CBAK Energy Technology, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; unaudited U.S. GAAP consolidated financial statements. CBAK manufactures and sells high-power lithium-ion batteries, primarily for uninterruptible power supplies (UPS) and electric vehicles (EVs), with operations and substantially all long-lived assets in China.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $4.27 million | $6.05 million | $9.44 million | $9.36 million |
| Gross profit (loss) | ($0.22 million) | ($1.05 million) | ($0.45 million) | ($1.40 million) |
| Gross margin | -5.1% | -17.3% | -4.8% | -14.9% |
| Operating loss | ($2.07 million) | ($3.29 million) | ($4.60 million) | ($5.70 million) |
| Net loss | ($2.33 million) | ($3.45 million) | ($5.14 million) | ($6.01 million) |
| Basic and diluted loss per share | ($0.07) | ($0.13) | ($0.16) | ($0.23) |
For the first half, operating cash flow was negative $4.89 million, investing cash flow negative $1.41 million, and financing cash flow positive $6.09 million. Cash and cash equivalents were $0.27 million at June 30; cash, cash equivalents and restricted cash together totaled $17.52 million. Pledged deposits were $17.25 million, largely securing bills payable and other obligations.
At June 30, current assets were $46.78 million versus current liabilities of $88.71 million, a working capital deficiency of $41.94 million. Bank loans totaled $20.77 million, including $11.00 million current maturities; other short-term loans were $12.85 million and bills payable were $22.82 million. The company reported $19.3 million of unused committed bank facilities. Total equity was $6.17 million, with an accumulated deficit of $170.51 million.
Material changes and operating trends
- Q2 revenue declined 29% year over year, while first-half revenue was approximately flat, up 1%. UPS battery sales were $3.94 million in Q2 and $7.90 million for the half; first-half EV battery revenue fell 15% to $1.54 million. No light-EV sales were reported in 2019 periods.
- Gross-loss margins improved year over year, which management attributed to production-line improvements, cost controls and higher product qualification rates. The company nevertheless continued to report gross losses.
- Q2 operating loss narrowed 37% and net loss narrowed 32% year over year. Higher finance costs partly offset those improvements: first-half net finance expense rose to $0.65 million from $0.31 million, primarily reflecting high-interest borrowing.
- First-half operating cash flow reversed from positive $4.80 million in 2018 to negative $4.89 million in 2019, including substantial cash use to settle trade payables.
- Shares issued rose from 26.79 million at year-end 2018 to 37.10 million at June 30, 2019. The company issued about 10.30 million shares during the first half, including shares in debt-cancellation transactions.
Outlook, risks and unusual items
- Going concern: Management states that recurring losses, working-capital deficiency and short-term debt create substantial doubt about the company’s ability to continue as a going concern. It plans to seek bank and equity financing, but says there is no assurance financing will be available. Management expects demand for high-power batteries, particularly for EVs, to support a return to profitability; no specific revenue or earnings guidance is provided.
- Market and customer exposure: Management says reductions in Chinese EV subsidies have pressured manufacturers and sharply reduced Chinese EV-battery prices. It temporarily reduced EV-market selling and new-product R&D investment, prioritizing existing cylindrical batteries for UPS. One customer accounted for 61.7% of Q2 revenue; three customers together accounted for approximately 62.5% of receivables at quarter-end.
- Expansion and commitments: Management estimated 2019 capital expenditures of approximately $6.0 million for automated manufacturing lines. Contractual obligations and commercial commitments totaled $85.46 million, including $20.40 million of required capital injections to subsidiaries and $10.998 million of current bank-loan maturities.
- Financing and dilution: After quarter-end, the company issued a 12-month note with $1.395 million principal at 10% interest, receiving $1.25 million net of discount and expenses. In July, creditors agreed to cancel approximately $7.4 million of loans and construction-fee debt for about 7.09 million shares, subject to the stated release terms. These transactions may relieve liabilities but increase share dilution.
- Inventory, litigation and asset matters: First-half obsolete-inventory write-downs were $0.56 million, and management warned further write-downs may be necessary if conditions deteriorate. Litigation includes a contractor appeal concerning a construction-cost dispute and the company’s ongoing effort to enforce a judgment against a customer; a full provision had been recorded against the customer receivable. Ownership certificates for Dalian buildings with a $26.38 million carrying value had not been obtained, although management believes it has legal title through the land-use rights.
- Reporting controls: Management concluded disclosure controls were ineffective at June 30, 2019, citing a material weakness involving accounting for key agreements and insufficient technically skilled accounting personnel. Training was planned; remediation was not assured.
Important facts for investors to verify
- Confirm the company’s near-term funding, refinancing and liquidity plan, including the availability and conditions of pledged deposits and bank facilities.
- Track whether UPS demand, EV sales and subsidy-related pricing stabilize, and whether gross margins can turn positive despite continued inventory write-down risk.
- Review share issuance and debt-conversion terms, including completion and release conditions for the July transactions and resulting dilution.
- Monitor customer concentration, receivable collectability, the Anyuan Bus enforcement appeal and the contractor litigation outcomes.
- Check progress in resolving the disclosed control weakness and obtaining ownership certificates for Dalian buildings.
- Reconcile an apparent MD&A error: one passage states Q2 2019 net loss was “$235 million,” whereas the financial statements and other MD&A tables report a net loss of $2.33 million.