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EX-99.10 - CHINA BAK BATTERY INCv192577_ex99-10.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10−Q
 
(Mark One)
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended: June 30, 2010
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to _____________
 
Commission File Number: 001-32898

CHINA BAK BATTERY, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
88-0442833
(State or other jurisdiction of incorporation 
or organization)
 
(I.R.S. Employer Identification No.)
  
BAK Industrial Park
No. 1 BAK Street
Kuichong Town, Longgang District
Shenzhen 518119
People’s Republic of China
(Address of principal executive offices, Zip Code)
 
(86-755) 8977-0093
(Registrant’s telephone number, including area code)
 

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ¨   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.

Large accelerated filer  ¨
 
Accelerated filer  x
Non-accelerated filer  ¨  (Do not check if a smaller reporting company)    
Smaller reporting company  ¨

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of August 6, 2010 is as follows:
 
Class of Securities
 
Shares Outstanding
Common Stock, $0.001 par value
 
63,612,526
     
 



CHINA BAK BATTERY, INC.



TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
     
ITEM 1.
FINANCIAL STATEMENTS.
F-1
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
1
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
20
ITEM 4.
CONTROLS AND PROCEDURES.
21
 
PART II
OTHER INFORMATION
     
ITEM 1.   
LEGAL PROCEEDINGS.
22
ITEM 1A.    
RISK FACTORS.
23
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
23
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES.
23
ITEM 4.
(REMOVED AND RESERVED).
23
ITEM 5.
OTHER INFORMATION.
23
ITEM 6.
EXHIBITS.
23
 
 
 

 

PART I
FINANCIAL INFORMATION
 
ITEM 1.             FINANCIAL STATEMENTS.
 
CHINA BAK BATTERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2010

Contents
 
Page
Condensed Consolidated Balance Sheets as of September 30, 2009 and June 30, 2010 (unaudited)
 
F-2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended June 30, 2009 and 2010 (unaudited)
 
F-4
Condensed Consolidated Statements of Operations and Comprehensive Loss for the nine months ended June 30, 2009 and 2010 (unaudited)
 
F-5
Condensed Consolidated Statements of Shareholders’ Equity for the nine months ended June 30, 2009 and 2010 (unaudited)
 
F-6
Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2009 and 2010 (unaudited)
 
F-7
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2009 and 2010 (unaudited)
 
F-9
Notes to the Condensed Consolidated Financial Statements (unaudited)
 
F-11

 
F-1

 

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements.

China BAK Battery, Inc. and subsidiaries
Condensed consolidated balance sheets
As of September 30, 2009 and June 30, 2010

(In US$)
         
September 30,
   
June 30,
 
   
Note
   
2009
   
2010
 
               
(Unaudited)
 
Assets
                 
Current assets
                 
Cash and cash equivalents
        $ 30,678,352     $ 24,875,023  
Pledged deposits
 
2
      31,115,109       9,294,353  
Trade accounts receivable, net
 
3
      83,291,698       79,628,616  
Inventories
 
4
      65,535,384       64,799,264  
Prepayments and other receivables
 
5
      4,632,424       5,599,889  
Assets held for sale
          803,648       800,247  
Deferred tax assets
          3,894,703       8,059,375  
                       
Total current assets
          219,951,318       193,056,767  
                       
Property, plant and equipment, net
 
6
      219,684,994       224,012,279  
Lease prepayments, net
          32,165,629       31,605,838  
Intangible assets, net
          239,487       202,149  
Deferred tax assets
          42,911       53,718  
                       
Total assets
        $ 472,084,339     $ 448,930,751  

See accompanying notes to the condensed interim consolidated financial statements.

