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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | |
Or | |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _________ to _________ | |
Commission file number:
(Exact name of registrant as specified in its charter)
| ||
(State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) | |
organization) |
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(Address of principal executive offices)
( |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which |
The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
The |
As of November 12, 2021, the Company had
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
2
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission.
3
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Three Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Net product sales ($ | $ | | $ | | ||
Cost of products sold ($ |
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Gross profit |
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Gain on other sales |
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Less: Operating expenses |
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Selling expenses |
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General and administrative expenses |
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Research and development expenses |
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Total operating expenses |
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Income from operations |
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Other income |
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Interest expense |
| ( |
| ( | ||
Financial expense, net |
| ( |
| ( | ||
Income/(loss) before income tax expenses and equity in earnings of affiliated companies |
| |
| ( | ||
Less: Income taxes expense/(benefit) |
| |
| ( | ||
Add: Equity in earnings of affiliated companies |
| |
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Net (loss)/income |
| ( |
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Less: Net income/(loss) attributable to non-controlling interests |
| |
| ( | ||
Accretion to redemption value of redeemable non-controlling interests | ( | ( | ||||
Net (loss)/income attributable to parent company’s common shareholders | $ | ( | $ | | ||
Comprehensive income: |
|
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Net (loss)/income | $ | ( | $ | | ||
Other comprehensive income: |
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| ||||
Foreign currency translation (loss)/income, net of tax |
| ( |
| | ||
Comprehensive (loss)/income |
| ( |
| | ||
Comprehensive (loss)/income attributable to non-controlling interests |
| ( |
| | ||
Accretion to redemption value of redeemable non-controlling interests | ( | ( | ||||
Comprehensive (loss)/income attributable to parent company | $ | ( | $ | | ||
|
| |||||
Net (loss)/income attributable to parent company’s common shareholders per share - |
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Basic | $ | ( | $ | | ||
Diluted | $ | ( | $ | | ||
Weighted average number of common shares outstanding - |
|
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Basic |
| |
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Diluted |
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The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
4
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Nine Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Net product sales ($ | $ | | $ | | ||
Cost of products sold ($ |
| |
| | ||
Gross profit |
| |
| | ||
Gain on other sales |
| |
| | ||
Less: Operating expenses |
|
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Selling expenses |
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General and administrative expenses |
| |
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Research and development expenses |
| |
| | ||
Total operating expenses |
| |
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Income/(loss) from operations |
| |
| ( | ||
Other income, net |
| |
| | ||
Interest expense |
| ( |
| ( | ||
Financial expense, net |
| ( |
| ( | ||
Income/(loss) before income tax expenses and equity in earnings of affiliated companies |
| |
| ( | ||
Less: Income taxes expense |
| |
| | ||
Add: Equity in earnings of affiliated companies |
| |
| | ||
Net income/(loss) |
| |
| ( | ||
Less: Net loss attributable to non-controlling interests |
| ( |
| ( | ||
Accretion to redemption value of redeemable non-controlling interests | ( | ( | ||||
Net income/(loss) attributable to parent company’s common shareholders | $ | | $ | ( | ||
Comprehensive income: |
|
| ||||
Net income/(loss) | $ | | $ | ( | ||
Other comprehensive income: |
|
| ||||
Foreign currency translation income, net of tax |
| |
| | ||
Comprehensive income |
| |
| | ||
Comprehensive loss attributable to non-controlling interests |
| ( |
| ( | ||
Accretion to redemption value of redeemable non-controlling interests | ( | ( | ||||
Comprehensive income attributable to parent company | $ | | $ | | ||
|
| |||||
Net income/(loss) attributable to parent company’s common shareholders per share - |
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Basic | $ | | $ | ( | ||
Diluted | $ | | $ | ( | ||
Weighted average number of common shares outstanding - |
|
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Basic |
| |
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Diluted |
| |
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Share-based compensation included in operating expense above is as follows: | ||||||
General and administrative expenses | | | ||||
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
5
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
|
| September 30, 2021 |
| December 31, 2020 | ||
ASSETS |
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Current assets: |
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Cash and cash equivalents | $ | $ | | |||
Pledged cash |
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Accounts and notes receivable, net - unrelated parties |
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Accounts and notes receivable - related parties |
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Inventories |
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Other current assets |
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Total current assets |
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Non-current assets: |
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Property, plant and equipment, net |
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Land use rights, net | | |||||
Long-term investments |
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Other non-current assets |
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Total assets | $ | $ | | |||
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Short-term loans | $ | $ | | |||
Accounts and notes payable - unrelated parties |
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Accounts and notes payable - related parties |
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Accrued expenses and other payables |
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Other current liabilities |
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Total current liabilities |
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Long-term liabilities: |
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Other long-term payable |
| — |
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Long-term tax payable |
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Other non-current liabilities |
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Total liabilities | $ | | $ | | ||
Commitments and Contingencies (See Note 23) |
|
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Mezzanine equity: | ||||||
Redeemable non-controlling interests | | | ||||
Stockholders’ equity: |
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Common stock, $ | $ | | $ | | ||
Additional paid-in capital |
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Retained earnings- |
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Appropriated |
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Unappropriated |
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Accumulated other comprehensive income |
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Treasury stock – |
| ( |
| ( | ||
Total parent company stockholders' equity |
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Non-controlling interests |
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Total stockholders' equity |
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Total liabilities, mezzanine equity and stockholders' equity | $ | | $ | | ||
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
6
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Cash Flows
(In thousands of USD unless otherwise indicated)
Nine Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Cash flows from operating activities: |
|
|
|
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Net income/(loss) | $ | | $ | ( | ||
Adjustments to reconcile net income/(loss)from operations to net cash (used in)/provided by operating activities: |
|
|
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Share-based compensation |
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Depreciation and amortization |
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Provision/(reversal) of credit losses |
| |
| ( | ||
Deferred income taxes |
| |
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Equity in gain of affiliated companies |
| ( |
| ( | ||
Government subsidy reclassified from government loans | | | ||||
Loss on fixed assets disposals | | | ||||
(Increase)/decrease in: |
|
| ||||
Accounts and notes receivable |
| |
| | ||
Inventories |
| ( |
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Other current assets |
| ( |
| | ||
Increase/(decrease) in: |
|
| ||||
Accounts and notes payable |
| ( |
| | ||
Accrued expenses and other payables |
| ( |
| | ||
Long-term taxes payable | ( | ( | ||||
Other current liabilities |
| ( |
| ( | ||
Other non-current liabilities | ( | | ||||
Net cash (used in)/provided by operating activities |
| ( |
| | ||
Cash flows from investing activities: |
|
| ||||
(Decrease)/Increase in demand loans included in other non-current assets |
| ( |
| | ||
Repayment of loan from a related party | | | ||||
Cash received from property, plant and equipment sales |
| |
| | ||
Payments to acquire property, plant and equipment (including $ |
| ( |
| ( | ||
Payments to acquire intangible assets |
| ( |
| ( | ||
Investment under the equity method | ( | ( | ||||
Purchase of short-term investments and long-term time deposits |
| ( |
| ( | ||
Proceeds from maturities of short-term investments | | | ||||
Cash received from long-term investment |
| |
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Net cash used in investing activities |
| ( |
| ( | ||
Cash flows from financing activities: |
|
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Proceeds from bank loans |
| |
| | ||
Repayments of bank loans |
| ( |
| ( | ||
Repayments of the borrowing for sale and leaseback transaction |
| ( |
| ( | ||
Cash received from capital contributions by non-controlling interest holder | | | ||||
Deemed distribution to shareholders | | ( | ||||
Acquisition of non-controlling interest | ( | ( | ||||
Repurchase of common shares |
| |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Effects of exchange rate on cash, cash equivalents and pledged cash |
| |
| | ||
Net (decrease)/increase in cash, cash equivalents and pledged cash |
| ( |
| | ||
Cash, cash equivalents and pledged cash at beginning of the period |
| |
| | ||
Cash, cash equivalents and pledged cash at end of the period | $ | | $ | | ||
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
7
China Automotive Systems, Inc. and Subsidiaries
Notes to Condensed Unaudited Consolidated Financial Statements
Three Months and Nine Months Ended September 30, 2021 and 2020
1. Organization and business
China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries described below, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support accordingly.
The Company owns the following aggregate net interests in the following subsidiaries organized in the People’s Republic of China, the “PRC,” and Brazil as of September 30, 2021 and December 31, 2020.
Percentage Interest |
| ||||
| September 30, |
| December 31, |
| |
Name of Entity | 2021 | 2020 |
| ||
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1 |
| | % | | % |
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2 |
| | % | | % |
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3 |
| | % | | % |
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4 |
| | % | | % |
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5 |
| | % | | % |
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6 |
| | % | | % |
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7 |
| | % | | % |
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8 |
| | % | | % |
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9 |
| | % | | % |
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10 |
| | % | | % |
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11 |
| | % | | % |
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”12 |
| | % | | % |
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”13 |
| | % | | % |
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”14 | | % | | % | |
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”15 | | % | | % | |
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”16 | | % | | % | |
| 1. |
| 2. |
| 3. |
| 4. |
8
| 5. |
| 6. |
| 7. |
| 8. |
| 9. |
| 10. |
| 11. |
| 12. |
| 13. |
| 14. |
| 15. |
| 16. |
9
2. Basis of presentation and significant accounting policies
(a) | Basis of Presentation |
Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all necessary adjustments, which include normal recurring adjustments, for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.
