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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10−Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2015

[   ] 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	(I.R.S. Employer Identification No.)
incorporation or organization)

BAK Industrial Park, Meigui Street
Huayuankou Economic Zone
Dalian City, Liaoning Province, China, 116422
(Address of principal executive offices, Zip Code)

(86)411-3918-5985
(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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes[X]      No[   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large accelerated filer [   ]	Accelerated filer [   ]
	Non-accelerated filer [   ] (Do not check if a smaller reporting company)	Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes[   ]      No [X]

The number of shares outstanding of each of the issuer’s classes of common stock, as of August 17, 2015 is as follows:

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Quarterly Report on Form 10-Q
Period Ended June 30, 2015

 

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION

Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4.	Controls and Procedures	12
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Mine Safety Disclosures	14
Item 5.	Other Information	14
Item 6.	Exhibits	14

i

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PART I
FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

CHINA BAK BATTERY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2015 AND 2014

Contents		Page(s)
Condensed Consolidated Balance Sheets as of September 30, 2014 and June 30, 2015 (unaudited)		F-2
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended June 30, 2015 and 2014 (unaudited)		F-3
Condensed Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended June 30, 2015 and 2014 (unaudited)		F-4
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2015 and 2014 (unaudited)		F-5
Notes to the Condensed Consolidated Financial Statements (unaudited)		F-6-F-24

1

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China BAK Battery, Inc. and Subsidiaries
Condensed consolidated balance sheets
As of September 30, 2014 and June 30, 2015
(In US$)

					September 30,			June 30,
		Note			2014			2015
								(Unaudited)
Assets
Current assets
Cash and cash equivalents				$	991,519		$	11,554,163
Trade accounts receivable, net		2			1,013,641			5,269,189
Inventories		3			2,648,098			4,004,479
Prepayments and other receivables		4			589,864			3,841,714
Receivable from former subsidiaries, net		5			7,261,089			-
Prepaid land use rights, current portion		8			183,048			181,258
Total current assets					12,687,259			24,850,803
Property, plant and equipment, net		6			124,255			12,152,968
Construction in progress		7			22,187,315			20,916,925
Prepaid land use rights, non-current		8			8,969,352			8,723,066
Total assets					43,968,181			66,643,762
Liabilities
Current liabilities
Short-term bank loans		9		$	4,887,426			12,905,724
Other short-term loans		10			5,552,117			11,955,520
Accounts payable					-			487,931
Trade payable to a former subsidiary		5			-			2,555,860
Advance from a former subsidiary		5			-			77,134
Accrued expenses and other payables		11			13,427,130			12,092,200
Deferred government grants, current		12			24,437,131			186,125
Deferred tax liabilities, current		13			-			267,524
Total current liabilities					48,303,804			40,528,018
Deferred government grants, non-current		12			-			7,238,974
Deferred tax liabilities, non-current		13			-			5,499,994
Total liabilities					48,303,804			53,266,986
Commitments and contingencies		17
Shareholders' (deficit) equity
Common stock $0.001 par value; 500,000,000 and 200,000,0000 authorized as of September 30, 2014 and June 30, 2015 ; 12,763,803 issued as of September 30, 2014 and June 30, 2015; 12,619,597 outstanding as of September 30, 2014 and June 30, 2015					12,763			12,763
Donated shares					14,101,689			14,101,689
Additional paid-in capital					127,438,362			127,630,791
Accumulated deficit					(141,796,196	)		(124,294,248	)
Accumulated other comprehensive income					(25,631	)		(7,609	)
					(269,013	)		17,443,386
Less: Treasury shares					(4,066,610	)		(4,066,610	)
Total shareholders' (deficit) equity					(4,335,623	)		13,376,776
Total liabilities and shareholder's (deficit) equity				$	43,968,181			66,643,762

See accompanying notes to the condensed consolidated financial statements.

F-2

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China BAK Battery, Inc. and Subsidiaries
Condensed consolidated statements of operations and comprehensive (loss) income
For the three and nine months ended June 30, 2014 and 2015
(Unaudited)
(In US$ except for number of shares)

See accompanying notes to the condensed consolidated financial statements.

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China BAK Battery, Inc. and Subsidiaries
Condensed consolidated statements of changes in shareholders’ equity
For the nine months ended June 30, 2014 and 2015
(Unaudited)
(In US$ except for number of shares)

See accompanying notes to the condensed consolidated financial statements.

F-4

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China BAK Battery, Inc. and subsidiaries
Condensed consolidated statements of cash flows
For the nine months ended June 30, 2014 and 2015
(Unaudited)
(In US$)

		Nine months ended June 30,
		2014			2015
Cash flows from operating activities
Net profit	$	22,559,994		$	17,501,948
Income from discontinued operations, net of tax		(48,928,143	)		(1,836,580	)
Adjustments to reconcile net profit to net cash used in operating activities:
Depreciation and amortization		8,251,510			259,013
Recovery of doubtful debts		(639,390	)		-
Write-down of inventories		8,752,543			-
Share-based compensation		87,606			192,429
Deferred government grants		(245,887	)		(23,204,113	)
Deferred tax liabilities		-			5,770,683
Exchange loss (gain)		375,127			(29,433	)
Changes in operating assets and liabilities:
Trade accounts receivable		(13,992,484	)		(4,619,132	)
Inventories		7,163,543			(755,529	)
Prepayments and other receivables		(8,768,517	)		(1,091,475	)
Accounts payable		(22,626,190	)		488,199
Accrued expenses and other payables		24,964,173			191,663
Trade payable to a former subsidiary		-			523,058
Net cash used in continuing operations		(23,046,115	)		(6,609,269	)
Net cash provided by discontinued operations		3,615,638			-
Net cash used in operating activities		(19,430,477	)		(6,609,269	)
Cash flows from investing activities
Disposal of subsidiaries, net of cash disposed of $4,163,555		(4,163,555	)		-
Increase in pledged deposits		7,990,705			-
Deferred government grant		-			7,449,075
Purchases of property, plant and equipment and construction in progress		(8,456,929	)		(7,070,412	)
Purchase of intangible assets		(15,825	)		-
Net cash (used in) provided by continuing operations		(4,645,604	)		378,663
Net cash (used in) provided by discontinued operations		(3,296,571	)		1,520,782
Net cash (used in) provided by investing activities		(7,942,175	)		1,899,445
Cash flows from financing activities
Proceeds from borrowings		91,614,488			8,070,504
Repayment of borrowings		(178,695,284	)		-
Borrowings from related party		-			3,553,864
Repayment to related party		-			(868,817	)
Borrowings from unrelated parties		121,232,353			9,252,699
Repayment of borrowings from unrelated parties		(20,554,868	)		(4,726,087	)
Net cash provided by financing activities		13,596,689			15,282,163
Effect of exchange rate changes on cash and cash equivalents		49,452			(9,695	)
Net (decrease) increase in cash and cash equivalents		(13,726,511	)		10,562,644
Cash and cash equivalents at the beginning of period		13,998,626			991,519
Cash and cash equivalents at the end of period	$	272,115		$	11,554,163
Non-cash transactions:
Purchase of inventories offset against receivables from former subsidiaries	$	-		$	618,389
Purchase of property, plant and equipment (inclusive of VAT) offset against receivables from former subsidiaries	$	-		$	4,393,535
Removal expenditures offset against government grants	$	-		$	1,007,399
Depreciation expenses offset against government grants	$	-		$	19,901
Accounts receivable offset against advance from a related company	$	-		$	351,335
Bill receivable discounted to the bank	$	913,517		$	-
Receivable from a former subsidiary offset against advance from a related company	$	-		$	403,304
Transfer of construction in progress to property, plant and equipment	$	3,391,846		$	12,150,057
Cash paid during the period for:
Income taxes	$	-		$	-
Interest, net of amounts capitalized	$	8,688,340		$	-

See accompanying notes to the condensed consolidated financial statements.

F-5

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(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") high power rechargeable batteries. Prior to the disposal of BAK International Limited (“BAK International”) and its subsidiaries (see below), the batteries produced by the Company were 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 vehicles, and general industrial applications. After the disposal of BAK International and its subsidiaries on June 30, 2014, the Company will focus on the manufacture, commercialization and distribution of high power lithium ion rechargeable batteries for use in cordless power tools, light electric vehicles, hybrid electric vehicles, electric cars, electric busses, uninterruptable power supplies and other high power 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

On November 6, 2004, BAK International, a non-operating holding company that had substantially the same shareholders as Shenzhen BAK Battery Co., Ltd (“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. 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. 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.

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 1,720,087 shares of common stock for gross proceeds of $17,000,000. In conjunction with this financing, Mr. Xiangqian Li, the Chairman and Chief Executive Officer of the Company (“Mr. Li”), agreed to place 435,910 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 $12,000,000, and the remaining 50% was 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 $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 435,910 shares would be released to Mr. 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. 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.

F-6

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

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

Basis of Presentation and Organization (continued)

While the 217,955 escrow shares relating to the 2005 performance threshold were previously released to Mr. Li, Mr. 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 217,955 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 in these financial statements by reclassifying the balances of certain items as of October 1, 2007. The balances of donated shares and additional paid-in capital as of October 1, 2007 were credited and debited by $7,955,358 respectively, as set out in the consolidated statements of changes in shareholders’ equity.

In November 2007, Mr. Li delivered the 217,955 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. Li regarding the shares, and Mr. 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 entered into settlement agreements (the “2008 Settlement Agreements”) with certain investors in the January 2005 private placement. Since the other investors have never submitted any claims regarding this matter, the Company did not reach any settlement with them.

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. Li, as well as all claims, including claims for liquidated damages relating to registration rights granted in connection with the January 2005 private placement. Under the 2008 Settlement Agreement, the Company has made settlement payments to each of the settling investors of the number of shares of the Company’s common stock equivalent to 50% of the number of the escrow shares related to the 2005 performance threshold these investors had claimed; aggregate settlement payments as of June 30, 2015 amounted to 73,749 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.

Pursuant to the Li Settlement Agreement, the 2008 Settlement Agreements and upon the release of the 217,955 escrow shares relating to the fiscal year 2006 performance threshold to the relevant investors, neither Mr. Li or the Company have any obligations to the investors who participated in the Company’s January 2005 private placement relating to the escrow shares.

As of June 30, 2015, the Company had not received any claim from the other investors who have not been covered by the “2008 Settlement Agreements” in the January 2005 private placement.

As the Company has transferred the 217,955 shares related to the 2006 performance threshold to the relevant investors in fiscal year 2007 and we also have transferred 73,749 shares relating to the 2005 performance threshold to the investors who had entered the “2008 Settlement Agreements” with us in fiscal year 2008, pursuant to “Li Settlement Agreement” and “2008 Settlement Agreements”, neither Mr. Li nor the Company had any remaining obligations to those related investors who participated in the Company’s January 2005 private placement relating to the escrow shares.

