UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2021

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: 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 which registered
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           x          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).

 

Yes           x           No          ¨

 

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	x	Smaller reporting company Emerging growth company	x ¨

 

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           x

 

As of May 12, 2021, 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.		4
		Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2021 and 2020		4
		Condensed Unaudited Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020		5
		Condensed Unaudited Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 and 2020		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.		32
		Part II — Other Information		33
Item 1.		Legal Proceedings.		33
Item 1A.		Risk Factors.		33
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds.		33
Item 3.		Defaults Upon Senior Securities.		33
Item 4.		Mine Safety Disclosures.		33
Item 5.		Other Information.		33
Item 6.		Exhibits.		34
Signatures				35

 

 

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, 2020, as filed with the Securities and Exchange Commission.

 

 

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,
		2021				2020
Net product sales ($16,575 and $7,494 sold to related parties for the three months ended March 31, 2021 and 2020)		$	130,341			$	73,555
Cost of products sold ($8,214 and $3,134 purchased from related parties for the three months ended March 31, 2021 and 2020)			110,593				62,403
Gross profit			19,748				11,152
Gain on other sales			1,316				600
Less: Operating expenses
Selling expenses			5,609				2,118
General and administrative expenses			4,615				3,429
Research and development expenses			6,680				5,193
Total operating expenses			16,904				10,740
Income from operations			4,160				1,012
Other income, net			1,723				117
Interest expense			(343	)			(365	)
Financial expense, net			(239	)			(531	)
Income before income tax expenses and equity in loss of affiliated companies			5,301				233
Less: Income taxes expense			(641	)			(514	)
Less: Equity in loss of affiliated companies			(1,429	)			(347	)
Net income/(loss)			3,231				(628	)
Less: Net income/(loss) attributable to non-controlling interests			18				(600	)
Accretion to redemption value of redeemable non-controlling interests			(7	)			-
Net income/(loss) attributable to parent company’s common shareholders		$	3,206			$	(28	)
Comprehensive income:
Net income/(loss)		$	3,231			$	(628	)
Other comprehensive income:
Foreign currency translation loss, net of tax			(2,271	)			(4,961	)
Comprehensive income/(loss)			960				(5,589	)
Comprehensive loss attributable to non-controlling interests			(118	)			(1,053	)
Comprehensive income/(loss) attributable to parent company		$	1,078			$	(4,536	)
Net income/(loss) attributable to parent company’s common shareholders per share -
Basic		$	0.10			$	-
Diluted		$	0.10			$	-
Weighted average number of common shares outstanding -
Basic			30,851,776				31,174,045
Diluted			30,857,736				31,174,045
Share-based compensation included in operating expense above is as follows:
General and administrative expenses			88				-

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Balance Sheets

(In thousands of USD unless otherwise indicated)

 

		March 31, 2021				December 31, 2020
ASSETS
Current assets:
Cash and cash equivalents		$	90,374			$	97,248
Pledged cash			31,663				30,813
Accounts and notes receivable, net - unrelated parties			217,372				216,519
Accounts and notes receivable - related parties			19,273				17,621
Inventories			89,638				88,325
Other current assets			30,963				25,132
Total current assets			479,283				475,658
Non-current assets:
Property, plant and equipment, net			138,542				141,004
Land use rights, net			10,626				10,774
Long-term investments			45,518				49,766
Other non-current assets			27,794				30,358
Total assets		$	701,763			$	707,560
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term loans		$	46,193			$	44,238
Accounts and notes payable - unrelated parties			212,925				212,522
Accounts and notes payable - related parties			10,984				12,730
Accrued expenses and other payables			51,458				55,607
Other current liabilities			27,216				29,387
Total current liabilities			348,776				354,484
Long-term liabilities:
Other long-term payable			35				1,126
Long-term tax payable			23,884				23,884
Other non-current liabilities			8,105				8,151
Total liabilities		$	380,800			$	387,645
Commitments and Contingencies (See Note 23)
Mezzanine equity:
Redeemable non-controlling interests			530				523
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, 2021 and December 31, 2020, respectively		$	3			$	3
Additional paid-in capital			64,361				64,273
Retained earnings-
Appropriated			11,303				11,303
Unappropriated			218,697				215,491
Accumulated other comprehensive income			15,285				17,413
Treasury stock - 1,486,526 and 1,486,526 shares as of March 31, 2021 and December 31, 2020, respectively			(5,261	)			(5,261	)
Total parent company stockholders' equity			304,388				303,222
Non-controlling interests			16,045				16,170
Total stockholders' equity			320,433				319,392
Total liabilities, mezzanine equity and stockholders' equity		$	701,763			$	707,560

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(In thousands of USD unless otherwise indicated)

 