The condensed consolidated balance sheet as of December 31, 2020 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The results of operations for the three months and nine months ended September 30, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2021.
Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian real, “BRL,” its functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
(b) | Recent Accounting Pronouncements |
No accounting standards newly issued during the nine months ended September 30, 2021, had a material impact on the Company’s financial statements or disclosures.
(c) | Significant Accounting Policies |
There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2020.
10
3. Accounts and notes receivable, net
The Company’s accounts and notes receivable, net as of September 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):
| September 30, 2021 |
| December 31, 2020 | |||
Accounts receivable - unrelated parties | $ | | $ | | ||
Notes receivable - unrelated parties |
| |
| | ||
Total accounts and notes receivable - unrelated parties |
| |
| | ||
Less: allowance for doubtful accounts - unrelated parties |
| ( |
| ( | ||
Accounts and notes receivable, net - unrelated parties |
| |
| | ||
Accounts and notes receivable - related parties | | | ||||
Less: allowance for doubtful accounts - related parties | ( | ( | ||||
Accounts and notes receivable, net - related parties |
| |
| | ||
Accounts and notes receivable, net | $ | | $ | | ||
Notes receivables represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.
As of September 30, 2021 and December 31, 2020, the Company pledged its notes receivable in amounts of
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of cash operations, amounted to $
Provision for doubtful accounts and notes receivable reversed, as provided in the unaudited consolidated statements of operations amounted to $
During the three months ended September 30, 2021, the Company’s
During the three months ended September 30, 2020, the Company’s
11
4. Inventories
The Company’s inventories as of September 30, 2021 and December 31, 2020 consisted of the following (figures are in thousands of USD):
| September 30, 2021 |
| December 31, 2020 | |||
Raw materials | $ | | $ | | ||
Work in process |
| |
| | ||
Finished goods |
| |
| | ||
Total | $ | | $ | | ||
The Company recorded $
5. Long-term investments
The Company’s long-term investments as of September 30, 2021 and December 31, 2020, are summarized as follows (figures are in thousands of USD):
| September 30, 2021 |
| December 31, 2020 | |||
Chongqing Venture Fund (1) | $ | | $ | | ||
Hubei Venture Fund (2) |
| |
| | ||
Suzhou Venture Fund (3) |
| |
| | ||
Beijing Henglong (4) |
| |
| | ||
Henglong Tianyu |
| |
| | ||
Chongqing Jinghua |
| |
| | ||
Jiangsu Intelligent |
| |
| | ||
Total | $ | | $ | | ||
| (1) | In January, May, June and August 2021, Chongqing Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $ |
| (2) | In April 2021, Hubei Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $ |
| (3) | In August 2021, Suzhou Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $ |
| (4) | In January 2021, Beijing Henglong made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $ |
The condensed financial information of the Company’s significant equity investees for the three and nine months ended September 30, 2021 and 2020 are summarized as follows (figures are in thousands of USD):
Three | Nine | |||||||||||
Months Ended | Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Revenue | $ | | $ | | $ | | $ | | ||||
Gross profit |
| |
| |
| |
| | ||||
Income from continuing operations |
| |
| |
| |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
12
6. Property, plant and equipment, net
The Company’s property, plant and equipment, net as of September 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):
| September 30, 2021 |
| December 31, 2020 | |||
Costs: |
|
|
|
| ||
Buildings | $ | | $ | | ||
Machinery and equipment |
| |
| | ||
Electronic equipment |
| |
| | ||
Motor vehicles |
| |
| | ||
Construction in progress |
| |
| | ||
Total amount of property, plant and equipment |
| |
| | ||
Less: Accumulated depreciation (1) |
| ( |
| ( | ||
Total amount of property, plant and equipment, net (2)(3) | $ | | $ | | ||
| (1) | Depreciation charges were $ |
| (2) | As of September 30, 2021 and December 31, 2020, the Company pledged property, plant and equipment with net book value of approximately $ |
| (3) | Interest costs capitalized for the three months ended September 30, 2021 and 2020, were $ |
7. Loans
Loans consist of the following as of September 30, 2021 and December 31, 2020 (figures are in thousands of USD):
| September 30, 2021 |
| December 31, 2020 | |||
Short-term bank loans (1) | $ | | $ | | ||
Current portion of long-term government loan (2) | | | ||||
Subtotal | | | ||||
Long-term government loans (2) |
| |
| | ||
Less: Current portion of long-term government loans (2) | | ( | ||||
Subtotal | | | ||||
Total bank and government loans | $ | | $ | | ||
| (1) |
| (2) |
The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of September 30, 2021.
13
8. Accounts and notes payable
The Company’s accounts and notes payable as of September 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):
| September 30, 2021 |
| December 31, 2020 | |||
Accounts payable - unrelated parties | $ | | $ | | ||
Notes payable - unrelated parties (1) |
| |
| | ||
Accounts and notes payable - unrelated parties |
| |
| | ||
Accounts and notes payable - related parties |
| |
| | ||
Total | $ | | $ | | ||
| (1) | Notes payable represent payables in the form of notes issued by the bank. As of September 30, 2021 and December 31, 2020, the Company has pledged cash of $ |
9. Accrued expenses and other payables
The Company’s accrued expenses and other payables as of September 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):
| September 30, 2021 |
| December 31, 2020 | |||
Warranty reserves(1) | $ | | $ | | ||
Accrued expenses | | | ||||
Current portion of other long-term payable (See Note 10) | | | ||||
Payables for overseas transportation and custom clearance |
| |
| | ||
Dividends payable to holders of non-controlling interests |
| |
| | ||
Accrued interest | | | ||||
Other payables |
| |
| | ||
Balance at end of year | $ | | $ | | ||
| (1) | The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances. |
For the three and nine months ended September 30, 2021 and 2020, the warranties activities were as follows (figures are in thousands of USD):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Balance at beginning of the period | $ | | $ | | $ | | $ | | ||||
Additions during the period |
| |
| |
| |
| | ||||
Settlement within the period |
| ( |
| ( |
| ( |
| ( | ||||
Foreign currency translation (gain)/loss |
| ( |
| |
| |
| | ||||
Balance at end of the period | $ | | $ | | $ | | $ | | ||||
14
10. Other long-term payable
On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor") and simultaneously entered into a
11. Redeemable non-controlling interests
In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $
For the three months and nine months ended September 30, 2021, the Company recognized accretion of $
12. Additional paid-in capital
The Company’s positions in respect of the amounts of additional paid-in capital for the three and nine months ended September 30, 2021 and 2020, are summarized as follows (figures are in thousands of USD):
Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Balance at beginning of the period | $ | | $ | | $ | | $ | | ||||
Share-based compensation | | | | | ||||||||
Acquisition of the non-controlling interest in Wuhu | — | — | ( | — | ||||||||
Acquisition of the non-controlling interest in Universal Sensor Application Inc., “USAI” | — | — | — | ( | ||||||||
Acquisition of the non-controlling interest in Changchun Hualong | | | | ( | ||||||||
Deemed distribution to shareholders | — | — | — | ( | ||||||||
Balance at end of the period | $ | | $ | | $ | | $ | | ||||
13. Stock Options
The Company’s stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended to June 27, 2025 at the Annual Meeting of Stockholders held on September 16, 2014. The maximum common shares available for issuance under this plan is
Under the aforementioned plan, the stock options granted will have an exercise price equal to the closing price of the Company’s common stock traded on NASDAQ one day before the date of grant, and will expire to
15
The fair value of stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield assumption is based on historical patterns and future expectations for the Company dividends.
For the stock options granted during the nine months ended September 30, 2021, assumptions used to estimate the fair value of stock options on the grant date is as follows:
Issuance Date |
| Expected volatility |
| Risk-free rate |
| Expected term (years) |
| Dividend yield |
|
February 3, 2021 |
| | % | | % |
| % |
The stock options granted during the nine months ended September 30, 2021 were exercisable immediately and their fair value on the grant date using the Black-Scholes option pricing model was $
The activities of stock options are summarized as follows, including granted, exercised and forfeited.
