest over a three year period in 12 equal quarterly installments with the first vesting date on June 30, 2015. On April 19, 2016, pursuant to the 2015 Plan, the Company granted Dr. Xue an aggregate of 30,000 restricted shares of the Company’s common stock. The restricted shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. The following table sets forth the total compensation earned by our non-employee directors during our fiscal year ended September 30, 2016: Name J. Simon Xue Martha C. Agee Jianjun He Fees Earned or Paid in Cash ($) Stock Awards ($) Total ($) 13,333 20,000 20,000 - 32,400 32,400 13,333 52,400 52,400 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. Yunfei 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 9, 2017 (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) Yunfei Li(7) J. Simon Xue (8) Martha C. Agee (4) Jianjun He (4) Guosheng Wang (5) Wenwu Wang (6) Amount and Nature of Beneficial Ownership (1) Number (2) Percent (3) 3,042,500 15.5% 5,000 17,500 17,500 32,500 32,500 * * * * * All executive officers and directors as a group (6 persons) 3,147,500 16.1% * Denotes less than 1% of the outstanding shares of Common Stock. 50 (1) (2) (3) (4) (5) (6) (7) (8) 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 19,600,469 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 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 April 19, 2016, Mr. Wang was granted an additional 20,000 restricted shares under the 2015 Plan. Such shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. 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. On April 19, 2016, Mr. Wang was granted an additional 20,000 restricted shares under the 2015 Plan. Such shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. On April 19, 2016, pursuant to the 2015 Plan, the Company granted Mr. Li an aggregate of 150,000 restricted shares of the Company’s common stock. The restricted shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. On April 19, 2016, pursuant to the 2015 Plan, the Company granted Dr. Xue an aggregate of 30,000 restricted shares of the Company’s common stock. The restricted shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. 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 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, 2016. Options exercisable for all of the securities shown in column (a) below were granted under our Stock Option Plan. 51 Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total - - - Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) - - - 222,401(1) - 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, 2016. 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, 2016. Options exercisable for all of the securities shown in column (a) below were granted under our 2015 Plan. Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) Weighted-average exercise price of outstanding options, warrants and rights (b) Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total 877,000 $ - 877,000 $ Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) 2.93 - 2.93 8,840,500(1) - 8,840,500(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 2015 Plan is ten million (10,000,000). On June 30, 2015, pursuant to the 2015 Plan, the Company 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. On April 19, 2016, pursuant to the 2015 Plan, the Company granted an aggregate of 500,000 restricted shares of the Company’s common stock to certain employees, officers and directors of the Company. The restricted shares vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. As of September 30, 2016, 282,500 vested shares were issued, and 877,000 shares were to be issued upon exercise of outstanding restricted shares. Under the 2015 Plan, 8,840,500 shares still remain available for future issuance. 52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Transactions with Related Persons We obtained a three-year banking facilities of $19.5 million from Bank of Dandong. The banking facilities were guaranteed by Mr. Yunfei Li (“Mr. Li”), our CEO, and Ms. Qinghui Yuan, Mr. Li’s wife, Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, and Shenzhen BAK, our former subsidiary. We also obtained a one-year banking facilities of $7.5 million from Bank of Dalian. The banking facilities were guaranteed by Mr. Li, Ms. Qinghui Yuan, and Shenzhen BAK. Mr. Yunfei 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. Also, from time to time, in order to meet the needs of our customers, we purchased products from these former subsidiaries that we did not produce. For the years ended September 30, 2015 and 2016, we purchased inventories of (i) $10.5 million and $2.7 million from BAK Tianjin, respectively; and (ii) nil and $5.6 million from Shenzhen BAK, respectively. For the years ended September 30, 2015 and 2016, we purchased inventories of $395,593 and nil, respectively, from Tianjin BAK New Energy Research Institute CO., Ltd. (“Tianjin New Energy”). Mr. Xiangqian Li, our former CEO, is director of Tianjin New Energy. During the years ended September 30, 2015 and 2016, the Company purchased machinery and equipment from BAK Tianjin totaled $6.8 million and nil, respectively. For the years ended September 30, 2015 and 2016, we generated revenue of (cid:122) $1,377,004 and $836,425 from sale of raw materials to Shenzhen BAK, respectively; (cid:122) $1,470,579 and $636,331 from BAK Tianjin, respectively; (cid:122) nil and $102,322 from Shenzhen BAK, respectively; (cid:122) $17,063 and $576, respectively from Zhengzhou BAK Battery Co., Ltd. Mr. Xiangqian Li, our former CEO, is director of this company; and (cid:122) $298,983 and nil, respectively from Tianjin New Energy. Promoters and Certain Control Persons We did not have any promoters at any time during the past five fiscal years. Director Independence J. Simon Xue, 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 Effective on September 29, 2016, Crowe Horwath (HK) CPA Limited (“Crowe Horwath”) resigned as the Company’s the independent registered public accounting firm. On September 29, 2016, the Company’s Audit Committee appointed Centurion ZD CPA Limited (formerly known as DCAW (CPA) Limited) (“Centurion”) as the Company’s independent registered public accounting firm for the fiscal year ended September 30, 2016, effective immediately. 53 Audit Fees Crowe Horwath has billed us $228,000 and $218,314 in the aggregate for the fiscal years ended September 30, 2015 and 2016, respectively, for professional services rendered for the audit of our 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. Centurion has billed us $50,000 for the fiscal year ended September 30, 2016 for professional services rendered for the audit of our annual financial statements. Audit-Related Fees We did not engage our principal accountants to provide assurance or related services during the last two fiscal years. Tax Fees 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. 54 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. 55 FINANCIAL STATEMENTS CHINA BAK BATTERY, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2016 CHINA BAK BATTERY, INC. AND SUBSIDIARIES TABLE OF CONTENTS Contents Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of September 30, 2015 and 2016 Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended September 30, 2015 and 2016 Consolidated Statements of Changes in Shareholders’ Equity for the years ended September 30, 2015 and 2016 Consolidated Statements of Cash Flows for the years ended September 30, 2015 and 2016 Notes to the Consolidated Financial Statements Page(s) F-2 F-3 F-4 F-5 F-6 F-7 - F35 F-1 Report of Independent Registered Public Accounting Firm 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, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2016, 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, 2016. 