Hall of Shame

Industrials

CBAK Energy Technology, Inc (CBAT US)

Year: 2020

CBAK Energy Technology, Inc., through its subsidiaries, develops, manufactures, and sells lithium batteries in Mainland China, the United States, Europe, Taiwan, Israel, and internationally. Its products are used in various applications, including electric vehicles, such as electric cars, electric buses, and hybrid electric cars and buses; light electric vehicles that include electric bicycles, electric motors, and sight-seeing cars; and electric tools, energy storage, uninterruptible power supply, and other high power applications, as well as cordless power tools. The company was formerly known as China BAK Battery, Inc. and changed its name to CBAK Energy Technology, Inc. in January 2017. It was founded in 1999 and is based in Dalian, China.

China BAK Battery, Inc was listed in US via a reverse merger in 2005 and started trading on the NASDAQ in May 2006. 

Additional share offerings raised US$16M in August 2008, US$20.55M in September 2009 and US$49.16M in December 2020.

December 3, 2012 MOX Reports published a report "Short CBAK. CBAK is insolvent". MOX believed that China BAK was insolvent and listed the following points to back up its opinion:

  • China BAK had not released a 10Q filing since June 2012,
  • China BAK was now down to just US$4M in cash,
  • It had US$170M in short term debt and payables which were due imminently,
  • Interest alone was now running US$1M per month,
  • The company was now selling its remaining products at below cost in order to pay the banks. However, given that over US$4M of inventory had been written off as obsolete in the previous 9 months, it was unclear how long even this could continue.

MOX concluded that on paper, the value of this company wasn’t just “zero”, it was actually deeply negative due to the massive debt load that the company had racked up over many substantial loss making years. That although the banks may have been able to realize some minimal recovery value on their loans, there was clearly no scenario whatsoever in which shareholders could ever receive anything from China BAK. MOX believed the recent surge in the stock, represented the last opportunity to sell this stock at any reasonable price and with any reasonable volume, so it was an opportunity that should have been jumped on as quickly as possible before it evaporated.

June 6, 2013 MOX Reports issued an article "Short CBAK. China BAK Soars 65% on False Rumour".  MOX reiterated that it was still short on China BAK following a headline which stated that China BAK confirmed a deal with Kandi to make batteries. MOX had confirmed with investor relations at China BAK that there was no deal. It also remained short on China BAK because:

  • China BAK was already deeply insolvent. It had only US$7M in cash, but the cash was restricted by its banks. Against that tiny balance, it had US$330M in current liabilities coming due in the following few weeks and months. The interest alone on these debts was running at US$1.5M per month. The company’s remaining assets had been pledged against credit facilities and the banks were even holding the Chairman’s shares of China BAK as collateral. Its inventories were dwindling and it was then selling its remaining products at below cost, as reflected by its negative gross margin.
  • the company also needed to fill a vacant board seat (due to a board resignation) in order to avoid delisting. The head of the audit committee, Charlene Budd from Texas, first installed her adopted son (Jonathon Paugh) as the head of two vacant board committees at China BAK. But when the NASDAQ found out, they objected and had him removed. Once again, the company was subject to prompt delisting.
  • Charlene Budd’s next solution was to install one of her co-workers, Martha Agee, a teacher at a small Christian college in Texas. According to her resume, Martha Agee has no experience in China and no corporate board experience in any country at all. It appeared that Martha Agee was therefore just a convenient placeholder on the board to prevent a delisting. Charlene Budd then resigned and the expectation was that Martha Agee would follow.
  • A few weeks previously, the CFO also resigned. It was the second CFO resignation in the year. The role of CFO was then assumed by the CEO, XiangQian Li. The Treasurer and Secretary had already resigned, and Mr. Li had already assumed those roles. So on paper Mr. Li then filled all 5 separate management roles of Chairman, CEO, CFO, Treasurer and Secretary. Clearly there were not a lot of management figures left at China BAK to turn the lights on and off, much less to gear up for a full scale operation supplying Kandi’s electric cars.

MOX concluded saying that the fact that China BAK would be delisted hardly seemed worth questioning. That the only real questions were: who planted this well placed rumour and how much of a profit did they reap.

July 7, 2014 GeoInvesting in an article "GeoTeam News 7/07/2014 >> CREG, NQ, DSKY, KNDI, YONG, SFUN, SIMO, WSTI" stated it was short on China BAK. The Company's main subsidiary defaulted on loan payments. Complicated terms of this transaction resulted in the company only owning two remaining subsidiaries that GeoInvesting believed were currently non-operating. China BAK no longer owned Shenzhen BAK, which was BAK’s only substantial operating entity.

