Company Quick10K Filing
China Automotive Systems
Price2.25 EPS0
Shares32 P/E6
MCap71 P/FCF17
Net Debt-102 EBIT16
TEV-31 TEV/EBIT-2
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-06-30 Filed 2020-08-14
10-Q 2020-03-31 Filed 2020-06-23
10-K 2019-12-31 Filed 2020-05-14
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-08
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-28
10-Q 2018-09-30 Filed 2018-11-09
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-10
10-K 2017-12-31 Filed 2018-03-29
10-Q 2017-09-30 Filed 2017-11-09
10-Q 2017-06-30 Filed 2017-08-10
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-30
10-Q 2016-09-30 Filed 2016-11-10
10-Q 2016-06-30 Filed 2016-08-11
10-Q 2016-03-31 Filed 2016-05-12
10-K 2015-12-31 Filed 2016-03-30
10-Q 2015-09-30 Filed 2015-11-12
10-Q 2015-06-30 Filed 2015-08-13
10-Q 2015-03-31 Filed 2015-05-14
10-K 2014-12-31 Filed 2015-03-26
10-Q 2014-09-30 Filed 2014-11-12
10-Q 2014-06-30 Filed 2014-08-13
10-Q 2014-03-31 Filed 2014-05-14
10-K 2013-12-31 Filed 2014-03-31
10-Q 2013-09-30 Filed 2013-11-13
10-Q 2013-06-30 Filed 2013-08-14
10-Q 2013-03-31 Filed 2013-05-14
10-K 2012-12-31 Filed 2013-03-27
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-09
10-K 2011-12-31 Filed 2012-03-09
10-Q 2011-09-30 Filed 2011-11-08
10-Q 2011-06-30 Filed 2011-08-09
10-Q 2011-03-31 Filed 2011-07-22
10-K 2010-12-31 Filed 2011-06-28
10-Q 2010-09-30 Filed 2010-11-09
10-Q 2010-06-30 Filed 2010-08-09
10-Q 2010-03-31 Filed 2010-05-06
10-K 2009-12-31 Filed 2010-03-25
8-K 2020-08-17 Shareholder Vote
8-K 2020-08-14 Earnings, Exhibits
8-K 2020-06-23
8-K 2020-05-14
8-K 2020-05-11
8-K 2020-03-20
8-K 2019-11-12
8-K 2019-08-08
8-K 2019-07-18
8-K 2019-05-09
8-K 2019-03-28
8-K 2018-12-05
8-K 2018-11-21
8-K 2018-11-09
8-K 2018-08-20
8-K 2018-08-09
8-K 2018-05-10
8-K 2018-04-27
8-K 2018-03-29

CAAS 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II. - Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 tm2024703d1_ex31-1.htm
EX-31.2 tm2024703d1_ex31-2.htm
EX-32.1 tm2024703d1_ex32-1.htm
EX-32.2 tm2024703d1_ex32-2.htm

China Automotive Systems Earnings 2020-06-30

Balance SheetIncome StatementCash Flow
97578058539019502012201420172020
Assets, Equity
1601157025-20-652012201420172020
Rev, G Profit, Net Income
402612-2-16-302012201420172020
Ops, Inv, Fin

10-Q 1 tm2024703-1_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

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

 

For the quarterly period ended June 30, 2020

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 number)
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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes           x           No           ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes           x           No           ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company x
    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           x

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading symbol Name of each exchange on which registered
Common Stock, $0.0001 par value CAAS The Nasdaq Capital Market

 

As of August 14, 2020, the Company had 31,174,045 shares of common stock issued and outstanding.

 

 

 

 

 

CHINA AUTOMOTIVE SYSTEMS, INC.

 

INDEX

 

    Page
     
  Part I — Financial Information 3
     
Item 1. Unaudited Financial Statements. 4
  Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months and Six Months Ended June 30, 2020 and 2019 4
  Condensed Unaudited Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019 6
  Condensed Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 7
  Notes to Condensed Unaudited Consolidated Financial Statements 8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 35
Item 4. Controls and Procedures. 35
     
  Part II — Other Information 36
     
Item 1. Legal Proceedings. 36
Item 1A. Risk Factors. 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 36
Item 3. Defaults Upon Senior Securities. 36
Item 4. Mine Safety Disclosures. 36
Item 5. Other Information. 37
Item 6. Exhibits. 37
     
Signatures 38

 

