Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
Or
☐
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
For the transition period from _________ to _________
Commission file number: 000-33123
China Automotive Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
33-0885775
(State or other jurisdiction of incorporation or
(I.R.S. Employer Identification No.)
organization)
No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District
Jing Zhou City, Hubei Province, the People’s Republic of China
(Address of principal executive offices)
(86) 716- 412- 7901
(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 whichregistered
Common Stock, $0.0001 par value
CAAS
The Nasdaq Capital Market
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.
Yes ☒ No ☐
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
Non-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 ☐ No ☒
As of May 23, 2022, the Company had 30,851,776 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Page
Part I — Financial Information
4
Item 1.
Unaudited Financial Statements.
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2022 and 2021
Condensed Unaudited Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
5
Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021
6
Notes to Condensed Unaudited Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
21
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
32
Item 4.
Controls and Procedures.
Part II — Other Information
33
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
34
Signatures
35
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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, 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 March 31,
2022
2021
Net product sales ($11,004 and $16,575 sold to related parties for the three months ended March 31, 2022 and 2021)
$
136,396
130,341
Cost of products sold ($7,540 and $8,214 purchased from related parties for the three months ended March 31, 2022 and 2021)
121,662
110,593
Gross profit
14,734
19,748
Gain on other sales
931
1,316
Less: Operating expenses
Selling expenses
4,312
5,609
General and administrative expenses
4,754
4,615
Research and development expenses
8,137
6,680
Total operating expenses
17,203
16,904
(Loss)/income from operations
(1,538)
4,160
Other income, net
3,519
1,723
Interest expense
(402)
(343)
Financial income/(expense), net
2,015
(239)
Income before income tax expenses and equity in earnings of affiliated companies
3,594
5,301
Less: Income taxes
958
641
Add: Equity in loss of affiliated companies
(2,487)
(1,429)
Net income
149
3,231
Less: Net income attributable to non-controlling interests
200
18
Accretion to redemption value of redeemable non-controlling interests
(8)
(7)
Net (loss)/income attributable to parent company’s common shareholders
(59)
3,206
Comprehensive income:
Other comprehensive income:
Foreign currency translation income/(loss), net of tax
1,437
(2,271)
Comprehensive income
1,586
960
Comprehensive income/(loss) attributable to non-controlling interests
289
(118)
Comprehensive income attributable to parent company
1,289
1,071
Net (loss)/income attributable to parent company’s common shareholders per share -
Basic
(0.00)
0.10
Diluted
Weighted average number of common shares outstanding -
30,851,776
30,857,736
Share-based compensation included in operating expense above is as follows:
—
88
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
March 31, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
79,402
131,695
Pledged cash
30,047
27,804
Accounts and notes receivable, net - unrelated parties
211,035
195,729
Accounts and notes receivable, net - related parties
11,362
14,607
Inventories
114,483
116,493
Other current assets
59,252
15,052
Total current assets
505,581
501,380
Non-current assets:
Property, plant and equipment, net
123,436
127,721
Land use rights, net
10,705
10,732
Long-term investments
60,660
36,966
Other non-current assets
26,265
39,963
Total assets
726,647
716,762
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans
48,185
47,592
Accounts and notes payable-unrelated parties
215,892
214,590
Accounts and notes payable-related parties
11,784
13,464
Accrued expenses and other payables
58,340
50,332
Other current liabilities
25,819
25,838
Total current liabilities
360,020
351,816
Long-term liabilities:
Long-term tax payable
21,075
Other non-current liabilities
6,525
6,430
Total liabilities
387,620
379,321
Commitments and Contingencies (See Note 22)
Mezzanine equity:
Redeemable non-controlling interests
561
553
Stockholders’ equity:
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of March 31, 2022 and December 31, 2021, respectively
Additional paid-in capital
63,731
Retained earnings-
Appropriated
11,481
Unappropriated
226,304
226,363
Accumulated other comprehensive income
26,065
24,717
Treasury stock – 1,486,526 and 1,486,526 shares as of March 31, 2022 and December 31, 2021, respectively
