CBAK Energy Technology, Inc. - Quarter Report: 2014 December (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: December 31, 2014

[   ] 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: 001-32898

CHINA BAK BATTERY, INC.
(Exact Name of Registrant as Specified in Its Charter)

BAK Industrial Park, Meigui Street
Huayuankou Economic Zone
Dalian City, Liaoning Province,
China, 116422
(Address of principal executive offices, Zip Code)

(86)411-3918-5985
(Registrant’s telephone number, including area code)

_____________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]      No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]      No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [   ]      No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of February 17, 2015 is as follows:

CHINA BAK BATTERY, INC.

TABLE OF CONTENTS

i

PART I
FINANCIAL INFORMATION

ITEM 1.      FINANCIAL STATEMENTS.

CHINA BAK BATTERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2014 AND 2013

F-1

China BAK Battery, Inc. and Subsidiaries
Condensed consolidated balance sheets
As of September 30, 2014 and December 31, 2014
(In US$)

See accompanying notes to the condensed consolidated financial statements.

F-2

China BAK Battery, Inc. and Subsidiaries
Condensed consolidated statements of operations and comprehensive (loss) income
For the three months ended December 31, 2013 and 2014
(Unaudited)
(In US$ except for number of shares)

See accompanying notes to the condensed consolidated financial statements.

F-3

China BAK Battery, Inc. and Subsidiaries
Condensed consolidated statements of changes in shareholders’ equity
For the three months ended December 31, 2013 and 2014
(Unaudited)
(In US$ except for number of shares)

See accompanying notes to the condensed consolidated financial statements.

F-4

China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of cash flows
For the three months ended December 31, 2013 and 2014
(Unaudited)
(In US$)

See accompanying notes to the condensed consolidated financial statements.

F-5

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

1.      Principal Activities, Basis of Presentation and Organization

Principal Activities

China BAK Battery, Inc. (“China BAK”) is a corporation formed in the State of Nevada on October 4, 1999 as Medina Copy, Inc. The Company changed its name to Medina Coffee, Inc. on October 6, 1999 and subsequently changed its name to China BAK Battery, Inc. on February 14, 2005. China BAK and its subsidiaries (hereinafter, collectively referred to as the “Company”) are principally engaged in the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion (known as "Li-ion" or "Li-ion cell") high power rechargeable batteries. Prior to the disposal of BAK International Limited (“BAK International”) and its subsidiaries (see below), the batteries produced by the Company were for use in cellular telephones, as well as various other portable electronic applications, including high-power handsets telephones, laptop computers, power tools, digital cameras, video camcorders, MP3 players, electric bicycles, hybrid/electric vehicles, and general industrial applications. After the disposal of BAK International and its subsidiaries on June 30, 2014, the Company will focus on the manufacture, commercialization and distribution of high power lithium ion rechargeable batteries for use in cordless power tools, light electric vehicles, hybrid electric vehicles, electric cars, electric busses, uninterruptable power supplies and other high power applications.

The shares of the Company traded in the over-the-counter market through the Over-the-Counter Bulletin Board from 2005 until May 31, 2006, when the Company obtained approval to list its common stock on The NASDAQ Global Market, and trading commenced that same date under the symbol "CBAK".

Basis of Presentation and Organization

On November 6, 2004, BAK International, a non-operating holding company that had substantially the same shareholders as Shenzhen BAK Battery Co., Ltd (“Shenzhen BAK”), entered into a share swap transaction with the shareholders of Shenzhen BAK for the purpose of the subsequent reverse acquisition of the Company. The share swap transaction between BAK International and the shareholders of Shenzhen BAK was accounted for as a reverse acquisition of Shenzhen BAK with no adjustment to the historical basis of the assets and liabilities of Shenzhen BAK.

On January 20, 2005, the Company completed a share swap transaction with the shareholders of BAK International. The share swap transaction, also referred to as the “reverse acquisition” of the Company, was consummated under Nevada law pursuant to the terms of a Securities Exchange Agreement entered by and among China BAK, BAK International and the shareholders of BAK International on January 20, 2005. The share swap transaction has been accounted for as a capital-raising transaction of the Company whereby the historical financial statements and operations of Shenzhen BAK are consolidated using historical carrying amounts.

Also on January 20, 2005, immediately prior to consummating the share swap transaction, BAK International executed a private placement of its common stock with unrelated investors whereby it issued an aggregate of 1,720,087 shares of common stock for gross proceeds of $17,000,000. In conjunction with this financing, Mr. Xiangqian Li, the Chairman and Chief Executive Officer of the Company (“Mr. Li”), agreed to place 435,910 shares of the Company's common stock owned by him into an escrow account pursuant to an Escrow Agreement dated January 20, 2005 (the “Escrow Agreement”). Pursuant to the Escrow Agreement, 50% of the escrowed shares were to be released to the investors in the private placement if audited net income of the Company for the fiscal year ended September 30, 2005 was not at least $12,000,000, and the remaining 50% was to be released to investors in the private placement if audited net income of the Company for the fiscal year ended September 30, 2006 was not at least $27,000,000. If the audited net income of the Company for the fiscal years ended September 30, 2005 and 2006 reached the above-mentioned targets, the 435,910 shares would be released to Mr. Li in the amount of 50% upon reaching the 2005 target and the remaining 50% upon reaching the 2006 target.