		Three Months Ended March 31,
		2021				2020
Cash flows from operating activities:
Net income/(loss)		$	3,231			$	(628	)
Adjustments to reconcile net income/(loss) from operations to net cash (used in)/provided by operating activities:
Share-based compensation			88				-
Depreciation and amortization			6,544				5,101
Reversal of credit losses			(177	)			(1	)
Deferred income taxes			(254	)			(34	)
Equity in loss of affiliated companies			1,429				347
Government subsidy reclassified from government loans			-				287
Loss on fixed assets disposals			9				52
(Increase)/decrease in:
Accounts and notes receivable			(3,972	)			33,444
Inventories			(1,934	)			10,430
Other current assets			(1,371	)			(3,455	)
Increase/(decrease) in:
Accounts and notes payable			1,595				(18,032	)
Accrued expenses and other payables			(4,135	)			2,557
Other current liabilities			(1,811	)			(824	)
Net cash (used in)/provided by operating activities			(758	)			29,244
Cash flows from investing activities:
Increase in demand loans and employee housing loans included in other non-current assets			(33	)			(212	)
Repayment of loan from a related party			154				-
Cash received from property, plant and equipment sales			51				242
Payments to acquire property, plant and equipment (including $137 and $242 paid to related parties for the three months ended March 31, 2021 and 2020, respectively)			(3,267	)			(1,984	)
Payments to acquire intangible assets			(112	)			-
Investment under the equity method			-				(2,579	)
Purchase of short-term investments			(14,661	)			-
Proceeds from maturities of short-term investments			9,873				5,781
Cash received from long-term investment			2,237				448
Net cash (used in)/provided by investing activities			(5,758	)			1,696
Cash flows from financing activities:
Proceeds from bank loans			12,569				14,368
Repayments of bank loans			(10,086	)			(16,247	)
Repayments of the borrowing for sale and leaseback transaction			(1,107	)			(1,028	)
Net cash provided by/(used in) financing activities			1,376				(2,907	)
Effects of exchange rate on cash, cash equivalents and pledged cash			(884	)			(1,851	)
Net (decrease)/increase in cash, cash equivalents and pledged cash			(6,024	)			26,182
Cash, cash equivalents and pledged cash at beginning of the period			128,061				106,403
Cash, cash equivalents and pledged cash at end of the period		$	122,037			$	132,585

 

The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.

 

 

China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three Months Ended March 31, 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 March 31, 2021 and December 31, 2020.

 

		Percentage Interest
Name of Entity		March 31, 2021				December 31, 2020
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1			100.00	%			100.00	%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2			100.00	%			100.00	%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3			70.00	%			70.00	%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4			85.00	%			85.00	%
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5			77.33	%			77.33	%
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6			100.00	%			100.00	%
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7			100.00	%			100.00	%
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8			70.00	%			70.00	%
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9			95.84	%			95.84	%
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10			85.00	%			85.00	%
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11			100.00	%			100.00	%
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan” 12			60.00	%			60.00	%
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 13			66.60	%			66.60	%
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 14			51.00	%			51.00	%
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 15			62.00	%			62.00	%
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 16			100.00	%			100.00	%

 

1.	Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.

 

2.	Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.

 

 

3.	Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
4.	Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns.
5.	Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.
6.	On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd.
7.	In December 2009, Henglong, a subsidiary of Genesis, formed Testing Center, which mainly engages in the research and development of new products.
8.	On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts.
9.	On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. 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.
10.	In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China.
11.	In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”, which mainly engages in the design and sales of automotive electronics.
12.	In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology.
13.	In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”, which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment.
14.	In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”, which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment.
15.	In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”, which mainly engages in the development, manufacturing and sale of high polymer materials. Hubei Henglong owns 62.0% of the shares of Wuhu Hongrun and has consolidated it since its establishment.

 

16.

In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.2 million, equivalent to approximately $0.2 million from an entity controlled by Hanlin Chen. Before the acquisition, 52.1% of the shares of Changchun Hualong were ultimately owned by Hanlin Chen and 47.9% of the shares were owned by third parties. Changchun Hualong mainly engages in design and R&D of automotive parts.

 

 

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 ended March 31, 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 three months ended March 31, 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.

 

 

3.	Accounts and notes receivable, net

 

The Company’s accounts and notes receivable, net as of March 31, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

 

		March 31, 2021				December 31, 2020
Accounts receivable - unrelated parties		$	140,944			$	141,018
Notes receivable - unrelated parties			86,040				85,354
Total accounts and notes receivable - unrelated parties			226,984				226,372
Less: allowance for doubtful accounts - unrelated parties			(9,612	)			(9,853	)
Accounts and notes receivable, net - unrelated parties			217,372				216,519
Accounts and notes receivable - related parties			19,274				17,622
Less: allowance for doubtful accounts - related parties			(1	)			(1	)
Accounts and notes receivable, net - related parties			19,273				17,621
Accounts and notes receivable, net		$	236,645			$	234,140

  

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, 2021 and December 31, 2020, the Company pledged its notes receivable in amounts of $8.1 million and $8.2 million, respectively, as collateral in favor of the local government for the government loans; and pledged its notes receivable in amounts of $6.3 million and $5.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 7).
Allowance for doubtful accounts receivable reversed in the consolidated statements of operations amounted to $0.2 million and $0.02 million, respectively, for the three months ended March 31, 2021 and 2020.
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 individually accounting for more than 10% of consolidated net sales, i.e., 16.5%. As of March 31, 2021, approximately 8.1% of accounts receivable were from trade transactions with the aforementioned customers 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, 2020, the Company’s five largest customers accounted for 53.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 33.7%. As of March 31, 2020, approximately 8.8% of accounts receivable were from trade transactions with the aforementioned customers 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, 2021 and December 31, 2020 consisted of the following (figures are in thousands of USD):

 

		March 31, 2021				December 31, 2020
Raw materials		$	27,274			$	24,367
Work in process			10,508				10,098
Finished goods			51,856				53,860
Total		$	89,638			$	88,325

 

The Company recorded $1.0 million and $0.8 million of inventory write-down to cost of product sold for the three months ended March 31, 2021 and 2020, respectively.

 

5.	Long-term investments

 

The Company’s long-term investments at March 31, 2021 and December 31, 2020, are summarized as follows (figures are in thousands of USD):

 

		March 31, 2021				December 31, 2020
Chongqing Venture Fund(1)		$	18,286			$	20,230
Hubei Venture Fund			14,171				14,473
Suzhou Venture Fund			7,328				7,740
Beijing Henglong (1)			3,749				5,241
Henglong Tianyu			1,022				1,070
Chongqing Jinghua			565				599
Jiangsu Intelligent			397				413
Total		$	45,518			$	49,766

 

(1)	In January 2021, the Chongqing Venture Fund and Beijing Henglong made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $0.7 million and $1.5 million, respectively.

