CBAK Energy Technology, Inc. - Quarter Report: 2006 March (Form 10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2006

o	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _______________ to _______________

Commission File Number: 000-49712

CHINA BAK BATTERY, INC.
(Exact name of registrant as specified in its charter)

Nevada		88-0442833
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

BAK Industrial Park No. 1 BAK Street Kuichong Town, Lunggang District Shenzhen, People’s Republic of China		518119
(Address of principal executive offices)		(Zip Code)

(86 755) 897-70060
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes x

No o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act)

Yes x

No o

APPLICABLE ONLY TO CORPORATE ISSUERS

State the number of shares outstanding of each of the issuer’s classes of common equity, as of May 1, 2006: 48,878,396 shares of common stock.

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION		3

	Item 1. Financial Statements	3

	Item 2. Management’s Discussion and Analysis or Plan of Operation	11

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	21

	Item 4. Controls and Procedures	21

PART II — OTHER INFORMATION		22

	Item 1. Legal Proceedings	22

	Item 1A. Risk Factors	22

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	35

	Item 3. Defaults Upon Senior Securities	35

	Item 4. Submission of Matters to a Vote of Security Holders	35

	Item 5. Other Information	35

	Item 6. Exhibits	36

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

CHINA BAK BATTERY, INC.
Consolidated Balance Sheets
As of March 31, 2006 and September 30, 2005
(In thousands, except share and per share amounts)

	March 31, 2006			September 30, 2005

	$			$

	Unaudited
Assets
Current Assets
Cash		7,923			33,056
Cash – Restricted		25,245			19,392
Accounts Receivable, Net		50,574			43,380
Inventories		45,916			21,696
Prepaid Expenses		1,638			1,448
Notes Receivable		7,152			484
Accounts Receivable – Related Party		22			272

Total Current Assets		138,470			119,728

Long-Term Assets
Property, Plant, & Equipment		76,458			52,161
Construction in Progress		7,497			17,804
Land Use Rights		3,277			3,247
Less Accumulated Depreciation		(8,509	)		(5,874	)

Long-term Assets, Net		78,723			67,338

Other Assets
Other Assets		716			567
Intangible Assets, Net		50			53

Total Other Assets		766			620

Total Assets		217,959			187,686

Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable		30,195			17,837
Bank Loans, Short Term		42,910			39,545
Notes Payable		32,460			29,577
Land Use Rights Payable		2,990			2,963
Construction Costs Payable		3,639			5,242
Customer Deposits		318			655
Accrued Expenses		3,691			3,197
Other Liabilities		1,477			712

Total Current Liabilities		117,680			99,728

CONTINGENCIES AND COMMITMENTS (NOTE 5)
Stockholders’ Equity
Capital Stock-$.001 Par Value; 100,000,000 Shares Authorized; 48,878,396 Shares Issued and Outstanding		49			49
Additional Paid In Capital		69,429			68,013
Accumulated Comprehensive Income		1,224			363
Reserves		5,551			3,689
Retained Earnings		24,026			15,844

Total Stockholders’ Equity		100,279			87,958

Total Liabilities and Stockholders’ Equity		217,959			187,686

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

CHINA BAK BATTERY, INC.
Consolidated Statements of Operations
For The Three Months Ended March 31, 2006 and 2005
(In thousands, except per share amounts)
(Unaudited)


	2006			2005

	$			$
Revenues, Net of Returns		38,219			25,878
Cost of Goods Sold		26,013			20,310

Gross Profit		12,206			5,568

Expenses:
Selling		1,316			1,018
General and Administrative		2,072			723
Research and Development		464			166
Bad Debts		393			294

Total Expenses		4,245			2,201

Operating Income		7,961			3,367
Other Expenses (Income):
Finance Costs		651			572
Other Expenses (Income)		(2	)		9

Net Income Before Provision for Income Taxes		7,312			2,786
Provision for Income Tax		345			220

Net Income		6,967			2,566

Net Income Per Common and Common Equivalent Share:
Basic		0.14			0.07

Diluted		0.14			0.07

Weighted Average Shares Outstanding:
Basic		48,878			38,811

Diluted		49,475			38,811

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

CHINA BAK BATTERY, INC.
Consolidated Statements of Operations
For The Six Months Ended March 31, 2006 and 2005
(In thousands, except per share amounts)
(Unaudited)

	2006			2005

	$			$
Revenues, Net of Returns		64,323			51,005
Cost of Goods Sold		45,078			41,054

Gross Profit		19,245			9,951

Expenses:
Selling		2,540			1,826
General and Administrative		3,877			1,875
Research and Development		959			186
Bad Debts		649			345

Total Expenses		8,025			4,232

Operating Income		11,220			5,719
Other Expenses (Income):
Finance Costs		1,036			962
Other Expenses (Income)		(311	)		25

Net Income Before Provision for Income Taxes		10,495			4,732
Provision for Income Tax		451			364

Net Income		10,044			4,368

Net Income Per Common and Common Equivalent Share:
Basic		0.21			0.12

Diluted		0.20			0.12

Weighted Average Shares Outstanding:
Basic		48,878			34,977

Diluted		49,475			34,977

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

CHINA BAK BATTERY, INC.
Consolidated Statements of Cash Flows
For The Six Months Ended March 31, 2006 and 2005
(In thousands)
(Unaudited)

	2006			2005

		$			$
Cash Flows from (used for) Operating Activities:
Net Income		10,044			4,368
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Bad Debts Expense		649			346
Depreciation and Amortization		2,638			1,497
Writedown of Inventory		105			—
Share Based Compensation		1,416			—
Changes in Assets and Liabilities:
Accounts Receivable		(7,843	)		(10,064	)
Inventories		(24,325	)		17,411
Prepaid Expenses		(190	)		(187	)
Notes Receivable		(6,668	)		(226	)
Accounts Receivable - Related Party		250			349
Other Assets		(149	)		77
Accounts Payable		12,358			(5,760	)
Land Use Rights Payable		27			—
Construction Costs Payable		(1,603	)		(3,799	)
Customer Deposits		(337	)		(161	)
Accrued Expenses		494			(1,859	)
Other Liabilities		765			235

Net Cash Flows from (used for) Operating Activities		(12,369	)		2,227

Cash Flows from (used for) Investing Activities:
Recapitalization		—			18
Acquisition of Property, Plant and Equipment		(24,327	)		(12,882	)
Construction in Progress		10,307			2,010

Net Cash Flows used for Investing Activities		(14,020	)		(10,854	)

Cash Flows from (used for) Financing Activities:
Proceeds from Borrowings		65,100			48,749
Repayment of Borrowings		(58,852	)		(44,539	)
Cash Pledged To Bank		(5,853	)		(3,436	)
Proceeds from Issuance of Capital Stock		—			15,529
Contribution of Cash from Stockholders Acquiring Shares of BAK International		—			11,500
Distribution of Cash to Stockholders in Connection with Acquisition of Shares of BAK Battery		—			(11,500	)

Net Cash Flows from Financing Activities		395			16,303
Effect of Exchange Rate Changes on Cash		861			(2	)

Net Increase (Decrease) in Cash		(25,133	)		7,674
Cash - Beginning of Period		33,056			3,212

Cash - End of Period		7,923			10,886

Supplemental Cash Flow Disclosures:
Interest Paid		657			875

Income Taxes Paid		197			138

Recapitalization		—			(2	)

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

CHINA BAK BATTERY, INC.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
(Unaudited)

1.	BASIS OF PRESENTATION

	The condensed consolidated financial statements of China BAK Battery, Inc. and Subsidiaries (the “Company”) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-KSB, and other reports filed with the SEC.

	The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole. Factors that affect the comparability of financial data from year to year and for comparable interim periods include non-recurring expenses associated with the Company’s registration with the SEC, costs incurred to raise capital and stock awards.

	The condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles used in the United States of America and include the accounts of BAK International Limited (“BAK International”), Shenzhen BAK Battery Co, Ltd. (“BAK”) and BAK Electronics (Shenzhen) Co., Ltd. for all periods presented. All significant intercompany balances and transactions have been eliminated on consolidation.

2.	CASH - RESTRICTED

	The Company’s cash - restricted at March 31, 2006 is summarized as follows:

			$ in thousands

Time deposits pledged as collateral for letter of credit facilities			8,157
Cash pledged as a guarantee for notes payable			17,088

Total cash – restricted			25,245

3.	INVENTORIES

	The Company’s inventories at March 31, 2006 and September 30, 2005 are summarized as follows:

	March 31, 2006		September 30, 2005

	$ in thousands		$ in thousands
Raw materials		17,695		9,284
Work in progress		7,721		2,738
Finished goods		20,500		9,674

Total inventories		45,916		21,696

CHINA BAK BATTERY, INC.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
(Unaudited)

4.	BANK DEBTS

	As of March 31, 2006, the Company had several short-term loans, notes payable and letter of credit facilities with banks with a total outstanding balance of $75,370. The loans were used primarily to support operating activities, carried interest rates ranging from 5.022% to 6.138%, and have maturity dates ranging from 5 to 12 months. The Company is required to pledge cash, inventories and equipment in order to secure these short-term bank loans and notes payable, summarized as follows at March 31, 2006:

	$ in thousands

Cash-restricted		25,245
Inventories		773
Equipment		12,120

Total assets pledged		38,138

5.	CONTINGENCIES AND COMMITMENTS

	A.	Contingent Liabilities

		1.	Land Use and Ownership Certificate:

			According to relevant PRC laws and regulations, a land use right certificate, along with government approvals for land planning, project planning, and construction need to be obtained before construction of a building is commenced. An ownership certificate shall be granted by the government upon application under the condition that the aforementioned certificate and government approvals are obtained.