Under accounting principles generally accepted in the United States of America (“US GAAP”), escrow agreements such as the one established by Mr. Li generally constitute compensation if, following attainment of a performance threshold, shares are returned to a company officer. The Company determined that without consideration of the compensation charge, the performance thresholds for the year ended September 30, 2005 would be achieved. However, after consideration of a related compensation charge, the Company determined that such thresholds would not have been achieved. The Company also determined that, even without consideration of a compensation charge, the performance thresholds for the year ended September 30, 2006 would not be achieved.

F-6

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

1.      Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

While the 217,955 escrow shares relating to the 2005 performance threshold were previously released to Mr. Li, Mr. Li executed a further undertaking on August 21, 2006 to return those shares to the escrow agent for the distribution to the relevant investors. However, such shares were not returned to the escrow agent, but, pursuant to a Delivery of Make Good Shares, Settlement and Release Agreement between the Company, BAK International and Mr. Li entered into on October 22, 2007 (the “Li Settlement Agreement”), such shares were ultimately delivered to the Company as described below. Because the Company failed to satisfy the performance threshold for the fiscal year ended September 30, 2006, the remaining 217,955 escrow shares relating to the fiscal year 2006 performance threshold were released to the relevant investors. As Mr. Li has not retained any of the shares placed into escrow, and as the investors party to the Escrow Agreement are only shareholders of the Company and do not have and are not expected to have any other relationship to the Company, the Company has not recorded a compensation charge for the years ended September 30, 2005 and 2006.

At the time the escrow shares relating to the 2006 performance threshold were transferred to the investors in fiscal year 2007, the Company should have recognized a credit to donated shares and a debit to additional paid-in capital, both of which are elements of shareholders’ equity. This entry is not material because total ordinary shares issued and outstanding, total shareholders’ equity and total assets do not change; nor is there any impact on income or earnings per share. Therefore, previously filed consolidated financial statements for the fiscal year ended September 30, 2007 will not be restated. This share transfer has been reflected in these financial statements by reclassifying the balances of certain items as of October 1, 2007. The balances of donated shares and additional paid-in capital as of October 1, 2007 were credited and debited by $7,955,358 respectively, as set out in the consolidated statements of changes in shareholders’ equity.

In November 2007, Mr. Li delivered the 217,955 shares related to the 2005 performance threshold to BAK International pursuant to the Li Settlement Agreement; BAK International in turn delivered the shares to the Company. Such shares (other than those issued to investors pursuant to the 2008 Settlement Agreements, as described below) are now held by the Company. Upon receipt of these shares, the Company and BAK International released all claims and causes of action against Mr. Li regarding the shares, and Mr. Li released all claims and causes of action against the Company and BAK International regarding the shares. Under the terms of the Li Settlement Agreement, the Company commenced negotiations with the investors who participated in the Company’s January 2005 private placement in order to achieve a complete settlement of BAK International’s obligations (and the Company’s obligations to the extent it has any) under the applicable agreements with such investors.

Beginning on March 13, 2008, the Company entered into settlement agreements (the “2008 Settlement Agreements”) with certain investors in the January 2005 private placement. Since the other investors have never submitted any claims regarding this matter, the Company did not reach any settlement with them.

Pursuant to the 2008 Settlement Agreements, the Company and the settling investors have agreed, without any admission of liability, to a settlement and mutual release from all claims relating to the January 2005 private placement, including all claims relating to the escrow shares related to the 2005 performance threshold that had been placed into escrow by Mr. Li, as well as all claims, including claims for liquidated damages relating to registration rights granted in connection with the January 2005 private placement. Under the 2008 Settlement Agreement, the Company has made settlement payments to each of the settling investors of the number of shares of the Company’s common stock equivalent to 50% of the number of the escrow shares related to the 2005 performance threshold these investors had claimed; aggregate settlement payments as of September 30, 2014 amounted to 73,749 shares. Share payments to date have been made in reliance upon the exemptions from registration provided by Section 4(2) and/or other applicable provisions of the Securities Act of 1933, as amended. In accordance with the 2008 Settlement Agreements, the Company filed a registration statement covering the resale of such shares which was declared effective by the SEC on June 26, 2008.

Pursuant to the Li Settlement Agreement, the 2008 Settlement Agreements and upon the release of the 217,955 escrow shares relating to the fiscal year 2006 performance threshold to the relevant investors, neither Mr. Li or the Company have any obligations to the investors who participated in the Company’s January 2005 private placement relating to the escrow shares.

As of December 31, 2014, the Company had not received any claim from the other investors who have not been covered by the “2008 Settlement Agreements” in the January 2005 private placement.

As the Company has transferred the 217,955 shares related to the 2006 performance threshold to the relevant investors in fiscal year 2007 and we also have transferred 73,749 shares relating to the 2005 performance threshold to the investors who had entered the “2008 Settlement Agreements” with us in fiscal year 2008, pursuant to “Li Settlement Agreement” and “2008 Settlement Agreements”, neither Mr. Li nor the Company had any remaining obligations to those related investors who participated in the Company’s January 2005 private placement relating to the escrow shares.

F-7

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

1.      Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

On December 27, 2013, Dalian BAK Power Battery Co., Ltd (“Dalian BAK Power”) was established as a wholly owned subsidiary of China BAK Asia Holding Limited (“BAK Asia”) with a registered capital of $30,000,000 (Note 17(i)). Pursuant to Dalian BAK Power’s article of association and relevant PRC regulations, BAK Asia was required to contribute $6,000,000 to Dalian BAK Power as capital (representing 20% of Dalian BAK Power’s registered capital) on or before December 27, 2015. Up to the date of this report, the Company has contributed $5,000,000 to Dalian BAK Power through an injection of a series of patents.

