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China BAK Battery 10-Q 2009 Documents found in this filing:UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
For the
quarterly period ended: December 31, 2008
OR
For the
transition period from ____________ to _____________
Commission
File Number: 001-32898
China
BAK Battery, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
(86 755)
897-70093
(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 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 equity,
as of February 6, 2009, is as follows:
TABLE
OF CONTENTS
Introductory
Comments
Introductory
Comments
Terminology
Throughout
this Report, the terms “we,” “us” or “our” refers to China BAK Battery, Inc. and
its subsidiaries on a consolidated basis; “BAK International” refers to our Hong
Kong subsidiary, BAK International Limited; “BAK Tianjin” refers to our PRC
subsidiary, BAK International (Tianjin) Ltd.; “Shenzhen BAK” refers to our PRC
subsidiary, Shenzhen BAK Battery Co., Ltd.; “BAK Electronics” refers to our PRC
subsidiary, BAK Electronics (Shenzhen) Co., Ltd.; “BAK Canada” refers to our
Canadian subsidiary, BAK Battery Canada Ltd.; “BAK Europe” refers to our German
subsidiary, BAK Europe GmbH; “BAK India” refers to our Indian subsidiary, BAK
Telecom India Private Limited; “China” or “PRC” refers to the People’s Republic
of China, excluding for the purposes of this Report only, Taiwan, Hong Kong and
Macau; “RMB” or “Renminbi” refers to the legal currency of China; and “$” or
“U.S. dollars” refers to the legal currency of the United States of
America.
Forward-Looking
Statements
Statements
contained in this Report include “forward-looking statements” within the meaning
of such term in Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Forward-looking statements involve known and
unknown risks, uncertainties and other factors which could cause actual
financial or operating results, performances or achievements expressed or
implied by such forward-looking statements not to occur or be realized.
Forward-looking statements made in this Report generally are based on our best
estimates of future results, performances or achievements, predicated upon
current conditions and the most recent results of the companies involved and
their respective industries. Forward-looking statements may be identified by the
use of forward-looking terminology such as “may,” “will,” “could,” “should,”
“project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,”
“potential,” “opportunity” or similar terms, variations of those terms or the
negative of those terms or other variations of those terms or comparable words
or expressions. Potential risks and uncertainties include, among other things,
such factors as:
i
Additional
disclosures regarding factors that could cause our results and performance to
differ from results or performance anticipated by this Report are discussed in
other reports that we file with the SEC, including without limitation our Annual
Report on Form 10-K for the fiscal year ended September 30, 2008, as amended
(the “2008 Form 10-K”). Readers are urged to carefully review and consider the
various disclosures made by us in this Report and our other filings with the
SEC. These reports attempt to advise interested parties of the risks and factors
that may affect our business, financial condition and results of operations and
prospects. The forward-looking statements made in this Report speak only as of
the date hereof and we disclaim any obligation to provide updates, revisions or
amendments to any forward-looking statements to reflect changes in our
expectations or future events.
Where
You Can Find Additional Information
We file
annual, quarterly and other reports, proxy statements and other information with
the SEC. You may obtain and copy any document we file with the SEC at the SEC’s
public reference room at 100 F Street, NE, Room 1580, Washington, D.C. 20549.
You may obtain information on the operation of the SEC’s public reference
facilities by calling the SEC at 1-800-SEC-0330. You can request copies of these
documents, upon payment of a duplicating fee, by writing to the SEC at its
principal office at 100 F Street, NE, Room 1580, Washington, D.C. 20549-1004.
The SEC maintains an Internet website at http://www.sec.gov that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC. Our SEC filings, including
exhibits filed therewith, are accessible through the Internet at that
website.