 
F-2

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated balance sheets
As of September 30, 2009 and June 30, 2010 (continued)
(In US$)

         
September 30,
   
June 30,
 
 
 
Note
   
2009
   
2010
 
               
(Unaudited)
 
Liabilities
                 
Current liabilities
                 
Short-term bank loans
 
7
    $ 139,159,380     $ 138,944,458  
Current maturities of long-term bank loans
 
8
      16,114,146       11,796,974  
Accounts and bills payable
          92,571,516       80,257,642  
Accrued expenses and other payables
          18,425,271       21,236,423  
                       
Total current liabilities
          266,270,313       252,235,497  
                       
Long-term bank loans, less current maturities
 
8
      39,552,906       29,492,436  
Deferred revenue
          7,441,806       7,314,124  
Other long-term payables
          1,940,217       3,381,544  
Deferred tax liabilities
          278,227       1,109,361  
                       
Total liabilities
          315,483,469       293,532,962  
                       
Commitments and contingencies
 
12
                 
                       
Shareholders’ equity
                     
Shares of common stock US$ 0.001 par value;
                     
100,000,000 authorized; 57,737,481 and 63,608,776 issued and outstanding as of September 30, 2009 and June 30, 2010 respectively
          57,738       63,609  
Donated shares
          14,101,689       14,101,689  
Additional paid-in capital
          101,161,455       123,131,461  
Statutory reserves
          7,227,195       7,314,565  
Retained earnings / (accumulated deficit)
          13,328,115       (10,964,358 )
Accumulated other comprehensive income
          24,791,288       25,817,433  
            160,667,480       159,464,399  
Less: Treasury shares
          (4,066,610 )     (4,066,610 )
                       
Total shareholders’ equity
          156,600,870       155,397,789  
                       
Total liabilities and shareholders’ equity
        $ 472,084,339     $ 448,930,751  

See accompanying notes to the condensed interim consolidated financial statements.

 
F-3

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of operations and comprehensive loss
For the three months ended June 30, 2009 and 2010
(Unaudited)
(In US$)
  
   
Three months ended June 30
 
   
2009
   
2010
 
     
 
   
 
 
Net revenues
  $ 44,688,608     $ 58,557,246  
Cost of revenues
    (39,640,812 )     (59,764,391 )
Gross profit / (loss)
    5,047,796       (1,207,145 )
Operating expenses:
               
Research and development expenses
    (1,472,015 )     (2,129,607 )
Sales and marketing expenses
    (1,580,776 )     (2,586,950 )
General and administrative expenses
    (5,551,289 )     (7,429,001 )
Impairment charge
    -       (5,057,745 )
Total operating expenses
    (8,604,080 )     (17,203,303 )
Operating loss
    (3,556,284 )     (18,410,448 )
Finance costs, net
    (1,896,552 )     (2,022,042 )
Government grant income
    222,136       58,673  
Other (expense) / income
    (353,354 )     107,243  
Loss before income taxes
    (5,584,054 )     (20,266,574 )
Income tax benefit
    413,027       2,003,609  
Net loss
  $ (5,171,027 )   $ (18,262,965 )
Other comprehensive (loss) / income
               
- Foreign currency translation adjustment
    (141,384 )     1,297,751  
Comprehensive loss
  $ (5,312,411 )   $ (16,965,214 )
                 
Net loss per share:
               
- Basic
  $ (0.09 )   $ (0.29 )
- Diluted
  $ (0.09 )   $ (0.29 )
Weighted average number of shares of common stock:
               
- Basic
    56,966,619       62,887,664  
- Diluted
    56,966,619       62,887,664  

See accompanying notes to the condensed interim consolidated financial statements.

 
F-4

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of operations and comprehensive loss
For the nine months ended June 30, 2009 and 2010
(Unaudited)
(In US$)
 
   
Nine months ended June 30,
 
   
2009
   
2010
 
   
 
   
 
 
Net revenues
  $ 153,593,006     $ 159,208,513  
Cost of revenues
    (134,930,310 )     (141,853,023 )
Gross profit
    18,662,696       17,355,490  
Operating expenses:
               
Research and development expenses
    (4,014,221 )     (5,523,092 )
Sales and marketing expenses
    (4,334,495 )     (6,320,569 )
General and administrative expenses
    (16,426,649 )     (20,884,801 )
Impairment charge
    -       (5,057,745 )
Total operating expenses
    (24,775,365 )     (37,786,207 )
Operating loss
    (6,112,669 )     (20,430,717 )
Finance costs, net
    (7,100,544 )     (6,365,775 )
Government grant income
    392,722       492,947  
Other expenses
    (189,197 )     (31,065 )
Loss before income taxes
    (13,009,688 )     (26,334,610 )
Income tax benefit
    377,980       2,129,507  
Net loss
  $ (12,631,708 )   $ (24,205,103 )
Other comprehensive (loss) / income
               
