ITEM 1.
|
FINANCIAL STATEMENTS.
|
CHINA BAK BATTERY, INC. AND SUBSIDIARIES
CONDENSED
INTERIM CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE
MONTHS ENDED JUNE 30, 2015 AND 2016
F-1
China BAK Battery, Inc. and Subsidiaries
Condensed
consolidated balance sheets
As of September 30, 2015 and June 30,
2016
(In US$)
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
Note
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
6,762,745
|
|
$
|
3,125,448
|
|
Pledged deposits
|
|
2
|
|
|
1,519,601
|
|
|
1,459,450
|
|
Trade accounts and bills
receivable, net
|
|
3
|
|
|
4,771,958
|
|
|
5,381,338
|
|
Inventories
|
|
4
|
|
|
3,057,575
|
|
|
10,965,513
|
|
Prepayments and other
receivables, net
|
|
5
|
|
|
2,552,658
|
|
|
5,318,633
|
|
Receivable from former subsidiaries, net
|
|
6
|
|
|
686,514
|
|
|
70,814
|
|
Prepaid land use rights,
current portion
|
|
9
|
|
|
176,764
|
|
|
168,993
|
|
Deferred tax assets, current portion
|
|
15
|
|
|
43,175
|
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
19,570,990
|
|
|
26,490,490
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
7
|
|
|
22,274,820
|
|
|
20,790,452
|
|
Construction in progress
|
|
8
|
|
|
13,039,373
|
|
|
27,278,764
|
|
Prepaid land use rights, non-current
|
|
9
|
|
|
8,455,231
|
|
|
7,956,764
|
|
Intangible assets, net
|
|
10
|
|
|
26,818
|
|
|
23,632
|
|
Deferred tax assets, non-current
|
|
15
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
$
|
63,367,232
|
|
$
|
82,540,102
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Trade accounts and bills payable
|
|
|
|
$
|
4,910,717
|
|
$
|
15,838,044
|
|
Taxes payable
|
|
|
|
|
5,108,878
|
|
|
4,433,036
|
|
Short-term bank loans
|
|
11
|
|
|
12,585,740
|
|
|
684,675
|
|
Other short-term loans
|
|
12
|
|
|
184,755
|
|
|
7,492,928
|
|
Accrued expenses and other payables
|
|
13
|
|
|
11,569,981
|
|
|
15,645,841
|
|
Payables to a former
subsidiary
|
|
6
|
|
|
-
|
|
|
3,817,817
|
|
Deferred government grants, current
|
|
14
|
|
|
181,510
|
|
|
198,320
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
34,541,581
|
|
|
48,110,661
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank loans
|
|
11
|
|
|
|
|
|
12,709,251
|
|
Deferred government grants,
non-current
|
|
14
|
|
|
7,014,114
|
|
|
6,523,373
|
|
Deferred tax liabilities, non-current
|
|
15
|
|
|
142,650
|
|
|
81,827
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
41,698,345
|
|
|
67,425,112
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 17,432,200 issued and 17,287,994
outstanding as of June 30, 2016
|
|
|
|
|
12,856
|
|
|
17,432
|
|
Donated shares
|
|
|
|
|
14,101,689
|
|
|
14,101,689
|
|
Additional paid-in capital
|
|
|
|
|
138,036,080
|
|
|
139,103,068
|
|
Statutory reserves
|
|
|
|
|
-
|
|
|
1,230,511
|
|
Accumulated deficit
|
|
|
|
|
(125,922,270
|
)
|
|
(133,857,253
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
(492,858
|
)
|
|
(1,413,847
|
)
|
|
|
|
|
|
25,735,497
|
|
|
19,181,600
|
|
Less: Treasury shares
|
|
|
|
|
(4,066,610
|
)
|
|
(4,066,610
|
)
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
|
21,668,887
|
|
|
15,114,990
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholder's equity
|
|
|
|
$
|
63,367,232
|
|
$
|
82,540,102
|
|
See accompanying notes to the condensed consolidated financial
statements.
F-2
China BAK Battery, Inc. and Subsidiaries
Condensed
consolidated statements of operations and comprehensive (loss) income
For the three and nine months ended June 30, 2015 and 2016
(Unaudited)
(In US$ except for number of shares)
|
|
|
|
|
Three months
ended June 30,
|
|
|
Nine months
ended June 30,
|
|
|
|
Note
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
Net revenues
|
|
21
|
|
$
|
2,452,692
|
|
$
|
1,362,295
|
|
$
|
8,598,106
|
|
$
|
10,061,797
|
|
Cost of revenues
|
|
|
|
|
(2,226,039
|
)
|
|
(1,915,890
|
)
|
|
(7,615,029
|
)
|
|
(10,872,984
|
)
|
Gross profit (loss)
|
|
|
|
|
226,653
|
|
|
(553,595
|
)
|
|
983,077
|
|
|
(811,187
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
expenses
|
|
|
|
|
(620,164
|
)
|
|
(312,024
|
)
|
|
(726,110
|
)
|
|
(1,420,101
|
)
|
Sales and marketing expenses
|
|
|
|
|
(41,175
|
)
|
|
(205,654
|
)
|
|
(79,558
|
)
|
|
(675,196
|
)
|
General and administrative
expenses
|
|
|
|
|
(779,860
|
)
|
|
(1,186,242
|
)
|
|
(1,800,336
|
)
|
|
(3,380,093
|
)
|
Provision for doubtful accounts
|
|
|
|
|
-
|
|
|
(625,222
|
)
|
|
-
|
|
|
(632,655
|
)
|
Total operating expenses
|
|
|
|
|
(1,441,199
|
)
|
|
(2,329,142
|
)
|
|
(2,606,004
|
)
|
|
(6,108,045
|
)
|
Operating loss
|
|
|
|
|
(1,214,546
|
)
|
|
(2,882,737
|
)
|
|
(1,622,927
|
)
|
|
(6,919,232
|
)
|
Finance cost, net
|
|
|
|
|
(64,429
|
)
|
|
(15,358
|
)
|
|
(48,459
|
)
|
|
(50,544
|
)
|
Government grant (expense) income
|
|
14
|
|
|
(11,242
|
)
|
|
-
|
|
|
23,204,113
|
|
|
-
|
|
Other (expenses) income, net
|
|
|
|
|
(11,635
|
)
|
|
229,403
|
|
|
(96,676
|
)
|
|
280,079
|
|
(Loss) profit before income tax and
discontinued operations
|
|
|
|
|
(1,301,852
|
)
|
|
(2,668,692
|
)
|
|
21,436,051
|
|
|
(6,689,697
|
)
|
Income tax credit (expenses)
|
|
15
|
|
|
32,851
|
|
|
51
|
|
|
(5,770,683
|
)
|
|
(14,775
|
)
|
(Loss) profit before discontinued operations,
net of tax
|
|
|
|
|
(1,269,001
|
)
|
|
(2,668,641
|
)
|
|
15,665,368
|
|
|
(6,704,472
|
)
|
Income from discontinued
operations
|
|
|
|
|
315,061
|
|
|
-
|
|
|
1,836,580
|
|
|
-
|
|
Net (loss) profit
|
|
|
|
$
|
(953,940
|
)
|
$
|
(2,668,641
|
)
|
$
|
17,501,948
|
|
$
|
(6,704,472
|
)
|
Other comprehensive income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustment
|
|
|
|
|
15,787
|
|
|
(579,454
|
)
|
|
18,022
|
|
|
(920,989
|
)
|
Comprehensive (loss) income
|
|
|
|
$
|
(938,153
|
)
|
$
|
(3,248,095
|
)
|
$
|
17,519,970
|
|
$
|
(7,625,461
|
)
|
(Loss) earnings per share Basic and diluted
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
|
|
|
$
|
(0.10
|
)
|
$
|
(0.15
|
)
|
$
|
1.23
|
|
$
|
(0.39
|
)
|
From discontinued
operations
|
|
|
|
|
0.02
|
|
|
-
|
|
|
0.14
|
|
|
-
|
|
|
|
|
|
$
|
(0.08
|
)
|
$
|
(0.15
|
)
|
$
|
1.37
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
shares of common stock:
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
12,720,229
|
|
|
17,284,432
|
|
|
12,719,808
|
|
|
17,228,399
|
|
Diluted
|
|
|
|
|
12,720,229
|
|
|
17,284,432
|
|
|
12,722,125
|
|
|
17,228,399
|
|
See accompanying notes to the condensed consolidated financial
statements.
F-3
China BAK
Battery,
Inc. and
Subsidiaries
Condensed
consolidated
statements
of
changes
in
shareholders
equity
For the nine
months
ended June 30, 2015 and 2016
(Unaudited)
(In US$ except for number of
shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
Treasury shares
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Donated
|
|
|
paid-in
|
|
|
Statutory
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
Number
|
|
|
|
|
|
shareholders
|
|
|
|
of shares
|
|
|
Amount
|
|
|
shares
|
|
|
capital
|
|
|
reserves
|
|
|
deficit
|
|
|
income (loss)
|
|
|
of shares
|
|
|
Amount
|
|
|
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
|
)
|
Net profit
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,501,948
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,501,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation for
employee and director stock awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
192,429
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
192,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
18,022
|
|
|
-
|
|
|
-
|
|
|
18,022
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June
30, 2015
|
|
12,763,803
|
|
$
|
12,763
|
|
$
|
14,101,689
|
|
$
|
127,630,791
|
|
$
|
-
|
|
$
|
(124,294,248
|
)
|
$
|
(7,609
|
)
|
|
(144,206
|
)
|
$
|
(4,066,610
|
)
|
$
|
13,376,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
October
1, 2015
|
|
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 loss
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,704,472
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(6,704,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to statutory reserves
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,230,511
|
|
|
(1,230,511
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Common stock
issued to new investors
|
|
4,376,731
|
|
|
4,377
|
|
|
-
|
|
|
(4,377
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
issued to employees and directors for stock award
|
|
199,168
|
|
|
199
|
|
|
-
|
|
|
(199
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based
compensation for employee and director stock awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,071,564
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,071,564
|
|
Foreign currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(920,989
|
)
|
|
-
|
|
|
-
|
|
|
(920,989
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
June
30, 2016
|
|
17,432,200
|
|
$
|
17,432
|
|
$
|
14,101,689
|
|
$
|
139,103,068
|
|
$
|
1,230,511
|
|
$
|
(133,857,253
|
)
|
$
|
(1,413,847
|
)
|
|
(144,206
|
)
|
$
|
(4,066,610
|
)
|
$
|
15,114,990
|
|
Note
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 $1,230,511, representing 10% of Dalian BAK Powers
profits after tax for the calendar year ended December 31, 2015, to the
statutory reserve.
See accompanying notes to the condensed consolidated financial
statements.
