Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
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 May 12, 2023, the Company had 30,185,702 shares of common stock issued and outstanding.
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX
Page
Part I — Financial Information
4
Item 1.
Unaudited Financial Statements.
Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended March 31, 2023 and 2022
Condensed Unaudited Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022
5
Condensed Unaudited Consolidated Statements of Cash Flows for the Three months Ended March 31, 2023 and 2022
6
Notes to Condensed Unaudited Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
19
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
28
Item 4.
Controls and Procedures.
29
Part II — Other Information
30
Legal Proceedings.
Item 1A.
Risk Factors.
Unregistered Sales of Equity Securities and Use of Proceeds.
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
31
Signatures
32
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, 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 March 31,
2023
2022
Net product sales ($13,576 and $11,004 sold to related parties for the three months ended March 31, 2023 and 2022)
$
142,243
136,396
Cost of products sold ($7,015 and $7,540 purchased from related parties for the three months ended March 31, 2023 and 2022)
120,625
121,662
Gross profit
21,618
14,734
Gain on other sales
653
931
Less: Operating expenses
Selling expenses
3,384
4,312
General and administrative expenses
4,753
4,754
Research and development expenses
6,390
8,137
Total operating expenses
14,527
17,203
Income/(loss) from operations
7,744
(1,538)
Other income, net
1,502
3,519
Interest expense
(249)
(402)
Financial (expense)/income, net
(422)
2,015
Income before income tax expenses and equity in earnings of affiliated companies
8,575
3,594
Less: Income taxes
829
958
Add: Equity in earnings/(loss) of affiliated companies
137
(2,487)
Net income
7,883
149
Less: Net income attributable to non-controlling interests
1,055
200
Accretion to redemption value of redeemable non-controlling interests
(8)
Net income/(loss) attributable to parent company’s common shareholders
6,820
(59)
Comprehensive income:
Other comprehensive income:
Foreign currency translation income, net of tax
4,554
1,437
Comprehensive income
12,437
1,586
Comprehensive income attributable to non-controlling interests
1,321
289
Comprehensive income attributable to parent company
11,108
1,289
Net income/(loss) attributable to parent company’s common shareholders per share -
Basic
0.23
(0.00)
Diluted
Weighted average number of common shares outstanding -
30,185,702
30,851,776
30,193,082
The accompanying notes are an integral part of these condensed unaudited consolidated financial statements.
Condensed Unaudited Consolidated Balance Sheets
(In thousands of USD unless otherwise indicated)
March 31, 2023
December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents
99,244
121,216
Pledged cash
43,639
37,735
Accounts and notes receivable, net - unrelated parties
232,593
214,308
Accounts and notes receivable, net - related parties
12,302
10,016
Inventories
105,498
112,236
Other current assets
35,334
25,207
Total current assets
528,610
520,718
Non-current assets:
Property, plant and equipment, net
104,931
106,606
Land use rights, net
9,616
9,555
Long-term investments
64,634
59,810
Other non-current assets
19,282
17,663
Total assets
727,073
714,352
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans
45,684
45,671
Accounts and notes payable-unrelated parties
224,111
218,412
Accounts and notes payable-related parties
15,530
16,695
Accrued expenses and other payables
46,153
48,311
Other current liabilities
32,799
35,106
Total current liabilities
364,277
364,195
Long-term liabilities:
Long-term tax payable
15,805
Other non-current liabilities
7,168
6,937
Total liabilities
387,250
386,937
Commitments and Contingencies (See Note 21)
Mezzanine equity:
Redeemable non-controlling interests
561
582
Stockholders’ equity:
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of March 31, 2023 and December 31, 2022, respectively
Additional paid-in capital
63,731
Retained earnings-
Appropriated
11,851
Unappropriated
253,994
247,174
Accumulated other comprehensive income
875
(3,413)
Treasury stock – 2,152,600 and 2,152,600 shares as of March 31, 2023 and December 31, 2022, respectively
(7,695)
Total parent company stockholders’ equity
322,759
311,651
Non-controlling interests
16,503
15,182
Total stockholders’ equity
339,262
326,833
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:
Depreciation and amortization
4,856
6,207
(Reversal)/provision of credit losses
(217)
100
Deferred income taxes
1,019
286
Equity in (earnings)/loss of affiliated companies
(137)
2,487
Loss on fixed assets disposals
15
37
(Increase)/decrease in:
Accounts and notes receivable
(17,383)
(11,184)
8,285
2,532
Other current assets and non-current assets
(1,206)
(1,281)
Increase/(decrease) in:
Accounts and notes payable
1,360
(1,407)
(2,868)
(2,041)
(3,023)
(135)
Net cash used in operating activities
(1,416)
(4,250)