- Foreign currency translation adjustment
    (242,542 )     1,026,145  
Comprehensive loss
  $ (12,874,250 )   $ (23,178,958 )
                 
Net loss per share:
               
- Basic
  $ (0.22 )   $ (0.39 )
- Diluted
  $ (0.22 )   $ (0.39 )
Weighted average number of shares of common stock:
               
- Basic
    56,961,797       62,285,862  
- Diluted
    56,961,797       62,285,862  

See accompanying notes to the condensed interim consolidated financial statements.

 
F-5

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of shareholders’ equity
For the nine months ended June 30, 2009 and 2010
(Unaudited)
                                 
Retained
   
Accumulated
                   
   
Shares of common stock
         
Additional
         
earnings /
   
other
   
Treasury shares
   
Total
 
   
Number of
         
Donated
   
paid-in
   
Statutory
   
(Accumulated
   
comprehensive
   
Number of
         
shareholders’
 
   
shares
   
Amount
   
shares
   
capital
   
reserves
   
deficit)
   
income
   
shares
   
Amount
   
equity
 
Balance as of October 1, 2008
    57,676,481     $ 57,677     $ 14,101,689     $ 97,286,286     $ 6,917,943     $ 27,628,860     $ 25,146,155       (721,030 )   $ (4,066,610 )   $ 167,072,000  
                                                                                 
Net loss
    -       -       -       -       -       (12,631,708 )     -       -       -       (12,631,708 )
                                                                                 
Share-based compensation for employee stock awards
    -       -       -       2,102,323       -       -       -       -       -       2,102,323  
                                                                                 
Issuance of common stock to non- employee directors
    11,250       11       -       (11 )     -       -       -       -       -       -  
                                                                                 
Appropriation to statutory reserves
    -       -       -       -       309,252       (309,252 )     -       -       -       -  
                                                                                 
Foreign currency translation adjustment
    -        -       -       -       -       -       (242,542 )     -       -       (242,542 )
                                                                                 
Balance as of June 30, 2009
    57,687,731      $ 57,688     $ 14,101,689     $ 99,388,598     $ 7,227,195     $ 14,687,900     $ 24,903,613       (721,030 )   $ (4,066,610 )   $ 156,300,073  
                                                                                 
Balance as of October 1, 2009
    57,737,481     $ 57,738     $ 14,101,689     $ 101,161,455     $ 7,227,195     $ 13,328,115     $ 24,791,288       (721,030 )   $ (4,066,610 )   $ 156,600,870  
                                                                                 
Net loss
    -       -       -       -       -       (24,205,103 )     -       -       -       (24,205,103 )
                                                                                 
Share-based compensation for employee stock awards
    -       -       -       2,359,797       -       -       -       -       -       2,359,797  
                                                                                 
Exercise of stock options awards
    70,045       70       -       226,526       -       -       -       -       -       226,596  
                                                                                 
Issuance of common stock to non- employee directors
    11,250       11       -       (11 )     -       -       -       -       -       -  
                                                                                 
Issuance of new common stock
    5,790,000       5,790       -       19,383,694       -       -       -       -       -       19,389,484  
                                                                                 
Appropriation to statutory reserves
    -       -       -       -       87,370       (87,370 )     -       -       -       -  
                                                                                 
Foreign currency translation adjustment
    -        -       -       -       -       -       1,026,145       -       -       1,026,145  
                                                                                 
Balance as of June 30, 2010
    63,608,776      $ 63,609     $ 14,101,689     $ 123,131,461     $ 7,314,565     $ (10,964,358 )   $ 25,817,433       (721,030 )   $ (4,066,610 )   $ 155,397,789  

See accompanying notes to the condensed interim consolidated financial statements.