F-4
China BAK Battery, Inc. and subsidiaries
Condensed
consolidated statements of cash flows
For the nine months ended June
30, 2015 and 2016
(Unaudited)
(In US$)
|
|
Nine months ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
Net profit (loss)
|
$
|
17,501,948
|
|
$
|
(6,704,472
|
)
|
Income from discontinued
operations, net of tax
|
|
(1,836,580
|
)
|
|
-
|
|
Adjustments to reconcile net profit (loss) to
net cash used in operating activities:
|
|
|
|
|
|
|
Depreciation and
amortization, net
|
|
259,013
|
|
|
828,479
|
|
Provision for doubtful accounts
|
|
-
|
|
|
632,655
|
|
Write-down of inventories
|
|
-
|
|
|
355,418
|
|
Share-based compensation
|
|
192,429
|
|
|
1,071,564
|
|
Deferred government grants
|
|
(23,204,113
|
)
|
|
-
|
|
Deferred tax liabilities
|
|
5,770,683
|
|
|
14,775
|
|
Exchange loss (gain)
|
|
(29,433
|
)
|
|
130,126
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Trade accounts
receivable
|
|
(4,619,132
|
)
|
|
(1,472,143
|
)
|
Inventories
|
|
(755,529
|
)
|
|
(8,597,230
|
)
|
Prepayments and other
receivables, net
|
|
(1,091,475
|
)
|
|
(2,949,580
|
)
|
Trade accounts and bills payable
|
|
488,199
|
|
|
11,419,575
|
|
Accrued expenses and
other payables
|
|
191,663
|
|
|
1,317,920
|
|
Taxes payable
|
|
-
|
|
|
(462,429
|
)
|
Trade receivable from
and payables to former subsidiaries
|
|
523,058
|
|
|
4,480,219
|
|
Net cash (used in) provided by operating
activities
|
|
(6,609,269
|
)
|
|
64,877
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
Increase in pledged deposits
|
|
-
|
|
|
(6,821
|
)
|
Deferred government grant
|
|
7,449,075
|
|
|
-
|
|
Purchases of property, plant
and equipment and construction in progress
|
|
(7,070,412
|
)
|
|
(12,215,667
|
)
|
Net cash provided by (used in) continuing
operations
|
|
378,663
|
|
|
(12,222,488
|
)
|
Net cash provided by
discontinued operations
|
|
1,520,782
|
|
|
-
|
|
Net cash provided by (used in) investing
activities
|
|
1,899,445
|
|
|
(12,222,488
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from bank borrowings
|
|
8,070,504
|
|
|
13,024,446
|
|
Repayment to bank borrowings
|
|
-
|
|
|
(11,629,181
|
)
|
Borrowings from related party
|
|
3,553,864
|
|
|
1,088,196
|
|
Repayment to related party
|
|
(868,817
|
)
|
|
-
|
|
Borrowings from unrelated
parties and equity investors
|
|
9,252,699
|
|
|
6,411,182
|
|
Repayment of borrowings from unrelated
parties
|
|
(4,726,087
|
)
|
|
(77,068
|
)
|
Net cash provided by
financing activities
|
|
15,282,163
|
|
|
8,817,575
|
|
|
|
|
|
|
|
|
Effect of exchange rate
changes on cash and cash equivalents
|
|
(9,695
|
)
|
|
(297,261
|
)
|
Net increase (decrease) in cash and cash
equivalents
|
|
10,562,644
|
|
|
(3,637,297
|
)
|
Cash and cash equivalents
at the beginning of period
|
|
991,519
|
|
|
6,762,745
|
|
Cash and cash equivalents at the end of
period
|
$
|
11,554,163
|
|
$
|
3,125,448
|
|
Supplementary disclosure
of cash flow information
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
Purchase of inventories
offset against receivables from former subsidiaries
|
$
|
618,389
|
|
$
|
-
|
|
Purchase of property, plant and equipment
(inclusive of VAT) offset against receivables from former subsidiaries
|
$
|
4,393,535
|
|
$
|
-
|
|
Removal expenditures offset
against government grants
|
$
|
1,007,399
|
|
$
|
-
|
|
Trade accounts receivable offset against
advance from a related company
|
$
|
351,335
|
|
$
|
-
|
|
Receivable from a former
subsidiary offset against advance from a related company
|
$
|
403,304
|
|
$
|
-
|
|
Transfer of construction in progress to
property, plant and equipment
|
$
|
12,150,057
|
|
$
|
333,272
|
|
Cash paid during the period
|
|
|
|
|
|
|
Income taxes
|
$
|
-
|
|
$
|
462,429
|
|
Interest, net of amounts
capitalized
|
$
|
-
|
|
$
|
-
|
|
See accompanying notes to the condensed consolidated financial
statements.
F-5
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 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 focused 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 former Chairman and
former Chief Executive Officer of the Company, 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 $27,000,000. If the audited net income of the Company for the
fiscal years ended September 30, 2005 and 2006 reached the above-mentioned
targets, the 435,910 shares would be released to Mr. Xiangqian Li in the amount
of 50% upon reaching the 2005 target and the remaining 50% upon reaching the
2006 target.
Under accounting principles generally accepted in the United
States of America (US GAAP), escrow agreements such as the one established by
Mr. Xiangqian Li generally constitute compensation if, following attainment of a
performance threshold, shares are returned to a company officer. The Company
determined that without consideration of the compensation charge, the
performance thresholds for the year ended September 30, 2005 would be achieved.
However, after consideration of a related compensation charge, the Company
determined that such thresholds would not have been achieved. The Company also
determined that, even without consideration of a compensation charge, the
performance thresholds for the year ended September 30, 2006 would not be
achieved.
F-6
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
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. Xiangqian Li, Mr.
Xiangqian 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. Xiangqian 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. Xiangqian 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. Xiangqian 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. Xiangqian Li regarding the shares, and Mr.
Xiangqian 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 Companys January 2005 private placement in order to achieve
a complete settlement of BAK Internationals obligations (and the Companys
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. Xiangqian
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
Companys 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, 2016 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.
F-7
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Basis of Presentation and Organization (continued)
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.
Xiangqian Li or the Company have any obligations to the investors who
participated in the Companys January 2005 private placement relating to the
escrow shares.
As of June 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
the Company also has 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. Xiangqian Li nor the Company had any
remaining obligations to those related investors who participated in the
Companys January 2005 private placement relating to the escrow shares.
On August 14, 2013, Dalian BAK Trading Co., Ltd (Dalian BAK
Trading) was established as a wholly owned subsidiary of China BAK Asia Holding
Limited (BAK Asia) with a registered capital of $500,000 (Note 19(i)).
Pursuant to Dalian BAK Tradings articles of association and relevant PRC
regulations, BAK Asia was required to contribute the capital to Dalian BAK
Trading on or before August 14, 2015. Up to the date of this report, the Company
has contributed $100,000 to Dalian BAK Trading in cash.
On December 27, 2013, Dalian BAK Power Battery Co., Ltd
(Dalian BAK Power) was established as a wholly owned subsidiary of BAK Asia
with a registered capital of $30,000,000 (Note 19(i)). Pursuant to Dalian BAK
Powers 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 and cash of
$15,504,004.
The Companys condensed consolidated financial statements have
been prepared under US GAAP.
These condensed consolidated financial statements are
unaudited. In the opinion of management, all adjustments and disclosures
necessary for a fair presentation of these condensed consolidated financial
statements, which are of a normal and recurring nature, have been included. The
results reported in the condensed consolidated financial statements for any
interim periods are not necessarily indicative of the results that may be
reported for the entire year. The following (a) condensed consolidated balance
sheet as of September 30, 2015, which was derived from the Companys audited
financial statements, and (b) the unaudited condensed consolidated financial
statements have been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in annual financial statements prepared in accordance with US
GAAP have been condensed or omitted pursuant to those rules and regulations,
though the Company believes that the disclosures made are adequate to make the
information not misleading. These unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements and accompanying footnotes of the Company for the year ended
September 30, 2015.
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 Companys 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 condensed 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.
F-8
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
1.
|
Principal Activities, Basis of Presentation
and Organization (continued)
|
Basis of Presentation and Organization (continued)
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 financial statements of these subsidiaries 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 June
30, 2016, the Companys 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, a wholly owned limited
company established on August 14, 2013 in the PRC; and iii) 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 in July 2015. BAK Tianjin is 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
Companys 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 BAKs 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. As of the date of this report, Mr. Xiangqian Li is no longer a
director of BAK International and BAK Tianjin.
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 $2.4 per share. After the share transfer, Mr. Yunfei Li
held 3,000,000 shares or 17.3% and Mr. Xiangqian Li held 760,557 shares at 4.4%
of the Companys outstanding stock, respectively. As of June 30, 2016, Mr. Yunfei Li held 3,002,500 shares or 17.2% and Mr. Xiangqian Li held 760,557
shares or 4.4%, respectively.
The Company had a working capital deficiency, accumulated
deficit from recurring net losses incurred in prior years and current period and
short-term debt obligations as of September 30, 2015 and June 30, 2016. These
factors raise substantial doubts about the Companys ability to continue as a
going concern.
F-9
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Basis of Presentation and Organization (continued)
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
|
$
|
2,227,148
|
|
Mr. Dawei Li
|
|
1,499,967
|
|
Mr. Ping Shen
|
|
1,499,967
|
|
Mr. Shangdong Liu
|
|
1,599,968
|
|
Ms. Lijuan Wang
|
|
1,500,000
|
|
Mr. Jiping Zhou
|
|
1,520,594
|
|
|
$
|
9,847,644
|
|
Pursuant to the loan agreements with the investors executed on
September 29, 2015, the loans were interest bearing at 20% per annum and secured
by all the assets of Dalian BAK Power in China. Advances of $9,466,985 were
repayable by September 30, 2015 and an advance of $380,659 was repayable by
December 7, 2015.
On September 29, 2015, the Company entered into a Debt
Conversion Agreement with these investors. Pursuant to the terms of the Debt
Conversion Agreement, each of the creditors agreed to convert existing loan
principal of $9,847,644 into an aggregate 4,376,731 shares of common stock of
the Company (the Shares) at a conversion price of $2.25 per share. The closing
price as of September 29, 2015 was $2.22, which was slightly lower than the
conversion price of $2.25. There was no expense associated with the
conversion.
Pursuant to supplemental agreements also executed on September
29, 2015, if the loans were converted into equity before October 30, 2015, the
investors will waive their entitlements to all the interest accruing on the
loans.
Upon receipt of the Shares on October 16, 2015, the creditors
released the Company from all claims, demands and other obligations relating to
the Debts. The amount of $9,847,644 was classified as shares to be issued under
additional paid-in capital as of September 30, 2015.
As such, no interest was recognized by the Company on the
advances from investors pursuant to the supplemental agreements with investors
and the Debt Conversion Agreement.
On June 10 and 15, 2016, the Company repaid 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 $19.6 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, our former CEO, Ms. Xiaoqiu Yu, the wife of the Companys
former CEO, Shenzhen BAK Battery Co., Ltd., the Companys former subsidiary
(Shenzhen BAK), Mr. Yunfei Li, the Companys CEO, and Ms. Qinghui Yuan, Mr.
Yunfei Lis wife. The facilities were also secured by part of its Dalian sites
prepaid land use rights, buildings, construction in progress, machinery and
equipment and pledged deposits. Under the banking facilities, in June 2016, the
Company borrowed various three-year bank loans that totaled RMB84.5 million
(approximately $12.7 million), bearing fixed interest at 7.2% per annum. The
Company also borrowed a series of short term loans that totaled $0.7 million
arising from the matured letters of credit from Bank of Dandong under the credit
facilities.
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, 2018,
the Company received further advances of $2.7 million from Mr Jiping Zhou. On
July 28, 2016, the Company entered into a 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.
As of June 30, 2016, the Company had unutilized committed
banking facilities of $4.6 million.
On July 5, 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 bills of RMB40 million
(approximately $6.0 million) to July 2017. The banking facilities were
guaranteed by Shenzhen BAK, Mr. Yunfei Li, the Companys CEO, and Ms. Qinghui
Yuan, Mr. Yunfei Lis wife. On July 5, 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 Company also borrowed a series of RMB20
million (approximately $3.0 million) of bank acceptance bills payable from Bank
of Dalian.
The Company is currently expanding its product lines and
manufacturing capacity in its Dalian plant, which requires more funding to
finance the expansion. The Company plans to raise additional funds through bank
borrowings and equity financing in the future to meet its daily cash demands if
required.
F-10
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Basis of Presentation and Organization (continued)
However, there can be no assurance that the Company will be
successful in obtaining further financing. The Company believes that it can
continue as a going concern and return to profitability in view of the booming
market demand on high power lithium in products.
The accompanying condensed 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 condensed 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 Companys ability to continue as a going concern.
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 June 2014, the FASB issued ASU 2014-15, "Presentation of
Financial Statements-Going concern (Subtopic 205-40) which provides guidance to
an organizations management, with principles and definitions that are intended
to reduce diversity in the timing and content of disclosures that are commonly
provided by organizations today in the financial statement footnotes. This
guidance in ASU 2014-15 is effective for annual periods ending after December
15, 2016, and interim periods within annual periods beginning after December 15,
2016. Early application is permitted for annual or interim reporting periods for
which the financial statements have not previously been issued. The Company does
not expect that the adoption will have a material impact on its consolidated
financial statements.