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, 2019, 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 June 30, 
   2020   2019 
Net product sales ($16,105 and $14,310 sold to related parties for the three months ended June 30, 2020 and 2019)  $83,184   $105,748 
Cost of products sold ($6,152 and $6,130 purchased from related parties for the three months ended June 30, 2020 and 2019)   75,353    90,563 
Gross profit   7,831    15,185 
Gain on other sales   838    2,485 
Less: Operating expenses          
Selling expenses   2,977    3,859 
General and administrative expenses   4,759    4,434 
Research and development expenses   6,125    6,752 
Total operating expenses   13,861    15,045 
(Loss)/income from operations   (5,192)   2,625 
Other income/(expense), net   1,257    (447)
Interest expense   (446)   (731)
Financial (expense)/income, net   (59)   1,552 
(Loss)/income before income tax expenses and equity in earnings/(loss) of affiliated companies   (4,440)   2,999 
Less: Income tax (benefit)/expense   (31)   674 
Equity in earnings/(loss) of affiliated companies   169    (207)
Net (loss)/income   (4,240)   2,118 
Net loss attributable to non-controlling interests   (142)   (332)
Net (loss)/income attributable to parent company’s common shareholders  $(4,098)  $2,450 
Comprehensive income:          
Net (loss)/income  $(4,240)  $2,118 
Other comprehensive income:          
Foreign currency translation income/(loss), net of tax   358    (6,881)
Comprehensive loss   (3,882)   (4,763)
Comprehensive loss attributable to non-controlling interests   (86)   (776)
Comprehensive loss attributable to parent company  $(3,796)  $(3,987)
           
Net (loss)/income attributable to parent company’s common shareholders per share -          
           
Basic  $(0.13)  $0.08 
           
Diluted  $(0.13)  $0.08 
Weighted average number of common shares outstanding -          
Basic   31,174,045    31,497,723 
Diluted   31,174,045    31,499,577 

 

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

 

4

 

 

 China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

(In thousands of USD, except share and per share amounts)

 

   Six Months Ended June 30, 
   2020   2019 
Net product sales ($23,599 and $27,146 sold to related parties for the six months ended June 30, 2020 and 2019)  $156,739   $214,941 
Cost of products sold ($9,286 and $11,634 purchased from related parties for the six months ended June 30, 2020 and 2019)   137,756    185,711 
Gross profit   18,983    29,230 
Gain on other sales   1,438    3,754 
Less: Operating expenses          
Selling expenses   5,095    6,944 
General and administrative expenses   8,188    9,024 
Research and development expenses   11,318    13,355 
Total operating expenses   24,601    29,323 
(Loss)/income from operations   (4,180)   3,661 
Other income, net   1,374    960 
Interest expense   (811)   (1,299)
Financial (expense)/income, net   (590)   887 
(Loss)/income before income tax expenses and equity in (loss)/earnings of affiliated companies   (4,207)   4,209 
Less: Income taxes   483    872 
Equity in (loss)/earnings of affiliated companies   (178)   4 
Net (loss)/income   (4,868)   3,341 
Net loss attributable to non-controlling interests   (742)   (575)
Net (loss)/income attributable to parent company’s common shareholders  $(4,126)  $3,916 
Comprehensive income:          
Net (loss)/income  $(4,868)  $3,341 
Other comprehensive income:          
Foreign currency translation loss, net of tax   (4,603)   (518)
Comprehensive (loss)/income   (9,471)   2,823 
Comprehensive loss attributable to non-controlling interests   (1,139)   (562)
Comprehensive (loss)/income attributable to parent company  $(8,332)  $3,385 
           
Net (loss)/income attributable to parent company’s common shareholders per share -          
           
Basic  $(0.13)  $0.12 
           
Diluted  $(0.13)  $0.12 
Weighted average number of common shares outstanding -          
Basic   31,174,045    31,501,889 
Diluted   31,174,082    31,505,721 

 

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

 

5

 

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Balance Sheets

(In thousands of USD unless otherwise indicated)

 

   June 30, 2020   December 31, 2019 
ASSETS          
Current assets:          
Cash and cash equivalents  $80,376   $76,715 
Pledged cash   25,504    29,688 
Accounts and notes receivable, net - unrelated parties   170,059    211,841 
Accounts and notes receivable - related parties   18,383    21,164 
Inventories   82,861    82,931 
Other current assets   37,086    18,974 
Total current assets   414,269    441,313 
Non-current assets:          
Property, plant and equipment, net   131,657    140,481 
Land use rights, net   10,062    10,346 
Long-term investments   43,774    39,642 
Other non-current assets   31,431    28,374 
Total assets  $631,193   $660,156 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Short-term loans  $55,191   $46,636 
Accounts and notes payable - unrelated parties   162,803    180,175 
Accounts and notes payable - related parties   9,233    6,492 
Accrued expenses and other payables   47,758    45,341 
Other current liabilities   22,629    25,135 
Total current liabilities   297,614    303,779 
Long-term liabilities:          
Long-term government loans   -    7,167 
Other long-term payable   2,998    4,948 
Long-term tax payable   23,884    26,693 
Other non-current liabilities   8,099    8,010 
Total liabilities  $332,595   $350,597 
           
Commitments and Contingencies (See Note 22)          
           
Stockholders’ equity:          
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued - 32,338,302 and 32,338,302 shares as of June 30, 2020 and December 31, 2019, respectively  $3   $3 
Additional paid-in capital   64,273    64,466 
Retained earnings-          
Appropriated   11,265    11,265 
Unappropriated   216,383    221,298 
Accumulated other comprehensive income   (7,668)   (3,462)
Treasury stock -1,164,257 and 1,164,257 shares as of June 30, 2020 and December 31, 2019, respectively   (4,261)   (4,261)
Total parent company stockholders' equity   279,995    289,309 
Non-controlling interests   18,603    20,250 
Total stockholders' equity   298,598    309,559 
Total liabilities and stockholders' equity  $631,193   $660,156 

