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CBAK > SEC Filings for CBAK > Form 10-Q/A on 23-Aug-2013All Recent SEC Filings

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Form 10-Q/A for CHINA BAK BATTERY INC


23-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 Electronics" are to our PRC subsidiary, BAK Electronics (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.

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 manufacturer, or OEM, customers 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.

During the second quarter of fiscal 2013, we continued the implementation of our business plan to expand our lithium-ion polymer and high-power lithium battery production capacity in response to evolving market demands. In particular, we developed and supplied cylindrical cell packs for use in high-capacity public-use electric vehicles as part of a strategic cooperation program for electric vehicle development with a major Taiwan-based automobile manufacturer. We are also expanding our prismatic cell production capacity through improving automatic production line for the smartphone market. During the transition period, we gradually reduced our supply to the replacement market. As a result, we have derived and expect to continue to derive an increasing portion of our revenues from other products.

We have experienced net losses during the past two fiscal years and for the current quarter ended March 31, 2013. We generated revenues of $44.1 million and $32.8 million for the three months ended March 31, 2013 and 2012, respectively, and net losses of $19.7 million and $15.6 million during the same periods, respectively. However, we believe that our accomplishments to date, as well as our business plan, will yield long-term growth of revenues and positive net income.

To help us finance and expand our operations, we had access to $217.2 million in short-term credit facilities, $24.1 million in long-term credit facilities and $38 million in other line of credit as of March 31, 2013. As of March 31, 2013, the principal outstanding amounts included short-term bank loans and current maturities of long-term bank loans of $162.8 million under credit facilities and long-term bank loans of $15.9 million maturing in over one year, and bills payable of $68.8 million under credit facilities, leaving $31.9 million funds available under our credit facilities for additional cash needs.

We had a working capital deficiency, accumulated deficit from recurring net losses incurred for the current and prior periods as of March 31, 2013 and significant short-term debt obligations maturing in less than one year. 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.

Second Quarter Financial Performance Highlights

The following are some financial highlights for the second quarter of our fiscal year ended March 31, 2013:

Net revenues: Net revenues increased by $11.3 million, or 34.4%, to $44.1 million for the three months ended March 31, 2013, from $32.8 million for the same period in 2012.



Gross loss: Gross loss was $3.6 million for the three months ended March 31, 2013, a decrease of $0.3 million from $3.9 million for the same period in 2012.

Operating loss: Operating loss was $16.6 million for the three months ended March 31, 2013, an increase of $3.1 million from of $13.4 million for the same period in 2012.

Net loss: Net loss was $19.7 million for the three months ended March 31, 2013, an increase of $4.1 million, or 20.8%, from $15.6 million for the same period in 2012.

Fully diluted net loss per share: Fully diluted net loss per share was $1.56 for the three months ended March 31, 2013, as compared to $1.24 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 non-operating nature and 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 Electronics' 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 Electronics 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 are deposited in bonded warehouses are exempt from import VAT.

Results of Operations

Comparison of Three Months Ended March 31, 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
                                              March 31,                    Change
                                         2013          2012                          %
Net revenues                         $    44,066   $    32,781   $    11,285          34.4
Cost of revenues                          47,619        36,651        10,968          29.9
Gross loss                                (3,553 )      (3,870 )         317          (8.2 )
Operating expenses:
   Research and development expenses       1,315           710           605         (85.2 )
   Sales and marketing expenses            1,915         1,753           162           9.2
   General and administrative              6,750         6,672           (98 )        (1.5 )
expenses
   Provision for / (recovery) of bad      (8,342 )         421        (8,763 )    (2,081.5 )
debt
   Impairment charge on property,         11,396             -        11,396         100.0
plant and equipment
   Total operating expenses               13,034         9,556         3,478          36.4
Operating loss                           (16,587 )     (13,426 )      (3,161 )         235
Finance costs, net                        (1,705 )      (2,634 )         929         (35.3 )
Recovery of loss from loan                 4,550             -         4,550             -
guarantees
Government grant income                        -            29           (29 )        (100 )
Other income                                  48           412          (364 )       (88.3 )
Income tax expenses                       (5,994 )          (8 )      (5,986 )       748.3
Net loss                             $   (19,688 ) $   (15,627 ) $    (4,061 )        26.0

Net revenues. Net revenues were $44.1 million for the three months ended March 31, 2013, as compared to $32.8 million for the same period in 2012, an increase of $11.3 million, or 34.4% .

