UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended:
September 30, 2016
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to
_____________
Commission File No.
001-32898
CHINA BAK BATTERY, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
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88-0442833
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(State or Other Jurisdiction of Incorporation or
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(I.R.S. Employer Identification No.)
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Organization)
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BAK Industrial Park, Meigui Street
Huayuankou
Economic Zone
Dalian, China, 116450
(Address of
Principal Executive Offices)
(86)(411)-3918-5985
(Registrants
telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
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Name of each exchange on which registered
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Common Stock, par value $0.001 per share
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The NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the Exchange
Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes [
] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes
[X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation
S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files)
Yes
[X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See the definitions of large accelerated filer,
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer [ ]
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Accelerated
Filer
[ ]
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Non-Accelerated Filer [ ] (Do not
check if a smaller reporting company)
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Smaller reporting company [X]
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Indicate by check mark whether registrant is a shell company
(as defined in Rule 12b-2 of the Act)
Yes [
] No [X]
As of March 31, 2016 (the last business day of the registrants
most recently completed second fiscal quarter), the aggregate market value of
the shares of the registrants common stock held by non-affiliates (based upon
the closing sale price of such shares as reported on The NASDAQ Global Market)
was approximately $25.8 million. Shares of the registrants common stock held by each
executive officer and director and by each person who owns 10% or more of the
outstanding common stock have been excluded from the calculation in that such
persons may be deemed to be affiliates of the registrant. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
There were a total of 19,600,469 shares of the
registrants common stock outstanding as of January 9, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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CHINA BAK BATTERY, INC.
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Annual Report
on Form 10-K
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TABLE OF CONTENTS
i
INTRODUCTORY NOTE
Use of Terms
Except as otherwise indicated by the context and for the
purposes of this report only, references in this report to:
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Company, we, us and our are to the combined
business of China BAK Battery, Inc., a Nevada corporation, and its
consolidated subsidiaries;
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BAK Asia are to our Hong Kong subsidiary,
China BAK Asia Holdings Limited;
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Dalian BAK Trading are to our PRC subsidiary,
Dalian BAK Trading Co., Ltd.;
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Dalian BAK Power are to our PRC subsidiary,
Dalian BAK Power Battery Co., Ltd;
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China and PRC are to the Peoples Republic
of China;
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RMB are to Renminbi, the legal currency of
China;
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U.S. dollar, $ and US$ are to the legal
currency of the United States;
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SEC are to the United States Securities and
Exchange Commission;
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Securities Act are to the Securities Act of
1933, as amended; and
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Exchange Act are to the Securities Exchange
Act of 1934, as amended.
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Special Note Regarding Forward Looking Statements
Statements contained in this report include forward-looking
statements within the meaning of such term in Section 27A of the Securities Act
and Section 21E of the Exchange Act. Forward-looking statements involve known
and unknown risks, uncertainties and other factors which could cause actual
financial or operating results, performances or achievements expressed or
implied by such forward-looking statements not to occur or be realized.
Forward-looking statements made in this report generally are based on our best
estimates of future results, performances or achievements, predicated upon
current conditions and the most recent results of the companies involved and
their respective industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as may, will, could, should,
project, expect, believe, estimate, anticipate, intend, continue,
potential, opportunity or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:
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our ability to continue as a going concern;
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our ability to remain listed on a national
securities exchange;
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our ability to timely complete the construction
of our Dalian facilities and commence its full commercial operations;
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our anticipated growth strategies and our
ability to manage the expansion of our business operations effectively;
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our future business development, results of
operations and financial condition;
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our ability to fund our operations and manage
our substantial short-term indebtedness;
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our ability to maintain or increase our market
share in the competitive markets in which we do business;
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our ability to keep up with rapidly changing
technologies and evolving industry standards, including our ability to
achieve technological advances;
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our ability to diversify our product offerings
and capture new market opportunities;
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our ability to obtain original equipment
manufacturer, or OEM, qualifications from brand names;
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our ability to source our needs for skilled
labor, machinery and raw materials economically;
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uncertainties with respect to the PRC legal and
regulatory environment;
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other risks identified in this report and in
our other reports filed with the SEC, including those identified in Item
1A. Risk Factors below.
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Readers are urged to carefully review and consider the various
disclosures made by us in this report and our other filings with the SEC. These
reports attempt to advise interested parties of the risks and factors that may
affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this report speak only as of
the date hereof and we disclaim any obligation to provide updates, revisions or
amendments to any forward-looking statements to reflect changes in our
expectations or future events.
1
PART I
ITEM
1. BUSINESS.
Overview of Our Business
Our Dalian manufacturing facilities began its partial
commercial operations in July 2015. We are now engaged in the business of
developing, manufacturing and selling new energy high power lithium batteries,
which are mainly used in the following applications:
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Electric vehicles (EV), such as electric cars, electric buses, hybrid
electric cars and buses;
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Light electric vehicles (LEV), such as electric bicycles, electric
motors, sight-seeing cars; and
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Electric tools, energy storage, uninterruptible power supply, and other
high power applications.
We have received most of the operating assets, including
customers, employees, patents and technologies of our former subsidiary, BAK
International (Tianjin) Ltd. (BAK Tianjin). Such assets were acquired in
exchange for a reduction in receivables from our former subsidiaries that were
disposed in June 2014. We have outsourced and will continue to outsource our
production to other manufacturers until our Dalian manufacturing facility can
fulfill our customers needs. For the fiscal year ended September 30, 2016,
Dalian BAK Power purchased batteries of approximately of $2.7 million from BAK
Tianjin.
We generated revenues of $10.4 million and $13.9 million for
the fiscal years ended September 30, 2016 and 2015, respectively. We had a net
loss of $12.7 million in 2016 and a net profit of $15.9 million in 2015. As of
September 30, 2016, we had an accumulated deficit of $139.8 million and net
assets of $15.1 million. We had a working capital deficiency and accumulated
deficit from recurring net losses and short-term debt obligations maturing in
less than one year as of September 30, 2016.
On June 14, 2016, we renewed our banking facilities from Bank
of Dandong for loans with a maximum amount of RMB130 million (approximately
$19.5 million), including three-year long-term loans and three-year revolving
bank acceptance and letters of credit bills for the period from June 13, 2016 to
June 12, 2019. The banking facilities were guaranteed by Mr. Yunfei Li (Mr.
Li), our CEO, and Ms. Qinghui Yuan, Mr. Lis wife, Mr. Xianqian Li, our former
CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, Shenzhen BAK Battery Co., Ltd.,
our former subsidiary (Shenzhen BAK). The facilities were also secured by part
of our Dalian sites prepaid land use rights, buildings, construction in
progress, machinery and equipment and pledged deposits. Under the banking
facilities, from June to September 2016, we borrowed various three-year term
bank loans that totaled RMB126.8 million (approximately $19.0 million), bearing
fixed interest at 7.2% per annum. We also borrowed a series of revolving bank
acceptance totaled $0.6 million from Bank of Dandong under the credit
facilities, and bank deposit of 50% was required to secure against these bank
acceptance bills.
On July 6, 2016, we obtained banking facilities from Bank of
Dalian for loans with a maximum amount of RMB10 million (approximately $1.5
million) and bank acceptance bills of RMB40 million (approximately $6.0 million)
to July 2017. The banking facilities were guaranteed by Mr. Li, our CEO, and Ms.
Qinghui Yuan, Mr. Lis wife, and Shenzhen BAK. Under the banking facilities, on
July 6, 2016 we borrowed one year short-term loan of RMB10 million
(approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum.
We also borrowed revolving bank acceptance totaled $6.0 million, and bank
deposit of 50% was required to secure against these bank acceptance bills.
In June 2016, we received advances in the aggregate of $2.9
million from Mr. Jiping Zhou and Mr. Dawei Li. These advances were unsecured,
non-interest bearing and repayable on demand. On July 8, 2016, we received
further advances of $2.6 million from Mr. Jiping Zhou. On July 28, 2016, to
convert these advances into equity interests in our Company, we entered into
securities purchase agreements with Mr. Jiping Zhou and Mr. Dawei Li to issue
and sell an aggregate of 2,206,640 shares of our common stock, at $2.5 per
share, for an aggregate consideration of approximately $5.52 million. On August
17, 2016, we issued these shares to the investors.
In the meanwhile, due to the growing environmental pollution
problem, the Chinese government is currently providing vigorous support to the
new energy facilities and vehicles. It is expected that we will be able to
secure more potential orders from the new energy market, especially from the
electric car market. We believe with that the booming market demand in high
power lithium ion products, we can continue as a going concern and return to
profitability.
2
To promote the development of new energy electric vehicles, in
April 2015, the central government of China issued Notice of Financial Support
Policies for the Promotion of New Energy Vehicles in 2016-2020, which regulated
favorable government subsidies for the new energy electric vehicles for years
from 2016 to 2020. It led to the explosive growth in the production and selling
of new electric vehicles in 2015. However, in January 2016, as it was reported
that there were widespread frauds involved in obtaining government subsidies,
the central government launched investigations among the electric vehicles
industry. Before the completion of the investigation, the subsidies for 2015
were ceased to be granted to the manufacturers of electric vehicles, and it was
said that the subsidies policy for 2016 to 2020 would be revised accordingly.
Due to the continued investigation and unclear government policies, almost all
the new energy electric vehicle manufacturers suspended or decreased the
production and selling of electric vehicles in 2016. Accordingly, the production
and selling of power batteries for use in electric vehicles dramatically
decreased in 2016. In November 2016 the central government announced the result
of investigation, including the list of manufacturers of electric vehicles who
committed alleged frauds and the related penalties. On December 29, 2016, the
Ministry of Finance of China finally issued the revised subsidy policy named
Notice of Revision to Financial Support Policies for the Promotion of New Energy
Vehicles in 2016-2020, which revised the subsidies standard to be based on cost
and technology of the power batteries, and set up the maximum amount of the
subsidies from the central and local governments. The revised subsidy policy
also raised the standard and threshold for the quality of electric vehicles and
power batteries, confirmed the responsibility of the manufacturers of electric
vehicles, and strengthened the penalty system.
In March 2015, the Ministry of Industry and Information
Technology of China (the MIIT) issued the Requirements of the Industry
Standards for the Auto Power Storage Batteries ("Requirements"), which are
applicable to auto power battery manufacturers located in China. In order to be
certified as qualified manufacturers under Requirements, manufacturers are
required to be examined by quality inspecting agencies appointed by
Administration of Quality Inspection under Requirements after the manufacturers
have obtained the following reports and certificates:
1. Environmental Acceptance Report;
2. Fire Acceptance
Report;
3. New National Standard Certificate of Power Battery: GB/T
31484-2015, GB/T 31485-2015 and GB/T 31486-2015;
4. OHSAS 18001 Occupational
Health and Safety Management System;
5. ISO14001 Environmental Management
System; and
6. Occupational Health Report Occupational Health Report.
We have obtained all the above listed required reports and
certificates. While we believe that we meet all of the conditions listed under
the Requirements, there is no assurance that the certification will be granted
to us by the MIIT. During the transition period in 2015 and the beginning of
2016, electric automobile manufacturers were able to obtain subsidies from the
governments even though their power battery suppliers were not as qualified
manufacturers under the Requirements. Subsequent to that period and prior to
obtaining the certification from the MIIT, we have been cooperating with
Shenzhen BAK, our former subsidiary, or other qualified companies under the
Requirements, by selling our key materials to those battery manufacturers for
them to manufacture, pack, test and use their own process produce and sell end
products in compliance with the Requirements to electric automobile
manufacturers. From September 2016, the MIIT ceased to certify auto power
battery manufacturers under the Requirements. Also it is reported that the
compliance with Requirements will not be deemed as a precondition for qualified
manufacturers of power batteries for use in electric vehicles. In the newly
issued Notice of Revision to Financial Support Policies for the Promotion of New
Energy Vehicles in 2016-2020, compliance with the Requirements was not listed as
a precondition for qualified manufacturers of power batteries to be used in
electric vehicles to obtain government subsidies.
Our Corporate History and Structure
We conduct our current business through the following two
wholly-owned operating subsidiaries in China that we own through BAK Asia:
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Dalian BAK Trading, located in Dalian, China,
incorporated on August 14, 2013, which focuses on the wholesale of lithium
batteries and lithium batteries materials, import & export business
and related technology consulting service; and
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Dalian BAK Power, located in Dalian, China, incorporated
on December 27, 2013, which focuses on the development and manufacture of
high-power lithium batteries.
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Almost all of our business operations are conducted primarily
through our Chinese subsidiaries. The chart below presents our current corporate
structure:
3
Our Products
The use of new materials have enabled the configuration of
high-power lithium battery cells to contain much higher energy density and
higher voltage and have a longer life cycle and shorter charge time than other
types of lithium-based batteries. These special attributes, coupled with
intrinsic safety features, are suitable for batteries used for high-power
applications, such as electric cars, electric bicycles, electric tools, energy
storage and uninterruptible power supply, or UPS.
We believe high power lithium batteries represent the main
direction of the development of new energy vehicle technologies according to the
12th Five-Year Plan published by the Chinese government.
Our Dalian manufacturing facilities focus on the development
and manufacture of high power lithium batteries, for use in the following end
applications:
Battery Cell
Type
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End applications*
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High-power lithium battery
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Electric bus
[6,000-20,000]
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Electric car [1,500-3,5000]
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Hybrid electric
vehicle [500-2000]
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Light electric vehicle [10-150]
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Cordless power
tool [10-30]
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Uninterruptible power supply
[30-300]
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Energy Storage
[>300 ]
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* Bracketed numbers denote number of cells per particular
battery.
Key High Power Lithium Battery Applications
End-product applications that are driving the demand for high
power lithium batteries include electric vehicles, such as electric cars,
electric buses, hybrid electric cars and buses; light electric vehicles, such as
electric bicycles, electric motors, sight-seeing cars; and electric tools,
energy storage, uninterruptible power supply, and other high power
applications.
Electric Vehicles
An electric vehicle, sometimes referred to as an electric drive
vehicle, uses one or more electric motors for propulsion. Electric vehicles
include electric cars, electric buses, electric trains, electric lorries,
electric airplanes, electric boats, and hybrid electric vehicles, plug in hybrid
electric vehicles and electric spacecraft. Electric cars and electric buses are
propelled by one or more electric motors powered by rechargeable battery packs.
Electric cars and buses have the potential to significantly reduce city
pollution by having zero tail pipe emissions. Electric cars and buses are also
expected to have less dependence on oil. World governments are pledging
significant funds to fund the development of electric vehicles and their
components due in part to these advantages. Due to these factors and a lithium
batterys relatively environmentally-friendly, light-weight and high-capacity features, the demand
for lithium batteries in the field of electric cars and buses is increasing.
4
Due to such recent trends as renewed concerns relating to the
availability and price of oil, increased legal fuel-efficiency requirements and
incentives, and heightened interest in environmentally-friendly or green
technologies, hybrid electric vehicles are likely to continue to attract
substantial interest from vehicle manufacturers and consumers. Hybrid electric
vehicles include automobiles, trucks, buses, and other vehicles that combine a
conventional propulsion system with a rechargeable energy storage system to
achieve better fuel economy than conventional vehicles. As these vehicles tend
to be large and heavy, their rechargeable energy storage system generally
consists of a large quantity of rechargeable high-power lithium cells.
The year 2014 was seen as the first real year for the
development of China's new energy vehicle industry by many industry insiders.
After explosive growth in 2015, the production and sales of new energy vehicles
continued to grow tremendously in 2016. According to China Association of
Automobile Manufacturers, from January to October 2016, the production of new
energy vehicles in China reached 355,000 units - up 77.9 percent year-on-year;
and sales in China reached 337,000 units - up 82.2 percent year-on-year. As the
core mechanism for new energy vehicles, the power battery industry has also
recently welcomed an unprecedented growth. According to the Development Program
for the Energy Efficient and New Energy Vehicle Industry 2012-2020 designed by
the State Council of the PRC, some major objectives are: to enthusiastically
advance innovation in power battery technologies; scientifically plan the
industrial layout; focus on developing power battery industry clusters; and
actively promote the mass production of power batteries. With the recent
introduction of a number of supporting policies, the production of power
batteries for vehicles has grown remarkably.
Light Electric Vehicles
Light electric vehicles include bicycles, scooters, and
motorcycles
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with rechargeable electric motors. Due to their relatively
small size and light design, approximately 10-150 high-power lithium cells can
be used to power light electric vehicles. The electric bicycle market in China
is huge. According to MIIT, from January to September 2016, the production of
electric bicycles in China was 22.6 million units, up 4.6% year-on-year.
Energy Storage
Energy storage mainly means storage of electric energy by
battery, inductor, and capacitor. Battery energy storage is mainly used for
storage of emergency supply, battery car, and redundant energy of power
plants.
Electric Tools
Electric tools such as drills, saws and grinders are used for
both commercial and personal use. Due to high power requirements, many electric
tools have historically used small combustion engines, used heavier nickel metal
hydride batteries or relied on external power sources. Manufacturers of electric
tools, such as Milwaukee Electric Tool Corporation, Stanley Black & Decker,
Inc., the Bosch Group, Metabowerke GmbH and Rigid Tool Company have begun to use
lithium-ion technology. The market for portable high-powered electric tools is
rapidly growing and has prompted many users, both commercial and personal, to
replace or upgrade their current power tools.
Uninterruptible Power Supplies
A UPS provides emergency power from a separate source when
utility power is not available. The most common type of battery used in UPS is
Sealed Lead-Acid, however, due to the lithium batterys relatively small size,
light design and environmentally-friendly features, the demand for lithium
batteries in this industry is increasing.
Revenue by Products
Before June 30, 2014, we derived our revenues from BAK
International and its subsidiaries which produced prismatic cells, cylindrical
cells, lithium polymer cells and high-power lithium batteries. Since July 1,
2014, our revenue has been mainly from Dalian BAK Power for sale of batteries
manufactured by BAK Tianjin under outsourcing arrangements. Starting from
October 2015, we generated revenues from high-power lithium battery cells
manufactured by Dalian BAK Power as well as batteries outsourced from BAK
Tianjin and other manufacturers. The following table sets forth the breakdown of
our net revenues by product types:
5
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Year Ended September 30,
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2015
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2016
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% of Net
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% of Net
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Amount
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Revenues
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Amount
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Revenues
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(in thousands of U.S. dollars, except
percentages)
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High-power lithium batteries
used in:
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Electric vehicles
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$
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-
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-
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$
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6,488
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62.57
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Light electric
vehicles
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-
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-
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553
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5.33
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Uninterruptable supplies
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13,904
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100.00
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3,328
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32.10
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Total
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$
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13,904
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100.00
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$
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10,369
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100.00
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Sales and Marketing
We plan to build an extensive sales and service network in
China, highlighted by our presence in the regions where Chinas main EV and LEV
productions is located, such as Beijing, Shandong Province, Guangdong Province,
Sichuan Province and three provinces in Northeast China. We intend to gradually
establish post-sales service offices in these areas to serve brand owners and
pack manufacturers in each designated area as currently our marketing department
at headquarters is responsible for our promoting efforts. In doing so, our sales
staff works closely with our customers to understand their needs and provide
feedback to us so that we can better address their needs and improve the quality
and features of our products.
We also engage in marketing activities such as attending
industry-specific conferences and exhibitions to promote our products and brand
name. We believe these activities are conducive in promoting our products and
brand name among key industry participants.
Suppliers
The primary raw materials used in the manufacture of
lithium-ion batteries include electrode materials, cases and caps, foils,
electrolyte and separators. Cost of these raw materials is a key factor in
pricing our products. We believe that there is an ample supply of most of the
raw materials we need in China. We are seeking to identify alternative raw
material suppliers to the extent there are viable alternatives and to expand our
use of alternative raw materials.
We aim to maintain multiple supply sources for each of our key
raw materials to ensure that supply problems with any one supplier will not
materially disrupt our operations. In addition, we strive to develop strategic
relationships with new suppliers to secure a stable supply of materials and
introduce competition in our supply chain, thereby increasing our ability to
negotiate better pricing and reducing our exposure to possible price
fluctuations.
For the fiscal year ended September 30, 2016, our key raw
material suppliers were as follows:
Materials
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Main Suppliers
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NCM
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Shenzhen Tianjiao
Technology, Co., Ltd.
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Cathode materials
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Huzhou Chuangya Power Battery
Material Co., Ltd
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Anode materials
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Changs Ascending
Enterprise Co., Ltd.
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BMS
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Shenzhen Klclear Technology Co.,
Ltd.
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Solvent NMP
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MYJ Chemical Co.,
Ltd.
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Electrolyte
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Dongguan Shanshan Battery
Material Co., Ltd
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Aluminum foil
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Shanghai Huxin
Aluminum Foil Products Co., Ltd
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Cases and caps
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Changzhou Wujinzhongrui Electric
Co., Ltd
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Copper sheet
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Dalian Desen
Metal Products Co.,Ltd
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Copper foil
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Lingbao Wason Copper Foil Co.,
Ltd
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NCM
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Shenzhen Tianjiao
Technology, Co., Ltd.
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Cathode materials
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Huzhou Chuangya Power Battery
Material Co., Ltd
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We source our manufacturing equipment both locally and from
overseas, based on consideration of their cost and function. Our key equipment
as of September 30, 2016 was purchased from the following suppliers:
6
Instruments
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Main Suppliers
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Winder
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Kaido Manufacturing Co., Ltd.
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Charge and Discharge Equipment
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Zhejiang Hangke Technologies Co., Ltd
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Electrode Preparing Machine
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Zhuhai Higrand Electronic
Technology Inc.
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Laser welding machine
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United Winners Laser Co., Ltd.
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Infusing Machine
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Kinlo Technology & System
(Shenzhen) Co. Ltd.
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Coating Machine
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Shenzhen Haoneng Technology Co., Ltd.
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Automatic Line Machine
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Shenzhen Zhongji Automation
Co., Ltd.
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Vacuum Oven
|
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Wujiang Jiangling Equipment Co., Ltd
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Dehumidifier
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Hangzhou Dry Air Treatment
Equipment Co., Ltd.
|
Intellectual Property
On August 25, 2014, we entered into an intellectual property
rights use agreement with Shenzhen BAK, pursuant to which we are authorized to
use Shenzhen BAKs registered logo, trademarks and patents obtained as of June
30, 2014 for a period of 5 years for free from June 30, 2014. As of June 30,
2014, Shenzhen BAK had registered 80 trademarks in the PRC, including BAK in
both English and in Chinese characters as well as its logo, and had registered
49 trademarks in the United States, European Union, Korea, Russia, Taiwan,
India, Canada and Hong Kong. As of June 30, 2014, Shenzhen BAK had registered
522 patents in the PRC and other countries relating to battery cell materials,
design and manufacturing processes. We have registered the following Internet
and WAP domain name:
www.cbak.com.cn
.
As of September 30, 2016, Dalian BAK Power has 20 patents
including 18 utility model patents and 2 patents for invention in the PRC. 17 of
these patents were acquired by BAK Asia, from an unrelated third party at RMB1
and were contributed as paid up capital of Dalian BAK Power.
We also have unpatented proprietary technologies for our
product offerings and key stages of the manufacturing process. Our management
and key technical personnel have entered into agreements requiring them to keep
confidential all information relating to our customers, methods, business and
trade secrets during their terms of employment with us and thereafter and to
assign to us their inventions, technologies and designs they develop during
their term of employment with us.
We have institutionalized our efforts to safeguard our
intellectual property rights by establishing an internal department that
includes professionals such as attorneys, engineers, information managers and
archives managers responsible for handling matters relating to our intellectual
property rights. We have published internally a series of rules to protect our
intellectual property rights.
Seasonality
According to the market demands, we usually experience seasonal
peaks during the months of October to March for electric vehicle markets, and
during the months of May to October for light electric markets. Also, at various
times during the year, our inventories may be increased in anticipation of
increased demand for consumer electronics. The period from the end of September
to February tends to be seasonally low sales months due to plant closures for
National Day holiday and the Chinese New Year in the PRC.
Customers
We have many well-known customers, including electric vehicle
manufacturers, such as Pingxiang Anyuan Tourist Bus Co., Ltd., Ltd, Shandong
Tangjun Electric Co., Ltd, Chery Automobile Co. Ltd., FAW Bus and Coach Co.,
Ltd., Dongfeng Special Automobile Co., Ltd., Dongfeng Xiangyang Touring Car Co.,
Ltd.; and electric bicycle manufacturers, such as Taiwan Taibag Co., Ltd,
Tianjin FSD Bicycles Co., Ltd, , Shenzhen Xidesheng Bicycle Co., Ltd., and Gamma
Bicycle Co., Ltd, and battery pack manufacturers, such as Guangdong Pisen
Electronics Co., Ltd., Sichuan Pisen Electric Co., Ltd, Shenzhen Max Technology
Co., Ltd, Dongguan Large Electronics Co., Ltd, and manufacturers in UPS and
other applications, such as Yangzhou Fengwei New Energy Technology Co., Ltd.,
Emerald Battery Technologies Co., Ltd., Robotics Technology Ltd. We believe that
we will continue to increase our revenue and market share as we gradually
increase our high-power batteries production as the demand for these batteries
has been increasing.
7
Geography of Sales
Before June 30, 2014, we sold our products domestically and
internationally. Thereafter, we sell high-power lithium battery primarily to
customers in China. The following table sets forth certain information relating
to our total revenues by location of our customers for the last two fiscal
years.
|
|
Year Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
% of Net
|
|
|
|
|
|
% of Net
|
|
|
|
Amount
|
|
|
Revenues
|
|
|
Amount
|
|
|
Revenues
|
|
|
|
(in thousands of U.S. dollars, except
percentages)
|
|
Mainland China
|
$
|
13,904
|
|
|
100.00
|
|
$
|
9,017
|
|
|
86.96
|
|
Europe
|
|
-
|
|
|
-
|
|
|
457
|
|
|
4.41
|
|
PRC Taiwan
|
|
-
|
|
|
-
|
|
|
413
|
|
|
3.98
|
|
Korea
|
|
-
|
|
|
-
|
|
|
258
|
|
|
2.49
|
|
Israel
|
|
-
|
|
|
-
|
|
|
224
|
|
|
2.16
|
|
Total
|
$
|
13,904
|
|
|
100.00
|
|
$
|
10,369
|
|
|
100.00
|
|
Competition
We face intense competition from high-power lithium battery
makers in China, as well as in Korea and Japan for each of our product types.
The following table sets forth our major competitors for the EV market and LEV
market as of September 30, 2016:
Product
Type
|
|
Competitors
|
|
EV battery
|
|
Japan:
|
Panasonic
Corporation
|
|
|
Korea:
|
Samsung Electronics Co., Ltd.
LG Chemical
|
|
|
China:
|
Tianjin Lishen
Battery Joint-stock Co., Ltd
Contemporary Amperex Technology Co.,
Limited
BYD Co. Ltd
Hefei Guoxuan Hi-Tech Power Energy Co., Ltd
Amperex Technology Limited
|
LEV battery
|
|
China:
|
Tianneng Power International
Limited
Chaowei Power Holdings Limited
Phylion Battery Co., Ltd
|
We believe that we are able to leverage our low-cost advantage
to compete favorably with our competitors. Compared to Korean and Japanese
battery makers, we are able to source our needs for skilled labor and raw
materials locally and economically. Compared to Chinese battery makers, we
believe we have higher consistency and safety in product quality, which enables
us to compete favorably with local competitors.
Research and Development
The R&D of next-generation advanced lithium battery and its
key materials characterized by high energy density, high security,
long-lasting life, and low cost as well as the training of related technical
talents, have become a major demand in the development of advanced electric
vehicles in China. We have reached strategic cooperation agreements with Dalian
Institute of Chemical Physics of Chinese Academy of Sciences ("DICP"), Dalian
University of Technology, Dalian Maritime University and Dalian Jiaotong
University. Under the agreements, these institutions and us will jointly
research and develop the next-generation key technologies and materials with an
aim to produce the most powerful battery worldwide.
We have an advanced R&D center in Dalian, receiving almost
all the R&D achievements, R&D equipment and staff of BAK Tianjin. BAK
Tianjin began its R&D manufacturing and distribution of high-power lithium
battery and battery modules in December 2006, for use in electric cars, electric
bicycles, UPS, and other applications.
During the fiscal years ended September 30, 2015 and 2016, our
expenditures for research and development activities were $1.0 million and $1.9
million, respectively, or 7.2% and 18.1% of net revenues, respectively.
8
Environmental Compliance
As we conduct our manufacturing activities in China, we are
subject to the requirements of PRC environmental laws and regulations on air
emission, waste water discharge, solid waste and noise. The major environmental
regulations applicable to us include the PRC Environmental Protection Law, the
PRC Law on the Prevention and Control of Water Pollution and its Implementation
Rules, the PRC Law on the Prevention and Control of Air Pollution and its
Implementation Rules, the PRC Law on the Prevention and Control of Solid Waste
Pollution, and the PRC Law on the Prevention and Control of Noise Pollution. We
aim to comply with environmental laws and regulations. We have built
environmental treatment facilities concurrently with the construction of our
manufacturing facilities, where waste air, waste water and waste solids we
generate can be treated in accordance with the relevant requirements. We
outsource our disposal of solid waste we generate in the Dalian facility to a
third party contractor. Certain key materials used in manufacturing, such as
cobalt dioxide, electrolyte and separators, have proven innocuous to workers
health and safety as well as the environment. We are not subject to any
admonitions, penalties, investigations or inquiries imposed by the environmental
regulators, nor are we subject to any claims or legal proceedings to which we
are named as a defendant for violation of any environmental law or regulation.
We do not have any reasonable basis to believe that there is any threatened
claim, action or legal proceedings against us that would have a material adverse
effect on our business, financial condition or results of operations.
Employees
We had a total of approximately 631 employees as of September
30, 2016. The following table sets forth the number of our employees by
function.
Function
|
|
|
|
|
Number
|
|
Production
|
|
|
|
|
357
|
|
Research and development
|
|
|
|
|
93
|
|
Sales and marketing
|
|
|
|
|
14
|
|
General and administrative
|
|
|
|
|
167
|
|
Total
|
|
|
|
|
631
|
|
Our employees are not represented by a labor organization or
covered by a collective bargaining agreement. We have not experienced any work
stoppages. We believe we maintain good relations with our employees.
ITEM 1A. RISK
FACTORS.
RISKS RELATED TO OUR BUSINESS
Our failure to timely complete the construction of our
Dalian facility and commence its full commercial operations could negatively
affect our business operations.
We are currently constructing our Dalian facility and we have
relocated most of the operating assets, including machinery and equipment, as
well as the customers, employees, patents and technologies from BAK Tianjin to
the Dalian facility. We have completed the construction of two plants of the
Dalian facility and their commercial operation began in July 2015. We are
currently constructing two more plants and have completed their civil work and
the product lines are expected to be completed by June 2017, but we cannot give
assurance that the construction will be completed as scheduled or, without cost
overrun. Even if the construction is completed on a timely basis, we cannot give
assurance that the full commercial operation can begin as we expected. In
addition, we may not be able to attract a sufficient number of skilled workers
to meet the needs of the new facility. If we experience delays in construction
or commencement of the full commercial operations, increased costs or lack of
skilled labor, or other unforeseen events occur, our business, financial
condition and results of operations could be adversely impacted. Operating
results could also be unfavorably impacted by start-up costs until production at
the new facility reaches planned levels.
Our independent registered auditors have expressed
substantial doubt about our ability to continue as a going concern.
Our independent auditors have added an explanatory paragraph to
their audit opinion issued in connection with our financial statements included
in this report which states that the financial statements were prepared assuming
that we would continue as a going concern. As discussed in Note 1 to the
consolidated financial statements included with this report, we had a working capital deficiency, accumulated deficit from
recurring losses and short-term debt obligations as of September 30, 2016. These
conditions raise substantial doubt about our ability to continue as a going
concern. As disclosed under Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations Recent Development and Note 1
to the consolidated financial statements, our Dalian manufacturing facilities
began partial commercial operations in July 2015 which focus on production and
sale of the new energy high power batteries for use in electric vehicles, light
electric vehicles and other high power applications. In June and July 2016, we
obtained advances with an aggregate amount of $5.5 million from potential
investors and converted these loans to common stock in August 2016. On June 14,
2016, we renewed our banking facilities from Bank of Dandong to provide loans
and bank acceptances up to a total amount of $19.5 million with a term expiring
on June 12, 2019. On July 6, 2016, we obtained banking facilities from Bank of Dalian to provide loans and bank acceptances up to a total amount of $7.5
million with a term expiring in July 2017. As of September 30, 2016, we had
unutilized committed banking facilities of $0.2 million. We plan to renew our
bank borrowings upon maturity and raise additional funds through bank borrowings
and equity financing in the future to meet our daily cash demands. However,
there can be no assurance that we will be successful in obtaining the financing.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
9
We rely on a few battery suppliers to fulfill our
customers orders. If we fail to effectively manage our relationships with, or
lose the services of these suppliers and we cannot substitute suitable
alternative suppliers, our operations would be materially adversely affected.
Before the production at our Dalian facility can completely
fulfill our customers orders, we expect to continue to generate part of our
revenues by outsourcing our customers orders to BAK Tianjin and a few other
suppliers. If our business relationship with BAK Tianjin and other suppliers
changes negatively or their financial condition deteriorates, or their operating
environment changes, our business may be harmed in many ways. BAK Tianjin and
other suppliers may unilaterally terminate battery supply to us or increase the
prices. As a result, we are not assured of an uninterrupted supply of high power
lithium batteries of acceptable quality or at acceptable prices from BAK Tianjin
and other suppliers. We may not be able to substitute suitable alternative
contract manufacturers in a timely manner on commercially acceptable term or at
all. We may be forced to default on the agreements with our customers. This may
negatively impact our revenues and adversely affect our reputation and
relationships with our customers, causing a material adverse effect on our
financial condition, results of operations and prospects.
Our business depends on the growth in demand for electric
vehicles, light electric vehicles, electric tools, energy storage, UPS, and
other high-power electric devices.
As the demand for our products is directly related to the
market demand for high-power electric devices, a fast growing high-power
electric devices market will be critical to the success of our business. In
anticipation of an expected increase in the demand for high-power electric
devices such as electric vehicles, light electric vehicles, electric tools,
energy storage and UPS in the next few years, we have built our Dalian
manufacturing facilities. However, the markets we have targeted, primarily those
in the PRC, may not achieve the level of growth we expect. If this market fails
to achieve our expected level of growth, we may have excess production capacity
and may not be able to generate enough revenue to obtain our profitability.
If we cannot continue to develop new products in a timely
manner, and at favorable margins, we may not be able to compete effectively.
The battery industry has been notable for the pace of
innovations in product life, product design and applied technology. We and our
competitors have made, and continue to make, investments in research and
development with the goal of further innovation. The successful development and
introduction of new products and line extensions face the uncertainty of
customer acceptance and reaction from competitors, as well as the possibility of
cannibalization of sales of our existing products. In addition, our ability to
create new products and line extensions and to sustain existing products is
affected by whether we can:
|
develop and fund research and
technological innovations;
|
|
receive and maintain necessary
intellectual property protections;
|
|
obtain governmental approvals and
registrations;
|
|
comply with governmental
regulations; and
|
|
anticipate customer needs and
preferences successfully.
|
10
The failure to develop and launch successful new products could
hinder the growth of our business and any delay in the development or launch of
a new product could also compromise our competitive position. If competitors
introduce new or enhanced products that significantly outperform ours, or if
they develop or apply manufacturing technology which permits them to manufacture
at a significantly lower cost relative to ours, we may be unable to compete
successfully in the market segments affected by these changes.
Our efforts to develop products for new commercial
applications could fail.
Although we are involved with developing certain products for
new commercial applications, we cannot provide assurance that acceptance of our
products will occur due to the highly competitive nature of the business. There
are many new product and technology entrants into the marketplace, and we must
continually reassess the market segments in which our products can be successful
and seek to engage customers in these segments that will adopt our products for
use in their products. In addition, these companies must be successful with
their products in their markets for us to gain increased business. Increased
competition, failure to gain customer acceptance of products, the introduction
of competitive technologies or failure of our customers in their markets could
have a further adverse effect on our business.
Our future success depends on the success of
manufacturers of the end applications that use our products.