			BAK has not yet obtained the land use right certificate and government approvals relating to the construction of BAK Industrial Park (the Company’s operating premises). However, BAK has applied to obtain the land use right certificate of approval. The local government of Kuichong Township of Longgang District of Shenzhen has, however, granted permission for BAK to commence the construction of the recently completed production plant pending a decision from the bureau of city planning. The Company anticipates that it will receive the approval from the bureau of city planning in 2006.


			Management believes, under the condition that BAK is granted a land use right certificate and related approvals, there should be no legal barriers for BAK to obtain an ownership certificate for the premises recently constructed in BAK Industrial Park. However, in the event that BAK fails to obtain the land use right certificate relating to BAK Industrial Park and/or the government approvals required for the construction of BAK Industrial Park, there is the risk that the buildings constructed will need to be vacated as illegitimate constructions. However, management believes that this possibility while present is very remote. As a result, no provision has been made in the financial statements for this potential occurrence.

			The Company does not currently insure its manufacturing facilities since it has not yet received its land use right certificate. The Company intends to procure such insurance once it has received the certificate.

CHINA BAK BATTERY, INC.
Notes to Consolidated Financial Statements
March 31, 2006 and 2005
(Unaudited)

5.	CONTINGENCIES AND COMMITMENTS (cont’d.)

	A.	Contingent Liabilities (cont’d.)

		2.	Guarantees

			The Company’s guarantees at March 31, 2006 are summarized as follows:

	$ in thousands

Guaranteed for Shenzhen Tongli Precision Stamping, a non-related party		1,771
Guaranteed for Shenzhen Tongli High Technolgy, a non-related party		4,295
Guaranteed for Shenzhen Zhengda, a non-related party		1,247
Notes receivable discounted		10,994

Total guarantees		18,307

The Company discounts notes and accounts receivable from time to time with banks. At the time of the discounting, all rights and privileges of holding the note are transferred to the banks. The Company removes the asset from its books and records a corresponding expense for the amount of the discount. The Company remains contingently liable on a portion of the amount outstanding in the event the note maker defaults.

			No provision has been made in the consolidated financial statements for these contingencies.

	B.	Capital Commitments

			BAK has commitments under construction contracts for the construction of factory, office, and employee residence buildings, amounting to $5,815 at March 31, 2006.

6.	SHARE-BASED COMPENSATION

	In December 2004, the FASB issued SFAS No. 123R, which requires compensation costs related to share-based transactions, including employee share options, to be recognized in the financial statements based on fair value. SFAS 123R revises SFAS No. 123, as amended, “Accounting for Stock-Based Compensation,” and supersedes APB No. 25, “Accounting for Stock Issued to Employees.”

	Effective October 1, 2005, the Company adopted the provisions of SFAS No. 123R using the modified prospective transition method. Under this transition method, the compensation cost recognized beginning October 1, 2005 is attributable to the options granted on May 16, 2005 based on the grant-date fair value estimated in accordance with the original provisions of SFAS No. 123. Compensation cost is recognized ratably over the related vesting period of the options.

	As a result of the adoption of SFAS No. 123R, the Company’s results for the quarter ended March 31, 2006 include incremental share-based compensation expense of $705, included as follows in the consolidated statement of operations:

	$ in thousands

Cost of goods sold		40
Selling expenses		63
General and administrative expenses		307
Research and development expenses		234

Share-based compensation expense before taxes		644
Income tax effect		61

Share-based compensation expense		705

	Since all of the options outstanding on March 31, 2006 were issued on May 16, 2005, there would have been no effect on the financial results for the three months ended March 31, 2005 had the fair value method as prescribed by SFAS No. 123 been applied by the Company.

Item 2. Management’s Discussion and Analysis or Plan of Operation

The following discussion should be read in conjunction with our consolidated financial statements and the notes thereto and the other financial information appearing elsewhere in this document. Our financial statements are prepared in U.S. dollars and are in accordance with accounting principles generally accepted in the United States. In addition to historical information, the following discussion and other parts of this document contain certain forward-looking information. When used in this discussion, the words “believes,” “anticipates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected due to a number of factors beyond our control. We do not undertake to publicly update or revise any of the forward-looking statements even if experience or future changes show that the indicated results or events will not be realized. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Factors that might cause actual results, performance or achievements to differ materially from those projected or implied in such forward-looking statements include, among other things: (i) the impact of competitive products; (ii) changes in law and regulations; (iii) adequacy and availability of insurance coverage; (iv) limitations on future financing; (v) increases in the cost of borrowings and unavailability of debt or equity capital; (vi) the effect of adverse publicity regarding our products; (vii) our inability to gain and/or hold market share; (viii) exposure to and expense of resolving and defending product liability claims and other litigation; (ix) consumer acceptance of our products; (x) managing and maintaining growth; (xi) customer demands; (xii) market and industry conditions including pricing and demand for products, (xiii) the success of product development and new product introductions into the marketplace; (xiv) the departure of key members of management; (xv) our ability to efficiently market our products; as well as other risks and uncertainties that are described from time to time in our filings with the Securities and Exchange Commission.

Net income does not reflect certain annual appropriations to reserve funds in accordance with PRC regulations. These appropriations are reflected in the statement of retained earnings as a reduction in retained earnings.

Except as otherwise indicated by the context, references in this Quarterly Report on Form 10-Q to “we,” “us,” or “our” are to the combined business of China BAK Battery, Inc. (“CBBI”) and its wholly-owned direct subsidiary, BAK International, Ltd. (“BAK International”) and BAK International’s wholly-owned subsidiaries, Shenzhen BAK Battery Co., Ltd. (“BAK Battery”) and BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”). References to “China” or to the “PRC” are references to the People’s Republic of China. All references to “dollars” or “$” refers to United States dollars.

Overview

CBBI is a holding company whose China-based subsidiaries, BAK International, BAK Battery and BAK Electronics, are focused on the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion rechargeable battery cells for use in a wide array of applications. We also have internal research and development facilities engaged primarily in furthering lithium ion and lithium polymer related technologies. We believe that our technologies allow us to offer batteries that are flexibly configured, lightweight and generally achieve longer operating time than many competing batteries currently available. We have focused on manufacturing a family of replacement lithium batteries for mobile phones. We also supply rechargeable lithium ion batteries for use in various other portable electronic applications, including high-power handset telephones, laptop computers, digital cameras, video camcorders, MP3 players and general industrial applications. Historically, we have manufactured four types of batteries: steel cell, aluminum cell, cylindrical cell and industrial batteries. In the fourth quarter of fiscal 2005, we began producing a fifth type of battery cell, lithium polymer, and in the second quarter of fiscal 2006, we began deliveries of our latest offering, high power cells. We deliver our products to packing plants operated by third parties where the bare cells are packed in accordance with specifications established by certain manufacturers of mobile phones and other electronic products. We operate sales and service branches in seven principal coastal cities and Beijing in the Peoples Republic of China. The majority of our income is generated from the sale of steel cells. However, we believe there is growth potential for aluminum and cylindrical cells because of their wide applications. Our current growth strategy includes entering into the original equipment manufacture (“OEM”) battery market for cellular telephone brands and other electronic products.

Critical Accounting Policies

In preparing our consolidated financial statements in conformity with accounting principles generally accepted in the United States, we use statistical analysis, estimates and projections that affect the reported amounts and related disclosures and may vary from actual results. We consider the following accounting policies to be both those that are most important to the portrayal of our financial condition and that require the most subjective judgment. If actual results differ significantly from management’s estimates and projections, there could be an effect on our financial statements.

Revenue Recognition, Returns and Warranties

Revenue from sales of our products is recognized upon shipment or delivery, depending on the sales order, provided that persuasive evidence of a sales arrangement exists, title and risk of loss have transferred to the customer, the sales amount is fixed and determinable, sales and value-added tax laws have been complied with, and collection of the revenue is reasonably assured. We reduce revenue based upon estimates of future credits to be granted to customers. Credits are granted for reasons such as product returns due to quality issues including product warranties claims, volume-based incentives, and other special pricing arrangements. Management utilizes our historical experience to estimate the allowance for product returns and warranty claims and revises those estimates periodically based on changes in actual experience, market conditions and contract terms.

In addition, management monitors collectability of accounts receivable and notes receivable primarily through review of the accounts receivable and notes receivable agings. When facts and circumstances indicate the collection of specific amounts or from specific customers is at risk, we assess the impact on amounts recorded for bad debts and, if necessary, will record a charge in the period such determination is made.

Inventory Valuation Allowances

Inventory is valued net of allowances for unsalable or obsolete raw materials, work-in-process and finished goods. Allowances are determined quarterly by comparing inventory levels of individual materials and parts to historical usage rates, current backlog and estimated future sales and by analyzing the age of inventory, in order to identify specific components of inventory that are judged unlikely to be sold. In addition to this specific identification process, statistical allowances are calculated for remaining inventory based on historical write-offs of inventory for salability and obsolescence reasons. Inventory is written-off in the period in which the disposal occurs. Actual future write-offs of inventory for salability and obsolescence reasons may differ from estimates and calculations used to determine valuation allowances due to changes in customer demand, customer negotiations, technology shifts and other factors.

