CBAK Energy Technology, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; unaudited consolidated financial statements, prepared under U.S. GAAP. The company manufactures high-power lithium-ion batteries, including batteries for electric vehicles (EVs), light electric vehicles, and uninterruptible power supplies (UPS). Results are reported in U.S. dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $6.05m | $6.34m | $9.36m | $10.06m |
| Gross loss (margin) | $1.05m (17.3%) | $1.49m (23.5%) | $1.40m (14.9%) | $1.91m (19.0%) |
| Operating loss | $3.29m | $3.63m | $5.70m | $5.70m |
| Net loss | $3.45m | $3.75m | $6.01m | $5.82m |
| Basic and diluted loss per share | $0.13 | $0.18 | $0.23 | $0.29 |
| Operating cash flow | Not provided for the quarter | $4.69m | $(3.48)m |
Q2 revenue fell 4.6%; lower production costs and improved gross margin reduced the quarterly gross and operating losses. For the first half, revenue fell 6.9% and net loss widened, primarily as higher R&D and finance expenses offset gross-loss improvement. Q2 finance expense rose to $136,000 from $93,000; first-half finance expense rose to $306,000 from $96,000.
Revenue mix and material changes
- Q2 EV battery revenue declined 69.8% to $1.75m; first-half EV revenue declined 79.9% to $1.82m. Management attributed the reduction partly to changes and reductions in Chinese government EV subsidies and said it temporarily reduced EV-battery production.
- UPS battery revenue increased to $4.28m in Q2 from $0.47m and to $7.52m for the first half from $0.79m, as the company shifted focus to this market.
- Light electric vehicle revenue also declined: $19,000 in Q2 and $20,000 for the first half. Management cited fierce competition.
- First-half R&D expense increased 41.7% to $1.36m, reflecting work on alternative materials and higher-energy, higher-quality batteries. Sales and marketing expense declined 10.4%; general and administrative expense increased 8.7%.
Financial position and liquidity
- At June 30, cash and cash equivalents were $0.51m; pledged deposits were $12.98m. Total current assets were $63.68m against current liabilities of $106.95m, a working-capital deficit of approximately $43.26m. The company reported total liabilities of $139.20m, total assets of $135.69m, and a shareholders’ deficit of $3.52m.
- Bank loans totaled $22.56m, including $4.53m current maturities; other short-term loans were $16.51m and payable on demand. Trade accounts and bills payable were $57.03m, including $29.12m of bills payable. The filing also reports $15.72m payable to former subsidiaries.
- First-half operating cash flow of $4.69m was mainly driven by a $25.76m reduction in receivables, partly offset by payments to suppliers and former subsidiaries. Investing cash outflow was $7.49m, primarily for property, equipment, and construction; financing cash inflow was $5.73m.
- Capital expenditures were $7.49m in the first half; management estimated approximately $13.6m for full-year 2018. The filing reports $14.4m in unused committed banking facilities. Borrowings are secured by company assets and, in some cases, guaranteed by executives and others.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management expects demand for high-power batteries to support future orders and believes the company can return to profitability, but acknowledged that additional bank or equity financing may be needed and is not assured.
- The company was expanding its Dalian manufacturing capacity and said a new high-capacity prismatic-battery line, planned for production by year-end 2018, would target about 5,000 units per day. Execution, funding, and customer demand remain uncertain.
- Management stated that recurring losses, working-capital deficiencies, and short-term debt raise substantial doubt about the company’s ability to continue as a going concern. The statements contain no adjustments for the possible effects of that uncertainty.
- Customer concentration is significant: one customer represented 41.99% of Q2 revenue and 39.55% of first-half revenue; one customer accounted for 54.76% of receivables at June 30.
- Litigation includes a contractor dispute remanded for retrial and a separate fire-control-contract claim; the company says it accrued the amounts claimed. A customer judgment for unpaid goods is in enforcement, and the receivable is fully provided for. A court freeze on $1.27m of deposits related to the contractor matter was described as lasting through August 31, 2018.
- Disclosure controls and procedures were deemed ineffective at June 30, 2018. Management cited a material weakness involving evaluation and accounting for key agreements and insufficient U.S. GAAP expertise among accounting staff; remediation was ongoing, with no assurance it would be completed.
- Revenue recognition guidance was adopted January 1, 2018 using the modified retrospective method, with no reported impact on revenue or retained earnings. Management warned that further inventory write-downs could be necessary if market conditions deteriorate.
Important facts for investors to verify
- Whether the company can renew or obtain financing to meet near-term obligations, fund expansion, and address its going-concern uncertainty.
- Whether UPS sales growth can offset continuing EV and light-EV declines, and whether customer concentration or collections create additional risk.
- Progress, funding, production start, and actual capacity utilization of the planned prismatic-battery line and the full-year capital-spending estimate.
- Resolution and cash impact of the contractor litigation, deposit freeze, and customer collection proceedings.
- Remediation of the disclosed material weakness and improvement in disclosure controls. The filing’s MD&A contains an apparent inventory write-down unit typo; the financial-statement note reports first-half 2018 write-downs of $1,199, not $1,199 million.