Weighted- | |||||||
Weighted- | Average | ||||||
Average | Contractual | ||||||
| Shares |
| Exercise Price |
| Term (years) | ||
Outstanding - January 1, 2020 |
| | $ | |
| ||
Expired |
| ( |
| |
| ||
Outstanding - December 31, 2020 |
| | $ | |
| ||
Granted |
| |
| |
| ||
Outstanding - September 30, 2021 |
| | $ | |
| ||
The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable on September 30, 2021:
| Outstanding Stock | Weighted Average | Weighted Average | Number of Stock | ||||
Range of Exercise Prices |
| Options |
| Remaining Life |
| Exercise Price |
| Options Exercisable |
$ | | | |
As of September 30, 2021 and December 31, 2020, the total intrinsic value of the Company’s stock options that were exercisable was $
For the three months and nine months ended September 30, 2021 and 2020,
During the nine months ended September 30, 2021, the weighted average fair value of the Company’s stock options granted was $
14. Retained earnings
Appropriated
Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at
16
The Company’s activities in respect of the amounts of appropriated retained earnings for the three and nine months ended September 30, 2021 and 2020, are summarized as follows (figures are in thousands of USD):
Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Balance at beginning of the period | $ | | $ | | $ | | $ | | ||||
Balance at end of the period | $ | | $ | | $ | | $ | | ||||
Unappropriated
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three and nine months ended September 30, 2021 and 2020, are summarized as follows (figures are in thousands of USD):
Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Balance at beginning of the period | $ | | $ | | $ | | $ | | ||||
Cumulative effect of accounting change - credit loss | — | — | — | ( | ||||||||
Net (loss)/income attributable to parent company | ( | | | ( | ||||||||
Accretion of redeemable non-controlling interests |
| ( |
| ( |
| ( |
| ( | ||||
Balance at end of the period | $ | | $ | | $ | | $ | | ||||
15. Accumulated other comprehensive income
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and nine months ended September 30, 2021 and 2020, are summarized as follows (figures are in thousands of USD):
Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Balance at beginning of the period | $ | | $ | ( | $ | | $ | ( | ||||
Foreign currency translation adjustment attributable to parent company |
| ( |
| |
| |
| | ||||
Balance at end of the period | $ | | $ | | $ | | $ | | ||||
16. Treasury stock
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On August 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $
17
17. Non-controlling interests
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three and nine months ended September 30, 2021 and 2020, are summarized as follows (figures are in thousands of USD):
Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Balance at beginning of the period | $ | | $ | | $ | | $ | | ||||
Net income/(loss) attributable to non-controlling interests |
| |
| ( |
| ( |
| ( | ||||
Contribution by non-controlling shareholder of Wuhu Hongrun | | | | | ||||||||
Acquisition of the non-controlling interest in USAI | | | | | ||||||||
Acquisition of the non-controlling interest in Changchun Hualong | | | | ( | ||||||||
Acquisition of the non-controlling interest in Wuhu | | | ( | | ||||||||
Cumulative effect of accounting change - credit loss | | | | ( | ||||||||
Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries | | | | ( | ||||||||
Foreign currency translation adjustment attributable to non-controlling interests |
| ( |
| |
| |
| | ||||
Balance at end of the period | $ | | $ | | $ | | $ | | ||||
18. Net product sales
Revenue Disaggregation
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 25.
Contract Assets and Liabilities
Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing processes.
Contract liabilities are mainly customer deposits. As of September 30, 2021 and December 31, 2020, the Company has customer deposits of $
19. Financial expense, net
During the three and nine months ended September 30, 2021 and 2020, the Company recorded financial expense, net which is summarized as follows (figures are in thousands of USD):
Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Interest income | $ | | $ | | $ | | $ | | ||||
Foreign exchange loss, net |
| ( |
| ( |
| ( |
| ( | ||||
Bank charges |
| ( |
| ( |
| ( |
| ( | ||||
Total financial expense, net | $ | ( | $ | ( | $ | ( | $ | ( | ||||
18
20. Income/(loss) per share
Basic income per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted income per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. The dilutive effect of outstanding stock options is determined based on the treasury stock method.
The calculations of basic and diluted (loss)/income per share attributable to the parent company for the three months ended September 30, 2021 and 2020, were as follows (figures are in thousands of USD, except share and per share amounts):
Three Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Numerator: |
|
|
|
| ||
Net (loss)/income attributable to the parent company’s common shareholders - Basic and Diluted | $ | ( | $ | | ||
Denominator: |
|
|
| |||
Weighted average shares outstanding |
| |
| | ||
Dilutive effects of stock options |
| |
| | ||
Denominator for dilutive income per share - Diluted |
| |
| | ||
|
| |||||
Net (loss)/income per share attributable to parent company’s common shareholders - Basic | $ | ( | $ | | ||
Net (loss)/income per share attributable to parent company’s common shareholders - Diluted | $ | ( | $ | | ||
The calculations of basic and diluted income/(loss) per share attributable to the parent company for the nine months ended September 30, 2021 and 2020, were as follows (figures are in thousands of USD, except share and per share amounts):
Nine Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Numerator: |
|
|
|
| ||
Net income/(loss) attributable to the parent company’s common shareholders - Basic and Diluted | $ | | $ | ( | ||
Denominator: |
|
| ||||
Weighted average shares outstanding |
| |
| | ||
Dilutive effects of stock options |
| |
| — | ||
Denominator for dilutive income per share - Diluted |
| |
| | ||
|
| |||||
Net income/(loss) per share attributable to parent company’s common shareholders - Basic | $ | | $ | ( | ||
Net income/(loss) per share attributable to parent company’s common shareholders - Diluted | $ | | $ | ( | ||
As of September 30, 2021, the exercise prices for
As of September 30, 2020, the exercise prices for
For the three months ended September 30, 2021 and the nine months ended September 30, 2020, assumed conversion of the stock options has not been reflected in the dilutive calculation pursuant to ASC 260, "Earnings Per Share," due to the anti-dilutive effect as a result of the Company's net loss. The effects of all outstanding share options with common share equivalents of
19
21. Significant concentrations
A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the "current account", which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign currency for settlement of such "current account" transactions without pre-approval.
China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, “China-based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law China-based Subsidiaries are required to set aside at least
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China. The China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its subsidiaries, including the China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its shares.
Transactions other than those that fall under the "current account" and that involve conversion of RMB into foreign currency are classified as "capital account" transactions; examples of "capital account" transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. "Capital account" transactions require prior approval from China's State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the People's Republic of China, or the PRC, the Company’s China subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the ability of the Company’s China subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.
20
22. Related party transactions and balances
Related party transactions are as follows (figures are in thousands of USD):
Related sales
Three Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Merchandise sold to related parties | $ | | $ | | ||
Materials and others sold to related parties |
| |
| | ||
Rental income obtained from related parties |
| |
| | ||
Total | $ | | $ | | ||
Nine Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Merchandise sold to related parties | $ | | $ | | ||
Materials and others sold to related parties |
| |
| | ||
Rental income obtained from related parties |
| |
| | ||
Total | $ | | $ | | ||
Related purchases
Three Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Materials purchased from related parties | $ | | $ | | ||
Equipment purchased from related parties |
| |
| | ||
R&D service purchased from related parties | | | ||||
Others purchased from related parties |
| |
| | ||
Total | $ | | $ | | ||
Nine Months Ended September 30, | ||||||
| 2021 |
| 2020 | |||
Materials purchased from related parties | $ | | $ | | ||
Equipment purchased from related parties |
| |
| | ||
R&D service purchased from related parties | | — | ||||
Others purchased from related parties |
| |
| | ||
Total | $ | | $ | | ||
Related receivables
| September 30, 2021 |
| December 31, 2020 | |||
Accounts and notes receivable from related parties | $ | | $ | | ||
Related advance payments
| September 30, 2021 |
| December 31, 2020 | |||
Advance payments for property, plant and equipment to related parties | $ | | $ | | ||
Advance payments and others to related parties |
| |
| | ||
Total | $ | | $ | | ||
Related payables
| September 30, 2021 |
| December 31, 2020 | |||
Accounts and notes payable | $ | | $ | | ||
21
These transactions were consummated under similar terms as those with the Company's third-party customers and suppliers.
As of November 12, 2021, Hanlin Chen, the chairman of the board of directors of the Company, owns
23. Commitments and contingencies
Legal proceedings
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. In November 2020, the Company reached a settlement to resolve the lawsuit for the sum of $
Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
Other commitments and contingencies
In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of September 30, 2021 (figures are in thousands of USD):
Payment obligations by period | |||||||||||||||
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total | ||||||
Obligations for investment contracts (1) | $ | | $ | | $ | — | $ | | $ | | |||||
Obligations for purchasing and service agreements |
| |
| |
| — |
| |
| | |||||
Total | $ | | $ | | $ | — | $ | | $ | | |||||
| (1) |
24. Off-balance sheet arrangements
As of September 30, 2021 and December 31, 2020, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
22
25. Segment reporting
The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2020 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.
As of September 30, 2021 and 2020, the Company had
The Company’s product sector information for the three months and nine months ended September 30, 2021 and 2020, is as follows (figures are in thousands of USD):
Net Product Sales | Net (Loss)/Income | |||||||||||
Three Months Ended | Three Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Henglong | $ | | $ | | $ | ( | $ | | ||||
Jiulong |
| |
| |
| |
| | ||||
Shenyang |
| |
| |
| ( |
| ( | ||||
Wuhu |
| |
| |
| |
| ( | ||||
Hubei Henglong |
| |
| |
| |
| | ||||
Henglong KYB |
| |
| |
| |
| ( | ||||
Other Entities |
| |
| |
| |
| | ||||
Total Segments |
| |
| |
| |
| | ||||
Corporate |
| |
| |
| ( |
| ( | ||||
Eliminations |
| ( |
| ( |
| ( |
| ( | ||||
Total | $ | | $ | | $ | ( | $ | | ||||
Net Product Sales | Net (Loss)/Income | |||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||
September 30, | September 30, | |||||||||||
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||||
Henglong | $ | | $ | | $ | ( | $ | ( | ||||
Jiulong |
| |
| |
| |
| ( | ||||
Shenyang |
| |
| |
| |
| | ||||
Wuhu |
| |
| |
| |
| | ||||
Hubei Henglong |
| |
| |
| |
| | ||||
Henglong KYB |
| |
| |
| ( |
| ( | ||||
Other Entities |
| |
| |
| |
| ( | ||||
Total Segments |
| |
| |
| |
| ( | ||||
Corporate |
| |
| |
| ( |
| ( | ||||
Eliminations |
| ( |
| ( |
| ( |
| ( | ||||
Total | $ | | $ | | $ | | $ | ( | ||||
23
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and the related notes thereto and the other financial information contained elsewhere in this Report.