Changes in Accounting Standards

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), which became effective for us on October 1, 2005. SFAS 123R revises FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 “Accounting for Stock Issued to Employees”. SFAS 123R requires all public and non-public companies to measure and recognize compensation expense for all stock-based payments for services received at the grant-date fair value, with the cost recognized over the vesting period (or the requisite service period). The impact of the adoption of SFAS 123R upon CBBI’s consolidated financial statements is consistent with the fair value disclosures included in CBBI’s September 30, 2005 consolidated financial statements.

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4,” which became effective for us beginning October 1, 2005. This standard clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted material should be expensed as incurred and not included in overhead. In addition, this standard requires that the allocation of fixed production overhead costs to inventory be based on the normal capacity of the production facilities. The implementation of this pronouncement did not have a material impact upon our financial results.

Results of operations for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005.

Revenues

Revenues increased to $38.2 million for the three months ended March 31, 2006 as compared to $25.9 million for same period of the prior year, an increase of $12.3 million or 47.7%. Our revenues increased during the period as a result of increased sales volumes, partially offset by a decline in unit selling prices. Revenues relating to steel case batteries increased to $18.8 million from $11.5 million in the prior year period, an increase of $7.4 million or 64.4%, due to increased sales volumes partially offset by lower selling prices.

Revenues from sales of aluminum case cell batteries increased to $14.3 million for the period as compared to $6.9 million in the prior year period, an increase of $7.4 million or 108.1%, due to increased sales volumes partially offset by lower sales prices. Revenues from sales of industrial batteries decreased to $2.4 million in the quarter, from $7.0 million a year ago, due to both lower sales volumes and lower unit selling prices. We also sold $2.6 million of high power cells in the second quarter of fiscal 2006, our first sales of this product. We were able to gain market share both domestically and internationally during the period because, in our belief, our production volume and technological advantage gives us an advantage over our competitors with regard to supply ability and cost. We also believe that our gain in market share was due in part to our decision to maintain low pricing, the improved quality of our products and the improvements we made in manufacturing efficiencies.

Gross Profit

Gross profit for the three months ended March 31, 2006 was $12.2 million or 32.0% of revenues as compared to gross profit of $5.6 million or 21.5% of revenues for the same period of the prior year. The increase in gross profit, as a percentage of revenues, resulted primarily from decreased unit manufacturing costs, stemming from a decrease in prices for most raw materials, and an increased yield in the manufacturing process. Steel case cell battery selling prices decreased by 5.2% during the period, while the cost of manufacturing steel case cell units decreased by 14.6%%, resulting in an overall increase in gross profit from 20.9% to 30.9% of revenues. In the aluminum case cell market, the average unit selling price decreased by 6.9% from last year and unit manufacturing costs decreased by 20.8%, thereby increasing gross profit from 17.0% to 30.2% of revenues. For industrial batteries, unit selling prices decreased by 26.6% from a year ago, while unit manufacturing costs decreased by 28.5%, resulting in an increase in gross profit from 28.7% to 30.0% of revenues. While we have historically sold our products primarily into the replacement battery market with lower selling prices and, consequently, lower gross profit margins, we are continuing to pursue a strategy of increasing sales into the higher profit margin OEM segment.

Continued vertical integration of the manufacturing process, volume discounts on increasing raw material purchases, increasing production efficiencies, and low labor costs collectively served to reduce manufacturing costs. We believe that we can continue to achieve cost savings from these activities that will help to offset potential replacement battery market selling price decreases during the rest of 2006.

Some entities include all costs associated with their distribution system in cost of goods sold while other companies may record a portion of their distribution costs in selling expense. Because of this disparity in financial reporting, gross margins between our company and other companies may not be comparable. With the exception of packaging, transportation and freight charges which we include under selling expenses, we believe we include most other costs of our distribution system in cost of goods sold.

Selling Expenses

Selling expenses increased to $1.3 million for the three month period ended March 31, 2006 as compared to $1.0 million for the same period of the prior year, an increase of $298,000 or 29.3%. As a percentage of revenues, selling expenses have decreased to 3.4% this year, from 3.9% last year. Salaries related to selling efforts increased to $553,000 from $530,000 for the same period of the prior year, an increase of $23,000. We had 72 employees engaged in sales and marketing on both March 31, 2006 and 2005. Share-based compensation included in selling expenses was $63,000 for the three months ended March 31, 2006. There was no comparable expense in the prior year since the options were issued in May 2005. Higher sales volumes increased packaging, transportation and supplies costs included in selling expenses by a total of $98,000 from the second quarter last year. We also incurred an additional $37,000 of exhibition and entertainment expenses this year in an effort to obtain orders to fill the recent production capacity expansion. Marketing or advertising costs consist primarily of promoting ourselves and our products through printed advertisements in trade publications, packaging and displaying our products through attendance of industry trade exhibitions. We do not pay slotting fees, engage in cooperative advertising programs, participate in buydown programs or similar arrangements. No material estimates are required to determine our marketing or advertising costs.

General and Administrative Expenses

General and administrative expenses increased to $2.1 million for the three months ended March 31, 2006 as compared to $723,000 for the same period of the prior year, an increase of $1.3 million or 186.6%. As a percentage of revenues, general and administrative expenses were 5.4% and 2.8% as of March 31, 2006 and March 31, 2005, respectively. Despite this increase, we believe that general and administrative expenses remain manageable relative to revenues. Share-based compensation included in general and administrative expenses was $306,000 for the three months ended March 31, 2006. There was no comparable expense in the prior year since the options were issued in May 2005. Professional fees and expenses increased $248,000 from the second quarter of last year, reflecting the additional costs of operating as a public company. Also included in general and administrative expense for the quarter ended March 31, 2006 is the write-off of the $418,000 remaining balance of a prepayment to the utility formerly supplying our electricity. The recent expansion of our facilities and workforce resulted in increased depreciation, office expenses, safety expenses, property taxes, supplies and utilities totaling $237,000 from a year ago. An increase of 154 general and administrative personnel from a year ago contributed another $122,000 to salaries and benefits.

Research and Development Expenses

Research and development expenses increased to $464,000 for the three months ended March 31, 2006 as compared to $166,000 for the same period of the prior year, an increase of $298,000 or 179.5%. Share-based compensation included in research and development expenses was $234,000 for the three months ended March 31, 2006. There was no comparable expense in the prior year since the options were issued in May 2005. Equipment purchases expensed to research and development also increased $51,000 from a year ago.

Bad Debts

Bad debts expense totaled $393,000 for the three months ended March 31, 2006 as compared to $294,000 for the same period of the prior year. As a percentage of revenues, bad debts expenses were 1.0% and 1.1% for the three months ended March 31, 2006 and 2005, respectively. The bad debt expense increase is primarily due to the increase in the bad debts reserve from $1.1 million or 3.4% of total accounts and notes receivable of $32.1 million at March 31, 2005 to $2.3 million or 3.8% of total accounts and notes receivable of $60.0 million at March 31, 2006. Management believes that the reserve for bad debts as of March 31, 2006 is adequate and will adjust future reserves as we gain more experience with our customers.

Operating Income

As a result of the above, operating income totaled $8.0 million for the three months ended March 31, 2006 as compared to operating income of $3.4 million for the same period of the prior year, an increase of $4.6 or 136.4%. As a percentage of revenues, operating income was 20.8% for the three months ended March 31, 2006 as compared to 13.0% for the same period of the prior year. The growth in operating income as a percentage of revenues was substantially due to the increase in gross profit.

Finance Costs

Finance costs increased to $651,000 for the three month period ended March 31, 2006 as compared to $572,000 for the same period of the prior year, an increase of $79,000 or 13.8%. The finance costs increase is primarily due to the interest costs during the period. We had $75.4 million in short term loans and notes payable as of March 31, 2006 as compared to $69.1 million outstanding as of March 31, 2005. Short term loans and notes payable are comprised of various short term bank loans and promissory notes, with interest ranging from 5.022% to 6.138%, and maturities of generally less than twelve months. The funds were used for working capital purposes.

Net Income

Primarily as a result of decreased manufacturing costs during the three month period ended March 31, 2006, we increased our net income to $7.0 million as compared to $2.6 million for the same period of the prior year, an increase of $4.4 million or 171.5%.

Results of operations for the six months ended March 31, 2006 as compared to the six months ended March 31, 2005.

Revenues

Revenues increased to $64.3 million for the six months ended March 31, 2006 as compared to $51.0 million for same period of the prior year, an increase of $13.3 million or 26.1%. Our revenues increased during the period as a result of increased sales volume, partially offset by a decline in unit selling prices. Revenues relating to steel case batteries increased to $33.2 million from $25.5 million in the prior year period, an increase of $7.7 million or 30.1%, due to increased sales volumes partially offset by lower selling prices. Revenues from sales of aluminum case cell batteries increased to $23.0 million for the period as compared to $13.4 million in the prior year period, an increase of $9.7 million or 72.2%, due to increased sales volumes partially offset by lower sales prices. Revenues from sales of industrial batteries decreased to $5.3 million for the first half of fiscal 2006, from $11.4 million a year ago, due to both lower sales volumes and lower unit selling prices. We also sold $2.6 million of high power cells in the first half of fiscal 2006, our first sales of this product.

