Business Context and Reporting Period
Company: China BAK Battery, Inc. (CBAK Energy Technology, Inc.)
Filing Type: Form 8-K (Current Report)
Date: August 4, 2006
Subject: Non-reliance on previously issued financial statements and change of independent registered public accounting firm.
Key Financial Metrics and Adjustments
The filing does not provide current period revenue, profit, cash flow, or liquidity metrics. Instead, it details estimated adjustments to historical financial statements for fiscal years ended September 30, 2003, 2004, and 2005, and fiscal quarters ended December 31, 2005, and March 31, 2006.
- Net Income Impact: Estimated increase of approximately $1 million for fiscal 2004 and $1 million for fiscal 2005.
- Shareholders' Equity Impact: Estimated increase of approximately $1 million for fiscal 2004 and $2 million for fiscal 2005.
- Revenue Impact: Management estimates previously reported revenues would not be affected, though no assurance is given.
- Debt and Liquidity: Specific figures are not provided in this filing.
Material Changes and Accounting Errors
The Board of Directors determined on August 2, 2006, that previously filed financial statements should no longer be relied upon due to misstatements identified by the new auditor, KPMG. The Company changed auditors from Schwartz Levitsky Feldman LLP to KPMG on May 15, 2006. Identified errors include:
- Overstatement of interest expense due to incorrect application of interest capitalization principles.
- Understatement of property, plant, equipment, construction in progress, and depreciation expenses.
- Incorrect charging of staff and workers' bonus and welfare fund provisions to shareholders' equity instead of income statements for fiscal 2005.
- Overstatement of provisions for social insurance plan contributions due to misinterpretation of PRC laws.
- Understatement of accumulated foreign-currency translation adjustments and overstatement of additional paid-in capital for fiscal 2005.
- Misstatements related to amortization of lease prepayments, receivables, payables, cost of revenues, and general and administrative expenses.
- Consequential errors in income tax expenses.
Outlook, Risks, and Management Commentary
Management Action: The Company is terminating the offering by selling stockholders under previously filed registration statements (File Nos. 333-122209 and 333-130247) because they contain the financial statements to be restated.
Restatement Status: The audit by KPMG is ongoing. The Company is not yet in a position to finalize the expected adjustments. Periodic reports will be amended to restate financial information.
Risks: Investors are advised not to rely on previously reported financial data. No assurance can be given regarding the final impact on revenues or other metrics until the restatement is complete.
Investor Verification Checklist
- Verify the final restated financial statements once the KPMG audit is complete.
- Confirm the specific impact of the restatement on the Company's current debt covenants and liquidity position.
- Monitor the status of the terminated stock offerings under File Nos. 333-122209 and 333-130247.
- Review the amended periodic reports for corrected historical data for fiscal years 2003, 2004, and 2005.
- Assess the implications of the accounting errors on the Company's internal controls and future reporting reliability.