 

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

 

6

 

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(In thousands of USD unless otherwise indicated)

 

   Six Months Ended June 30, 
   2020   2019 
Cash flows from operating activities:          
Net (loss)/income  $(4,868)  $3,341 
Adjustments to reconcile net (loss)/income from operations to net cash provided by/(used in) operating activities:          
Depreciation and amortization   10,562    9,283 
Reversal of provision for doubtful accounts   (239)   (673)
Deferred income taxes   21    (1,124)
Equity in loss/(earnings) of affiliated companies   178    (4)
Government subsidy reclassified from government loans   287    - 
Loss/(gain) on fixed assets disposals   42    (733)
(Increase)/decrease in:          
Accounts and notes receivable   41,917    969 
Inventories   (1,281)   (3,294)
Other current assets   (1,355)   4,760 
Increase/(decrease) in:          
Accounts and notes payable   (11,924)   (31,049)
Accrued expenses and other payables   2,683    (3,055)
Long-term taxes payable   (2,809)   (2,810)
Other current liabilities   (1,835)   (1,342)
Net cash provided by/(used in) operating activities   31,379    (25,731)
Cash flows from investing activities:          
Decrease/(increase) in demand loans and employee housing loans included in other non-current assets   (3)   1,057 
Cash received from property, plant and equipment sales   586    700 
Payments to acquire property, plant and equipment (including $760 and $2,271 paid to related parties for the six months ended June 30, 2020 and 2019, respectively)   (4,525)   (10,335)
Payments to acquire intangible assets   (390)   (1,387)
Investment under the equity method   (5,360)   (2,348)
Purchase of short-term investments and long-term time deposits   (27,128)   (17,031)
Government subsidy received for purchase of property, plant and equipment   -    1,898 
Proceeds from maturities of short-term investments   5,781    17,087 
Cash received from long-term investment   448    579 
Net cash used in investing activities   (30,591)   (9,780)
Cash flows from financing activities:          
Proceeds from bank loans   36,135    29,036 
Repayments of bank loans   (33,890)   (18,910)
Repayments of the borrowing for sale and leaseback transaction   (2,041)   (2,116)
Dividends paid to non-controlling interest holders of non-wholly owned subsidiaries   -    (333)
Cash received from capital contributions by non-controlling interest holder   212    1,438 
Deemed distribution to shareholders   (88)   - 
Acquisition of non-controlling interest   (81)   - 
Repurchase of common shares   -    (342)
Net cash provided by financing activities   247    8,773 
Effects of exchange rate on cash, cash equivalents and pledged cash   (1,558)   (172)
Net decrease in cash, cash equivalents and pledged cash   (523)   (26,910)
Cash, cash equivalents and pledged cash at beginning of the period   106,403    115,969 
Cash, cash equivalents and pledged cash at end of the period  $105,880   $89,059 

 

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

 

7

 

 

 China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three Months and Six Months Ended June 30, 2020 and 2019

 

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 June 30, 2020 and December 31, 2019.

 

   Percentage Interest 
Name of Entity  June 30,
2020
   December 31,
2019
 
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1   100.00%   100.00%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2   100.00%   100.00%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3   70.00%   70.00%
Universal Sensor Application Inc., “USAI” 4   -    83.34%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 5   85.00%   85.00%
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 6   77.33%   77.33%
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 7   100.00%   100.00%
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 8   100.00%   100.00%
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 9   70.00%   70.00%
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 10   95.84%   95.84%
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 11   85.00%   85.00%
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 12   100.00%   100.00%
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan” 13   60.00%   60.00%
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 14   66.60%   66.60%
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 15   51.00%   51.00%
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 16   70.00%   100.00%
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 17   100.00%   - 

 

1. Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.
   
2. Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.
   
3. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
   
4. USAI was established in 2005 and mainly engages in the production and sales of sensor modules. It was merged with Wuhan Chuguanjie in the second quarter of 2020.
   
5. Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns.
   
6. Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.
   
7. On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd.

 

8

 

 

8. In December 2009, Henglong, a subsidiary of Genesis, formed Testing Center, which mainly engages in the research and development of new products.
   
9. On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts.
   
10. On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction.
   
11. In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China.
   
12. In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”, which mainly engages in the design and sales of automotive electronics.
   
13. In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology.
   
14. In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”, which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment.
   
15. In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”, which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment.
   
16. In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”, which mainly engages in the development, manufacturing and sale of high polymer materials. Hubei Henglong owns 70.0% of the shares of Wuhu Hongrun and has consolidated it since its establishment.
   
17. In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.2 million, equivalent to approximately $0.2 million from an entity controlled by Hanlin Chen. Before the acquisition, 52.1% of the shares of Changchun Hualong were ultimately owned by Hanlin Chen and 47.9% of the shares were owned by third parties. Changchun Hualong mainly engages in design and R&D of automotive parts.