Gross Profit

Gross profit for the six months ended March 31, 2006 was $19.2 million or 30.0% of revenues as compared to gross profit of $10.0 million or 19.5% of revenues for the same period of the prior year. The increase in gross profit, as a percentage of revenues, resulted primarily from decreased unit manufacturing costs stemming from a decrease in prices for most raw materials and an increased yield in the manufacturing process. Steel case cell battery selling prices decreased by 4.9% during the period, while the cost of manufacturing steel case cell units decreased by 17.7%, resulting in an overall increase in gross profit from 18.5% to 29.5% of revenues. In the aluminum case cell market, the average unit selling price decreased by 3.3% during the period from last year and unit manufacturing costs decreased by 18.2%, thereby increasing gross profit from 15.6% to 28.6% of revenues. For industrial batteries, unit selling prices decreased by 24.5% from a year ago, while unit manufacturing costs decreased by 28.8%, resulting in an increase in gross profit from 27.4% to 31.0% of revenues.

Selling Expenses

Selling expenses increased to $2.5 million for the six month period ended March 31, 2006 as compared to $1.8 million for the same period of the prior year, an increase of $714,000 or 39.1%. As a percentage of revenues, selling expenses have increased slightly to 3.9% this year, from 3.6% last year.

Salaries related to selling efforts increased to $1.2 million from $917,000 for the same period of the prior year, an increase of $234,000. Share-based compensation included in selling expenses was $172,000 for the six months ended March 31, 2006. There was no comparable expense in the prior year since the options were issued in May 2005. Higher sales volumes increased packaging, transportation and supplies costs included in selling expenses by a total of $171,000 from the first half of last year. Depreciation and maintenance and repairs also increased by $152,000 from a year ago due to the recent facilities expansion.

General and Administrative Expenses

General and administrative expenses increased to $3.9 million for the six months ended March 31, 2006 as compared to $1.9 million for the same period of the prior year, an increase of $2.0 million or 106.8%. As a percentage of revenues, general and administrative expenses were 6.0% and 3.7% as of March 31, 2006 and March 31, 2005, respectively. Despite increased general and administrative expense, we believe that general and administrative expenses remain manageable relative to revenues. Share-based compensation included in general and administrative expenses was $639,000 for the six months ended March 31, 2006. There was no comparable expense in the prior year since the options were issued in May 2005. Professional fees and expenses increased $410,000 from the first half of last year, reflecting the additional costs of operating as a public company. Also included in general and administrative expenses in the first half of fiscal 2006 is the write-off of the $418,000 remaining balance of a prepayment to the utility formerly supplying our electricity. The recent expansion of our facilities and workforce resulted in increased insurance, repairs and maintenance, depreciation, safety expenses, property taxes, supplies and utilities totaling $421,000 from a year ago.

Research and Development Expenses

Research and development expenses increased to $959,000 for the six months ended March 31, 2006 as compared to $186,000 for the same period of the prior year, an increase of $773,000 or 415.6%. Share-based compensation included in research and development expenses was $488,000 for the six months ended March 31, 2006. There was no comparable expense in the prior year since the optionswere issued in May 2005. Equipment purchases expensed to research and development increased $106,000 from the first half of last year. This increase also resulted from a $60,000 grant that partially offset the prior year’s expense,

Bad Debts

Bad debts expense totaled $649,000 for the six months ended March 31, 2006 as compared to $345,000 for the same period of the prior year. As a percentage of revenues, bad debts expenses were 1.0% and 0.7% for the six months ended March 31, 2006 and 2005, respectively. The bad debt expense increase is primarily due to the increase in the bad debts reserve from $1.1 million or 3.4% of total accounts and notes receivable of $32.1 million at March 31, 2005 to $2.3 million or 3.8% of total accounts and notes receivable of $60.0 million at March 31, 2006.

Operating Income

As a result of the above, operating income totaled $11.2 million for the six months ended March 31, 2006 as compared to operating income of $5.7 million for the same period of the prior year, an increase of $5.5 million or 96.2%. As a percentage of revenues, operating income was 17.4% for the six months ended March 31, 2006 as compared to 11.2% for the same period of the prior year. The growth in operating income as a percentage of revenues was substantially due to the increase in gross profit.

Finance Costs

Finance costs, primarily interest on our debt, increased to $1.0 million for the six month period ended March 31, 2006 as compared to $962,000 for the same period of the prior year, a increase of $74,000 or 7.7%. We had $75.4 million in short term loans and notes payable as of March 31, 2006 as compared to $69.1 million outstanding as of March 31, 2005.

Other Expenses (Income)

Other income was $311,000 for the six month period ended March 31, 2006, as compared to $25,000 of other expenses for the same period of the prior year, an improvement of $336,000. The other income increase is primarily due to BAK International’s short term investment in financial instruments during the period.

Net Income

Primarily as a result of decreased manufacturing costs during the six month period ended March 31, 2006, we increased our net income to $10.0 million as compared to $4.4 million for the same period of the prior year, an increase of $5.7 million or 129.9%.

Inventory

Inventory totaled $45.9 million as of March 31, 2006 as compared to $21.7 million as of September 30, 2005, an increase of $24.2 million. We built finished goods inventory by $10.8 million in preparation for the increased sales activities that began in the second quarter of fiscal 2006. Management believes that the finished goods inventory, approximating 2.5 months’ sales at March 31, 2006 levels is normal. We were also able to enjoy volume discounts from the increased level of raw material purchases.

Notes Receivable

We have modified our policy with respect to accounts receivable by allowing customers that have good credit ratings and business relationships with us to transfer a portion of their accounts receivable balances to notes receivable. As a result, notes receivable increased to $7.2 million as of March 31, 2006 from $484,000 as of September 30, 2005, an increase of $6.7 million. All of this increase was attributed to sales made since December 31, 2005 and the corresponding notes receivable are due by September 15, 2006. Management believes that this policy will better secure our receivables as well as provide the flexibility for us to discount our notes receivable in the future.

Liquidity and Capital Resources

We have historically financed our liquidity requirements from a variety of sources, including short term borrowings under bank credit agreements, promissory notes and issuance of capital stock. As of March 31, 2006, we had cash and cash equivalents of $33.2 million, as compared to $52.4 million as of September 30, 2005. Included in cash and cash equivalents are cash deposits that are pledged to banks in the amount of $25.2 million and $19.4 million at March 31, 2006 and September 30, 2005, respectively. Typically, banks will require borrowers to maintain deposits of approximately 20% to 100% of the outstanding loan balances. The individual bank loans have maturities ranging from 5 to 12 months which coincides with the periods the cash remains pledged to the banks.

We had a working capital surplus of $20.8 million as of March 31, 2006, as compared to $20.0 million as of September 30, 2005, an increase of $790,000. This increase was primarily attributable to the $13.9 million increase in accounts and notes receivable and the $24.2 million increase in inventories caused by the increase in sales activities, offset by the $6.2 million increase in short term bank loans and notes payable and the $19.3 million decrease in cash to finance the construction of the BAK Industrial Park and the acquisition of equipment, as well as the $12.4 million increase in accounts payable due to increased inventory purchases. We had short term borrowings maturing in less than one year of $75.4 million as of March 31, 2006, as compared to $69.1 million as of September 30, 2005, an increase of $6.3 million. We currently expect to be able to extend the maturities of our short-term debt once we formally acquire our certificate of land use right. If we are not able to do so, we will have to refinance such short-term debt as it becomes due or to repay that debt to the extent we have cash available from operations or from the proceeds of additional issuances of capital stock.

As of March 31, 2006, the principal outstanding under our credit facilities and lines of credit were as follows:

	Maximum Amount Available		Amount Borrowed

	(In thousands)
Comprehensive Credit Facilities:
Agricultural Bank of China	$	49,896	$	37,940
Shenzhen Development Bank		18,771		12,555
Shenzhen Commercial Bank		6,237		4,366
China Minsheng Bank		4,990		—
China CITIC Bank		16,278		—
Construction Bank of China		6,237		6,237

Subtotal - Credit Facilities	$	102,409		61,098

Lines of Credit:
Agricultural Bank of China				1,771
Shenzhen Development Bank				19
Shenzhen Commercial Bank				3,772
China Minsheng Bank				4,976
China CITIC Bank				3,734

Subtotal – Other Borrowings				14,272

Total Principal Outstanding			$	75,370

Lines of credit are outside of comprehensive credit facilities and are therefore shown separately.

During the three months ended March 31, 2006, we refinanced four of our credit facilities totalling $13.6 million, and entered into two new credit facilities totalling $8.6 million with existing lenders. The refinanced and new facilities provide for monthly interest payments at fixed annual interest rates from 5.22% to 5.481%, with principal repayments at maturities during the third calendar quarter of 2006. There were no changes in assets pledged or payment guarantees from September 30, 2005 as a result of these new facilities. In the future, we may be unable to obtain the same or similar terms for any refinancing of our short-term indebtedness, or be unable to renew our credit facilities on acceptable terms. If we fail to obtain debt or equity financing to meet our debt obligations, or fail to obtain extensions of maturity dates of these obligations as they become due, our overall liquidity and capital resources will be adversely affected.

