Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
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 whichregistered
Common Stock, $0.0001 par value
CAAS
The Nasdaq Capital Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of November 14, 2022, the Company had 30,195,826 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Page
Part I — Financial Information
4
Item 1.
Unaudited Financial Statements.
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months and Nine Months Ended September 30, 2022 and 2021
Condensed Unaudited Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021
6
Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021
7
Notes to Condensed Unaudited Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
37
Item 4.
Controls and Procedures.
Part II — Other Information
38
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
42
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
43
Signatures
44
2
Cautionary Statement
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, as filed with the Securities and Exchange Commission.
3
PART I — FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
China Automotive Systems, Inc. and Subsidiaries
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income
(In thousands of USD, except share and per share amounts)
Three Months Ended September 30,
2022
2021
Net product sales ($11,181 and $14,691 sold to related parties for the three months ended September 30, 2022 and 2021)
$
137,207
108,231
Cost of products sold ($7,689 and $6,505 purchased from related parties for the three months ended September 30, 2022 and 2021)
116,289
91,439
Gross profit
20,918
16,792
Gain on other sales
2,290
487
Less: Operating expenses
Selling expenses
3,978
4,802
General and administrative expenses
4,893
6,174
Research and development expenses
9,450
5,712
Total operating expenses
18,321
16,688
Income from operations
4,887
591
Other income, net
744
2,407
Interest expense
(384)
(255)
Financial income/(expense), net
4,760
(821)
Income before income tax expenses and equity in earnings of affiliated companies
10,007
1,922
Less: Income taxes
899
2,441
Add: Equity in (loss)/earnings of affiliated companies
(1,101)
251
Net income/(loss)
8,007
(268)
Less: Net income attributable to non-controlling interests
529
Accretion to redemption value of redeemable non-controlling interests
(8)
(7)
Net income/(loss) attributable to parent company’s common shareholders
7,470
(317)
Comprehensive income:
Other comprehensive income:
Foreign currency translation loss, net of tax
(18,705)
(1,338)
Comprehensive loss
(10,698)
(1,606)
Less: Comprehensive loss attributable to non-controlling interests
(604)
(40)
Comprehensive loss attributable to parent company
(10,102)
(1,573)
Net income attributable to parent company’s common shareholders per share -
Basic
0.24
(0.01)
Diluted
Weighted average number of common shares outstanding -
30,637,876
30,851,776
30,640,260
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
Nine Months Ended September 30,
Net product sales ($31,343 and $47,016 sold to related parties for the nine months ended September 30, 2022 and 2021)
400,764
359,176
Cost of products sold ($21,725 and $21,916 purchased from related parties for the nine months ended September 30, 2022 and 2021)
342,401
306,807
58,363
52,369
5,326
2,528
12,358
14,857
15,309
16,852
25,473
18,318
53,140
50,027
10,549
4,870
7,067
5,636
(1,156)
(892)
9,318
(878)
25,778
8,736
Less: Income taxes expense
5,013
3,280
(2,674)
435
Net income
18,091
5,891
Less: Net income/(loss) attributable to non-controlling interests
1,229
(219)
(23)
(21)
Net income attributable to parent company’s common shareholders
16,839
6,089
Foreign currency translation (loss)/income, net of tax
(36,323)
1,977
Comprehensive (loss)/income
(18,232)
7,868
(957)
(92)
Comprehensive (loss)/income attributable to parent company
(17,298)
7,939
0.55
0.20
30,778,336
30,779,883
30,855,967
Share-based compensation included in operating expense above is as follows:
—
88
5
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
September 30, 2022
December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
100,712
131,695
Pledged cash
31,033
27,804
Accounts and notes receivable, net - unrelated parties
199,636
195,729
Accounts and notes receivable, net - related parties
8,919
14,607
Inventories
104,629
116,493
Other current assets
43,251
15,052
Total current assets
488,180
501,380
Non-current assets:
Property, plant and equipment, net
104,877
127,721
Land use rights, net
9,439
10,732
Long-term investments
52,755
36,966
Other non-current assets
19,642
39,963
Total assets
674,893
716,762
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans
44,208
47,592
Accounts and notes payable - unrelated parties
197,610
214,590
Accounts and notes payable - related parties
12,578
13,464
Accrued expenses and other payables
48,321
50,332
Other current liabilities
32,058
25,838
Total current liabilities
334,775
351,816
Long-term liabilities:
Long-term tax payable
15,805
21,075
Long term loans
532
Other non-current liabilities
6,140
6,430
Total liabilities
357,252
379,321
Commitments and Contingencies (See Note 22)
Mezzanine equity:
Redeemable non-controlling interests
575
553
Stockholders’ equity:
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of September 30, 2022 and December 31, 2021, respectively
Additional paid-in capital
63,731
Retained earnings-
Appropriated
11,481
Unappropriated
243,202
226,363
Accumulated other comprehensive income
(9,420)
24,717
Treasury stock – 1,938,129 and 1,486,526 shares as of September 30, 2022 and December 31, 2021, respectively
(6,828)
(5,261)
Total parent company stockholders’ equity
302,169
321,034
Non-controlling interests
14,897
15,854
Total stockholders’ equity
317,066
336,888
Total liabilities, mezzanine equity and stockholders’ equity
Condensed Unaudited Consolidated Statements of Cash Flows
Cash flows from operating activities:
Adjustments to reconcile net income from operations to net cash provided by operating activities:
Share-based compensation
Depreciation and amortization
17,402
19,686
Provision of credit losses
602
1,644
Deferred income taxes
2,880
2,573
Equity in loss/(earnings) of affiliated companies
2,674
(435)
Loss on fixed assets disposals
35
71
(Increase)/decrease in:
Accounts and notes receivable
(21,616)
6,631
115
(17,500)
(3,748)
(129)
Increase/(decrease) in:
Accounts and notes payable
5,795
(11,506)
3,004
(2,325)
Long-term taxes payable
(2,809)
9,252
(7,462)
(285)
Net cash provided by/(used in) operating activities
31,677
(5,867)
Cash flows from investing activities:
Decrease/(increase) in demand loans included in other non-current assets
288
(357)
Repayment of loan from a related party
154
Cash received from property, plant and equipment sales
1,143
252
Payments to acquire property, plant and equipment (including $2,632 and $929 paid to related parties for the nine months ended September 30, 2022 and 2021, respectively)
(11,842)
(5,344)
Payments to acquire intangible assets
(68)
(505)
Investment under the equity method
(12,802)
(308)
Purchase of short-term investments
(79,311)
(46,212)
Proceeds from maturities of short-term investments
55,944
40,016
Cash received from long-term investment
3,986
10,116
Net cash used in investing activities
(42,662)
(2,188)
Cash flows from financing activities:
Proceeds from bank loans
43,616
42,700
Repayments of bank loans
(41,465)
(44,854)
Repayments of the borrowing for sale and leaseback transaction
(1,130)
(3,328)
Repurchase of common shares
(1,567)
Acquisition of non-controlling interest
(538)
Net cash used in financing activities
(546)
(6,020)
Effects of exchange rate on cash, cash equivalents and pledged cash
(16,223)
1,015
Net decrease in cash, cash equivalents and pledged cash
(27,754)
(13,060)
Cash, cash equivalents and pledged cash at beginning of the period
159,499
128,061
Cash, cash equivalents and pledged cash at end of the period
131,745
115,001
Three Months and Nine Months Ended September 30, 2022 and 2021
1. Organization and business
China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries described below, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support accordingly.
