CBAK Energy Technology, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The unaudited consolidated statements are prepared under U.S. GAAP. CBAK manufactures lithium-ion batteries; following its 2021 Hitrans acquisition, it also sells battery cathode and precursor materials.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $56.35m | $5.89m | $136.55m | $15.31m |
| Gross profit / margin | $5.54m / 9.8% | $1.10m / 18.6% | $10.85m / 8.0% | $2.94m / 19.2% |
| Operating income (loss) | $0.14m | $(2.72)m | $(1.19)m | $(2.75)m |
| Net income | $1.02m | $2.72m | $1.70m | $32.33m |
| Net income attributable to CBAK | $0.81m | $2.70m | $1.25m | $32.31m |
| Operating cash flow | Six-month 2022: $17.34m; six-month 2021: $(2.42)m | — |
Revenue rose sharply year over year, reflecting Hitrans materials sales and higher battery sales, particularly for uninterruptible power supply (UPS) applications. In Q2, battery materials contributed $30.63m of revenue and UPS batteries $25.04m. For the first half, materials contributed $95.81m and UPS batteries $39.98m. Management attributed weaker gross margins mainly to higher raw-material prices and Hitrans’ lower-margin sales.
Net income included non-cash gains from the decline in warrant-liability fair value: $2.13m in Q2 2022 and $3.76m in the first half, versus $5.75m and $34.18m in the comparable 2021 periods. First-half operating loss persisted despite the large revenue increase.
Financial position and liquidity
- At June 30, 2022, current assets were $137.28m and current liabilities $125.72m, yielding working capital of approximately $11.55m and a current ratio of about 1.09.
- Cash and cash equivalents were $4.38m; pledged deposits were $37.12m. Cash, cash equivalents and restricted cash totaled $41.50m in the cash-flow statement.
- Short-term bank borrowings were $16.88m; other short-term loans were $0.71m. Trade accounts and bills payable totaled $80.51m, including $40.03m of bills payable.
- Six-month investing cash outflow was $6.34m, primarily for property, plant and equipment and construction. Financing provided $4.95m. Capital expenditures were $6.3m in the first half; management estimated approximately $10m for fiscal 2022.
- Capital commitments totaled $162.30m, including $148.03m of capital-injection commitments. A portion of available cash is pledged as security for bank acceptance bills.
Changes, outlook, and material risks
- Period comparison: First-half revenue increased 792%, but gross margin fell to 8.0% from approximately 19.2%. First-half net income declined to $1.70m from $32.33m, largely reflecting much smaller warrant fair-value gains. Operating loss narrowed but remained negative.
- Funding and going concern: The filing states that accumulated deficits from prior recurring losses and significant short-term debt obligations raise substantial doubt about the company’s ability to continue as a going concern. Management plans to improve profitability and seek additional bank borrowing, shareholder/director loans, or equity financing; it gives no assurance financing will be available on acceptable terms.
- Management outlook: Management cited expected demand in the new-energy market and plans to expand product lines and manufacturing capacity in Dalian and Nanjing. No quantified revenue or earnings guidance was provided. The company expects about $10m in 2022 capital expenditures.
- Concentration and related parties: Zhengzhou BAK Battery, a related party, represented 34.13% of first-half revenue and 60.2% of net trade receivables at June 30. The company also reported substantial purchases from this counterparty and other concentrated suppliers.
- Other risks and contingencies: The filing cites possible adverse effects from COVID-19 on demand and operations, commodity costs, foreign-exchange movements, and the need for additional financing. A contractor dispute was remanded for retrial; the company accrued approximately $0.9m in construction costs. Another equipment-purchase dispute was withdrawn after an agreement requiring at least $2.4m of purchases by December 2023 or a payment based on the unpurchased amount.
- Controls: Management concluded disclosure controls and procedures were ineffective as of June 30, 2022, citing previously identified weaknesses in accounting for key agreements and insufficient skilled U.S. GAAP/SEC reporting personnel. Remediation was in progress, with no assurance it would be completed successfully.
- Unusual item: Foreign-currency translation reduced first-half comprehensive income by $6.69m. Warrant liabilities are measured using Level 3 valuation inputs.
Important facts for investors to verify
- Whether operating performance and gross margins improve as Hitrans sales and capacity expansion continue, and how much earnings depend on non-cash warrant remeasurement.
- Whether pledged deposits can be released as bills payable mature, and the timing and refinancing requirements for short-term debt.
- Progress on financing plans, going-concern uncertainty, capital-injection commitments, and the stated 2022 capital expenditure program.
- Collection of the large related-party receivable from Zhengzhou BAK Battery and the continued scale and terms of related-party sales and purchases.
- Outcome of the contractor retrial and compliance with the Haoneng equipment-purchase agreement.
- Remediation of ineffective disclosure controls and the identified financial-reporting weaknesses.