General Overview
China Automotive Systems, Inc. is a leading power steering systems supplier for the China automobile industry. The Company has business relationships with more than sixty vehicle manufacturers, including China’s top ranking domestic automobile manufacturers such as JAC motors, Changan Automobile Group, BAIC Group, Dongfeng Group, Brilliance Jinbei, Chery, BYD and Zhejiang Geely as well as Sino-foreign or foreign automobile manufacturer such as General Motors, Citroen, Fiat Chrysler North America and Ford. Starting in 2008, the Company has supplied power steering gears to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gear to Fiat Chrysler North America since 2009 and to Ford Motor Company since 2016.
Most of the Company’s production and research and development institutes are located in China. As of September 30, 2021, the Company has approximately 4,529 employees dedicated to design, development, manufacture and sales of its products. By leveraging its extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in automotive power steering systems and to further improve overall margins, long-term operating profitability and cash flows. To achieve these goals and to respond to industry factors and trends, the Company is continuing work to improve its operations and business structure and achieve profitable growth.
In addition, as a result of COVID-19, the Company’s businesses, results of operations, financial position and cash flows had been materially and adversely affected in the first quarter of 2020. The Company resumed operation in March of 2020. However, because of the significant uncertainties surrounding COVID-19, which are still evolving, the extent of the business disruption, including the duration and the related financial impact on subsequent periods cannot be reasonably estimated at this time. See “Item 1A. Risk Factors—Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19)” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
Corporate Structure
The Company, through its subsidiaries, engages in the manufacture and sales of automotive systems and components. Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company and the holding company of the Company’s joint ventures in the PRC. Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support. CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong,” was established by Hubei Henglong Automotive System Group Co., Ltd., formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations,high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016. USAI was established in 2005, and the Company and Hubei Wanlong owned 83.34% and 16.66%, respectively. In May 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and it deregistered from the local business administration on April 28, 2020. Following the merger, 85.0% of Wuhan Chuguanjie was owned by the Company and 15.0% was owned by Hubei Wanlong. In April 2020, Hubei Henglong acquired 100.00% of the shares of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts. Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” was formed in December 2019, which mainly engages in the development, manufacturing and sale of high polymer materials. In April 2021, the Company obtained an additional 22.67% equity interest in Wuhu, for total consideration of RMB 6.9 million, equivalent to approximately $1.1 million, from the other shareholder. Following the acquisition, the Company owned 100% of the equity interests of Wuhu.
24
Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.
The Company considers an accounting estimate to be critical if:
| ● | It requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate, and |
| ● | Changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial condition or results of operations. |
The table below presents information about the nature and rationale for the Company’s critical accounting estimates:
Balance Sheet |
| Critical |
| Nature of Estimates |
| Assumptions/Approaches |
| Key Factors |
Accrued liabilities and other long-term liabilities
| Warranty obligations
|
| Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs (Original Equipment Manufacturers) are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs. |
| The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers. |
| ●OEM sourcing ●OEM policy decisions regarding warranty claims
| |
|
|
|
|
|
|
|
| |
Property, plant and equipment, intangible assets and other long-term assets | Valuation of long- lived assets and investments |
| The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines. |
| The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. |
| ●Future production estimates ●Customer preferences and decisions | |
|
|
|
|
|
|
|
| |
Accounts receivable | Allowance for doubtful accounts |
| The Company is required from time to time to review the credit of customers and make timely provision of allowance for doubtful accounts. |
| The Company estimates the collectability of the receivables based on the future cash flows using historical experiences. |
| Customer credit | |
|
|
|
|
|
|
|
| |
Inventory
| Write-down of inventory |
| The Company is required from time to time to review the cash ability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories. |
| The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. |
| ·Future production estimates ·Customer preferences and decisions | |
|
|
|
|
|
|
|
| |
Deferred income taxes
| Recoverability of deferred tax assets |
| The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction. |
| The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry forward period, tax planning opportunities and other relevant considerations. |
| ·Tax law changes ·Variances in future projected profitability, including by taxing entity |
Recent Accounting Pronouncements
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this report.
25
Results of Operations - Three Months Ended September 30, 2021 and 2020
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
| Three Months Ended September 30, |
| ||||||||||
2021 |
| 2020 |
| Change |
| Change % |
| |||||
Net product sales | $ | 108,231 | $ | 114,417 | $ | (6,186) |
| -5.4 | % | |||
Cost of products sold |
| 91,439 |
| 100,842 |
| (9,403) |
| -9.3 | ||||
Gain on other sales |
| 487 |
| 1,497 |
| (1,010) |
| -67.5 | ||||
Selling expenses |
| 4,802 |
| 3,800 |
| 1,002 |
| 26.4 | ||||
General and administrative expenses |
| 6,174 |
| 5,142 |
| 1,032 |
| 20.1 | ||||
Research and development expenses |
| 5,712 |
| 6,072 |
| (360) |
| -5.9 | ||||
Other income |
| 2,407 |
| 350 |
| 2,057 |
| 587.7 | ||||
Interest expense |
| (255) |
| (403) |
| 148 |
| -36.7 | ||||
Income taxes |
| 2,441 |
| (189) |
| 2,630 |
| -1,391.5 | ||||
Net (loss)/income |
| (268) |
| 1,513 |
| (1,781) |
| -117.7 | ||||
Net income/(loss) attributable to non-controlling interests |
| 42 |
| (848) |
| 890 |
| -105.0 | ||||
Net (loss)/income attributable to parent company’s common shareholders | (317) |
| 2,358 | (2,675) |
| -113.4 | % | |||||
Net Product Sales and Cost of Products Sold
| Net Product Sales |
| Cost of Products Sold |
| |||||||||||||||||||
(in thousands of USD, | (in thousands of USD, |
| |||||||||||||||||||||
except percentages) | except percentages) | ||||||||||||||||||||||
2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change |
| ||||||||||||
Henglong |
| $ | 39,937 |
| $ | 41,001 |
| $ | (1,064) |
| -2.6 | % | $ | 37,800 |
| $ | 37,940 |
| $ | (140) |
| -0.4 | % |
Jiulong |
| 17,127 |
| 25,879 |
| (8,752) |
| -33.8 |
| 15,483 |
| 22,589 |
| (7,106) |
| -31.5 | |||||||
Shenyang |
| 3,659 |
| 3,622 |
| 37 |
| 1.0 |
| 3,095 |
| 2,934 |
| 161 |
| 5.5 | |||||||
Wuhu |
| 7,878 |
| 3,221 |
| 4,657 |
| 144.6 |
| 7,436 |
| 2,968 |
| 4,468 |
| 150.5 | |||||||
Hubei Henglong |
| 31,023 |
| 37,014 |
| (5,991) |
| -16.2 |
| 25,111 |
| 32,366 |
| (7,255) |
| -22.4 | |||||||
Henglong KYB |
| 19,095 |
| 14,298 |
| 4,797 |
| 33.6 |
| 17,163 |
| 14,764 |
| 2,399 |
| 16.2 | |||||||
Other Entities |
| 24,456 |
| 16,743 |
| 7,713 |
| 46.1 |
| 19,824 |
| 13,706 |
| 6,118 |
| 44.6 | |||||||
Total Segments |
| 143,175 |
| 141,778 |
| 1,397 |
| 1.0 |
| 125,912 |
| 127,267 |
| (1,355) |
| -1.1 | |||||||
Elimination |
| (34,944) |
| (27,361) |
| (7,583) |
| 27.7 |
| (34,473) |
| (26,425) |
| (8,048) |
| 30.5 | |||||||
Total | $ | 108,231 | $ | 114,417 | $ | (6,186) |
| -5.4 | % | $ | 91,439 | $ | 100,842 | $ | (9,403) |
| -9.3 | % | |||||
Net Product Sales
Net product sales were $108.2 million for the three months ended September 30, 2021, compared to $114.4 million for the same period in 2020, representing a decrease of $6.2 million, or 5.4%, mainly due to the decline in market demand as a result of the chips shortage and other overall auto market trends.
Net sales of traditional steering products and parts were $78.8 million for the three months ended September 30, 2021, compared to $97.7 million for the same period in 2020, representing a decrease of $18.9 million, or 19.3%. Net sales of electric power steering (“EPS”) were $29.4 million for the three months ended September 30, 2021 and $16.7 million for the same period in 2020, representing an increase of $12.7 million, or 76.0%. As a percentage of net sales, sales of EPS were 27.2% for the three months ended September 30, 2021, compared with 14.6% for the same period in 2020.
The decrease in net product sales was due to the effects of three major factors: i) the decrease in sales volume led to a sales decrease of $11.3 million due to the decline in market demand as a result of the chips shortage and other overall auto market trends; ii) the decrease in average price of steering gears led to a sales decrease of $3.5 million; and iii) the appreciation of the RMB against the U.S. dollar in this quarter compared to the same quarter last year resulted in a sales increase of $8.6 million.