Cash flows from investing activities:
(Increase)/decrease in demand loans included in other non-current assets
(14)
242
Cash received from property, plant and equipment sales
95
Payments to acquire property, plant and equipment (including $2,376 and $794 paid to related parties for the three months ended March 31, 2023 and 2022, respectively)
(3,160)
(1,024)
Payments to acquire intangible assets
—
(40)
Investment under the equity method
(5,841)
(4,724)
Purchase of short-term investments
(34,795)
(44,693)
Proceeds from maturities of short-term investments
26,541
1,801
Cash received from long-term investment
557
2,704
Net cash used in investing activities
(16,681)
(45,639)
Cash flows from financing activities:
Proceeds from bank loans
20,135
16,088
Repayments of bank loans
(20,534)
(15,701)
Repayments of the borrowing for sale and leaseback transaction
(1,130)
Net cash used in financing activities
(399)
(743)
Effects of exchange rate on cash, cash equivalents and pledged cash
2,428
583
Net decrease in cash, cash equivalents and pledged cash
(16,068)
(50,049)
Cash, cash equivalents and pledged cash at beginning of the period
158,951
159,498
Cash, cash equivalents and pledged cash at end of the period
142,883
109,449
Three months Ended March 31, 2023 and 2022
1. Organization and business
China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries described below, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.
Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.
Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support accordingly.
The Company owns the following aggregate net interests in the following subsidiaries organized in the People’s Republic of China, the “PRC,” and Brazil as of March 31, 2023 and December 31, 2022.
Percentage Interest
March 31,
December 31,
Name of Entity
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1
100.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3
70.00
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4
85.00
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9
95.84
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 12
66.60
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 13
51.00
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 14
62.00
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 15
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, 2022.
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.
8
The condensed consolidated balance sheet as of December 31, 2022 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.
The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2023.
Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian real, “BRL,” its functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.
(b)
Recent Accounting Pronouncements
No accounting standards newly issued during the three months ended March 31, 2023, had a material impact on the Company’s financial statements or disclosures.
(c)
Significant Accounting Policies
There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2022.
3. Accounts and notes receivable, net
The Company’s accounts and notes receivable, net as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):
Accounts receivable - unrelated parties
150,628
139,533
Notes receivable - unrelated parties
96,166
89,134
Total accounts and notes receivable - unrelated parties
246,794
228,667
Less: allowance for credit losses - unrelated parties
(14,201)
(14,359)
Accounts and notes receivable - related parties
14,006
11,779
Less: allowance for credit losses - related parties
(1,704)
(1,763)
Accounts and notes receivable, net
244,895
224,324
Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.
As of March 31, 2023 and December 31, 2022, the Company pledged its notes receivable in amounts of $18.0 million and $13.7 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).
Provision for doubtful accounts and notes receivable, as reversed in the unaudited consolidated statements of operations, amounted to $0.3 million for the three months ended March 31,2023.
9
Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of cash operations, amounted to $0.1 million for the three months ended March 31, 2022.
During the three months ended March 31, 2023, the Company’s five largest customers accounted for 45.2% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 22.2%. As of March 31, 2023, approximately 7.0% of accounts receivable were from trade transactions with the aforementioned customer.
During the three months ended March 31, 2022, the Company’s five largest customers accounted for 46.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 22.1%. As of March 31, 2022, approximately 8.7% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.
4. Inventories
The Company’s inventories as of March 31, 2023 and December 31, 2022 consisted of the following (figures are in thousands of USD):
Raw materials
23,961
24,502
Work in process
16,914
16,001
Finished goods
64,256
71,371
Cost of R&D service
367
362
Total
The Company recorded $1.2 million and $4.7 million of inventory write-down to cost of products sold for the three months ended March 31, 2023 and 2022, respectively.