 

2.Basis of presentation and significant accounting policies

 

  (a) Basis of Presentation

 

Basis of Presentation - The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

 

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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, 2019 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 six months ended June 30, 2020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2020.

 

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 reais, “BRL,” its functional currency. In accordance with ASC Topic 830, “FASB Accounting Standards Codification”, 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

 

On January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) No. 2016-13 ASC (Topic 326), Financial Instruments - Credit Losses. The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The Company adopted the CECL model to recognize credit losses of financial assets using a modified retrospective method of accounting as of January 1, 2020. The impact of adopting the new standard on the consolidated financial statements was a reduction of $0.8 million to beginning retained earnings.

  

  (c) Significant Accounting Policies

 

Business combinations under common control – The Company accounts for business combinations involving entities under common control in accordance with ASC 805 - “Business Combinations”. The consideration paid and net assets obtained by the receiving entity in a business combination are measured at the carrying amount. The difference between the carrying amount of the net assets obtained from the combination and the carrying amount of the consideration paid for the combination is treated as an adjustment to equity. The financial statements of the receiving entity reports results of operations for the period in which the transfer occurs as though the transfer of net assets had occurred at the beginning of the period. Results of operations for that period comprise those of the previously separate entities combined from the beginning of the period to the date the transfer is completed and those of the combined operations from that date to the end of the period. Similarly, the receiving entity presents the statement of financial position and other financial information as of the beginning of the period as though the assets and liabilities had been transferred at that date.

 

In April 2020, the Company acquired Changchun Hualong for total consideration of $0.2 million. Before the acquisition, Hanlin Chen, the Company’s ultimate controlling shareholder, owned 52.1% of Changchun Hualong’s shares and the remaining 47.9% of the shares were owned by third parties. Therefore, this transaction was accounted for as a business combination under common control. In accordance with ASC 805 - “Business Combinations”, the consolidated financial statements of the Company were retrospectively adjusted to reflect the results of the acquired business as if it had been acquired at the beginning of the periods presented.

 
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, 2019, except for the adoption of ASC Topic 326 (Note 2(b)).

 

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3.Accounts and notes receivable, net

 

The Company’s accounts and notes receivable, net as of June 30, 2020 and December 31, 2019 are summarized as follows (figures are in thousands of USD):

 

   June 30, 2020   December 31, 2019 
Accounts receivable - unrelated parties  $121,549   $141,423 
Notes receivable - unrelated parties   51,786    72,797 
Total accounts and notes receivable - unrelated parties   173,335    214,220 
Less: allowance for doubtful accounts - unrelated parties   (3,276)   (2,379)
Accounts and notes receivable, net - unrelated parties   170,059    211,841 
Accounts and notes receivable - related parties   18,383    21,164 
Accounts and notes receivable, net  $188,442   $233,005 

  

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 June 30, 2020 and December 31, 2019, the Company pledged its notes receivable in amounts of $9.7 million and $9.7 million, respectively, as collateral for the government loans (See Note 7).

 

As of June 30, 2020 and December 31, 2019, the Company pledged its accounts and notes receivable in amounts of $2.2 million and $7.4 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholder upon maturity.

 
Provision for doubtful accounts and notes receivable reversed in the consolidated statements of operations amounted to $0.2 million and $0.7 million for the six months ended June 30, 2020 and 2019, respectively.

 

During the three months ended June 30, 2020, the Company’s five largest customers accounted for 38.4% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 10.1%. During the six months ended June 30, 2020, the Company’s five largest customers accounted for 44.4% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 21.1%. As of June 30, 2020, approximately 6.7% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

 

During the three months ended June 30, 2019, the Company’s five largest customers accounted for 46.9% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 22.6%. During the six months ended June 30, 2019, the Company’s five largest customers accounted for 45.1% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 20.2%. As of June 30, 2019, approximately 6.1% 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 June 30, 2020 and December 31, 2019 consisted of the following (figures are in thousands of USD):

 

   June 30, 2020   December 31, 2019 
Raw materials  $23,506   $21,464 
Work in process   9,177    9,469 
Finished goods   50,178    51,998 
Total  $82,861   $82,931 

 

The Company recorded $0.6 million and $1.1 million of inventory write-down to cost of product sold for the three months ended June 30, 2020 and 2019, respectively, and $1.4 million and $2.2 million for the six months ended June 30, 2020 and 2019, respectively.

 

5.Long-term investments

 

The Company’s long-term investments at June 30, 2020 and December 31, 2019, are summarized as follows (figures are in thousands of USD):

 

   June 30, 2020   December 31, 2019 
Chongqing Venture Fund  $14,830   $15,085 
Hubei Venture Fund (1)   13,956    8,730 
Suzhou Venture Fund (2)   8,379    9,141 
Beijing Henglong   4,722    4,630 
Henglong Tianyu   1,057    1,122 
Chongqing Jinghua   446    523 
Jiangsu Intelligent   384    411 
Total  $43,774   $39,642 

 

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(1) During the three and six months ended June 30, 2020, the Company made equity investments of $2.8 million and $5.4 million, respectively, in the Hubei Venture Fund.
   