The Company owns the following aggregate net interests in the following subsidiaries organized in the People’s Republic of China, the “PRC,” and Brazil as of September 30, 2022 and December 31, 2021.
Percentage Interest
September 30,
December 31,
Name of Entity
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1
100.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
70.00
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4
85.00
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5
77.33
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9
95.84
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”12
60.00
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”13
66.60
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”14
51.00
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”15
62.00
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”16
9
2. Basis of presentation and significant accounting policies
(a)
Basis of Presentation
Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all necessary adjustments, which include normal recurring adjustments, for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.
The condensed consolidated balance sheet as of December 31, 2021 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The results of operations for the three months and nine months ended September 30, 2022 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2022.
Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian real, “BRL,” its functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
(b)
Recent Accounting Pronouncements
In November 2021, the FASB issued Accounting Standards Update (“ASU”) 2021-10 Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance, effective for financial statements issued for annual periods beginning after December 15, 2021. ASU 2021-10 requires business entities to disclose information in the notes to the financial statements about certain types of government assistance. The annual disclosure requirements apply to transactions with a government that are accounted for by analogizing to either a grant model or a contribution model. We plan to adopt ASU 2020-10 when we issue our annual financial statements. We do not expect it to have a material impact on our consolidated financial statements.
(c)
Significant Accounting Policies
There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2021.
10
3. Accounts and notes receivable, net
The Company’s accounts and notes receivable, net as of September 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Accounts receivable - unrelated parties
142,344
146,362
Notes receivable - unrelated parties
67,886
61,328
Total accounts and notes receivable - unrelated parties
210,230
207,690
Less: allowance for credit losses - unrelated parties
(10,594)
(11,961)
Accounts and notes receivable - related parties
10,268
15,505
Less: allowance for credit losses - related parties
(1,349)
(898)
Accounts and notes receivable, net
208,555
210,336
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.
As of September 30, 2022 and December 31, 2021, the Company pledged its notes receivable in amounts of $10.6 million and $18.2 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).
Provision for doubtful accounts and notes receivable reversed, as provided in the unaudited consolidated statements of cash operations, amounted to $0.12 million for the three months ended September 30,2022.
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $0.6 million for the nine months ended September 30, 2022.
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $1.3 million and $1.7 million for the three and nine months ended September 30, 2021, respectively.
During the three months ended September 30, 2022, the Company’s five largest customers accounted for 41.9% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 17.8%. During the nine months ended September 30, 2022, the Company’s five largest customers accounted for 43.6% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 21.6%. As of September 30, 2022, approximately 6.8% of accounts receivable were from trade transactions with the aforementioned customer.
During the three months ended September 30, 2021, the Company’s five largest customers accounted for 43.0% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 17.1%. During the nine months ended September 30, 2021, the Company’s five largest customers accounted for 39.2% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 17.3%. As of September 30, 2021, approximately 9.0% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
4. Inventories
The Company’s inventories as of September 30, 2022 and December 31, 2021 consisted of the following (figures are in thousands of USD):
Raw materials
32,089
33,583
Work in process
9,105
9,415
Finished goods
63,435
73,495
Total
11
The Company recorded $1.2 million and $0.7 million of inventory write-down to cost of products sold for the three months ended September 30, 2022 and 2021, respectively, and $3.8 million and $3.0 million for the nine months ended September 30, 2022 and 2021, respectively.
5. Long-term investments
The Company’s long-term investments as of September 30, 2022 and December 31, 2021, are summarized as follows (figures are in thousands of USD):
Sentient AB(1)
21,387
Chongqing Venture Fund(2)
12,528
17,530
Hubei Venture Fund (3)
7,456
9,665
Suzhou Venture Fund (4)
5,272
7,413
Suzhou Qingshan (5)
4,132
Henglong Tianyu
772
913
Chongqing Jinghua
642
Jiangsu Intelligent
633
803
The condensed financial information of the Company’s significant equity investees for the three and nine months ended September 30, 2022 and 2021, including Chongqing Venture Fund, is summarized as follows (figures are in thousands of USD):
Revenue
3,811
5,937
(Loss)/income from continuing operations
(2,395)
3,805
(17,389)
5,318
Net (loss)/income
12
6. Property, plant and equipment, net
The Company’s property, plant and equipment, net as of September 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Costs:
Buildings
64,353
69,554
Machinery and equipment
230,705
253,245
Electronic equipment
6,409
6,887
Motor vehicles
4,622
5,121
Construction in progress
4,435
6,583
Total amount of property, plant and equipment
310,523
341,390
Less: Accumulated depreciation (1)
(205,647)
(213,669)
Total amount of property, plant and equipment, net (2)(3)
7. Loans
Loans consist of the following as of September 30, 2022 and December 31, 2021 (figures are in thousands of USD):
Short-term bank loans (1)
Long-term bank loans (2)
Total bank loans
44,740
The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of September 30, 2022.
13
8. Accounts and notes payable
The Company’s accounts and notes payable as of September 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Accounts payable - unrelated parties
129,709
132,593
Notes payable - unrelated parties (1)
67,901
81,997
210,188
228,054
9. Accrued expenses and other payables
The Company’s accrued expenses and other payables as of September 30, 2022 and December 31, 2021 are summarized as follows (figures are in thousands of USD):
Warranty reserves(1)
34,526
36,572
Payable for the investment in Sentient AB (See Note 5)
2,004
Accrued expenses
8,024
5,596
Current portion of other long-term payable (See Note 10)
1,115
Payables for overseas transportation and custom clearance
4,548
Dividends payable to holders of non-controlling interests
423
471
Accrued interest
287
507
Other payables
3,057
1,523
Balance at end of year/period
For the three and nine months ended September 30, 2022 and 2021, the warranties activities were as follows (figures are in thousands of USD):
Balance at beginning of the period
35,028
36,537
36,215
Additions during the period
4,712
4,551
11,685
12,249
Settlement within the period
(3,255)
(4,022)
(9,909)
(11,752)
Foreign currency translation gain
(1,959)
(145)
(3,822)
209
Balance at end of the period
36,921
14
10. Other long-term payable
On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor”) and simultaneously entered into a 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 $12.9 million as of September 30, 2022) and the sales price was RMB 100.0 million (equivalent to $14.1 million as of September 30, 2022). Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over four years with a quarterly lease payment of approximately $1.1 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as a sale. Therefore, the transaction was accounted for as a financing transaction by the Company. As of September 30, 2022, the payables have been fully paid.
