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CBAK > SEC Filings for CBAK > Form 10-Q on 19-Aug-2013All Recent SEC Filings

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Form 10-Q for CHINA BAK BATTERY INC


19-Aug-2013

Quarterly Report


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

The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. Our financial statements are prepared in U.S. dollars and in accordance with 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" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

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

Use of Terms

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

"Company," "we," "us" and "our" are to the combined business of China BAK Battery, Inc., a Nevada corporation, and its consolidated subsidiaries;
"BAK International" are to our Hong Kong subsidiary, BAK International Limited;
"BAK Europe" are to our German subsidiary, BAK Europe GmbH;
"BAK Canada" are to our Canadian subsidiary, BAK Battery Canada Ltd.;
"BAK India" are to our Indian subsidiary, BAK Telecom India Private Limited;
"Shenzhen BAK" are to our PRC subsidiary, Shenzhen BAK Battery Co., Ltd.;
"BAK Tianjin" are to our PRC subsidiary, BAK International (Tianjin) Ltd.;
"BAK Battery" are to our PRC subsidiary, BAK Battery (Shenzhen) Co., Ltd.;
"Tianjin Meicai" are to our PRC subsidiary, Tianjin Meicai New Material Technology Co., Ltd.;
"China" and "PRC" are to People's Republic of China;
"RMB" are to Renminbi, the legal currency of China;
"U.S. dollar," "$" and "US$" are to the legal currency of the United States;
"SEC" are to the United States Securities and Exchange Commission;
"Securities Act" are to the Securities Act of 1933, as amended; and
"Exchange Act" are to the Securities Exchange Act of 1934, as amended.

On March 28, 2013, the Company decided to dissolve BAK Canada due to the financial difficulties of the subsidiary and filed for bankruptcy. It's in the process of dissolving this entity as of today.

On March 5, 2013, the Company changed one subsidiary's name from "BAK Electronics (Shenzhen) Co., Ltd." to "BAK Battery (Shenzhen) Co., Ltd."


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

We are a leading global manufacturer of lithium-based battery cells. We produce battery cells for original equipment manufacturers, or OEM and replacement battery manufacturers that are the principal component of rechargeable batteries commonly used to power the following applications:

cellular phones and smartphones;

notebook computers, tablet computers and e-book readers;

portable consumer electronics, such as digital cameras, portable media players, portable gaming devices, personal digital assistants, or PDAs, camcorders, digital cameras and Bluetooth headsets; and

electric bicycles and other light electric vehicles, hybrid electric vehicles and other electric vehicles; cordless power tools; and uninterruptible power supplies, or UPS.

We conduct all of our manufacturing operations in China, in close proximity to China's electronics manufacturing base and its rapidly growing market. Historically, we have primarily manufactured prismatic lithium-ion cells for the cellular phone replacement battery market and the OEM market. Our products are packed into batteries by third-party battery pack manufacturers in accordance with the specifications of manufacturers of portable electronic applications. At the request of our customers that order prismatic battery packs, we assemble our prismatic cells into battery packs at our Shenzhen facility or engage battery pack manufacturers to assemble our cells into batteries for a fee, and then sell battery packs to these customers both for the replacement and OEM markets.

We have a working capital deficiency, accumulated deficit from recurring net losses incurred for the current period and prior years and significant short-term debt obligations maturing in less than one year as of September 30, 2012 and June 30, 2013. These factors raise substantial doubts about our ability to continue as a going concern. Accordingly, we have continued to develop a strategic plan. Under this plan, we will continue to increase our presence in the OEM market both domestically and internationally with more aggressive marketing strategies to expand and secure our market base. We will also continue to implement measures to reduce both manufacturing costs and operating expenses, improve profit margins as well as reduce receivable turnover days through stronger credit controls. Also, as a supplement of the plan, we intend to sell part of our low efficiency assets to repay our short term debts and to provide cash for the development of more promising products such as high power batteries and Electronic Vehicle batteries. The Company is in the process of transferring its equity interest in Tianjin Meicai to an unrelated party (refer to note 7(b) to the financial statements).

We have experienced net losses during the past two fiscal years and for the current quarter ended June 30, 2013. We generated revenues of $45.6 million and $46.8 million for the three months ended June 30, 2013 and 2012, respectively, and net losses of $10.3 million and $27.6 million during the same periods, respectively. However, we believe that our accomplishments to date, as well as our strategic plan, will yield long-term growth of revenues and positive net income.