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/ Centurion ZD CPA Limited Centurion ZD CPA Limited Hong Kong, China January 13, 2017 F-2 China BAK Battery, Inc. and Subsidiaries Consolidated balance sheets As of September 30, 2015 and 2016 (In US$) Note 2015 2016 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 Payables to former subsidiaries Deferred government grants, current Total current liabilities Long-term bank loans Deferred government grants, non-current Long- term tax payable Deferred tax liabilities, non-current Total liabilities Commitments and contingencies Shareholders' equity Common stock $0.001 par value; 500,000,000 authorized ; 12,856,301 issued and 12,712,095 outstanding as of September 30, 2015; 19,689,674 issued and 19,545,468 outstanding as of September 30, 2016 Donated shares Additional paid-in capital Statutory reserves Accumulated deficit Accumulated other comprehensive loss Less: Treasury shares Total shareholders' equity Total liabilities and shareholder's equity 3 4 5 6 7 10 16 8 9 10 11 12 13 14 7 15 12 15 16 20 $ $ $ $ 6,762,745 1,519,601 4,771,958 3,057,575 2,552,658 686,514 176,764 43,175 1,953,295 4,569,027 2,382,427 16,540,252 6,730,671 - 168,418 - 19,570,990 32,344,090 22,274,820 13,039,373 8,455,231 26,818 20,735,209 32,321,914 7,887,587 22,885 63,367,232 $ 93,311,685 $ 4,910,717 5,108,878 12,585,740 184,755 11,569,981 - 181,510 18,551,836 - 1,498,936 4,391,004 18,561,640 4,382,234 197,645 34,541,581 47,583,295 - 5,199,014 1,815,100 142,650 19,006,505 4,731,185 6,900,704 - 41,698,345 78,221,689 12,856 14,101,689 138,036,080 - (125,922,270) (492,858) 25,735,497 (4,066,610) 19,690 14,101,689 145,008,043 1,230,511 (139,804,975) (1,398,352) 19,156,606 (4,066,610) 21,668,887 15,089,996 $ 63,367,232 $ 93,311,685 See accompanying notes to the consolidated financial statements. F-3 China BAK Battery, Inc. and Subsidiaries Consolidated statements of operations and comprehensive income (loss) For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) Net revenues Cost of revenues Gross profit (loss) Operating expenses: Research and development expenses Sales and marketing expenses General and administrative expenses Provision for doubtful accounts Total operating expenses Operating loss Government grant income Other (expenses) income, net Loss before income tax and discontinued operations Income tax (expense) credit Profit (loss) before discontinued operations, net of tax Income from discontinued operations Net profit (loss) Other comprehensive loss – Foreign currency translation adjustment Comprehensive loss Earnings (loss) per share – Basic – From continuing operations – From discontinued operations Earnings (loss) per share – Diluted From continuing operations From discontinued operations – – Weighted average number of shares of common stock: – Basic – Diluted Note 20 15 16 18 18 18 $ $ $ $ $ 2015 13,904,414 (12,954,553) 949,861 $ (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 15,873,926 (467,227) 15,406,699 1.10 0.14 1.24 1.09 0.14 1.23 $ $ $ $ 2016 10,369,444 (12,099,632) (1,730,188) (1,879,869) (995,290) (4,737,843) (2,779,497) (10,392,499) (12,122,687) - 143,073 (11,979,614) (672,580) (12,652,194) - (12,652,194) (905,494) (13,557,688) (0.71) - (0.71) (0.71) - (0.71) 12,718,388 12,881,121 17,786,374 17,786,374 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, 2015 and 2016 (In US$ except for number of shares) Common stock issued Number of shares Amount Donated shares Additional paid-in capital Statutory reserves (Note) Accumulated other Treasury shares Accumulated comprehensive Number of shares deficit loss Amount Total shareholders’ equity Balance as of October 1, 2014 12,763,803 $ 12,763 $ 14,101,689 $ 127,438,362 $ - $ (141,796,196)$ (25,631) (144,206) $ (4,066,610) $ (4,335,623) 12,856,301 $ 12,856 $ 14,101,689 $ 138,036,080 $ - $ (125,922,270)$ (492,858) (144,206) $ (4,066,610) $ 21,668,887 Net profit Share-based compensation for employee and director stock awards - - - - Common stock issued 92,498 93 Shares to be issued Foreign currency translation adjustment Balance as of September 30, 2015 Net loss Transfer to statutory reserves Share-based compensation for employee and director stock awards - - - - - - - - Common stock issued to new investors 6,583,371 6,584 Common stock issued to employees and directors for stock award Foreign currency translation adjustment 250,002 250 - - - - - - - - 750,167 (93) 9,847,644 - - - - - - 15,873,926 - - - - - - - - (467,227) - - - - - - - - - - 15,873,926 750,167 - 9,847,644 (467,227) - - - - - - - (12,652,194) 1,230,511 (1,230,511) 1,462,197 5,510,016 (250) - - - - - - - - - - - - - (905,494) - - - - - - (12,652,194) - - - - - 1,462,197 5,516,600 - (905,494) Balance as of September 30, 2016 Note 19,689,674 $ 19,690 $ 14,101,689 $ 145,008,043 $ 1,230,511 $ (139,804,975)$ (1,398,352) (144,206) $ (4,066,610) $ 15,089,996 In accordance with the relevant regulations applicable in the PRC, subsidiaries established in the PRC are required to transfer a certain percentage of their statutory annual profits after tax (after offsetting any prior years' losses), if any, to the statutory reserve until the balance of the reserve reaches 50% of their respective registered capital. Subject to certain restrictions as set out in the relevant PRC regulations, the statutory reserve may be used to offset against accumulated losses of the respective PRC subsidiaries. The amount of the transfer is subject to the approval of the board of directors of the respective PRC subsidiaries. On December 31, 2015 the board of directors of Dalian BAK Power approved the transfer of $1,230,511, representing 10% of Dalian BAK Power’s profits after tax for the calendar year ended December 31, 2015, to the statutory reserve. See accompanying notes to the consolidated financial statements. F-5 China BAK Battery, Inc. and subsidiaries Consolidated statements of cash flows For the years ended September 30, 2015 and 2016 (In US$) Cash flows from operating activities Net profit (loss) Income from discontinued operations, net of tax Adjustments to reconcile net profit (loss) to net cash used in operating activities: Depreciation and amortization Provision for doubtful debts Write-down of inventories Share-based compensation Government grant income Deferred tax liabilities Exchange loss (gain) Changes in operating assets and liabilities: Trade accounts and bills receivable Inventories Prepayments and other receivables Trade accounts and bills payable Accrued expenses and other payables Income taxes payable Trade receivable from and payables to former subsidiaries Net cash used in operating activities Cash flows from investing activities Increase in pledged deposits Deferred government grant Purchases of property, plant and equipment and construction in progress Purchase of intangible assets Net cash used in continuing operations Net cash provided by 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 of borrowings from unrelated parties Borrowings from related party Repayment to related party Proceeds from issuance of common stock (Note 1) Net cash provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) 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 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 Interest, net of amounts capitalized See accompanying notes to the consolidated financial statements. F-6 2015 2016 $ 15,873,926 (1,831,237) $ (12,652,194) - 508,945 131,745 221,172 750,167 (23,103,427) 101,617 (200,078) (4,349,352) (107,512) 132,777 5,016,470 400,375 5,218,898 (801,608) (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 - - $ $ $ $ $ $ $ $ $ $ $ 1,117,741 2,779,497 439,068 1,462,197 - (96,793) 213,127 (569,265) (14,357,199) (4,389,940) 5,515,277 1,232,105 310,108 5,108,935 (13,887,336) (3,187,541) - (5,926,675) - (9,114,216) - (9,114,216) 19,410,639 (10,715,653) - 87,230 (76,540) 4,289,084 - 5,516,600 18,511,360 (319,258) (4,809,450) 6,762,745 1,953,295 - - - - - - 602,109 - 459,265 - $ $ $ $ $ $ $ $ $ $ $ China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) (Unaudited) 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 busses, 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 $27,000,000. If the audited net income of the Company for the fiscal years ended September 30, 2005 and 2006 reached the above-mentioned targets, the 435,910 shares would be released to Mr. Li in the amount of 50% upon reaching the 2005 target and the remaining 50% upon reaching the 2006 target. Under accounting principles generally accepted in the United States of America (“US GAAP”), escrow agreements such as the one established by Mr. Li generally constitute compensation if, following attainment of a performance threshold, shares are returned to a company officer. The Company determined that without consideration of the compensation charge, the performance thresholds for the year ended September 30, 2005 would be achieved. However, after consideration of a related compensation charge, the Company determined that such thresholds would not have been achieved. The Company also determined that, even without consideration of a compensation charge, the performance thresholds for the year ended September 30, 2006 would not be achieved. F-7 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ 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, 2016, 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, 2015 and 2016 (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 20(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 20(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 $20,504,004 to Dalian BAK Power through injection of a series of patents of $5,000,000 and cash of $15,504,004. 