F-11
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Recently Issued Accounting Standards (Continued)
In November 2014, FASB issued Accounting Standards Update No.
2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host
Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More
Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task
Force).The amendments permit the use of the Fed Funds Effective Swap Rate (also
referred to as the Overnight Index Swap Rate, or OIS) as a benchmark interest
rate for hedge accounting purposes. Public business entities are required to
implement the new requirements in fiscal years (and interim periods within those
fiscal years) beginning after December 15, 2015. All other types of entities are
required to implement the new requirements in fiscal years beginning after
December 15, 2015, and interim periods beginning after December 15, 2016. The
Company does not expect the adoption of ASU 2014-16 to have a material impact on
its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02 "Consolidation
(Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the
analysis that a reporting entity must perform to determine whether it should
consolidate certain types of legal entities. It is effective for annual
reporting periods, and interim periods within those years, beginning after
December 15, 2015. Early adoption is permitted, including adoption in an interim
period. The Company is currently in the process of evaluating the impact of the
adoption of ASU 2015-02 on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03 Simplifying the
Presentation of Debt Issuance Costs, which changes the presentation of debt
issuance costs in the financial statements. ASU 2015-03 requires an entity to
present such costs in the balance sheet as a direct deduction from the related
debt liability rather than as an asset. Amortization of the costs will continue
to be reported as interest expense. The guidance is effective for annual
reporting periods beginning after December 15, 2016, with early adoption
permitted. The guidance will be applied retrospectively to each period
presented. The adoption of this standard update is not expected to have any
impact on the Company's financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory, which
requires an entity to measure inventory within the scope at the lower of cost
and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. The effective date for the standard is
for fiscal years beginning after December 15, 2016. Early adoption is permitted.
The Company does not expect the adoption of ASU 2015-11 to have a material
impact on its consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Business
Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments. To simplify the accounting for adjustments made to provisional
amounts recognized in a business combination, the amendments eliminate the
requirement to retrospectively account for those adjustments. For public
business entities, the amendments are effective for fiscal years beginning after
December 15, 2015, including interim periods within those fiscal years. For all
other entities, the amendments in this update are effective for fiscal years
beginning after December 15, 2016, and interim periods within fiscal years
beginning after December 15, 2017. The amendments should be applied
prospectively to adjustments to provisional amounts that occur after the
effective date with earlier application permitted for financial statements that
have not been issued. The Company does not expect the adoption of ASU 2015-16 to
have a material impact on its consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes. To simplify the
presentation of deferred income taxes, the amendments in this update require
that deferred income tax liabilities and assets be classified as noncurrent in a
classified statement of financial position. The amendments in ASU 2015-17 are
effective for public business entities for financial statements issued for
annual periods beginning after December 15, 2016, and interim periods within
those annual periods. The amendments may be applied prospectively to all
deferred tax liabilities and assets or retrospectively to all periods presented.
The Company does not expect that the adoption will have a material impact on its
consolidated financial statements.
F-12
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
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.
On March 15, 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 31, 2017 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.
On March 30, 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 31,
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 Companys 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.
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 Companys
condensed consolidated financial statements upon adoption.
F-13
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
Pledged deposits as of September 30,
2015 and June 30, 2016 consisted of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Pledged deposits with bank
for:
|
|
|
|
|
|
|
|
Bills payable
|
$
|
1,461,757
|
|
$
|
1,429,210
|
|
|
Letters of credit
|
|
57,844
|
|
|
30,240
|
|
|
|
$
|
1,519,601
|
|
$
|
1,459,450
|
|
3.
|
Trade Accounts and Bills Receivable,
net
|
Trade accounts and bills receivables,
net as of September 30, 2015 and June 30, 2016 consisted of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Trade accounts receivable
|
$
|
4,792,416
|
|
$
|
5,859,816
|
|
|
Less: Allowance for doubtful accounts
|
|
(122,115
|
)
|
|
(734,092
|
)
|
|
|
|
4,670,301
|
|
|
5,125,724
|
|
|
Bills receivable
|
|
101,657
|
|
|
255,614
|
|
|
|
$
|
4,771,958
|
|
$
|
5,381,338
|
|
An analysis of the allowance for
doubtful accounts is as follows:
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Balance at beginning of
period
|
$
|
-
|
|
$
|
122,115
|
|
|
Provision for the period
|
|
-
|
|
|
683,721
|
|
|
Reversal by cash for the
period
|
|
-
|
|
|
(51,066
|
)
|
|
Charged to condensed consolidated statements
of operations and comprehensive (loss) income
|
|
-
|
|
|
632,655
|
|
|
Foreign exchange adjustment
|
|
-
|
|
|
(20,678
|
)
|
|
Balance at end of period
|
$
|
-
|
|
$
|
734,092
|
|
F-14
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
Inventories as of September 30, 2015
and June 30, 2016 consisted of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Raw materials
|
$
|
712,713
|
|
$
|
2,894,948
|
|
|
Work in progress
|
|
1,441,368
|
|
|
2,063,877
|
|
|
Finished goods
|
|
903,494
|
|
|
6,006,688
|
|
|
|
$
|
3,057,575
|
|
$
|
10,965,513
|
|
During the three months ended June 30,
2015 and 2016, write-downs of obsolete inventories to lower of cost or market of
nil and $116,383 respectively, were charged to cost of revenues.
During the nine months ended June 30,
2015 and 2016, write-downs of obsolete inventories to lower of cost or market of
nil and $355,418 respectively, were charged to cost of revenues.
5.
|
Prepayments and Other Receivables,
net
|
Prepayments and other receivables, net
as of September 30, 2015 and June 30, 2016 consisted of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Value added tax recoverable
|
$
|
1,719,062
|
|
$
|
5,064,467
|
|
|
Prepayments to suppliers
|
|
447,430
|
|
|
60,018
|
|
|
Deposits
|
|
154,892
|
|
|
9,638
|
|
|
Staff advances
|
|
42,718
|
|
|
67,572
|
|
|
Prepaid operating expenses
|
|
195,556
|
|
|
123,938
|
|
|
|
|
2,559,658
|
|
|
5,325,633
|
|
|
Less: Allowance for doubtful
accounts
|
|
(7,000
|
)
|
|
(7,000
|
)
|
|
|
$
|
2,552,658
|
|
$
|
5,318,633
|
|
F-15
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
6.
|
Balances with Former
Subsidiaries
|
Receivables from former subsidiaries as
of September 30, 2015 and June 30, 2016 consisted of the following:
|
|
|
September 30, 2015
|
|
|
June 30, 2016
|
|
|
Shenzhen BAK
|
$
|
62,963
|
|
$
|
-
|
|
|
BAK Tianjin
|
|
623,551
|
|
|
70,814
|
|
|
|
$
|
686,514
|
|
$
|
70,814
|
|
These amounts are interest-free,
unsecured and repayable on demand.
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 (property leasing and
management of its Research and Development Centre in Shenzhen) for the year
ended September 30, 2014. During the three and nine months ended June 30, 2015,
the Company determined that $0.3 million and $1.8 million was recoverable,
respectively. The recovery was treated as an adjustment to the gain on disposal
of subsidiaries from discontinued operations for the three and nine months ended
June 30, 2015.
Payables to a former subsidiary as of
September 30, 2015 and June 30, 2016 consisted of the following:
|
|
|
September 30,
2015
|
|
|
June 30, 2016
|
|
|
Shenzhen BAK
|
$
|
-
|
|
$
|
3,817,817
|
|
7.
|
Property, Plant and Equipment,
net
|
Property, plant and equipment as of
September 30, 2015 and June 30, 2016 consisted of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Buildings
|
$
|
18,440,000
|
|
$
|
17,629,313
|
|
|
Machinery and equipment
|
|
4,020,238
|
|
|
4,132,736
|
|
|
Office equipment
|
|
37,050
|
|
|
78,356
|
|
|
Motor vehicles
|
|
147,197
|
|
|
140,726
|
|
|
|
|
22,644,485
|
|
|
21,981,131
|
|
|
Accumulated depreciation
|
|
(369,665
|
)
|
|
(1,190,679
|
)
|
|
Carrying amount
|
$
|
22,274,820
|
|
$
|
20,790,452
|
|
Depreciation expense for the three and
nine months ended June 30, 2015 and 2016 is included in the condensed
consolidated statements of operations as follows:
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
$
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
Cost of revenues
|
$
|
-
|
|
|
216,828
|
|
$
|
-
|
|
$
|
634,465
|
|
|
Research and development expenses
|
|
99,917
|
|
|
15,682
|
|
|
99,917
|
|
|
45,282
|
|
|
Sales and marketing expenses
|
|
-
|
|
|
11
|
|
|
-
|
|
|
11
|
|
|
General and administrative expenses
|
|
7,050
|
|
|
66,131
|
|
|
20,309
|
|
|
178,272
|
|
|
|
$
|
106,967
|
|
$
|
298,652
|
|
$
|
120,226
|
|
$
|
858,030
|
|
F-16
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
7.
|
Property, Plant and Equipment, net
(continued)
|
The Company has not yet obtained the
property ownership of the buildings in its Dalian manufacture facilities with a
carrying amount of $18,318,313 and $17,135,560 as of September 30, 2015 and June
30, 2016, respectively. The management expects that they will obtain the
property ownership rights in September 2016.
During the course of the Companys
strategic review of its operations, the Company assessed the recoverability of
the carrying value of the Companys property, plant and equipment. The
impairment charge, if any, represented the excess of carrying amounts of the
Companys property, plant and equipment over the estimated discounted cash flows
expected to be generated by the Companys production facilities. The Company
believes that there was no impairment of its property, plant and equipment for
the three and nine months ended June 30, 2015 and 2016.
8.
|
Construction in Progress
|
Construction in progress as of
September 30, 2015 and June 30, 2016 consisted of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Construction in progress
|
$
|
13,009,922
|
|
$
|
27,034,230
|
|
|
Prepayment for acquisition of property, plant
and equipment
|
|
29,451
|
|
|
244,534
|
|
|
Carrying amount
|
$
|
13,039,373
|
|
$
|
27,278,764
|
|
Construction in progress as of
September 30, 2015 and June 30, 2016 is mainly comprised of capital expenditures
for the construction of the facilities and production lines of Dalian BAK Power.
For the three months ended June 30,
2015 and 2016, the Company capitalized interest of $103,023 and $241,652,
respectively, to the cost of construction in progress.
For the nine months ended June 30, 2015
and 2016, the Company capitalized interest of $294,064 and $732,082,
respectively, to the cost of construction in progress.
9.
|
Prepaid Land Use Rights,
net
|
Prepaid land use rights as of September
30, 2015 and June 30, 2016 consisted of the followings:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Prepaid land use rights
|
$
|
8,838,220
|
|
$
|
8,449,661
|
|
|
Accumulated amortization
|
|
(206,225
|
)
|
|
(323,904
|
)
|
|
|
$
|
8,631,995
|
|
$
|
8,125,757
|
|
|
Less: Classified as current assets
|
|
(176,764
|
)
|
|
(168,993
|
)
|
|
|
$
|
8,455,231
|
|
$
|
7,956,764
|
|
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 m
2
in Dalian Economic
Zone for 50 years up to August 9, 2064 at a total consideration of $8,234,000
(RMB53.1 million). Other incidental costs incurred totaled $482,000 (RMB3.1
million).
Amortization expenses of prepaid land
use rights were $45,284 and $42,997 for the three months ended June 30, 2015 and
2016 and $158,688 and $129,888 for the nine months ended June 30, 2015 and 2016,
respectively.
F-17
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
10.
|
Intangible Assets, net
|
Intangible assets as of September 30,
2015 and June 30, 2016 consisted of the followings:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Computer software at cost
|
$
|
27,984
|
|
$
|
26,753
|
|
|
Accumulated amortization
|
|
(1,166
|
)
|
|
(3,121
|
)
|
|
|
$
|
26,818
|
|
$
|
23,632
|
|
Amortization expenses were nil and $680
for the three months ended June 30, 2015 and 2016 and nil and $2,056 for the
nine months ended June 30, 2015 and 2016, respectively.
