CBAK Energy Technology, Inc. quarterly report, Q3 FY2020

CBAK Energy Technology, Inc. — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020; unaudited consolidated financial statements prepared under U.S. GAAP. The company develops and sells high-power lithium-ion batteries, chiefly for UPS, electric vehicles and other applications. Amounts below are in U.S. dollars.

Financial performance and liquidity

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Revenue	$10.62 million	$8.09 million	$22.15 million	$17.53 million
Gross profit / margin	$1.37 million / 13%	$0.66 million / 8%	$1.67 million / 7.5%	$0.21 million / 1.2%
Operating income (loss)	$0.39 million	$(1.50) million	$(2.49) million	$(6.10) million
Net income (loss)	$41,715	$(1.79) million	$(3.51) million	$(6.93) million
Net income (loss) attributable to CBAK shareholders	$44,247	$(1.77) million	$(3.51) million	$(6.88) million
Operating cash flow	Not presented for the quarter	$4.90 million	$(13.91) million

At September 30, cash and cash equivalents were $1.30 million and pledged deposits were $6.60 million; together, cash and restricted cash were $7.90 million. Total current assets were $34.71 million versus current liabilities of $71.49 million, a $36.78 million working-capital deficit. The resulting current ratio was approximately 0.49.
Total assets were $102.07 million, total liabilities $85.03 million and total equity $17.04 million. Bank loans totaled $26.60 million, all classified as current at quarter-end; other short-term loans were $5.27 million and notes payable $1.61 million. Approximately $20.72 million of bank loans was scheduled as current maturities of long-term debt.
Nine-month investing cash outflow was $2.03 million and financing cash outflow was $2.33 million. Operating cash generation reflected, among other items, lower inventory, higher trade payables, government grant proceeds and a $10.42 million increase in receivables.
Basic and diluted loss per share for the nine months was $0.06. Q3 EPS was reported as $0.00 in the statements; MD&A gives diluted EPS of $0.0007.

Changes versus comparable periods

Q3 revenue rose 31% and gross profit more than doubled; the company moved from a $1.50 million operating loss to $0.39 million operating income and recorded a small net profit.
Nine-month revenue increased 26%, but battery-product revenue excluding raw-material sales was nearly flat overall: UPS battery sales rose 31% to $17.11 million while EV battery sales fell 83% to $0.74 million. The $4.27 million of raw-material sales, absent in 2019, contributed materially to total revenue growth.
Nine-month gross profit improved by $1.46 million and operating loss narrowed by $3.61 million. Net loss narrowed to $3.51 million from $6.93 million. Operating expenses declined, while finance expense increased 20% to $1.17 million.
Operating cash flow improved from a $13.91 million use to $4.90 million provided. However, working-capital movements and government grants were important contributors; receivables increased sharply.
Common shares outstanding rose from 53.08 million at December 31, 2019 to 65.15 million at September 30, 2020, reflecting equity issuance and debt conversions.

Outlook, risks and unusual items

Going concern: Management states that recurring losses, working-capital deficiency and short-term debt raise substantial doubt about the company’s ability to continue as a going concern. Management expects to seek bank and equity financing and anticipates demand growth, but says additional financing is not assured.
Strategy and outlook: Management says it is prioritizing existing cylindrical batteries for UPS, reducing investment in EV-product R&D and cutting EV battery production amid reduced Chinese EV subsidies. It expects to pursue new-energy demand and reports plans for projects targeting 8 GWh of capacity with Gaochun EDZ support. No specific revenue or earnings guidance is provided. Management estimated 2020 capital expenditures of approximately $4 million.
Funding and commitments: The filing reports $7.1 million of unused committed facilities. It also reports total contractual obligations and commercial commitments of $330.8 million, including $285.7 million of capital injections. The MD&A table presents all amounts as due within one year, although subsidiary contribution deadlines described elsewhere extend substantially further; the timing and enforceability warrant review.
Debt and dilution: Atlas Sciences notes bore 10% interest. After quarter-end, an October amendment provided for conversion at 80% of the lowest closing price over the preceding 10 trading days, subject to a $1.00 floor. The company reports that the notes were fully repaid by the report date through repayments and share exchanges, including post-quarter share issuances.
Operating and market risks: Management says COVID-19 disrupted operations, including a first-quarter suspension, though it had limited adverse impact on results to date; future effects remain uncertain. Further inventory write-downs may be necessary if market conditions deteriorate. Revenue and receivables are concentrated among a limited number of customers, and supplier concentration is also significant.
Contingencies: Several supplier-payment lawsuits and arbitrations are disclosed, with many related costs accrued. After quarter-end, CBAK Power reportedly failed to pay a $0.5 million Dongguan Shanshan settlement, prompting a renewed bank-deposit freeze. The company had not collected a $276,356 judgment in its favor against Shenzhen Huijie as of September 30. A $2.57 million Anyuan Bus receivable was fully provided for.
Reporting controls: Management concluded disclosure controls and procedures were ineffective at September 30, 2020. Previously identified material weaknesses involved inadequate accounting policies for evaluating key agreements and insufficient U.S. GAAP/SEC-reporting expertise among accounting personnel. Remediation and hiring a permanent CFO were planned.
Other items: The company received an approximately $2.9 million government subsidy from Gaochun EDZ. It recorded $0.72 million of inventory write-downs in the nine-month period. Certain Dalian buildings, with a carrying value of $23.85 million, lacked property ownership certificates, although management believes it has legal title based on land-use rights.

Most important facts for investors to verify

How the company will fund its $36.78 million working-capital deficit, upcoming debt maturities and expansion plans, and whether going-concern uncertainty persists.
The actual timing and binding nature of the reported $285.7 million capital-injection commitments, given the differing contribution deadlines elsewhere in the filing.
Whether revenue growth and improved margins are sustainable without raw-material resale, and whether UPS growth can offset the steep decline in EV battery sales.
Receivable collectability, especially the large increase in trade receivables, customer concentration, the unpaid Shenzhen Huijie judgment and the fully reserved Anyuan Bus balance.
The status and financial impact of supplier litigation, bank-deposit freezes, and the missed Dongguan Shanshan settlement payment.
The share-count impact and terms of Atlas Sciences conversions, including reconciliation of post-quarter issuances with the reported November 13 outstanding share count of 66,467,285.
Progress in remediating ineffective disclosure controls and the identified accounting-personnel and technical-accounting weaknesses.