11. Redeemable non-controlling interests
In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $0.7 million. The shares will be transferred to the Company and the other shareholder of the subsidiary on a pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed period of time after their issuance with a transfer price of par plus 6% per year. $0.5 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity and are accreted to the redemption value over the period starting from the issuance date.
For the three and nine months ended September 30, 2022, the Company recognized accretion of $0.008 million and $0.023 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.
For the three and nine months ended September 30, 2021, the Company recognized accretion of $0.007 million and $0.021 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.
12. Additional paid-in capital
The Company’s positions in respect of the amounts of additional paid-in capital for the three and nine months ended September 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
64,273
Acquisition of the non-controlling interest in Wuhu
(630)
13. Retained earnings
Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three and nine months ended September 30, 2022 and 2021, no statutory reserve was appropriated by the subsidiaries in China.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three and nine months ended September 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
11,303
15
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three and nine months ended September 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
235,732
221,897
215,491
Net income attributable to parent company
7,478
(310)
16,862
6,110
Accretion of redeemable non-controlling interests
221,580
14. Accumulated other comprehensive income
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and nine months ended September 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
8,152
20,519
17,413
Foreign currency translation adjustment attributable to parent company
(17,572)
(1,256)
(34,137)
1,850
19,263
15. Treasury stock
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On March 29, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $4.00 per share through March 30, 2023. As of September 30, 2022, the Company had repurchased 451,603 shares of the Company’s common stock under the program. The repurchased shares are presented as “treasury stock” on the balance sheet.
16. Non-controlling interests
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three and nine months ended September 30, 2022 and 2021, are summarized as follows (figures are in thousands of USD):
15,501
15,674
16,170
Net income/(loss) attributable to non-controlling interests
(444)
Foreign currency translation adjustment attributable to non-controlling interests
(1,133)
(82)
(2,186)
127
15,634
17. Net product sales
Revenue Disaggregation
Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 24.
16
Payment to customer
The Company accounts for consideration payable to a customer as a reduction of revenue at the later of revenue recognition and the Company’s promise to pay the consideration.
Contract Assets and Liabilities
Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing processes.
Contract liabilities are mainly customer deposits. As of September 30, 2022 and December 31, 2021, the Company has customer deposits of $3.7 million and $2.4 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the nine months ended September 30, 2022, $4.3 million was received and $3.0 million (including $2.4 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the three months ended September 30, 2021, $1.5 million was received and $0.2 million (including $0.2 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of the customer deposit liability.
18. Financial income/(expense), net
During the three and nine months ended September 30, 2022 and 2021, the Company recorded financial income/(expense), net which is summarized as follows (figures are in thousands of USD):
Interest income
340
227
903
748
Foreign exchange gain/(loss), net
4,453
(1,015)
8,688
(1,293)
Bank charges
(33)
(273)
(333)
Total financial income/(expense), net
19. Income 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 September 30, 2022 and 2021, were as follows (figures are in thousands of USD, except share and per share amounts):
Numerator:
Net income attributable to the parent company’s common shareholders - Basic and Diluted
Denominator:
Weighted average shares outstanding
Dilutive effects of stock options
2,384
Denominator for dilutive income per share - Diluted
Net income per share attributable to parent company’s common shareholders - Basic
Net income per share attributable to parent company’s common shareholders - Diluted
17
The calculations of basic and diluted income per share attributable to the parent company for the nine months ended September 30, 2022 and 2021, were as follows (figures are in thousands of USD, except share and per share amounts):
1,547
4,191
As of September 30, 2022 and 2021, the exercise prices for 30,000 and 37,500 outstanding stock options were above the weighted average market price of the Company’s common stock during the three months ended September 30, 2022 and 2021, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
As of September 30, 2022 and 2021, the exercise prices for 30,000 and 30,000 outstanding stock options were above the weighted average market price of the Company’s common stock during the nine months ended September 30, 2022 and 2021, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
20. Significant concentrations
A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the “current account”, which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign currency for settlement of such “current account” transactions without pre-approval.
China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, “China-based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law China-based Subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the discretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China. The China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its subsidiaries, including the China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its shares.
Transactions other than those that fall under the “current account” and that involve conversion of RMB into foreign currency are classified as “capital account” transactions; examples of “capital account” transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. “Capital account” transactions require prior approval from China’s State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
18
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.
21. Related party transactions and balances
Related party transactions are as follows (figures are in thousands of USD):
Related party sales
Merchandise sold to related parties
11,181
14,691
Materials and others sold to related parties
646
365
Rental income obtained from related parties
114
132
11,941
15,188
31,343
47,016
2,222
1,313
359
373
33,924
48,702
Related party purchases
Materials purchased from related parties
7,689
6,505
Equipment purchased from related parties
831
537
Service purchased from related parties
330
8,850
7,873
21,725
21,916
1,951
1,917
Others purchased from related parties
24,163
24,675
Related party investment transaction
Equity interest purchase from related parties
23,618
19
Related party receivables
Accounts and notes receivable, net from related parties
Other receivables, net from related parties
8,935
Related party advance payments
Advance payments for property, plant and equipment to related parties
1,560
810
Advance payments and others to related parties
682
600
2,242
1,410
Related party payables
Accounts and notes payable to related parties
Accrued expenses and other payables to related parties
14,582
These transactions were consummated under similar terms as those with the Company’s third-party customers and suppliers.
As of November 14, 2022, Hanlin Chen, the chairman of the board of directors of the Company, owns 59.1% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.
22. Commitments and contingencies
Legal proceedings
The Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
Other commitments and contingencies
In addition to the bank loans, notes payables, the related interest and other payables, the following table summarizes the Company’s major commitments and contingencies as of September 30, 2022 (figures are in thousands of USD):
Payment obligations by period
2023
2024
Thereafter
Obligations for investment contracts (1)
4,225
Obligations for purchasing and service agreements
10,335
19,435
29,770
23,660
33,995
23. Off-balance sheet arrangements
As of September 30, 2022 and December 31, 2021, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
20
24. Segment reporting
The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2021 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.
As of September 30, 2022 and 2021, the Company had 15 product sectors, seven of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB, Hubei Henglong and Brazil Henglong), and one holding company (Genesis). The other eight sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).
