CBAK Energy Technology, Inc.

Regulatory Filings • Jun 13, 2013

CORRESP 1 filename1.htm China BAK Battery Inc.: Correspondence - Filed by newsfilecorp.com $$/page=

June 13, 2013

Jeanne Bennett Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549

Re:
Form 10-K for Fiscal Year
Ended September 30, 2012
Filed December 31, 2012
Form 10-Q for Quarterly Period Ended
December 31, 2012
Filed February 14, 2013
File No. 001-32898

Dear Ms. Bennett:

On behalf of China BAK Battery, Inc. (the “ Company ”), we hereby submit the Company’s responses to the comments of the staff (the “ Staff ”) of the Securities and Exchange Commission (the “ Commission ”), dated May 15, 2013, with respect to the above-referenced Form 10-K for the fiscal year ended September 30, 2012 (the “ 10-K ”) and the Form 10-Q for the quarterly period ended December 31, 2012 (the “ 10-Q ”).

For the convenience of the Staff, a summary of the Staff’s comments is included and is followed by the corresponding response of the Company. References in this letter to “we,” “us” and “our” refer to the Company, and “you” and “your” refer to the Staff, unless the context indicates otherwise.

Form 10-K for the Fiscal Year Ended September 30, 2012

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Liquidity and Capital Resources, page 40

1. Please expand your response to prior comment 1, and your revised disclosure in future filings, to clarify what you mean by having a “good relationship” with banks and how this “good relationship” will allow you to renew your short- term debt. Given the amount of your current liabilities relative to your existing sources of liquidity, it is unclear from your response how having only a “good relationship” will allow you to renew debt. Also, as a related matter, it appears your response only addresses your short-term debt. Please also expand to discuss your other short-term obligations, such as your accounts and bills payable and accrued expenses. In this regard, we note the table you provided in response to comment 1 lists anticipated cash outflows of $192 million over the next 12 months, but your most recent Form 10-Q lists more than $320 million of current liabilities.

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Jeanne Bennett
June 13, 2013
Page 2

COMPANY RESPONSE: In response to the Staff’s comment, we believe that due to our long history of business relationship with our banks, which has historically allowed us to renew our loans on maturity, we should be able to continue to do so. The following summarizes our history with our banks:-

| Name of Bank | Name of Branch | Loan facility since (month/year) | Last facility letter — Period start (date / month /year) | Period end (date / month /year) | Amount | Existing facility
letter — Period start (date / month /year) | Period end(date / month /year) | Amount |
| --- | --- | --- | --- | --- | --- | --- | --- | --- |
| | | | | | $'000 | | | $'000 |
| Agricultural Bank of China | Shenzhen Eastern Branch | 06/2007 | 30/11/2011 | 24/11/2012 | 72,492 | 27/11/2012 | 25/11/2013 | 67,659 |
| Bank of China | Longgang Branch | 03/2010 | 4/5/2011 | 4/5/2012 | 62,942 | 3/7/2012 | 3/7/2013 | 64,437 |
| Shenzhen Development Bank | Longgang Branch | 06/2007 | 26/1/2011 | 18/1/2012 | 31,718 | 5/6/2012 | 31/5/2013 3 | 28,997 |
| CITIC Bank | Shungan Branch | 05/2010 | 6/5/2011 | 6/5/2012 | 11,802 | 13/6/2012 | 13/6/2013 3 | 12,082 |
| China Everbright Bank | Shenzhen Branch | 08/2009 | 11/11/2011 | 10/11/2012 | 12,727 1 | - | - | - |
| China Construction Bank | Tianjin Branch | 01/2012 | 16/1/2012 | 15/1/2013 | 8,128 2 | - | - | - |
| Bank of Dalian | Tianjin Branch Office | 11/2009 | 22/11/2011 | 21/11/2012 | 12,887 | 21/11/2012 | 20/11/2013 | 11,857 |
| Bank of Dalian | Tianjin Branch Office | 11/2009 | 21/11/2012 | 20/11/2013 | 11,856 | 28/1/2013 | 27/1/2014 | 19,331 |
| Bohai Bank | Tianjin Branch | 01/2010 | 19/1/2010 | 19/1/2011 | 6,058 | 29/5/2012 | 28/5/2013 3 | 12,887 |
| China Development Bank | Shenzhen Branch | 02/2010 | N/A | N/A | N/A | 9/2/2010 | 9/2/2016 | 24,164 |

Note:

| 1. | The Company repaid this loan in January and March
2013. |
| --- | --- |
| 2. | The Company repaid this loan on January 15,
2013. |
| 3. | The Company is negotiating with the banks to extend these
facilities and expect that they should be renewed by the end of June,
2013, amounts of which should be at least equal to the expired
facilities. |

As a leading company in the new-energy industry in China, we are supported by the Chinese government at both national and local levels. The government encourages banks including most of the above mentioned to provide preferential financial support to us.