As we expand to the battery markets for global electric
vehicles, light electric vehicles, electric tools, energy storage, UPS and other
high-power electric devices, our future success depends on whether
end-application manufacturers are willing to use batteries that incorporate our
products. To secure acceptance of our products, we must constantly develop and
introduce more reliable and cost-effective battery cells with enhanced
functionality to meet evolving industry standards. Our failure to gain
acceptance of our products from these manufacturers could materially and
adversely affect our future success.
Even if a manufacturer decides to use batteries that
incorporate our products, the manufacturer may not be able to market and sell
its products successfully. The manufacturers inability to market and sell its
products successfully, whether from lack of market acceptance or otherwise,
could materially and adversely affect our business and prospects because this
manufacturer may not order new products from us. If we cannot achieve the
expected level of sales, we will not be able to make sufficient profits to
offset the expenditures we have incurred to expand our production capacity, nor
will we be able to grow our business. Accordingly, our business, financial
condition, results of operations and future success would be materially and
adversely affected.
Our failure to keep up with rapid technological changes
and evolving industry standards may cause our products to become obsolete and
less marketable, resulting in loss of market share to our competitors.
The lithium-based battery market is characterized by changing
technologies and evolving industry standards, which are difficult to predict.
This, coupled with frequent introduction of new products and models, has
shortened product life cycles and may render our products obsolete or
unmarketable. Our ability to adapt to evolving industry standards and anticipate
future standards will be a significant factor in maintaining and improving our
competitive position and our prospects for growth. To achieve this goal, we have
invested and plan to continue investing significant financial resources in our
R&D infrastructure. R&D activities, however, are inherently uncertain,
and we might encounter practical difficulties in commercializing our research
results. Accordingly, our significant investment in our R&D infrastructure
may not bear fruit. On the other hand, our competitors may improve their
technologies or even achieve technological breakthroughs that would render our
products obsolete or less marketable. Therefore, our failure to effectively keep
up with rapid technological changes and evolving industry standards by
introducing new and enhanced products may cause us to lose our market share and
to suffer a decrease in our revenue.
A change in our product mix may cause our results of
operations to differ substantially from the anticipated results in any
particular period.
Our overall profitability may not meet expectations if our
products, customers or geographic mix are substantially different than
anticipated. Our profit margins vary among products, customers and geographic
markets. Consequently, if our mix of any of these is substantially different
from what is anticipated in any particular period, our profitability could be
lower than anticipated.
11
We may be subject to declining average selling prices,
which may harm our revenue and gross profits.
Consumer electronics such as electric vehicles, light electric
vehicles, electric tools, energy storage, UPS are subject to declines in average
selling prices due to rapidly evolving technologies, industry standards and
consumer preferences. As a result, manufacturers of these electronic devices
expect us as suppliers to cut our costs and lower the price of our products in
order to mitigate the negative impact on their own margins. We have reduced the
price of some of our electric bike batteries in the past in order to meet market
demand and expect to continue to face market-driven downward pricing pressures
in the future. Our revenue and profitability will suffer if we are unable to
offset any declines in our average selling prices by developing new or enhanced
products with higher selling prices or gross profit margins, increasing our
sales volumes or reducing our costs on a timely basis.
We may face impairment charges if economic environments
in which our businesses operate and key economic and business assumptions
substantially change.
Assessment of the potential impairment of property, plant and
equipment and other identifiable intangible assets is an integral part of our
normal ongoing review of operations. Testing for potential impairment of
long-lived assets is dependent on numerous assumptions and reflects our best
estimates at a particular point in time, which may vary from testing date to
testing date. The economic environments in which our businesses operate and key
economic and business assumptions with respect to projected product selling
prices and materials costs, market growth and inflation rates, can significantly
affect the outcome of impairment tests. Estimates based on these assumptions may
differ significantly from actual results. Changes in factors and assumptions
used in assessing potential impairments can have a significant impact on both
the existence and magnitude of impairments, as well as the time at which such
impairments are recognized. Future changes in the economic environment and the
economic outlook for the assets being evaluated could also result in impairment
charges. Any significant asset impairments would adversely impact our financial
results.
We experience fluctuations in quarterly and annual
operating results.
Our quarterly and annual operating results have fluctuated in
the past and likely will fluctuate in the future. The demand for our products is
driven largely by the demand for the end-product applications that are powered
by our products. Accordingly, the rechargeable battery industry is affected by
market conditions that are often outside our control. Our results of operations
may fluctuate significantly from period to period due to a number of factors,
including seasonal variations in consumer demand for batteries and their end
applications, capacity ramp up by competitors, industry-wide technological
changes, the loss of a key customer and the postponement, rescheduling or
cancellation of large orders by a key customer. As a result of these factors and
other risks discussed in this section, period-to-period comparisons should not
be relied upon to predict our future performance.
We may not be able to substantially increase our
manufacturing output in order to maintain our cost competitiveness.
We believe that our ability to provide cost-effective products
is one of the most significant factors that contributed to our past success and
will be essential for our future growth. We believe this is one of our
competitive advantages over our Japanese and Korean competitors. We need to
increase our manufacturing output to a level that will enable us to
substantially reduce the cost of our products on a per unit basis through
economies of scale. However, our ability to substantially increase our
manufacturing output is subject to significant constraints and uncertainties,
including:
-
the need to raise significant additional funds to purchase and prepay raw
materials or to build additional manufacturing facilities, which we may be
unable to obtain on reasonable terms or at all;
-
delays and cost overruns as a result of a number of factors, many of which
may be beyond our control, such as increases in raw material prices and
problems with equipment vendors;
-
delays or denial of required approvals by relevant government authorities;
-
diversion of significant management attention and other resources; and
-
failure to execute our expansion plan effectively.
If we are unable to increase our manufacturing output because
of any of the risks described above, we may be unable to maintain our
competitive position or achieve the growth we expect. Moreover, even if we
expand our manufacturing output, we may not be able to generate sufficient
customer demand for our products to support our increased production output.
12
Maintaining our manufacturing operations will require
significant capital expenditures, and our inability or failure to maintain our
operations would have a material adverse impact on our market share and ability
to generate revenue.
We had capital expenditures of approximately $12.9 million and
$5.9 million in fiscal years 2015 and 2016, respectively. We may incur
significant additional capital expenditures as a result of unanticipated
expenses, regulatory changes and other events that impact our business. If we
are unable or fail to adequately maintain our manufacturing capacity or quality
control processes, we could lose customers and there could be a material adverse
impact on our market share and our ability to generate revenue.
We may incur significant costs because of the warranties
we supply with our products and services.
With respect to the sale of our battery products from fiscal
2016, we typically offer warranties against any defects due to product
malfunction or workmanship for a period of six months-to-five years from the
date of purchase, including a period of six to twelve months for battery cells,
and a period of twelve to twenty seven months for battery modules for electric
bicycles, and a period of three years to five years for battery modules for
electric vehicles. We will provide a reserve for these potential warranty
expenses, which is based on an analysis of historical warranty issues. There is
no assurance that future warranty claims will be consistent with past history,
and in the event we experience a significant increase in warranty claims, there
is no assurance that our reserves will be sufficient. This could have a material
adverse effect on our business, financial condition and results of operations.
We do not have insurance coverage against damages or
losses of our products. Defects in our products could result in a loss of
customers and decrease in revenue, unexpected expenses and a loss of market
share.
We have not purchased product liability insurance to provide
against any claims against us based on our product quality. We expect that we
will purchase product liability insurance in fiscal year 2017. If we fail to
purchase product liability insurance, defects in our products could result in a
loss of customers and decrease in revenue, unexpected expenses and a loss of
market share, and any of our products are found to have reliability, quality or
compatibility problems, we will be required to accept returns, provide
replacements, provide refunds, or pay damages. As the insurance policy imposes a
ceiling for maximum coverage and high deductibles, we may not be able to obtain
from the insurance policy a sufficient amount to compensate our customers for
damages they suffered attributable to the quality of the products. Moreover, the
insurance policy also excludes certain types of claims from its coverage, and if
any of our customers claims against us falls into those exclusions, we would
not receive any amount from the insurance policy at all. In either case, we may
still be required to incur substantial amounts to indemnify our customers in
respect of their product quality claims against us, which would materially and
adversely affect the results of our operations and severely damage our
reputation.
We may not be able to accurately plan our production
based on our sales contracts, which may result in excess product inventory or
product shortages.
Our sales contracts typically provide for a non-binding,
three-month forecast on the quantity of products that our customers may purchase
from us. We typically have only a 15-day lead time to manufacture products to
meet our customers requirements once our customers place orders with us. To
meet the short delivery deadline, we generally make significant decisions on our
production level and timing, procurement, facility requirements, personnel needs
and other resources requirements based on our estimate in light of this
forecast, our past dealings with such customers, market conditions and other
relevant factors. Our customers final purchase orders may not be consistent
with our estimates. If the final purchase orders substantially differ from our
estimates, we may have excess product inventory or product shortages. Excess
product inventory could result in unprofitable sales or write-offs as our
products are susceptible to obsolescence and price declines. Producing
additional products to make up for any product shortages within a short time
frame may be difficult, making us unable to fill out the purchase orders. In
either case, our results of operation would fluctuate from period to period.
We historically depended on third parties to supply key
raw materials and components to us. Failure to obtain a sufficient supply of
these raw materials and components in a timely fashion and at reasonable costs
could significantly delay our production and shipments, which would cause us to
breach our sales contracts with our customers.
We historically purchased from Chinese domestic suppliers
certain key raw materials and components such as electrolytes, electrode
materials and import separators, a key component of battery cells, from foreign
countries. We purchased raw materials and components on the basis of purchase
orders. In the absence of firm and long-term contracts, we may not be able to
obtain a sufficient supply of these raw materials and components from our
existing suppliers or alternates in a timely fashion or at a reasonable cost. If
we fail to secure a sufficient supply of key raw materials and components in a
timely fashion, it would result in a significant delay in our production and
shipments, which may cause us to breach our sales contracts with our customers.
Furthermore, failure to obtain sufficient supply of these raw materials and
components at a reasonable cost could also harm our revenue and gross profit
margins.
13
Fluctuations in prices and availability of raw materials,
particularly LiFePO4 and Ni, Co, Mn, could increase our costs or cause delays in
shipments, which would adversely impact our business and results of operations.
Our operating results could be adversely affected by increases
in the cost of raw materials, particularly LiFePO4 and Ni, Co, Mn, the primary
cost component of our battery products, or other product parts or components.
Our average purchase price of LiFePO4 and Ni, Co, Mn were $10.1 per kilogram and
$12.2 per kilogram during the years ended September 30, 2015 and 2016,
respectively. The price of LiFePO4 and Ni, Co, Mn is not stable as most output
of cobalt is conducted in unstable or developing countries such as the
Democratic Republic of the Congo, and we cannot predict the price trend. If the
price increases, it will negatively impact our financial results in years ahead.
We historically have not been able to fully offset the effects of higher costs
of raw materials through price increases to customers or by way of productivity
improvements.
A significant increase in the price of one or more raw
materials, parts or components or the inability to successfully implement price
increases/ surcharges to mitigate such cost increases could have a material
adverse effect on our results of operations.
We mainly manufacture and market lithium-based battery
cells. If a viable substitute product or chemistry emerges and gains market
acceptance, our business, financial condition and results of operations will be
materially and adversely affected.
We mainly manufacture and market lithium-based batteries. As we
believe that the market for lithium-based batteries has good growth potential,
we have focused our R&D activities on exploring new chemistries and formulas
to enhance our product quality and features while reducing cost. Some of our
competitors are conducting R&D on alternative battery technologies, such as
fuel cells. If any viable substitute product emerges and gains market acceptance
because it has more enhanced features, more power, more attractive pricing, or
better reliability, the market demand for our products may be reduced, and
accordingly our business, financial condition and results of operations would be
materially and adversely affected.
Manufacturing or use of our products may cause accidents,
which could result in significant production interruption, delay or claims for
substantial damages.
Due to the high energy density inherent in lithium-based
batteries, our batteries can pose certain safety risks, including the risk of
fire. Although we incorporate safety procedures in the research, development,
manufacture and transportation of batteries that are designed to minimize safety
risks, the manufacture or use of our products may still cause accidents. Any
accident, whether occurring at the manufacturing facilities or from the use of
our products, may result in significant production interruption, delays or
claims for substantial damages caused by personal injuries or property damages.
We face intense competition from other battery
manufacturers, many of which have significantly greater resources.
The market for batteries used in electric vehicles and light
electric vehicles is intensely competitive and is characterized by frequent
technological changes and evolving industry standards. We expect competition to
become more intense. Increased competition may result in declines in average
selling prices, causing a decrease in gross profit margins. We have faced and
will continue to face competition from manufacturers of traditional rechargeable
batteries, such as lead-acid batteries other manufacturers of lithium-ion
batteries, as well as from companies engaged in the development of batteries
incorporating new technologies. Other manufacturers of high-power lithium
batteries currently include Panasonic Corporation, Samsung Electronics Co.,
Ltd., BYD Co. Ltd., Tianjin Lishen Battery Joint Stock Co., Ltd., Amperex
Technology Limited, BYD Co. Ltd, Hefei Guoxuan Hi-Tech Power Energy Co., Ltd and
Chaowei Power Holdings Limited.
Many of these existing competitors have greater financial,
personnel, technical, manufacturing, marketing, sales and other resources than
we do. As a result, these competitors may be in a stronger position to respond
quickly to market opportunities, new or emerging technologies and evolving
industry standards. Many of our competitors are developing a variety of battery
technologies, such as lithium polymer and fuel cell batteries, which are
expected to compete with our existing product lines. Other companies undertaking
R&D activities of solid-polymer lithium-ion batteries have developed
prototypes and are constructing commercial scale production facilities. It is
possible that our competitors will be able to introduce new products with more
desirable features than ours and their new products will gain market acceptance.
If our competitors successfully do so, we may not be able to maintain our
competitive position and our future success would be materially and adversely
affected.
14
We are dependent on a limited number of customers for a
significant portion of our revenues and this dependence is likely to continue.
We have been dependent on a limited number of customers for a
significant portion of our revenue. Our top five customers accounted for
approximately 83.8% and 78.9% of our revenues for the years ended September 30,
2015 and 2016, respectively. Dependence on a few customers could make it
difficult to negotiate attractive prices for our products and could expose us to
the risk of substantial losses if a single dominant customer stops purchasing
our products. We expect that a limited number of customers will continue to
contribute a significant portion of our sales in the near future. Our ability to
maintain close relationships with these top customers is essential to the growth
and profitability of our business. If we fail to sell our products to one or
more of these top customers in any particular period, or if a large customer
purchases fewer of our products, defers orders or fails to place additional
orders with us, or if we fail to develop additional major customers, our revenue
could decline, and our results of operations could be adversely affected.
We do not have long-term purchase commitments from our
customers, which may result in significant uncertainties and volatility with
respect to our revenue from period to period.
We do not have long-term purchase commitments from our
customers and the term of our sales contracts with our customers is typically
one year or less. Furthermore, these contracts leave certain major terms such as
price and quantity of products open to be determined in each purchase order.
These contracts also allow parties to re-adjust the contract price for
substantial changes in market conditions. As a result, if our customers hold
stronger bargaining power than us or the market conditions are in their favor,
we may not be able to enjoy the price downside protection or upside gain.
Furthermore, our customers may decide not to continue placing purchase orders
with us in the future at the same level as in prior periods. As a result, our
results of operations may vary from period to period and may fluctuate
significantly in the future.
We extend relatively long payment terms to some large
customers.
As is customary in the industry in the PRC, we extend
relatively long payment terms to some large customers. As a result of the size
of many of our orders, these extended terms may adversely affect our cash flow
and our ability to fund our operations out of our operating cash flow. In
addition, although we attempt to establish appropriate reserves for our
receivables, those reserves may not prove to be adequate in view of actual
levels of bad debts. The failure of our customers to pay us timely would
negatively affect our working capital, which could in turn adversely affect our
cash flow.
Our customers often place large orders for products, requiring
fast delivery, which impacts our working capital. If our customers do not
incorporate our products into their products and sell them in a timely fashion,
for example, due to excess inventories, sales slowdowns or other issues, they
may not pay us in a timely fashion, even on our extended terms. Our customers
failure to pay may force us to defer or delay further product orders, which may
adversely affect our cash flows, sales or income in subsequent periods.
We face risks associated with the marketing, distribution
and sale of our products internationally, and if we are unable to effectively
manage these risks, they could impair our ability to expand our business abroad.
For the years ended September 30, 2015 and 2016, we derived nil
and 13.0%, respectively, of our sales from outside the PRC mainland. We still
deem overseas market as an important revenue source for us, and have been
actively exploring overseas customers. The marketing, international distribution
and sale of our products expose us to a number of risks, including:
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fluctuations in currency exchange rates;
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difficulty in engaging and retaining distributors that
are knowledgeable about, and can function effectively in, overseas
markets;
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increased costs associated with maintaining marketing
efforts in various countries;
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difficulty and cost relating to compliance with the
different commercial and legal requirements of the overseas markets in
which we offer our products;
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inability to obtain, maintain or enforce intellectual
property rights; and
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trade barriers such as export requirements, tariffs,
taxes and other restrictions and expenses, which could increase the prices
of our products and make us less competitive in some countries.
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15
Our business depends substantially on the continuing
efforts of our senior executives and other key personnel, and our business may
be severely disrupted if we lost their services.
Our future success heavily depends on the continued service of
our senior executives and other key employees. In particular, we rely on the
expertise and experience of our Chairman, Chief Executive Officer, President Mr.
Yunfei Li, our Interim Chief Financial Officer, Mr. Wenwu Wang, and our Interim
Chief Technology Officer, Dr. Jian Lin. If one or more of our other senior
executives are unable or unwilling to continue to work for us in their present
positions, we may encounter similar problems, but on a compounded basis.
Moreover, if any of our current or former senior executives joins a competitor
or forms a competing company, we may lose customers, suppliers, know-how and key
personnel. Each of our executive officers has entered into an employment
agreement with us, which contains non-competition and confidentiality clauses.
However, if any dispute arises between our current or former executive officers
and the Company, it is hard to predict the extent to which any of these
agreements could be enforced in China, where these executive officers reside, in
light of the uncertainties with Chinas legal system.
We have experienced significant management changes which
could increase our control risks and have a material adverse effect on our
ability to do business and our results of operations.
Since February 2009, we have had a number of changes in our
senior management, including multiple changes in our Chief Financial Officer.
The magnitude of these past and expected changes and the short time interval in
which they have occurred or are expected to occur, particularly during the
ongoing economic and financial crisis, add to the risks of control failures,
including a failure in the effective operation of our internal control over
financial reporting or our disclosure controls and procedures. Control failures
could result in material adverse effects on our financial condition and results
of operations. It may take time for the new management team to become
sufficiently familiar with our business and each other to effectively develop
and implement our business strategies. This turnover of key management positions
could further harm our financial performance and results of operations.
Management attention may be diverted from regular business concerns by
reorganizations.
The success of our business depends on our ability to
attract, train and retain highly skilled employees and key personnel.
Because of the highly specialized, technical nature of our
business, we must attract, train and retain a sizable workforce comprising
highly skilled employees and other key personnel. Since our industry is
characterized by high demand and intense competition for talent, we may have to
pay higher salaries and wages and provide greater benefits in order to attract
and retain highly skilled employees or other key personnel that we will need to
achieve our strategic objectives. As we are still a relatively young company and
our business has grown rapidly, our ability to train and integrate new employees
into our operations may not meet the requirements of our growing business. Our
failure to attract, train or retain highly skilled employees and other key
personnel in numbers that are sufficient to satisfy our needs would materially
and adversely affect our business.
We may be exposed to infringement or misappropriation
claims by third parties, which, if determined adversely to us, could cause our
loss of significant rights and inability to continue providing our existing
product offerings.
Our success also depends largely on our ability to use and
develop our technology and know-how without infringing the intellectual property
rights of third parties. The validity and scope of claims relating to
lithium-ion battery technology patents involve complex scientific, legal and
factual questions and analysis and, therefore, may be highly expensive and
time-consuming. If there is a successful claim of infringement against us, we
may be required to pay substantial damages to the party claiming infringement,
develop non-infringing technologies or enter into royalty or license agreements
that may not be available on acceptable terms, if at all. Our failure to develop
non-infringing technologies or license the proprietary rights on a timely basis
would harm our business. Protracted litigation could result in our customers, or
potential customers, deferring or limiting their purchase or use of our products
until resolution of such litigation. Parties making the infringement claim may
also obtain an injunction that can prevent us from selling our products or using
technology that contains the allegedly infringing contents. Any intellectual
property litigation could have a material adverse effect on our business,
results of operation and financial condition.
16
We can make no assurance that we will continue to get
authorization from Shenzhen BAK to use its intellectual property rights when the
current intellectual property rights use agreement with Shenzhen BAK expires,
nor can we make assurance that we can get the authorization at a favorable
price, which could harm our business and competitive position.
We lack intellectual property rights for the business we
operate. As of September 30, 2016, Dalian BAK Power only owns 20 patents
including 18 utility model patents and 2 patents for invention in the PRC.
During fiscal year 2016, Dalian BAK Power obtained 3 patents. On August 25,
2014, we entered into an intellectual property rights use agreement with
Shenzhen BAK under which we are authorized to use Shenzhen BAKs registered
logo, trademarks and patents for a period of 5 years for free from June 30,
2014. As of June 30, 2014, Shenzhen BAK owned 462 registered patents in PRC and
60 registered patents in other countries, 80 registered trademarks in PRC and 49
registered trademarks in the United States, European Union, Korea, Russia,
Taiwan, Canada, India and Hong Kong that cover various categories of goods and
services. We cannot provide assurance that we will continue to get authorization
from Shenzhen BAK to use its intellectual property rights when the current
intellectual property rights use agreement with Shenzhen BAK expires, nor can we
make assurance that we can get the authorization at a favorable price, which
could harm our business and competitive position.
We do not hold the property ownership rights for
facilities located in the PRC. Our manufacturing activities could be adversely
affected if we lose the facilities that we do not have property ownership
rights.
We have obtained land use rights for our Dalian manufacture
facilities, but have not yet obtained the property ownership of the Dalian
manufacture facilities including its plants, office building, warehouse, and
related supporting facilities. We expect that we will obtain the property
ownership rights by March 2017. If we lose our Dalian facility due to the lack
of the property ownership, our manufacturing activities will be adversely
impacted.
Compliance with environmental regulations can be
expensive, and our failure to comply with these regulations may result in
adverse publicity and a material adverse effect on our business.
As a manufacturer, we are subject to various PRC environmental
laws and regulations on air emission, waste water discharge, solid waste and
noise. Although we believe that our operations are in substantial compliance
with current environmental laws and regulations, we may not be able to comply
with these regulations at all times as the PRC environmental legal regime is
evolving and becoming more stringent. Therefore, if the PRC government imposes
more stringent regulations in the future, we will have to incur additional
substantial costs and expenses in order to comply with new regulations, which
may negatively affect our results of operations. If we fail to comply with any
of the present or future environmental regulations in material aspects, we may
suffer from negative publicity and may be required to pay substantial fines,
suspend or even cease operations. Failure to comply with PRC environmental laws
and regulations may materially and adversely affect our business, financial
condition and results of operations.
To the extent we ship our products outside of the PRC, or to
the extent our products are used in products sold outside of the PRC, they may
be affected by the following: The transportation of non-rechargeable and
rechargeable lithium batteries is regulated by the International Civil Aviation
Organization, or ICAO, and corresponding International Air Transport
Association, or IATA, Pipeline & Hazardous Materials Safety Administration,
or PHMSA, Dangerous Goods Regulations and the International Maritime Dangerous
Goods Code, or IMDG, and in the PRC by General Administration of Civil Aviation
of China and Maritime Safety Administration of Peoples Republic of China. These
regulations are based on the United Nations, or UN, Recommendations on the
Transport of Dangerous Goods Model Regulations and the UN Manual of Tests and
Criteria. We currently ship our products pursuant to ICAO, IATA and PHMSA
hazardous goods regulations. New regulations that pertain to all lithium battery
manufacturers went into effect in 2003, 2004, and 2009, 2010 and 2013. The
regulations require companies to meet certain testing, packaging, labeling and
shipping specifications for safety reasons. We comply with all current PRC and
international regulations for the shipment of our products, and will comply with
any new regulations that are imposed. We have established our own testing
facilities to ensure that we comply with these regulations. If we were unable to
comply with the new regulations, however, or if regulations are introduced that
limit our ability to transport our products to customers in a cost-effective
manner, this could have a material adverse effect on our business, financial
condition and results of operations.
We do not have sufficient insurance coverage against damages or
losses of our Dalian facilities.
We currently have insurance for our pledged machinery and
equipment and completed constructions of buildings located at our Dalian
facilities. We do not have insurance for our constructions in progress of
buildings. We expect we will purchase related
insurance for the buildings when we obtain the property ownership certificate
after the construction is completed. If we were to suffer any losses or damages
to any of the facilities before the purchase of insurance, our business,
financial condition and results of operations would be materially and adversely
affected.
17
We have identified material weaknesses in our internal
control over financial reporting. If we fail to remediate the material
weaknesses or maintain an effective system of internal control over financial
reporting, we may be unable to accurately report our financial results or prevent fraud,
and investor confidence and the market price of our shares may be adversely
affected.
To implement Section 404 of the Sarbanes-Oxley Act of 2002, or
SOX 404, the SEC adopted rules requiring public companies to include a report of
management on the companys internal control over financial reporting in their
annual reports on Form 10-K. Under current law, we are subject to the
requirement that we maintain internal controls and that management perform
periodic evaluation of the effectiveness of the internal controls, assuming our
filing status remains as a smaller reporting company. A report of our management
is included under Item 9A of this Annual Report on Form 10-K. Our management has
identified the following material weakness in our internal control over
financial reporting: we did not have appropriate policies and procedures in
place to evaluate the proper accounting and disclosures of key documents and
agreements, and there was insufficient accounting personnel with an appropriate
level of technical accounting knowledge and experience in the application of
accounting principles generally accepted in the United States of America, or
U.S. GAAP, commensurate with our financial reporting requirements. A "material
weakness" is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of the company's annual or interim financial statements
will not be prevented or detected on a timely basis. We have taken measures and
plan to continue to take measures to remedy this material weakness. In September
2016, we implemented training on internal control and enterprise risk
management. In November 2016, we implemented training on U.S. GAAP accounting
guidelines. However, the implementation of these measures may not fully address
the material weakness in our internal control over financial reporting. Our
failure to address any control deficiency could result in inaccuracies in our
financial statements and could also impair our ability to comply with applicable
financial reporting requirements and related regulatory filings on a timely
basis. Moreover, effective internal control over financial reporting is
important to prevent fraud. As a result, our business, financial condition,
results of operations and prospects, as well as the trading price of our shares,
may be materially and adversely affected.
If we become directly subject to the recent scrutiny,
criticism and negative publicity involving U.S.-listed Chinese companies, we may
have to expend significant resources to investigate and resolve the matter which
could harm our business operations, stock price and reputation and could result
in a loss of your investment in our stock, especially if such matter cannot be
addressed and resolved favorably.
Recently, U.S. public companies that have substantially all of
their operations in China, particularly companies like us which have completed
so-called reverse merger transactions, have been the subject of intense
scrutiny, criticism and negative publicity by investors, financial commentators
and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and
negative publicity has centered around financial and accounting irregularities
and mistakes, a lack of effective internal controls over financial accounting,
inadequate corporate governance policies or a lack of adherence thereto and, in
many cases, allegations of fraud. As a result of the scrutiny, criticism and
negative publicity, the publicly traded stock of many U.S. listed Chinese
companies has sharply decreased in value and, in some cases, has become
virtually worthless. Many of these companies are now subject to shareholder
lawsuits and SEC enforcement actions, and are conducting internal and external
investigations into the allegations. It is not clear what effect this
sector-wide scrutiny, criticism and negative publicity will have on our Company,
our business and our stock price. If we become the subject of any unfavorable
allegations, whether such allegations are proven to be true or untrue, we will
have to expend significant resources to investigate such allegations and/or
defend our company. This situation will be costly and time consuming and
distract our management from growing our company. If such allegations are not
proven to be groundless, our company and business operations will be severely
and your investment in our stock could be rendered worthless.
The disclosures in our reports and other filings with the
SEC and our other public pronouncements are not subject to the scrutiny of any
regulatory bodies in the PRC. Accordingly, our public disclosure should be
reviewed in light of the fact that no governmental agency that is located in
China where substantially all of our operations and business are located have
conducted any due diligence on our operations or reviewed or cleared any of our
disclosures.
We are regulated by the SEC and our reports and other filings
with the SEC are subject to SEC review in accordance with the rules and
regulations promulgated by the SEC under the Securities Act and the Exchange
Act. Unlike public reporting companies whose operations are located primarily in
the United States, however, substantially all of our operations are located in
China. Since substantially all of our operations and business take place in
China, it may be more difficult for the Staff of the SEC to overcome the
geographic and cultural obstacles that are present when reviewing our
disclosures. These same obstacles are not present for similar companies whose
operations or business take place entirely or primarily in the United States.
Furthermore, our SEC reports and other disclosures and public pronouncements are
not subject to the review or scrutiny of any PRC regulatory authority. For
example, the disclosure in our SEC reports and other filings are not subject to
the review of China Securities Regulatory Commission, a PRC regulator that is
tasked with oversight of the capital markets in China. Accordingly, you should review our SEC
reports, filings and our other public pronouncements with the understanding that
no local regulator has done any due diligence on our company and with the
understanding that none of our SEC reports, other filings or any of our other
public pronouncements has been reviewed or otherwise been scrutinized by any
local regulator.
18
Our auditors, based in Hong Kong, China, like other
independent registered public accounting firms operating in China and to the
extent their audit clients have operations in China, is not permitted to be
subject to full inspection by the Public Company Accounting Oversight Board and,
as such, you may be deprived of the benefits of such inspection.
Our independent registered public accounting firms that issued
the audit reports included in our annual reports filed with the SEC, as auditors
of companies that are traded publicly in the United States and a firm registered
with the US Public Company Accounting Oversight Board (United States), or PCAOB,
are required by the laws of the United States to undergo regular inspections by
the PCAOB to assess their compliance with the laws of the United States and
professional standards.
However, our operations are solely located in the PRC, a
jurisdiction where PCAOB is currently unable to conduct inspections without the
approval of the PRC authorities. Our independent registered public accounting
firm, like others operating in China (and Hong Kong, to the extent their audit
clients have operations in China), is currently not subject to inspection
conducted by the PCAOB. Inspections of other firms that the PCAOB has conducted
outside China have identified deficiencies in those firms audit procedures and
quality control procedures, which may be addressed as part of the inspection
process to improve future audit quality. The inability of the PCAOB to conduct
full inspections of auditors operating in China makes it more difficult to
evaluate our auditors audit procedures or quality control procedures. As a
result, investors may be deprived of the benefits of PCAOB inspections.
Proceedings instituted by the SEC against five PRC-based
accounting firms could result in financial statements being determined to be not
in compliance with the requirements of the Securities Exchange Act of 1934.
In December 2012, the SEC instituted proceedings under Rule
102(e)(1)(iii) of the SECs Rules of Practice against five PRC-based accounting
firms, alleging that these firms had violated U.S. securities laws and the SECs
rules and regulations thereunder by failing to provide to the SEC the firms
work papers related to their audits of certain PRC-based companies that are
publicly traded in the United States. Rule 102(e)(1)(iii) grants to the SEC the
authority to deny to any person, temporarily or permanently, the ability to
practice before the SEC who is found by the SEC, after notice and opportunity
for a hearing, to have willfully violated, or willfully aided and abetted the
violation of, any such laws or rules and regulations. On January 22, 2014, an
initial administrative law decision was issued, sanctioning four of these
accounting firms and suspending them from practicing before the SEC for a period
of six months. The sanction will not take effect until there is an order of
effectiveness issued by the SEC. In February 2014, four of these PRC-based
accounting firms filed a petition for review of the initial decision. In
February 2015, each of these four accounting firms agreed to a censure and to
pay fine to the SEC to settle the dispute with the SEC. The settlement stays the
current proceeding for four years, during which time the firms are required to
follow detailed procedures to seek to provide the SEC with access to Chinese
firms' audit documents via the CSRC. If a firm does not follow the procedures,
the SEC would impose penalties such as suspensions, or commence a new, expedited
administrative proceeding against the non-compliant firm or it could restart the
administrative proceeding against all four firms.
While these issues raised by the proceedings are not specific
to our auditor or to us, they potentially affect equally all PCAOB-registered
audit firms based in China and all businesses based in China (or with
substantial operations in China) with securities listed in the United States.
Depending upon the final outcome, public companies in the United States with
major PRC operations may find it difficult or impossible to retain auditors in
respect of their operations in the PRC, which may result in SECs revocation of
the registration of their shares under the Exchange Act. Such a determinate
would cause the immediate delisting of our Common Stock from the NASDAQ Stock
Market, and the effective termination of the trading market for our securities
in the United States, which would likely have a significant adverse effect on
the value of our securities. Moreover, although our independent registered
public accounting firm was not named as a defendant in the above SEC
administrative proceedings, any negative news about the proceedings against
these audit firms may erode investor confidence in China-based, US public
companies, including us, and the market price of our shares may be adversely
affected.
19
We may be adversely affected by the outcome of litigation
against us in China.
On July 7, 2016, Shenzhen Huijie Purification System
Engineering Co., Ltd (Shenzhen Huijie), one of the 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 $1,263,722 (RMB
8,430,792), including construction costs of $0.9 million (RMB6.3 million, which
we already accrued for at June 30, 2016), interest of $30,689 (RMB0.2 million)
and compensation of $0.3 million (RMB1.9 million). On September 7, 2016, upon
the request of Shenzhen Huijie for property preservation, the Court froze Dalian
BAKs bank deposits totaling $1,263,722 (RMB 8,430,792) for a period of one
year. Although we believe that the plaintiff's claims for interest and
compensation are without merit and we are vigorously defending ourselves, there
is no assurance that we will be successful in the lawsuit. In the event that
plaintiff prevails in the lawsuit, unfavorable court judgment could have an
adverse effect on our business, financial condition and results of operations.
RISKS RELATED TO DOING BUSINESS IN CHINA
Changes in the economic and political policies of the PRC
government could have a material and adverse effect on our business and
operations.
We conduct substantially all our business operations in China.
Accordingly, our results of operations, financial condition and prospects are
significantly dependent on economic and political developments in China. Chinas
economy differs from the economies of developed countries in many aspects,
including the level of development, growth rate and degree of government control
over foreign exchange and allocation of resources. While Chinas economy has
experienced significant growth in the past 30 years, the growth has been uneven
across different regions and periods and among various economic sectors in
China. We cannot assure you that Chinas economy will continue to grow, or that
if there is growth, such growth will be steady and uniform, or that if there is
a slowdown, such slowdown will not have a negative effect on its business and
results of operations.
The PRC government exercises significant control over Chinas
economic growth through the allocation of resources, control over payment of
foreign currency-denominated obligations, implementation of monetary policy, and
preferential treatment of particular industries or companies. Certain measures
adopted by the PRC government may restrict loans to certain industries, such as
changes in the statutory deposit reserve ratio and lending guidelines for
commercial banks by the Peoples Bank of China, or PBOC. These current and
future government actions could materially affect our liquidity, access to
capital, and ability to operate our business.
The global financial markets experienced significant
disruptions in 2008 and the United States, Europe and other economies went into
recession. Since 2012, growth of the Chinese economy has slowed down. The PRC
government has implemented various measures to encourage economic growth and
guide the allocation of resources. Some of these measures may benefit the
overall PRC economy but may also have a negative effect on us. Our financial
condition and results of operation could be materially and adversely affected by
government control over capital investments or changes in tax regulations that
are applicable to us. In addition, any stimulus measures designed to boost the
Chinese economy, may contribute to higher inflation, which could adversely
affect our results of operations and financial condition.
Uncertainties with respect to the PRC legal system could
limit the legal protections available to you and us.
