CBAK ENERGY TECHNOLOGY, INC. The following management's discussion and analysis should be read in conjunction with our financial statements and the notes thereto and the other financial information appearing elsewhere in this report. In addition to historical information, the following discussion contains certain forward-looking information. See "Special Note Regarding Forward Looking Statements" above for certain information concerning those forward-looking statements. Our financial statements are prepared inU.S. dollars and in accordance withU.S. GAAP. Overview
We are engaged in the development, manufacture and sale of new energy high power lithium batteries, as well as cathode materials and precursors for lithium batteries, which are mainly used in the following applications:
? Electric vehicles ("EV"), such as electric cars, electric buses, hybrid
electric cars and buses;
? Light electric vehicles ("LEV"), such as electric bicycles, electric motors,
sight-seeing cars; and
? Electric tools, energy storage including but not limited to uninterruptible
power supply application, and other high-power applications. In 2022, to meet a great demand for lithium-ion batteries, we have ramped up capacity in our Dalian manufacturing center and the Phase One project inNanjing with new production lines. We generated revenues from the manufacture and sale of high-power lithium batteries and raw materials for lithium batteries of$248.7 million and$52.7 million for the fiscal years endedDecember 31, 2022 and 2021, respectively. We incurred a net loss of$11.3 million and a net profit of$61.5 million during the fiscal years endedDecember 31, 2022 and 2021, respectively. New revenues driven from the sale of materials used in manufacturing of lithium batteries, through the newly acquired subsidiary, Hitrans, as well as the continuous climb of sales in uninterruptible supplies and light-electric-vehicle related products, contributed to the total increase. For more details, see "Item 1. Business-Overview of Our Business." Specifically, net revenue from sales of batteries for uninterruptable supplies was$83.6 million for the fiscal year endedDecember 31, 2022 , as compared to$33.3 million for fiscal year endedDecember 31, 2021 , an increase of$50.3 million , or 151%. Net revenue from sales of cathode materials and precursors was$154.0 million for the fiscal year endedDecember 31, 2022 , as compared to$17.9 million for fiscal year endedDecember 31, 2021 . This increase was partly attributed to revenue from Hitrans being included for a full year in 2022, as opposed to only one month in 2021. In addition, net revenues from sales of batteries for light electric vehicles was$6.4 million for the fiscal year endedDecember 31, 2022 , as compared to$0.7 million for fiscal year endedDecember 31, 2021 , an increase of$5.7 million , or 814%. We believe the government's new energy policies will, in the long run, encourage the production of new energy vehicles, optimize the industry's structure, enhance technical standards and strengthen the industry's competitiveness, which ultimately will foster strategic development of new energy vehicles. In addition, our latest development of 32140 battery and our planned investment in the R&D of Series 46 batteries will help us regain competitiveness in both LEV and EV markets with the appropriate products. With the demand for new energy growing, we are confident in our ability to secure additional orders from the expanding market. We completed the construction of a cylindrical power battery manufacturing plant inDalian which started commercial production inJuly 2015 . We have received and been utilizing most of BAK Tianjin's operating assets relocated to our Dalian facilities, including its machinery and equipment for battery production and battery pack production, customers, management team and technical staff, patents and technologies. We also started construction of ourNanjing facilities in 2020. The construction work is designed to comprise two phases. The first phase project ("Phase One") was put into operation in the second half of 2021. Phase One covers an area of approximately 27,173 square meters. Since the operation of Phase One, we have been steadily increasing its production capacity to 2GWh. We started the construction of the second phase project ("Phase Two") in 2022 and expect to complete the infrastructure of the first 60,494 square meters in the third quarter of 2023 which would be put into operation in the last quarter of 2023. TheNanjing facilities, once fully built, are expected to provide 20 GWh capacity to support our customers' growing demand. In addition to construction, we have also purchased machinery and equipment for our capacity expansion. Moreover, given the equity and debt financings we have obtained, we believe that with the booming future market demand for high power lithium-ion products, we can continue as a going concern and return to profitability. In addition, we completed the acquisition of 81.56% of registered equity interests (representing 75.57% of paid-up capital) in Hitrans, a leading developer and manufacturer of NCM precursor and cathode materials inChina , inNovember 2021 . As ofDecember 31, 2022 , our equity interests in Hitrans had reduced to 67.33% after Hitrans took investments from several investors. See "Item 1. Business-Overview of Our Business-Acquisition of A Raw Materials Manufacturer" for more information on the acquisition. The consolidated financial statements contained in this annual report have been prepared assuming we will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty related to our ability to continue as a going concern. 34
Financial Statement Presentation
Net revenues. The Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation. Revenues from product sales are recognized when the customer obtains control of our product, which occurs at a point in time, typically upon delivery to the customer. We expense incremental costs of obtaining a contract as and when incurred it the expected amortization period of the asset that it would have recognized is on year or less or the amount is immaterial.
Revenue from product sales is recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the categories: discounts and returns. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to the Company's customer. Cost of revenues. Cost of revenues consists primarily of material costs, employee remuneration for staff engaged in production activity, share-based compensation, depreciation and related expenses that are directly attributable to the production of products. Cost of revenues also includes write-downs of inventory to lower of cost and net realizable value. Research and development expenses. Research and development expenses primarily consist of remuneration for R&D staff, share-based compensation, depreciation and maintenance expenses relating to R&D equipment, and R&D material costs. Sales and marketing expenses. Sales and marketing expenses consist primarily of remuneration for staff involved in selling and marketing efforts, including staff engaged in the packaging of goods for shipment, warranty expenses, advertising cost, depreciation, share-based compensation and travel and entertainment expenses. We do not pay slotting fees to retail companies for displaying our products, engage in cooperative advertising programs, participate in buy-down programs or similar arrangements. General and administrative expenses. General and administrative expenses consist primarily of employee remuneration, share-based compensation, professional fees, insurance, benefits, general office expenses, depreciation, liquidated damage charges and bad debt expenses.
Finance costs, net. Finance costs consist primarily of interest income and interest on bank loans, net of capitalized interest.
Income tax expenses. Our subsidiaries in PRC are subject to an income tax rate of 25%, except forHitrans and CBAK Power which was recognized as a "High and New Technology Enterprise" and enjoyed a preferential tax rate of 15% from 2021 to 2024. OurHong Kong subsidiary BAK Asia is andBAK Investment are subject to profits tax at a rate of 16.5%. However, because we did not have any assessable income derived from or arising inHong Kong , BAK Asia andBAK Investment had not paid any such tax. 35 Results of Operations
Comparison of Years Ended
The following table sets forth key components of our results of operations for the years indicated, both in dollars and as a percentage of our revenue.