(5,261)
Total parent company stockholders’ equity
322,323
321,034
Non-controlling interests
16,143
15,854
Total stockholders’ equity
338,466
336,888
Total liabilities, mezzanine equity and stockholders’ equity
Condensed Unaudited Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income from operations to net cash provided by /(used in) operating activities:
Share-based compensation
Depreciation and amortization
6,207
6,544
Provision/(reversal) of credit losses
100
(177)
Deferred income taxes
286
(254)
Equity in loss of affiliated companies
2,487
1,429
Loss on fixed assets disposals
37
9
(Increase)/decrease in:
Accounts and notes receivable
(11,184)
(3,972)
2,532
(1,934)
(1,281)
(1,371)
Increase/(decrease) in:
Accounts and notes payable
(1,407)
1,595
(2,041)
(4,135)
(135)
(1,811)
Net cash used in operating activities
(4,250)
(758)
Cash flows from investing activities:
Decrease/(increase) in demand loans included in other non-current assets
242
(33)
Repayment of loan from a related party
154
Cash received from property, plant and equipment sales
95
51
Payments to acquire property, plant and equipment (including $794 and $137 paid to related parties for the three months ended March 31, 2022 and 2021, respectively)
(1,024)
(3,267)
Payments to acquire intangible assets
(40)
(112)
Investment under the equity method
(4,724)
Purchase of short-term investments
(44,693)
(14,661)
Proceeds from maturities of short-term investments
1,801
9,873
Cash received from long-term investment
2,704
2,237
Net cash used in investing activities
(45,639)
(5,758)
Cash flows from financing activities:
Proceeds from bank loans
16,088
12,569
Repayments of bank loans
(15,701)
(10,086)
Repayments of the borrowing for sale and leaseback transaction
(1,130)
(1,107)
Net cash (used in)/provided by financing activities
(743)
1,376
Effects of exchange rate on cash, cash equivalents and pledged cash
583
(884)
Net decrease in cash, cash equivalents and pledged cash
(50,049)
(6,024)
Cash, cash equivalents and pledged cash at beginning of the period
159,498
128,061
Cash, cash equivalents and pledged cash at end of the period
109,449
122,037
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 March 31, 2022 and December 31, 2021.
Percentage Interest
March 31,
December 31,
Name of Entity
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1
100.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
70.00
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4
85.00
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
95.84
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
60.00
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”13
66.60
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”14
51.00
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”15
62.00
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”16
8
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, 2021.
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, 2021 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 ended March 31, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.
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
In November 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-10 Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, effective for financial statements issued for annual periods beginning after December 15, 2021. ASU 2021-10 requires business entities to disclose information in the notes to the financial statements about certain types of government assistance. The annual disclosure requirements apply to transactions with a government that are accounted for by analogizing to either a grant model or a contribution model. We plan to adopt ASU 2020-10 when we issue our annual financial statements. We do not expect it to have a material impact on our consolidated financial statements.
(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, 2021.
3. Accounts and notes receivable, net
The Company’s accounts and notes receivable, net as of March 31, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Accounts receivable - unrelated parties
151,245
146,362
Notes receivable - unrelated parties
72,643
61,328
Total accounts and notes receivable - unrelated parties
223,888
207,690
Less: allowance for doubtful accounts - unrelated parties
(12,853)
(11,961)
Accounts and notes receivable - related parties
12,256
15,505
Less: allowance for doubtful accounts - related parties
(894)
(898)
Accounts and notes receivable, net
222,397
210,336
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.
As of March 31, 2022 and December 31, 2021, the Company pledged its notes receivable in amounts of $19.7 million and $18.2 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of cash operations amounted to $0.1 million and $0.2 million, respectively, for the three months ended March 31,2022 and 2021.