The Company’s condensed consolidated financial statements have been prepared under US GAAP.

These condensed consolidated financial statements are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these condensed consolidated financial statements, which are of a normal and recurring nature, have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The following (a) condensed consolidated balance sheet as of September 30, 2014, which was derived from the Company’s audited financial statements, and (b) the unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations, though the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying footnotes of the Company for the year ended September 30, 2014.

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. This basis of accounting differs in certain material respects from that used for the preparation of the books of account of the Company’s principal subsidiaries, which are prepared in accordance with the accounting principles and the relevant financial regulations applicable to enterprises with limited liability established in the PRC or Hong Kong. The accompanying condensed consolidated financial statements reflect necessary adjustments not recorded in the books of account of the Company's subsidiaries to present them in conformity with US GAAP.

The equity interest of BAK International and its wholly owned subsidiaries, namely Shenzhen BAK, BAK Battery (Shenzhen) Co., Ltd. (“BAK Battery”), BAK International (Tianjin) Ltd. (“BAK Tianjin”), Tianjin Chenhao Technological Development Limited (a subsidiary of BAK Tianjin established on May 8, 2014,“Tianjin Chenhao”), BAK Battery Canada Ltd. (“BAK Canada”), BAK Europe GmbH (“BAK Europe”) and BAK Telecom India Private Limited (“BAK India”) (collectively the “Disposal Group”) was disposed of effective on June 30, 2014 as a result of the foreclosure by Mr. Jinghui Wang (“Mr. Wang”), an unrelated third party, after Shenzhen BAK failed to repay the loans to Mr. Wang on March 31, 2014. The consolidated financial statements were consolidated up to the date of disposal.

After the disposal of BAK International Limited and its subsidiaries effective on June 30, 2014, and as of September 30, 2014 and December 31, 2014, the Company’s subsidiaries consisted of: i) China BAK Asia Holdings Limited (“BAK Asia”), a wholly owned limited liability company incorporated in Hong Kong on July 9, 2013; ii) Dalian BAK Trading Co., Ltd. (“Dalian BAK Trading”), a wholly owned limited company established on August 14, 2013 in the PRC; and iii) Dalian BAK Power Battery Co., Ltd. (“Dalian BAK Power”), a wholly owned limited liability company established on December 27, 2013 in the PRC.

The Company continued its business and continued to generate revenues from sale of batteries via subcontracting the production to BAK Tianjin, a former subsidiary before the completion of construction and commencement of operation of its facility in Dalian. BAK Tianjin is now a supplier of the Company and the Company does not have any significant benefits or liability from the operating results of BAK Tianjin except the normal risk with any major supplier.

Pursuant to a memorandum of understanding with the buyer of the Company’s former subsidiaries dated August 20, 2014, Mr. Xiangqian Li remains as a director of BAK International, Shenzhen BAK, BAK Battery and BAK Battery until Shenzhen BAK’s full settlement of its bank loans of $63.1 million expiring on various dates through March 2015. During this period, Mr. Li should not participate in any operational and managerial decision making of these entities.

F-8

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

1.      Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

The Company had a working capital deficiency, accumulated deficit from recurring net losses incurred for prior years and short-term debt obligations as of September 30, 2014 and December 31, 2014. These factors raise substantial doubts about the Company’s ability to continue as a going concern.

The Company obtained a short term bank loan of $4.8 million (RMB30 million) from Bank of Dandong for the period from August 19, 2014 to August 18, 2015. The short term loan is bearing fixed interest at 7.8% per annum and was guaranteed by Shenzhen BAK and Mr. Li. The Company expects to renew the bank loan in August 2015 upon maturity, and plans to raise further financing from local banks to meet its daily cash demands. However, there can be no assurance that the Company will be successful in obtaining this financing. The Company believes that with the significant reduction of liabilities and disposal of traditionally low margin battery business after the foreclosure of BAK International Limited, it can continue as a going concern and return to profitability.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty related to the Company’s ability to continue as a going concern.

Discontinued operations

The Company had also been engaged in property leasing and management of its Research and Development Centre in Shenzhen since its completion in July 2013. Following the disposal of BAK International and its subsidiaries on June 30, 2014, the Company no longer engaged in property leasing and management. Thus, this business is now accounted for as discontinued operations in the accompanying consolidated financial statements for all periods presented. Accordingly, revenues and expenses and cash flows related to the property leasing and management business have been appropriately reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented.

The following table presents the components of discontinued operations in relation to the property leasing and management business reported in the condensed consolidated statement of operations and comprehensive loss for the three months ended December 31, 2013:

F-9

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

1.      Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

Recently Issued Accounting Standards

In April 2014, the FASB issued ASU 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Entities may “early adopt” the guidance for new disposals. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" which clarifies and improves the principles for recognizing revenue and develops a common revenue standard for United States generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) that among other things, improves comparability of revenue recognition practices and provides more useful information to users of financial statements through improved disclosure requirements. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently reviewing the effect of ASU 2014-09 on its revenue recognition.

In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718)" which provides explicit guidance on the treatment of awards with performance targets that could be achieved after the requisite service period. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going concern (Subtopic 205-40) which provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. This guidance in ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.