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 held in 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. After the disposal of BAK International Limited and its subsidiaries effective on June 30, 2014, and as of September 30, 2015 and 2016, 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. Pursuant to a memorandum of understanding with the buyer of the Company’s former subsidiaries dated August 20, 2014, Mr. Xiangqian Li remained as a director of BAK International, Shenzhen BAK, BAK Battery and BAK Tianjin until Shenzhen BAK’s full settlement of its bank loans of $58.6 million expiring on various dates through March 2015. Shenzhen BAK renewed the banking loans with Agricultural Bank of China of $65.0 million (RMB420 million) expiring on April 14, 2016. Shenzhen BAK repaid bank loans of $14.4 million (RMB93 million) in April 2016 and had outstanding bank loans of $50.6 million (RMB326 million) expiring on various dates through February 2017. On May 20, 2015, BAK Asia New Energy Holding Limited (formerly known as “Asia Zhi Li New Energy Holding Limited”), the shareholder of BAK International Limited agreed to indemnify Mr. Xiangqian Li from any loss as a result of the default of repayment of bank loans by Shenzhen BAK. On November 2016, Shenzhen BAK has fully repaid the loans to Bank of China. As of the date of this report, Mr. Xiangqian Li is no longer a director of BAK International and BAK Tianjin. F-9 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 1. Principal Activities, Basis of Presentation and Organization (continued) Basis of Presentation and Organization (continued) On and effective March 1, 2016, Mr. Xiangqian Li resigned as Chairman, director, Chief Executive Officer, President and Secretary of the Company. On the same date, the Board of Directors of the Company appointed Mr. Yunfei Li as Chairman, Chief Executive Officer, President and Secretary of the Company. On March 4, 2016, Mr. Xiangqian Li transferred 3,000,000 shares to Mr. Yunfei Li for a price of $2.4 per share. After the share transfer, Mr. Yunfei Li held 3,000,000 shares or 17.3% and Mr. Xiangqian Li held 760,557 shares at 4.4% of the Company’s outstanding stock, respectively. As of September 30, 2016, Mr. Yunfei Li held 3,005,000 shares or 15.4% and Mr. Xiangqian Li held 591,520 shares or 3.0%, respectively. The Company had a working capital deficiency, accumulated deficit from recurring net losses and short-term debt obligations as of September 30, 2015 and 2016. 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. In June 2016, the Company received further advances in the aggregate of $2.9 million from Mr. Jiping Zhou and Mr. Dawei Li. These advances were unsecured, non-interest bearing and repayable on demand. On July 8, 2016, the Company received further advances of $2.6 million from Mr Jiping Zhou. On July 28, 2016, the Company entered into securities purchase agreements with Mr. Jiping Zhou and Mr. Dawei Li to issue and sell an aggregate of 2,206,640 shares of common stock of the Company, at $2.5 per share, for an aggregate consideration of approximately $5.52 million. On August 17, 2016, the Company issued these shares to the investors. On June 10 and 15, 2016, the Company repaid Bank of Dandong the one-year short term loans of RMB30 million and RMB50 million, respectively, obtained under its banking facilities in June 2015. On June 14, 2016, the Company renewed its banking facilities from Bank of Dandong to provide a maximum amount of RMB130 million (approximately $19.5 million), including three-year long-term loans and three-year revolving bank acceptance and letters of credit bills for the period from June 13, 2016 to June 12, 2019. The banking facilities were guaranteed by Mr. Xianqian Li, the Company’s former CEO, Ms. Xiaoqiu Yu, the wife of the Company’s former CEO, Shenzhen BAK, Mr. Yunfei Li, the Company’s CEO, and Ms. Qinghui Yuan, Mr. Yunfei Li’s wife. The facilities were also secured by part of its Dalian site’s prepaid land use rights, buildings, construction in progress, machinery and equipment and pledged deposits. Under the banking facilities, from June to September 2016, the Company borrowed various three-year term bank loans that totaled RMB126.8 million (approximately $19.0 million), bearing fixed interest at 7.2% per annum. The Company also borrowed a series of revolving bank acceptance totaled $0.6 million from Bank of Dandong under the credit facilities, and bank deposit of 50% was required to secure against these bank acceptance bills.. F-10 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 1. Principal Activities, Basis of Presentation and Organization (continued) Basis of Presentation and Organization (continued) On July 6, 2016, the Company obtained banking facilities from Bank of Dalian to provide a maximum amount of RMB10 million (approximately $1.5 million) and bank acceptance bills of RMB40 million (approximately $6.0 million) to July 2017. The banking facilities were guaranteed by Mr. Yunfei Li, the Company’s CEO, Ms. Qinghui Yuan, Mr. Li’s wife, and Shenzhen BAK. Under the banking facilities, on July 6, 2016, the Company borrowed one year short-term loan of RMB10 million (approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum. The Company also borrowed a series of RMB40 million (approximately $6.0 million) of bank acceptance bills payable from Bank of Dalian, and bank deposit of 50% was required to secure against these bank acceptance bills. As of September 30, 2016, the Company had unutilized committed banking facilities of $0.2 million. The Company plans to renew these loans upon maturity. The Company is currently expanding its product lines and manufacturing capacity in its Dalian plant, which requires more funding to finance the expansion. The Company plans to raise additional funds through banks 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 expects that it will be able to secure more potential orders from the new energy market, especially from the electric car market. The Company believes that with the booming future market demand in high power lithium ion products, they can continue as a going concern and return to profitability. 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 was accounted for as discontinued operations. Upon the disposal, the Company’s former subsidiaries owed the Company a sum of $17.8 million. 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 fiscal 2015, the Company determined that $1.8 million was recoverable. The recovery was treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations in 2015. F-11 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ 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, 2015 and 2016, 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 1 – 15 years 1 – 5 years 5 – 10 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 and staff dormitories, 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, 2015 and 2016 (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 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. 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, 2016 Balance sheet, except for equity accounts Income statement and cash flows September 30, 2015 Balance sheet, except for equity accounts Income statement and cash flows (h) Intangible Assets RMB 6.6714 to US$1.00 RMB 6.5325 to US$1.00 RMB 6.3564 to US$1.00 RMB 6.2224 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. (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 at the rate of 17% on the invoiced value of products sold. 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. F-13 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 2. Summary of Significant Accounting Policies and Practices (Continued) (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 carryforwards. 