CBAK Energy Technology, Inc. - Quarter Report: 2015 June (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: June 30, 2015

[   ] 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 August 17, 2015 is as follows:

Quarterly Report on Form 10-Q
Period Ended June 30, 2015

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

i

PART I
FINANCIAL INFORMATION

CHINA BAK BATTERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2015 AND 2014

1

China BAK Battery, Inc. and Subsidiaries
Condensed consolidated balance sheets
As of September 30, 2014 and June 30, 2015
(In US$)

See accompanying notes to the condensed consolidated financial statements.

China BAK Battery, Inc. and Subsidiaries
Condensed consolidated statements of operations and comprehensive (loss) income
For the three and nine months ended June 30, 2014 and 2015
(Unaudited)
(In US$ except for number of shares)

See accompanying notes to the condensed consolidated financial statements.

China BAK Battery, Inc. and Subsidiaries
Condensed consolidated statements of changes in shareholders’ equity
For the nine months ended June 30, 2014 and 2015
(Unaudited)
(In US$ except for number of shares)

See accompanying notes to the condensed consolidated financial statements.

China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of cash flows
For the nine months ended June 30, 2014 and 2015
(Unaudited)
(In US$)

See accompanying notes to the condensed consolidated financial statements.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Principal Activities

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

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

Basis of Presentation and Organization

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

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

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

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

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Basis of Presentation and Organization (continued)

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

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

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

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

Pursuant to the 2008 Settlement Agreements, the Company and the settling investors have agreed, without any admission of liability, to a settlement and mutual release from all claims relating to the January 2005 private placement, including all claims relating to the escrow shares related to the 2005 performance threshold that had been placed into escrow by Mr. Li, as well as all claims, including claims for liquidated damages relating to registration rights granted in connection with the January 2005 private placement. Under the 2008 Settlement Agreement, the Company has made settlement payments to each of the settling investors of the number of shares of the Company’s common stock equivalent to 50% of the number of the escrow shares related to the 2005 performance threshold these investors had claimed; aggregate settlement payments as of June 30, 2015 amounted to 73,749 shares. Share payments to date have been made in reliance upon the exemptions from registration provided by Section 4(2) and/or other applicable provisions of the Securities Act of 1933, as amended. In accordance with the 2008 Settlement Agreements, the Company filed a registration statement covering the resale of such shares which was declared effective by the SEC on June 26, 2008.

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

As of June 30, 2015, 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.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Basis of Presentation and Organization (continued)

On August 14, 2013, Dalian BAK Trading Co., Ltd (“Dalian BAK Trading”) was established as a wholly owned subsidiary of China BAK Asia Holding Limited (“BAK Asia”) with a registered capital of $500,000 (Note 17(i)). Pursuant to Dalian BAK Trading’s articles of association and relevant PRC regulations, BAK Asia was required to contribute the capital to Dalian BAK Trading on or before August 14, 2015. Up to the date of this report, the Company has contributed $100,000 to Dalian BAK Trading in cash.

On December 27, 2013, Dalian BAK Power Battery Co., Ltd (“Dalian BAK Power”) was established as a wholly owned subsidiary of BAK Asia with a registered capital of $30,000,000 (Note 17(i)). Pursuant to Dalian BAK Power’s articles of association and relevant PRC regulations, BAK Asia was required to contribute the capital to Dalian BAK Power on or before December 27, 2015. Up to the date of this report, the Company has contributed $14,466,384 to Dalian BAK Power through an injection of a series of patents and cash of $9,466,384.

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 June 30, 2015, the Company’s subsidiaries consisted of: i) China BAK Asia Holdings Limited (“BAK Asia”), a wholly owned limited liability company incorporated in Hong Kong on July 9, 2013; ii) Dalian BAK Trading Co., Ltd. (“Dalian BAK Trading”), a wholly owned limited company established on August 14, 2013 in the PRC; and iii) Dalian BAK Power Battery Co., Ltd. (“Dalian BAK Power”), a wholly owned limited liability company established on December 27, 2013 in the PRC.

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

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Basis of Presentation and Organization (continued)

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 Tianjin until Shenzhen BAK’s full settlement of its bank loans of $63.1 million expiring on various dates through March 2015. Shenzhen BAK renewed the banking loans with Agricultural Bank of China of $67.8 million expiring on April 14, 2016. On May 21, 2015, BAK Asia New Energy Holding Limited (“formerly known as Asia Zhi Li New Energy Holding Limited”), the shareholder of BAK International Limited agreed to indemnify Mr. Li from any loss as a result of the default of repayment of bank loans by Shenzhen BAK. Mr Li should not participate in any operational and managerial decision making of these entities.

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 June 30, 2015. 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) which is bearing fixed interest at 7.8% per annum from Bank of Dandong for the period from August 19, 2014 to August 18, 2015. This short term bank loan was guaranteed by Shenzhen BAK and Mr. Li. The Company repaid this bank loan in August 2015 and borrowed a new loan of $4.8 million (RMB 30 million) under the banking facilities letter dated June 22, 2015.