26
Further analysis by segment (before elimination) is as follows:
| ● | Henglong mainly engages in providing passenger vehicle steering systems. Net product sales for Henglong were $39.9 million for the three months ended September 30, 2021, compared with $41.0 million for the three months ended September 30, 2020, representing a decrease of $1.1 million, or 2.7%. An increase in sales volume led to a sales increase of $1.3 million, a decrease in selling price led to a sales decrease of $5.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $2.6 million. |
| ● | Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for Jiulong were $17.1 million for the three months ended September 30, 2021, compared with $25.9 million for the three months ended September 30, 2020, representing a decrease of $8.8 million, or 34.0%. A decrease in sales volume led to a sales decrease of $9.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $1.1 million. |
| ● | Shenyang mainly engages in providing vehicle steering systems to Shenyang Brilliance Jinbei Automobile Co., Ltd. (“Jinbei”), one of the major automotive manufacturers in China. Net product sales for Shenyang were $3.7 million for the three months ended September 30, 2021, compared to $3.6 million for the same period in 2020, representing an increase of $0.1 million, or 2.8%, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million. |
| ● | Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd. (“Chery”), one of the major automotive manufacturers in China. Net product sales for Wuhu were $7.9 million for the three months ended September 30, 2021, compared to $3.2 million for the same period in 2020, representing an increase of $4.7 million. An increase in sales volumes led to a sales increase of $4.1 million, an increase in selling prices led to a sales increase of $0.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.5 million. |
| ● | Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for Hubei Henglong were $31.0 million for the three months ended September 30, 2021, compared with $37.0 million for the three months ended September 30, 2020, representing a decrease of $6.0 million, or 16.2%. A decrease in sales volume led to a sales decrease of $13.7 million, an increase in selling price led to a sales increase of $5.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $2.0 million. |
| ● | Henglong KYB mainly engages in providing passenger EPS products. Net product sales for Henglong KYB were $19.1 million for the three months ended September 30, 2021, compared with $14.3 million for the three months ended September 30, 2020, representing an increase of $4.8 million, or 33.6 %. An increase in sales volume led to a sales increase of $8.4 million, a decrease in selling price led to a sales decrease of $4.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $1.2 million. |
| ● | Net product sales for other entities were $24.5 million for the three months ended September 30, 2021, compared to $16.7 million for the same period in 2020, representing an increase of $7.8 million, or 46.7%, mainly caused by increases in sales of Jielong and Brazil Henglong. |
27
Cost of Products Sold
For the three months ended September 30, 2021, the cost of products sold was $91.4 million, compared to $100.8 million for the same period of 2020, representing a decrease of $9.4 million, or 9.3%. The decrease in cost of sales was mainly due to the effect of the following major factors: i) the decrease in sales volumes led to a cost of sales decrease of $11.7 million; ii) the decrease in unit price led to a cost of sales decrease of $5.3 million; and iii) the appreciation of the RMB against the U.S. dollar resulted in a cost of sales increase of $7.6 million. Further analysis is as follows:
| ● | Cost of products sold for Henglong was $37.8 million for the three months ended September 30, 2021, compared to $37.9 million for the same period of 2020, representing a decrease of $0.1 million, or 0.3%. The decrease in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $1.1 million, a decrease in unit cost resulting in a cost of sales decrease of $3.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $2.5 million. |
| ● | Cost of products sold for Jiulong was $15.5 million for the three months ended September 30, 2021, compared to $22.6 million for the same period of 2020, representing a decrease of $7.1 million, or 31.4%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $9.3 million, an increase in unit cost resulting in a cost of sales increase of $1.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $1.0 million. |
| ● | Cost of products sold for Shenyang was $3.1 million for the three months ended September 30, 2021, compared to $2.9 million for the same period of 2020, representing an increase of $0.2 million, or 6.9%. The increase in cost of sales was mainly due to the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.2 million. |
| ● | Cost of products sold for Wuhu was $7.4 million for the three months ended September 30, 2021, compared to $3.0 million for the same period of 2020, representing an increase of $4.4 million. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $3.8 million, an increase in unit cost resulting in a cost of sales increase of $0.1 million and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.5 million. |
| ● | Cost of products sold for Hubei Henglong was $25.1 million for the three months ended September 30, 2021, compared to $32.4 million for the same period of 2020, representing a decrease of $7.3 million, or 22.5%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $10.4 million, an increase in unit cost resulting in a cost of sales increase of $1.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $1.5 million. |
| ● | Cost of products sold for Henglong KYB was $17.2 million for the three months ended September 30, 2021, compared to $14.8 million for the same period of 2020, representing an increase of $2.4 million, or 16.2%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $8.7 million, a decrease in unit cost resulting in a cost of sales decrease of $7.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $1.1 million. |
| ● | Cost of products sold for other entities was $19.8 million for the three months ended September 30, 2021, compared to $13.7 million for the same period in 2020, representing an increase of $6.1 million, or 44.5%. |
Gross margin was 15.5% for the three months ended September 30, 2021, compared to 11.9% for the same period of 2020, representing an increase of 3.6%, mainly due to the changes in the product mix for the three months ended September 30, 2021.
Selling Expenses
Selling expenses were $4.8 million for the three months ended September 30, 2021, as compared to $3.8 million for the same period of 2020, representing an increase of $1.0 million, or 26.3%, which was primarily due to the increase in logistic expenses and higher payroll expenses.
28
General and Administrative Expenses
General and administrative expenses were $6.2 million for the three months ended September 30, 2021, as compared to $5.1 million for the same period of 2020, representing an increase of $1.1 million, or 21.6%, which was mainly due to the increased bad debt provision for accounts receivable.
Research and Development Expenses
Research and development expenses were $5.7 million for the three months ended September 30, 2021, as compared to $6.1 million for the same period of 2020, representing a decrease of $0.4 million, or 6.6%, which was primarily due to lower payroll expenses.
Other Income
Other income, net was $2.4 million for the three months ended September 30, 2021, as compared to $0.4 million for the three months ended September 30, 2020, representing an increase of $2.0 million, which was mainly due to the various government subsidies of $1.8 million received in the third quarter of 2021, whereas only $0.2 million was received in the same period of last year.
Interest Expense
Interest expense was $0.3 million for the three months ended September 30, 2021, which is consistent with to $0.4 million for the three months ended September 30, 2020.
Income Taxes
Income tax expense was $2.4 million for the three months ended September 30, 2021, compared to income tax benefit of $0.2 million for the three months ended September 30, 2020, which was primarily due to the increase in valuation allowance recognized in the three months ended September 30, 2021.
Net income/(loss) Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $0.1 million for the three months ended September 30, 2021, compared to net loss of $0.8 million for the three months ended September 30, 2020.
Net Income/(loss) Attributable to Parent Company’s Common Shareholders
Net loss attributable to parent company’s common shareholders was $0.3 million for the three months ended September 30, 2021, compared to net income attributable to parent company’s common shareholders of $2.4 million for the three months ended September 30, 2020, representing a decrease in net income of $2.7 million.
29
Results of Operations - Nine Months Ended September 30, 2021 and 2020
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Nine Months Ended September 30, |
| |||||||||||
| 2021 |
| 2020 |
| Change |
| Change% | |||||
Net product sales | $ | 359,176 | $ | 271,156 | $ | 88,020 |
| 32.5 | % | |||
Cost of products sold |
| 306,807 |
| 238,598 |
| 68,209 |
| 28.6 | ||||
Gain on other sales |
| 2,528 |
| 2,935 |
| (407) |
| -13.9 | ||||
Selling expenses |
| 14,857 |
| 8,895 |
| 5,962 |
| 67.0 | ||||
General and administrative expenses |
| 16,852 |
| 13,330 |
| 3,522 |
| 26.4 | ||||
Research and development expenses |
| 18,318 |
| 17,390 |
| 928 |
| 5.3 | ||||
Other income, net |
| 5,636 |
| 1,724 |
| 3,912 |
| 226.9 | ||||
Interest expense |
| (892) |
| (1,214) |
| 322 |
| -26.5 | ||||
Income taxes |
| 3,280 |
| 294 |
| 2,986 |
| 1,015.6 | ||||
Net income/(loss) |
| 5,891 |
| (3,355) |
| 9,246 |
| -275.6 | ||||
Net loss attributable to non-controlling interests |
| (219) |
| (1,590) |
| 1,371 |
| -86.2 | ||||
Net (loss)/income attributable to parent company’s common shareholders |
| 6,089 |
| (1,768) |
| 7,857 |
| -444.4 | % | |||
Net Product Sales and Cost of Products Sold
Net Product Sales | Cost of Products Sold |
| |||||||||||||||||||||
(in thousands of USD, | (in thousands of USD, |
| |||||||||||||||||||||
except percentages) | except percentages) |
| |||||||||||||||||||||
| 2021 |
| 2020 |
| Change |
| 2021 |
| 2020 |
| Change | ||||||||||||
Henglong | $ | 138,151 | $ | 100,651 | $ | 37,500 |
| 37.3 | % | $ | 128,793 | $ | 94,069 | $ | 34,724 |
| 36.9 | % | |||||
Jiulong |
| 76,248 |
| 64,948 |
| 11,300 |
| 17.4 |
| 69,782 |
| 59,759 |
| 10,023 |
| 16.8 | |||||||
Shenyang |
| 11,988 |
| 9,860 |
| 2,128 |
| 21.6 |
| 9,843 |
| 8,111 |
| 1,732 |
| 21.4 | |||||||
Wuhu |
| 17,598 |
| 8,742 |
| 8,856 |
| 101.3 |
| 16,170 |
| 7,735 |
| 8,435 |
| 109.0 | |||||||
Hubei Henglong |
| 98,338 |
| 76,565 |
| 21,773 |
| 28.4 |
| 80,396 |
| 63,740 |
| 16,656 |
| 26.1 | |||||||
Henglong KYB |
| 53,961 |
| 32,987 |
| 20,974 |
| 63.6 |
| 49,954 |
| 32,907 |
| 17,047 |
| 51.8 | |||||||
Other Entities |
| 67,247 |
| 39,054 |
| 28,193 |
| 72.2 |
| 55,586 |
| 31,591 |
| 23,995 |
| 76.0 | |||||||
Total Segments |
| 463,531 |
| 332,807 |
| 130,724 |
| 39.3 |
| 410,524 |
| 297,912 |
| 112,612 |
| 37.8 | |||||||
Elimination |
| (104,355) |
| (61,651) |
| (42,704) |
| 69.3 |
| (103,717) |
| (59,314) |
| (44,403) |
| 74.9 | |||||||
Total | $ | 359,176 | $ | 271,156 | $ | 88,020 |
| 32.5 | % | $ | 306,807 | $ | 238,598 | $ | 68,209 |
| 28.6 | % | |||||
Net Product Sales
Net product sales were $359.2 million for the nine months ended September 30, 2021, compared to $271.2 million for the same period of 2020, representing an increase of $88.0 million, or 32.4%, mainly due to the market recovery from COVID-19.