We conduct substantially all of our business through our
operating subsidiaries in China. Our operating subsidiaries are generally
subject to laws and regulations applicable to foreign investments in China and,
in particular, laws applicable to foreign-invested enterprises, or FIEs. The PRC
legal system is based on written statutes, and prior court decisions may be
cited for reference, but have limited precedential value. Since 1979, a series
of new PRC laws and regulations have significantly enhanced the protections
afforded to various forms of foreign investments in China. However, since the
PRC legal system continues to rapidly evolve, the interpretations of many laws,
regulations and rules are not always uniform and enforcement of these laws,
regulations and rules involve uncertainties for you and us. In addition, any
litigation in China may be protracted and result in substantial costs and
diversion of resources and management attention. Moreover, most of our executive
officers and directors are residents of China and not of the United States, and
substantially all the assets of these persons are located outside the United
States. As a result, it could be difficult for investors to affect service of
process in the United States or to enforce a judgment obtained in the United
States against our Chinese operations and subsidiaries.
20
The PRC government exerts substantial influence over the
manner in which we must conduct our business activities.
The PRC government has exercised and continues to exercise
substantial control over virtually every sector of the Chinese economy through
regulation and state ownership. Our ability to operate in China may be harmed by
changes in its laws and regulations, including those relating to taxation,
import and export tariffs, environmental regulations, land use rights, property,
and other matters. We believe that our operations in China are in material
compliance with all applicable legal and regulatory requirements. However, the
central or local governments of the jurisdictions in which we operate may impose
new, stricter regulations or interpretations of existing regulations that would
require additional expenditures and efforts on our part to ensure our compliance
with such regulations or interpretations.
Accordingly, government actions in the future, including any
decision not to continue to support recent economic reforms and to return to a
more centrally planned economy or regional or local variations in the
implementation of economic policies, could have a significant effect on economic
conditions in China or particular regions thereof and could require us to divest
ourselves of any interest we then hold in Chinese properties or joint ventures.
We rely on dividends and other distributions on equity
paid by our subsidiaries for our cash needs.
We are a holding company, and we conduct all of our operations
through our PRC subsidiaries. We rely on dividends and other distributions on
equity paid by our PRC subsidiaries for our cash needs, including the funds
necessary to pay dividends and other cash distributions to our stockholders, to
service any debt we may incur and to pay our operating expenses. Current
regulations in the PRC permit payment of dividends only out of accumulated
profits as determined in accordance with PRC accounting standards and
regulations. According to the articles of association of our PRC subsidiaries,
each of our PRC subsidiaries is required to set aside at least 10% of its
after-tax profit based on the PRC accounting standards and regulations each year
to its statutory general reserve, until the balance in the reserve reaches 50%
of the registered capital of the company. Funds in the reserve are not
distributable to us in forms of cash dividends, loans or advances. In addition,
if our PRC subsidiaries incur debt on their own behalf in the future, the
instruments governing the debt may restrict their ability to pay dividends or
make other distributions to us, which in turn will adversely affect our
available cash. Any limitations on the ability of our PRC subsidiaries to
transfer funds to us could materially and adversely limit our ability to grow,
make investments or acquisitions that could be beneficial to our business, pay
dividends and otherwise fund and conduct our business.
Restrictions on currency exchange may limit our ability
to receive and use our sales revenue effectively.
The majority of our sales will be settled in RMB and U.S.
dollars, and any future restrictions on currency exchanges may limit our ability
to use revenue generated in RMB to fund any future business activities outside
China or to make dividend or other payments in U.S. dollars. Although the
Chinese government introduced regulations in 1996 to allow greater
convertibility of the RMB for current account transactions, significant
restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies
after providing valid commercial documents, at those banks in China authorized
to conduct foreign exchange business. In addition, conversion of RMB for capital
account items, including direct investment and loans, is subject to governmental
approval in China, and companies are required to open and maintain separate
foreign exchange accounts for capital account items. We cannot be certain that
the Chinese regulatory authorities will not impose more stringent restrictions
on the convertibility of the RMB in the future.
In addition, the Notice of the General Affairs Department of
the State Administration of Foreign Exchange on the Relevant Operating Issues
concerning the Improvement of the Administration of Payment and Settlement of
Foreign Currency Capital of Foreign-Invested Enterprises, issued by the PRC
State Administration of Foreign Exchange (SAFE), and effective as of August
29, 2008 (Circular 142), regulates the conversion by foreign-invested
enterprises of foreign currency into RMB by restricting how the converted RMB
may be used. Circular 142 requires that RMB converted from the foreign
currency-dominated capital of a foreign-invested enterprise may only be used for
purposes within the business scope approved by the relevant government authority
and may not be used to make equity investments in PRC, unless specifically
provided otherwise. SAFE further strengthened its oversight over the flow and
use of RMB funds converted from the foreign currency-dominated capital of a
foreign-invested enterprise. The use of such RMB may not be changed without
approval from SAFE, and may not be used to repay RMB loans if the proceeds of
such loans have not yet been used. Any violation of Circular 142 may result in
severe penalties, including substantial fines.
21
Fluctuations in exchange rates could adversely affect our
business and the value of our securities.
The value of our securities will be indirectly affected by the
foreign exchange rate between the U.S. dollar and RMB and between those
currencies and other currencies in which our sales may be denominated.
Appreciation or depreciation in the value of the RMB relative to the U.S. dollar
would affect our financial results reported in U.S. dollar terms without giving
effect to any underlying change in our business or results of operations.
Fluctuations in the exchange rate will also affect the relative value of any
dividend we issue that will be exchanged into U.S. dollars, as well as earnings
from, and the value of, any U.S. dollar-denominated investments we make in the
future.
Since July 2005, the RMB has no longer been pegged to the U.S.
dollar. However, the PBOC regularly intervenes in the foreign exchange market to
limit fluctuations in RMB exchange rates and achieve policy goals. Following the
removal of the U.S. dollar peg, the RMB appreciated more than 20% against the
U.S. dollar over the following three years. From July 2008 to June 2010, the RMB
traded within a narrow range against the U.S. dollar. On April 16, 2012, the
PBOC announced a policy to expand the maximum daily floating range of RMB
trading prices against the U.S. dollar in the inter-bank spot foreign exchange
market from 0.5% to 1%. On March 17, 2014, the Peoples Bank of China announced
a policy to further expand the maximum daily floating range of RMB trading
prices against the U.S. dollar in the inter-bank spot foreign exchange market to
2%. In the long term, the RMB may appreciate or depreciate more significantly in
value against the U.S. dollar or other foreign currencies, depending on the
market supply and demand with reference to a basket of currencies.
Very limited hedging transactions are available in China to
reduce our exposure to exchange rate fluctuations. To date, we have not entered
into any hedging transactions. While we may enter into hedging transactions in
the future, the availability and effectiveness of these transactions may be
limited, and we may not be able to successfully hedge our exposure at all. In
addition, our foreign currency exchange losses may be magnified by PRC exchange
control regulations that restrict our ability to convert RMB into foreign
currencies. As a result, fluctuations in exchange rates may have a material
adverse effect on your investment.
Failure to comply with PRC regulations relating to the
investment in offshore special purpose companies by PRC residents may subject
our PRC resident stockholders to personal liability, limit our ability to
acquire PRC companies or to inject capital into our PRC subsidiaries, limit our
PRC subsidiaries ability to distribute profits to us or otherwise materially
adversely affect us.
On July 14, 2014, SAFE issued the Circular on Relevant Issues
Relating to Domestic Residents Investment and Financing and Roundtrip
Investment through Special Purpose Vehicles (Circular 37), which replaced the
Circular 75, promulgated by SAFE on October 21, 2005. Circular 37 requires PRC
residents to register with local branches of SAFE in connection with their
direct establishment or indirect control of an offshore entity, for the purpose
of overseas investment and financing, with such PRC residents legally owned
assets or equity interests in domestic enterprises or offshore assets or
interests, referred to in Circular 37 as a special purpose vehicle.
We have notified substantial beneficial owners of our company
who we know are PRC residents to comply with the registration obligation.
However, we may not be aware of the identities of all our beneficial owners who
are PRC residents. In addition, we do not have control over our beneficial
owners and cannot assure you that all of our PRC resident beneficial owners will
comply with Circular 37. The failure of our beneficial owners who are PRC
residents to register or amend their SAFE registrations in a timely manner
pursuant to Circular 37 or the failure of future beneficial owners of our
company who are PRC residents to comply with the registration procedures set
forth in Circular 37 may subject such beneficial owners or our PRC subsidiaries
to fines and legal sanctions. Failure to register or amend the registration may
also limit our ability to contribute additional capital to our PRC subsidiaries
or receive dividends or other distributions from our PRC subsidiaries or other
proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
These risks may have a material adverse effect on our business, financial
condition and results of operations.
The M&A Rule establishes more complex procedures for
some acquisitions of Chinese companies by foreign investors, which could make it
more difficult for us to pursue growth through acquisitions in China.
On August 8, 2006, six PRC regulatory agencies, including the
China Securities Regulatory Commission, promulgated the Provisions Regarding
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the
M&A Rule, which became effective on September 8, 2006. The M&A Rule
establishes additional procedures and requirements that could make some
acquisitions of Chinese companies by foreign investors more time-consuming and
complex, including requirements in some instances that the PRC Ministry of
Commerce be notified in advance of any change-of-control transaction and in some
situations, require approval of the PRC Ministry of Commerce when a foreign
investor takes control of a Chinese domestic enterprise. The regulations
prohibit a transaction at an acquisition price obviously lower than the
appraised value of the PRC business or assets and in certain transaction
structures, require that consideration must be paid within defined periods,
generally not in excess of a year. The regulation also limits our ability to
negotiate various terms of the acquisition, including aspects of the initial
consideration, contingent consideration, holdback provisions, indemnification
provisions and provisions relating to the assumption and allocation of assets
and liabilities. Transaction structures involving trusts, nominees and similar
entities are prohibited. Government approvals will have expiration dates by
which a transaction must be completed and reported to the government agencies.
In the future, we may grow our business in part by acquiring complementary
businesses, although we do not have any plans to do so at this time. The M&A
Rule also requires PRC Ministry of Commerce anti-trust review of any
change-of-control transactions involving certain types of foreign acquirers. On
February 3, 2011, the Circular on Establishing the Security Review System for
Merger and Acquisition of Domestic Enterprises by Foreign Investors was
promulgated by the General Office of the State Council, which went into effect
on March 4, 2011. On August 25, 2011, the Ministry of Commerce issued the
corresponding implementation rules. According to these rules, a foreign
investors acquisitions of Chinese companies in the fields of military,
important agricultural products, energy and resources, infrastructure, transport
service, key technology and major equipment manufacturing, and other restricted
fields requires security review by a ministerial panel established and governed
under the direction of the State Council and led by the National Development and
Reform Commission and Ministry of Commerce. Complying with the requirements of
the M&A Rule to complete such transactions could be time-consuming, and any
required approval processes, including obtaining approval from the PRC Ministry
of Commerce, may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market
share.
22
Investors may experience difficulties in effecting
service of legal process, enforcing foreign judgments or bringing original
actions in China based upon U.S. laws, including the federal securities laws or
other foreign laws against us or our management.
All of our current operations are conducted in China. Moreover,
most of our current directors and officers are nationals or residents of China.
All or a substantial portion of the assets of these persons are located outside
the United States and in the PRC. As a result, it may not be possible to effect
service of process within the United States or elsewhere outside China upon
these persons. In addition, uncertainty exists as to whether the courts of China
would recognize or enforce judgments of U.S. courts obtained against us or such
officers and/or directors predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof, or be competent to
hear original actions brought in China against us or such persons predicated
upon the securities laws of the United States or any state thereof.
Under the Enterprise Income Tax Law, we may be classified
as a resident enterprise of China. Such classification will likely result in
unfavorable tax consequences to us and our non-PRC shareholders.
On March 16, 2007, the National Peoples Congress of China
passed a new Enterprise Income Tax Law, or the EIT Law, and on November 28,
2007, the State Council of China passed its implementing rules, which took
effect on January 1, 2008. Under the EIT Law, an enterprise established outside
of China with de facto management bodies within China is considered a
resident enterprise, meaning that it can be treated in a manner similar to a
Chinese enterprise for enterprise income tax purposes. The implementing rules of
the EIT Law define de facto management as substantial and overall management
and control over the production and operations, personnel, accounting, and
properties of the enterprise.
On April 22, 2009, the State Administration of Taxation issued
the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment
Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to
Criteria of de facto Management Bodies, or the Notice, further interpreting the
application of the EIT Law and its implementation non-Chinese enterprise or
group controlled offshore entities. Pursuant to the Notice, an enterprise
incorporated in an offshore jurisdiction and controlled by a Chinese enterprise
or group will be classified as a non-domestically incorporated resident
enterprise if (i) its senior management in charge of daily operations reside or
perform their duties mainly in China; (ii) its financial or personnel decisions
are made or approved by bodies or persons in China; (iii) its substantial assets
and properties, accounting books, corporate chops, board and shareholder minutes
are kept in China; and (iv) at least half of its directors with voting rights or
senior management often resident in China. A resident enterprise would be
subject to an enterprise income tax rate of 25% on its worldwide income and must
pay a withholding tax at a rate of 10% when paying dividends to its non-PRC
shareholders. However, it remains unclear as to whether the Notice is applicable
to an offshore enterprise incorporated by a Chinese natural person. Nor are
detailed measures on imposition of tax from non-domestically incorporated
resident enterprises are available. Therefore, it is unclear how tax authorities
will determine tax residency based on the facts of each case.
23
We may be deemed to be a resident enterprise by Chinese tax
authorities. If the PRC tax authorities determine that we are a resident
enterprise for PRC enterprise income tax purposes, a number of unfavorable PRC
tax consequences could follow. First, we may be subject to the enterprise income
tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise
income tax reporting obligations. In our case, this would mean that income such
as interest on financing proceeds and non-China source income would be subject
to PRC enterprise income tax at a rate of 25%. Second, although under the EIT
Law and its implementing rules dividends paid to us from our PRC subsidiaries
would qualify as tax-exempt income, we cannot guarantee that such dividends
will not be subject to a 10% withholding tax, as the PRC foreign exchange
control authorities, which enforce the withholding tax, have not yet issued
guidance with respect to the processing of outbound remittances to entities that
are treated as resident enterprises for PRC enterprise income tax purposes.
Finally, it is possible that future guidance issued with respect to the new
resident enterprise classification could result in a situation in which a 10%
withholding tax is imposed on dividends we pay to our non-PRC shareholders and
with respect to gains derived by our non-PRC stockholders from transferring our
shares.
Heightened scrutiny of acquisition transactions by PRC
tax authorities may have a negative impact on Chinese companys business
operations and its acquisition strategy.
Pursuant to the Notice on Strengthening Administration of
Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or
SAT Circular 698, effective on January 1, 2008, and the Announcement on Several
Issues Related to Enterprise Income Tax for Indirect Asset Transfer by Non-PRC
Resident Enterprises , or SAT Announcement 7, effective on February 3, 2015,
issued by the SAT, if a non-resident enterprise transfers the equity interests
of or similar rights or interests in overseas companies which directly or
indirectly own PRC taxable assets through an arrangement without a reasonable
commercial purpose, but rather to avoid PRC corporate income tax, the
transaction will be re-characterized and treated as a direct transfer of PRC
taxable assets subject to PRC corporate income tax. SAT Announcement 7 specifies
certain factors that should be considered in determining whether an indirect
transfer has a reasonable commercial purpose. However, as SAT Announcement 7 is
newly issued, there is uncertainty as to the application of SAT Announcement 7
and the interpretation of the term reasonable commercial purpose.
Under SAT Announcement 7, the entity which has the obligation
to pay the consideration for the transfer to the transferring shareholders has
the obligation to withhold any PRC corporate income tax that is due. If the
transferring shareholders do not pay corporate income tax that is due for a
transfer and the entity which has the obligation to pay the consideration does
not withhold the tax due, the PRC tax authorities may impose a penalty on the
entity that so fails to withhold, which may be relieved or exempted from the
withholding obligation and any resulting penalty under certain circumstances if
it reports such transfer to the PRC tax authorities.
Although SAT Announcement 7 is generally effective as of
February 3, 2015, it also applies to cases where the PRC tax treatment of a
transaction that took place prior to its effectiveness has not yet been finally
settled. As a result, SAT Announcement 7 could be determined by PRC tax
authorities to be applicable to the historical reorganization, and it is
possible that these transactions could be determined by PRC tax authorities to
lack a reasonable commercial purpose. As a result, the transfer of shares by
certain shareholders to other parties could be subject to corporate income tax
of up to 10% on capital gains generated from such transfers, and PRC tax
authorities could impose tax obligations on the transferring shareholders or
subject us to penalty if the transferring shareholders do not pay such
obligations and withhold such tax.
SAT Announcement 7 and its interpretation by relevant PRC
authorities clarify that an exemption provided by SAT Circular 698 for transfers
of shares in a publicly-traded entity that is listed overseas is available if
the purchase of the shares and the sale of the shares both take place in
open-market transactions. However, if a shareholder of an entity that is listed
overseas purchases shares in the open market and sells them in a private
transaction, or vice-versa, PRC tax authorities might deem such a transfer to be
subject to SAT Circular 698 and SAT Announcement 7, which could subject such
shareholder to additional reporting obligations or tax burdens. Accordingly, if
a holder of the Companys common stock purchases such common stock in the open
market and sells them in a private transaction, or vice-versa, and fails to
comply with SAT Circular 698 or SAT Announcement 7, the PRC tax authorities may
take actions, including requesting to provide assistance for their investigation
or impose a penalty on it, which could have a negative impact on the companys
business operations.
We may be exposed to liabilities under the Foreign
Corrupt Practices Act and Chinese anti-corruption laws, and any determination
that we violated these laws could have a material adverse effect on our
business.
We are subject to the Foreign Corrupt Practice Act (FCPA),
and other laws that prohibit improper payments or offers of payments to foreign
governments and their officials and political parties by U.S. persons and
issuers as defined by the statute, for the purpose of obtaining or retaining business. We
have operations, have agreements with third parties, and make most of our sales
in China. The PRC also strictly prohibits bribery of government officials. Our
activities in China create the risk of unauthorized payments or offers of
payments by the employees, consultants, sales agents, or distributors of our
subsidiaries, even though they may not always be subject to our control. It is
our policy to implement safeguards to discourage these practices by our
employees. However, our existing safeguards and any future improvements may
prove to be less than effective, and the employees, consultants, sales agents,
or distributors of our subsidiaries may engage in conduct for which we might be
held responsible. Violations of the FCPA or Chinese anti-corruption laws may
result in severe criminal or civil sanctions, and we may be subject to other
liabilities, which could negatively affect our business, operating results and
financial condition. In addition, the U.S. government may seek to hold our
subsidiaries liable for successor liability FCPA violations committed by
companies in which we invest or that we acquire.
24
The implementation of the new PRC employment contract law
and increases in the labor costs in China may hurt our business and
profitability.
China adopted a new Labor Contract Law, effective on January 1,
2008, and issued its implementation rules, effective on September 18, 2008. The
Labor Contract Law and related rules and regulations impose more stringent
requirements on employers with regard to, among others, minimum wages, severance
payment and non-fixed-term employment contracts, time limits for probation
periods, as well as the duration and the times that an employee can be placed on
a fixed-term employment contract. Due to the limited period of effectiveness of
the Labor Contract Law and its implementation rules and regulations, and the
lack of clarity with respect to their implementation and potential penalties and
fines, it is uncertain how they will impact our current employment policies and
practices. In particular, compliance with the Labor Contract Law and its
implementation rules and regulations may increase our operating expenses. In the
event that we decide to terminate some of our employees or otherwise change our
employment or labor practices, the Labor Contract Law and its implementation
rules and regulations may also limit our ability to effect those changes in a
manner that we believe to be cost-effective or desirable, and could result in a
material decrease in our profitability.
RISKS RELATED TO OUR COMMON STOCK
Numerous factors, many of which are beyond our control,
may cause the market price of our common stock to fluctuate
significantly.
There are numerous factors, many of which are beyond our
control, may cause the market price of our common stock to fluctuate
significantly. These factors include:
|
our earnings releases, actual or anticipated changes in
our earnings, fluctuations in our operating results or our failure to meet
the expectations of financial market analysts and investors;
|
|
changes in financial estimates by us or by any securities
analysts who might cover our shares;
|
|
speculation about our business in the press or the
investment community;
|
|
significant developments relating to our relationships
with our customers or suppliers;
|
|
stock market price and volume fluctuations of other
publicly traded companies and, in particular, those that are in the our
industries;
|
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customer demand for our products;
|
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investor perceptions of the our industry in general and
our company in particular;
|
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the operating and stock performance of comparable
companies;
|
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general economic conditions and trends;
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major catastrophic events;
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announcements by us or our competitors of new products,
significant acquisitions, strategic partnerships or divestitures;
|
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changes in accounting standards, policies, guidance,
interpretation or principles;
|
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loss of external funding sources;
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sales of our shares, including sales by our directors,
officers or significant shareholders; and
|
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additions or departures of key personnel.
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Securities class action litigation is often instituted against
companies following periods of volatility in their share price. This type of
litigation could result in substantial costs to us and divert our managements
attention and resources. Moreover, securities markets may from time to time
experience significant price and volume fluctuations for reasons unrelated to
operating performance of particular companies. For example, in July 2008, the
securities markets in the United
States, China and other jurisdictions experienced the largest decline in share prices since September 2001. These market fluctuations may adversely affect the price of our shares and other interests in our company at a time when you want to sell
your interest in us.
25
If we fail to comply with the continued listing requirements of NASDAQ, we would face possible delisting, which would result in a limited public market for our shares and make obtaining future debt or equity financing more difficult for us.
Our common stock is traded and listed on the NASDAQ Global Market under the symbol “CBAK.” The common stock may be delisted if we fail to maintain certain NASDAQ listing requirements. On May 25, 2012, we received a letter from NASDAQ
indicating that for the last 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share requirement pursuant to NASDAQ Listing Rule 5450(a)(1) for continued inclusion on the NASDAQ Global Market.
After we effected a one-for-five reverse split on October 26, 2012, we regained compliance with the minimum bid price requirement for continued listing set forth in NASDAQ Listing Rule 5450(a)(1). On June 5, 2013, we received another letter from
NASDAQ indicating that for the last 30 consecutive business days, the bid price of our common stock closed below the minimum $1.00 per share. We again regained compliance within a short period of time. As of January 9, 2017, the closing price of
our common stock was $1.65 per share.
We cannot ensure you that the Company will continue to comply with the requirements for continued listing on the NASDAQ Global Market in the future. If our common stock loses its status on The NASDAQ Global Market and we are not successful in
obtaining a listing on The NASDAQ Capital Market, our common stock would likely trade in the over-the-counter market. If our shares were to trade on the over-the-counter market, selling our common stock could be more difficult because smaller
quantities of shares would likely be bought and sold, transactions could be delayed, and security analysts’ coverage of us may be reduced. In addition, in the event our common stock is delisted, broker-dealers have certain regulatory burdens
imposed upon them, which may discourage broker-dealers from effecting transactions in our common stock, further limiting the liquidity of our common stock. These factors could result in lower prices and larger spreads in the bid and ask prices for
our common stock. Such delisting from the NASDAQ Global Market and continued or further declines in our share price could also greatly impair our ability to raise additional necessary capital through equity or debt financing, and could significantly
increase the ownership dilution to shareholders caused by our issuing equity in financing or other transactions.
If we were delisted from NASDAQ, we may become subject to the trading complications experienced by “Penny Stocks” in the over-the-counter market.
Delisting from NASDAQ may cause our shares of common stock to become the SEC’s “penny stock” rules. The SEC generally defines a penny stock as an equity security that has a market price of less than $5.00 per share or an
exercise price of less than $5.00 per share, subject to specific exemptions. One such exemption is to be listed on NASDAQ. Therefore, were we to be delisted from NASDAQ, our common stock may become subject to the SEC’s “penny
stock” rules. These rules require, among other things, that any broker engaging in a purchase or sale of our securities provide its customers with: (i) a risk disclosure document, (ii) disclosure of market quotations, if any, (iii) disclosure
of the compensation of the broker and its salespersons in the transaction and (iv) monthly account statements showing the market values of our securities held in the customer’s accounts. A broker would be required to provide the bid and offer
quotations and compensation information before effecting the transaction. This information must be contained on the customer’s confirmation. Generally, brokers are less willing to effect transactions in penny stocks due to these additional
delivery requirements. These requirements may make it more difficult for shareholders to purchase or sell our shares. Because the broker, not us, prepares this information, we would not be able to assure that such information is accurate, complete
or current.
Our directors and executive officers, collectively, own approximately 16.1% of our outstanding common stock and may be able to control our management and affairs.
Mr. Yunfei Li, our president and chief executive officer and chairman of our board, and our other executive officers and directors beneficially own an aggregate of 16.
1% of our outstanding common stock. As a result, our directors and executive officers, acting together, may be able to control our management and affairs, including the election of directors and approval of significant corporate transactions, such as mergers,
consolidation, and sale of all or substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination
involving us, even if such a change of control would benefit our stockholders.
26
Provisions in our articles of incorporation and bylaws
could entrench our board of directors and prevent a change in
control.
Our articles of incorporation provide that special meetings of
the stockholders can only be called by our president or any other executive
officer, or the board of directors, or any member thereof, the record holder or
holders of at least 10% of all shares entitled to vote at the meeting, or the
president or secretary at the written request of our stockholders holding not
less than 30% of all shares issued, outstanding and entitled to vote. In
addition, our bylaws and/or our articles of incorporation (i) allow vacancies in
the board of directors to be filled by a majority of the remaining directors,
though less than a quorum, (ii) provide that no contract or transaction between
us and one or more of our directors or officers is void if certain criteria are
met, (iii) provide that our bylaws may be amended or appealed at any meeting of
the board of directors at which a quorum is present, by the affirmative vote of
a majority of the directors present at such meeting, and (iv) provide that at an
annual meeting, our stockholders elect a board of directors and transact such
other business as may properly be brought before the meeting; by contrast, at a
special meeting, our stockholders may transact only the business for the
purposes specified in the notice of the meeting unless all of our stockholders
entitled to vote are present at the special meeting and consent.
In addition, our board of directors may cause us to issue our
authorized but unissued shares of common stock in the future without
stockholders approval. These additional shares may be utilized for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of
authorized but unissued shares of common stock could render more difficult or
discourage an attempt to obtain control of a majority of our common stock by
means of a proxy contest, tender offer, merger or otherwise.
Collectively, these provisions may have the effect of
entrenching our existing board members, discouraging or preventing a transaction
including a change in control transaction where such transaction would be
beneficial to our stockholders.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
Not applicable.
ITEM
2. PROPERTIES.
We have completed the construction of the facilities in our
Dalian site with a total area of 40,100 square meters comprising manufacturing
facilities, warehousing and packaging facilities and administrative offices at
the BAK Industrial Park in Dalian. Of that space, approximately 26,437 square
meters are manufacturing facilities. We have completed the construction of a
power battery manufacturing plant and a power battery packing plant in Dalian
which started commercial production in July 2015. We are also in the progress to
construct two more buildings with a total area of 29,908 square meters including
a manufacturing plant and a warehouse of finished goods. We believe that these
facilities will meet our recent business needs as well as the needs of our
expanded operations in the future.
The following table sets forth the breakdown of our facilities
as of September 30, 2016 based on use:
Facility
|
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Usage
|
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Area (m2 )
|
Constructions completed
|
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Manufacturing
|
|
31,202
|
|
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R&D and administrative
|
|
3,231
|
|
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Warehousing
|
|
4,765
|
|
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Other facilities
|
|
902
|
|
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Subtotal
|
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40,100
|
|
|
|
|
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Constructions in progress
|
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Manufacturing
|
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16,908
|
|
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Warehousing
|
|
13,000
|
|
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Subtotal
|
|
29,908
|
|
|
|
|
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Dalian BAK Power facilities
|
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Total
|
|
70,008
|
We currently have insurance for the completed constructions. We
expect we will purchase related insurance for the remaining buildings after the
construction is completed and the property ownership certificates are obtained.
27
ITEM
3. LEGAL
PROCEEDINGS.
From time to time, we may become involved in various lawsuits
and legal proceedings, which arise, in the ordinary course of business. However,
litigation is subject to inherent uncertainties, and an adverse result in these,
or other matters, may arise from time to time that may harm our business. Other
than the legal proceedings set forth below, we are currently not aware of any
such legal proceedings or claims that we believe will have an adverse effect on
our business, financial condition or operating results:
An individual named Steven R. Ruth filed suit against China BAK
Battery, Inc. in United States District Court for the Western District of Texas
on August 15, 2013 alleging breach of contract. China BAK Battery, Inc. did not
receive notice of this lawsuit and the plaintiff sought a default judgment,
which the court granted in January 2014. Accordingly, the court entered judgment
in favor of Mr. Ruth in the amount of $553,774 inclusive of costs and attorneys
fees (the First Judgment).
Subsequent to the entry of the First Judgment, Mr. Ruth has
made efforts to have the judgment enforced in Canada. On September 19, 2014, Mr.
Ruth also filed a second complaint in the United States District Court for the
Western District of Texas. On November 12, 2014, a second default judgment was
entered against China BAK Battery, Inc. in the amount of $553,774 for the First
Judgment plus an additional $7,550 in attorneys fees (the Second Judgment).
The Second Judgment is inclusive of the amounts ordered in the First Judgment.
BAK International thereafter agreed to indemnify China BAK Battery, Inc. from
any expenses, losses and damages that were incurred and will incur to China BAK
Battery, Inc. due to the lawsuit filed by Mr. Ruth.
On December 30, 2015, Mr. Ruth, China BAK Battery, Inc., BAK
International Limited, Shenzhen BAK Battery Co., Ltd. and Shenzhen BAK Power
Battery Co., Ltd. entered into a settlement and release agreement, pursuant to
which, among others, the parties irrevocably released and forever discharged
each other from and against any and all liabilities, claims, actions, cause of
actions and damages, including any and all claims against the parties in the
First Judgement, the Second Judgement and certain recognition action commenced
by Mr. Ruth in the Supreme Court of British Columbia of Canada. On May 6, 2016,
the Supreme Court of British Columbia issued a consent dismissal order upon the
applications of the parties and dismissed the recognition action.
On July 7, 2016, Shenzhen Huijie Purification System
Engineering Co., Ltd (Shenzhen Huijie), one of our contractors, filed a
lawsuit against Dalian BAK Power in the Peoples Court of Zhuanghe City, Dalian
for the failure to pay pursuant to the terms of the contract and entrusted part
of the project of the contract to a third party without their prior consent. The
plaintiff sought a total amount of $1,263,722 (RMB8,430,792), including
construction costs of $0.9 million (RMB6.3 million), interest of $30,689 (RMB0.2
million) and compensation of $0.3 million (RMB1.9 million), which we already
accrued for as of September 30, 2016. On September 7, 2016, upon the request of
Shenzhen Huijie, the Court froze Dalian BAKs bank deposits totaling $1,263,722
(RMB 8,430,792) for a period of one year. We intend to vigorously defend
ourselves in this lawsuit.
ITEM
4. MINE SAFETY
DISCLOSURES.
Not applicable.
28
PART II
ITEM 5.
|
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
|
Market Information
Our common stock is listed on The NASDAQ Global Market under
the symbol CBAK.
The following table sets forth the quarterly high and low sales
prices of a share of our common stock as reported by NASDAQ for the periods
indicated. These prices do not include retail markup, markdown or commission and
may not represent actual transactions.
|
|
Closing Prices
(1)
|
|
|
|
High
|
|
|
Low
|
|
Year Ended September 30, 2016
|
|
|
|
|
|
|
First Quarter
|
$
|
3.75
|
|
$
|
2.21
|
|
Second Quarter
|
$
|
2.65
|
|
$
|
2.00
|
|
Third Quarter
|
$
|
2.98
|
|
$
|
2.28
|
|
Fourth Quarter
|
$
|
3.08
|
|
$
|
2.11
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2015
|
|
|
|
|
|
|
First Quarter
|
$
|
3.44
|
|
$
|
1.79
|
|
Second Quarter
|
$
|
3.52
|
|
$
|
1.75
|
|
Third Quarter
|
$
|
4.67
|
|
$
|
3.12
|
|
Fourth Quarter
|
$
|
3.23
|
|
$
|
1.58
|
|
(1)
The
above table sets forth the range of high and low closing prices per share of our
common stock as reported by Yahoo! Finance for the periods indicated.
Approximate Number of Holders of Our Common Stock
As of January 9, 2017, there were approximately 46 holders of
record of our common stock, which does not include the number of stockholders
holding shares of our common stock in street name.
Dividend Policy
We have never declared or paid any dividends, nor do we have
any present plan to pay any cash dividends on our common stock in the
foreseeable future. We currently intend to retain most, if not all, of our
available funds and any future earnings to operate and expand our business.
As we are a holding company, we rely on dividends paid to us by
our subsidiaries in the PRC through our Hong Kong subsidiary, BAK Asia. In
accordance with its articles of association, each of our subsidiaries in the PRC
is required to allocate to its statutory general reserve at least 10% of its
respective after-tax profits determined in accordance with the PRC accounting
standards and regulations. Each of our subsidiaries in the PRC may stop
allocations to its general reserve if such reserve has reached 50% of its
registered capital. Allocations to the reserve can only be used for making up
losses and other specified purposes and may not be paid to us in the form of
loans, advances, or cash dividends. Dividends paid by our PRC subsidiaries to
BAK Asia, our Hong Kong subsidiary, will not be subject to Hong Kong capital
gains or other income tax under current Hong Kong laws and regulations because
they will not be deemed to be assessable income derived from or arising in Hong
Kong. Such dividends, however, may be subject to a 10% withholding tax in the
PRC.
Our board of directors has discretion on whether to pay
dividends unless the distribution would render us unable to repay our debts as
they become due, as provided in Chapter 78.288 of the Nevada Revised Statutes.
Even if our board of directors decides to pay dividends, the form, frequency and
amount will depend upon our future operations and earnings, capital requirements
and surplus, general financial condition, contractual restrictions and other
factors that the board of directors may deem relevant.
29
Securities Authorized for Issuance Under Equity Compensation
Plans
See Item 12, Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters Securities Authorized for
Issuance Under Equity Compensation Plans.
Recent Sales of Unregistered Securities
We have not sold any equity securities during the 2016 fiscal
year that were not previously disclosed in a quarterly report on Form 10-Q or a
current report on Form 8-K that was filed during the 2016 fiscal year.
Purchases of Equity Securities
No repurchases of our common stock were made during the fiscal
year of 2016.
ITEM
6. SELECTED
FINANCIAL DATA.
Not applicable.
ITEM
7. 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. In addition to
historical information, the following discussion contains certain
forward-looking information. See Special Note Regarding Forward Looking
Statements above for certain information concerning those forward looking
statements. Our financial statements are prepared in U.S. dollars and in
accordance with U.S. GAAP.
Overview
We are engaged in the developing, manufacturing and selling of
new energy high power lithium batteries, which are mainly used in the following
applications:
|
Electric vehicles (EV), such as
electric cars, electric buses, hybrid electric cars and buses;
|
|
Light electric vehicles (LEV),
such as electric bicycles, electric motors, sight-seeing cars; and
|
|
Electric tools, energy storage,
uninterruptible power supply, and other high power applications.
|
We generated revenues from the manufacture and sale of high
power lithium batteries of $13.9 million and $10.4 million for the fiscal years
ended September 30, 2015 and 2016, respectively, and net profit from continuing
operations of $14.0 million and net loss of $12.7 million during the same years,
respectively. We believe that our operations will yield long-term growth of
revenues with the expected expansion of our manufacturing capabilities in the
coming years.
We have completed the construction of a power battery
manufacturing plant and a power battery packing plant of our Dalian facilities
which started commercial production in July 2015. We have received and been
utilizing most of BAK Tianjins operating assets relocated to our Dalian
facilities, including its machinery and equipment for battery production and
battery pack production, customers, management team and technical staff, patents
and technologies. BAK Tianjin had been one of the major manufacturers of high
power lithium batteries in China which started operations in 2008, and has many
well-known customers in EV, LEV and other high power applications. We have also
purchased and will purchase more machinery and equipment to expand our
manufacturing capabilities. In addition, we have outsourced and will continue to
outsource our production to other manufacturers until our Dalian manufacturing
facility can fulfill our customers needs.
For the fiscal year ended September
30, 2016, Dalian BAK Power purchased batteries of approximately $2.7 million and
$5.6 million from BAK Tianjin and Shenzhen BAK, respectively.