11.
|
Short-term and Long-term Bank
Loans
|
Bank borrowings from Bank of Dandong as
of September 30, 2015 and June 30, 2016 consisted of the followings:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Bank of Dandong:
|
|
|
|
|
|
|
|
Short-term bank borrowings
|
$
|
12,585,740
|
|
$
|
684,675
|
|
|
Long-term bank borrowings
|
|
-
|
|
|
12,709,251
|
|
|
|
$
|
12,585,740
|
|
$
|
13,393,926
|
|
On June 10 and 15, 2016, the Company
repaid 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 $19.6 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, in June 2016, the Company borrowed various three-year bank
loans that totaled RMB84.5 million (approximately $12.7 million), bearing fixed
interest at 7.2% per annum. The Company also borrowed a series of short term
loans that totaled $0.7 million arising from the matured letters of credit from
Bank of Dandong under the credit facilities.
The banking facilities were guaranteed
by Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of the Companys
former CEO, Shenzhen BAK Battery Co., Ltd., the Companys former subsidiary
(Shenzhen BAK), Mr. Yunfei Li, the Companys CEO, and Ms. Qinghui Yuan, Mr.
Yunfei Lis wife.
The facilities were also secured by the
Companys assets with the following carrying amounts:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Pledged deposits (note 2)
|
$
|
1,519,601
|
|
$
|
1,459,450
|
|
|
Prepaid land use rights (note 9)
|
|
8,631,995
|
|
|
8,125,757
|
|
|
Buildings
|
|
13,120,083
|
|
|
12,596,736
|
|
|
Machinery and equipment
|
|
3,831,790
|
|
|
3,263,865
|
|
|
Construction in progress
|
|
6,228,371
|
|
|
6,868,440
|
|
|
|
$
|
33,331,840
|
|
$
|
32,314,248
|
|
As of June 30, 2016, the Company had
unutilized committed banking facilities of $4.6 million.
During the three months ended June 30,
2015 and 2016, interest of $103,023 and $241,652, respectively, was incurred on
the Company's bank borrowings.
During the nine months ended June 30,
2015 and 2016, interest of $294,064 and $732,082, respectively, was incurred on
the Company's bank borrowings.
F-18
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
12.
|
Other Short-term Loans
|
Other short-term loans as of September
30, 2015 and June 30, 2016 consisted of the following:
|
|
|
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
Note
|
|
|
2015
|
|
|
2016
|
|
|
Advance from related parties
|
|
|
|
|
|
|
|
|
|
|
Tianjin BAK New
Energy Research Institute Co., Ltd (Tianjin New Energy)
|
|
(a)
|
|
$
|
6,094
|
|
$
|
1,067,688
|
|
|
Mr.
Xiangqian Li, the Companys Former CEO
|
|
(b)
|
|
|
100,000
|
|
|
100,000
|
|
|
|
|
|
|
|
106,094
|
|
|
1,167,688
|
|
|
Advances from unrelated third
party
|
|
(c)
|
|
|
|
|
|
|
|
|
Mr. Mingzhe Li
|
|
|
|
|
-
|
|
|
782,108
|
|
|
Mr.
Wenwu Yu
|
|
|
|
|
-
|
|
|
2,683,231
|
|
|
Mr. Yunfei Li (CEO
of the Company since March 1, 2016)
|
|
|
|
|
78,661
|
|
|
-
|
|
|
|
|
|
|
|
78,661
|
|
|
3,465,339
|
|
|
Advances from equity investors
|
|
(d)
|
|
|
|
|
|
|
|
|
Mr.
Jiping Zhou (Note 1)
|
|
|
|
|
-
|
|
|
829,967
|
|
|
Mr. Dawei Li (Note
1)
|
|
|
|
|
-
|
|
|
2,029,934
|
|
|
|
|
|
|
|
-
|
|
|
2,859,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
184,755
|
|
$
|
7,492,928
|
|
|
(a)
|
The Company received an advance from Tianjin New Energy,
a related company under the common control of Mr. Xiangqian Li, the
Companys former CEO, which was unsecured, non-interest bearing and
repayable on demand. As of September 30, 2015 and June 30, 2016, the
payable to Tianjin New Energy of $453,087 and $280,968, respectively, was
included in trade accounts and bills payable.
|
|
(b)
|
Advance from Mr. Xiangqian Li, the Companys former CEO,
was unsecured, non-interest bearing and repayable on demand.
|
|
(c)
|
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 July 2016.
|
|
(d)
|
The Company received advances from these investors who
are independent from each other. These advances were unsecured,
non-interest bearing and repayable on demand. On July 8, 2016, the Company
received further advance of $2,656,698 from Mr. Jiping Zhou. On July 28,
2016, the Company entered into a securities purchase agreement 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 approximately of $5.52 million. On August 17, 2016, the
Company issued these shares to the investors.
|
13.
|
Accrued Expenses and Other
Payables
|
Accrued expenses and other payables as
of September 30, 2015 and June 30, 2016 consisted of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Construction costs payable
|
$
|
8,625,828
|
|
$
|
6,433,119
|
|
|
Equipment purchase payable
|
|
611,833
|
|
|
5,623,201
|
|
|
Accrued staff costs
|
|
444,249
|
|
|
1,231,805
|
|
|
Liquidated damages (note a)
|
|
1,210,119
|
|
|
1,210,119
|
|
|
Product warranty (note b)
|
|
-
|
|
|
223,666
|
|
|
Customer deposits
|
|
260,015
|
|
|
195,780
|
|
|
Other payables and accruals
|
|
417,937
|
|
|
728,151
|
|
|
|
$
|
11,569,981
|
|
$
|
15,645,841
|
|
F-19
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
13.
|
Accrued Expenses and Other Payables
(continued)
|
|
(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 Companys 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
June 30, 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 Companys 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
Companys private placement on November 9, 2007, or the Effectiveness
Deadline, then the Company would be liable to pay partial liquidated damages to
each such investor of (a) 1.5% of the aggregate purchase price paid by such
investor for the shares it purchased on the one month anniversary of the
Effectiveness Deadline; (b) an additional 1.5% of the aggregate purchase price
paid by such investor every thirtieth day thereafter (pro rated for periods
totaling less than thirty days) until the earliest of the effectiveness of the
registration statement, the ten-month anniversary of the Effectiveness Deadline
and the time that the Company is no longer required to keep such resale
registration statement effective because either such shareholders have sold all
of their shares or such shareholders may sell their shares pursuant to Rule 144
without volume limitations; and (c) 0.5% of the aggregate purchase price paid by
such investor for the shares it purchased in our November 2007 private placement
on each of the following dates: the ten-month anniversary of the Effectiveness
Deadline and every thirtieth day thereafter (prorated for periods totaling less
than thirty days), until the earlier of the effectiveness of the registration
statement and the time that the Company no longer is required to keep such
resale registration statement effective because either such shareholders have
sold all of their shares or such shareholders may sell their shares pursuant to
Rule 144 without volume limitations. Such liquidated damages would bear interest
at the rate of 1% per month (prorated for partial months) until paid in full.
On December 21, 2007, pursuant to the
registration rights agreement, the Company filed a registration statement on
Form S-3, which was declared effective by the SEC on May 7, 2008. As a result,
the Company estimated liquidated damages amounting to $561,174 for the November
2007 registration rights agreement. As of September 30, 2015 and June 30, 2016,
the Company had settled the liquidated damages with all the investors and the
remaining provision of approximately $159,000 was included in accrued expenses
and other payables.
|
(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 approximately nil and $63,759 for the three months
ended June 30, 2015 and 2016 and nil and $258,447 for the nine months
ended June 30, 2015 and 2016, respectively, which are included in its
sales and marketing expenses.
|
F-20
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
14.
|
Deferred Government Grants
|
Deferred government grants as of
September 30, 2015 and June 30, 2016 consist of the following:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Total government grants
|
$
|
7,195,624
|
|
$
|
6,721,693
|
|
|
Less: Current portion
|
|
(181,510
|
)
|
|
(198,320
|
)
|
|
Non-current portion
|
$
|
7,014,114
|
|
$
|
6,523,373
|
|
In September 2013, the Management
Committee of Dalian Economic Zone Management Committee (the Management
Committee) provided a subsidy of RMB150 million to finance the costsand
projected operating loss incurred in moving the Companys facilities to Dalian,
including the loss of sales while the new facilities were being constructed.
During the three and nine months ended June 30, 2015, the Company recognized
$23,204,113 as income after offset of the related removal
expenditures of $1,007,399. No such income or offset was recognized in fiscal
2016.
On October 17, 2014, the Company
received a subsidy of RMB46.2 million ($7.2 million) pursuant to an agreement
with the Management Committee dated July 2, 2013 for costs of land use rights
and to be used to construct the new manufacturing site in Dalian. Part of the
facilities had been completed and commenced to operate in July 2015 and the Company has initiated
amortization on a straight-line basis over the estimated useful lives of the
depreciable facilities constructed thereon.
The Company offset government grants of
$19,901 and $72,271 for the three months ended June 30, 2015 and 2016 and
$19,901 and $161,495 for the nine months ended June 30, 2015 and 2016, against
depreciation expenses of the Dalian facilities, respectively.
15.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities
|
|
(a)
Income taxes in the condensed consolidated
statements of comprehensive loss (income)
|
|
|
|
The Companys provision
for income taxes (credit) expenses consisted
of:
|
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
PRC income tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Deferred
|
|
(32,851
|
)
|
|
(51
|
)
|
|
5,770,683
|
|
|
14,775
|
|
|
|
$
|
(32,851
|
)
|
$
|
(51
|
)
|
$
|
5,770,683
|
|
$
|
14,775
|
|
United States Tax
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 three and nine months ended June
30, 2015 and 2016.
Hong Kong Tax
BAK Asia is
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 three and nine months ended
June 30, 2015 and 2016 and accordingly no provision for Hong Kong profits tax
was made in these periods.
PRC Tax
The Companys
subsidiaries in China are subject to Enterprise Income Tax at 25% for the three
and nine months ended June 30, 2015 and 2016.
F-21
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
15.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities (continued)
|
|
(a)
|
Income taxes in the condensed consolidated statements
of comprehensive loss (income)(continued)
|
A reconciliation of the provision for
income taxes determined at the statutory income tax rate to the Company's income
taxes is as follows:
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
(Loss) profit before income
taxes
|
$
|
(1,301,852
|
)
|
$
|
(2,668,692
|
)
|
$
|
21,436,051
|
|
$
|
(6,689,697
|
)
|
|
United States federal corporate income tax
rate
|
|
35%
|
|
|
35%
|
|
|
35%
|
|
|
35%
|
|
|
Income tax (credit) expenses
computed at United States statutory corporate income tax rate
|
|
(455,648
|
)
|
|
(934,042
|
)
|
|
7,502,618
|
|
|
(2,341,393
|
)
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance on
deferred tax assets
|
|
238,141
|
|
|
489,723
|
|
|
285,153
|
|
|
1,326,230
|
|
|
Rate differential for PRC earnings
|
|
97,818
|
|
|
219,389
|
|
|
(2,194,794
|
)
|
|
529,619
|
|
|
Non-deductible expenses
|
|
19,488
|
|
|
39,032
|
|
|
110,660
|
|
|
120,313
|
|
|
Share based payments
|
|
67,350
|
|
|
131,860
|
|
|
67,350
|
|
|
375,047
|
|
|
Others
|
|
-
|
|
|
53,987
|
|
|
(304
|
)
|
|
4,959
|
|
|
Income tax (credit) expenses
|
$
|
(32,851
|
)
|
$
|
(51
|
)
|
$
|
5,770,683
|
|
$
|
14,775
|
|
|
(b)
|
Deferred tax assets and deferred tax
liabilities
|
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 June 30, 2016 are presented below:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
32,979
|
|
$
|
185,973
|
|
|
Inventories
|
|
54,127
|
|
|
86,704
|
|
|
Property, plant and equipment
|
|
5,976
|
|
|
301
|
|
|
Valuation allowance
|
|
(49,907
|
)
|
|
(272,677
|
)
|
|
Deferred tax assets, current portion
|
$
|
43,175
|
|
$
|
301
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carried forward
|
|
12,470,938
|
|
|
13,571,948
|
|
|
Valuation allowance
|
|
(12,470,938
|
)
|
|
(13,571,948
|
)
|
|
Deferred tax assets, non-current
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, non-current
|
|
|
|
|
|
|
|
Property, plant and equipment
|
$
|
142,650
|
|
$
|
81,827
|
|
F-22
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
15.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities (continued)
|
As of September 30, 2015 and June 30,
2016, the Companys U.S. entity had net operating loss carry forwards of
$35,318,443, of which $102,293 was available to reduce future taxable income
which will expire in various years through 2035 and $35,216,150 was available to
offset capital gains recognized through 2020 and the Companys PRC subsidiaries
had net operating loss carry forwards of $437,933 and $4,841,972, 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 June
30, 2016 of approximately of $14.2 million and $8.9 million, respectively. The
cumulative undistributed earnings of foreign subsidiaries were included in
accumulated deficit and will continue to be indefinitely reinvested in
international operations. Accordingly, no provision has been made for U.S.
deferred taxes or applicable withholding taxes, related to future repatriation
of these earnings, nor is it practicable to estimate the amount of income taxes
that would have to be provided if management concluded that such earnings will
be remitted in the future.