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Jeanne Bennett
June 13, 2013
Page 3

Also, we have long-term business relationship with our suppliers and we have been paying them within 90-360 days from the respective invoice dates. The following summarizes our history with our major suppliers:

| | Name of
Supplier | Business relationship since (month/year) | Amount of accounts payable
at — 9/30/2012 | 12/31/2012 | 3/31/2013 |
| --- | --- | --- | --- | --- | --- |
| | | | in thousands of US dollars | | |
| 1 | Citic Guoan MGL Power Technolong
Co.,Ltd | 01/2004 | 10,531 | 2,534 | 6,836 |
| 2 | Hunan Reshine New Material
Co.,Ltd | 09/2004 | 4,125 | 4,479 | 4,401 |
| 3 | Shenzhen Tianjiao Technology
Development Co.,Ltd | 07/2005 | 3,186 | 3,236 | 3,705 |
| 4 | Shenzhen Capchem Technology
Co.,Ltd | 08/2006 | 2,994 | 2,766 | 1,923 |
| 5 | Qingdao Dahua Electronics
Technology Co.,Ltd | 11/2006 | 2,647 | 2,231 | 1,682 |
| 6 | Beijing Easpring Material
Technology Co.,Ltd | 01/2004 | 4,288 | 1,886 | 1,446 |
| 7 | Hunan Bangpu Recycle Technology
Co.,Ltd | 07/2011 | 1,445 | 481 | 483 |
| 8 | Shenzhen BTR New Energy Material
Co.,Ltd | 01/2004 | 2,215 | 2,493 | 2,753 |
| 9 | Shenzhen Topband Co.,Ltd | 08/2008 | 1,658 | 1,559 | 1,700 |
| 10 | Hubei Yanguang Technology Co.,Ltd | 09/2010 | 3,444 | 51 | 2,394 |
| | Total of the above | | 36,533 | 21,716 | 27,323 |
| | Consolidated accounts payable | | 143,745 | 136,677 | 136,488 |

The cash plan that we presented in our letter dated April 18, 2013 is for the period from April 1, 2013 to March 31, 2014. A reconciliation of our anticipated cash outflows of $192,742 to our current liabilities as of March 31, 2013 is presented in the following table:

	(In thousands of U.S
	dollars)
Anticipated cash outflows as per cash plan	192,742
Add: Items excluded from anticipated cash outflows
Bank borrowings repaid and renewed within
one year	137,815
Total current liabilities as of March 31,
2013 per Form 10-Q	330,557

In accordance with the staff’s request, we will add disclosures to discuss our relationships with banks and to discuss our other short-term obligations, such as accounts and bills payable and accrued expenses, as follows:-x

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Jeanne Bennett
June 13, 2013
Page 4

Form 10-K for the fiscal year ended September 30, 2012 Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operation

“We have long-term business relationships with our banks and over the term of these relationships we have been able to renew our loans upon maturity and we expect that we should be able to continue to do so. As of September 30, 2012, we still have unutilized lines of credit totaling approximately $27.6 million extending to periods up to February 2016. We also have established long-term relationships with our suppliers and we will be able to pay them within 90-360 days from the respective invoice dates. We will continue to implement our turnaround plans to improve our operations. We expect that our sources of liquidity will be sufficient for the next 12 months.”

Note 2. Summary of Significant Accounting Policies and Practices (o) Government Grants, page F-18

1. We note your response to prior comment 3. Irrespective of whether the company presents the amount in a separate line item, we continue to note that the nature of the grants is related to your operations and that since you present a caption entitled “operating loss” that amount should reflect all transactions relating to your operations. Refer to Rule 5-03 of Regulation S-X. Also, see our views outlined in SAB Topic 5.P.3., indicating that the proper classification of an item depends on the nature of the charge and the assets and operations to which it relates. Please revise future filings to present government grants as part of your operating loss.

COMPANY RESPONSE: We will revise our future filings to present government grants as part of our operating loss as follows:-

Form 10-K for the fiscal year ended September 30, 2012 Consolidated statements of operations and comprehensive loss

Net revenues	Note — 25	$ 218,952,724		$ 205,670,946
Cost of revenues	8, 20	(192,648,690	)	(204,197,751	)
Gross profit		26,304,034		1,473,195
Operating expenses:
Research and development
expenses	8, 20	(6,513,814	)	(1,843,451	)
Sales and marketing expenses	8, 20	(8,541,782	)	(8,488,889	)
General and administrative
expenses	8, 20	(17,955,625	)	(39,761,019	)
Impairment charge	8	(6,517,344	)	(3,918,959	)
Total operating expenses		(39,528,565	)	(54,012,318	)
Operating loss		(13,224,531	)	(52,539,123	)
Finance costs, net	19	(10,828,983	)	(11,265,990	)
Government grant income		505,769		1,190,012
Other income / (expense)		312,501		(798,528	)
Loss before income taxes		(23,235,244	)	(63,413,629	)
Income taxes expense	7(a)	(1,302,120	)	(2,393,766	)
Net loss		$ (24,537,364	)	$ (65,807,395	)