The Company’s product sector information for the three and nine months ended September 30, 2022 and 2021, is as follows (figures are in thousands of USD):
Net Product Sales
Net Income/(Loss)
Three Months Ended
Henglong
62,590
39,937
1,996
(1,820)
Jiulong
16,986
17,127
196
126
Shenyang
2,930
3,659
(300)
(251)
Wuhu
11,831
7,878
Hubei Henglong
29,525
31,023
3,116
563
Henglong KYB
36,995
19,095
1,760
485
Brazil Henglong
11,510
7,576
188
566
Other Entities
20,061
16,880
1,637
461
Total Segments
192,428
143,175
8,609
136
Corporate
(211)
(172)
Eliminations
(55,221)
(34,944)
(391)
(232)
Nine Months Ended
177,401
138,151
5,680
(877)
53,071
76,248
(3,219)
650
8,998
11,988
(625)
186
30,695
17,598
70
117
100,744
98,338
1,893
87,815
53,961
3,927
(72)
30,471
19,660
1,741
2,900
58,669
47,587
4,431
2,570
547,864
463,531
19,944
7,367
(632)
(1,221)
(147,100)
(104,355)
21
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and the related notes thereto and the other financial information contained elsewhere in this Report.
General Overview
China Automotive Systems, Inc. is a leading power steering systems supplier for the China automobile industry. The Company has business relationships with more than sixty vehicle manufacturers, including China’s top ranking domestic automobile manufacturers such as JAC motors, Changan Automobile Group, BAIC Group, Dongfeng Group, Brilliance Jinbei, Chery, BYD and Zhejiang Geely as well as Sino-foreign or foreign automobile manufacturer such as General Motors, Citroen, Fiat Chrysler North America and Ford. Starting in 2008, the Company has supplied power steering gears to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gear to Fiat Chrysler North America since 2009 and to Ford Motor Company since 2016.
Most of the Company’s production and research and development institutes are located in China. As of September 30, 2022, the Company has approximately 4,288 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 its 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 affected in the first three quarters of 2022, with the Company commencing its 2022 operations in March of 2022. However, because of the significant uncertainties surrounding COVID-19, which are still evolving, the extent of the business disruption, including the duration and the related financial impact on subsequent periods cannot be reasonably estimated at this time. See “Item 1A. Risk Factors—Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19)” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Corporate Structure
The Company, through its subsidiaries, engages in the manufacture and sales of automotive systems and components. Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company and the holding company of the Company’s joint ventures in the PRC. Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support. CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong,” was established by Hubei Henglong Automotive System Group Co., Ltd., formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations,high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016. USAI was established in 2005, and the Company and Hubei Wanlong owned 83.34% and 16.66%, respectively. In May 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and it deregistered from the local business administration on April 28, 2020. Following the merger, 85.0% of Wuhan Chuguanjie was owned by the Company and 15.0% was owned by Hubei Wanlong. In April 2020, Hubei Henglong acquired 100.00% of the shares of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts. Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” was formed in December 2019, which mainly engages in the development, manufacturing and sale of high polymer materials. In April 2021, the Company obtained an additional 22.67% equity interest in Wuhu, for total consideration of RMB 6.9 million, equivalent to approximately $1.1 million, from the other shareholder. Following the acquisition, the Company owned 100% of the equity interests of Wuhu Henglong. Jingzhou Qingyan deregistered from the local business administration on June 22, 2022.
Critical Accounting Estimates
The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.
The Company considers an accounting estimate to be critical if:
The table below presents information about the nature and rationale for the Company’s critical accounting estimates:
Balance SheetCaption
CriticalEstimateItem
Nature of EstimatesRequired
Assumptions/ApproachesUsed
Key Factors
Accrued liabilities and other long-term liabilities
Warranty obligations
Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs (Original Equipment Manufacturers) are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.
The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.
OEM sourcing
OEM policy decisions regarding warranty claims
Property, plant and equipment, intangible assets and other long-term assets
Valuation of long- lived assets and investments
The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.
The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.
Future production estimates
Customer preferences and decisions
Accounts
receivable
Allowance for
doubtful
accounts
The Company is required from time to time to review the credit of customers and make timely provision of allowance for doubtful accounts.
The Company estimates the collectability of the receivables based on the future cash flows using historical experiences.
Customer credit
Inventory
Write-down of inventory
The Company is required from time to time to review the cash ability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories.
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
Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this report.
23
Results of Operations - Three Months Ended September 30, 2022 and 2021
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Change
Change %
Net product sales
28,976
26.8
Cost of products sold
24,850
27.2
1,803
370.2
(824)
(17.2)
(1,281)
(20.7)
3,738
65.4
Other income
(1,663)
(69.1)
50.6
5,581
679.8
Income taxes
(1,542)
(63.2)
8,275
3,087.7
Net income attributable to non-controlling interests
1,159.5
7,787
(2,456.5)
Net Product Sales and Cost of Products Sold
Cost of Products Sold
(in thousands of USD,
except percentages)
22,653
56.7
59,006
37,800
21,206
56.1
(141)
(0.8)
14,584
15,483
(899)
(5.8)
(729)
(19.9)
2,765
3,095
(330)
(10.7)
3,953
50.2
11,121
7,436
3,685
49.6
(1,498)
(4.8)
24,384
25,111
(727)
(2.9)
17,900
93.7
32,669
17,163
15,506
90.3
3,934
51.9
9,948
6,419
3,529
55.0
3,181
18.8
15,557
13,405
2,152
16.0
49,253
34.4
170,034
125,912
44,122
35.0
Elimination
(20,277)
58.0
(53,745)
(34,473)
(19,272)
55.9
Net product sales were $137.2 million for the three months ended September 30, 2022, compared to $108.2 million for the same period in 2021, representing an increase of $29.0 million, or 26.8%, mainly due to the Company’s increased sales of electric power steering.
Net sales of traditional steering products and parts were $92.4 million for the three months ended September 30, 2022, compared to $78.8 million for the same period in 2021, representing an increase of $13.6 million, or 17.3%. Net sales of electric power steering (“EPS”) were $44.8 million for the three months ended September 30, 2022 and $29.4 million for the same period in 2021, representing an increase of $15.4 million, or 52.4%. As a percentage of net sales, sales of EPS were 32.6% for the three months ended September 30, 2022, compared with 27.2% for the same period in 2021.
The increase in net product sales was due to the effects of three major factors: i) the increase in sales volume led to a sales increase of $27.2 million; ii) the increase in average selling price of steering gears led to a sales increase of $8.8 million; and iii) the depreciation of the RMB against the U.S. dollar in this quarter compared to the same quarter last year resulted in a sales decrease of $7.0 million.
24
Further analysis by segment (before elimination) is as follows:
25
For the three months ended September 30, 2022, the cost of products sold was $116.3 million, compared to $91.4 million for the same period of 2021, representing an increase of $24.9 million, or 27.2%. The increase in cost of sales was mainly due to the effect of the following major factors: i) the increase in sales volume led to a cost of sales increase of $22.4 million; ii) an increase in unit cost resulting in a cost of sales increase of $8.6 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $6.1 million. Further analysis is as follows:
Cost of products sold for Brazil Henglong was $9.9 million for the three months ended September 30, 2022, compared to $6.4 million for the same period in 2021, representing an increase of $3.5 million, or 55.0%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $3.5 million.