We have completed the construction of 174,784 square meters of new facilities comprised of manufacturing facilities, warehousing and packaging facilities, dormitory space and administrative offices at the BAK Industrial Park. Of that space, 107,388 square meters are new manufacturing facilities. We have completed construction and put into use an additional administrative area, production facility, four manufacturing facilities, a warehouse and packaging facility, two dormitories and one dining hall. At present, we have no payment obligations related to these facilities, although we continue to make payments regarding the construction of the facility as costs arise. We do not own the tract of property on which we constructed the new manufacturing plant and related facilities. We have applied for, but have not obtained, a certificate of land use right for the property and those new facilities. After formal receipt of our land use right, we anticipate being able to extend the maturity of some or all of our short-term debt.

Off-Balance Sheet Transactions

BAK Battery had guaranteed the timely re-payment of principal and interest of three non-related parties to a bank and discounted certain notes receivable. The maximum amount of our exposure for those guaranties at March 31, 2006 was $18.3 million. No revenue, expenses or cash flows arose from these arrangements at anytime.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans. Although the interest rates, based on the banks’ prime rates, are fixed for the terms of the loans, the terms are typically five to twelve months and interest rates are subject to change upon renewal. There were no changes in interest rates for short-term bank loans renewed during the three months ended March 31, 2006. A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities at March 31, 2006 would decrease net income before provision for income taxes by $188,000 or 2.6% for the three months ended March 31, 2006. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

While our reporting currency is the U.S. Dollar, approximately 70% of our consolidated revenues and 90% of consolidated costs and expenses are denominated in Renminbi (“RMB”), with the balance denominated in U.S. Dollars. Substantially all of our assets are denominated in RMB except for cash, of which 5.8% is denominated in U.S. Dollars. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. Dollars and RMB. If the RMB depreciates against the U.S. Dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. Dollar financial statements will decline. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chairman and Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2006. Our Chairman and Chief Executive Officer and our Chief Financial Officer concluded that as of March 31, 2006 our disclosure controls and procedures (i) were designed and were effective to give reasonable assurance that the information required to be disclosed by us in reports that we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Commission, and (ii) were also effective to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions on required disclosure. The two Executive Officers responsible for the financial reporting and disclosure are in direct control of our books and records and are involved first-hand in the decision making process for material transactions.

There have been no significant changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2006, that has materially effected, or is reasonably likely to materially affect our internal controls over financial reporting, other than the following set of changes that our management began to implement in the fourth quarter of calendar year 2005:

(1) Engaging outside consultants with technical accounting expertise, as needed, to ensure that accounting personnel with adequate experience, skills and knowledge are directly involved in the review of our financial statements and how we account for complex, non-recurring transactions and those items for which we have restated our financial statements;

(2) Having additional senior accounting personnel with technical accounting expertise and providing additional training of our accounting staff;

(3) Involving both internal accounting personnel and outside consultants with technical accounting expertise, as needed, early in the evaluation of the application of generally accepted accounting principles in complex, non-recurring transactions;

(4) Documenting to standards established by senior accounting personnel and the principal accounting officer the review, analysis and related conclusions with respect to complex, non-recurring transactions and those items for which we have restated our financial statements; and

(5) Requiring senior accounting personnel and our outside consultants with technical accounting expertise to review complex, non-recurring transactions to evaluate and approve the accounting treatment for such transactions and those items for which we have restated our financial statements prior to issuance an any financial statements by us.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

We caution you that the following important factors, among others, in the future could cause our actual results to differ materially from those expressed in forward-looking statements made by or on behalf of us in filings with the Securities and Exchange Commission, press releases, communications with analysts, investors and oral statements. Any or all of our forward-looking statements in this quarterly report on Form 10-Q, and in any other public statements we make, may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below are important in determining future results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.

Risks Related to Our Business

We have significant short-term debt obligations, which mature in less than one year. Failure to extend those maturities of, or to refinance, that debt could result in defaults, in certain instances, and foreclosures on our assets.

At March 31, 2006, we had $75.370 million of short-term loans and notes payable maturing in less than one year, a substantial portion of which is secured by the pledge of certain of our assets. That collateral includes inventory, machinery and equipment, and cash and cash equivalents which, at March 31, 2006, were in the aggregate amount of $38.138 million. Failure to obtain extensions of the maturity dates of, or to refinance, these obligations or to obtain additional equity financing to meet these debt obligations would result in an event of default with respect to such obligations and could result in the foreclosure on the collateral. The sale of such collateral at foreclosure would result in a substantial disruption in our ability to produce products for our customers in the quantities required by customer orders or deliver products in a timely fashion, which could significantly lower our revenues and profitability. We may be able to refinance or obtain extensions of the maturities of all or some of such debt only on terms that significant restrict our ability to operate, including terms that place limitations on our ability to incur other indebtedness, to pay dividends, to use our assets as collateral for other financings, to sell assets or to make acquisitions or enter into other transactions. Such restrictions may adversely affect our ability to finance our future operations or to engage in other business activities. If we finance the repayment of our outstanding indebtedness by issuing additional equity or convertible debt securities, such issuances could result in substantial dilution to our stockholders.

Our indebtedness adversely affects our ability to fund our operations and to compete effectively.

The amount of our indebtedness to lenders, which was $75.370 million, as of March 31, 2006, is substantial compared to our assets, stockholders’ equity and our operating cash flow. That indebtedness limits our ability to fund our operations through our operating cash flow and to compete effectively. Among other things, our indebtedness:

	•	requires us to dedicate a substantial portion of our cash flow from operations to debt service payments, reducing our working capital and adversely affecting our ability to fund capital expenditures through operating cash flow;

	•	places us at a disadvantage compared with competitors that have proportionately less debt; and

	•	limits our ability to borrow additional funds in the future, if we need them, due to financial and restrictive covenants in our debt agreements.

Our manufacturing facilities are not insured against damage or loss.

Our operations and financial condition are solely dependent on the success of BAK Battery’s operations in China. As is the case with many manufacturing companies in the PRC, we conduct those operations in manufacturing facilities, using machinery and other related property, that we do not insure against damage or loss. We do not carry business interruption insurance. If we suffer any business interruption or material damage to, or the loss of, any of our manufacturing facilities, due to any cause, the loss would not be offset by any insurance proceeds, and if large enough, that loss could threaten the continued viability of our business.

We are and will continue to be under downward pricing pressures on our products from our customers and competitors.

We face downward pricing pressures from our customers and competitors, especially in the sales of replacement batteries. To retain our existing customers and gain new ones, we must continue to keep our unit prices low. In view of our need to maintain low prices on our products, our growth, profit margins and net income will suffer if we cannot effectively continue to control our manufacturing and other costs.

Our contracts with our customers are generally short-term and do not require the purchase of a minimum amount.

Our customers generally do not provide us with firm, long-term volume purchase commitments. Although we enter into manufacturing contracts with our customers who have continuing demand for a certain product, these contracts state terms such as payment method, payment period, quality standard and inspection and similar matters rather than provide firm, long-term commitments to purchase products from us. As a result of the absence of the long term contracts, we could have periods during which we have no or only limited orders for our products, but will continue to have to pay the costs to maintain our work force and our manufacturing facilities and to service our indebtedness without the benefit of current revenues.

We consistently face short lead times for delivery of products to customers. Failure to meet delivery deadlines in our production agreements could result in the loss of customers and damage to our reputation and goodwill.

We enter into production agreements with our customers prior to commencing production, which reduces our risk of cancellations. However, these production agreements typically contain short lead times for delivery of products, leading to production schedules that can strain our resources and reduce our profit margins on the products produced. Although we have increased our manufacturing capacity, we may lack sufficient capacity at any given time to meet all of our customers’ demands if they exceed the production capacity levels. We strive for rapid response to customer demand, which can lead to reduced purchasing efficiency and increased material costs. If we are unable to sufficiently meet our customers’ demands, we may lose our customers. Moreover, failure to meet customer demands may damage our reputation and goodwill.

Because of the short lead times in our production agreements, we may not be able to accurately or effectively plan our production or supply needs.

We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, facility requirements, personnel needs, and other resource requirements, based on our production agreements with our customers. Short lead times of our customers’ commitments to their own customers and the possibility of rapid changes in demand for their products reduce our ability to estimate accurately the future requirements of those customers for our products. Because many of our costs and operating expenses are fixed, a reduction in customer demand can harm our gross margins and operating results. We may also occasionally acquire raw materials without having customer orders based on a customer’s forecast or in anticipation of an order and to secure more favorable pricing, delivery or credit terms in view of the short lead times we often have under our customers’ orders. These purchases can expose us to losses from inventory carrying costs or inventory obsolescence.

We have not obtained the certificate of land use right for our BAK Industrial Park.

We do not own the tract of property on which we are constructing a new manufacturing plant and related facilities, which facilities are important to our future operations. We have applied for, but have not obtained, a certificate of land use right for the property and those new facilities. We are negotiating with the PRC government to obtain such a certificate and believe that we will obtain the certificate. If we are unsuccessful in doing so, we could be forced to vacate our current premises, would not be permitted to use the new manufacturing and other facilities we are constructing and could be required to relocate to new facilities. Such an event would cause a severe disruption in our ability to produce our products, resulting in the failure to fill customer orders, the loss of customer revenues and a resulting loss of revenues.