F-7

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

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

Basis of Presentation and Organization (continued)

On August 14, 2013, Dalian BAK Trading Co., Ltd (“Dalian BAK Trading”) was established as a wholly owned subsidiary of China BAK Asia Holding Limited (“BAK Asia”) with a registered capital of $500,000 (Note 17(i)). Pursuant to Dalian BAK Trading’s articles of association and relevant PRC regulations, BAK Asia was required to contribute the capital to Dalian BAK Trading on or before August 14, 2015. Up to the date of this report, the Company has contributed $100,000 to Dalian BAK Trading in cash.

On December 27, 2013, Dalian BAK Power Battery Co., Ltd (“Dalian BAK Power”) was established as a wholly owned subsidiary of BAK Asia with a registered capital of $30,000,000 (Note 17(i)). Pursuant to Dalian BAK Power’s articles of association and relevant PRC regulations, BAK Asia was required to contribute the capital to Dalian BAK Power on or before December 27, 2015. Up to the date of this report, the Company has contributed $14,466,384 to Dalian BAK Power through an injection of a series of patents and cash of $9,466,384.

The Company’s condensed consolidated financial statements have been prepared under US GAAP.

These condensed consolidated financial statements are unaudited. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these condensed consolidated financial statements, which are of a normal and recurring nature, have been included. The results reported in the condensed consolidated financial statements for any interim periods are not necessarily indicative of the results that may be reported for the entire year. The following (a) condensed consolidated balance sheet as of September 30, 2014, which was derived from the Company’s audited financial statements, and (b) the unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to those rules and regulations, though the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying footnotes of the Company for the year ended September 30, 2014.

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 liability established in the PRC or Hong Kong. The accompanying condensed 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 equity interest of BAK International and its wholly owned subsidiaries, namely Shenzhen BAK, BAK Battery (Shenzhen) Co., Ltd. (“BAK Battery”), BAK International (Tianjin) Ltd. (“BAK Tianjin”), Tianjin Chenhao Technological Development Limited (a subsidiary of BAK Tianjin established on May 8, 2014,“Tianjin Chenhao”), BAK Battery Canada Ltd. (“BAK Canada”), BAK Europe GmbH (“BAK Europe”) and BAK Telecom India Private Limited (“BAK India”) (collectively the “Disposal Group”) was disposed of effective on June 30, 2014 as a result of the foreclosure by Mr. Jinghui Wang (“Mr. Wang”), an unrelated third party, after Shenzhen BAK failed to repay the loans to Mr. Wang on March 31, 2014. The consolidated financial statements were consolidated up to the date of disposal.

After the disposal of BAK International Limited and its subsidiaries effective on June 30, 2014, and as of September 30, 2014 and June 30, 2015, the Company’s subsidiaries consisted of: i) China BAK Asia Holdings Limited (“BAK Asia”), a wholly owned limited liability company incorporated in Hong Kong on July 9, 2013; ii) Dalian BAK Trading Co., Ltd. (“Dalian BAK Trading”), a wholly owned limited company established on August 14, 2013 in the PRC; and iii) Dalian BAK Power Battery Co., Ltd. (“Dalian BAK Power”), a wholly owned limited liability company established on December 27, 2013 in the PRC.

The Company continued its business and continued to generate revenues from sale of batteries via subcontracting the production to BAK Tianjin, a former subsidiary before the completion of construction and operation of its facility in Dalian. BAK Tianjin is now a supplier of the Company and the Company does not have any significant benefits or liability from the operating results of BAK Tianjin except the normal risk with any major supplier.

F-8

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

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

Basis of Presentation and Organization (continued)

Pursuant to a memorandum of understanding with the buyer of the Company’s former subsidiaries dated August 20, 2014, Mr. Xiangqian Li remains as a director of BAK International, Shenzhen BAK, BAK Battery and BAK Tianjin until Shenzhen BAK’s full settlement of its bank loans of $63.1 million expiring on various dates through March 2015. Shenzhen BAK renewed the banking loans with Agricultural Bank of China of $67.8 million expiring on April 14, 2016. On May 21, 2015, BAK Asia New Energy Holding Limited (“formerly known as Asia Zhi Li New Energy Holding Limited”), the shareholder of BAK International Limited agreed to indemnify Mr. Li from any loss as a result of the default of repayment of bank loans by Shenzhen BAK. Mr Li should not participate in any operational and managerial decision making of these entities.

The Company had a working capital deficiency, accumulated deficit from recurring net losses incurred for prior years and short-term debt obligations as of September 30, 2014 and June 30, 2015. These factors raise substantial doubts about the Company’s ability to continue as a going concern.

The Company obtained a short term bank loan of $4.8 million (RMB30 million) which is bearing fixed interest at 7.8% per annum from Bank of Dandong for the period from August 19, 2014 to August 18, 2015. This short term bank loan was guaranteed by Shenzhen BAK and Mr. Li. The Company repaid this bank loan in August 2015 and borrowed a new loan of $4.8 million (RMB 30 million) under the banking facilities letter dated June 22, 2015.

On June 22, 2015, Dalian BAK Power entered into a banking facility letter with Bank of Dandong to provide a maximum loan amount of $19.4 million (RMB120 million) to June 22, 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li, and his wife, Ms. Xiaoqiu Yu. The facilities were also secured by Dalian BAK Power’s buildings, construction in progress, prepaid land use rights and machineries. On June 25, 2015, the Company borrowed another loan of $8.1 million (RMB50 million) from Bank of Dandong for a period from June 25, 2015 to June 22, 2016, bearing fixed interest at 7.84% per annum. As of June 30, 2015, the Company had $12.9 million outstanding on the banking facilities, and $6.5 million available for borrowing. The Company plans to raise further financing from local banks to meet its daily cash demands if required.

However, there can be no assurance that the Company will be successful in obtaining further financing. The Company believes that with the significant reduction of liabilities and disposal of traditionally low margin battery business after the foreclosure of BAK International Limited, it can continue as a going concern and return to profitability.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty related to the Company’s ability to continue as a going concern.

Discontinued operations

The Company had also been engaged in property leasing and management of its Research and Development Centre in Shenzhen since its completion in July 2013. Following the disposal of BAK International and in subsidiaries on June 30, 2014, the Company no longer engaged in property leasing and management. Thus, this business is now accounted for as discontinued operations in the accompanying consolidated financial statements for all periods presented. Accordingly, revenues and expenses and cash flows related to the property leasing and management business have been appropriately reclassified in the accompanying consolidated financial statements as discontinued operations for all periods presented.

The following table presents the components of discontinued operations in relation to the property leasing and management business reported in the condensed consolidated statement of operations and comprehensive (loss) income for the three and nine months ended June 30, 2014 and 2015:

		Three months ended June 30,						Nine months ended June 30,
		2014			2015			2014			2015
Net revenues	$	1,459,719		$	-		$	4,069,146		$	-
Cost of revenues		(301,935	)		-			(919,470	)		-
		1,157,784			-			3,149,676			-
Gain on disposal of subsidiaries		45,778,467			-			45,778,467			-
Recovery of doubtful accounts (note 5)		-			315,061			-			1,836,580
Income from discontinued operations, net of tax	$	46,936,251		$	315,061		$	48,928,143		$	1,836,580

F-9

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

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

Basis of Presentation and Organization (continued)

Recently Issued Accounting Standards

In April 2014, the FASB issued ASU 2014-08 “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) - Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”, which changes the threshold for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal that “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The standard is required to be adopted by public business entities in annual periods beginning on or after December 15, 2014, and interim periods within those annual periods. Entities may “early adopt” the guidance for new disposals. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" which clarifies and improves the principles for recognizing revenue and develops a common revenue standard for United States generally accepted accounting principles (U.S. GAAP) and International Financial Reporting Standards (IFRS) that among other things, improves comparability of revenue recognition practices and provides more useful information to users of financial statements through improved disclosure requirements. The amendments in ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently reviewing the effect of ASU 2014-09 on its revenue recognition.

In June 2014, the FASB issued ASU 2014-12, "Compensation - Stock Compensation (Topic 718)" which provides explicit guidance on the treatment of awards with performance targets that could be achieved after the requisite service period. The amendments in ASU 2014-12 are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.

In June 2014, the FASB issued ASU 2014-15, "Presentation of Financial Statements-Going concern (Subtopic 205-40) which provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. This guidance in ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early application is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not expect that the adoption will have a material impact on its consolidated financial statements.

In November 2014, FASB issued Accounting Standards Update No. 2014-16, Derivatives and Hedging (Topic 815): Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity (a consensus of the FASB Emerging Issues Task Force).The amendments permit the use of the Fed Funds Effective Swap Rate (also referred to as the Overnight Index Swap Rate, or OIS) as a benchmark interest rate for hedge accounting purposes. Public business entities are required to implement the new requirements in fiscal years (and interim periods within those fiscal years) beginning after December 15, 2015. All other types of entities are required to implement the new requirements in fiscal years beginning after December 15, 2015, and interim periods beginning after December 15, 2016. The Company does not expect the adoption of ASU 2014-16 to have material impact on its consolidated financial statement.

In February 2015, the FASB issued ASU 2015-02 "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the adoption of ASU 2015-02 on its consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

F-10

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

2.	Trade Accounts Receivable, net

Trade accounts receivable as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Trade accounts receivable	$	1,013,641		$	5,248,670
	Less: Allowance for doubtful accounts		-			-
			1,013,641			5,248,670
	Bills receivable		-			20,519
		$	1,013,641		$	5,269,189

3.	Inventories

Inventories as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Raw materials	$	9,187		$	52,269
	Finished goods		2,638,911			3,952,210
		$	2,648,098		$	4,004,479

During the three months ended June 30, 2014 and 2015, write-downs of obsolete inventories to lower of cost or market of $3,105,534 and nil, respectively, were charged to cost of revenues.

During the nine months ended June 30, 2014 and 2015, write-downs of obsolete inventories to lower of cost or market of $8,752,543 and nil, respectively, were charged to cost of revenues.

4.	Prepayments and Other Receivables

Prepayments and other receivables as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Value added tax recoverable	$	570,577		$	3,081,375
	Prepayments to suppliers		-			464,198
	Deposits		-			151,003
	Staff advances		5,028			72,914
	Prepaid operating expenses		2,750			72,224
	Others		11,509			-
		$	589,864		$	3,841,714

F-11

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

5.	Receivables from Former Subsidiaries, trade payable to and advance from former subsidiaries

Receivable from former subsidiaries as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Shenzhen BAK	$	1,856,356		$	-
	BAK Tianjin		7,261,089			-
			9,117,445			-
	Allowance for doubtful debts		(1,856,356	)		-
	Carrying amount	$	7,261,089		$	-

Upon disposal of the Disposal Group in June 2014, the Disposal Group owed the Company a sum of $17.8 million. Management of the Company evaluated the collectability of the remaining amount and determined that $1.8 million should be impaired and offset against the gain on disposal of subsidiaries from discontinued operations for the year ended September 30, 2014. During the three and nine months ended June 30, 2015, the Company determined that $0.3 million and $1.8 million were recoverable. The recovery was treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations for the three and nine months ended June 30, 2015.

