CBAK Energy Technology, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company manufactures lithium-ion batteries and, through Hitrans, produces battery cathode materials and precursors. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and liquidity
- Revenue: $42.4 million, down 47% from $80.2 million a year earlier. Battery revenue rose to $29.6 million from $15.0 million, led by UPS batteries ($25.8 million). Hitrans materials revenue fell to $12.8 million from $65.2 million, which management attributed largely to declining raw-material prices and resulting pricing pressure.
- Profitability: Gross profit was $2.9 million, versus $5.3 million; gross margin improved slightly to 6.9% from 6.6%, which management attributed to battery-segment cost control. Operating loss widened to $2.9 million from $1.3 million. Net loss was $2.2 million, compared with net income of $0.7 million; loss attributable to CBAK shareholders was $1.4 million. Diluted loss per share was $0.02, versus income per share of $0.01.
- Cash flow: Operating cash flow was positive $9.5 million, compared with $5.1 million, supported substantially by a $9.9 million increase in trade and bills payable and a $3.7 million decrease in receivables from a former subsidiary. Investing cash outflow was $7.2 million, mainly capital spending; financing cash inflow was $3.2 million. Cash, cash equivalents and restricted cash totaled $43.1 million at quarter-end.
- Liquidity: Current assets were $130.0 million and current liabilities $121.6 million, giving working capital of $8.4 million. Balance-sheet cash and cash equivalents were $7.5 million; a further $35.6 million was pledged deposits, so the reported cash-flow total includes restricted funds.
- Debt and obligations: Short-term bank borrowings were $18.6 million and other short-term loans $0.6 million. Trade and bills payable were $77.8 million. Management also reports $60.7 million drawn across credit facilities and other lines; this facility presentation includes credit/bill arrangements and should not be treated as equivalent to balance-sheet bank borrowings without reconciliation. Significant short-term maturities and recurring losses raise substantial doubt about the company’s ability to continue as a going concern.
- Other metrics: Inventory was $50.8 million, including a $1.0 million quarterly inventory write-down. Capital expenditures were $7.2 million. Contracted capital commitments totaled $264.6 million, including $236.4 million of capital injections.
Material changes versus Q1 2022
- Revenue contraction was concentrated in Hitrans: cathode-material sales declined 63% and precursor sales 94%. Battery sales increased 97%, including growth in UPS, light-electric-vehicle and electric-vehicle applications.
- Operating expenses declined 13% to $5.8 million, but the reduction did not offset lower gross profit. G&A rose 11%, primarily from higher Nanjing employee costs.
- The $1.6 million gain from warrant fair-value changes in Q1 2022 fell to $0.1 million in Q1 2023, contributing to the year-over-year shift to a net loss.
- Cash from operations increased, but was strongly influenced by working-capital movements, particularly higher payables. Capital spending increased from $2.7 million to $7.2 million.
Outlook, risks and unusual items
- Management estimated 2023 capital expenditures of approximately $80 million, primarily for new facilities, product lines and battery-module packing lines. It said expansion requires additional funding and plans to renew loans and seek bank borrowing and/or equity financing; availability and acceptable terms are not assured.
- The Nanjing expansion is described as targeting 20 GWh when fully operational. The filing says Phase I currently has 2 GWh capacity and that infrastructure for an initial Phase II area is anticipated to be completed in Q3 2023; it also states an expected start of operations in Q4 2023, without making the phase reference clear.
- Going-concern doubt reflects recurring losses, accumulated deficit of $133.3 million and significant short-term obligations. Management’s plans include improving profitability and obtaining additional financing, but success is uncertain.
- On March 10, 2023, CBAK Power agreed to transfer its 67.33% registered interest in Hitrans to Nanjing BFD. Local registration remained in process as of the report date; following completion, Nanjing BFD is expected to control Hitrans. The filing does not clearly state the accounting or financial-statement impact expected from the transfer.
- Customer and counterparty concentration is notable: Zhengzhou BAK accounted for 22.0% of quarterly revenue and 61.6% of net trade receivables at March 31, 2023. Related-party transactions and balances are also disclosed.
- Contingencies include a contractor dispute for which the company accrued approximately $0.9 million, and an equipment-purchase agreement requiring at least $2.4 million of purchases by December 31, 2023 or potential payment of a 15% shortfall amount. The company also reports litigation to recover approximately $0.5 million from an acquisition intermediary.
- Management concluded disclosure controls and procedures were ineffective as of March 31, 2023. Cited material weaknesses include inadequate procedures for accounting for key agreements and insufficient experienced U.S. GAAP accounting staff. Remediation is underway, with no assurance it will be completed successfully.
- Management said COVID-related restrictions had affected factory capacity during 2022; future effects of the pandemic or other disruptions remain uncertain. No specific earnings or revenue guidance was provided.
Investor verification priorities
- Reconcile the $43.1 million cash-flow figure with $7.5 million cash and $35.6 million pledged deposits, and assess funds actually available for operations.
- Review near-term maturities and repayment capacity, including bills payable, facility drawdowns, collateral requirements and the $3.6 million of unused committed bank facilities.
- Evaluate whether cash generation is sustainable given its reliance on increases in payables, and how the planned $80 million of 2023 capital spending and $264.6 million of commitments will be funded.
- Track Hitrans transfer registration, control and consolidation treatment, and the operating impact of Hitrans’ sharp revenue decline.
- Monitor customer concentration, collection of related-party receivables, the disclosed legal matters and progress remediating ineffective disclosure controls.