CBAK Energy Technology, Inc. — Q3 2017 Form 10-Q
Business context and reporting period. CBAK manufactures and sells high-power lithium-ion batteries, primarily for electric vehicles (EVs), light electric vehicles and uninterruptible power supplies. The report covers the three and nine months ended September 30, 2017, with comparisons to the corresponding 2016 periods. The company changed its fiscal year-end from September 30 to December 31 in January 2017.
Financial performance
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $17.75 million, versus $0.31 million in 2016 | $27.81 million, versus $4.87 million in 2016 |
| Gross loss | $1.36 million; gross margin approximately -7.7% | $3.27 million; gross margin approximately -11.8% |
| Operating loss | $4.20 million, versus $5.20 million | $9.90 million, versus $10.02 million |
| Net loss | $4.20 million, versus $5.95 million; loss per share $0.16 versus $0.34 | $10.02 million, versus $10.52 million; loss per share $0.45 versus $0.61 |
| Operating cash flow | Not presented as a quarterly figure | Cash used: $6.48 million, versus $12.55 million in 2016 |
For the nine-month period, investing activities used $6.29 million and financing activities provided $12.47 million. Cash and cash equivalents fell from $408,713 at December 31, 2016 to $126,367 at September 30, 2017. Capital spending was $8.74 million; management estimated 2017 capital expenditures of approximately $9.2 million.
Balance sheet and liquidity at September 30, 2017
- Total assets were $123.66 million; total liabilities were $110.14 million; shareholders’ equity was $13.52 million.
- Current assets of $58.64 million compared with current liabilities of $79.70 million, a working-capital deficit of approximately $21.05 million and a current ratio of approximately 0.74.
- Trade accounts and bills receivable were $30.58 million, up from $2.47 million at December 31, 2016. Inventories were $18.25 million.
- Bank loans totaled $19.05 million, including $19.05 million classified as long-term. Other short-term loans were $13.30 million. Bills payable were approximately $15.39 million.
- Accumulated deficit was $152.02 million. The company reported substantial doubt about its ability to continue as a going concern.
Material changes and management commentary
- Revenue growth was largely driven by EV batteries: nine-month EV revenue increased to $26.00 million from $2.83 million. Management attributed higher orders to China’s support for new-energy vehicles and strategic cooperation agreements with automakers.
- Despite higher sales, the company continued to report gross losses. Management cited inefficiencies from ramping up the Dalian facility and maintaining staffing ahead of anticipated demand.
- Inventory write-downs increased to $1.36 million for the first nine months, from $0.30 million. Management said aged inventory was a factor and warned further write-downs may be needed if market conditions deteriorate.
- Nine-month sales and marketing expense rose to $1.82 million, primarily from higher warranty provisions and travel costs. The product warranty liability increased to $1.34 million.
- At September 30, receivables were highly concentrated: two customers represented 65.21% and 26.99% of nine-month revenue. Those customers also represented 63.57% and 30.93% of trade accounts receivable, respectively.
- The company raised $9.6 million through a June 2017 issuance of 6,403,518 shares to investors, including its CEO. Management said it may need additional debt or equity financing and gave no assurance that financing would be available on acceptable terms.
- After quarter-end, the company obtained and drew a $15 million China Everbright Bank loan on November 10, 2017, at 4.505% annual interest, secured by the equity of CBAK Power and subject to a 50% cash-deposit requirement.
Risks, contingencies and unusual items
- Going concern and liquidity: Management cited recurring losses, a working-capital deficit and short-term obligations as factors raising substantial doubt. It expects to seek additional financing and anticipates growth in the EV market, but those expectations are not assured.
- Legal proceeding: Contractor Shenzhen Huijie sought approximately $1.27 million. A lower court ruling required payment of the remaining contract amount and related costs; CBAK Power appealed. A $1.27 million deposit remained frozen through August 31, 2018. The filing gives inconsistent dates for the first-instance ruling in different sections.
- Reporting controls: Management concluded disclosure controls were ineffective at September 30, 2017. It cited weaknesses in accounting for key agreements and insufficient technically skilled accounting staff; remediation efforts included appointing a CFO and providing training.
- Other exposures: Approximately $6.74 million of long-term tax payable related to an uncertain tax position involving local-government subsidies. The company also had $3.03 million of capital commitments and $69.23 million of listed contractual obligations, including bills payable, former-subsidiary payables and short-term loans.
- Outlook: No quantified revenue or earnings guidance was provided. Management expressed optimism about EV-market demand and a return to profitability, while noting the need for further funding and continued facility expansion.
Important facts for investors to verify
- Whether the company can improve production economics and achieve positive gross margins as EV sales grow.
- Collection timing and credit quality for the sharply increased, highly concentrated receivables; also verify subsequent customer orders and returns.
- Availability, terms and collateral requirements for future financing, and the company’s ability to meet near-term payables and other short-term obligations.
- Status and financial impact of the Shenzhen Huijie appeal, frozen funds and the outstanding tax position.
- Reconciliation of the CEO’s share allocation in the June 2017 issuance: the notes state 746,018 shares, while MD&A states 764,018 shares.
- Progress in remediating the disclosed control weaknesses and resolving title-certificate delays for Dalian buildings.