As of September 30, 2015 and June 30,
2016, the Company had no material unrecognized tax benefits which would
favorably affect the effective income tax rates in future periods and does not
believe that there will be any significant increases or decreases of
unrecognized tax benefits within the next twelve months. No interest or
penalties relating to income tax matters have been imposed on the Company during
the three and nine months ended June 30, 2015 and 2016, and no provision for
interest and penalties is deemed necessary as of September 30, 2015 and June 30,
2016.
According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the
underpayment of taxes is due to computational errors made by the taxpayer or its
withholding agent. The statute of limitations extends to five years under
special circumstances, which are not clearly defined. In the case of a related
party transaction, the statute of limitations is ten years. There is no statute
of limitations in the case of tax evasion.
F-23
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
16.
|
Share-based Compensation
|
(i) Options
The Company grants share options to
officers and employees and restricted shares of common stock to its non-employee
directors and employees 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 Companys
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 Companys 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 Companys
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 Companys 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 Companys 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
originally provided that only new options may be granted in this case.
On June 22, 2009, the Compensation
Committee of the Companys Board of Directors recommended and approved the grant
of options to purchase 385,640 shares of the Companys common stock to certain
key employees, officers and consultants with an exercise price of $14.05 per
share and a contractual life of 7 years. In accordance with the vesting
provisions of the grants, the options will become vested and exercisable over
five years in twenty equal quarterly installments on the first day of each
fiscal quarter beginning on October 1, 2009.
A summary of share option plan activity
for these options as of September 30, 2015 and June 30, 2016 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
exercise price
|
|
|
remaining
|
|
|
intrinsic
|
|
|
|
|
shares
|
|
|
per share
|
|
|
contractual term
|
|
|
value
(1)
|
|
|
Outstanding as of October 1,
2015
|
|
4,200
|
|
$
|
14.05
|
|
|
0.45 years
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(4,200
|
)
|
|
(14.05
|
)
|
|
|
|
|
|
|
|
Cancelled
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of June 30,
2016
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of June 30,
2016
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
As of September 30, 2015 and June 30,
2016, there were no unrecognized compensation costs related to the above
non-vested share options.
F-24
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
16.
|
Share-based Compensation
(continued)
|
(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 Companys Board of Directors granted an
aggregate of 690,000 restricted shares of the Companys 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 ending March 31, 2018). The Company
recognizes the share-based compensation expenses on a graded-vesting method.
The Company recorded non-cash
share-based compensation expense of $210,129 for the three months ended June 30,
2016, in respect of the restricted shares granted on June 30, 2015, of which
$170,332, $25,470 and $14,327 were allocated to general and administrative
expenses, research and development expenses and sales and marketing expenses and
$904,948 for the nine months ended June 30, 2016, in respect of the restricted
shares granted on June 30, 2015, of which $739,278, $106,029 and $59,641 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 $192,429 for the three and nine
months ended June 30, 2015, in respect of the restricted shares granted on June
30, 2015, of which $157,569, $22,310 and $12,550 were allocated to general and
administrative expenses, research and development expenses and sales and
marketing expense, respectively.
As of June 30, 2016, non-vested
restricted shares granted on June 30, 2015 is as follows:
|
Non-vested shares as
of September 30, 2015
|
|
575,000
|
|
|
Granted
|
|
-
|
|
|
Vested
|
|
(167,500
|
)
|
|
Forfeited
Note
|
|
(22,500
|
)
|
|
Non-vested shares as of June
30, 2016
|
|
385,000
|
|
Note:
During the three and nine month period
June 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 nine month period June
30, 2016.
As of June 30, 2016, there was
unrecognized stock-based compensation of $580,484 associated with the above
restricted shares. As of June 30, 2016, 231,665 vested shares were issued and
50,835 vested shares were to be issued. On July 5, 2016, the remaining 50,835
vested shares were issued.
Restricted shares granted on April 19,
2016
On April 19, 2016, pursuant to the
Companys 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 Companys 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 Companys
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 $166,616 for the three and nine months ended
June 30, 2016, in respect of the restricted shares granted on April 19, 2016 of
which $126,295, $21,660, $10,330 and $8,331 were allocated to general and
administrative expenses, research and development expenses, sales and marketing
expenses and cost of revenues, respectively.
As of June 30, 2016, non-vested
restricted shares granted on April 19, 2016 are as follows:
|
Non-vested shares as
of September 30, 2015
|
|
-
|
|
|
Granted
|
|
500,000
|
|
|
Vested
|
|
-
|
|
|
Forfeited
|
|
-
|
|
|
Non-vested shares as of June
30, 2016
|
|
500,000
|
|
As the Company itself is an investment
holding company which is not expected to generate operating profits to realize
the tax benefits arising from its net operating loss carried forward, no income
tax benefits were recognized for such stock-based compensation cost under the
stock option plan for the three and nine months ended June 30, 2015 and
2016.
F-25
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and
nine months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
17
.
|
(Loss) Earnings Per Share
|
The following is the calculation of
(loss) earnings per share:
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
201
|
|
|
(Loss) profit before
discontinued operations
|
$
|
(1,269,001
|
)
|
$
|
(2,668,641
|
)
|
$
|
15,665,368
|
|
$
|
(6,704,472
|
)
|
|
Income from discontinued operations
|
|
315,061
|
|
|
-
|
|
|
1,836,580
|
|
|
-
|
|
|
Net profit (loss)
|
$
|
(953,940
|
)
|
$
|
(2,668,641
|
)
|
$
|
17,501,948
|
|
$
|
(6,704,472
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used
in basic computation (note)
|
|
12,720,229
|
|
|
17,284,432
|
|
|
12,719,808
|
|
|
17,228,399
|
|
|
Diluted effect of unvested restricted shares
|
|
-
|
|
|
-
|
|
|
2,317
|
|
|
-
|
|
|
Weighted average shares used
in diluted computation
|
|
12,720,229
|
|
|
17,284,432
|
|
|
12,722,125
|
|
|
17,228,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
$
|
(0.10
|
)
|
$
|
(0.15
|
)
|
$
|
1.23
|
|
$
|
(0.39
|
)
|
|
From discontinued operations
|
|
0.02
|
|
|
-
|
|
|
0.14
|
|
|
-
|
|
|
|
$
|
(0.08
|
)
|
$
|
(0.15
|
)
|
$
|
1.37
|
|
$
|
(0.39
|
)
|
|
(Loss) earnings per share
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From continuing operations
|
$
|
(0.10
|
)
|
$
|
(0.15
|
)
|
$
|
1.23
|
|
$
|
(0.39
|
)
|
|
From discontinued operations
|
|
0.02
|
|
|
-
|
|
|
0.14
|
|
|
-
|
|
|
|
$
|
(0.08
|
)
|
$
|
(0.15
|
)
|
$
|
1.37
|
|
$
|
(0.39
|
)
|
Note
The above weighted average shares
include 57,000 vested restricted shares granted pursuant to the 2015 Plan that
were not yet issued for the three and nine months ended June 30, 2015, and
50,835 vested restricted shares granted pursuant to the 2015 Plan that were not
yet issued for the three and nine months ended June 30, 2016.
For the three months ended June 30,
2015, 632,500 unvested restricted shares were anti-dilutive and excluded from
shares used in the diluted computation.
For the three and nine months ended
June 30, 2016, 885,000 unvested restricted shares were anti-dilutive and
excluded from shares used in the diluted computation.
For the three and nine months ended
June 30, 2015 and 2016, the outstanding 4,200 stock options were anti-dilutive
and excluded from diluted (loss) earnings per share.
18.
|
Fair Value of Financial
Instruments
|
ASC Topic 820, Fair Value Measurement
and Disclosures, defines fair value as the exchange price that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. This topic also establishes
a fair value hierarchy, which requires classification based on observable and
unobservable inputs when measuring fair value. Certain current assets and
current liabilities are financial instruments. Management believes their
carrying amounts are a reasonable estimate of fair value because of the short
period of time between the origination of such instruments and their expected
realization and, if applicable, their current interest rates are equivalent to
interest rates currently available. The three levels of valuation hierarchy are
defined as follows:
|
|
Level 1 inputs to the valuation methodology are quoted
prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
Level 2 inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or
indirectly, for substantially the full term of the financial instruments.
|
|
|
Level 3 inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
|
The carrying amounts of financial assets and liabilities, such
as cash and cash equivalents, pledged deposits, trade accounts and bills
receivable, other receivables, receivables from and payables to former
subsidiaries, trade accounts and bills payables, 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.
F-26
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
19.
|
Commitments and
Contingencies
|
As of September 30, 2015 and June 30,
2016, the Company had the following contracted capital commitments:
|
|
|
September 30,
|
|
|
June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
For construction of buildings
|
$
|
1,819,977
|
|
$
|
4,645,097
|
|
|
For purchases of equipment
|
|
68,718
|
|
|
110,548
|
|
|
Capital injection to Dalian
BAK Power and Dalian BAK Trading
Note
|
|
15,553,656
|
|
|
15,553,656
|
|
|
|
$
|
17,442,351
|
|
$
|
20,309,301
|
|
In July 2016, BAK Asia contributed
further capital to Dalian BAK Power through injection of cash of $5,657,660.
|
Note
|
Initially, BAK Asia was required to pay the
remaining capital within two years, of the date of issuance of the
subsidiarys business license according to PRC registration capital
management rules. According to the revised PRC Companies Law which became
effective in 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.
|
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). 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
Companys 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,
which the Company already accrued for at June 30, 2016), interest of $30,689
(RMB0.2 million) and compensation of $0.3 million (RMB1.9 million).The Company
believes that the plaintiff's claims for interest and compensation are without
merit and intends to vigorously defend itself in this lawsuit.
F-27
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
20.
|
Concentrations and Credit
Risk
|
The Company had two and six customers
that individually comprised 10% or more of net revenue for the three months
ended June 30, 2015 and 2016, respectively, as follows:
|
|
|
Three months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Shenzhen Max Technology Co.,
Ltd
|
$
|
*
|
|
|
*
|
|
$
|
238,959
|
|
|
17.54%
|
|
|
BAK Tianjin
|
|
499,290
|
|
|
20.36%
|
|
|
236,598
|
|
|
17.37%
|
|
|
Sysgration Co., Ltd
|
|
*
|
|
|
*
|
|
|
231,862
|
|
|
17.02%
|
|
|
Robotics Technology Ltd
|
|
*
|
|
|
*
|
|
|
225,754
|
|
|
16.57%
|
|
|
Sunghwa Co., Ltd.
|
|
*
|
|
|
*
|
|
|
164,931
|
|
|
12.11%
|
|
|
Emerald Battery Technology Co., Ltd.
|
|
*
|
|
|
*
|
|
|
137,305
|
|
|
10.08%
|
|
|
Sichuan Pisen Electronics
Co., Ltd
|
$
|
1,467,419
|
|
|
59.83%
|
|
$
|
*
|
|
|
*
|
|
* Comprised less than 10% of net
revenue for the respective period.