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. The significant uncertain tax position arose from the subsidies granted by the local government for the Company’s PRC subsidiary, which may be modified or challenged by the central government or the tax authority. A reconciliation of October 1, 2014, through September 30, 2016 amount of unrecognized tax benefits excluding interest and penalties ("Gross UTB") is as follows: Balance as of October 1, 2014 Increase in unrecognized tax benefits taken in current year Balance as of September 30, 2015 Transfer from current taxes payable Decrease in unrecognized tax benefits taken in current year* Balance as of September 30, 2016 Gross UTB Surcharge Net UTB $ $ $ - 1,815,100 1,815,100 5,108,878 (23,274) 6,900,704 $ $ $ - $ - - $ - - - $ - 1,815,100 1,815,100 5,108,878 (23,274) 6,900,704 As of September 30, 2016 and 2015, the Company had not accrued any interest and penalties related to unrecognized tax benefits. The Company’s Chinese subsidiaries are subject to taxation in the PRC. The PRC income tax returns are generally not subject to examination by the tax authorities for tax years before calendar (tax) year 2010. With a few exceptions, the calendar (tax) years 2011 -2015 remain open to examination by tax authorities in the PRC. (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 material costs for research and development. Advertising expenses, included in sales and marketing expenses were insignificant for the years ended September 30, 2015 and 2016. (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. F-14 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 2. Summary of Significant Accounting Policies and Practices (Continued) (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). 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) Earnings (Loss) per Share Basic earnings (loss) per share is computed by dividing net loss by the weighted average number of ordinary shares outstanding during the year. Diluted earnings (loss) per share is computed by dividing net earnings (loss) by the sum of the weighted average number of ordinary shares outstanding and dilutive potential ordinary shares during the year. (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; unrecognized tax benefits, valuation allowance for obsolete inventories, receivables and deferred tax assets; provision for warranty and sales returns; 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 subproduct 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”. F-15 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 2. Summary of Significant Accounting Policies and Practices (Continued) (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) Reclassification The amount of unrecognized tax benefits on the Company’s deferred government grant included in the 2015 financial statements have been reclassified to conform to the 2016 financial statement presentation. Total liabilities and total shareholders’ equity as of September 30, 2015 remained unchanged as a result of this reclassification. (w) Recently Issued Accounting Standards 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 August 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. 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. 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. 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. F-16 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 2. Summary of Significant Accounting Policies and Practices (Continued) (w) Recently Issued Accounting Standards (Continued) In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.” The amendments in this update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The amendments in ASU 2016-01 are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect that the adoption will have a material impact on its consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. 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, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB approved a one-year deferral of the effective date of the new revenue recognition standard. The amendments in ASU 2014-09 are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The standard permits the use of either the retrospective or cumulative effect transition method. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal versus Agent Considerations (Reporting Revenue versus Net). In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), Identifying Performance Obligations and Licensing. In May 2016, the FASB issued ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and 2014-16, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) - Narrow Scope Improvements and Practical Expedients. These ASUs clarify the implementation guidance on a few narrow areas and adds some practical expedients to the guidance Topic 606. The Company is evaluating the effect the ASUs will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of these standards on its ongoing financial reporting. In March 2016, the FASB issued ASU No. 2016-07, Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The amendments in ASU 2016-07 are effective for public companies for fiscal years beginning after December 15, 2016 including interim periods therein. Early adoption is permitted. The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. The Company does not expect that the adoption will have a material impact on its consolidated financial statements. In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which includes amendments to accounting for income taxes at settlement, forfeitures, and net settlements to cover withholding taxes. The amendments in ASU 2016-09 are effective for public companies for fiscal years beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted but requires all elements of the amendments to be adopted at once rather than individually. The Company is evaluating the effect that ASU No. 2016-09 will have on the Company’s consolidated financial statements and related disclosures. In June 2016, the FASB issued Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early application will be permitted for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures. F-17 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 2. Summary of Significant Accounting Policies and Practices (Continued) (w) Recently Issued Accounting Standards (Continued) In August 2016, the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. This ASU is effective for public business entities for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-15 on its financial statements and related disclosures. In October 2016, the FASB issued ASU No. 2016-16—Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2017. Early adoption is permitted. The Company does not anticipate that the adoption of this ASU to have a significant impact on its consolidated financial statements. In October 2016, the FASB issued ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are Under Common Control. The amendments in this ASU change how a reporting entity that is the single decision maker of a variable interest entity should treat indirect interests in the entity held through related parties that are under common control with the reporting entity when determining whether it is the primary beneficiary of that variable interest entity. The ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2016. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements. In November 2016, the FASB issued Accounting Standards Update 2016-18 (ASU 2016-18), Statement of Cash Flows: Restricted Cash. This ASU provides guidance on the classification of restricted cash in the statement of cash flows. The amendments in this ASU are effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted. The amendments in the ASU should be adopted on a retrospective basis. The Company does not expect that adoption of this ASU to have a material effect 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, 2015 and 2016 consisted of the following: Pledged deposits with bank for: Bills payable Letters of credit Others* 2015 2016 $ $ 1,461,757 57,844 - 1,519,601 $ $ 3,305,305 - 1,263,722 4,569,027 * On July 7, 2016, Shenzhen Huijie Purification System Engineering Co., Ltd (“Shenzhen Huijie”), one of the Company’s contractors, filed a lawsuit against Dalian BAK Power in the Peoples’ Court of Zhuanghe City, Dalian for the failure to pay pursuant to the terms of the contract and entrusted part of the project of the contract to a third party without their prior consent. The plaintiff sought a total amount of $1,263,722 (RMB 8,430,792), including construction costs of $0.9 million (RMB6.3 million), interest of $30,689 (RMB0.2 million) and compensation of $0.3 million (RMB1.9 million), which we already accrued for as of September 30, 2016. On September 7, 2016, upon the request of Shenzhen Huijie, the Court froze Dalian BAK Power’s bank deposits totaling $1,263,722 (RMB 8,430,792) for a period of one year. F-18 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 4. Trade Accounts and Bills Receivable, net Trade accounts and bills receivable as of September 30, 2015 and 2016 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 Provision for the year Reversal - recoveries by cash Charged to consolidated statements of operations and comprehensive (loss) income Foreign exchange adjustment Balance at end of year 5. Inventories Inventories as of September 30, 2015 and 2016 consisted of the following: Raw materials Work in progress Finished goods 2015 2016 4,792,416 (122,115) 4,670,301 101,657 4,771,958 $ $ 4,995,564 (2,837,977) 2,157,587 224,840 2,382,427 $ $ 2015 2016 $ - - - 124,745 (2,630) 122,115 122,115 2,833,615 (54,118) 2,779,497 (6,635) 2,837,977 2015 712,713 1,441,368 903,494 3,057,575 $ $ 2016 3,760,481 2,153,945 10,625,826 16,540,252 $ $ $ $ During the years ended September 30, 2015 and 2016, write-downs of obsolete inventories to lower of cost or market of $221,172 and $439,068, respectively, were charged to cost of revenues. 6. Prepayments and Other Receivables Prepayments and other receivables as of September 30, 2015 and 2016 consisted of the following: Value added tax recoverable Prepayments to suppliers Deposits Staff advances Prepaid operating expenses Others Less: Allowance for doubtful accounts 7. Balances with Former Subsidiaries Receivable from former subsidiaries as of September 30, 2015 and 2016 consisted of the following: Shenzhen BAK BAK Tianjin These amounts are interest-free, unsecured and repayable on demand. F-19 2015 2016 $ $ $ 1,719,062 447,430 154,892 42,718 195,556 - 2,559,658 (7,000) 2,552,658 $ 6,169,612 110,566 49,310 67,702 175,598 164,883 6,737,671 (7,000) 6,730,671 2015 2016 $ $ 62,963 623,551 686,514 $ $ - - - China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 7. Balances with Former Subsidiaries (Continued) Upon disposal of the Disposal Group in June 2014, the Disposal Group owed the Company a sum of $17.8 million. 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 years ended September 30, 2015, the Company determined that $1.8 million were 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. Payable to former subsidiaries as of September 30, 2015 and 2016 consisted of the following: BAK Tianjin Shenzhen BAK 2015 $ $ - - - 2016 56,188 4,326,046 4,382,234 Balance as of September 30, 2016 consisted of payables for purchase of inventories from BAK Tianjin and Shenzhen BAK. From time to time, the Company purchased products from these former subsidiaries that they did not produce to meet the needs of its customers. 8. Property, Plant and Equipment, net Property, plant and equipment as of September 30, 2015 and 2016 consisted of the following: Buildings Machinery and equipment Office equipment Motor vehicles Accumulated depreciation Carrying amount $ $ $ 2015 18,440,000 4,020,238 37,050 147,197 22,644,485 (369,665) 22,274,820 $ 2016 17,569,328 4,388,160 82,722 168,240 22,208,450 (1,473,241) 20,735,209 Depreciation expense for the years ended September 30, 2015 and 2016 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 $ $ 2015 2016 198,053 107,803 - 77,139 382,995 $ $ 800,604 88,048 28 256,186 1,144,866 The Company has not yet obtained the property ownership certificates of the buildings in its Dalian manufacturing facilities with a carrying amount of $18,318,313 and $16,958,674 as of September 30, 2015 and 2016, respectively. The Company built its facilities on the land for which it had already obtained the related land use right. The Company has submitted applications to the Chinese government for the ownership certificates on the completed buildings located on these lands. However, the application process takes longer than the Company expected and it has not obtained the certificates as of the date of this report. However, since the Company has obtained the land use right in relation to the land, the management believe the Company has legal title to the buildings thereon albeit the lack of ownership certificates. As soon as the Chinese government completes its formalities, the Company will obtain the ownership certificates. The management expects that they will obtain the property ownership certificates by March 2017. During the course of the Company’s strategic review of its operations, the Company assessed the recoverability of the carrying value of the Company’s property, plant and equipment. The impairment charge, if any, represented the excess of carrying amounts of the Company’s property, plant and equipment over the estimated discounted cash flows expected to be generated by the Company’s production facilities. The Company believes that there was no impairment of its property, plant and equipment for the years ended September 30, 2015 and 2016. During the years ended September 30, 2015 and 2016, the Company purchased machinery and equipment from BAK Tianjin in the amount of $6.8 million and nil (inclusive of VAT) respectively. F-20 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 9. Construction in Progress Construction in progress as of September 30, 2015 and 2016 consisted of the following: Construction in progress Prepayment for acquisition of property, plant and equipment Carrying amount $ $ 2015 13,009,922 29,451 13,039,373 $ $ 2016 32,139,329 182,585 32,321,914 Construction in progress as of September 30, 2015 and 2016 was mainly comprised of capital expenditures for the construction of the facilities and production lines of Dalian BAK Power. For the years ended September 30, 2015 and 2016, the Company capitalized interest of $527,104 and $1,046,302, respectively, to the cost of construction in progress. 10. Prepaid Land Use Rights, net Prepaid land use rights as of September 30, 2015 and 2016 consisted of the followings: Prepaid land use rights Accumulated amortization Less: Classified as current assets 2015 2016 $ $ $ 8,838,220 (206,225) 8,631,995 (176,764) 8,455,231 $ $ $ 8,420,911 (364,906) 8,056,005 (168,418) 7,887,587 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 $7,954,852 (RMB53.1 million). Other incidental costs incurred totaled $466,059 (RMB3.1 million). Amortization expenses of the prepaid land use rights were $210,666 and $171,999 for the years ended September 30, 2015 and 2016, respectively. Annual amortization expense is expected to be approximately $168,418 over each of the next five years. 11. Intangible Assets, net Intangible assets as of September 30, 2015 and 2016 consisted of the followings: Computer software at cost Accumulated amortization Amortization expenses were $1,191 and $2,723 for the years ended September 30, 2015 and 2016, respectively. F-21 2015 2016 $ $ 27,984 (1,166) 26,818 $ $ 26,662 (3,777) 22,885 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 12. Bank Loans Bank borrowings as of September 30, 2015 and 2016 consisted of the followings Short-term bank borrowings Long-term bank borrowings 2015 2016 $ $ 12,585,740 - 12,585,740 $ $ 1,498,936 19,006,505 20,505,441 On June 10 and 15, 2016, the Company repaid Bank of Dandong the one-year short term loans of RMB30 million and RMB50 million, respectively, obtained under its banking facilities in June 2015. On June 14, 2016, the Company renewed its banking facilities from Bank of Dandong to provide a maximum amount of RMB130 million (approximately $19.5 million), including three-year long-term loans and three-year revolving bank acceptance and letters of credit bills for the period from June 13, 2016 to June 12, 2019. Under the banking facilities, from June to September 2016, the Company borrowed various three-year bank loans that totaled RMB126.8 million (approximately $19.0 million), bearing fixed interest at 7.2% per annum. The banking facilities