CBAK Energy Technology, Inc. quarterly report, Q2 FY2021

CBAK Energy Technology, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021; unaudited. CBAK manufactures high-power lithium-ion batteries, with products serving UPS, electric vehicle and light electric vehicle markets. Financial amounts below are in U.S. dollars.

Key financial metrics

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Revenue	$5.89 million	$4.62 million	$15.31 million	$11.53 million
Gross profit / margin	$1.10 million / 18.6%	$0.09 million / 1.9%	$2.94 million / 19.2%	$0.29 million / 2.6%
Operating loss	$2.72 million	$0.91 million	$2.75 million	$2.89 million
Net income (loss)	$2.72 million	$(1.20) million	$32.33 million	$(3.55) million
Net cash from (used in) operations	Not stated for the quarter	Not stated for the quarter	$(2.42) million	$1.98 million

• Q2 diluted EPS was $0.02, versus a loss of $0.02; first-half diluted EPS was $0.37, versus a loss of $0.06.
• At June 30, cash and cash equivalents were $33.30 million and pledged deposits were $19.07 million. Together, cash and restricted cash totaled $52.37 million.
• Current assets were $93.41 million and current liabilities $72.78 million, a $20.63 million working-capital surplus. Current liabilities included a $33.47 million warrant liability; excluding it, the filing reports approximately $39.3 million of other current liabilities.
• The company reported no bank loans outstanding at June 30, but had $19.05 million of bank-acceptance bills payable, secured by an equivalent amount of pledged deposits, and $0.83 million of other short-term loans.
• Total assets were $192.17 million, total liabilities $90.34 million and total equity $101.84 million.

Changes and operating performance

• Q2 revenue rose 27% year over year; first-half revenue rose 33%. UPS battery sales were the main driver, increasing 29% in Q2 and 30% in the first half. UPS accounted for almost all revenue. First-half EV battery revenue declined 70% to $0.10 million.
• Gross margin improved substantially, which management attributed to productivity gains, cost control and production-line upgrades. However, operating losses persisted: Q2 operating loss widened as operating expenses increased 283% to $3.82 million.
• Q2 net income included a $5.75 million favorable, noncash change in warrant fair value. The first-half $34.18 million warrant gain was the principal reason for reported net income; it is not evidence of comparable operating profitability. The warrants were recorded as derivative liabilities because they are denominated in U.S. dollars while the company’s functional currency is RMB.
• First-half operating cash flow was negative despite reported net income, reflecting inventory growth and lower payables, partly offset by collections of receivables. Investing activities used $17.68 million, including $13.20 million for equipment and construction, a $3.09 million Hitrans deposit and $1.39 million for DJY. Financing activities provided $51.20 million, mainly from share issuance, partly offset by bank-loan repayments.
• The company raised approximately $70 million gross in February 2021 through an equity offering and warrant issuance; first-half cash proceeds from share issuance were $65.50 million. Issued common shares increased to 88.54 million at June 30 from 79.31 million at year-end.

Outlook, risks and unusual items

• Management expects demand for high-power lithium batteries, particularly in EV and UPS markets, to support future orders and a return to sustained profitability. This is forward-looking and is not quantified guidance. Estimated 2021 capital expenditures are approximately $20 million, principally for automatic manufacturing lines.
• Management says expansion in Dalian and Nanjing requires additional funding and plans to use borrowing and equity financing if needed; it cautions that financing is not assured. The company disclosed a prior-year working-capital deficit and an auditor’s going-concern explanatory paragraph, and states that recurring operating losses and funding needs raise substantial doubt about continued operations.
• At June 30, contractual obligations and commercial commitments totaled approximately $196.10 million, including $141.69 million of capital-injection commitments, $18.27 million for subsidiary acquisition, construction and equipment commitments, bills payable and lease obligations. The scale and timing of these commitments warrant attention relative to available, partly restricted cash.
• After quarter-end, CBAK Power reported acquiring 81.56% of Hitrans, subject to closing conditions, including Hitrans obtaining title to assets. The transaction involves a court deposit of approximately $20.28 million, cash consideration and loans; CBAK Power guarantees certain Hitrans repayment obligations. Related ownership interests had been frozen in litigation. Verify final closing, asset title, funding and repayment performance.
• The company invested $1.39 million for a 9.74% interest in DJY and recognized a $0.69 million impairment during the first half. The filing also describes numerous supplier-payment lawsuits and settlements; a major contractor dispute was remanded for retrial, and CBAK had accrued approximately $0.9 million for the underlying construction cost.
• Disclosure controls and procedures were deemed ineffective as of June 30, 2021. Management cited weaknesses in accounting for and disclosing key agreements and insufficient U.S. GAAP/SEC-reporting expertise among accounting staff; remediation was ongoing.

Important facts for investors to verify

• How much of reported earnings reflects recurring operations versus noncash warrant remeasurement, and whether operating margins and operating cash flow improve.
• Availability and restrictions on cash, the collateral supporting acceptance bills, and the company’s ability to meet its large commitments and expansion funding needs.
• Hitrans acquisition closing conditions, court-related asset freezes, the company’s loan and guarantee exposure, and whether Hitrans repays amounts on schedule.
• Customer and receivable concentration: two customers represented 58.32% of June 30 receivables; confirm collections and credit-loss exposure.
• Progress in remediating ineffective disclosure controls and resolving material litigation, including the remanded contractor case.