In November 2014, FASB issued Accounting Standards Update No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force).The amendments permit the use of the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate, or OIS) as a benchmark interest rate for hedge accounting purposes. Public business entities are required to implement the new requirements in fiscal years (and interim periods within those fiscal years) beginning after December 15, 2015. All other types of entities are required to implement the new requirements in fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016. The Company does not expect the adoption of ASU 2014-16 to have material impact on its consolidated financial statement.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

F-10

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

These amounts are interest-free, unsecured and repayable on demand. These unpaid balance from BAK Tianjin has been settled subsequent to December 31, 2014 primarily in the form of provision of property, plant and equipment to the Company in January 2015.

As of September 30, 2014 and December 31, 2014, the Company has provided $1.8 million of allowance for doubtful accounts.

F-11

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

Depreciation expense for the three months ended December 31, 2013 and 2014 is included in the condensed consolidated statements of operations as follows:

Construction in progress as of September 30, 2014 and December 31, 2014 was mainly comprised of capital expenditures for the construction of the facilities and production lines of Dalian BAK Power.

For the three months ended December 31, 2013 and 2014, the Company capitalized interest of $233,080 and $97,261 respectively to the cost of construction in progress.

F-12

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

During the three months ended December 31, 2013 and 2014, interest expense of $1,543,968 and nil, respectively, was incurred on the Company’s other short-term loans.

F-13

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

F-14

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

(a)      Income taxes in the condensed consolidated statements of comprehensive loss (income)

The Company’s provision for income taxes consisted of:

United States Tax
China BAK is subject to a statutory tax rate of 35% under the United States of America tax law. No provision for income taxes in the United States or elsewhere has been made as China BAK had no taxable income for the three months ended December 31, 2013 and 2014.

Hong Kong Tax
BAK Asia and BAK International are subject to Hong Kong profits tax rate of 16.5% and did not have any assessable profits arising in or derived from Hong Kong for the three months ended December 31, 2013 and 2014 and accordingly no provision for Hong Kong profits tax was made in these periods.

PRC Tax
The Company’s subsidiaries in China are subject to enterprise income tax at 25% for the three months ended December 31, 2013 and 2014.

Canada States Tax
BAK Canada was subject to statutory tax rate of 38% under Canada tax law. No provision for income taxes in Canada has been made as BAK Canada had no taxable income for the three months ended December 31, 2013.

German States Tax
BAK Europe was subject to a 25% statutory tax rate under Germany tax law. No provision for income taxes in Germany has been made as BAK Europe had no taxable income for the three months ended December 31, 2013.

India Tax
BAK India was subject to a 30% statutory tax rate under India tax law. No provision for income taxes in India has been made as BAK India had no taxable income for the three months ended December 31, 2013.

F-15

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

(b)      Deferred tax assets and deferred tax liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of  September 30, 2014 and December 31, 2014 are presented below:

As of September 30, 2014 and December 31, 2014, the Company’s U.S. entity had net operating loss carry forwards of $35,318,443, available to reduce future taxable income which will expire in various years through 2034 and the Company’s PRC subsidiaries had net operating loss carry forwards of $690,821 and $693,520 which will expire in various years through 2019. Management believes it is more likely than not that the Company will not realize these potential tax benefits as these operations will not generate any operating profits in the foreseeable future. As a result, a valuation allowance was provided against the full amount of the potential tax benefits.

The Company did not provide for deferred income taxes and foreign withholding taxes on the cumulative undistributed earnings of foreign subsidiaries as of September 30, 2014 and December 31, 2014 of approximately of nil and $17.3 million, respectively. The cumulative distributed earnings of foreign subsidiaries were included in accumulated deficit and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes or applicable withholding taxes, related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if management concluded that such earnings will be remitted in the future.

As of September 30, 2014 and December 31, 2014, the Company had no material unrecognized tax benefits which would favorably affect the effective income tax rates in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three months ended December 31, 2013 and 2014, and no provision for interest and penalties is deemed necessary as of December 31, 2014 and September 30, 2014.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion.

F-16

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

The weighted average grant-date fair value of options granted on June 22, 2009 was $12.30 per share. The Company recorded non-cash share-based compensation expense of $32,932 and nil for the three months ended December 31, 2013 and 2014, respectively.

As of December 31, 2014, there were no unrecognized compensation costs related to the above non-vested share options.

F-17

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

Note: Including 85,000 and 100,000 vested restricted shares not yet issued to Mr. Xiangqian Li as of December 31, 2013 and 2014, respectively.

For the three months ended December 31, 2013, the outstanding 24,600 stock options and 15,000 restricted shares were anti-dilutive and excluded from diluted loss per share.

For the three months ended December 31, 2014, the outstanding 4,200 stock options were anti-dilutive and excluded from diluted earnings per share.

F-18

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

(ii)      Litigation

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal proceeding set forth below, the Company is currently not aware of any such legal proceedings or claims that the Company believe will have an adverse effect on our business, financial condition or operating results:

An individual named Steven R. Ruth filed suit against China BAK Battery, Inc. in United States District Court for the Western District of Texas in 2013 alleging breach of contract. The Company did not receive notice of this lawsuit and the plaintiff sought a default judgment, which the court granted in January 2014. Accordingly, the court entered judgment in favor of Mr. Ruth in the amount of $553,774 inclusive of costs and attorneys’ fees (the “First Judgment”)

Subsequent to the entry of the First Judgment, Mr. Ruth has made efforts to have the judgment enforced in Canada. On September 19, 2014, Mr. Ruth also filed a second complaint in the United States District Court for the Western District of Texas. On November 12, 2014, a second default judgment was entered against the Company in the amount of $553,774 for the First Judgment plus an additional $7,550 in attorneys’ fees. The second judgment is inclusive of the amounts ordered in the First Judgment. BAK International thereafter agreed to indemnify the Company from any expenses, losses and damages that were incurred and will be incurred by the Company due to the lawsuit filed by Mr. Ruth.

