CBAK Energy Technology, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - CBAK Energy Technology, Inc.	exhibit31-1.htm
EX-99.1 - EXHIBIT 99.1 - CBAK Energy Technology, Inc.	exhibit99-1.htm
EX-32.1 - EXHIBIT 32.1 - CBAK Energy Technology, Inc.	exhibit32-1.htm
EX-99.2 - EXHIBIT 99.2 - CBAK Energy Technology, Inc.	exhibit99-2.htm
EX-99.5 - EXHIBIT 99.5 - CBAK Energy Technology, Inc.	exhibit99-5.htm
EX-32.2 - EXHIBIT 32.2 - CBAK Energy Technology, Inc.	exhibit32-2.htm
EX-99.3 - EXHIBIT 99.3 - CBAK Energy Technology, Inc.	exhibit99-3.htm
EX-31.2 - EXHIBIT 31.2 - CBAK Energy Technology, Inc.	exhibit31-2.htm
EX-99.4 - EXHIBIT 99.4 - CBAK Energy Technology, Inc.	exhibit99-4.htm
EX-99.6 - EXHIBIT 99.6 - CBAK Energy Technology, Inc.	exhibit99-6.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: December 31, 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		(I.R.S. Employer Identification No.)
or organization)

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 February 8, 2011 is as follows:

Class of Securities	Shares Outstanding
Common Stock, $0.001 par value	63,616,276

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.	16
ITEM 4.	CONTROLS AND PROCEDURES.	17
PART II
OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS.	18
ITEM 1A.	RISK FACTORS.	18
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.	18
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.	18
ITEM 4.	(REMOVED AND RESERVED).	18
ITEM 5.	OTHER INFORMATION.	18
ITEM 6.	EXHIBITS.	18

PART I FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS.
CHINA BAK BATTERY, INC. AND SUBSIDIARIES CONDENSED INTERIM CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER 31, 2010

Contents		Page
Condensed Interim Consolidated Balance Sheets as of September 30, 2010 and December 31, 2010 (unaudited)		F-2 - F-3
Condensed Interim Consolidated Statements of Operations and Comprehensive Loss for the three months ended December 31, 2009 and 2010 (unaudited)		F-4
Condensed Interim Consolidated Statements of Shareholders’ Equity for the three months ended December 31, 2009 and 2010 (unaudited)		F-5 - F-6
Condensed Interim Consolidated Statements of Cash Flows for the three months ended December 31, 2009 and 2010 (unaudited)		F-7 - F- 8
Notes to the Condensed Consolidated Financial Statements (unaudited)		F-9 - F- 31

F-1

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated balance sheets
As of September 30, 2010 and December 31, 2010
(In US$)
			September 30,		December 31,
	Note		2010		2010
					(Unaudited)
Assets
Current assets
Cash and cash equivalents		$	22,588,635	$	24,526,892
Pledged deposits	2		9,425,838		16,365,405
Trade accounts receivable, net	3		86,198,239		92,218,679
Inventories	4		64,048,366		67,166,812
Prepayments and other receivables	5		5,513,221		5,054,965
Deferred tax assets			6,887,723		7,209,609
Total current assets			194,662,022		212,542,362
Property, plant and equipment, net	6		228,884,576		229,074,236
Lease prepayments, net			31,924,396		32,178,238
Intangible assets, net			184,367		234,457
Deferred tax assets			1,680,348		1,705,885
Total assets		$	457,335,709	$	475,735,178

See accompanying notes to the condensed interim consolidated financial statements.

F-2

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated balance sheets
As of September 30, 2010 and December 31, 2010 (continued)
(In US$)
			September 30,			December 31,
	Note		2010			2010
						(Unaudited)
Liabilities
Current liabilities
Short-term bank loans	7	$	137,418,187		$	139,774,133
Current maturities of long-term bank loans	8		11,956,002			15,146,236
Accounts and bills payable			93,724,448			110,590,976
Accrued expenses and other payables			22,411,066			19,681,047
Total current liabilities			265,509,703			285,192,392
Long-term bank loans, less current maturities	8		29,890,004			22,719,355
Deferred revenue			7,352,941			7,391,363
Other long-term payables	9		3,431,373			10,358,934
Deferred tax liabilities			718,912			722,979
Total liabilities			306,902,933			326,385,023
Commitments and contingencies	13
Shareholders’ equity
Common stock US$ 0.001 par value;
100,000,000 authorized; 63,612,526 and 63,616,276 issued and outstanding as of September 30, 2010 and December 31, 2010 respectively			63,613			63,617
Donated shares			14,101,689			14,101,689
Additional paid-in capital			124,551,522			125,076,537
Statutory reserves			7,314,565			7,645,303
Accumulated deficit			(19,542,138	)		(23,530,668	)
Accumulated other comprehensive income			28,010,135			30,060,287
			154,499,386			153,416,765
Less: Treasury shares			(4,066,610	)		(4,066,610	)
Total shareholders’ equity			150,432,776			149,350,155
Total liabilities and shareholders’ equity		$	457,335,709		$	475,735,178

See accompanying notes to the condensed interim consolidated financial statements.

F-3

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of operations and comprehensive loss
For the three months ended December 31, 2009 and 2010
(Unaudited)
(In US$)
			Three months ended December 31,
	Note		2009			2010
Net revenues	15	$	50,227,552		$	63,530,219
Cost of revenues			(40,667,672	)		(53,533,855	)
Gross profit			9,559,880			9,996,364
Operating expenses:
Research and development expenses			(1,768,107	)		(1,644,744	)
Sales and marketing expenses			(2,027,970	)		(2,273,363	)
General and administrative expenses			(8,637,340	)		(7,878,671	)
Total operating expenses			(12,433,417	)		(11,796,778	)
Operating loss			(2,873,537	)		(1,800,414	)
Finance costs, net			(2,153,126	)		(2,839,640	)
Government grant income			355,304			606,971
Other income			6,716			241,493
Loss before income taxes			(4,664,643	)		(3,791,590	)
Income tax benefits			1,272,316			133,798
Net loss		$	(3,392,327	)	$	(3,657,792	)
Other comprehensive (loss) / income
- Foreign currency translation adjustment			(107,346	)		2,050,152
Comprehensive loss		$	(3,499,673	)	$	(1,607,640	)
Net loss per share:
- Basic	11	$	(0.06	)	$	(0.06	)
- Diluted	11	$	(0.06	)	$	(0.06	)
Weighted average number of shares of common stock:
- Basic	11		61,107,713			62,895,001
- Diluted	11		61,107,713			62,895,001

See accompanying notes to the condensed interim consolidated financial statements.

F-4

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of shareholders’ equity
For the three months ended December 31, 2009 and 2010
(Unaudited)
												Retained			Accumulated
	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, 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	-		-		-		-			-		(3,392,327	)		-		-			-			(3,392,327	)
Share-based
compensation for employee stock awards	-		-		-		1,145,210			-		-			-		-			-			1,145,210
Exercise of stock options awards	70,045		70		-		226,526			-		-			-		-			-			226,596
Issuance of common stock to non- employee directors	3,750		3		-		(3	)		-		-			-		-			-			-
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	-		-		-		-			-		-			(107,346	)	-			-			(107,346	)
Balance as of December 31, 2009	63,601,276	$	63,601	$	14,101,689	$	121,916,882		$	7,314,565	$	9,848,418		$	24,683,942		(721,030	)	$	(4,066,610	)	$	173,862,487
Balance as of October 1, 2010	63,612,526	$	63,613	$	14,101,689	$	124,551,522		$	7,314,565	$	(19,542,138	)	$	28,010,135		(721,030	)	$	(4,066,610	)	$	150,432,776
Net loss	-		-		-		-			-		(3,657,792	)		-		-			-			(3,657,792	)
Share-based compensation for employee stock awards	-		-		-		525,019			-		-			-		-			-			525,019
Issuance of common stock to non- employee directors	3,750		4		-		(4	)		-		-			-		-			-			-
Appropriation to statutory reserves	-		-		-		-			330,738		(330,738	)		-		-			-			-

F-5

											Retained			Accumulated
	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
Foreign currency translation adjustment	-		-		-		-		-		-			2,050,152	-			-			2,050,152
Balance as of December 31, 2010	63,616,276	$	63,617	$	14,101,689	$	125,076,537	$	7,645,303	$	(23,530,668	)	$	30,060,287	(721,030	)	$	(4,066,610	)	$	149,350,155

See accompanying notes to the condensed interim consolidated financial statements.

F-6

China BAK Battery, Inc. and subsidiaries
Condensed interim consolidated statements of cash flows
For the three months ended December 31, 2009 and 2010
(Unaudited)
(In US$)
		Three months ended December 31,
		2009			2010
Cash flow from operating activities
Net loss	$	(3,392,327	)	$	(3,657,792	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		4,192,735			4,319,358
Provision for doubtful debts		4,736,336			3,060,868
Recovery of obsolete inventories		(280,255	)		-
Share-based compensation		1,145,210			525,019
Deferred income taxes		(1,494,655	)		(235,750	)
Deferred revenue		(58,587	)		(60,096	)
Exchange gain		(262,558	)		(65,527	)
Changes in operating assets and liabilities:
Trade accounts receivable		4,475,260			(7,871,723	)
Inventories		(13,572,622	)		(2,228,036	)
Prepayments and other receivables		(8,197,254	)		521,311
Accounts and bills payable		(4,795,115	)		15,961,714
Accrued expenses and other payables		130,935			8,116,784
Net cash (used in) / provided by operating activities		(17,372,897	)		18,386,130
Cash flow from investing activities
Purchases of property, plant and equipment		(3,904,649	)		(5,967,721	)
Purchases of intangible assets		(1,503	)		-
Net cash used in investing activities	$	(3,906,152	)	$	(5,967,721	)

See accompanying notes to the condensed interim consolidated financial statements.

F-7

		Three months ended December 31,
		2009			2010
Cash flow from financing activities
Proceeds from borrowings	$	40,937,888		$	27,754,283
Repayment of borrowings		(63,713,859	)		(31,759,964	)
Decrease / (increase) in pledged deposits		12,070,796			(6,757,619	)
Proceeds from issuance of capital stock, net		19,616,080			-
Net cash provided by / (used in) financing activities		8,910,905			(10,763,300	)
Effect of exchange rate changes on cash and cash equivalents		(7,285	)		283,148
Net (decrease) / increase in cash and cash equivalents		(12,375,429	)		1,938,257
Cash and cash equivalents at the beginning of period		30,678,352			22,588,635
Cash and cash equivalents at the end of period	$	18,302,923		$	24,526,892
Supplemental disclosure of cash flow information:
Cash received during the period for:
Bills receivable discounted to banks	$	585,969		$	9,095,582
Cash paid during the period for:
Income taxes	$	222,339		$	-
Interest, net of amounts capitalized	$	1,822,195		$	2,402,600

See accompanying notes to the condensed interim consolidated financial statements.

F-8

China BAK Battery, Inc. and subsidiaries
Notes to the condensed interim consolidated financial statements
For the three months ended December 31, 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, electric bicycles, hybrid/electric motors, and general industrial applications.

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

Basis of Presentation and Organization

As of December 31, 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.

F-9

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-10

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 ordinary shares issued and outstanding, total shareholders’ equity and total assets do not change; nor is there any impact on income or earnings per share. Therefore, previously filed consolidated financial statements for the fiscal year ended September 30, 2007 will not be restated. This share transfer has been reflected by reclassifying the balances of certain items as of October 1, 2007. The balances of donated shares and additional paid-in capital as of October 1, 2007 were credited and debited by US$7,955,358 respectively.

In November 2007, Mr. Xiangqian Li delivered the 1,089,775 shares related to the 2005 performance threshold to BAK International pursuant to the Li Settlement Agreement; BAK International in turn delivered the shares to the Company. Such shares (other than those issued to investors pursuant to the 2008 Settlement Agreements, as described below) are now held by the Company. Upon receipt of these shares, the Company and BAK International released all claims and causes of action against Mr. Xiangqian Li regarding the shares, and Mr. Xiangqian Li released all claims and causes of action against the Company and BAK International regarding the shares. Under the terms of the Li Settlement Agreement, the Company commenced negotiations with the investors who participated in the Company’s January 2005 private placement in order to achieve a complete settlement of BAK International’s obligations (and the Company’s obligations to the extent it has any) under the applicable agreements with such investors.