On June 22, 2015, Dalian BAK Power entered into a banking facility letter with Bank of Dandong to provide a maximum loan amount of $19.4 million (RMB120 million) to June 22, 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li, and his wife, Ms. Xiaoqiu Yu. The facilities were also secured by Dalian BAK Power’s buildings, construction in progress, prepaid land use rights and machineries. On June 25, 2015, the Company borrowed another loan of $8.1 million (RMB50 million) from Bank of Dandong for a period from June 25, 2015 to June 22, 2016, bearing fixed interest at 7.84% per annum. As of June 30, 2015, the Company had $12.9 million outstanding on the banking facilities, and $6.5 million available for borrowing. The Company plans to raise further financing from local banks to meet its daily cash demands if required.

However, there can be no assurance that the Company will be successful in obtaining further financing. The Company 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 in 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) income for the three and nine months ended June 30, 2014 and 2015:

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

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.

In February 2015, the FASB issued ASU 2015-02 "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the adoption of ASU 2015-02 on its consolidated financial statements.

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.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Trade accounts receivable as of September 30, 2014 and June 30, 2015 consisted of the following:

Inventories as of September 30, 2014 and June 30, 2015 consisted of the following:

During the three months ended June 30, 2014 and 2015, write-downs of obsolete inventories to lower of cost or market of $3,105,534 and nil, respectively, were charged to cost of revenues.

During the nine months ended June 30, 2014 and 2015, write-downs of obsolete inventories to lower of cost or market of $8,752,543 and nil, respectively, were charged to cost of revenues.

Prepayments and other receivables as of September 30, 2014 and June 30, 2015 consisted of the following:

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Receivable from former subsidiaries as of September 30, 2014 and June 30, 2015 consisted of the following:

Upon disposal of the Disposal Group in June 2014, the Disposal Group owed the Company a sum of $17.8 million. Management of the Company evaluated the collectability of the remaining amount and determined that $1.8 million should be impaired and offset against the gain on disposal of subsidiaries from discontinued operations for the year ended September 30, 2014. During the three and nine months ended June 30, 2015, the Company determined that $0.3 million and $1.8 million were recoverable. The recovery was treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations for the three and nine months ended June 30, 2015.

Trade payable to a former subsidiary as of September 30, 2014 and June 30, 2015 consisted of the following:

Balance at June 30, 2015 included payables for purchase of machinery and equipment of $2,025, 273 from BAK Tianjin.

Advance from a former subsidiary as of September 30, 2014 and June 30, 2015 consisted of the following:

This amount is unsecured, non-interest bearing and repayable on demand.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Property, plant and equipment as of September 30, 2014 and June 30, 2015 consisted of the following:

Depreciation expense for the three and nine months ended June 30, 2014 and 2015 is included in the condensed consolidated statements of operations as follows:

During the course of the Company’s strategic review of its operations, the Company assessed the recoverability of the carrying value of the Company’s property, plant and equipment. The impairment charge, if any, represented the excess of carrying amounts of the Company’s property, plant and equipment over the estimated discounted cash flows expected to be generated by the Company’s production facilities. The Company believes that there was no impairment of its property, plant and equipment for the three and nine months ended June 30, 2014 and 2015.

During the three and nine months ended June 30, 2015, the Company purchased machinery and equipment from BAK Tianjin totaled $2.0 million and $6.4 million, respectively.

Construction in progress as of September 30, 2014 and June 30, 2015 consisted of the following:

Construction in progress as of September 30, 2014 and June 30, 2015 was mainly comprised of capital expenditures for the construction of the facilities and production lines of Dalian BAK Power.

For the three months ended June 30, 2014 and 2015, the Company capitalized interest of $26,943 and $103,023, respectively, to the cost of construction in progress.

For the nine months ended June 30, 2014 and 2015, the Company capitalized interest of $345,443 and $294,064, respectively, to the cost of construction in progress.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Prepaid land use rights as of September 30, 2014 and June 30, 2015 consisted of the followings:

Pursuant to a land use rights acquisition agreement dated August 10, 2014, the Company acquired the rights to use a piece of land with an area of 153,832 m² in Dalian Economic Zone for 50 years up to August 9, 2064, at a total consideration of $8,561,334 (RMB53.1 million). Other incidental costs incurred totaled $501,592 (RMB3.1 million).

Amortization expenses of the prepaid land use rights were $150,712 and $45,284 for the three months ended June 30, 2014 and 2015 and $418,720 and $158,688 for the nine months ended June 30, 2014 and 2015, respectively.

As of September 30, 2014 and June 30, 2015, the Company had short term bank borrowings of $4,887,426 and $12,905,724, respectively.

