CBAK Energy Technology, Inc. quarterly report, Q1 FY2018

CBAK Energy Technology, Inc. — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018; comparatives are for Q1 2017. The unaudited consolidated statements are prepared under U.S. GAAP. CBAK develops, manufactures, and sells high-power lithium-ion batteries, with operations centered in Dalian, China.

Financial performance

Metric	Q1 2018	Q1 2017
Revenue	$3.31 million	$3.72 million
Gross loss (margin)	$0.35 million (10.5%)	$0.42 million (11.2%)
Operating loss	$2.41 million	$2.07 million
Net loss	$2.57 million	$2.07 million
Basic and diluted loss per share	$0.10	$0.10
Cash from operating activities	$2.41 million	$(4.32) million
Capital expenditures / investing cash flow	$4.46 million	$1.21 million

Revenue fell 10.8%; cost of revenue declined 11.4%. The smaller gross loss improved gross margin by about 0.7 percentage points, but higher operating expenses and financing costs widened operating and net losses.
Product mix shifted sharply: EV battery revenue fell 98.0% to $65,000 and light electric vehicle revenue fell 98.6% to about $2,000. UPS revenue rose 924.0% to $3.25 million, offsetting much of the decline. Management said major EV customers’ Q4 2017 orders did not recur until Q2 2018; new UPS customers contributed to growth.
R&D expense rose 90.0% to $817,000, mainly reflecting materials and testing for alternative raw materials and higher-performance batteries. G&A rose 16.0% to $1.13 million, partly due to financial-reporting professional fees.
Operating cash flow turned positive primarily because receivables declined by $15.2 million; this was partly offset by supplier payments, inventory increases, and payments to former subsidiaries. Cash and cash equivalents were $1.25 million at quarter-end; cash, cash equivalents, and restricted cash totaled $11.73 million.

Balance sheet, debt, and liquidity

At March 31, 2018, current assets were $74.99 million and current liabilities were $113.72 million, a working-capital deficit of $38.73 million and an approximate current ratio of 0.66. Total liabilities were $148.96 million against total assets of $148.80 million, leaving a shareholders’ deficit of $153,000.
Recorded debt included $20.21 million of long-term bank loans and $17.85 million of other short-term loans. The latter included $16.92 million of related-party advances; these advances were unsecured, non-interest-bearing, and repayable on demand. Trade accounts and bills payable were $60.29 million. Separately, MD&A reports $47.51 million drawn under listed bank facilities and credit lines, including letters of credit and acceptances; these figures are not directly equivalent to balance-sheet loan balances.
The company reported $6.2 million of unused committed banking facilities. Bank loans and credit facilities are secured by deposits, receivables, land-use rights, buildings, equipment, or subsidiary equity, and some facilities are personally guaranteed.
Management and the auditor-related financial-statement disclosures identify substantial doubt about the company’s ability to continue as a going concern, citing recurring losses, working-capital deficiency, and short-term obligations. Management plans to seek bank and equity financing and expects market demand to improve, but gives no assurance that additional financing will be available.

Outlook, risks, and unusual items

Management estimated 2018 capital expenditures of approximately $29.1 million, mainly for new plants and automated production lines. It expected a new high-capacity prismatic-battery line to begin production by year-end 2018, with stated capacity of about 5,000 units per day.
Management cited Chinese government support for new-energy vehicles and anticipated future orders, while noting that 2018 subsidy rates were reduced. These are forward-looking expectations, not assured outcomes.
Contracted capital commitments were $10.83 million at March 31, including $3.80 million for construction and $6.63 million for equipment. The filing’s contractual-obligations table reported total obligations of $104.47 million, including $83.95 million due within one year.
Customer concentration was significant: one customer accounted for 35.1% of Q1 revenue, and one customer represented 74.8% of trade receivables at quarter-end. A customer receivable of approximately $2.68 million from Anyuan Bus was fully provided for; a judgment in CBAK’s favor was in enforcement.
Contractor Shenzhen Huijie litigation remained pending after an earlier judgment was rescinded and the matter remanded for retrial. A separate claim of approximately $39,000 was accrued. A related $1.34 million deposit remained frozen through August 31, 2018. The company said it was defending the claims but could not assure success.
Management concluded disclosure controls and procedures were ineffective as of March 31, 2018. Reported material weaknesses involved inadequate procedures for accounting for key agreements and insufficient skilled U.S. GAAP accounting personnel. Remediation was underway, with no assurance it would be completed successfully.
Revenue-standard adoption on January 1, 2018 did not materially change revenue recognition or require a retained-earnings adjustment. Subsequent to quarter-end, an 80%-owned Suzhou subsidiary was established to manufacture high-power battery packs.

Important facts for investors to verify

Whether planned financing and the $6.2 million of unused facilities can fund operations, near-term obligations, and the expansion program.
Whether Q2 customer orders resumed as management described, and whether EV and UPS revenue can be sustained without heavy reliance on a small number of customers.
Progress, cost, and commissioning timing for the new production line and the broader $29.1 million 2018 capex plan.
Collection of concentrated receivables, recovery of the Anyuan Bus balance, and outcomes of the Shenzhen Huijie cases and deposit freeze.
Whether internal-control weaknesses are remediated and whether subsequent filings clarify financial reporting and liquidity disclosures.