 

 

6.	Property, plant and equipment, net

 

The Company’s property, plant and equipment, net as of March 31, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

 

		March 31, 2021				December 31, 2020
Costs:
Buildings		$	61,432			$	61,035
Machinery and equipment			233,711				233,273
Electronic equipment			6,512				6,491
Motor vehicles			5,018				5,064
Construction in progress			22,520				20,813
Total amount of property, plant and equipment			329,193				326,676
Less: Accumulated depreciation (1)			(190,651	)			(185,672	)
Total amount of property, plant and equipment, net (2)(3)		$	138,542			$	141,004

 

(1)	Depreciation charges were $6.4 million and $5.0 million for the three months ended March 31, 2021 and 2020, respectively.
(2)	As of March 31, 2021 and December 31, 2020, the Company pledged property, plant and equipment with net book value of approximately $63.0 million and $66.1 million, respectively, as security for its comprehensive credit facilities with banks in China.
(3)	Interest costs capitalized for the three months ended March 31, 2021 and 2020, were $0.2 million and $0.3 million, respectively.

 

7.

Loans

 

Loans consist of the following as of March 31, 2021 and December 31, 2020 (figures are in thousands of USD):

 

		March 31, 2021				December 31, 2020
Short-term bank loans (1)		$	38,584			$	36,575
Current portion of long-term government loan (2)			7,609				7,663
Subtotal			46,193				44,238
Long-term government loans (2)			7,609				7,663
Less: Current portion of long-term government loans (2)			(7,609	)			(7,663	)
Subtotal			-				-
Total bank and government loans		$	46,193			$	44,238

 

(1)	The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. The total credit facility amount was $173.1 million and $172.7 million, respectively, as of March 31, 2021 and December 31, 2020. As of March 31, 2021 and December 31, 2020, the Company has drawn down loans with an aggregate amount of $38.6 million and $36.6 million, respectively. The weighted average interest rate was 3.8% and 3.7% for the three months ended March 31, 2021 and December 31, 2020, respectively.
(2)	On August 7 and September 3, 2019, the Company borrowed from the local government loans of RMB 20.0 million and RMB 30.0 million, equivalent to approximately $3.0 million and $4.6 million, respectively. These loans are due for repayment on June 30, 2021 and have an interest rate of 3.80% per annum. As of March 31, 2021 and December 31, 2020, Henglong pledged RMB 53.5 million and RMB 53.5 million, equivalent to approximately $8.1 million and $8.2 million, respectively, of notes receivable as collateral for the local government loans (See Note 3).

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, 2021.

 

 

8.	Accounts and notes payable

 

The Company’s accounts and notes payable as of March 31, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

 

		March 31, 2021				December 31, 2020
Accounts payable - unrelated parties		$	129,099			$	132,349
Notes payable - unrelated parties (1)			83,826				80,173
Accounts and notes payable - unrelated parties			212,925				212,522
Accounts and notes payable - related parties			10,984				12,730
Total		$	223,909			$	225,252

  

(1)

Notes payable represent payables in the form of notes issued by the bank. As of March 31, 2021 and December 31, 2020, the Company has pledged cash of $30.7 million and $30.8 million, respectively. As of March 31, 2021 and December 31, 2020, the Company has pledged notes receivable of $6.3 million and $5.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity. The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. As of March 31, 2021 and December 31, 2020, the Company has used $49.5 million and $43.9 million, respectively, for issuing bank notes.

 

9.	Accrued expenses and other payables

 

The Company’s accrued expenses and other payables as of March 31, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

		March 31, 2021				December 31, 2020
Warranty reserves (1)		$	35,985			$	36,215
Accrued expenses			7,870				8,627
Current portion of other long-term payable (See Note 10)			4,177				4,131
Payables for overseas transportation and custom clearance			1,956				3,278
Dividends payable to holders of non-controlling interests			457				460
Accrued interest			588				646
Other payables			425				2,250
Balance at end of year		$	51,458			$	55,607

 

(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 months ended March 31, 2021 and 2020, the warranties activities were as follows (figures are in thousands of USD): 

 

		Three Months Ended March 31,
		2021				2020
Balance at beginning of the period		$	36,215			$	32,907
Additions during the period			3,681				3,428
Settlement within the period			(3,645	)			(3,174	)
Foreign currency translation gain			(266	)			(520	)
Balance at end of the period		$	35,985			$	32,641

 

 

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 $13.9 million as of March 31, 2021) and the sales price was RMB 100.0 million (equivalent to $15.2 million as of March 31, 2021). Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over four (4) years with a quarterly lease payment of approximately $1.0 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, 2021, $4.2 million was recognized as other payable (See Note 9) and $0.04 million was recognized as other long-term payable to the buyer-lessor according to the contract term.

 

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, 2021, the Company recognized accretion of $0.007 million 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, 2021 and 2020, are summarized as follows (figures are in thousands of USD):

 

		Three Months Ended March 31,
		2021				2020
Balance at beginning of the period		$	64,273			$	64,466
Share-based compensation			88				-
Acquisition of the non-controlling interest in USAI			-				(29	)
Balance at end of the period		$	64,361			$	64,437

 

 

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 2,200,000. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees who served over three years or have given outstanding performance, of options to purchase shares of the Company’s common stock. The Company has issued 658,850 stock options under this plan, and there remain 1,541,150 stock options issuable in the future as of March 31, 2021.