During the fiscal year 2016, we received advances of
approximately $5.5 million from certain investors and on July 28, 2016, we
entered into securities purchase agreements with these investors and converted
such loans into equity interests by issuing 2.2 million shares of our common
stock to these investors on August 17, 2016.
In June 2016, we renewed our banking facilities from Bank of
Dandong for loans in a maximum amount of $19.5 million including three-year
long-term loans and three-year revolving bank acceptance and letters of credit
bills for the period from June 13, 2016 to June 12, 2019. The banking facilities were
guaranteed by Mr. Yunfei Li (Mr. Li), our CEO, Ms. Qinghui Yuan, Mr. Lis
wife, Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of our former
CEO, and Shenzhen BAK. The facilities were also secured by part of our Dalian
sites prepaid land use rights, buildings, construction in progress, machinery
and equipment and pledged deposits. Under the banking facilities, from June to
September 2016, we borrowed various three-year term bank loans that totaled
RMB126.8 million (approximately $19.0 million), bearing fixed interest at 7.2%
per annum. We also borrowed a series of revolving bank acceptance totaled $0.5
million from Bank of Dandong under the credit facilities.
30
On July 6, 2016, we obtained banking facilities from Bank of
Dalian for loans in a maximum amount of RMB10 million (approximately $1.5
million) and bank acceptance bills of RMB40 million (approximately $6.0 million)
to July 2017. The banking facilities were guaranteed by Mr. Li, our CEO, Ms.
Qinghui Yuan, Mr. Lis wife, and Shenzhen BAK. Under the banking facilities, on
July 6, 2016 we borrowed one year short-term loan of RMB10 million
(approximately $1.5 million), bearing a fixed interest rate at 6.525% per annum.
We also borrowed revolving bank acceptance totaled $6.0 million. As of September
30, 2016, we had unutilized committed banking facilities of $0.2 million. We
plan to renew these loans upon maturity, and plan to raise additional funds
through banks borrowings and equity financing in the future to meet our daily
cash demands, if required.
In the meanwhile, due to the growing environmental pollution
problem, the Chinese government is currently providing vigorous support to the
new energy facilities and vehicles. It is expected that we will be able to
secure more potential orders from the new energy market, especially from the
electric car market. We believe with that the booming future market demand in
high power lithium ion products, we can continue as a going concern and return
to profitability.
These consolidated financial statements have been prepared
assuming we will continue to operate as a going concern, which contemplates the
realization of assets and the settlement of liabilities in the normal course of
business. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty related to our ability to continue as a going
concern.
Financial Statement Presentation
Net revenues.
Our net revenues represent the
invoiced value of our products sold, net of value added taxes, or VAT, sales
returns, trade discounts and allowances. We are subject to VAT, which is levied
on most of our products at the rate of 17% on the invoiced value of our
products. Provision for sales returns are recorded as a reduction of revenue in
the same period that revenue is recognized. The provision for sales returns
represents our best estimate of the amount of goods that will be returned from
our customers based on historical sales return data.
Pursuant to the Provisional Regulation of China on Value Added
Tax and its implementing rules, all entities and individuals that are engaged in
the sale of goods, the provision of repairs and replacement services and the
importation of goods in China are generally required to pay VAT at a rate of 17%
of the gross sales proceeds received, less any deductible VAT already paid or
borne by the taxpayer. Further, when exporting goods, the exporter is entitled
to some or all of the refund of VAT that it has already paid or borne. Our
imported raw materials that are used for manufacturing exported products and
deposited in bonded warehouses are exempt from import VAT.
Cost of revenues.
Cost of revenues consists
primarily of material costs, employee remuneration for staff engaged in
production activity, share-based compensation, depreciation and related expenses
that are directly attributable to the production of products. Cost of revenues
also includes write-downs of inventory to lower of cost or market.
Research and development expenses.
Research and
development expenses primarily consist of remuneration for R&D staff,
share-based compensation, depreciation and R&D material costs. For the years ended September 30,
2015 and 2016, we recorded research and development expenses of $1,001,889 and
$1,879,869, respectively.
Sales and marketing expenses.
Sales and marketing
expenses consist primarily of remuneration for staff involved in selling and
marketing efforts, including staff engaged in the packaging of goods for
shipment, advertising cost, depreciation, share-based compensation and travel
and entertainment expenses. We do not pay slotting fees to retail companies for
displaying our products, engage in cooperative advertising programs, participate
in buy-down programs or similar arrangements.
31
General and administrative expenses.
General and
administrative expenses consist primarily of employee remuneration, share-based
compensation, professional fees, insurance, benefits, general office expenses,
depreciation and liquidated damage charges.
Government grant income.
We present the
government subsidies received as income unless the subsidies received are
earmarked to compensate a specific expense, which have been accounted for by
offsetting the specific expense, such as research and development expense,
interest expenses and removal costs. Unearned government subsidies received are
deferred for recognition until the criteria for such recognition could be met.
Grants applicable to land are amortized over the life of the depreciable
facilities constructed on it. For research and development expenses, we match
and offset the government grants with the expenses of the research and
development activities as specified in the grant approval document in the
corresponding period when such expenses are incurred.
Finance costs, net.
Finance costs consist
primarily of interest income and interest on bank loans and other short term
loans, net of capitalized interest.
Income tax expenses.
Our subsidiaries in PRC are
subject to an income tax rate of 25%. Our Hong Kong subsidiary BAK Asia is
subject to profits tax at a rate of 16.5%. However, because we did not have any
assessable income derived from or arising in Hong Kong, BAK Asia had not paid
any such tax.
Results of Operations
The following table sets forth key components of our results of
operations for the years indicated, both in dollars and as a percentage of our
revenue.
(All amounts, other than percentages, in thousands of U.S.
dollars)
|
|
Year Ended September 30,
|
|
|
Change
|
|
|
|
2015
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
Net revenues
|
$
|
13,904
|
|
$
|
10,369
|
|
|
(3,535
|
)
|
|
(25.42
|
)
|
Cost of revenues
|
|
(12,954
|
)
|
|
(12,100
|
)
|
|
854
|
|
|
6.59
|
|
Gross profit (loss)
|
|
950
|
|
|
(1,731
|
)
|
|
(2,681
|
)
|
|
(282.21
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses
|
|
1,002
|
|
|
1,880
|
|
|
878
|
|
|
87.62
|
|
Sales and marketing expenses
|
|
135
|
|
|
995
|
|
|
860
|
|
|
637.04
|
|
General and administrative expenses
|
|
3,330
|
|
|
4,738
|
|
|
1,408
|
|
|
42.28
|
|
Provision for doubtful accounts
|
|
132
|
|
|
2,779
|
|
|
2,647
|
|
|
2,005.30
|
|
Total operating expenses
|
|
4,599
|
|
|
10,392
|
|
|
5,793
|
|
|
125.96
|
|
Operating loss
|
|
(3,649
|
)
|
|
(12,123
|
)
|
|
(8,474
|
)
|
|
(232.23
|
)
|
Government grant income
|
|
23,103
|
|
|
-
|
|
|
(23,103
|
)
|
|
(100.00
|
)
|
Other (expense) income, net
|
|
(91
|
)
|
|
143
|
|
|
234
|
|
|
257.14
|
|
Profit (loss) before income tax and
discontinued operations
|
|
19,363
|
|
|
(11,980
|
)
|
|
(31,343
|
)
|
|
(161.87
|
)
|
Income tax expense
|
|
(5,321
|
)
|
|
(672
|
)
|
|
4,649
|
|
|
87.37
|
|
Net profit (loss) from continuing
operations, net of tax
|
|
14,042
|
|
|
(12,652
|
)
|
|
(26,694
|
)
|
|
(190.10
|
)
|
Income from discontinued operations, net of tax
|
|
1,831
|
|
|
-
|
|
|
(1,831
|
)
|
|
(100.00
|
)
|
Net profit (loss)
|
$
|
15,873
|
|
$
|
(12,652
|
)
|
|
(28,525
|
)
|
|
(179.71
|
)
|
Net revenues
. Net revenues were $10.4 million for
the fiscal year ended September 30, 2016, as compared to $13.9 million for the
fiscal year of 2015, a decrease of $3.5 million, or 25.4% .
32
The following table sets forth the breakdown of our net
revenues by end-product applications derived from high-power lithium
batteries.
(All amounts, other than percentage, in thousands of U.S.
dollars)
|
|
Year ended September 30,
|
|
|
Change
|
|
|
|
2015
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
High power lithium batteries used in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric vehicles
|
$
|
-
|
|
$
|
6,488
|
|
|
6,488
|
|
|
100.00
|
|
Light electric vehicles
|
|
-
|
|
|
553
|
|
|
553
|
|
|
100.00
|
|
Uninterruptable supplies
|
|
13,904
|
|
|
3,328
|
|
|
(10,576
|
)
|
|
(76.06
|
)
|
|
$
|
13,904
|
|
$
|
10,369
|
|
|
(3,535
|
)
|
|
(25.42
|
)
|
Net revenues from sales of batteries for electric vehicles were
$6.5 million for the fiscal year ended September 30, 2016, as compared to nil
for fiscal year 2015. We started producing batteries for electric vehicles in
our Dalian facilities at the end of fiscal year 2015. Our revenue from sales of
batteries for electric vehicles for the fiscal year 2016 was negatively affected
by the delay in the announcement of the government subsidy policy for new energy
vehicles in 2016 and our application for the eligible manufacturers of MIIT as
discussed above.
Net revenues from sales of batteries for light electric
vehicles was $0.6 million for the fiscal year ended September 30, 2016, as
compared nil for fiscal year 2015.
Net revenues from sales of batteries for uninterruptable
supplies was $3.3 million for the fiscal year ended September 30, 2016, as
compared $13.9 million for fiscal year 2015, a decrease of $10.6 million, or
76.1% . We focused on manufacturing of batteries for electric vehicles in fiscal
2016 and therefore sales of batteries for uninterruptable power supplies
decreased significantly.
Cost of revenues.
Cost of revenues decreased to
$12.1 million for the year ended September 30, 2016, as compared to $13.0
million for fiscal year 2015, a decrease of $0.8 million, or 6.6% . Included in
cost of revenues was a write down of inventories of $0.2 million and $0.4
million for the years ended September 30, 2015 and 2016, respectively. We write
down the inventory value whenever there is an indication that it is impaired.
However, further write-downs may be necessary if market conditions continue to
deteriorate.
Gross profit (loss).
Gross loss for the year
ended September 30, 2016 was $1.7 million, or 16.7% of net revenues as compared
to a gross profit of $1.0 million, or 6.8% of net revenues, for fiscal year
2015. Our new Dalian facilities commenced manufacturing activities in July 2015.
Inefficiency was inevitable due to the operation of the newly installed
machinery and newly hired production staff. As a result, we incurred a gross
loss for fiscal year 2016.
Research and development expenses.
Research and
development expenses increased to $1.9 million for the year ended September 30,
2016, as compared to $1.0 million for fiscal year 2015, an increase of $0.9
million, or 87.6% . This increase was mainly because the materials and
consumables used in research and development increased by $0.8 million for
fiscal year 2016 compared with fiscal year 2015. We put more resources on
developing batteries and modules to fulfill the demand of electric vehicles
manufacturers to achieve more orders.
Sales and marketing expenses.
Sales and marketing
expenses increased to $1.0 million for the year ended September 30, 2016, as
compared to $0.1 million for fiscal year 2015, an increase of $0.9 million, or
634.7%, primarily due to the increase in salary and wages, product warranty
expense, travelling expenses by $0.2 million, $0.2 million and $0.2 million,
respectively, for the year ended September 30, 2016 as compared with the same
period 2015. We recruited more sales and marketing stuff to develop customers in
fiscal year 2016. In fiscal 2016, we made provision for warranty expenses of
$0.2 million according to our after sale service maintenance policy on electric
vehicle battery products. We also incurred $0.2 million in travelling and
promotion expenses for our overseas sales during fiscal 2016 while we did not
have overseas sales in fiscal 2015. As a percentage of revenues, sales and
marketing expenses have increased to 9.6% for the year ended September 30, 2016,
from 1.0% for the same period in 2015.
General and administrative expenses.
General and
administrative expenses increased to $4.7 million for the year ended September
30, 2016, as compared to $3.3 million for fiscal year 2015, an increase of $1.4
million, or 42.3% . The increase in general and administrative expenses was
mainly because we expanded our administrative and management teams after we
commenced our commercial operations in Dalian. As a result, the salary and wages
including share based compensation expense, increased $1.2 million for the year
ended September 30, 2016 as compared with 2015.
33
Provision for doubtful accounts.
Provision for
doubtful accounts increased to $2.8 million for the year ended September 30,
2016, as compared to $0.1 million for the fiscal year 2015, an increase of $2.7
million, or 2005.3%. We determine the allowance based on historical write-off
experience, customer specific facts and economic conditions.
Operating loss.
As a result of the above, our
operating loss totaled $12.0 million for the year ended September 30, 2016, as
compared to $3.7 million for the fiscal year 2015, an increase of $8.4 million
or 232.2%.
Government grant income
. Government grant income
decreased to nil for the fiscal year ended September 30, 2016, as compared to
$23.1 million for the same period last year. The government grant income in 2015
was mainly due to the recognition of the subsidy of $23.1 million from the
Management Committee of Dalian Economic Zone granted to finance the costs and
the projected operating loss incurred due to the relocation to our new
facilities in Dalian in fiscal year 2015.
Income tax expense.
Income tax expense was
approximately $672,000 for the fiscal year 2016, primarily due to the
significantly uncertain tax position arose from the subsidies granted by the
local government to the Companys PRC subsidiary, as compared to income tax
expense of $5.3 million income tax expense for 2015. Income tax expense in
fiscal 2015 was mainly due to the income tax impact of the government subsidies
recognized.
Income from discontinued operations, net of tax.
Income from discontinued operations, net of tax was nil for the fiscal
year ended September 30, 2016 as compared to $1.8 million for 2015. Income from
discontinued operations in 2015 represents an adjustment to the gain on disposal
of subsidiaries from discontinued operations previously recorded in fiscal 2014.
Upon the disposal, our former subsidiaries owed us a sum of $17.8 million. We
evaluated the collectability of the remaining amount and determined that $1.8
million should be impaired and offset against the gain on disposal of
subsidiaries from discontinued operations for the year ended September 30, 2014.
During fiscal 2015, we determined that $1.8 million was recoverable. The
recovery was treated as an adjustment to the gain on disposal of subsidiaries
from discontinued operations in 2015.
Net profit (loss)
.
As a result of
the foregoing, we had a net loss of $12.7 million for the year ended September
30, 2016, compared to a net profit of $15.9 million for the year ended September
30, 2015.
Liquidity and Capital Resources
We had financed our liquidity requirements from a variety of
sources, including short-term bank loans, other short-term loans and bills
payable under bank credit agreements, advance from our related and unrelated
parties, investors and issuance of capital stock.
We incurred a net loss of $12.7 million in fiscal 2016. As of
September 30, 2016, we had cash and cash equivalents of $2.0 million. Our total
current assets were $32.3 million and our total current liabilities were $47.6 million, resulting in a net working capital deficiency of $15.3 million. These
factors raise substantial doubts about our ability to continue as a going
concern.
During the fiscal year of 2016, we received advances of
approximately $5.5 million from certain investors. We entered into securities
purchase agreements with these investors on July 28, 2016 and converted such
loans into equity interests by issuing an aggregate of 2,206,640 shares of our
common stock to the investors on August 17, 2016.
On June 14, 2016, we renewed our banking facility letter from
Bank of Dandong for loans in a maximum amount of RMB130.0 million (approximately
$19.5 million), including three-year long-term loans and three-year revolving
bank acceptance and letters of credit bills for the period from June 13, 2016 to
June 12, 2019. The banking facilities were guaranteed by Mr. Li, our CEO, Ms.
Qinghui Yuan, Mr. Lis wife, Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu,
the wife of our former CEO, and Shenzhen BAK. The facilities were also secured
by part of our Dalian sites prepaid land use rights, buildings, construction in
progress, machinery and equipment and pledged deposits. Under the banking
facilities, from June to September 2016, we borrowed various three-year term
bank loans that totaled RMB126.8 million (approximately $19.0 million), bearing
fixed interest at 7.2% per annum. As of September 30, 2016, we also borrowed a
series of revolving bank acceptance totaled $0.5 million from Bank of Dandong under the credit facilities
(50% pledged deposit was required).
On July 6, 2016, we entered into a banking facility letter with
Bank of Dalian for loans in a maximum amount of RMB10 million (approximately
$1.5 million) and bank acceptance bills of RMB40 million (approximately $6.0
million) expiring July 2017. The banking facilities were guaranteed by Mr. Li,
our CEO, Ms. Qinghui Yuan, Mr. Lis wife, and Shenzhen BAK. Under the banking
facilities, on July 6, 2016 we borrowed one year short-term loan of RMB10
million (approximately $1.5 million), bearing a fixed interest rate at 6.525%
per annum. We also borrowed revolving bank acceptance totaled $6.0 million (50%
pledged deposit was required).
34
As of September 30, 2016, we had unutilized committed banking
facilities of $0.2 million.
We are currently expanding our product lines and manufacturing
capacity in our Dalian plant, which require more funding to finance the
expansion. We may also require additional cash due to changing business
conditions or other future developments, including any investments or
acquisitions we may decide to pursue. We plan to renew these loans upon
maturity, if required, and plan to raise additional funds through bank
borrowings and equity financing in the future to meet our daily cash demands, if
required. However, there can be no assurance that we will be successful in
obtaining this financing. If our existing cash and bank borrowing are
insufficient to meet our requirements, we may seek to sell equity securities,
debt securities or borrow from lending institutions. We can make no assurance
that financing will be available in the amounts we need or on terms acceptable
to us, if at all. The sale of equity securities, including convertible debt
securities, would dilute the interests of our current shareholders. The
incurrence of debt would divert cash for working capital and capital
expenditures to service debt obligations and could result in operating and
financial covenants that restrict our operations and our ability to pay
dividends to our shareholders. If we are unable to obtain additional equity or
debt financing as required, our business operations and prospects may
suffer.
In the meanwhile, due to the growing environmental pollution
problem, the Chinese government is currently providing vigorous support to the
new energy facilities and vehicle. It is expected that we will be able to secure
more potential orders from the new energy market, especially from the electric
car market. We believe with that the booming future market demand in high power
lithium ion products, we can continue as a going concern and return to
profitability.
The following table sets forth a summary of our cash flows for
the periods indicated:
(All amounts in thousands of U.S. dollars)
|
|
Year Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
Net cash used in operating activities
|
$
|
(2,037
|
)
|
$
|
(13,888
|
)
|
Net cash used in investing activities
|
|
(5,502
|
)
|
|
(9,114
|
)
|
Net cash provided by financing activities
|
|
13,344
|
|
|
18,511
|
|
Effect of exchange rate changes on cash and cash
equivalents
|
|
(34
|
)
|
|
(319
|
)
|
Net increase (decrease) in cash and cash
equivalents
|
|
5,771
|
|
|
(4,810
|
)
|
Cash and cash equivalents at beginning of the year
|
|
992
|
|
|
6,763
|
|
Cash and cash equivalents at end of the
year
|
$
|
6,763
|
|
$
|
1,953
|
|
Operating Activities
Net cash used in operating activities was $13.9 million in the
year ended September 30, 2016, as compared with net cash used in operating
activities of $2.0 million in fiscal year 2015. The increase of $11.9 million
was mainly attributable to our net loss of $12.7 million and an increase of
inventories of $14.4 million, offset by an increase in trade accounts and bills
payable of $5.5 million and an increase in payables to our former subsidiaries
of $5.1 million.
Investing Activities
Net cash used in investing activities increased to $9.1 million
in fiscal 2016, from $5.5 million in fiscal 2015. The net cash used in investing
activities for the year ended September 30, 2016 mainly consisted of the net
cash payments of $5.9 million to construct the Dalian facilities, including
construction and purchase of equipment. The net cash used in investing
activities for the year ended September 30, 2015 was mainly attributable to a
net cash payment of $12.9 million to construct the Dalian facilities, offset by
the receipt of government grant of $7.4 million.
Financing Activities
Net cash provided by financing activities was $18.5 million in
fiscal 2016, compared with net cash provided by financing activities of $13.3
million in fiscal 2015. In fiscal 2016, we obtained bank loans of $19.4 million,
borrowed $4.3 million from related and unrelated parties, and issued common
stock for $5.5 million, offset by repayment of short term bank borrowings of $10.7 million. In fiscal 2015, we received $12.9
million of short term bank loans, $5.3 million other short term loans from
related and unrelated parties, and $9.8 million from investors, offset by
repayment of short term bank borrowings of $4.8 million and an repayment of $9.9
million to related and unrelated parties.
35
As of September 30, 2016, the principal amounts outstanding
under our credit facilities and lines of credit were as follows:
(All amounts in thousands of U.S. dollars)
|
|
Maximum amount available
|
|
|
Amount borrowed
|
|
Long-term credit facilities:
|
|
|
|
|
|
|
Bank of Dandong
|
$
|
19,179
|
|
$
|
19,007
|
|
|
|
|
|
|
|
|
Short-term credit facilities:
|
|
|
|
|
|
|
Bank of Dandong
|
|
307
|
|
|
307
|
|
Bank of Dalian
|
$
|
7,495
|
|
$
|
7,495
|
|
|
|
7,802
|
|
|
7,802
|
|
|
|
|
|
|
|
|
Total
|
$
|
26,981
|
|
$
|
26,809
|
|
For the fiscal year 2016, we obtained $5.5 million from the
issuance of 2,206,640 shares of common stock to certain investors.
Capital Expenditures
We incurred capital expenditures of $5.9 million and $12.9
million in fiscal years 2016 and 2015, respectively. Our capital expenditures in
2016 were used primarily to construct our Dalian facility. The table below sets
forth the breakdown of our capital expenditures by use for the periods
indicated.
(All amounts in thousands of U.S. dollars)
|
|
Year Ended September 30,
|
|
|
|
2015
|
|
|
2016
|
|
Purchase of property, plant and equipment
and construction in progress
|
$
|
12,852
|
|
$
|
5,927
|
|
Purchase of intangible assets
|
|
29
|
|
|
-
|
|
Total capital expenditure
|
$
|
12,881
|
|
$
|
5,927
|
|
We estimate that our total capital expenditures in fiscal year
2017 will reach approximately $23.5 million. Such funds will be used to
construct a new plant with 2 product lines and a new warehouse and battery
module packing lines.
Contractual Obligations and Commercial Commitments
The following table sets forth our contractual obligations and
commercial commitments as of September 30, 2016:
(All amounts in thousands of U.S. dollars)
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
Short-term bank loans
|
$
|
1,499
|
|
$
|
1,499
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Long-term bank loans
|
|
19,006
|
|
|
-
|
|
|
19,006
|
|
|
-
|
|
|
-
|
|
Bills payable
|
|
10,886
|
|
|
10,886
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Advances from related parties
|
|
4,306
|
|
|
4,306
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Advances from unrelated third parties
|
|
85
|
|
|
85
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital injection to Dalian BAK Power
|
|
9,896
|
|
|
9,896
|
|
|
|
|
|
|
|
|
-
|
|
and Dalian BAK Trading
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
Capital commitments for construction of buildings
|
|
3,303
|
|
|
3,303
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Capital commitments for purchase of
equipment
|
|
470
|
|
|
470
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Future interest payment on bank loans
|
|
3,767
|
|
|
1,443
|
|
|
2,324
|
|
|
-
|
|
|
-
|
|
Total
|
$
|
53,218
|
|
$
|
31,888
|
|
$
|
21,330
|
|
$
|
-
|
|
$
|
-
|
|
36
Other than the contractual obligations and commercial
commitments set forth above, we did not have any other long-term debt
obligations, operating lease obligations, capital commitments, purchase
obligations or other long-term liabilities as of September 30, 2016.
Off-Balance Sheet Transactions
We have not entered into any transactions, agreements or other
contractual arrangements to which an entity unconsolidated with us is a party
and under which we have (i) any obligation under a guarantee, (ii) any retained
or contingent interest in assets transferred to an unconsolidated entity that
serves as credit, liquidity or market risk support to such entity, (iii) any
obligation under derivative instruments that are indexed to our shares and
classified as shareholders equity in our consolidated balance sheets, or (iv)
any obligation arising out of a variable interest in any unconsolidated entity
that provides financing, liquidity, market risk or credit support to us or
engages in leasing, hedging or research and development services with us.
Critical Accounting Policies
Our consolidated financial information has been prepared in
accordance with U.S. GAAP, which requires us to make judgments, estimates and
assumptions that affect (1) the reported amounts of our assets and liabilities,
(2) the disclosure of our contingent assets and liabilities at the end of each
fiscal period and (3) the reported amounts of revenues and expenses during each
fiscal period. We continually evaluate these estimates based on our own
historical experience, knowledge and assessment of current business and other
conditions, our expectations regarding the future based on available information
and reasonable assumptions, which together form our basis for making judgments
about matters that are not readily apparent from other sources. Since the use of
estimates is an integral component of the financial reporting process, our
actual results could differ from those estimates. Some of our accounting
policies require a higher degree of judgment than others in their
application.
When reviewing our financial statements, the following should
also be considered: (1) our selection of critical accounting policies, (2) the
judgment and other uncertainties affecting the application of those policies,
and (3) the sensitivity of reported results to changes in conditions and
assumptions. We believe the following accounting policies involve the most
significant judgment and estimates used in the preparation of our financial
statements.
We consider the following to be the most critical accounting
policies:
Revenue Recognition
We recognize revenue on product sales when products are
delivered and the customer takes ownership and assumes risk of loss, collection
of the relevant receivable is probable, persuasive evidence of an arrangement
exists and the sales price is fixed or determinable.
Net sales of products represent the invoiced value of goods
sold, net of value added taxes (VAT), sales returns, trade discounts and
allowances. We are subject to VAT which is levied on the majority of our
products at the rate of 17% on the invoiced value of sales. Output VAT is borne
by customers in addition to the invoiced value of sales and input VAT is borne
by us in addition to the invoiced value of purchases to the extent not refunded
for export sales. Provision for sales returns are recorded as a reduction of
revenue in the same period that revenue is recognized. The provision for sales
returns, which is based on historical sales returns data, is our best estimate
of the amount of goods that will be returned from our customers.
Impairment of Long-lived Assets
Long-lived assets, which include property, plant and equipment,
prepaid land use rights and intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated undiscounted future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
37
Trade Accounts and Bills Receivable
Trade accounts and bills receivable are recorded at the
invoiced amount, net of allowances for doubtful accounts and sales returns. The
allowance for doubtful accounts is our best estimate of the amount of probable
credit losses in our existing trade accounts receivable. We determine the
allowance based on historical write-off experience, customer specific facts and
economic conditions.
Outstanding accounts receivable balances are reviewed
individually for collectability. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
Inventories
Inventories are stated at the lower of cost or market. The cost
of inventories is determined using the weighted average cost method, and
includes expenditure incurred in acquiring the inventories and bringing them to
their existing location and condition. In case of finished goods and work in
progress, cost includes an appropriate share of production overhead based on
normal operating capacity.
We regularly review the cost of inventories against their
estimated fair market value and record a lower of cost or market write-down for
inventories that have costs in excess of estimated market value.
Government Grants
Our subsidiaries in China receive government subsidies from
local Chinese government agencies in accordance with relevant Chinese government
policies. In general, we present the government subsidies received as income
unless the subsidies received are earmarked to compensate a specific expense,
which have been accounted for by offsetting the specific expense, such as
research and development expense, interest expenses and removal costs. Unearned
government subsidies received are deferred for recognition until the criteria
for such recognition could be met.
Grants applicable to land are amortized over the life of the
depreciable facilities constructed on it. For research and development expenses,
we match and offset the government grants with the expenses of the research and
development activities as specified in the grant approval document in the
corresponding period when such expenses are incurred.
Share-based Compensation
We adopted the provisions of ASC Topic 718 which requires us to
measure and recognize compensation expenses for an award of an equity instrument
based on the grant-date fair value. The cost is recognized over the vesting
period (or the requisite service period). ASC Topic 718 also requires us to
measure the cost of a liability classified award based on its current fair
value. The fair value of the award will be remeasured subsequently at each
reporting date through the settlement date. Changes in fair value during the
requisite service period are recognized as compensation cost over that period.
Further, ASC Topic 718 requires us to estimate forfeitures in calculating the
expense related to stock-based compensation.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes Option Valuation Model. The expected volatility
was based on the historical volatilities of our listed common stocks in the
United States and other relevant market information. We use historical data to
estimate share option exercises and employee departure behavior used in the
valuation model. The expected terms of share options granted is derived from the
output of the option pricing model and represents the period of time that share
options granted are expected to be outstanding. Since the share options once
exercised will primarily trade in the U.S. capital market, the risk-free rate
for periods within the contractual term of the share option is based on the U.S.
Treasury yield curve in effect at the time of grant.
Changes in Accounting Standards
Please refer to note 2 to our consolidated financial
statements, Principal Activities, Basis of Presentation and Organization
Recently Issued Accounting Standards, for a discussion of relevant
pronouncements.
Exchange Rates
The financial records of our PRC subsidiaries are maintained in
RMB. In order to prepare our financial statements, we have translated amounts in
RMB into amounts in U.S. dollars. The amounts of our assets and liabilities on
our balance sheets are translated using the closing exchange rate as of the date of
the balance sheet. Revenues, expenses, gains and losses are translated using the
average exchange rate prevailing during the period covered by such financial
statements. Adjustments resulting from the translation, if any, are included in
our cumulative other comprehensive income in our stockholders equity section of
our balance sheet. All other amounts that were originally booked in RMB and
translated into U.S. dollars were translated using the closing exchange rate on
the date of recognition. Consequently, the exchange rates at which the amounts
in those comparisons were computed varied from year to year.
38
The exchange rates used to translate amounts in RMB into U.S.
dollars in connection with the preparation of our financial statements were as
follows:
|
|
RMB per U.S. Dollar
|
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
Balance sheet items as of September 30
|
|
6.3564
|
|
|
6.6714
|
|
Amounts included in the statement of income and
comprehensive loss and statement of cash flows for the years ended
September 30
|
|
6.2224
|
|
|
6.5325
|
|
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
The full text of our audited consolidated financial statements
begins on page F-1 of this annual report.
ITEM
9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
The disclosure required under this section was previously
reported as such term is defined in Rule 12b-2 under the Securities Exchange Act
of 1934, as amended, on a Current Report on Form 8-K filed with the Securities
and Exchange Commission on September 29, 2016.
ITEM 9A. CONTROLS
AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our
management has carried out an evaluation, with the participation and under the
supervision of our Chief Executive Officer and Interim Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as of September 30, 2016. Disclosure controls and procedures refer to
controls and other procedures designed to ensure that information required to be
disclosed in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
rules and forms of the SEC and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and our
Interim Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognizes that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management is required to apply
its judgment in evaluating and implementing possible controls and
procedures.
Management conducted its evaluation of disclosure controls and
procedures under the supervision of our Chief Executive Officer and our Interim
Chief Financial Officer. Based upon, and as of the date of this evaluation, our
Chief Executive Officer and Interim Chief Financial Officer concluded that our
disclosure controls and procedures were ineffective as of September 30, 2016.
Managements Annual Report on Internal Control over
Financial Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting for the Company. Internal
control over financial reporting refers to the process designed by, or under the
supervision of, our Chief Executive Officer and our Interim Chief Financial
Officer, and effected by our board of directors, management and other personnel,
to provide reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. GAAP, and includes those policies and procedures that:
39
|
|
pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and dispositions of
our assets;
|
|
|
provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with U.S. GAAP, and that our receipts and expenditures are
being made only in accordance with the authorization of our management and
directors; and
|
|
|
provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control
over financial reporting as of September 30, 2016. In making this assessment,
management used the framework set forth in the report entitled Internal Control
- Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO. The COSO framework summarizes
each of the components of a companys internal control system, including (i) the
control environment, (ii) risk assessment, (iii) control activities, (iv)
information and communication, and (v) monitoring.
Based on this evaluation and as a result of the material
weakness discussed below, our Chief Executive Officer and our Interim Chief
Financial Officer concluded that the Companys disclosure controls and
procedures as of September 30, 2016 were not effective because of the following
material weakness in our internal control over financial reporting has been
identified:
|
|
We did not have appropriate policies and procedures in
place to evaluate the proper accounting and disclosures of key documents
and agreements.
|
|
|
|
|
|
We do not have sufficient and skilled accounting
personnel with an appropriate level of technical accounting knowledge and
experience in the application of accounting principles generally accepted
in the United States commensurate with our financial reporting
requirements.
|
In order to cure the foregoing material weakness, we have taken
or are taking the following remediation measures:
|
|
We are in the process of hiring a permanent chief
financial officer with significant U.S. GAAP and SEC reporting experience.
Mr. Wenwu Wang was appointed by the Board of Directors of the Company as
the Interim Chief Financial Officer on August 28, 2014.
|
|
|
|
|
|
We plan to make necessary changes by providing training
to our financial team and our other relevant personnel on the U.S. GAAP
accounting guidelines applicable to our financial reporting requirements.
In September 2016, we implemented training on internal control and
enterprise risk management. In November 2016, we implemented training on
U.S. GAAP accounting guidelines.
|
We intend to complete the remediation of the material
weaknesses discussed above as soon as practicable but we can give no assurance
that we will be able to do so. Designing and implementing an effective
disclosure controls and procedures is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to devote significant resources to maintain a financial
reporting system that adequately satisfies our reporting obligations. The
remedial measures that we have taken and intend to take may not fully address
the material weakness that we have identified, and material weaknesses in our
disclosure controls and procedures may be identified in the future. Should we
discover such conditions, we intend to remediate them as soon as practicable. We
are committed to taking appropriate steps for remediation, as needed.
Changes in internal control over financial reporting
Except for the matters described above, there were no changes
in our internal controls over financial reporting during the fourth quarter of
our fiscal year ended September 30, 2016 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
40
ITEM 9B. OTHER
INFORMATION.
We have no information to disclose that was required to be
disclosed in a report on Form 8-K during the fourth quarter of fiscal year 2016,
but was not reported.
41
PART III
ITEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following sets forth the name and position of each of our
current executive officers and directors.
NAME
|
AGE
|
POSITION
|
Yunfei Li
|
50
|
Chairman of the
Board and Chief Executive Officer
|
J. Simon Xue
|
62
|
Director
|
Martha C. Agee
|
61
|
Director
|
Jianjun He
|
44
|
Director
|
Guosheng Wang
|
44
|
Director
|
Jian Lin
|
39
|
Interim Chief Technology Officer
|
Wenwu Wang
|
35
|
Interim Chief
Financial Officer
|
Yunfei Li
has served as the chairman of our
board, our president and chief executive officer since March 1, 2016. Mr. Li has
more than 20 years management experience in industries of real estate
development, battery and new energy. Since May 2014, he has been Vice President
of the Companys subsidiary, Dalian BAK Power in charge of the companys
construction of manufacturing facilities, government relationship and
development of new customers. From May 2010 to May 2014, Mr. Li held management
positions of various new energy development and real estate development
companies in China. Prior to that, he was Director of Construction Department,
Director of Comprehensive Management Department and Assistant to President of
Shenzhen BAK Battery Co., Ltd., a former subsidiary of the Company, from March
2003 to May 2010. Mr. Li holds a Bachelors degree in Civil Engineering from
Liao Yuan Vocational Technical College.
J. Simon Xue
has served as our director since
February 1, 2016. Dr. Xue has approximately 40 years experience in nuclear
chemistry, solid state chemistry, superconductivity and materials for Lithium
ion batteries. Within his research career, he has spent 21 years in the research
and development of Lithium ion battery. Dr. Xue is currently the Senior Director
of National Institute for Low-&-Clean Energy in China and a member of
National Thousand Talent Plan and a member of Expert Committee for Chinese
Industrial Association of Power Sources. Prior to that, Dr. Xue was a director
of Altair Nanotechnologies Inc., a Delaware company, between August 2011 and
April 2012. From 2010 to 2011, he served as the chief executive officer of
Yintong Energy Co., Ltd., a subsidiary of Canon Investment Holdings Ltd. Dr. Xue
has also held positions at Ultralife, Duracell, B&K Electronics Co., Ltd.,
Valence Energy-Tech (Suzhou) Co., A123 Systems Inc. and International Battery
Inc. He enjoys an extensive reputation in the whole product chain of lithium ion
battery in China, including materials, equipment, cell manufacturing and
testing. He has authored or co-authored over 50 scientific articles, 12 patents
relevant to battery chemistry and materials and participated, presented and
hosted more than 30 battery or material related international conferences. Dr.