(All amounts, other than percentages, in thousands of U.S. dollars)
Years Ended Change
December 31, December 31,
2021 2022 $ %
Net revenues $52,670 $248,725 196,055 372
Cost of revenues (47,559 ) (230,630 ) (183,071 ) 385
Gross profit 5,111 18,095 12,984 254
Operating expenses:
Research and development expenses (5,274 ) (10,635 ) (5,361 ) 102
Sales and marketing expenses (2,302 ) (2,008 ) 294 -13
General and administrative expenses (10,027 ) (9,738 ) 289 -3
Impairment charge on long-lived assets - (4,832 ) (4,832 ) n/a
Impairment charge on goodwill - (1,556 ) (1,556 ) n/a
Recovery of (provision for) doubtful
accounts 780 (831 ) (1,611 ) -207
Total operating expenses (16,823 ) (29,600 ) (12,777 ) 76
Operating loss (11,712 ) (11,505 ) 207 -2
Finance income, net 785 491 (294 ) -37
Other income (expense), net 3,644 (7,252 ) (10,896 ) -299
Impairment of Non-marketable equity
securities (693 ) - 693 -100
Change in fair value of warrants
liability 61,802 5,710 (56,092 ) -91
Income (loss) before income tax 53,826 (12,556 ) (66,382 ) -123
Income tax credit 7,733 1,228 (6,505 ) -84
Net income (loss) $ 61,559 (11,328 ) (72,887 ) -118
Less: Net (income) loss attributable to
non-controlling interests (73 ) 1,879 1,952 -2,674
Net income (loss) attributable to
shareholders of CBAK Energy Technology,
Inc. 61,486 $ (9,449 ) (70,935 ) -115
Net revenues. Net revenues were
The following table sets forth the breakdown of our net revenues by end-product applications.
(All amounts, other than percentage, in thousands of U.S. dollars)
Years Ended Change
December 31, December 31,
2021 2022 $ %
High-power lithium batteries used in:
Electric vehicles $ 244 $ 4,695 4,451 1,824
Light electric vehicles 733 6,415 5,682 775
Uninterruptable supplies 33,308 83,603 50,295 151
Trading of Raw materials used in lithium
batteries 520 2 -518 -100
34,805 94,715 59,910 172
Materials used in manufacturing of
lithium batteries
Cathode 8,726 75,331 66,605 763
Precursor 9,139 78,679 69,540 761
17,865 154,010 136,145 762
Total $ 52,670 $ 248,725 196,055 372
Net revenues from sales of batteries for electric vehicles were $4.7 million for
the fiscal year ended December 31, 2022 , as compared to $0.2 million for 2021,
an increase of 1,824%. This was partly because our batteries now have improved
features and higher quality, making them more attractive to electric vehicle
manufacturers. Additionally, the downstream market for electric vehicles
continued to grow in 2022, leading to an increase in demand for EV battery
products. As a result, we were able to secure more orders and increase our
sales
volume.
36
Net revenues from sales of batteries for light electric vehicles was
approximately $6.4 million for the fiscal year ended December 31, 2022 , as
compared $0.7 million for 2021, representing an increase of $5.7 million , or
775%. The light electric vehicle market experienced strong growth in 2022 due to
various developments. First, the upgrading of electric bicycles to comply with
new "national standards" in China led to increased demand for our batteries.
Second, the COVID-19 pandemic spurred a fast development of the food delivery
industry, which in turn drove the growth of the shared electric bicycle market.
Last, there has been an increased popularity of electric scooters, motors, and
bicycles in China , Southeast Asia , and European markets as people seek ways to
reduce carbon emissions and pollution. With the favorable market conditions, we
were able to boost our sales in 2022. We will continue to penetrate the market
for batteries used in light electric vehicles.
Net revenues from sales of batteries for uninterruptable supplies was $83.6
million for the fiscal year ended December 31, 2022 , as compared to $33.3
million for fiscal year ended December 31, 2021 , an increase of $50.3 million ,
or 151%. The increase in sales of batteries for uninterruptable supplies in 2022
can be attributed to a combination of factors including growing demand for
renewable energy sources, and our development of reliable and low-cost products.
As more businesses and households switch to renewable energy, there has been a
growing demand for renewable energy sources and the need for energy storage
solutions to support these sources. Additionally, our focus on research and
development has allowed us to develop innovative and reliable energy storage
products at a competitive pricing. As we continue to invest in R&D and improve
our product offerings, we expect to remain a leader in the energy storage
industry and see continued growth in sales.
Net revenues from trading of raw materials used in lithium batteries were $2,172
for the fiscal year ended December 31, 2022 , as compared with $0.5 million in the same period in 2021. Net revenues from sales of materials for use in manufacturing of lithium battery cell were$154.0 million for the fiscal year endedDecember 31, 2022 , as compared to$17.9 million for 2021. InNovember 2021 , we completed the acquisition of Hitrans, which is a raw materials producer and added the sale of materials for lithium battery cell to our business lines. This increase is partly attributed to the revenue of Hitrans being included for a full year in 2022, as opposed to just one month in 2021. During 2022, we through the newly acquired subsidiary, Hitrans, a producer of cathode and precursor materials, earned sales of materials used in manufacturing of lithium batteries in an amount of$154.0 million . We look forward to strengthening the battery product ecosystem as we seek stable raw material supply and drive greater revenue for our business. Cost of revenues. Cost of revenues increased to$230.6 million for the fiscal year endedDecember 31, 2022 , as compared to$47.6 million for 2021, an increase of$183.1 million , or 385%. The increase in cost of revenues was in line with the increase of net revenues. Included in cost of revenues were write down of obsolete and slow-moving inventories of$1.7 million for the year endedDecember 31, 2022 , while it was$0.9 million for the year 2021. We write down the inventory value whenever there is an indication that it is impaired. Gross profit. Gross profit for the year endedDecember 31, 2022 was$18.1 million , or 7.3% of net revenues as compared to gross profit of$5.1 million , or 9.7% of net revenues, for the fiscal year endedDecember 31, 2021 . Gross profit margin slightly decreased largely due to increased pricing of battery raw materials. Research and development expenses. Research and development expenses increased to$10.6 million for the year endedDecember 31, 2022 , as compared to$5.3 million for 2021, an increase of$5.3 million , or 102%. The increase was primarily attributed to an increase in R&D employees' salaries and social insurance expenses by approximately$2.0 million . R&D employees' salaries and social insurance expenses increased largely due to the inclusion of salaries for the newly acquired subsidiary, Hitrans's, R&D staff, and a growing number of employees at Nanjing CBAK. Also, the expiration of Chinese government's COVID-19 relief policy that alleviated corporations' social insurance burdens has also contributed to the increase. In addition, we incurred expenses for materials used in battery research and development of$0.7 million and$0.5 for the years endedDecember 31, 2022 and 2021, respectively, as a result of the Company's efforts to research and develop upgraded battery products with lower costs and better performance. We incurred$2.7 million of R&D operating expenses by incorporating Hitrans's R&D expenses for the year endedDecember 31, 2022 . Sales and marketing expenses. Sales and marketing expenses slightly decreased to$2.0 million for the year endedDecember 31, 2022 , as compared