 
F-6

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of cash flows
For the three months ended June 30, 2009 and 2010
(Unaudited)
(In US$)
  
   
Three months ended June 30,
 
   
2009
   
2010
 
Cash flow from operating activities
           
Net loss
  $ (5,171,027 )   $ (18,262,965 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation and amortization
    3,982,887       4,469,160  
Provision for doubtful debts
    2,538,670       3,447,312  
Provision for obsolete inventories
    425,929       5,573,979  
Impairment charge
    -       5,057,745  
Share-based compensation
    553,848       414,912  
Deferred income taxes
    (713,239 )     (2,004,232 )
Deferred revenue
    (58,567 )     (58,616 )
Exchange (gain) / loss
    (345,649 )     558,173  
                 
Changes in operating assets and liabilities:
               
Trade accounts receivable
    1,735,782       1,545,615  
Inventories
    (4,545,283     5,842,860  
Prepayments and other receivables
    3,140,961       1,954,428  
Accounts and bills payable
    4,015,291       1,110,779  
Accrued expenses and other payables
    (399,438     (1,442,885
                 
Net cash provided by operating activities
    5,160,165       8,206,265  
                 
Cash flow from investing activities
               
                 
Purchases of property, plant and equipment
    (1,765,783 )     (12,529,550 )
Purchases of intangible assets
    (49,291 )     (12,284 )
                 
Net cash used in investing activities
  $ (1,815,074 )   $ (12,541,834 )

See accompanying notes to the condensed interim consolidated financial statements.

 
F-7

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of cash flows
For the three months ended June 30, 2009 and 2010 (continued)
(Unaudited)
(In US$)
 
   
Three months ended June 30,
 
   
2009
   
2010
 
Cash flow from financing activities
           
Proceeds from borrowings
  $ 38,456,922     $ 48,020,212  
Repayment of borrowings
    (19,801,349 )     (67,250,509 )
(Increase) / decrease in pledged deposits
    (17,656,329 )     8,793,960  
Net cash provided by / (used in) financing activities
    999,244       (10,436,337 )
Effect of exchange rate changes on cash and cash equivalents
    (79,908 )     2,521  
Net increase / (decrease) in cash and cash equivalents
    4,264,427       (14,769,385 )
Cash and cash equivalents at the beginning of period
    25,374,498       39,644,408  
Cash and cash equivalents at the end of period
  $ 29,638,925     $ 24,875,023  
Supplemental disclosure of cash flow information:
               
Cash received during the period for:
               
Bills receivable discounted to banks
  $ 10,244,795     $ 15,947,373  
Cash paid during the period for:
               
Income taxes
  $ 530,793     $ 621,442  
Interest, net of amounts capitalized
  $ 1,417,056     $ 2,960,974  

See accompanying notes to the condensed interim consolidated financial statements.

 
F-8

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of cash flows
For the nine months ended June 30, 2009 and 2010
(Unaudited)
(In US$)
 
   
Nine months ended June 30,
 
   
2009
   
2010
 
Cash flow from operating activities
           
Net loss
  $ (12,631,708 )   $ (24,205,103 )
Adjustments to reconcile net loss to net cash provided by / (used in) operating activities:
               
Depreciation and amortization
    11,503,691       13,261,962  
Provision for doubtful debts
    5,861,135       9,104,861  
(Recovery of) / provision for obsolete inventories
    (130,790 )     5,435,854  
Impairment charge
    -       5,057,745  
Share-based compensation
    2,102,323       2,359,797  
Deferred income taxes
    (1,003,707 )     (3,298,717 )
Deferred revenue
    (175,567 )     (175,790 )
Exchange loss
    409,774       711,684  
                 
Changes in operating assets and liabilities:
               
Trade accounts receivable
    6,930,391       (4,378,527 )
Inventories
    5,749,171       (4,254,359 )
Prepayments and other receivables
    (5,114,724 )     (1,488,373 )
Accounts and bills payable
    16,871,050       (11,278,196 )
Accrued expenses and other payables
    2,241,048       2,462,334  
                 
Net cash provided by / (used in) operating activities
    32,612,087       (10,684,828 )
                 
Cash flow from investing activities
               
                 
Purchases of property, plant and equipment
    (33,623,698 )     (20,238,084 )
Payment of lease prepayments
    (1,076,777 )     -  
Purchases of intangible assets
    (127,955 )     (13,922 )
                 
Net cash used in investing activities
  $ (34,828,430 )   $ (20,252,006 )

See accompanying notes to the condensed interim consolidated financial statements.