Net sales of traditional steering products and parts were $281.9 million for the nine months ended September 30, 2021, compared to $231.1 million for the same period in 2020, representing an increase of $50.8 million, or 22.0 %. Net sales of electric power steering (“EPS”) were $77.3 million for the nine months ended September 30, 2021 and $40.1 million for the same period in 2020, representing an increase of $37.2 million, or 92.8%. As a percentage of net sales, sales of EPS were 21.5 % for the nine months ended September 30, 2021, compared to 14.8% for the same period in 2020.
The increase in net product sales was due to the effects of three major factors: i) the increase in sales volume led to a sales increase of $80.0 million due to the increase in demand as a result of the recovery of manufacturing and operations of the Company’s customers from the economic effects of COVID-19; ii) the decrease in average selling price of steering gears led to a sales decrease of $11.9 million; and iii) the depreciation of the RMB against the U.S. dollar in this period compared to the same period last year resulted in a sales increase of $19.9 million.
30
Further analysis by segment (before elimination) is as follows:
| ● | Henglong mainly engages in providing passenger vehicle steering systems. Net product sales for Henglong were $138.2 million for the nine months ended September 30, 2021, compared with $100.7 million for the nine months ended September 30, 2020, representing an increase of $37.5 million, or 37.2 %. An increase in sales volume led to a sales increase of $40.3 million, a decrease in selling price led to a sales decrease of $9.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $6.7 million. |
| ● | Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for Jiulong were $76.2 million for the nine months ended September 30, 2021, compared with $65.0 million for the nine months ended September 30, 2020, representing an increase of $11.2 million, or 17.2%.The increase was primarily due to the increased demand in the China commercial vehicle market after the COVID-19 pandemic along with China’s economic stimulus policies. An increase in sales volume led to a sales increase of $2.9 million, an increase in selling price led to a sales increase of $4.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $4.1 million. |
| ● | Shenyang mainly engages in providing vehicle steering systems to Shenyang Brilliance Jinbei Automobile Co., Ltd., “Jinbei”, one of the major automotive manufacturers in China. Net product sales for Shenyang were $12.0 million for the nine months ended September 30, 2021, compared to $9.9 million for the same period in 2020, representing an increase of $2.1 million, or 21.2%. An increase in sales volumes led to a sales increase of $1.6 million, a decrease in selling price led to a sales decrease of $0.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.6 million. |
| ● | Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd., “Chery”, one of the major automotive manufacturers in China. Net product sales for Wuhu were $17.6 million for the nine months ended September 30, 2021, compared to $8.7 million for the same period in 2020, representing an increase of $8.9 million. An increase in sales volume led to a sales increase of $9.4 million, a decrease in selling price led to a sales decrease of $1.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $1.0 million. |
| ● | Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for Hubei Henglong were $98.3 million for the nine months ended September 30, 2021, compared to $76.6 million for the same period in 2020, representing an increase of $21.7 million, or 28.3%. An increase in sales volume led to a sales increase of $5.0 million, an increase in selling price led to a sales increase of $12.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $4.1 million. |
| ● | Henglong KYB mainly engages in providing passenger EPS products. Net product sales for Henglong KYB were $54.0 million for the nine months ended September 30, 2021, compared with $33.0 million for the nine months ended September 30, 2020, representing an increase of $21.0 million, or 63.6%. An increase in sales volume led to a sales increase of $23.9 million, a decrease in selling price led to a sales decrease of $5.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $2.9 million. |
| ● | Net product sales for other entities were $67.2 million for the nine months ended September 30, 2021, compared to $39.1 million for the same period in 2020, representing an increase of $28.1 million, or 71.9%. |
Cost of Products Sold
For the nine months ended September 30, 2021, the cost of products sold was $306.8 million, compared to $238.6 million for the same period of 2020, representing an increase of $68.2 million, or 28.6%. The increase in cost of sales was mainly due to the effect of the following major factors: i) the increase in sales volumes led to a cost of sales increase of $62.9 million; ii) the decrease in unit cost led to a cost of sales decrease of $15.3 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales increase of $20.6 million. Further analysis is as follows:
| ● | Cost of products sold for Henglong was $128.8 million for the nine months ended September 30, 2021, compared to $94.0 million for the same period of 2020, representing an increase of $34.8 million, or 37.0%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $36.8 million, a decrease in unit cost resulting in a cost of sales |
31
| decrease of $8.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $6.5 million. |
| ● | Cost of products sold for Jiulong was $69.8 million for the nine months ended September 30, 2021, compared to $59.8 million for the same period of 2020, representing an increase of $10.0 million, or 16.7%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $1.8 million, an increase in unit cost resulting in a cost of sales increase of $4.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $4.0 million. |
| ● | Cost of products sold for Shenyang was $9.8 million for the nine months ended September 30, 2021, compared to $8.1 million for the same period of 2020, representing an increase of $1.7 million, or 21.0%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $1.3 million, a decrease in unit cost resulting in a cost of sales decrease of $0.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.6 million. |
| ● | Cost of products sold for Wuhu was $16.2 million for the nine months ended September 30, 2021, compared to $7.8 million for the same period of 2020, representing an increase of $8.4 million. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $8.8 million, a decrease in unit cost resulting in a cost of sales decrease of $1.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.8 million. |
| ● | Cost of products sold for Hubei Henglong was $80.4 million for the nine months ended September 30, 2021, compared to $63.8 million for the same period of 2020, representing an increase of $16.6 million, or 26.0%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $11.3 million, an increase in unit cost resulting in a cost of sales increase of $2.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $3.3 million. |
| ● | Cost of products sold for Henglong KYB was $50.0 million for the nine months ended September 30, 2021, compared to $32.9 million for the same period of 2020, representing an increase of $17.1 million, or 52.0%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $23.3 million, a decrease in unit cost resulting in a cost of sales decrease of $8.8 million, and the depreciation of the RMB against the U.S. dollar resulting in a cost of sales increase of $2.6 million. |
| ● | Cost of products sold for other entities was $55.6 million for the nine months ended September 30, 2021, compared to $31.6 million for the same period in 2020, representing an increase of $24.0 million, or 75.9%. |
Gross margin was 14.6% for the nine months ended September 30, 2021, compared to 12.0% for the same period of 2020, representing an increase of 2.6%. There was a significant decline in export sales to United States, which were the Company’s highest gross margin products, due to COVID-19, which resulted in the temporary shutdown of operations of our major customers in the second quarter of 2020. As our customers in the United States began re-opening operations, the Company’s export sales volume and gross margin increased.
Selling Expenses
Selling expenses were $14.9 million for the nine months ended September 30, 2021, as compared to $8.9 million for the same period of 2020, representing an increase of $6.0 million, or 67.4%, which was primarily due to increase in logistic expenses and higher payroll expenses.
32
General and Administrative Expenses
General and administrative expenses were $16.9 million for the nine months ended September 30, 2021, as compared to $13.3 million for the same period of 2020, representing an increase of $3.6 million, or 27.1%, which was mainly due to the bad debt provision provided for accounts receivable and miscellaneous fees.
Research and Development Expenses
Research and development expenses were $18.3 million for the nine months ended September 30, 2021, as compared to $17.4 million for the nine months ended September 30, 2020, representing an increase of $0.9 million, or 5.2%, which was mainly due to increased expenditures on R&D activities for EPS products.