On August 13, 2014, the Company borrowed $4,839,645 (RMB30 million) from Bank of Dandong for a period from August 19, 2014 to August 18, 2015, bearing interest at 7.8% per annum. The loan was guaranteed by Mr. Xiangqian Li, the Company’s CEO and Shenzhen BAK, a former subsidiary of the Company. On August 18, 2015, the Company repaid the bank loan and borrowed a new loan of $4,839,645 (RMB 30 million) under the banking facilities letter dated June 22, 2015 from Bank of Dandong for a period from August 18, 2015 to June 22, 2015, bearing interest at 7.84% per annum.

On June 22, 2015, the Company entered into a banking facilities letter with Bank of Dandong to provide a maximum loan amount of $19,358,585 (RMB120,000,000) up to June 2016. The banking facilities were guaranteed by Mr. Xiangqian Li, the Company’s CEO and his wife, Ms. Xiaoqiu Yu, and Shenzhen BAK, a former subsidiary of the Company. The facilities were also secured by the Company’s assets with the following carrying amount:

The Company borrowed another loan of $8,066,077 (RMB50 million) from Bank of Dandong for a period from June 25, 2015 to June 22, 2016, bearing interest at 7.84% per annum. As of June 30, 2015, the Company had $12,905,724 outstanding on the banking facilities, and $6,452,861 available for borrowing.

During the three months ended June 30, 2014 and 2015, interest of $1,101,889 and $103,023, respectively, was incurred on the Company's bank borrowings.

During the nine months ended June 30, 2014 and 2015, interest of $5,693,738 and $294,064, respectively, was incurred on the Company's bank borrowings.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Other short-term loans as of September 30, 2014 and June 30, 2015 consisted of the following:

During the three months ended June 30, 2014 and 2015, interest of $5,149,806 and nil, respectively, was incurred on the Company’s other short-term loans.

During the nine months ended June 30, 2014 and 2015, interest of $11,687,780 and nil, respectively, was incurred on the Company’s other short-term loans.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Accrued expenses and other payables as of September 30, 2014 and June 30, 2015 consisted of the following:

On November 9, 2007, the Company completed a private placement for the gross proceeds to the Company of $13,650,000 by selling 3,500,000 shares of common stock at the price of $3.90 per share. Roth Capital Partners, LLC acted as the Company’s exclusive financial advisor and placement agent in connection with the private placement and received a cash fee of $819,000. The Company may have become liable for liquidated damages to certain shareholders whose shares were included in a resale registration statement on Form S-3 that the Company filed pursuant to a registration rights agreement that the Company entered into with such shareholders in November 2007. Under the registration rights agreement, among other things, if a registration statement filed pursuant thereto was not declared effective by the SEC by the 100th calendar day after the closing of the Company’s private placement on November 9, 2007, or the “Effectiveness Deadline”, then the Company would be liable to pay partial liquidated damages to each such investor of (a) 1.5% of the aggregate purchase price paid by such investor for the shares it purchased on the one month anniversary of the Effectiveness Deadline; (b) an additional 1.5% of the aggregate purchase price paid by such investor every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until the earliest of the effectiveness of the registration statement, the ten-month anniversary of the Effectiveness Deadline and the time that the Company is no longer required to keep such resale registration statement effective because either such shareholders have sold all of their shares or such shareholders may sell their shares pursuant to Rule 144 without volume limitations; and (c) 0.5% of the aggregate purchase price paid by such investor for the shares it purchased in our November 2007 private placement on each of the following dates: the ten-month anniversary of the Effectiveness Deadline and every thirtieth day thereafter (prorated for periods totaling less than thirty days), until the earlier of the effectiveness of the registration statement and the time that the Company no longer is required to keep such resale registration statement effective because either such shareholders have sold all of their shares or such shareholders may sell their shares pursuant to Rule 144 without volume limitations. Such liquidated damages would bear interest at the rate of 1% per month (prorated for partial months) until paid in full.

On December 21, 2007, pursuant to the registration rights agreement, the Company filed a registration statement on Form S-3, which was declared effective by the SEC on May 7, 2008. As a result, the Company estimated liquidated damages amounting to $561,174 for the November 2007 registration rights agreement. As of September 30, 2014 and June 30, 2015, the Company had settled the liquidated damages with all the investors and the remaining provision of approximately $159,000 was included in other payables and accruals.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Deferred government grants as of September 30, 2014 and June 30, 2015 consist of the following:

In September 2013, the Management Committee of Dalian Economic Zone Management Committee (the “Management Committee”) provided a subsidy of RMB150 million to finance the costs incurred in moving our facilities to Dalian, including the loss of sales while the new facilities were being constructed. During the three and nine months ended June 30, 2015, the Company recognized nil and $23,204,113 as income after offset of the related removal expenditures of $1,007,399. No such income or offset was recognized in fiscal 2014.