Trade payable to a former subsidiary as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	BAK Tianjin	$	-		$	2,555,860

Balance at June 30, 2015 included payables for purchase of machinery and equipment of $2,025, 273 from BAK Tianjin.

Advance from a former subsidiary as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Shenzhen BAK	$	- $			77,134

This amount is unsecured, non-interest bearing and repayable on demand.

---

China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

6.	Property, Plant and Equipment, net

Property, plant and equipment as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Buildings	$	-		$	8,536,704
	Machinery and equipment		-			3,603,616
	Office equipment		19,999			20,747
	Motor vehicles		118,821			126,484
			138,820			12,287,551
	Accumulated depreciation		(14,565	)		(134,583	)
	Carrying amount	$	124,255		$	12,152,968

Depreciation expense for the three and nine months ended June 30, 2014 and 2015 is included in the condensed consolidated statements of operations as follows:

During the course of the Company’s strategic review of its operations, the Company assessed the recoverability of the carrying value of the Company’s property, plant and equipment. The impairment charge, if any, represented the excess of carrying amounts of the Company’s property, plant and equipment over the estimated discounted cash flows expected to be generated by the Company’s production facilities. The Company believes that there was no impairment of its property, plant and equipment for the three and nine months ended June 30, 2014 and 2015.

During the three and nine months ended June 30, 2015, the Company purchased machinery and equipment from BAK Tianjin totaled $2.0 million and $6.4 million, respectively.

7.	Construction in Progress

Construction in progress as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Construction in progress	$	21,760,746		$	20,847,703
	Prepayment for acquisition of property, plant and equipment		426,569			69,222
	Carrying amount	$	22,187,315		$	20,916,925

Construction in progress as of September 30, 2014 and June 30, 2015 was mainly comprised of capital expenditures for the construction of the facilities and production lines of Dalian BAK Power.

For the three months ended June 30, 2014 and 2015, the Company capitalized interest of $26,943 and $103,023, respectively, to the cost of construction in progress.

For the nine months ended June 30, 2014 and 2015, the Company capitalized interest of $345,443 and $294,064, respectively, to the cost of construction in progress.

F-13

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

8.	Prepaid Land Use Rights, net

Prepaid land use rights as of September 30, 2014 and June 30, 2015 consisted of the followings:

			September 30,			June 30,
			2014			2015
	Prepaid land use rights	$	9,152,400		$	9,062,926
	Accumulated amortization		-			(158,602	)
		$	9,152,400		$	8,904,324
	Less: Classified as current assets		(183,048	)		(181,258	)
		$	8,969,352		$	8,723,066

Pursuant to a land use rights acquisition agreement dated August 10, 2014, the Company acquired the rights to use a piece of land with an area of 153,832 m² in Dalian Economic Zone for 50 years up to August 9, 2064, at a total consideration of $8,561,334 (RMB53.1 million). Other incidental costs incurred totaled $501,592 (RMB3.1 million).

Amortization expenses of the prepaid land use rights were $150,712 and $45,284 for the three months ended June 30, 2014 and 2015 and $418,720 and $158,688 for the nine months ended June 30, 2014 and 2015, respectively.

9.	Short-term Bank Loans

As of September 30, 2014 and June 30, 2015, the Company had short term bank borrowings of $4,887,426 and $12,905,724, respectively.

On August 13, 2014, the Company borrowed $4,839,645 (RMB30 million) from Bank of Dandong for a period from August 19, 2014 to August 18, 2015, bearing interest at 7.8% per annum. The loan was guaranteed by Mr. Xiangqian Li, the Company’s CEO and Shenzhen BAK, a former subsidiary of the Company. On August 18, 2015, the Company repaid the bank loan and borrowed a new loan of $4,839,645 (RMB 30 million) under the banking facilities letter dated June 22, 2015 from Bank of Dandong for a period from August 18, 2015 to June 22, 2015, bearing interest at 7.84% per annum.

On June 22, 2015, the Company entered into a banking facilities letter with Bank of Dandong to provide a maximum loan amount of $19,358,585 (RMB120,000,000) up to June 2016. The banking facilities were guaranteed by Mr. Xiangqian Li, the Company’s CEO and his wife, Ms. Xiaoqiu Yu, and Shenzhen BAK, a former subsidiary of the Company. The facilities were also secured by the Company’s assets with the following carrying amount:

			September 30,			June 30,
			2014			2015
	Prepaid land use rights (note 8)	$	-		$	8,904,324
	Buildings		-			7,232,594
	Machinery and equipment		-			3,522,249
	Construction in progress		-			14,675,149
			-			34,334,316

The Company borrowed another loan of $8,066,077 (RMB50 million) from Bank of Dandong for a period from June 25, 2015 to June 22, 2016, bearing interest at 7.84% per annum. As of June 30, 2015, the Company had $12,905,724 outstanding on the banking facilities, and $6,452,861 available for borrowing.

During the three months ended June 30, 2014 and 2015, interest of $1,101,889 and $103,023, respectively, was incurred on the Company's bank borrowings.

During the nine months ended June 30, 2014 and 2015, interest of $5,693,738 and $294,064, respectively, was incurred on the Company's bank borrowings.

F-14

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

10.	Other Short-term Loans

Other short-term loans as of September 30, 2014 and June 30, 2015 consisted of the following:

						September 30,			June 30,
			Note			2014			2015
	Advance from a related company
	– Tianjin BAK New Energy Research Institute Co., Ltd (“Tianjin New Energy”)		(a)		$	651,657		$	2,474,470
	– Mr. Xiangqian Li, the Company’s CEO		(b)			-			100,000
						651,657			2,574,470
	Advances from unrelated third parties		(c)
	– HK Golden Fortune Trade Co Limited					-			1,500,000
	– Hong Kong Ou Yuan Investment Limited					-			89,997
	– Light Power Limited					-			1,599,968
	– Maoru Wine Business Limited					-			319,982
	– Shengjia International Industrial Limited					-			3,227,152
	– Shengjin Dress Limited					-			479,974
	– Smart Linkage Corporation Limited								249,982
	– Wanfeng (Hong Kong) Development Company Limited					-			499,962
	– Mr. Jianqiang Han					-			629,154
	– Mr. Longqian Peng					162,915			129,057
	– Mr. Mingzhe Li					382,848			171,646
	– Mr. Shengdan Qiu					4,354,697			290,379
	– Others					-			193,797
						4,900,460			9,381,050
					$	5,552,117		$	11,955,520

	(a)	The Company received an advance from Tianjin New Energy, a related company under the common control of Mr. Xiangqian Li, the Company’s CEO, which was unsecured, non-interest bearing and repayable on demand. For the three and nine months ended June 30, 2015, the Company generated revenue of nil and $300,286 from Tianjin New Energy, and the related trade receivables was offset against the advance from Tianjin New Energy as of June 30, 2015.
	(b)	Advances from Mr. Xiangqian Li, the Company’s CEO, was unsecured, non-interest bearing and repayable on demand.
	(c)	Advances from unrelated third parties were unsecured, non-interest bearing and repayable on demand.

During the three months ended June 30, 2014 and 2015, interest of $5,149,806 and nil, respectively, was incurred on the Company’s other short-term loans.

During the nine months ended June 30, 2014 and 2015, interest of $11,687,780 and nil, respectively, was incurred on the Company’s other short-term loans.

F-15

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

11.	Accrued Expenses and Other Payables

Accrued expenses and other payables as of September 30, 2014 and June 30, 2015 consisted of the following:

			September 30,			June 30,
			2014			2015
	Construction costs payable	$	10,935,000		$	9,399,456
	Liquidated damages (note)		1,210,119			1,210,119
	Equipment purchase payable		536,239			553,140
	Customer deposits		143,524			210,396
	Accrued staff costs		65,978			188,884
	Other payables and accruals		536,270			530,205
		$	13,427,130		$	12,092,200

Note:

On August 15, 2006, the SEC declared effective a post-effective amendment that the Company had filed on August 4, 2006, terminating the effectiveness of a resale registration statement on Form SB-2 that had been filed pursuant to a registration rights agreement with certain shareholders to register the resale of shares held by those shareholders. The Company subsequently filed Form S-1 for these shareholders. On December 8, 2006, the Company filed its Annual Report on Form 10- K for the year ended September 30, 2006 (the “2006 Form 10-K”). After the filing of the 2006 Form 10- K, the Company’s previously filed registration statement on Form S-1 was no longer available for resale by the selling shareholders whose shares were included in such Form S-1. Under the registration rights agreement, those selling shareholders became eligible for liquidated damages from the Company relating to the above two events totaling approximately $1,051,000. As of September 30, 2014 and June 30, 2015, no liquidated damages relating to both events have been paid.

On November 9, 2007, the Company completed a private placement for the gross proceeds to the Company of $13,650,000 by selling 3,500,000 shares of common stock at the price of $3.90 per share. Roth Capital Partners, LLC acted as the Company’s exclusive financial advisor and placement agent in connection with the private placement and received a cash fee of $819,000. The Company may have become liable for liquidated damages to certain shareholders whose shares were included in a resale registration statement on Form S-3 that the Company filed pursuant to a registration rights agreement that the Company entered into with such shareholders in November 2007. Under the registration rights agreement, among other things, if a registration statement filed pursuant thereto was not declared effective by the SEC by the 100th calendar day after the closing of the Company’s private placement on November 9, 2007, or the “Effectiveness Deadline”, then the Company would be liable to pay partial liquidated damages to each such investor of (a) 1.5% of the aggregate purchase price paid by such investor for the shares it purchased on the one month anniversary of the Effectiveness Deadline; (b) an additional 1.5% of the aggregate purchase price paid by such investor every thirtieth day thereafter (pro rated for periods totaling less than thirty days) until the earliest of the effectiveness of the registration statement, the ten-month anniversary of the Effectiveness Deadline and the time that the Company is no longer required to keep such resale registration statement effective because either such shareholders have sold all of their shares or such shareholders may sell their shares pursuant to Rule 144 without volume limitations; and (c) 0.5% of the aggregate purchase price paid by such investor for the shares it purchased in our November 2007 private placement on each of the following dates: the ten-month anniversary of the Effectiveness Deadline and every thirtieth day thereafter (prorated for periods totaling less than thirty days), until the earlier of the effectiveness of the registration statement and the time that the Company no longer is required to keep such resale registration statement effective because either such shareholders have sold all of their shares or such shareholders may sell their shares pursuant to Rule 144 without volume limitations. Such liquidated damages would bear interest at the rate of 1% per month (prorated for partial months) until paid in full.