Other Income, net
Other income, net was $5.6 million for the nine months ended September 30, 2021, which was comprised of government subsidies, as compared to $1.7 million for the nine months ended September 30, 2020, which was comprised of government subsidies and donation to the local government, representing an increase of $3.9 million, which was mainly due to the various government subsidies of $4.2 million received in the nine months ended September 30, 2021, whereas only $0.7 million was received in the same period of 2020, and a donation of $1.1 million to the local government in the same period of 2020.
Interest Expense
Interest expense was $0.9 million for the nine months ended September 30, 2021, compared to $1.2 million for the nine months ended September 30, 2020.
Income Taxes
Income tax expense was $3.3 million for the nine months ended September 30, 2021, compared to $0.3 million for the nine months ended September 30, 2020, which was primarily due to the increase in valuation allowance recognized in the nine months ended September 30, 2021.
Net Loss Attributable to Non-controlling Interests
Net loss attributable to non-controlling interests amounted to $0.2 million for the nine months ended September 30, 2021, compared to net loss of $1.6 million for the nine months ended September 30, 2020.
Net Income/(loss) Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $6.1 million for the nine months ended September 30, 2021, compared to net loss attributable to parent company’s common shareholders of $1.8 million for the nine months ended September 30, 2020, representing an increase in net income attributable to parent company’s common shareholders of $7.9 million.
Liquidity and Capital Resources
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of September 30, 2021, the Company had cash and cash equivalents and short-term investments of $94.4 million, compared to $107.4 million as of December 31, 2020, representing a decrease of $13.0 million, or 12.1%.
The Company had working capital (total current assets less total current liabilities) of $145.6 million as of September 30, 2021, compared to $121.2 million as of December 31, 2020, representing an increase of $24.4 million, or 20.1%.
33
Except for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
We cannot predict the impact COVID-19 may have on our cash flow for the rest of 2021. However, based on our liquidity assessment, we believe that our cash flow from operations and proceeds from our financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for the foreseeable future and for at least twelve months subsequent to the filing of this report.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banks’ acceptance facilities. In financing activities and operating activities, the Company’s banks require the Company to sign line of credit agreements and repay such facilities within one to two years. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such facilities can be extended for another one to two years.
The Company had short-term loans of $42.2 million (See Note 7) and bankers’ acceptances of $82.2 million (See Note 8) as of September 30, 2021.
The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances is expected to be reduced by approximately $16.4 million over the next 12 months. If the Company wishes to maintain the same amount of bank loans and banker's acceptances in the future, it may be required by the banks to provide additional mortgages of $16.4 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $8.8 million, which is 53.9%, the mortgage ratio, of $16.4 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
34
Bank Arrangements
As of September 30, 2021, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD):
|
|
|
|
| Assessed | ||||||||
Due | Amount | Amount | Mortgage | ||||||||||
Bank |
| Date | Available(3) | Used(4) | Value(5) | ||||||||
1. Comprehensive credit facilities | China Everbright Bank (2) | May 2022 |
| $ | 3,084 | $ | 964 | $ | 9,786 | ||||
|
| ||||||||||||
2. Comprehensive credit facilities | Shanghai Pudong Development Bank (1)(2) | Oct 2021 |
| 20,045 |
| 9,653 |
| 22,681 | |||||
|
| ||||||||||||
3. Comprehensive credit facilities | China CITIC Bank (2) | Aug 2022 |
| 65,531 |
| 40,958 |
| 20,081 | |||||
China CITIC Bank | Jun 2022 |
| 3,331 |
| — |
| 6,801 | ||||||
|
| ||||||||||||
4. Comprehensive credit facilities | Hubei Bank | Mar 2022 |
| 26,213 |
| 17,887 |
| 71,881 | |||||
|
| ||||||||||||
5. Comprehensive credit facilities | Bank of China (2) | Nov 2021 |
| 17,886 |
| 6,168 |
| 6,168 | |||||
|
| ||||||||||||
6. Comprehensive credit facilities | China Merchants Bank (1)(2) | Oct 2021 |
| 23,129 |
| — |
| — | |||||
|
| ||||||||||||
7. Comprehensive credit facilities | Agricultural Bank of China | Mar 2022 |
| 1,542 |
| 1,079 |
| 4,284 | |||||
|
| ||||||||||||
Total |
| $ | 160,761 | $ | 76,709 | $ | 141,682 | ||||||
| (1) | These facilities have expired. The Company is currently in the process of negotiating with these banks to renew the credit facilities. |
| (2) | The comprehensive credit facilities with China Everbright Bank are guaranteed by Hubei Henglong in addition to the above pledged assets. The comprehensive credit facilities with Shanghai Pudong Development Bank are guaranteed by Henglong in addition to the above pledged assets. The comprehensive credit facilities with China CITIC Bank are guaranteed by Henglong and Hubei Henglong in addition to the above pledged assets. The comprehensive credit facilities with Bank of China are guaranteed by Hubei Henglong in addition to the above pledged assets. The comprehensive credit facilities with China Merchants Bank are guaranteed by Hubei Henglong. |
| (3) | “Amount available” is used for the drawdown of bank loans and issuance of bank notes at the Company’s discretion. If the Company elects to utilize the facility by issuance of bank notes, additional collateral is requested to be pledged to the bank. |
| (4) | “Amount used” represents the credit facilities used by the Company for the purpose of bank loans or notes payable during the facility contract period. The loans or notes payable under the credit facilities will remain outstanding regardless of the expiration of the relevant credit facilities until the separate loans or notes payable expire. The amount used includes bank loans of $42.2 million and notes payable of $38.9 million as of September 30, 2021. |
| (5) | In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of September 30, 2021, the pledged assets included property, plant and equipment and land use rights with an aggregate assessed value of $141.7 million. |
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.
The Company’s bank loan terms range from 6 months to 12 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:
1. Land use rights and buildings with an assessed value of approximately $9.8 million as security for its comprehensive credit facility with China Everbright Bank.
35
2. Buildings with an assessed value of approximately $22.7 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.
3. Land use rights and buildings with an assessed value of approximately $20.1 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.
4. Land use rights and buildings with an assessed value of approximately $6.8 million as security for its comprehensive credit facility with China CITIC Bank Shenyang Branch.
5. Equipment with an assessed value of approximately $71.9 million as security for its revolving comprehensive credit facility with Hubei Bank.
6. The tax refund special bank account with an assessed value of approximately $6.2 million as security for its comprehensive credit facility with Bank of China.
7. Buildings with an assessed value of approximately $4.3 million as security for its comprehensive credit facility with Agricultural Bank of China.
36
Short-term Loans
The following table summarizes the contract information of short-term borrowings between the banks and the Company as of September 30, 2021 (figures are in thousands of USD).
|
|
|
| Borrowing |
|
|
|
| Annual |
| Date of |
|
| ||
Bank | Borrowing | Term | Interest | Interest | |||||||||||
Government | Purpose | Date | (Months) | Principal | Rate | Payment | Due Date | ||||||||
China CITIC Bank | Working Capital | Jun 4, 2021 | 6 | 912 | 2.80 | % | Pay in arrear | Dec 2, 2021 | |||||||
China CITIC Bank | Working Capital | Jun 21, 2021 | 6 | 3,805 | 2.60 | % | Pay in arrear | Dec 17, 2021 | |||||||
China CITIC Bank | Working Capital | Jun 21, 2021 | 6 | 1,519 | 2.60 | % | Pay in arrear | Jan 17, 2022 | |||||||
China CITIC Bank | Working Capital | Jul 27, 2021 | 6 | 1,542 | 4.35 | % | Pay monthly | Jan 27, 2022 | |||||||
Agricultural Bank of China | Working Capital |
| Mar 18, 2021 |
| 12 |
| 1,079 |
| 4.05 | % | Pay monthly |
| Mar 17, 2022 | ||
China CITIC Bank | Working Capital |
| Mar 22, 2021 |
| 12 |
| 6,922 |
| 3.45 | % | Pay in arrear |
| Mar 18, 2022 | ||
China CITIC Bank | Working Capital |
| Mar 22, 2021 |
| 12 |
| 4,166 |
| 3.45 | % | Pay in arrear |
| Mar 22, 2022 | ||
China CITIC Bank | Working Capital | Apr 29, 2021 | 12 | 1,542 | 4.35 | % | Pay monthly | Apr 29, 2022 | |||||||
China CITIC Bank | Working Capital | Jun 21, 2021 | 11 | 6,337 | 2.60 | % | Pay in arrear | May 17, 2022 | |||||||
China CITIC Bank | Working Capital | May 21, 2021 | 12 | 1,542 | 4.35 | % | Pay monthly | May 21, 2022 | |||||||
China CITIC Bank | Working Capital | May 28, 2021 | 12 | 1,542 | 4.35 | % | Pay monthly | May 28, 2022 | |||||||
China CITIC Bank | Working Capital |
| Jun 21, 2021 |
| 12 |
| 5,134 |
| 2.60 | % | Pay in arrear |
| Jun 21, 2022 | ||
Bank of China | Working Capital |
| Aug 27, 2021 |
| 12 |
| 3,084 |
| 3.80 | % | Pay monthly |
| Aug 27, 2022 | ||
Bank of China | Working Capital |
| Sep 23, 2021 |
| 12 |
| 3,084 |
| 3.80 | % | Pay monthly |
| Sep 23, 2022 | ||
$ | 42,210 | ||||||||||||||
The Company must use the loans for the purpose described and repay the principal outstanding on the specified date in the table. If it fails to do so, it will be charged additional 30% to 100% penalty interest.