Gross margin was 15.2% for the three months ended September 30, 2022, compared to 15.5% for the same period of 2021, representing a decrease of 0.3%, mainly due to the change in product mix and the price adjustment.
26
Selling Expenses
Selling expenses were $4.0 million for the three months ended September 30, 2022, as compared to $4.8 million for the same period of 2021, representing a decrease of $0.8 million, or 17.2%, which was primarily due to a decrease in transportation expenses.
General and Administrative Expenses
General and administrative expenses were $4.9 million for the three months ended September 30, 2022, as compared to $6.2 million for the same period of 2021, representing a decrease of $1.3 million, or 20.7%, which was primarily due to the decrease in provision for credit losses provided for accounts receivable.
Research and Development Expenses
Research and development expenses were $9.5 million for the three months ended September 30, 2022, as compared to $5.7 million for the same period of 2021, representing an increase of $3.8 million, or 65.4%, which was mainly due to increased expenditures for R&D activities for new projects.
Other Income, net
Other income, net was $0.7 million for the three months ended September 30, 2022, as compared to $2.4 million for the three months ended September 30, 2021, representing a decrease of $1.7 million, which was mainly due to the various government subsidies of only $0.6 million received for the three months ended September 30, 2022, whereas $1.8 million was received in the same period of last year.
Interest Expense
Interest expense was $0.4 million for the three months ended September 30, 2022, which is generally consistent with $0.3 million for the three months ended September 30, 2021.
Financial Income, net
Financial income, net was $4.8 million for the three months ended September 30, 2022, compared to financial expense, net of $0.8 million for the three months ended September 30, 2021, representing an increase in financial income of $5.6 million, which was primarily due to an increase in the foreign exchange gains due to the sharp appreciation of the US dollar against the RMB and the Brazilian Real.
Income Taxes
Income tax expense was $0.9 million for the three months ended September 30, 2022, compared to income tax expense of $2.4 million for the three months ended September 30, 2021, which was primarily due to the valuation allowance provided in the three months ended September 30, 2021.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $0.5 million for the three months ended September 30, 2022, compared to net income attributable to non-controlling interests of $0.1 million for the three months ended September 30, 2021.
Net Income/(Loss) Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $7.5 million for the three months ended September 30, 2022, compared to net loss attributable to parent company’s common shareholders of $0.3 million for the three months ended September 30, 2021, representing an increase in net income attributable to parent company’s common shareholders of $7.2 million.
27
Results of Operations - Nine Months Ended September 30, 2022 and 2021
Change%
41,588
11.6
35,594
2,798
110.7
(2,499)
(16.8)
(1,543)
(9.2)
7,155
39.1
1,431
25.4
(264)
29.6
10,196
1,161.3
1,733
52.8
12,200
207.1
1,448
661.2
10,750
176.5
39,250
28.4
164,794
128,793
36,001
28.0
(23,177)
(30.4)
47,953
69,782
(21,829)
(31.3)
(2,990)
(24.9)
7,846
9,843
(1,997)
(20.3)
13,097
74.4
28,841
12,671
78.4
2,406
2.4
85,521
80,396
5,125
6.4
33,854
62.7
77,788
49,954
27,834
55.7
10,811
26,940
16,468
10,472
63.6
11,082
23.3
45,868
39,118
6,750
17.3
84,333
18.2
485,551
410,524
75,027
18.3
(42,745)
41.0
(143,150)
(103,717)
(39,433)
38.0
Net product sales were $400.8 million for the nine months ended September 30, 2022, compared to $359.2 million for the same period of 2021, representing an increase of $41.6 million, or 11.6%, mainly due to the Company’s increased sales of electric power steering.
Net sales of traditional steering products and parts were $282.7 million for the nine months ended September 30, 2022, which is substantially consistent with $281.9 million for the same period in 2021. Net sales of electric power steering (“EPS”) were $118.1 million for the nine months ended September 30, 2022 and $77.3 million for the same period in 2021, representing an increase of $40.8 million, or 52.8%. As a percentage of net sales, sales of EPS were 29.5% for the nine months ended September 30, 2022, compared to 21.5% for the same period in 2021.
The increase in net product sales was due to the effects of three major factors: i) the increase in sales volume led to a sales increase of $32.9 million; ii) the increase in average selling price of steering gears led to a sales increase of $15.1 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a sales decrease of $6.3 million.
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29
For the nine months ended September 30, 2022, the cost of products sold was $342.4 million, compared to $306.8 million for the same period of 2021, representing an increase of $35.6 million, or 11.6%. The increase in cost of sales was mainly due to the effect of the following major factors: i) the increase in sales volumes led to a cost of sales increase of $27.9 million; ii) the increase in unit cost led to a cost of sales increase of $12.9 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $5.2 million. Further analysis is as follows:
Gross margin was 14.6% for the nine months ended September 30, 2022, which is stable compared to 14.6% for the same period of 2021.
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Selling expenses were $12.4 million for the nine months ended September 30, 2022, as compared to $14.9 million for the nine months ended September 30, 2021, representing a decrease of $2.5 million, or 16.8%, which was mainly due to decrease in transportation expenses.
General and administrative expenses were $15.3 million for the nine months ended September 30, 2022, as compared to $16.9 million for the nine months ended September 30, 2021, representing a decrease of $1.6 million, or 9.2%, which was mainly due to the decrease in provision for credit losses provided for accounts receivable.
Research and development expenses were $25.5 million for the nine months ended September 30, 2022, as compared to $18.3 million for the nine months ended September 30, 2021, representing an increase of $7.2 million, or 39.1%, which was mainly due to increased R&D activities for new projects.
Other income, net was $7.1 million for the nine months ended September 30, 2022, which was comprised of government subsidies, as compared to $5.6 million for the nine months ended September 30, 2021, representing an increase of $1.5 million, which was mainly due to the various government subsidies of $5.8 million for the nine months ended September 30, 2022, whereas only $4.2 million was received in the same period of last year.
Interest expense was $1.2 million for the nine months ended September 30, 2022, as compared to $0.9 million for the nine months ended September 30, 2021.
Financial Income/(expense), net
Financial income, net was $9.3 million for the nine months ended September 30, 2022, compared to financial expense, net of $0.9 million for the nine months ended September 30, 2021, representing an increase in financial income of $10.2 million, which was primarily due to an increase in the foreign exchange gains due to the sharp fluctuations of the US dollar against the RMB and the Brazilian Real.
Income tax expense was $5.0 million for the nine months ended September 30, 2022, compared to $3.3 million for the nine months ended September 30, 2021, which was primarily due to the valuation allowance provided in the nine months ended September 30, 2022.
Net Income/(loss) Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $1.2 million for the nine months ended September 30, 2022, compared to net loss attributable to non-controlling interests of $0.2 million for the nine months ended September 30, 2021.