 

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 two to five years after the grant date. The stock options granted during the three months ended March 31, 2021 were exercisable immediately on the grant date. Stock options will be settled in shares of the Company’s common stock upon exercise and are recorded in the Company’s consolidated balance sheets under the caption “Additional paid-in capital.” As of March 31, 2021, the Company has sufficient unissued registered common stock for settlement of the stock incentive plan mentioned above.

 

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 three months ended March 31, 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			76.91	%			0.46	%			5				0.00	%

 

The stock options granted during the three months ended March 31, 2021 were exercisable immediately and their fair value on the grant date using the Black-Scholes option pricing model was $0.1 million. For the three months ended March 31, 2021 and 2020, the Company recognized stock-based compensation expenses of $0.1 million and nil, respectively.

 

The activities of stock options are summarized as follows, including granted, exercised and forfeited.

 

										Weighted-Average
						Weighted-Average				Contractual
		Shares				Exercise Price				Term (years)
Outstanding - January 1, 2020			30,000			$	4.99				5
Expired			(7,500	)			5.58				5
Outstanding - December 31, 2020			22,500			$	4.79				5
Granted			22,500				6.26				5
Outstanding - March 31, 2021			45,000			$	5.52				5

 

The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable at March 31, 2021:

 

		Outstanding Stock				Weighted Average				Weighted Average				Number of Stock
Range of Exercise Prices		Options				Remaining Life				Exercise Price				Options Exercisable
$2.37 - $6.95			45,000				2.39			$	5.52				45,000

 

 

As of March 31, 2021 and December 31, 2020, the total intrinsic value of the Company’s stock options that were exercisable was $0.2 million and $0.1 million, respectively.

 

For the three months ended March 31, 2021 and 2020, no Company’s stock options were exercised.

 

During the three months ended March 31, 2021, the weighted average fair value of the Company’s stock options granted was $3.92. No stock option was granted during the three months ended March 31, 2020.

 

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 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, 2021 and 2020, 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, 2021 and 2020, are summarized as follows (figures are in thousands of USD):

 

		Three Months Ended March 31,
		2021				2020
Balance at beginning of the period		$	11,303			$	11,265
Balance at end of the period		$	11,303			$	11,265

 

Unappropriated

 

The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three months ended March 31, 2021 and 2020, are summarized as follows (figures are in thousands of USD):

 

 

		Three Months Ended March 31,
		2021				2020
Balance at beginning of the period		$	215,491			$	221,298
Cumulative effect of accounting change - credit loss			-				(789	)
Net income/(loss) attributable to parent company			3,213				(28	)
Accretion of redeemable non-controlling interests			(7	)			-
Balance at end of the period		$	218,697			$	220,481

 

15.	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, 2021 and 2020, are summarized as follows (figures are in thousands of USD): 

 

		Three Months Ended March 31,
		2021				2020
Balance at beginning of the period		$	17,413			$	(3,462	)
Foreign currency translation adjustment attributable to parent company			(2,128	)			(4,508	)
Balance at end of the period		$	15,285			$	(7,970	)

 

 

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 $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $3.50 per share through August 12, 2021. As of March 31, 2021, the Company had cumulatively repurchased 322,269 of the shares that were authorized to be repurchased under the program that was approved on August 13, 2020. The repurchased shares are presented as “treasury stock” on the balance sheet.

 

17.	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, 2021 and 2020, are summarized as follows (figures are in thousands of USD):  

 

		Three Months Ended March 31,
		2021				2020
Balance at beginning of the period		$	16,170			$	20,250
Net income/(loss) attributable to non-controlling interests			18				(600	)
Acquisition of the non-controlling interest in USAI			-				29
Cumulative effect of accounting change - credit loss			-				(102	)
Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries			-				(430	)
Foreign currency translation adjustment attributable to non-controlling interests			(143	)			(453	)
Balance at end of the period		$	16,045			$	18,694

 

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 March 31, 2021 and December 31, 2020, the Company has customer deposits of $1.1 million and $1.5 million, respectively, which were included in other current liabilities on the consolidated balance sheets. 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. During the three months ended March 31, 2020, $0.3 million was received and $0.6 million (including $0.6 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.

 

19.	Financial expense, net

 

During the three months ended March 31, 2021 and 2020, the Company recorded financial expense, net which is summarized as follows (figures are in thousands of USD):

 

 

		Three Months Ended  March 31,
		2021				2020
Interest income		$	313			$	351
Foreign exchange loss, net			(469	)			(711	)
Bank fees			(83	)			(171	)
Total financial expense, net		$	(239	)		$	(531	)

 

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 income per share attributable to the parent company for the three months ended March 31, 2021 and 2020, were as follows (figures are in thousands of USD, except share and per share amounts):

 

		Three Months Ended  March 31,
		2021				2020
Numerator:
Net income/(loss) attributable to the parent company’s common shareholders - Basic and Diluted		$	3,206			$	(28	)
Denominator:
Weighted average shares outstanding			30,851,776				31,174,045
Dilutive effects of stock options			5,960				-
Denominator for dilutive income per share - Diluted			30,857,736				31,174,045
Net income/(loss) per share attributable to parent company’s common shareholders - Basic		$	0.10			$	-
Net income/(loss) per share attributable to parent company’s common shareholders - Diluted		$	0.10			$	-

  

As of March 31, 2021, the exercise prices for 30,000 shares, of 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.

 

For the three months ended March 31, 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 74 shares, have been excluded from the calculation of the diluted loss per share for the three months ended March 31, 2020, due to their anti-dilutive effect.

  

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 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.