to$2.3 million for 2021, a decrease of$0.3 million , or 13%. As a percentage of revenues, sales and marketing expenses were 0.8% and 4.4% of revenues for the years endedDecember 31, 2022 and 2021, respectively. For the year endedDecember 31, 2022 , salaries, sales commissions and social insurance expenses for sales and marketing employees increased by approximately$0.5 million . Sales and marketing employees' salaries and social insurance expenses increased is due to a growing number of employees at Nanjing CBAK as well as the expiration of Chinese government's COVID-19 relief policy that alleviated corporations' social insurance burdens. Moreover, given the growth in revenue, we increased sales and marketing employees' salaries and welfare. We incurred exhibition-related expenses of$0.2 million in the year endedDecember 31, 2021 as we attended several exhibitions to increase our brand awareness. We did not attend exhibitions, incurring nil of such expenses, in 2022, largely because of the COVID-19 pandemic and quarantine measures. Besides, the transaction costs and custom declaration charges increased by$0.6 million due to the increase of international sales during fiscal 2022. The above increase was offset by the reversal of our product warranty provision by$1.4 million for the year endedDecember 31, 2022 . We accrues an estimate of the exposures o warranty claims based on current and historical sales data and warranty costs incurred. We have made reversal on product warranty provision on sales which the warranty provision period had passed in 2022. 37 General and administrative expenses. General and administrative expenses slightly decreased to$9.7 million for the year endedDecember 31, 2022 , as compared to$10.0 million for 2021, a decrease of$0.3 million , or 3%. The decrease was primarily resulted from a decrease in professional fees of approximately$1.8 million , offset by an increase in administrative employees' salaries and social insurance expenses by approximately$1.5 million . Administrative employees' salaries and social insurance expenses increased due to the salary expenses incurred for the newly acquired subsidiary, Hitrans, and a growing number of employees at Nanjing CBAK as well as the expiration of Chinese government's COVID-19 relief policy that alleviated corporations' social insurance burdens. Our consultancy, legal and other professional fees decreased by$1.8 million in 2022, as compared to 2021 where we incurred consultancy fees related to the Hitrans acquisition and fundraising activities. Long-lived assets impairment charge.During the course of our strategic review of our operations, we assessed the recoverability of the carrying value of our long-lived assets which resulted in impairment losses of$4.8 million and nil for the years endedDecember 31, 2022 and 2021, respectively. The impairment charge represented the excess of carrying amounts of our long-lived assets over the estimated fair value of the Company's production facilities in Hitrans for the production of materials used in manufacturing of lithium batteries, due to underperformance of Hitrans reporting unit. No impairment charge on production facilities inDalian andNanjing .Goodwill impairment charge.Goodwill impairment was$1.6 million for the year endedDecember 31, 2022 . The impairment loss of goodwill was primarily attributable to the impairment related to Hitrans reporting unit. Hitrans reporting unit carrying value exceeded the fair value as ofDecember 31, 2022 , due to underperformance of Hitrans reporting unit. Recovery of (provision for) doubtful accounts. Provision for doubtful accounts was$0.8 million for the year endedDecember 31, 2022 , as compared to a recovery of$0.8 million for 2021. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions.
Operating loss. As a result of the above, our operating loss totaled
Finance income, net. Finance income, net was$0.5 million for the year endedDecember 31, 2022 , as compared to finance income, net of$0.8 million for the year endedDecember 31, 2021 , as a result of a higher loan balance in 2022. The interest expenses for the year endedDecember 31, 2022 and 2021 was$0.6 million and$0.3 million , respectively.
Other income (expenses), net. Other expenses were
Changes in fair value of warrants liability. We issued warrants in the financings we consummated inDecember 2020 andFebruary 2021 , respectively. We determined that these warrants should be accounted for as derivative liabilities, as the warrants are dominated in a currency (U.S. dollar) other than our functional currency. The change in fair value of warrants liability is mainly due to our share price decline. Income tax credit. Income tax credit was$1.2 million and$7.7 million for the years endedDecember 31, 2022 and 2021, respectively. The decrease in the income tax credit was primarily due to the reduction in the uncertain tax positions taken by the Company in 2021.
Net (loss) income. As a result of the foregoing, we had a net loss of
Liquidity and Capital Resources
We have financed our liquidity requirements from a variety of sources, including short-term bank loans, other short-term loans and bills payable under bank credit agreements, advance from our related and unrelated parties, investors and issuance of capital stock.
We recorded a net loss of$11.3 million in the fiscal year endedDecember 31, 2022 . As ofDecember 31, 2022 , we had cash and cash equivalents and restricted cash of$37.4 million . Our total current assets were$125.7 million and our total current liabilities were$111.9 million , resulting in a net working capital surplus of$13.8 million .
Lending from Financial Institutions
OnNovember 16, 2021 , the Company obtained banking facilities fromShaoxing Branch of Bank of Communications Co., Ltd with a maximum amount ofRMB120.1 million (approximately$19.0 million ) with maturity dates ranging fromNovember 18, 2021 toNovember 18, 2026 . The facility was secured by the Company's land use rights and buildings. Under the facility, the Company has borrowedRMB 56.0 million (approximately 8.9 million) andRMB59.0 million (approximately$8.5 million ) as ofDecember 31, 2021 and 2022, respectively, for varying terms ending betweenNovember 16, 2022 andMay 16, 2023 , bearing interest at 4.15% - 4.35% per annum. We repaidRMB45 million (approximately$6.5 million ) inMarch 2023 and borrowedRMB60 million (approximately$8.7 million ) under the same facility for a term untilFebruary 15, 2024 tomarch 17, 2024 , bearing annual interest rate at 3.65%. 38 OnApril 19, 2021 , we obtained five-year acceptance bills facilities from Bank of Ningbo Co., Ltd with a maximum amount ofRMB84.4 million (approximately$13.2 million ). Any amount drawn under the facilities requires security in the form of cash or bank acceptance bills receivable of at least the same amount. Under the facilities, as ofDecember 31, 2021 , we borrowed a total ofRMB10 million (approximately$1.6 million ) from Bank of Ningbo Co., Ltd in the form of bills payable, with maturity dates ranging from January toFebruary 2022 , which were secured by our cash totalingRMB10 million (approximately$1.6 million ). OnMarch 21, 2022 , we renewed the above acceptance bills facilities from Bank of Ningbo Co., Ltd with a maximum amount ofRMB71.6 million ($10.4 million ) with other terms remain the same. Under the facilities, as ofDecember 31, 2022 , we borrowed a total ofRMB15.9 million (approximately$2.3 million ) in the form of bills payable for various terms expiring from January toJune 2023 , which was secured by our cash totalingRMB15.9 million (approximately$2.3 million ). We intend to renew the above acceptance facility from Bank of Ningbo Co., Ltd.
in the near future.