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Jeanne Bennett
June 13, 2013
Page 5

Below is reconciliation between the original Form 10-K and our proposed future filings:-

			Amortization		Subsidies for
			on subsidies for		research and		Revised
	Per original		lease		development		September 30,
For the year ended September 30, 2011	2012 Form 10-K		prepayments		projects		2011 (note)
	$		$		$		$
Government grant income	1,453,727		(177,761	)	(770,197	)	505,769
Research and development expenses	(7,287,214	)	3,203		770,197		(6,513,814	)
General and administrative expenses	(18,130,183	)	174,558		-		(17,955,625	)

			Amortization		Subsidies for
			on subsidies for		research and		Revised
	Per original		lease		development		September 30,
For the year ended September 30, 2012	2012 Form 10-K		prepayments		projects		2012 (note)
	$		$		$		$
Government grant income	5,353,554		(252,470	)	(3,911,072	)	1,190,012
Research and development expenses	(5,759,072	)	4,549		3,911,072		(1,843,451	)
General and administrative expenses	(40,008,940	)	247,921		-		(39,761,019	)

Note: These represented government subsidies received by us with non-operating nature and with no further conditions to be met. The amounts are recorded as a non- operating income when received.

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Jeanne Bennett
June 13, 2013
Page 6

Note 4. Trade Accounts Receivable, net, page F-21

| 3. |
| --- |
| Explain to us how the company’s standard payment terms
for receivables differed from the terms offered under the loose credit
policy. |
| Tell us how the change in the company’s credit policy
impacted the consideration of your revenue recognition policy, including
your determination of collectability. |
| Describe to us how the change in credit policy
impacted your analysis of your allowance for doubtful
accounts. |

COMPANY RESPONSE: The Company did not change its payment terms. However, given the severe market competition, overall unfavorable credit status in China and challenging macroeconomic environment, the Company did not strictly enforce the payment terms with respect to some of its major customers and did not follow up with them regarding outstanding payments regularly, hoping that the customers might be able to solve their own short-term working capital problems and would eventually pay off our invoices. As a result, the payments of these customers were delayed and some of them failed to solve their working capital shortage problems and eventually went bankrupt.

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Jeanne Bennett
June 13, 2013
Page 7

1. We note from your response that your loss rates for each aging range were (i) 15% for the accounts from 7 to 9 months past due, (ii) 50% for accounts from 10 to 12 months past due and (iii) 100% for your accounts over one year past due. Please explain how you developed your loss rates. For example, discuss why the loss rates for accounts past due from 7 to 9 months and from 10 to 12 months are not higher.

COMPANY RESPONSE: The allowance for doubtful accounts is determined based on our best estimate of the amount of probable credit losses in our existing trade accounts receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions. Our loss rate on doubtful accounts is analyzed as follows:

	7 to 9 months	Over 9 months but — within 12 months	Over 1 year
	$	$	$
Accounts receivable as of September 30,
2011	6,861,298	1,834,256	24,548,227
Settlement up to September 30, 2012	5,996,094	939,255	-
September 30, 2011 accounts receivable
remained unsettled as of September 30, 2012	865,204	895,001	24,548,227
Loss rate	13%	49%	100%

As of September 30, 2012, we compared the recoverability of accounts receivable of the prior year. Historical loss rate of aged accounts from 7 to 9 months, over 9 months but within 12 months and over one year were 13%, 49% and 100%, respectively. Based on the historical loss experience, we estimated our loss rates for accounts receivable as of September 30, 2012 for each aging range were (i) 15% for the accounts from 7 to 9 months past due, (ii) 50% for accounts over 9 months but within 12 months past due and (iii) 100% for our accounts over one year past due.

1. With respect to the aging of your accounts receivable provided in the exhibit of your response, we note that the aging in the 271 – 360 day category was $26.2 million as of September 30, 2012. It appears that the receivables are still outstanding and are included in the 361 – 720 day category in the December 31, 2012 aging which shows a $28.4 million receivable. Please tell us the nature of the significant receivables included in the $26.2 million as of September 30, 2012 and your analysis in determining that the allowance should only be 50% of that balance.