were guaranteed by Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of the Company’s former CEO, Shenzhen BAK, Mr. Yunfei Li, the Company’s CEO, and Ms. Qinghui Yuan, Mr. Yunfei Li’s wife. On July 6, 2016, the Company obtained new banking facilities from Bank of Dalian to provide a maximum loan amount of RMB10 million (approximately $1.5 million) and bank acceptance of RMB40 million (approximately $6.0 million) to July 2017. The banking facilities were guaranteed by Shenzhen BAK, Mr. Yunfei Li, our CEO, and Ms. Qinghui Yuan, Mr. Yunfei Li’s wife. On July 6, 2016, the Company borrowed a one-year term bank loan of RMB10 million (approximately $1.5 million), bearing fixed interest at 6.525% per annum. The facilities were also secured by the Company’s assets with the following carrying amounts: Pledged deposits (note 3) Prepaid land use rights (note 10) Buildings Machinery and equipment Construction in progress $ 2015 2016 $ 1,519,601 8,631,995 13,120,083 3,831,790 6,228,371 33,331,840 3,305,305 8,056,005 12,294,838 3,041,665 6,408,694 33,106,507 As of September 30, 2016, the Company had unutilized committed banking facilities of $0.2 million. During the years ended September 30, 2015 and 2016, interest of $527,104 and $1,046,302, respectively, was incurred on the Company's bank borrowings. F-22 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 13. Other Short-term Loans Other short-term loans as of September 30, 2015 and 2016 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 Former CEO Advances from unrelated third party – Mr. Guozhu Liang – Mr. Wenwu Yu – Mr. Yunfei Li (CEO of the Company since March 1, 2016) Note (a) (b) (c) 2015 2016 $ 6,094 100,000 106,094 - - 78,661 78,661 4,205,591 100,000 4,305,591 14,989 70,424 - 85,413 184,755 $ 4,391,004 $ $ $ (a) (b) (c) The Company received advances from Tianjin New Energy, a related company under the control of Mr. Xiangqian Li, the Company’s former CEO, which was unsecured, non-interest bearing and repayable on demand. As of September 30, 2015 and 2016, the payable to Tianjin New Energy of $453,087 and $301,231, respectively, was included in trade accounts and bills payable. Advances from Mr. Xiangqian Li, the Company’s former CEO, was unsecured, non-interest bearing and repayable on demand. Advances from unrelated third parties were unsecured, non-interest bearing and repayable on demand. The Company has fully repaid the advance to Mr. Wenwu Yu in December 2016. F-23 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 14. Accrued Expenses and Other Payables Accrued expenses and other payables as of September 30, 2015 and 2016 consisted of the following: Construction costs payable Equipment purchase payable Liquidated damages (note a) Accrued staff costs Compensation costs (note 20(ii)) Product warranty (note b) Customer deposits Other payables and accruals 2015 2016 $ $ 8,625,828 611,833 1,210,119 444,249 - - 260,015 417,937 11,569,981 $ $ 8,994,780 6,062,267 1,210,119 1,171,572 322,672 182,741 122,997 494,492 18,561,640 (a) 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, 2015 and 2016, 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 the Company’s 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, 2015 and 2016, 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. (b) The Company maintains a policy of providing after sales support for certain of its new EV and LEV battery products introduced since October 1, 2015 by way of a warranty program. The Company accrues an estimate of its exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability at least annually and adjusts the amounts as necessary. The Company recognized warranty expenses amounting to nil and $246,354 for the years ended September 30, 2015 and 2016, respectively, which are included in its sales and marketing expenses. F-24 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 15. Deferred Government Grants Deferred government grants as of September 30, 2015 and 2016 consist of the following: Total government grants Less: Current portion Non-current portion 2015 2016 $ $ 5,380,524 (181,510) 5,199,014 $ $ 4,928,830 (197,645) 4,731,185 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 our 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 $23,103,427 as income after offset of the related removal expenditures of $1,004,027. No such income or offset was recognized in fiscal 2016. 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 was operated 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 offset government grants of $66,169 and $201,847 for the years ended September 30, 2015 and 2016, respectively, against depreciation expenses of the Dalian facilities. 16. 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 expenses (credit) consisted of: PRC income tax: Current Deferred United States Tax 2015 2016 $ $ 5,218,898 101,617 5,320,515 $ $ 769,373 (96,793) (672,580) 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, 2015 and 2016. Hong Kong Tax BAK Asia and BAK International are subject to Hong Kong profits tax rate of 16.5% and did not have any assessable profits arising in or derived from Hong Kong for the years ended September 30, 2015 and 2016 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, 2015 and 2016. A reconciliation of the provision for income taxes determined at the statutory income tax rate to the Company's income taxes is as follows: Profit (loss) before income taxes United States federal corporate income tax rate Income tax expense (credit) computed at United States statutory corporate income tax rate Reconciling items: Over provision of deferred taxation in prior year Rate differential for PRC earnings Non-deductible expenses Share based payments ASC 740-10 uncertain tax position Valuation allowance on deferred tax assets Income tax expenses F-25 $ $ 2015 $ 19,363,204 35% 6,777,121 - (2,100,342) 310,514 262,558 - 70,664 5,320,515 $ 2016 (11,979,614) 35% (4,192,865) (96,793) 1,015,843 125,998 511,769 769,373 2,539,255 672,580 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 16. Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities (Continued) (b) Deferred tax assets and deferred tax liabilities During November 2015, the FASB issued ASU 2015-17, “Balance Sheet Classification of Deferred Taxes,” which simplifies the presentation of deferred income taxes. This ASU requires that deferred tax assets and liabilities be classified as non-current in a statement of financial position. The Company early adopted this guidance to the current fiscal year ending September 30, 2016 on a prospective basis. Adoption of this guidance resulted in a reclassification of the net current deferred tax asset to the net non-current deferred tax asset in the consolidated balance sheet as of September 30, 2016. No prior periods were retrospectively adjusted. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of September 30, 2015 and 2016 are presented below: Deferred tax assets Trade accounts receivable Inventories Property, plant and equipment Valuation allowance Deferred tax assets, current Trade accounts receivable Inventories Property, plant and equipment Valuation allowance Deferred tax assets, non-current Net operating loss carried forward Valuation allowance Deferred tax assets, non-current Deferred tax liabilities, non-current Property, plant and equipment 2015 2016 $ $ $ $ $ $ $ $ $ $ $ $ 32,979 54,127 5,976 (49,907) 43,175 - - - - - 36,362,743 (36,362,743) - 142,650 $ - - - - - 711,944 160,222 156,628 (1,028,794) - 37,923,110 (37,923,110) - - As of September 30, 2015 and 2016, the Company’s U.S. entity had net operating loss carry forwards of $103,580,741, respectively, of which $102,293 available to reduce future taxable income which will expire in various years through 2035 and $103,478,448 available to offset capital gains recognized in the succeeding 5 tax years and the Company’s PRC subsidiaries had net operating loss carry forwards of $437,933 and $6,679,401, respectively, which will expire in various years through 2021. 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, 2015 and 2016 of approximately of $14.2 million and $3.4 million, respectively. The cumulative distributed earnings of foreign subsidiaries were included in accumulated deficit and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes or applicable withholding taxes, related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if management concluded that such earnings will be remitted in the future. According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion. F-26 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 17. 