The Company has complied with such financial covenants as of September 30, 2021.
37
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of September 30, 2021 (figures are in thousands of USD):
Amount | |||||||
Payable on | |||||||
Purpose |
| Term (Months) |
| Due Date |
| Due Date | |
Working Capital(1) |
| 6 |
| Oct. 2021 |
| 13,343 | |
Working Capital |
| 6 |
| Nov. 2021 |
| 11,710 | |
Working Capital |
| 6 |
| Dec. 2021 |
| 15,539 | |
Working Capital |
| 6 |
| Jan. 2022 |
| 13,795 | |
Working Capital |
| 6 |
| Feb. 2022 |
| 14,692 | |
Working Capital |
| 6 |
| Mar. 2022 |
| 13,167 | |
Total (See Note 8) |
| 82,246 | |||||
(1) | The notes payable were repaid in full on their respective due dates. |
The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit sufficient cash on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged an additional 50% penalty interest. The Company complied with such financial covenants as of September 30, 2021.
Cash Flows
(a)Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2021 was $5.9 million, compared with net cash provided in operating activities of $52.7 million for the same period of 2020, representing an increase in net cash outflows by $58.6 million, which was mainly due to (1) the increase in net income excluding non-cash items by $19.9 million, (2) the decrease in cash inflows from movements of accounts notes receivable by $22.8 million, (3) the increase in the cash outflows from movements of accounts and notes payable by $22.0 million, (4) the increase in the cash outflows from movements of inventories by $20.1 million, and (5) a combination of other factors contributing an increase of cash outflows by $13.6 million.
(b)Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2021 was $2.2 million, as compared to net cash used in investing activities of $33.8 million for the same period of 2020, representing an increase in net cash inflows by $31.6 million, which was mainly due to the net effect of (1) a decrease in payments to acquire property, plant and equipment by $3.5 million, (2) an increase in cash received from proceeds from maturities of short-term investment by $18.4 million, and (3) a combination of other factors contributing an increase of cash inflows by $9.7 million, primarily including an increase in purchase of short-term investment and long-term time deposits by $3.5 million, and an increase in cash received from long-term investment by $9.7 million.
(c)Financing Activities
Net cash used in financing activities for the nine months ended September 30, 2021 was $6.0 million, compared to net cash used in financing activities of $14.5 million for the same period of 2020, representing a decrease in net cash outflows by $8.5 million, which was mainly due to the net effect of (1) a decrease in repayments of bank loan by $5.7 million and (2) a combination of other factors contributing an increase of cash inflows by $2.8 million.
Off-Balance Sheet Arrangements
As of September 30, 2021 and December 31, 2020, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 regarding this matter.
ITEM 4. CONTROLS AND PROCEDURES.
| A. | Disclosure Controls and Procedures |
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2021, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
| B. | Changes in Internal Control Over Financial Reporting |
There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
39
PART II. — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. In November 2020, the Company reached a settlement to resolve the lawsuit for the sum of $55,998. The Company did not admit any liability in reaching the settlement. On February 5, 2021, the Court of Chancery conducted a hearing to confirm the settlement of the stockholder derivative action. The Court entered a Final Order and Judgment approving the settlement. The Court further ordered that the plaintiffs’ application for an award of attorneys’ fees and reimbursement of litigation expenses be reduced from $100,000 to $30,000. The Court’s Final Order and Judgment is publicly available on the Court of Chancery docket. As of September 30, 2021, the Company has received above settlement of $55,998 from the directors and paid the above attorneys’ fees and reimbursement of litigation expenses.
Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
ITEM 1A. RISK FACTORS.
The recent government interference into business activities of U.S. listed Chinese companies may negatively impact our operations.
Recently, certain PRC regulatory authorities issued Opinions on Strictly Cracking Down on Illegal Securities Activities, which were available to the public on July 6, 2021, which further emphasized their goal to strengthen the cross-board regulatory collaboration, to improve relevant laws and regulations on data security, cross-border data transmission and confidential information management, and provided that efforts will be made to revise the regulations on strengthening the confidentiality and file management relating to the offering and listing of securities overseas, to implement the responsibility on information security of overseas listed companies, and to strengthen the standardized management of cross-border information provision mechanisms and procedures. However, these opinions were newly issued, and there were no further explanations or detailed rules or regulations with respect to such opinions, and there are still uncertainties regarding the interpretation and implementation of these opinions. China intends to improve regulation of cross-border data flows and security, crack down on illegal activity in the securities market and punish fraudulent securities issuance, market manipulation and insider trading. China will also check sources of funding for securities investment and control leverage ratios. The Cyberspace Administration of China has also opened a cyber security probe into several U.S.-listed tech giants focusing on anti-monopoly, financial technology regulation and more recently, with the passage of the Data Security Law, how companies collect, store, process and transfer data. If the Chinese government’s interference expands, our operations may be negatively impacted in a significant way, although, presently, there is no discernible immediate impact.
40
If the Company becomes directly subject to the recent scrutiny, criticism and negative publicity involving U.S.-listed Chinese companies, we may have to expend significant resources to investigate and resolve the matters. Any unfavorable results from the investigations could harm our business operations, and our reputation.
Recently, U.S. public companies that have substantially all of their operations in China have been subjects of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the SEC. Much of the scrutiny, criticism and negative publicity has centered on financial and accounting irregularities, lack of effective internal control over financial accountings, inadequate corporate governance and ineffective implementation thereof and, in many cases, allegations of fraud. As a result of enhanced scrutiny, criticism and negative publicity, the publicly traded stocks of many U.S. listed Chinese companies have sharply decreased in value and, in some cases, have become virtually worthless or illiquid. Many of these companies are now subject to shareholder lawsuits and SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effects the sector-wide investigations will have on the Company. If the Company becomes a subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company will have to expend significant resources to investigate such allegations and defend the Company. If such allegations were not proven to be baseless, the Company would be severely hampered and the price of the stock of the Company could decline substantially. If such allegations were proven to be groundless, the investigation might have significantly distracted the attention of the Company’s management.
The Company could be delisted if it is unable to timely meet the PCAOB inspection requirements established by the Holding Foreign Companies Accountable Act.
On December 18, 2020, the Holding Foreign Companies Accountable Act, or HFCAA, was enacted. In essence, the act requires the SEC to prohibit securities of any foreign companies from being listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. Our independent registered public accounting firm is located in and organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, and therefore our auditors are not currently inspected by the PCAOB.
On March 24, 2021, the SEC adopted interim final amendments, which will become effective 30 days after publication in the Federal Register, relating to the implementation of certain disclosure and documentation requirements of the HFCAA. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Before any registrant will be required to comply with the interim final amendments, the SEC must implement a process for identifying such registrants. As of the date of this annual report, the SEC is seeking public comment on this identification process. Consistent with the HFCAA, the amendments will require any identified registrant to submit documentation to the SEC establishing that the registrant is not owned or controlled by a government entity in that jurisdiction, and will also require, among other things, disclosure in the registrant’s annual report regarding the audit arrangements of, and government influence on, such registrant.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two.
On September 22, 2021, the PCAOB adopted a new rule related to its responsibilities under the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether it is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. The new rule is subject to approval by the SEC. While we understand that there has been dialogue among the China Securities Regulatory Commission, the SEC and the PCAOB regarding the inspection of PCAOB-registered accounting firms in China, there can be no assurance that we will be able to comply with requirements imposed by U.S. regulators.
The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President's Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended that the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.
41
It is unclear when the SEC will complete its rulemaking, when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The enactment of the HFCAA and the implications of any additional rulemaking efforts to increase U.S. regulatory access to audit information in China could cause investor uncertainty for affected SEC registrants, including us, and the market price of our stock could be materially adversely affected. Additionally, whether the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be delisted from the Nasdaq Capital Market and our stock will not be permitted for trading “over-the-counter” either. Such a delisting would substantially impair your ability to sell or purchase our stock when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our stock. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.
Except for as set forth above, there have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2020 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
42
ITEM 6. EXHIBITS.
INDEX TO EXHIBITS
Exhibit |
| Description |
|
|
|
3.1(i) |
| |
|
|
|
3.1(ii) |
| Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123). |
|
|
|
10.1 |
| |
|
|
|
10.2 |
| |
|
|
|
10.3 |
| |
|
|
|
31.1 |
| |
|
|
|
31.2 |
| |
|
|
|
32.1 |
| |
|
|
|
32.2 |
| |
|
|
|
101.INS* |
| XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | XBRL Taxonomy Extension Schema Document | |
101.CAL* | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | XBRL Taxonomy Extension Presentation Linkbase Document | |
Exhibit 104* | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
*filed herewith
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CHINA AUTOMOTIVE SYSTEMS, INC. | |
| (Registrant) | |
|
|
|
Date: November 12, 2021 | By: | / s/ Qizhou Wu |
|
| Qizhou Wu |
|
| President and Chief Executive Officer |
|
|
|
Date: November 12, 2021 | By: | /s/ Jie Li |
|
| Jie Li |
|
| Chief Financial Officer |
44