OnJanuary 17, 2022 , we obtained a one-year term facility from Agricultural Bank of China with a maximum amount ofRMB10 million (approximately$1.4 million ) bearing interest at 105% of benchmark rate of thePeople's Bank of China ("PBOC") for short-term loans, which is 3.85% per annum. The facility was guaranteed by the Company's CEO, Mr.Yunfei Li and Mr.Yunfei Li's wife Ms.Qinghui Yuan and secured by an unrelated third party,Jiangsu Credits Financing Guarantee Co., Ltd. We borrowedRMB10 million (approximately$1.4 million ) on the same date for a term untilJanuary 16, 2023 . We repaid the loan early onJanuary 5, 2023 .
OnJanuary 5, 2023 , we renewed the one-year term facility from Agricultural Bank of China, for a maximum amount ofRMB10 million (approximately$1.4 million ) for a period of one year toJanuary 4, 2024 , bearing interest at 120% of benchmark rate of the PBOC for short-term loans, which is 3.85% per annum, while other terms and guarantee remaining the same. We borrowedRMB10 million (approximately$1.4 million ) onJanuary 6, 2023 . OnFebruary 9, 2022 , we obtained a one-year term facility fromJiangsu Gaochun Rural Commercial Bank with a maximum amount ofRMB10 million (approximately$1.4 million ) bearing interest at 124% of benchmark rate of thePeople's Bank of China ("PBOC") for short-term loans, which is 4.94% per annum. The facility was guaranteed by the Company's CEO, Mr.Yunfei Li and Mr.Yunfei Li's wife Ms.Qinghui Yuan . We borrowedRMB10 million (approximately$1.4 million ) onFebruary 17, 2022 for a term untilJanuary 28, 2023 . We repaid the loan early onJanuary 16, 2023 . OnJanuary 14, 2023 , we renewed the one-year term facility fromJiangsu Gaochun Rural Commercial Bank , for a maximum amount ofRMB10 million (approximately$1.4 million ) bearing interest at 129% of benchmark rate of thePeople's Bank of China ("PBOC") for short-term loans, which is 4.7% per annum. We borrowedRMB10 million (approximately$1.4 million ) onJanuary 17, 2023 for a term untilJanuary 13, 2024 . OnMarch 8, 2022 , we obtained a one-year term facility from China Zheshang Bank Co., Ltd. Shangyu Branch with a maximum amount ofRMB10 million (approximately$1.4 million ) bearing interest at 5. 5% per annum. The facility was guaranteed by 100% equity inCBAK Power held by BAK Asia and the Company's CEO, Mr.Yunfei Li . The Company borrowedRMB10 million (approximately$1.6 million ) on the same date. OnMay 17, 2022 , we repaid the loan principal and related loan interests. OnApril 28, 2022 , we obtained a three-year term facility from Industrial andCommercial Bank of China Nanjing Gaochun branch, with a maximum amount ofRMB12 million (approximately$1.7 million ) with the term fromApril 21, 2022 toApril 21, 2025 . The facilities were guaranteed by our CEO, Mr.Yunfei Li and Mr.Yunfei Li's wife Ms.Qinghui Yuan . Under the facility, we borrowedRMB10 million (approximately$1.4 million ) onApril 29, 2022 , bearing interest at 3.95% per annum for a term untilApril 29, 2023 . OnJune 22, 2022 , we obtained another one-year term facility from China Zheshang Bank Co., Ltd. Shangyu Branch with a maximum amount ofRMB10 million (approximately$1.4 million ) bearing interest at 4.5% per annum. The facility was guaranteed by 100% equity inCBAK Power held by BAK Asia and our CEO, Mr.Yunfei Li . The Company borrowedRMB10 million (approximately$1.4 million ) on the same date for a term untilJune 21, 2023 . We repaid the loan onNovember 10, 2022 . OnSeptember 25, 2022 , we entered into a new one-year term facility withJiangsu Gaochun Rural Commercial Bank with a maximum amount ofRMB9 million (approximately$1.3 million ) bearing interest rate at 4.81% per annum. The facility was guaranteed by 100% equity in CBAK Nanjing held byBAK Investment and our CEO, Mr.Yunfei Li and Mr.Yunfei Li's wife Ms.Qinghui Yuan . We borrowedRMB9 million (approximately$1.3 million ) onSeptember 27, 2022 for a term untilSeptember 24, 2023 . OnNovember 8, 2022 , we obtained a one-year term facility from China CITIC Bank with a maximum amount ofRMB10 million (approximately$1.4 million ). OnNovember 8, 2022 , we borrowedRMB10 million (approximately$1.4 million ) under the facility, bearing interest rate at 4.35% per annum, with the maturity date toAugust 9, 2023 . We repaidRMB5.0 million (approximately$0.7 million ) andRMB0.2 million (approximately$0.1 million ) onNovember 16, 2022 andDecember 27, 2022 , respectively. OnDecember 27, 2022 , we entered into another facility with China CITIC Bank for a maximum amount ofRMB0.2 million (approximately$0.1 million ), the interest rate is 4.2%, and the maturity date isDecember 27, 2023 . OnDecember 9, 2022 , we obtained aRMB5 million (approximately$0.7 million ) letter of credit from China CITIC Bank for a period toOctober 30, 2024 for settlement of Hitrans purchase. We have not utilized the letter of credit as ofDecember 31, 2022 . OnJanuary 5, 2023 , we utilizedRMB 1.5 million (approximately$0.2 million ) at an interest rate of 2.7% for a period of one year toJanuary 5, 2024 . OnJanuary 7, 2023 , we obtained a two-year term facility from Postal SavingsBank of China , NanjingTianhe Branch with a maximum amount ofRMB10 million (approximately$1.4 million ) for a period fromJanuary 7, 2023 toJanuary 6, 2025 . The facility was guaranteed by the Company's CEO, Mr.Yunfei Li , Mr.Yunfei Li's wife Ms.Qinghui Yuan and CBAK New Energy (Nanjing ) Co., Ltd. We borrowedRMB5 million (approximately$0.7 million ) onJanuary 12, 2023 for a term of one year untilJanuary 11, 2024 , bearing interest at 3.65% per annum. 39 We borrowed a series of acceptance bills from Agricultural Bank of China totalingRMB28.4 million (approximately$4.1 million ) for various terms through January toMarch 2023 , which were secured by our cash totalingRMB28.4 million (approximately$4.1 million ).
We borrowed a series of acceptance bills from
We borrowed a series of acceptance bills from China Zheshang Bank Co. Ltd
Shangyu Branch totaling
We borrowed a series of acceptance bills fromShaoxing Branch of Bank of Communications Co., Ltd totalingRMB21.9 million (approximately$3.2 million ) for various terms ending through March toMay 2023 , which were secured by our cash totalingRMB12.2 million (approximately$1.8 million ) and our land use rights and buildings. We borrowed a series of acceptance bills from China MerchantsBank Dalian Branch totalingRMB96.4 million (approximately$14.0 million ) for various terms ending through January toJune 2023 , which was secured by our cash totalingRMB96.4 million (approximately$14.0 million ). As ofDecember 31, 2022 , we had unutilized committed banking facilities of$6.8 million . We plan to renew these loans upon maturity and intend to raise additional funds through bank borrowings in the future to meet our daily cash demands, if required.