You may
also request a copy of our SEC filings, at no cost to you, by writing or
telephoning us at: BAK Industrial Park, No. 1 BAK Street, Kuichong Town,
Longgang District, Shenzhen, People’s Republic of China, attention Corporate
Secretary, telephone 011 (86-755) 8977-0093. We will not send exhibits to the
documents, unless the exhibits are specifically requested and you pay our fee
for duplication and delivery.
ii
PART
I
FINANCIAL
INFORMATION
China
BAK Battery, Inc. and subsidiaries
Condensed
interim consolidated balance sheets
As
of September 30, 2008 and December 31, 2008
(In
US$)
See
accompanying notes to the condensed interim consolidated financial
statements.
F-1
China
BAK Battery, Inc. and subsidiaries
Condensed
interim consolidated balance sheets
As
of September 30, 2008 and December 31, 2008 (continued)
(In
US$)
See
accompanying notes to the condensed interim consolidated financial
statements.
F-2
China
BAK Battery, Inc. and subsidiaries
Condensed
interim consolidated statements of operations
and
comprehensive income / (loss)
For
the three months ended December 31, 2007 and 2008
(Unaudited)
(In
US$)
See
accompanying notes to the condensed interim consolidated financial
statements.
F-3
China BAK Battery, Inc. and
subsidiaries
Condensed interim consolidated
statements of shareholders’ equity>
For
the three months ended December 31, 2007 and 2008
(Unaudited)
See
accompanying notes to the condensed interim consolidated financial
statements.
F-4
China
BAK Battery, Inc. and subsidiaries
Condensed
interim consolidated statements of cash flows
For
the three months ended December 31, 2007 and 2008
(Unaudited)
(In
US$)
See
accompanying notes to the condensed interim consolidated financial
statements.
F-5
China
BAK Battery, Inc. and subsidiaries
Condensed
interim consolidated statements of cash flows
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
(In
US$)
See
accompanying notes to the condensed interim consolidated financial
statements.
F-6
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008
(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") rechargeable
batteries 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 motors, and general industrial
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
As of
December 31, 2008, the Company’s subsidiaries consist of: i) BAK International
Limited (“BAK International”), a wholly owned limited liability company
incorporated in Hong Kong on December 29, 2003 as BATCO International Limited,
which changed its name to BAK International Limited on November 3, 2004; ii)
Shenzhen BAK Battery Co., Ltd. (“Shenzhen BAK”), a wholly owned limited
liability company established on August 3, 2001 in the People’s Republic of
China (“PRC”); iii) BAK Electronics (Shenzhen) Co., Ltd. (“BAK Electronics”), a
wholly owned limited liability company established on August 15, 2005 in the
PRC; iv) BAK International (Tianjin) Ltd. (“BAK Tianjin”), a wholly owned
limited liability company established on December 12, 2006 in the PRC; v) BAK
Battery Canada Ltd. (“BAK Canada”), a wholly owned limited liability company
established on December 20, 2006 in Canada as BAK Canada Battery Ltd., which
changed its name to BAK Battery Canada Ltd. on December 22, 2006; vi) BAK Europe
GmbH (“BAK Europe”), a wholly owned limited liability company established in
Germany on November 28, 2007; and vii) BAK Telecom India Private Limited (“BAK
India”), a wholly owned limited liability company established in India on August
14, 2008.
BAK
Tianjin was established in Tianjin Technology Industrial District on December
12, 2006 as a wholly owned subsidiary of BAK International with registered
capital of US$99,990,000. Pursuant to BAK Tianjin’s articles of association and
relevant PRC regulations, BAK International was required to contribute
US$20,000,000 to BAK Tianjin as capital (representing 20% of BAK Tianjin’s
registered capital) before March 11, 2007. An extension from the Business
Administration Bureau of Beichen District, Tianjin, was obtained to make this
contribution no later than December 11, 2007. On November 16, 2007, BAK
International contributed approximately US$20,000,000 capital to BAK Tianjin.
The remaining US$79,990,000 was originally required to be fully contributed no
later than December 11, 2008 and an extension from the Business Administration
Bureau of Beichen District, Tianjin, was obtained to make this contribution no
later than December 11, 2009. BAK Tianjin is principally engaged in the
manufacture of advanced lithium ion batteries for use in cordless power tools
and other applications.