To help us finance and expand our operations, we had access to $206.7 million in short-term credit facilities, $24.4 million in long-term credit facilities and $26.2 million in other line of credit as of June 30, 2013. As of June 30, 2013, the principal outstanding amounts included short-term bank loans and current maturities of long-term bank loans of $149.6 million under credit facilities and long-term bank loans of $12.8 million maturing in over one year, and bills payable of $68.3 million under credit facilities, leaving $26.6 million of short-term funds available under our credit facilities for additional cash needs. We did not repay one loan from Shenzhen Longgang Branch, Bank of China ("Bank of China") amounted to $32.6 million matured on August 3, 2013 and we are in the process to renew it. If we fail to renew the facility and loan from Bank of China, there will be an adverse impact to our operations.


Third Quarter Financial Performance Highlights

The following are some financial highlights for the third quarter of our fiscal year ending September 30, 2013:

Net revenues: Net revenues decreased by $1.2 million, or 2.7%, to $45.6 million for the three months ended June 30, 2013, from $46.8 million for the same period in 2012.

Gross loss: Gross loss was $1.4 million for the three months ended June 30, 2013, a decrease of $3.7 million from $5.1 million for the same period in 2012.

Operating loss: Operating loss was $7.7 million for the three months ended June 30, 2013, a decrease of $16.7 million from $24.5 million for the same period in 2012.

Net loss: Net loss was $10.3 million for the three months ended June 30, 2013, a decrease of $17.3 million, or 62.8%, from $27.6 million for the same period in 2012.

Fully diluted net loss per share: Fully diluted net loss per share was $0.81 for the three months ended June 30, 2013, as compared to $2.19 for the same period in 2012.

Financial Statement Presentation

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

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, engaging in cooperative advertising programs, participating 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.

Property, plant and equipment impairment charges. Impairment charges consist 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 mainly consisted of government subsidies received by us with no further conditions to be met. The amounts are recorded as a non-operating income when received.

Finance costs, net. Finance costs consist primarily of interest income, interest on bank loans, net of capitalized interest, and bank charges.


Income taxes. Since Shenzhen BAK was acknowledged as a "New and High technology enterprise," it is entitled to a preferential tax rate of 15% for each of the calendar years 2011, 2012 and 2013. BAK Battery's income tax rates were 11% and 24% for calendar years 2010 and 2011, respectively, and starting in calendar year 2012, it was subject to an income tax rate of 25%. BAK Battery did not incur any enterprise income tax for the calendar year 2013 due to the current tax losses carried forward from calendar years 2011 and 2012. BAK Tianjin is currently paying no enterprise income tax due to cumulative tax losses. Our Canadian, German, Indian, and Hong Kong subsidiaries-BAK Canada, BAK Europe, BAK India and BAK International-are subject to profits tax in their respective countries at rates of 38%, 25%, 30%, and 16.5%, respectively. However, because they do not have any assessable income derived from or arising in those countries, they have not paid any such tax.

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

Results of Operations

Comparison of Three Months Ended June 30, 2013 and 2012

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)

                                 Three Months Ended June 30,               Change
                                   2013               2012             $             %
Net revenues                 $       45,599    $        46,844   $    (1,245 )        (2.7 )
Cost of revenues                     46,986             51,907        (4,921 )        (9.5 )
Gross loss                           (1,387 )           (5,063 )       3,676         (72.6 )
Operating expenses:                                                                      -
Research and development              1,135              1,612          (477 )       (29.6 )
expenses
Sales and marketing expenses          1,710              2,257          (547 )       (24.2 )
General and administrative            4,655              3,743           912          24.4
expenses
Provision for / (reversal            (4,388 )            8,162       (12,550 )      (153.8 )
of) bad debt
Impairment charge on                  3,208              3,617          (409 )       (11.3 )
property, plant and
equipment
Total operating expenses              6,320             19,391       (13,071 )       (67.4 )
Operating loss                       (7,707 )          (24,454 )      16,747          68.5
Finance costs, net                   (3,455 )           (2,799 )        (656 )        23.4
Recovery of loss from loan              809                  -           809           100
guarantees
Government grant income                 113                  -           113           100
Other (expense)/income                   27                (68 )          95        (139.7 )
Income tax expenses                     (58 )             (275 )         217         (78.9 )
Net loss                     $      (10,271 )  $       (27,596 ) $    17,325         (62.8 )

Net revenues. Net revenues were $45.6 million for the three months ended June 30, 2013, as compared to $46.8 million for the same period in 2012, a decrease of $1.2 million, or 2.7%.


