CBAK Energy Technology, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The interim financial statements are unaudited and prepared under U.S. GAAP. The company manufactures high-power lithium batteries, with expansion underway in Dalian and Nanjing and development of a light electric vehicle business.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $9.56 million | $10.62 million | $24.87 million | $22.15 million |
| Gross profit / margin | $1.13 million / 12% | $1.37 million / 13% | $4.07 million / 16% | $1.67 million / 8% |
| Operating income (loss) | $(3.17) million | $0.39 million | $(5.93) million | $(2.49) million |
| Net income (loss) | $20.02 million | $0.04 million | $52.35 million | $(3.51) million |
| Diluted earnings (loss) per share | $0.23 | $0.00 | $0.60 | $(0.06) |
- Revenue mix: Nine-month revenue increased 12%. UPS battery sales rose 40% to $23.91 million and were the principal revenue driver. Q3 battery sales grew 51%, but total revenue declined 10% as raw-material sales fell to nearly zero from $4.27 million. EV battery revenue remained small and declined year over year.
- Cash flow: Operating activities used $7.24 million in the first nine months, versus $4.90 million generated a year earlier. Investing activities used $47.50 million, including $17.55 million for property, plant and equipment/construction, $20.25 million for the Hitrans loan and $8.32 million for an acquisition deposit. Financing provided $51.05 million, principally from share issuance.
- Liquidity: Current assets were $59.58 million and current liabilities $49.39 million, giving working capital of about $10.19 million. Cash and cash equivalents were $1.99 million; pledged deposits were $15.55 million, so reported cash plus restricted cash was $17.55 million. The pledged deposits largely secure bills payable.
- Debt and obligations: The company reported no bank loans at September 30, after repaying its term loan in June. It had $15.65 million of bills payable, $0.68 million of other short-term loans, and $10.47 million of warrant liability. Management reported $8.4 million of unused committed banking facilities.
Material changes and unusual items
- Reported earnings were substantially influenced by a non-cash $57.17 million gain from the change in fair value of warrant liabilities for the nine months, including $23.00 million in Q3. The filing attributes the decline in warrant fair value mainly to the share-price decline. This gain more than offset operating losses; net income should not be read as operating profitability.
- Operating losses widened as operating expenses increased: nine-month R&D, sales and marketing, and general and administrative expenses all rose. Management cited staffing and social-insurance costs, expansion, light-EV development, rentals, shareholder-meeting and financing-related expenses.
- Nine-month gross margin improved to 16% from 8%, which management attributed to productivity, cost control and production-line upgrades. Q3 margin slipped to 12% from 13%; management cited raw-material price inflation and temporary disruption to existing Dalian production during new-line installation.
- In February 2021, the company raised approximately $70 million gross through an offering and concurrent private placement, issuing shares and warrants. It also raised approximately $49 million gross in December 2020. The nine-month cash-flow statement reports $65.50 million of share-issuance proceeds; share count increased during the period.
- The proposed Hitrans transaction involves acquiring 81.56% ownership. The company had advanced approximately $20.33 million as a loan, paid approximately $6.32 million to an intermediary and recorded an acquisition deposit. Although the ownership transfer was registered, closing remained subject to conditions, including Hitrans obtaining title to assets; the company also guarantees certain Hitrans repayment obligations.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expects potential demand growth in high-power lithium products, especially EVs, and intends to expand production and develop light EVs. It estimated 2021 capital expenditures of approximately $20 million.
- Management says expansion requires additional funding and plans to renew or obtain bank borrowings and pursue equity financing as needed, but gives no assurance financing will be available on acceptable terms. Equity financing could dilute shareholders; debt could constrain cash and operations.
- The filing states that recurring operating losses and funding needs raise substantial doubt about the company’s ability to continue as a going concern. The auditor’s 2020 report included a going-concern explanatory paragraph. Management believes additional financing and potential orders may support continued operations, but the statements contain no adjustments for the uncertainty.
- Customer and product concentration are material: one customer represented 32.46% of Q3 revenue, and UPS batteries accounted for most battery revenue. Raw-material prices, production-line ramp-up, customer collections and supplier dependence are relevant operating risks.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2021. Management identified weaknesses in accounting and disclosure review of key agreements and insufficient U.S. GAAP/SEC-reporting expertise; remediation includes training and seeking a permanent CFO.
- Capital commitments were $149.44 million in the financial-statement note, including $140.39 million of capital injections. MD&A lists contractual and commercial commitments totaling $167.81 million, primarily due within one year; these presentations have different scopes. Litigation includes a construction-cost dispute remanded for retrial, with a related accrual reinstated, and other supplier disputes or payment arrangements.
Important facts for investors to verify
- How much of reported profit is attributable to the warrant fair-value gain, and what recurring operating performance and cash generation look like excluding that non-cash item.
- Availability and terms of funding for expansion and commitments, including the status and cash requirements of the Hitrans acquisition and any remaining closing conditions or guarantees.
- Whether operating cash flow improves, and how much of reported liquidity is freely available versus pledged or otherwise restricted.
- Progress in diversifying revenue beyond UPS batteries and major customers, and the effect of raw-material inflation and Dalian production-line installation on margins and output.
- Remediation of ineffective disclosure controls, the accounting treatment of complex agreements, and updates to material litigation and contingent obligations.