 
F-9

 
 
China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of cash flows
For the nine months ended June 30, 2009 and 2010 (continued)
(Unaudited)
(In US$)
 
   
Nine months ended June 30,
 
   
2009
   
2010
 
Cash flow from financing activities
           
Proceeds from borrowings
  $ 173,007,057     $ 189,852,315  
Repayment of borrowings
    (151,426,481 )     (205,519,128 )
(Increase) / decrease in pledged deposits
    (25,152,373 )     21,882,643  
Proceeds from issuance of capital stock, net
    -       19,616,080  
Net cash (used in) / provided by financing activities
    (3,571,797     25,831,910  
Effect of exchange rate changes on cash and cash equivalents
    (279,769 )     (698,405 )
Net decrease in cash and cash equivalents
    (6,067,909     (5,803,329 )
Cash and cash equivalents at the beginning of period
    35,706,834       30,678,352  
Cash and cash equivalents at the end of period
  $ 29,638,925     $ 24,875,023  
Supplemental disclosure of cash flow information:
               
Cash received during the period for:
               
Bills receivable discounted to banks
  $ 18,971,302     $ 16,533,342  
Cash paid during the period for:
               
Income taxes
  $ 625,726     $ 843,781  
Interest, net of amounts capitalized
  $ 6,557,660     $ 6,603,127  

See accompanying notes to the condensed interim consolidated financial statements.

 
F-10

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
1. 
Principal Activities, Basis of Presentation and Organization

Principal Activities

China BAK Battery, Inc. (“China BAK”) is a corporation formed in the State of Nevada on October 4, 1999 as Medina Copy, Inc. The Company changed its name to Medina Coffee, Inc. on October 6, 1999 and subsequently changed its name to China BAK Battery, Inc. on February 14, 2005. China BAK and its subsidiaries (hereinafter, collectively referred to as the “Company”) are principally engaged in the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion (known as "Li-ion" or "Li-ion cell") 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, uninterruptible power suppliers, Bluetooth devices, electric bicycles, electric buses, hybrid/electric vehicles, 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 June 30, 2010, the Company’s subsidiaries consisted 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 International beneficially owns 100% of BAK India partly through a nominee agreement with one of its employees.

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. On November 16, 2009, BAK International contributed approximately US$9,000,000 capital to BAK Tianjin and as of November 16, 2009, the total contribution from BAK International was US$29,000,000. The remaining US$70,990,000 was originally required to be fully contributed no later than December 11, 2009 and an extension from the Business Administration Bureau of Beichen District, Tianjin, was obtained to make this contribution no later than December 2012. BAK Tianjin is principally engaged in the manufacture of larger lithium ion batteries for use in cordless power tools and various types of vehicles.

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. On May 5, 2009, an approval from Shenzhen Bureau of Trade and Industry was obtained to reduce the required registered capital to US$76,877,480, which had been fully paid up, and on June 22, 2009, an updated business license of Shenzhen BAK from the Business Administration Bureau of Shenzhen was obtained. On December 25, 2009, BAK International contributed approximately US$10,122,520 capital to Shenzhen BAK and as of June 30, 2010, the total contribution from BAK International and Shenzhen BAK’s registered capital was US$87,000,000.

 
F-11

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
1.
Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

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.

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 accounting principles generally accepted 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.

 
F-12

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
1.
Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

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 have not been restated.

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 June 30, 2010 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.
 
 
F-13

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
1.
Principal Activities, Basis of Presentation and Organization (continued)

Basis of Presentation and Organization (continued)

The interim results of operations are not necessarily indicative of the results to be expected for the fiscal year ending September 30, 2010. The Company’s consolidated balance sheet as of September 30, 2009 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, 2009. 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-14

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
1.
Principal Activities, Basis of Presentation and Organization (continued)