Net Income Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $16.8 million for the nine months ended September 30, 2022, compared to net income attributable to parent company’s common shareholders of $6.1 million for the nine months ended September 30, 2021, representing an increase in net income attributable to parent company’s common shareholders of $10.7 million.
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Liquidity and Capital Resources
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of September 30, 2022, the Company had cash and cash equivalents and short-term investments of $128.5 million, compared to $133.5 million as of December 31, 2021, representing a decrease of $5.0 million, or 3.7%.
The Company had working capital (total current assets less total current liabilities) of $153.5 million as of September 30, 2022, compared to $149.6 million as of December 31, 2021, representing an increase of $3.9 million, or 2.6%.
Except for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.
We cannot predict the impact COVID-19 may have on our cash flow for the rest of 2022. However, based on our liquidity assessment, we believe that our cash flow from operations and proceeds from our financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for the foreseeable future and for at least twelve months subsequent to the filing of this report.
Capital Source
The Company’s capital source is multifaceted, such as bank loans and banks’ acceptance facilities. In financing activities and operating activities, the Company’s banks require the Company to sign line of credit agreements and repay such facilities within one to two years. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such facilities can be extended for another one to two years.
The Company had short-term loans of $44.2 million, long-term loans of $0.5 million (See Note 7) and bankers’ acceptances of $72.3 million (See Note 8) as of September 30, 2022.
The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances is expected to be reduced by approximately $16.4 million over the next 12 months. If the Company wishes to maintain the same amount of bank loans and banker's acceptances in the future, it may be required by the banks to provide additional mortgages of $16.4 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $10.6 million, which is 64.6%, the mortgage ratio, of $16.4 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
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Bank Arrangements
As of September 30, 2022, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD):
Assessed
Due
Amount
Mortgage
Bank
Date
Available(2)
Used(3)
Value(4)
1. Comprehensive credit facilities
China CITIC Bank (1)
Aug 2024
68,312
40,292
20,551
2. Comprehensive credit facilities
Hankou Bank
Nov 2022
14,085
4,795
3. Comprehensive credit facilities
China Industrial Bank
986
2,784
4. Comprehensive credit facilities
Shanghai Pudong Development Bank
Jan 2023
18,310
1,948
16,411
5. Comprehensive credit facilities
Hubei Bank
Mar 2024
23,944
10,426
72,960
6. Comprehensive credit facilities
Chongqing Bank
Mar 2025
560
1,798
7. Comprehensive credit facilities
China Constitution Bank
Sep 2025
2,958
1,408
6,392
8. Comprehensive credit facilities
China Merchants Bank(1)
Jun 2024
4,249
143,666
64,664
120,896
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 4 months to 35 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 $20.6 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.
2. Buildings with an assessed value of approximately $2.8 million as security for its comprehensive credit facility with China Industrial Bank.
3. Land use rights and buildings with an assessed value of approximately $16.4 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.
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4. Equipment with an assessed value of approximately $73.0 million as security for its revolving comprehensive credit facility with Hubei Bank.
5. Buildings with an assessed value of approximately $1.8 million as security for its comprehensive credit facility with Chongqing Bank.
6. Land use rights and buildings with an assessed value of approximately $6.4 million as security for its revolving comprehensive credit facility with China Constitution Bank.
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Short-term and Long-term Loans
The following table summarizes the contract information of short-term borrowings between the banks and the Company as of September 30, 2022 (figures are in thousands of USD).
Borrowing
Annual
Date of
Term
Interest
Government
Purpose
(Months)
Principal
Rate
Payment
Due Date
Bank of China
Working Capital
Nov 24, 2021
3,662
3.80
Pay monthly
Nov 24, 2022
Sep 28, 2022
2,817
3.00
Sep 27, 2023
Bank of China (1)
Oct 27, 2021
Oct 26, 2022
Dec 22, 2021
3.85
Pay quarterly
Dec 21, 2022
China CITIC Bank
Apr 27, 2022
3.90
Jan 27, 2023
May 20, 2022
Jan 20, 2023
Sep 26, 2022
704
3.65
Sep 25, 2023
3.50
Sep 26, 2023
Chongqing Bank (1)
Apr 14, 2022
Pay semiannually
Oct 14, 2022
Apr 14, 2023
52
Mar 20, 2025
118
May 12, 2022
73
May 24, 2022
53
Jun 16, 2022
Jun 29, 2022
Jul 28, 2022
79
Apr 13, 2025
6,741
2.30
Pay in arrear
Jun 15, 2023
Mar 21, 2022
1,366
Mar 21, 2023
Mar 23, 2022
4,370
Mar 23, 2023
4,815
Mar 18, 2022
2,763
1.90
Mar 13, 2023
5,053
May 17, 2022
349
2.20
Oct 8, 2022
431
Oct 28, 2022
237
Oct 24, 2022
Oct 31, 2022
Jul 13, 2022
189
1.80
Nov 7, 2022
Sep 5, 2022
494
1.70
Feb 28, 2023
Sep 21, 2022
280
Feb 20, 2023
Jan 18, 2023
332
Feb 9, 2023
Feb 13, 2023
Mar 2, 2023
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 had complied with such financial covenants as of September 30, 2022.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of September 30, 2022 (figures are in thousands of USD):
Payable on
Term (Months)
Working Capital(1)
Oct. 2022
11,342
Nov. 2022
11,384
Dec. 2022
12,587
Jan. 2023
12,922
Feb. 2023
10,528
Mar. 2023
13,533
Total (See Note 8)
72,296
(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 amount of cash on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged an additional 50% penalty interest. The Company complied with such financial covenants as of September 30, 2022.
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Cash Flows
Net cash provided by operating activities for the nine months ended September 30, 2022 was $31.7 million, compared to net cash used in operating activities of $5.9 million for the same period of 2021, representing an increase in net cash inflows by $37.6 million, which was mainly due to (1) the increase in net income excluding non-cash items by $12.2 million, (2) the increase in the cash inflows from movements of inventory by $17.6 million, (3) the decrease in the cash inflows from movements of accounts and notes receivable by $28.2 million, (4) the increase in the cash inflows from movements of other current liabilities by $16.7 million, 5) the increase in the cash inflows from movements of accounts and notes payable by $17.3 million and (6) a combination of other factors contributing an increase of cash inflows by $2.0 million.
Net cash used in investing activities for the nine months ended September 30, 2022 was $42.7 million, as compared to net cash used in investing activities of $2.2 million for the same period of 2021, representing an increase in net cash outflows by $40.5 million, which was mainly due to the net effect of (1) an increase in purchase of short-term investments of $15.9 million, (2) an increase in proceeds from maturities of short-term investments by $33.1 million, (3) an increase in investment under the equity method by $12.5 million, and (4) a combination of other factors contributing a decrease of cash inflows by $10.8 million, primarily including a decrease in cash received from long-term investment by $6.1 million.