On October 17, 2014, the Company received a subsidy of $7,444,989 (RMB46,150,000) pursuant to an agreement with the Management Committee dated July 2, 2013 for costs of land use rights and to be used to construct the new manufacturing site in Dalian. Part of the facilities had been completed and was operated in July 2015 and the Company has initiated amortization on a straight-line basis over the estimated useful lives of the depreciable facilities constructed thereon. The Company expects that the remaining facilities will be completed and put into operation by the end of December 2015. During the three and nine months ended June 30, 2015, the Company offset government grants of $19,901 against depreciation expenses of the Dalian facilities.

The Company’s provision for income taxes consisted of:

United States Tax
China BAK is subject to a statutory tax rate of 35% under United States of America tax law. No provision for income taxes in the United States or elsewhere has been made as China BAK had no taxable income for the three and nine months ended June 30, 2014 and 2015.

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 and nine months ended June 30, 2014 and 2015 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 and nine months ended June 30, 2014 and 2015.

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 and nine months ended June 30, 2014.

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 and nine months ended June 30, 2014.

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 and nine months ended June 30, 2014.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

A reconciliation of the provision for income taxes determined at the statutory income tax rate to the Company's income taxes is as follows:

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 June 30, 2015 are presented below:

As of September 30, 2014 and June 30, 2015, the Company’s U.S. entity had net operating loss carry forwards of $35,581,443, 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 $1,851,208, respectively, which will expire in various years through 2020. 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 June 30, 2015 of approximately of nil and $16.1 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 June 30, 2015, the Company had no material unrecognized tax benefits which would favorably affect the effective income tax rates in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three and nine months ended June 30, 2014 and 2015, and no provision for interest and penalties is deemed necessary as of June 30, 2015 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.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

The Company grants share options to officers and employees and restricted shares of common stock to its non-employee directors as rewards for their services.

Stock Option Plan

In May 2005, the Board of Directors adopted the China BAK Battery, Inc. 2005 Stock Option Plan (the “Plan”). The Plan originally authorized the issuance of up to 800,000 shares of the Company’s common stock, pursuant to stock options granted under the Plan, or as grants of restricted stock. The exercise price of options granted pursuant to the Plan must be at least equal to the fair market value of the Company’s common stock at the date of the grant. Fair market value is determined at the discretion of the designated committee on the basis of reported sales prices for the Company’s common stock over a ten-business-day period ending on the grant date. The Plan will terminate on May 16, 2055. On July 28, 2008, the Company’s stockholders approved certain amendments to the Plan, including an amendment increasing the total number of shares available for issuance under the Plan to 1,600,000. On June 17, 2015, the Company’s stockholders approved an amendment to Section 1.7 of the Plan that if an option terminates without being wholly exercised, new options or restricted stock may be granted hereunder covering the number of shares to which such option termination relates. Section 1.7 of the Plan currently provides that only new options may be granted in this case.

On June 22, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 385,640 shares of the Company’s common stock to certain key employees, officers and consultants with an exercise price of $14.05 per share and a contractual life of 7 years. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

A summary of share option plan activity for these options as of September 30, 2014 and June 30, 2015 is presented below:

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 $10,498 and nil for the three months ended June 30, 2014 and 2015, and $64,604 and nil for the nine months ended June 30, 2014 and 2015, respectively.

As of June 30, 2015, there were no unrecognized compensation costs related to the above non-vested share options.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

Restricted shares granted on June 22, 2009

Pursuant to the Plan and in accordance with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of 100,000 restricted shares to the Chief Executive Officer, Mr. Xiangqian Li with a fair value of $14.05 per share on June 22, 2009. In accordance with the vesting schedule of the grant, the restricted shares will vest in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.  As of June 30, 2015, 100,000 shares were vested and to be issued to Mr. Li. On August 17, 2015, 60,000 vested shares were issued.

The Company recorded non-cash share-based compensation expense of $4,026 and nil for the three months ended June 30, 2014 and 2015, and $23,002 and nil for the nine months ended June 30, 2014 and 2015, respectively, in respect of the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.

As of June 30, 2015, there was no unrecognized stock-based compensation associated with the restricted shares granted to Mr. Xiangqian Li on June 22, 2009.

Restricted shares granted on June 30, 2015

On June 12, 2015, the Board of Director approved the China BAK Battery, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) for Employees, Directors and Consultants of the Company and its Affiliates. The maximum aggregate number of Shares that may be issued under the Plan is ten million (10,000,000) Shares.

On June 30, 2015, pursuant to the 2015 Plan, the Compensation Committee of the Company’s Board of Directors granted an aggregate of 690,000 restricted shares of the Company’s common stock, par value $0.001, to certain employees, officers and directors of the Company with a fair value of $3.24 per share on June 30, 2015. In accordance with the vesting schedule of the grant, the restricted shares will vest in twelve equal quarterly installments on the last day of each fiscal quarter beginning on June 30, 2015 (i.e. last vesting period: quarter ended March 31, 2018).