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Jeanne Bennett
June 13, 2013
Page 8

COMPANY RESPONSE: Included in the $26.2 million were receivables from customers, most of which are still making regular payments to us. Based on our historical loss experience (see our responses to Comment #4 above), we estimated our loss rate for accounts receivable as of September 30, 2012 was 50% for accounts over 9 months but within 12 months past due.

The following tables provide an analysis of the September 30, 2012 accounts receivable which remained outstanding as of December 31, 2012 and March 31, 2013.

Table 1: Accounts receivable aged over 270 days as of 9/30/2012 and 12/31/2012

Account receivable	Over 9 months but — within 12 months	Over 1 year but — within 3 years	Over 3 years
	$	$	$
September 30, 2012	26,167,044	12,290,133	7,405,633
December 31, 2012	904,563	28,402,698	7,480,992

Table 2: Subsequent status of 9/30/2012 accounts receivable aged over 270 days

Account receivable	Over 9 months but — within 12 months	Over 1 year but — within 3 years	Over 3 years
	$	$	$
September 30, 2012	26,167,044	12,290,133	7,405,633
9/30/2012 accounts receivable remained outstanding as of
12/31/2012	16,112,565	12,290,133	7,405,633
9/30/2012 accounts receivable remained
outstanding as of 3/31/2013	9,672,346	12,290,133	7,405,633
Actual loss rate up to 3/31/2013	37%	100%	100%
Estimated loss rate	50%	100%	100%

We received subsequent settlement for those accounts over 270 days. As of March 31, 2013, we have received $16.5 million for those accounts over 270 days and $9.7 million was outstanding. The actual loss rate as of March 31, 2013 for accounts over 270 days was 37%. Therefore, we determined that an allowance of 50% of accounts receivable aged over 9 months but within one year is adequate.

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Jeanne Bennett
June 13, 2013
Page 9

Note 5. Inventories, page F-22

1. While we note your response to comment 7, your response did not address how you plan to revise your disclosures in future filings to comply with U.S. GAAP. We continue to note that you are reporting recoveries of obsolete inventories and reversals of provisions. Please confirm that your accounting and disclosure in future filings complies with SAB Topic 5.BB, wherein a write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently cannot be marked up based on changes in underlying facts and circumstances. Please also see FASB ASC 330-10-35-1 and 35-14.

COMPANY RESPONSE: We confirm that our current accounting of inventories complies with SAB Topic 5.BB and FASB ASC 330-10-35-1 and 35-14, wherein a write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that we do not mark up based on subsequent changes in underlying facts and circumstances. We will amend our future filings to present the impairment of inventories as a write down of each of the inventory components as follows:-

Form 10-K for the fiscal year ended September 30, 2012 Consolidated financial statements Note 5. Inventories, page F-22

Inventories as of September 30, 2012 and 2011 consisted of the following:

Raw materials	$ 18,522,969	$ 19,999,192
Work-in-progress	9,366,491	13,912,685
Finished goods	39,251,508	31,471,952
	$ 67,140,968	$ 65,383,829

During the years ended September 30, 2012 and 2011, write-down of obsolete inventories to lower of cost or market was $9,702,373 and $4,517,357 was charged to cost of revenues, respectively.

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Jeanne Bennett
June 13, 2013
Page 10

Consolidated statements of cash flows

Cash flow from operating activities
Net loss	$ (24,537,364	)	$ (65,807,395	)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization	18,628,181		18,519,317
Provision for doubtful debts	1,910,521		22,505,322
Provision for obsolete inventories	4,517,357		9,702,373
Share-based compensation	1,584,154		804,085
Impairment charge	6,517,344		3,918,959
Gain on disposal of property, plant and
equipment	(471,444	)	(16,106	)
Deferred income taxes	1,302,120		2,116,630
Deferred revenue	(244,181	)	(252,469	)
Exchange loss	1,353,907		3,206,705
Changes in operating assets and liabilities:
Trade accounts receivable	(157,072	)	(9,816,650	)
Inventories	(4,235,943	)	(6,953,601	)
Prepayments and other receivables	472,866		(2,962,638	)
Accounts and bills payable	20,032,670		22,048,375
Accrued expenses and other payables	8,645,183		8,155,480
Net cash provided by operating activities	35,318,299		5,168,387

Note 8. Property, Plant and Equipment, page F-27

1. Your response to prior comment 10 did not explain why you disclosed additional pledged assets as of September 30, 2012 in your December 31, 2012 Form 10-Q. That is, you have not addressed whether your disclosure in the 10- K is complete and accurate. Therefore, we reissue the comment.

