1117171--12/14/2010--CHINA_BAK_BATTERY

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RISKS RELATED TO OUR BUSINESS Risks Related to Our Business Our independent registered auditors have expressed substantial doubt about our ability to continue as a going concern. We face risks related to general domestic and global economic conditions and to the recent credit crisis. We are primarily dependent on sales of lithium-ion battery cells for the cellular phone battery replacement market. A reduction in the volume or average price of lithium-ion battery cells that we sell for this market would cause our overall revenue to decline. Our business depends on the growth in demand for portable electronic devices. If we cannot continue to develop new products in a timely manner, and at favorable margins, we may not be able to compete effectively. Our efforts to develop products for new commercial applications could fail. Our future success depends on the success of manufacturers of the end applications that use our products. We experience fluctuations in quarterly and annual operating results. Our failure to keep up with rapid technological changes and evolving industry standards may cause our products to become obsolete and less marketable, resulting in loss of market share to our competitors. A change in our product mix may cause our results of operations to differ substantially from the anticipated results in any particular period. We may not be able to manage our expansion of operations effectively. We may not be able to substantially increase our manufacturing output in order to maintain our cost competitiveness. Maintaining our manufacturing operations requires significant capital expenditures, and our inability or failure to maintain our operations would have a material adverse impact on our market share and ability to generate revenue. We have been and most likely will continue to be subject to rapidly declining average selling prices, which may harm our revenue and gross profits. Our business depends substantially on the continuing efforts of our senior executives and other key personnel, and our business may be severely disrupted if we lost their services. We have experienced significant management changes which could increase our control risks and have a material adverse effect on our ability to do business and our results of operations. We are dependent on a limited number of customers for a significant portion of our revenues and this dependence is likely to continue. We do not have long-term purchase commitments from our customers, which may result in significant uncertainties and volatility with respect to our revenue from period to period. We may incur significant costs because of the warranties we supply with our products and services. We may not be able to accurately plan our production based on our sales contracts, which may result in excess product inventory or product shortages. We may face impairment charges if economic environments in which our businesses operate and key economic and business assumptions substantially change. We depend on third parties to supply key raw materials and components to us. Failure to obtain a sufficient supply of these raw materials and components in a timely fashion and at reasonable costs could significantly delay our production and shipments, which would cause us to breach our sales contracts with our customers. Fluctuations in prices and availability of raw materials, particularly lithium cobalt dioxide, could increase our costs or cause delays in shipments, which would adversely impact our business and results of operations. We face intense competition from other battery cell manufacturers, many of which have significantly greater resources. We depend on third-party battery pack manufacturers to incorporate our products into battery packs to make batteries ready for use in various portable consumer electronics. If these factories fail to properly assemble our products and battery packs, resulting in defective battery cells, our reputation could be severely damaged and our sales could be materially and adversely affected. Moreover, our battery technology may only be commercially viable as a component of other companies' products, and these companies may choose not to include our systems in their products. The success of our business depends on our ability to attract, train and retain highly skilled employees and key personnel. Manufacturing or use of our products may cause accidents, which could result in significant production interruption, delay or claims for substantial damages. We extend relatively long payment terms to some large customers. We manufacture and market lithium-based battery cells only. If a viable substitute product or chemistry emerges and gains market acceptance, our business, financial condition and results of operations will be materially and adversely affected. We face risks associated with the marketing, distribution and sale of our products internationally, and if we are unable to effectively manage these risks, they could impair our ability to expand our business abroad. Our cost reduction steps taken may have weakened our competitive position. We rely on third parties whose operations are outside our control. Defects in our products could result in a loss of customers and decrease in revenue, unexpected expenses and a loss of market share. We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause our loss of significant rights and inability to continue providing our existing product offerings. Other future litigation could impact our financial results and condition. We may not be able to prevent others from unauthorized use of our intellectual property, or others may challenge our intellectual property rights, which could harm our business and competitive position. We do not hold the property ownership rights for facilities located in the PRC. We may lose some or all of the land use rights that we have obtained. We are currently required to pledge land use rights and property rights. Compliance with environmental regulations can be expensive, and our failure to comply with these regulations may result in adverse publicity and a material adverse effect on our business. We have significant short-term debt obligations, which mature in less than one year. Failure to extend those maturities of, or to refinance, that debt could result in defaults, and in certain instances, foreclosures on our assets. Moreover, we may be unable to obtain financing to fund ongoing operations and future growth. We have limited insurance coverage against damages or losses we might suffer. Risks Related to Doing Business in China Adverse changes in political and economic policies of the PRC government could impede the overall economic growth of China, which could reduce the demand for our products and damage our business. Uncertainties with respect to the PRC legal system could limit the legal protections available to you and us. If we are found to have failed to comply with applicable laws, we may incur additional expenditures or be subject to significant fines and penalties. We currently enjoy a reduced tax rate and other government incentives, and the loss of or reduction in these benefits may materially and adversely affect our business and results of operations. We rely on dividends and other distributions on equity paid by our subsidiaries for our cash needs. Restrictions on currency exchange may limit our ability to receive and use our sales revenue effectively. Fluctuation in the value of the RMB may result in foreign currency translation losses or in increased costs to us. Failure to comply with PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability, limit our ability to acquire PRC companies or to inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute profits to us or otherwise materially adversely affect us. The M A Rule establishes more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China. We face uncertainty from the Circular on Strengthening the Administration of Enterprise Income Tax on Non-resident Enterprises' Share Transfer released in December 2009 by China's State Administration of Taxation (SAT), effective as of January 1, 2008. Investors may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China based upon U.S. laws, including the federal securities laws or other foreign laws against us or our management. Our production facilities are subject to risks of power shortages. Under the New Enterprise Income Tax Law, or the New CIT Law, we may be classified as a resident enterprise of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC stockholders. The Chinese government exerts substantial influence over the manner in which we must conduct our business activities. Future inflation in China may inhibit our ability to conduct business profitably in China. Risks Related to Our Common Stock The market price for our common stock may be volatile. Our directors and executive officers, collectively, own approximately 32.03% of our outstanding common stock and may be able to control our management and affairs. Provisions in our articles of incorporation and bylaws could entrench our board of directors and prevent a change in control. We are obligated to indemnify our officers and directors for certain losses they suffer.

Full 10-K form ▸

1117171--12/14/2010--CHINA_BAK_BATTERY_INC