Pursuant
to Shenzhen BAK’s articles of association and relevant PRC regulations, BAK
International was required to contribute about US$5.72 million to Shenzhen BAK
as capital (representing 7% of Shenzhen BAK’s registered capital) no later than
October 2008. As of December 31, 2008, BAK International is in the process of
applying for a reduction in its required registered capital with the relevant
government bureau.
On
November 6, 2004, BAK International, a non-operating holding company that had
substantially the same shareholders as 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 as described below. Pursuant to
the terms of the share swap transaction, BAK International acquired all of the
outstanding shares of Shenzhen BAK for US$11.5 million in cash, while the
shareholders of Shenzhen BAK acquired substantially all of the outstanding
shares of BAK International for US$11.5 million in cash. As a result, Shenzhen
BAK became a wholly-owned subsidiary of BAK International. After the share swap
transaction was completed, there were 31,225,642 shares of BAK International
stock outstanding, exactly the same as the number of shares of capital stock of
Shenzhen BAK that had been outstanding immediately prior to the share swap, and
the shareholders of BAK International were substantially the same as the
shareholders of Shenzhen BAK prior to the share swap. Consequently, 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.
F-7
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
Basis
of Presentation and Organization (continued)
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. Pursuant to the Securities Exchange Agreement, the Company
issued 39,826,075 shares of common stock, par value US$0.001 per share, to the
shareholders of BAK International (including 31,225,642 shares to the original
shareholders and 8,600,433 shares to new investors who had purchased shares in
the private placement described below), representing approximately 97.2% of the
Company’s post-exchange issued and outstanding common stock, in exchange for
100% of the outstanding capital stock of BAK International.
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. The 1,152,458 shares of
China BAK outstanding prior to the stock exchange transaction were accounted for
at the net book value at the time of the transaction, which was a deficit of
US$1,672.
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 8,600,433 shares of common
stock for gross proceeds of US$17,000,000. In conjunction with this
financing, Mr. Xiangqian Li, the Chairman and Chief Executive Officer of the
Company, agreed to place 2,179,550 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 US$12,000,000, and the remaining 50% were 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
US$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 2,179,550 shares would be released to Mr. Xiangqian Li in the
amount of 50% upon reaching the 2005 target and the remaining 50% upon reaching
the 2006 target.
Under
generally accepted accounting principles in the United States of America (“US
GAAP”), escrow agreements such as the one established by Mr. Xiangqian Li
generally constitute compensation if, following attainment of a performance
threshold, shares are returned to a company officer. The Company determined that
without consideration of the compensation charge, the performance thresholds for
the year ended September 30, 2005 would be achieved. However, after
consideration of a related compensation charge, the Company determined that such
thresholds would not have been achieved. The Company also determined that, even
without consideration of a compensation charge, the performance thresholds for
the year ended September 30, 2006 would not be achieved. No compensation charge
was recorded by the Company for the years ended September 30, 2005 and
2006.
While the
1,089,775 escrow shares relating to the 2005 performance threshold were
previously released to Mr. Xiangqian Li, Mr. Xiangqian Li executed a further
undertaking on August 21, 2006 to return those shares to the escrow agent for
the distribution to the relevant investors. However, such shares were not
returned to the escrow agent, but, pursuant to a Delivery of Make Good Shares,
Settlement and Release Agreement between the Company, BAK International and Mr.
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 1,089,775 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 shares of common stock 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 US$7,955,358 respectively, as set out in the
consolidated statements of shareholders’ equity for the three months ended
December 31, 2007.