COMPANY RESPONSE: In accordance with the Staff’s request, we provide the following reconciliation of pledged assets:-

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Jeanne Bennett
June 13, 2013
Page 11

	N ote disclosure on	Note disclosure on — December 31, 2012	Balance of — pledged assets as	Balance of — pledged assets
	September 30, 2012	Form 10-Q	of September 30,	as of December
	Form 10-K		2012	31, 2012
			$	$
For short-term bank loans
Inventories	Notes 5, 11	Notes 4 and 7	23,863,691	24,072,024
Machinery and equipment	Notes 8(iii), 11	Notes 6 (iii) and 7	47,255,604	45,722,332
Land use rights, buildings and construction in progress of
Shenzhen BAK Industrial Park	Note 11	Note 6 (iii)	107,140,980*	107,340,987 @
For long-term bank loans
Land use rights, and construction in progress of Research
and Development Test Centre	Notes 9 and 12 (The land use right stated in
Note 9 should be $1,283,424, instead of $4,919,301*. Also, the Company
disclosed the fact that the property ownership on this land is pledged,
and did not disclose the amount of the property being pledged
(construction in progress of $33.5 million). We will ensure proper and
adequate of disclosures in future filings)	Notes 6 (iii) and 8 (The Company erroneously
disclosed the net book value of Shenzhen BAK Industrial Park of $16.4
million in note 8 and included an amount of $4.9 million @ Note
6 (iii), instead of the correct net book value of this site of $1.2
million) under this note. Also, the Company disclosed the fact that the
property ownership on this land is pledged, and did not disclose the
amount of the property being pledged (CIP of $38.1 million). We will
ensure proper and adequate disclosures in future filings)	34,796,887	39,369,580
For other long-term loans
Land use rights #2 (“LUR #2”) of Tianjin Industrial Park
Zone	Notes 9, 11 and 14 (LUR #2 of Tianjin Industrial Park Zone should be $9,566,555 instead of
$4,793,816 (as disclosed in Note 9). We will ensure accuracy of
disclosures in future filing)	Note 9 (LUR #2 of Tianjin Industrial Park Zone should be $9,595,552,
instead of $5,087,131 (as disclosed in Note 9). We will ensure accuracy of
disclosures in future filing)	9,566,555	9,595,552

Summation of * = $112,060,281 per the Staff’s prior comment # 10 Summation of @ = $112,217,714 per the original disclosure on Form 10-Q Note 6 (iii)

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Jeanne Bennett
June 13, 2013
Page 12

Note 9. Lease Prepayments, page F-28

1. Further to your response to prior comment 13, and as previously requested, please reconcile your response to your disclosure in the two paragraphs following the table. We note that the response shows total lease prepayments for Shenzhen BAK industrial park, Shenzhen R&D, and Tianjin of $18.7 million, $1.4 million, and $16.9 million, respectively. We also note that your disclosure shows total lease prepayments for Shenzhen BAK industrial park, Shenzhen R&D, and Tianjin of $3.9 million, $0.7 million, and $14.1 million, respectively. Please explain the reasons for the differences.

COMPANY RESPONSE: The differences were mainly related to payments in other years and foreign exchange adjustments. We refer to the Staff’s request and reconcile the land use rights as follows:-

	Lease prepayment as of
	September 30, 2012
	$
Shenzhen BAK Industrial Park
First payment in 2003 (as disclosed in note 9 on the 2012
Form 10-K)	3,246,791
Second payment in 2007	7,889,991
Final payment in 2008 (as disclosed in note 9 on the 2012
Form 10-K)	3,929,850
Foreign exchange adjustment	3,650,018
	18,716,650
Shenzhen Research and Development Test Centre
First payment on June 26, 2007 (as
disclosed in note 9 on the 2012 Form 10-K)	717,344
Final payment in December 2008	466,724
Foreign exchange adjustment	204,762
	1,388,830

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Jeanne Bennett
June 13, 2013
Page 13

Tianjin BAK Industrial Park
Purchase cost in September 2007(as disclosed in note 9 on
the 2012 Form 10-K)	14,119,888
Foreign exchange adjustment	2,752,004
	16,871,892

Note 11. Short-term Bank Loans, page F-29

1. Your response to prior comment 14 did not explain why you disclosed additional assets securing loans as of September 30, 2012 in your December 31, 2012 Form 10-Q. That is, you have not addressed whether your disclosure in the 10-K is complete and accurate. We continue to note that the total amount of assets securing loans as of September 30, 2012 as reflected in Note 11 is only $71.1 million, whereas the similar table as of that date on page F-16 of your December 31, 2012 Form 10-Q totals $166.9 million. Further, we note that the paragraph following the table refers to additional assets securing loans. Please show us the total amount of assets securing short-term bank loans as of September 30, 2012 and December 31, 2012.

COMPANY RESPONSE: Please refer to our responses to comment #7 above.

