CBAK Energy Technology, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited interim results; amounts below are in U.S. dollars. The company manufactures high-power lithium-ion batteries and, through Hitrans, battery cathode materials and precursors, primarily in China.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $42.4 million | $56.3 million | $84.8 million | $136.5 million |
| Gross profit / margin | $3.9 million / 9.2% | $5.5 million / 9.8% | $6.8 million / 8.0% | $10.9 million / 8.0% |
| Operating income (loss) | $(3.8) million | $0.1 million | $(6.7) million | $(1.2) million |
| Net income (loss) | $(2.9) million | $1.0 million | $(5.1) million | $1.7 million |
| Net income (loss) attributable to CBAK | $(2.6) million | $0.8 million | $(4.0) million | $1.2 million |
| Basic and diluted EPS | $(0.03) | Less than $0.01 | $(0.05) | $0.01 |
- First-half operating cash flow was $15.8 million, versus $17.3 million a year earlier. Investing cash outflow was $19.6 million, largely for property, plant and equipment; financing cash inflow was $12.2 million. Cash, cash equivalents and restricted cash totaled $43.6 million at period-end. Of this, $40.2 million was pledged deposits; unrestricted cash and cash equivalents were $3.4 million.
- At June 30, current assets were $120.4 million and current liabilities were $131.9 million, a working-capital deficit of approximately $11.5 million. Short-term bank borrowings were $26.8 million; other short-term loans were $0.4 million. Trade and bills payable totaled $75.6 million.
- Total assets were $252.2 million, total liabilities $138.0 million and total equity $114.2 million. Construction in progress rose to $25.9 million from $10.0 million at year-end 2022.
Changes versus prior periods
- Q2 revenue fell 25% year over year and first-half revenue fell 38%. The largest first-half reduction was in Hitrans materials: cathode revenue fell 77% and precursor revenue fell 50%.
- Q2 battery revenue was lower overall, mainly reflecting a 16% decline in UPS battery sales. Management attributed a temporary slowdown in Q2 UPS orders to lithium carbonate price volatility and customers waiting for prices to stabilize. For the first half, UPS battery revenue rose 17%; light-electric-vehicle and electric-vehicle battery revenue also increased from relatively small bases.
- Management attributed the reduction in materials revenue to falling raw-material prices putting downward pressure on selling prices. First-half gross margin was unchanged at 8.0%; Q2 margin decreased to 9.2% from 9.8%.
- Operating expenses rose 42% in Q2 and 12% in the first half. Higher compensation and social-insurance costs, new restricted-stock-unit compensation, and increased marketing and expansion-related costs contributed. First-half inventory write-downs were $1.6 million, versus $0.9 million in 2022.
- Results included a $0.1 million warrant fair-value gain in the first half of 2023, compared with $3.8 million in the first half of 2022. First-half foreign-currency translation losses were $5.9 million.
Outlook, risks and unusual items
- Management estimated fiscal 2023 capital expenditures at approximately $80 million for new plants, product lines and battery-module packing lines. Capital expenditures were $19.6 million in the first half. The company reported $273.9 million in capital commitments, including $231.8 million of capital-injection commitments.
- The company says it may need additional bank borrowing or equity financing to fund operations and expansion; it had $2.9 million of unused committed bank facilities. Management plans to renew loans as they mature, but gives no assurance that financing will be available on acceptable terms.
- The filing states that recurring losses, an accumulated deficit of $136.0 million and significant short-term obligations raise substantial doubt about the company’s ability to continue as a going concern. Management’s plans include improving profitability and obtaining additional financing; the statements contain no adjustments for a possible failure to continue as a going concern.
- Customer concentration is significant: Zhengzhou BAK Battery represented 20.0% of first-half revenue and 64.7% of trade receivables at June 30. It is also a related party. Management reported that $1.3 million had been repaid toward its receivable by the report date.
- Litigation includes a contractor dispute dating to 2016; the company accrued approximately $0.9 million in construction costs while the case was remanded for retrial. Under a separate agreement, the company and related parties were to purchase at least $2.4 million of equipment from Haoneng by December 31, 2023, or CBAK Power could owe a 15% penalty on the unpurchased amount; the equipment had not been received by June 30.
- Management concluded disclosure controls and procedures were ineffective as of June 30, 2023. Identified weaknesses concern accounting for key agreements and insufficient U.S. GAAP and SEC-reporting expertise among accounting personnel; remediation was ongoing.
Important facts for investors to verify
- Whether revenue, orders and margins recover, particularly in Hitrans materials and UPS batteries, and how changes in lithium-material prices affect customer orders and selling prices.
- Availability, terms and timing of financing, refinancing of near-term maturities, and the company’s ability to fund its planned capital expenditures and capital commitments.
- Collection of concentrated customer receivables, especially amounts due from related party Zhengzhou BAK, and the status and potential cost of the contractor and Haoneng matters.
- Progress in addressing the disclosed control weaknesses and whether future filings report effective controls.
- The difference between reported cash including restricted funds and cash available for general use: $43.6 million including restricted cash versus $3.4 million of cash and cash equivalents.