Net cash used in financing activities for the nine months ended September 30, 2022 was $0.5 million, compared to net cash used in financing activities of $6.0 million for the same period of 2021, representing a decrease in net cash outflows by $5.5 million, which was mainly due to the net effect of (1) a decrease in repayment of bank loan by $3.4 million, and (2) a decrease in proceeds from bank loan by $0.9 million.
Off-Balance Sheet Arrangements
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 regarding this matter.
ITEM 4. CONTROLS AND PROCEDURES.
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2022, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
There have been no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 1A. RISK FACTORS.
Other than as set forth below, there have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2021 Annual Report on Form 10-K, as supplemented by the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022.
Because a majority of our operations are in China, our business is subject to the complex and rapidly evolving laws and regulations there. The Chinese government may exercise significant oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our securities.
As a business operating in China, we are subject to the laws and regulations of the PRC, which can be complex and which evolve rapidly. The PRC government has the power to exercise significant oversight and discretion over the conduct of our business, and the regulations to which we are subject may change rapidly and with little notice to us or our shareholders. As a result, there remain uncertainties regarding the application, interpretation, and enforcement of new and existing laws and regulations in the PRC. Compliance with the complex and evolving PRC laws, regulations, and regulatory statements may be costly, and such compliance or any associated inquiries or investigations or any other government actions may:
The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, that restrict or otherwise unfavorably impact the ability or manner in which we conduct our business and could require us to change certain aspects of our business to ensure compliance, could decrease demand for our products, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals or certificates, or subject us to additional liabilities. To the extent any new or more stringent measures are required to be implemented, our business, financial condition and results of operations could be adversely affected as well as materially decrease the value of our securities.
The PRC government has significant oversight over the conduct of the business of our PRC subsidiaries; such oversight could result in a material change in our operations and/or the value of our securities or could significantly limit our ability to offer or continue to offer securities and/or other securities to investors and cause the value of such securities to significantly decline.
The PRC government has significant oversight over the conduct of the business of our PRC subsidiaries and may intervene or influence our operations in mainland China, which may potentially result in a material adverse effect on our operations. The PRC government has recently published new policies that significantly affect certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations.
On December 24, 2021, the China Securities Regulatory Commission (“CSRC”) released the Provisions of the State Council on the Administration of Domestic Companies Offering Securities for Overseas Listing (Revision Draft for Comments) (the “Draft Provisions”) and the Administrative Measures for the Filing of Domestic Companies Seeking Overseas Securities Offering and Listing (the Filing Measures, or collectively, the Draft Overseas Listing Regulations) for public comment. The Draft Provisions provide for a general filing regulatory framework, and the Filing Measures set out more detailed terms and procedures of the filing requirements. Pursuant to the Draft Overseas Listing Regulations, domestic companies that apply for direct offerings and listings in an overseas market or an indirect offerings and listings in the name of an offshore entity are required to, among others, file and report to the CSRC, if: (i) the total assets, net assets, revenues or profits of the PRC operating entity of the issuer in the most recent accounting year account for more than 50% of the corresponding figure in the issuer’s audited consolidated financial statements for the same period and (2) the senior managers in charge of business operation and management of the issuer are mostly PRC citizens or have habitual residence in the PRC, and its main places of business are located in the PRC or main business activities are conducted in the PRC. Based on our global assets, operations and management outside of the PRC, we believe that we would be subject to the Draft Overseas Listing Regulations if we were to conduct an offering in the future in the United States.
According to questions and answers published by the CSRC on December 24, 2021, the record-filing requirement would be imposed starting from the new listing and new financing activities and the sufficient transition period would be given for the existing public companies offering their securities on overseas stock exchanges before the effectiveness of these regulations. If we are deemed to be subject to the Draft Overseas Listing Regulations and we fail to complete the filing procedures with the CSRC for any of our follow-on offerings in an overseas stock market, such as Nasdaq, or fall within any of the circumstances where our follow-on offering is prohibited by the State Council, our offering application may be discontinued and we may be subject to penalties, sanctions and fines imposed by the CSRC and relevant departments of the State Council. In severe circumstances, the business of our PRC subsidiaries may be suspended and their business qualifications and licenses may be revoked. However, uncertainties exist regarding the interpretation of the Draft Overseas Listing Regulations, as well as interpretation of the final form of these regulations and implementation thereof after promulgation.
Recently, the General Office of the Central Committee of the Communist Party of China and the General Office of the State Council jointly issued the Opinions on Intensifying Crack Down on Illegal Securities Activities, which call for strengthened regulation over illegal securities activities and supervision on overseas listings by China-based companies and propose to take effective measures, such as promoting the development of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. The PRC government has indicated that it may exert more control or influence over offerings of securities conducted overseas. If the PRC authorities attempt to exercise such control or influence through regulation over our PRC subsidiaries, we could be required to restructure our operations to comply with such regulations or potentially cease operations in the PRC entirely, which could adversely affect our business, results of operations and financial condition. Moreover, any such action could significantly limit our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline.
Currently, these statements and regulatory actions have had no impact on our daily business operations, the ability to accept foreign investments and list our securities on a U.S. or other foreign exchange. Since these statements and regulatory actions are new, it is highly uncertain how soon legislative or administrative regulation making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any, and the potential impact such modified or new laws and regulations will have on our daily business operations, the ability to accept foreign investments and list our securities on a U.S., Hong Kong, or other stock exchange.
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The approval of, or filing or other procedures with, the CSRC or other Chinese regulatory authorities may be required in connection with issuing our equity securities to foreign investors under Chinese law, and, if required, we cannot predict whether we will be able, or how long it will take us, to obtain such approval or complete such filing or other procedures. We are also required to obtain business licenses from Chinese authorities in connection with our general business activities currently conducted in China.
On July 6, 2021, the General Office of the Communist Party of China Central Committee and the State Council jointly promulgated the Opinions on Intensifying Crack Down on Illegal Securities Activities, pursuant to which Chinese regulators are required to accelerate rulemaking related to the overseas issuance and listing of securities, and update the existing laws and regulations related to data security, cross-border data flow, and administration of classified information. As there are still uncertainties regarding the interpretation and implementation of such regulatory guidance, we cannot assure investors that we will be able to comply with new regulatory requirements relating to our future overseas capital-raising activities and we may become subject to more stringent requirements with respect to matters including data privacy and cross-border investigation and enforcement of legal claims.
Furthermore, on December 24, 2021, the CSRC promulgated the Draft Overseas Listing Rules, which, among others, require certain companies to fulfill a filing procedure in respect of its offering and listing in the stock markets outside of China if such companies meet the criteria set forth in the Draft Overseas Listing Rules. As the Draft Overseas Listing Rules were released only for public comment, the final version and the effective date thereof may be subject to change with substantial uncertainty.
