CBAK Energy Technology, Inc. (then China BAK Battery, Inc.) — Form 10-Q
Reporting period: Fiscal first quarter ended December 31, 2015; unaudited results compared with the three months ended December 31, 2014. Amounts are in U.S. dollars.
Business context
The company manufactures and sells high-power lithium-ion batteries, principally for electric vehicles (EVs), light electric vehicles, and uninterruptible power supplies (UPS). Its Dalian facilities began partial commercial production in July 2015. While production capacity ramps up, the company continues to outsource some manufacturing to former subsidiary BAK Tianjin. The filing describes a business materially reshaped following the 2014 disposal of BAK International and its subsidiaries.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Revenue | $5.50 million | $3.08 million |
| Gross profit (loss) | $(0.16) million | $0.41 million |
| Gross margin | (2.9)% | 13.2% |
| Operating expenses | $1.95 million | $0.55 million |
| Operating loss | $(2.11) million | $(0.15) million |
| Net income (loss) | $(2.13) million | $17.39 million |
| Basic and diluted earnings (loss) per share | $(0.12) | $1.37 |
| Net cash used in operating activities | $1.33 million | $0.57 million |
| Net cash used in investing activities | $5.20 million | Net cash provided: $4.06 million |
Revenue rose 78.7%, led by $3.66 million of EV battery sales, which began in the quarter, and $0.09 million of light-EV sales. UPS revenue declined 43.4% to $1.74 million, mainly due to a lower average selling price. Cost of revenue grew faster than sales, and the company attributed the gross loss to start-up inefficiencies at its new Dalian facility. Q1 FY2016 cost of revenue also included a $142,125 inventory write-down. Research and development expense increased to $748,000, sales and marketing expense to $170,000, and general and administrative expense to $1.03 million, reflecting the launch and expansion of Dalian operations.
The prior-year quarter’s $17.39 million profit included $23.38 million of government grant income related to relocation and facility construction; there was no comparable grant income in Q1 FY2016. The prior-year result is therefore not a like-for-like indicator of operating performance.
Liquidity, debt, and balance sheet
- At December 31, 2015, cash and cash equivalents were $80,711, compared with $6.76 million at September 30, 2015. Current assets were $20.01 million and current liabilities $37.90 million, producing a $17.89 million working-capital deficiency.
- Total liabilities were $44.86 million and shareholders’ equity $19.42 million. Short-term bank loans were $12.32 million; other short-term loans were $183,000. Bank loans bore fixed interest of 7.84% and were due in June 2016. The company also reported $3.74 million of bills payable.
- Operating cash use was $1.33 million. Investing cash use was $5.20 million, mainly $4.60 million of Dalian construction and equipment spending and increased pledged deposits. Cash fell by $6.68 million during the quarter. The company reported no financing cash flow in the period.
- Cash generation and liquidity were also affected by a $6.2 million advance to BAK Tianjin to source battery cells. At quarter-end, $5.18 million was recorded as receivable/prepayment; the company reported receiving approximately $3.1 million of cells by quarter-end and a subsequent $4.0 million cash refund.
- Bank facilities were secured by company assets and guaranteed by former subsidiary Shenzhen BAK, CEO Xiangqian Li, and his wife. The company reported only $0.8 million of unused committed facilities.
Outlook, risks, and unusual items
- Management stated that the working-capital deficit, recurring losses, and short-term debt obligations raise substantial doubt about the company’s ability to continue as a going concern. Management planned to renew maturing loans and seek additional bank borrowing and equity financing, but gave no assurance financing would be available.
- Management cited expected growth in China’s new-energy market, particularly electric cars, and believed the company could return to profitability. No specific revenue or earnings guidance was provided.
- Management estimated capital expenditures of approximately $32.6 million for the remainder of fiscal 2016 to complete plants and expand automated manufacturing lines. Contracted capital commitments at quarter-end totaled $17.40 million, including $15.55 million of required capital contributions to subsidiaries.
- Customer concentration was significant: three customers each exceeded 10% of quarterly revenue, with the largest representing 44.29%. These three customers together accounted for approximately 83% of revenue.
- The filing reports a $561,324 default judgment in a Texas contract lawsuit, inclusive of the first judgment and additional attorneys’ fees. BAK International agreed to indemnify the company for related losses and expenses; the filing does not establish that the indemnity will be collectible.
- Management concluded disclosure controls and procedures were ineffective at December 31, 2015. Identified material weaknesses concerned accounting and disclosure review of key agreements and a shortage of appropriately skilled U.S. GAAP accounting personnel. Remediation was underway, with no assurance it would be completed successfully.
- The company had not obtained ownership certificates for Dalian facility buildings with a carrying value of approximately $17.8 million at quarter-end; management expected to obtain the rights by March 2016.
Most important facts for investors to verify
- Whether the company can refinance or repay loans due in 2016 and obtain enough additional liquidity to fund operations and planned construction.
- Whether Dalian production can improve utilization and margins after the reported start-up losses, and whether the planned capital spending can be financed.
- Whether customer concentration and dependence on BAK Tianjin for outsourced production and sourcing create material supply, collection, or counterparty risks.
- Whether the BAK Tianjin advance and subsequent refund were fully settled, and whether the former-subsidiary indemnity for the lawsuit is enforceable and recoverable.
- Progress in remediating the disclosed material weaknesses and obtaining ownership rights for the Dalian buildings.