Beginning on March 13, 2008, the Company has entered into settlement agreements (the “2008 Settlement Agreements”) with certain investors in the January 2005 private placement.

Pursuant to the 2008 Settlement Agreements, the Company and the settling investors have agreed, without any admission of liability, to a settlement and mutual release from all claims relating to the January 2005 private placement, including all claims relating to the escrow shares related to the 2005 performance threshold that had been placed into escrow by Mr. Xiangqian Li, as well as all claims, including claims for liquidated damages relating to registration rights granted in connection with the January 2005 private placement. Under the 2008 Settlement Agreement, the Company has made settlement payments to each of the settling investors of the number of shares of the Company’s common stock equivalent to 50% of the number of the escrow shares related to the 2005 performance threshold these investors had claimed; aggregate settlement payments as of December 31, 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-11

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, 2011. The Company’s consolidated balance sheet as of September 30, 2010 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, 2010. 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.

The Company has a working deficiency and accumulated deficit from net losses incurred for each of the three years in the fiscal year ended September 30, 2010 and for the three months ended December 31, 2010. These factors may raise doubts about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The Company accordingly has developed a strategic plan to generate a positive cash flow from operating activities for the fiscal year ending September 30, 2011 (the "FY2011 Turnaround Plan"). Under the FY2011 Turnaround Plan, the Company will implement cost reductions on both manufacturing costs and operating expenses to improve margins as well as reduce receivable turnover days through stronger credit controls.

Recently Issued Accounting Standards

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 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 adoption of ASU 2010-13 has no material impact on the Company’s financial statements.

F-12

1. Principal Activities, Basis of Presentation and Organization (continued)

In April 2010, the FASB issued ASU 2010-17, Revenue Recognition—Milestone Method (Topic 605)—Revenue Recognition, or ASU 2010-17. ASU 2010-17 provides guidance on defining the milestone and determining when the use of the milestone method of revenue recognition for research or development transactions is appropriate. It provides criteria for evaluating if the milestone is substantive and clarifies that a vendor can recognize consideration that is contingent upon achievement of a milestone as revenue in the period in which the milestone is achieved, if the milestone meets all the criteria to be considered substantive. ASU 2010-17 is effective in the Company's first quarter of fiscal year 2012 and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2010-17 on its financial statements.

In July 2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (Topic 310)—Receivables, or ASU 2010- 20. ASU 2010-20 enhances the disclosure requirements about the credit quality and related allowance for credit losses of financing receivables. ASU 2010-20 is effective for interim and annual reporting periods beginning on or after December 15, 2010. The adoption of ASU 2010-20 has no material impact on the Company’s financial statements.

2 Pledged Deposits

Pledged deposits as of September 30, 2010 and December 31, 2010 consisted of the following:
		September 30,		December 31,
		2010		2010
Pledged deposits with banks for:
Construction payable	$	463,410	$	7,533,738
Short-term bank loans (Note 7)		658,508		-
Bills payable		8,303,920		8,831,667
	$	9,425,838	$	16,365,405

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, 2010 and December 31, 2010 consisted of the following:

		September 30,			December 31,
		2010			2010
Trade accounts receivable	$	98,625,901		$	108,349,148
Less: Allowance for doubtful accounts		(23,354,925	)		(26,746,590	)
		75,270,976			81,602,558
Bills receivable		10,927,263			10,616,121
	$	86,198,239		$	92,218,679

An analysis of the allowance for doubtful accounts for the three months ended December 31, 2009 and 2010 is as follows:

		Three months ended December 31,
		2009			2010
Balance at beginning of period	$	13,081,331		$	23,354,925
Addition of bad debt expense, net		4,727,552			3,048,943
Foreign exchange adjustment		(1,065	)		342,722
Balance at end of period	$	17,807,818		$	26,746,590

F-13

4 Inventories

Inventories as of September 30, 2010 and December 31, 2010 consisted of the following:
		September 30,			December 31,
		2010			2010
Raw materials	$	18,357,473		$	23,823,740
Work-in-progress		6,771,843			12,364,206
Finished goods		47,458,604			39,633,405
		72,587,920			75,821,351
Provision for obsolete inventories		(8,539,554	)		(8,654,539	)
	$	64,048,366		$	67,166,812

Part of the Company’s inventories with carrying value of US$22,417,504 and US$22,719,355 as of September 30, 2010 and December 31, 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, 2010 and December 31, 2010 consisted of the following:

		September 30,			December 31,
		2010			2010
Prepayments for raw materials and others	$	2,198,770		$	2,449,711
Other receivables		3,952,530			3,260,498
Less: Allowance for doubtful accounts		(638,079	)		(655,244	)
	$	5,513,221		$	5,054,965

6 Property, Plant and Equipment, net

Property, plant and equipment as of September 30, 2010 and December 31, 2010 consisted of the following:
		September 30,			December 31,
		2010			2010
Buildings	$	121,050,663		$	122,985,925
Machinery and equipment		135,127,265			138,568,749
Office equipment		2,207,168			2,278,115
Motor vehicles		1,416,369			1,436,114
		259,801,465			265,268,903
Accumulated depreciation		(61,340,759	)		(66,325,517	)
Construction in progress		33,791,211			34,397,802
Prepayment for acquisition of property, plant and equipment		2,550,733			1,949,098
Assets held for abandonment		1,043,835			839,602
Net book value		235,846,485			236,129,888
Impairment charge		(6,961,909	)		(7,055,652	)
Carried amount	$	228,884,576		$	229,074,236

F-14

6 Property, Plant and Equipment, net (continued)

(i) Depreciation expense for the three months ended December 31, 2009 and 2010 is included in the condensed interim consolidated statements of operations and comprehensive loss as follows:

		Three months ended December 31,
		2009		2010
Cost of revenues	$	3,113,461	$	3,321,155
Research and development expenses		137,788		57,749
Sales and marketing expenses		95,941		123,983
General and administrative expenses		492,650		628,642
	$	3,839,840	$	4,131,529

(ii) Construction in Progress

Construction in progress mainly comprises capital expenditures for construction of the Company’s new corporate campus, including offices and factories.

For the three months ended December 31, 2009 and 2010, the Company capitalized interest of US$181,057 and US$117,079 respectively to the cost of construction in progress.

(iii) Pledged Property, Plant and Equipment

As of September 30, 2010 and December 31, 2010, machinery and equipment with net book value of US$59,735,854 and US$58,426,829 of the Company were pledged as collateral under certain loan arrangements (see Notes 7 and 8).

(iv) Assets held for abandonment

Assets held for abandonment as of September 30, 2010 and December 31, 2010 consisted of the following:

		September 30,			December 31,
		2010			2010
Net book value	$	1,043,835		$	1,045,989
Less: impairment charge		(819,874	)		(830,913	)
Carried amount	$	223,961		$	215,076

The carried amount as of December 31, 2010 composed of the machinery and equipment relating to steel-case cell production line and certain used assets which have been written down to their salvage value of $215,076.

7 Short-term Bank Loans

The Company obtained several short-term loan facilities from financial institutions in the PRC. These facilities were secured by the Company’s assets with the following carrying values:

		September 30,		December 31,
		2010		2010
Pledged deposits (Note 2)	$	658,508	$	-
Inventories (Note 4)		22,417,504		22,719,355
Machinery and equipment, net (Note 6)		31,788,414		27,246,520
	$	54,864,426		$49,965,875

F-15

7 Short-term Bank Loans (continued)

As of September 30, 2010 and December 31, 2010, the Company had several short-term bank loans with aggregate outstanding balances of US$137,418,187 and US$139,774,133, respectively. The loans were primarily obtained for general working capital, carried interest rates ranging from 4.56% to 6.12% per annum, and had maturity dates ranging from 3 to 12 months. Each loan is guaranteed by Mr. Xiangqian Li, who did not receive any compensation for acting as guarantor.

As of December 31, 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$60,584,948 borrowed from Shenzhen Eastern Branch, Agricultural Bank of China. As of December 31, 2010, the aggregate net book value of the buildings and land use rights in relation to the land use rights certificate was US$113,880,143.

8 Long-term Bank Loans

As of September 30, 2010 and December 31, 2010, the Company had long-term bank loans of US$41,846,006 and US$37,865,591, respectively. As of December 31, 2010, US$7,573,119 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$15,146,236 as of December 31, 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$6,058,494 currently carries interest at 5.184% per annum and is repayable on January 25, 2012. The second loan of US$9,087,742 currently carries annual interest of 5.184% and is repayable in two installments of US$7,573,118 on January 25, 2011 and US$1,514,624 on January 25, 2012, respectively.

Another loan of US$15,146,236 as of December 31, 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 two installments of US$7,573,118 on December 26, 2011 and US$7,573,118 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.

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$31,180,309 as of December 31, 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 the machinery and equipment purchased for the automated high-power lithium battery cells production line in Tianjin. As of December 31, 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.

F-16

8 Long-term Bank Loans (continued)

The aggregate maturities of long-term bank loans as of December 31, 2010 are as follows:

Fiscal years ending on December 31,
2011	$	15,146,236
2012		15,146,236
2013 or after		7,573,119
	$	37,865,591

9	Other Long-term Payables

	Other long-term payables as of December 31, 2010 included a government subsidy of approximately US$7,500,000 for its automated high-power lithium battery project from the National Development and Reform Commission and the Ministry of Industry and Information Technology.

10	Share-based Compensation

	(i) Options

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%

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.

F-17

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

				Weighted
			Weighted	average
			average	remaining		Aggregate
	Number of		exercise price	contractual		intrinsic
	shares		per share	term		value (1	)
Outstanding as of October 1, 2010	200,000	$	6.25
Exercised	-		-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2010	200,000	$	6.25	0.4 years	$	-
Exercisable as of December 31, 2010	200,000	$	6.25	0.4 years	$	-

(1) Aggregate intrinsic value represents the value of the Company’s closing stock price on December 31, 2010 (US$1.93) 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 three months ended December 31, 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 December 31, 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 December 31, 2007 to February 9, 2012 according to each employee’s respective agreement.

F-18

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

			Weighted	Weighted average
	Number of		average exercise	remaining		Aggregate intrinsic
	Shares		price per share	contractual term		value (1)
Outstanding as of October 1, 2010	923,500	$	3.29
Exercised	-		-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2010	923,500	$	3.29	2.7 years	$	-
Exercisable as of December 31, 2010	665,500	$	3.18	2.1 years	$	-

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$58,002 and US$24,884 for the three months ended December 31, 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 December 31, 2010, there were unrecognized compensation costs of US$48,944 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.5 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-19

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

			Weighted	Weighted average
	Number of		average exercise	remaining		Aggregate intrinsic
	Shares		price per share	contractual term		value (1	)
Outstanding as of October 1, 2010	360,000	$	4.30
Exercised	-		-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2010	360,000	$	4.30	2.1 years	$	-
Exercisable as of December 31, 2010	330,000	$	4.30	2.1 years	$	-

The weighted average grant-date fair value of options granted on January 28, 2008 was US$3.59 per share. The Company recorded non-cash share-based compensation expense of US$60,183 and US$12,057 for the three months ended December 31, 2009 and 2010, respectively, in respect of share options granted on January 28, 2008, which was allocated to general and administrative expenses and research and development expenses respectively.

The fair value of the above option awards granted on January 28, 2008 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility	120.23%
Expected dividends	Nil
Expected life	5 years
Risk-free interest rate	3.59%

As of December 31, 2010, there were unrecognized compensation costs of US$2,755 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.1 years.

On May 29, 2008, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 1,080,000 shares of the Company’s common stock to Mr. Xiangqian Li and options to purchase 170,000 shares to five other employees, with an exercise price of US$4.18 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable during the period from September 30, 2008 to May 29, 2012 according to each employee’s respective agreement.