On December 21, 2007, pursuant to the registration rights agreement, the Company filed a registration statement on Form S-3, which was declared effective by the SEC on May 7, 2008. As a result, the Company estimated liquidated damages amounting to $561,174 for the November 2007 registration rights agreement. As of September 30, 2014 and June 30, 2015, the Company had settled the liquidated damages with all the investors and the remaining provision of approximately $159,000 was included in other payables and accruals.

F-16

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

12.	Deferred Government Grants

Deferred government grants as of September 30, 2014 and June 30, 2015 consist of the following:

			September 30,			June 30,
			2014			2015
	Total government grants	$	24,437,131		$	7,425,099
	Less: Current portion		(24,437,131	)		(186,125	)
	Non-current portion	$	-		$	7,238,974

In September 2013, the Management Committee of Dalian Economic Zone Management Committee (the “Management Committee”) provided a subsidy of RMB150 million to finance the costs incurred in moving our facilities to Dalian, including the loss of sales while the new facilities were being constructed. During the three and nine months ended June 30, 2015, the Company recognized nil and $23,204,113 as income after offset of the related removal expenditures of $1,007,399. No such income or offset was recognized in fiscal 2014.

On October 17, 2014, the Company received a subsidy of $7,444,989 (RMB46,150,000) pursuant to an agreement with the Management Committee dated July 2, 2013 for costs of land use rights and to be used to construct the new manufacturing site in Dalian. Part of the facilities had been completed and was operated in July 2015 and the Company has initiated amortization on a straight-line basis over the estimated useful lives of the depreciable facilities constructed thereon. The Company expects that the remaining facilities will be completed and put into operation by the end of December 2015. During the three and nine months ended June 30, 2015, the Company offset government grants of $19,901 against depreciation expenses of the Dalian facilities.

13.	Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities

(a)

Income taxes in the condensed consolidated statements of comprehensive loss (income)

The Company’s provision for income taxes consisted of:

United States Tax
China BAK is subject to a statutory tax rate of 35% under United States of America tax law. No provision for income taxes in the United States or elsewhere has been made as China BAK had no taxable income for the three and nine months ended June 30, 2014 and 2015.

Hong Kong Tax
BAK Asia and BAK International are subject to Hong Kong profits tax rate of 16.5% and did not have any assessable profits arising in or derived from Hong Kong for the three and nine months ended June 30, 2014 and 2015 and accordingly no provision for Hong Kong profits tax was made in these periods.

PRC Tax
The Company’s subsidiaries in China are subject to enterprise income tax at 25% for the three and nine months ended June 30, 2014 and 2015.

Canada States Tax
BAK Canada was subject to statutory tax rate of 38% under Canada tax law. No provision for income taxes in Canada has been made as BAK Canada had no taxable income for the three and nine months ended June 30, 2014.

German States Tax
BAK Europe was subject to a 25% statutory tax rate under Germany tax law. No provision for income taxes in Germany has been made as BAK Europe had no taxable income for the three and nine months ended June 30, 2014.

India Tax
BAK India was subject to a 30% statutory tax rate under India tax law. No provision for income taxes in India has been made as BAK India had no taxable income for the three and nine months ended June 30, 2014.

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

13.	Income Taxes, Deferred Tax Assets and Deferred Tax Liabilities (continued)

(a)

Income taxes in the condensed consolidated statements of comprehensive loss (income) (continued)

A reconciliation of the provision for income taxes determined at the statutory income tax rate to the Company's income taxes is as follows:

			Three months ended June 30,						Nine months ended June 30,
			2014			2015			2014			2015
	(Loss) earnings before income taxes - continuing operations	$	(9,829,430	)	$	(1,301,852	)	$	(26,351,675	)	$	21,436,051
	United States federal corporate income tax rate		35%			35%			35%			35%
	Income tax credit computed at United States statutory corporate income tax rate		(3,440,301	)		(455,648	)		(9,223,086	)		7,502,618
	Reconciling items:
	Valuation allowance on deferred tax assets		2,939,065			238,141			6,147,546			285,153
	Rate differential for PRC earnings		455,721			97,818			2,555,291			(2,194,794	)
	Non-deductible expenses		40,430			19,488			506,060			110,660
	Share based payments		5,085			67,350			30,663			67,350
	Others		-			-			-			(304	)
	Income tax (credit) expenses	$	-		$	(32,851	)	$	16,474		$	5,770,683

(b)

Deferred tax assets and deferred tax liabilities

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of September 30, 2014 and June 30, 2015 are presented below:

			September 30,			June 30,
			2014			2015
	Deferred tax assets
	Net operating loss carried forward	$	12,534,160		$	12,824,257
	Valuation allowance		(12,534,160	)		(12,824,257	)
	Long-term deferred tax assets	$	-		$	-
	Deferred tax liabilities
	Government grants	$	-		$	5,767,518
	Less: current portion		-			(267,524	)
	Non-current portion	$	-		$	5,499,994

As of September 30, 2014 and June 30, 2015, the Company’s U.S. entity had net operating loss carry forwards of $35,581,443, available to reduce future taxable income which will expire in various years through 2034 and the Company’s PRC subsidiaries had net operating loss carry forwards of $690,821 and $1,851,208, respectively, which will expire in various years through 2020. Management believes it is more likely than not that the Company will not realize these potential tax benefits as these operations will not generate any operating profits in the foreseeable future. As a result, a valuation allowance was provided against the full amount of the potential tax benefits.

The Company did not provide for deferred income taxes and foreign withholding taxes on the cumulative undistributed earnings of foreign subsidiaries as of September 30, 2014 and June 30, 2015 of approximately of nil and $16.1 million, respectively. The cumulative distributed earnings of foreign subsidiaries were included in accumulated deficit and will continue to be indefinitely reinvested in international operations. Accordingly, no provision has been made for U.S. deferred taxes or applicable withholding taxes, related to future repatriation of these earnings, nor is it practicable to estimate the amount of income taxes that would have to be provided if management concluded that such earnings will be remitted in the future.

As of September 30, 2014 and June 30, 2015, the Company had no material unrecognized tax benefits which would favorably affect the effective income tax rates in future periods and does not believe that there will be any significant increases or decreases of unrecognized tax benefits within the next twelve months. No interest or penalties relating to income tax matters have been imposed on the Company during the three and nine months ended June 30, 2014 and 2015, and no provision for interest and penalties is deemed necessary as of June 30, 2015 and September 30, 2014.

According to the PRC Tax Administration and Collection Law, the statute of limitations is three years if the underpayment of taxes is due to computational errors made by the taxpayer or its withholding agent. The statute of limitations extends to five years under special circumstances, which are not clearly defined. In the case of a related party transaction, the statute of limitations is ten years. There is no statute of limitations in the case of tax evasion.

F-18

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

14.	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 800,000 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 1,600,000. On June 17, 2015, the Company’s stockholders approved an amendment to Section 1.7 of the Plan that if an option terminates without being wholly exercised, new options or restricted stock may be granted hereunder covering the number of shares to which such option termination relates. Section 1.7 of the Plan currently provides that only new options may be granted in this case.

On June 22, 2009, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of options to purchase 385,640 shares of the Company’s common stock to certain key employees, officers and consultants with an exercise price of $14.05 per share and a contractual life of 7 years. 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.

A summary of share option plan activity for these options as of September 30, 2014 and June 30, 2015 is presented below:

(1)

The intrinsic values of option at June 30, 2015 was zero since the share market value of common stock of $3.24 was lower than the exercise price of the option of $14.05 per share.

The weighted average grant-date fair value of options granted on June 22, 2009 was $12.30 per share. The Company recorded non-cash share-based compensation expense of $10,498 and nil for the three months ended June 30, 2014 and 2015, and $64,604 and nil for the nine months ended June 30, 2014 and 2015, respectively.

As of June 30, 2015, there were no unrecognized compensation costs related to the above non-vested share options.

F-19

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

14.	Share-based Compensation (continued)

(ii)

Restricted Shares

Restricted shares granted on June 22, 2009

Pursuant to the Plan and in accordance with the China BAK Battery, Inc. Compensation Plan for Non-Employee Directors, the Compensation Committee of the Company’s Board of Directors recommended and approved the grant of 100,000 restricted shares to the Chief Executive Officer, Mr. Xiangqian Li with a fair value of $14.05 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.  As of June 30, 2015, 100,000 shares were vested and to be issued to Mr. Li. On August 17, 2015, 60,000 vested shares were issued.

The Company recorded non-cash share-based compensation expense of $4,026 and nil for the three months ended June 30, 2014 and 2015, and $23,002 and nil for the nine months ended June 30, 2014 and 2015, respectively, in respect of the restricted shares granted on June 22, 2009, which was allocated to general and administrative expenses.

As of June 30, 2015, there was no unrecognized stock-based compensation associated with the restricted shares granted to Mr. Xiangqian Li on June 22, 2009.

Restricted shares granted on June 30, 2015

On June 12, 2015, the Board of Director approved the China BAK Battery, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) for Employees, Directors and Consultants of the Company and its Affiliates. The maximum aggregate number of Shares that may be issued under the Plan is ten million (10,000,000) Shares.

On June 30, 2015, pursuant to the 2015 Plan, the Compensation Committee of the Company’s Board of Directors granted an aggregate of 690,000 restricted shares of the Company’s common stock, par value $0.001, to certain employees, officers and directors of the Company with a fair value of $3.24 per share on June 30, 2015. In accordance with the vesting schedule of the grant, the restricted shares will vest in twelve equal quarterly installments on the last day of each fiscal quarter beginning on June 30, 2015 (i.e. last vesting period: quarter ended March 31, 2018).

The Company recorded non-cash share-based compensation expense of $192,429 for the three and nine months ended June 30, 2015, respectively, in respect of the restricted shares granted on June 30, 2015, of which $157,569, $22,310 and $12,550 were allocated to general and administrative expenses, research and development expenses and sales and marketing expenses, respectively. As of June 30, 2015, 57,500 shares were vested and to be issued to the Company’s employees and directors, and there was unrecognized stock-based compensation of $2,043,171 associated to the above restricted shares. On August 7, 2015, 29,998 vested shares were issued.

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 such stock-based compensation cost under the stock option plan for the three and nine months ended June 30, 2014 and 2015.