F-19

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

* Comprised less than 10% of net revenue for the respective period.

The Company had two customers that individually comprised 10% or more of accounts receivable as of September 30, 2014 and December 31, 2014 as follows:

F-20

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three months ended December 31, 2013 and 2014
(In US$ except for number of shares)
(Unaudited)

Net revenues by geographic area:

Substantially all of the Company’s long-lived assets are located in the PRC.

F-21

ITEM 2.      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. Our financial statements are prepared in U.S. dollars and in accordance with U.S. GAAP.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A, “Risk Factors” described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context and for the purposes of this report only, references in this report to:

• “Company”, “we”, “us” and “our” are to the combined business of China BAK Battery, Inc., a Nevada corporation, and its consolidated subsidiaries;

• “BAK Asia” are to our Hong Kong subsidiary, China BAK Asia Holdings Limited;

• “Dalian BAK Trading” are to our PRC subsidiary, Dalian BAK Trading Co., Ltd.;

• “Dalian BAK Power” are to our PRC subsidiary, Dalian BAK Power Battery Co., Ltd;

• “China” and “PRC” are to the People’s Republic of China;

• “RMB” are to Renminbi, the legal currency of China;

• “U.S. dollar”, “$” and “US$” are to the legal currency of the United States;

• “SEC” are to the United States Securities and Exchange Commission;

• “Securities Act” are to the Securities Act of 1933, as amended; and

• “Exchange Act” are to the Securities Exchange Act of 1934, as amended.

1

Overview

Upon the commencement of commercial operations of our Dalian manufacturing facilities, which is expected to be in March 2015, we will be engaged in the business of developing, manufacturing and selling new energy high power lithium batteries, which are mainly used in the following applications:

• Electric vehicles (“EV”), such as electric cars, electric buses, hybrid electric cars and buses;
• Light electric vehicles (“LEV”), such as electric bicycles, electric motors, sight-seeing cars; and
• Electric tools, energy storage, uninterruptible power supply, and other high power applications.

The construction of our Dalian facilities is nearly completed and we will commence the trial production in early March 2015. We received most of the operating assets, including customers, employees, patents and technologies of our former subsidiary, BAK International (Tianjin) Ltd. (“BAK Tianjin”). Also, the assets were acquired in exchange for a reduction in receivables from former subsidiaries. We have outsourced and will continue to outsource our production to BAK Tianjin or other manufacturers until our Dalian manufacturing facility begins its commercial operations excepted in March 2015. As of December 31, 2014, Dalian BAK Power has generated revenues of approximately $3.1 million from the sale of batteries manufactured by BAK Tianjin under outsourcing arrangements.

We had experienced net losses from continuing operations during the past two fiscal years. We generated revenues of $3.1 million and $41.2 million for the three months ended December 31, 2014 and 2013, respectively. We incurred a net loss of $5.3 million during the three months ended December 31, 2013. During the three months ended December 31, 2014, we recorded a net profit of $17.4 million, including a one-time government subsidy of $23.4 million to finance the projected operating loss incurred during the move and construction of our new facilities in Dalian. As of December 31, 2014, we had an accumulated deficit of $124.4 million and net assets of $12.9 million. We had a working capital deficiency and accumulated deficit from recurring net losses incurred for the current and prior years and significant short-term debt obligations maturing in less than one year as of December 31, 2014.

In October 2014, we received from Dalian government a subsidy of RMB46.2 million (approximately $7.4 million) for costs of land use rights relating to the new manufacturing site in Dalian. We also obtained a short term bank loan of RMB30 million (approximately $4.9 million) with a one-year term from Bank of Dandong in August 2014. The short term bank loan is bearing a fixed interest rate at 7.8% per annum and is guaranteed by Mr. Xiangqian Li, our CEO, and Shenzhen BAK Battery Co., Ltd., our former subsidiary (“Shenzhen BAK”). We plan to renew this loan upon maturity, and plan to raise additional funds in the future to meet our daily cash demands. In the meanwhile, due to the growing environmental pollution problem, the Chinese government is currently providing vigorous support to the new energy facilities and vehicles. It is expected that we will be able to secure more potential orders from the new energy market, especially from the electric car market. We believe with the significant reduction of liabilities and disposal of traditionally low margin battery business, supported by the future market demand in high power lithium ion products, we can continue as a going concern and return to profitability.

First Quarter Financial Performance Highlights

The following are some financial highlights for the first quarter of our fiscal year 2015:

• Net revenues: Net revenues decreased by $38.1 million, or 92.5%, to $3.1 million for the three months ended December 31, 2014, from $41.2 million for the same period in 2013.

• Gross profit: Gross profit was $0.4 million, representing a decrease of $2.2 million, or 84.6%, for the three months ended December 31, 2014, from $2.6 million for the same period in 2013.

• Operating loss: Operating loss was $0.1 million for the three months ended December 31, 2014, reflecting an improvement of $2.6 million from an operating loss of $2.7 million for the same period in 2013.