Equity and Debt Financings from Investors
In addition, we have obtained funds through private placements, registered direct offerings and other equity and debt financings:
OnJuly 28, 2016 , the Company entered into securities purchase agreements with Mr.Jiping Zhou and Mr.Dawei Li to issue and sell an aggregate of 2,206,640 shares of common stock of the Company, at$2.5 per share, for an aggregate consideration of approximately$5.52 million . OnAugust 17, 2016 , the Company issued the foregoing shares to the two investors. OnFebruary 17, 2017 , we signed a letter of understanding with each of eight individual investors, including our CEO, Mr.Yunfei Li , whereby these shareholders agreed in principle to subscribe for new shares of our common stock totaling$10 million . The issue price was determined with reference to the market price prior to the issuance of new shares. InJanuary 2017 , the shareholders paid us a total of$2.1 million as refundable earnest money, among which, Mr.Yunfei Li agreed to subscribe new shares totaling$1.12 million and pay a refundable earnest money of$0.2 million . In April andMay 2017 , we received cash of$9.6 million from these shareholders. OnMay 31, 2017 , we entered into a securities purchase agreement with these investors, pursuant to which we agreed to issue an aggregate of 6,403,518 shares of common stock to these investors, at a purchase price of$1.50 per share, for an aggregate price of$9.6 million , including 764,018 shares issued to Mr.Yunfei Li . OnJune 22, 2017 , we issued the shares to the investors. The issuance of the shares to the investors was made in reliance on the exemption provided by Section 4(a)(2) of the Securities Act. In 2019, according to the securities purchase agreement and agreed by the investors, we returned partial earnest money of$966,579 (approximatelyRMB6.7 million ) to these investors. OnJanuary 7, 2019 , each of Mr.Dawei Li and Mr.Yunfei Li entered into an agreement withCBAK Power and Tianjin New Energy whereby Tianjin New Energy assigned its rights to loans toCBAK Power of approximately$3.4 million (RMB23,980,950 ) and$1.7 million (RMB11,647,890 ) (totaled$5.1 million , the "First Debt") to Mr.Dawei Li and Mr.Yunfei Li , respectively. On the same date, the Company entered into a cancellation agreement with Mr.Dawei Li and Mr.Yunfei Li . Pursuant to the terms of the cancellation agreement, Mr.Dawei Li and Mr.Yunfei Li agreed to cancel the First Debt in exchange for 3,431,373 and 1,666,667 shares of common stock of the Company, respectively, at an exchange price of$1.02 per share. Upon receipt of the shares, the creditors released the Company from any claims, demands and other obligations relating to the First Debt. OnApril 26, 2019 , each of Mr.Jun Lang , Ms.Jing Shi and Asia EVK Energy Auto Limited ("Asia EVK") entered into an agreement withCBAK Power andTianjin New Energy whereby Tianjin New Energy assigned its rights to loans toCBAK Power of approximately$0.3 million (RMB2,225,082 ),$0.1 million (RMB 912,204 ) and$5.2 million (RMB35,406,036 ) (collectively$5.7 million , the "Second Debt") to Mr.Jun Lang , Ms.Jing Shi and Asia EVK, respectively. On the same date, the Company entered into a cancellation agreement with Mr.Jun Lang , Ms.Jing Shi andAsia EVK (the creditors). Pursuant to the terms of the Cancellation Agreement, the creditors agreed to cancel the Second Debt in exchange for 300,534, 123,208 and 4,782,163 shares of common stock of the Company, respectively, at an exchange price of$1.1 per share. Upon receipt of the shares, the creditors released the Company from any claims, demands and other obligations relating to the Second Debt. OnJune 28, 2019 , each of Mr.Dawei Li and Mr.Yunfei Li entered into an agreement withCBAK Power to loan approximately$1.4 million (RMB10,000,000 ) and$2.5 million (RMB18,000,000 ), respectively, toCBAK Power for a terms of six months (collectively$3.9 million , the "Third Debt"). The loan was unsecured, non-interest bearing and repayable on demand. OnJuly 16, 2019 , each of Asia EVK and Mr.Yunfei Li entered into an agreement withCBAK Power andDalian Zhenghong Architectural Decoration andInstallation Engineering Co. Ltd. (the Company's construction contractor) wherebyDalian Zhenghong Architectural Decoration and Installation Engineering Co. Ltd. assigned its rights to the unpaid construction fees owed byCBAK Power of approximately$2.8 million (RMB20,000,000 ) and$0.4 million (RMB2,813,810 ) (collectively$3.2 million , the "Fourth Debt") toAsia EVK and Mr.Yunfei Li , respectively. OnJuly 26, 2019 , we entered into a cancellation agreement with Mr.Dawei Li , Mr.Yunfei Li and Asia EVK (the creditors). Pursuant to the terms of the cancellation agreement, Mr.Dawei Li , Mr.Yunfei Li and Asia EVK agreed to cancel the Third Debt and Fourth Debt in exchange for 1,384,717, 2,938,067 and 2,769,435 shares of common stock of the Company, respectively, at an exchange price of$1.05 per share. Upon receipt of the shares, the creditors released the Company from any claims, demands and other obligations relating to the Third Debt and Fourth Debt. 40 OnOctober 10, 2019 , each of Mr.Shibin Mao , Ms.Lijuan Wang and Mr.Ping Shen entered into an agreement withCBAK Power andZhengzhou BAK New Energy Vehicle Co., Ltd. (the Company's supplier) wherebyZhengzhou BAK New Energy Vehicle Co., Ltd. assigned its rights to the unpaid inventories cost owed byCBAK Power of approximately$2.1 million (RMB15,000,000 ),$1.0 million (RMB7,380,000 ) and$1.0 million (RMB7,380,000 ) (collectively$4.2 million , the "Fifth Debt") to Mr.Shibin Mao , Ms.Lijuan Wang and Mr.Ping Shen , respectively. OnOctober 14, 2019 , we entered into a cancellation agreement with Mr. Shangdong Liu, Mr.Shibin Mao , Ms.Lijuan Wang and Mr.Ping Shen (the creditors). Pursuant to the terms of the cancellation agreement, Mr. Shangdong Liu, Mr.Shibin Mao , Ms.Lijuan Wang and Mr.Ping Shen agreed to cancel and convert the Fifth Debt and the unpaid earnest money in exchange for 528,053, 3,536,068, 2,267,798 and 2,267,798 shares of common stock of the Company, respectively, at an exchange price of$0.6 per share. Upon receipt of the shares, the creditors released the Company from any claims, demands and other obligations relating to the Fifth Debt and the unpaid earnest money. OnApril 27, 2020 , we entered into a cancellation agreement with Mr.Yunfei Li , Asia EVK and Mr.Ping Shen , who loaned an aggregate of approximately$4.3 million toCBAK Power (the "Sixth Debt"). Pursuant to the terms of the cancellation