F-20

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

15.	(Loss) Earnings Per Share

The following is the calculation of (loss) earnings per share:

			Three months ended June 30,						Nine months ended June 30,
			2014			2015			2014			2015
	Net (loss) profit from continuing operations	$	(9,829,430	)	$	(1,269,001	)	$	(26,368,149	)	$	15,665,368
	Income from discontinued operations		46,936,251			315,061			48,928,143			1,836,580
	Net (loss) profit	$	37,106,821		$	(953,940	)	$	22,559,994		$	17,501,948
	Weighted average shares used in basic computation (note)		12,714,597			12,720,229			12,709,524			12,719,808
	Diluted effect of unvested restricted shares		-			-			-			2,317
	Weighted average shares used in diluted computation		12,714,597			12,720,229			12,709,524			12,722,125
	(Loss) earnings per share – Basic
	From continuing operations	$	(0.77	)	$	(0.10	)	$	(2.07	)	$	1.23
	From discontinued operations		3.69			0.02			3.85			0.14
		$	2.92		$	(0.08	)	$	1.78		$	1.37
	(Loss) earnings per share –Diluted
	From continuing operations	$	(0.77	)	$	(0.10	)	$	(2.07	)	$	1.23
	From discontinued operations		3.69			0.02			3.85			0.14
		$	2.92		$	(0.08	)	$	1.78		$	1.37

Note: Including 95,000 and 100,000 vested restricted shares not yet issued to Mr. Xiangqian Li as of June 30, 2014 and 2015, respectively, and nil and 57,500 vested restricted shares granted pursuant to the 2015 Plan not yet issued as of June 30, 2014 and 2015, respectively.

For the three months ended June 30, 2015, 632,500 unvested restricted shares were anti-dilutive and excluded from diluted loss per share.

For the three and nine months ended June 30, 2015, the outstanding 4,200 stock options were anti-dilutive and excluded from diluted (loss) earnings per share.

For the three and nine months ended June 30, 2014, the outstanding 4,200 stock options and 5,000 unvested restricted shares were anti-dilutive and excluded from diluted (loss) earnings per share.

16.	Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurement and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. This topic also establishes a fair value hierarchy, which requires classification based on observable and unobservable inputs when measuring fair value. Certain current assets and current liabilities are financial instruments. Management believes their carrying amounts are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and, if applicable, their current interest rates are equivalent to interest rates currently available. The three levels of valuation hierarchy are defined as follows:

	•	Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
	•	Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
	•	Level 3 inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The carrying amounts of financial assets and liabilities, such as cash and cash equivalents, trade accounts receivable, other receivables, receivables from, payables to and trade payables to former subsidiaries, other short-term loans and other payables approximate their fair values because of the short maturity of these instruments or the rate of interest of these instruments approximate the market rate of interest.

F-21

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

17.	Commitments and Contingencies

(i)

Capital Commitments

As of September 30, 2014 and June 30, 2015, the Company had the following contracted capital commitments:

			September 30,			June 30,
			2014			2015
	For construction of buildings	$	4,348,995		$	2,740,692
	For purchases of equipment		1,073,596			70,465
	Capital injection to Dalian BAK Power and Dalian BAK TradingNote		25,400,000			18,910,708
		$	30,822,591		$	21,721,865

^Note
On July 1, 2015, BAK Asia contributed further capital of $2,977,092 to Dalian BAK Power.

Initially, BAK Asia was required to pay the remaining capital within two years, of the date of issuance of the subsidiary’s business license according to PRC registration capital management rules. According to the revised PRC Companies Law which became effective on March 2014, the time requirement of the registered capital contribution has been abolished. As such, BAK Asia has its discretion to consider the timing of the registered capital contributions.

(ii)

Litigation

From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal proceeding set forth below, the Company is currently not aware of any such legal proceedings or claims that the Company believe will have an adverse effect on our business, financial condition or operating results.

An individual named Steven R. Ruth filed suit against China BAK Battery, Inc. in United States District Court for the Western District of Texas in 2013 alleging breach of contract. The Company did not receive notice of this lawsuit and the plaintiff sought a default judgment, which the court granted in January 2014. Accordingly, the court entered judgment in favor of Mr. Ruth in the amount of $553,774 inclusive of costs and attorneys’ fees (the “First Judgment”).

Subsequent to the entry of the First Judgment, Mr. Ruth has made efforts to have the judgment enforced in Canada. On September 19, 2014, Mr. Ruth also filed a second complaint in the United States District Court for the Western District of Texas. On November 12, 2014, a second default judgment was entered against the Company in the amount of $553,774 for the First Judgment plus an additional $7,550 in attorneys’ fees. The second judgment is inclusive of the amounts ordered in the First Judgment. BAK International thereafter agreed to indemnify the Company from any expenses, losses and damages that were incurred and will be incurred by the Company due to the lawsuit filed by Mr. Ruth.

F-22

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

18.	Concentrations and Credit Risk

(a)

Concentrations

The Company had one and two customers that individually comprised 10% or more of net revenue for the three months ended June 30, 2014 and 2015, respectively, as follows:

			Three months ended June 30,
			2014						2015
	Dongguan Yulong Telecom Technology Co., Ltd	$	6,657,646			13.87%		$	*			*
	Sichuan Pisen Electronics Co., Ltd		*			*			1,467,419			59.83%
	BAK Tianjin		*			*			499,290			20.36%

* Comprised less than 10% of net revenue for the respective period.

The Company had one and two customers that individually comprised 10% or more of net revenue for the nine months ended June 30, 2014 and 2015, respectively, as follows:

* Comprised less than 10% of net revenue for the respective period.

The Company had one and four customers that individually comprised 10% or more of accounts receivable as of September 30, 2014 and June 30, 2015, respectively, as follows:

			September 30, 2014						June 30, 2015
	Guangdong Pisen Electronics Co., Ltd.	$	569,444			56.17%		$	969,049			18.39%
	Sichuan Pisen Electronics Co., Ltd.		*			*			2,019,876			38.33%
	Dongguan Juda Electronics Co., Ltd		*			*			1,045,492			19.84%
	Shenzhen Max Technology Co., Ltd		*			*			653,941			12.41%

After the disposal of BAK International (Note 1) and prior to the completion of the new manufacturing site in Dalian, the Company generated its revenues from sale of batteries via subcontracting the production to BAK Tianjin, a former subsidiary. For the three and nine months ended June 30, 2015, the Company purchased inventories of $3.1 million and $6.7 million from BAK Tianjin.

For the three and nine months ended June 30, 2015, the Company generated revenue of

		•	$18,030 and $82,680 from Shenzhen BAK, respectively;
		•	$499,290 and $557,778 from BAK Tianjin, respectively; and
		•	$17,137 and $17,137 from Zhengzhou BAK Battery Co., Ltd, a company with the common director of Mr. Xiangqian Li, the Company's CEO.

(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, 2014 and June 30, 2015, substantially all of the Company’s cash and cash equivalents were held by major financial institutions located in the PRC, which management believes are of high credit quality.

F-23

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China BAK Battery, Inc. and subsidiaries
Notes to the condensed consolidated financial statements
For the three and nine months ended June 30, 2014 and 2015
(In US$ except for number of shares)
(Unaudited)

19.	Segment Information

The Company used to engage in one business segment, 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. The Company manufactured five types of Li-ion rechargeable batteries: aluminum-case cell, battery pack, cylindrical cell, lithium 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. Starting from the three months ended December 31, 2013 and until June 30, 2014, the Company was also engaged in the business segment of property lease and management (see Note 1). Net revenues from continuing operations for the three and nine months ended June 30, 2014 and 2015 were as follows:

Net revenues by product:

			Three months ended June 30,						Nine months ended June 30,
			2014			2015			2014			2015
	Prismatic cells
	Aluminum-case cells	$	3,361,596		$	-		$	24,486,486		$	-
	Battery packs		29,050,554			-			61,800,144			-
	Cylindrical cells		3,341,239			-			9,277,848			-
	Lithium polymer cells		9,963,279			-			17,145,636			-
	High-power lithium battery cells		2,278,178			2,452,692			9,329,136			8,598,106
		$	47,994,846		$	2,452,692		$	122,039,250		$	8,598,106

Net revenues by geographic area:

			Three months ended June 30,						Nine months ended June 30,
			2014			2015			2014			2015
	PRC Mainland	$	44,300,448		$	2,452,692		$	105,513,367		$	8,598,106
	PRC Taiwan		644,796			-			2,952,745			-
	Hong Kong, China		1,431,131			-			5,337,486			-
	India		822,849			-			1,978,668			-
	Others		795,622			-			6,256,984			-
		$	47,994,846		$	2,452,692		$	122,039,250		$	8,598,106

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

F-24

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ITEM 2.

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

The following management’s discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. Our financial statements are prepared in U.S. dollars and in accordance with United States generally accepted accounting principles, or U.S. GAAP.

Special Note Regarding Forward Looking Statements

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A, “Risk Factors” described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

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

Use of Terms

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

	•	“Company”, “we”, “us” and “our” are to the combined business of China BAK Battery, Inc., a Nevada corporation, and its consolidated subsidiaries;
	•	“BAK Asia” are to our Hong Kong subsidiary, China BAK Asia Holdings Limited;
	•	“Dalian BAK Trading” are to our PRC subsidiary, Dalian BAK Trading Co., Ltd.;
	•	“Dalian BAK Power” are to our PRC subsidiary, Dalian BAK Power Battery Co., Ltd;
	•	“China” and “PRC” are to the People’s Republic of China;
	•	“RMB” are to Renminbi, the legal currency of China;
	•	“U.S. dollar”, “$” and “US$” are to the legal currency of the United States;
	•	“SEC” are to the United States Securities and Exchange Commission;
	•	“Securities Act” are to the Securities Act of 1933, as amended; and
	•	“Exchange Act” are to the Securities Exchange Act of 1934, as amended

We completed a reverse stock split on October 26, 2012, pursuant to which every five shares of our common stock were combined into one share of common stock. All references in this report to share and per share data have been adjusted, including historical data which have been retroactively adjusted, to give effect to the reverse stock split unless specified otherwise.

Overview of Our Business

Our Dalian manufacturing facilities began its partial commercial operations in July 2015. As a result, we are engaged in the business of developing, manufacturing and selling new energy high power lithium batteries, which are mainly used in the following applications:

	•	Electric vehicles (“EV”), such as electric cars, electric buses, hybrid electric cars and buses;
	•	Light electric vehicles (“LEV”), such as electric bicycles, electric motors, sight-seeing cars; and
	•	Electric tools, energy storage, uninterruptible power supply, and other high power applications.

