Business context and reporting period
China BAK Battery, Inc. (now CBAK Energy Technology, Inc.) filed this unaudited Form 10-Q for its fiscal third quarter and nine months ended June 30, 2013. The company manufactures and sells lithium-ion batteries, with operations principally in China. Financial figures below are in U.S. dollars.
Financial performance and position
| Metric | Three months ended June 30, 2013 | Nine months ended June 30, 2013 |
|---|---|---|
| Revenue | $45.6 million | $153.4 million |
| Gross profit (loss) | ($1.4 million); margin (3.0%) | ($9.2 million); margin (6.0%) |
| Operating loss | ($7.7 million) | ($42.2 million) |
| Net loss | ($10.3 million); $0.81 loss per share | ($58.1 million); $4.61 loss per share |
| Operating cash flow | Not separately provided | $43.2 million |
| Investing cash flow | Not separately provided | ($42.0 million) |
| Financing cash flow | Not separately provided | ($0.5 million) |
- At June 30, cash and equivalents were $10.4 million and pledged deposits were $13.3 million. Current assets of $189.6 million were well below current liabilities of $371.6 million, a working capital deficit of approximately $182.0 million.
- Short-term loans were $149.6 million; long-term bank loans were $12.8 million, excluding current maturities. Bills payable were $68.3 million. The filing reports $26.6 million of unused credit availability.
- Total assets were $438.1 million and shareholders’ equity was $16.2 million, down from $71.8 million at September 30, 2012.
Material changes versus prior comparable periods
- Quarterly revenue fell 2.7% year over year, while net loss narrowed from $27.6 million to $10.3 million. Gross loss improved from $5.1 million, but the company remained below gross break-even.
- For the nine-month period, revenue rose 1.3%, but gross result deteriorated from $5.1 million profit to $9.2 million loss and net loss widened from $45.0 million to $58.1 million.
- Nine-month cost of revenue included $38.1 million of inventory write-downs, versus $4.4 million a year earlier. Property, plant and equipment impairment was $14.6 million, versus $6.3 million.
- Product mix shifted: nine-month battery-pack revenue increased 33.5%, lithium-polymer revenue 79.5%, and high-power battery revenue 88.4%; aluminum-case cell revenue fell 56.9%. These gains did not offset inventory charges and losses on certain products.
- Nine-month operating cash flow increased to $43.2 million from $12.4 million, which management attributed mainly to tighter receivables collection. Cash flow also reflected a $32.1 million inventory increase and a $30.6 million increase in accrued expenses and other payables.
Outlook, risks and unusual items
- Management disclosed recurring losses, a working capital deficiency and significant short-term maturities that raise substantial doubt about the company’s ability to continue as a going concern. It nevertheless expected liquidity to be sufficient for the next 12 months, relying on operating cash flow, bank renewals, cost reductions, collections and asset sales.
- A $32.6 million Bank of China loan matured August 3, 2013 and had not been repaid; renewal was in progress. The filing warns that failure to renew the facility could adversely affect operations.
- The company paid approximately $7.5 million after supplier Shenzhen Langjin defaulted on a guaranteed loan, and had recovered $5.5 million by June 30. It reported $31.0 million of maximum exposure on guarantees to unrelated parties and separately guaranteed approximately $4.9 million of debt for a company under common control with the CEO.
- After quarter-end, the company agreed to sell its Tianjin Meicai subsidiary for RMB180 million, approximately $29.3 million, with an expected gain of about $1.8 million. Consideration included debt offsets; completion was expected in September 2013. The sale was not yet complete at June 30.
- Management’s turnaround plan focused on OEM expansion, higher-margin products, manufacturing and operating cost reductions, stronger credit controls, and disposing of low-efficiency assets. It expected government R&D grants and rental income from its Shenzhen R&D centre; these were forward-looking expectations, not assured results.
- Disclosure controls were deemed ineffective due to a material weakness in accounting for key agreements and insufficient technically qualified accounting staff. The company was pursuing remediation but gave no assurance it would be completed by September 30, 2013.
- Other risks include pledged assets, outstanding discounted or transferred bills of $48.6 million, customer concentration (three customers represented 33.6% of quarterly revenue), and unresolved extension requirements for Tianjin land-use rights. BAK Canada had filed for bankruptcy and remained in the process of dissolution.
Important facts for investors to verify
- Whether the $32.6 million Bank of China maturity and other near-term loans were renewed or repaid, and whether stated unused credit remained available.
- Whether Tianjin Meicai’s sale closed, the net cash and debt reduction realized, and whether the expected gain was achieved.
- How much of the inventory write-downs and asset impairments recur, and whether gross margins improve as management’s product-mix plan is implemented.
- Whether receivables collections and operating cash flow are sustainable, given the large working capital deficit and reliance on increases in accrued payables.
- Developments in the Langjin recovery, other guarantee exposures, and the material weakness remediation; assess these alongside the going-concern disclosure.