CBAK Energy Technology, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The company changed its fiscal year-end from September 30 to December 31; the prior annual comparison is the year ended September 30, 2016, and a separate transition period covers the three months ended December 31, 2016. The annual comparison therefore covers different fiscal-year windows. Figures below are in U.S. dollars.
Business context
CBAK develops, manufactures and sells high-power lithium-ion batteries, primarily for electric vehicles (EVs), as well as light electric vehicles and uninterruptible power supplies (UPS). Operations are principally in China. Dalian facilities began partial commercial production in 2015, while the company continued outsourcing some customer orders; it purchased approximately $27.7 million of batteries from Shenzhen BAK in 2017.
Key financial results and liquidity
| Metric | FY2017 | Prior annual period |
|---|---|---|
| Revenue | $58.4 million | $10.4 million |
| Gross loss (gross margin) | $10.2 million loss (−17.5%) | $1.7 million loss (−16.7%) |
| Operating loss | $21.2 million | $12.1 million |
| Net loss | $21.5 million | $12.7 million |
| Basic and diluted loss per share | $0.92 | $0.71 |
| Cash from operating activities | $6.2 million provided | $13.9 million used |
| Cash used in investing activities | $16.4 million | $9.1 million |
| Cash from financing activities | $11.4 million | $18.5 million |
Revenue rose 463%, chiefly as EV battery sales increased to $55.0 million, or 94.2% of revenue. The company remained loss-making: cost of revenue exceeded sales, and operating loss widened. Cost of revenue included $5.8 million of obsolete-inventory write-downs; operating expenses included a $1.0 million property and equipment impairment charge. Warranty provision expense also increased substantially, contributing to higher sales and marketing costs.
At December 31, 2017, cash and cash equivalents were $1.6 million; current assets were $85.2 million and current liabilities $116.9 million, a working-capital deficiency of $31.7 million. Total assets were $153.1 million, total liabilities $150.9 million, shareholders’ equity $2.2 million, and accumulated deficit $163.5 million. Cash from operations was supported by a $47.2 million increase in trade accounts and bills payable and a $19.0 million increase in payables to former subsidiaries, partly offset by a $53.6 million increase in trade accounts and bills receivable and the net loss.
Bank borrowings included $19.5 million of long-term loans, principally bearing fixed interest at 7.2%. Other short-term loans were $14.6 million. Bills payable were $35.8 million and payables to former subsidiaries were $22.3 million, with these and other obligations contributing to substantial near-term funding needs. The company reported $53.5 million drawn across listed credit facilities and lines of credit, including bank acceptances and letters of credit; this figure should not be added mechanically to balance-sheet liabilities. Cash pledged as collateral totaled $9.1 million. Unused committed banking facilities were $5.5 million.
Material changes and outlook
- EV battery revenue increased sharply after Chinese EV subsidy rules were announced at the end of 2016 and customer orders recovered in 2017. Light-EV and UPS revenue declined year over year.
- Top five customers represented approximately 91.3% of FY2017 revenue. One customer accounted for 38.15% of revenue and 62.08% of year-end accounts receivable.
- Capital expenditures were approximately $12.0 million in 2017. Management estimated 2018 capital expenditures of about $28.1 million for plant, production-line and warehouse work.
- Management expected a new 260Ah prismatic-battery production line, with stated capacity of about 5,000 units per day, to enter production by September 2018; elsewhere the filing estimates completion and commercial operations by year-end 2018.
- Management cited expected growth in China’s new-energy vehicle market and anticipated a return to profitability, but provided no quantified revenue or earnings guidance. The filing notes that 2018 EV subsidy standards were reduced from 2017 levels.
Risks, contingencies and unusual items
- The auditor issued an unmodified opinion but included a going-concern explanatory paragraph: recurring losses, working-capital deficiency and short-term obligations raise substantial doubt about the company’s ability to continue as a going concern. Management plans to seek further borrowing and equity financing, with no assurance of success.
- Liquidity and execution risks include customer collections, reliance on suppliers and outsourced production, and construction and ramp-up of Dalian facilities. The company had $57.5 million of net trade accounts and bills receivable at year-end, while a major customer’s receivable concentration was high.
- Shenzhen Huijie contractor litigation remained unresolved: an earlier judgment was rescinded and remanded for retrial, and a related deposit freeze was extended through August 2018. A further fire-control contract claim of about $36,000 was accrued. Separately, CBAK obtained a judgment for approximately $2.7 million against customer Anyuan Bus; enforcement was underway, but the receivable had been fully provided for.
- Management reported ineffective disclosure controls and material weaknesses in financial reporting controls, including inadequate accounting policies for key agreements and insufficient technically skilled U.S. GAAP accounting staff.
- Additional risks include dependence on a small number of customers, raw-material price volatility, reduced government subsidies, product warranties and safety, and the company’s limited proprietary patent base. The filing also says the Dalian buildings’ ownership certificates had not yet been obtained.
- The company reported a $7.5 million long-term uncertain tax position related to local-government subsidies. It also disclosed that the impact of U.S. tax reform was still being evaluated.
Important facts for investors to verify
- Whether the company can refinance or otherwise meet its near-term obligations, and how much reported cash and collateral are available for general operations.
- Whether large customer receivables are collected, particularly the highly concentrated year-end balances, and whether Anyuan Bus judgment proceeds are recovered.
- Progress, cost and timing of the Dalian construction and new production line, including building-title certificates and the stated 2018 capital-spending plan.
- Whether gross margins improve after the large inventory write-downs and warranty accruals, and whether production can shift away from outsourced supply.
- Remediation of the reported control weaknesses, developments in the Shenzhen Huijie litigation, and the status of the uncertain tax position.