F-8
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
Basis
of Presentation and Organization (continued)
In
November 2007, Mr. Xiangqian Li delivered the 1,089,775 shares related to the
2005 performance threshold to BAK International pursuant to the Li Settlement
Agreement; BAK International in turn delivered the shares to the Company. Such
shares (other than those issued to investors pursuant to the 2008 Settlement
Agreements, as described below) are now held by the Company. Upon receipt of
these shares, the Company and BAK International released all claims and causes
of action against Mr. Xiangqian Li regarding the shares, and Mr. Xiangqian Li
released all claims and causes of action against the Company and BAK
International regarding the shares. Under the terms of the Li Settlement
Agreement, the Company commenced negotiations with the investors who
participated in the 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 has entered into settlement agreements (the “2008
Settlement Agreements”) with certain investors in the January 2005 private
placement.
Pursuant
to the 2008 Settlement Agreements, the Company and the settling investors have
agreed, without any admission of liability, to a settlement and mutual release
from all claims relating to the January 2005 private placement, including all
claims relating to the escrow shares related to the 2005 performance threshold
that had been placed into escrow by Mr. Xiangqian Li, as well as all claims,
including claims for liquidated damages relating to registration rights granted
in connection with the January 2005 private placement. Under the 2008 Settlement
Agreement, the Company has made settlement payments to each of the settling
investors of the number of shares of the 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 December 31,
2008 amounted to 368,745 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.
The
Company’s condensed interim consolidated financial statements have been prepared
in accordance with US GAAP.
The
interim results of operations are not necessarily indicative of the results to
be expected for the fiscal year ending September 30, 2009. The Company’s
consolidated balance sheet as of September 30, 2008 has been taken from the
Company’s audited consolidated balance sheet as of that date. All other
financial statements contained herein are unaudited and, in the opinion of
management, contain all adjustments (consisting only of normal recurring
accruals) necessary for a fair presentation of financial position, results of
operations and cash flows for the periods presented. The Company’s accounting
policies and certain other disclosure are set forth in the notes to the
consolidated financial statements contained in the Company’s Annual Report on
Form 10-K for the year ended September 30, 2008. These financial statements
should be read in conjunction with the Company’s audited consolidated financial
statements and notes thereto.
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
liabilities established in the PRC, Hong Kong, India, Canada or Germany, the
accounting standards used in the places of their domicile. The
accompanying condensed interim consolidated financial statements reflect
necessary adjustments not recorded in the books of account of the Company's
subsidiaries to present them in conformity with US GAAP.
F-9
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
Recently
Issued Accounting Standards
SFAS
No. 157 “Fair Value Measurements”
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements,” or SFAS
No. 157, which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 applies under other
accounting pronouncements that require or permit fair value measurements, where
fair value is the relevant measurement attribute. The standard does not require
any new fair value measurements. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS No.
157 has no material impact on the Company’s financial statements.
SFAS
No. 159 “The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115”
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an Amendment of FASB
Statement No. 115,” or SFAS No. 159. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other items at fair
value. Entities that elect the fair value option will report
unrealized gains and losses in earnings at each subsequent reporting
date. The fair value option may be elected on an
instrument-by-instrument basis, with a few exceptions. SFAS No. 159
also establishes presentation and disclosure requirements to facilitate
comparisons between entities that choose different measurement attributes for
similar assets and liabilities. The requirements of SFAS No. 159
apply to the Company’s financial statements starting in its fiscal year
beginning October 1, 2008. The adoption of SFAS No. 159 has no
material impact on the Company’s financial statements.
SFAS
No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an
amendment of ARB No. 51”
In
December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51,” or SFAS No.
160. SFAS No. 160 establishes accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The guidance will apply to the Company’s financial
statements starting in its fiscal year beginning October 1, 2009. The
Company’s management is in the process of evaluating the impact SFAS No. 160
will have on its financial statements upon adoption.
SFAS
No. 141(Revised) “Business Combinations”
In
December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations,”
or SFAS No. 141 (Revised). SFAS No. 141 (Revised) establishes
principles and requirements for how the acquirer of a business recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The
statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination and determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. The guidance will apply to the
Company starting in its fiscal year beginning October 1, 2009. The
Company’s management is in the process of evaluating the impact SFAS No. 141
(Revised) will have on its financial statements upon adoption.