July 22, 2014 GeoInvesting followed up with a report "Loan Default And Foreclosure Bring China BAK Battery's Solvency And Viability Into Question".  The issues raised by GeoInvesting were

  • China BAK lost a primary operating asset to foreclosure, which should result in the company reporting little to no revenue when it filed its Q4 2014 September results.
  • Loss of asset spoke volumes. China BAK had hoped to sell assets to fund future growth and to repair its balance sheet sporting Q2 negative equity of $56.5M, up 16% vs. Q1.
  • GeoInvesting did not think many investors buying China BAK were aware of the recent developments since the company had not issued any formal related press releases on major news wires.
  • GeoInvesting questioned China BAK’s viability to continue as an operating entity unless it raised substantial capital, which the company had admitted had been challenging.
  • China BAK was, as a result, essentially a start-up, which GeoInvesting believed should be valued on shareholder equity. Its best case scenario put China BAK’s new book value per share at around $0.10.

GeoInvesting concluded that it believed that investors who were getting excited about China BAK’s near-term prospects probably had not properly interpreted recent developments. The fact that its main operating asset was lost to foreclosure meant that CBAK could not generate meaningful revenues AND could not raise cash from the sale of this asset to fund its growth plan to participate in a “sexy” segment of the battery market. Concurrently, the foreclosure should have raised China BAK’s need to raise capital, while at the same time making this task all the more challenging. These events made it difficult for investors, who wanted to ride the EV hype, to get excited about China BAK. Ultimately, GeoInvesting thought that China BAK shareholder equity remained negative and that it was worse off than before the foreclosure.

July 23, 2014 MOX Reports published an article on its web site; "Short CBAK; Watch For A Sharp Drop In China BAK Battery". It reviewed GeoInvesting's report and it said that it saw conditions at the company being far more severe than GeoInvesting had articulated.  In summary:

  • China BAK had recently soared from below $2.50 to $5.00 “news” that LG was entering the China EV market and on subsequent EV subsidy news from China.
  • But China BAK was not even in the EV business and would likely derive zero benefit. Day traders were simply playing a dangerous game of greater fool.
  • Creditors, at the time, began seizing the assets of the insolvent China BAK and key management had already resigned. The company had been the subject of repeated delisting notices.
  • China BAK had just lost all revenues and was saddled by over US$200M in near term debts. There was almost nothing left of the company.
  • In the past, China BAK soared 65% on entirely fake China headlines, only to crash within days.

MOX wrapped up saying that China BAK had not made a profit since 2008. It had survived by pledging all of its assets so that it could borrow cash to stay afloat. But the creditors had begun seizing the assets and were not lending any more money. The company’s sales had plunged and what remains of inventory was often being liquidated at below cost.  Even after the recent asset seizure, the company still had over US$200M current liabilities coming due that year and only around US$10M of available cash with which to pay. The company had minimal fixed assets while inventory and receivables were both deeply impaired. Of greatest importance, the company had no revenue producing assets such that a) it could not generate cash and b) it could not borrow against those assets.

July 28, 2014 China BAK issued a press release "China BAK Joins Hands with Dalian Institute of Chemical Physics of Chinese Academy of Sciences in Leading EV Battery Technological Revolution". It stated that it reached a strategic cooperation agreement for working together to tackle core technologies and key materials and jointly training postgraduates and doctors in the battery sector.

July 29, 2014 GeoInvesting followed up with an article "Hard To Believe That CBAK's Shares Still Trading After Exaggerated Claims".  GeoInvesting said that the previous day's press release appeared to contain highly misleading false statements that far surpassed the usual hype and hyperbole of most “pump-style” press releases. It believed that the false claims were:

  • China BAK claimed to be, “the world’s leading lithium battery manufacturer and electric energy solution provider.” The company was, at the time, scrambling to build a new production facility after having lost is primary operating assets to foreclosure. As far as anyone could determine CBAK had no current ability to generate revenues or cash flows from operations and had creditors breathing down its neck.
  • “China BAK possesses China’s first production base specially engaged in power battery…”  China BAK disclosed that its only operating facilities were lost in foreclosure. Its Dalian facility was under construction. GeoInvesting asked - So how does CBAK currently “possess” any production base?
  • The release also included a picture/drawing, of a seemingly fully constructed facility when, in fact, GeoInvesting's on-the-ground due diligence established that China BAK’s new production facility, in Dalian, was still under construction.

GeoInvesting concluded that it found it remarkable that management did not take the opportunity to address the grave issues facing China BAK. After having lost its primary operating assets to foreclosure there had been no statements from management regarding the Company’s plan of operations or how it would fend off creditors and survive to fund construction of the new manufacturing facility or working capital for production. GeoInvesting believed that management was simply skirting the most important issues facing China BAK while misrepresenting the business to attract investors. It viewed the press release as an outlandish attempt to pump the stock that mimicked the tactics promoters use to tout defunct pump and dump penny stocks in the U.S.

