Business context and reporting period
China BAK Battery, Inc. (now CBAK Energy Technology, Inc.) filed this Form 10-K for the fiscal year ended September 30, 2015. The company develops, manufactures and sells high-power lithium batteries, primarily for electric vehicles, light electric vehicles and other high-power applications. Its Dalian facilities began partial commercial operations in July 2015; production was still partly outsourced, including approximately $10.5 million of battery purchases from former subsidiary BAK Tianjin.
Financial performance and liquidity
| Metric (US$ millions, except percentages) | FY2014 | FY2015 |
|---|---|---|
| Revenue | 123.0 | 13.9 |
| Gross profit / margin | 9.6 / 7.8% | 1.0 / 6.8% |
| Operating loss | (10.6) | (3.6) |
| Continuing operations profit (loss), net of tax | (26.7) | 14.0 |
| Net profit | 37.8 | 15.9 |
| Operating cash flow | (29.3) | (2.0) |
| Investing cash flow | (17.5) | (5.5) |
| Financing cash flow | 33.8 | 13.3 |
- At September 30, 2015, cash and cash equivalents were $6.8 million; current assets were $19.6 million and current liabilities $34.5 million, a $15.0 million working-capital deficit. Total assets were $63.4 million, total liabilities $41.7 million and shareholders’ equity $21.7 million. Accumulated deficit was $125.9 million.
- Short-term bank loans were $12.6 million, primarily under Bank of Dandong facilities bearing 7.84% interest. The facilities were secured by Dalian property, land-use rights, equipment and pledged deposits, and guaranteed by CEO Xiangqian Li, his wife and Shenzhen BAK. The company also reported $3.2 million of bills payable and $1.5 million of pledged deposits.
- FY2015 capital expenditures were $12.9 million, mainly for Dalian construction. Management estimated FY2016 capital expenditures of approximately $47.2 million for a new plant and warehouse.
Material changes versus the prior year
- Revenue fell 88.7%, mainly because the company disposed of BAK International and its subsidiaries in June 2014. FY2015 revenue was entirely from high-power lithium battery cells; that product’s revenue increased 34.9% to $13.9 million, but gross profit fell to $1.0 million.
- FY2015 net profit included $23.1 million of government grant income, substantially related to support for projected operating losses during the move and construction of the Dalian facilities. Income tax expense was $5.3 million, primarily reflecting the subsidy. Net income also included a $1.8 million recovery adjustment relating to the disposal of former subsidiaries.
- FY2014 net profit included a $61.3 million accounting gain on disposal of subsidiaries. Accordingly, reported net profit in both years includes substantial unusual items and does not reflect solely ongoing battery operations.
- Operating expenses declined with the disposed businesses, while the new Dalian operation incurred start-up inefficiencies. Management attributed lower gross margin partly to newly installed machinery and newly hired production staff.
Outlook, risks and contingencies
- Management expected Chinese support for new-energy vehicles and rising battery demand to create potential orders, particularly in electric cars, and said it believed the business could continue as a going concern and return to profitability. The filing provides no quantified revenue or earnings guidance.
- The auditor’s report raised substantial doubt about the company’s ability to continue as a going concern, citing the working-capital deficit, prior recurring losses and short-term debt. Management planned to renew borrowings and seek further bank and equity financing, but stated that financing was not assured.
- The remaining Dalian construction was expected to be completed by June 2016; the company also expected to obtain property ownership certificates for its buildings by March 2016. Delays, cost overruns, hiring constraints or failure to ramp production could affect results. Buildings were not insured at year-end.
- Customer and supplier concentration were significant: the top five customers accounted for 83.8% of FY2015 revenue, and the largest customer represented 43.4%. The company lacked long-term customer purchase commitments and relied on BAK Tianjin and other manufacturers while Dalian capacity ramped.
- Disclosure controls were ineffective at year-end, with material weaknesses in accounting for key agreements and in the availability of appropriately skilled U.S. GAAP accounting personnel. Management described hiring and training plans but gave no assurance remediation would be completed.
- A Texas court had entered default judgments totaling approximately $561,000, inclusive of an additional attorney-fee award; BAK International agreed to indemnify the company for related losses and expenses. The filing reported no other known proceedings expected to materially affect the business.
Important facts for investors to verify
- Whether the company obtained additional financing, renewed its short-term loans and met its near-term cash requirements after September 30, 2015.
- Whether Dalian construction, property title registration and commercial production ramp-up proceeded on schedule, and whether the projected FY2016 capital spending was funded.
- How much of FY2015 earnings came from recurring battery operations versus government grants and disposal-related adjustments.
- Whether customer concentration and reliance on BAK Tianjin decreased, and whether the major customers paid receivables on time.
- Whether management remediated the disclosed internal-control weaknesses and whether the company maintained its Nasdaq listing and going-concern status.