F-20

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

				Weighted
			Weighted	average
			average	remaining		Aggregate
	Number of		exercise price	contractual		intrinsic
	shares		per share	term		value (1	)
Outstanding as of October 1, 2010	1,250,000	$	4.18
Exercised	-		-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2010	1,250,000	$	4.18	2.4 years	$	-
Exercisable as of December 31, 2010	681,670	$	4.18	1.5 years	$	-

The weighted average grant-date fair value of options granted on May 29, 2008 was US$2.36 per share. The Company recorded non-cash share-based compensation expense of US$195,063 and US$71,456 for the three months ended December 31, 2009 and 2010 respectively, in respect of share options granted on May 29, 2008, which was allocated to general and administrative expenses and research and development expenses respectively.

The fair value of the above option awards granted on May 29, 2008 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility		59.48%
Expected dividends		Nil
Expected life		5 years
Risk-free interest rate		4.01%

As of December 31, 2010, there were unrecognized compensation costs of US$101,234 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 0.6 years.

On June 22, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 1,928,200 shares of the Company’s common stock to certain key employees, officers and consultants with an exercise price of US$2.81 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

F-21

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

			Weighted	Weighted average
	Number of		average exercise	remaining		Aggregate intrinsic
	Shares		price per share	contractual term		value (1	)
Outstanding as of October 1, 2010	1,694,355	$	2.81
Exercised	-		-
Forfeited	16,000		2.81
Cancelled	-		-
Outstanding as of December 31, 2010	1,678,355	$	2.81	5.5 years	$	-
Exercisable as of December 31, 2010	336,640	$	2.81	5.5 years	$	-

The weighted average grant-date fair value of options granted on June 22, 2009 was US$2.46 per share. The Company recorded non-cash share-based compensation expense of US$614,860 and of US$287,740 for the three months ended December 31, 2009 and 2010, respectively, in respect of share options granted on June 22, 2009, which was allocated to general and administrative expenses and research and development expenses respectively.

The fair value of the above option awards granted on June 22, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility		111.03%
Expected dividends		Nil
Expected life		7 years
Risk-free interest rate		3.69%

As of December 31, 2010, there were unrecognized compensation costs of US$1,460,690 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 2.2 years.

On June 26, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 75,000 shares of the Company’s common stock to certain key management with an exercise price of US$3.24 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over five years in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

F-22

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

			Weighted	Weighted
			average	average		Aggregate
	Number of		exercise	remaining		intrinsic
	Shares		price per share	contractual term		value (1	)
Outstanding as of October 1, 2010	75,000	$	3.24
Exercised	-		-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2010	75,000	$	3.24	5.5 years	$	-
Exercisable as of December 31, 2010	15,000	$	3.24	5.5 years	$	-

The weighted average grant-date fair value of options granted on June 26, 2009 was US$2.86 per share. The Company recorded non-cash share-based compensation expense of US$27,374 and US$13,814 for the three months ended December 31, 2009 and 2010, respectively, in respect of share options granted on June 26, 2009, which was allocated to research and development expenses.

The fair value of the above option awards granted on June 26, 2009 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility		113.58%
Expected dividends		Nil
Expected life		7 years
Risk-free interest rate		3.51%

As of December 31, 2010, there were unrecognized compensation costs of US$78,234 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 2.0 years.

On March 11, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 50,000 shares of the Company’s common stock to certain key management with an exercise price of US$2.58 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable over two years in two equal installments beginning on each anniversary of the grant day on March 11, 2010.

F-23

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

			Weighted	Weighted
			average	average		Aggregate
	Number of		exercise	remaining		intrinsic
	Shares		price per share	contractual term		value (1	)
Outstanding as of October 1, 2010	50,000	$	2.58
Exercised	-		-
Forfeited	50,000		2.58
Cancelled	-		-
Outstanding as of December 31, 2010	-	$	-	-	$	-
Exercisable as of December 31, 2010	-	$	-	-	$	-

The weighted average grant-date fair value of options granted on March 11, 2010 was US$1.51 per share. No non-cash share-based compensation expense was recognized in respect of these share options for the three months ended December 31, 2009 and 2010, in respect of share options granted on March 11, 2010.

The fair value of the above option awards granted on March 11, 2010 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility		76.32%
Expected dividends		Nil
Expected life		4 years
Risk-free interest rate		3.72%

As of December 31, 2010, there were no unrecognized compensation costs related to non-vested share options.

On April 8, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 100,000 shares of the Company’s common stock to certain key management with an exercise price of US$2.43 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable in eight equal installments beginning on each quarter after September 30, 2010.

F-24

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

			Weighted	Weighted
			average	average		Aggregate
	Number of		exercise	remaining		intrinsic
	Shares		price per share	contractual term		value (1	)
Outstanding as of October 1, 2010	100,000	$	2.43
Exercised	-		-
Forfeited	-		-
Cancelled	-		-
Outstanding as of December 31, 2010	100,000	$	2.43	6.7 years	$	-
Exercisable as of December 31, 2010	12,500	$	2.43	6.7 years	$	-

The weighted average grant-date fair value of options granted on April 8, 2010 was US$1.41 per share. The Company recorded non-cash share-based compensation expense of US$16,639 for the three months ended December 31, 2010 in respect of share options granted on April 8, 2010 which was allocated to research and development expense.

The fair value of the above option awards granted on April 8, 2010 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility		51.79%
Expected dividends		Nil
Expected life		7.5 years
Risk-free interest rate		3.90%

As of December 31, 2010, there were unrecognized compensation costs of US$75,351 related to the above non-vested share options. These costs are expected to be recognized over a weighted average period of 2.5 years.

On July 23, 2010, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 80,000 shares of the Company’s common stock to certain key management with an exercise price of US$1.58 per share. In accordance with the vesting provisions of the grants, the options will become vested and exercisable in eight equal installments beginning on each quarter after September 30, 2010.

F-25

10 Share-based Compensation (continued)

A summary of share option plan activity for these options during the three months ended December 31, 2010 is presented below:

		Weighted	Weighted
		average	average
		exercise	remaining		Aggregate
	Number of	price per	contractual		intrinsic
	Shares	share	term		value (1	)
Outstanding as of October 1, 2010	80,000	1.58
Exercised	-	-
Forfeited	80,000	1.58
Cancelled	-	-
Outstanding as of December 31, 2010	-	-	-	$	-
Exercisable as of December 31, 2010	-	-	-	$	-

The weighted average grant-date fair value of options granted on July 23, 2010 was US$1.58 per share. No non-cash share-based compensation expense was recognized in respect of these share options for the three months ended December 31, 2009 and 2010, in respect of share options granted on July 23, 2010.

The fair value of the above option awards granted on July 23, 2010 was estimated on the date of grant using the Black-Scholes Option Valuation Model that uses the following assumptions.

Expected volatility		58.50%
Expected dividends		Nil
Expected life		5.0 years
Risk-free interest rate		2.99%

As of December 31, 2010, there were no unrecognized compensation costs related to non-vested share options.

(ii) Restricted Shares

Pursuant to the Plan and in accordance with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors, the Company granted 5,000 restricted shares to each of the existing elected independent directors with a fair value of US$1.68 per share on July 1, 2010. The eligible directors shall vest in their rights under the restricted shares according to the following schedule:

(i)	25% of the restricted shares granted will immediately vest on the grant date; and

(ii)	The remaining 75% of the restricted shares will vest in three equal quarterly installments on the last day of each subsequent quarter or in three equal quarterly installments on the last day of each calendar quarter beginning on the last day of the first full calendar quarter after the grant date.

The Company recorded non-cash share-based compensation expense of US$6,854 for the three months ended December 31, 2010, in respect of the restricted shares granted on July 1, 2010, which was allocated to general and administrative expenses.

F-26

10 Share-based Compensation (continued)

As of December 31, 2010, there were unrecognized stock-based compensation costs of US$5,193 associated with these restricted shares granted to non-employee directors. The first and second 25% of the restricted shares were already issued as fully paid shares of common stock to the Company’s three independent directors on August 4, 2010 and October 6, 2010.

Pursuant to the Plan, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of 500,000 restricted shares to Chief Executive Officer, Mr. Xiangqian Li with a fair value of US$2.81 per share on June 22, 2009. In accordance with the vesting schedule of the grant, the restricted shares will vest in twenty equal quarterly installments on the first day of each fiscal quarter beginning on October 1, 2009.

The Company recorded non-cash share-based compensation expense of US$179,682 and of US$91,575 for the three months ended December 31, 2009 and 2010 respectively in respect of the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.

As of December 31, 2010, there were unrecognized stock-based compensation costs of US$499,535 associated with these restricted shares granted to Mr. Xiangqian Li. These costs are expected to be recognized over a weighted-average period of 3.5 years.

As the Company itself is an investment holding company which is not expected to generate operating profits to realize the tax benefits arising from its net operating loss carried forward, no income tax benefits were recognized for the stock-based compensation cost under the Stock Option Plan for the three months ended December 31, 2009 and 2010.

11 Net Loss per Share

The calculation of basic net loss per share is based on the net loss for the three months ended December 31, 2010 attributable to equity shareholders of $3,657,792 (three months ended December 31, 2009: $3,392,327) and the weighted average number of shares of common stock of 62,895,001 issued and outstanding during the three months ended December 31, 2010 (three months ended December 31, 2009: 61,107,713).

The effects of 4,460,655 shares of stock options, 507,500 shares of restricted stock and 1,447,500 warrants outstanding during the three months ended or as of December 31, 2009 were all anti-dilutive and the effects of 4,586,855 shares of stock options, 507,500 shares of restricted stock and 1,447,500 warrants outstanding during the three months ended or as of December 31, 2010, also were all anti-dilutive. As such, basic and diluted net loss per share for the three months ended December 31, 2009 and 2010 are the same.

12 Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, pledged deposits, trade accounts receivable, other receivables, short-term bank loans, long-term bank loans, accounts and bills payable and other payables, approximate their fair values because of the short maturity of these instruments and market rates of interest.

13 Commitments and Contingencies
(i) Capital Commitments

As of September 30, 2010 and December 31, 2010, the Company had the following contracted capital commitments:

F-27

13 Commitments and Contingencies (continued)
		September 30,		December 31,
		2010		2010
For construction of buildings	$	1,784,549	$	2,067,800
For purchases of equipment		4,166,911		5,867,517
	$	5,951,460	$	7,935,317
(ii) Land Use Rights and Property Ownership Certificate

According to the relevant PRC laws and regulations, a land use rights certificate, along with government approvals for land planning, project planning and construction, needs to be obtained before construction of a building is commenced. A property ownership certificate shall be granted by the government upon application under the condition that the aforementioned certificate and government approvals have been obtained.

The Company did not obtain the land use right certificate and approvals for project-planning and construction relating to the premises occupied by the Company, BAK Industrial Park, before construction of the buildings was commenced. On July 3, 2009, the Company had obtained the approval for project-planning and construction from the local government of Shenzhen. As of December 31, 2010, the Company has obtained the aforementioned land use rights certificate and government approvals and was in the process of negotiating with the relevant government for the application and acquisition of the appropriate property ownership certificate.

Management believes that the Company will ultimately be granted a property ownership certificate, and that there should be no legal barriers for the Company to obtain a property ownership certificate for the premises presently occupied by the Company in BAK Industrial Park. However, in the event that the Company fails to obtain the property ownership certificate relating to BAK Industrial Park, there is a risk that the building constructed will need to be vacated as illegitimate constructions and the Company might be subject to penalties and fines. However, management believes that this possibility, while present, is remote.

Pursuant to the land use rights certificate relating to the Company’s Tianjin facility, the Tianjin government had requested that the Company complete the construction of the Tianjin facility before September 30, 2008. As of December 31, 2010, the Company was in the process of negotiating with the relevant government bureau for the extension of the completion date. If the Company fails to obtain the approval for the extension of the completion date from the relevant government bureau, there is a risk that the land use rights certificate relating to the Company’s Tianjin facility will become invalid. However, management believes that this possibility, while present, is remote.

Pursuant to the land use rights certificate that the Company obtained relating to the Research and Development Test Centre to be constructed in Shenzhen, the Company must complete at least 25% of the construction of the Research and Development Test Centre by September 30, 2008. On November 11, 2008 and May 27, 2009, the Company has signed two supplement agreements with Shenzhen government to increase the dimensions of the Research and Development Test Centre. According to the supplement agreements, the Company is required to complete the construction by May 6, 2011. According to the property ownership and land use rights certificate, such rights may not be pledged without the approval of the relevant government office. The Company is required to pledge its property ownership and land use rights certificate in relation to the Research and Development Test Centre to China Development Bank according to the loan agreement entered into with it. 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-28

13 Commitments and Contingencies (continued)

On August 20, 2010, the Company purchased the new insurance for its manufacturing facilities at BAK Industrial Park in Shenzhen, China. Under the new insurance policy entered into with Ping An Property & Casualty Insurance Company of China, Ltd, the insured amount for our manufacturing facilities at BAK Industrial Park is RMB550,000,000 (approximately $82.2 million) for the period from August 26, 2010 to March 26, 2012.