(2) In January 2020, the Suzhou Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $0.4 million.

 

6.Property, plant and equipment, net

 

The Company’s property, plant and equipment, net as of June 30, 2020 and December 31, 2019 are summarized as follows (figures are in thousands of USD):

 

   June 30, 2020   December 31, 2019 
Costs:          
Buildings  $51,992   $51,771 
Machinery and equipment   203,180    199,592 
Electronic equipment   6,262    5,799 
Motor vehicles   4,732    5,229 
Construction in progress   27,674    33,063 
Total amount of property, plant and equipment   293,840    295,454 
Less: Accumulated depreciation (1)   (162,183)   (154,973)
Total amount of property, plant and equipment, net (2)(3)  $131,657   $140,481 

  

(1) Depreciation charges were $5.3 million and $5.3 million for the three months ended June 30, 2020 and 2019, respectively, and $10.6 million and $9.2 million for the six months ended June 30, 2020 and 2019, respectively.
   
(2) As of June 30, 2020 and December 31, 2019, the Company pledged property, plant and equipment with net book value of approximately $65.7 million and $50.9 million, respectively, as security for its comprehensive credit facilities with banks in China.
   
(3) Interest costs capitalized for the three months ended June 30, 2020 and 2019, were $0.3 million and $0.2 million, respectively, and $0.6 million and $0.3 million for the six months ended June 30, 2020 and 2019, respectively.

 

7.Loans

 

Loans consist of the following as of June 30, 2020 and December 31, 2019 (figures are in thousands of USD):

 

   June 30, 2020   December 31, 2019 
Short-term bank loans (1)  $19,564   $23,536 
Short-term bank loans (2)   26,445    20,663 
Short-term government loan (3)   2,119    2,150 
Current portion of long-term government loans (4)(5)   7,063    287 
Subtotal   55,191    46,636 
           
Long-term government loans (4)(5)   7,063    7,454 
Less: Current portion of long-term government loan (4)(5)   (7,063)   (287)
Subtotal   -    7,167 
           
Total bank and government loans  $55,191   $53,803 

 

(1) These loans are secured by property, plant and equipment and land use rights of the Company and are repayable within one year (See Note 6). As of June 30, 2020 and December 31, 2019, the weighted average interest rate was 4.1% and 4.8% per annum, respectively.

 

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(2)

On October 27, 2017, Henglong and Hubei Henglong entered into credit facility agreements with China CITIC Bank, the “CITIC Credit Facility”. The maturity date of the CITIC Credit Facility was originally set for October 27, 2018 and was extended to October 26, 2019. On December 5, 2019, the CITIC Credit Facility was further extended to June 5, 2020. The Company is currently in the process of negotiating with the bank to renew the credit facility. The Company’s property, plant and equipment and land use rights with book value amounting to $9.6 million were pledged as collateral for such loans. As of June 30, 2020 and December 31, 2019, the Company has drawn down loans with an aggregate amount of $23.7 million and $20.7 million, respectively.

 

On March 1, 2019, Henglong and Hubei Henglong entered into credit facility agreements with China Merchants Bank, the “Merchants Credit Facility”. The maturity date of the Merchants Credit Facility was originally set for February 29, 2020. The Company is currently in the process of negotiating with the bank to renew the credit facility. As of June 30, 2020 and December 31, 2019, the Company has drawn down loans with an aggregate amount of $2.7 million and nil, respectively. The Company has pledged cash of $1.1 million as collateral for such loans.

 

The weighted average interest rate of the loans as of June 30, 2020 and December 31, 2019 was 3.08% and 3.46% per annum, respectively.

   
(3) On December 26, 2019, the Company borrowed from the local government a loan of RMB 15.0 million, equivalent to approximately $2.1 million, with an interest rate of 3.48% per annum, which is due for repayment on December 25, 2020. Henglong pledged RMB 17.9 million, equivalent to approximately $2.5 million, of notes receivable as collateral for the local government loans (See Note 3).
   
(4) On November 13, 2017, the Company borrowed from the local government a loan of RMB 2.0 million, equivalent to approximately $0.3 million, with an interest rate of 4.75% per annum, which was due for repayment on November 12, 2020. In the first quarter of 2020, the Company received a notice from the government that the loan was reclassified as government subsidy, so repayment was no longer required. As a result, the Company reduced the loan balance and recorded it as other income in the consolidated statements of operations for the six months ended June 30, 2020.
   
(5) On August 7 and September 3, 2019, the Company borrowed from the local government loans of RMB 20.0 million and RMB 30.0 million, equivalent to approximately $2.8 million and $4.2 million, respectively. These loans are due for repayment on June 30, 2021 and have an interest rate of 3.80% per annum. Henglong pledged RMB 50.6 million, equivalent to approximately $7.2 million, of notes receivable as collateral for the local government loans (See Note 3).

 

The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of June 30, 2020, and management expects it will continue to comply with them.

