1117171--12/8/2006--CHINA_BAK_BATTERY

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Risks Related to Our Business Our limited operating history may not serve as an adequate basis to evaluate our future prospects and results of operations. 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. Our future success depends on the success of manufacturers of the end applications that use our products. We experience fluctuations in quarterly 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 our loss of market share to our competitors. Failure to successfully obtain OEM certification from international cellular phone brand owners may materially and adversely affect our future growth. 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. We are and will continue to be subject to rapidly declining average selling prices, which may harm our revenue and gross profits. Failure to achieve and maintain effective internal controls could have a material adverse effect on our business, results of operations and the trading price of our common stock. We became a public company through our acquisition by a non-operating public shell company, where we were the accounting acquirer and assumed all liabilities of our predecessor entity. 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 not be able to accurately plan our production based on our sales contracts, which may result in excess product inventory or product shortages. We depend on third parties to supply key raw materials to us. Failure to obtain sufficient supply of these raw materials 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. 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 batteries, our reputation could be severely damaged and our sales could be materially and adversely affected. 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. 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 our 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. Defects in our products could result in a loss of customers and decrease in revenue, unexpected expenses and a loss of the market share. We are subject to a patent infringement lawsuit in the United States involving our production of battery cells for A123 Systems for use in cordless power tools. If the court holds against us, we may be required to pay monetary damages, terminate our production of the cells, or pay royalties to continue the production. This would in turn materially adversely affect our ability to execute our growth strategy, revenues and business prospects. 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. We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position. We do not hold land use right for our BAK Industrial Park where our facilities are located, nor did we obtain the required construction and zoning permits for our manufacturing facilities and other related facilities situated on the land. 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. We have limited insurance coverage against damages or loss we might suffer. Risks Related to Doing Business in China Adverse changes in political and economic policies of the PRC government could have a material adverse effect on the overall economic growth of China, which could reduce the demand for our products and materially and adversely affect our competitive position. We may be unable to enforce our legal rights due to policies regarding the regulation of foreign investments in China. 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 distribution on equity paid by our subsidiaries for our cash needs. Governmental control of currency conversion may affect our ability to satisfy our non-RMB obligations. Fluctuation in the value of the RMB may result in foreign currency translation losses or in increased costs to us. Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident stockholders to personal liability and limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries ability to distribute profits to us, or otherwise adversely affect us. 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. An outbreak of a pandemic avian influenza, SARS or other contagious disease may have an adverse effect on the economies of certain Asian countries and may adversely affect our results of operations. Our production facilities are subject to risks of power shortages. Risks Related to Our Common Stock The market price for our common stock may be volatile. Our directors and executive officers, collectively, own approximately 45.1% 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--12/8/2006--CHINA_BAK_BATTERY_INC