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 March 31,
                                       2013                2012
Prismatic cells
   Aluminum-case cells           $         8,987    $         11,690
   Battery packs                          17,384               8,787
Cylindrical cells                         10,692               7,621
Lithium polymer cells                      2,916               2,343
High-power lithium battery cells           4,087               2,340
Total                            $        44,066    $         32,781

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 March 31, 2013
                                   Reconditioned     Normal     Total revenue

Prismatic cells
   Aluminum-case cells           $         7,270   $  1,717   $         8,987
   Battery packs                           7,287     10,097            17,384
Cylindrical cells                              -     10,692            10,692
Lithium polymer cells                        316      2,600             2,916
High-power lithium battery cells               -      4,087             4,087
Total                            $        14,873   $ 29,193   $        44,066


Net revenues from sales of aluminum-case cells decreased to $9.0 million in the three months ended March 31, 2013, from $11.7 million in the same period in 2012, a decrease of $2.7 million, or 23.1%, resulting from a decrease in sales volume of 4% accompanied by a decrease in our average selling price of 20%. This was mainly due to the adjustments in our marketing strategy to focus on high end markets and high-value customers thereby increasing sales of prismatic smartphone batteries and lithium-ion polymer smartphone batteries instead of the prismatic cells sold to the replacement market. The polymer batteries have a higher capacity and are safer than prismatic batteries and therefore more suitable for use in smartphones. This also led to a sharp drop in the price of prismatic cells. Thus, we gradually stopped producing prismatic cells for the replacement market and we are in a transition period to develop the high-end products and, during this transition period, we were disposing of reconditioned prismatic cells at a very low price. These cells were primarily prior returns from customers and we reconditioned them for sale to other customers, generally at a low price. During the three months ended March 31, 2013, sales of $14.6 million were generated from these reconditioned prismatic cells.

Net revenues from sales of battery packs increased to $17.4 million in the three months ended March 31, 2013, from $8.8 million in the same period in 2012, an increase of $8.6 million, or 97.8%. This resulted from an increase in sales volume of 58% as well as an increase in the average price of 25.2%. There was a strong market demand for our battery packs derived from the increased market demand for smartphones.

Net revenues from sales of cylindrical cells increased to $10.7 million in the three months ended March 31, 2013, from $7.6 million in the same period in 2012, an increase of $3.1 million, or 40.3% . This resulted from an increase in sales volume of 37% as well as an increase in our average selling price of 2%. The increase in sales volume was mainly attributable to the strong market demand and our effort to expand our market share.

We sold $2.9 million in lithium polymer cells for the three months ended March 31, 2013, compared to $2.3 million in lithium polymer cells in the same period in 2012, an increase of $0.6 million, or 24.5%, resulting from an increase in sales volume of 50.5%, offset by a decrease in the average selling price of 16.94%. The increase in sales volume was mainly due to the increased demand for our lithium polymer cells from the booming smartphone market. The selling price decreased this year due to clearance of reconditioned products during this period. During the three months ended March 31, 2013, sales of $0.3 million were generated from these reconditioned lithium polymer cells.

We also sold approximately $4.1 million in high-power lithium battery cells for the three months ended March 31, 2013, as compared to $2.3 million in high-power lithium battery cells in the same period in 2012, resulting from an increase in sales volume of 74.7%, offset by a decrease in the average selling price of 2.4%. The increase in sales was mainly due to the increased demand from the electric vehicle market, especially electric bicycles and electric car manufacturers. We reduced the selling price to attract new customers.

Cost of revenues. Cost of revenues increased to $47.6 million for the three months ended March 31, 2013, as compared to $36.7 million for the same period in 2012, an increase of $11.0 million, or 29.9%. The increase in cost of revenues was due to the increase in total sales volume, which increased by 28.8% to $41.6 million for the three month ended March 31, 2013 from $32.3 million in the same period in 2012. Included in cost of revenues was impairment of reconditioned inventories of $0.5 million for the three months ended March 31, 2013 and $5.8 million in the six months ended March 31, 2013. The Company had previously written down these products in prior periods whenever there was an indication and expectation that they were impaired. However, as the market conditions continued to deteriorate, further write downs were necessary.