On July 2, 2010, the Company purchased insurance for its manufacturing facilities in Tianjin, China. Under the insurance policy entered into with Ping An Property & Casualty Insurance Company of China, Ltd, the insured amount for our manufacturing facilities in Tianjin is RMB220,991,420 (approximately $33.0 million) for the period from July 2, 2010 to July 2, 2011.

The Company is not able to insure its new Research and Development Test Centre to be constructed in Shenzhen, China, until it receives the required property ownership and land use rights certificates. Upon receipt of such certificates, the Company intends to procure such insurance. As discussed above, the Company has obtained the land use rights certificate to the land relating to these facilities. The application for a property ownership certificate is in process with respect to the Company’s facilities in Shenzhen.

(iii) Guarantees

In order to secure the supplies of certain raw materials and equipment and upon the request of suppliers, the Company has given guarantees to certain suppliers which are summarized as follows:

		September 30,		December 31,
		2010		2010
Guaranteed for Shenzhen Tongli Hi-tech Co. Ltd.
- a non-related party	$	2,241,750	$	2,271,936
Guaranteed for Hunan Reshine New Material Ltd.
- a non-related party		5,978,001		6,058,495
Guaranteed for Nanjing Special Metal Equipment
Co. Ltd. - a non-related party		14,197,752		14,388,925
Guaranteed for Siping Juyuan Hanyang Plate
Heat Exchanger Co. Ltd. - a non-related party		2,989,000		3,029,247
Guaranteed for Shanghai Global Children
Products Co. Ltd.– a non-related party		747,250		757,312
Guaranteed for Beijing Triolion Technology Co.
Ltd. – a non-related party		597,800		605,849
Guaranteed for Shenzhen Yasu Technology Co.
Ltd. - a non-related party		4,483,501		4,543,871
Guaranteed for Shenzhen B&G Technology
Development Co. Ltd. - a non-related party		8,967,001		9,087,742

	$	40,202,055	$	40,743,377

Management has assessed the fair value of the obligation arising from the above financial guarantees and considered it is immaterial to the condensed interim consolidated financial statements. Therefore, no obligations in respect of the above guarantees were recognized as of December 31, 2010.

F-29

13 Commitments and Contingencies (continued)

(iv) Outstanding Discounted Bills and Transferred Bills

From time to time, the Company factors bills receivable to banks and endorses the bank acceptance bills received to its suppliers, vendors or other parties for settlement of its liabilities to these creditors. At the time of the factoring and transfer, all rights and privileges of holding the receivables are transferred to the banks and the creditors. The Company removes the assets from its books and records a corresponding expense for the amount of the discount. The Company remains contingently liable on the amount outstanding in the event the bill issuer defaults.

The Company's outstanding discounted and transferred bills as of September 30, 2010 and December 31, 2010 are summarized as follows:

		September 30,		December 31,
		2010		2010
Bank acceptance bills	$	21,464,186	$	12,990,363

14 Significant Concentrations

(a) Customers and Credit Concentrations

The Company had only one customer that individually comprised 10% or more of net revenue for the three months ended December 31, 2010, as follows:

		Three months ended December 31,
		2009			2010
Jiangsu Huatiantong Technology Co., Ltd.	$	2,432,073	5%	$	7,036,640	11%

As of September 30, 2010 and December 31, 2010, approximately 6% and 8% of gross trade accounts receivable was due from Jiangshu Huatiantong Technology Co., Ltd. respectively.

(b) Credit Risk

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist primarily of cash and cash equivalents and pledged deposits. As of September 30, 2010 and December 31, 2010, substantially all of the Company’s cash and cash equivalents and pledged deposits were held by major financial institutions located in the PRC, which management believes are of high credit quality.

15 Segment Information

The Company engages in the manufacture, commercialization and distribution of a wide variety of standard and customized lithium ion rechargeable batteries for use in a wide array of applications. During the three months ended December 31, 2010, the Company manufactured five types of Li-ion rechargeable batteries: aluminum-case cell, battery pack, cylindrical cell, polymer cell and high-power lithium battery cell. The Company's products are sold to packing plants operated by third parties primarily for use in mobile phones and other electronic devices. Net revenues for the three months ended December 31, 2009 and 2010 were as follows:

F-30

15 Segment Information (continued)


Net revenues by product:
			Three months ended December 31,
		2009			2010
			%			%
Aluminum-case cell	$	27,862,938	55.47	$	30,597,741	48.16
Battery pack		10,919,984	21.74		16,898,310	26.60
Cylindrical cells		8,114,305	16.16		10,470,639	16.48
Lithium polymer cells		3,167,734	6.31		3,464,629	5.45
High-power lithium battery cells		162,591	0.32		2,098,900	3.31
	$	50,227,552	100.00	$	63,530,219	100.00
Net revenues by geographic area:

	Three months ended December 31,
	2009			2010
			%			%
PRC Mainland	$	35,648,576	70.97	$	48,189,095	75.86
PRC Taiwan		6,754,940	13.45		9,315,786	14.66
India		1,598,406	3.18		1,889,702	2.98
Hong Kong, China		5,552,246	11.05		2,791,600	4.39
Others		673,384	1.35		1,344,036	2.11
	$	50,227,552	100.00	$	63,530,219	100.00

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

16 Subsequent Events

The Company evaluated all events or transactions that occurred after December 31, 2010 through the date these financial statements were issued and has determined that there were no material recognizable nor subsequent events or transactions which would require recognition or disclosure in the financial statements.

F-31

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

Statements contained in this Report include “forward-looking statements” within the meaning of such term in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements involve known and unknown risks, uncertainties and other factors which could cause actual financial or operating results, performances or achievements expressed or implied by such forward-looking statements not to occur or be realized. Forward-looking statements made in this Report generally are based on our best estimates of future results, performances or achievements, predicated upon current conditions and the most recent results of the companies involved and their respective industries. Forward-looking statements may be identified by the use of forward-looking terminology such as “may,” “will,” “could,” “should,” “project,” “expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” “potential,” “opportunity” or similar terms, variations of those terms or the negative of those terms or other variations of those terms or comparable words or expressions. Potential risks and uncertainties include, among other things, such factors as:

our ability to continue as a going concern;
our anticipated growth strategies and our ability to manage the expansion of our business operations effectively;
our future business development, results of operations and financial condition;
our ability to fund our operations and manage our substantial short-term indebtedness;
our ability to maintain or increase our market share in the competitive markets in which we do business;
our ability to keep up with rapidly changing technologies and evolving industry standards, including our ability to achieve technological advances;
our dependence on the growth in demand for the portable electronic devices that are powered by our products;
our ability to diversify our product offerings and capture new market opportunities;
our ability to obtain original equipment manufacturer, or OEM, qualifications from brand names;
our ability to source our needs for skilled labor, machinery and raw materials economically;
our ability to secure raw materials in the future and to manage the costs of raw materials or to secure alternative or substitute raw materials;
our ability to maintain low costs without damaging our competitive position;
uncertainties with respect to the PRC legal and regulatory environment;
our ability to remediate any material weaknesses in our internal control over financial reporting;
our ability to obtain property ownership rights to our facilities; and
other risks identified in this Report and in our other reports filed with the U.S. Securities and Exchange Commission, or SEC.

Additional disclosures regarding factors that could cause our results and performance to differ from results or performance anticipated by this Report are discussed in other reports that we file with the SEC, including without limitation our Annual Report on Form 10-K for the fiscal year ended September 30, 2010, or the 2010 Form 10-K. Readers are urged to carefully review and consider the various disclosures made by us in this Report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this Report speak only as of the date hereof and we disclaim any obligation to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

Use of Terms

Except as otherwise indicated by the context, all references in this Report to: “we,” “us,” “our” and the “Company” are to the combined business of China BAK Battery, Inc. and its consolidated subsidiaries. Unless the context requires otherwise, all references to:

“BAK Canada” are to our Canadian subsidiary, BAK Battery Canada Ltd.;
“BAK Electronics” are to our PRC subsidiary, BAK Electronics (Shenzhen) Co., Ltd.;
“BAK Europe” are to our German subsidiary, BAK Europe GmbH;
“BAK India” are to our Indian subsidiary, BAK Telecom India Private Limited;
“BAK International” are to our Hong Kong subsidiary, BAK International Limited;
“BAK Tianjin” are to our PRC subsidiary, BAK International (Tianjin) Ltd.;
“China,” “Chinese” and “PRC” are to the People’s Republic of China, excluding for the purposes of this Report only, Taiwan, Hong Kong and Macau;
“Exchange Act” are to the Securities Exchange Act of 1934, as amended;
“RMB” are to Renminbi, the legal currency of China; and
“Securities Act” are to the Securities Act of 1933, as amended;
“Shenzhen BAK” refers to our PRC subsidiary, Shenzhen BAK Battery Co., Ltd.;
“U.S. dollar,” “$” and “US$” are to the legal currency of the United States of America.

Overview

We are a leading global manufacturer of lithium based battery cells. We produce battery cells that are the principal component of rechargeable batteries commonly used to power the following applications:

cellular phones and smart phones—customer categories include OEM customers and replacement battery manufacturers;
notebook computers;
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
light electric vehicles, hybrid electric vehicles, electric vehicles, cordless power tools, and uninterruptible power supplies, or UPS.

We conduct all of our 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 also engage battery pack manufacturers to assemble our prismatic cells into batteries for a fee and then sell battery packs to these customers both for the replacement and OEM markets.

As we expand our production capacity and add other lithium-ion battery cell product lines in response to evolving market demands, we have derived and will continue to derive an increasing portion of our revenues from our other product lines.

First Fiscal Quarter Financial Performance Highlights

During the first quarter of fiscal year 2011, we generated $63.5 million in net revenues, an increase of 14.3% from $55.6 million in the fourth quarter 2010, and up 26.5% from $50.2 million in the first quarter of 2010.

The following achievements were accomplished in the first quarter of fiscal year 2011:

Revenue increased 26.5% year-over-year and 14.3% quarter on quarter (compared to the fiscal quarter ended September 30, 2010)
Revenues from high-power batteries more than tripled in the fiscal quarter ended December 31, 2010 compared to the fiscal quarter ended September 30, 2010 due to robust demand for batteries used in energy storage solutions, including UPS
Gross margin improved to 15.7% in the first quarter of fiscal year 2011 from 9.5% in the previous quarter
Reported another quarter of positive cash flow of $18.4 million from operating activities, reflecting continued progress in the Company’s turnaround plan
Days Sales Outstanding declined to 126 days from 134 days last quarter and Days Sales of Inventory declined to 110 days from 115 days in the previous quarter
In November 2010, Chery Automobile Co., Ltd. officially launched its first Lithium-ion-based electric vehicle, Ruilin M1, powered by China BAK’s lithium-ion phosphate batteries at the 25th World Electric Vehicle Symposium and Exposition
BAK Tianjin received a subsidy of approximately $7.5 million for its automated high power lithium battery project in December 2010

Gross profit for the first quarter of fiscal year 2011 was $10.0 million, up 88.3% from $5.3 million last quarter and up 4.6% from $9.6 million in the same quarter of last year. Gross margin was 15.7%, up from 9.5% last quarter and slightly lower than 19.0% in the same period last year. The increase in gross profit was primarily a result of increased direct sales of battery packs to OEM cell phone manufacturers driven by strong customer demand. The year-over-year decline in gross margin was primarily a result of the Company’s adoption of a competitive pricing strategy for its cylindrical cells to increase its market share in the OEM market.