During the three months ended March 31, 2022, the Company’s five largest customers accounted for 46.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 22.1%. As of March 31, 2022, approximately 8.7% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
During the three months ended March 31, 2021, the Company’s five largest customers accounted for 43.3% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 20.9%. As of March 31, 2021, approximately 8.8% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
4. Inventories
The Company’s inventories as of March 31, 2022 and December 31, 2021 consisted of the following (figures are in thousands of USD):
Raw materials
36,215
33,583
Work in process
10,114
9,415
Finished goods
68,154
73,495
Total
The Company recorded $1.0 million and $1.0 million of inventory write-down to cost of products sold for the three months ended March 31, 2022 and 2021, respectively.
10
5. Long-term investments
The Company’s long-term investments at March 31, 2022 and December 31, 2021, are summarized as follows (figures are in thousands of USD):
Sentient AB(1)
24,452
Chongqing Venture Fund(2)
15,085
17,530
Hubei Venture Fund (3)
8,333
9,665
Suzhou Venture Fund (4)
5,634
7,413
Suzhou Qingshan (5)
4,727
Henglong Tianyu
891
913
Chongqing Jinghua
578
642
Jiangsu Intelligent
803
The condensed financial information of the Company’s significant equity investees for the three months ended March 31, 2022 and 2021 are summarized as follows (figures are in thousands of USD):
Revenue
(Loss) from continuing operations
(20,578)
(9,093)
Net (loss)
11
6. Property, plant and equipment, net
The Company’s property, plant and equipment, net as of March 31, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Costs:
Buildings
71,798
69,554
Machinery and equipment
256,334
253,245
Electronic equipment
6,997
6,887
Motor vehicles
5,108
5,121
Construction in progress
4,979
6,583
Total amount of property, plant and equipment
345,216
341,390
Less: Accumulated depreciation (1)
(221,780)
(213,669)
Total amount of property, plant and equipment, net (2)(3)
7. Loans
Loans consist of the following as of March 31, 2022 and December 31, 2021 (figures are in thousands of USD):
Short-term bank loans (1)
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 March 31, 2022.
12
8. Accounts and notes payable
The Company’s accounts and notes payable as of March 31, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Accounts payable - unrelated parties
132,199
132,593
Notes payable - unrelated parties (1)
83,693
81,997
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
227,676
228,054
9. Accrued expenses and other payables
The Company’s accrued expenses and other payables as of March 31, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Warranty reserves(1)
37,128
36,572
Payable for the investment in Sentient AB (See Note 5)
10,905
Accrued expenses
6,697
5,596
Current portion of other long-term payable (See Note 10)
1,115
Payables for overseas transportation and custom clearance
1,731
4,548
Dividends payable to holders of non-controlling interests
473
471
Accrued interest
257
507
Other payables
1,149
1,523
Balance at end of year
For the three months ended March 31, 2022 and 2021, the warranties activities were as follows (figures are in thousands of USD):
Balance at beginning of the period
Additions during the period
3,888
3,681
Settlement within the period
(3,476)
(3,645)
Foreign currency translation loss/(gain)
144
(266)
Balance at end of the period
35,985
13
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 four-year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was RMB 91.3 million (equivalent to $14.4 million as of March 31, 2022) and the sales price was RMB 100.0 million (equivalent to $15.8 million as of March 31, 2022). Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over four years with a quarterly lease payment of approximately $1.1 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as a sale. Therefore, the transaction was accounted for as a financing transaction by the Company. As of March 31, 2022, the payables have been fully paid.
11. Redeemable non-controlling interests
In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $0.7 million. The shares will be transferred to the Company and the other shareholder of the subsidiary on a pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed period of time after their issuance with a transfer price of par plus 6% per year. $0.5 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity and are accreted to the redemption value over the period starting from the issuance date.
For the three months ended March 31, 2022 and 2021, the Company recognized accretion of $0.008 million and $0.007 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.