We face intense competition from other battery manufacturers, many of whom have significantly greater resources than do we.

We are subject to intense competition from manufacturers of traditional rechargeable batteries, such as nickel-cadmium batteries, from manufacturers of rechargeable batteries of more recent technologies, such as nickel-metal hydride and liquid electrolyte, other manufacturers of lithium ion batteries, as well as from companies engaged in the development of batteries incorporating new technologies. Other manufacturers of lithium ion batteries currently include Sanyo Electric Co., Sony Corp., Matsushita Electric Industrial Co., Ltd. (Panasonic), GS Group, NEC Corporation, Hitachi Ltd., LG Chemical Ltd., Samsung Electronics Co., Ltd., BYD Co. Ltd., Tianjin Lishen Battery Joint-Stock Co., Ltd., Henan Huanyu Group and Harbin Coslight Technology International Group Co., Ltd.

Several of these existing competitors have greater financial, personnel and capacity resources than we do and, as a result, these competitors may be in a stronger position to respond quickly to market opportunities, new or emerging technologies and changes in customer requirements. 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 research and development activities of solid-polymer lithium ion batteries have developed prototypes and are constructing commercial scale production facilities. The introduction of new products that are perceived as having more desirable qualities than our products and that gain market acceptance would lead to price erosion for our products, require greater marketing and advertising of our products or require greater research and development costs to develop competing products. If competitors develop manufacturing processes that are more efficient than ours, we may face downward pressure on pricing with resulting reductions in our gross profit for our products. Any such developments may require us to increase our research and development and related expenditures to develop competing technology or more efficient manufacturing processes.

We are dependent on a single line of products.

Our revenues are derived solely from the sale of our lithium ion batteries. The market for these products is characterized by changing technology and evolving industry standards, often resulting in product obsolescence or short product lifecycles. Although we believe our products are based on state-of-the-art technology, other technologies may become the standard for manufacturers of cellular telephones and other devices that use our batteries. In that instance, our products could be obsolete, requiring us to develop new products that compete effectively with the other products on the market. Our failure to identify and develop a commercially viable number of product lines that are sought by the market could adversely affect our growth opportunities and, ultimately, our viability. Because we do not have a diverse product offering that would enable us to sustain our business while seeking to develop new types of products, our business may not be able to recover if we experience a steep decline in demand for our current product offerings.

Our operations depend highly on Mr. Xianqian Li, our President and Chief Executive Officer and a small number of other executives.

The success of operations depends greatly on a small number of key managers, including Mr. Li, the President, Chief Executive Officer and Chairman of the Board of Directors of CBBI and the chief executive officer and sole director of BAK International and BAK Battery. The loss of the services of Mr. Li or any of the other senior executives of CBBI or BAK Battery could adversely affect our ability to conduct our business. Although we believe we would be able to find other managers to replace any of these managers, the search for such managers and the integration of such managers into our business will inevitably occur only over an extended period of time. During that time the lack of senior leadership could affect adversely our sales and manufacturing, as well as our research and development efforts. Mr. Li has held his positions with BAK Battery since the inception of its business, and our future growth and success very much depends on his continued involvement with our company. All of our senior managers have an employment agreement with CBBI, BAK International or BAK Battery.

Our operations depend on our ability to attract and retain a highly skilled group of managers and other personnel.

Because of the highly specialized, technical nature of our business, we must attract and retain a highly skilled group of managers and a sizeable workforce of technically competent employees. Although we do not experience unacceptable attrition among our technical staff and sales force, if we were to lose a substantial portion of such persons, our ability to effectively pursue our business strategy would be materially and negatively affected. Although we believe the pool of managers and workers having the necessary education, training and technical skills to fill any positions that may become open is sufficient for our needs, the labor market for such managers and workers is becoming more competitive and we could have to pay higher salaries and wages and provide greater benefits in order for us to attract the necessary workers.

We may not be able to effectively respond to rapid growth in demand for our products and of our manufacturing operations.

If we are successful in obtaining rapid market growth of our batteries, we will be required to deliver large volumes of quality products to customers on a timely basis at a reasonable cost to those customers. Meeting such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we produce products. Such demands would require more capital and working capital than we currently have available.

We extend relatively long payment terms for accounts receivable.

As is customary in the PRC, we extend relatively long payment terms and provide liberal return policies to our customers. As a result of the size of many of our orders, these extended terms 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. This failure to pay timely may defer or delay further product orders from us, which may adversely affect our cash flows, sales or income in subsequent periods.

We may not be able to finance the development of new products.

Our future operating results will depend to a significant extent on our ability to continue to provide new products that compare favorably on the basis of cost and performance with the products of our competitors, many of whom have design and manufacturing capabilities and technologies that compete well with our products. We are currently conducting research and development on a number of new products, activities requiring a substantial outlay of capital. To remain competitive, we must continue to incur significant costs in product development, equipment, and facilities and invest in research and development of new products. These costs may increase, resulting in greater fixed costs and operating expenses. All of these factors create pressures on our working capital and ability to fund our current and future manufacturing activities and the expansion of our business.

Lithium ion batteries pose certain safety risks that could affect our financial condition and results of operations.

Due to the high energy density inherent in lithium batteries, our batteries can pose certain safety risks, including the risk of fire. Although through our research, design, development and manufacturing processes we attempt to minimize safety risks related to our batteries, should an accident occur, whether at the manufacturing facilities or from the use of the products, it could result in significant production delays or product liability claims for damages resulting from injuries. As a result of limits imposed in our product liability insurance policy, such losses might not be covered by our insurance policy, and if large enough, could have a material and negative effect on our financial condition and results of operations.

We depend on certain suppliers of raw materials for the production of our products, and any disruption with those suppliers could delay product shipments and adversely affect our relationships with customers.

Certain materials used in products are available to us only from a limited number of suppliers. We currently maintain volume purchase agreements with our major suppliers. However, any interruption in deliveries from any such supplier could delay our product shipments and adversely affect our relationships with customers. We believe, however, that alternative suppliers could supply raw materials that could replace the materials currently used and that, if necessary, we would be able to redesign our products to make use of such alternatives.

We receive a significant portion of our revenues from a small number of customers.

Two of our customers individually accounted for approximately 10% of our revenues for the quarter ended March 31, 2006 and our five largest customers accounted for approximately 46.1% of our revenues in the quarter. 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.

Our business depends on our ability to protect our intellectual property effectively.

The success of our business depends in substantial measure on the legal protection of the patents and other proprietary rights in technology we hold. We hold patents in China and have patent applications pending in China and other countries regarding technologies important to our business. If (i) our pending patent applications do not result in the issuance of patents, (ii) the claims allowed under any existing patents are not sufficiently broad to protect our technology, or (iii) any patents issued to us are challenged, invalidated or circumvented, then the resulting ability of third parties to utilize the subject technology will adversely affect our business. We do not hold similar patents in other countries with respect to these technologies. Consequently, our ability to protect against the unauthorized use of those technologies outside of China is limited.

We claim proprietary rights in various unpatented technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes. We protect our proprietary rights in our products and operations through contractual obligations, including nondisclosure agreements. If these contractual measures fail to protect our proprietary rights, any advantage those proprietary rights provided to us would be negated.

Monitoring infringement of intellectual property rights is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our intellectual property and know-how, particularly in the PRC and other countries in which the laws may not protect our proprietary rights as fully as the laws of the United States. Accordingly, other parties, including competitors, may duplicate our products using our proprietary technologies. Pursuing legal remedies against persons infringing our patents or otherwise improperly using our proprietary information is a costly and time consuming process that would divert management’s attention and other resources from the conduct of our other business, could cause delays and other problems with the marketing and sales of our products, as well as delays in deliveries. Our business may be adversely affected by obsolete inventories as a result of changes in demand for our products and change in life cycles of our products.

Risks Related to Doing Business in China

Our operations are located in China. Changes in the political and economic policies of the Chinese government may adversely affect our operations.

Our business operations may be adversely affected by the political environment in the PRC. The PRC has operated as a socialist state since 1949 and is controlled by the Communist Party of China. In recent years, however, the government has introduced reforms aimed at creating a “socialist market economy” and policies have been implemented to allow business enterprises greater autonomy in their operations. Changes in the political leadership of the PRC may have a significant effect on laws and policies related to the current economic reforms program, other policies affecting business and the general political, economic and social environment in the PRC, including the introduction of measures to control inflation, changes in the rate or method of taxation, the imposition of additional restrictions on currency conversion and remittances abroad, and foreign investment. Moreover, economic reforms and growth in the PRC have been more successful in certain provinces in the PRC than in others, and the continuation or increases of such disparities could affect the political or social stability of the PRC.

Although we believe that the economic reform and the macroeconomic measures adopted by the Chinese government have had a positive effect on the economic development of China, the future direction of these economic reforms is uncertain and the uncertainty may decrease the attractiveness of our company as an investment, which may in turn materially adversely affect the price at which our stock trades.

The Chinese government exerts substantial influence over the manner in which we must conduct our business activities.