We had access to $222.5 million in short-term credit facilities and $53.0 million in long-term credit facilities as of December 31, 2010. As of December 31, 2010, the principal outstanding amounts included short-term bank loans of $139.8 million, long-term bank loans of $15.1 million maturing within one year, and long-term bank loans of $22.7 million maturing in over one year, and bills payable of $51.5 million, leaving $66.9 million of short-term funds available for additional cash needs. In addition, on July 10, 2008, our $60 million shelf registration statement was declared effective by the SEC, pursuant to which we have raised $36.6 million in gross proceeds from sales of common stock and issued common stock warrants exercisable for up to $21.6 million in additional gross proceeds. As $16 million of these warrants were not exercised before their expiration, we may raise up to an additional $17.8 million in gross proceeds from future equity financings under this shelf registration statement.

Financial Statement Presentation

Net revenues. Our net revenues represent the invoice 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 invoice 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 returns data.

Cost of Revenues. Cost of revenues consists primarily of material costs, employee remuneration for staff engaged in production activity, equity-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 are primarily comprised of remuneration for R&D staff, equity-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, equity-based compensation and travel and entertainment expenses. We do not pay slotting fees to retail companies for displaying our products, engage in cooperative advertising programs, participate in buy-down programs or similar arrangements. No material estimates are required by management to determine our actual marketing or advertising costs for any period.

General and Administrative Expenses. General and administrative expenses consist primarily of employee remuneration, equity-based compensation, professional fees, insurance, benefits, general office expenses, depreciation, liquidated damages, and bad debt expenses.

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

Government Grant Income. Income from government grants consisted primarily of grant funds awarded to Shenzhen BAK as consideration for its contributions to the Shenzhen area’s economy and as subsidies for land-use rights at BAK Industrial Park. No present or future obligations arise from the receipt of these funds.

Income Taxes. Under PRC income tax laws and regulations, before January 1, 2008, a foreign-invested enterprise, or FIE, was generally subject to an enterprise income tax rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. However, from at least calendar year 2002 through calendar year 2007, an enterprise recognized as a “Manufacturing Enterprise Located in Special Economic Zone” under PRC tax laws was entitled to a preferential income tax rate of 15%. Moreover, a foreign-invested manufacturing enterprise, starting from its first profitable calendar year after offset of accumulated tax losses, was entitled to a two-year exemption from enterprise income tax followed by a three-year 50% reduction in its enterprise income tax rate, also referred to herein as the “tax holiday.” An enterprise qualified for such treatment may receive a further tax rate reduction related to the size of qualified capital contributions received. In addition, from at least calendar year 2002 through calendar year 2007, an enterprise qualified as an “advanced technology enterprise” under PRC tax law was also entitled to a 50% reduction of income taxes.

On March 16, 2007, the National People’s Congress of the PRC determined to adopt the new corporate income tax law, or the New CIT Law. The New CIT Law unifies the application scope, tax rate, tax deduction and preferential policy for both domestic enterprises and FIEs. The New CIT Law became effective on January 1, 2008. According to the New CIT Law, the applicable income tax rate for Shenzhen BAK, BAK Electronics and BAK Tianjin will be 25% after their preferential tax holidays and the transition period have ended. During the transition period, tax rates for subject entities was 18% and 20% for the calendar years 2008 and 2009, respectively, and is expected to be 22% and 24% for the calendar years 2010 and 2011, respectively, before the application of applicable tax holidays or other tax preferences.

Shenzhen BAK and BAK Electronics are both registered and operate in Shenzhen, the PRC, and are each recognized as “Manufacturing Enterprise Located in Special Economic Zone.” As a result, they have been entitled to a preferential enterprise income tax rate of 15%. In accordance with the relevant income tax laws, the profits of Shenzhen BAK and BAK Electronics were fully exempted from income tax for two years from the first profitable calendar year of operations after offset of accumulated taxable losses, followed by a 50% exemption for the immediate next three calendar years.

The tax holiday of Shenzhen BAK commenced in 2002, the first calendar year in which Shenzhen BAK had assessable profit, and ended on December 31, 2006. In addition, due to additional capital contributed by BAK International to Shenzhen BAK in both 2005 and 2006 and Shenzhen BAK’s qualification as an advanced technology enterprise in 2007 and 2008, Shenzhen BAK was granted a preferential income tax rate of 7.5%, 11.8% and 12.6% for calendar years 2007, 2008 and 2009, respectively. In accordance with the transition period of the New CIT Law and before considering the above-mentioned tax concessions, Shenzhen BAK’s income tax rate for calendar years 2010 and 2011 are expected to be 22% and 24%, respectively, and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%.

Therefore, Shenzhen BAK’s income tax rates after consideration of its tax concessions are expected to be 15% for both calendar years 2010 and 2011and starting in calendar year 2012, it is expected to be subject to an income tax rate of 25%.

For BAK Electronics, established in August 2005, the same tax holiday was in effect for calendar years 2006 and 2007, making BAK Electronics fully exempt from any enterprise income tax. Following the tax holiday, a three-year 50% reduction in BAK Electronics’ enterprise income tax rate commenced. Pursuant to the transition period of the New CIT Law, BAK Electronics’ income tax rates for calendar years 2010 and 2011 were expected to be 22% and 24%, respectively, and starting in calendar year 2012 it was expected to be subject to an income tax rate of 25%. Taking the 50% reduction into account, BAK Electronics’ income tax rates are now expected to be 11% and 24% for calendar years 2010 and 2011, respectively, with no change in its expected 2012 tax rate of 25%. BAK Electronics did not incur any enterprise income tax for calendar year 2010 due to the current tax losses.

Shenzhen BAK and BAK Electronics received in aggregate a tax benefit of $233,000 pursuant to their transitional tax rate for the three months ended December 31, 2010, or $0.004 per basic share.

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 taxes 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.

Our effective tax benefit rate was 3.5% for the three months ended December 31, 2010 and our effective tax benefit rate was 27.3% for the three months ended December 31, 2009.

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 17.0% 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 export products and are deposited in bonded warehouses are exempt from import VAT.

Results of Operations

Comparison of Three Months Ended December 31, 2010 and December 31, 2009

The following table sets forth key components of our results of operations for the periods indicated. All amounts, other than percentages, are in thousands of U.S. dollars.

		Three Months Ended
		December 31,
		2010			2009		$	Change		% Change
Net revenues	$	63,530		$	50,228		$	13,302		26.5
Cost of revenues		53,534			40,668			12,866		31.6
Gross profit		9,996			9,560			436		4.6
Operating expenses:
Research and development expenses		1,645			1,768			(123	)	(7.0	)
Sales and marketing expenses		2,273			2,028			245		12.1
General and administrative expenses		7,879			8,637			(758	)	(8.8	)
Total operating expenses		11,797			12,433			(636	)	(5.1	)
Operating loss		(1,801	)		(2,873	)		1,072		(37.3	)
Finance costs, net		2,840			2,153			687		31.9
Government grant income		607			355			252		71.0
Other income		241			7			234		3,342.9
Income tax benefits		134			1,272			(1,138	)	(89.5	)
Net loss	$	(3,659	)	$	(3,392	)	$	(267	)	7.9

Net Revenues. Net revenues increased to $63.5 million for the three months ended December 31, 2010 as compared to $50.2 million for the same period of the prior year, an increase of $13.3 million or 26.5% . The following sets forth the breakdown of our net revenues by battery cell type for the periods indicated.

		Three Months Ended
		December 31,
		2010		2009
		(in thousands)
Prismatic cells
Aluminum-case cells	$	30,597	$	27,863
Battery packs		16,898		10,920
Cylindrical cells		10,470		8,114
Lithium polymer cells		3,465		3,168
High-power lithium battery cells		2,100		163
Total	$	63,530	$	50,228

Net revenues from sales of aluminum-case cells increased to $30.6 million in the three months ended December 31, 2010, from $27.9 million in the same period in fiscal year 2010, an increase of $2.7 million or 9.8%, resulting from sales volume of 4.3% driven by increase sales to the OEM market in the PRC and an increase of 4.1% in our average selling price.
Net revenues from sales of battery packs increased to $16.9 million in the three months ended December 31, 2010, from $10.9 million in the same period in fiscal year 2010, an increase of $6.0 million or 54.7%. This resulted from an increase in sales volume of 59.1% due to increased export sales and domestic market sales in the PRC, offset by a 2.8% decrease in average selling price.
Net revenues from sales of cylindrical cells increased to $10.5 million in the three months ended December 31, 2010, from $8.1 million in the same period in fiscal year 2010, an increase of $2.5 million or 29.1%. This result was the net effect of a 38.4% increase in sales volume driven primarily by increased sales to laptop manufacturers, offset by a decrease in our average selling prices of 6.6% due to our competitive pricing strategy for the cylindrical battery cells to increase our market share in the OEM market.
We sold $3.5 million in lithium polymer cells in the three months ended December 31, 2010, compared to $3.2 million in lithium polymer cells in the same period in fiscal year 2010, a slight increase of $298,000 or 9.4%, resulting from a 35.7% increase in average selling price, offset by a 17.7% decrease in sales volume as a result of fierce competition.
We also sold approximately $2.1 million in high-power lithium battery cells in the three months ended December 31, 2010, as compared to $163,000 in high-power lithium battery cells in the same period of fiscal year 2010, due to our sale of sample products used in electric buses, electric vehicles, electric bicycles, power tools, uninterruptible power supplies, and other applications from our Tianjin facility.

Cost of Revenues. Cost of revenues increased to $53.5 million for the three months ended December 31, 2010, as compared to $40.7 million for the same period in fiscal year 2010, an increase of $12.9 million or 31.6% . The increase in cost of revenues correlates to an increase in sales volume over the three months ended December 31, 2010.

As a result, gross profit for the three months ended December 31, 2010 was $10.0 million, or 15.7% of net revenues, as compared to gross profit of $9.6 million, or 19.0% of net revenues, for the same period in fiscal year 2010. The decrease in gross profit as a percentage of net revenues was primarily due to a decrease in the average selling price of cylindrical battery cells, resulting from the temporary competitive-pricing strategy implemented in order to maintain and increase our market share in the OEM market.

Research and Development Costs. Research and development costs decreased to $1.6 million for the three months ended December 31, 2010, as compared to $1.8 million for the same period in fiscal year 2010, a decrease of $123,000 or 7.0% . Equity-based compensation included in R&D costs decreased by $90,000 as charges relating to outstanding stock options to R&D staff had already been reflected in large part in fiscal periods prior to fiscal year 2011.

Sales and Marketing Expenses. Sales and marketing expenses increased to $2.3 million for the three months ended December 31, 2010, as compared to $2.0 million for the same period in fiscal year 2010, an increase of $245,000, or 12.1% . Salaries and welfare increased $205,000 primarily due to increased basic salaries and benefits in response to guidance issued to Shenzhen-based companies by relevant local government authorities during the three months ended June 30, 2010 and effective July 1, 2010. As a percentage of revenues, sales and marketing expenses have decreased to 3.6% for the three months ended December 31, 2010 from 4.0% for the same period in fiscal year 2010, due to the significant increase in revenues from sales.

General and Administrative Expenses. General and administrative expenses decreased to $7.9 million, or 12.4% of revenues, for the three months ended December 31, 2010, as compared to $8.6 million, or 17.2% of revenues, for the same period in fiscal year 2010, a decrease of $758,000 million, or 8.8%. Bad debt expenses decreased, during the three months ended December 31, 2010, by $1.7 million. We also recognized the exchange loss of $755,000 for the three months ended December 31, 2010, compared with exchange gain of $150,000 for the three months ended December 31, 2009.

Operating Loss. As a result of the above, operating loss totaled $1.8 million for the three months ended December 31, 2010, as compared to $2.9 million for the same period of the prior year. As a percentage of net revenues, operating loss was 2.8% for the three months ended December 31, 2010, as compared to operating loss of 5.7% for the same period of the prior fiscal year.

Finance Costs, Net. Finance costs, net, increased to $2.8 million for the three months ended December 31, 2010, as compared to $2.2 million for the same period of the prior fiscal year, an increase of $687,000 or 31.9% . This increase mainly was due to an increase in discounts charged for bills receivable recognized during the three months ended December 31, 2010.

Government Grant Income / Other Income / (Other Expenses). We had deferred revenue from government grant income of $607,000 and other income of $241,000 for the three-month period ended December 31, 2010, as compared to government grant income of $355,000 and other income of $7,000 for the same period of the prior fiscal year. The government grant income for the three months ended December 31, 2010 and December 31, 2009 mainly consisted of subsidies to pay for the land use rights to our corporate campus at BAK Industrial Park and government grant funds to subsidize certain lithium battery projects. No present or future obligation will arise from the receipt of such income.