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We have received most of the operating assets, including customers, employees, patents and technologies of our former subsidiary, BAK International (Tianjin) Ltd. (“BAK Tianjin”). Such assets were acquired in exchange for a reduction in receivables from our former subsidiaries that were disposed in June 2014. We have outsourced and will continue to outsource our production to BAK Tianjin or other manufacturers until our Dalian manufacturing facility begins its full commercial operations. For the three and nine months ended June 30, 2015, Dalian BAK Power purchased batteries of approximately of $3.1 million and $6.7 million, respectively from BAK Tianjin.

We have experienced net losses from continuing operations during the past two fiscal years. We generated revenues of $2.5 million and $48.0 million for the three months ended June 30, 2015 and 2014, respectively. We incurred a net loss from our continuing operations of $9.8 million and $1.3 million for the three months ended June 30, 2014 and 2015, respectively. As of June 30, 2015, we had an accumulated deficit of $124.3 million and net assets of $13.4 million. We had a working capital deficiency and accumulated deficit from recurring net losses in prior years and short-term debt obligations maturing in less than one year as of June 30, 2015.

In October 2014, we received from Dalian government a subsidy of RMB46.2 million (approximately $7.5 million) equivalent to the costs of land use rights to be used to construct the new manufacturing site over the land use rights. We also obtained a short term bank loan of RMB30 million (approximately $4.8 million). The short term bank loan is bearing a fixed interest rate at 7.80% per annum and is guaranteed by Mr. Xiangqian Li (“Mr. Li”), our CEO, and Shenzhen BAK Battery Co., Ltd., our former subsidiary (“Shenzhen BAK”). In June 2015, we received banking facilities from Bank of Dandong to provide a maximum loan amount of $19.4 million to June 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li and Ms. Xiaoqiu Yu, Mr Li’s wife. The banking facilities were also secured by our Dalian site’s land use right, buildings, constructions in progress and machinery and equipment. On June 25, 2015, we borrowed RMB50 million (approximately $8.1 million), with a one-year term bank loan with fixed interest bearing at 7.84% per annum under the banking facilities. As of June 30, 2015, we had $12.9 million outstanding under the banking facilities, and $6.5 million available for borrowing. We plan to renew these loans upon maturity, and plan to raise additional funds in the future to meet our daily cash demands, if required.

In the meanwhile, due to the growing environmental pollution problem, the Chinese government is currently providing vigorous support to the new energy facilities and vehicles. It is expected that we will be able to secure more potential orders from the new energy market, especially from the electric car market. We believe with the significant reduction of liabilities and disposal of the traditionally low margin battery business, supported by the future market demand in high power lithium ion products, we can continue as a going concern and return to profitability.

Third Quarter Financial Performance Highlights

The following are some financial highlights for the third quarter of our 2015 fiscal year:

	•	Net revenues: Net revenues decreased by $45.5 million, or 94.9%, to $2.5 million for the three months ended June 30, 2015, from $48.0 million for the same period in 2014.
	•	Gross profit: Gross profit was $0.2 million for the three months ended June 30, 2015, a decrease of $4.1 million from $4.3 million for the same period in 2014.
	•	Operating loss: Operating loss was $1.2 million for the three months ended June 30, 2015, reflecting an improvement of $2.4 million from an operating loss of $3.6 million for the same period in 2014.
	•	Loss from continuing operations: Loss from continuing operations was $1.3 million for the three months ended June 30, 2015, representing an improvement of $8.5 million from a net loss from continuing operations of $9.8 million for the same period in 2014.
	•	Income from discontinued operations: Income from our discontinued operations was $0.3 million for the three months ended June 30, 2015, compared to income from discontinued operations of $46.9 million for the same period in 2014.
	•	Diluted (loss) earnings per share: Diluted loss per share was $0.08 for the three months ended June 30, 2015, as compared to diluted earnings per share of $2.92 for the same period in 2014.

Financial Statement Presentation

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

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Revenue from our discontinued operations represents rental income from commercial property leases and management and is recognized on a straight-line basis over the respective lease terms.

Cost of revenues. Cost of revenues consists primarily of material costs, employee remuneration for staff engaged in production activity, share-based compensation, depreciation and related expenses that are directly attributable to the production of products. Cost of revenues also includes write-downs of inventory to lower of cost or market. Cost of revenues from the sales of battery packs includes the fees we pay to pack manufacturers for assembling our prismatic cells into battery packs.

Research and development expenses. Research and development expenses primarily consist of remuneration for R&D staff, share-based compensation, depreciation and maintenance expenses relating to R&D equipment, and R&D material costs.

Sales and marketing expenses. Sales and marketing expenses consist primarily of remuneration for staff involved in selling and marketing efforts, including staff engaged in the packaging of goods for shipment, advertising cost, depreciation, share-based compensation and travel and entertainment expenses. We do not pay slotting fees to retail companies for displaying our products, 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, share-based compensation, professional fees, insurance, benefits, general office expenses, depreciation, liquidated damage charge and bad debt expenses.

Impairment charge on property, plant and equipment. Impairment charge consists primarily of impairment losses for long-lived assets. These losses reflect the amounts by which the carrying values of these assets exceed their estimated fair value as determined by their estimated future discounted cash flows.

Government grant income. Government grant income represents the government subsidies received as part of our income unless the subsidies received are earmarked to compensate the specific expenses, which have been accounted for by offsetting the specific expenses, such as research and development expense, interest expenses and removal costs. Unearned government subsidies received are deferred for recognition until the criteria for such recognition could be met. Grants applicable to land are amortized over the life of the depreciable facilities constructed on it. For research and development expenses, we match and offset the government grants with the expenses of the research and development activities as specified in the grant approval document in the corresponding period when such expenses are incurred.

Finance costs, net. Finance costs consist primarily of interest income and interest on bank loans and other short term loans, net of capitalized interest.

Income tax expenses. All of our PRC subsidiaries and our former PRC subsidiaries were subject to enterprise income tax at 25% for the three and nine months ended June 30, 2015 and 2014. Our PRC subsidiaries did not have any assessable income and did not incur any enterprise income tax for the three and nine months ended June 30, 2015 and 2014. Deferred tax in the three and nine months ended June 30, 2015 was incurred in relation to government subsidies recognized. Our former Canadian, German, Indian, and Hong Kong subsidiaries-BAK Canada, BAK Europe, BAK India and BAK International were subject to profits tax in their respective countries at rates of 38%, 25%, 30%, and 16.5%, respectively. However, because they did not have any assessable income derived from or arising in those countries, they had not paid any such tax for the three and nine months ended June 30, 2014.

Dalian BAK Trading and Dalian BAK Power are subject to an income tax rate of 25%. BAK Asia is subject to Hong Kong profit tax of 16.5% . Neither company has incurred any enterprise income tax since their establishment.

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

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Results of Operations

Comparison of Three Months Ended June 30, 2015 and 2014

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

(All amounts, other than percentages, in thousands of U.S. dollars)

		Three months ended June
		30,						Change
		2014			2015			$			%
Net revenues	$	47,995		$	2,453		$	(45,542	)		(94.9	)
Cost of revenues		(43,676	)		(2,226	)		41,450			(94.9	)
Gross profit		4,319			227			(4,092	)		(94.7	)
Operating expenses:
Research and development expenses		1,469			620			(849	)		(57.8	)
Sales and marketing expenses		1,807			41			(1,766	)		(97.7	)
General and administrative expenses		3,921			781			(3,140	)		(80.1	)
Provision for doubtful accounts		729			-			(729	)		(100.0	)
Total operating expenses		7,926			1,442			(6,484	)		(81.8	)
Operating loss		(3,607	)		(1,215	)		2,392			(66.3	)
Finance costs, net		(6,193	)		(64	)		6,129			(99.0	)
Government grant income (expense)		22			(11	)		(33	)		(150.0	)
Other expense		(51	)		(12	)		39			(76.5	)
Loss before income tax and discontinuing operations		(9,829	)		(1,302	)		8,527			(86.8	)
Income tax credit		-			33			33			100.0
Net loss from continuing operations, net of tax		(9,829	)		(1,269	)		8,560			(87.1	)
Income from discontinued operations, net of tax		46,936			315			(46,621	)		(99.3	)
Net profit(loss)	$	37,107		$	(954	)	$	(38,061	)		(102.6	)

Net revenues. Net revenues were $2.5 million for the three months ended June 30, 2015, as compared to $48.0 million for the same period in 2014, representing a decrease of $45.5 million, or 94.9% . The decrease was primarily attributable to the disposal of BAK International and its subsidiaries that manufactured prismatic, cylindrical and lithium polymer cells. After June 30, 2014, we generated revenue from sales of high-power lithium battery cells mainly manufactured by BAK Tianjin under our outsourcing arrangement with them.

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

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

		Three Months Ended June 30,
		2014			2015
Prismatic cells
Aluminum-case cells	$	3,361		$	-
Battery packs		29,051			-
Cylindrical cells		3,341			-
Lithium polymer cells		9,964			-
High-power lithium battery cells		2,278			2,453
Total	$	47,995		$	2,453

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The following table sets forth the breakdown of our net revenues from reconditioned and normal products for the three months ended June 30, 2014. We did not generate any sales from reconditioned products during the three months ended June 30, 2015.

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

		Three Months Ended June 30, 2014
		Reconditioned sales			Normal sales			Total sales
Prismatic cells
Aluminum-case cells	$	169		$	3,192		$	3,361
Battery packs		2,254			26,797			29,051
Cylindrical cells		-			3,341			3,341
Lithium polymer cells		6,516			3,448			9,964
High-power lithium battery cells		-			2,278			2,278
Total	$	8,939		$	39,056		$	47,995

The following table sets forth certain information related to high-power lithium battery cells for the three months ended June 30, 2014 and 2015, respectively.

Sales from high-power lithium battery cells for the three months ended June 30, 2015 increased 7.7%, from $2.3 million for the quarter ended June 30, 2014 to $2.5 million in the same period of 2015. The increase was mainly attributable to an increase of 130.0% in sales volume, offset by a decrease of 52.8% in average selling price. The increase in sales volume and the decrease in average selling price were mainly due to a change of our product mix from the sale of high-power lithium cells for light electric vehicles in 2014 to those used for uninterruptable power supplies with a relatively lower selling unit price in 2015.

Cost of revenues. Cost of revenues decreased to $2.2 million for the three months ended June 30, 2015, as compared to $43.7 million for the same period in 2014, a decrease of $41.5 million, or 94.9% . Included in cost of revenues were write downs of obsolete inventories of $3.1 million for the three months ended June 30, 2014 and nil for the same period of 2015. We write down the inventory value whenever there is an indication that they are impaired. However, further write-downs may be necessary if market conditions continue to deteriorate. Also, as we disposed of the major subsidiaries which generated most of our sales in 2014, our sales revenue and cost of sales decreased substantially in the same period of fiscal 2015.

