Business context and reporting period
China BAK Battery, Inc. (now CBAK Energy Technology, Inc.) filed this Form 10-Q for the quarter ended March 31, 2014, its fiscal second quarter, and the six months ended March 31, 2014. The company manufactures lithium-ion batteries in China and began generating rental and property-management revenue from its Shenzhen research and development center.
Financial performance
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 | Comparable 2013 period |
|---|---|---|---|
| Revenue | $34.3 million | $76.7 million | $44.1 million; $107.8 million |
| Gross profit (margin) | $3.7 million (10.7%) | $7.2 million (9.3%) | Gross losses of $3.6 million and $7.8 million |
| Operating loss | $2.8 million | $4.7 million | $16.6 million; $34.5 million |
| Net loss | $9.3 million | $14.5 million | $19.7 million; $47.9 million |
| Basic and diluted loss per share | $0.73 | $1.15 | $1.56; $3.79 |
| Operating cash flow | Not separately reported | Use of $3.2 million | Generation of $19.9 million |
Quarterly revenue fell 22.2%; six-month revenue fell 28.9%. Battery manufacturing revenue declined, partly offset by $1.4 million of quarterly and $2.6 million of six-month property revenue. Six-month battery revenue was particularly weak in cylindrical cells, down 80.4%, and high-power cells, down 26.0%. Gross profit improved chiefly because inventory write-downs declined to $1.0 million for the quarter and $5.6 million for six months, from $6.5 million and $25.8 million, respectively, in 2013. Management cautioned that further inventory write-downs may be needed.
Finance costs rose to $6.7 million for the quarter and $10.6 million for six months, mainly reflecting high-cost borrowings, including a loan bearing 20% annual interest. Six-month cash used in investing was $15.3 million; financing provided $13.0 million. Cash declined by $5.5 million during the six months to $8.4 million.
Balance sheet, liquidity and debt
At March 31, 2014, total assets were $329.2 million and total liabilities were $385.7 million, leaving negative shareholders’ equity of $56.5 million. Current assets of $129.8 million compared with current liabilities of $352.7 million, a working-capital deficit of approximately $223.0 million. Cash was $8.4 million; an additional $11.9 million of deposits was pledged and not freely available.
Short-term bank loans were $65.3 million and other short-term loans were $126.7 million. The company reported $25.8 million of bills payable and only approximately $1.8 million of unused capacity under its stated credit facilities. Most listed obligations, including short-term loans, bills payable and accrued loan interest, were due within one year or repayable on demand.
Material changes, outlook and risks
- Going concern: Management disclosed recurring losses, severe cash-flow constraints, net liabilities and limited borrowing availability, stating that these conditions raise substantial doubt about the company’s ability to continue as a going concern.
- Major lender default after quarter-end: The company defaulted on a $83.7 million loan from Jinghui Wang, secured by its entire ownership interest in BAK International. In April 2014, Wang demanded approximately $87.7 million, including accrued interest, and could foreclose on the pledged shares if no settlement is reached. BAK International represents a substantial portion of company assets.
- Other financing and restructuring: Tianjin Zhantuo had lent $19.2 million interest-free, repayable on demand, in connection with a proposed sale of Tianjin land and properties. Management intended to sell assets, including BAK International and Tianjin properties, to reduce debt and fund development of high-power and electric-vehicle batteries; completion and proceeds were uncertain.
- Operational transition: The company reported intense competition, reduced customer orders amid its cash difficulties, and a sharp decline in market share while shifting toward higher-end and high-power batteries. It planned to move Tianjin production assets to Dalian. Management estimated fiscal 2014 capital expenditures of approximately $35.3 million, while reporting a $30.0 million Dalian BAK Power capital-injection commitment.
- Controls and legal matters: Disclosure controls were deemed ineffective. Management cited inadequate accounting policies for evaluating agreements and insufficient technically experienced accounting staff. A Texas court had entered a $442,629 default judgment in a contract case; the company was seeking to vacate it. A separate product-liability suit sought $126,978 plus interest and fees.
Most important facts for investors to verify
- Whether Wang’s demanded repayment was settled, renegotiated, or enforced against the pledged BAK International shares.
- Whether the company secured new financing or completed asset sales sufficient to address its working-capital deficit and near-term obligations.
- Whether reported operating cash generation improves, and whether further inventory write-downs or customer losses occur.
- Whether the Dalian relocation, capital injection and planned capital spending proceeded as described.
- Whether management remedied the disclosed material weaknesses in financial reporting controls.