  

22.	Related party transactions and balances

 

Related party transactions are as follows (figures are in thousands of USD):

 

Related sales

 

		Three Months Ended  March 31,
		2021				2020
Merchandise sold to related parties		$	16,575			$	7,494
Materials and others sold to related parties			426				270
Rental income obtained from related parties			106				77
Total		$	17,107			$	7,841

 

Related purchases

 

		Three Months Ended  March 31,
		2021				2020
Materials purchased from related parties		$	8,214			$	3,134
Equipment purchased from related parties			225				69
Others purchased from related parties			10				4
Total		$	8,449			$	3,207

 

 

Related receivables

 

		March 31, 2021				December 31, 2020
Accounts and notes receivable from related parties		$	19,274			$	17,622

 

Related advance payments

 

		March 31, 2021				December 31, 2020
Advance payments for property, plant and equipment to related parties		$	2,393			$	3,284
Advance payments and others to related parties			551				522
Total		$	2,944			$	3,806

 

Related payables

 

		March 31, 2021				December 31, 2020
Accounts and notes payable		$	10,984			$	12,730

 

These transactions were consummated under similar terms as those with the Company's third party customers and suppliers.

 

As of May 12, 2021, 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.

 

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 $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 March 31, 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.

 

 

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, 2021 (figures are in thousands of USD):

 

		Payment obligations by period
		2021				2022				2023				Thereafter				Total
Obligations for investment contracts (1)		$	2,678			$	-			$	-			$	-			$	2,678
Obligations for purchasing and service agreements			19,873				1,550				-				-				21,423
Total		$	22,551			$	1,550			$	-			$	-			$	24,101

 

(1)

In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s shares. As of March 31, 2021, Hubei Henglong has completed a capital contribution of RMB 3.0 million, equivalent to approximately $0.4 million. According to the agreement, the remaining capital commitment of RMB 2.0 million, equivalent to approximately $0.3 million, will be paid in 2021.   In November 2019, Hubei Henglong entered into an agreement with other parties and committed to purchase 70% of the shares of Hefei Senye Light Plastic Technology Co., Ltd. for total consideration of RMB 33.6 million, equivalent to approximately $5.0 million.  As of March 31, 2021, Hubei Henglong has paid the amount of RMB 18.0 million, equivalent to approximately $2.6 million, which was reported in other non-current assets as the transfer of shares had not been consummated. According to the agreement, of the remaining consideration of RMB 15.6 million, equivalent to approximately $2.4 million, will be paid in 2021.

24.	Off-balance sheet arrangements

 

As of March 31, 2021 and December 31, 2020, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

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 March 31, 2021, the Company had 15 product sectors, six 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 and Hubei Henglong), and one holding company (Genesis). The other nine 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), trade (Brazil 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).

 

 

As of March 31, 2020, the Company had 14 product sectors, six 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 and Hubei Henglong), and one holding company (Genesis). The other eight sectors were engaged in the production and sale of modular sensors (USAI), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil 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).

 

The Company’s product sector information for the three months ended March 31, 2021 and 2020, is as follows (figures are in thousands of USD):

 

		Net Product Sales								Net Income/(Loss)
		Three Months Ended								Three Months Ended
		March 31,								March 31,
		2021				2020				2021				2020
Henglong		$	49,079			$	23,907			$	799			$	(682	)
Jiulong			33,719				12,759				1,000				(1,450	)
Shenyang			4,092				2,793				353				(170	)
Wuhu			4,159				2,803				7				239
Hubei Henglong			35,458				28,132				666				4,065
Henglong KYB			18,206				6,126				165				(907	)
Other Entities			21,237				9,482				508				(1,935	)
Total Segments			165,950				86,002				3,498				(840	)
Corporate			-				-				(217	)			(61	)
Eliminations			(35,609	)			(12,447	)			(50	)			273
Total		$	130,341			$	73,555			$	3,231			$	(628	)

 

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, 2021, the Company has approximately 4,566 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.

 

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 Caption			Critical Estimate Item		Nature of Estimates Required		Assumptions/Approaches Used		Key Factors
Accrued liabilities and other long-term liabilities			Warranty obligations		Estimating warranty requires the Com-pany 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 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.		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.

 

Results of Operations

  

Three Months Ended March 31, 2021 and 2020

 

Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):

 

		Three Months Ended March 31,
		2021				2020				Change				Change%
Net product sales		$	130,341			$	73,555			$	56,786				77.2	%
Cost of products sold			110,593				62,403				48,190				77.2
Gain on other sales			1,316				600				716				119.3
Selling expenses			5,609				2,118				3,491				164.8
General and administrative expenses			4,615				3,429				1,186				34.6
Research and development expenses			6,680				5,193				1,487				28.6
Other income, net			1,723				117				1,606				1,372.6
Interest expense			343				365				(22	)			-6.0
Income taxes			641				514				127				24.7
Net income/(loss)			3,231				(628	)			3,859				-614.5
Net income/(loss) attributable to non-controlling interests			18				(600	)			618				-103.0
Net income/(loss) attributable to parent company’s common shareholders		$	3,206				(28	)		$	3,234				-11,550.0	%

 

Net Product Sales and Cost of Products Sold

 