Income Tax Benefits. Income tax benefits were $134,000 for the three months ended December 31, 2010, as compared to income tax benefits of $1.3 million for the same period of fiscal year 2010. The change was the result of a deferred tax provision during the three months ended December 31, 2010.

Net Loss. As a result of the foregoing, we had a net loss of $3.7 million for the three months ended December 31, 2010 compared to $3.4 million for the same period of 2009.

Liquidity and Capital Resources

We have historically financed our liquidity requirements from a variety of sources, including short-term bank loans, long-term bank loans and bills payable under bank credit agreements, sale of bills receivable and issuance of capital stock. As of December 31, 2010, we had cash and cash equivalents of $24.5 million, as compared to $22.6 million as of September 30, 2010 and $18.3 million as of December 31, 2009. In addition, we had pledged deposits amounting to $16.4 million and $9.4 million as of December 31, 2010 and September 30, 2010, respectively. Typically, our banks require their borrowers to maintain deposits of approximately 10% to 100% of the outstanding loan balances and bills payable. The individual bank loans have maturities ranging from three to twelve months which coincides with the periods the cash remains pledged to the banks.

We had access to $222.5 million in short-term credit facilities and $53.0 million in long-term credit facilities as of December 31, 2010. As of December 31, 2010, the principal outstanding amounts included short-term bank loans of $139.8 million, long-term bank loans of $15.1 million maturing within one year, and long-term bank loans of $22.7 million maturing in over one year, and bills payable of $51.5 million, leaving $66.9 million of short-term funds available for additional cash needs. In addition, on July 10, 2008, our $60.0 million shelf registration statement was declared effective by the SEC, pursuant to which we have raised $36.6 million in gross revenue from common stock purchases and issued common stock warrants exercisable for up to $21.6 million in additional gross proceeds. As $16.0 million of these warrants were not exercised before their expiration, we may raise up to an additional $17.8 million in gross proceeds from future equity financings under this shelf registration statement.


The following table sets forth a summary of our cash flows for the periods indicated:
Cash Flow
(All amounts in thousands of U.S. dollars)
		Three Months Ended
		December 31
		2010			2009
Net cash provided by / (used in) operating activities	$	18,386		$	(17,373	)
Net cash used in investing activities		(5,968	)		(3,906	)
Net cash (used in) / provided by financing activities		(10,763	)		8,911
Effect of exchange rate on cash and cash equivalents		283			(7	)
Net increase / (decrease) in cash and cash equivalents		1,938			(12,375	)
Cash and cash equivalents at beginning of the period		22,589			30,678
Cash and cash equivalents at end of period		24,527			18,303

Operating Activities

Net cash provided by operating activities was $18.4 million in the three months ended December 31, 2010, compared to $17.4 million of net cash used in operating activities in the same period in fiscal year 2010. The increase of $35.8 million in operating activities was mainly attributable to longer credit terms we obtained from our suppliers.

Investing Activities

Net cash used in investing activities was $5.9 million in the three months ended December 31, 2010, compared to $3.9 million of net cash used in investing activities in the same period in fiscal year 2010. The net cash used in investing activities during the period ended December 31, 2010 was mainly used for procurement of machinery and equipment for cylindrical cell line and prismatic cell production line and construction of the Research and Development Test Centre in Shenzhen.

Financing Activities

Net cash used in financing activities was $10.8 million in the three months ended December 31, 2010, compared to $8.9 million net cash provided by financing activities in the same period in fiscal year 2010. This was mainly attributable to (i) net proceeds of $19.6 million from a private placement of our common stock completed in October 2009, (ii) a $18.8 million increase in cash deposits at banks as collateral in the three months ended December 31, 2010, and (iii) decreased borrowings, net of repayments, of $18.7 million in the three months ended December 31, 2010.

As of December 31, 2010, the principal amounts outstanding under our credit facilities and lines of credit were as follows:

		Maximum Amount Available		Amount Borrowed (includes bank loans and bills payable)
Short-term credit facilities:		(in thousands)
Agricultural Bank of China	$	60,585	$	60,585
Shenzhen Development Bank		30,292		22,719
China CITIC Bank		12,117		12,117
Bank of China		68,158		56,234
China Everbright Bank		18,175		6,025
Bank of Communications		7,573		-
Guangdong Development Bank		13,469		-

Tianjin Branch, Bank of Dalian		6,058		6,955
Tianjin Branch, China Bohai Bank		6,058		6,058
Subtotal—Short-term credit facilities	$	222,485	$	170,693
Long-term credit facilities:
Agricultural Bank of China		15,146		15,146
China Development Bank		22,719		7,573
Agricultural Bank of China, Tianjin Jinxin Branch		15,146		15,146
Subtotal—Long-term credit facilities	$	53,011	$	37,865
Lines of Credit:
Agricultural Bank of China
Guangdong Development Bank				4,542
Tianjin Branch, Bank of Dalian				1,943
Bank of China				9,457
Shanghai Pudong Development Bank				4,664
Subtotal—Lines of credit			$	20,606
Total Principal Outstanding	$	275,496	$	229,164

The above principal outstanding amounts under credit facilities and lines of credit included short-term bank loans of $139.8 million, long-term bank loans of $15.1 million maturing within one year and long-term bank loans of $22.7 million maturing in over one year, and bills payable of $51.5 million.

For the purpose of presentation, the effect of increases in bills payable balances is included in operating activities in the statements of cash flows.

During the three months ended December 31, 2010, we repaid loans totaling approximately $31.8 million, renewed a comprehensive credit facility agreement with a maximum loan amount of approximately $75.7 million, and entered into new short-term bank loan agreements totaling approximately $27.8 million. The material financing terms of these loans are described below.

On November 15, 2010, we renewed our comprehensive credit facility agreement with Agricultural Bank of China, Shenzhen Eastern Branch, or Agricultural Bank – Shenzhen Branch, to provide a maximum loan amount of RMB 500 million (approximately $75.7 million), including RMB 400 million (approximately $60.6 million) of one-year term credit facilities and RMB 100 million (approximately $15.1 million) of five-year term credit facilities. This comprehensive credit facility agreement renewed a predecessor credit facility agreement between Shenzhen BAK and Agricultural Bank – Shenzhen Branch dated November 26, 2009 and governs all loans that were subject to the predecessor agreement at the time of the renewal. New loans may be drawn under this credit facility from November 15, 2010 through November 10, 2011, with the term of the loan established at the time each new loan is drawn, except as to funds borrowed under a loan agreement between Shenzhen BAK and Agricultural Bank – Shenzhen Branch dated November 23, 2006 and effective December 18, 2006, or the 2006 Loan Agreement, which may be drawn at any time within five years of December 18, 2006, and which will mature five years after such funds are drawn. Pursuant to the comprehensive credit facility, Shenzhen BAK must obtain prior approval from Agricultural Bank – Shenzhen Branch to renew long-term loans that are subject to this credit facility. In addition, Shenzhen BAK undertook to ensure that the percentage of certain business conducted with Agricultural Bank – Shenzhen Branch relative to such business it conducts with all financial institutions combined be at least equal to the percentage of its indebtedness to Agricultural Bank – Shenzhen Branch relative to its indebtedness to all financial institutions combined (referred to as the “Percentages Undertaking”). The “business” referred to in the preceding sentence refers to the volume of transactional payments that are drawn from Shenzhen BAK’s accounts with Agricultural Bank –Shenzhen Branch or applicable financial institutions and the amount of foreign currencies deposited with Agricultural Bank – Shenzhen Branch or applicable financial institutions. Shenzhen BAK also undertook not to issue any dividends without the written consent of Agricultural Bank – Shenzhen Branch prior to the expiration of all loans under this credit facility (this undertaking and the Percentages Undertaking are collectively referred to as the “Undertakings”). The obligations of Shenzhen BAK under this comprehensive credit facility are guaranteed by Mr. Xiangqian Li, BAK Tianjin, and BAK International. Shenzhen BAK’s obligations under this credit facility agreement are also guaranteed by Shenzhen BAK’s pledge of the property ownership and land use rights certificates relating to its manufacturing and other facilities in Shenzhen, PRC, known as BAK Industrial Park. In the event that Shenzhen BAK breaches any of the Undertakings or any guaranteed party breaches any of its guaranty obligations, Agricultural Bank – Shenzhen Branch may, in addition to exercising any other applicable remedies under the applicable agreements, accelerate repayment of all loan amounts governed by this credit facility.

During the fiscal quarter ended December 31, 2010, we had seven outstanding short-term loans under the comprehensive credit facility with Agricultural Bank – Shenzhen Branch totaling approximately $72.0 million. The first loan, of approximately $11.4 million, carried annual interest at 5.31%, and was due on January 6, 2011. The second loan, of approximately $7.6 million, carried annual interest at 5.56%, and was due on January 21, 2011. The third loan, of approximately $7.6 million, carried annual interest at 5.56%, and was due on January 22, 2011. We repaid each of the foregoing three loans on its respective due date. The fourth loan, of approximately $9.0 million, currently carries annual interest at 5.282% and is due on April 20, 2011. The fifth loan, of approximately $11.4 million, carries annual interest at 5.282% and is due on April 22, 2011. The sixth loan, of approximately $13.6 million, currently carries annual interest at 5.282% and is due on April 19, 2011. The seventh loan, of approximately $11.4 million, currently carries annual interest at 95% of the benchmark rate of the People's Bank of China, or PBOC and is due on December 21, 2011. Each of the loan agreements specifically provides for acceleration of repayment of the loan under certain conditions, as well as other penalties and remedies. Agricultural Bank - Shenzhen Branch permitted us to obtain the seventh loan under this credit facility notwithstanding that we had borrowed the maximum amount of one-year term loans under this facility on the date of such loan.

As of December 31, 2010, we also had two five-year term loans totaling approximately $15.1 million under the Agricultural Bank – Shenzhen Branch comprehensive credit facility carrying interest at 90% of the benchmark rate of the PBOC for three-year to five-year long-term loans. The first loan, of approximately $6.0 million, currently carries annual interest of 5.184% and is due on January 25, 2012. The second loan, of approximately $9.1 million, currently carries annual interest of 5.184% and is due in two installments of approximately $7.5 million on January 25, 2011, and approximately $1.6 million on January 25, 2012, respectively. The installment due on January 25, 2011 was repaid on that date. These five-year term loans are specifically: (i) guaranteed by Mr. Xiangqian Li; (ii) secured by Shenzhen BAK’s machinery and equipment with carrying values of approximately $31.2 million as of December 31, 2010; and (iii) secured by the property ownership and land use rights certificates with an aggregate net book value of $111.1 million as of December 31, 2010 in relation to the land on which Shenzhen BAK’s corporate campus had been constructed and any machinery and equipment purchased and used at the campus subsequent to such construction.

As of December 31, 2010, we had a comprehensive credit facility agreement, dated as of June 28, 2010, with Bank of Communications to provide a maximum loan amount of RMB 50 million (approximately $7.6 million). This credit facility agreement is guaranteed by BAK Tianjin and Mr. Xiangqian Li. Loans may be drawn at any time from June 28, 2010 to June 28, 2011. As of December 31, 2010, we had not borrowed any loans under this credit facility.

As of December 31, 2010, we had a comprehensive credit facility agreement with China Everbright Bank to provide a maximum amount of RMB 120 million (approximately $18.2 million) including RMB 40 million to support bank acceptance bills (instruments commonly used in China that are similar to letters of credit) and RMB 80 million to cover discounts on our notes receivable due to their assignment to certain banks, suppliers, vendors, and other creditors from November 8, 2010 to November 8, 2011. This credit facility agreement is guaranteed by BAK International and Mr. Xiangqian Li. As of December 31, 2010, we had borrowed $6.0 million of notes payable under this credit facility.

