China BAK Battery, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the three months ended December 31, 2013, the first quarter of fiscal 2014; comparative figures are for the three months ended December 31, 2012. The registrant was named China BAK Battery, Inc. in the filing. It manufactures lithium-ion batteries and, beginning this quarter, also reports property leasing and management revenue. The interim financial statements are unaudited.
Financial performance and condition
| Metric | Quarter ended Dec. 31, 2013 | Prior-year quarter |
|---|---|---|
| Revenue | $42.37 million | $63.73 million |
| Gross profit (loss) | $3.50 million; 8.3% margin | $(4.24) million; (6.6)% margin |
| Operating loss | $(1.88) million | $(17.94) million |
| Net loss | $(5.28) million | $(28.17) million |
| Loss per share, basic and diluted | $(0.42) | $(2.23) |
| Operating cash flow | $(4.77) million | $5.91 million |
| Investing cash flow | $(19.89) million | $(9.94) million |
| Financing cash flow | $20.49 million | $3.97 million |
- Battery manufacturing revenue fell 35.3% to $41.21 million; property leasing and management contributed $1.16 million. Total revenue declined 33.5%.
- At December 31, cash and cash equivalents were $9.98 million, while pledged deposits were $25.50 million. Current assets were $145.91 million versus current liabilities of $358.45 million, a working capital deficit of approximately $212.54 million.
- Short-term bank loans were $153.05 million. The company also reported $36.66 million of bills payable and $49.24 million of advances from unrelated parties within accrued expenses and other payables. Nearly all credit lines were utilized.
- Total liabilities were $392.01 million, total assets $343.37 million, and shareholders’ equity was negative $48.64 million. Accumulated deficit was $231.65 million.
- Net cash fell by $4.02 million during the quarter. Investing outflows included a $17.17 million increase in pledged deposits; financing cash flow included borrowing from unrelated parties.
Material changes versus the prior comparable period
- Gross results improved from a loss to a profit, largely as inventory write-downs declined from $19.28 million to $4.64 million and fewer reconditioned products were sold at a deep loss.
- Operating loss narrowed by $16.05 million. Operating expenses declined, including a $1.56 million recovery of doubtful accounts in 2013 versus a $6.20 million provision in 2012.
- Net loss improved by $22.88 million. The prior-year quarter included a $7.36 million loss related to a loan guarantee; no such loss was recorded in 2013. However, net finance costs rose to $3.89 million from $2.73 million, with management citing interest on third-party borrowing.
- Battery revenue weakness included declines in cylindrical cells (71.9%), lithium polymer cells (76.8%), and battery packs (23.2%). Management cited competition, reduced customer orders amid cash constraints, lower selling prices, and a strategic transition away from replacement-market sales.
- Reconditioned product sales were $19.18 million, compared with $14.23 million in the prior-year quarter; the product mix and inventory write-downs remained important to reported results.
Outlook, management commentary, risks, and unusual items
- Going concern: Management disclosed recurring losses, negative working capital, net liabilities, severe cash-flow deficiencies, and significant short-term obligations. The filing states that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Debt and asset restrictions: The company had defaulted on Bank of China loans due in August 2013. Shenzhen court orders had frozen properties in Shenzhen and Tianjin; the company reported repayment of the defaulted Bank of China loans on January 9, 2014 and release of the freeze on January 13, 2014. By February 10, it reported repayment of approximately $98.4 million of bank loans.
- Restructuring and financing: Management intended to sell BAK International and its subsidiaries and Tianjin properties, subject to negotiations and required approvals. By the filing date, it reported receiving approximately $61.1 million under a loan agreement with a potential buyer of BAK International, an additional $24.8 million from that lender, and approximately $19.7 million in loans from the potential Tianjin property buyer. These loans and guarantees are secured by company interests or assets and include a 20% annual interest rate on the $61.1 million loan. The proposed disposals were not reported as completed.
- Strategic plan: The company planned to move operating assets from Tianjin to Dalian and focus on high-power batteries for electric vehicles and other applications. Management expected government support and believed restructuring and disposal of lower-margin operations could reduce liabilities and restore profitability; these are forward-looking expectations, not assured outcomes.
- Spending and commitments: Management estimated fiscal 2014 capital expenditures of approximately $14.5 million. Contracted capital commitments totaled $31.71 million, including a $30 million capital commitment to Dalian BAK Power.
- Guarantees and contingencies: Maximum disclosed exposure under guarantees was approximately $31.38 million. A product-liability case sought $126,978 plus interest and fees; the company said it considered the claims without merit. Certain Shenzhen buildings lacked ownership certificates at quarter-end; the certificate for the Research and Development Test Centre was obtained in January 2014.
- Controls: Management concluded disclosure controls and procedures were not effective, citing weaknesses in review of key agreements and insufficient technically skilled accounting staff. Remediation plans included hiring a permanent CFO with U.S. GAAP and SEC reporting experience and training staff; completion was not assured.
- The filing provides no specific revenue or earnings guidance. It warns that forward-looking statements are subject to risks and may differ materially from actual results.
Most important facts for investors to verify
- Whether the proposed BAK International and Tianjin asset sales received required approvals, closed, and generated proceeds sufficient to meet near-term obligations.
- Repayment terms, collateral, guarantees, and maturity status of the high-cost third-party loans, and the company’s ability to refinance or repay debt coming due.
- Whether operating cash flow, customer orders, battery margins, inventory quality, and receivable collections improved after the quarter.
- Funding and completion of the Dalian relocation, the $30 million capital commitment, and the planned fiscal 2014 capital expenditures.
- Whether management remediated the disclosed material weaknesses and improved financial reporting controls.
- Potential exposure from the $31.38 million of guarantees, property-title matters, and the pending product-liability litigation.