CBAK Energy Technology, Inc. — Q1 2019 Form 10-Q
Period: Three months ended March 31, 2019; unaudited, with comparison to Q1 2018. The company develops, manufactures and sells high-power lithium-ion batteries, primarily for uninterruptible power supplies (UPS) and electric vehicles (EVs). Amounts below are in U.S. dollars.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $5.17 million | $3.31 million |
| Gross loss (margin) | $0.23 million (4.4%) | $0.35 million (10.5%) |
| Operating loss | $2.54 million | $2.41 million |
| Net loss | $2.81 million | $2.57 million |
| Net loss attributable to CBAK shareholders | $2.79 million | $2.57 million |
| Basic and diluted loss per share | $0.10 | $0.10 |
| Operating cash flow | $(4.02) million | $2.40 million |
| Investing cash flow | $(1.22) million | $(4.46) million |
| Financing cash flow | $5.01 million | $2.64 million |
- Revenue increased 56%. UPS battery sales rose 22% to $3.96 million; EV battery sales increased to $1.21 million from $65,000. No light-EV revenue was reported in Q1 2019.
- Gross loss narrowed despite higher revenue and cost of sales. Management attributed the improvement in gross-loss rate to production-line improvements, cost controls and a higher product qualification rate.
- Operating loss widened 5%, and net loss widened 9%. Finance expense rose to $287,000 from $170,000. R&D spending declined 48%; sales and marketing expense increased 78%. A $273,000 loss on equipment disposal was recorded.
Financial position and liquidity
- At March 31, 2019, total assets were $123.25 million, total liabilities $120.29 million, and total equity $2.96 million. Accumulated deficit was $168.20 million.
- Balance-sheet current assets were $50.37 million and current liabilities $85.14 million, a working-capital deficit of approximately $34.77 million. The MD&A gives different figures—$51.1 million and $85.9 million, respectively—so the current-asset and liability figures should be checked against the filed statements.
- Cash and cash equivalents were only $246,000. Cash and restricted cash together were $17.89 million, including $17.65 million of pledged deposits; much of the reported cash therefore was restricted or pledged.
- Bank loans totaled $24.88 million, including $3.75 million current maturities and $21.13 million long-term. Other short-term loans were $14.17 million. Trade accounts and bills payable were $45.27 million. The company reported $19.8 million of unused committed banking facilities.
- Operating cash use primarily reflected settlement of trade payables, including $8.27 million paid to suppliers. Financing inflows included $5.87 million borrowed from an unrelated party. Capital spending was $1.22 million.
Changes, outlook and risks
- In January 2019, creditors exchanged $5.2 million of debt for 5,098,040 common shares at $1.02 per share. Shares outstanding at March 31 were 31,745,518. A further post-quarter debt cancellation of approximately $5.73 million for 5,205,905 shares was agreed on April 26, 2019.
- Management estimated 2019 capital expenditures at approximately $6 million for new facilities and automated production lines. It expected potential order growth, particularly in EV and UPS markets, and said it aimed to return to profitability; the filing provides no quantified revenue or earnings guidance.
- The company disclosed recurring losses, a working-capital deficit and short-term debt obligations that raise substantial doubt about its ability to continue as a going concern. It plans to seek or renew bank borrowing and may raise equity, but gave no assurance financing will be available. Expansion also requires funding.
- Management noted that lower Chinese EV subsidies had pressured battery prices and that subsidy reductions could adversely affect EV manufacturers and demand. It said it had focused resources on existing cylindrical batteries for UPS and temporarily reduced EV investment amid market uncertainty.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2019. Identified weaknesses included insufficient skilled accounting personnel and inadequate procedures for evaluating accounting and disclosures for key documents and agreements; remediation was ongoing.
- Contingencies include a contractor dispute involving frozen deposits of approximately $1.26 million through August 27, 2019, and a fully provided $2.60 million receivable from Anyuan Bus. The company appealed a ruling that prevented adding the customer’s shareholders as judgment debtors. It also had $25.17 million of capital commitments, including a $20.4 million required capital injection.
- Customer concentration was significant: three customers accounted for approximately 60.5% of Q1 2019 revenue. The company also reported buildings with a $27.20 million carrying amount for which it had not yet obtained ownership certificates.
Investor verification priorities
- Reconcile the MD&A working-capital figures with the balance-sheet totals and confirm which figures management intended to report.
- Assess near-term liquidity, access to the $19.8 million of unused facilities, maturity and renewal terms, and the availability of cash after pledged deposits and other restrictions.
- Verify completion and accounting for the January and April debt-for-equity cancellations, including the resulting share count and dilution.
- Track operating cash use, gross-margin progress, customer concentration, and the effect of Chinese EV subsidy changes on orders and pricing.
- Monitor going-concern financing plans, control remediation, the frozen deposits and litigation outcomes, and the status of building certificates and capital commitments.