5. Long-term investments
The Company’s long-term investments as of March 31, 2023 and December 31, 2022, are summarized as follows (figures are in thousands of USD):
Sentient AB (1)
21,912
21,831
Chongqing Venture Fund
15,055
14,435
Hubei Venture Fund
11,792
11,738
Suzhou Qingshan (2)
8,584
4,179
Suzhou Venture Fund
5,152
5,473
Henglong Tianyu
777
774
Chongqing Jinghua
683
695
Jiangsu Intelligent
679
685
10
The condensed financial information of the Company’s significant equity investees for the three months ended March 31, 2023 and 2022, including Chongqing and Suzhou Venture Fund, is summarized as follows (figures are in thousands of USD):
Revenue
Gain/(loss) from continuing operations
3,957
(20,578)
Net gain/(loss)
6. Property, plant and equipment, net
The Company’s property, plant and equipment, net as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):
Costs:
Buildings
65,958
64,928
Machinery and equipment
245,227
239,385
Electronic equipment
6,286
6,242
Motor vehicles
4,433
4,308
Construction in progress
6,764
8,238
Total amount of property, plant and equipment
328,668
323,101
Less: Accumulated depreciation (1)
(223,737)
(216,495)
Total amount of property, plant and equipment, net (2)(3)
7. Loans
Loans consist of the following as of March 31, 2023 and December 31, 2022 (figures are in thousands of USD):
Short-term bank loans
Long-term bank loans
742
528
46,426
46,199
The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. The total credit facility amount was $146.7 million and $148.3 million, respectively, as of March 31, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022, the Company has drawn down loans with an aggregate amount of $46.4 million and $46.2 million, respectively. The weighted average interest rate was 2.7% and 2.9%, respectively.
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 during the three months ended March 31, 2023.
11
8. Accounts and notes payable
The Company’s accounts and notes payable as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):
Accounts payable - unrelated parties
126,642
133,882
Notes payable - unrelated parties (1)
97,469
84,530
Accounts and notes payable - unrelated parties
Accounts and notes payable - related parties
239,641
235,107
9. Accrued expenses and other payables
The Company’s accrued expenses and other payables as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):
Warranty reserves (1)
34,032
32,435
Payable for the investment in Sentient AB (See Note 5)
615
2,043
Accrued expenses
8,282
9,652
Payables for overseas transportation and custom clearance
222
294
Dividends payable to holders of non-controlling interests
437
431
Accrued interest
229
465
Other payables
2,336
2,991
Balance at end of year/period
For the three months ended March 31, 2023 and 2022, the warranties activities were as follows (figures are in thousands of USD):
Balance at beginning of the period
36,572
Additions during the period
4,611
3,888
Settlement within the period
(3,448)
(3,476)
Foreign currency translation loss
434
144
Balance at end of the period
37,128
10. 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 issuance with a transfer price of par plus 6% interest per year. As of March 31, 2023, $0.6 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity.
12
For the three months ended March 31, 2023 and 2022, the Company recognized accretion of $0.008 million and $0.008 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.
11. Additional paid-in capital
The Company’s positions in respect of the amounts of additional paid-in capital for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):
12. Retained earnings
Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three months ended March 31, 2023 and 2022, no statutory reserve was appropriated by the subsidiaries in China.
The Company’s activities in respect of the amounts of appropriated retained earnings for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):
11,481
The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):
226,363
Net income/(loss) attributable to parent company
6,828
(51)
Accretion of redeemable non-controlling interests
226,304
13. Accumulated other comprehensive income
The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):
24,717
Foreign currency translation adjustment attributable to parent company
4,288
1,348
26,065
13
14. 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 March 31, 2023, the Company had repurchased 666,074 shares of the Company’s common stock under the program and the total number of shares held in treasury was 2,152,600. The repurchased shares are presented as “treasury stock” on the balance sheet.
15. Non-controlling interests
The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):
15,854
Net income attributable to non-controlling interests
Foreign currency translation adjustment attributable to non-controlling interests
266
89
16,143
16. 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 23.
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 March 31, 2023 and December 31, 2022, the Company has customer deposits of $6.7 million and $5.7 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the three months ended March 31, 2023, $2.3 million was received and $1.3 million (including $1.2 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the three months ended March 31, 2022, $2.3 million was received and $1.0 million (including $1.0 million from the beginning balance of customer deposits) was recognized as net product sales revenue. 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.