As of December 31, 2010, we had a credit facility with Shenzhen Branch, China CITIC Bank to provide a maximum loan amount of RMB 80 million (approximately $12.1 million). This credit facility was guaranteed by BAK International and Mr. Xiangqian Li. As of December 31, 2010, we had borrowed $12.1 million under two loans at floating interest rate of 5.0445%, with a rate in line with the benchmark interest rate adjustment of the PBOC under this credit facility. The first loan, of approximately $6.0 million, carried floating interest of 5.0445% and is repayable on June 11, 2011. The second loan, of approximately $6.1 million, also carried floating interest of 5.0445% and is also repayable on June 11, 2011.

As of December 31, 2010, we had also borrowed $0.5 million of notes payable outside any credit facility in Bank of China, Tianjin Branch.

As of December 31, 2010, we had a credit facility agreement with Bank of China to provide a maximum loan amount of RMB 450 million (approximately $68.2 million). This credit facility was guaranteed by BAK International and Mr. Xiangqian Li, and also is secured by machinery and equipment with carrying values of approximately $31.2 million as of December 31, 2010. As of December 31, 2010, we had two outstanding short-term loans under the comprehensive credit facility. The first loan, of approximately $22.7 million, currently carries annual interest of 5.31% and is due on March 11, 2011. The second loan, of approximately $7.6 million, currently carries annual interest at 95% of the benchmark rate of the PBOC and is due on November 9, 2011, and $25.9 million of notes payable under this credit facility agreement. We had also borrowed $9.0 million of notes payable separate from the credit facility.

As of December 31, 2010, we had a comprehensive credit facility agreement with Tianjin Branch, China Bohai Bank to provide a maximum loan amount of RMB 40 million (approximately $6.1 million). This credit facility agreement was guaranteed by Shenzhen BAK. Under the terms of the credit facility agreement, loans may be drawn at any time from January 19, 2010 to January 19, 2011. As of December 31, 2010, we had borrowed approximately $6.1 million under the loan agreement which bears a floating interest rate equal to the benchmark rate of the PBOC on the date of the loan agreement and adjusted annually, and which was repayable on January 18, 2011. The loan was repaid on January 18, 2011.

As of December 31, 2010, we had a comprehensive credit facility agreement with Shenzhen Development Bank, Longgang Branch, or Shenzhen Development Bank, to provide a maximum loan amount of RMB 200 million (approximately $30.3 million). Loans may be drawn at any time over the one-year period beginning December 31, 2009 and will be due based on each loan agreement. This credit facility agreement was guaranteed by BAK International, BAK Tianjin and Mr. Xiangqian Li, and was also secured by $22.7 million of inventory and $1.3 million of machinery and equipment. As of December 31, 2010, we had three outstanding short-term loans under the comprehensive credit facility with Shenzhen Development Bank totaling approximately $22.7 million. The first loan, dated December 31, 2009, was approximately $3.0 million, carried a floating interest rate equal to 95% of the benchmark rate of the PBOC on the date of the loan agreement and adjusted quarterly, and was repayable on December 31, 2010. We repaid this loan on December 31, 2010. The second loan, dated January 4, 2010, was approximately $9.1 million, carried a floating interest rate equal to 95% of the benchmark rate of the PBOC on the date of the loan agreement and adjusted quarterly, and was repayable on January 4, 2011. We repaid this loan on January 4, 2011. The third loan, dated February 3, 2010, was approximately $10.6 million, carried a floating interest rate equal to 90% of the benchmark rate of the PBOC on the date of the loan agreement and adjusted quarterly, and was repayable on February 3, 2011. We repaid this loan in January 2011.

As of December 31, 2010, we had a six-year long-term loan agreement expiring on December 30, 2015 of RMB 150 million (approximately $22.7 million) with Shenzhen Branch, China Development Bank, or China Development Bank. The long-term loan is secured by Shenzhen BAK’s pledge of its land use rights certificates, property ownership and equipment built-up by use of this long-term loan pursuant to the loan agreement. According to the property ownership and land use rights certificate that we obtained in relation to this facility, the certificate may not be pledged without the approval of the relevant government office. On April 7, 2010, the pledge of the land use rights certificate to China Development Bank was approved by the relevant government bureau. For further discussion regarding the status of property ownership rights relating to this facility, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Expenditures.” The obligations of Shenzhen BAK under this loan agreement are guaranteed by Mr. Xiangqian Li. We had borrowed approximately $7.6 million under a loan agreement dated March 1, 2010, bearing annual interest of 5.90%, adjusted monthly, and repayable within 72 months.

During the fiscal quarter ended December 31, 2010, we had a comprehensive credit facility agreement with Shenzhen Hi-Tech District Branch, Industrial Bank, or Industrial Bank, for a maximum loan amount of RMB 62.5 million (approximately $9.3 million). This credit facility agreement was guaranteed by BAK International, BAK Tianjin and Mr. Xiangqian Li. Loans may be drawn at any time from March 31, 2010 to December 31, 2010. During the quarter ended December 31, 2010, we had borrowings of approximately $7.6 million under a loan agreement dated January 6, 2010 bearing fixed interest of 4.779%, and which was repayable on December 31, 2010 under this credit facility agreement. We repaid this loan on December 31, 2010.

As of December 31, 2010, we had a comprehensive credit facility agreement with Tianjin Branch, Bank of Dalian, or Bank of Dalian, for a maximum loan amount of RMB 40 million (approximately $6.1 million). If we increase paid-up capital by $20 million, then an additional RMB 10 million of credit facilities would be available. If we pay up 50% of our total registered capital, then another additional RMB 10 million of credit facilities would be available. If we pay up all our registered capital, the total amount of available credit under this facility would be RMB 80 million (approximately $12.0 million). This credit facility agreement is guaranteed by Shenzhen BAK and Mr. Xiangqian Li. Loans may be drawn at any time from November 27, 2009 to November 26, 2010. During the fiscal quarter ended December 31, 2010, we had borrowed approximately $6.1 million under a loan agreement dated October 27, 2010, bearing annual interest of 6.116%, adjusted monthly, repayable on October 26, 2011. In addition, we had also borrowed $1.9 million of short term loans and $0.9 notes payable separate from the credit facility.

On September 28, 2009, we entered into a guaranty contract with Shanghai Pudong Development Bank to provide guaranty for the loans drawn from September 28, 2009 to August 31, 2010, and the maximum amount for all loans will be less than RMB 30 million (approximately $4.5 million). As of December 31, 2010, we had borrowed approximately $4.7 million of notes payable outside any credit facility.

As of December 31, 2010, we had a four-year, long-term loan agreement expiring May 26, 2012 of RMB 100 million (approximately $15.1 million) with Agricultural Bank of China, Tianjin Branch, or Agricultural Bank – Tianjin Branch. This loan agreement is secured by the machinery and equipment purchased for the automated high-power lithium battery cells production line at our Tianjin facility. As of December 31, 2010, we had borrowed $15.1 million under this loan agreement, payable in three installments: (i) RMB 50 million (approximately $7.5 million) on December 26, 2011; and(ii) RMB 50 million (approximately $7.6 million) on May 26, 2012.

We had negative working capital of $72.7 million as of December 31, 2010, as compared to negative working capital of $70.8 million as of September 30, 2010. Current assets as of December 31, 2010 were $212.5 million compared with $194.7 million as of September 30, 2010, an increase of $17.9 million. Current liabilities as of December 31, 2010 were $285.2 million compared with $265.5 million as of September 30, 2010, an increase of $19.7 million. We had short-term bank loans maturing in less than one year of $139.8 million and long-term bank loans maturing within one year of $15.1 million as of December 31, 2010, or a total of $154.9 million of loans maturing within one year, as compared to a total of $149.4 million of such loans as of September 30, 2010, an increase of $5.5 million. We had long-term bank loans maturing in over one year of $22.7 million as of December 31, 2010, as compared to $29.9 million of such loans as of September 30, 2010, a decrease of $7.2 million.

We believe that our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures for at least the next 12 months. We may, however, require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. If our existing cash and amount available under existing credit facilities is insufficient to meet our requirements, we may seek to sell additional equity securities, debt securities or borrow from lending institutions. We can make no assurances that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of additional equity securities, including convertible debt securities, would dilute the interests of our current shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer.

Capital Expenditures

We made capital expenditures of $6.0 million and $3.9 million in the three months ended December 31, 2010 and 2009, respectively. Our capital expenditures were used primarily to purchase plant and equipment to expand our production capacity.

The following table sets forth the breakdown of our capital expenditures by use for the periods indicated.
		Three Months Ended
		December 31,
		2010		2009
		(in thousands)
Construction costs	$	1,690	$	192
Purchase of equipment		4,278		3,714
Total capital expenditures	$	5,968	$	3,906

We estimate that our total capital expenditures in fiscal year 2011 will reach approximately $35.0 million, to purchase manufacturing equipment for the expansion of our production lines and for the construction of our new Research and Development Test Centre at our Shenzhen facility.

We have completed the construction and put into use facilities measuring 218,178 square meters comprised of manufacturing facilities, warehousing and packaging facilities, dormitory space, dining halls and administrative offices at the BAK Industrial Park in Shenzhen. Of that space, approximately 81,411 square meters are manufacturing facilities. We have also completed the construction and put into use facilities measuring 65,907 square meters comprised of manufacturing facilities, dormitory space, dining halls and other facilities in Tianjin. Of that space, approximately 44,129 square meters are manufacturing facilities. The primary reasons for our continuing investments in the facilities in Tianjin are to realize the benefits of our prior investment in these facilities, to position the Company to capitalize on our knowledge of and experience with established markets for lithium-phosphate technology, such as electric bicycles, cordless power tools, and to penetrate emerging consuming markets for this technology, such as electric cars, electric buses, light electric vehicles, and hybrid electric vehicles. We have received several contracts to supply high-power lithium cells for use in electric cars, electric bicycles, UPS, and other applications.

According to the relevant PRC laws and regulations, a land use right certificate, along with government approvals for land planning, project planning, and construction must be obtained before the construction of any building is commenced. An ownership certificate will be granted by the government upon application under the condition that the aforementioned certificate and government approvals are obtained. We recently obtained the land use right to the tract of property on which we have constructed and on which we plan further construction of our manufacturing facilities and other related facilities in Shenzhen. While we have been constructing and have completed a substantial part of the construction of our facilities with the approval of the local government of Kuichong Township of Longgang District of Shenzhen, we understand it did not have the authority to grant us the land use rights certificate. However, the Company obtained approval for project planning and construction from the government of Shenzhen on June 20, 2007. Under an agreement with the government of Shenzhen for the acquisition of the land use rights to BAK Industrial Park dated June 29, 2007, effective June 2008, the government agreed to provide us with the land use rights certificate relating to BAK Industrial Park on the condition that the Company would pay it an additional $11,819,841. According to a notice received from the government of Shenzhen on June 6, 2008, the Company obtained government grants of $7,889,991 to subsidize this additional payment. As of September 30, 2008, the Company had fully paid the remaining cost of $3,929,850 and had obtained the land use rights certificate for BAK Industrial Park.

We have insurance for our manufacturing facilities for Shenzhen BAK located in BAK Industrial Park and our manufacturing facilities at our Tianjin facility. However, we are not able to insure our new Research and Development Test Centre to be constructed in Shenzhen, China, until we receive the required certificate of property ownership. Upon receipt of the certificate of property ownership, we intend to procure such insurance. The applications for the related certificates of property ownership rights are in process with respect to our facilities at BAK Industrial Park and Tianjin (see discussion of our Research and Development Test Centre below). As we have been granted the land use rights certificate to the premises presently occupied by the Company in BAK Industrial Park, there should be no legal barriers for us to obtain a property ownership certificate for this property. However, it is possible that the Shenzhen government may determine that even with our land use rights certificate, the buildings constructed at BAK Industrial Park were still constructed without the proper authority and must be vacated as illegitimate constructions, and we might be subject to penalties and fines. However, we believe that this possibility, while present, is remote.

As of September 30, 2007, we had fully paid the lease prepayment amount of $14.1 million for the acquisition of land use rights regarding our Tianjin facility. As of September 30, 2008, we had obtained the relevant land use rights certificate to this facility. As of December 31, 2010, we were in the process of obtaining the relevant property ownership rights certificate to this facility.