Note 23. Commitments and Contingencies, page F-43

1. In your response to prior comment 15, you note that of the five listed suppliers in Note 23, four of them are former raw material suppliers so they are not also listed on page 8 where you disclose your major suppliers. We similarly note that these four suppliers were not listed in the similar disclosure on page 9 of your Fiscal 2011 Form 10-K. Please tell us the nature of your relationship with these suppliers, including a discussion of any related party relationships. Tell us what products or services these companies supplied and the dates upon which the supplier relationships started and terminated.

COMPANY RESPONSE: The four suppliers were not listed in the key suppliers of Item 1 of Form 10-K because they were not the top suppliers of the key raw material of suppliers in fiscal 2011 or 2012. In response to the Staff’s comment, we advise that none of these four suppliers is a related party of the Company and the Company’s relationship with the four suppliers is as follows:

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Jeanne Bennett
June 13, 2013
Page 14

	Products/services	Commencement	End date of
Guarantee for (all non-	that these parties	date of supplier	supplier
related parties)	supplied	relationship	relationship
Shenzhen Tongli Hi-tech Co. Ltd.	Battery case	01/2004	Not applicable
Tianjin Huaxiahongyuan Ltd.	Chemical raw materials such as lithium cobalt
oxides	03/2012	05/2012
Shenzhen Yasu Technology Co. Ltd.	Chemical raw materials such as
lithium cobalt oxides	08/2009	03/2010
Shenzhen Langjin Technology Development Co. Ltd.	Chemical raw materials such as battery
separator paper	06/2011	09/2011

1. Further, with respect to each of your guarantees, please tell us the term of the guarantee as of September 30, 2012 and December 31, 2012, including the dates of any renewals. Also tell us in more detail how the guarantee arose, including an explanation of why the company agreed to provide guarantees ranging from $1.6 million to $9.5 million for suppliers if the supply relationship was only temporary. Also discuss why you continued to provide these guarantees given the termination of the supplier relationship.

COMPANY RESPONSE: In response to the Staff’s comment, we explain the terms and reasons for providing these guarantees as follows:

					Why continued to
					provide
Guarantee					guarantees given
for (all non-					the termination of
related	Max. amount of		Guarantee	Why provided	supplier
parties)	guarantees ($’000)		period	guarantees	relationship
	9/30/2012	12/31/2012
Shenzhen Tongli Hi- tech Co. Ltd.	2,386	2,407	3/27/2012– 3/31/2013	We would like to insure a
continued supply of products.	We ceased to provide guarantee
upon expiration on March 31, 2013.
Tianjin Huaxiahongy yuan Ltd.	2,386	2,407	4/25/2012– 4/25/2015	We are trying to expand our supplier base to insure a continued supply of
products.	We are trying to expand our supplier base to insure a continued supply of
products.
Shenzhen Yasu Technology Co. Ltd.	9,545	10,752	5/25/2012– 6/24/2015	We are trying to expand our supplier base to
insure a continued supply of products.	We are trying to expand our supplier base to
insure a continued supply of products.
Shenzhen Langjin Technology Development Co. Ltd.	9,545	9,629	8/15/2011– 8/14/2014	We were trying to expand our supplier base to
insure a continued supply of products.	We intend to terminate the guarantee upon
expiration in August 2014

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Jeanne Bennett
June 13, 2013
Page 15

1. In response to prior comment 16 you told us that the company is entitled to be indemnified fully or partially for any losses, damages or expenses in connection with the guarantees. Please explain the extent to which you may or have sought this indemnification with respect to your guarantee for Shenzhen Langjin Technology Co., LTD.

COMPANY RESPONSE: In accordance with the Staff’s request, we advise our indemnification with respect to the guarantee for Shenzhen Liangjin Technology Co., Ltd. as follows:-

On January 5, 2013, the Company received a notice that Shenzhen Langjin Technology Development Co. Ltd. (“Shenzhen Langjin”) had defaulted on the loan guaranteed by China BAK and two other companies and demanded immediate payment of the full guaranteed amount of RMB60 million ($9,665,571) from the Company and two other co-guarantors. As the two other co-guarantors had the ability to only pay RMB14 million ($2,255,300), the Company was demanded to pay the remaining balance. As of March 31, 2013, the Company has paid China Agricultural Bank an amount of RMB46 million (approximately $7.4 million) and received an amount of RMB9 million (approximately $1.5 million) that it claimed back from Shenzhen Lanjin. On April 28, 2013, the Company received a further indemnification amount of RMB19 million (approximately $3.1 million). We expect to receive the remaining indemnification within 3 months.

