Business context and reporting period
This is China BAK Battery, Inc.’s Form 10-K for the fiscal year ended September 30, 2014—not a standalone fourth-quarter report. The company reported results through June 30 for BAK International and its subsidiaries; following foreclosure that date, it lost ownership of those businesses and now operates through Dalian-focused subsidiaries. The planned business is high-power lithium-ion batteries, with Dalian manufacturing expected to begin commercial operations in the first quarter of calendar 2015. Until then, production was outsourced, principally to former subsidiary BAK Tianjin.
Financial performance and position
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $123.0 million | $185.6 million |
| Gross profit (loss) / margin | $9.6 million / 7.8% | ($16.6 million) / (9.0%) |
| Operating loss | ($10.6 million) | ($100.7 million) |
| Continuing-operations net loss | ($26.7 million) | ($116.4 million) |
| Net profit (loss), including discontinued operations | $37.8 million | ($116.0 million) |
| Net cash from (used in) operations | ($29.3 million) | $23.6 million |
Revenue fell 33.7%, primarily because of the disposal of BAK International and its subsidiaries. FY2014 net profit was not driven by continuing operations: it included a $61.3 million gain on disposal, recorded in discontinued operations, partly reflecting appreciation in the Shenzhen R&D Centre’s market value. The company also reported a $39.0 million release of foreign-currency translation adjustment on disposal in other comprehensive income. Finance costs rose 45.8% to $16.8 million; the company cited high-interest borrowing, including loans from Mr. Wang at 20% annually.
At September 30, 2014, cash was $1.0 million, current assets $12.7 million, and current liabilities $48.3 million, a $35.6 million working-capital deficit. Total liabilities were $48.3 million versus total assets of $44.0 million, leaving a $4.3 million shareholders’ deficit. Accumulated deficit was $141.8 million. The balance sheet listed $4.9 million of short-term bank loans and $5.6 million of other short-term loans; significant current payables and accrued obligations remained. The auditor’s report included a going-concern explanatory paragraph citing net liabilities, working-capital deficiency, recurring losses and near-term debt obligations.
Capital expenditures were $19.0 million in FY2014, largely for Dalian land rights and construction; management estimated FY2015 capital expenditures of approximately $14.8 million. Government support included a $24.4 million relocation subsidy received before year-end and a further $7.5 million land-use-rights subsidy received in October 2014.
Material changes versus the prior comparable period
- Revenue declined 33.7%, while gross results improved from a $16.6 million loss to $9.6 million profit. Management attributed much of the improvement to lower inventory write-downs ($8.8 million versus $59.6 million) and fewer loss-making reconditioned-product sales.
- Operating loss narrowed substantially, to $10.6 million from $100.7 million, including the absence of the prior-year $62.5 million impairment charge.
- Cash from operations swung from a $23.6 million inflow to a $29.3 million outflow, which management attributed principally to increased accounts receivable. Year-end cash fell from $14.0 million to $1.0 million.
- The June foreclosure transferred ownership of BAK International and its operating subsidiaries to a third party. In connection with $83.8 million of defaulted loans, the lender foreclosed on the pledged equity; the company and BAK International were released from their guarantees, and $8.3 million of accrued interest was waived. The disposal materially changed the company’s assets, liabilities, revenue base and operating model.
Outlook, risks, contingencies and unusual items
Management expected Dalian construction to finish in January 2015, trial production to follow, and commercial operations to start by the end of March 2015. It anticipated transferring BAK Tianjin’s operating assets, staff, technology and customers and targeting demand for EVs, light electric vehicles and other high-power applications. These plans depend on timely construction, financing, successful production ramp-up, and continued supply and customer relationships. The filing gives no quantified revenue or earnings guidance.
Management planned to renew the $4.9 million Bank of Dandong loan at its August 2015 maturity and seek additional local-bank financing, but stated that financing was not assured. The auditor and management identified substantial going-concern uncertainty. Other key risks include reliance on outsourcing to BAK Tianjin before Dalian opens, a concentrated customer base (top five customers represented 40.8% of FY2014 revenue), competitive pricing and technology changes, raw-material costs, and dependence on intellectual property licensed from Shenzhen BAK at no charge for five years from June 30, 2014.
Management concluded disclosure controls were ineffective as of September 30, 2014 because of a material weakness: inadequate policies for accounting for and disclosing key agreements and insufficient technically skilled accounting staff. Remediation efforts included hiring a permanent CFO with U.S. GAAP and SEC-reporting experience and training finance personnel; completion was not assured.
Legal matters included a product-liability case settled and dismissed with prejudice in September 2014, with the plaintiff agreeing to indemnify the company for related future claims. A separate breach-of-contract matter resulted in default judgments totaling approximately $561,000, including additional attorneys’ fees; BAK International agreed to indemnify the company, although its ability to pay is not established in the filing.
Most important facts for investors to verify
- Whether Dalian construction, equipment transfer and commercial production occurred on schedule, and whether the facility reached viable output and margins.
- Availability and terms of refinancing and additional funding, and the company’s subsequent cash, working-capital and debt position.
- Whether receivables from former subsidiaries and the indemnity for the default judgment were collected or otherwise honored.
- Whether the $61.3 million disposal gain and FY2014 reported profit are clearly distinguished from ongoing operating performance in assessing the business.
- Whether the material weakness was remediated, and whether subsequent filings report effective disclosure and financial-reporting controls.