CBAK Energy Technology, Inc. (then China BAK Battery, Inc.) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended June 30, 2016. The interim financial statements are unaudited. The company manufactures high-power lithium-ion batteries, with its Dalian facility beginning partial commercial operations in July 2015; it targets electric vehicles (EVs), light electric vehicles (LEVs), and uninterruptible power supplies (UPS).
Financial performance and position
| Metric | Three months ended June 30, 2016 | Nine months ended June 30, 2016 |
|---|---|---|
| Revenue | $1.36 million, down 44.5% year over year | $10.06 million, up 17.0% |
| Gross profit (loss) and margin | $(0.55) million; (40.6)% | $(0.81) million; (8.1)% |
| Operating loss | $(2.88) million | $(6.92) million |
| Net income (loss) | $(2.67) million, versus $(0.95) million | $(6.70) million, versus $17.50 million profit |
| Basic and diluted EPS | $(0.15) | $(0.39) |
Revenue mix: Nine-month EV battery revenue was $6.50 million and LEV revenue $0.56 million, both new versus the prior-year period; UPS revenue fell 65% to $3.01 million. Six customers each generated at least 10% of third-quarter revenue. For the nine-month period, two customers represented 37.5% and 24.5% of revenue.
Cash flow: Nine-month operating cash flow was $0.06 million, compared with $(6.61) million a year earlier. The company attributed the 2016 inflow largely to higher trade payables and amounts payable to former subsidiaries, partly offset by increased inventory. Investing cash flow was $(12.22) million, primarily for Dalian construction and equipment; financing cash flow was $8.82 million. Cash declined $3.64 million to $3.13 million.
Liquidity, debt and balance sheet: At June 30, cash was $3.13 million; current assets were $26.49 million and current liabilities $48.11 million, a working-capital deficit of $21.62 million. Total liabilities were $67.43 million and shareholders’ equity $15.11 million. Bank loans totaled $13.39 million, including $12.71 million long-term; other short-term loans were $7.49 million. Bank facilities were secured by company assets and supported by personal and former-subsidiary guarantees. Management and the auditor’s disclosed financial statements raise substantial doubt about the company’s ability to continue as a going concern.
Material changes versus comparable periods
- Quarterly revenue and gross performance weakened: the company shifted focus toward EV batteries, while UPS sales fell; new Dalian production lines and staffing were operating inefficiently.
- Nine-month revenue increased, but the company moved from a $17.50 million profit to a $6.70 million loss. The comparison is significantly affected by $23.20 million of government grant income recognized in the prior-year period and none in 2016, as well as prior-year discontinued-operations income.
- Operating expenses rose to $6.11 million for nine months, including higher R&D, sales and marketing, and general and administrative costs, plus $0.63 million of doubtful-account provision. Inventory write-downs were $0.36 million.
- Inventories rose from $3.06 million at September 30, 2015 to $10.97 million at June 30, 2016; construction in progress increased from $13.04 million to $27.28 million.
Outlook, risks, contingencies and unusual items
- Management expected revenue to improve after anticipated Chinese EV subsidy-policy announcements in the second half of calendar 2016. It reported customer cooperative agreements for sales totaling more than RMB600 million, but stated customers had delayed orders pending the policy. These agreements are not reported as booked revenue or firm orders.
- The company was seeking MIIT certification under China’s power-battery industry standards. It had obtained several required certificates, expected to submit its application by the end of August 2016, and acknowledged certification was not assured. Failure or delay could impair EV sales and access to subsidy-linked demand.
- Management planned further borrowing and equity financing to fund working capital and expansion; financing availability was not assured. It estimated capital expenditures of approximately $7.5 million for the remainder of fiscal 2016 and $17.2 million for fiscal 2017. Contractual obligations and commitments totaled $50.85 million, including capital contributions, construction commitments, and debt-related payments.
- After quarter-end, the company reported a $5.52 million common-stock issuance to two investors, completed August 17, 2016, and additional bank facilities and borrowing from Bank of Dalian. The filing reports 19,545,468 shares outstanding on August 18, versus 17,287,994 at June 30.
- A contractor sued Dalian BAK Power on July 7, 2016, seeking $1.27 million, including approximately $0.90 million of construction costs already accrued at June 30; management disputed the additional interest and compensation claims. The earlier Ruth litigation was settled and the Canadian recognition action dismissed.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2016. Management cited weaknesses in accounting for and disclosing key agreements and insufficient U.S. GAAP/SEC-reporting expertise among accounting staff.
Most important facts for investors to verify
- Whether the company obtained MIIT certification and whether the anticipated subsidy policy translated into customer orders, revenue, and cash receipts.
- Whether Dalian production achieved better utilization and margins, and whether elevated inventory is saleable without further write-downs.
- How the company funded its working-capital deficit and expansion, including the terms, guarantees, collateral, maturities, and dilution from subsequent financing.
- Whether collections from concentrated customers and former subsidiaries support reported receivables and near-term liquidity.
- The outcome and final cost of the contractor lawsuit, and progress in remediating the disclosed control weaknesses.
- The filing contains an apparent date inconsistency for an additional investor advance, stating “July 8, 2018” in one passage; verify the correct date against subsequent filings.