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

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

                                     Three Months Ended June 30,
                                       2013               2012
Prismatic cells
   Aluminum-case cells           $        7,565    $        14,032
   Battery packs                         15,415             11,762
Cylindrical cells                         8,476             11,099
Lithium polymer cells                    10,463              6,338
High-power lithium battery cells          3,680              3,613
Total                            $       45,599    $        46,844

The following table sets forth the breakdown of our net revenues from reconditioned and normal products.

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

                                      Three Months Ended June 30, 2013
                                                                   Total
                                   Reconditioned       Normal     revenue

Prismatic cells
   Aluminum-case cells                      3,600       3,965       7,565
   Battery packs                            6,372       9,043      15,415
Cylindrical cells                               -       8,476       8,476
Lithium polymer cells                       3,143       7,320      10,463
High-power lithium battery cells                -       3,680       3,680
Total                                      13,115      32,484      45,599

Net revenues from sales of aluminum-case cells decreased to $7.6 million in the three months ended June 30, 2013, from $14.0 million in the same period in 2012, a decrease of $6.5 million, or 46.1%. This resulted from a decrease in sales volume of 63.8% accompanied by an increase in our average selling price of 49%. The decrease of sales volume was because of the decrease in demand for aluminum-case cells in view of the popularity of polymer smartphone batteries. In order to cope with the market change, we continued to aggressively clear our re-conditioned and low-end products in the three months ended June 30, 2013, resulting gross loss for this period, and focus on selling high end products with a high unit selling price. Although we still recorded gross loss on our aluminum-case cell products and the gross loss margin for the three months ended June 30, 2013 worsened from 12% for the same period last year to 39%, our overall unit selling price of our aluminum-case cell products increased 49% in the three months ended June 30, 2013 as compared to the same period last year.

Net revenues from sales of battery packs, which is a crucial component of smartphones, increased to $15.4 million in the three months ended June 30, 2013, from $11.8 million in the same period in 2012, an increase of $3.7 million, or 31.1%. This resulted from an increase in sales volume of 9.1% as well as an increase in the average price of 20.1%. The increase in both market price and volume was attributable to the strong market demand for smartphones and our ability to develop high end products to meet market demand this year. We recorded gross profit of 16.8% from our sales of battery packs for the three months ended June 30, 2013 compared to gross loss of 2.2% for the same period last year.

Net revenues from sales of cylindrical cells decreased to $8.5 million in the three months ended June 30, 2013, from $11.1 million in the same period in 2012, a decrease of $2.6 million, or 23.6%. This resulted from a decrease in sales volume of 58.6% as well as an increase in our average selling price of 84.6%. The decrease in sales volume was mainly due to the change in the sales mix to high-end products, and as result, more high-end products with higher selling prices had been sold during this quarter. Although sales amount decreased, the Company was able to achieve a higher gross profit. Compared to the third quarter fiscal 2012, the gross profit margin in the three months ended June 30, 2013 increased from 17% to 28%.

We sold $10.5 million in lithium polymer cells for the three months ended June 30, 2013, compared to $6.3 million in lithium polymer cells in the same period in 2012, an increase of $4.1 million, or 65.1%, resulting from an increase in sales volume of 134.2%, offset by a decrease in the average selling price of 29.5%. The increase in sales volume was mainly attributable to our effort to expand our market share. We reduced the selling price in fiscal 2013 to attract new customers. However, our margin was still adversely affected by our clearing of re-conditioned products, resulting gross loss for this period. We recorded gross loss of 36.9% from our sales of lithium polymer cells for the three months ended June 30, 2013 compared to gross loss of 82.3% for the same period last year.

We also sold approximately $3.7 million in high-power lithium battery cells for the three months ended June 30, 2013, as compared to $3.6 million in high-power lithium battery cells in the same period in 2012, resulting from an increase in sales volume of 29.6%, offset by a decrease in the average selling price of 21.4%. The increase in sales volume was mainly due to the increasing demand from the electric car market and the electric bicycle market. We reduced the selling price to attract new customers.


