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.