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Jeanne Bennett
June 13, 2013
Page 16

Form 10-Q for the Quarterly Period Ended September 30, 2012

Item 1. Financial Statements

Note 16. Commitments and Contingencies, page F-24

1. Further to your responses to prior comments 16 and 18, please describe to us the analysis you performed as of September 30, 2012 for your guarantees in determining that the company was not required to recognize a contingent liability under FASB ASC Section 450-20-25. Please be sufficiently detailed and explain the factors that caused your assessment to change between September 30, 2012 and December 31, 2012. Discuss the procedures the company used as of September 30, 2012 and December 31, 2012 to assess the payment/performance risk of the guarantee. Discuss how you considered the disclosure requirements of FASB ASC 450-20-50-3 through 50-4.

COMPANY RESPONSE: In accordance with FASB ASC Section 450-20-25, we have considered whether an estimated loss from a loss contingency shall be accrued in relation to our guarantees by a charge to income if both of the following conditions are met:

| a. | Information available before the financial statements are
issued or are available to be issued indicates that it is probable that an
asset had been impaired or a liability had been incurred at the date of
the financial statements. |
| --- | --- |
| b. | The amount of loss can be reasonably
estimated. |

We have also considered whether a liability should be recorded based on the fair value of the guarantee under FASB ASC 460-10-30.

We were not aware of any indication of default on any of the loans that we guaranteed through December 31, 2012, the date on which the Company issued the financial statements for the fiscal year ended September 30, 2012. As a result, the condition in paragraph 450-20-25-2(a) was not satisfied because information available to us up to the date of issuance of the financial statements for the year ended September 30, 2012 did not indicate any known or possible default and thus prior to the occurrence of any known default there was no liability incurred.

In accordance with paragraph 450-20-50-3, no disclosure was required in the financial statements for the year ended September 30, 2012 as there seemed to be a remote possibility that a loss from loan guarantees had incurred when we issued such financial statements on December 31, 2012. Therefore, we consider there is no liability under FASB ASC 460-10-30.

The loan granted by Agricultural bank of China to Shenzhen Lanjin was due for repayment for various periods from November 2012 to February 2013. Up to December 31, 2012 (the date when the Company filed its annual report on Form 10-K for fiscal 2012), we were aware that Shenzhen Lanjin was negotiating with the Agricultural Bank of China for the extension of these loans. On January 5, 2013, we were informed by the Agricultural Bank of China about Shenzhen Lanjin’s default on the loan guaranteed by us and two other co-guarantors. As such, the condition in paragraph 450-20-25-2(a) was met as information available to us before we issued the financial statements for the quarter ended December 31, 2012 indicates that it was probable that a liability had been incurred at the date of the financial statements. An accrual of losses had been made on the financial statements as of December 31, 2012 as the losses were reasonably estimable and relate to the current accounting period.

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Jeanne Bennett
June 13, 2013
Page 17

1. Please tell us why the amount of loss recognized ($7,360,706) is less than the total amount of the guarantee as of December 31, 2012 ($9,628,809).

COMPANY RESPONSE: In accordance with the Staff’s request, we would like to advise that the loans of Shenzhen Langjin were co-guaranteed by the Company and two other co-guarantors. As the two other co-guarantors had the ability to pay RMB14 million ($2,246,722, using exchange rate at December 31, 2012) only, the Company was demanded to pay the remaining balance of RMB46 million ($7,382,087, using exchange rate at December 31, 2012). As such, the Company recorded a loss of $7,360,706 (using period average exchange rate) for the three month period ended December 31, 2012.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 2

1. We note your reference to FASB ASC 330-10-35-7 in your response to prior comment 19. Please tell us in more detail how the company applied FASB ASC 330-10-35-1 to 35-12. Show us the significant components of the gross loss in the last four quarters. Relate your response regarding your inventory accounting to your disclosure on page 6 that the company’s significant change from gross profit to gross loss included the impact of the sale of low priced and obsolete products with negative gross margins as a result of severe market competition.

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Jeanne Bennett
June 13, 2013
Page 18

COMPANY RESPONSE: In accordance with the Staff’s request, we advise that the gross loss was mainly from sale of our aluminum-case cell and lithium polymer cell products. There were about 600 and 350 items of aluminum-case cell and lithium polymer cell products, respectively, sold at a loss in each of the last four quarters. We listed below five of these low priced and obsolete products with negative gross margins in the last four quarters:-