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. The options expired on June 21, 2016. A summary of share option plan activity for these options as of September 30, 2015 and 2016 is presented below: Outstanding as of October 1, 2014 Exercised Expired Forfeited Outstanding as of October 1, 2015 Exercised Expired Forfeited Outstanding as of September 30, 2016 Exercisable as of September 30, 2016 Number of shares 4,200 - - - 4,200 - (4,200) - - - $ $ $ $ Weighted average exercise price per share 14.05 Weighted average remaining contractual term 1.7 years Aggregate intrinsic value (1) 14.05 (14.05) - - 0.7 years - - $ $ - - As of September 30, 2015 and 2016, there were no unrecognized compensation costs related to the above non-vested share options. (ii) Restricted Shares Restricted shares granted on June 30, 2015 On June 12, 2015, the Board of Director 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 $3.24 per share on June 30, 2015. In accordance with the vesting schedule of the grant, the restricted shares will vest in twelve equal quarterly installments on the last day of each fiscal quarter beginning on June 30, 2015 (i.e. last vesting period: quarter ended March 31, 2018). The Company recognizes the share-based compensation expenses on a graded-vesting method. F-27 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 17. Share-based Compensation (continued) 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 $614,167, $86,976 and $48,924 were allocated to general and administrative expenses, research and development expenses and sales and marketing expenses, respectively. The Company recorded non-cash share-based compensation expense of $1,072,486 for the year ended September 30, 2016, in respect of the restricted shares granted on June 30, 2015, of which $878,195, $124,346 and $69,945 were allocated to general and administrative expenses, research and development expenses and sales and marketing expenses, respectively. As of September 30, 2016, non-vested restricted shares granted on June 30, 2015 are as follows: Non-vested shares as of October 1, 2014 Granted Vested Forfeited Note Non-vested shares as of October 1, 2015 Granted Vested Forfeited Note Non-vested shares as of September 30, 2016 - 690,000 (115,000) - 575,000 - (222,500) (22,500) 330,000 Note: During the year ended September 30, 2016, 22,500 restricted shares were forfeited following the resignation of Mr. Chunzhi Zhang, an independent director on January 14, 2016. Unrecognized compensation cost of $48,172 was recognized as non-cash share-based compensation expenses to general and administrative expenses for the year ended September 30, 2016. As of September 30, 2016, there was unrecognized stock-based compensation of $412,947 associated with the above restricted shares. As of September 30, 2015, 32,498 vested shares were issued. As of September 30, 2016, 282,500 vested shares were issued and 55,000 vested shares were to be issued. On October 14, 2016, the remaining 55,000 vested shares were issued. Restricted shares granted on April 19, 2016 On April 19, 2016, pursuant to the Company’s 2015 Equity Incentive Plan, the Compensation Committee of the Board of Directors of the Company (the “Compensation Committee”) granted an aggregate of 500,000 restricted shares of the Company’s common stock, par value $0.001 (the “Restricted Shares”), to certain employees, officers and directors of the Company, of which 220,000 restricted shares were granted to the Company’s executive officers and directors. There are three types of vesting schedules. First, if the number of restricted shares granted is below 3,000, the shares will vest annually in 2 equal installments over a two year period with the first vesting on June 30, 2017. Second, if the number of restricted shares granted is larger than or equal to 3,000 and is below 10,000, the shares will vest annually in 3 equal installments over a three year period with the first vesting on June 30, 2017. Third, if the number of restricted shares granted is above or equal to 10,000, the shares will vest semi-annually in 6 equal installments over a three year period with the first vesting on December 31, 2016. The fair value of these restricted shares was $2.68 per share on April 19, 2016. The Company recognizes the share-based compensation expenses over the vesting period (or the requisite service period) on a graded- vesting method. The Company recorded non-cash share-based compensation expense of $389,711 for the year ended September 30, 2016, in respect of the restricted shares granted on April 19, 2016 of which $295,401, $50,663, $24,162 and $19,485 were allocated to general and administrative expenses, research and development expenses, sales and marketing expenses and cost of revenues, respectively. As of September 30, 2016, non-vested restricted shares granted on April 19, 2016 are as follows: Non-vested shares as of October 1, 2015 Granted Vested Forfeited Note Non-vested shares as of September 30, 2016 - 500,000 - (8,000) 492,000 Note: During the year ended September 30, 2016, 8,000 restricted shares were forfeited following the resignation of two employees in September 2016. Unrecognized compensation cost of $10,196 was recognized as non-cash share-based compensation expenses to sales and marketing expenses for the year ended September 30, 2016. F-28 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 17. Share-based Compensation (continued) (ii) Restricted Shares (continued) As of September 30, 2016, there was unrecognized stock-based compensation of $950,289 associated with the above restricted shares. 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, 2015 and 2016. 18. Earnings (Loss) Per Share The following is the calculation of earnings (loss) per share: Net profit (loss) from continuing operations Income from discontinued operations Net profit (loss) Weighted average shares used in basic computation (note) Dilutive effect of unvested restricted shares Weighted average shares used in diluted computation Earnings (loss) per share – Basic From continuing operations From discontinued operations Earnings (loss) per share –Diluted From continuing operations From discontinued operations $ $ $ $ $ $ 2015 14,042,689 1,831,237 15,873,926 12,718,388 162,733 12,881,121 1.10 0.14 1.24 1.09 0.14 1.23 $ $ $ $ $ $ 2016 (12,652,194) - (12,652,194) 17,786,374 - 17,786,374 (0.71) - (0.71) (0.71) - (0.71) Note: Including (i) 82,502 and 55,000 vested restricted shares granted pursuant to the 2015 Plan that were not yet issued for the years ended September 30, 2015 and 2016, respectively; and (ii) 4,376,731 and nil shares to be issued to the investors as of September 30, 2015 and 2016, respectively, on conversion of loans pursuant to the Debt Conversion Agreement on September 29, 2015 (Note 1). For the year ended September 30, 2015 and 2016, the outstanding 4,200 stock options were anti-dilutive and excluded from diluted earnings per share. For the year ended September 30, 2016, 822,000 unvested restricted shares were anti-dilutive and excluded from shares used in the diluted computation. F-29 19. Fair Value of Financial Instruments China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 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, trade accounts and bills receivable, other receivables, balances with former subsidiaries, other short-term loans, short-term and long-term bank 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. 