The Company recorded non-cash share-based compensation expense of $192,429 for the three and nine months ended June 30, 2015, respectively, in respect of the restricted shares granted on June 30, 2015, of which $157,569, $22,310 and $12,550 were allocated to general and administrative expenses, research and development expenses and sales and marketing expenses, respectively. As of June 30, 2015, 57,500 shares were vested and to be issued to the Company’s employees and directors, and there was unrecognized stock-based compensation of $2,043,171 associated to the above restricted shares. On August 7, 2015, 29,998 vested shares were issued.

As the Company itself is an investment holding company which is not expected to generate operating profits to realize the tax benefits arising from its net operating loss carried forward, no income tax benefits were recognized for such stock-based compensation cost under the stock option plan for the three and nine months ended June 30, 2014 and 2015.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

The following is the calculation of (loss) earnings per share:

Note: Including 95,000 and 100,000 vested restricted shares not yet issued to Mr. Xiangqian Li as of June 30, 2014 and 2015, respectively, and nil and 57,500 vested restricted shares granted pursuant to the 2015 Plan not yet issued as of June 30, 2014 and 2015, respectively.

For the three months ended June 30, 2015, 632,500 unvested restricted shares were anti-dilutive and excluded from diluted loss per share.

For the three and nine months ended June 30, 2015, the outstanding 4,200 stock options were anti-dilutive and excluded from diluted (loss) earnings per share.

For the three and nine months ended June 30, 2014, the outstanding 4,200 stock options and 5,000 unvested restricted shares were anti-dilutive and excluded from diluted (loss) earnings per share.

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. Certain current assets and current liabilities are financial instruments. Management believes their carrying amounts are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and, if applicable, their current interest rates are equivalent to interest rates currently available. The three levels of valuation hierarchy are defined as follows:

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, trade accounts receivable, other receivables, receivables from, payables to and trade payables to former subsidiaries, other short-term loans and other payables approximate their fair values because of the short maturity of these instruments or the rate of interest of these instruments approximate the market rate of interest.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

As of September 30, 2014 and June 30, 2015, the Company had the following contracted capital commitments:

^Note
On July 1, 2015, BAK Asia contributed further capital of $2,977,092 to Dalian BAK Power.

Initially, BAK Asia was required to pay the remaining capital within two years, of the date of issuance of the subsidiary’s business license according to PRC registration capital management rules. According to the revised PRC Companies Law which became effective on March 2014, the time requirement of the registered capital contribution has been abolished. As such, BAK Asia has its discretion to consider the timing of the registered capital contributions.

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.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

The Company had one and two customers that individually comprised 10% or more of net revenue for the three months ended June 30, 2014 and 2015, respectively, as follows:

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

The Company had one and two customers that individually comprised 10% or more of net revenue for the nine months ended June 30, 2014 and 2015, respectively, as follows:

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

The Company had one and four customers that individually comprised 10% or more of accounts receivable as of September 30, 2014 and June 30, 2015, respectively, as follows:

After the disposal of BAK International (Note 1) and prior to the completion of the new manufacturing site in Dalian, the Company generated its revenues from sale of batteries via subcontracting the production to BAK Tianjin, a former subsidiary. For the three and nine months ended June 30, 2015, the Company purchased inventories of $3.1 million and $6.7 million from BAK Tianjin.

For the three and nine months ended June 30, 2015, the Company generated revenue of

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and pledged deposits. As of September 30, 2014 and June 30, 2015, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality.

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

The Company used to engage in one business segment, the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion rechargeable batteries for use in a wide array of applications. The Company manufactured five types of Li-ion rechargeable batteries: aluminum-case cell, battery pack, cylindrical cell, lithium polymer cell and high-power lithium battery cell. The Company’s products are sold to packing plants operated by third parties primarily for use in mobile phones and other electronic devices. Starting from the three months ended December 31, 2013 and until June 30, 2014, the Company was also engaged in the business segment of property lease and management (see Note 1). Net revenues from continuing operations for the three and nine months ended June 30, 2014 and 2015 were as follows:

Net revenues by product:

Net revenues by geographic area:

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

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 United States generally accepted accounting principles, or 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:

We completed a reverse stock split on October 26, 2012, pursuant to which every five shares of our common stock were combined into one share of common stock. All references in this report to share and per share data have been adjusted, including historical data which have been retroactively adjusted, to give effect to the reverse stock split unless specified otherwise.

Overview of Our Business

Our Dalian manufacturing facilities began its partial commercial operations in July 2015. As a result, we are engaged in the business of developing, manufacturing and selling new energy high power lithium batteries, which are mainly used in the following applications:

2

We have received most of the operating assets, including customers, employees, patents and technologies of our former subsidiary, BAK International (Tianjin) Ltd. (“BAK Tianjin”). Such assets were acquired in exchange for a reduction in receivables from our former subsidiaries that were disposed in June 2014. We have outsourced and will continue to outsource our production to BAK Tianjin or other manufacturers until our Dalian manufacturing facility begins its full commercial operations. For the three and nine months ended June 30, 2015, Dalian BAK Power purchased batteries of approximately of $3.1 million and $6.7 million, respectively from BAK Tianjin.

