Business context and reporting period
China BAK Battery, Inc. (the filing issuer; now associated with CBAK Energy Technology, Inc.) filed this unaudited Form 10-Q for its fiscal quarter ended March 31, 2013, and the six months then ended. The company manufactures and sells lithium-ion batteries, principally from operations in China. It was shifting away from replacement-market prismatic cells toward battery packs, cylindrical cells, lithium-polymer cells, and high-power batteries. Financial amounts below are U.S. dollars.
Financial performance and position
| Metric | Three months ended March 31, 2013 | Six months ended March 31, 2013 |
|---|---|---|
| Revenue | $44.1 million | $107.8 million |
| Gross profit (loss) | $(3.6) million; gross margin (8.1%) | $(7.8) million; gross margin (7.2%) |
| Operating loss | $(19.6) million | $(34.7) million |
| Net loss | $(22.6) million; $(1.79) per share | $(47.9) million; $(3.79) per share |
| Operating cash flow | Not presented separately | $19.9 million provided |
| Investing cash flow | Not presented separately | $(30.3) million |
| Financing cash flow | Not presented separately | $8.3 million provided |
- For the six-month period, revenue rose 3.1% year over year, but cost of revenue rose 22.5%; the company moved from gross profit of $10.2 million to a gross loss of $7.8 million.
- At March 31, cash and cash equivalents were $7.2 million and pledged deposits were $9.0 million. Current assets were $138.5 million versus current liabilities of $330.6 million, a working-capital deficit of about $192.1 million.
- Short-term bank loans were $162.8 million; long-term bank loans were $15.9 million, with $6.4 million of current maturities included in short-term loans. Other long-term loans were $15.9 million. Accounts and bills payable totaled $136.5 million.
- Total liabilities were $392.7 million against total assets of $418.2 million. Shareholders’ equity fell to $25.5 million from $71.8 million at September 30, 2012, largely reflecting the six-month net loss.
Material changes versus comparable periods
- Quarterly revenue increased 34.4%, while quarterly net loss widened 44.8% from $15.6 million. Gross loss narrowed modestly from $3.9 million, but operating loss increased from $14.6 million.
- Six-month revenue growth was modest, while gross and operating results deteriorated substantially. Management attributed pressure to lower aluminum-case cell sales, competitive pricing, and clearance of reconditioned products.
- Six-month inventory write-downs were $25.8 million, compared with $2.0 million in the prior-year period. The company also recorded an $11.4 million impairment of property, plant and equipment, primarily assets at Shenzhen facilities used to produce aluminum-case cells.
- Quarterly results included a $4.6 million reversal of expected loan-guarantee losses; the six-month results included a net $2.8 million guarantee loss. A $6.0 million income-tax expense included a valuation allowance against deferred tax assets.
- Cash declined by $2.1 million during the six months. Operating cash flow improved to $19.9 million, while investing outflows increased to $30.3 million, mainly for construction and production-line expansion.
Outlook, risks, contingencies and unusual items
- Management stated that recurring losses, a working-capital deficit, and significant short-term debt raise substantial doubt about the company’s ability to continue as a going concern. The statements nevertheless assume continued operations.
- The turnaround plan targets OEM-market growth, cost reductions, stronger receivables collection, and improved margins. Management expected to complete the new corporate campus in the third quarter of fiscal 2013, begin leasing unused space, and seek government grants for battery research. It estimated fiscal 2013 capital expenditures of approximately $22.7 million. No specific revenue or earnings guidance was provided.
- Management said existing cash, expected operating cash flows, and available credit should meet anticipated needs for at least 12 months, and expected to renew short-term debt. Financing availability is not assured; additional equity could dilute shareholders, while additional debt would increase servicing requirements and could constrain operations.
- Contractual obligations totaled $275.9 million, including $162.8 million of short-term bank loans, $68.8 million of bills payable, $15.9 million of long-term bank loans, and $15.9 million of other long-term loans. Most obligations were due within three years; the filing reported $240.6 million due within one year.
- The company had guarantees for suppliers and a related party. A supplier, Shenzhen Langjin, defaulted; the company paid approximately $7.4 million and had received about $1.5 million by March 31. It received a further approximately $3.1 million indemnification on April 28, 2013. The filing also describes a new guarantee of up to approximately $4.8 million entered into on April 3, 2013.
- Other subsequent events: the company decided to close BAK Canada and appointed a receiver on April 2; it terminated its CFO on April 13 and appointed CEO Xiangqian Li as interim CFO, treasurer, and secretary.
- Disclosure controls were deemed ineffective because of a material weakness involving insufficient skilled accounting personnel and the absence of an audit committee financial expert. Management described remediation plans but gave no assurance they would be completed on schedule.
Most important facts for investors to verify
- Confirm near-term liquidity and debt maturities, including actual availability and renewal terms of credit facilities; the filing contains differing presentations of bills payable and facility availability.
- Assess the sustainability and quality of revenue growth, particularly the proportion from reconditioned products sold at low prices, and whether the product shift can restore positive gross margins.
- Verify collectability of receivables and recovery of amounts paid under guarantees, including subsequent Langjin reimbursements and the company’s exposure under outstanding guarantees.
- Track the going-concern risk, capital requirements, and execution of the turnaround plan, campus leasing, and projected grants.
- Monitor completion of control remediation, appointment of a permanent CFO and qualified audit committee financial expert, and the effects of the BAK Canada closure.