agreement, the creditors agreed to cancel the Sixth Debt in exchange for an aggregate of 8,928,193 shares of common stock of the Company at an exchange price of$0.48 per share. According to the amount of loan, 2,062,619, 2,151,017 and 4,714,557 shares were issued to Mr.Yunfei Li , Asia EVK and Mr.Pin Shen , respectively. Upon receipt of the shares, the creditors released the Company from any claims, demands and other obligations relating to the Sixth Debt. OnJuly 24, 2019 , we entered into a securities purchase agreement withAtlas Sciences, LLC (the "Lender"), pursuant to which we issued a promissory note (the "Note I") to the Lender. The Note I has an original principal amount of$1,395,000 , bears interest at a rate of 10% per annum and will mature 12 months after the issuance, unless earlier paid or redeemed in accordance with its terms. The Company received proceeds of$1,250,000 after an original issue discount of$125,000 and payment of Lender's expenses of$20,000 . OnDecember 30, 2019 , we entered into a second securities purchase agreement withAtlas Sciences, LLC , pursuant to which the Company issued a promissory note (the "Note II") to the Lender. The Note II has an original principal amount of$1,670,000 , bears interest at a rate of 10% per annum and will mature 12 months after the issuance, unless earlier paid or redeemed in accordance with its terms. We received proceeds of$1,500,000 after an original issue discount of$150,000 and payment of Lender's expenses of$20,000 . OnJanuary 27, 2020 , we entered into an exchange agreement (the "First Exchange Agreement") with the Lender, pursuant to which we and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$100,000 (the "Partitioned Promissory Note) from the outstanding balance of certain promissory note that the Company issued to the Lender onJuly 24, 2019 , which has an original principal amount of$1,395,000 , and (ii) exchange the Partitioned Promissory Note for the issuance of 160,256 shares of the Company's common stock, par value$0.001 per share, to the Lender. OnFebruary 20, 2020 , we entered into another exchange agreement (the "Second Exchange Agreement") with the Lender, pursuant to which the Company and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$100,000 (the "Partitioned Promissory Note") from the outstanding balance of certain promissory note that the Company issued to the Lender onJuly 24, 2019 , which has an original principal amount of$1,395,000 , and (ii) exchange the Partitioned Promissory Note for the issuance of 207,641 shares of the Company's common stock, par value$0.001 per share, to the Lender. OnApril 28, 2020 , we entered into a third exchange agreement (the "Third Exchange Agreement") with the Lender, pursuant to which the Company and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$100,000 (the "Partitioned Promissory Note") from the outstanding balance of certain promissory note that the Company issued to the Lender onJuly 24, 2019 , which has an original principal amount of$1,395,000 , and (ii) exchange the Partitioned Promissory Note for the issuance of 312,500 shares of the Company's common stock, par value$0.001 per share, to the Lender. 41 OnJune 8, 2020 , we entered into a fourth exchange agreement (the "Fourth Exchange Agreement") with the Lender, pursuant to which the Company and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$100,000 from the outstanding balance of certain promissory note that the Company issued to the Lender onJuly 24, 2019 , which has an original principal amount of$1,395,000 , and (ii) exchange the partitioned promissory note for the issuance of 271,739 shares of the Company's common stock, par value$0.001 per share to the Lender. OnJune 10, 2020 , we entered into a fifth exchange agreement (the "Fifth Exchange Agreement") with the Lender, pursuant to which the Company and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$150,000 from the outstanding balance of certain promissory note that the Company issued to the Lender onJuly 24, 2019 , which has an original principal amount of$1,395,000 , and (ii) exchange the partitioned promissory note for the issuance of 407,609 shares of the Company's common stock, par value$0.001 per share to the Lender. OnJuly 6, 2020 , we entered into a sixth exchange agreement (the "Sixth Exchange Agreement") with the Lender, pursuant to which the Company and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$250,000 from the outstanding balance of certain promissory note that the Company issued to the Lender onJuly 24, 2019 , which has an original principal amount of$1,395,000 , and (ii) exchange the partitioned promissory note for the issuance of 461,595 shares of the Company's common stock, par value$0.001
per share to the Lender. OnJuly 8, 2020 , we entered into certain exchange agreement with the Lender, pursuant to which the Company and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$250,000 from the outstanding balance of certain promissory note that the Company issued to the Lender onDecember 30, 2019 , which has an original principal amount of$1,670,000 , and (ii) exchange the partitioned promissory note for the issuance of 453,161 shares of the Company's common stock, par value$0.001 per share
to the Lender. OnJuly 29, 2020 , we entered into a seventh exchange agreement (the "Seventh Exchange Agreement") with the Lender, pursuant to which the Company and the Lender agreed to (i) partition a new promissory note in the original principal amount equal to$365,000 from the outstanding balance of certain promissory note that the Company issued to the Lender onJuly 24, 2019 , which has an original principal amount of$1,395,000 , and (ii) exchange the partitioned promissory note for the issuance of 576,802 shares of the Company's common stock, par value$0.001 per share to the Lender. OnOctober 12, 2020 , we entered into an amendment to promissory notes (the "Amendment") with the Lender, pursuant to which the Lender has the right at any time until the outstanding balance of the notes has been paid in full, at its election, to convert all or any portion of the outstanding balance of the notes into shares of common stock of the Company. The conversion price for each conversion will be calculated pursuant to the following formula: 80% multiplied by the lowest closing price of the Company common stock during the ten (10) trading days immediately preceding the applicable conversion. Notwithstanding the foregoing, in no event will the conversion price be less than$1.00 .