We have experienced net losses from continuing operations during the past two fiscal years. We generated revenues of $2.5 million and $48.0 million for the three months ended June 30, 2015 and 2014, respectively. We incurred a net loss from our continuing operations of $9.8 million and $1.3 million for the three months ended June 30, 2014 and 2015, respectively. As of June 30, 2015, we had an accumulated deficit of $124.3 million and net assets of $13.4 million. We had a working capital deficiency and accumulated deficit from recurring net losses in prior years and short-term debt obligations maturing in less than one year as of June 30, 2015.

In October 2014, we received from Dalian government a subsidy of RMB46.2 million (approximately $7.5 million) equivalent to the costs of land use rights to be used to construct the new manufacturing site over the land use rights. We also obtained a short term bank loan of RMB30 million (approximately $4.8 million). The short term bank loan is bearing a fixed interest rate at 7.80% per annum and is guaranteed by Mr. Xiangqian Li (“Mr. Li”), our CEO, and Shenzhen BAK Battery Co., Ltd., our former subsidiary (“Shenzhen BAK”). In June 2015, we received banking facilities from Bank of Dandong to provide a maximum loan amount of $19.4 million to June 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li and Ms. Xiaoqiu Yu, Mr Li’s wife. The banking facilities were also secured by our Dalian site’s land use right, buildings, constructions in progress and machinery and equipment. On June 25, 2015, we borrowed RMB50 million (approximately $8.1 million), with a one-year term bank loan with fixed interest bearing at 7.84% per annum under the banking facilities. As of June 30, 2015, we had $12.9 million outstanding under the banking facilities, and $6.5 million available for borrowing. We plan to renew these loans upon maturity, and plan to raise additional funds in the future to meet our daily cash demands, if required.

In the meanwhile, due to the growing environmental pollution problem, the Chinese government is currently providing vigorous support to the new energy facilities and vehicles. It is expected that we will be able to secure more potential orders from the new energy market, especially from the electric car market. We believe with the significant reduction of liabilities and disposal of the 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.

Third Quarter Financial Performance Highlights

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

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.

3

Revenue from our discontinued operations represents rental income from 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.

Impairment 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. All of our PRC subsidiaries and our former PRC subsidiaries were subject to enterprise income tax at 25% for the three and nine months ended June 30, 2015 and 2014. Our PRC subsidiaries did not have any assessable income and did not incur any enterprise income tax for the three and nine months ended June 30, 2015 and 2014. Deferred tax in the three and nine months ended June 30, 2015 was incurred in relation to government subsidies recognized. 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 and nine months ended June 30, 2014.

Dalian BAK Trading and Dalian BAK Power are subject to an income tax rate of 25%. BAK Asia is subject to Hong Kong profit tax of 16.5% . Neither company has incurred 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

4

Results of Operations

Comparison of Three Months Ended June 30, 2015 and 2014

The following table sets forth key components of our results of operations for the periods indicated.

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

Net revenues. Net revenues were $2.5 million for the three months ended June 30, 2015, as compared to $48.0 million for the same period in 2014, representing a decrease of $45.5 million, or 94.9% . 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 mainly manufactured by BAK Tianjin under our outsourcing arrangement with them.

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

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

5

The following table sets forth the breakdown of our net revenues from reconditioned and normal products for the three months ended June 30, 2014. We did not generate any sales from reconditioned products during the three months ended June 30, 2015.

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

The following table sets forth certain information related to high-power lithium battery cells for the three months ended June 30, 2014 and 2015, respectively.

Sales from high-power lithium battery cells for the three months ended June 30, 2015 increased 7.7%, from $2.3 million for the quarter ended June 30, 2014 to $2.5 million in the same period of 2015. The increase was mainly attributable to an increase of 130.0% in sales volume, offset by a decrease of 52.8% in average selling price. The increase in sales volume and the decrease in average selling price were mainly due to a change of our product mix from the sale of high-power lithium cells for light electric vehicles in 2014 to those used for uninterruptable power supplies with a relatively lower selling unit price in 2015.

Cost of revenues. Cost of revenues decreased to $2.2 million for the three months ended June 30, 2015, as compared to $43.7 million for the same period in 2014, a decrease of $41.5 million, or 94.9% . Included in cost of revenues were write downs of obsolete inventories of $3.1 million for the three months ended June 30, 2014 and nil for the same period of 2015. 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 2014, our sales revenue and cost of sales decreased substantially in the same period of fiscal 2015.