14
17. Financial (expense)/income, net
During the three months ended March 31, 2023 and 2022, the Company recorded financial (expense)/income, net which is summarized as follows (figures are in thousands of USD):
Interest income
219
251
Foreign exchange (loss)/gain, net
(565)
1,910
Bank charges
(76)
(146)
Total financial (expense)/income, net
18. 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 March 31, 2023 and 2022, were as follows (figures are in thousands of USD, except share and per share amounts):
Numerator:
Net income/(loss) attributable to the parent company’s common shareholders - Basic and Diluted
Denominator:
Weighted average shares outstanding
Dilutive effects of stock options
7,380
Denominator for dilutive income per share - Diluted
Net income per share attributable to parent company’s common shareholders - Basic
Net income/(loss) per share attributable to parent company’s common shareholders - Diluted
As of March 31, 2023, the exercise prices for all outstanding stock options were below the weighted average market price of the Company’s common stock during the three months ended March 31, 2023. These stock options were included in the calculation of the diluted income per share for the corresponding periods presented.
For the three months ended March 31, 2022, assumed conversion of the stock options has not been reflected in the dilution calculation pursuant to ASC 260, “Earnings Per Share,” due to the anti-dilutive effect as a result of the Company’s net loss. The effects of all outstanding share options with common share equivalents of 954 shares have been excluded from the calculation of the diluted loss per share for the three months ended March 31, 2022, due to their anti-dilutive effect.
19. Significant concentrations
A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the “current account”, which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign currency for settlement of such “current account” transactions without pre-approval.
China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, “China-based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law China-based Subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the cumulative amount reaches 50% of their
paid-in capital. These reserves are not distributable as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the discretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.
The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China. The China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its subsidiaries, including the China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its shares.
Transactions other than those that fall under the “current account” and that involve conversion of RMB into foreign currency are classified as “capital account” transactions; examples of “capital account” transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. “Capital account” transactions require prior approval from China’s State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the People’s Republic of China, or the PRC, the Company’s China subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the ability of the Company’s China subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.
20. 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
13,576
11,004
Materials and others sold to related parties
592
605
Rental income obtained from related parties
63
125
14,231
11,734
Related party purchases
Materials purchased from related parties
7,015
7,540
Equipment purchased from related parties
243
449
Others purchased from related parties
21
157
7,279
8,146
Related party investment transaction
Equity interest purchase from related parties
24,452
16
Related party receivables
Accounts and notes receivable, net from related parties
Related party advance payments
Advance payments for property, plant and equipment to related parties
1,909
1,884
Advance payments and others to related parties
2,314
1,439
4,223
3,323
Related party payables
These transactions were consummated under similar terms as those with the Company’s third-party customers and suppliers.
As of May 12, 2023, Hanlin Chen, the chairman of the board of directors of the Company, owns 59.13% 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.
21. Commitments and contingencies
Legal proceedings
The Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.
Other commitments and contingencies
In addition to the bank loans, notes payables and the related interest and other payables, the following table summarizes the Company’s major commitments and contingencies as of March 31, 2023 (figures are in thousands of USD):
Payment obligations by period
2024
2025
Thereafter
Obligations for investment contracts
5,093
Obligations for purchasing and service agreements
29,393
8,518
37,911
43,004
22. Off-balance sheet arrangements
As of March 31, 2023 and December 31, 2022, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.
17
23. 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 2022 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.
As of March 31, 2023 and 2022, the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Wuhu, Henglong KYB, Hubei Henglong and Brazil Henglong), and one holding company (Genesis). The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), power steering parts (Shenyang), 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 months ended March 31, 2023 and 2022, is as follows (figures are in thousands of USD):
Net Product Sales
Net Income/(Loss)
Three Months Ended
Henglong
61,631
62,003
1,609
1,199
Jiulong
16,820
17,728
(369)
(2,434)
Wuhu
7,899
8,872
452
Hubei Henglong
34,657
32,943
(2,837)
Henglong KYB
37,196
29,807
2,778
569
Brazil Henglong
10,762
10,484
1,370
2,815
Other Entities
22,115
23,160
1,177
1,087
Total Segments
191,080
184,997
7,791
401
Corporate
(150)
(235)
Eliminations
(48,837)
(48,601)
(17)
18
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and the related notes thereto and the other financial information contained elsewhere in this Report.