January 13, 2017 The Company changed it's name from China BAK Battery, Inc to CBAK Energy Technology, Inc.

December 18, 2020 J-Capital Research (JCAP) released a report "CBAT - The Undead; Why China BAK Has Zero Value".  It believed that CBAK Energy represented a rare trifecta of Chinese fraud: a reverse merger, a Tier 3 auditor, and a suspect broker. JCAP thought that History was repeating itself. CBAK Energy appeared to be on the brink of another default. In its report JCAP put forward the following:

  • The current CEO was little more than a straw man for a founder who was in dire financial straits. This straw man, CEO Li Yunfei, resided close to the old CEO’s company in Shenzhen, thousands of miles from CBAK Energy’s headquarters in Dalian.
  • CBAK Energy claimed to be an EV company. Actually, it made AA-size batteries for small appliances. JCAP contacted the auto companies CBAK Energy claimed are big clients, and they denied they do business with the company.
  • JCAP thought CBAK Energy was taking money from shareholders via the capital construction budget. Its analysis concluded that at least US$32M in construction assets held on the balance sheet in 2019 was fake. JCAP showed that about US$10M in 2014 and at least US$21M since then has been diverted. The company had consistently reported massive construction at its subsidiary in Dalian, from 2015 through the most recent quarter in 2019, yet satellite photos and a 2016 government assessment report proved that little had been built there since 2016.
  • CBAK Energy’s financial distress was the subject of a half dozen lawsuits in China. CBAK Energy had been told by at least three courts in the last five months, under pain of criminal detention, that neither the company nor its executives could spend anything more than what was strictly necessary to operate the business. This included construction of new facilities.
  • CBAK Energy claimed to be building a 6 GW or 8 GW production line in Nanjing.  The company had three subsidiaries in Nanjing and had legally committed to injecting US$103M in capital. But JCAP's researcher visited the Nanjing site and found one decrepit, empty building at CBAK Energy’s address in Nanjing and two registered addresses where other companies resided.
  • The company’s Suzhou subsidiary had already had its accounts frozen for non-payment of debt and ceased operating in 2019. 
  • CBAK Energy warned that it may go bust. In the 2020 Q3 report, CBAT said “The Company had a working capital deficiency, accumulated deficit from recurring net losses and short-term debt obligations as of December 31, 2019 and September 30, 2020. These factors raise substantial doubts about the Company’s ability to continue as a going concern.”  It was embroiled in dozens of legal proceedings seeking payment of debt. Pages 29-32 of the 2019 annual report (10K) list a half dozen outstanding cases, and the Chinese documents for company subsidiary Dalian BAK list no fewer than 65 legal proceedings. 
  • JCAP estimated that CBAT made no more than US$15M in revenue in 2019, one-third less than the reported US$22M. It suspected that a large chunk of sales may have been faked. JCAP estimated that 58% of revenue comes from related parties.
  • JCAP believed that the 2014 "default" had the effect of whisking all the assets into the hands of the founder, who then put up a straw man CEO to manage the listed company. Before the default, the company owned a number of operating subsidiaries. Afterwards, the China-based companies were all still operating but were controlled by the CBAK Energy founder.

JCAP concluded saying that CBAK Energy was holding onto the NASDAQ listing by the skin of its teeth, even as its Chinese assets get frozen and the court orders pile up. JCAP expected CBAK Energy would raise as much money as possible from U.S. investors before delisting; or perhaps it would whisk the Dalian factory into private hands and get investors to fund yet another re-animation.


MOX Reports: Short CBAK, CBAK is insolvent, 3 Dec 2012
MOX Reports: Short CBAK; China BAK Soars 65% on False Rumour, 6 Jun 2013
GeoInvesting: GeoTeam News: Short-CBAK, 7 Jul 2014
GeoInvesting: Loan Default And Foreclosure Bring China BAK Battery's Solvency And Viability Into Question, 22 Jul 2014
MOX Reports: Short CBAK; Watch For A Sharp Drop In China BAK Battery, 23 Jul 2014
China BAK Battery: Joins Hands with Dalian Institute in Leading EV Battery Technological Revolution, 28 Jul 2014
GeoInvesting: Hard To Believe That CBAK's Shares Still Trading After Exaggerated Claims, 29 Jul 2014
J-Capital Research: CBAT - The Undead; Why China BAK Has Zero Value, 18 Dec 2020
CBAK Energy Technology: Annual Report - YE. Sep. 2019
China BAK Battery: Annual Report - YE. Sep. 2014
China BAK Battery: Annual Report - YE. Sep. 2013
China BAK Battery: Annual Report - YE. Sep. 2012
China BAK Battery: Annual Report - YE. Sep. 2011


 


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