 

8.Accounts and notes payable

 

The Company’s accounts and notes payable as of June 30, 2020 and December 31, 2019 are summarized as follows (figures are in thousands of USD):

 

   June 30, 2020   December 31, 2019 
Accounts payable - unrelated parties  $106,297   $110,246 
Notes payable - unrelated parties (1)   56,506    69,929 
Accounts and notes payable - unrelated parties   162,803    180,175 
Accounts and notes payable - related parties   9,233    6,492 
Total  $172,036   $186,667 

  

(1) Notes payable represent payables in the form of notes issued by the bank. As of June 30, 2020 and December 31, 2019, the Company has pledged cash of $24.2 million and $29.7 million, respectively; has pledged accounts and notes receivable of $2.2 million and $7.4 million, respectively; has used $31.9 million and $37.8 million, respectively, of its credit facilities that are pledged by property, plant and equipment with net book value of $65.7 million and $50.9 million, respectively; and has pledged land use right with net book value of $5.3 million and $5.5 million, respectively, as collateral for banks to endorse the payment to the noteholder upon maturity.

 

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9.Accrued expenses and other payables

 

The Company’s accrued expenses and other payables as of June 30, 2020 and December 31, 2019 are summarized as follows (figures are in thousands of USD):

 

   June 30, 2020   December 31, 2019 
Accrued expenses  $6,309   $6,306 
Accrued interest   631    104 
Current portion of other long-term payable (See Note 10)   3,671    3,593 
Other payables   2,692    2,431 
Dividends payable to holders of non-controlling interests   424    - 
Warranty reserves (1)   34,031    32,907 
Total  $47,758   $45,341 

 

(1) The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances.

 

For the three and six months ended June 30, 2020 and 2019, the warranties activities were as follows (figures are in thousands of USD): 

 

  

 

Three Months Ended

June 30,

  

Six Months Ended 

June 30,

 
   2020   2019   2020   2019 
Balance at beginning of the period  $32,642   $32,157   $32,907   $31,085 
Additions during the period   4,927    4,725    8,355    7,501 
Settlement within the period   (3,564)   (5,289)   (6,739)   (7,583)
Foreign currency translation loss/(gain)   26    (657)   (492)   (67)
Balance at end of the period  $34,031   $30,936   $34,031   $30,936 

 

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 June 30, 2020) and the sales price was RMB 100 million (equivalent to $14.1 million as of June 30, 2020). Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over 4 years with a quarterly payment of approximately $1.0 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as a sale. Therefore, the transaction was accounted for as a financing transaction by the Company. As of June 30, 2020, $3.7 million was recognized as other payable (See Note 9) and $3.0 million was recognized as other long-term payable to the buyer-lessor according to the contract term.

  

11.Additional paid-in capital

 

The Company’s positions in respect of the amounts of additional paid-in capital for the three and six months ended June 30, 2020 and 2019, are summarized as follows (figures are in thousands of USD):

 

  

Three Months Ended

June 30,

  

Six Months Ended 

June 30,

 
   2020   2019   2020   2019 
Balance at beginning of the period  $64,437   $64,466   $64,466   $64,466 
Acquisition of the non-controlling interest in USAI   -    -    (29)   - 
Acquisition of the non-controlling interest in Changchun Hualong (1)   (76)   -    (76)   - 
Deemed distribution to shareholders (1)   (88)   -    (88)   - 
Balance at end of the period  $64,273   $64,466   $64,273   $64,466 

 

(1) In April 2020, the Company acquired Changchun Hualong for total consideration of $0.2 million. Before acquisition, Hanlin Chen, the Company’s ultimate controlling shareholder owned 52.1% of Changchun Hualong’s shares and the remaining 47.9% were owned by third parties. Therefore, this transaction was accounted for as a business combination under common control. In accordance with ASC 805 - “Business Combinations”, the consolidated financial statements of the Company were retrospectively adjusted to reflect the results of the acquired business as if it had been acquired at the beginning of the periods presented.

 

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12.Retained earnings

 

Appropriated

 

Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three months ended June 30, 2020 and 2019, 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 six months ended June 30, 2020 and 2019, are summarized as follows (figures are in thousands of USD):

 

  

Three Months Ended

June 30,

  

Six Months Ended 

June 30,

 
   2020   2019   2020   2019 
Balance at beginning of the period  $11,265   $11,104   $11,265   $11,104 
Balance at end of the period  $11,265   $11,104   $11,265   $11,104 

 

 Unappropriated

 

The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three and six months ended June 30, 2020 and 2019, are summarized as follows (figures are in thousands of USD):

 

  

Three Months Ended

June 30,

  

Six Months Ended 

June 30,

 
   2020   2019   2020   2019 
Balance at beginning of the period  $220,481   $212,963   $221,298   $211,497 
Cumulative effect of accounting change - credit loss   -    -    (789)   - 
Net (loss)/income attributable to parent company   (4,098)   2,450    (4,126)   3,916 
Balance at end of the period  $216,383   $215,413   $216,383   $215,413 

 

13.Accumulated other comprehensive income

 

The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and six months ended June 30, 2020 and 2019, are summarized as follows (figures are in thousands of USD): 

 

  

Three Months Ended

June 30,

  

Six Months Ended 

June 30,

 
   2020   2019   2020   2019 
Balance at beginning of the period  $(7,970)  $7,761   $(3,462)  $1,855 
Foreign currency translation adjustment attributable to parent company   302    (6,382)   (4,206)   (476)
Balance at end of the period  $(7,668)  $1,379   $(7,668)  $1,379 

 

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 December 5, 2018, 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 December 4, 2019. The Board of Directors of the Company approved the extension of such program to December 4, 2020. As of each of June 30, 2020 and December 31, 2019, the Company had cumulatively repurchased 1,164,257 shares of the Company’s common stock since the inception of the program. The repurchased shares are presented as “treasury stock” on the balance sheet.