Gross loss. Gross loss for the three months ended March 31, 2013 was $3.6 million, or 8.1% of net revenues, as compared to $3.9 million, or 11.8% of net revenues, for the same period in 2012. Such decrease was mainly due to the fact that we implemented a strategic plan to reduce our supply of low or negative gross margin products including the prismatic cells to the replacement market and instead focusing on high-end products. In addition, we are expanding sales of our lithium-ion polymer and high-power lithium batteries production 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 the severe market competition.

Research and development expenses. Research and development expenses increased to $1.3 million for the three months ended March 31, 2013, as compared to $0.7 million for the same period in 2012, representing an increase of $0.6 million, or 85.2%. We continued our cost reduction policy included in our turnaround plan, but since we received lesser amount of R&D government subsidies this year, which were accounted for as credit against our expenses, conversely a higher net research and development expenses were recorded in the three months ended March 31, 2013 as compared to the same period last year.

Sales and marketing expenses. Sales and marketing expenses increased to $1.9 million for the three months ended March 31, 2013, as compared to $1.8 million for the same period in 2012, representing an increase of $0.1 million, or 9.2%, primarily due to the increase in transportation and packing expenses of $0.4 million. As a percentage of revenues, sales and marketing expenses decreased to 4.4% for the three months ended March 31, 2013, from 5.4% for the same period in 2012, primarily due to the increase in net revenues.


General and administrative expenses. General and administrative expenses increased to $6.8 million, or 15.3% of revenues, for the three months ended March 31, 2013, as compared to $6.7 million, or 20.3% of revenues, for the same period in 2012, representing an increase of $0.1 million, or 1.2% .

Provision for (reversal of) bad debt. We recorded a reversal of bad debt of $8.3 million for the three months ended March 31, 2013 owing to our efforts to collect long outstanding receivables. We recorded a provision for bad debt of $0.4 million in the three months ended March 31, 2012.

Impairment charge. We recognized a property, plant and equipment impairment charge totaling $11.4 million for the three months ended March 31, 2013, as compared to no such impairment charge for the same period in 2012. During the course of our strategic review of our operations for the three months ended March 31, 2013, we assessed the recoverability of the carrying value of certain property, plant and equipment which resulted in impairment losses of $11.4 million, from an assessment that the total net book value of property, plant and equipment was lower than 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 $16.6 million for the three months ended March 31, 2013, as compared to $13.4 million for the same period in 2012. As a percentage of net revenues, our operating loss was 37.7% of revenues for the three months ended March 31, 2013, as compared to 41.0% for the same period in 2012.

Finance costs, net. Finance costs, net, decreased to $1.7 million for the three months ended March 31, 2013, as compared to $2.6 million for the same period in 2012, a decrease of $0.9 million, or 35.3% . The decrease in net finance costs is mainly attributable to the decrease in interest rates and a higher proportion of capitalized interest on the higher level of construction in progress in the quarter ended March 31, 2013 as compared to the same period last year.

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 $7.4 million to the bank. As of March 31, 2013, we expected to recover at least $4.6 million from Shenzhen Langjin. A reversal of loss arising from loan guarantees of $4.6 million was recognized in three months ended March 31, 2013.

Government grant income / Other (expenses)/income. Government grant income was approximately $35 and other income was approximately $47,000 for the three months ended March 31, 2013, as compared to government grant income of $29,000 and other income of $0.4 million for the same period in 2012.

Income tax expense. Income tax expense was approximately $6.0 million for the three months ended March 31, 2013, as compared to approximately $8,000 for the same period in 2012. This was mainly due to the valuation allowance of approximately $5.8 million on deferred income tax assets arisng on tax losses primarily before the fiscal year 2012. Since we continued to experience significant losses for the current quarter ended March 31, 2013, we are uncertain that we can generate sufficient profit to claim these deferred income tax benefit in the future.

Net loss. As a cumulative result of the foregoing, we had a net loss of $19.7 million for the three months ended March 31, 2013, compared to $15.6 million for the three months ended March 31, 2012.


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