According to the Amendment, on
OnOctober 20, 2020 , the Company exchanged the remaining balance of$778,252 under the notes for the issuance of 329,768 shares of common stock, par value$0.001 per share to the Lender. OnNovember 5, 2020 ,Tillicum Investment Company Limited entered into an agreement withCBAK Nanjing and Shenzhen ESTAR Industrial Company Limited (the Company's equipment supplier) wherebyShenzhen ESTAR Industrial Company Limited assigned its rights to the unpaid equipment cost owed byCBAK Power of approximately $$11.17 million (RMB75,000,000 ) (the "Seventh Debt") toTillicum Investment Company Limited . 42 OnNovember 11, 2020 , we entered into a cancellation agreement withTillicum Investment Company Limited . Pursuant to the terms of the cancellation agreement,Tillicum Investment Company Limited agreed to cancel the Seventh Debt in exchange for 3,192,291 shares of common stock of the Company, at an exchange price of$3.5 per share. Upon receipt of the shares, the creditor released the Company from any claims, demands and other obligations relating to the Seventh Debt. OnDecember 8, 2020 , we entered into a securities purchase agreement with certain institutional investors, pursuant to which we issued in a registered direct offering, an aggregate of 9,489,800 shares of common stock of the Company at a per share purchase price of$5.18 , and warrants to purchase an aggregate of 3,795,920 shares of common stock of the Company at an exercise price of$6.46 per share exercisable for 36 months from the date of issuance, for gross proceeds of approximately$49.16 million , before deducting fees to the placement agent and other offering expenses payable by the Company. OnFebruary 8, 2021 , we entered into another securities purchase agreement with the same investors, pursuant to which we issued in a registered direct offering, an aggregate of 8,939,976 shares of common stock of the Company at a per share purchase price of$7.83 . In addition, we issued to the investors (i) in a concurrent private placement, the Series A-1 warrants to purchase a total of 4,469,988 shares of common stock, at a per share exercise price of$7.67 and exercisable for 42 months from the date of issuance; (ii) in the registered direct offering, the Series B warrants to purchase a total of 4,469,988 shares of common stock, at a per share exercise price of$7.83 and exercisable for 90 days from the date of issuance; and (iii) in the registered direct offering, the Series A-2 warrants to purchase up to 2,234,992 shares of common stock, at a per share exercise price of$7.67 and exercisable for 45 months from the date of issuance. We received gross proceeds of approximately$70 million from the registered direct offering and the concurrent private placement, before deducting fees to the placement agent and other offering expenses payable by the Company. OnMay 10, 2021 , we entered into that Amendment No. 1 to the Series B Warrant (the "Series B Warrant Amendment") with each of the holders of the Company's outstanding Series B warrants. Pursuant to the Series B Warrant Amendment, the term of the Series B warrants was extended fromMay 11, 2021 toAugust 31, 2021 . As ofAugust 31, 2021 , we had not received any notices from the investors to exercise Series B warrants. As of the date of this report, Series B warrants, along with Series A-2 warrants, had both expired. We currently are expanding our product lines and manufacturing capacity in our Dalian andNanjing plants, which require more funding to finance the expansion. We may also require additional cash due to changing business conditions or other future developments, including any investments or acquisitions we may decide to pursue. We plan to renew our bank loans upon maturity, if required, and plan to raise additional funds through bank borrowings and equity financing in the future to meet our daily cash demands, if required. However, there can be no assurance that we will be successful in obtaining such financing. If our existing cash and bank borrowing are insufficient to meet our requirements, we may seek to sell equity securities, debt securities or borrow from lending institutions. We can make no assurance that financing will be available in the amounts we need or on terms acceptable to us, if at all. The sale of equity securities, including convertible debt securities, would dilute the interests of our current shareholders. The incurrence of debt would divert cash for working capital and capital expenditures to service debt obligations and could result in operating and financial covenants that restrict our operations and our ability to pay dividends to our shareholders. If we are unable to obtain additional equity or debt financing as required, our business operations and prospects may suffer. The following table sets forth a summary of our cash flows for the periods indicated: (All amounts in thousands of U.S. dollars) Year Ended December 31, December 31, 2021 2022 Net cash (used in) provided by operating activities$ (4,270 ) $ 15 , 115 Net cash used in investing activities (38,081 ) (7,928 ) Net cash provided by financing activities 48,272 5,611
Effect of exchange rate changes on cash and cash equivalents and restricted cash
(238 ) (1,797 )
Net increase in cash and cash equivalents and restricted cash
5,683 11,001
Cash and cash equivalents and restricted cash at the beginning of the year
20,672 26,355
Cash and cash equivalents and restricted cash at the end of
the year $ 26,355 $ 37,356
43
Operating Activities
Net cash provided by operating activities was $15.1 million in the year ended
December 31, 2022 , as compared to net cash used in operating activities of $4.3
million in 2021. The net cash provided by operating activities in 2022 was
mainly attributable to our net income of $6.9 million (before loss on disposal
of property, plant and equipment, impairment charge of long-lived assets,
impairment charge of goodwill and excluding non-cash depreciation and
amortization, write-down of inventories, share-based compensation and changes in
fair value of warrants liability), a decrease of trade and bills receivable of
$21.0 million , decrease of prepayments and other receivables of $7.1 million ,
increase of trade and bills payable by $7.6 million offset by increase of
inventories of $24.0 million and increase of trade receivable from BAK Shenzhen
of $3.5 million .
Net cash used in operating activities was $4.3 million in the year ended
December 31, 2021 . The net cash used in operating activities in 2021 was mainly
attributable to our net profit (before loss on disposal of property, plant and
equipment, impairment charge of non-marketable equity securities and excluding
non-cash depreciation and amortization, write-down of inventories, share-based
compensation and changes in fair value of warrants liability) of $4.6 million
offset by a decrease of uncertain tax position of 7.5 million.
Investing Activities
Net cash used in investing activities decreased to $7.9 million in the fiscal
year ended December 31, 2022 , from $38.1 million in 2021. In 2022, the primary
uses of net cash for investing activities were purchases of property, plant and
equipment, and construction in progress, totaling $12.4 million offset by $4.5
million cash receipt from disposal of equity interest of Hitrans.
Net cash used in investing activities was $38.1 million in the fiscal year ended
December 31, 2021 . In 2021, net cash used in investing activities comprised
$17.8 million for acquiring Hitrans (net of cash acquired), $1.4 million for
purchasing non-marketable securities and $19.2 million for the acquisition of
property, plant and equipment and in-progress construction projects.
Financing Activities
Net cash provided by financing activities was $5.6 million in the fiscal year
ended December 31, 2022 , compared with $48.3 million in 2021. The net cash
provided by financing activities for the year ended December 31, 2022 mainly
comprised of $21.6 million bank borrowings, $1.5 million from non-controlling
interests injections, $1.5 million from finance leases, partially offset by
repayment of bank borrowings of $14.6 million , and $3.7 million in repayment of
loans to Mr. Ye Junnan.
Net cash provided by financing activities was $48.3 million in the fiscal year
ended December 31, 2021 . In 2021, net cash provided by financing activities
mainly comprised $65.5 million in net proceeds from issuance of shares to
institutional investors, partially offset by the repayment of bank borrowings of
$13.9 million , $2.8 million in loans repaid to Mr. Ye Junnan and repayment of
borrowings from unrelated parties of $0.4 million .
As of
(All amounts in thousands of U.S. dollars)
Maximum
amount Amount
available borrowed
Long-term credit facilities:
Shaoxing Branch of Bank of Communications Co., Ltd $ 14,300 $ 8,540
Industrial and Commercial Bank of China Limited 1,737
1,447
China CITIC Bank 724 -
16,761 9,987
Short-term credit facilities:
China CITIC Bank 724 724
Jiangsu Gaochun Rural Commercial Bank 2,750
2,750
Agricultural Bank of China 1,447 1,447
4,921 4,921
Other lines of credit:Shaoxing Branch of Bank of Communications Co., Ltd 3,167
3,167
AgriculturalBank of China 4,114
4,114
Jiangsu Gaochun Rural Commercial Bank 969 969 Bank of Ningbo Nanjing Gaochun Branch 2,296
2,296
China Zheshang Bank Co., Ltd 10,475
10,475
China Merchants Bank Co., Ltd, Dalian Development Zone Branch 13,954
13,954
34,975 34,975
Total $ 56,657 $ 49,883
44
Capital Expenditures
We incurred capital expenditures of$19.2 million and$12.4 million in the fiscal years endedDecember 31, 2022 and 2021, respectively. Our capital expenditures in 2022 were primarily allocated to the construction of our Dalian andNanjing facilities. The table below sets forth the breakdown of our capital expenditures by use for the periods indicated. (All amounts in thousands of U.S. dollars) Year Ended December 31, December 31, 2021 2022 Purchase of property, plant and equipment and construction in progress$ 19,212 $ 12,373 We estimate that our total capital expenditures in fiscal year 2023 will reach approximately$80 million . Such funds will be used to construct new plants with new production lines and battery module packing lines.
