CBAK Energy Technology, Inc. — Q3 2022 Form 10-Q
Period: Three and nine months ended September 30, 2022. Unaudited consolidated financial statements; amounts below are in U.S. dollars.
Business context and reporting period
CBAK manufactures high-power lithium-ion batteries for applications including uninterruptible power supplies (UPS) and light electric vehicles. Following its November 2021 acquisition of Hitrans, it also manufactures and sells lithium-battery cathode and precursor materials. Results therefore include a new materials segment, which materially expanded reported revenue.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $57.7 million | $9.6 million | $194.3 million | $24.9 million |
| Gross profit / margin | $3.5 million / 6.0% | $1.1 million / 11.8% | $14.3 million / 7.4% | $4.1 million / 16.4% |
| Operating loss | $1.5 million | $3.2 million | $2.7 million | $5.9 million |
| Consolidated net income (loss) | $(0.85) million | $20.0 million | $0.85 million | $52.4 million |
| Net income (loss) attributable to CBAK shareholders | $(290) | $20.0 million | $1.25 million | $52.3 million |
| Operating cash flow | Not separately stated | Not separately stated | $16.7 million | $(7.2) million |
Revenue increased 504% in Q3 and 681% year to date. Hitrans contributed $31.9 million of Q3 and $127.7 million of nine-month revenue. Battery revenue was led by UPS products: $24.7 million in Q3 and $64.7 million year to date. Despite higher gross profit dollars, gross margins fell, which management attributed to higher raw-material prices and the lower margins of battery-material sales.
Prior-period earnings included substantial noncash gains from changes in warrant fair value: $23.0 million in Q3 2021 and $57.2 million for the first nine months of 2021, versus $0.9 million and $4.7 million, respectively, in 2022. These gains largely explain why prior-year net income was much higher despite weaker operating results. 2022 also included a $2.1 million Q3 loss from dismantling Hitrans buildings; the nine-month MD&A cites $2.7 million of losses from building dismantlement and asset disposal.
Balance sheet, liquidity and capital
- At September 30, 2022, total assets were $251.2 million and total liabilities were $123.6 million. Current assets of $129.2 million exceeded current liabilities of $115.9 million by $13.3 million.
- Cash and cash equivalents were $4.0 million. A further $37.6 million of pledged deposits was restricted, bringing cash plus restricted cash to $41.6 million. Pledged deposits principally secure bills payable.
- Short-term bank loans were $17.6 million; other short-term loans were $3.5 million. Trade and bills payable were $70.5 million, including $38.3 million of bills payable. The filing reports $55.9 million borrowed across specified credit facilities and bill lines; figures reflect different debt categories and should not be treated as directly interchangeable.
- Trade and bills receivable fell to $21.9 million from $49.9 million at year-end 2021, while inventory rose to $52.7 million from $30.1 million. Operating cash flow was positive, but included significant working-capital movements, including a $29.0 million inventory cash outflow and a $24.4 million receivables-related cash inflow.
- Investing cash outflow was $9.9 million and financing cash inflow was $12.4 million for the nine months. Capital expenditures were $9.8 million; management estimated approximately $12 million for full-year 2022, principally for automated battery and light-electric-vehicle production lines.
- Accumulated deficit was $121.2 million. The company disclosed substantial doubt about its ability to continue as a going concern, citing prior recurring losses and significant short-term obligations. Management plans to improve profitability and seek borrowing and other financing, but provided no assurance that funding will be available on acceptable terms.
Outlook, risks and other material items
- Management said UPS battery sales continued to grow and described expansion of product lines and manufacturing capacity in Dalian, Nanjing and Zhejiang. It provided no specific revenue, earnings or margin guidance.
- Contracted capital commitments totaled $255.6 million, including $241.4 million of capital-injection commitments, $12.1 million for equipment and $2.1 million for building construction. These commitments are material relative to current liquidity.
- Customer concentration is significant: one customer represented 28.17% of Q3 revenue. For the first nine months, Zhengzhou BAK Battery, a related party, represented 26.80% of revenue. It also accounted for 53.59% of net accounts receivable at quarter-end. The company disclosed substantial related-party sales and purchases.
- Foreign-currency translation reduced nine-month comprehensive income by $15.6 million; comprehensive loss attributable to CBAK was $13.6 million. The filing identifies currency fluctuations as affecting results and cash.
- Disclosure controls and procedures were deemed ineffective at September 30, 2022. Management cited material weaknesses involving review and accounting of key agreements and insufficient U.S. GAAP/SEC-reporting expertise among accounting personnel. Remediation was ongoing, including plans to hire a permanent CFO and provide training.
- Contingencies include a construction dispute remanded for retrial, for which the company accrued approximately $0.9 million, and a supplier equipment agreement that could require a payment based on a $2.1 million purchase commitment if purchases are not made by the contractual deadline. The filing also reports no material change to previously disclosed risk factors.
Important facts for investors to verify
- Whether the company can refinance or repay near-term borrowings and obtain additional funding, given its going-concern warning, restricted deposits and large capital commitments.
- Whether Hitrans and battery operations can improve margins as input costs and product mix change, and whether reported growth translates into sustainable cash generation.
- Collection and credit risk for concentrated and related-party receivables, including the reported Zhengzhou BAK balances and receivables from former subsidiaries.
- Progress and outcomes in the disclosed litigation, supplier commitment and unresolved property-ownership certificates for certain Dalian buildings.
- Whether management remediates the ineffective disclosure controls and material weaknesses, and how warrant fair-value changes and foreign-exchange movements affect future reported earnings and equity.