SFAS
No. 161 “Disclosures about Derivative Instruments and Hedging
Activities”
In March
2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and
Hedging Activities,” or SFAS No. 161. SFAS No. 161 is intended to
improve financial reporting about derivative instruments and hedging activities
by requiring enhanced disclosures to enable investors to better understand their
effects on an entity’s financial position, financial performance, and cash
flows. It is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008, with early
application encouraged. SFAS No. 161 is not expected to have a
material impact on the Company’s financial statements.
SFAS
No. 162 “The Hierarchy of Generally Accepted Accounting Principles”
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” or SFAS No. 162. SFAS No. 162 identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with GAAP. SFAS No. 162
directs the GAAP hierarchy to the entity, not the independent auditors, as the
entity is responsible for selecting accounting principles for financial
statements that are presented in conformity with GAAP. SFAS No. 162
is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to remove the GAAP hierarchy from the
auditing standards. SFAS No. 162 is not expected to have a material
impact on the Company’s financial statements.
F-10
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
Pledged
deposits as of September 30, 2008 and December 31, 2008 consisted of the
following:
Deposits
pledged for construction payable are generally released when the relevant
construction projects are completed.
Trade
accounts receivable as of September 30, 2008 and December 31, 2008 consisted of
the following:
An
analysis of the allowance for doubtful accounts for the three months ended
December 31, 2007 and 2008 is as follows:
F-11
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
Inventories
as of September 30, 2008 and December 31, 2008 consisted of the
following:
Part of
the Company’s inventories with carrying value of US$21,999,619 and US$21,986,075
as of September 30, 2008 and December 31, 2008, respectively, was pledged as
collateral under certain loan agreements (see Note 7).
Prepayments
and other receivables as of September 30, 2008 and December 31, 2008 consisted
of the following:
F-12
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
Property,
plant and equipment as of September 30, 2008 and December 31, 2008 consisted of
the following:
(i)
Depreciation expense for the three months ended December 31, 2007 and 2008 is
included in the condensed interim consolidated statements of operations and
comprehensive income / (loss) as follows:
(ii)
Construction in Progress
Construction
in progress mainly comprises capital expenditures for construction of the
Company’s new corporate campus, including offices, factories and staff
dormitories.
For the
three months ended December 31, 2007 and 2008, the Company capitalized interest
of approximately US$275,735 and US$175,298 to the cost of construction in
progress.
(iii)
Pledged Property, Plant and Equipment
As of
September 30, 2008 and December 31, 2008, machinery and equipment with net book
value of US$42,582,851 and US$47,554,206 of the Company were pledged as
collateral under certain loan arrangements (see Notes 7 and 8).
As of
December 31, 2008, the buildings and land use rights certificate in relation to
the land on which Shenzhen BAK’s corporate campus is located with aggregate net
book value of US$105,163,853 were pledged as collateral under certain loan
agreements (See Note 7).
F-13
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
The
Company obtained several short-term loan facilities from financial institutions
in the PRC. In addition to the pledge of land use rights certificates by
Shenzhen BAK as disclosed below, these facilities were secured by the Company’s
assets with the following carrying values:
As of
September 30, 2008 and December 31, 2008, the Company had several short-term
bank loans with aggregate outstanding balances of US$105,598,170 and
US$112,128,985, respectively. The loans were primarily obtained for general
working capital, carried interest rates ranging from 5.040% to 8.217% per annum,
and had maturity dates ranging from 1 to 12 months. Each loan is guaranteed by
Mr. Xiangqian Li, who did not receive any compensation for acting as
guarantor.
As of
December 31, 2008, the Company had pledged the land use rights certificate in
relation to the land on which Shenzhen BAK’s corporate campus had been
constructed for short-term bank loans amounting to US$47,636,497 borrowed from
Shenzhen Eastern Branch, Agricultural Bank of China. As of December 31, 2008,
the aggregate net book value of the buildings and land use rights in relation to
the respective land use rights certificate as of December 31, 2008 was
US$105,163,853.