General Overview
China Automotive Systems, Inc. is a leading power steering systems supplier for the China automobile industry. The Company has business relationships with more than sixty vehicle manufacturers, including China’s top ranking domestic automobile manufacturers such as JAC motors, Changan Automobile Group, BAIC Group, Dongfeng Group, Brilliance Jinbei, Chery, BYD and Zhejiang Geely as well as Sino-foreign or foreign automobile manufacturer such as General Motors, Citroen, Fiat Chrysler North America and Ford. Starting in 2008, the Company has supplied power steering gears to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gear to Fiat Chrysler North America since 2009 and to Ford Motor Company since 2016.
Most of the Company’s production and research and development institutes are located in China. As of March 31, 2023, the Company has approximately 3,964 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 and may continue to be affected. 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, 2022.
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.
20
Results of Operations - Three Months Ended March 31, 2023 and 2022
Selected highlights from our results of operations are as follows (in thousands of U.S. dollars):
Change
Change %
Net product sales
5,847
4.3
Cost of products sold
(1,037)
(0.9)
(278)
(29.9)
(928)
(21.5)
(1)
(0.0)
(1,747)
Other income
(2,017)
(57.3)
249
402
(153)
(38.1)
Financial expense/(income), net
422
(2,015)
2,437
120.9
Income taxes
(129)
(13.5)
7,734
5,190.6
855
427.5
6,879
11,659.3
Net Product Sales and Cost of Products Sold
Cost of Products Sold
(in thousands of USD,
except percentages)
(372)
(0.6)
57,151
57,441
(290)
(0.5)
(908)
(5.1)
15,531
17,606
(2,075)
(11.8)
(973)
(11.0)
7,134
8,302
(1,168)
(14.1)
1,714
5.2
30,073
30,122
(49)
(0.2)
7,389
24.8
32,456
27,321
5,135
18.8
278
2.7
8,926
9,498
(572)
(6.0)
(1,045)
(4.5)
17,984
18,860
(876)
(4.6)
6,083
3.3
169,255
169,150
105
0.1
Elimination
(236)
0.5
(48,630)
(47,488)
(1,142)
2.4
Net product sales were $142.2 million for the three months ended March 31, 2023, compared to $136.4 million for the same period in 2022, representing an increase of $5.8 million, or 4.3%, mainly due to the Company’s increased sales of electric power steering (“EPS”) systems and parts and partially offset by the impact from appreciation of USD agaist RMB..
Net sales of traditional steering products and parts were $94.4 million for the three months ended March 31, 2023, compared to $95.4 million for the same period in 2022. Net sales of electric power steering (“EPS”) were $47.8 million for the three months ended March 31, 2023 and $41.0 million for the same period in 2022, representing an increase of $6.8 million, or 16.6%. As a percentage of net sales, sales of EPS were 33.6% for the three months ended March 31, 2023, compared with 30.1% for the same period in 2022.
Further analysis by segment (before elimination) is as follows:
For the three months ended March 31, 2023, the cost of products sold was $120.6 million, compared to $121.7 million for the same period of 2022, representing a decrease of $1.1 million, or 0.9%. The decrease in cost of sales was mainly due to the impact from foreign exchange rate fluctuation and the decrease in unit cost offset by the increase in sales volume. Further analysis is as follows:
22
Gross margin was 15.2% for the three months ended March 31, 2023, compared to 10.8% for the same period of 2022, representing an increase of 4.4%. The increase was mainly due to a change in our product mix and increase in average selling price for the three months ended March 31, 2023.
Selling Expenses
Selling expenses were $3.4 million for the three months ended March 31, 2023, as compared to $4.3 million for the same period of 2022, representing a decrease of $0.9 million, or 21%, which was primarily due to a decrease in transportation expenses, marketing and office expense and the impact from appreciation of USD against RMB.
General and Administrative Expenses
General and administrative expenses were $4.8 million for the three months ended March 31, 2023, which is stable compared to $4.8 million for the same period of 2022.
Research and Development Expenses
Research and development expenses were $6.4 million for the three months ended March 31, 2023, as compared to $8.1 million for the same period of 2022, representing a decrease of $1.7 million, or 21%, which was mainly due to a decrease of tooling charge and the depreciation of the RMB against the USD in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.