Gross profit. Gross profit for the three months ended June 30, 2015 was $0.2 million, or 9.2% of net revenues, as compared to $4.3 million, or 9.0% of net revenues, for the same period in 2014. The improvement in our gross profit percentage was largely due to the fact that there was no write-down of inventory or reconditioned products being sold at a loss during the nine months ended June 30, 2015 as compared to the same period of 2014.

Research and development expenses. Research and development expenses decreased to $0.6 million for the three months ended June 30, 2015, as compared to $1.5 million for the same period in 2014, a decrease of $0.9 million, or 60.0% . This decrease was mainly because we only carried out quality control and did not incur any overseas sales or conduct any R&D projects after the disposal of BAK International. Therefore, no certification fees were incurred for overseas sales and no materials were consumed for R&D projects in fiscal year 2015.

Sales and marketing expenses. Sales and marketing expenses decreased to $41,175 for the three months ended June 30, 2015, as compared to $1.8 million for the same period in 2014, a decrease of $1.8 million, or 97.7%, 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 1.7% for the three months ended June 30, 2015, from 3.8% for the same period in 2014, primarily because we did not expand our sales team at the Dalian site as of June 30, 2015. We intend to expand our sales team at the Dalian site in the fourth quarter of fiscal 2015.

General and administrative expenses. General and administrative expenses decreased to $0.8 million for the three months ended June 30, 2015, as compared to $3.9 million for the same period in 2014, a decrease of $3.1 million, or 80.1% . The decrease was mainly because of reduction of headcount and operating expenses after the disposal of BAK International and the reduction of depreciation expense of office buildings after the disposal of BAK International.

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Operating loss. As a result of the above, our operating loss totaled $1.2 million for the three months ended June 30, 2015, as compared to $3.6 million for the same period in 2014, a decrease of $2.4 million, or 66.3% .

Finance costs, 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 June 30, 2015. 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 (expense). Government grant expense was $11,000 for the three months ended June 30, 2015, as compared to unconditional government grant income of $22,000 for the same period last year.

Income tax credit. Income tax credit was $32,851 due to the reversal of the deferred tax liabilities to the extent of depreciation on property, plant and equipment for the three months ended June 30, 2015, as compared to nil for the same period in 2014.

Income from discontinued operations, net of tax. Income from discontinued operations, net of tax was $0.3 million for the three months ended June 30, 2015 as compared to $46.9 million for the same period in 2014. Income from discontinued operations, net of tax, represents the income from the leasing and management of our Research and Development Centre of our former subsidiary in Shenzhen. During the three months ended June 30, 2014, this operation generated net income of $1.1 million. We recorded an accounting profit of $45.8 million as of June 30, 2014 on disposal of BAK International and its subsidiaries (collectively the “Disposal Group”) as a result of the foreclosure (“the Disposal”), which was mainly related to the market value appreciation of our Research and Development Centre. Income from discontinued operations in 2015 represents an adjustment to the gain on disposal of subsidiaries from discontinued operations previously recorded in fiscal 2014. Upon the disposal, our former subsidiaries owed us a sum of $17.8 million. We evaluated the collectability of the remaining amount and determined that $1.8 million should be impaired and offset against the gain on disposal of subsidiaries from discontinued operations for the year ended September 30, 2014. During the three months ended June 30, 2015, we determined that the remaining $0.3 million was recoverable. The recovery was treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations in 2015.

Net (loss) profit. As a result of the foregoing, we had a net loss of $0.9 million for the three months ended June 30, 2015, compared to a net profit of $37.1 million for the three months ended June 30, 2014.

Comparison of Nine Months Ended June 30, 2015 and 2014

The following table sets forth key components of our results of operations for the periods indicated.

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

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Net revenues. Net revenues were $8.6 million for the nine months ended June 30, 2015, as compared to $122.0 million for the same period in 2014, representing a decrease of $113.4 million, or 93.0% . 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 mainly manufactured by BAK Tianjin under our outsourcing arrangements with them.

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 nine months ended June 30, 2014. We did not generate any sales from reconditioned products during the nine months ended June 30, 2015.

The following table sets forth certain information related to high-power lithium battery cells for the nine months ended June 30, 2014 and 2015, respectively.

Sales from high-power lithium battery cells for the nine months ended June 30, 2015 decreased by $0.7 million, or 7.8%, from $9.3 million for the nine months ended June 30, 2014 to $8.6 million. The decrease was mainly attributable to an increase of 34.1% in sales volume, offset by a decrease of 31.2% in average selling price. The increase in sales volume and the decrease in average selling price were mainly due to a change of our product mix from the sale of high-power lithium cells for light electric vehicles in 2014 to those used for uninterruptable power supplies with a relatively lower selling unit price in 2015.

Cost of revenues. Cost of revenues decreased to $7.6 million for the nine months ended June 30, 2015, as compared to $112.6 million for the same period in 2014, a decrease of $104.9 million, or 93.2% . Included in cost of revenues were write downs of obsolete inventories of $8.8 million for the nine months ended June 30, 2014 and nil for the same period of 2015. 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 2014, our sales revenue and cost of sales decreased substantially in the same period of fiscal 2015.