		Net Product Sales																Cost of Products Sold
		(in thousands of USD, except percentages)																(in thousands of USD, except percentages)
		2021				2020				Change								2021				2020				Change
Henglong		$	49,079			$	23,907			$	25,172				105.3	%		$	45,119			$	23,069			$	22,050				95.6	%
Jiulong			33,719				12,759				20,960				164.3				30,668				13,347				17,321				129.8
Shenyang			4,092				2,793				1,299				46.5				3,313				2,421				892				36.8
Wuhu			4,159				2,803				1,356				48.4				3,872				2,375				1,497				63.0
Hubei Henglong			35,458				28,132				7,326				26.0				29,485				19,307				10,178				52.7
Henglong KYB			18,206				6,126				12,080				197.2				16,895				6,083				10,812				177.7
Other Entities			21,237				9,482				11,755				124.0				16,738				8,388				8,350				99.5
Total Segments			165,950				86,002				79,948				93.0				146,090				74,990				71,100				94.8
Elimination			(35,609	)			(12,447	)			(23,162	)			186.1				(35,497	)			(12,587	)			(22,910	)			182.0
Total		$	130,341			$	73,555			$	56,786				77.2	%		$	110,593			$	62,403			$	48,190				77.2	%

 

 

Net Product Sales

 

Net product sales were $130.3 million for the three months ended March 31, 2021, compared to $73.6 million for the same period in 2020, representing an increase of $56.7 million, or 77.0%, mainly due to the market recovery after COVID-19.

 

Net sales of traditional steering products and parts were $105.6 million for the three months ended March 31, 2021, compared to $65.5 million for the same period in 2020, representing an increase of $40.1 million, or 61.2%. Net sales of electric power steering (“EPS”) were $24.7 million for the three months ended March 31, 2021 and $8.1 million for the same period in 2020, representing an increase of $16.6 million. As a percentage of net sales, sales of EPS were 19.0% for the three months ended March 31, 2021, compared with 11.0% 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 $60.7 million due to the increase in demand as a result of the recovery of manufacturing and operations of the Company’s customers after COVID-19 around the world; ii) the decrease in average selling price of steering gears led to a sales decrease of $7.9 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 $3.9 million.

 

Further analysis by segment (before elimination) is as follows:

  

•

Henglong mainly engages in providing passenger vehicle steering systems. Net product sales for Henglong were $49.1 million for the three months ended March 31, 2021, compared with $23.9 million for the three months ended March 31, 2020, representing an increase of $25.2 million, or 105.4%. An increase in sales volume led to a sales increase of $24.5 million, a decrease in selling price led to a sales decrease of $0.3 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.

   

•

Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for Jiulong were $33.7 million for the three months ended March 31, 2021, compared with $12.8 million for the three months ended March 31, 2020, representing an increase of $20.9 million, or 163.3%. 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 $20.3 million, a decrease in selling price led to a sales decrease of $0.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.8 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 $4.1 million for the three months ended March 31, 2021, compared to $2.8 million for the same period in 2020, representing an increase of $1.3 million, or 46.4%. An increase in sales volume led to a sales increase of $1.5 million, a decrease in selling price led to a sales decrease of $0.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.2 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 $4.2 million for the three months ended March 31, 2021, compared to $2.8 million for the same period in 2020, representing an increase of $1.4 million, or 50.0%. An increase in sales volumes led to a sales increase of $2.5 million, a decrease in selling prices led to a sales decrease of $1.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.2 million.

 

•

Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for Hubei Henglong were $35.5 million for the three months ended March 31, 2021, compared with $28.1 million for the three months ended March 31, 2020, representing an increase of $7.4 million, or 26.3%. An increase in sales volume led to a sales increase of $8.3 million, a decrease in selling price led to a sales decrease of $1.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.9 million.

 

 

•

Henglong KYB mainly engages in providing passenger EPS products. Net product sales for Henglong KYB were $18.2 million for the three months ended March 31, 2021, compared with $6.1 million for the three months ended March 31, 2020, representing an increase of $12.1 million, or 198.4%. An increase in sales volume led to a sales increase of $12.1 million, a decrease in selling price led to a sales decrease of $0.5 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.

 

•

Net product sales for other entities were $21.2 million for the three months ended March 31, 2021, compared to $9.5 million for the same period in 2020, representing an increase of $11.7 million, or 123.2%, mainly caused by increases in sales of Jielong and Chongqing

 

Cost of Products Sold

 

For the three months ended March 31, 2021, the cost of products sold was $110.6 million, compared to $62.4 million for the same period of 2020, representing an increase of $48.2 million, or 77.2%. The increase in cost of sales was mainly due to the effect of the following major factors: i) the decrease in unit price led to a cost of sales decrease of $6.3 million; (ii) the increase in sales volumes led to a cost of sales increase of $50.6 million; and iii) the appreciation of the RMB against the U.S. dollar resulted in a cost of sales increase of $3.9 million. Further analysis is as follows:

 

•

Cost of products sold for Henglong was $45.1 million for the three months ended March 31, 2021, compared to $23.1 million for the same period of 2020, representing an increase of $22.0 million, or 95.2%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $21.3 million, a decrease in unit cost resulting in a cost of sales decrease of $0.3 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 Jiulong was $30.7 million for the three months ended March 31, 2021, compared to $13.3 million for the same period of 2020, representing an increase of $17.4 million, or 130.8%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $20.5 million, a decrease in unit cost resulting in a cost of sales decrease of $3.9 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 Shenyang was $3.3 million for the three months ended March 31, 2021, compared to $2.4 million for the same period of 2020, representing an increase of $0.9 million, or 37.5%. The increase 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 sale decrease of $0.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.2 million.

 

•

Cost of products sold for Wuhu was $3.9 million for the three months ended March 31, 2021, compared to $2.4 million for the same period of 2020, representing an increase of $1.5 million, or 62.5%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $2.4 million, a decrease in unit cost resulting in a cost of sales decrease of $1.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.1 million.

 

•

Cost of products sold for Hubei Henglong was $29.5 million for the three months ended March 31, 2021, compared to $19.3 million for the same period of 2020, representing an increase of $10.2 million, or 52.8%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $17.2 million, a decrease in unit cost resulting in a cost of sales decrease of $7.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.7 million.