As of
September 30, 2008 and December 31, 2008, the Company had long-term bank loans
of US$64,532,214 and US$60,095,273, respectively. As of December 31, 2008,
US$10,260,168 was borrowed under a four-year long-term loan credit facility from
China Development Bank, bearing interest at the benchmark rate of the People’s
Bank of China (“PBOC”) for three-year to five-year long-term loans, which is
currently 7.74% per annum. This long-term bank loan is repayable in two
installments of US$4,397,215 on November 20, 2009 and US$5,862,953 on December
26, 2010.
Three
other long-term loans totaled an aggregate borrowed amount of US$26,383,291 as
of December 31, 2008. These loans were borrowed under a five-year
long-term loan credit facility from Shenzhen Eastern Branch, Agricultural Bank
of China, and carry interest at 90% of the benchmark rate of the PBOC for
three-year to five-year long-term loans. The first loan of US$5,862,953
currently carries interest at 5.832% per annum and is repayable on January 25,
2012. The second loan of US$11,725,908 currently carries annual interest of
6.237% and is repayable in three installments of US$2,931,477 on January 25,
2010, US$7,328,693 on January 25, 2011 and US$1,465,738 on January 25, 2012,
respectively. The third loan of US$8,794,430 currently carries annual interest
of 7.65% and is repayable in two installments of US$4,397,215 on January 25,
2009 and US$4,397,215 on January 25, 2010.
Another
loan of US$23,451,814 as of December 31, 2008, was borrowed under a four-year
long-term loan credit facility from Tianjin Branch, Agricultural Bank of China
and carries interest at the benchmark rate of the PBOC for three-year to
five-year long-term loans, which is currently 7.74% per annum. This loan is
repayable in four installments of US$4,397,215 on December 26, 2009,
US$4,397,215 on December 26, 2010, US$7,328,692 on December 26, 2011, and
US$7,328,692 on May 26, 2012.
The
long-term bank loan with China Development Bank is: (i) guaranteed by Mr.
Xiangqian Li; (ii) secured by certain shares of the Company owned by Mr.
Xiangqian Li; and (iii) to be secured by the property ownership and land use
rights certificates relating to the land on which the Company’s Research and
Development Test Centre is to be constructed and the facilities to be
constructed thereon. As of December 31, 2008, the Company had obtained the
relevant land use rights certificate and was in the process of negotiating with
the relevant government bureau for the requisite approval to pledge it as
described.
F-14
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
The
long-term bank loan with Shenzhen Eastern Branch, Agricultural Bank of China is:
(i) guaranteed by Mr. Xiangqian Li; (ii) secured by the Company’s machinery and
equipment with carrying values of US$34,813,406 as of December 31, 2008 (see
Note 6); and (iii) secured by the property ownership and land use rights
certificates in relation to the land on which Shenzhen BAK’s corporate campus
had been constructed (see Note 6) and any machinery and
equipment purchased and used in the campus subsequent to such
construction.
The
long-term bank loan with Tianjin Branch, Agricultural Bank of China is secured
by the machinery and equipment purchased for the automated high-power
lithium-phosphate cells production line in Tianjin. As of December 31, 2008,
construction of the automated high-power lithium-phosphate cells production line
was in progress.
Mr.
Xiangqian Li did not receive any compensation for pledging his shares in the
Company or acting as guarantor for the above long-term bank loans.
The
aggregate maturities of long-term bank loans as of December 31, 2008 are as
follows:
F-15
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(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
4,000,000 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 8,000,000.
Pursuant
to the Plan, the Company granted options to purchase 2,000,000 shares of common
stock with an exercise price of US$6.25 per share on May 16, 2005. In accordance
with the vesting provisions of the grants, the options became vested and
exercisable under the following schedule:
Subsequent
to the grant date, options to purchase 200,000 shares of common stock were
forfeited because the optionees terminated their employment with the Company. In
addition, on September 28, 2006, options to purchase a total of 1,400,000 shares
of common stock were cancelled pursuant to the Termination and Release
Agreements signed on that day. Details of the cancellation of stock options and
the relevant replacement awards are set out below under “Employee Restricted
Stock Awards”.