Recently Issued Accounting Standards

In October 2009, the FASB issued ASU 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements,” or ASU 2009-13. ASU 2009-13 requires companies to allocate revenue in multiple-element arrangements based on an element’s estimated selling price if vendor-specific or other third party evidence of value is not available. ASU 2009-13 is to be applied on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with earlier application permitted.  The adoption of ASC 605 is not expected to have a material effect on the Company’s financial statements.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements”, or ASU 2010-06 that expands the required disclosures about fair value measurements. This guidance provides for new disclosures requiring the Company to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separately information about purchases, sales, issuances and settlements in the reconciliation of Level 3 fair value measurements. This guidance also provides clarification of existing disclosures requiring the Company to (i) determine each class of assets and liabilities based on the nature and risks of the investments rather than by major security type and (ii) for each class of assets and liabilities, disclose the valuation techniques and inputs used to measure fair value for both Level 2 and Level 3 fair value measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is permitted. The adoption of ASU 2010-06 has no material impact on the Company’s financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events—Amendments to Certain Recognition and Disclosure Requirements,” or ASU 2010-09. The ASU amends the guidance on subsequent events in the FASB Accounting Standards Codification to (1) eliminate the requirement for an SEC filer to disclose the date through which it has evaluated subsequent events, (2) clarify the period through which conduit bond obligors must evaluate subsequent events, and (3) refine the scope of the disclosure requirements for reissued financial statements. All of the amendments in ASU 2010-09 were effective upon issuance on February 24, 2010, except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010. The adoption of ASU 2009-09 has no material impact on the Company’s financial statements.

In April 2010, the FASB issued ASU 2010-13, “Compensation-Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades - a consensus of the FASB Emerging Issues Task Force,” or ASU 2010-13. ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently evaluating the impact of the adoption of ASU 2010-13 on its financial statements.
 
 
F-15

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
2
Pledged Deposits

Pledged deposits as of September 30, 2009 and June 30, 2010 consisted of the following:

   
September 30,
   
June 30,
 
   
2009
   
2010
 
Pledged deposits with banks for:
           
Construction payable
  $ 893,603     $ 457,133  
Short-term bank loans (Note 7)
    7,137,307       3,838,470  
Bills payable
    23,084,199       4,998,750  
    $ 31,115,109     $ 9,294,353  

Deposits pledged for construction payable are generally released when the relevant construction projects are completed.

3
Trade Accounts Receivable, net

Trade accounts receivable as of September 30, 2009 and June 30, 2010 consisted of the following:
   
September 30,
   
June 30,
 
   
2009
   
2010
 
             
Trade accounts receivable
  $ 84,133,865     $ 96,079,947  
Less: Allowance for doubtful accounts
    (13,081,331 )     (21,791,386 )
      71,052,534       74,288,561  
Bills receivable
    12,239,164       5,340,055  
    $ 83,291,698     $ 79,628,616  


 
F-16

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
3
Trade Accounts Receivable, net (continued)

An analysis of the allowance for doubtful accounts for the nine months ended June 30, 2009 and 2010 is as follows:

   
Nine months ended June 30,
 
   
2009
   
2010
 
             
Balance at beginning of period
  $ 5,351,244     $ 13,081,331  
Addition of bad debt expense, net
    3,324,909       8,563,300  
Foreign exchange adjustment
    (10,035 )     146,755  
                 
Balance at end of period
  $ 8,666,118     $ 21,791,386  
 
4
Inventories
 
Inventories as of September 30, 2009 and June 30, 2010 consisted of the following:

   
September 30,
   
June 30,
 
   
2009
   
2010
 
             
Raw materials
  $ 18,476,929     $ 18,104,970  
Work-in-progress
    10,488,114       13,638,788  
Finished goods
    40,217,837       42,197,169  
      69,182,880       73,940,927  
                 
Provision for obsolete inventories
    (3,647,496 )     (9,141,663 )
                 
    $ 65,535,384     $ 64,799,264  

Part of the Company’s inventories with carrying value of US$21,973,836 and US$22,119,326 as of September 30, 2009 and June 30, 2010, respectively, was pledged as collateral under certain loan agreements (see Note 7).