Other Income, net
Other income, net was $1.5 million for the three months ended March 31, 2023, as compared to $3.5 million for the three months ended March 31, 2022, representing a decrease of $2.0 million, which was mainly due to the government subsidies received for the three months ended March 31, 2023 being less than the amount received for the three months ended March 31, 2022.
Interest Expense
Interest expense was $0.2 million for the three months ended March 31, 2023, as compared to $0.4 million for the three months ended March 31, 2022, representing a decrease of $0.2 million, which is mainly due to the decrease in short-term loan and weighted average interest rate.
Financial Expense/(Income), net
Financial expense, net was $0.4 million for the three months ended March 31, 2023, as compared to financial income, net of $2.0 million for the three months ended March 31, 2022, representing a decrease in financial income of $2.4 million, which was primarily due to an increase in the foreign exchange loss due to the appreciation of RMB against USD.
Income Taxes
Income tax expense was $0.8 million for the three months ended March 31, 2023, compared to income tax expense of $1.0 million for the three months ended March 31, 2022, which was primarily due to the valuation allowance recognized in the three months ended March 31, 2022 whereas no significant valuation allowance was recognized in the three months ended March 31, 2023.
Net Income Attributable to Non-controlling Interests
Net income attributable to non-controlling interests amounted to $1.1 million for the three months ended March 31, 2023, compared to net income attributable to non-controlling interests of $0.2 million for the three months ended March 31, 2022.
Net Income/(Loss) Attributable to Parent Company’s Common Shareholders
Net income attributable to parent company’s common shareholders was $6.8 million for the three months ended March 31, 2023, compared to net loss attributable to parent company’s common shareholders of $0.1 million for the three months ended March 31, 2022, representing an increase in net income attributable to parent company’s common shareholders of $6.9 million.
23
Liquidity and Capital Resources
Capital Resources and Use of Cash
The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of March 31, 2023, the Company had cash and cash equivalents and short-term investments of $120.6 million, compared to $134.1 million as of December 31, 2022, representing a decrease of $13.5 million, or 10.1%.
The Company had working capital (total current assets less total current liabilities) of $164.3 million as of March 31, 2023, compared to $156.5 million as of December 31, 2022, representing an increase of $7.8 million, or 5.0%.
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 2023. 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 $45.7 million, long-term loans of $0.7 million (See Note 7) and bankers’ acceptances of $105.5 million (See Note 8) as of March 31, 2023.
The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker’s acceptances is expected to be reduced by approximately $16.7 million over the next 12 months. If the Company wishes to maintain the same amount of bank loans and banker’s acceptances in the future, it may be required by the banks to provide additional mortgages of $16.7 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $9.4 million, which is 56.1%, the mortgage ratio, of $16.7 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.
24
Bank Arrangements
As of March 31, 2023, 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
70,579
42,860
27,818
2. Comprehensive credit facilities
Hankou Bank(1)
Mar-2024
14,552
2,838
3. Comprehensive credit facilities
Hubei Bank(1)
24,739
14,229
75,382
4. Comprehensive credit facilities
Chongqing Bank
Mar-2025
786
1,858
5. Comprehensive credit facilities
China Construction Bank
Sep-2025
2,910
2,328
6,605
6. Comprehensive credit facilities
China Merchants Bank(1)
June-2024
2,949
7. Comprehensive credit facilities
Bank of China(1)
Aug-2023
13,243
5,821
8. Comprehensive credit facilities
China Everbright Bank
Dec-2025
4,366
2,117
9,142
9. Comprehensive credit facilities
China Industrial Bank
728
2,876
146,688
73,928
123,681
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 3 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 $27.8 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.
2. Equipment with an assessed value of approximately $75.4 million as security for its revolving comprehensive credit facility with Hubei Bank.
25
3. Buildings with an assessed value of approximately $1.9 million as security for its comprehensive credit facility with Chongqing Bank.
4. Land use rights and buildings with an assessed value of approximately $6.6 million as security for its revolving comprehensive credit facility with China Constitution Bank.
5. Land use rights and buildings with an assessed value of approximately $9.1 million as security for its revolving comprehensive credit facility with China Everbright Bank.
6. Land use rights and buildings with an assessed value of approximately $2.9 million as security for its revolving comprehensive credit facility with China Industrial Bank.