• Net profit (loss) from continuing operations: Net profit from continuing operations was $17.4 million for the three months ended December 31, 2014, representing an improvement of $29.4 million from a net loss from continuing operations of $6.1 million for the same period in 2013.

• Income from discontinued operations: No income was generated from our discontinued operations for the three months ended December 31, 2014, compared to a net profit of $0.9 million for the same period in 2013.

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• Fully diluted earnings (loss) per share: Fully diluted earnings per share was $1.37 for the three months ended December 31, 2014, as compared to fully diluted loss per share of $0.42 for the same period in 2013.

Financial Statement Presentation

Net revenues. Our net revenues from our continuing operations of sale of batteries represent the invoiced value of our products sold, net of value added taxes, or VAT, sales returns, trade discounts and allowances. We are subject to VAT, which is levied on most of our products at the rate of 17% on the invoiced value of our products. A provision for sales returns is recorded as a reduction of revenue in the same period that revenue is recognized. The provision for sales returns represents our best estimate of the amount of goods that will be returned from our customers based on historical sales return data.

Revenue from our discontinued operations represents rental income for commercial property leases and management and is recognized on a straight-line basis over the respective lease terms.

Cost of revenues. Cost of revenues consists primarily of material costs, employee remuneration for staff engaged in production activity, share-based compensation, depreciation and related expenses that are directly attributable to the production of products. Cost of revenues also includes write-downs of inventory to lower of cost or market. Cost of revenues from the sales of battery packs includes the fees we pay to pack manufacturers for assembling our prismatic cells into battery packs.

Research and development expenses. Research and development expenses primarily consist of remuneration for R&D staff, share-based compensation, depreciation and maintenance expenses relating to R&D equipment, and R&D material costs.

Sales and marketing expenses. Sales and marketing expenses consist primarily of remuneration for staff involved in selling and marketing efforts, including staff engaged in the packaging of goods for shipment, advertising cost, depreciation, share-based compensation and travel and entertainment expenses. We do not pay slotting fees to retail companies for displaying our products, engage in cooperative advertising programs, participate in buy-down programs or similar arrangements. No material estimates are required by management to determine our actual marketing or advertising costs for any period.

General and administrative expenses. General and administrative expenses consist primarily of employee remuneration, share-based compensation, professional fees, insurance, benefits, general office expenses, depreciation, liquidated damage charge and bad debt expenses.

Impartment charge on property, plant and equipment. Impairment charge consists primarily of impairment losses for long-lived assets. These losses reflect the amounts by which the carrying values of these assets exceed their estimated fair value as determined by their estimated future discounted cash flows.

Government grant income. Government grant income represents the government subsidies received as part of our income unless the subsidies received are earmarked to compensate the specific expenses, which have been accounted for by offsetting the specific expenses, such as research and development expense, interest expenses and removal costs. Unearned government subsidies received are deferred for recognition until the criteria for such recognition could be met. Grants applicable to land are amortized over the life of the depreciable facilities constructed on it. For research and development expenses, we match and offset the government grants with the expenses of the research and development activities as specified in the grant approval document in the corresponding period when such expenses are incurred.

Finance costs, net. Finance costs consist primarily of interest income and interest on bank loans and other short term loans, net of capitalized interest.

Income tax expenses. Since Shenzhen BAK was acknowledged as a New and High technology enterprise, it was entitled to a preferential tax rate of 15%. BAK Battery (Shenzhen) Co., Ltd. (“BAK Battery”), our other former subsidiary, was subject to an income tax rate of 25%. Both companies did not incur any enterprise income tax for the calendar years 2013 and 2014 due to the current tax losses carried forward from calendar years 2011 and 2012. BAK Tianjin was paying no enterprise income tax due to cumulative tax losses for the three months ended December 31, 2013. Our former Canadian, German, Indian, and Hong Kong subsidiaries-BAK Canada, BAK Europe, BAK India and BAK International were subject to profits tax in their respective countries at rates of 38%, 25%, 30%, and 16.5%, respectively. However, because they did not have any assessable income derived from or arising in those countries, they had not paid any such tax for the three months ended December 31, 2013.

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Dalian BAK Trading and Dalian BAK Power are subject to an income tax rate of 25%. Both companies did not incur any enterprise income tax since their establishment.

Pursuant to the Provisional Regulation of China on Value Added Tax and its implementing rules, all entities and individuals that are engaged in the sale of goods, the provision of repairs and replacement services and the importation of goods in China are generally required to pay VAT at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. Further, when exporting goods, the exporter is entitled to some or all of the refund of VAT that it has already paid or borne. Our imported raw materials that are used for manufacturing exported products and deposited in bonded warehouses are exempt from import VAT.

Results of Operations

Comparison of Three Months Ended December 31, 2014 and 2013

The following tables set forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of net revenues.

(All amounts, other than percentages, in thousands of U.S. dollars)

Net revenues. Net revenues were $3.1 million for the three months ended December 31, 2014, as compared to $41.2 million for the same period in 2013, representing a decrease of $38.1 million, or 92.5% . The decrease was primarily attributable to the disposal of BAK International and its subsidiaries that manufactured prismatic, cylindrical and lithium polymer cells. After June 30, 2014, we generated revenue from sales of high-power lithium battery cells manufactured by BAK Tianjin under our outsourcing arrangements with them.

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The following table sets forth the breakdown of our net revenues by battery cell type.

(All amounts in thousands of U.S. dollars)

The following table sets forth the breakdown of our net revenues from reconditioned and normal products for the three months ended December 31, 2013. We did not generate any sales from reconditioned products during the three months ended December 31, 2014.