5
Prepayments and Other Receivables

Prepayments and other receivables as of September 30, 2009 and June 30, 2010 consisted of the following:

   
September 30,
   
June 30,
 
   
2009
   
2010
 
             
Prepayments for raw materials and others
  $ 1,437,115     $ 2,476,520  
Other receivables
    3,202,149       3,671,770  
Less: Allowance for doubtful accounts
    (6,840 )     (548,401 )
                 
    $ 4,632,424     $ 5,599,889  
 
 
F-17

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
6
Property, Plant and Equipment, net

Property, plant and equipment as of September 30, 2009 and June 30, 2010 consisted of the following:
   
September 30,
   
June 30,
 
   
2009
   
2010
 
Buildings
  $ 100,280,425     $ 103,416,193  
Machinery and equipment
    123,796,485       132,526,452  
Office equipment
    1,802,825       2,053,491  
Motor vehicles
    1,168,575       1,189,439  
      227,048,310       239,185,575  
Accumulated depreciation
    (42,709,026 )     (55,512,573 )
Construction in progress
    27,959,855       39,582,029  
Prepayment for acquisition of property, plant and equipment
    7,385,855       5,848,481  
 
    219,684,994       229,103,512  
Impairment charge
    -       (5,091,233 )
                 
Net book value
  $ 219,684,994     $ 224,012,279  

 
(i)
Depreciation expense for the nine months ended June 30, 2009 and 2010 is included in the condensed interim consolidated statements of operations and comprehensive loss as follows:

   
Nine months ended June 30,
 
   
2009
   
2010
 
Cost of revenues
  $ 8,776,477     $ 9,302,306  
Research and development expenses
    374,177       485,684  
Sales and marketing expenses
    346,643       444,561  
General and administrative expenses
    1,448,192       1,898,721  
    $ 10,945,489     $ 12,131,272  

(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 nine months ended June 30, 2009 and 2010, the Company capitalized interest of US$542,884 and US$745,342 to the cost of construction in progress.

(iii) Pledged Property, Plant and Equipment

As of September 30, 2009 and June 30, 2010, machinery and equipment with net book value of US$67,873,955 and US$62,711,167 of the Company were pledged as collateral under certain loan arrangements (see Notes 7 and 8).

(iv) Impairment Charge

In the quarter ended June 30, 2010, during the course of the Company's strategic review of its operation, the Company assessed the recoverability of the carrying value of certain fixed assets which resulted in impairment losses of $5,057,745. These losses reflect the amounts by which the carrying values of these assets exceed their estimated fair values determined by their estimated future discounted cash flows. The impairment loss is recorded as "Impairment charge" in the statement of operations and comprehensive loss for the quarter ended June 30, 2010. 
 
 
F-18

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
7
Short-term Bank Loans

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:
   
September 30,
   
June 30,
 
   
2009
   
2010
 
Pledged deposits (Note 2)
  $ 7,137,307     $ 3,838,470  
Inventories (Note 4)
    21,973,836       22,119,326  
Machinery and equipment, net (Note 6)
    33,174,263       28,698,933  
    $ 62,285,406     $ 54,656,729  

As of September 30, 2009 and June 30, 2010, the Company had several short-term bank loans with aggregate outstanding balances of US$139,159,380 and US$138,944,458, respectively. The loans were primarily obtained for general working capital, carried interest rates ranging from 0.07% to 5.58% per annum, and had maturity dates ranging from 6 to 12 months. Each loan is guaranteed by Mr. Xiangqian Li, who did not receive any compensation for acting as guarantor.

As of June 30, 2010, 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$58,984,870 borrowed from Shenzhen Eastern Branch, Agricultural Bank of China. As of June 30, 2010, the aggregate net book value of the buildings and land use rights in relation to the land use rights certificate was US$103,781,336.

8
Long-term Bank Loans

As of September 30, 2009 and June 30, 2010, the Company had long-term bank loans of US$55,667,052 and US$41,289,410, respectively. As of June 30, 2010, US$7,373,109 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 5.94% per annum. This long-term bank loan is repayable on February 28, 2016.

Two other long-term loans totaled an aggregate borrowed amount of US$14,746,218 as of June 30, 2010. 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$5,898,487 currently carries interest at 5.184% per annum and is repayable on January 25, 2012. The second loan of US$8,847,731 currently carries annual interest of 5.184% and is repayable in two installments of US$7,373,109 on January 25, 2011 and US$1,474,622 on January 25, 2012, respectively.