The Company had two and two customers
that individually comprised 10% or more of net revenue for the nine months ended
June 30, 2015 and 2016, respectively, as follows:
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
Guangdong Pisen Electronics
Co., Ltd.
|
$
|
2,191,904
|
|
|
25.49%
|
|
$
|
*
|
|
|
*
|
|
|
Sichuan Pisen Electronics Co., Ltd
|
|
3,444,317
|
|
|
40.06%
|
|
|
*
|
|
|
*
|
|
|
Shandong Tangjun Electric
Co., Ltd
|
|
*
|
|
|
*
|
|
|
3,774,564
|
|
|
37.51%
|
|
|
Pingxiang Anyuan Tourist Bus Co., Ltd
|
$
|
*
|
|
|
*
|
|
$
|
2,459,646
|
|
|
24.45%
|
|
* Comprised less than 10% of net
revenue for the respective period.
The Company had two customers that
individually comprised 10% or more of accounts receivable as of September 30,
2015 and June 30, 2016, respectively, as follows:
|
|
|
September 30, 2015
|
|
|
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sichuan Pisen Electronics
Co., Ltd.
|
$
|
3,146,177
|
|
|
65.93%
|
|
$
|
*
|
|
|
*
|
|
|
Guangdong Pisen Electronics Co., Ltd
|
|
763,738
|
|
|
16.01%
|
|
|
*
|
|
|
*
|
|
|
Shandong Tangjun Electric
Co., Ltd
|
|
*
|
|
|
*
|
|
|
2,264,906
|
|
|
42.09%
|
|
|
Pingxiang Anyuan Tourist Bus Co., Ltd
|
$
|
*
|
|
|
*
|
|
$
|
2,038,669
|
|
|
37.89%
|
|
* Comprised less than 10% of accounts
receivable for the respective period.
F-28
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
20.
|
Concentrations and Credit Risk
(Continued)
|
|
(a)
|
Concentrations (Continued)
|
For the three and nine months ended
June 30, 2015 and 2016, the Company recorded the following transactions :
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
Purchase of inventories from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAK Tianjin
|
$
|
3,184,578
|
|
$
|
49,095
|
|
$
|
6,744,335
|
|
$
|
3,234,401
|
|
|
Shenzhen BAK
|
|
-
|
|
|
2,677,785
|
|
|
-
|
|
|
2,695,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of finished goods to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BAK Tianjin
|
$
|
499,290
|
|
$
|
236,598
|
|
$
|
557,778
|
|
$
|
604,835
|
|
|
Zhengzhou BAK
Battery Co., Ltd*
|
|
17,137
|
|
|
-
|
|
|
17,137
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of raw materials to
Shenzhen BAK
|
$
|
18,030
|
|
$
|
(2,844
|
)
|
$
|
82,680
|
|
$
|
824,673
|
|
*Mr. Xiangqian Li, the former CEO, is a
director of this company.
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 June 30, 2016, substantially all of the Companys cash and cash
equivalents and pledged deposits were held by major financial institutions
located in the PRC, which management believes are of high credit quality.
For the credit risk related to trade
accounts receivable, the Company performs ongoing credit evaluations of its
customers and, if necessary, maintains reserves for potential credit losses.
Historically, such losses have been within managements expectations.
F-29
China BAK Battery, Inc. and subsidiaries
Notes to
the condensed consolidated financial statements
For the three and nine
months ended June 30, 2015 and 2016
(In US$ except for number of
shares)
(Unaudited)
The Company engages in one business
segment, the manufacture, commercialization and distribution of a wide variety
of standard and customized rechargeable batteries for use in a wide array of
applications. The Company used to manufacture five types of Li-ion rechargeable
batteries: aluminum-case cell, battery pack, cylindrical cell, lithium polymer
cell and high-power lithium battery cell. The Companys products were sold to
packing plants operated by third parties primarily for use in mobile phones and
other electronic devices. After the disposal of BAK International, the Company
focused on producing high-power lithium battery cells. Net revenues for the
three and nine months ended June 30, 2015 and 2016 were as follows:
Net revenues by product:
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
High power lithium batteries
used in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric vehicles
|
$
|
-
|
|
$
|
89,022
|
|
$
|
-
|
|
$
|
6,496,901
|
|
|
Light electric vehicles
|
|
-
|
|
|
412,112
|
|
|
-
|
|
|
557,203
|
|
|
Uninterruptable supplies
|
|
2,452,692
|
|
|
861,161
|
|
|
8,598,106
|
|
|
3,007,693
|
|
|
|
$
|
2,452,692
|
|
$
|
1,362,295
|
|
$
|
8,598,106
|
|
$
|
10,061,797
|
|
Net revenues by geographic
area:
|
|
|
Three months ended June 30,
|
|
|
Nine months ended June 30,
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
PRC Mainland
|
$
|
2,452,692
|
|
$
|
867,730
|
|
$
|
8,598,106
|
|
$
|
9,029,397
|
|
|
Europe
|
|
-
|
|
|
-
|
|
|
-
|
|
|
251,206
|
|
|
Israel
|
|
-
|
|
|
225,754
|
|
|
-
|
|
|
225,754
|
|
|
Korea
|
|
-
|
|
|
164,930
|
|
|
-
|
|
|
165,051
|
|
|
PRC Taiwan
|
|
-
|
|
|
102,850
|
|
|
-
|
|
|
388,376
|
|
|
Others
|
|
-
|
|
|
1,031
|
|
|
-
|
|
|
2,013
|
|
|
|
$
|
2,452,692
|
|
$
|
1,362,295
|
|
$
|
8,598,106
|
|
$
|
10,061,797
|
|
Substantially all of the Companys
long-lived assets are located in the PRC.
F-30
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The following managements 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. Our financial
statements are prepared in U.S. dollars and in accordance with U.S. GAAP.
Special Note Regarding Forward Looking Statements
In addition to historical information, this report contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We use words such as believe, expect, anticipate, project,
target, plan, optimistic, intend, aim, will or similar expressions
which are intended to identify forward-looking statements. Such statements
include, among others, those concerning market and industry segment growth and
demand and acceptance of new and existing products; any projections of sales,
earnings, revenue, margins or other financial items; any statements of the
plans, strategies and objectives of management for future operations; any
statements regarding future economic conditions or performance; as well as all
assumptions, expectations, predictions, intentions or beliefs about future
events. You are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, including
those identified in Part II, Item 1A, "Risk Factors" of this quarterly report
and Item 1A, Risk Factors described in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2015, as well as assumptions,
which, if they were to ever materialize or prove incorrect, could cause the
results of the Company to differ materially from those expressed or implied by
such forward-looking statements.
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, except as required by law, to
provide updates, revisions or amendments to any forward-looking statements to
reflect changes in our expectations or future events.
Use of Terms
Except as otherwise indicated by the context and for the
purposes of this report only, references in this report to:
|
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 Peoples 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.
|
1
Overview
Our Dalian manufacturing facilities began partial commercial
operations in July 2015. As a result, we are engaged in the business of
developing, manufacturing and selling new energy high power lithium batteries,
which are mainly used in the following applications:
|
Electric vehicles (EV), such as electric
cars, electric buses, hybrid electric cars and buses;
|
|
Light electric vehicles (LEV), such as
electric bicycles, electric motors, sight-seeing cars; and
|
|
Electric tools, energy storage, uninterruptible
power supply, and other high power applications.
|
We have received most of the operating assets, including
customers, employees, patents and technologies of our former subsidiary, BAK
International (Tianjin) Ltd. (BAK Tianjin). Such assets were acquired in
exchange for a reduction in receivables from our former subsidiaries that were
disposed in June 2014. We have outsourced and will continue to outsource our
production to BAK Tianjin or other manufacturers until our Dalian manufacturing
facility can fulfill our customers needs. For the three months ended June 30,
2016, Dalian BAK Power had purchased from BAK Tianjin of approximately
$49,095.
We generated revenues of $2.5 million and $1.4 million for the
three months ended June 30, 2015 and 2016, respectively. We incurred a net loss
of $1.0 million and $2.7 million for the three months ended June 30, 2015 and
2016, respectively. As of June 30, 2016, we had an accumulated deficit of $133.9
million and net assets of $15.1 million. We had a working capital deficiency and
accumulated deficit from recurring net losses in prior and current years and
short-term debt obligations maturing in less than one year as of June 30,
2016.
On June 10 and 14, 2016, we repaid the one-year short term
loans of RMB30 million and RMB50 million, respectively, obtained under our
banking facilities in June 2015. On June 14, 2016, we renewed our banking
facilities from Bank of Dandong to provide a maximum amount of RMB130 million
(approximately $19.6 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, our former CEO, Ms. Xiaoqiu Yu, the wife of our former CEO,
Shenzhen BAK Battery Co., Ltd., our former subsidiary (Shenzhen BAK), Mr.
Yunfei Li, our CEO, and Ms. Qinghui Yuan, Mr. Yunfei Li is wife. The facilities
were also secured by part of our Dalian sites prepaid land use rights,
buildings, construction in progress, machinery and equipment and pledged
deposits. Under the banking facilities, in June 2016, we borrowed various
three-year term bank loans that totaled RMB84.5 million (approximately $12.7
million), bearing fixed interest at 7.2% per annum. We also borrowed a series of
short-term loans that totaled $0.7 million arising from the matured letters of
credit from Bank of Dandong under the credit facilities. In June 2016, we
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, 2018, we received further advances of $2.7
million from Mr Jiping Zhou. On July 28, 2016, we entered into a 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.
As of June 30, 2016, we had unutilized committed banking facilities of $4.6
million.
On July 5, 2016, we 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 Lis wife. On July 5, 2016, we
borrowed a one-year term bank loan of RMB10 million (approximately $1.5
million), bearing fixed interest at 6.525% per annum. We also borrowed a series
of RMB20 million (approximately $3.0 million) of bank acceptance from Bank of
Dalian. We intend to raise additional funds through bank borrowings and equity
financing in the future to meet our daily cash demands, if required.
In the meanwhile, due to the growing environmental pollution
problem, the Chinese government is currently providing vigorous support to the
new energy facilities and vehicles. It is expected that we will be able to
secure more potential orders from the new energy market, especially from the
electric car market. We believe with that the booming market demand on high
power lithium ion products, we can continue as a going concern and return to
profitability.
We typically receive orders from customers two to seven weeks
in advance of production. We enter into cooperative agreements with customers,
and a sales contract each time a customer places an order. Once we have
delivered the products to the customer and the customer has examined and
accepted the products, we provide after sales support from one year to 8 years.
We confirm amounts payable with each customer on a monthly basis. The products
typically must be delivered to customers within fifteen days of receipt of the
sales order, and the customers typically pay 50% sales deposits within one week
of placement of sales order and the remaining must be paid for the products
within one month of delivery.
As of June, 30, 2016, we have signed cooperative agreements
with customers to provide high-power battery products with total sales amount
over RMB600 million ($90 million).
We expect the Chinese government to announce a subsidy policy to partially
offset the cost to produce new energy vehicles and thereby encourage the
development of new energy vehicle industry. Manufacturers of new energy vehicles
are expected to receive subsidies from the central and/or local governments
based on their sales value. Since the subsidy policy had not been announced by
the government in the first half of calendar year 2016, our customers did not
place sales orders according to the production plan of the sales agreement they
entered into with us. As a result, our revenue for the three months ended June
30, 2016 was mainly generated from sales of samples to our new customers. We
believe that our revenue will increase significantly as soon as the subsidy
policy is announced, which is expected to be in the second half of the calendar
year of 2016.
2
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 currently obtained the required reports and
certificates listed under items 1 to 5 above. We expect that we will
obtain the remaining certificates and reports in August 2016 and submit all
application materials to the MIIT by the end of August 2016. Although we believe
that we will 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 plan to cooperate 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.