The PRC only recently has permitted provincial and local economic autonomy and private economic activities. The government of the PRC 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 adversely affected by changes in Chinese 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 compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions 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 or to nationalized ownership of all companies now privately owned, could have a significant effect on economic conditions in the PRC or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties or joint ventures.

We currently enjoy a reduced tax rate, and the loss of this benefit may adversely impact our net income.

Under PRC laws and regulations our PRC subsidiary BAK Battery enjoys a reduced enterprise income tax rate as a foreign invested enterprise and a high tech enterprise in an economic development zone. As such, under the current tax scheme, we did not owe any tax during the first two years following the time at which we became profitable, which tax-free period ended on December 31, 2003. After that time and through the 2009 calendar year, we have been and will be taxed on our enterprise income, which is equivalent to our net income before provision for income tax, at the rate of 7.5%, which is equal to 50% of the current 15% enterprise income tax rate currently applicable in Shenzhen. If we fail to qualify for a reduced tax program following the end of the 2009 calendar year, we would be required to pay tax at the full tax rate applicable in Shenzhen at that time.

We currently benefit from favorable local tax treatment, the loss of which would adversely affect our results of operations. The current enterprise income tax rate in Shenzhen is 15%, which is in addition to the taxes described above. The PRC could change the tax law to raise the enterprise income tax rate applicable in Shenzhen to the standard statutory tax rate in the PRC, which currently is 33%, which change would result in our incurring a substantially increased tax liability and a consequent reduction in our net income.

Future inflation in China may inhibit economic activity in China.

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past ten years, the rate of inflation in China has been as high as 20.7% and China has experienced deflation as low as minus 2.2%. These factors have led to the adoption by the PRC government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since 1995, high inflation may in the future cause the PRC government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China, and thereby adversely affect the market for our products.

Any recurrence of severe acute respiratory syndrome, or SARS, or another widespread public health problem, in the PRC could adversely affect our operations.

A renewed outbreak of SARS or another widespread public health problem in China, where all of our manufacturing facilities are located and where over 77% of our sales occur and in Shenzhen, where our operations are headquartered, could have a negative effect on our operations. Such an outbreak could have an impact on our operations as a result of:

	•	quarantines or closures of some of our manufacturing facilities offices, which would severely disrupt our operations,

	•	the sickness or death of our key officers and employees, and

	•	a general slowdown in the Chinese economy.

Any of the foregoing events or other unforeseen consequences of public health problems could adversely affect our operations.

Restrictions on currency exchange may limit our ability to receive and use our revenues effectively.

Because all of our revenues are in the form of Renminbi, the Chinese currency unit, any restrictions on currency exchanges may limit our ability to use revenue generated in Renminbi to fund any future business activities outside China. Although the Chinese government introduced regulations in 1996 to allow greater convertibility of the Renminbi 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 authorized to conduct foreign exchange business. In addition, conversion of Renminbi for capital account items, including direct investment and loans, is subject to government approval in China, and companies are required to open and maintain separate foreign exchange accounts for capital account items. If the currency exchange system prevents us from obtaining sufficient foreign currency, we may be unable to fund business activities outside China or otherwise make payments in dollars. Shortages in China in the availability of foreign currency may also restrict our ability to pay dividends. We cannot be certain that the Chinese regulatory authorities will not impose more stringent restrictions on the convertibility of the Renminbi, especially with respect to foreign exchange transactions.

The value of our common stock will be affected by the foreign exchange rate between Dollars and Renminbi.

To the extent that we need to convert dollars into Renminbi for our operational needs, should the Renminbi appreciate against the U.S. dollar at that time, our financial position and the price of our common stock may be adversely affected. Conversely, if we decide to convert our Renminbi into dollars for the purpose of paying dividends on our common stock or for other business purposes and the dollar appreciates against the Renminbi, the dollar equivalent of our earnings from our subsidiaries in China would be reduced.

Until 1994, the Renminbi experienced a gradual but significant devaluation against most major currencies, including dollars, and there was a significant devaluation of the Renminbi on January 1, 1994 in connection with the replacement of the dual exchange rate system with a unified managed floating rate foreign exchange system. Since 1994, the value of the Renminbi relative to the U.S. Dollar has remained stable and has appreciated slightly against the U.S. dollar. Countries, including the United States, have argued that the Renminbi is artificially undervalued due to China’s current monetary policies and have pressured China to allow the Renminbi to float freely in world markets. On July 21, 2005 the PRC government changed its policy of pegging the value of the Renminbi to the dollar. Under the new policy the Renminbi is permitted to fluctuate within a narrow and managed band against a basket of designated foreign currencies. This change in policy has resulted in an approximate 2.5% appreciation in the Renminbi against the dollar. While the international reaction to the Renminbi revaluation has generally been positive, there remains significant international pressure on the PRC government to adopt an even more flexible currency policy, which could result in further and more significant appreciation of the Renminbi against the dollar.

Any significant revaluation of the Renminbi may materially and adversely affect our revenues, cash flow, earnings and financial position, and the value of any dividends payable in dollars. For example, an appreciation of the Renminbi against the dollar would make any Renminbi denominated investment or expenditure more costly to us, to the extent that we use dollars that we must convert into Renminbi for such purpose.

We may be unable to enforce our legal rights due to policies regarding the regulation of foreign investments in China.

The PRC’s legal system is a civil law system based on written statutes, in which system decided legal cases have little value as precedents unlike the common law system prevalent in the United States. The PRC does not have a well-developed, consolidated body of laws governing foreign investment enterprises. As a result, the administration of laws and regulations by government agencies are subject to considerable discretion and variation on the part of the PRC government, including its courts, and may be subject to influence by external forces unrelated to the legal merits of a particular matter. China’s regulations and policies with respect to foreign investments are evolving. Definitive regulations and policies with respect to such matters as the permissible percentage of foreign investment and permissible rates of equity returns have not yet been published. As a result, we may not be aware of any violations of these policies and rules until some time after their violation. Statements regarding these evolving policies have been conflicting and any such policies, as administered, are likely to be subject to broad interpretation and discretion and to be modified, perhaps on a case-by-case basis. The uncertainties regarding such regulations and policies present risks that may affect our ability to achieve our business objectives. If we are unable to enforce any legal rights we may have under our contracts or otherwise, our ability to compete with other companies in our industry could be materially and negatively affected. In addition, any litigation in China may be protracted and result in substantial cost and diversion of resources and management attention.

You 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.

Almost all of our current operations are conducted in China. Moreover, all of our 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.

Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our PRC subsidiary’s ability to operate, including its ability to pay dividends.

The PRC State Administration of Foreign Exchange, or SAFE, issued a public notice in January 2005 concerning foreign exchange regulations on mergers and acquisitions in China. The public notice states that if an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to strict examination by the relevant foreign exchange authorities. The public notice also states that the approval of the relevant foreign exchange authorities is required for any sale or transfer by the PRC residents of a PRC company’s assets or equity interests to foreign entities, such as CBBI, for equity interests or assets of the foreign entities.

In April 2005, SAFE issued another public notice further explaining the January notice. In accordance with the April notice, if an acquisition of a PRC company by an offshore company controlled by PRC residents has been confirmed by a Foreign Investment Enterprise Certificate prior to the promulgation of the January notice, the PRC residents must each submit a registration form to the local SAFE branch with respect to their respective ownership interests in the offshore company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transaction or use of assets in China to guarantee offshore obligations. The April notice also provides that failure to comply with the registration procedures set forth therein may result in restrictions on our PRC resident stockholders and BAK International and BAK Battery, including their ability to distribute profits to CBBI. Pending the promulgation of detailed implementation rules, the relevant government authorities are reluctant to commence processing any registration or application for approval required under the SAFE notices.

Our business operations or future strategy could be adversely affected by the interpretations and implementation of the SAFE notices . For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, including remittance of dividends to CBBI and the making of foreign-currency-denominated borrowings.

Risks Related to our Common Stock

The market price for our common stock may be volatile.

The market price for our common stock is likely to be highly volatile and subject to wide fluctuations in response to factors including the following:

	•	the lack of depth and liquidity of the market for our common stock,

	•	actual or anticipated fluctuations in our quarterly operating results,

	•	announcements of new products or services by us or our competitors,

	•	changes in financial estimates by securities analysts,

	•	conditions in the lithium ion battery market,

	•	changes in the economic performance or market valuations of other companies involved in lithium ion battery production,

	•	our sales of common stock,

	•	investor perceptions of us and our business,

	•	changes in the estimates of the future size and growth rate of our markets,

	•	announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments,

	•	additions or departures of key personnel, and

	•	potential litigation, or conditions in the mobile telephone market.

In addition, the stock market in general, and the over-the-counter market in particular, have experienced significant price and volume fluctuations that have often been unrelated or disproportionate to the performance of listed companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance.

A large portion of our common stock is controlled by a small number of stockholders.

43.4% of our common stock is held by Xiangqian Li, our President and Chief Executive Officer and Chairman of our Board, and 44.6% of our common stock is held by our directors and executive officers, collectively. As a result, our directors and executive officers are able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions including business combinations. Furthermore, the current ratios of ownership of our common stock reduce the public float and liquidity of our common stock which can in turn affect the market price of our common stock.

Only a limited trading market for our common stock exists.