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 March 31, 2023 (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
October 28, 2022
3.00
Pay monthly
October 28, 2023
September 28, 2022
September 27, 2023
China CITIC Bank
September 26, 2022
3.65
September 25, 2023
March 2, 2023
1,455
March 1, 2024
March 23, 2023
March 23, 2024
China Constitution Bank
3.50
September 26, 2023
Chongqing Bank(1)
April 14, 2022
3.80
Pay semiannually
April 14, 2023
October 14, 2023
35
39
March 20, 2025
April 27, 2022
122
May 12, 2022
34
76
May 24, 2022
55
June 16, 2022
33
44
June 29, 2022
118
July 28, 2022
81
April 13, 2025
January 16, 2023
27
164
February 20, 2023
26
March 21, 2023
6,965
2.30
Pay in arrear
June 15, 2023
March 28, 2023
5,619
2.70
March 27, 2024
4,975
Hankou Bank
March 30, 2023
2,789
December 25, 2023
4,671
March 26, 2024
China CITIC Bank(1)
October 20, 2022
1,444
1.65
April 8, 2023
November 21, 2022
433
April 11, 2023
1,175
April 28, 2023
May 16, 2023
December 19, 2022
1,156
May 29, 2023
51
May 30, 2023
2.50
288
January 28, 2023
338
2.60
February 24, 2023
2.55
January 10, 2023
250
1.80
June 30, 2023
432
February 17, 2023
115
July 3, 2023
866
July 4, 2023
February 16, 2023
July 17, 2023
720
2.52
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 March 31, 2023.
Notes Payable
The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 2023 (figures are in thousands of USD):
Payable on
Term (Months)
Working Capital(1)
Apr. 2023
22,892
May. 2023
16,957
Jun. 2023
13,283
Jul. 2023
15,828
Aug.2023
13,593
Sep. 2023
22,913
Total (See Note 8)
105,466
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 March 31, 2023.
Cash Flows
Net cash used in operating activities for the three months ended March 31, 2023 was $1.4 million, compared to net cash used in operating activities of $4.3 million for the same period of 2022, representing a decrease in net cash outflows by $2.9 million, which was mainly due to (1) the increase in net income excluding non-cash items by $4.1 million, (2) the increase in the cash inflows from movements of inventory by $5.8 million, (3) the increase in the cash outflows from movements of accounts and notes receivable by $6.2 million, (4) the increase in the cash outflows from movements of accrued expenses and others by $0.8 million, and (5) a combination of other factors contributing an increase of cash outflows by $0.1 million.
Net cash used in investing activities for the three months ended March 31, 2023 was $16.7 million, as compared to net cash used in investing activities of $45.6 million for the same period of 2022, representing a decrease in net cash outflows by $28.9 million, which was mainly due to the net effect of (1) a decrease in purchase of short-term investments of $9.9 million, (2) an increase in proceeds from maturities of short-term investments by $24.7 million, (3) an increase in payments to acquire investments under the equity method by $1.1 million, and (4) a combination of other factors contributing an increase of cash outflows by $4.5 million, primarily including a decrease in cash received from long-term investment by $2.1 million and an increase in payments to acquire property, plant and equipment by $2.1 million.
Net cash used in financing activities for the three months ended March 31, 2023 was $0.4 million, compared to net cash used in financing activities of $0.7 million for the same period of 2022, representing a decrease in net cash outflows by $0.3 million, which was mainly due to the net effect of (1) an increase in repayment of bank loan by $4.8 million, (2) an increase in proceeds from bank loan by $4.0 million, and (3) a decrease in repayments of the borrowing for sale and leaseback transaction by $1.1 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, 2022 regarding this matter.
ITEM 4. CONTROLS AND PROCEDURES.
The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2023, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023.
The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
There have been no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2022 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
INDEX TO EXHIBITS
ExhibitNumber
Description
3.1(i)
Certificate of Incorporation (incorporated by reference from the filing on Form 10SB12G File No. 000-33123).
3.1(ii)
Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123).
10.1
Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).
10.2
Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).
10.3
English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2018).
31.1
Rule 13a-14(a) Certification*
31.2
32.1
Section 1350 Certification*
32.2
101.INS*
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 104*
Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
*filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant)
Date: May 12, 2023
By:
/ s/ Qizhou Wu
Qizhou Wu
President and Chief Executive Officer
/s/ Jie Li
Jie Li
Chief Financial Officer