CBAK Energy Technology, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. The unaudited report covers the three and six months ended June 30, 2017, compared with the same periods in 2016. The company changed its fiscal year-end from September 30 to December 31; the six-month periods shown are January–June. CBAK manufactures high-power lithium-ion batteries, with a focus on electric vehicles (EVs), light electric vehicles and uninterruptible power supplies. Its Dalian facility was still expanding and the company also used outside manufacturers.
Financial performance
| Metric (US$ millions, except per-share data) | Q2 2016 | Q2 2017 | Six months 2016 | Six months 2017 |
|---|---|---|---|---|
| Revenue | 1.36 | 6.34 | 4.56 | 10.06 |
| Gross loss | (0.55) | (1.49) | (0.65) | (1.91) |
| Operating loss | (2.88) | (3.63) | (4.81) | (5.70) |
| Net loss | (2.67) | (3.75) | (4.57) | (5.82) |
| Basic and diluted loss per share | (0.15) | (0.18) | (0.26) | (0.29) |
- Revenue rose 365% in Q2 and 120% for the six-month period year over year, primarily from EV battery sales. EVs represented about 92% of Q2 revenue and 90% of six-month revenue.
- Gross margins remained negative: approximately (23.5%) in Q2 2017 versus (40.6%) in Q2 2016; for the six months, approximately (19.0%) versus (14.3%). The six-month gross loss worsened despite higher sales. Management cited new-facility inefficiencies and staffing for anticipated demand.
- Q2 operating expenses declined to $2.14 million from $2.33 million, but higher gross loss contributed to a larger operating and net loss. Six-month operating expenses fell to $3.79 million from $4.16 million.
- Inventory write-downs were $0.85 million in Q2 and $1.00 million for the first half, versus $0.12 million and $0.21 million in the comparable 2016 periods. Management attributed the increase mainly to inventory aged over one year and warned further write-downs may be needed if market conditions deteriorate.
Cash flow, liquidity and financing
- For the six months, operating cash flow was negative $3.48 million, compared with positive $1.40 million in 2016; investing outflow was $7.05 million, mainly facility and equipment spending. Financing provided $12.08 million, including $9.61 million from a share issuance. Cash ended at $1.97 million, down from $3.13 million at June 30, 2016.
- At June 30, 2017, cash was $1.97 million, pledged deposits were $4.63 million and current assets were $40.54 million versus current liabilities of $56.78 million, a working-capital deficit of $16.24 million. Management and the filing identify substantial doubt about the company’s ability to continue as a going concern.
- Balance-sheet bank loans totaled $20.18 million, including $1.47 million short-term and $18.70 million long-term. Other short-term loans were $13.29 million; these include related-party advances, several unsecured and repayable on demand. Trade accounts and bills payable were $19.09 million, and payables to former subsidiaries were $7.23 million. Much of the company’s property and deposits were pledged for borrowing.
- The company issued 6,403,518 shares to eight investors for approximately $9.6 million at $1.50 per share, including shares purchased by the CEO. It plans to seek further bank and equity financing, but says financing availability is not assured.
Changes, outlook and risks
- EV revenue increased sharply following revised Chinese EV subsidy policies and new orders; light-EV and uninterruptible-power-supply revenue declined. One customer accounted for 87% of Q2 revenue and 86% of first-half revenue, and 90% of receivables at June 30, indicating substantial customer concentration.
- Management expects potential orders from the new-energy market, particularly electric cars, and believes growth could support a return to profitability. No quantified revenue or earnings guidance was provided. The company estimated 2017 capital expenditures of approximately $30.2 million for new plants and automated production lines.
- Management cited uncertainty over financing, working-capital needs, operating losses, Chinese subsidy and qualification policies, competition, and potential further inventory impairments. In 2016, subsidy investigations and policy uncertainty had reduced EV production and battery demand.
- A contractor lawsuit resulted in a June 30, 2017 trial-level ruling requiring CBAK Power to pay approximately $0.9 million plus about $0.1 million in other expenses. The company appealed on July 24 and intends to defend the case. Related bank deposits of approximately $1.24 million had been frozen; the filing says the freeze was for one year from September 2016.
- Disclosure controls and procedures were deemed ineffective as of June 30, 2017. Identified weaknesses included insufficient U.S. GAAP and SEC-reporting expertise and inadequate procedures for assessing accounting and disclosures for key agreements. Management described hiring and training remediation efforts, with no assurance they will be sufficient.
- Some completed Dalian buildings lacked ownership certificates; management said applications were pending and described delaying certificates while arranging additional secured borrowing. The filing also reports substantial tax-loss valuation allowances and a $6.61 million unrecognized tax benefit related to local-government subsidies.
Important facts for investors to verify
- Whether the company can fund operations, meet demand and capital commitments, and renew or replace credit facilities given the working-capital deficit and going-concern doubt.
- Whether EV sales can be sustained, production can reach positive gross margins, and customer concentration and receivables collection improve.
- The status and ultimate cost of the Shenzhen Huijie litigation, the frozen deposits, building title documentation and subsidy-related tax position.
- The share issuance details: the filing gives inconsistent CEO allocation figures of 746,018 and 764,018 shares in different sections. Verify the final allocation and shares outstanding.
- Whether internal-control remediation is completed and whether additional inventory write-downs or financing dilution are required.