Gross profit. Gross profit for the three months ended June 30, 2015 was $0.2 million, or 9.2% of net revenues, as compared to $4.3 million, or 9.0% of net revenues, for the same period in 2014. The improvement in our gross profit percentage was largely due to the fact that there was no write-down of inventory or reconditioned products being sold at a loss during the nine months ended June 30, 2015 as compared to the same period of 2014.

Research and development expenses. Research and development expenses decreased to $0.6 million for the three months ended June 30, 2015, as compared to $1.5 million for the same period in 2014, a decrease of $0.9 million, or 60.0% . This decrease was mainly because we only carried out quality control and did not incur any overseas sales or conduct any R&D projects after the disposal of BAK International. Therefore, no certification fees were incurred for overseas sales and no materials were consumed for R&D projects in fiscal year 2015.

Sales and marketing expenses. Sales and marketing expenses decreased to $41,175 for the three months ended June 30, 2015, as compared to $1.8 million for the same period in 2014, a decrease of $1.8 million, or 97.7%, primarily due to our disposal of former subsidiaries which contributed most of our prior period expense. As a percentage of revenues, sales and marketing expenses have decreased to 1.7% for the three months ended June 30, 2015, from 3.8% for the same period in 2014, primarily because we did not expand our sales team at the Dalian site as of June 30, 2015. We intend to expand our sales team at the Dalian site in the fourth quarter of fiscal 2015.

General and administrative expenses. General and administrative expenses decreased to $0.8 million for the three months ended June 30, 2015, as compared to $3.9 million for the same period in 2014, a decrease of $3.1 million, or 80.1% . The decrease was mainly because of reduction of headcount and operating expenses after the disposal of BAK International and the reduction of depreciation expense of office buildings after the disposal of BAK International.

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Operating loss. As a result of the above, our operating loss totaled $1.2 million for the three months ended June 30, 2015, as compared to $3.6 million for the same period in 2014, a decrease of $2.4 million, or 66.3% .

Finance costs, net. As we are in the process of constructing our Dalian site, interest expenses incurred on bank borrowings were capitalized as construction in progress during the quarter ended June 30, 2015. In the same period of the prior year, we incurred interest expense on our bank borrowings and loans from unrelated third parties.

Government grant income (expense). Government grant expense was $11,000 for the three months ended June 30, 2015, as compared to unconditional government grant income of $22,000 for the same period last year.

Income tax credit. Income tax credit was $32,851 due to the reversal of the deferred tax liabilities to the extent of depreciation on property, plant and equipment for the three months ended June 30, 2015, as compared to nil for the same period in 2014.

Income from discontinued operations, net of tax. Income from discontinued operations, net of tax was $0.3 million for the three months ended June 30, 2015 as compared to $46.9 million for the same period in 2014. Income from discontinued operations, net of tax, represents the income from the leasing and management of our Research and Development Centre of our former subsidiary in Shenzhen. During the three months ended June 30, 2014, this operation generated net income of $1.1 million. We recorded an accounting profit of $45.8 million as of June 30, 2014 on disposal of BAK International and its subsidiaries (collectively the “Disposal Group”) as a result of the foreclosure (“the Disposal”), which was mainly related to the market value appreciation of our Research and Development Centre. Income from discontinued operations in 2015 represents an adjustment to the gain on disposal of subsidiaries from discontinued operations previously recorded in fiscal 2014. Upon the disposal, our former subsidiaries owed us a sum of $17.8 million. We evaluated the collectability of the remaining amount and determined that $1.8 million should be impaired and offset against the gain on disposal of subsidiaries from discontinued operations for the year ended September 30, 2014. During the three months ended June 30, 2015, we determined that the remaining $0.3 million was recoverable. The recovery was treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations in 2015.

Net (loss) profit. As a result of the foregoing, we had a net loss of $0.9 million for the three months ended June 30, 2015, compared to a net profit of $37.1 million for the three months ended June 30, 2014.

Comparison of Nine Months Ended June 30, 2015 and 2014

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

(All amounts, other than percentages, in thousands of U.S. dollars)

		Nine months ended June 30,						Change
		2014			2015			$			%
Net revenues	$	122,039		$	8,598		$	(113,441	)		(93.0	)
Cost of revenues		(112,558	)		(7,615	)		104,943			(93.2	)
Gross profit		9,481			983			(8,498	)		(89.6	)
Operating expenses:
Research and development expenses		3,981			726			(3,255	)		(81.8	)
Sales and marketing expenses		4,504			80			(4,424	)		(98.2	)
General and administrative expenses		11,913			1,800			(10,113	)		(84.9	)
Recovery of doubtful accounts		(639	)		-			639			(100.0	)
Total operating expenses		19,759			2,606			(17,153	)		(86.8	)
Operating loss		(10,278	)		(1,623	)		8,655			(84.2	)
Finance costs, net		(16,785	)		(48	)		16,737			(99.7	)
Government grant income		74			23,204			23,130			31,256.8
Other income (expenses)		636			(97	)		(733	)		(115.3	)
(Loss) profit before income tax and discontinued operations		(26,353	)		21,436			47,789			(181.3	)
Income tax expenses		(16	)		(5,771	)		(5,755	)		35,967.5
Net loss from continuing operations, net of tax		(26,369	)		15,665			42,034			(159.4	)
Income from discontinued operations, net of tax		48,928			1,837			(47,091	)		(96.2	)
Net profit	$	22,559		$	17,502		$	(5,057	)		(22.4	)

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Net revenues. Net revenues were $8.6 million for the nine months ended June 30, 2015, as compared to $122.0 million for the same period in 2014, representing a decrease of $113.4 million, or 93.0% . The decrease was primarily attributable to the disposal of BAK International and its subsidiaries that manufactured prismatic, cylindrical and lithium polymer cells. After June 30, 2014, we generated revenue from sales of high-power lithium battery cells mainly manufactured by BAK Tianjin under our outsourcing arrangements with them.

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

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

		Nine Months Ended June 30,
		2014			2015
Prismatic cells
Aluminum-case cells	$	24,486		$	-
Battery packs		61,800			-
Cylindrical cells		9,278			-
Lithium polymer cells		17,146			-
High-power lithium battery cells		9,329			8,598
Total	$	122,039		$	8,598

The following table sets forth the breakdown of our net revenues from reconditioned and normal products for the nine months ended June 30, 2014. We did not generate any sales from reconditioned products during the nine months ended June 30, 2015.

		Nine Months Ended June 30, 2014
		Reconditioned sales			Normal sales			Total sales
Prismatic cells
Aluminum-case cells	$	18,709		$	5,777		$	24,486
Battery packs		8,545			53,255			61,800
Cylindrical cells		-			9,278			9,278
Lithium polymer cells		12,782			4,364			17,146
High-power lithium battery cells		-			9,329			9,329
Total	$	40,036		$	82,003		$	122,039

The following table sets forth certain information related to high-power lithium battery cells for the nine months ended June 30, 2014 and 2015, respectively.

		Nine months ended June 30,						Change
		2014			2015			$			%
Sales revenue	$	9,329		$	8,598		$	(731	)		(7.8	)
Cost of sales		(7,888	)		(7,615	)		273			(3.5	)
Gross profit	$	1,441		$	983		$	(458	)		(31.8	)

Sales from high-power lithium battery cells for the nine months ended June 30, 2015 decreased by $0.7 million, or 7.8%, from $9.3 million for the nine months ended June 30, 2014 to $8.6 million. The decrease was mainly attributable to an increase of 34.1% in sales volume, offset by a decrease of 31.2% in average selling price. The increase in sales volume and the decrease in average selling price were mainly due to a change of our product mix from the sale of high-power lithium cells for light electric vehicles in 2014 to those used for uninterruptable power supplies with a relatively lower selling unit price in 2015.

Cost of revenues. Cost of revenues decreased to $7.6 million for the nine months ended June 30, 2015, as compared to $112.6 million for the same period in 2014, a decrease of $104.9 million, or 93.2% . Included in cost of revenues were write downs of obsolete inventories of $8.8 million for the nine months ended June 30, 2014 and nil for the same period of 2015. We write down the inventory value whenever there is an indication that they are impaired. However, further write-downs may be necessary if market conditions continue to deteriorate. Also, as we disposed of the major subsidiaries which generated most of our sales in 2014, our sales revenue and cost of sales decreased substantially in the same period of fiscal 2015.

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Gross profit. Gross profit for the nine months ended June 30, 2015 was $1.0 million, or 11.4% of net revenues, as compared to a gross profit of $9.5 million, or 7.8% of net revenues, for the same period in 2014. The improvement in our gross profit percentage was largely due to the fact that there was no write-down of inventory or reconditioned products being sold at a loss during the nine months ended June 30, 2015 as compared to the same period of 2014.

Research and development expenses. Research and development expenses decreased to $0.7 million for the nine months ended June 30, 2015, as compared to $4.0 million for the same period in 2014, a decrease of $3.3 million, or 81.8% . This decrease was mainly because we only carried out quality control and did not incur any overseas sales or conduct any R&D projects after the disposal of BAK International. Therefore, no certification fees were incurred for overseas sales and no materials were consumed for R&D projects in fiscal year 2015.

Sales and marketing expenses. Sales and marketing expenses decreased to $79,558 for the nine months ended June 30, 2015, as compared to $4.5 million for the same period in 2014, a decrease of $4.4 million, or 98.2%, primarily due to our disposal of former subsidiaries which contributed most of our prior period expense. As a percentage of revenues, sales and marketing expenses have decreased to 0.9% for the nine months ended June 30, 2015, from 3.7% for the same period in 2014, primarily because we did not expand our sales team at the Dalian site as of June 30, 2015. We intend to expand our sales team at the Dalian site in the fourth quarter of fiscal 2015.

General and administrative expenses. General and administrative expenses decreased to $1.8 million for the nine months ended June 30, 2015, as compared to $11.9 million for the same period in 2014, a decrease of $10.1 million, or 84.9% . The decrease was mainly because of the reduction of headcount and operating expenses after the disposal of BAK International and the reduction of depreciation expense of office buildings after the disposal of BAK International.

Operating loss. As a result of the above, our operating loss totaled $1.6 million for the nine months ended June 30, 2015, as compared to $10.3 million for the same period in 2014, a decrease of $8.7 million, or 84.2% .

Finance costs, net. As we are in the process of constructing our Dalian site, interest expenses incurred on bank borrowings were capitalized as construction in progress during the nine months ended June 30, 2015. In the same period of the prior year, we incurred interest expense on our bank borrowings and loans from unrelated third parties.

Government grant income. Government grant income increased to $23.2 million for the nine months ended June 30, 2015, as compared to $74,000 for the same period last year. This was mainly due to the recognition of the subsidy of $23.2 million from the Management Committee of Dalian Economic Zone granted to finance the projected operating loss incurred during the move and construction of our new facilities in Dalian.

