CBAK Energy Technology, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. The unaudited report covers the three and six months ended June 30, 2020, with comparisons to 2019. CBAK manufactures and sells high-power lithium batteries, including products for uninterruptible power supplies (UPS), electric vehicles (EVs), and light electric vehicles. The company is based in China and reports in U.S. dollars.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2020: $4.62 million; 2019: $4.27 million | 2020: $11.53 million; 2019: $9.44 million |
| Gross profit (loss) | 2020: $0.09 million; 2019: $(0.22) million | 2020: $0.29 million; 2019: $(0.45) million |
| Operating loss | 2020: $(0.91) million; 2019: $(2.07) million | 2020: $(2.89) million; 2019: $(4.60) million |
| Net loss | 2020: $(1.20) million; 2019: $(2.33) million | 2020: $(3.55) million; 2019: $(5.14) million |
| Basic and diluted loss per share | 2020: $(0.02); 2019: $(0.07) | 2020: $(0.06); 2019: $(0.16) |
- Gross margin improved to 1.9% for Q2 and 2.5% for the first half, versus gross losses in the comparable 2019 periods.
- UPS battery revenue rose 14% in Q2 and 42% in the first half. EV battery revenue fell 63% in Q2 and 78% in the first half.
- Operating expenses declined, partly reflecting lower payroll and social insurance costs, including temporary Chinese government social-security relief. First-half finance expense increased 25% to $0.81 million, which management attributed to higher average loan balances.
- First-half operating cash flow was positive $1.98 million, compared with cash used of $4.89 million in 2019. The 2020 inflow was supported by working-capital movements, including lower inventory and increased amounts payable to former subsidiaries, and was partly offset by higher receivables.
- First-half investing cash outflow was $0.78 million; financing cash outflow was $2.08 million. Cash, cash equivalents and restricted cash totaled $6.17 million at period-end, but unrestricted cash and cash equivalents were only $155,809; pledged deposits were $6.02 million.
Balance sheet, debt and liquidity
- At June 30, 2020, current assets were $27.50 million and current liabilities were $64.21 million, a working-capital deficit of $36.71 million. Total assets were $92.41 million, total liabilities $77.28 million, and total equity $15.12 million. Accumulated deficit was $179.73 million.
- Bank borrowings totaled approximately $25.56 million, including $19.91 million classified as current maturities of long-term loans. Other short-term loans were $5.14 million. Notes payable were $2.44 million net of discount; the contractual-obligations table reports $2.72 million. Much of the debt and other listed obligations is due within one year.
- The company reported $6.8 million of unused committed banking facilities. It disclosed $84.60 million in capital commitments, including planned capital injections to subsidiaries, and total contractual obligations and commercial commitments of $126.52 million. The obligations table classifies the total as due within one year.
- Outstanding shares increased during the first half, including shares issued to settle debt and shares issued to investors. Common shares issued rose from 53.22 million at year-end 2019 to 63.80 million at June 30, 2020.
Changes, outlook and risks
- Revenue growth was driven by UPS batteries, while EV battery sales contracted amid reduced Chinese government subsidies for new-energy vehicles. Management said it would prioritize the UPS market, temporarily reduce EV-focused R&D investment and cut EV battery production.
- Management reported that COVID-19 disrupted operations, including a first-quarter suspension, but said its adverse impact on results had been limited to date. The filing cautions that the pandemic’s future effects remain uncertain.
- Management plans approximately $4.0 million of 2020 capital expenditures, principally for automatic manufacturing lines, and is expanding product lines and capacity at the Dalian plant. A June 2020 framework agreement with Gaochun EDZ contemplated projects targeting 8 GWh of production capacity; the filing describes this as an intended development, not completed capacity.
- The company intends to renew loans and seek additional bank borrowing and equity financing, but states there is no assurance financing will be available. Management believes potential demand for high-power lithium batteries could support a return to profitability; no quantified earnings or revenue guidance is provided.
- The filing says recurring losses, short-term debt and the working-capital deficit raise substantial doubt about the company’s ability to continue as a going concern. The financial statements contain no adjustments for the possible effects of that uncertainty.
- Customer concentration is significant: Customer B supplied 55.9% of Q2 revenue, while Customer D supplied 35.2%. In the first half, Customers B, E and D represented 40.6%, 32.7% and 17.4% of revenue, respectively.
- Several supplier-payment and contract disputes were disclosed. Notable matters include a fully provided $2.47 million receivable from Anyuan Bus that remains in enforcement, and a July 2020 settlement with Dongguan Shanshan for staged payments. Some other proceedings were unresolved at the reporting date; the filing says related recorded costs were accrued where applicable.
- Management concluded disclosure controls and procedures were ineffective as of June 30, 2020. Previously identified material weaknesses involved review of accounting and disclosure for key agreements and insufficient skilled U.S. GAAP accounting personnel. Remediation was in progress, including seeking a permanent CFO and providing training.
- Other notable items include unissued ownership certificates for Dalian buildings with a June 30 carrying value of $23.11 million, and an unrecognized tax benefit balance of $6.94 million. The filing reports no material changes to the risk factors in the 2019 Form 10-K.
Important facts for investors to verify
- Near-term liquidity and refinancing capacity, including actual availability of the $6.8 million in unused facilities and the timing and terms of debt maturities.
- Whether the company can fund the reported commitments, especially the $82.57 million of subsidiary capital injections included in capital commitments, and how these commitments reconcile to the $126.52 million contractual-obligations table.
- Cash conversion and collection of receivables, including the impact of customer concentration, the allowance for doubtful accounts, and the recovery of the Anyuan Bus balance.
- Execution and funding of the Dalian expansion and the proposed Gaochun projects, including whether intended production capacity and customer demand translate into profitable orders.
- Share dilution from debt conversions and future equity financing, and progress in remediating the disclosed control weaknesses.