 

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15.Non-controlling interests

 

The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three and six months ended June 30, 2020 and 2019, are summarized as follows (figures are in thousands of USD):  

 

  

Three Months Ended

June 30,

  

Six Months Ended 

June 30,

 
   2020   2019   2020   2019 
Balance at beginning of the period  $18,694   $19,251   $20,250   $19,037 
Net loss attributable to non-controlling interests   (142)   (332)   (742)   (575)
Acquisition of the non-controlling interest in USAI   -    -    29    - 
Acquisition of the non-controlling interest in Changchun Hualong   (5)   -    (5)   - 
Cumulative effect of accounting change - credit loss   -    -    (102)   - 
Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries   -    (333)   (430)   (333)
Contribution by non-controlling shareholder of Wuhan Hyoseong   -    1,438    -    1,438 
Foreign currency translation adjustment attributable to non-controlling interests   56    (499)   (397)   (42)
Balance at end of the period  $18,603   $19,525   $18,603   $19,525 

  

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 24.

 

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 June 30, 2020 and December 31, 2019, the Company has customer deposits of $1.6 million and $1.3 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the six months ended June 30, 2020, $1.1 million was received and $0.8 million (including $0.8 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent 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.

  

17. Financial (expense)/income, net

 

During the three and six months ended June 30, 2020 and 2019, the Company’s financial (expense)/income is summarized as follows (figures are in thousands of USD):

 

  

Three Months Ended 

June 30,

  

Six Months Ended 

June 30,

 
   2020   2019   2020   2019 
Interest income  $397   $714   $748   $1,477 
Foreign exchange gain/(loss), net   (413)   853    (1,124)   (396)
Bank charges   (43)   (15)   (214)   (194)
Total financial (expense)/income, net  $(59)  $1,552   $(590)  $887 

 

18. Income tax

 

Income tax benefit was $0.1 million and income tax expense was $0.7 million for the three months ended June 30, 2020 and 2019, respectively. Income tax expense was $0.5 million and $0.9 million for the six months ended June 30, 2020 and 2019, respectively. The increase in income tax benefit was primarily due to the increase in loss before income tax expenses.

 

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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 June 30, 2020 and 2019, were as follows (figures are in thousands of USD, except share and per share amounts):

 

   Three Months Ended 
June 30,
 
   2020   2019 
Numerator:        
Net (loss)/income attributable to the parent company’s common shareholders - Basic and Diluted  $(4,098)  $2,450 
Denominator:          
Weighted average shares outstanding   31,174,045    31,497,723 
Dilutive effects of stock options   -    1,854 
Denominator for dilutive income per share - Diluted   31,174,045    31,499,577 
           
Net (loss)/income per share attributable to parent company’s common shareholders - Basic  $(0.13)  $0.08 
Net (loss)/income per share attributable to parent company’s common shareholders - Diluted  $(0.13)  $0.08 

  

 

The calculations of basic and diluted income per share attributable to the parent company for the six months ended June 30, 2020 and 2019, were as follows (figures are in thousands of USD, except share and per share amounts):

 

   Six Months Ended June 30, 
   2020   2019 
Numerator:          
Net (loss)/income attributable to the parent company’s common shareholders - Basic and Diluted  $(4,126)  $3,916 
Denominator:          
Weighted average shares outstanding   31,174,045    31,501,889 
Dilutive effects of stock options   37    3,832 
Denominator for dilutive income per share - Diluted   31,174,082    31,505,721 
           
Net (loss)/income per share attributable to parent company’s common shareholders - Basic  $(0.13)  $0.12 
Net (loss)/income per share attributable to parent company’s common shareholders - Diluted  $(0.13)  $0.12 

 

As of June 30, 2020 and 2019, the exercise prices for 30,000 shares and 112,500 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the three months ended June 30, 2020 and 2019, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.

 

As of June 30, 2020 and 2019, the exercise prices for 22,500 shares and 112,500 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the six months ended June 30, 2020 and 2019, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.

 

17

 

 

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 exchange 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.