Critical Accounting Policies and Estimates
Our consolidated financial information has been prepared in accordance withU.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (1) the reported amounts of our assets and liabilities, (2) the disclosure of our contingent assets and liabilities at the end of each fiscal period and (3) the reported amounts of revenues and expenses during each fiscal period. We continually evaluate these estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and reasonable assumptions, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application. When reviewing our financial statements, the following should also be considered: (1) our selection of critical accounting policies, (2) the judgment and other uncertainties affecting the application of those policies, and (3) the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgment and estimates used in the preparation of our financial statements.
We consider the following to be the most critical accounting policies:
Revenue Recognition
We recognize revenues when our customer obtains control of promised goods or
services, in an amount that reflects the consideration which it expects to
receive in exchange for those goods. We recognize revenues following the five
step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a
customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenues when (or as)
we satisfy the performance obligation.
45
Revenues from product sales are recognized when the customer obtains control of
our product, which occurs at a point in time, typically upon delivery to the
customer. We expense incremental costs of obtaining a contract as and when
incurred if the expected amortization period of the asset that it would have
recognized is one year or less or the amount is immaterial.
Revenues from product sales are recorded net of reserves established for applicable discounts and allowances that are offered within contracts with our customers.
Product revenue reserves, which are classified as a reduction in product revenues, are generally characterized in the categories: discounts and returns. These reserves are based on estimates of the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable as the amount is payable to our customer.
Impairment of Long-lived Assets
Long-lived assets, which include property, plant and equipment, prepaid land use rights, leased assets and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Trade and Bills Receivable Trade and bills receivable are recorded at the invoiced amount, net of allowances for doubtful accounts and sales returns. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing trade receivable. We determine the allowance based on historical write-off experience, customer specific facts and economic conditions.
Outstanding trade receivable balances are reviewed individually for collectability. Trade balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Inventories
Inventories are stated at the lower of cost or net realizable value. The cost of
inventories is determined using the weighted average cost method, and includes
expenditure incurred in acquiring the inventories and bringing them to their
existing location and condition. In case of finished goods and work in progress,
cost includes an appropriate share of production overhead based on normal
operating capacity. Net realizable value is the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation.
We record adjustments to its inventory for estimated obsolescence or diminution
in net realizable value equal to the difference between the cost of the
inventory and the estimated net realizable value. At the point of loss
recognition, a new cost basis for that inventory is established, and subsequent
changes in facts and circumstances do not result in the restoration or increase
in that newly established cost basis.
Warranties
We provide a manufacturer's warranty on all our products. We accrue a warranty
reserve for the products sold, which includes our best estimate of the projected
costs to repair or replace items under warranty. These estimates are based on
actual claims incurred to date and an estimate of the nature, frequency and
costs of future claims. These estimates are inherently uncertain given our
relatively short history of sales of our current products, and changes to our
historical or projected warranty experience may cause material changes to the
warranty reserve in the future. The portion of the warranty reserve expected to
be incurred within the next 12 months is included within accrued liabilities and
other while the remaining balance is included within other long-term liabilities
on the consolidated balance sheets.
46
Government Grants
Our subsidiaries in China receive government subsidies from local Chinese
government agencies in accordance with relevant Chinese government policies. In
general, we present the government subsidies received as part of income unless
the subsidies received are earmarked to compensate a specific expense, which
have been accounted for by offsetting the specific expense, such as research and
development expense, interest expenses and removal costs. Unearned government
subsidies received are deferred for recognition until the criteria for such
recognition could be met.
Grants applicable to land are amortized over the life of the depreciable facilities constructed on it. For research and development expenses, we match and offset the government grants with the expenses of the research and development activities as specified in the grant approval document in the corresponding period when such expenses are incurred.
Share-based Compensation
We adopted the provisions of ASC Topic 718 which requires us to measure and recognize compensation expenses for an award of an equity instrument based on the grant-date fair value. The cost is recognized over the vesting period (or the requisite service period). ASC Topic 718 also requires us to measure the cost of a liability classified award based on its current fair value. The fair value of the award will be remeasured subsequently at each reporting date through the settlement date. Changes in fair value during the requisite service period are recognized as compensation cost over that period. Further, ASC Topic 718 requires us to estimate forfeitures in calculating the expense related
to stock-based compensation.
The fair value of each option award is estimated on the date of grant using the Black-Scholes Option Valuation Model. The expected volatility was based on the historical volatilities of our listed common stocks inthe United States and other relevant market information. We use historical data to estimate share option exercises and employee departure behavior used in the valuation model. The expected terms of share options granted is derived from the output of the option pricing model and represents the period of time that share options granted are expected to be outstanding. Since the share options once exercised will primarily trade in theU.S. capital market, the risk-free rate for periods within the contractual term of the share option is based on theU.S. Treasury yield curve in effect at the time of grant. Warrant Liability For warrants that are not indexed to the Company's stock, the Company records the fair value of the issued warrants as a liability at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statement of operations and comprehensive income. The warrant liability is recognized in the balance sheet at the fair value (level 3). The fair value of these warrants has been determined using the Binomial model.
Changes in Accounting Standards
Please refer to note 2 to our consolidated financial statements, "Summary of Significant Accounting Policies and Practices-Recently Adopted Accounting Standards," for a discussion of relevant pronouncements.
Exchange Rates The financial records of our PRC subsidiaries are maintained in RMB. In order to prepare our financial statements, we have translated amounts in RMB into amounts inU.S. dollars. The amounts of our assets and liabilities on our balance sheets are translated using the closing exchange rate as of the date of the balance sheet. Revenues, expenses, gains and losses are translated using the average exchange rate prevailing during the period covered by such financial statements. Adjustments resulting from the translation, if any, are included in our cumulative other comprehensive income in our stockholders' equity section of our balance sheet. All other amounts that were originally booked in RMB and translated intoU.S. dollars were translated using the closing exchange rate on the date of recognition. Consequently, the exchange rates at which the amounts in those comparisons were computed varied from year to year. The exchange rates used to translate amounts in RMB intoU.S. dollars in connection with the preparation of our financial statements were as follows: RMB per U.S. Dollar Fiscal Year Ended December 31, December 31, 2021 2022 Balance sheet items, except for equity accounts 6.3551 6.9091 Amounts included in the statement of income and comprehensive loss and statement of cash flows 6.4525 6.7264
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