During the three months ended June 30, 2016, 36.3% of our
revenue was generated from the oversea markets. We also devoted more resources
to manufacture high-power lithium batteries for end-product applications in
light electric vehicles and uninterruptable power suppliers. During the three
months ended June 30, 2016, 93.5% of our revenue was generated from our
manufactured batteries used for light electric vehicles and uninterruptable
power supplies.
Third Quarter Financial Performance Highlights
The following are some financial highlights for the third
quarter of our fiscal year 2016:
|
Net revenues
: Net revenues
decreased by $1.1 million, or 44.5%, to $1.4 million for the three months
ended June 30, 2016, from $2.5 million for the same period in 2015.
|
|
Gross (loss) profit
: Gross loss
was $0.6 million, representing a decrease of $0.8 million, for the three
months ended June 30, 2016, from gross profit of $0.2 million for the same
period in 2015.
|
|
Operating loss
: Operating loss
was $2.9 million for the three months ended June 30, 2016, reflecting an
increase of $1.7 million from an operating loss of $1.2 million for the
same period in 2015.
|
|
Net loss:
Net loss was $2.7
million for the three months ended June 30, 2016, representing an increase
of $1.7 million from a net loss of $1.0 million for the same period in
2015.
|
|
Fully diluted loss per share
:
Fully diluted loss per share was $0.15 for the three months ended June 30,
2016, as compared to fully diluted loss per share of $0.08 for the same
period in 2015.
|
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.
3
Cost of revenues.
Cost of revenues consists
primarily of material costs, employee remuneration for staff engaged in
production activity, share-based compensation, depreciation and related expenses
that are directly attributable to the production of products. Cost of revenues
also includes write-downs of inventory to lower of cost or market. Cost of
revenues from the sales of battery packs includes the fees we pay to pack
manufacturers for assembling our prismatic cells into battery packs.
Research and development expenses.
Research and
development expenses primarily consist of remuneration for R&D staff,
share-based compensation, depreciation and maintenance expenses relating to
R&D equipment, and R&D material costs.
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, warranty and
travel and entertainment expenses. We do not pay slotting fees to retail
companies for displaying our products, engage in cooperative advertising
programs, participate in buy-down programs or similar arrangements.
General and administrative expenses.
General and
administrative expenses consist primarily of employee remuneration, share-based
compensation, professional fees, insurance, benefits, general office expenses,
depreciation 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, net of capitalized
interest.
Income tax expenses.
Our subsidiaries in the PRC
are subject to income tax rate of 25%. Our Hong Kong subsidiary BAK Asia is
subject to a profits tax at a rate of 16.5% . However, because we did not have
any assessable income derived from or arising in the region, the entity had not
paid any such tax.
Results of Operations
Comparison of Three Months Ended June 30, 2015 and
2016
The following tables set forth key components of our results of
operations for the periods indicated, both in dollars and as a percentage of net
revenues.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Three months ended June 30,
|
|
|
Change
|
|
|
|
2015
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Net revenues
|
$
|
2,453
|
|
$
|
1,362
|
|
$
|
(1,091
|
)
|
|
(44.5
|
)
|
Cost of revenues
|
|
(2,226
|
)
|
|
(1,916
|
)
|
|
310
|
|
|
(14.0
|
)
|
Gross profit (loss)
|
|
227
|
|
|
(554
|
)
|
|
(781
|
)
|
|
(344.1
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
expenses
|
|
620
|
|
|
312
|
|
|
(308
|
)
|
|
(49.7
|
)
|
Sales and marketing expenses
|
|
41
|
|
|
206
|
|
|
165
|
|
|
402.4
|
|
General and administrative
expenses
|
|
781
|
|
|
1,186
|
|
|
405
|
|
|
51.9
|
|
Provision for doubtful accounts
|
|
-
|
|
|
625
|
|
|
625
|
|
|
100.0
|
|
Total operating expenses
|
|
1,442
|
|
|
2,329
|
|
|
887
|
|
|
61.5
|
|
Operating loss
|
|
(1,215
|
)
|
|
(2,883
|
)
|
|
(1,668
|
)
|
|
(137.3
|
)
|
Finance cost, net
|
|
(64
|
)
|
|
(15
|
)
|
|
49
|
|
|
76.6
|
|
Government grant (expense) income
|
|
(11
|
)
|
|
-
|
|
|
11
|
|
|
100.0
|
|
Other (expenses) income, net
|
|
(12
|
)
|
|
229
|
|
|
241
|
|
|
2,008.3
|
|
Loss before income tax and discontinued
operations
|
|
(1,302
|
)
|
|
(2,669
|
)
|
|
(1,367
|
)
|
|
(105.0
|
)
|
Income tax credit (expenses)
|
|
33
|
|
|
-
|
|
|
(33
|
)
|
|
(100.0
|
)
|
Loss before discontinued operations, net of
tax
|
$
|
(1,269
|
)
|
$
|
(2,669
|
)
|
$
|
(1,400
|
)
|
|
110.3
|
|
Income from discontinued
operations
|
|
315
|
|
|
-
|
|
|
(315
|
)
|
|
(100.0
|
)
|
Net profit (loss)
|
$
|
(954
|
)
|
$
|
(2,669
|
)
|
$
|
(1,715
|
)
|
|
(179.8
|
)
|
4
Net revenues
. Net revenues were $1.4 million for
the three months ended June 30, 2016, as compared to $2.5 million for the same
period in 2015, representing a decrease of $1.1 million, or 44.5% .
The following table sets forth the breakdown of our net
revenues by end-product applications derived from high-power lithium batteries
for the three months ended June 30, 2015 and 2016.
(All amounts in thousands of U.S. dollars other than
percentages)
|
|
Three months ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
Electric vehicles
|
$
|
-
|
|
$
|
89
|
|
Light electric vehicles
|
|
-
|
|
|
412
|
|
Uninterruptable power supplies
|
|
2,453
|
|
|
861
|
|
|
$
|
2,453
|
|
$
|
1,362
|
|
Net revenues from sales of batteries for electric vehicles was
$0.1 million in the three months ended June 30, 2016, compared to nil in the
same period of 2015. We started producing batteries for electric vehicles in
Dalian facilities at the end of fiscal year 2015. Our revenue from sales of
batteries for electric vehicles for the three months ended June 30, 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 revenue from sales of batteries for light electric vehicles
was approximately $0.4 million in the three months ended June 30, 2016, compared
to nil in the same period of 2015.
Net revenues from sales of batteries for uninterruptable power
supplies was $0.9 million in the three months ended June 30, 2016, as compared
with $2.5 million in the same period in 2015, representing a decrease of $1.6
million, or 64.9% . 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
$1.9 million for the three months ended June 30, 2016, as compared to $2.2
million for the same period in 2015, a decrease of $0.3 million, or 14.0% .
Included in cost of revenues was a write down of inventories of $0.1 million and
nil for the three months ended June 30, 2016 and 2015, respectively. We write
down the inventory value when 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 three
months ended June 30, 2016 was $0.6 million or 40.6% of net revenues as compared
to a gross profit of $0.2 million, or 9.3% of net revenues, for the same period
in 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. In particular, we need to maintain a
high level of skilled production staff, in anticipation for the production needs
following the release of the government subsidy policy of new energy vehicles in
the second half of calendar year 2016. As a result, we incurred a gross loss in
the third quarter of fiscal 2016.
Research and development expenses
. Research and
development expenses decreased to $0.3 million for the three months ended June
30, 2016, as compared to $0.6 million for the same period in 2015, a decrease of
approximately $0.3 million, or 49.7% . This decrease was mainly because we had
more trial production operation in our Dalian site for the three months ended
June 30, 2015 before our commercial operation in July 2015. The research and
development expenses in the three months ended June 30, 2016 was mainly
comprised of $0.24 million of salary and wages including restricted shares
granted to our research and development staff.
Sales and marketing expenses
. Sales and marketing
expenses increased to $0.2 million for the three months ended June 30, 2016, as
compared to approximately $41,175 for the same period in 2015, an increase of
$0.2 million, or 400.0%, primarily due to the provision for warranty expenses of
$64,000 according to our after sale service maintenance policy on electric
vehicle battery products. We also expanded our sales team at our Dalian
facilities. As of June 30, 2016, we had a sales team of 14 employees in Dalian
and recorded salaries and allowance, including restricted shares granted, of
$81,000. We also incurred approximately $43,000 in travelling, entertainment and
promotion expenses for our promotion of overseas sales during the third quarter
of fiscal 2016 while we did not have overseas sales in the same period of
2015.
5
General and administrative expenses
. General and
administrative expenses increased to $1.2 million, or 87.2% of revenues, for the
three months ended June 30, 2016, as compared to $0.8 million, or 31.8% of
revenues, for the same period in 2015, an increase of $0.4 million, or 52.0% .
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
restricted shares granted, for the three months ended June 30, 2016 increased
$0.4 million compared with the same period in 2015.
Operating loss
. As a result of the above, our
operating loss totaled $2.9 million for the three months ended June 30, 2016, as
compared to $1.2 million for the same period in 2015, an increase of $1.7
million, or 137.3% .
Income tax credit.
Income tax credit was nil for
the three months ended June 30, 2016 as compared to $32,851 for the same period
in 2015.
Income from discontinued operations, net of
tax.
Income from discontinued operations, net of tax was $0.3
million and nil for the three months ended June 30, 2015 and 2016. 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 disposal of BAK International and its subsidiaries (collectively the
Disposal Group) in June 2014, the Disposal Group owed us a sum of $17.8
million. Our management 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. In the third quarter of fiscal 2015, we determined that a
further amount of $0.3 million was recoverable. The recovery was treated as an
adjustment to the gain on disposal of subsidiaries from discontinued operations
in 2015.
Net (loss)
profit.
As a result of
the foregoing, we had a net loss of $2.7 million for the three months ended June
30, 2016, compared to a net loss of $1.0 million for the three months ended June
30, 2015.
6
Comparison of Nine Months Ended June 30, 2015 and
2016
The following tables set forth key components of our results of
operations for the periods indicated, both in dollars and as a percentage of net
revenues.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Nine months ended June 30,
|
|
|
Change
|
|
|
|
2015
|
|
|
2016
|
|
$
|
|
|
|
%
|
|
Net revenues
|
$
|
8,598
|
|
$
|
10,062
|
|
$
|
1,464
|
|
|
17.0
|
|
Cost of revenues
|
|
(7,615
|
)
|
|
(10,873
|
)
|
|
(3,258
|
)
|
|
(42.8
|
)
|
Gross profit (loss)
|
|
983
|
|
|
(811
|
)
|
|
(1,794
|
)
|
|
(182.5
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
expenses
|
|
726
|
|
|
1,420
|
|
|
694
|
|
|
95.6
|
|
Sales and marketing expenses
|
|
80
|
|
|
675
|
|
|
595
|
|
|
743.8
|
|
General and administrative
expenses
|
|
1,800
|
|
|
3,380
|
|
|
1,580
|
|
|
87.8
|
|
Provision for doubtful accounts
|
|
-
|
|
|
633
|
|
|
633
|
|
|
100.0
|
|
Total operating expenses
|
|
2,606
|
|
|
6,108
|
|
|
3,502
|
|
|
134.4
|
|
Operating loss
|
|
(1,623
|
)
|
|
(6,919
|
)
|
|
(5,296
|
)
|
|
326.3
|
|
Finance cost, net
|
|
(48
|
)
|
|
(50
|
)
|
|
(2
|
)
|
|
(4.2
|
)
|
Government grant income
|
|
23,204
|
|
|
-
|
|
|
(23,204
|
)
|
|
(100.0
|
)
|
Other (expenses) income, net
|
|
(97
|
)
|
|
280
|
|
|
377
|
|
|
388.7
|
|
Profit (loss) before income tax and
discontinued operations
|
|
21,436
|
|
|
(6,689
|
)
|
|
(28,125
|
)
|
|
(131.2
|
)
|
Income tax expenses
|
|
(5,771
|
)
|
|
(15
|
)
|
|
5,756
|
|
|
99.7
|
|
Profit (loss) before discontinued operations,
net of tax
|
$
|
15,665
|
|
$
|
(6,704
|
)
|
$
|
(22,369
|
)
|
|
(142.8
|
)
|
Income from discontinued
operations
|
|
1,837
|
|
|
-
|
|
|
(1,837
|
)
|
|
(100.0
|
)
|
Net profit (loss)
|
|
17,502
|
|
|
(6,704
|
)
|
|
(24,206
|
)
|
|
(138.3
|
)
|
Net revenues
. Net revenues were $10.1 million for
the nine months ended June 30, 2016, as compared to $8.6 million for the same
period in 2015, representing an increase of $1.5 million, or 17.0% .