20. Commitments and Contingencies (i) Capital Commitments As of September 30, 2015 and 2016, 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 Trading Note $ $ 2015 1,819,977 68,718 15,553,656 17,442,351 $ $ 2016 3,302,524 469,542 9,895,996 13,668,062 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. On December 30, 2015, Mr. Ruth, China BAK Battery, Inc., BAK International Limited, Shenzhen BAK Battery Co., Ltd. and Shenzhen BAK Power Battery Co., Ltd. entered into a settlement and release agreement, pursuant to which, among others, the parties irrevocably released and forever discharged each other from and against any and all liabilities, claims, actions, cause of actions and damages, including any and all claims against the parties in the First Judgement, the Second Judgement and certain recognition action commenced by Mr. Ruth in the Supreme Court of British Columbia of Canada. On May 6, 2016, the Supreme Court of British Columbia issued a consent dismissal order upon the applications of the parties and dismissed the recognition action. On July 7, 2016, Shenzhen Huijie Purification System Engineering Co., Ltd (“Shenzhen Huijie”), one of the Company’s contractors, filed a lawsuit against Dalian BAK Power in the Peoples’ Court of Zhuanghe City, Dalian for the failure to pay pursuant to the terms of the contract and entrusted part of the project of the contract to a third party without their prior consent. The plaintiff sought a total amount of $1,268,036 (RMB 8,430,792), including construction costs of $0.9 million (RMB6.3 million), interest of $30,689 (RMB0.2 million) and compensation of $0.3 million (RMB1.9 million), which the Company already accrued for as of September 30, 2016. On September 7, 2016, upon the request of Shenzhen Huijie, the Court froze Dalian BAK’s bank deposits totaling $1,268,036 (RMB 8,430,792) for a period of one year. F-30 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 21. 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, 2015 and 2016 as follows: Customer A Customer B BAK Tianjin Customer C Customer D $ 2015 6,036,172 2,252,816 1,470,579 * * 43.41% $ 16.20% 10.58% * * 2016 * * * 3,574,273 2,442,816 * * * 34.47% 23.56% * 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, 2015 and 2016 as follows: Customer B Customer A Customer C $ 2015 3,146,177 763,738 * 2016 65.93% $ 16.01% * * * 1,529,703 * * 64.21% For the years ended September 30, 2015 and 2016, the Company recorded the following transactions: Purchase of inventories from BAK Tianjin Shenzhen BAK Tianjin BAK New Energy (Note 13) Sales of finished goods to BAK Tianjin Shenzhen BAK Tianjin BAK New Energy (Note 13) Zhengzhou BAK Battery Co., Ltd * Sales of raw materials to Shenzhen BAK * Mr. Xiangqian Li, the former CEO, is a director of this company. (b) Credit Risk 2015 2016 $ $ 10,536,887 - 395,593 1,470,579 - 298,983 17,063 2,743,618 5,565,461 - 636,331 102,322 - 576 1,377,004 836,425 Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and pledged deposits. As of September 30, 2015 and 2016, substantially all of the Company’s cash and cash equivalents 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-31 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 22. 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). After the disposal of BAK International, the Company focused on producing high-power lithium battery cells. Net revenues from continuing operations for the years ended September 30, 2015 and 2016 were as follows: Net revenues by product: High power lithium batteries used in: Electric vehicles Light electric vehicles Uninterruptable supplies Total Net revenues by geographic area: Mainland China Europe PRC Taiwan Korea Israel Total Substantially all of the Company’s long-lived assets are located in the PRC. F-32 2015 2016 $ $ $ $ - - 13,904,414 13,904,414 2015 13,904,414 - - - - 13,904,414 $ $ $ $ 6,488,149 553,390 3,327,905 10,369,444 2016 9,017,227 456,795 412,963 258,248 224,211 10,369,444 23. China BAK Battery, Inc. (Parent Company) China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 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, 2015 and 2016, additional transfers of $15,250,000 and $15,019,489 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, 2015 and 2016, there was nil and $1,230,511 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, 2015 and 2016. Dalian BAK Power had after tax profits of $15,769,742 and after tax loss of $10,790,255 in fiscal 2015 and 2016, respectively. Schedule I of Article 504 of Regulation SX requires the condensed financial information of the registrant (Parent Company) to be filed when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year. For purposes of this test, restricted net assets of consolidated subsidiaries shall mean that amount of the registrant’s proportionate share of net assets of consolidated subsidiaries (after intercompany eliminations) which as of the end of the most recent fiscal year may not be transferred to the parent company by subsidiaries in the form of loans, advances or cash dividends without the consent of a third party (i.e., lender, regulatory agency, foreign government, etc.). F-33 China BAK Battery, Inc. and subsidiaries Notes to the consolidated financial statements For the years ended September 30, 2015 and 2016 (In US$ except for number of shares) 23. 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, 2015 AND 2016 REVENUE, net OPERATING EXPENSES: Salaries and consulting expenses General and administrative Total operating expenses LOSS FROM OPERATIONS OTHER INCOME: LOSS ATTRIBUTABLE TO PARENT COMPANY EQUITY IN EARNINGS (LOSS) OF SUBSIDIARIES 2015 2016 $ - $ - (795,167) (848,679) (1,565,530) (439,009) (1,643,846) (2,004,539) (1,643,846) (2,004,539) - 182,708 (1,643,846) (1,821,831) 17,517,772 (10,830,363) NET INCOME (LOSS) AVAILABLE TO SHAREHOLDERS $ 15,873,926 $ (12,652,194) CHINA BAK BATTERY, INC. PARENT COMPANY BALANCE SHEETS AS OF SEPTEMBER 30, 2015 AND 2016 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 SHAREHOLDERS' EQUITY Total liabilities and shareholders' equity F-34 2015 2016 $ $ $ $ - - 23,279,070 23,279,070 1,610,183 1,610,183 21,668,887 23,279,070 $ $ $ $ - - 16,684,482 16,684,482 1,594,486 1,594,486 15,089,996 16,684,482 23. China BAK Battery, Inc. (Parent Company)(continued) CHINA BAK BATTERY, INC. PARENT COMPANY STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2016 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) available to shareholders Adjustments to reconcile net income to net cash used in operating activities: Equity in (earnings) loss 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 (increase) in interest in subsidiaries Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock Net cash provided by financing activities CHANGE IN CASH CASH, beginning of year CASH, end of year 2015 2016 $ 15,873,926 $ (12,652,194) (17,517,772) 7,000 750,167 (27,501) (914,180) 914,180 914,180 - - - - $ - $ 10,830,363 - 1,462,197 (15,697) (375,331) (5,141,269) (5,141,269) 5,516,600 5,516,600 - - - 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-35 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, 2017 SIGNATURES CHINA BAK BATTERY, INC. By: By: /s/ Yunfei Li Yunfei 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/ Yunfei Li Yunfei Li /s/ Wenwu Wang Wenxu Wang /s/ Guosheng Wang Guosheng Wang /s/ J. Simon Xue J. Simon Xue /s/ Martha C. Agee Martha C. Agee /s/ Jianjun He Jianjun He Title Chairman and Chief Executive Officer (Principal Executive Officer) Interim Chief Financial Officer (Principal Financial and Accounting Officer) Director Director Director Director Date January 13, 2017 January 13, 2017 January 13, 2017 January 13, 2017 January 13, 2017 January 13, 2017 Exhibit No. Description EXHIBIT INDEX 3.1 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 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) 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 10.12 14.1 21.1 23.1* 31.1* 31.2* 32.1* 32.2* 99.1 101* * Filed herewith 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). Form of Securities Purchase Agreement (incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on August 3, 2016) 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 Centurion ZD 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). Interactive data files pursuant to Rule 405 of Regulation S-T. 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, 2017, 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, 2016. /s/ Centurion ZD CPA Limited Centurion ZD CPA Limited Hong Kong, China January 13, 2017 I, Yunfei 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, 2017 /s/ Yunfei Li Yunfei 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, 2017 /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, Yunfei 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, 2016 (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, 2017. /s/ Yunfei Li Yunfei 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, 2016 (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, 2017. /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. 

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