CBAK Energy Technology, Inc. (formerly China BAK Battery, Inc.) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2016. Amounts are in U.S. dollars. Interim financial statements are unaudited.
Business context and reporting period
The company manufactures and sells rechargeable lithium-ion batteries, focusing on high-power products for electric vehicles (EVs), light electric vehicles, and uninterruptible power supplies. Its Dalian facility began partial commercial operations in July 2015; production was also outsourced to former subsidiary BAK Tianjin. The company’s business had shifted toward EV batteries, while legacy operations had been disposed of in 2014.
Financial performance
| Metric | Three months ended March 31, 2016 | Six months ended March 31, 2016 |
|---|---|---|
| Revenue | $3.20 million, up 4.3% year over year | $8.70 million, up 41.6% |
| Gross profit (loss) | $(0.10) million; margin (3.1%) | $(0.26) million; margin (3.0%) |
| Operating loss | $(1.93) million | $(4.04) million |
| Net profit (loss) | $(1.90) million | $(4.04) million |
| Basic and diluted loss per share | $(0.11) | $(0.23) |
| Operating cash flow | Not separately reported for the quarter | $2.04 million provided |
| Investing cash flow | Not separately reported for the quarter | $(8.14) million used |
| Financing cash flow | Not separately reported for the quarter | $1.02 million provided |
Cash and cash equivalents were $1.59 million at March 31, 2016, down from $6.76 million at September 30, 2015. Current assets were $19.00 million and current liabilities $42.64 million, a $23.64 million working-capital deficiency. Total liabilities were $49.56 million and shareholders’ equity $17.99 million.
Short-term bank loans totaled $12.90 million; other short-term loans were $0.73 million. The company reported $3.79 million of bills payable in its obligations table. Bank loans carried stated rates of 7.84% for two principal loans, with additional short-term borrowing at 5.86%–5.89%. The main bank facilities were secured by company assets and guaranteed by former CEO Xiangqian Li, his wife, and former subsidiary Shenzhen BAK. The company reported $0.8 million of unused committed facilities.
Material changes versus prior comparable periods
- Quarterly revenue rose modestly, but cost of revenue grew faster, turning a $0.35 million gross profit in the prior-year quarter into a $0.10 million gross loss. The company attributed the loss to start-up inefficiencies at the new Dalian facility.
- Quarterly operating expenses increased to $1.83 million from $0.61 million, reflecting higher R&D, sales and marketing, and administrative costs, including staffing, warranty accruals, and share-based compensation.
- EV battery revenue was $2.74 million in the quarter and $6.41 million for the six months, compared with none in the prior-year periods. Uninterruptible-power-supply revenue declined to $0.40 million for the quarter and $2.15 million for the six months.
- Six-month net results swung from $18.46 million profit to $4.04 million loss. The prior-year period included $23.22 million of government-grant income and $1.52 million from discontinued operations; neither recurred in 2016.
- Six-month operating cash flow improved from $1.24 million used to $2.04 million provided, largely because trade payables increased $7.93 million. Capital spending rose to $7.62 million from $4.25 million, mainly for the Dalian facility; cash fell by $5.17 million overall.
Outlook, risks, contingencies, and unusual items
- Going concern: Management disclosed that the working-capital deficiency, recurring losses, and short-term debt raise substantial doubt about the company’s ability to continue as a going concern. Management planned to renew maturing loans and seek bank and equity financing, but gave no assurance that funding would be available.
- Expansion and capital needs: Management estimated approximately $29.3 million of capital expenditures for the remainder of fiscal 2016 to build plants and expand automated production lines. Contractual obligations and commitments totaled $35.86 million, reported as due within one year; this included $15.55 million of capital contributions to subsidiaries and construction and equipment commitments.
- Management outlook: The company expected Chinese government support and growing demand for new-energy vehicles, especially electric cars, to help generate orders and restore profitability. It provided no quantified revenue or earnings guidance.
- Customer concentration: In the quarter, two customers accounted for 42.6% and 39.6% of revenue. For the six months, the two largest customers accounted for 43.7% and 28.4%, respectively.
- Other operating risks: Inventory write-downs were $0.24 million for the six months. The company had not obtained ownership documentation for Dalian buildings with a March 31 carrying value of $17.82 million; management expected to obtain the rights in June 2016. Further inventory write-downs could be required if market conditions deteriorated.
- Contingencies: A $1.21 million provision for historical registration-rights liquidated damages remained unpaid. A separate breach-of-contract matter was settled on December 30, 2015; the related Canadian recognition action was dismissed by consent on May 6, 2016.
- Controls and leadership: Management concluded disclosure controls were ineffective at March 31, 2016, citing weaknesses in accounting for key agreements and insufficient experienced U.S. GAAP personnel. Yunfei Li became CEO, Chairman, President, and Secretary on March 1, 2016, succeeding Xiangqian Li.
Most important facts for investors to verify
- Whether the company renewed or repaid loans maturing in June and July 2016, and secured additional financing without unacceptable dilution or terms.
- Whether the Dalian plant reached efficient utilization and improved gross margins, and whether projected capital spending and customer demand were realized.
- Whether customer concentration, receivable collection, and the large increase in trade payables created additional liquidity or credit risk.
- Whether building ownership documentation was obtained and the stated capital commitments to subsidiaries were met or deferred.
- Whether management remediated the material control weaknesses and whether subsequent filings continued to disclose ineffective controls.