A summary
of share option plan activity for these options during the three months ended
December 31, 2008 is presented below:
F-16
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
The
weighted-average grant-date fair value of options granted during 2005 was
US$3.67 per share. The Company recorded non-cash share-based compensation
expense of US$38,842 for the three months ended December 31, 2007 in respect of
these share options granted in 2005, which was allocated to research and
development expenses. No non-cash share-based compensation expense was
recognized in respect of these share options for the three months ended December
31, 2008.
The fair
value of the above option awards was estimated on the date of grant using the
Black-Scholes Option Valuation Model together with the following
assumptions:
As of
December 31, 2008, there were no unrecognized compensation costs related to
non-vested share options.
Pursuant
to the Plan, the Company also granted options to purchase 1,501,500 shares of
the Company’s common stock with a weighted-average exercise price of US$3.28 per
share on June 25, 2007. In accordance with the vesting provisions of the grants,
the options will become vested and exercisable during the period from June 30,
2007 to February 9, 2012 according to each employee’s respective
agreement.
A summary
of share option plan activity for these options during the three months ended
December 31, 2008 is presented below:
The
weighted-average grant-date fair value of options granted during 2007 was
US$2.15 per share. The Company recorded non-cash share-based compensation
expense of US$496,804 and US$183,829 for the three months ended December 31,
2007 and 2008 respectively, in respect of share options granted in 2007, which
was allocated to cost of revenues, sales and marketing expenses, general and
administrative expenses and research and development expenses
respectively.
The fair
value of the above option awards granted on June 25, 2007 was estimated on the
date of grant using the Black-Scholes Option Valuation Model that uses the
following assumptions:
As of
December 31, 2008, there were unrecognized compensation costs of US$747,815
related to the above non-vested share options. These costs are expected to be
recognized over a weighted average period of 1.5 years.
F-17
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
Pursuant
to the Plan, the Company also granted options to purchase 360,000 shares of
common stock with an exercise price of US$4.30 per share on January 28, 2008. In
accordance with the vesting provisions of the grants, the options will become
vested and exercisable during the period from April 28, 2008 to January 28, 2011
according to each employee’s respective agreement.
A summary
of share option plan activity for these options during the three months ended
December 31, 2008 is presented below:
(1) Aggregate
intrinsic value represents the value of the Company’s closing stock price on
December 31, 2008 (US$1.62) in excess of the exercise price multiplied by the
number of options outstanding or exercisable.
The
weighted average grant-date fair value of options granted on January 28, 2008
was US$3.59 per share. The Company recorded non-cash share-based compensation
expense of US$148,989 for the three months ended December 31, 2008, in respect
of share options granted on January 28, 2008, which was allocated to general and
administrative expenses and research and development expenses
respectively.
The fair
value of the above option awards granted on January 28, 2008 was estimated on
the date of grant using the Black-Scholes Option Valuation Model that uses the
following assumptions.
As of
December 31, 2008, there were unrecognized compensation costs of approximately
US$463,000 related to the above non-vested share options. These costs are
expected to be recognized over a weighted average period of 0.8
years.
On May
29, 2008, the Compensation Committee of the Company’s Board of Directors
recommended and approved the grant of options to purchase 1,080,000 shares of
the Company’s common stock to Mr. Xiangqian Li and options to purchase 170,000
shares to five other employees, with an exercise price of US$4.18 per share. In
accordance with the vesting provisions of the grants, the options will become
vested and exercisable during the period from September 30, 2008 to May 29, 2012
according to each employee’s respective agreement.
F-18
China
BAK Battery, Inc. and subsidiaries
Notes
to the condensed interim consolidated financial statements
For
the three months ended December 31, 2007 and 2008 (continued)
(Unaudited)
A summary of share option plan activity for these
options during the three months ended December 31, 2008 is presented
below:
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