12. Additional paid-in capital
The Company’s positions in respect of the amounts of additional paid-in capital for the three months ended March 31, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
64,273
64,361
13. Retained earnings
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 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three months ended March 31, 2022 and 2021, no statutory reserve was appropriated by the subsidiaries in China.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three months ended March 31, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
11,303
14
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three months ended March 31, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
215,491
Net (loss)/income attributable to parent company
(51)
3,213
Accretion of redeemable non-controlling interests
218,697
14. Accumulated other comprehensive income
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three months ended March 31, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
17,413
Foreign currency translation adjustment attributable to parent company
1,348
(2,128)
15,285
15. 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 March 29, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $4.00 per share through March 30, 2023. As of the report date, the Company has not repurchased any shares of the Company’s common stock.
16. Non-controlling interests
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three months ended March 31, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
16,170
Net income attributable to non-controlling interests
Foreign currency translation adjustment attributable to non-controlling interests
89
(143)
16,045
17. 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 24.
15
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 March 31, 2022 and December 31, 2021, the Company has customer deposits of $3.7 million and $2.4 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the three months ended March 31, 2022, $2.3 million was received and $1.0 million (including $1.0 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the three months ended March 31, 2021, $1.0 million was received and $1.4 million (including $1.4 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of the customer deposit liability.
18. Financial income/(expense), net
During the three months ended March 31, 2022 and 2021, the Company recorded financial income/(expense), net which is summarized as follows (figures are in thousands of USD):
Interest income
251
313
Foreign exchange gain/(loss), net
1,910
(469)
Bank charges
(146)
(83)
Total financial income/(expense), net
19. 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 income per share attributable to the parent company for the three months ended March 31, 2022 and 2021, were as follows (figures are in thousands of USD, except share and per share amounts):
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
5,960
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
As of March 31, 2021, the exercise prices for 30,000 outstanding stock options were above the weighted average market price of the Company’s common stock during the three months ended March 31, 2021. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
16
For the three months ended March 31, 2022, 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 954 shares have been excluded from the calculation of the diluted loss per share for the three months ended March 31, 2022, due to their anti-dilutive effect.
20. 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 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the discretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.
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.
17
21. Related party transactions and balances
Related party transactions are as follows (figures are in thousands of USD):
Related party sales
Merchandise sold to related parties
11,004
16,575
Materials and others sold to related parties
605
426
Rental income obtained from related parties
125
106
11,734
17,107
Related party purchases
Materials purchased from related parties
7,540
8,214
Equipment purchased from related parties
449
225
Others purchased from related parties
157
8,146
8,449
Related party investment transaction
Equity interest purchase from related parties
Related party receivables
Accounts and notes receivable, net from related parties
Related party advance payments
Advance payments for property, plant and equipment to related parties
1,159
810
Advance payments and others to related parties
1,520
600
2,679
1,410
Related party payables
Accrued expenses and other payables to related parties
22,689
These transactions were consummated under similar terms as those with the Company’s third party customers and suppliers.
As of May 23, 2022, Hanlin Chen, the chairman of the board of directors of the Company, owns 57.9% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.
22. Commitments and contingencies
Legal proceedings
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 March 31, 2022 (figures are in thousands of USD):
Payment obligations by period
2023
2024
Thereafter
Obligations for investment contracts (1)
4,726
Obligations for purchasing and service agreements
22,925
2,004
24,929
6,730
29,655
23. Off-balance sheet arrangements
As of March 31, 2022 and December 31, 2021, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
24. 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 2021 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 March 31, 2022 and 2021, the Company had 15 product sectors, seven of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB, Hubei Henglong, and Brazil Henglong), and one holding company (Genesis). The other eight sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).
19
The Company’s product sector information for the three months ended March 31, 2022 and 2021, is as follows (figures are in thousands of USD):
Net Product Sales
Net (Loss)/Income
Three Months Ended
Henglong
62,003
49,079
1,199
799
Jiulong
17,728
33,719
(2,434)
1,000
Shenyang
3,311
4,092
(60)
353
Wuhu
8,872
4,159
Hubei Henglong
32,943
35,458
(2,837)
666
Henglong KYB
29,807
18,206
569
165
Brazil Henglong
10,484
4,915
2,815
413
Other Entities
19,849
16,322
1,147
Total Segments
184,997
165,950
401
3,498
Corporate
(235)
(217)
Eliminations
(48,601)
(35,609)
(17)
(50)
20
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 March 31, 2022, the Company has approximately 4,051 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 2022. The Company resumed operation in March of 2022. 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, 2021.