Historically, we have had limited trading in our common stock, in part, as a result of the limited public float of our stock and as a result of our operating history. Unless a substantial number of shares are sold by the selling stockholders and other CBBI stockholders into the open market, an active trading market for shares of our common stock may never develop. Without an active market in our shares, the liquidity of the stock could be limited and prices for the common stock would be depressed.

Our common stock is traded in the over-the-counter market through the Over-the-Counter Electronic Bulletin Board. Our common stock may never be included for trading on any stock exchange or through any other quotation system (including, without limitation, the NASDAQ Stock Market).

Sales of substantial amounts of our common stock in the market could cause the price to fall.

As there is only limited trading activity in our securities, the sale of a substantial amount of our common stock in the market over a relatively short period of time could result in significant fluctuations in the market price of our common stock and could cause our common stock price to fall. We have filed with the Securities and Exchange Commission (i) a registration statement on Form SB-2 (file number 333-122209), as amended, registering the resale of 13,639,916 shares of our common stock by certain selling stockholders as described therein and (ii) a registration statement on Form SB-2 (file number 333-130247), as amended, registering the resale of 8,531,852 shares of our common stock by certain selling stockholders as described therein. Each of these registration statements was declared effective by the Securities and Exchange Commission on March 30, 2006. Offers and sales of the shares covered by such registration statements by those selling stockholders could adversely affect the price for shares of our common stock in the open market.

Our common stock could be subject to additional regulation as a “penny stock,” which may reduce the liquidity of our common stock.

If the trading price of our common stock falls below $5.00 per share, the open-market trading of our common stock will be subject to the “penny stock” rules. The “penny stock” rules impose additional sales practice requirements on broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or, together with his or her spouse, $300,000). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of securities and have received the purchaser’s written consent to the transaction before the purchase.

Additionally, for any transaction involving a penny stock, unless exempt, the broker-dealer must deliver, before the transaction, a disclosure schedule prescribed by the SEC relating to the penny stock market. The broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements must be sent disclosing recent price information on the limited market in penny stocks. These additional burdens imposed on broker-dealers may restrict the ability of broker-dealers to sell the common stock and may affect a stockholder’s ability to resell the common stock.

Stockholders should be aware that, according to SEC Release No. 34-29093, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses.

We are obligated to indemnify our officers and directors for certain losses they suffer.

Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against liabilities, attorney’s fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us to the maximum extent permitted by Nevada law. If we are required to indemnify any persons under this policy, the amounts we would have to pay could be material, and we may be unable to recover any of these funds from any source.

We recently adopted amendments to our Bylaws that could entrench our Board of Directors and prevent a change in control.

Effective January 20, 2005, we adopted Amended and Restated Bylaws that (i) increased the percentage of stockholders required to call special meetings of stockholders from 10% to 30%, (ii) eliminated a provision allowing stockholders to fill vacancies in the Board if such vacancies were not filled by the Board, (iii) include a new provision providing that no contract or transaction between us and one or more of our directors or officers is void if certain criteria are met and (iv) allow for the amendment of our Bylaws by the Board of Directors rather than our stockholders. Collectively, these provisions may allow our Board of Directors to entrench the current members and prevent a change in control of our company in situations where a change in control would be beneficial to our stockholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

On March 23, 2006, Shenzen BAK Battery Co., Ltd. (“Shenzen BAK Battery”) entered into a Comprehensive Credit Facility Agreement of Maximum Amount (the “Agricultural Bank Credit Facility”) with Shatoujiao Branch, Agricultural Bank of China (“Agricultural Bank”). Shenzen BAK Battery may borrow up to RMB 400 million under the Agricultural Bank Credit Facility, which expires pursuant to its terms on March 17, 2007. In connection with the Agricultural Bank Credit Facility, Li Xiangqian entered into a Guaranty Contract of Maximum Amount (the “Agricultural Bank Guaranty”) on March 23, 2006, whereby Mr. Xiangqian will provide an unconditional guaranty of joint and several liability for all indebtedness of Shenzen BAK Battery under the Agricultural Bank Credit Facility. The Agricultural Bank Guaranty expires pursuant to its terms on March 17, 2008. Also in connection with the Agricultural Bank Credit Facility, Shenzen BAK Battery entered into four (4) separate loan agreements with Agricultural Bank.

The loan agreement dated March 20, 2006 provides for RMB 28 million at a fixed annual interest rate of 5.22% and expires pursuant to its terms on September 20, 2006. The loan agreement dated March 24, 2006 provides for RMB 40 million at a fixed annual interest rate of 5.22% and expires pursuant to its terms on September 24, 2006. The loan agreement dated March 28, 2006 provides for RMB 41 million at a fixed annual interest rate of 5.22% and expires pursuant to its terms on August 28, 2006. The loan agreement dated March 30, 2006 provides for RMB 39 million at a fixed annual interest rate of 5.22% and expires pursuant to its terms on July 30, 2006.

On February 9, 2006, Shenzen BAK Battery entered into a Comprehensive Credit Facility Agreement of Maximum Amount (the “CITIC Credity Facility”) with Shenzen Branch, China CITIC Bank (“CITIC”). Shenzen BAK Battery may borrow up to RMB 50 million under the CITIC Credit Facility, which expires pursuant to its terms on February 17, 2007. In connection with the CITIC Credit Facility, BAK International Limited entered into a Guaranty Contract of Maximum Amount (“CITIC Guaranty I”) on February 9, 2006, whereby BAK International will provide an unconditional guaranty of joint and several liability for all indebtedness of Shenzen BAK Battery under the CITIC Credit Facility. The CITIC Guaranty I expires pursuant to its terms on February 17, 2006. Also in connection with the CITIC Credit Facility, Mr. Xiangqian entered into a Guaranty Contract of Maximum Amount (the “CITIC Guaranty II”) on February 9, 2006, whereby Mr. Xiangqian will provide an unconditional guaranty of joint and several liability for all indebtedness of Shenzen BAK Battery under the CITIC Credit Facility. The CITIC Guaranty II expires pursuant to its terms on February 18, 2007.

On February 22, 2006, BAK Battery drew an additional 30 million RMB for production working capital under that certain Comprehensive Credit Facility Agreement (No. Jie 2005 Zong 1145042R) with Shenzen Branch, China Construction Bank, bearing interest at an annual rate of 5.481% and maturing August 23, 2006.

As previously disclosed in our 10-Q/A for the period ended December 31, 2005, by the written consent of holders of a majority of our shares of common stock (the “Majority Stockholders”), Dr. Huanyu Mao, Mr. Richard Goodner, Mr. Joseph R. Mannes and Mr. Jay J. Shi have been chosen to become directors. The Majority Stockholders also approved by written consent an amendment to our Articles of Incorporation and Bylaws which will give our board of directors (the “Board”) the authority to determine the number of directors on the Board. Finally, the Majority Stockholders approved by written consent the Stock Option Plan and Compensation Plan for Non-Employee Directors of China BAK Battery, Inc. An Information Statement under Section 14(c) of the Securities Exchange Act of 1934, as amended (the “Information Statement”), which included information relating to the foregoing actions, was sent to our stockholders on or about April 23, 2006. The foregoing actions will be effective on May 12, 2006, the twentieth calendar day after the mailing of the Information Statement.

Item 6. Exhibits.

	Exhibits

	10.1	Comprehensive Credit Facility Agreement of Maximum Amount by and between Shenzen BAK Battery Co., Ltd. and Shatoujiao Branch, Agricultural Bank of China dated March 23, 2006

	10.2	Guaranty Contract of Maximum Amount by and between Shenzen BAK Battery Co., Ltd. and Shatoujiao Branch, Agricultural Bank of China dated March 23, 2006

	10.3	Loan Agreement by and between Shenzen BAK Battery Co., Ltd. and Shatoujiao Branch, Agricultural Bank of China dated March 23, 2006

	10.4	Loan Agreement by and between Shenzen BAK Battery Co., Ltd. and Shatoujiao Branch, Agricultural Bank of China dated March 24, 2006

	10.5	Loan Agreement by and between Shenzen BAK Battery Co., Ltd. and Shatoujiao Branch, Agricultural Bank of China dated March 28, 2006

	10.6	Loan Agreement by and between Shenzen BAK Battery Co., Ltd. and Shatoujiao Branch, Agricultural Bank of China dated March 30, 2006

	10.7	Comprehensive Credit Facility Agreement Of Maximum Amount by and between Shenzhen BAK Battery Co., Ltd and Shenzhen Branch, China CITIC Bank dated February 9, 2006

	10.8	Guaranty Contract of Maximum Amount by and between BAK International Limited and Shenzhen Branch, China CITIC Bank dated February 9, 2006

	10.9	Guaranty Contract of Maximum Amount by and between Li Xiangqian and Shenzhen Branch, China CITIC Bank dated February 9, 2006

	31.1	Certification by CEO pursuant to 18 USC Section 1350 as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.

	31.2	Certification by CFO pursuant to 18 USC Section 1350 as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.

	32.1	Certification by CEO pursuant to 18 USC Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

	32.2	Certification by CFO pursuant to 18 USC Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 10, 2006

	CHINA BAK BATTERY, INC.


	By:	/s/ Li Xiangqian

		Li Xiangqian, Chief Executive Officer


	By:	/s/ Han Yongbin

		Han Yongbin, Chief Financial Officer