As of the date of this report, we have not received any inquiry, notice, warning or sanction regarding obtaining approval, completing filing or other procedures in connection with offering our equity securities to foreign investors in foreign stock markets from the CSRC or any other Chinese regulatory authorities that have jurisdiction over our operations. However, there remains significant uncertainty as to the enactment, interpretation and implementation of regulatory requirements related to overseas securities offerings and other capital markets activities. If it is determined in the future that the approval of, filing or other procedure with the CSRC or any other regulatory authority is required for issuing our equity securities in foreign stock markets, it is uncertain whether we will be able to and how long it would take for us to obtain the approval or complete the filing or other procedure, despite our best efforts. If we, for any reason, are unable to obtain or complete, or experience significant delays in obtaining or completing, the requisite relevant approval(s), filing or other procedure(s), we may face sanctions by the CSRC or other Chinese regulatory authorities. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operations in China, delay or restrict the repatriation of funds into China or take other actions that could have a material adverse effect on our business, financial condition, results of operations and prospects, as well as the trading price of our securities. In addition, if the CSRC or other regulatory authorities later promulgate new rules requiring that we obtain their approvals or complete filing or other procedures for any future public offerings in foreign stock markets, we may be unable to obtain a waiver of such requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such a requirement could have a material adverse effect on the trading price of our securities.
The PRC government has significant oversight and discretion over the conduct of the business operations of our PRC subsidiaries or to exert control over any offering of securities conducted overseas and/or foreign investment in China-based issuers, and may intervene with or influence our operations, may limit or completely hinder our ability to offer or continue to offer securities to investors, and may cause the value of such securities to significantly decline or be worthless, as the government deems appropriate to further regulatory, political and societal goals.
The PRC government may intervene or influence the operations of our PRC subsidiaries at any time with little to no advanced notice, which could result in a material change in our operations and/or the value of our securities. For example, the PRC government recently published new policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding any industry that could adversely affect the business, financial condition and results of operations of our company. For example, on December 28, 2021, the Cyberspace Administration of China (“CAC”) adopted rules mandating that an issuer who is a “critical information infrastructure operator” or a “data processing operator” as defined therein and who possesses personal information of more than one million users, and intends to have its securities listed for trading in a foreign country must complete a cybersecurity review by the CAC. Alternatively, relevant governmental authorities in the PRC may initiate cyber security review if such governmental authorities determine an operator’s cyber products or services, data processing or potential listing in a foreign country affect or may affect national security. The rules became effective on February 15, 2022. Moreover, on July 7, 2022, the CAC promulgated the Measures for the Security Assessment of Cross-border Data Transmission, which will come into effect on September 1, 2022, and will regulate the security assessment on the cross-border data transfer by data processor of important data and personal information collected and generated during operations within the PRC. According to these measures, personal data processors will be subject to security assessment conducted by the Cyberspace Administration of China prior to any cross-border transfer of data if the transfer involves (i) important data; (ii) personal information transferred overseas by operators
40
of critical information infrastructure or a data processor that has processed personal data of more than one million persons; (iii) personal information transferred overseas by a data processor that has already provided personal data of 100,000 persons or sensitive personal data of 10,000 persons overseas since January 1 of the prior year; or (iv) other circumstances as requested by the Cyberspace Administration of China.
The new CAC rules do not appear to apply to the Company or its subsidiaries at this time. As advised by our PRC counsel, Zhong Lun Law Firm, as of the date of this report, (i) the Company does not hold personal information of over one million users; (ii) the Company and its subsidiaries have not been informed by any PRC governmental authority of any requirement that it file for a cybersecurity review; (iii) data processed in the Company’s business does not have a bearing on national security and may not be classified as core or important data by the PRC governmental authorities; and (iv) none of the Company and its subsidiaries provides any important data, personal information or sensitive personal data outside the territory of PRC, therefore, the Company believes it is not required to pass cybersecurity review of CAC. If the Chinese government’s interference expands, our operations may be negatively impacted in a significant way, although, presently, there is no discernible immediate impact.
Uncertainties with respect to the PRC legal system, including uncertainties regarding the enforcement of laws, and sudden or unexpected changes in policies, laws and regulations in China could adversely affect us.
Our operations in China are governed by the PRC laws and regulations. We may be adversely affected by the complexity, uncertainties and changes in PRC laws and regulations regarding foreign investment and manufacturing, which could have a material adverse effect on our business and our ability to operate our business in China.
For example, two draft regulations relating to overseas offerings by domestic companies of equity shares, depository receipts, convertible corporate bonds, or other equity-like securities, and overseas listing of the securities for trading — namely the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) and the Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) — were recently released in December 2021 for public comments. Pursuant to such draft regulations, a filing-based regulatory system would be implemented covering both direct and indirect overseas offering and listing, among which, (i) if an issuer listed in other overseas markets after overseas offerings, the issuer shall submit to the CSRC filing documents within three working days after such application is submitted; (ii) if an issuer issues overseas listed securities after listing abroad and issues such securities aiming at purchasing assets, the issuer shall submit to the CSRC filing documents within three working days after the issue is completed, however, if the assets purchased are domestic assets, the filing procedure shall be performed within three working days from the date of the first announcement of the transaction; and (iii) if the significant events, such as change of control and delisting, occur after the issuer’s overseas listing, it should report the details to CSRC within three working days from the date of occurrence. Uncertainties exist regarding the final form of these regulations as well as the interpretation and implementation thereof after promulgation. If those two rules were adopted in the current form, we may be required to file documents regarding the events listed in the regulations with the CRSC before or after the events occurred.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have some discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy, than in more developed legal systems. These uncertainties may impede our ability to enforce contracts in China and could materially and adversely affect our business and results of operations.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis, or at all, and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business, and impede our ability to continue our operations and proceed with our future business plans.
41
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers
The following table provides information about the Company’s share repurchase activity for the three months ended September 30, 2022 (in thousands of USD):
Issuer Purchases of Equity Securities
Approximate
dollar value of
Total number of
shares that may
shares purchased
yet be purchased
as part of publicly
Average price
announced
Period
paid per share (1)
programs (2)
program
July 1, 2022 to July 31, 2022
85,633
2.8705
154,818
4,559
August 1, 2022 to August 31, 2022
128,525
3.4589
283,343
4,114
September 1, 2022 to September 30, 2022
168,260
4.0479
451,603
3,433
382,418
3.5863
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
INDEX TO EXHIBITS
ExhibitNumber
Description
3.1(i)
Certificate of Incorporation (incorporated by reference from the filing on Form 10SB12G File No. 000-33123).
3.1(ii)
Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123).
10.1
Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).
10.2
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).
10.3
English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2018).
31.1
Rule 13a-14(a) Certification*
31.2
32.1
Section 1350 Certification*
32.2
101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104*
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Date: November 14, 2022
By:
/ s/ Qizhou Wu
Qizhou Wu
President and Chief Executive Officer
/s/ Jie Li
Jie Li
Chief Financial Officer