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 Henglong.
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:
The table below presents information about the nature and rationale for the Company’s critical accounting estimates:
Balance SheetCaption
CriticalEstimateItem
Nature of EstimatesRequired
Assumptions/ApproachesUsed
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.
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.
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 collect-ability 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.
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.
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this report.
22
Results of Operations
Three Months Ended March 31, 2022 and 2021
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Change
Change %
Net product sales
6,055
4.6
Cost of products sold
11,069
10.0
(385)
(29.3)
(1,297)
(23.1)
139
3.0
1,457
21.8
1,796
104.2
402
343
59
17.2
Financial (income)/expense, net
(2,015)
239
(2,254)
(943.1)
Income taxes
317
49.5
(3,082)
(95.4)
182
1,011.1
(3,265)
(101.8)
Net Product Sales and Cost of Products Sold
Cost of Products Sold
(in thousands of USD,
except percentages)
12,924
26.3
57,441
45,119
12,322
27.3
(15,991)
(47.4)
17,606
30,668
(13,062)
(42.6)
(781)
(19.1)
2,816
3,313
(497)
(15.0)
4,713
113.3
8,302
3,872
4,430
114.4
(2,515)
(7.1)
30,122
29,485
637
2.2
11,601
63.7
27,321
16,895
10,426
61.7
5,569
9,498
3,336
6,162
184.7
3,527
21.6
16,044
13,402
2,642
19.7
19,047
11.5
169,150
146,090
23,060
15.8
Elimination
(12,992)
36.5
(47,488)
(35,497)
(11,991)
33.8
Net product sales were $ 136.4 million for the three months ended March 31, 2022, compared to $130.3 million for the same period in 2021, representing an increase of $6.1 million, or 4.7%.
Net sales of traditional steering products and parts were $95.4 million for the three months ended March 31, 2022, compared to $105.6 million for the same period in 2021, representing a decrease of $10.2 million, or 9.7%. Net sales of electric power steering (“EPS”) were $41.0 million for the three months ended March 31, 2022 and $24.7 million for the same period in 2021, representing an increase of $16.3 million, or 66.0%. As a percentage of net sales, sales of EPS were 30.1% for the three months ended March 31, 2022, compared with 19.0% for the same period in 2021.
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 $2.2 million due to the Company’s increased sales in foreign markets; ii) the increase in average selling price of steering gears led to a sales increase of $0.5 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 $3.4 million.
23
Further analysis by segment (before elimination) is as follows:
24
For the three months ended March 31, 2022, the cost of products sold was $121.7 million, compared to $110.6 million for the same period of 2021, representing an increase of $11.1 million, or 10.0%. The increase in cost of sales was mainly due to the effect of the following major factors: (i) the increase in sales volume led to a cost of sales increase of $4.1 million; (ii) an increase in unit cost resulting in a cost of sales increase of $4.0 million; and iii) the appreciation of the RMB against the U.S. dollar resulted in a cost of sales increase of $3.0 million. Further analysis is as follows:
25
Gross margin was 10.8% for the three months ended March 31, 2022, compared to 15.1% for the same period of 2021, representing a decrease of 4.3%, mainly due to the changes in the product mix for the three months ended March 31, 2021.
Selling Expenses
Selling expenses were $4.3 million for the three months ended March 31, 2022, as compared to $5.6 million for the same period of 2021, representing a decrease of $1.3 million, which was primarily due to the decrease in transportation expenses.
General and Administrative Expenses
General and administrative expenses were $4.8 million for the three months ended March 31, 2022, which is substantially consistent with $4.6 million for the three months ended March 31, 2021.