 

•

Cost of products sold for Henglong KYB was $16.9 million for the three months ended March 31, 2021, compared to $6.1 million for the same period of 2020, representing an increase of $10.8 million, or 177.0%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $11.1 million, a decrease in unit cost resulting in a cost of sales decrease of $0.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.4 million.

 

 

•

Cost of products sold for other entities was $16.7 million for the three months ended March 31, 2021, compared to $8.4 million for the same period in 2020, representing an increase of $8.3 million, or 98.8%.

 

Gross margin was 15.1% for the three months ended March 31, 2021, which is consistent with 15.2% for the same period of 2020.

   

Selling Expenses

 

Selling expenses were $5.6 million for the three months ended March 31, 2021, as compared to $2.1 million for the same period of 2020, representing an increase of $3.5 million, which was primarily due to higher sales volume and increased air freight charge.

 

General and Administrative Expenses

 

General and administrative expenses were $4.6 million for the three months ended March 31, 2021, as compared to $3.4 million for the same period of 2020, representing an increase of $1.2 million, or 35.3%, which was mainly due to the increased payroll expenses.

 

Research and Development Expenses

 

Research and development expenses were $6.7 million for the three months ended March 31, 2021, as compared to $5.2 million for the three months ended March 31, 2020, representing an increase of $1.5 million which was mainly due to increased expenditures on R&D activities for EPS products.

 

Other Income

 

Other income, net was $1.7 million for the three months ended March 31, 2021, as compared to $0.1 million for the three months ended March 31, 2020, representing an increase of $1.6 million, which was mainly due to the various government subsidies of $1.4 million received in the first three months of 2021, whereas only $0.5 million was received in the same period of last year.  

 

Interest Expense

 

Interest expense was $0.3 million for the three months ended March 31, 2021, which is consistent with $0.4 million for the three months ended March 31, 2020.

 

Income Taxes

 

Income tax expense was $0.6 million for the three months ended March 31, 2021, compared to $0.5 million for the three months ended March 31, 2020, which was due to the increase in income before income tax expenses.

 

Net Income/(loss) Attributable to Non-controlling Interests

 

Net income attributable to non-controlling interests amounted to $0.02 million for the three months ended March 31, 2021, compared to net loss attributable to non-controlling interests of $0.6 million for the three months ended March 31, 2020.

 

Net Income/(loss) Attributable to Parent Company’s Common Shareholders

 

Net income attributable to parent company’s common shareholders was $3.2 million for the three months ended March 31, 2021, compared to net loss attributable to parent company’s common shareholders of $0.03 million for the three months ended March 31, 2020, representing an increase in net income attributable to parent company’s common shareholders of $3.2 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 March 31, 2021, the Company had cash and cash equivalents and short-term investments of $105.2 million, compared to $107.4 million as of December 31, 2020, representing a decrease of $2.2 million, or 2.0%. 

 

The Company had working capital (total current assets less total current liabilities) of $130.5 million as of March 31, 2021, compared to $121.2 million as of December 31, 2020, representing an increase of $9.3 million, or 7.7%.

 

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 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 $46.2 million (See Note 7) and bankers’ acceptances of $86.6 million (See Note 8) as of March 31, 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 $16.2 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 $16.2 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 $8.6 million, which is 52.9%, the mortgage ratio, of $16.2 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. 

 

 

Bank Arrangements

 

As of March 31, 2021, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD): 

 

		Bank		Due Date		Amount Available(3)				Amount Used(4)				Assessed Mortgage Value(5)
1.  Comprehensive credit facilities		China Everbright Bank (1)		Mar 2021			4,565				3,453				9,678
2.  Comprehensive credit facilities		Shanghai Pudong Development Bank (2)		Oct 2021			19,783				10,637				22,385
3.  Comprehensive credit facilities		China CITIC Bank (2)		Aug 2022			64,675				22,605				21,680
		China CITIC Bank (2)		Aug 2021			10,652				2,563				-
		China CITIC Bank		Jun 2022			3,287				1,671				6,712
4.  Comprehensive credit facilities		Hubei Bank		Mar 2022			25,870				24,070				70,943
5.  Comprehensive credit facilities		Bank of Chongqing		Sep 2021			761				228				2,377
6.  Comprehensive credit facilities		Bank of China (2)		Sep 2020			17,653				13,087				-
7.  Comprehensive credit facilities		China Merchants Bank (2)		Oct 2021			22,826				8,742				-
8.  Comprehensive credit facilities		Agricultural Bank of China		Mar 2022			1,522				1,065				4,227
9.  Comprehensive credit facilities		Huishang Bank		May 2021			1,522				-				-
Total						$	173,116			$	88,121			$	138,002

 

(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 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. 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 $38.6 million and notes payable of $49.5 million as of March 31, 2021.
(5)	In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of March 31, 2021, the pledged assets included property, plant and equipment and land use rights with an aggregate assessed value of $138.0 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 9 months to 23 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 $9.7 million as security for its comprehensive credit facility with China Everbright Bank.

 

 

2. Buildings with an assessed value of approximately $22.4 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 $21.7 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 $6.7 million as security for its comprehensive credit facility with China CITIC Bank Shenyang Branch.

 

5. Equipment with an assessed value of approximately $70.9 million as security for its revolving comprehensive credit facility with Hubei Bank.

 

6. Buildings with an assessed value of approximately $2.4 million as security for its comprehensive credit facility with Bank of Chongqing.

 

7. Buildings with an assessed value of approximately $4.2 million as security for its comprehensive credit facility with Agricultural Bank of China.