Xue completed his Ph.D. program in Solid State Chemistry in McMaster University
in 1992.
Martha C. Agee
has served as our director since
November 15, 2012. Since 1997, Ms. Agee has been a senior lecturer of business
law at Hankamer School of Business of Baylor University where she teaches
courses in the Legal Environment of Business, International Business Law, and
Healthcare Law & Ethics for graduate and undergraduate students. Prior to
that, Ms. Agee practiced law from 1988 to 1996. Ms. Agee obtained her bachelors
degree in Accounting in 1976 and Juris Doctorate degree in 1988 from Baylor
University.
Jianjun He
has served as our director since
November 4, 2013. Mr. He has more than 15 years experience in accounting and
finance and is an associate member of the Chinese Institute of Certificate
Public Accounts. Mr. He has been the Managing Director of Jilin Cybernaut Lvke
Investment and Management Co., Ltd., an investment consulting firm in China,
since January 1, 2013. From June 30, 2009 to December 31, 2012, Mr. He served as
the Chief Financial Officer of THT Heat Transfer Technology, Inc. (Nasdaq: THTI)
(THT Heat), a provider of heat exchangers and heat exchange solutions in
China. Mr. He was the Chief Financial Officer of Siping City Juyuan Hanyang
Plate Heat Exchanger Co. Ltd, a wholly owned subsidiary of THT Heat from 2007 to
December 2012. From 1999 to 2007, Mr. He worked as senior financial officer in
Jilin Grain Group, a state-owned enterprise engaged in the grain processing and
trading business. Mr. He graduated from Changchun Taxation College in 1995 with
a Bachelors degree in Auditing and obtained a Masters degree from Jilin
University in 2005.
42
Guosheng Wang
has served as our director since
August 1, 2014. Since June 2014, Mr. Wang has been in charge of the construction
of facilities of the Companys subsidiary, Dalian BAK Power Battery Co., Ltd
(Dalian BAK) and the relocation of assets and equipment of BAK International
(Tianjin) Limited (BAK Tianjin) to Dalian BAK. Prior to that, Mr. Wang served
as vice president of operations of BAK Tianjin since May 2013, where he was
managing the Quality Department, Purchase Department, Equipment Department and
HR Department. From May 2010 to May 2013, Mr. Wang served as manager of
Equipment Department of BAK Tianjin. From March 2008 to May 2010, he served as
Director of No. 1 Manufacture Department of BAK Tianjin. Mr. Wang began his
career working as an engineer at Harbin Railway Transportation Equipment Co.,
Ltd in 1994. Mr. Wang obtained his bachelors degree in mechanical manufacturing
engineering and equipment from Lanzhou Jiaotong University in July 1994.
Jian Lin
has served as our Interim Chief
Technical Officer since April 17, 2014. He served as Vice Director of R&D
Centre of Shenzhen BAK from March 2012 to April, 2014, where he was responsible
for the overall R&D activities of Shenzhen BAK. From October 2009 to
February 2012, he worked for Postdoctoral R&D Station of Shenzhen BAK, which
was co-established by Shenzhen BAK and Xiamen University, where he focused on
the research of high performance liquid electrolytes for Li-ion battery. From
August 2008 to September 2009, he worked as R&D scientist for U.S. Brady
(Beijing) R&D Center. Dr. Lin has extensive knowledge of lithium-ion battery
technologies and holds three patents relating to lithium-ion technology. Dr. Lin
received a doctorate degree in polymer science and engineering from Case Western
Reserve University, where he focused on novel lithium salts and polymer
electrolyte membranes/separators for lithium batteries.
Wenwu Wang
has served as our Interim Chief
Financial Officer since August 28, 2014. He has served as the financial
controller of Dalian BAK Power since April 2014, and served as the vice
financial manager of Shenzhen BAK from August 2013 to June 2014. Mr. Wang has
been our consolidation and financial reporting manager since September 2012.
From November 2010 to September 2012, he served as the financial manager of BAK
India. From October 2008 to November 2010, Mr. Wang was account receivable
supervisor of Shenzhen BAK and consolidation and financial reporting assistant
of the Company. Mr. Wang received a bachelors degree in Accounting from
Southwest University in China.
There are no agreements or understandings for any of our
executive officers or director to resign at the request of another person and no
officer or director is acting on behalf of nor will any of them act at the
direction of any other person.
Directors are elected until their successors are duly elected
and qualified.
Director Qualifications
Directors are responsible for overseeing the Companys business
consistent with their fiduciary duty to shareholders. This significant
responsibility requires highly-skilled individuals with various qualities,
attributes and professional experience. The Board believes that there are
general requirements for service on the Companys Board of Directors that are
applicable to all directors and that there are other skills and experience that
should be represented on the Board as a whole but not necessarily by each
director. The Board and the Nominating and Corporate Governance Committee of the
Board consider the qualifications of directors and director candidates
individually and in the broader context of the Boards overall composition and
the Companys current and future needs.
Qualifications for All Directors
In identifying and evaluating nominees, the Nominating and
Corporate Governance Committee may consult with the other Board members,
management, consultants, and other individuals likely to possess an
understanding of the Companys business and knowledge of suitable candidates. In
making its recommendations, the Nominating and Corporate Governance Committee
assesses the requisite skills and qualifications of nominees and the composition
of the Board as a whole in the context of the Board's criteria and needs. In
evaluating the suitability of individual Board members, the Nominating and
Corporate Governance Committee may take into account many factors, including
general understanding of marketing, finance and other disciplines relevant to
the success of a publicly traded company in todays business environment;
understanding of the Companys business and technology; the international nature
of the Companys operations; educational and professional background; and
personal accomplishment. The Nominating and Corporate Governance Committee
evaluates each individual in the context of the Board as a whole, with the
objective of recommending a group that can best perpetuate the success of the
Companys business and represent stockholder interests through the exercise of
sound judgment, using its diversity of experience. The Nominating and Corporate
Governance Committee also ensures that a majority of nominees would be
independent directors as defined under the applicable rules of the SEC and The
NASDAQ Stock Market LLC.
43
Qualifications, Attributes, Skills and Experience to be
Represented on the Board as a Whole
In its assessment of each potential candidate, including those
recommended by stockholders, the Nominating and Corporate Governance Committee
considers the nominees judgment, integrity, experience, independence,
understanding of the Companys business or other related industries and such
other factors the Nominating and Corporate Governance Committee determines are
pertinent in light of the current needs of the Board. The Nominating and
Corporate Governance Committee also takes into account the ability of a Director
to devote the time and effort necessary to fulfill his or her responsibilities
to the Company.
The Board and the Nominating and Corporate Governance Committee
require that each Director be a recognized person of high integrity with a
proven record of success in his or her field. Each Director must demonstrate
innovative thinking, familiarity with and respect for corporate governance
requirements and practices, an appreciation of multiple cultures and a
commitment to sustainability and to dealing responsibly with social issues. In
addition to the qualifications required of all Directors, the Board assesses
intangible qualities including the individuals ability to ask difficult
questions and, simultaneously, to work collegially.
The Board has identified particular qualifications, attributes,
skills and experience that are important to be represented on the Board as a
whole, in light of the Companys current needs and business priorities. The
Companys services are performed in various countries and in significant areas
of future growth located outside of the United States. Accordingly, the Board
believes that international experience or specific knowledge of key geographic
growth areas and diversity of professional experiences should be represented on
the Board. In addition, the Companys business is multifaceted and involves
complex financial transactions. Therefore, the Board believes that the Board
should include some Directors with a high level of financial literacy and some
Directors who possess relevant business experience as a Chief Executive Officer
or President. Our business involves complex technologies in a highly specialized
industry. Therefore, the Board believes that extensive knowledge of the
Companys business and industry should be represented on the Board.
The Board and the Nominating and Corporate Governance Committee
do not have a specific diversity policy, but consider diversity of race,
ethnicity, gender, age, cultural background and professional experiences in
evaluating candidates for Board membership. Diversity is important because a
variety of points of view contribute to a more effective decision-making
process.
Summary of Qualifications of Directors
Set forth below is a narrative disclosure that summarizes some
of the specific qualifications, attributes, skills and experiences of our
directors. For more detailed information, please refer to the biographical
information for each director set forth above.
Mr. Li,
has extensive senior management experience in
the industry in which we operate and has held management positions of various
new energy development and real estate development companies in China..
Dr. Xue
, Chair of the Compensation Committee, has
approximately 40 years experience in nuclear chemistry, solid state chemistry,
superconductivity and materials for Lithium ion batteries. Within his research
career, he has spent 21 years in the research and development of Lithium ion
battery.
Ms. Agee
, Chair of the Audit Committee, was previously a
Certified Public Accountant, worked as Chief Accountant for political
sub-division for five and a half years and worked as Supervisor of Accounting
for a large retail chain where the responsibilities included hiring, training,
and supervision of accounting staff; preparation and analysis of 17 monthly
financial statements and quarterly consolidated financial statements; budgeting,
and internal auditing.
Mr. He
, Chair of the Nominating and Corporate Governance
Committee, has more than 15-year experience in accounting and finance and is an
associate member of the Chinese Institute of Certificate Public Accounts.
Mr. Wang
, has served with the Company since 2003 and
brings to the Board extensive experience in all aspects of our business and
industry and strong management and technical skills.
44
Family Relationships
There are no family relationships among our directors or
officers.
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or
executive officers has, during the past ten years:
|
been convicted in a criminal proceeding or been subject
to a pending criminal proceeding (excluding traffic violations and other
minor offences);
|
|
had any bankruptcy petition filed by or against the
business or property of the person, or of any partnership, corporation or
business association of which he was a general partner or executive
officer, either at the time of the bankruptcy filing or within two years
prior to that time;
|
|
been subject to any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction or federal or state authority, permanently or temporarily
enjoining, barring, suspending or otherwise limiting, his involvement in
any type of business, securities, futures, commodities, investment,
banking, savings and loan, or insurance activities, or to be associated
with persons engaged in any such activity;
|
|
been found by a court of competent jurisdiction in a
civil action or by the Securities and Exchange Commission or the Commodity
Futures Trading Commission to have violated a federal or state securities
or commodities law, and the judgment has not been reversed, suspended, or
vacated;
|
|
been the subject of, or a party to, any federal or state
judicial or administrative order, judgment, decree, or finding, not
subsequently reversed, suspended or vacated (not including any settlement
of a civil proceeding among private litigants), relating to an alleged
violation of any federal or state securities or commodities law or
regulation, any law or regulation respecting financial institutions or
insurance companies including, but not limited to, a temporary or
permanent injunction, order of disgorgement or restitution, civil money
penalty or temporary or permanent cease- and-desist order, or removal or
prohibition order, or any law or regulation prohibiting mail or wire fraud
or fraud in connection with any business entity; or
|
|
been the subject of, or a party to, any sanction or
order, not subsequently reversed, suspended or vacated, of any self-
regulatory organization (as defined in Section 3(a)(26) of the Exchange
Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section
1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any
equivalent exchange, association, entity or organization that has
disciplinary authority over its members or persons associated with a
member.
|
Board Composition and Committees
Our board of directors is comprised of Yunfei Li, J. Simon Xue,
Martha C. Agee, Jianjun He and Guosheng Wang.
J. Simon Xue, Martha Agee and Jianjun He each serves on our
board of directors as an independent director as defined by as defined by Rule
5605(a)(2) of the NASDAQ Listing Rules. Our board of directors has determined
that Martha Agee possesses the accounting or related financial management
experience that qualifies her as financially sophisticated within the meaning of
Rule 5605(c)(2)(A) of the NASDAQ Listing Rule and that she is an audit
committee financial expert as defined by the rules and regulations of the
SEC.
Our board of directors currently has three standing committees
which perform various duties on behalf of and report to the board of directors:
(i) audit committee, (ii) compensation committee and (iii) nominating and
corporate governance committee. Each of the three standing committees is
comprised entirely of independent directors. From time to time, the board of
directors may establish other committees.
Audit Committee
Our Audit Committee consists of three members: Martha C. Agee,
J. Simon Xue and Jianjun He. Pursuant to the determination of our Board of
Directors, Ms. Agee serves as the chair of the Audit Committee and as our Audit
Committee financial expert as that term is defined by the applicable SEC rules.
Each director who has served or is serving on our Audit Committee was or is
independent as that term is defined under the NASDAQ listing rules for Audit
Committee members at all times during their service on such Committee.
The Audit Committee oversees our accounting and financial
reporting processes and the audits of the financial statements of our Company.
The Audit Committee is responsible for, among other things:
45
|
the appointment, compensation, retention and oversight of
the work of the independent auditor;
|
|
reviewing and pre-approving all auditing services and
permissible non-audit services (including the fees and terms thereof) to
be performed by the independent auditor;
|
|
reviewing and approving all proposed related-party
transactions;
|
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discussing the interim and annual financial statements
with management and our independent auditors;
|
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reviewing and discussing with management and the
independent auditor (a) the adequacy and effectiveness of the Companys
internal controls, (b) the Companys internal audit procedures, and (c)
the adequacy and effectiveness of the Companys disclosure controls and
procedures, and management reports thereon;
|
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reviewing reported violations of the Companys code of
conduct and business ethics; and
|
|
eviewing and discussing with management and the
independent auditor various topics and events that may have significant
financial impact on the Company or that are the subject of discussions
between management and the independent auditors.
|
Compensation Committee
Our Compensation Committee consists of three members: Martha C.
Agee, J. Simon Xue and Jianjun He, with Mr. Xue serving as chair. Each director
who has served or is serving on our Compensation Committee was or is
independent as that term is defined under the NASDAQ listing rules at all
times during their service on such Committee.
The purpose of our Compensation Committee discharge the
responsibilities of the Companys Board of Directors relating to compensation of
the Companys executives, to produce an annual report on executive compensation
for inclusion in the Companys proxy statement, if required, and to oversee and
advise the Board on the adoption of policies that govern the Companys
compensation programs, including stock and benefit plans. Our chief executive
officer may not be present at any Compensation Committee meeting during which
his compensation is deliberated. The Compensation Committee is responsible for,
among other things:
|
reviewing and approving the compensation structure for
corporate officers at the level of corporate vice president and above;
|
|
overseeing an evaluation of the performance of the
Companys executive officers and approve the annual compensation,
including salary, bonus, incentive and equity compensation, for the
executive officers;
|
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reviewing and approving chief executive officer goals and
objectives, evaluate chief executive officer performance in light of these
corporate objectives, and set chief executive officer compensation
consistent with Company philosophy;
|
|
making recommendations to the Board regarding the
compensation of board members;
|
|
reviewing and making recommendations concerning long-term
incentive compensation plans, including the use of equity-based plans.
Except as otherwise delegated by the Board of Directors, the Compensation
Committee will act on behalf of the Board of Directors as the Committee
established to administer equity-based and employee benefit plans, and as
such will discharge any responsibilities imposed on the Compensation
Committee under those plans, including making and authorizing grants, in
accordance with the terms of those plans.
|
Nominating and Corporate Governance Committee
Our Nominating and Corporate Governance Committee consists of
three members: Martha C. Agee, J. Simon Xue and Jianjun He, with Mr. He serving
as chair. Each director who has served or is serving on our Nominating and
Corporate Governance Committee was or is independent as that term is defined
under the NASDAQ listing standards at all times during their service on such
Committee.
The purpose of the Nominating and Corporate Governance
Committee is to determine the slate of director nominees for election to the
Companys Board of Directors, to identify and recommend candidates to fill
vacancies occurring between annual shareholder meetings, and to review the
Companys policies and programs that relate to matters of corporate
responsibility, including public issues of significance to the Company and its
members. The Nominating and Corporate Governance Committee is responsible for,
among other things:
|
annually presenting to the Board a list of individuals
recommended for nomination for election to the Board at the annual meeting
of stockholders, and for appointment to the committees of the Board;
|
46
|
annually reviewing the composition of each committee and
present recommendations for committee memberships to the Board as needed;
and
|
|
annually evaluating and reporting to the Board of
Directors on the performance and effectiveness of the Board of Directors
to facilitate the directors fulfillment of their responsibilities in a
manner that serves the interests of the Companys shareholders.
|
Code of Business Ethics and Conduct
We have adopted a Code of Business Ethics and Conduct relating
to the conduct of our business by our employees, officers and directors. We
intend to maintain the highest standards of ethical business practices and
compliance with all laws and regulations applicable to our business, including
those relating to doing business outside the United States. During the fiscal
year ended September 30, 2014, there were no amendments to or waivers of our
Code of Business Ethics and Conduct. If we effect an amendment to, or waiver
from, a provision of our Code of Business Ethics and Conduct, we intend to
satisfy our disclosure requirements by posting a description of such amendment
or waiver on our Internet website at www.cbak.com.cn or via a current report on
Form 8-K.
Section 16(A) Beneficial Ownership Reporting
Compliance
Under U.S. securities laws, directors, certain executive
officers and persons beneficially owning more than 10% of our Common Stock must
report their initial ownership of the Common Stock, and any changes in that
ownership, to the SEC. The SEC has designated specific due dates for these
reports. Based solely on our review of copies of such reports filed with the SEC
and written representations of our directors and executive offers, we believe
that all persons subject to reporting filed the required reports on time in
fiscal year 2016.
ITEM 11. EXECUTIVE
COMPENSATION.
Summary Compensation Table
The following table sets forth information concerning all cash
and non-cash compensation awarded to, earned by or paid to the named persons for
services rendered in all capacities during the noted periods. No other executive
officer received total annual salary and bonus compensation in excess of
$100,000.
|
|
|
|
|
|
|
|
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards
|
|
|
Option
|
|
|
|
|
Name and Principal
Position
|
|
Year
|
|
|
Salary ($)
(1)
|
|
|
($)
(3)
|
|
|
Awards ($)
|
|
|
Total
($)
|
|
Yunfei Li, President, Chief Executive
Officer
(2)
|
|
2016
|
|
|
92,044
|
|
|
24,300
|
|
|
|
|
|
116,344
|
|
|
|
2015
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Wenwu Wang, Interim Chief Financial Officer
|
|
2016
|
|
|
48,531
|
|
|
54,000
|
|
|
|
|
|
102,531
|
|
|
|
2015
|
|
|
49,300
|
|
|
27,000
|
|
|
-
|
|
|
76,300
|
|
Xiangqian Li, former President and Chief
Executive Officer
(2)
|
|
2016
|
|
|
9,185
|
|
|
|
|
|
|
|
|
9,185
|
|
|
|
2015
|
|
|
21,214
|
|
|
-
|
|
|
-
|
|
|
21,214
|
|
(1) The amounts reported in this table have been converted from
RMB to U.S. dollars based on the average conversion rate between the U.S. dollar
and RMB for the applicable fiscal year, or $1.00 to RMB 6.5325 (fiscal year 2016
exchange rate), $1.00 to RMB6.2224 (fiscal year 2015 exchange rate).
(2) Mr. Yunfei Li became our President and Chief Executive
Officer on March 1, 2016 upon the resignation of Mr. Xiangqian Li.
(3) The stock awards consisted of restrict shares granted on
June 30, 2015, which are vested and exercisable in twelve equal quarterly
installment with the first vesting date of June 30, 2015 and with a fair value
of $3.24.
Summary of Employment Agreements
The base salary shown in the Summary Compensation Table is
described in each named executive officers respective employment agreement. The
material terms of those employment agreements are summarized below.
47
We entered into employment agreements with three-year initial
terms with our named executive officers with standard employment agreements. We
entered into the employment agreements with Mr. Yunfei Li and Mr. Wenwu Wang on
March 1, 2016 and September 30, 2014, respectively. Each of our standard
employment agreements is automatically extended by a year at the expiration of
the initial term and at the expiration of every one-year extension, until
terminated in accordance with the termination provisions of the agreements,
which are described below.
Our standard employment agreement permits us to terminate the
executives employment for cause, at any time, without notice or remuneration,
for certain acts of the executive, including but not limited to a conviction or
plea of guilty to a felony, negligence or dishonesty to our detriment and
failure to perform agreed duties after a reasonable opportunity to cure the
failure. An executive may terminate his employment upon one months written
notice if there is a material reduction in his authority, duties and
responsibilities or if there is a material reduction in his annual salary before
the next annual salary review. Furthermore, we may terminate the executives
employment at any time without cause by giving one months advance written
notice to the executive officer. If we terminate the executives employment
without cause, the executive will be entitled to a termination payment of up to
three months of his or her then base salary, depending on the length of such
executives employment with us. Specifically, the executive will receive salary
continuation for: (i) one month following a termination effective prior to the
first anniversary of the effective date of the employment agreement; (ii) two
months following a termination effective prior to the second anniversary of the
effective date; and (iii) three months following a termination effective prior
to or any time after the third anniversary of the effective date. The employment
agreements provide that the executive will not participate in any severance
plan, policy, or program of the Company.
Our standard employment agreement contains customary
non-competition, confidentiality, and non-disclosure covenants. Each executive
officer has agreed to hold, both during and after the employment agreement
expires or is earlier terminated, in strict confidence and not to use, except as
required in the performance of his duties in connection with the employment, any
confidential information, technical data, trade secrets and know-how of our
company or the confidential information of any third party, including our
affiliated entities and our subsidiaries, received by us. The executive officers
have also agreed to disclose in confidence to us all inventions, designs and
trade secrets which they conceive, develop or reduce to practice and to assign
all right, title and interest in them to us. In addition, each executive officer
has agreed to be bound by non-competition restrictions set forth in his or her
employment agreement. Specifically, each executive officer has agreed not to,
while employed by us and for a period of one year following the termination or
expiration of the employment agreement,
-
approach our clients, customers or contacts or other persons or entities,
and not to interfere with the business relationship between us and such
persons and/or entities;
-
assume employment with or provide services as a director for any of our
competitors, or engage in any business which is in direct or indirect
competition with our business; or
-
solicit the services of any of our employees.
Outstanding Equity Awards at Fiscal Year-End 2016
The following table sets forth the equity awards outstanding at
September 30, 2016 for each of our named executive officers.
48
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
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Option
Awards
|
|
|
|
Stock
Awards
|
|
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Name
|
Number of
securities
underlying
unexercised
options (#)
exercisable
|
Number of
securities
underlying
unexercised
options (#)
unexercisable
|
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options (#)
|
Option
exercise
price
($)
|
Option
expiration
date
|
Number
of
shares
or units
of
stock
that
have
not
vested
(#)
|
Market
value
of
shares
or units
of
stock
that
have
not
vested
(#)
|
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units or
other
rights
that have
not
vested
(#)
|
Equity incentive plan
awards:
Market or
payout value of unearned
shares, units or other
rights that have not
vested ($)
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Yunfei Li
|
|
|
|
|
|
-
|
-
|
165,000*
|
371,250
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Wenwu Wang, Interim Chief Financial Officer
|
|
|
|
|
|
-
|
-
|
45,000
#
|
101,250
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* On June 30, 2015, Mr. Li was granted 30,000 restricted shares
of the Companys common stock, par value $0.001, under the 2015 Equity Incentive
Plan of the Company (the 2015 Plan). The restricted shares vest over a three
year period in 12 equal quarterly installments with the first vesting date on
June 30, 2015. On April 19, 2016, pursuant to the 2015 Plan, the Company granted
Mr. Li an aggregate of 150,000 restricted shares of the Companys common stock.
The restricted shares vest semi-annually in 6 equal installments over a three
year period with the first vesting on December 31, 2016.
#
On June 30, 2015, Mr. Wang was granted 50,000
restricted shares of the Companys common stock, par value $0.001, under the
2015 Plan. The restricted shares vest over a three year period in 12 equal
quarterly installments with the first vesting date on June 30, 2015. On April
19, 2016, pursuant to the 2015 Plan, the Company granted Mr. Wang an aggregate
of 20,000 restricted shares of the Companys common stock. The restricted shares
vest semi-annually in 6 equal installments over a three year period with the
first vesting on December 31, 2016.
Compensation of Directors
Under our Compensation Plan for Non-Employee Directors, or the
Directors Plan, each eligible non-employee director of the Company may receive
an annual retainer fee. Pursuant to the Directors Plan, the annual retainer fee
under the Directors Plan is subject to adjustments determined by our Board from
time to time. Each independent director is also eligible to be granted 5,000
restricted shares of our common stock for serving as a director.
In December 2010, our Board of Directors unanimously approved a
change in the annual retainer fee for independent directors in accordance with
the Directors Plan. Effective January 1, 2011, our independent directors will be
paid an annual retainer fee of $45,000. As was previously our policy, the chair
of the Audit Committee will continue to receive an additional $5,000 in
recognition of the added responsibility of this position. In connection with
this change, the Board unanimously determined that the independent directors
will no longer receive an annual issuance of restricted shares under the
Directors Plan. Each of the independent directors has waived all rights to such
annual issuances, including with respect to 2,500 of the shares that were to be
issued to each of the independent directors during calendar year 2011 in
connection with their grants on July 1, 2010.
Effective October 1, 2012, each of our independent directors
will be paid an annual retainer fee of $61,000. The chair of the Audit Committee
will receive an additional $9,000 in recognition of the added responsibility of
this position.
In June 2013, due to the financial situation of the Company,
each of the independent directors agreed to reduce their annual retainer fee to
$20,000, effective from the quarter ended June 30, 2013.
49
On June 30, 2015, each of our independent directors was granted
30,000 restricted shares of the Companys common stock, par value $0.001, under
the 2015 Plan. The restricted shares vest over a three year period in 12 equal
quarterly installments with the first vesting date on June 30, 2015.
On April 19, 2016, pursuant to the 2015 Plan, the Company
granted Dr. Xue an aggregate of 30,000 restricted shares of the Companys common
stock. The restricted shares vest semi-annually in 6 equal installments over a
three year period with the first vesting on December 31, 2016.
The following table sets forth the total compensation earned by
our non-employee directors during our fiscal year ended September 30, 2016:
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Fees Earned
|
|
|
|
|
|
|
|
|
|
or
|
|
|
|
|
|
|
|
Name
|
|
Paid in
|
|
|
Stock
|
|
|
Total ($)
|
|
|
|
Cash
($)
|
|
|
Awards
($)
|
|
|
|
|
J. Simon Xue
|
|
13,333
|
|
|
-
|
|
|
13,333
|
|
Martha C. Agee
|
|
20,000
|
|
|
32,400
|
|
|
52,400
|
|
Jianjun He
|
|
20,000
|
|
|
32,400
|
|
|
52,400
|
|
We do not maintain a medical, dental or retirement benefits
plan for the directors.
Except as disclosed in this annual report, we have not
compensated, and will not compensate, our non-independent directors, Mr. Yunfei
Li and Mr. Guosheng Wang, for serving as our directors, although they are
entitled to reimbursements for reasonable expenses incurred in connection with
attending our board meetings.
The directors may determine remuneration to be paid to the
directors with interested members of the Board refraining from voting. The
Compensation Committee will assist the directors in reviewing and approving the
compensation structure for the directors.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
Securities Ownership of Certain Beneficial Owners and
Management
The following table sets forth information known to us with
respect to the beneficial ownership of our Common Stock as of the close of
business on January 9, 2017 (the Reference Date) for: (i) each person known by
us to beneficially own more than 5% of our voting securities, (ii) each named
executive officer, (iii) each of our directors and nominees, and (iv) all of our
executive officers and directors as a group:
Names of Management and Names
|
|
Amount and Nature of
|
|
of Certain
Beneficial Owners
(1)
|
|
Beneficial Ownership
(1)
|
|
|
|
Number
(2)
|
|
|
Percent
(3)
|
|
|
|
|
|
|
|
|
Yunfei Li
(7)
|
|
3,042,500
|
|
|
15.5%
|
|
|
|
|
|
|
|
|
J. Simon Xue
(8)
|
|
5,000
|
|
|
*
|
|
|
|
|
|
|
|
|
Martha C. Agee
(4)
|
|
17,500
|
|
|
*
|
|
|
|
|
|
|
|
|
Jianjun He
(4)
|
|
17,500
|
|
|
*
|
|
|
|
|
|
|
|
|
Guosheng Wang
(5)
|
|
32,500
|
|
|
*
|
|
|
|
|
|
|
|
|
Wenwu Wang
(6)
|
|
32,500
|
|
|
*
|
|
|
|
|
|
|
|
|
All executive officers and directors as a
group (6 persons)
|
|
3,147,500
|
|
|
16.1%
|
|
*
|
Denotes less than 1% of the outstanding shares
of Common Stock.
|
50
(1)
|
The number of shares beneficially owned is determined
under Securities and Exchange Commission (SEC) rules, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under those rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power, and also any shares which the individual has the right to acquire
within 60 days of the Reference Date, through the exercise or conversion
of any stock option, convertible security, warrant or other right (a
Presently Exercisable security). Including those shares in the table
does not, however, constitute an admission that the named stockholder is a
direct or indirect beneficial owner of those shares.
|
|
|
(2)
|
Unless otherwise indicated, each person or entity named
in the table has sole voting power and investment power (or shares that
power with that persons spouse) with respect to all shares of Common
Stock listed as owned by that person or entity.
|
|
|
(3)
|
A total of 19,600,469 shares of Common Stock are
considered to be outstanding on the Reference Date. For each beneficial
owner above, any Presently Exercisable securities of such beneficial owner
have been included in the denominator, pursuant to Rule 13d-3(d)(1) under
the Securities Exchange Act of 1934, as amended, or the Exchange
Act.
|
|
|
(4)
|
On June 30, 2015, each of our independent directors was
granted 30,000 restricted shares of the Companys common stock, par value
$0.001, under the 2015 Plan. The restricted shares vest over a three year
period in 12 equal quarterly installments with the first vesting date on
June 30, 2015.
|
|
|
(5)
|
On June 30, 2015, Mr. Guosheng Wang was granted 50,000
restricted shares of the Companys common stock, par value $0.001, under
the 2015 Plan. The restricted shares vest over a three year period in 12
equal quarterly installments with the first vesting date on June 30, 2015.
On April 19, 2016, Mr. Wang was granted an additional 20,000 restricted
shares under the 2015 Plan. Such shares vest semi-annually in 6 equal
installments over a three year period with the first vesting on December
31, 2016.
|
|
|
(6)
|
On June 30, 2015, Mr. Wenwu Wang was granted 50,000
restricted shares of the Companys common stock, par value $0.001, under
the 2015 Plan. The restricted shares vest over a three year period in 12
equal quarterly installments with the first vesting date on June 30, 2015.
On April 19, 2016, Mr. Wang was granted an additional 20,000 restricted
shares under the 2015 Plan. Such shares vest semi-annually in 6 equal
installments over a three year period with the first vesting on December
31, 2016.
|
|
|
(7)
|
On April 19, 2016, pursuant to the 2015 Plan, the Company
granted Mr. Li an aggregate of 150,000 restricted shares of the Companys
common stock. The restricted shares vest semi-annually in 6 equal
installments over a three year period with the first vesting on December
31, 2016.
|
|
|
(8)
|
On April 19, 2016, pursuant to the 2015 Plan, the Company
granted Dr. Xue an aggregate of 30,000 restricted shares of the Companys
common stock. The restricted shares vest semi-annually in 6 equal
installments over a three year period with the first vesting on December
31, 2016.
|
Changes in Control
There are no arrangements known to us, including any pledge by
any person of our securities, the operation of which may at a subsequent date
result in a change in control of the Company.
Securities Authorized for Issuance Under Equity Compensation
Plans
Stock Option Plan and Compensation Plan for Non-Employee
Directors
The following table sets forth certain information about the
securities authorized for issuance under our Stock Option Plan and our
Compensation Plan for Non-Employee Directors as of September 30, 2016. Options
exercisable for all of the securities shown in column (a) below were granted
under our Stock Option Plan.
51
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
Number of securities
|
|
|
Weighted-average
|
|
|
remaining available for future
|
|
|
|
to be issued upon
|
|
|
exercise price of
|
|
|
issuance under equity
|
|
|
|
exercise of
|
|
|
outstanding
|
|
|
compensation plans
|
|
|
|
outstanding options,
|
|
|
options, warrants
|
|
|
(excluding securities reflected
|
|
|
|
warrants and rights
|
|
|
and rights
|
|
|
in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans
approved by security holders
|
|
-
|
|
|
-
|
|
|
222,401
|
(1)
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
-
|
|
|
-
|
|
|
222,401
|
(1)
|
*All information in and below this table gives retroactive
effect to our one-for-five reverse stock split effected on October 26, 2012.
(1) Includes 86,500 shares of restricted stock that were
available for future issuance under our Compensation Plan for Non-Employee
Directors and 135,901 shares of restricted stock that were available for future
issuance under our Stock Option Plan, as of September 30, 2016.
2015 Equity Incentive Plan
The following table sets forth certain information about the
securities authorized for issuance under our 2015 Plan as of September 30, 2016.
Options exercisable for all of the securities shown in column (a) below were
granted under our 2015 Plan.
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
Number of securities
|
|
|
Weighted-average
|
|
|
remaining available for future
|
|
|
|
to be issued upon
|
|
|
exercise price of
|
|
|
issuance under equity
|
|
|
|
exercise of
|
|
|
outstanding
|
|
|
compensation plans
|
|
|
|
outstanding options,
|
|
|
options, warrants
|
|
|
(excluding securities reflected
|
|
|
|
warrants and rights
|
|
|
and rights
|
|
|
in column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans
approved by security holders
|
|
877,000
|
|
$
|
2.93
|
|
|
8,840,500
|
(1)
|
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not
approved by security holders
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
877,000
|
|
$
|
2.93
|
|
|
8,840,500
|
(1)
|
On June 12, 2015, shareholders of the Company approved the 2015
Plan for employees, directors and consultants of the Company and its affiliates.
The maximum aggregate number of shares that may be issued under the 2015 Plan is
ten million (10,000,000).
On June 30, 2015, pursuant to the 2015 Plan, the Company
granted an aggregate of 690,000 restricted shares of the Companys common stock
to certain employees, officers and directors of the Company. In accordance with
the vesting schedule of the grant, the restricted shares will vest in twelve
equal quarterly installments on the last day of each fiscal quarter beginning on
June 30, 2015 and ending on March 31, 2018.
On April 19, 2016, pursuant to the 2015 Plan, the Company
granted an aggregate of 500,000 restricted shares of the Companys common stock
to certain employees, officers and directors of the Company. The restricted
shares vest semi-annually in 6 equal installments over a three year period with
the first vesting on December 31, 2016.
As of September 30, 2016, 282,500 vested shares were issued,
and 877,000 shares were to be issued upon exercise of outstanding restricted
shares. Under the 2015 Plan, 8,840,500 shares still remain available for future
issuance.
52
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Transactions with Related Persons
We obtained a three-year banking facilities of $19.5 million
from Bank of Dandong. The banking facilities were guaranteed by Mr. Yunfei Li
(Mr. Li), our CEO, and Ms. Qinghui Yuan, Mr. Lis wife, Mr. Xianqian Li, our
former CEO, Ms. Xiaoqiu Yu, the wife of our former CEO, and Shenzhen BAK, our
former subsidiary. We also obtained a one-year banking facilities of $7.5
million from Bank of Dalian. The banking facilities were guaranteed by Mr. Li,
Ms. Qinghui Yuan, and Shenzhen BAK. Mr. Yunfei Li did not receive and is not
entitled to receive any consideration for the above-referenced guarantees. We
are not independently obligated to indemnify any of those guarantors for any
amounts paid by them pursuant to any guarantee.
After the disposal of BAK International and prior to the
completion of construction of the new manufacturing site in Dalian, we generated
our revenues from sale of batteries via subcontracting the production to BAK
Tianjin, a former subsidiary. Also, from time to time, in order to meet the
needs of our customers, we purchased products from these former subsidiaries
that we did not produce.
For the years ended September 30, 2015 and 2016, we purchased
inventories of (i) $10.5 million and $2.7 million from BAK Tianjin,
respectively; and (ii) nil and $5.6 million from Shenzhen BAK, respectively.
For the years ended September 30, 2015 and 2016, we purchased
inventories of $395,593 and nil, respectively, from Tianjin BAK New Energy
Research Institute CO., Ltd. (Tianjin New Energy). Mr. Xiangqian Li, our
former CEO, is director of Tianjin New Energy.
