CBAK Energy Technology, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparative periods are the three and nine months ended September 30, 2018. Financial statements are unaudited and presented in U.S. dollars. The company manufactures and sells high-power lithium-ion batteries, principally for electric vehicles and uninterruptible power supplies (UPS).
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $8.09 million | $5.59 million | $17.53 million | $14.95 million |
| Gross profit (loss) | $0.66 million | ($1.84 million) | $0.21 million | ($3.23 million) |
| Gross margin | 8.1% | (32.9%) | 1.2% | (21.6%) |
| Operating loss | ($1.50 million) | ($4.12 million) | ($6.10 million) | ($9.82 million) |
| Net income (loss) | ($1.79 million) | $7.92 million | ($6.93 million) | $1.91 million |
| Net loss attributable to CBAK shareholders | ($1.77 million) | $7.93 million | ($6.88 million) | $1.92 million |
| Basic and diluted EPS | ($0.04) | $0.30 | ($0.19) | $0.07 |
Cash flow: For the first nine months of 2019, operating activities used $13.91 million, investing activities used $2.00 million, and financing activities provided $7.29 million. Cash and cash equivalents plus restricted cash declined by $9.11 million to $8.58 million; only $0.20 million was reported as cash and cash equivalents, with $8.38 million in pledged deposits.
Balance sheet and debt at September 30, 2019: Current assets were $42.11 million and current liabilities were $76.40 million, a working-capital deficit of approximately $34.29 million. Total assets were $110.40 million, total liabilities $98.90 million, and total equity $11.51 million. Bank loans totaled approximately $19.95 million, including $10.56 million current maturities; other short-term loans were $8.30 million. Trade accounts and bills payable were $38.87 million, including $13.92 million of bills payable. The company reported $4.6 million of unused committed banking facilities.
Material changes versus prior comparable periods
- Nine-month revenue increased 17.3%; Q3 revenue rose 44.7%. UPS battery sales grew to $13.11 million year to date, while electric-vehicle battery sales rose to $4.43 million. No light-electric-vehicle battery sales were recorded in 2019 year to date.
- Gross results improved from losses to modest profits, which management attributed to production-line improvements, better product quality and cost control. Operating losses also narrowed, despite higher nine-month general and administrative costs and finance expense.
- Net results turned to losses. Prior-year earnings included approximately $12.3 million of other income from transferring patented technology to former subsidiary BAK Shenzhen; 2019 other income was only $0.15 million for the first nine months.
- Operating cash flow shifted from $9.14 million provided in the first nine months of 2018 to $13.91 million used in 2019, notably reflecting payments on trade payables and amounts owed to former subsidiaries.
- Shares issued increased during 2019 through equity issuance and debt cancellations. The balance sheet reported 44.32 million issued shares at September 30; the filing reported 52.78 million shares outstanding as of November 18, 2019.
Outlook, risks and unusual items
- Going concern: Management disclosed that working-capital deficiencies, recurring losses and short-term debt raise substantial doubt about the company’s ability to continue as a going concern. It plans to seek bank borrowing and equity financing, but states that additional financing is not assured.
- Business outlook: Management expects potential orders from new-energy markets, especially energy storage and electric vehicles, and believes demand could support a return to profitability. No quantified revenue or earnings guidance was provided. The company estimated 2019 capital expenditures of approximately $6.0 million, primarily for automated manufacturing lines.
- Market and product mix: Management said Chinese EV subsidy changes had contributed to sharp battery-price declines and planned to focus on existing prismatic and UPS battery products while temporarily reducing EV-related new-product R&D investment.
- Financing and dilution: The company issued a $1.395 million promissory note in July 2019, bearing 10% annual interest and maturing in 12 months; net proceeds were $1.25 million. Debt cancellations and subsequent October 2019 agreements exchanged certain obligations for shares, creating potential dilution. Future equity financing could further dilute shareholders.
- Contingencies: Litigation and arbitration included a contractor dispute with frozen deposits, an equipment arbitration and counterclaim, and employee wage claims. The company had fully reserved a $2.44 million receivable from customer Anyuan Bus and its appeal seeking recovery from the customer’s shareholders was dismissed in October 2019. The filing also reports customer concentration, including one customer contributing 34.2% of nine-month revenue.
- Other risks and controls: Some Dalian facility buildings, with a reported carrying value of $25.14 million, lacked ownership certificates, although management believes it has legal title based on the land-use rights. Management concluded disclosure controls and procedures were ineffective as of September 30, 2019, citing previously identified weaknesses in accounting for agreements and insufficient technically skilled accounting personnel.
Most important facts for investors to verify
- Whether the company can obtain sufficient financing to meet near-term obligations, fund expansion and address the disclosed going-concern uncertainty.
- Whether operating cash burn and the working-capital deficit improve, and how much of reported deposits remain restricted or pledged.
- Whether gross profitability is sustainable, particularly given the thin nine-month gross margin and reliance on UPS sales.
- The status and final share impact of debt conversions and other post-quarter equity transactions, including reconciliation of September issued shares with the November outstanding-share count.
- Developments in customer collections, concentrated customer exposure, litigation and frozen deposits, and remediation of ineffective disclosure controls.