Pursuant to our land use rights certificate relating to our Tianjin facility, the Tianjin government had originally requested that we complete construction of the Tianjin facility before September 30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this requirement, we have obtained an extension from the Business Administration Bureau of Beichen District, Tianjin, to make the remaining contribution of the registered capital by December 11, 2009, which we interpreted as an extension of the completion date of construction to this date. 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 complete this contribution no later than December 2012. As of December 31, 2010, we were in the process of negotiating with the relevant government bureau for the extension of the completion date of the construction of the Tianjin facility.

As of September 30, 2007, we had paid the lease prepayment amount of $717,000 for the acquisition of land use rights for a new Research and Development Test Centre to be constructed in Shenzhen, China. As of September 30, 2008, we had obtained the relevant property ownership and land use rights certificate. Pursuant to the property ownership and land use rights certificate, we are required to complete at least 25% of the construction of the new Research and Development Test Centre facility by September 30, 2008. As of September 30, 2008, we had not done so. Notwithstanding this requirement, the Shenzhen government has agreed to increase the dimensions of the Research and Development Test Centre and signed two supplemental agreements with us. According to the supplemental agreements, we are required to complete the construction by May 6, 2011. In addition, according to the property ownership and land use rights certificate, such land may not be pledged without the approval of the relevant government office. We are required to pledge our property ownership and land use rights certificate in relation to the new Research and Development Test Centre to China Development Bank pursuant to the loan agreement entered into with it. 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. In addition, the so-named “property ownership and land use rights certificate” relating to this facility that we were issued lacks certain terms relating to property ownership rights, which appears to indicate that the granting government has so far only granted us the relevant land use rights. As a result, this certificate may not be adequate evidence of our property ownership rights to this property. We anticipate that the government will re-grant this certificate with adequate property ownership indicia after we have satisfied the above construction requirement and followed certain procedures.

Contractual Obligations and Commercial Commitments

Please refer to Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” in the 2010 Form 10-K for a discussion of our contractual obligations and commercial commitments as of September 30, 2010. There were no material changes outside the ordinary course of our business in our contractual obligations and commercial commitments for the quarter ended December 31, 2010.

Off-Balance Sheet Transactions

In the ordinary course of business practices in China, we enter into transactions with banks or other lenders where we guarantee the debt of other parties. These parties may be related to or unrelated to us. Conversely, our debt with lenders may also be guaranteed by other parties which may be related or unrelated to us.

Under U.S. GAAP, these transactions may not be recorded on our balance sheet or may be recorded in amounts different than the full contract or notional amount of the transaction. Our primary off-balance sheet arrangements would result from our loan guaranties in which Shenzhen BAK, BAK International, BAK Tianjin, and/or Mr. Xiangqian Li, our director, Chairman, President, and Chief Executive Officer, would provide contractual assurance of the debt, or guarantee the timely re-payment of principal and interest of the guaranteed party. Neither Shenzhen BAK, BAK International, BAK Tianjin, nor Mr. Xiangqian Li received, nor is entitled to receive, any consideration for the above-referenced guarantees, and we are not independently obligated to indemnify any of those guarantors for any amounts paid by them pursuant to any guarantee.

Typically, no fees are received for this service. Thus, in those transactions, Shenzhen BAK would have a contingent obligation related to the guarantee of payment in the event the underlying loan is in default.

Transactions described above require accounting treatment under ASC Topic 460 “Guarantees”. Under that standard, we would be required to recognize the fair value of guarantees issued or modified after December 31, 2002, for non-contingent guarantee obligations, and also a liability for contingent guarantee obligations based on the probability that the guaranteed party will not perform under the contractual terms of the guaranty agreement.

We have assessed the contingent liabilities arising from the above-described guarantees and have considered them immaterial to the consolidated financial statements. Therefore, no liabilities in respect of the guarantees were recognized as of December 31, 2010. As of December 31, 2010, we provided the guarantees for the non-related parties, Nanjing Special Metal Equipment Co., Ltd., Hunan Reshine New Material Ltd, Shenzhen Tongli Hi-tech Co. Ltd., Shenzhen B&G Technology Development Co. Ltd., Shanghai Global Children Products Co. Ltd., Shenzhen Yasu Technology Co. Ltd., Beijing Triolion Technology Co. Ltd. and Siping Juyuan Hanyang Plate Heat Exchanger Co. Ltd. The maximum amount of our exposure for these guarantees was $40.7 million and $40.2 million at December 31, 2010 and September 30, 2010, respectively.

Critical Accounting Policies

Our consolidated financial information has been prepared in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.

When reviewing our financial statements, the following should also be considered: (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.

Recoverability of Long-Lived Assets

Our business is capital intensive and has required, and will continue to require, significant investments in property, plant and equipment. As of December 31, 2010 and September 30, 2010, the carrying amount of property, plant and equipment, net was $229.1 million and $228.9 million, respectively. We assess the recoverability of property, plant and equipment to be held and used by a comparison of the carrying amount of an asset or group of assets to the future net undiscounted cash flows expected to be generated by the asset or group of assets. If such assets are considered impaired, the impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

A prolonged general economic downturn and, specifically, a continued downturn in the battery cell industry as well as other market factors could intensify competitive pricing pressure, create an imbalance of industry supply and demand, or otherwise diminish volumes or profits. Such events, combined with changes in interest rates, could adversely affect our estimates of future net cash flows to be generated by our long-lived assets. Consequently, it is possible that our future operating results could be materially and adversely affected by additional impairment charges related to the recoverability of our long-lived assets.

We have not recognized any impairment charges for the long-lived assets for the three months ended December 31, 2010.

Inventory Obsolescence

We review our inventory for potential impairment on a quarterly or more frequent basis as deemed necessary. Such review includes, but is not limited to, reviewing the levels of inventory versus customer requirements and obsolescence. The review and evaluation also considers the potential sale of impaired inventory at lower than market prices. At each balance sheet date, we identify inventories that are worth less than cost and write them down to their net realizable value and the difference is charged to our cost of revenues of that period. Though management considers such write-down of inventories adequate and proper, changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy of such write-down.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our accounts receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Bad debt expense is included in the general and administrative expenses. We review outstanding account balances individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of December 31, 2010 and September 30, 2010, we had not charged off any balances as we had yet to exhaust all means of collection.

Equity-Based Compensation

We adopted the provisions of ASC Topic 718 “Compensation – Stock Compensation,” which requires the use of the fair value method of accounting for share-based compensation. Under the fair value based method, compensation cost related to employee stock options or similar equity instruments is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. ASC Topic 718 also requires measurement of cost of a liability-classified award based on its current fair value. The fair value of the liability-classified award will be subsequently re-measured at each reporting date through the settlement date. Change in fair value during the requisite service period will be recognized as compensation cost over that period.

We determine fair value using the Black-Scholes model. Under this model, certain assumptions, including the risk-free interest rate, the expected life of the options and the estimated fair value of our ordinary shares and the expected volatility, are required to determine the fair value of the options. If different assumptions had been used, the fair value of the options would have been different from the amount we computed and recorded, which would have resulted in either an increase or decrease in the compensation expense.

Pursuant to ASC Topic 718, we have recognized compensation costs of $525,000 in relation to stock-based awards to our employees and non-employee directors for the three months ended December 31, 2010, as an increase in both the operating costs and shareholder’s equity.

Recently Issued Accounting Pronouncements

Please refer to note 1 to our financial statements, “Principal Activities, Basis of Presentation and Organization – Recently Issued Accounting Standards,” for a discussion of relevant pronouncements.

Exchange Rates

The financial records of Shenzhen BAK, BAK Electronics and BAK Tianjin are maintained in RMB. In order to prepare our financial statements, we have translated amounts in RMB into amounts in U.S. dollars. The amounts of our assets and liabilities on our balance sheets are translated using the closing exchange rate as of the date of the balance sheet. Revenues, expenses, gains and losses are translated using the average exchange rate prevailing during the period covered by such financial statements. Adjustments resulting from the translation, if any, are included in our cumulative other comprehensive income/(loss) in our stockholders’ equity section of our balance sheet. All other amounts that were originally booked in RMB and translated into U.S. dollars were translated using the closing exchange rate on the date of recognition. Consequently, the exchange rates at which the amounts in those comparisons were computed varied from year to year.

The exchange rates used to translate amounts in RMB into U.S. dollars in connection with the preparation of our financial statements were as follows:

	RMB per U.S. Dollar
	2010	2009
Balance sheet items as of December 31	6.6023	6.8270
Amounts included in the statement of operations and comprehensive loss,
statement of changes in stockholders’ equity and statement of cash flows for the three
months ended December 31	6.6560	6.8274
Balance sheet items as of September 30	6.6912	6.8263



ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to interest rate risk primarily with respect to our short-term bank loans and long-term bank loans. Although the interest rates, which are based on the banks’ prime rates with respect to our short-term loans are fixed for the terms of the loans, the terms are typically three to twelve months for short-term bank loans and interest rates are subject to change upon renewal. There were no material changes in interest rates for short-term bank loans renewed during the three months ended December 31, 2010.

Please refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources — Financing Activities” for a discussion of our credit facilities and loan agreements.

A hypothetical 1.0% increase in the annual interest rates for all of our credit facilities under which we had outstanding borrowings at December 31, 2010, would increase net loss before provision for income taxes by approximately $1.8 million, or 46.9%, for the three months ended December 31, 2010. Management monitors the banks’ prime rates in conjunction with our cash requirements to determine the appropriate level of debt balances relative to other sources of funds. We have not entered into any hedging transactions in an effort to reduce our exposure to interest rate risk.

Foreign Exchange Risk

Although our reporting currency is the U.S. dollar, the financial records of our operating subsidiaries are maintained in their local currency, the RMB, which is our functional currency. Approximately 98.3% of our revenues and 99.2% of our costs and expenses for the three months ended December 31, 2010 are denominated in RMB, with the balance denominated in U.S. dollars. Approximately 99.3% of our assets except for cash were denominated in RMB as of December 31, 2010. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical exchange rates, and their income and expenses items are translated using the average rate for the period. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. An average appreciation (depreciation) of the RMB against the U.S. dollar of 5% would increase (decrease) our comprehensive income by $3.4 million based on our outstanding revenues, costs and expenses, assets, and liabilities denominated in RMB as of December 31, 2010. As of December 31, 2010, our accumulated other comprehensive income was $30.1 million. We have not entered into any hedging transactions in an effort to reduce our exposure to foreign exchange risk.

Inflation Risk

Inflationary factors such as increases in the cost of our products and overhead costs may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling and general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs.

ITEM 4.

CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Exchange Act, our management has carried out an evaluation, with the participation and under the supervision of our chief executive officer and interim chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2010. Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and interim chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our interim chief financial officer. Based upon, and as of the date of this evaluation, our chief executive officer and interim chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 2010.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during our fiscal quarter ended December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II
OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS.

None.

ITEM 1A.	RISK FACTORS.

There have been no material changes to the risk factors disclosed in our 2010 Form 10-K. Investors are directed to Item 1, “Risk Factors” of the 2010 Form 10-K.

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.	(REMOVED AND RESERVED).

ITEM 5.	OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this Report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6.

EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No.	Description

31.1	Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2	Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1	Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2	Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1	Comprehensive Credit Facility Agreement of Maximum Amount (English summary), dated November 15, 2010, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China.

99.2	Loan Agreement (English summary), dated December 22, 2010, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China.

99.3	Guaranty Contract of Maximum Amount (English summary), dated November 15, 2010, between Xiangqian Li, BAK International Limited, BAK International (Tianjin) Ltd., and Shenzhen Eastern Branch, Agricultural Bank of China.

99.4	Mortgage Contract of Maximum Amount (English summary), dated November 15, 2010, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Eastern Branch, Agricultural Bank of China.

99.5	Loan Agreement (English summary), dated October 27, 2010, between BAK International (Tianjin) Ltd. and Tianjin Branch, Bank of Dalian.

99.6	Loan Agreement (English summary), dated November 8, 2010, between Shenzhen BAK Battery Co., Ltd. and Shenzhen Longgang Branch, Bank of China.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 9, 2011

CHINA BAK BATTERY, INC.

By: /s/ Xiangqian Li
      Xiangqian Li, Chief Executive Officer
      (Principal Executive Officer)

By: /s/ Ke Marcus Cui
       Ke Marcus Cui, Interim Chief Financial Officer
       (Principal Financial Officer and Principal
       Accounting Officer)

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