During the years ended September 30, 2015 and 2016, the Company
purchased machinery and equipment from BAK Tianjin totaled $6.8 million and nil,
respectively.
For the years ended September 30, 2015 and 2016, we generated
revenue of
-
$1,377,004 and $836,425 from sale of raw materials to Shenzhen BAK,
respectively;
-
$1,470,579 and $636,331 from BAK Tianjin, respectively;
-
nil and $102,322 from Shenzhen BAK, respectively;
-
$17,063 and $576, respectively from Zhengzhou BAK Battery Co., Ltd. Mr.
Xiangqian Li, our former CEO, is director of this company; and
-
$298,983 and nil, respectively from Tianjin New Energy.
Promoters and Certain Control Persons
We did not have any promoters at any time during the past five
fiscal years.
Director Independence
J. Simon Xue, Martha C. Agee and Jianjun He each serves on our
board of directors as an independent director as defined by Rule 5605(a)(2) of
the NASDAQ Listing Rule.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.
Independent Registered Public Accounting Firms Fees and
Services
Effective on September 29, 2016, Crowe Horwath (HK) CPA Limited
(Crowe Horwath) resigned as the Companys the independent registered public
accounting firm. On September 29, 2016, the Companys Audit Committee appointed
Centurion ZD CPA Limited (formerly known as DCAW (CPA) Limited) (Centurion) as
the Companys independent registered public accounting firm for the fiscal year
ended September 30, 2016, effective immediately.
53
Audit Fees
Crowe Horwath has billed us $228,000 and $218,314 in the
aggregate for the fiscal years ended September 30, 2015 and 2016, respectively,
for professional services rendered for the audit of our annual financial
statements, including reviews of the interim financial statements included in
our quarterly reports on Form 10-Q and assistance with the Securities Act
filings.
Centurion has billed us $50,000 for the fiscal year ended
September 30, 2016 for professional services rendered for the audit of our
annual financial statements.
Audit-Related Fee
s
We did not engage our principal accountants to provide
assurance or related services during the last two fiscal years.
Tax Fees
We did not engage our principal accountants to provide tax
compliance, tax advice or tax planning services during the last two fiscal
years.
All Other Fees
We did not engage our principal accountants to render services
to us during the last two fiscal years, other than as reported above.
Pre-Approval Policies and Procedures
All auditing services and permitted non-audit services
(including the fees and terms thereof) to be performed for the Company by our
independent auditor must be approved by the Audit Committee in advance, except
non-audit services (other than review and attestation services) if such services
fall within exceptions established by the SEC. The Audit Committee will
pre-approve any permissible non-audit services to be provided by the Companys
independent auditors on behalf of the Company that do not fall within any
exception to the pre-approval requirements established by the SEC. The Audit
Committee may delegate to one or more members the authority to pre-approve
permissible non-audit services, but any such delegate or delegates must present
their pre-approval decisions to the Audit Committee at its next meeting. All of
our accountants services described above were pre-approved by the Audit
Committee or by one or more members under the delegate authority described
above.
54
PART IV
ITEM 15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
Financial Statements and Schedules
The financial statements are set forth under Item 8 of this
annual report on Form 10-K. Financial statement schedules have been omitted
since they are either not required, not applicable, or the information is
otherwise included.
Exhibit List
The list of exhibits in the Exhibit Index to this Report is
incorporated herein by reference.
55
|
FINANCIAL STATEMENTS
|
|
CHINA BAK BATTERY, INC. AND SUBSIDIARIES
|
CONSOLIDATED FINANCIAL STATEMENTS
|
FOR THE YEARS ENDED
|
SEPTEMBER 30, 2015 AND 2016
|
|
CHINA BAK BATTERY, INC.
AND SUBSIDIARIES
TABLE OF CONTENTS
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
China BAK Battery, Inc.
We have audited the accompanying consolidated balance sheets of China BAK
Battery, Inc. and its subsidiaries (the Company) as of September 30, 2016 and
2015, and the related consolidated statements of operations and comprehensive
(loss) income, changes in shareholders' equity and cash flows for each of the
years in the two-year period ended September 30, 2016. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of the Companys internal control
over financial reporting. Our audits included consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of September 30, 2016 and 2015, and the
consolidated results of their operations and their cash flows for each of the
years in the two-year period ended September 30, 2016, in conformity with U.S.
generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has a working capital deficiency,
accumulated deficit from recurring net losses and significant short-term debt
obligations maturing in less than one year as of September 30, 2016. All these
factors raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also discussed in
Note 1 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ Centurion ZD CPA Limited
Centurion ZD CPA Limited
Hong Kong, China
January 13, 2017
F-2
China BAK Battery, Inc. and Subsidiaries
Consolidated
balance sheets
As of September 30, 2015 and 2016
(In US$)
|
|
Note
|
|
|
2015
|
|
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
|
|
$
|
6,762,745
|
|
$
|
1,953,295
|
|
Pledged deposits
|
|
3
|
|
|
1,519,601
|
|
|
4,569,027
|
|
Trade accounts and bills
receivable, net
|
|
4
|
|
|
4,771,958
|
|
|
2,382,427
|
|
Inventories
|
|
5
|
|
|
3,057,575
|
|
|
16,540,252
|
|
Prepayments and other
receivables
|
|
6
|
|
|
2,552,658
|
|
|
6,730,671
|
|
Receivable from former subsidiaries, net
|
|
7
|
|
|
686,514
|
|
|
-
|
|
Prepaid land use rights,
current portion
|
|
10
|
|
|
176,764
|
|
|
168,418
|
|
Deferred tax assets, current portion
|
|
16
|
|
|
43,175
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
19,570,990
|
|
|
32,344,090
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
8
|
|
|
22,274,820
|
|
|
20,735,209
|
|
Construction in progress
|
|
9
|
|
|
13,039,373
|
|
|
32,321,914
|
|
Prepaid land use rights, non-current
|
|
10
|
|
|
8,455,231
|
|
|
7,887,587
|
|
Intangible assets, net
|
|
11
|
|
|
26,818
|
|
|
22,885
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
$
|
63,367,232
|
|
$
|
93,311,685
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Trade accounts and bills
payable
|
|
|
|
$
|
4,910,717
|
|
$
|
18,551,836
|
|
Taxes payable
|
|
|
|
|
5,108,878
|
|
|
-
|
|
Short-term bank loans
|
|
12
|
|
|
12,585,740
|
|
|
1,498,936
|
|
Other short-term loans
|
|
13
|
|
|
184,755
|
|
|
4,391,004
|
|
Accrued expenses and other
payables
|
|
14
|
|
|
11,569,981
|
|
|
18,561,640
|
|
Payables to former subsidiaries
|
|
7
|
|
|
-
|
|
|
4,382,234
|
|
Deferred government grants,
current
|
|
15
|
|
|
181,510
|
|
|
197,645
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
|
|
34,541,581
|
|
|
47,583,295
|
|
|
|
|
|
|
|
|
|
|
|
Long-term bank loans
|
|
12
|
|
|
-
|
|
|
19,006,505
|
|
Deferred government grants, non-current
|
|
15
|
|
|
5,199,014
|
|
|
4,731,185
|
|
Long- term tax payable
|
|
|
|
|
1,815,100
|
|
|
6,900,704
|
|
Deferred tax liabilities, non-current
|
|
16
|
|
|
142,650
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
41,698,345
|
|
|
78,221,689
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
|
|
|
|
|
|
Common stock $0.001 par
value; 500,000,000 authorized ;
12,856,301 issued and 12,712,095
outstanding as of September 30, 2015;
19,689,674 issued and 19,545,468
outstanding as of September 30, 2016
|
|
|
|
|
12,856
|
|
|
19,690
|
|
Donated shares
|
|
|
|
|
14,101,689
|
|
|
14,101,689
|
|
Additional paid-in capital
|
|
|
|
|
138,036,080
|
|
|
145,008,043
|
|
Statutory reserves
|
|
|
|
|
-
|
|
|
1,230,511
|
|
Accumulated deficit
|
|
|
|
|
(125,922,270
|
)
|
|
(139,804,975
|
)
|
Accumulated other comprehensive loss
|
|
|
|
|
(492,858
|
)
|
|
(1,398,352
|
)
|
|
|
|
|
|
25,735,497
|
|
|
19,156,606
|
|
Less: Treasury
shares
|
|
|
|
|
(4,066,610
|
)
|
|
(4,066,610
|
)
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity
|
|
|
|
|
21,668,887
|
|
|
15,089,996
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholder's equity
|
|
|
|
$
|
63,367,232
|
|
$
|
93,311,685
|
|
See accompanying notes to the consolidated financial statements.
F-3
China BAK Battery, Inc. and Subsidiaries
Consolidated
statements of operations and comprehensive income (loss)
For the years ended
September 30, 2015 and 2016
(In US$ except for number of shares)
|
|
Note
|
|
|
2015
|
|
|
2016
|
|
Net revenues
|
|
20
|
|
$
|
13,904,414
|
|
$
|
10,369,444
|
|
Cost of revenues
|
|
|
|
|
(12,954,553
|
)
|
|
(12,099,632
|
)
|
Gross profit (loss)
|
|
|
|
|
949,861
|
|
|
(1,730,188
|
)
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and
development expenses
|
|
|
|
|
(1,001,889
|
)
|
|
(1,879,869
|
)
|
Sales and marketing expenses
|
|
|
|
|
(135,468
|
)
|
|
(995,290
|
)
|
General and
administrative expenses
|
|
|
|
|
(3,329,763
|
)
|
|
(4,737,843
|
)
|
Provision for doubtful accounts
|
|
|
|
|
(131,745
|
)
|
|
(2,779,497
|
)
|
Total operating
expenses
|
|
|
|
|
(4,598,865
|
)
|
|
(10,392,499
|
)
|
Operating loss
|
|
|
|
|
(3,649,004
|
)
|
|
(12,122,687
|
)
|
Government grant income
|
|
15
|
|
|
23,103,427
|
|
|
-
|
|
Other (expenses) income, net
|
|
|
|
|
(91,219
|
)
|
|
143,073
|
|
Loss before income tax and
discontinued operations
|
|
|
|
|
19,363,204
|
|
|
(11,979,614
|
)
|
Income tax (expense) credit
|
|
16
|
|
|
(5,320,515
|
)
|
|
(672,580
|
)
|
Profit (loss) before
discontinued operations, net of tax
|
|
|
|
|
14,042,689
|
|
|
(12,652,194
|
)
|
Income from discontinued operations
|
|
|
|
|
1,831,237
|
|
|
-
|
|
Net profit (loss)
|
|
|
|
$
|
15,873,926
|
|
$
|
(12,652,194
|
)
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
|
|
(467,227
|
)
|
|
(905,494
|
)
|
Comprehensive loss
|
|
|
|
$
|
15,406,699
|
|
$
|
(13,557,688
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Basic
|
|
18
|
|
|
|
|
|
|
|
From continuing operations
|
|
|
|
$
|
1.10
|
|
$
|
(0.71
|
)
|
From discontinued operations
|
|
|
|
|
0.14
|
|
|
-
|
|
|
|
|
|
|
1.24
|
|
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
Diluted
|
|
18
|
|
|
|
|
|
|
|
From continuing operations
|
|
|
|
$
|
1.09
|
|
$
|
(0.71
|
)
|
From discontinued operations
|
|
|
|
|
0.14
|
|
|
-
|
|
|
|
|
|
|
1.23
|
|
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common
stock:
|
|
18
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
12,718,388
|
|
|
17,786,374
|
|
Diluted
|
|
|
|
|
12,881,121
|
|
|
17,786,374
|
|
See accompanying notes to the consolidated financial statements.
F-4
China BAK
Battery,
Inc. and
Subsidiaries
Consolidated
statements
of
changes
in
shareholders
equity
For the years ended
September
30, 2015 and 2016
(In US$ except for number of shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
other
|
|
|
Treasury shares
|
|
|
Total
|
|
|
|
Number
|
|
|
|
|
|
Donated
|
|
|
paid-in
|
|
|
Statutory
|
|
|
Accumulated
|
|
|
comprehensive
|
|
|
Number
|
|
|
|
|
|
shareholders
|
|
|
|
of shares
|
|
|
Amount
|
|
|
shares
|
|
|
capital
|
|
|
reserves (Note)
|
|
|
deficit
|
|
|
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
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,873,926
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
15,873,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation for
employee and director stock
awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,167
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
750,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued
|
|
92,498
|
|
|
93
|
|
|
-
|
|
|
(93
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares to be issued
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,847,644
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
9,847,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(467,227
|
)
|
|
-
|
|
|
-
|
|
|
(467,227
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September
30,
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
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,652,194
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(12,652,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to statutory
reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,230,511
|
|
|
(1,230,511
|
)
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation for
employee and director stock
awards
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,462,197
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,462,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to new
investors
|
|
6,583,371
|
|
|
6,584
|
|
|
-
|
|
|
5,510,016
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5,516,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued to
employees and directors for
stock award
|
|
250,002
|
|
|
250
|
|
|
-
|
|
|
(250
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(905,494
|
)
|
|
-
|
|
|
-
|
|
|
(905,494
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30,
2016
|
|
19,689,674
|
|
$
|
19,690
|
|
$
|
14,101,689
|
|
$
|
145,008,043
|
|
$
|
1,230,511
|
|
$
|
(139,804,975
|
)
|
$
|
(1,398,352
|
)
|
|
(144,206
|
)
|
$
|
(4,066,610
|
)
|
$
|
15,089,996
|
|
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 $1,230,511, representing 10% of Dalian BAK Powers
profits after tax for the calendar year ended December 31, 2015, to the
statutory reserve.
See accompanying notes to the consolidated financial statements.
F-5
China BAK Battery, Inc. and subsidiaries
Consolidated
statements of cash flows
For the years ended September 30, 2015 and
2016
(In US$)
|
|
2015
|
|
|
2016
|
|
Cash flows from operating
activities
|
|
|
|
|
|
|
Net profit (loss)
|
$
|
15,873,926
|
|
$
|
(12,652,194
|
)
|
Income from discontinued operations, net of
tax
|
|
(1,831,237
|
)
|
|
-
|
|
Adjustments to reconcile net
profit (loss) to net cash used in operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
508,945
|
|
|
1,117,741
|
|
Provision for doubtful debts
|
|
131,745
|
|
|
2,779,497
|
|
Write-down of inventories
|
|
221,172
|
|
|
439,068
|
|
Share-based compensation
|
|
750,167
|
|
|
1,462,197
|
|
Government grant income
|
|
(23,103,427
|
)
|
|
-
|
|
Deferred tax liabilities
|
|
101,617
|
|
|
(96,793
|
)
|
Exchange loss (gain)
|
|
(200,078
|
)
|
|
213,127
|
|
Changes in operating assets
and liabilities:
|
|
|
|
|
|
|
Trade accounts and bills
receivable
|
|
(4,349,352
|
)
|
|
(569,265
|
)
|
Inventories
|
|
(107,512
|
)
|
|
(14,357,199
|
)
|
Prepayments and other
receivables
|
|
132,777
|
|
|
(4,389,940
|
)
|
Trade accounts
and bills payable
|
|
5,016,470
|
|
|
5,515,277
|
|
Accrued expenses and other
payables
|
|
400,375
|
|
|
1,232,105
|
|
Income taxes
payable
|
|
5,218,898
|
|
|
310,108
|
|
Trade receivable from and
payables to former subsidiaries
|
|
(801,608
|
)
|
|
5,108,935
|
|
Net cash used in operating
activities
|
|
(2,037,122
|
)
|
|
(13,887,336
|
)
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
Increase in pledged deposits
|
|
(1,552,326
|
)
|
|
(3,187,541
|
)
|
Deferred government grant
|
|
7,416,752
|
|
|
-
|
|
Purchases of property, plant and equipment
and construction in progress
|
|
(12,851,944
|
)
|
|
(5,926,675
|
)
|
Purchase of intangible assets
|
|
(28,586
|
)
|
|
-
|
|
Net cash used in continuing operations
|
|
(7,016,104
|
)
|
|
(9,114,216
|
)
|
Net cash provided by
discontinued operations
|
|
1,514,183
|
|
|
-
|
|
Net cash used in investing activities
|
|
(5,501,921
|
)
|
|
(9,114,216
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
12,856,775
|
|
|
19,410,639
|
|
Repayment of borrowings
|
|
(4,821,290
|
)
|
|
(10,715,653
|
)
|
Advances from investors (Note
1)
|
|
9,847,644
|
|
|
-
|
|
Borrowings from unrelated parties
|
|
1,601,311
|
|
|
87,230
|
|
Repayment of borrowings from
unrelated parties
|
|
(6,355,104
|
)
|
|
(76,540
|
)
|
Borrowings from related party
|
|
3,747,800
|
|
|
4,289,084
|
|
Repayment to related party
|
|
(3,532,828
|
)
|
|
-
|
|
Proceeds from issuance of common stock (Note
1)
|
|
-
|
|
|
5,516,600
|
|
Net cash provided by
financing activities
|
|
13,344,308
|
|
|
18,511,360
|
|
|
|
|
|
|
|
|
Effect of exchange rate
changes on cash and cash equivalents
|
|
(34,039
|
)
|
|
(319,258
|
)
|
Net increase (decrease) in cash and cash
equivalents
|
|
5,771,226
|
|
|
(4,809,450
|
)
|
Cash and cash equivalents
at the beginning of year
|
|
991,519
|
|
|
6,762,745
|
|
Cash and cash equivalents at the end of
year
|
$
|
6,762,745
|
|
$
|
1,953,295
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
Purchase of inventories
offset against receivables from former subsidiaries
|
$
|
615,706
|
|
$
|
-
|
|
Purchase of property, plant and equipment
(inclusive of VAT) offset against receivables from former subsidiaries
|
$
|
6,831,398
|
|
$
|
-
|
|
Removal expenditures offset
against government grants
|
$
|
1,003,027
|
|
$
|
-
|
|
Depreciation expenses offset against
government grants
|
$
|
66,169
|
|
$
|
-
|
|
Accounts receivable offset
against advance from a related company
|
$
|
349,810
|
|
$
|
-
|
|
Receivable from a former subsidiary offset
against advance from a related company
|
$
|
401,774
|
|
$
|
-
|
|
Transfer of construction in
progress to property, plant and equipment
|
$
|
22,944,570
|
|
$
|
602,109
|
|
Cash paid during the period for:
|
$
|
|
|
$
|
-
|
|
Income taxes
|
$
|
-
|
|
$
|
459,265
|
|
Interest, net of amounts capitalized
|
$
|
-
|
|
$
|
-
|
|
See accompanying notes to the consolidated financial
statements.
F-6
China BAK Battery, Inc. and subsidiaries
Notes to the
consolidated financial statements
For the years ended September 30, 2015 and
2016
(In US$ except for number of shares)
(Unaudited)
1.
|
Principal Activities, Basis of Presentation and
Organization
|
Principal Activities
China BAK Battery, Inc. (China BAK) is a corporation formed
in the State of Nevada on October 4, 1999 as Medina Copy, Inc. The Company
changed its name to Medina Coffee, Inc. on October 6, 1999 and subsequently
changed its name to China BAK Battery, Inc. on February 14, 2005. China BAK and
its subsidiaries (hereinafter, collectively referred to as the Company) are
principally engaged in the manufacture, commercialization and distribution of a
wide variety of standard and customized lithium ion (known as "Li-ion" or
"Li-ion cell") high power rechargeable batteries. Prior to the disposal of BAK
International Limited (BAK International) and its subsidiaries (see below),
the batteries produced by the Company were for use in cellular telephones, as
well as various other portable electronic applications, including high-power
handset telephones, laptop computers, power tools, digital cameras, video
camcorders, MP3 players, electric bicycles, hybrid/electric vehicles, and
general industrial applications. After the disposal of BAK International and its
subsidiaries on June 30, 2014, the Company will focus on the manufacture,
commercialization and distribution of high power lithium ion rechargeable
batteries for use in cordless power tools, light electric vehicles, hybrid
electric vehicles, electric cars, electric busses, uninterruptable power
supplies and other high power applications.
The shares of the Company traded in the over-the-counter market
through the Over-the-Counter Bulletin Board from 2005 until May 31, 2006, when
the Company obtained approval to list its common stock on The NASDAQ Global
Market, and trading commenced that same date under the symbol "CBAK".
Basis of Presentation and Organization
On November 6, 2004, BAK International, a non-operating holding
company that had substantially the same shareholders as Shenzhen BAK Battery
Co., Ltd (Shenzhen BAK), entered into a share swap transaction with the
shareholders of Shenzhen BAK for the purpose of the subsequent reverse
acquisition of the Company. The share swap transaction between BAK International
and the shareholders of Shenzhen BAK was accounted for as a reverse acquisition
of Shenzhen BAK with no adjustment to the historical basis of the assets and
liabilities of Shenzhen BAK.
On January 20, 2005, the Company completed a share swap
transaction with the shareholders of BAK International. The share swap
transaction, also referred to as the reverse acquisition of the Company, was
consummated under Nevada law pursuant to the terms of a Securities Exchange
Agreement entered by and among China BAK, BAK International and the shareholders
of BAK International on January 20, 2005. The share swap transaction has been
accounted for as a capital-raising transaction of the Company whereby the
historical financial statements and operations of Shenzhen BAK are consolidated
using historical carrying amounts.
Also on January 20, 2005, immediately prior to consummating the
share swap transaction, BAK International executed a private placement of its
common stock with unrelated investors whereby it issued an aggregate of
1,720,087 shares of common stock for gross proceeds of $17,000,000. In
conjunction with this financing, Mr. Xiangqian Li, the Chairman and Chief
Executive Officer of the Company (Mr. Li), agreed to place 435,910 shares of
the Company's common stock owned by him into an escrow account pursuant to an
Escrow Agreement dated January 20, 2005 (the Escrow Agreement). Pursuant to
the Escrow Agreement, 50% of the escrowed shares were to be released to the
investors in the private placement if audited net income of the Company for the
fiscal year ended September 30, 2005 was not at least $12,000,000, and the
remaining 50% was to be released to investors in the private placement if
audited net income of the Company for the fiscal year ended September 30, 2006
was not at least $27,000,000. If the audited net income of the Company for the
fiscal years ended September 30, 2005 and 2006 reached the above-mentioned
targets, the 435,910 shares would be released to Mr. Li in the amount of 50%
upon reaching the 2005 target and the remaining 50% upon reaching the 2006
target.
Under accounting principles generally accepted in the United
States of America (US GAAP), escrow agreements such as the one established by
Mr. Li generally constitute compensation if, following attainment of a
performance threshold, shares are returned to a company officer. The Company
determined that without consideration of the compensation charge, the
performance thresholds for the year ended September 30, 2005 would be achieved.
However, after consideration of a related compensation charge, the Company
determined that such thresholds would not have been achieved. The Company also
determined that, even without consideration of a compensation charge, the
performance thresholds for the year ended September 30, 2006 would not be
achieved.
F-7
China BAK Battery, Inc. and subsidiaries
Notes to the
consolidated financial statements
For the years ended September 30, 2015 and
2016
(In US$ except for number of shares)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Basis of Presentation and Organization (continued)
While the 217,955 escrow shares relating to the 2005
performance threshold were previously released to Mr. Li, Mr. Li executed a
further undertaking on August 21, 2006 to return those shares to the escrow
agent for the distribution to the relevant investors. However, such shares were
not returned to the escrow agent, but, pursuant to a Delivery of Make Good
Shares, Settlement and Release Agreement between the Company, BAK International
and Mr. Li entered into on October 22, 2007 (the Li Settlement Agreement),
such shares were ultimately delivered to the Company as described below. Because
the Company failed to satisfy the performance threshold for the fiscal year
ended September 30, 2006, the remaining 217,955 escrow shares relating to the
fiscal year 2006 performance threshold were released to the relevant investors.
As Mr. Li has not retained any of the shares placed into escrow, and as the
investors party to the Escrow Agreement are only shareholders of the Company and
do not have and are not expected to have any other relationship to the Company,
the Company has not recorded a compensation charge for the years ended September
30, 2005 and 2006.
At the time the escrow shares relating to the 2006 performance
threshold were transferred to the investors in fiscal year 2007, the Company
should have recognized a credit to donated shares and a debit to additional
paid-in capital, both of which are elements of shareholders equity. This entry
is not material because total ordinary shares issued and outstanding, total
shareholders equity and total assets do not change; nor is there any impact on
income or earnings per share. Therefore, previously filed consolidated financial
statements for the fiscal year ended September 30, 2007 will not be restated.
This share transfer has been reflected in these financial statements by
reclassifying the balances of certain items as of October 1, 2007. The balances
of donated shares and additional paid-in capital as of October 1, 2007 were
credited and debited by $7,955,358 respectively, as set out in the consolidated
statements of changes in shareholders equity.
In November 2007, Mr. Li delivered the 217,955 shares related
to the 2005 performance threshold to BAK International pursuant to the Li
Settlement Agreement; BAK International in turn delivered the shares to the
Company. Such shares (other than those issued to investors pursuant to the 2008
Settlement Agreements, as described below) are now held by the Company. Upon
receipt of these shares, the Company and BAK International released all claims
and causes of action against Mr. Li regarding the shares, and Mr. Li released
all claims and causes of action against the Company and BAK International
regarding the shares. Under the terms of the Li Settlement Agreement, the
Company commenced negotiations with the investors who participated in the
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. 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, 2015 amounted to 73,749 shares. Share
payments to date have been made in reliance upon the exemptions from
registration provided by Section 4(2) and/or other applicable provisions of the
Securities Act of 1933, as amended. In accordance with the 2008 Settlement
Agreements, the Company filed a registration statement covering the resale of
such shares which was declared effective by the SEC on June 26, 2008.
Pursuant to the Li Settlement Agreement, the 2008 Settlement
Agreements and upon the release of the 217,955 escrow shares relating to the
fiscal year 2006 performance threshold to the relevant investors, neither Mr. Li
or the Company have any obligations to the investors who participated in the
Companys January 2005 private placement relating to the escrow shares.
As of September 30, 2016, the Company had not received any
claim from the other investors who have not been covered by the 2008 Settlement
Agreements in the January 2005 private placement.
As the Company has transferred the 217,955 shares related to
the 2006 performance threshold to the relevant investors in fiscal year 2007 and
we also have transferred 73,749 shares relating to the 2005 performance
threshold to the investors who had entered the 2008 Settlement Agreements with
us in fiscal year 2008, pursuant to Li Settlement Agreement and 2008
Settlement Agreements, neither Mr. Li nor the Company had any remaining
obligations to those related investors who participated in the Companys January
2005 private placement relating to the escrow shares.
F-8
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Basis of Presentation and Organization (continued)
On August 14, 2013, Dalian BAK Trading Co., Ltd (Dalian BAK
Trading) was established as a wholly owned subsidiary of China BAK Asia Holding
Limited (BAK Asia) with a registered capital of $500,000 (Note 20(i)).
Pursuant to Dalian BAK 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 20(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 of $5,000,000 and cash
of $15,504,004.
The Companys consolidated financial statements have been
prepared under US GAAP.
The preparation of financial statements in conformity with US
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates. This basis of accounting differs in certain
material respects from that used for the preparation of the books of account of
the 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 consolidated financial statements reflect necessary adjustments not
recorded in the books of account of the Company's subsidiaries to present them
in conformity with US GAAP.
The equity interest held in BAK International and its wholly
owned subsidiaries, namely Shenzhen BAK, BAK Battery (Shenzhen) Co., Ltd. (BAK
Battery), BAK International (Tianjin) Ltd. (BAK Tianjin), Tianjin Chenhao
Technological Development Limited (a subsidiary of BAK Tianjin established on
May 8, 2014,Tianjin Chenhao), BAK Battery Canada Ltd. (BAK Canada), BAK
Europe GmbH (BAK Europe) and BAK Telecom India Private Limited (BAK India)
(collectively the Disposal Group) was disposed of effective on June 30, 2014
as a result of the foreclosure by Mr. Jinghui Wang (Mr. Wang), an unrelated
third party, after Shenzhen BAK failed to repay the loans to Mr. Wang on March
31, 2014. The consolidated financial statements were consolidated up to the date
of disposal.
After the disposal of BAK International Limited and its
subsidiaries effective on June 30, 2014, and as of September 30, 2015 and 2016,
the 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 Co., Ltd. (Dalian BAK Trading), a
wholly owned limited company established on August 14, 2013 in the PRC; and iii)
Dalian BAK Power Battery Co., Ltd. (Dalian BAK Power), a wholly owned limited
liability company established on December 27, 2013 in the PRC.
The Company continued its business and continued to generate
revenues from sale of batteries via subcontracting the production to BAK
Tianjin, a former subsidiary before the completion of construction and operation
of its facility in Dalian. BAK Tianjin is now a supplier of the Company and the
Company does not have any significant benefits or liability from the operating
results of BAK Tianjin except the normal risk with any major supplier.
Pursuant to a memorandum of understanding with the buyer of the
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 $50.6 million (RMB326 million)
expiring on various dates through February 2017. On May 20, 2015, BAK Asia New
Energy Holding Limited (formerly known as Asia Zhi Li New Energy Holding
Limited), the shareholder of BAK International Limited agreed to indemnify Mr.
Xiangqian Li from any loss as a result of the default of repayment of bank loans
by Shenzhen BAK. On November 2016, Shenzhen BAK has fully repaid the loans to
Bank of China. As of the date of this report, Mr. Xiangqian Li is no longer a
director of BAK International and BAK Tianjin.
F-9
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Basis of Presentation and Organization (continued)
On and effective March 1, 2016, Mr. Xiangqian Li resigned as
Chairman, director, Chief Executive Officer, President and Secretary of the
Company. On the same date, the Board of Directors of the Company appointed Mr.
Yunfei Li as Chairman, Chief Executive Officer, President and Secretary of the
Company. On March 4, 2016, Mr. Xiangqian Li transferred 3,000,000 shares to Mr.
Yunfei Li for a price of $2.4 per share. After the share transfer, Mr. Yunfei Li
held 3,000,000 shares or 17.3% and Mr. Xiangqian Li held 760,557 shares at 4.4%
of the Companys outstanding stock, respectively. As of September 30, 2016, Mr.
Yunfei Li held 3,005,000 shares or 15.4% and Mr. Xiangqian Li held 591,520
shares or 3.0%, respectively.
The Company had a working capital deficiency, accumulated
deficit from recurring net losses and short-term debt obligations as of
September 30, 2015 and 2016. These factors raise substantial doubts about the
Companys ability to continue as a going concern.
In June and July 2015, the Company received advances of
approximately $9.8 million from the following potential investors, who are
independent from the Company and independent from each other:
Mr. Shibin Mao
|
$
|
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.
In June 2016, the Company received further advances in the
aggregate of $2.9 million from Mr. Jiping Zhou and Mr. Dawei Li. These advances
were unsecured, non-interest bearing and repayable on demand. On July 8, 2016,
the Company received further advances of $2.6 million from Mr Jiping Zhou. On
July 28, 2016, the Company entered into securities purchase agreements with
Mr. Jiping Zhou and Mr. Dawei Li to issue and sell an aggregate of 2,206,640
shares of common stock of the Company, at $2.5 per share, for an aggregate
consideration of approximately $5.52 million. On August 17, 2016, the Company
issued these shares to the investors.
On June 10 and 15, 2016, the Company repaid Bank of Dandong the
one-year short term loans of RMB30 million and RMB50 million, respectively,
obtained under its banking facilities in June 2015. On June 14, 2016, the
Company renewed its banking facilities from Bank of Dandong to provide a maximum
amount of RMB130 million (approximately $19.5 million), including three-year
long-term loans and three-year revolving bank acceptance and letters of credit
bills for the period from June 13, 2016 to June 12, 2019. The banking facilities
were guaranteed by Mr. Xianqian Li, the Companys former CEO, Ms. Xiaoqiu Yu,
the wife of the Companys former CEO, 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, from June to September 2016, the Company borrowed
various three-year term bank loans that totaled RMB126.8 million (approximately
$19.0 million), bearing fixed interest at 7.2% per annum. The Company also
borrowed a series of revolving bank acceptance totaled $0.6 million from Bank of
Dandong under the credit facilities, and bank deposit of 50% was required to
secure against these bank acceptance bills..
F-10
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
1.
|
Principal Activities, Basis of Presentation and
Organization (continued)
|
Basis of Presentation and Organization (continued)
On July 6, 2016, the Company obtained banking facilities from
Bank of Dalian to provide a maximum amount of RMB10 million (approximately $1.5
million) and bank acceptance bills of RMB40 million (approximately $6.0 million)
to July 2017. The banking facilities were guaranteed by Mr. Yunfei Li, the
Companys CEO, Ms. Qinghui Yuan, Mr. Lis wife, and Shenzhen BAK. Under the
banking facilities, on July 6, 2016, the Company borrowed one year short-term
loan of RMB10 million (approximately $1.5 million), bearing a fixed interest
rate at 6.525% per annum. The Company also borrowed a series of RMB40 million
(approximately $6.0 million) of bank acceptance bills payable from Bank of Dalian, and bank deposit of 50% was required to secure against these bank
acceptance bills.
As of September 30, 2016, the Company had unutilized committed
banking facilities of $0.2 million. The Company plans to renew these loans upon
maturity.
The Company is currently expanding its product lines and
manufacturing capacity in its Dalian plant, which requires more funding to
finance the expansion. The Company plans to raise additional funds through banks
borrowings and equity financing in the future to meet its daily cash demands, if
required.
However, there can be no assurance that the Company will be
successful in obtaining further financing. The Company expects that it will be
able to secure more potential orders from the new energy market, especially from
the electric car market. The Company believes that with the booming future
market demand in high power lithium ion products, they can continue as a going
concern and return to profitability.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue to operate as a going concern, which
contemplates the realization of assets and the settlement of liabilities in the
normal course of business. The consolidated financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty related to the Companys ability
to continue as a going concern.
Discontinued operations
The Company had also been engaged in property leasing and
management of its Research and Development Centre in Shenzhen since its
completion in July 2013. Following the disposal of BAK International and in
subsidiaries on June 30, 2014, the Company no longer engaged in property leasing
and management. Thus, this business was accounted for as discontinued
operations. Upon the disposal, the Companys former subsidiaries owed the
Company a sum of $17.8 million. The Company evaluated the collectability of the
remaining amount and determined that $1.8 million should be impaired and offset
against the gain on disposal of subsidiaries from discontinued operations for
the year ended September 30, 2014. During fiscal 2015, the Company determined
that $1.8 million was recoverable. The recovery was treated as an adjustment to
the gain on disposal of subsidiaries from discontinued operations in 2015.
F-11
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
2.
|
Summary of Significant Accounting Policies and
Practices
|
(a) Principles of Consolidation
The consolidated financial statements include the financial
statements of the Company and its subsidiaries up to the date of disposal. All
significant Intercompany balances and transactions have been eliminated prior to
consolidation.
(b) Cash and Cash Equivalents
Cash consists of cash on hand and in banks excluding pledged
deposits. The Company considers all highly liquid debt instruments, with initial
terms of less than three months to be cash equivalents. As of September 30, 2015
and 2016, there were no cash equivalents.
(c) Trade Accounts and Bills Receivable
Trade accounts and bills receivable are recorded at the
invoiced amount, net of allowances for doubtful accounts and sales returns. The
allowance for doubtful accounts is the Companys best estimate of the amount of
probable credit losses in the Companys existing trade accounts receivable. The
Company determines the allowance based on historical write-off experience,
customer specific facts and economic conditions.
Outstanding accounts receivable balances are reviewed
individually for collectability. Account balances are charged off against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
(d) Inventories
Inventories are stated at the lower of cost or market. The cost
of inventories is determined using the weighted average cost method, and
includes expenditures incurred in acquiring the inventories and bringing them to
their existing location and condition. In case of finished goods and work in
progress, the cost includes an appropriate share of production overhead based on
normal operating capacity.
The Company regularly reviews the cost of inventories against
their estimated fair market value and records a lower of cost or market write
down for inventories that have costs in their excess of estimated market value.
(e) Property, Plant and Equipment
Property, plant and equipment (except construction in progress)
are stated at cost less accumulated depreciation and impairment charges.