	Quarter — ended		Quarter — ended		Quarter — ended		Quarter — ended
	3/31/2012		6/30/2012		9/30/2012		12/31/2012
	RMB		RMB		RMB		RMB
1. Lithium polymer cells – 18650C4
Unit selling price	9.03		8.72		8.23		7.91
Unit cost	10.53		8.99		8.69		8.12
Gross loss – per unit	(1.50	)	(0.27	)	(0.46	)	(0.21	)
Gross loss – total	(5,920,279	)	(1,270,323	)	(1,276,256	)	(500,973	)
- Including write- down of inventories to realizable value
(charged to cost of sales for the quarter)	559,239		1,230,723		1,055,482		590,877
Gross loss %	(16.6%	)	(3.1%	)	(5.6%	)	(2.7%	)
Inventory value at quarter end	57,893,290		14,759,223		12,802,070		1,505,046
2. Aluminum case cells – 523450AHR
Unit selling price	5.25		5.01		4.33		4.02
Unit cost	4.29		5.25		4.42		4.06
Gross profit (loss) – per unit	0.96		(0.24	)	(0.09	)	(0.04	)
Gross profit (loss) – total	3,044,899		(768,165	)	(428,769	)	(127,153	)
- Including write- down of inventories to realizable value
(charged to cost of sales for the quarter)	137,024		573,491		-		44,945

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Jeanne Bennett
June 13, 2013
Page 19

Gross profit (loss) %	18.5%		(4.8%	)	(2.1%	)	(1.0%	)
Inventory value at quarter end	11,019,564		10,990,649		5,314,238		7,621,939
3. Lithium polymer cells – C18650CC
Unit selling price	11.38		10.80		9.66		3.77
Unit cost	12.13		11.35		10.65		9.46
Gross loss – per unit	(0.75	)	(0.55	)	(0.99	)	(5.69	)
Gross loss – total	(119,241	)	(474,978	)	(361,448	)	(40,706	)
- Including write- down of inventories to realizable value
(charged to cost of sales for the quarter)	89,480		112,372		267,193		60,975
Gross loss %	(6.6%	)	(5.1%	)	(10.2%	)	(150.9%	)
Inventory value at quarter end	998,846		612,384		3,261,471		2,014,025
4. Lithium polymer cells – C18650CA
Unit selling price	7.30		8.18		7.78		7.35
Unit cost	8.22		7.26		8.16		7.51
Gross profit (loss) – per unit	(0.92	)	0.92		(0.38	)	(0.16	)
Gross profit (loss) – total	(611,257	)	2,050,709		(1,710,286	)	(815,252	)
- Including write- down of inventories to realizable value
(charged to cost of sales for the quarter)	13,301		-		342,257		43,482
Gross profit (loss) %	(12.6%	)	11.3%		(4.9%	)	(2.2%	)
Inventory value at quarter end	717,171		4,606,924		132,640		85,124

$$/page=

Jeanne Bennett
June 13, 2013
Page 20

5. Lithium polymer cells – 10036010 — Unit selling price	5.92		5.76		5.38		5.24
Unit cost	7.66		5.89		5.67		5.32
Gross loss – per unit	(1.74	)	(0.13	)	(0.29	)	(0.08	)
Gross loss – total	(1,179,336	)	(175,216	)	(452,742	)	(89,158	)
- Including write- down of inventories to realizable value
(charged to cost of sales for the quarter)	52,948		32,333		172,312		30,483
Gross profit (loss) %	(29.4%	)	(2.3%	)	(5.4%	)	(1.5%	)
Inventory value at quarter end	175,493		1,327,261		526,877		599,139
Total of the above	RMB		RMB		RMB		RMB
listed items:-
Inventory value	70,804,364		32,296,441		22,037,296		11,825,273
Gross loss	(4,785,214	)	(637,973	)	(4,229,501	)	(1,573,242	)
- Including write- down of inventories to
realizable value (charged to cost of sales for the quarter)	851,992		1,948,919		1,837,244		770,762
Total of the above listed items:-	$		$		$		$
Gross loss-total	(755,731	)	(100,782	)	(667,387	)	(251,743	)
- Including write- down of inventories to
realizable value (charged to cost of sales for the quarter)	134,556		307,876		289,905		123,334
Inventory value	11,245,928		5,081,972		3,505,941		1,897,722

$$/page=

Jeanne Bennett
June 13, 2013
Page 21

Consolidated:- — Gross loss	(3,870,132	(5,062,898	(3,624,975	(4,239,010
- Including write- down of inventories to realizable value
(charged to cost of sales for the quarter)	1,958,048	2,394,541	3,985,949	19,985,972
Inventory value	58,785,685	59,994,029	65,383,829	60,567,344

---

In connection with the Company’s response to the foregoing comments, the Company hereby acknowledges that

• the Company is responsible for the adequacy and accuracy of the disclosure in the filing;
• Staff comments or changes to disclosure in response to Staff comments do not foreclose the Commission from taking any action with respect to the filing; and
• the Company may not assert Staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

If you would like to discuss any of our responses to the Staff’s comments or if you would like to discuss any other matters, please contact Thomas M. Shoesmith at (650)-233-4553, of Pillsbury Winthrop Shaw Pittman LLP, our outside counsel.

Sincerely,

CHINA BAK BATTERY, INC.

By: /s/ Xiangqian Li Xiangqian Li Chief Executive Officer