The following table sets forth certain information related to high-power lithium battery cells for the three months ended December 31, 2013 and 2014, respectively.

Sales from high-power lithium battery cells for the three months ended December 31, 2014 decreased by $0.8 million, or 20.5%, from $3.9 million for the quarter ended December 31, 2013 to $3.1 million in the same period of 2014. The decrease was mainly attributable to the reduction of average unit selling price from $1.24 for the three months ended December 31, 2013 to $0.93 for the same period in 2014 as a result of a change of our product mix from the sale of high-power lithium cells for light electric vehicles in 2013 to those used for uninterruptable power supplies with a relatively lower selling unit price in 2014.

Cost of revenues. Cost of revenues decreased to $2.7 million for the three months ended December 31, 2014, as compared to $38.6 million for the same period in 2013, a decrease of $35.9 million, or 93.1% . Included in cost of revenues were write downs of obsolete inventories of $4.6 million for the three months ended December 31, 2013 and nil for the same period of 2014. We write down the inventory value whenever there is an indication that they are impaired. However, further write-downs may be necessary if market conditions continue to deteriorate. Also, as we disposed of the major subsidiaries which generated most of our sales in 2013, our sales revenue and cost of sales decreased substantially in the same period 2014.

Gross profit. Gross profit for the three months ended December 31, 2014 was $0.4 million, or 13.2% of net revenues, as compared to a gross profit of $2.6 million, or 6.4% of net revenues, for the same period in 2013. Our improvement of gross profit was largely due to the fact that there was no write-down of inventory or reconditioned products being sold at a loss during the first quarter of fiscal 2015 as compared to the same period of 2013.

5

Research and development expenses. Research and development expenses decreased to $0.05 million for the three months ended December 31, 2014, as compared to $1.3 million for the same period in 2013, a decrease of $1.2 million, or 96.0% . This decrease was mainly because we only carried out quality control and did not incur any overseas sales or conduct any R&D project after the disposal of BAK International. Therefore, no certification fees were incurred for overseas sales and no materials consumed for R&D projects in fiscal year 2015.

Sales and marketing expenses. Sales and marketing expenses decreased to $0.02 million for the three months ended December 31, 2014, as compared to $1.5 million for the same period in 2013, a decrease of $1.43 million, or 98.7%, primarily due to our disposal of former subsidiaries which contributed most of our prior period expense. As a percentage of revenues, sales and marketing expenses have decreased to 0.6% for the three months ended December 31, 2014, from 3.5% for the same period in 2013, primarily because we incurred minimal sales and marketing activities in this quarter until late December 2014 when we set up our new sales team at our Dalian facilities.

General and administrative expenses. General and administrative expenses decreased to $0.5 million, or 15.7% of revenues, for the three months ended December 31, 2014, as compared to $4.2 million, or 10.2% of revenues, for the same period in 2013, a decrease of $3.7 million, or 88.5% . The primary reason for the decrease was the reduction of head count and related expenses for the three months ended December 31, 2014 following the disposal of BAK International and its subsidiaries in June 2014.

Operating loss. As a result of the above, our operating loss totaled $0.1 million for the three months ended December 31, 2014, as compared to $2.7 million for the same period in 2013, an improvement of $2.6 million, or 94.7% .

Finance cost, net. As we are in the process of constructing our Dalian site, interest expenses incurred on bank borrowings were capitalized as construction in progress during the quarter ended December 31, 2014. In the same period of the prior year, we incurred interest expense on our bank borrowings and loans from unrelated third parties.

Government grant income. Government grant income increased to $23.4 million for the three months ended December 31, 2014, as compared to $33,000 for the same period last year. This was mainly due to the recognition of the subsidy of $23.4 million from the Management Committee of Dalian Economic Zone granted to finance the projected operating loss incurred during the move and construction of our new facilities in Dalian.

Income tax expense. Income tax expense was $5.8 million for the three months ended December 31, 2014 due to the deferred tax impact of the government subsidies recognized, as compared to $16,000 income tax expense for the same period in 2013.

Income from discontinued operations, net of tax. Income from discontinued operations, net of tax represents the income from the leasing and management of our Research and Development Centre in Shenzhen. During the three months ended December 2013, this leasing and management operation generated revenue of $1.2 million, and a profit of $0.9 million. No income was generated from our discontinued operations for the three months ended December 31, 2014.

Net profit (loss). As a result of the foregoing, we had a net profit of $17.4 million for the three months ended December 31, 2014, compared to a net loss of $5.3 million for the three months ended December 31, 2013.

Liquidity and Capital Resources

Before the foreclosure of the pledged ownership of BAK International, we had historically financed our liquidity requirements from a variety of sources, including short-term bank loans, other short-term loans and bills payable under bank credit agreements, factoring of bills receivable to banks and issuance of capital stock. During the three months ended December 31, 2014, we were primarily financed by short-term bank loans and other short-term loans.

As of December 31, 2014, we had cash and cash equivalents of $35,020. Our total current assets were $8.3 million and our total current liabilities were $18.8 million, which results in a net working capital deficiency of $10.5 million. These factors raise substantial doubts about our ability to continue as a going concern. In October 2014, we received from Dalian government a subsidy of $7.4 million (RMB46.2 million) for costs of land use rights relating to the new manufacturing site in Dalian. We obtained a short term bank loan of $4.8 million (RMB30 million) from Bank of Dandong for a period from August 19, 2014 to August 18, 2015. The short term bank loan is bearing fixed interest at 7.8% per annum and was guaranteed by Shenzhen BAK and Mr. Xiangqian Li.