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Gross profit. Gross profit for the nine months ended June 30, 2015 was $1.0 million, or 11.4% of net revenues, as compared to a gross profit of $9.5 million, or 7.8% of net revenues, for the same period in 2014. The improvement in our gross profit percentage was largely due to the fact that there was no write-down of inventory or reconditioned products being sold at a loss during the nine months ended June 30, 2015 as compared to the same period of 2014.

Research and development expenses. Research and development expenses decreased to $0.7 million for the nine months ended June 30, 2015, as compared to $4.0 million for the same period in 2014, a decrease of $3.3 million, or 81.8% . This decrease was mainly because we only carried out quality control and did not incur any overseas sales or conduct any R&D projects after the disposal of BAK International. Therefore, no certification fees were incurred for overseas sales and no materials were consumed for R&D projects in fiscal year 2015.

Sales and marketing expenses. Sales and marketing expenses decreased to $79,558 for the nine months ended June 30, 2015, as compared to $4.5 million for the same period in 2014, a decrease of $4.4 million, or 98.2%, 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 0.9% for the nine months ended June 30, 2015, from 3.7% for the same period in 2014, primarily because we did not expand our sales team at the Dalian site as of June 30, 2015. We intend to expand our sales team at the Dalian site in the fourth quarter of fiscal 2015.

General and administrative expenses. General and administrative expenses decreased to $1.8 million for the nine months ended June 30, 2015, as compared to $11.9 million for the same period in 2014, a decrease of $10.1 million, or 84.9% . The decrease was mainly because of the reduction of headcount and operating expenses after the disposal of BAK International and the reduction of depreciation expense of office buildings after the disposal of BAK International.

Operating loss. As a result of the above, our operating loss totaled $1.6 million for the nine months ended June 30, 2015, as compared to $10.3 million for the same period in 2014, a decrease of $8.7 million, or 84.2% .

Finance costs, 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 nine months ended June 30, 2015. 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 $23.2 million for the nine months ended June 30, 2015, as compared to $74,000 for the same period last year. This was mainly due to the recognition of the subsidy of $23.2 million from the Management Committee of Dalian Economic Zone granted to finance the 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 nine months ended June 30, 2015 due to the deferred tax impact of the government subsidies recognized, as compared to $16,474 income tax expense for the same period in 2014.

Income from discontinued operations, net of tax. Income from discontinued operations, net of tax was $1.8 million for the nine months ended June 30, 2015 as compared to $48.9 million for the same period in 2014. Income from discontinued operations, net of tax, represents the income from the leasing and management of our Research and Development Centre of our former subsidiary in Shenzhen. During the nine months ended June 30, 2014, this operation generated net income of $3.1 million. We recorded an accounting profit of $45.8 million as of June 30, 2014 on disposal of BAK International and its subsidiaries as a result of the foreclosure described above, which was mainly related to the market value appreciation of our Research and Development Centre. Income from discontinued operations in 2015 represents an adjustment to the gain on disposal of subsidiaries from discontinued operations previously recorded in fiscal 2014. Upon the disposal, our former subsidiaries owed us a sum of $17.8 million. We evaluated the collectability of the remaining amount and determined that $1.8 million should be impaired and offset against the gain on disposal of subsidiaries from discontinued operations for the year ended September 30, 2014. During the nine months ended June 30, 2015, we determined that $1.8 million was recoverable. The recovery was treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations in 2015.

Net profit. As a result of the foregoing, we had a net profit of $17.5 million for the nine months ended June 30, 2015, compared to a net profit of $22.6 million for the nine months ended June 30, 2014.

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 June 30, 2015, we were primarily financed by short-term bank loans and other short-term loans.

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As of June 30, 2015, we had cash and cash equivalents of $11.6 million. Our total current assets were $24.9 million and our total current liabilities were $40.5 million, which result in a net working capital deficiency of $15.6 million. These factors raise substantial doubts about our ability to continue as a going concern. In October 2014, we received a subsidy of $7.4 million (RMB46.2 million) from Dalian government equivalent to the costs of land use rights. The subsidy is used to construct the new manufacturing site in Dalian. In addition, as of June 30, 2015, we obtained one-year short term bank loans of $12.9 million (RMB80 million) from Bank of Dandong, and had $6.5 million available for borrowing under the banking facilities granted by Bank of Dandong until June 22, 2016.

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 repaid the short term bank loan of $4.8 million in August 2015 and borrowed a new loan of $4.8 million under the banking facilities letter dated on June 22, 2015. We also plan to borrow additional funds from local banks to meet the Company’s cash needs if required. However, there can be no assurance that we will be successful in obtaining further financing. If our existing cash and bank borrowings 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)