The following table sets forth the breakdown of our net
revenues by end-product applications derived from high-power lithium batteries
for the nine months ended June 30, 2015 and 2016.
(All amounts in thousands of U.S. dollars other than
percentages)
|
|
Nine months ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
Electric vehicles
|
$
|
-
|
|
$
|
6,497
|
|
Light electric vehicles
|
|
-
|
|
|
557
|
|
Uninterruptable power
supplies
|
|
8,598
|
|
|
3,008
|
|
|
$
|
8,598
|
|
$
|
10,062
|
|
Net revenues from sales of batteries for electric vehicles was
$6.5 million in the nine months ended June 30, 2016, compared to nil in the same
period of 2015. We started producing batteries for electric vehicles in our
Dalian facilities at the end of fiscal year 2015.
Net revenues from sales of batteries for light electric
vehicles was approximately $0.6 million in the nine months ended June 30, 2016,
compared to nil in the same period of 2015.
Net revenues from sales of batteries for uninterruptable power
supplies was $3.0 million in the nine months ended June 30, 2016, as compared
with $8.6 million in the same period in 2015, representing a decrease of $5.6
million, or 65.0% . 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 increased to
$10.9 million for the nine months ended June 30, 2016, as compared to $7.6
million for the same period in 2015, an increase of $3.3 million, or 42.8% .
Included in cost of revenues was a write down of inventories, of which is $0.4
million and nil for the nine months ended June 30, 2016 and 2015, respectively.
We write down the inventory value when there is an indication that it is
impaired. However, further write-downs may be necessary if market conditions
continue to deteriorate.
Gross (loss) profit.
Gross loss for the nine
months ended June 30, 2016 was $0.8 million, or 8.1% of net revenues as compared
to a gross profit of $1.0 million, or 11.4% of net revenues, for the same period
in 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 in the first nine months
of fiscal 2016.
7
Research and development expenses
. Research and
development expenses increased to $1.4 million for the nine months ended June
30, 2016, as compared to $0.7 million for the same period in 2015, an increase
of $0.7 million, or 95.6 %. We began our trial production in the three months
ended June 30, 2015 before our commercial operation in July 2015. The research
and development expenses in the nine months ended June 30, 2016 was mainly
comprised of $0.7 million of material and consumable expenses and $0.6 million
of salary and wages including restricted shares granted to our research and
development staff.
Sales and marketing expenses
. Sales and marketing
expenses increased to $0.7 million for the nine months ended June 30, 2016, as
compared to approximately $0.1 million for the same period in 2015, an increase
of $0.6 million, or 743.8%, primarily due to the provision for warranty expenses
of $0.3 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 the first nine months of
fiscal 2016 while we did not have overseas sales in the same period in fiscal
year 2015.
General and administrative expenses
. General and
administrative expenses increased to $3.4 million, or 33.6% of revenues, for the
nine months ended June 30, 2016, as compared to $1.8 million, or 20.9% of
revenues, for the same period in 2015, an increase by $1.6 million, or 87.8% .
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 increased,
including restricted shares granted, by $1.4 million as compared with the same
period of fiscal year 2015.
Operating loss
. As a result of the above, our
operating loss totaled $6.9 million for the nine months ended June 30, 2016, as
compared to $1.6 million for the same period in 2015, an increase of $5.3
million,or 326.3% .
Government grant income.
Government grant income
was nil for the nine months ended June 30, 2016, as compared to $23.2 million of
government grant income for the same period last year. The government grant
income in 2015 was mainly due to the recognition of the subsidy of $23.2 million
from the Management Committee of Dalian Economic Zone granted to finance the
costs and projected operating losses incurred during the move to our new
facilities in Dalian.
Income tax expense.
Income tax expense was
$14,775 for the nine months ended June 30, 2016 as compared to income tax
expense of $5.8 million for the same period in 2015. Income tax expense for the
nine months ended June 30, 2015 was due to the deferred tax impact of the
government subsidies recognized.
Income from discontinued operations, net of tax.
Income from discontinued operations, net of tax was $1.8 million and nil
for the nine months ended June 30, 2015 and 2016, respectively. 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 disposal of BAK International and its subsidiaries (collectively the
Disposal Group) in June 2014, the Disposal Group owed us a sum of $17.8
million. Our management 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. In 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 (loss)
profit.
As a result of
the foregoing, we had a net loss of $6.7 million for the nine months ended June
30, 2016, compared to a net profit of $17.5 million for the nine months ended
June 30, 2015.
Liquidity and Capital Resources
We have financed our liquidity requirements from short-term and
long-term bank loans and bills payable under bank credit agreements, advance
from our related and unrelated parties, investors and issuance of capital stock.
As of June 30, 2016, we had cash and cash equivalents of $3.1
million. Our total current assets were $26.5 million and our total current
liabilities were $48.1 million, resulting in a net working capital deficiency of
$21.6 million. These factors raise substantial doubts about our ability to
continue as a going concern.
On June 10 and 14, 2016, we repaid the one-year short term
loans of RMB30 million and RMB50 million, respectively, obtained under our
banking facilities in June 2015. On June 14, 2016, we renewed our banking
facilities from Bank of Dandong to provide a maximum amount of RMB130 million
(approximately $19.6 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, our former CEO, Ms. Xiaoqiu Yu, the wife of our former CEO,
Shenzhen BAK, Mr. Yunfei Li, our CEO, and Ms. Qinghui Yuan, Mr. Yunfei Li is
wife. The facilities were also secured by part of our Dalian sites prepaid land
use rights, buildings, construction in progress, machinery and equipment and
pledged deposits. Under the banking facilities, in June 2016, we borrowed
various three-year term bank loans that totaled RMB84.5 million (approximately
$12.7 million), bearing fixed interest at 7.2% per annum. We also borrowed a
series of short-term loans that totaled $0.7 million arising from the matured letters of credit from Bank of Dandong
under the credit facilities. In June 2016, we 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, 2018,
we received further advances of $2.7 million from Mr Jiping Zhou. On July 28,
2016, we entered into a 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.
As of June 30, 2016, we had unutilized committed banking facilities of $4.6
million.
8
On July 5, 2016, our subsidiary Dalian BAK Power entered into a
banking facility letter with 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 Lis wife. On July 5, 2016 we borrowed a one-year term bank loan of RMB10
million (approximately $1.5 million), bearing fixed interest at 6.525% per
annum. We also borrowed a series of RMB20 million (approximately $3.0 million)
of bank acceptances from Bank of Dalian.
We are currently expanding our product lines and manufacturing
capacity in our Dalian plant, which require more funding to finance the
expansion. We plan to raise additional funds through bank borrowings and equity
financing in the future to meet our daily cash demands if required. 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.
Moreover, we plan to renew these loans upon maturity, 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 have 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 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 that with the booming future market demand in
high power lithium ion products, we can continue as a going concern and return
to profitability.
9
The following table sets forth a summary of our cash flows for
the periods indicated:
(All amounts in thousands of U.S. dollars)
|
|
Nine Months Ended June 30,
|
|
|
|
2015
|
|
|
2016
|
|
Net cash (used in) provided
by operating activities
|
$
|
(6,609
|
)
|
$
|
65
|
|
Net cash provided by (used in) investing
activities
|
|
1,899
|
|
|
(12,223
|
)
|
Net cash provided by
financing activities
|
|
15,282
|
|
|
8,817
|
|
Effect of exchange rate changes on cash and
cash equivalents
|
|
(10
|
)
|
|
(297
|
)
|
Net increase (decrease) in
cash and cash equivalents
|
|
10,562
|
|
|
(3,638
|
)
|
Cash and cash equivalents at the beginning of
period
|
|
992
|
|
|
6,763
|
|
Cash and cash equivalents at
the end of period
|
$
|
11,554
|
|
$
|
3,125
|
|
Operating Activities
Net cash provided by operating activities was $64,877 in the
nine months ended June 30, 2016, as compared to net cash used in operating
activities of $6.6 million in the same period in 2015. The net cash provided by
operating activities in the nine months ended June 30, 2016 was mainly
attributable to an increase in trade accounts and bills payable of $11.4 million
and payables from our former subsidiaries of $4.5 million, which were offset by
our net loss of $6.5 million and increase in inventories of $8.6 million.
Investing Activities
Net cash used in investing activities was $12.2 million for the
nine months ended June 30, 2016, as compared to net cash provided by investing
activities of $1.9 million in the same period of 2015. The net cash used in
investing activities in the nine months ended June 30, 2016 was mainly comprised
of the net cash payments of $12.2 million to construct the Dalian facilities,
including construction and purchase of equipment. The net cash provided by
investing activities for the nine months ended June 30, 2015 was mainly
attributable to a $7.4 million government grant received and $1.5 million
repayment from our former subsidiary, offset by a net cash payment of $7.1
million to construct the Dalian facilities.
Financing Activities
Net cash provided by financing activities was $8.8 million in
the nine months ended June 30, 2016, compared to net cash provided by financing
activities of $15.3 million during the same period in 2015. We obtained bank
loans of $13.0 million and borrowed $7.5 million from related and unrelated
parties during the nine months ended June 30, 2016, offset by repayment of short
term bank borrowings of $11.6 million. In the nine months ended June 30, 2015,
we received $8.1 million of short term bank loans and $12.8 million other short
term loans from related and unrelated parties, offset by repayments of $5.6
million to related and unrelated parties.
As of June 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)
|
|
Maximum amount available
|
|
|
Amount borrowed
|
|
Short term and long term credit
facilities:
|
|
|
|
|
|
|
Bank of Dandong
|
$
|
19.6
|
|
$
|
15.0
|
|
Capital Expenditures
We incurred capital expenditures of $12.2 million and $7.1
million in the nine months ended June 30, 2016 and 2015, respectively. Our
capital expenditures in the first nine months of fiscal 2016 were used primarily
to construct our manufacturing facilities in Dalian.
We estimate that our total capital expenditures for the
remainder of fiscal year 2016 and fiscal year of 2017 will reach approximately
$7.5 million and $17.2 million, respectively. Such funds will be used to
construct new plants and expand new automatic manufacturing lines in Dalian to
fulfill our customer demands.
10
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and
commercial commitments as of June 30, 2016:
(All amounts in thousands of U.S. dollars)
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1 - 3
|
|
|
|
|
|
More than
|
|
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
3 - 5 years
|
|
|
5years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank loans
|
$
|
13,394
|
|
$
|
685
|
|
$
|
12,709
|
|
$
|
-
|
|
$
|
-
|
|
Bills payable
|
|
3,091
|
|
|
3,091
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Payables to a former subsidiary
|
|
3,818
|
|
|
3,818
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Advances from related parties
|
|
1,168
|
|
|
1,168
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Advances from an unrelated third parties
|
|
3,465
|
|
|
3,465
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Advances from equity
investors
|
|
2,860
|
|
|
2,860
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital injection to Dalian Power and Trading
|
|
15,554
|
|
|
15,554
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments for
construction of buildings
|
|
4,645
|
|
|
4,645
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments for purchase of equipment
|
|
111
|
|
|
111
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Future interest payment on
bank loans
|
|
2,742
|
|
|
920
|
|
|
1,822
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
50,848
|
|
$
|
36,317
|
|
$
|
14,531
|
|
$
|
-
|
|
$
|
-
|
|
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 June 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 condensed 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. There have been no material changes to the critical accounting
policies previously disclosed in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2015.
Changes in Accounting Standards
Please refer to note 1 to our condensed consolidated financial
statements, Principal Activities, Basis of Presentation and Organization
Recently Issued Accounting Standards, for a discussion of relevant
pronouncements.