CBAK Energy Technology, Inc. — Q1 2020 Form 10-Q
Business context and period. The unaudited report covers the three months ended March 31, 2020, compared with Q1 2019; balance-sheet comparisons are with December 31, 2019. CBAK develops and sells high-power lithium batteries, primarily for uninterruptible power supplies (UPS), electric vehicles (EVs) and light electric vehicles. Its operations and customers are in China. The filing was delayed because of COVID-19-related disruption and filed July 2, 2020.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $6.90 million | $5.17 million |
| Gross profit (loss) | $0.21 million; 3.0% margin | ($0.23) million; (4.4)% margin |
| Operating loss | ($1.98) million | ($2.54) million |
| Net loss | ($2.35) million | ($2.81) million |
| Net loss attributable to CBAK shareholders | ($2.36) million | ($2.79) million |
| Basic and diluted loss per share | ($0.04) | ($0.10) |
| Operating cash flow | $0.69 million | ($4.02) million |
| Capital expenditures | $0.26 million | $1.22 million |
Revenue rose 33%, driven by UPS battery sales, up 69% to $6.69 million. EV battery revenue fell 82% to $0.22 million. Cost of revenue increased 24%; the company recorded $0.41 million of obsolete-inventory write-downs versus $0.06 million a year earlier. A $0.67 million doubtful-account provision was also recorded, versus $0.07 million.
Liquidity, debt and financial position
- At March 31, cash and cash equivalents were $0.17 million; pledged deposits were $5.34 million and are not freely available. Cash plus restricted cash reported in the cash-flow statement was $5.51 million, down $1.62 million during the quarter.
- Current assets of $28.32 million versus current liabilities of $60.19 million produced a $31.87 million working-capital deficit. Total liabilities were $82.70 million and total equity was $11.50 million.
- Bank borrowings totaled $25.66 million, including $16.30 million current maturities and short-term bank loans. Other short-term loans were $5.26 million and notes payable were $2.72 million. The filing states $6.8 million of committed bank facilities remained unused.
- Operating cash flow was positive, but benefited substantially from a $4.27 million increase in payables to former subsidiaries; growth in receivables used $3.63 million. Financing cash flow was negative $1.94 million, mainly reflecting loan repayments.
- Management identified recurring losses, working-capital deficiency and short-term debt as conditions raising substantial doubt about the company’s ability to continue as a going concern. It plans to pursue borrowing and equity financing, but states there is no assurance funding will be available.
Changes, outlook and material risks
- Management attributed improved gross results to cost controls and higher production quality. Operating expenses declined 6%, partly because COVID-related suspensions reduced payroll and related costs; finance expense rose 49% to $0.43 million as average loan balances increased.
- COVID-19 disrupted manufacturing, procurement and shipments and temporarily closed offices in Q1, causing delays, increased costs and reduced revenue. Operations had fully resumed by the report date, but management said the pandemic’s duration and financial effects remained uncertain. Management characterized its Q1 impact on results as limited.
- Management plans to prioritize cylindrical batteries for the UPS market, temporarily reduce EV-product R&D investment and cut EV battery production, amid reduced Chinese EV subsidies. It expects further demand in high-power lithium batteries but gave no specific revenue or earnings guidance.
- Management estimated 2020 capital expenditures of approximately $4.0 million. A June 23, 2020 framework agreement contemplated projects with an intended production capacity of 8 GWh; the filing does not establish that this capacity is funded or committed.
- Contractual obligations and commercial commitments were reported at $131.36 million, including $121.87 million due within one year. This includes substantial stated capital-injection commitments; verify timing, enforceability and funding sources.
- Customer concentration increased: one customer represented 55.01% of Q1 revenue. Shenzhen BAK, a former subsidiary and supplier, represented 82.43% of Q1 purchases. Related-party context is relevant: the former CEO is a director of Shenzhen BAK.
- Subsequent financing included conversion of approximately $4.3 million of supplier debt into about 8.9 million shares at $0.48 per share, plus further Atlas Sciences note-for-share exchanges. These transactions reduce debt but dilute shareholders. The company also amended a China Everbright repayment schedule after quarter-end; the revised schedule leaves a large $18.3 million installment due June 2021.
- Legal matters include supplier claims and frozen deposits. The company accrued amounts for several claims; it disputes an equipment arbitration claim and filed a counterclaim. In a separate contractor matter, a June 2020 final judgment required Shenzhen Huijie to repay CBAK Power $0.24 million plus interest and litigation costs.
- Management concluded disclosure controls were ineffective as of March 31, 2020, citing weaknesses in reviewing accounting and agreements and insufficient skilled U.S. GAAP accounting staff. Remediation efforts include hiring a permanent CFO and training staff.
Important facts for investors to verify
- Whether the company can secure refinancing or other capital to meet near-term debt service and its large stated commitments, and how the going-concern uncertainty evolves.
- Whether the reported positive operating cash flow is sustainable apart from increased former-subsidiary payables, and whether receivables— including the elevated doubtful-account allowance—are collectible.
- Whether UPS customer concentration and dependence on Shenzhen BAK for supply continue, and the commercial terms and related-party safeguards for those relationships.
- The status, funding, approvals and binding obligations associated with the proposed 8 GWh projects and the $4.0 million capital-expenditure estimate.
- The outcome and cash impact of pending litigation, frozen deposits, the disputed tax position and the unresolved building ownership certificates.
- Progress in remediating ineffective disclosure controls and the potential dilution from debt conversions and equity financing.