Research and Development Expenses
Research and development expenses were $8.1 million for the three months ended March 31, 2022, as compared to $6.7 million for the same period of 2021, representing an increase of $1.4 million, or 20.9%, which was mainly due to increased expenditures on R&D activities for EPS products.
Other Income, net
Other income, net was $3.5 million for the three months ended March 31, 2022, as compared to $1.7 million for the three months ended March 31, 2021, representing an increase of $1.8 million, which was mainly due to the various government subsidies of $3.0 million received in the first quarter of 2022, whereas only $1.4 million was received in the same period of last year.
Interest Expense
Interest expense was $0.4 million for the three months ended March 31, 2022, which is substantially consistent with $0.3 million for the three months ended March 31, 2021.
Financial (Income)/expense, net
Financial income, net was $2.0 million for the three months ended March 31, 2022, compared to financial expense, net of $0.2 million for the three months ended March 31, 2021, representing a decrease in financial expense of $2.2 million, which was primarily due to an increase in the foreign exchange gains due to the appreciation of the exchange rate between the Brazilian Real and the U.S. dollar.
Income Taxes
Income tax expense was $1.0 million for the three months ended March 31, 2022, compared to income tax expense of $0.6 million for the three months ended March 31, 2021, which was primarily due to the increase in valuation allowance recognized in the three months ended March 31, 2022.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $0.2 million for the three months ended March 31, 2022, compared to $0.02 million for the three months ended March 31, 2021.
Net (Loss)/income Attributable to Parent Company’s Common Shareholders
Net loss attributable to parent company’s common shareholders was $0.1 million for the three months ended March 31, 2022, compared to net income attributable to parent company’s common shareholders of $3.2 million for the three months ended March 31, 2021, representing an increase in net loss attributable to parent company’s common shareholders of $3.3 million.
26
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 March 31, 2022, the Company had cash and cash equivalents and short-term investments of $124.0 million, compared to $133.5 million as of December 31, 2021, representing a decrease of $9.5 million, or 7.1%.
The Company had working capital (total current assets less total current liabilities) of $145.6 million as of March 31, 2022, compared to $149.6 million as of December 31, 2021, representing a decrease of $4.0 million, or 2.7%.
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 2022. 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 $48.2 million (See Note 7) and bankers’ acceptances of $86.8 million (See Note 8) as of March 31, 2022.
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 $16.7 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 $16.7 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 $16.0 million, which is 95.8%, the mortgage ratio, of $16.7 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.
27
Bank Arrangements
As of March 31, 2022, 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
Mortgage
Bank
Date
Available(2)
Used(3)
Value(4)
1. Comprehensive credit facilities
China Everbright Bank (1)
May 2022
3,151
2,521
9,997
2. Comprehensive credit facilities
Shanghai Pudong Development Bank (1)
Jan 2023
20,478
1,261
18,354
3. Comprehensive credit facilities
China CITIC Bank (1)
Aug 2022
66,948
45,838
22,443
4. Comprehensive credit facilities
China Industrial Bank
Nov 2022
1,103
3,113
5. Comprehensive credit facilities
Huishang Bank
1,575
6. Comprehensive credit facilities
Bank of China (1)
Jun 2022
14,335
13,547
6,301
7. Comprehensive credit facilities
Hankou Bank (1)
15,752
4,043
123,342
68,313
60,208
The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.
28
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 $10.0 million as security for its comprehensive credit facility with China Everbright Bank.
2. Land use rights and buildings with an assessed value of approximately $18.4 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 $22.4 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.
4. Buildings with an assessed value of approximately $3.1 million as security for its comprehensive credit facility with China Industrial Bank.
5. The tax refund special bank account with an assessed value of approximately $6.3 million as security for its comprehensive credit facility with Bank of China.
29
Short-term Loans
The following table summarizes the contract information of short-term borrowings between the banks and the Company as of March 31, 2022 (figures are in thousands of USD).