6

We will require additional cash to complete the construction of the new Dalian manufacturing facilities. We may also require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We plan to renew the short term bank loan of $4.8 million in August 2015 upon maturity, and plan to borrow additional funds from local banks to meet the Company’s cash needs. However, there can be no assurance that we will be successful in obtaining this financing. If our existing cash and bank borrowing are insufficient to meet our requirements, we may seek to sell equity securities, debt securities or borrow from lending institutions. We can make no assurances that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of equity securities, including convertible debt securities, would dilute the interests of our current shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

The following table sets forth a summary of our cash flows for the periods indicated:

(All amounts in thousands of U.S. dollars)

Operating Activities

Net cash used in operating activities was $0.6 million in the three months ended December 31, 2014, as compared to net cash used in operating activities of $4.8 million in the same period in 2013. The net cash used in operating activities in this period was mainly attributable to the an increase in accounts receivable of $3.1 million, offset by a reduction of inventories of $1.7 million and prepayment and other receivables of $0.7 million.

Investing Activities

Net cash used in investing activities was $19.9 million for the three months ended December 31, 2013, as compared to net cash provided by investing activities of $4.1 million  in the same period of 2014. In the quarter ended December 31, 2013, there was placement of pledged deposits of $17.2 million to secure bank borrowings while there was no pledged deposit in 2014. Also, we received deferred government grants of $7.4 million during the three months ended December 31, 2014.

Financing Activities

Net cash used in financing activities was $4.5 million in the three months ended December 31, 2014, compared to net cash provided by financing activities of $20.5 million during the same period in 2013. In the three months ended December 31, 2014, we repaid $4.7 million short term advances to unrelated third parties. The net cash provided by financing activities in the three months ended December 31, 2013 was attributable to $20.5 million net increase in advances from unrelated third parties.

Capital Expenditures

We incurred capital expenditures of $3.4 million and $0.2 million in the three months ended December 31, 2014 and 2013, respectively. Our capital expenditures in the first quarter of fiscal 2015 were used primarily to finance the construction and purchase of equipment and machineries for our production plant at our Dalian facility.

We estimate that our total capital expenditures for the remainder of fiscal year 2015 will reach approximately $12.4 million. Such funds will be used to purchase manufacturing equipment and for the construction of the production plant at our new Dalian facility.

7

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of December 31, 2014:

(All amounts in thousands of U.S. dollars)

Other than the contractual obligations and commercial commitments set forth above, we did not have any other long-term debt obligations, operating lease obligations, capital commitments, purchase obligations or other long-term liabilities as of December 31, 2014.

Off-Balance Sheet Transactions

We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as shareholders’ equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

Critical Accounting Policies

Our condensed consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

Changes in Accounting Standards

Please refer to note 1 to our condensed consolidated financial statements, “Principal Activities, Basis of Presentation and Organization –Recently Issued Accounting Standards,” for a discussion of relevant pronouncements.

ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

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ITEM 4.      CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2014. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based upon, and as of the date of this evaluation, our Chief Executive Officer and Interim Chief Financial Officer concluded that our disclosure controls and procedures were ineffective as of December 31, 2014.

As we disclosed in our Annual Report on Form 10-K filed with the SEC on January 13, 2015, during our assessment of the effectiveness of internal control over financial reporting as of September 30, 2014, management identified the following material weakness in our internal control over financial reporting:

In order to cure the foregoing material weakness, we have taken or are taking the following remediation measures:

We intend to complete the remediation of the material weaknesses discussed above as soon as practicable but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weakness that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.

Changes in Internal Control over Financial Reporting

Except for the matters described above, there were no changes in our internal controls over financial reporting during the first quarter of our fiscal year 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II
OTHER INFORMATION

ITEM 1.      LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal proceedings set forth below, we are currently not aware of any such legal proceedings or claims that we believe will have an adverse effect on our business, financial condition or operating results:

An individual named Steven R. Ruth filed suit against China BAK Battery, Inc. in United States District Court for the Western District of Texas on August 15, 2013 alleging breach of contract. China BAK Battery, Inc. did not receive notice of this lawsuit and the plaintiff sought a default judgment, which the court granted in January 2014. Accordingly, the court entered judgment in favor of Mr. Ruth in the amount of $553,774 inclusive of costs and attorneys’ fees (the “First Judgment”).

Subsequent to the entry of the First Judgment, Mr. Ruth has made efforts to have the judgment enforced in Canada. On September 19, 2014, Mr. Ruth also filed a second complaint in the United States District Court for the Western District of Texas. On November 12, 2014, a second default judgment was entered against China BAK Battery, Inc. in the amount of $553,774 for the First Judgment plus an additional $7,550 in attorneys’ fees. The second judgment is inclusive of the amounts ordered in the First Judgment. BAK International thereafter agreed to indemnify China BAK Battery, Inc. from any expenses, losses and damages that were incurred and will be incurred by China BAK Battery, Inc. due to the lawsuit filed by Mr. Ruth.

ITEM 1A.    RISK FACTORS.

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

ITEM 2.      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.      DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.      MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.      OTHER INFORMATION.

None.

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ITEM 6.      EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

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SIGNATURES

          Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: February 17, 2015

CHINA BAK BATTERY, INC.

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EXHIBIT INDEX