Depreciation is calculated based on the straight-line method (after taking into
account their respective estimated residual values) over the estimated useful
lives of the assets as follows:
Buildings
|
|
5 35 years
|
|
Machinery and equipment
|
|
1 15 years
|
|
Office equipment
|
|
1 5 years
|
|
Motor vehicles
|
|
5 10 years
|
|
The cost and accumulated depreciation of property, plant and
equipment sold are removed from the consolidated balance sheets and resulting
gains or losses are recognized in the consolidated statements of operations and
comprehensive loss.
Construction in progress mainly represents expenditures in
respect of the Companys corporate campus, including offices, factories and
staff dormitories, under construction. All direct costs relating to the
acquisition or construction of the Companys corporate campus and equipment,
including interest charges on borrowings, are capitalized as construction in
progress. No depreciation is provided in respect of construction in progress.
A long-lived asset to be disposed of by abandonment continues
to be classified as held and used until it is disposed of.
(f) Prepaid Land Use Rights
Land use rights are carried at cost and amortized on a
straight-line basis over the period of rights of 50 years.
F-12
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
2.
|
Summary of Significant Accounting Policies and
Practices (Continued)
|
(g) Foreign Currency Transactions and Translation
The reporting currency of the Company is the United States
dollar (US dollar). The financial records of the Companys PRC operating
subsidiaries are maintained in their local currency, the Renminbi (RMB), which
is the functional currency. The financial records of the Companys subsidiaries
established in other countries are maintained in their local currencies. Assets
and liabilities of the subsidiaries are translated into the reporting currency
at the exchange rates at the balance sheet date, equity accounts are translated
at historical exchange rates, and income and expense items are translated using
the average rate for the period. The translation adjustments are recorded in
accumulated other comprehensive income under shareholders equity.
Monetary assets and liabilities denominated in currencies other
than the applicable functional currencies are translated into the functional
currencies at the prevailing rates of exchange at the balance sheet date.
Nonmonetary assets and liabilities are remeasured into the applicable functional
currencies at historical exchange rates. Transactions in currencies other than
the applicable functional currencies during the period are converted into the
functional currencies at the applicable rates of exchange prevailing at the
transaction dates. Transaction gains and losses are recognized in the
consolidated statements of operations.
RMB is not a fully convertible currency. All foreign exchange
transactions involving RMB must take place either through the Peoples Bank of
China (the PBOC) or other institutions authorized to buy and sell foreign
exchange. The exchange rates adopted for the foreign exchange transactions are
the rates of exchange quoted by the PBOC, which are determined largely by supply
and demand. Translation of amounts from RMB into US dollars has been made at the
following exchange rates for the respective years:
September 30, 2016
|
|
|
|
Balance sheet, except for equity accounts
|
|
RMB 6.6714 to
US$1.00
|
|
Income statement and cash flows
|
|
RMB 6.5325 to US$1.00
|
|
|
|
|
|
September 30, 2015
|
|
|
|
Balance sheet, except for equity accounts
|
|
RMB 6.3564 to
US$1.00
|
|
Income statement and cash flows
|
|
RMB 6.2224 to US$1.00
|
|
(h) Intangible Assets
Intangible assets are stated in the balance sheet at cost less
accumulated amortization and impairment, if any. The costs of the intangible
assets are amortized on a straight-line basis over their estimated useful lives.
The respective amortization periods for the intangible assets are as follows:
Computer software
|
|
10 years
|
|
(i) Impairment of Long-lived Assets
Long-lived assets, which include property, plant and equipment,
prepaid land use rights and intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is
measured by a comparison of the carrying amount of an asset to the estimated
undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated undiscounted future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset.
(j) Revenue Recognition
The Company recognizes revenue on product sales when products
are delivered and the customer takes ownership and assumes risk of loss,
collection of the relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed or determinable.
Net sales of products represent the invoiced value of goods
sold, net of value added taxes (VAT), sales returns, trade discounts and
allowances. The Company is subject to VAT which is levied at the rate of 17% on
the invoiced value of products sold. Output VAT is borne by customers in
addition to the invoiced value of sales and input VAT is borne by the Company in
addition to the invoiced value of purchases to the extent not refunded for
export sales. Provision for sales returns are recorded as a reduction of revenue
in the same period that revenue is recognized. The provision for sales returns,
which is based on historical sales returns data, is the Companys best estimate
of the amount of goods that will be returned from its customers.
F-13
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
2.
|
Summary of Significant Accounting Policies and
Practices (Continued)
|
(k) Cost of Revenues
Cost of revenues consists primarily of material costs, employee
compensation, depreciation and related expenses, which are directly attributable
to the production of products. Write-down of inventories to lower of cost or
market is also recorded in cost of revenues.
(l) Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets are
reduced by a valuation allowance to the extent management concludes it is more
likely than not that the assets will not be realized. Deferred tax assets and
liabilities are measured using enacted tax rates applied to taxable income in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the statement of operations and comprehensive loss in the
period that includes the enactment date.
The impact of an uncertain income tax positions on the income
tax return must be recognized at the largest amount that is more likely than not
to be sustained upon audit by the relevant tax authority. An uncertain income
tax position will not be recognized if it has less than a 50% likelihood of
being sustained. Interest and penalties on income taxes will be classified as a
component of the provisions for income taxes.
The significant uncertain tax position arose from the subsidies
granted by the local government for the Companys PRC subsidiary, which may be
modified or challenged by the central government or the tax authority. A
reconciliation of October 1, 2014, through September 30, 2016 amount of
unrecognized tax benefits excluding interest and penalties ("Gross UTB") is as
follows:
|
|
Gross UTB
|
|
|
Surcharge
|
|
|
Net UTB
|
|
Balance as of October 1, 2014
|
$
|
-
|
|
$
|
- $
|
|
|
-
|
|
Increase in unrecognized tax benefits taken in current year
|
|
1,815,100
|
|
|
-
|
|
|
1,815,100
|
|
Balance as of September 30, 2015
|
$
|
1,815,100
|
|
$
|
- $
|
|
|
1,815,100
|
|
Transfer from current taxes payable
|
|
5,108,878
|
|
|
-
|
|
|
5,108,878
|
|
Decrease in unrecognized tax benefits taken
in current year*
|
|
(23,274
|
)
|
|
-
|
|
|
(23,274
|
)
|
Balance as of September 30, 2016
|
$
|
6,900,704
|
|
$
|
- $
|
|
|
6,900,704
|
|
As of September 30, 2016 and 2015, the Company had not accrued
any interest and penalties related to unrecognized tax benefits.
The Companys Chinese subsidiaries are subject to taxation in
the PRC. The PRC income tax returns are generally not subject to examination by
the tax authorities for tax years before calendar (tax) year 2010. With a few
exceptions, the calendar (tax) years 2011 -2015 remain open to examination by
tax authorities in the PRC.
(m) Research and Development and Advertising Expenses
Research and development and advertising expenses are expensed
as incurred. Research and development expenses consist primarily of remuneration
for research and development staff, depreciation and material costs for research
and development. Advertising expenses, included in sales and marketing expenses
were insignificant for the years ended September 30, 2015 and 2016.
(n) Bills Payable
Bills payable represent bills issued by financial institutions
to the Companys vendors. The Companys vendors receive payments from the
financial institutions directly upon maturity of the bills and the Company is
obliged to repay the face value of the bills to the financial institutions.
F-14
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
2.
|
Summary of Significant Accounting Policies and
Practices (Continued)
|
(o) Government Grants
The Companys subsidiaries in China receive government
subsidies from local Chinese government agencies in accordance with relevant
Chinese government policies. In general, the Company presents the government
subsidies received as part of other income unless the subsidies received are
earmarked to compensate a specific expense, which have been accounted for by
offsetting the specific expense, such as research and development expense,
interest expenses and removal costs. Unearned government subsidies received are
deferred for recognition until the criteria for such recognition could be met.
Grants applicable to land are amortized over the life of the
depreciable facilities constructed on it. For research and development expenses,
the Company matches and offsets the government grants with the expenses of the
research and development activities as specified in the grant approval document
in the corresponding period when such expenses are incurred.
(p) Share-based Compensation
The Company adopted the provisions of ASC Topic 718 which
requires the Company to measure and recognize compensation expenses for an award
of an equity instrument based on the grant-date fair value. The cost is
recognized over the vesting period (or the requisite service period). ASC Topic
718 also requires the Company to measure the cost of a liability classified
award based on its current fair value. The fair value of the award will be
remeasured subsequently at each reporting date through the settlement date.
Changes in fair value during the requisite service period are recognized as
compensation cost over that period. Further, ASC Topic 718 requires the Company
to estimate forfeitures in calculating the expense related to stock-based
compensation.
The fair value of each option award is estimated on the date of
grant using the Black-Scholes Option Valuation Model. The expected volatility
was based on the historical volatilities of the Companys listed common stocks
in the United States and other relevant market information. The Company uses
historical data to estimate share option exercises and employee departure
behavior used in the valuation model. The expected terms of share options
granted is derived from the output of the option pricing model and represents
the period of time that share options granted are expected to be outstanding.
Since the share options once exercised will primarily trade in the U.S. capital
market, the risk-free rate for periods within the contractual term of the share
option is based on the U.S. Treasury yield curve in effect at the time of grant.
(q) Retirement and Other Postretirement Benefits
Contributions to retirement schemes (which are defined
contribution plans) are charged to cost of revenues, research and development
expenses, sales and marketing expenses and general and administrative expenses
in the statement of operations and comprehensive loss as and when the related
employee service is provided.
(r) Earnings (Loss) per Share
Basic earnings (loss) per share is computed by dividing net
loss by the weighted average number of ordinary shares outstanding during the
year. Diluted earnings (loss) per share is computed by dividing net earnings
(loss) by the sum of the weighted average number of ordinary shares outstanding
and dilutive potential ordinary shares during the year.
(s) Use of Estimates
The preparation of the consolidated financial statements in
accordance with US GAAP requires management of the Company to make a number of
estimates and assumptions relating to the reported amount of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues
and expenses during the period. Actual results could differ from those
estimates. Significant items subject to such estimates and assumptions include
the recoverability of the carrying amount of long-lived assets; unrecognized tax
benefits, valuation
allowance for obsolete inventories, receivables and deferred tax assets;
provision for warranty and sales returns; and valuation of share-based
compensation expense. Actual results could differ from those estimates.
(t) Segment Reporting
The Company uses the management approach in determining
reportable operating segments. The management approach considers the internal
organization and reporting used by the Companys chief operating decision maker
for making operating decisions and assessing performance as the source for
determining the Companys reportable segments. Management, including the chief
operating decision maker, reviews operating results solely by monthly revenue of
Li-ion rechargeable batteries (but not by subproduct type or geographic area)
and operating results of the Company and, as such, the Company has determined
that the Company has one operating segment as defined by ASC Topic 280 Segment
Reporting.
F-15
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
2.
|
Summary of Significant Accounting Policies and
Practices (Continued)
|
(u) Commitments and Contingencies
Liabilities for loss contingencies arising from claims,
assessments, litigation, fines and penalties and other sources are recorded when
it is probable that a liability has been incurred and the amount of the
assessment can be reasonably estimated.
(v) Reclassification
The amount of unrecognized tax benefits on the Companys
deferred government grant included in the 2015 financial statements have been
reclassified to conform to the 2016 financial statement presentation. Total
liabilities and total shareholders equity as of September 30, 2015 remained
unchanged as a result of this reclassification.
(w) Recently Issued Accounting Standards
In June 2014, the FASB issued ASU 2014-12, "Compensation -
Stock Compensation (Topic 718)" which provides explicit guidance on the
treatment of awards with performance targets that could be achieved after the
requisite service period. The amendments in ASU 2014-12 are effective for annual
periods and interim periods within those annual periods beginning after December
15, 2015. The Company does not expect that the adoption will have a material
impact on its consolidated financial statements.
In August 2014, the FASB issued ASU 2014-15, "Presentation of
Financial Statements-Going concern (Subtopic 205-40) which provides guidance to
an 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.
In November 2014, FASB issued Accounting Standards Update No.
2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host
Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More
Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task
Force).The amendments permit the use of the Fed Funds Effective Swap Rate (also
referred to as the Overnight Index Swap Rate, or OIS) as a benchmark interest
rate for hedge accounting purposes. Public business entities are required to
implement the new requirements in fiscal years (and interim periods within those
fiscal years) beginning after December 15, 2015. The Company does not expect the
adoption of ASU 2014-16 to have a material impact on its consolidated financial
statements.
In February 2015, the FASB issued ASU 2015-02 "Consolidation
(Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the
analysis that a reporting entity must perform to determine whether it should
consolidate certain types of legal entities. It is effective for annual
reporting periods, and interim periods within those years, beginning after
December 15, 2015. Early adoption is permitted, including adoption in an interim
period. The Company is currently in the process of evaluating the impact of the
adoption of ASU 2015-02 on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03 Simplifying the
Presentation of Debt Issuance Costs, which changes the presentation of debt
issuance costs in the financial statements. ASU 2015-03 requires an entity to
present such costs in the balance sheet as a direct deduction from the related
debt liability rather than as an asset. Amortization of the costs will continue
to be reported as interest expense. The guidance is effective for annual
reporting periods beginning after December 15, 2016, with early adoption
permitted. The guidance will be applied retrospectively to each period
presented. The adoption of this standard update is not expected to have any
impact on the Company's financial statements.
In July 2015, the FASB issued ASU 2015-11, Inventory, which
requires an entity to measure inventory within the scope at the lower of cost
and net realizable value. Net realizable value is the estimated selling prices
in the ordinary course of business, less reasonably predictable costs of
completion, disposal, and transportation. The effective date for the standard is
for fiscal years beginning after December 15, 2016. Early adoption is permitted.
The Company does not expect the adoption of ASU 2015-11 to have a material
impact on its consolidated financial statements.
In September 2015, the FASB issued ASU No. 2015-16, Business
Combinations (Topic 805): Simplifying the Accounting for Measurement-Period
Adjustments. To simplify the accounting for adjustments made to provisional
amounts recognized in a business combination, the amendments eliminate the
requirement to retrospectively account for those adjustments. For public
business entities, the amendments are effective for fiscal years beginning after
December 15, 2015, including interim periods within those fiscal years. The
amendments should be applied prospectively to adjustments to provisional amounts
that occur after the effective date with earlier application permitted for
financial statements that have not been issued. The Company does not expect the
adoption of ASU 2015-16 to have a material impact on its consolidated financial
statements.
F-16
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
2.
|
Summary of Significant Accounting Policies and
Practices (Continued)
|
(w) Recently Issued Accounting Standards (Continued)
In January 2016, the FASB issued ASU 2016-01, Financial
Instruments - Overall (Subtopic 825-10): Recognition and Measurement of
Financial Assets and Financial Liabilities. The amendments in this update
require all equity investments to be measured at fair value with changes in the
fair value recognized through net income (other than those accounted for under
equity method of accounting or those that result in consolidation of the
investee). The amendments in this update also require an entity to present
separately in other comprehensive income the portion of the total change in the
fair value of a liability resulting from a change in the instrument-specific
credit risk when the entity has elected to measure the liability at fair value
in accordance with the fair value option for financial instruments. The
amendments in ASU 2016-01 are effective for public companies for fiscal years
beginning after December 15, 2017, including interim periods within those fiscal
years. The Company does not expect that the adoption will have a material impact
on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases
(Topic 842). The new standard establishes a right-of-use (ROU) model that
requires a lessee to record a ROU asset and a lease liability on the balance
sheet for all leases with terms longer than 12 months. Leases will be classified
as either finance or operating, with classification affecting the pattern of
expense recognition in the income statement. The new standard is effective for
fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. A modified retrospective transition approach is required for
lessees for capital and operating leases existing at, or entered into after, the
beginning of the earliest comparative period presented in the financial
statements, with certain practical expedients available. The Company does not
expect that the adoption will have a material impact on its consolidated
financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from
Contracts with Customers, which requires an entity to recognize the amount of
revenue to which it expects to be entitled for the transfer of promised goods or
services to customers. ASU 2014-09 will replace most existing revenue
recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the
FASB approved a one-year deferral of the effective date of the new revenue
recognition standard. The amendments in ASU 2014-09 are effective for public
companies for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The standard permits the use of either the
retrospective or cumulative effect transition method. In March 2016, the FASB
issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606), Principal
versus Agent Considerations (Reporting Revenue versus Net). In April 2016, the
FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606),
Identifying Performance Obligations and Licensing. In May 2016, the FASB issued
ASU 2016-11, Revenue from Contracts with Customers (Topic 606) and Derivatives
and Hedging (Topic 815) - Rescission of SEC Guidance Because of ASU 2014-09 and
2014-16, and ASU 2016-12, Revenue from Contracts with Customers (Topic 606) -
Narrow Scope Improvements and Practical Expedients. These ASUs clarify the
implementation guidance on a few narrow areas and adds some practical expedients
to the guidance Topic 606. The Company is evaluating the effect the ASUs will
have on its consolidated financial statements and related disclosures. The
Company has not yet selected a transition method nor has it determined the
effect of these standards on its ongoing financial reporting.
In March 2016, the FASB issued ASU No. 2016-07, Simplifying the
Transition to the Equity Method of Accounting, which eliminates the requirement
to apply the equity method of accounting retrospectively when a reporting entity
obtains significant influence over a previously held investment. The amendments
in ASU 2016-07 are effective for public companies for fiscal years beginning
after December 15, 2016 including interim periods therein. Early adoption is
permitted. The new standard should be applied prospectively for investments that
qualify for the equity method of accounting after the effective date. The
Company does not expect that the adoption will have a material impact on its
consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to
Employee Share-Based Payment Accounting, which includes amendments to accounting
for income taxes at settlement, forfeitures, and net settlements to cover
withholding taxes. The amendments in ASU 2016-09 are effective for public
companies for fiscal years beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted but requires
all elements of the amendments to be adopted at once rather than individually.
The Company is evaluating the effect that ASU No. 2016-09 will have on the
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.
F-17
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
2.
|
Summary of Significant Accounting Policies and
Practices (Continued)
|
(w) Recently Issued Accounting Standards (Continued)
In August 2016, the FASB issued ASU No. 2016-15, Classification
of Certain Cash Receipts and Cash Payments. ASU 2016-15 clarifies the
presentation and classification of certain cash receipts and cash payments in
the statement of cash flows. This ASU is effective for public business entities
for fiscal years, and interim periods within those years, beginning after
December 15, 2017. Early adoption is permitted. The Company is currently
assessing the potential impact of ASU 2016-15 on its financial statements and
related disclosures.
In October 2016, the FASB issued ASU No. 2016-16Income Taxes
(Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU
improves the accounting for the income tax consequences of intra-entity
transfers of assets other than inventory. This ASU is effective for fiscal years
and interim periods within those years beginning after December 15, 2017. Early
adoption is permitted. The Company does not anticipate that the adoption of this
ASU to have a significant impact on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-17, Consolidation
(Topic 810): Interests Held through Related Parties That Are Under Common
Control. The amendments in this ASU change how a reporting entity that is the
single decision maker of a variable interest entity should treat indirect
interests in the entity held through related parties that are under common
control with the reporting entity when determining whether it is the primary
beneficiary of that variable interest entity. The ASU is effective for fiscal
years and interim periods within those years beginning after December 15, 2016.
The Company does not expect the adoption of this ASU to have a material impact
on its consolidated financial statements.
In November 2016, the FASB issued Accounting Standards Update
2016-18 (ASU 2016-18), Statement of Cash Flows: Restricted Cash. This ASU
provides guidance on the classification of restricted cash in the statement of
cash flows. The amendments in this ASU are effective for interim and annual
periods beginning after December 15, 2017. Early adoption is permitted. The
amendments in the ASU should be adopted on a retrospective basis. The Company
does not expect that adoption of this ASU to have a material effect on its
consolidated financial statements.
Other accounting standards that have been issued or proposed by
the FASB or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the Companys
consolidated financial statements upon adoption.
Pledged deposits as of September 30,
2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Pledged deposits with bank for:
|
|
|
|
|
|
|
|
Bills payable
|
$
|
1,461,757
|
|
$
|
3,305,305
|
|
|
Letters of credit
|
|
57,844
|
|
|
-
|
|
|
Others*
|
|
-
|
|
|
1,263,722
|
|
|
|
$
|
1,519,601
|
|
$
|
4,569,027
|
|
|
*
|
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 $1,263,722 (RMB 8,430,792), including construction costs of $0.9
million (RMB6.3 million), interest of $30,689 (RMB0.2 million) and
compensation of $0.3 million (RMB1.9 million), which we already accrued
for as of September 30, 2016. On September 7, 2016, upon the request of
Shenzhen Huijie, the Court froze Dalian BAK Powers bank deposits totaling
$1,263,722 (RMB 8,430,792) for a period of one
year.
|
F-18
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
4.
|
Trade Accounts and Bills Receivable,
net
|
Trade accounts and bills receivable as
of September 30, 2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Trade accounts receivable
|
$
|
4,792,416
|
|
$
|
4,995,564
|
|
|
Less: Allowance for doubtful accounts
|
|
(122,115
|
)
|
|
(2,837,977
|
)
|
|
|
|
4,670,301
|
|
|
2,157,587
|
|
|
Bills receivable
|
|
101,657
|
|
|
224,840
|
|
|
|
$
|
4,771,958
|
|
$
|
2,382,427
|
|
An analysis of the allowance for
doubtful accounts is as follows:
|
|
|
2015
|
|
|
2016
|
|
|
Balance at beginning of year
|
$
|
-
|
|
$
|
122,115
|
|
|
Provision for the year
|
|
-
|
|
|
2,833,615
|
|
|
Reversal - recoveries by cash
|
|
-
|
|
|
(54,118
|
)
|
|
Charged to consolidated statements of operations and
comprehensive (loss) income
|
|
124,745
|
|
|
2,779,497
|
|
|
Foreign exchange adjustment
|
|
(2,630
|
)
|
|
(6,635
|
)
|
|
Balance at end of year
|
$
|
122,115
|
|
|
2,837,977
|
|
Inventories as of September 30, 2015
and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Raw materials
|
$
|
712,713
|
|
$
|
3,760,481
|
|
|
Work in progress
|
|
1,441,368
|
|
|
2,153,945
|
|
|
Finished goods
|
|
903,494
|
|
|
10,625,826
|
|
|
|
$
|
3,057,575
|
|
$
|
16,540,252
|
|
During the years ended September 30,
2015 and 2016, write-downs of obsolete inventories to lower of cost or market of
$221,172 and $439,068, respectively, were charged to cost of revenues.
6.
|
Prepayments and Other
Receivables
|
Prepayments and other receivables as of
September 30, 2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Value added tax recoverable
|
$
|
1,719,062
|
|
$
|
6,169,612
|
|
|
Prepayments to suppliers
|
|
447,430
|
|
|
110,566
|
|
|
Deposits
|
|
154,892
|
|
|
49,310
|
|
|
Staff advances
|
|
42,718
|
|
|
67,702
|
|
|
Prepaid operating expenses
|
|
195,556
|
|
|
175,598
|
|
|
Others
|
|
-
|
|
|
164,883
|
|
|
|
|
2,559,658
|
|
|
6,737,671
|
|
|
Less: Allowance for doubtful accounts
|
|
(7,000
|
)
|
|
(7,000
|
)
|
|
|
$
|
2,552,658
|
|
$
|
6,730,671
|
|
7.
|
Balances with Former
Subsidiaries
|
Receivable from former subsidiaries as
of September 30, 2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Shenzhen BAK
|
$
|
62,963
|
|
$
|
-
|
|
|
BAK Tianjin
|
|
623,551
|
|
|
-
|
|
|
|
$
|
686,514
|
|
$
|
-
|
|
These amounts are interest-free,
unsecured and repayable on demand.
F-19
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
7.
|
Balances with Former Subsidiaries
(Continued)
|
Upon disposal of the Disposal Group in
June 2014, the Disposal Group owed the Company a sum of $17.8 million.
Management of the Company evaluated the collectability of the remaining amount
and determined that $1.8 million should be impaired and offset against the gain
on disposal of subsidiaries from discontinued operations for the year ended
September 30, 2014. During the years ended September 30, 2015, the Company
determined that $1.8 million were recoverable. The recovery was treated as an
adjustment to the gain on disposal of subsidiaries from discontinued operations
for the year ended September 30, 2015.
Payable to former subsidiaries as of
September 30, 2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
BAK Tianjin
|
$
|
-
|
|
$
|
56,188
|
|
|
Shenzhen BAK
|
|
-
|
|
|
4,326,046
|
|
|
|
|
-
|
|
|
4,382,234
|
|
Balance as of September 30, 2016
consisted of payables for purchase of inventories from BAK Tianjin and Shenzhen
BAK. From time to time, the Company purchased products from these former
subsidiaries that they did not produce to meet the needs of its customers.
8.
|
Property, Plant and Equipment,
net
|
Property, plant and equipment as of
September 30, 2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Buildings
|
$
|
18,440,000
|
|
$
|
17,569,328
|
|
|
Machinery and equipment
|
|
4,020,238
|
|
|
4,388,160
|
|
|
Office equipment
|
|
37,050
|
|
|
82,722
|
|
|
Motor vehicles
|
|
147,197
|
|
|
168,240
|
|
|
|
|
22,644,485
|
|
|
22,208,450
|
|
|
Accumulated depreciation
|
|
(369,665
|
)
|
|
(1,473,241
|
)
|
|
Carrying amount
|
$
|
22,274,820
|
|
$
|
20,735,209
|
|
Depreciation expense for the years
ended September 30, 2015 and 2016 is included in the consolidated statements of
operations as follows:
|
|
|
2015
|
|
|
2016
|
|
|
Cost of revenues
|
$
|
198,053
|
|
$
|
800,604
|
|
|
Research and development expenses
|
|
107,803
|
|
|
88,048
|
|
|
Sales and marketing expenses
|
|
-
|
|
|
28
|
|
|
General and administrative expenses
|
|
77,139
|
|
|
256,186
|
|
|
|
$
|
382,995
|
|
$
|
1,144,866
|
|
The Company has not yet obtained the
property ownership certificates of the buildings in its Dalian manufacturing
facilities with a carrying amount of $18,318,313 and $16,958,674 as of September
30, 2015 and 2016, respectively. The Company built its facilities on the land
for which it had already obtained the related land use right. The Company has
submitted applications to the Chinese government for the ownership certificates
on the completed buildings located on these lands. However, the application
process takes longer than the Company expected and it has not obtained the
certificates as of the date of this report. However, since the Company has
obtained the land use right in relation to the land, the management believe the
Company has legal title to the buildings thereon albeit the lack of ownership
certificates. As soon as the Chinese government completes its formalities, the
Company will obtain the ownership certificates. The management expects that they
will obtain the property ownership certificates by March 2017.
During the course of the 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 years ended September 30, 2015 and 2016.
During the years ended September 30,
2015 and 2016, the Company purchased machinery and equipment from BAK Tianjin in
the amount of $6.8 million and nil (inclusive of VAT) respectively.
F-20
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
9.
|
Construction in Progress
|
Construction in progress as of
September 30, 2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Construction in progress
|
$
|
13,009,922
|
|
$
|
32,139,329
|
|
|
Prepayment for acquisition of property, plant and equipment
|
|
29,451
|
|
|
182,585
|
|
|
Carrying amount
|
$
|
13,039,373
|
|
$
|
32,321,914
|
|
Construction in progress as of
September 30, 2015 and 2016 was mainly comprised of capital expenditures for the
construction of the facilities and production lines of Dalian BAK Power.
For the years ended September 30, 2015
and 2016, the Company capitalized interest of $527,104 and $1,046,302,
respectively, to the cost of construction in progress.
10.
|
Prepaid Land Use Rights,
net
|
Prepaid land use rights as of September
30, 2015 and 2016 consisted of the followings:
|
|
|
2015
|
|
|
2016
|
|
|
Prepaid land use rights
|
$
|
8,838,220
|
|
$
|
8,420,911
|
|
|
Accumulated amortization
|
|
(206,225
|
)
|
|
(364,906
|
)
|
|
|
$
|
8,631,995
|
|
$
|
8,056,005
|
|
|
Less: Classified as current assets
|
|
(176,764
|
)
|
|
(168,418
|
)
|
|
|
$
|
8,455,231
|
|
$
|
7,887,587
|
|
Pursuant to a land use rights
acquisition agreement dated August 10, 2014, the Company acquired the rights to
use a piece of land with an area of 153,832 m
2
in Dalian Economic
Zone for 50 years up to August 9, 2064, at a total consideration of $7,954,852
(RMB53.1 million). Other incidental costs incurred totaled $466,059 (RMB3.1
million).
Amortization expenses of the prepaid
land use rights were $210,666 and $171,999 for the years ended September 30,
2015 and 2016, respectively. Annual amortization expense is expected to be
approximately $168,418 over each of the next five years.
11.
|
Intangible Assets, net
|
Intangible assets as of September 30,
2015 and 2016 consisted of the followings:
|
|
|
2015
|
|
|
2016
|
|
|
Computer software at cost
|
$
|
27,984
|
|
$
|
26,662
|
|
|
Accumulated amortization
|
|
(1,166
|
)
|
|
(3,777
|
)
|
|
|
$
|
26,818
|
|
$
|
22,885
|
|
Amortization expenses were $1,191 and
$2,723 for the years ended September 30, 2015 and 2016, respectively.
F-21
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
Bank borrowings as of September 30,
2015 and 2016 consisted of the followings
|
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Short-term bank borrowings
|
$
|
12,585,740
|
|
$
|
1,498,936
|
|
|
Long-term bank borrowings
|
|
-
|
|
|
19,006,505
|
|
|
|
$
|
12,585,740
|
|
$
|
20,505,441
|
|
On June 10 and 15, 2016, the Company
repaid Bank of Dandong the one-year short term loans of RMB30 million and RMB50
million, respectively, obtained under its banking facilities in June 2015. On
June 14, 2016, the Company renewed its banking facilities from Bank of Dandong
to provide a maximum amount of RMB130 million (approximately $19.5 million),
including three-year long-term loans and three-year revolving bank acceptance
and letters of credit bills for the period from June 13, 2016 to June 12, 2019.
Under the banking facilities, from June to September 2016, the Company borrowed
various three-year bank loans that totaled RMB126.8 million (approximately $19.0
million), bearing fixed interest at 7.2% per annum. The banking facilities were
guaranteed by Mr. Xianqian Li, our former CEO, Ms. Xiaoqiu Yu, the wife of the
Companys former CEO, Shenzhen BAK, Mr. Yunfei Li, the Companys CEO, and Ms.
Qinghui Yuan, Mr. Yunfei Lis wife.
On July 6, 2016, the Company obtained
new banking facilities from Bank of Dalian to provide a maximum loan amount of
RMB10 million (approximately $1.5 million) and bank acceptance of RMB40 million
(approximately $6.0 million) to July 2017. The banking facilities were
guaranteed by Shenzhen BAK, Mr. Yunfei Li, our CEO, and Ms. Qinghui Yuan, Mr.
Yunfei Lis wife. On July 6, 2016, the Company borrowed a one-year term bank
loan of RMB10 million (approximately $1.5 million), bearing fixed interest at
6.525% per annum.
The facilities were also secured by the
Companys assets with the following carrying amounts:
|
|
|
2015
|
|
|
2016
|
|
|
Pledged deposits (note 3)
|
$
|
1,519,601
|
|
$
|
3,305,305
|
|
|
Prepaid land use rights (note 10)
|
|
8,631,995
|
|
|
8,056,005
|
|
|
Buildings
|
|
13,120,083
|
|
|
12,294,838
|
|
|
Machinery and equipment
|
|
3,831,790
|
|
|
3,041,665
|
|
|
Construction in progress
|
|
6,228,371
|
|
|
6,408,694
|
|
|
|
|
33,331,840
|
|
|
33,106,507
|
|
As of September 30, 2016, the Company
had unutilized committed banking facilities of $0.2 million.
During the years ended September 30,
2015 and 2016, interest of $527,104 and $1,046,302, respectively, was incurred
on the Company's bank borrowings.
F-22
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
13.
|
Other Short-term Loans
|
Other short-term loans as of September
30, 2015 and 2016 consisted of the following:
|
|
|
Note
|
|
|
2015
|
|
|
2016
|
|
|
Advance from related parties
|
|
|
|
|
|
|
|
|
|
|
Tianjin BAK New
Energy Research Institute Co., Ltd (Tianjin New Energy)
|
|
(a)
|
|
$
|
6,094
|
|
$
|
4,205,591
|
|
|
Mr. Xiangqian Li, the
Companys Former CEO
|
|
(b)
|
|
|
100,000
|
|
|
100,000
|
|
|
|
|
|
|
|
106,094
|
|
|
4,305,591
|
|
|
Advances from unrelated third party
|
|
(c)
|
|
|
|
|
|
|
|
|
Mr.
Guozhu Liang
|
|
|
|
$
|
-
|
|
|
14,989
|
|
|
Mr. Wenwu Yu
|
|
|
|
|
-
|
|
|
70,424
|
|
|
Mr.
Yunfei Li (CEO of the Company since March 1, 2016)
|
|
|
|
|
78,661
|
|
|
-
|
|
|
|
|
|
|
|
78,661
|
|
|
85,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
184,755
|
|
$
|
4,391,004
|
|
|
(a)
|
The Company received advances from Tianjin New Energy, a
related company under the 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 2016, the payable to Tianjin New
Energy of $453,087 and $301,231, respectively, was included in trade
accounts and bills payable.
|
|
|
|
|
(b)
|
Advances from Mr. Xiangqian Li, the Companys former CEO,
was unsecured, non-interest bearing and repayable on demand.
|
|
|
|
|
(c)
|
Advances from unrelated third parties were unsecured,
non-interest bearing and repayable on demand. The Company has fully repaid
the advance to Mr. Wenwu Yu in December 2016.
|
F-23
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
14.
|
Accrued Expenses and Other
Payables
|
Accrued expenses and other payables as
of September 30, 2015 and 2016 consisted of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Construction costs payable
|
$
|
8,625,828
|
|
$
|
8,994,780
|
|
|
Equipment purchase payable
|
|
611,833
|
|
|
6,062,267
|
|
|
Liquidated damages (note a)
|
|
1,210,119
|
|
|
1,210,119
|
|
|
Accrued staff costs
|
|
444,249
|
|
|
1,171,572
|
|
|
Compensation costs (note 20(ii))
|
|
-
|
|
|
322,672
|
|
|
Product warranty (note b)
|
|
-
|
|
|
182,741
|
|
|
Customer deposits
|
|
260,015
|
|
|
122,997
|
|
|
Other payables and accruals
|
|
417,937
|
|
|
494,492
|
|
|
|
$
|
11,569,981
|
|
$
|
18,561,640
|
|
|
(a)
|
On August 15, 2006, the SEC declared effective a
post-effective amendment that the Company had filed on August 4, 2006,
terminating the effectiveness of a resale registration statement on Form
SB-2 that had been filed pursuant to a registration rights agreement with
certain shareholders to register the resale of shares held by those
shareholders. The Company subsequently filed Form S-1 for these
shareholders. On December 8, 2006, the Company filed its Annual Report on
Form 10-K for the year ended September 30, 2006 (the 2006 Form 10-K).
After the filing of the 2006 Form 10-K, the 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
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 the Companys November 2007
private placement on each of the following dates: the ten-month
anniversary of the Effectiveness Deadline and every thirtieth day
thereafter (prorated for periods totaling less than thirty days), until
the earlier of the effectiveness of the registration statement and the
time that the Company no longer is required to keep such resale
registration statement effective because either such shareholders have
sold all of their shares or such shareholders may sell their shares
pursuant to Rule 144 without volume limitations. Such liquidated damages
would bear interest at the rate of 1% per month (prorated for partial
months) until paid in full.
|
|
|
|
|
|
On December 21, 2007, pursuant to the registration rights
agreement, the Company filed a registration statement on Form S-3, which
was declared effective by the SEC on May 7, 2008. As a result, the Company
estimated liquidated damages amounting to $561,174 for the November 2007
registration rights agreement. As of September 30, 2015 and 2016, the
Company had settled the liquidated damages with all the investors and the
remaining provision of approximately $159,000 was included in other
payables and accruals.
|
|
|
|
|
(b)
|
The Company maintains a policy of providing after sales
support for certain of its new EV and LEV battery products introduced
since October 1, 2015 by way of a warranty program. The Company accrues an
estimate of its exposure to warranty claims based on both current and
historical product sales data and warranty costs incurred. The Company
assesses the adequacy of its recorded warranty liability at least annually
and adjusts the amounts as necessary. The Company recognized warranty
expenses amounting to nil and $246,354 for the years ended September 30,
2015 and 2016, respectively, which are included in its sales and marketing
expenses.
|
F-24
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September 30, 2015
and 2016
(In US$ except for number of shares)
15.
|
Deferred Government Grants
|
Deferred government grants as of
September 30, 2015 and 2016 consist of the following:
|
|
|
2015
|
|
|
2016
|
|
|
Total government grants
|
$
|
5,380,524
|
|
$
|
4,928,830
|
|
|
Less: Current portion
|
|
(181,510
|
)
|
|
(197,645
|
)
|
|
Non-current portion
|
$
|
5,199,014
|
|
$
|
4,731,185
|
|
In September 2013, the Management
Committee of Dalian Economic Zone Management Committee (the Management
Committee) provided a subsidy of RMB150 million to finance the costs incurred
in moving our facilities to Dalian, including the loss of sales while the new
facilities were being constructed. For the year ended September 30, 2015, the
Company recognized $23,103,427 as income after offset of the related
removal expenditures of $1,004,027. No such income or offset was recognized in
fiscal 2016.