Another loan of US$19,170,083 as of June 30, 2010 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 5.76% per annum. This loan is repayable in three installments of US$4,423,865 on December 26, 2010, US$7,373,109 on December 26, 2011, and US$7,373,109 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 certificate 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. On April 7, 2010, the pledge of the land use rights certificate to China Development Bank was approved by the relevant government bureau. On April 20, 2010, the relevant land use rights certificate was pledged to China Development Bank.
 
 
F-19

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
8
Long-term Bank Loans (continued)

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$34,012,234 as of June 30, 2010 (see Note 6); and (iii) secured by the property ownership certificate and land use rights certificate in relation to the land on which Shenzhen BAK’s corporate campus had been constructed 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 machinery and equipment with carrying values of $6,279,896 as of June 30, 2010 purchased for the automated high-power lithium battery cells production line in Tianjin. As of June 30, 2010, construction of the automated high-power lithium battery 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 June 30, 2010 are as follows:

Fiscal years ending on June 30,
     
2011
  $ 11,796,974  
2012
    22,119,327  
2016
    7,373,109  
         
    $ 41,289,410  

9
Share-based Compensation

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:
   
Percentage of
 
Initial
Number of Shares
 
Options Issued
 
Vesting Date
800,000
    40 %
July 1, 2007
600,000
    30 %
January 1, 2008
600,000
    30 %
July 1, 2008
2,000,000
    100 %  
 
 
F-20

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
9
Share-based Compensation (continued)
 
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.

A summary of share option plan activity for these options during the nine months ended June 30, 2010 is presented below:
 
         
Weighted
   
Weighted
       
          
average
   
average
   
 
 
   
Number of
   
exercise
price per
   
remaining
contractual
   
Aggregate
intrinsic
 
   
shares
   
share
   
term
   
value (1)
 
                         
Outstanding as of October 1, 2009
    200,000     $ 6.25                  
Exercised
    -       -                  
Forfeited
    -       -                  
Cancelled
    -       -                  
Outstanding as of June 30, 2010
    200,000     $ 6.25    
       0.7 years
    $ -  
Exercisable as of June 30, 2010
    200,000     $ 6.25    
      0.7 years
    $ -  

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on June 30, 2010 (US$1.74) 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 during 2005 was US$3.67 per share. No non-cash share-based compensation expense was recognized in respect of these share options for the nine months ended June 30, 2009 and 2010.

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:

Expected volatility
    59.85 %
Expected dividends
 
Nil
 
Expected life
 
6 years
 
Risk-free interest rate
    4.13 %

As of June 30, 2010, 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.
 
 
F-21

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
9
Share-based Compensation (continued)

A summary of share option plan activity for these options during the nine months ended June 30, 2010 is presented below:
 
         
 
 
Weighted
     
   
 
   
Weighted
average
 
average
remaining
 
Aggregate
 
   
Number of
Shares
   
exercise price
per share
 
contractual
term
 
intrinsic value
(1)
 
                     
Outstanding as of October 1, 2009
    1,070,500     $ 3.29          
Exercised
    65,000       3.27          
Forfeited
    80,000       -          
Cancelled
    -       -          
Outstanding as of June 30, 2010
    925,500     $ 3.29  
3.0 years
  $ -  
Exercisable as of June 30, 2010
    665,500     $ 3.18  
2.4 years
  $ -  

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on June 30, 2010 (US$1.74) 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 during 2007 was US$2.15 per share. The Company recorded non-cash share-based compensation expense of US$579,864 and US$172,115 for the nine months ended June 30, 2009 and 2010 respectively, in respect of share options granted on June 25, 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:

Expected volatility
    69.44 %
Expected dividends
 
Nil
 
Expected life
 
4 - 10 years
 
Risk-free interest rate
    5.09 %

As of June 30, 2010, there were unrecognized compensation costs of US$98,708 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.7 years.

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.
 
 
F-22

 
 
China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the nine months ended June 30, 2009 and 2010
(Unaudited)
 
9
Share-based Compensation (continued)
 
A summary of share option plan activity for these options during the nine months ended June 30, 2010 is presented below:
 
         
 
 
Weighted
     
   
 
   
Weighted
average
 
average
remaining
 
Aggregate