Income tax expense. Income tax expense was $5.8 million for the nine months ended June 30, 2015 due to the deferred tax impact of the government subsidies recognized, as compared to $16,474 income tax expense for the same period in 2014.

Income from discontinued operations, net of tax. Income from discontinued operations, net of tax was $1.8 million for the nine months ended June 30, 2015 as compared to $48.9 million for the same period in 2014. Income from discontinued operations, net of tax, represents the income from the leasing and management of our Research and Development Centre of our former subsidiary in Shenzhen. During the nine months ended June 30, 2014, this operation generated net income of $3.1 million. We recorded an accounting profit of $45.8 million as of June 30, 2014 on disposal of BAK International and its subsidiaries as a result of the foreclosure described above, which was mainly related to the market value appreciation of our Research and Development Centre. Income from discontinued operations in 2015 represents an adjustment to the gain on disposal of subsidiaries from discontinued operations previously recorded in fiscal 2014. Upon the disposal, our former subsidiaries owed us a sum of $17.8 million. We evaluated the collectability of the remaining amount and determined that $1.8 million should be impaired and offset against the gain on disposal of subsidiaries from discontinued operations for the year ended September 30, 2014. During the nine months ended June 30, 2015, we determined that $1.8 million was recoverable. The recovery was treated as an adjustment to the gain on disposal of subsidiaries from discontinued operations in 2015.

Net profit. As a result of the foregoing, we had a net profit of $17.5 million for the nine months ended June 30, 2015, compared to a net profit of $22.6 million for the nine months ended June 30, 2014.

Liquidity and Capital Resources

Before the foreclosure of the pledged ownership of BAK International, we had historically financed our liquidity requirements from a variety of sources, including short-term bank loans, other short-term loans and bills payable under bank credit agreements, factoring of bills receivable to banks and issuance of capital stock. During the three months ended June 30, 2015, we were primarily financed by short-term bank loans and other short-term loans.

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As of June 30, 2015, we had cash and cash equivalents of $11.6 million. Our total current assets were $24.9 million and our total current liabilities were $40.5 million, which result in a net working capital deficiency of $15.6 million. These factors raise substantial doubts about our ability to continue as a going concern. In October 2014, we received a subsidy of $7.4 million (RMB46.2 million) from Dalian government equivalent to the costs of land use rights. The subsidy is used to construct the new manufacturing site in Dalian. In addition, as of June 30, 2015, we obtained one-year short term bank loans of $12.9 million (RMB80 million) from Bank of Dandong, and had $6.5 million available for borrowing under the banking facilities granted by Bank of Dandong until June 22, 2016.

We will require additional cash to complete the construction of the new Dalian manufacturing facilities. We may also require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We repaid the short term bank loan of $4.8 million in August 2015 and borrowed a new loan of $4.8 million under the banking facilities letter dated on June 22, 2015. We also plan to borrow additional funds from local banks to meet the Company’s cash needs if required. However, there can be no assurance that we will be successful in obtaining further financing. If our existing cash and bank borrowings are insufficient to meet our requirements, we may seek to sell 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 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.

The following table sets forth a summary of our cash flows for the periods indicated:

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

		Nine Months Ended June 30,
		2014			2015
Net cash used in operating activities	$	(19,431	)	$	(6,609	)
Net cash (used in) provided by investing activities		(7,942	)		1,899
Net cash provided by financing activities		13,597			15,282
Effect of exchange rate changes on cash and cash equivalents		49			(10	)
Net (decrease) increase in cash and cash equivalents		(13,727	)		10,562
Cash and cash equivalents at the beginning of period		13,999			992
Cash and cash equivalents at the end of period	$	272		$	11,554

Operating Activities

Net cash used in operating activities was $6.6 million in the nine months ended June 30, 2015, as compared to net cash used in operating activities of $19.4 million in the same period in 2014. The net cash used in operating activities in 2015 was mainly attributable to the increase of trade accounts receivable by $4.6 million as well as the increase of prepayments and other receivables by $0.8 million.

Investing Activities

Net cash provided by investing activities was $1.9 million for the nine months ended June 30, 2015, as compared to net cash used in investing activities of $7.9 million in the same period of 2014. We received a deferred government subsidy of $7.4 million and collected $1.5 million from our former subsidiaries, offset by the purchase of property, plants and equipment and payment of construction in progress of $7.1 million.

Financing Activities

Net cash provided by financing activities was $15.3 million in the nine months ended June 30, 2015, compared to net cash provided by financing activities of $13.6 million during the same period in 2014. In the nine months ended June 30, 2015, we received $8.1 million of short term bank loans and $12.8 million other short term loans from related and unrelated parties, offset by repayments of $5.6 million to related and unrelated parties.

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As of June 30, 2015, the principal amounts outstanding under our credit facilities and lines of credit were as follows:.

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

		Maximum amount available			Amount borrowed
Short term credit facilities:
Bank of Dandong	$	19,359		$	12,906

We obtained a short term bank loan of $4.8 million (RMB30 million) which is bearing fixed interest at 7.8% per annum from Bank of Dandong for the period from August 19, 2014 to August 18, 2015. We repaid this loan on August 18, 2015 and borrowed a new loan of $4.8 million (RMB30 million) on August 18, 2015 under the banking facilities letter dated on June 22, 2015.

On June 22, 2015, Dalian BAK Power entered into a banking facilities letter with Bank of Dandong to provide a maximum loan amount of $19.4 million (RMB120 million) to June 22, 2016. The banking facilities were guaranteed by Shenzhen BAK, Mr. Li and Ms. Xiaoqiu Yu, the wife of our CEO. The banking facilities were also secured by Dalian BAK Power’s buildings, construction in progress, prepaid land use rights and machineries. On June 25, 2015, we borrowed $8.1 million (RMB50 million) from Bank of Dandong under the banking facilities for a period from June 25, 2015 to June 22, 2016, bearing a fixed interest at 7.84% per annum.

Capital Expenditures

We incurred capital expenditures of $7.1 million and $11.8 million in the nine months ended June 30, 2015 and 2014, respectively. Our capital expenditures in fiscal 2015 were used primarily for the construction and purchase of equipment and machineries for our production plant at our Dalian facility.

We estimate that our total capital expenditures for the remainder of fiscal year 2015 will reach approximately $5.3million. Such funds will be used to purchase manufacturing equipment and for purchasing manufacturing equipment and machineries and for the construction of the production plant at our Dalian facility.

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations and commercial commitments as of June 30, 2015: (All amounts in thousands of U.S. dollars)

Other than the contractual obligations and commercial commitments set forth above, we did not have any other long-term debt obligations, operating lease obligations, capital commitments, purchase obligations or other long-term liabilities as of June 30, 2015.

Off-Balance Sheet Transactions

We have not entered into any transactions, agreements or other contractual arrangements to which an entity unconsolidated with us is a party and under which we have (i) any obligation under a guarantee, (ii) any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity, (iii) any obligation under derivative instruments that are indexed to our shares and classified as shareholders’ equity in our consolidated balance sheets, or (iv) any obligation arising out of a variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

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Critical Accounting Policies

Our condensed 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. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

Changes in Accounting Standards

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Not applicable.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of 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 chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015. 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 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 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 ineffective as of June 30, 2015.

As we disclosed in our Annual Report on Form 10-K filed with the SEC on January 13, 2015, during our assessment of the effectiveness of internal control over financial reporting as of September 30, 2014, management identified the following material weakness in our internal control over financial reporting:

•	We did not have appropriate policies and procedures in place to evaluate the proper accounting and disclosures of key documents and agreements.
•	We do not have sufficient and skilled accounting personnel with an appropriate level of technical accounting knowledge and experience in the application of accounting principles generally accepted in the United States commensurate with our financial reporting requirements.

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In order to cure the foregoing material weakness, we have taken or are taking the following remediation measures:

•	We are in the process of hiring a permanent chief financial officer with significant U.S. GAAP and SEC reporting experience. Mr. Wenwu Wang was appointed by the Board of Directors of the Company as the Interim Chief Financial Officer on August 28, 2014.
•	We plan to make necessary changes by providing training to our financial team and our other relevant personnel on the U.S. GAAP accounting guidelines applicable to our financial reporting requirements.

We intend to complete the remediation of the material weaknesses discussed above as soon as practicable but we can give no assurance that we will be able to do so. Designing and implementing an effective disclosure controls and procedures is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to devote significant resources to maintain a financial reporting system that adequately satisfies our reporting obligations. The remedial measures that we have taken and intend to take may not fully address the material weakness that we have identified, and material weaknesses in our disclosure controls and procedures may be identified in the future. Should we discover such conditions, we intend to remediate them as soon as practicable. We are committed to taking appropriate steps for remediation, as needed.

Changes in Internal Control over Financial Reporting

Except for the matters described above, there were no changes in our internal controls over financial reporting during the third quarter of our fiscal year 2015 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.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal proceedings set forth below, we are currently not aware of any such legal proceedings or claims that we believe will have an adverse effect on our business, financial condition or operating results:

An individual named Steven R. Ruth filed suit against China BAK Battery, Inc. in United States District Court for the Western District of Texas on August 15, 2013 alleging breach of contract. China BAK Battery, Inc. did not receive notice of this lawsuit and the plaintiff sought a default judgment, which the court granted in January 2014. Accordingly, the court entered judgment in favor of Mr. Ruth in the amount of $553,774 inclusive of costs and attorneys’ fees (the “First Judgment”).

Subsequent to the entry of the First Judgment, Mr. Ruth has made efforts to have the judgment enforced in Canada. On September 19, 2014, Mr. Ruth also filed a second complaint in the United States District Court for the Western District of Texas. On November 12, 2014, a second default judgment was entered against China BAK Battery, Inc. in the amount of $553,774 for the First Judgment plus an additional $7,550 in attorneys’ fees. The second judgment is inclusive of the amounts ordered in the First Judgment. BAK International thereafter agreed to indemnify China BAK Battery, Inc. from any expenses, losses and damages that were incurred and will be incurred by China BAK Battery, Inc. due to the lawsuit filed by Mr. Ruth.

ITEM 1A.

RISK FACTORS.

There are no material changes from the risk factors previously disclosed in Item 1A “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2014.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

None.

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ITEM 4.

MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.

OTHER INFORMATION.

None.

ITEM 6.

EXHIBITS.

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1935, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 19, 2015	CHINA BAK BATTERY, INC.
	By:	/s/ Xiangqian Li
		Xiangqian Li, Chief Executive Officer
	By:	/s/ Wenwu Wang
		Interim Chief Financial Officer

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EXHIBIT INDEX

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.
101	Interactive data files pursuant to Rule 405 of Regulation S-T

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