Cost of revenues. Cost of revenues decreased to $47.0 million for the three months ended June 30, 2013, as compared to $51.9 million for the same period in 2012, a decrease of $4.9 million, or 9.5% . Included in cost of revenues were write-downs of obsolete inventories of $2.4 million and $12.7 million for the three months ended June 30, 2012 and 2013, respectively. The Company writes down the inventory value whenever there is an indication that they are impaired. However, as the market conditions continued to deteriorate, further write-downs were necessary. The reduction in cost of revenues was higher than the drop in sales primarily due to our efforts to sell high profit margin products.

Gross loss. Gross loss for the three months ended June 30, 2013 was $1.4 million, or 3.0% of net revenues, as compared to $5.1 million, or 10.8% of net revenues, for the same period in 2012. Such decrease was largely due to the fact that we continued to reduce our supply of low or negative gross margin products including prismatic cells and instead focused on high-end products. In addition, we are expanding sales of lithium polymer cells and high power lithium batteries which generate higher gross profit. However, we are still selling a significant amount of low priced and reconditioned products with low or even negative gross margin as a result of the impairment of inventory due to severe market competition.

Research and development expenses. Research and development expenses decreased to $1.1 million for the three months ended June 30, 2013, as compared to $1.6 million for the same period in 2012, a decrease of $0.5 million, or 29.6% . This decrease was mainly due to the cost reduction policy under which we continued to reduce the number of R&D personnel.

Sales and marketing expenses. Sales and marketing expenses decreased to $1.7 million for the three months ended June 30, 2013, as compared to $2.3 million for the same period in 2012, a decrease of $0.5 million, or 24.2%, primarily due to the cost reduction policy under which we continued to reduce the number of sales department personnel.

General and administrative expenses. General and administrative expenses increased to $4.7 million, or 10.2% of revenues, for the three months ended June 30, 2013, as compared to $3.7 million, an increase of $1 million, or 24.4% . While we continued to implement our cost control policy to reduce expenses, we increased staff benefits in order to retain staff and more was spent by our management on travelling and meetings due to strategic needs.

(Reversal of)provision for bad debt. We recorded a reversal of bad debts of $4.4 million for the three months ended June 30, 2013 due to our efforts to collect long outstanding receivables either in cash settlement or return of products from customers. We recorded a provision for bad debts of $8.2 million for the three months ended June 30, 2012.

Impairment charge. We recorded a property, plant and equipment impairment charge totaling $3.2 million for the three months ended June 30, 2013. During the course of our strategic review of our operations for the three months ended June 30, 2013, we assessed the recoverability of the carrying value of certain property, plant and equipment which resulted in impairment losses of $3.2 million, representing the excess of the carrying value of our property, plant and equipment over their discounted cash flows expected to be generated from our production facilities in Shenzhen primarily for the production of aluminum-case cells.

Operating loss. As a result of the above, our operating loss totaled $7.7 million for the three months ended June 30, 2013, as compared to $24.5 million for the same period in 2012. As a percentage of net revenues, our operating loss was 16.9% for the three months ended June 30, 2013, as compared to 52.2% for the same period in 2012.

Finance costs, net. Finance costs, net, increased to $3.5 million for the three months ended June 30, 2013, as compared to $2.8 million for the same period in 2012, an increase of $0.7 million, or 23.4% . The increase in net finance costs is mainly attributable to more overseas customers that settled their accounts in their local currencies compared with the same period last year. This resulted in an increase in the exchange loss of $0.3 million or 374% for the three months ended June 30, 2013.

Reversal of loss arising from loan guarantees. Shenzhen Langjin Technology Development Co. Ltd., or Shenzhen Langjin, has defaulted on bank loans guaranteed by us and we paid an aggregate amount of $7.5 million to the bank. On June 18, 2013, the Company has further received a total of $0.8 million back from Langjin resulting in a reversal of the previously recorded loss in the three months ended June 30, 2013.


Government grant income / Other (expenses)/income. Government grant income was approximately $113,000 and other income was approximately $27,000 for the three months ended June 30, 2013, as compared to government grant income of $21 and other expenses of $68,000 for the same period in 2012.

Income tax expense. Income tax expense was approximately $0.06 million for the three months ended June 30, 2013, as compared to $0.28 million for the same period in 2012.

Net loss. As a cumulative result of the foregoing, we had a net loss of $10.3 million for the three months ended June 30, 2013, compared to $27.6 million for the three months ended June 30, 2012.

Comparison of Nine Months Ended June 30, 2013 and 2012

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