 

Short-term and Long-term Loans

  

The following table summarizes the contract information of short-term and long-term borrowings between the banks, government and the Company as of March 31, 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
Financial Bureau of Jingzhou Development Zone		Working Capital		Aug 07, 2019			23				3,044				3.80	%		Pay annually		Jun 30, 2021
Financial Bureau of Jingzhou Development Zone		Working Capital		Sep 03, 2019			22				4,565				3.80	%		Pay annually		Jun 30, 2021
Agricultural Bank of China		Working Capital		Mar 18, 2021			12				1,065				4.05	%		Pay monthly		Mar 17, 2022
China CITIC Bank		Working Capital		Jun 19, 2020			12				2,729				2.50	%		Pay in arrear		Jun 18, 2021
China CITIC Bank		Working Capital		Mar 22, 2021			12				4,112				3.45	%		Pay in arrear		Mar 22, 2022
Bank of China (1)		Working Capital		Apr 29, 2020			12				6,087				3.92	%		Pay monthly		Apr 28, 2021
China CITIC Bank (1)		Working Capital		Apr 29, 2020			12				1,522				4.35	%		Pay monthly		Apr 29, 2021
China CITIC Bank		Working Capital		May 20, 2020			12				1,522				4.35	%		Pay monthly		May 20, 2021
China CITIC Bank		Working Capital		May 29, 2020			12				1,522				4.00	%		Pay monthly		May 29, 2021
China CITIC Bank		Working Capital		Jun 19, 2020			12				2,922				2.50	%		Pay in arrear		Jun 18, 2021
China CITIC Bank		Working Capital		Mar 22, 2021			12				6,831				3.45	%		Pay in arrear		Mar 18, 2022
Bank of China		Working Capital		Jun 28, 2020			12				7,000				3.80	%		Pay monthly		Jun 27, 2021
China CITIC Bank		Working Capital		Sep 03, 2020			12				1,522				4.35	%		Pay monthly		Sep 03, 2021
China CITIC Bank		Working Capital		Sep 11, 2020			12				1,522				5.22	%		Pay monthly		Sep 11, 2021
Bank of ChongQing		Working Capital		Dec 29, 2020			9				228				4.05	%		Pay monthly		Sep 19, 2021
										$	46,193

 

(1)	These bank loans were repaid between April and May 2021 when they became due.

 

 

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 March 31, 2021.

 

Notes Payable

 

The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 2021 (figures are in thousands of USD):

 

Purpose		Term (Months)				Due Date				Amount Payable on Due Date
Working Capital(1)			6				Apr. 2021				13,167
Working Capital(1)			6				May. 2021				14,691
Working Capital			6				Jun. 2021				15,390
Working Capital			6				Jul. 2021				11,879
Working Capital			6				Aug. 2021				16,273
Working Capital			6				Sep. 2021				15,152
Total (See Note 8)										$	86,552

 

(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 a 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, 2021. 

 

Cash Flows

 

(a)	Operating Activities

 

Net cash used in operating activities for the three months ended March 31, 2021 was $0.8 million, compared with net cash provided in operating activities of $29.2 million for the same period of 2020, representing an increase in net cash outflows by $30.0 million, which was mainly due to (1) the increase in net income excluding non-cash items by $5.7 million, (2) the decrease in cash inflows from movements of accounts and notes receivable by $37.4 million, (3) the decrease in the cash outflows from movements of accounts and notes payable by $19.6 million, and (4) a combination of other factors contributing an increase of cash outflows by $17.9 million.

 

 

(b)	Investing Activities

 

Net cash used in investing activities for the three months ended March 31, 2021 was $5.8 million, as compared to net cash provided by investing activities of $1.7 million for the same period of 2020, representing an increase in net cash outflows by $7.5 million, which was mainly due to the net effect of (1) an increase in payments to acquire property, plant and equipment by $1.3 million, and (2) a combination of other factors contributing an increase of cash inflows by $6.3 million, primarily including an increase in purchase of short-term investment by $14.7 million, offset by the increase in cash received from proceeds from maturities of short-term investment and long-term time deposits by $4.1 million, and a decrease in investment under the equity method by $2.6 million.

   

(c)	Financing Activities

 

Net cash provided by financing activities for the three months ended March 31, 2021 was $1.4 million, compared to net cash used in financing activities of $2.9 million for the same period of 2020, representing an increase in net cash inflows by $4.3 million, which was mainly due to the net effect of (1) a decrease in proceeds from bank loan by $1.8 million, and (2) a decrease in repayment of bank loans by $6.1 million.

 

Off-Balance Sheet Arrangements

 

As of March 31, 2021 and December 31, 2020, the Company did not have any significant transactions, obligations or relationships that could be considered 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, 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 March 31, 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 March 31, 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 March 31, 2021 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.

 

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 March 31, 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.

 

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.

 

 

ITEM 6.

EXHIBITS.

 

INDEX TO EXHIBITS

 

Exhibit Number		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		Rule 13a-14(a) Certification*
32.1		Section 1350 Certification*
32.2		Section 1350 Certification*
101*		The following materials from the China Automotive Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, were filed on May 12, 2021 formatted in Extensible Business Reporting Language (XBRL):

 

	(i)	Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income,
	(ii)	Condensed Unaudited Consolidated Balance Sheets,
	(iii)	Condensed Unaudited Consolidated Statements of Cash Flows, and
	(iv)	related notes
	*	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.

 

	CHINA AUTOMOTIVE SYSTEMS, INC.
	(Registrant)
Date: May 12, 2021	By:	/ s/ Qizhou Wu
		Qizhou Wu
		President and Chief Executive Officer
Date: May 12, 2021	By:	/s/ Jie Li
		Jie Li
		Chief Financial Officer