On October 17, 2014, the Company
received a subsidy of RMB46,150,000 pursuant to an agreement with the Management
Committee dated July 2, 2013 for costs of land use rights and to be used to
construct the new manufacturing site in Dalian. Part of the facilities had been
completed and was operated in July 2015 and the Company has initiated
amortization on a straight-line basis over the estimated useful lives of the
depreciable facilities constructed thereon.
The Company offset government grants of
$66,169 and $201,847 for the years ended September 30, 2015 and 2016,
respectively, against depreciation expenses of the Dalian facilities.
16.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities
|
(a)
Income taxes in
the consolidated statements of comprehensive loss (income)
The Companys provision for income
taxes expenses (credit) consisted of:
|
|
|
2015
|
|
|
2016
|
|
|
PRC income tax:
|
|
|
|
|
|
|
|
Current
|
$
|
5,218,898
|
|
$
|
769,373
|
|
|
Deferred
|
|
101,617
|
|
|
(96,793
|
)
|
|
|
$
|
5,320,515
|
|
$
|
(672,580
|
)
|
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 years ended September 30, 2015 and 2016.
Hong Kong Tax
BAK Asia and BAK International are
subject to Hong Kong profits tax rate of 16.5% and did not have any assessable
profits arising in or derived from Hong Kong for the years ended September 30,
2015 and 2016 and accordingly no provision for Hong Kong profits tax was made in
these periods.
PRC Tax
The Companys subsidiaries in China are
subject to enterprise income tax at 25% for the years ended September 30, 2015
and 2016.
A reconciliation of the provision for
income taxes determined at the statutory income tax rate to the Company's income
taxes is as follows:
|
|
|
2015
|
|
|
2016
|
|
|
Profit (loss) before income taxes
|
$
|
19,363,204
|
|
$
|
(11,979,614
|
)
|
|
United States federal corporate income tax rate
|
|
35%
|
|
|
35%
|
|
|
Income tax expense (credit) computed at
United States statutory corporate income tax rate
|
|
6,777,121
|
|
|
(4,192,865
|
)
|
|
Reconciling items:
|
|
|
|
|
|
|
|
Over provision of deferred taxation in
prior year
|
|
-
|
|
|
(96,793
|
)
|
|
Rate differential for PRC earnings
|
|
(2,100,342
|
)
|
|
1,015,843
|
|
|
Non-deductible expenses
|
|
310,514
|
|
|
125,998
|
|
|
Share based payments
|
|
262,558
|
|
|
511,769
|
|
|
ASC 740-10 uncertain tax position
|
|
-
|
|
|
769,373
|
|
|
Valuation allowance on deferred tax assets
|
|
70,664
|
|
|
2,539,255
|
|
|
Income tax expenses
|
$
|
5,320,515
|
|
$
|
672,580
|
|
F-25
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
16.
|
Income Taxes, Deferred Tax Assets and Deferred Tax
Liabilities (Continued)
|
(b)
Deferred tax
assets and deferred tax liabilities
During November 2015, the FASB issued
ASU 2015-17, Balance Sheet Classification of Deferred Taxes, which simplifies
the presentation of deferred income taxes. This ASU requires that deferred tax
assets and liabilities be classified as non-current in a statement of financial
position. The Company early adopted this guidance to the current fiscal year
ending September 30, 2016 on a prospective basis. Adoption of this guidance
resulted in a reclassification of the net current deferred tax asset to the net
non-current deferred tax asset in the consolidated balance sheet as of September
30, 2016. No prior periods were retrospectively adjusted.
The tax effects of temporary
differences that give rise to significant portions of the deferred tax assets
and liabilities as of September 30, 2015 and 2016 are presented below:
|
|
|
2015
|
|
|
2016
|
|
|
Deferred tax
assets
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
32,979
|
|
$
|
-
|
|
|
Inventories
|
|
54,127
|
|
|
-
|
|
|
Property, plant and equipment
|
|
5,976
|
|
|
-
|
|
|
Valuation allowance
|
|
(49,907
|
)
|
|
-
|
|
|
Deferred tax assets, current
|
$
|
43,175
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable
|
$
|
-
|
|
$
|
711,944
|
|
|
Inventories
|
|
-
|
|
|
160,222
|
|
|
Property, plant and equipment
|
|
-
|
|
|
156,628
|
|
|
Valuation allowance
|
|
-
|
|
|
(1,028,794
|
)
|
|
Deferred tax assets, non-current
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carried forward
|
$
|
36,362,743
|
|
$
|
37,923,110
|
|
|
Valuation allowance
|
|
(36,362,743
|
)
|
|
(37,923,110
|
)
|
|
Deferred tax assets, non-current
|
$
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, non-current
|
|
|
|
|
|
|
|
Property, plant and equipment
|
$
|
142,650
|
|
$
|
-
|
|
As of September 30, 2015 and 2016, the
Companys U.S. entity had net operating loss carry forwards of $103,580,741,
respectively, of which $102,293 available to reduce future taxable income which
will expire in various years through 2035 and $103,478,448 available to offset
capital gains recognized in the succeeding 5 tax years and the Companys PRC
subsidiaries had net operating loss carry forwards of $437,933 and $6,679,401,
respectively, which will expire in various years through 2021. Management
believes it is more likely than not that the Company will not realize these
potential tax benefits as these operations will not generate any operating
profits in the foreseeable future. As a result, a valuation allowance was
provided against the full amount of the potential tax benefits.
The Company did not provide for
deferred income taxes and foreign withholding taxes on the cumulative
undistributed earnings of foreign subsidiaries as of September 30, 2015 and 2016
of approximately of $14.2 million and $3.4 million, respectively. The cumulative
distributed earnings of foreign subsidiaries were included in accumulated
deficit and will continue to be indefinitely reinvested in international
operations. Accordingly, no provision has been made for U.S. deferred taxes or
applicable withholding taxes, related to future repatriation of these earnings,
nor is it practicable to estimate the amount of income taxes that would have to
be provided if management concluded that such earnings will be remitted in the
future.
According to the PRC Tax Administration
and Collection Law, the statute of limitations is three years if the
underpayment of taxes is due to computational errors made by the taxpayer or its
withholding agent. The statute of limitations extends to five years under
special circumstances, which are not clearly defined. In the case of a related
party transaction, the statute of limitations is ten years. There is no statute
of limitations in the case of tax evasion.
F-26
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
17.
|
Share-based Compensation
|
The Company grants share options to
officers and employees and restricted shares of common stock to its non-employee
directors as rewards for their services.
Stock Option Plan
In May 2005, the Board of Directors
adopted the China BAK Battery, Inc. 2005 Stock Option Plan (the Plan). The
Plan originally authorized the issuance of up to 800,000 shares of the 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
currently provides 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. The options expired on June 21,
2016.
A summary of share option plan activity
for these options as of September 30, 2015 and 2016 is presented below:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Weighted average
|
|
|
Aggregate
|
|
|
|
|
Number of
|
|
|
exercise price
|
|
|
remaining
|
|
|
intrinsic
|
|
|
|
|
shares
|
|
|
per share
|
|
|
contractual term
|
|
|
value
(1)
|
|
|
Outstanding as of October 1,
2014
|
|
4,200
|
|
$
|
14.05
|
|
|
1.7 years
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of October 1,
2015
|
|
4,200
|
|
$
|
14.05
|
|
|
0.7 years
|
|
|
|
|
|
Exercised
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
(4,200
|
)
|
|
(14.05
|
)
|
|
|
|
|
|
|
|
Forfeited
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of September 30, 2016
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of September 30, 2016
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
-
|
|
As of September 30, 2015 and 2016,
there were no unrecognized compensation costs related to the above non-vested
share options.
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 $3.24 per share on June 30, 2015. In accordance with the vesting
schedule of the grant, the restricted shares will vest in twelve equal quarterly
installments on the last day of each fiscal quarter beginning on June 30, 2015
(i.e. last vesting period: quarter ended March 31, 2018). The Company recognizes
the share-based compensation expenses on a graded-vesting method.
F-27
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
17.
|
Share-based Compensation
(continued)
|
The Company recorded non-cash
share-based compensation expense of $750,167 for the year ended September 30,
2015, in respect of the restricted shares granted on June 30, 2015, of which
$614,167, $86,976 and $48,924 were allocated to general and administrative
expenses, research and development expenses and sales and marketing expenses,
respectively.
The Company recorded non-cash
share-based compensation expense of $1,072,486 for the year ended September 30,
2016, in respect of the restricted shares granted on June 30, 2015, of which
$878,195, $124,346 and $69,945 were allocated to general and administrative
expenses, research and development expenses and sales and marketing expenses,
respectively.
As of September 30, 2016, non-vested
restricted shares granted on June 30, 2015 are as follows:
|
Non-vested shares as
of October 1, 2014
|
|
-
|
|
|
Granted
|
|
690,000
|
|
|
Vested
|
|
(115,000
|
)
|
|
Forfeited
Note
|
|
-
|
|
|
Non-vested shares as of
October 1, 2015
|
|
575,000
|
|
|
Granted
|
|
-
|
|
|
Vested
|
|
(222,500
|
)
|
|
Forfeited
Note
|
|
(22,500
|
)
|
|
Non-vested shares as of
September 30, 2016
|
|
330,000
|
|
Note: During the year ended September 30,
2016, 22,500 restricted shares were forfeited following the resignation of Mr.
Chunzhi Zhang, an independent director on January 14, 2016. Unrecognized
compensation cost of $48,172 was recognized as non-cash share-based compensation
expenses to general and administrative expenses for the year ended September 30,
2016.
As of September 30, 2016, there was
unrecognized stock-based compensation of $412,947 associated with the above
restricted shares. As of September 30, 2015, 32,498 vested shares were issued.
As of September 30, 2016, 282,500 vested shares were issued and 55,000 vested
shares were to be issued. On October 14, 2016, the remaining 55,000 vested
shares were issued.
Restricted shares granted on April 19,
2016
On April 19, 2016, pursuant to the
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 $389,711 for the year ended September 30,
2016, in respect of the restricted shares granted on April 19, 2016 of which
$295,401, $50,663, $24,162 and $19,485 were allocated to general and
administrative expenses, research and development expenses, sales and marketing
expenses and cost of revenues, respectively.
As of September 30, 2016, non-vested
restricted shares granted on April 19, 2016 are as follows:
|
Non-vested shares as
of October 1, 2015
|
-
|
|
Granted
|
500,000
|
|
Vested
|
-
|
|
Forfeited
Note
|
(8,000)
|
|
Non-vested shares as of
September 30, 2016
|
492,000
|
Note: During the year ended September 30,
2016, 8,000 restricted shares were forfeited following the resignation of two
employees in September 2016. Unrecognized compensation cost of $10,196 was
recognized as non-cash share-based compensation expenses to sales and marketing expenses for the
year ended September 30, 2016.
F-28
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
17.
|
Share-based Compensation
(continued)
|
|
(ii)
|
Restricted Shares
(continued)
|
As of September 30, 2016, there was
unrecognized stock-based compensation of $950,289 associated with the above
restricted shares.
As the Company itself is an investment
holding company which is not expected to generate operating profits to realize
the tax benefits arising from its net operating loss carried forward, no income
tax benefits were recognized for such stock-based compensation cost under the
stock option plan for the years ended September 30, 2015 and 2016.
18.
|
Earnings (Loss) Per Share
|
The following is the calculation of
earnings (loss) per share:
|
|
|
2015
|
|
|
2016
|
|
|
Net profit (loss) from
continuing operations
|
$
|
14,042,689
|
|
$
|
(12,652,194
|
)
|
|
Income from discontinued operations
|
|
1,831,237
|
|
|
-
|
|
|
Net profit (loss)
|
$
|
15,873,926
|
|
$
|
(12,652,194
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used
in basic computation
(note)
|
|
12,718,388
|
|
|
17,786,374
|
|
|
Dilutive effect of unvested restricted shares
|
|
162,733
|
|
|
-
|
|
|
Weighted average shares used
in diluted computation
|
|
12,881,121
|
|
|
17,786,374
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
Basic
|
|
|
|
|
|
|
|
From continuing operations
|
$
|
1.10
|
|
$
|
(0.71
|
)
|
|
From discontinued operations
|
|
0.14
|
|
|
-
|
|
|
|
$
|
1.24
|
|
$
|
(0.71
|
)
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share Diluted
|
|
|
|
|
|
|
|
From continuing operations
|
$
|
1.09
|
|
$
|
(0.71
|
)
|
|
From discontinued operations
|
|
0.14
|
|
|
-
|
|
|
|
$
|
1.23
|
|
$
|
(0.71
|
)
|
|
Note:
|
Including (i) 82,502 and 55,000 vested restricted shares
granted pursuant to the 2015 Plan that were not yet issued for the years
ended September 30, 2015 and 2016, respectively; and (ii) 4,376,731 and
nil shares to be issued to the investors as of September 30, 2015 and
2016, respectively, on conversion of loans pursuant to the Debt Conversion
Agreement on September 29, 2015 (Note 1).
|
For the year ended September 30, 2015
and 2016, the outstanding 4,200 stock options were anti-dilutive and excluded
from diluted earnings per share.
For the year ended September 30, 2016,
822,000 unvested restricted shares were anti-dilutive and excluded from shares
used in the diluted computation.
F-29
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
19.
|
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, trade accounts and
bills receivable, other receivables, balances with former subsidiaries, other
short-term loans, short-term and long-term bank loans and other payables
approximate their fair values because of the short maturity of these instruments
or the rate of interest of these instruments approximate the market rate of
interest.
20.
|
Commitments and
Contingencies
|
As of September 30, 2015 and 2016, the
Company had the following contracted capital commitments:
|
|
|
2015
|
|
|
2016
|
|
|
For construction of buildings
|
$
|
1,819,977
|
|
$
|
3,302,524
|
|
|
For purchases of equipment
|
|
68,718
|
|
|
469,542
|
|
|
Capital injection to Dalian
BAK Power and Dalian BAK Trading
Note
|
|
15,553,656
|
|
|
9,895,996
|
|
|
|
$
|
17,442,351
|
|
$
|
13,668,062
|
|
|
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 on March
2014, the time requirement of the registered capital contribution has been
abolished. As such, BAK Asia has its discretion to consider the timing of
the registered capital contributions.
|
From time to time, the Company may
become involved in various lawsuits and legal proceedings, which arise, in the
ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these, or other matters, may arise from
time to time that may harm our business. Other than the legal proceeding set
forth below, the Company is currently not aware of any such legal proceedings or
claims that the Company believe will have an adverse effect on our business,
financial condition or operating results.
An individual named Steven R. Ruth
filed suit against China BAK Battery, Inc. in United States District Court for
the Western District of Texas in 2013 alleging breach of contract. The Company
did not receive notice of this lawsuit and the plaintiff sought a default
judgment, which the court granted in January 2014. Accordingly, the court
entered judgment in favor of Mr. Ruth in the amount of $553,774 inclusive of
costs and attorneys fees (the First Judgment).
Subsequent to the entry of the First
Judgment, Mr. Ruth has made efforts to have the judgment enforced in Canada. On
September 19, 2014, Mr. Ruth also filed a second complaint in the United States
District Court for the Western District of Texas. On November 12, 2014, a second
default judgment was entered against the Company in the amount of $553,774 for
the First Judgment plus an additional $7,550 in attorneys fees. The second
judgment is inclusive of the amounts ordered in the First Judgment. BAK
International thereafter agreed to indemnify the Company from any expenses,
losses and damages that were incurred and will be incurred by the Company due to
the lawsuit filed by Mr. Ruth.
On December 30, 2015, Mr. Ruth, China
BAK Battery, Inc., BAK International Limited, Shenzhen BAK Battery Co., Ltd. and
Shenzhen BAK Power Battery Co., Ltd. entered into a settlement and release
agreement, pursuant to which, among others, the parties irrevocably released and
forever discharged each other from and against any and all liabilities, claims,
actions, cause of actions and damages, including any and all claims against the
parties in the First Judgement, the Second Judgement and certain recognition
action commenced by Mr. Ruth in the Supreme Court of British Columbia of Canada.
On May 6, 2016, the Supreme Court of British Columbia issued a consent dismissal
order upon the applications of the parties and dismissed the recognition action.
On July 7, 2016, Shenzhen Huijie
Purification System Engineering Co., Ltd (Shenzhen Huijie), one of the
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), interest of $30,689 (RMB0.2 million) and compensation
of $0.3 million (RMB1.9 million), which the Company already accrued for as of
September 30, 2016. On September 7, 2016, upon the request of Shenzhen Huijie, the Court
froze Dalian BAKs bank deposits totaling $1,268,036 (RMB 8,430,792) for a
period of one year.
F-30
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
21.
|
Concentrations and Credit
Risk
|
(a)
Concentrations
The Company had the following customers
that individually comprised 10% or more of net revenue for the years ended
September 30, 2015 and 2016 as follows:
|
|
|
2015
|
|
|
2016
|
|
|
Customer A
|
$
|
6,036,172
|
|
|
43.41%
|
|
$
|
*
|
|
|
*
|
|
|
Customer B
|
|
2,252,816
|
|
|
16.20%
|
|
|
*
|
|
|
*
|
|
|
BAK Tianjin
|
|
1,470,579
|
|
|
10.58%
|
|
|
*
|
|
|
*
|
|
|
Customer C
|
|
*
|
|
|
*
|
|
|
3,574,273
|
|
|
34.47%
|
|
|
Customer D
|
|
*
|
|
|
*
|
|
|
2,442,816
|
|
|
23.56%
|
|
* Comprised less than 10% of net
revenue for the respective period.
The Company had the following customers
that individually comprised 10% or more of accounts receivable as of September
30, 2015 and 2016 as follows:
|
|
|
2015
|
|
|
2016
|
|
|
Customer B
|
$
|
3,146,177
|
|
|
65.93%
|
|
$
|
*
|
|
|
*
|
|
|
Customer A
|
|
763,738
|
|
|
16.01%
|
|
|
*
|
|
|
*
|
|
|
Customer C
|
|
*
|
|
|
*
|
|
|
1,529,703
|
|
|
64.21%
|
|
For the years ended September 30, 2015
and 2016, the Company recorded the following transactions:
|
|
|
2015
|
|
|
2016
|
|
|
Purchase of inventories from
|
|
|
|
|
|
|
|
BAK Tianjin
|
$
|
10,536,887
|
|
$
|
2,743,618
|
|
|
Shenzhen BAK
|
|
-
|
|
|
5,565,461
|
|
|
Tianjin BAK New Energy (Note 13)
|
|
395,593
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Sales of finished goods to
|
|
|
|
|
|
|
|
BAK Tianjin
|
|
1,470,579
|
|
|
636,331
|
|
|
Shenzhen BAK
|
|
-
|
|
|
102,322
|
|
|
Tianjin BAK New
Energy (Note 13)
|
|
298,983
|
|
|
-
|
|
|
Zhengzhou BAK Battery Co., Ltd *
|
|
17,063
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
Sales of raw materials to
|
|
|
|
|
|
|
|
Shenzhen BAK
|
|
1,377,004
|
|
|
836,425
|
|
* Mr. Xiangqian Li, the former CEO, is
a director of this company.
(b)
Credit Risk
Financial instruments that potentially
subject the Company to a significant concentration of credit risk consist
primarily of cash and cash equivalents and pledged deposits. As of September 30,
2015 and 2016, substantially all of the Companys cash and cash equivalents were
held by major financial institutions located in the PRC, which management
believes are of high credit quality.
For the credit risk related to trade
accounts receivable, the Company performs ongoing credit evaluations of its
customers and, if necessary, maintains reserves for potential credit losses.
Historically, such losses have been within managements expectations.
F-31
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
The Company used to engage in one
business segment, the manufacture, commercialization and distribution of a wide
variety of standard and customized lithium ion rechargeable batteries for use in
a wide array of applications. The Company manufactured five types of Li-ion
rechargeable batteries: aluminum-case cell, battery pack, cylindrical cell,
lithium polymer cell and high-power lithium battery cell. The Companys products
are sold to packing plants operated by third parties primarily for use in mobile
phones and other electronic devices. Starting from the three months ended
December 31, 2013 and until June 30, 2014, the Company was also engaged in the
business segment of property lease and management (see Note 1).
After the disposal of BAK
International, the Company focused on producing high-power lithium battery
cells. Net revenues from continuing operations for the years ended September 30,
2015 and 2016 were as follows:
Net revenues by product:
|
|
|
2015
|
|
|
2016
|
|
|
High power lithium batteries
used in:
|
|
|
|
|
|
|
|
Electric vehicles
|
$
|
-
|
|
$
|
6,488,149
|
|
|
Light electric vehicles
|
|
-
|
|
|
553,390
|
|
|
Uninterruptable supplies
|
|
13,904,414
|
|
|
3,327,905
|
|
|
Total
|
$
|
13,904,414
|
|
$
|
10,369,444
|
|
Net revenues by geographic area:
|
|
|
2015
|
|
|
2016
|
|
|
Mainland China
|
$
|
13,904,414
|
|
$
|
9,017,227
|
|
|
Europe
|
|
-
|
|
|
456,795
|
|
|
PRC Taiwan
|
|
-
|
|
|
412,963
|
|
|
Korea
|
|
-
|
|
|
258,248
|
|
|
Israel
|
|
-
|
|
|
224,211
|
|
|
Total
|
$
|
13,904,414
|
|
$
|
10,369,444
|
|
Substantially all of the Companys
long-lived assets are located in the PRC.
F-32
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
23.
|
China BAK Battery, Inc. (Parent
Company)
|
Under PRC regulations, subsidiaries in
PRC (the PRC subsidiaries) may pay dividends only out of their accumulated
profits, if any, determined in accordance with PRC GAAP. In addition, the PRC
subsidiaries are required to set aside at least 10% of their after tax net
profits each year, if any, to fund the statutory general reserve until the
balance of the reserves reaches 50% of their registered capital. The statutory
general reserves are not distributable in the form of cash dividends to the
Company and can be used to make up cumulative prior year losses, if any, and may
be converted into share capital by the issue of new shares to shareholders in
proportion to their existing shareholdings, or by increasing the par value of
the shares currently held by them, provided that the reserve balance after such
issue is not less than 25% of the registered capital. As of September 30, 2015
and 2016, additional transfers of $15,250,000 and $15,019,489 were required for Dalian BAK Power and Dalian BAK Trading before the statutory general reserve
reached 50% of the registered capital of the PRC subsidiaries, respectively. As
of September 30, 2015 and 2016, there was nil and $1,230,511 appropriation from retained
earnings and set aside for statutory general reserves by the PRC subsidiaries.
BAK Dalian did not have after tax net profits since its incorporation and
therefore no appropriation was made to fund its statutory general reserve as of
September 30, 2015 and 2016. Dalian BAK Power had after tax profits of
$15,769,742 and after tax loss of $10,790,255 in fiscal 2015 and 2016, respectively.
Schedule I of Article 504 of Regulation
SX requires the condensed financial information of the registrant (Parent
Company) to be filed when the restricted net assets of consolidated subsidiaries
exceed 25 percent of consolidated net assets as of the end of the most recently
completed fiscal year. For purposes of this test, restricted net assets of
consolidated subsidiaries shall mean that amount of the registrants
proportionate share of net assets of consolidated subsidiaries (after
intercompany eliminations) which as of the end of the most recent fiscal year
may not be transferred to the parent company by subsidiaries in the form of
loans, advances or cash dividends without the consent of a third party (i.e.,
lender, regulatory agency, foreign government, etc.).
F-33
China BAK Battery, Inc. and subsidiaries
Notes to
the consolidated financial statements
For the years ended September
30, 2015 and 2016
(In US$ except for number of shares)
23.
|
China BAK Battery, Inc. (Parent
Company)(continued)
|
SCHEDULE I CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CHINA BAK BATTERY, INC.
PARENT COMPANY STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2016
|
|
2015
|
|
|
2016
|
|
|
|
|
|
|
|
|
REVENUE, net
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and
consulting expenses
|
|
(795,167
|
)
|
|
(1,565,530
|
)
|
|
|
|
|
|
|
|
General and
administrative
|
|
(848,679
|
)
|
|
(439,009
|
)
|
|
|
|
|
|
|
|
Total operating expenses
|
|
(1,643,846
|
)
|
|
(2,004,539
|
)
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
(1,643,846
|
)
|
|
(2,004,539
|
)
|
|
|
|
|
|
|
|
OTHER INCOME:
|
|
-
|
|
|
182,708
|
|
|
|
|
|
|
|
|
LOSS ATTRIBUTABLE TO PARENT
COMPANY
|
|
(1,643,846
|
)
|
|
(1,821,831
|
)
|
|
|
|
|
|
|
|
EQUITY IN EARNINGS (LOSS) OF
SUBSIDIARIES
|
|
17,517,772
|
|
|
(10,830,363
|
)
|
|
|
|
|
|
|
|
NET INCOME (LOSS) AVAILABLE
TO SHAREHOLDERS
|
$
|
15,873,926
|
|
$
|
(12,652,194
|
)
|
CHINA BAK BATTERY, INC.
PARENT COMPANY BALANCE SHEETS
AS OF SEPTEMBER 30, 2015 AND 2016
|
|
2015
|
|
|
2016
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Other
receivables
|
$
|
-
|
|
$
|
-
|
|
Total current assets
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
Interests in subsidiaries
|
|
23,279,070
|
|
|
16,684,482
|
|
Total assets
|
$
|
23,279,070
|
|
$
|
16,684,482
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
Accrued expenses and other
payables
|
$
|
1,610,183
|
|
$
|
1,594,486
|
|
Total current liabilities
|
|
1,610,183
|
|
|
1,594,486
|
|
|
|
|
|
|
|
|
SHAREHOLDERS' EQUITY
|
|
21,668,887
|
|
|
15,089,996
|
|
Total liabilities and shareholders' equity
|
$
|
23,279,070
|
|
$
|
16,684,482
|
|
F-34
2
3
.
|
China BAK Battery, Inc. (Parent
Company)(continued)
|
CHINA BAK BATTERY, INC.
PARENT COMPANY STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2015 AND 2016
|
|
2015
|
|
|
2016
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income
(loss) available to shareholders
|
$
|
15,873,926
|
|
$
|
(12,652,194
|
)
|
Adjustments to reconcile net
income to net cash used in operating activities:
|
|
|
|
|
|
|
Equity in (earnings) loss of subsidiaries
|
|
(17,517,772
|
)
|
|
10,830,363
|
|
Provision for
doubtful debts
|
|
7,000
|
|
|
-
|
|
Share based compensation
|
|
750,167
|
|
|
1,462,197
|
|
Change in
operating assets and liabilities
|
|
|
|
|
|
|
Accrued expenses and
other payable
|
|
(27,501
|
)
|
|
(15,697
|
)
|
Net cash used in
operating activities
|
|
(914,180
|
)
|
|
(375,331
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Decrease
(increase) in interest in subsidiaries
|
|
914,180
|
|
|
(5,141,269
|
)
|
Net cash provided by (used in) investing activities
|
|
914,180
|
|
|
(5,141,269
|
)
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Proceeds from
issuance of common stock
|
|
-
|
|
|
5,516,600
|
|
Net cash provided by financing activities
|
|
-
|
|
|
5,516,600
|
|
|
|
|
|
|
|
|
CHANGE IN CASH
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
CASH, beginning of year
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
CASH, end of year
|
$
|
-
|
|
$
|
-
|
|
The condensed parent company financial statements have been
prepared using the equity method to account for its subsidiaries. Refer to the
consolidated financial statements and notes presented above for additional
information and disclosures with respect to these financial statements.
F-35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Date: January 13, 2017
CHINA BAK BATTERY, INC.
|
By:
|
/s/ Yunfei Li
|
|
|
Yunfei Li
|
|
|
Chief Executive
Officer
|
|
|
|
|
By:
|
/s/ Wenwu Wang
|
|
|
Wenxu Wang
|
|
|
Interim Chief Financial Officer
|
In accordance with the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature
|
|
Title
|
Date
|
|
|
|
|
/s/ Yunfei Li
|
|
Chairman and Chief Executive
Officer
|
January 13, 2017
|
Yunfei Li
|
|
(Principal Executive Officer)
|
|
|
|
|
|
/s/ Wenwu Wang
|
|
Interim Chief Financial Officer
|
January 13, 2017
|
Wenxu Wang
|
|
(Principal Financial and
Accounting Officer)
|
|
|
|
|
|
/s/ Guosheng Wang
|
|
Director
|
January 13, 2017
|
Guosheng Wang
|
|
|
|
|
|
|
|
/s/ J. Simon Xue
|
|
Director
|
January 13, 2017
|
J. Simon Xue
|
|
|
|
|
|
|
|
/s/ Martha C. Agee
|
|
Director
|
January 13, 2017
|
Martha C. Agee
|
|
|
|
|
|
|
|
/s/ Jianjun He
|
|
Director
|
January 13, 2017
|
Jianjun He
|
|
|
|
EXHIBIT INDEX
Exhibit No.
|
|
Description
|
|
|
|
3.1
|
|
Articles of Incorporation of the registrant (incorporated
by reference to Exhibit 3.1 to the registrants Annual Report on Form 10-K
filed on December 8, 2006)
|
|
|
|
3.2
|
|
By-laws of the registrant (incorporated by reference to
Exhibit 3.2 to the registrants Annual Report on Form 10-K filed on
December 19, 2007)
|
|
|
|
3.3
|
|
Certificate of Change Pursuant to NRS 78.209 filed by the
Company on October 22, 2012 (incorporated by reference to Exhibit 3.1 to
the registrants Current Report on Form 8-K filed on October 26, 2012)
|
|
|
|
3.4
|
|
Certificate of Amendment to Articles of Incorporation
filed by the Company on June 23, 2015 (incorporated by reference to
Exhibit 3.1 to the registrants Current Report on Form 8-K filed on June
26, 2015)
|
|
|
|
4.1
|
|
China BAK Battery, Inc. Stock Option Plan (incorporated
by reference to Exhibit 10.1 to the registrants Quarterly Report on Form
10-Q filed on August 22, 2006)
|
|
|
|
4.2
|
|
Amendment No. 1 to the China BAK Battery, Inc. Stock
Option Plan (incorporated by reference to Exhibit 4.1 to the registrants
Quarterly Report on Form 10-Q filed on August 8, 2008)
|
|
|
|
4.3
|
|
Amendment No. 2 to the China BAK Battery, Inc. Stock
Option Plan (incorporated by reference to Appendix B to the registrants
Definitive Proxy Statement on Schedule 14A filed April 24, 2015)
|
|
|
|
4.4
|
|
China BAK Battery, Inc. 2015 Equity Incentive Plan
(incorporated by reference to Appendix D to the registrants Definitive
Proxy Statement on Schedule 14A filed April 24, 2015).
|
|
|
|
10.1
|
|
Form of Debt Conversion Agreement (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on Form 8-K
filed on October 5, 2015)
|
|
|
|
10.2
|
|
Form of Director and Officer Indemnification Agreement
(incorporated by reference to Exhibit 10.1 to the registrants Current
Report on Form 8-K filed on January 3, 2011)
|
|
|
|
10.3
|
|
English Translation of Loan Agreement, dated December 17,
2013, by and between Shenzhen BAK and Mr. Jinghui Wang (incorporated by
reference to Exhibit 10.12 to the registrants Annual Report on Form 10-K
filed on January 14, 2014)
|
|
|
|
10.4
|
|
Corporate Guarantee, dated January 14, 2014, by and
between BAK International and Mr. Jinghui Wang (incorporated by reference
to Exhibit 10.13 to the registrants Annual Report on Form 10-K filed on
January 14, 2014).
|
|
|
|
10.5
|
|
Corporate Guarantee, dated January 14, 2014, by and
between China BAK Battery, Inc. and Mr. Jinghui Wang (incorporated by
reference to Exhibit 10.14 to the registrants Annual Report on Form 10-K
filed on January 14, 2014).
|
|
|
|
10.6
|
|
Share Mortgage, dated January 14, 2014, by and among
China BAK Battery, Inc., BAK International and Mr. Jinghui Wang
(incorporated by reference to Exhibit 10.15 to the registrants Annual
Report on Form 10-K filed on January 14, 2014).
|
|
|
|
10.7
|
|
English Translation of Loan Agreement, dated January 8,
2014, by and between Shenzhen BAK and Mr. Jinghui Wang (incorporated by
reference to Exhibit 10.1 to the registrants Current Report on Form 8-K
filed on March 14, 2014).
|
|
|
|
10.8
|
|
Corporate Guarantee, dated March 10, 2014, by and between
BAK International and Mr. Jinghui Wang (incorporated by reference to
Exhibit 10.2 to the registrants Current Report on Form 8-K filed on March
14, 2014).
|
|
|
|
10.9
|
|
Corporate Guarantee, dated March 10, 2014, by and between
China BAK Battery, Inc. and Mr. Jinghui Wang (incorporated by reference to
Exhibit 10.3 to the registrants Current Report on Form 8-K filed on March
14, 2014).
|
|
|
|
10.10
|
|
Further Share Mortgage, dated March 10, 2014, by and
among China BAK Battery, Inc., BAK International, Shenzhen BAK and Mr.
Jinghui Wang (incorporated by reference to Exhibit 10.4 to the
registrants Current Report on Form 8-K filed on March 14, 2014).
|
Exhibit No.
|
|
Description
|
|
|
|
10.11
|
|
Summary of Intellectual Property Rights License Agreement
entered into by and among Shenzhen BAK Battery Co., Ltd. (the Licensor),
China BAK Battery, Inc. (the Licensee 1) and Dalian BAK Power Battery
Co., Ltd (the Licensee 2), dated August 25, 2014 (incorporated by
reference to Exhibit 10.20 to the registrants Annual Report on Form 10-K
filed on January 13, 2015).
|
|
|
|
10.12
|
|
Form of Securities Purchase Agreement (incorporated by reference to
Exhibit 10.1 to the registrants Current Report on Form 8-K filed on
August 3, 2016)
|
|
|
|
14.1
|
|
Code of Business Conduct and Ethics of the registrant
(incorporated by reference to Exhibit 14.1 to the registrants Quarterly
Report on Form 10-Q filed on August 22, 2006)
|
|
|
|
21.1
|
|
List of subsidiaries of the registrant (incorporated by
reference to Exhibit 21.1 to the registrants Annual Report on Form 10-K
filed on January 13, 2015).
|
|
|
|
23.1*
|
|
Consent of Centurion ZD CPA Limited
|
|
|
|
31.1*
|
|
Certifications of Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2*
|
|
Certifications of Interim Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1*
|
|
Certifications of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
|
|
|
|
32.2*
|
|
Certifications of Interim Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
99.1
|
|
Deed of Waiver and Release, dated July 4, 2014, by and
among, Shenzhen BAK, the Company, BAK International and Mr. Wang
(incorporated by reference to Exhibit 99.1 to the registrants Quarterly
Report on Form 10-Q filed on August 19, 2014).
|
|
|
|
101*
|
|
Interactive data files pursuant to Rule 405 of Regulation
S-T.
|
* Filed herewith
CBAK Energy Technology, Inc. (NASDAQ:CBAK)
Historical Stock Chart
From Mar 2024 to Apr 2024
CBAK Energy Technology, Inc. (NASDAQ:CBAK)
Historical Stock Chart
From Apr 2023 to Apr 2024