Borrowing
Annual
Date of
Term
Interest
Government
Purpose
(Months)
Principal
Rate
Payment
Due Date
Bank of China
Working Capital
Sep 27, 2021
3,150
3.80
Pay monthly
Sep 27, 2022
Nov 24, 2021
4,096
Nov 24, 2022
Aug 27, 2021
Aug 26, 2022
Oct 27, 2021
Oct 26, 2022
Apr 29, 2021
4.35
Apr 29, 2022
May 21, 2021
May 21, 2022
China CITIC Bank
May 28, 2021
May 28, 2022
Dec 22, 2021
3.85
Pay quarterly
Dec 21, 2022
Mar 21, 2022
1,527
3.00
Pay in arrear
Mar 21, 2023
Mar 23, 2022
4,888
Mar 23, 2023
Jun 21, 2021
6,474
2.60
May 17, 2022
Hankou Bank
Mar 18, 2022
3,091
1.90
Mar 13, 2023
5,651
5,245
Jun 21, 2022
Oct 26, 2021
62
2.55
Apr 11, 2022
Nov 16, 2021
156
2.70
Apr 22, 2022
May 5, 2022
Dec 8, 2021
468
2.50
Feb 15, 2022
469
2.65
Jun 8, 2022
Mar 7, 2022
Jul 21, 2022
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.
30
The Company had complied with such financial covenants as of March 31, 2022.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 2022 (figures are in thousands of USD):
Payable on
Term (Months)
Working Capital(1)
Apr. 2022
12,310
May. 2022
12,199
Jun. 2022
18,829
Jul. 2022
15,896
Aug.2022
11,035
Sep. 2022
16,490
Total (See Note 8)
86,759
(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 March 31, 2022.
Cash Flows
Net cash used in operating activities for the three months ended March 31, 2022 was $4.3 million, compared to $0.8 million for the same period of 2021, representing an increase in net cash outflows by $3.5 million, which was mainly due to (1) the decrease in the cash outflows from movements of accrued expenses and other payables by $2.1 million,(2) the decrease in net income excluding non-cash items by $1.6 million, (3) the decrease in cash inflows from movements of accounts and notes receivable by $7.2 million, (4) the increase in the cash outflows from movements of accounts and notes payable by $3.0 million, and (5) a combination of other factors contributing an increase of cash inflows by $6.2 million, including the decrease in the cash outflows from movements of inventory by $4.5 million
Net cash used in investing activities for the three months ended March 31, 2022 was $45.6 million, as compared to net cash used in investing activities of $5.8 million for the same period of 2021, representing an increase in net cash outflows by $39.8 million, which was mainly due to the net effect of (1) a decrease in payments to acquire property, plant and equipment by $2.2 million, (2) an increase in purchase of short-term investments and long-term time deposits of $30.0 million and (3) a combination of other factors contributing an increase of cash outflows by $12.0 million, primarily including a decrease in proceeds from maturities of short-term investments by $8.1 million, and an increase in investment under the equity method by $4.7 million.
Net cash used in financing activities for the three months ended March 31, 2022 was $0.7 million, compared to net cash provided by financing activities of $1.4 million for the same period of 2021, representing an increase in net cash outflows by $2.1 million, which was mainly due to the net effect of (1) an increase in proceeds from bank loan by $3.5 million, and (2) an increase in repayment of bank loans by $5.6 million.
31
Off-Balance Sheet Arrangements
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, 2021 regarding this matter.
ITEM 4. 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 March 31, 2022, 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 March 31, 2022.
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.
There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2021 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
INDEX TO EXHIBITS
ExhibitNumber
Description
3.1(i)
Certificate of Incorporation (incorporated by reference from the filing on Form 10SB12G File No. 000-33123).
3.1(ii)
Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123).
10.1
Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).
10.2
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).
10.3
English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2018).
31.1
Rule 13a-14(a) Certification*
31.2
32.1
Section 1350 Certification*
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
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.
(Registrant)
Date: May 23, 2022
By:
/ s/ Qizhou Wu
Qizhou Wu
President and Chief Executive Officer
/s/ Jie Li
Jie Li
Chief Financial Officer