  

21.Related party transactions and balances

 

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

 

Related sales

 

   Three Months Ended June 30, 
   2020   2019 
Merchandise sold to related parties  $16,105   $14,310 
Materials and others sold to related parties   446    435 
Rental income obtained from related parties   164    121 
Total  $16,715   $14,866 

  

   Six Months Ended June 30, 
   2020   2019 
Merchandise sold to related parties  $23,599   $27,146 
Materials and others sold to related parties   716    896 
Rental income obtained from related parties   241    201 
Total  $24,556   $28,243 

 

18

 

 

Related purchases

 

    Three Months Ended June 30, 
    2020    2019 
Materials purchased from related parties  $6,152   $6,130 
Equipment purchased from related parties   518    1,511 
Others purchased from related parties   -    10 
Total  $6,670   $7,651 

 

   Six Months Ended June 30, 
   2020   2019 
Materials purchased from related parties  $9,286   $11,634 
Equipment purchased from related parties   587    2,271 
Others purchased from related parties   4    21 
Total  $9,877   $13,926 

 

Related receivables

 

   June 30, 2020   December 31, 2019 
Accounts and notes receivable from related parties  $18,383   $21,164 

 

Related advance payments

 

   June 30, 2020   December 31, 2019 
Advance payments for property, plant and equipment to related parties  $2,446   $2,311 
Advance payments and others to related parties   1,004    1,287 
Total  $3,450   $3,598 

 

Related payables

 

   June 30, 2020   December 31, 2019 
Accounts and notes payable  $9,233   $6,492 

 

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

 

As of August 14, 2020, Hanlin Chen, the chairman of the board of directors of the Company, owns 57.3% 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

 

On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. The directors of the Company will continue to answer this complaint. Management expects the impact of the suit on the Company’s consolidated financial statements to be immaterial.

 

Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

 

19

 

 

Other commitments and contingencies

 

In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of June 30, 2020 (figures are in thousands of USD):

 

   Payment obligations by period 
   2020   2021   2022   Thereafter   Total 
Obligations for investment contracts (1)  $2,062   $424   $      -   $           -   $2,486 
Obligations for purchasing and service agreements   19,044    7,481    -    -    26,525 
Total  $21,106   $7,905   $-   $-   $29,011 

 

(1)

In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s shares. As of June 30, 2020, Hubei Henglong has completed a capital contribution of RMB 3.0 million, equivalent to approximately $0.4 million. According to the agreement, the remaining capital commitment of RMB 2.0 million, equivalent to approximately $0.3 million, will be paid in 2020.

 

In November 2019, Hubei Henglong entered into an agreement with other parties and committed to purchase 70% of the shares of Hefei Senye Light Plastic Technology Co., Ltd. for total consideration of RMB 33.6 million, equivalent to approximately $4.8 million. As of June 30, 2020, Hubei Henglong has paid the amount of RMB 18.0 million, equivalent to approximately $2.5 million, which was reported in other non-current assets as the transfer of shares had not been consummated. According to the agreement, of the remaining consideration of RMB 15.6 million, equivalent to approximately $2.2 million, $1.8 million will be paid in 2020 and the remaining $0.4 million will be paid in 2021.

 

23.Off-balance sheet arrangements

 

As of June 30, 2020 and December 31, 2019, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

24.Segment reporting

 

The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2019 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 June 30, 2020, the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis). The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).

 

As of June 30, 2019, the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis). The other nine sectors were engaged in the production and sale of sensor modular (USAI), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).

 

The Company’s product sector information for the three months and six months ended June 30, 2020 and 2019, is as follows (figures are in thousands of USD):

 

20

 

 

   Net Product Sales   Net (Loss)/Income 
   Three Months Ended   Three Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Henglong  $35,743   $36,575   $191   $2,208 
Jiulong   26,310    26,638    574    1,192 
Shenyang   3,445    5,411    505    704 
Wuhu   2,718    4,238    84    (212)
Hubei Henglong   11,419    27,584    (1,913)   2,419 
Henglong KYB   12,563    18,878    (532)   (1,469)
Other Entities   12,829    15,353    (585)   1,296 
Total Segments   105,027    134,677    (1,676)   6,138 
Corporate   -    -    (1,027)   (1,163)
Eliminations   (21,843)   (28,929)   (1,537)   (2,857)
Total  $83,184   $105,748   $(4,240)  $2,118 

 

   Net Product Sales   Net (Loss)/Income 
   Six Months Ended   Six Months Ended 
   June 30,   June 30, 
   2020   2019   2020   2019 
Henglong  $59,650   $77,539   $(491)  $87 
Jiulong   39,069    48,760    (876)   2,360 
Shenyang   6,238    10,306    335    405 
Wuhu   5,521    11,236    323    (387)
Hubei Henglong   39,551    55,759    2,152    3,791 
Henglong KYB   18,689    38,832    (1,439)   (1,865)
Other Entities   22,311    32,649    (2,520)   2,750 
Total Segments   191,029    275,081    (2,516)   7,141 
Corporate   -    -    (1,088)   (1,464)
Eliminations   (34,290)   (60,140)   (1,264)   (2,336)
Total  $156,739   $214,941   $(4,868)  $3,341 

 

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 relations with more than sixty vehicle manufacturers, including JAC Motors, Changan Automobile Group, BAIC Group, SAIC Group and Dongfeng Auto Group, the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd., the largest light vehicle manufacturer in China; Chery Automobile Co., Ltd., the largest state owned car manufacturer in China; BYD Auto Co., Ltd. and Zhejiang Geely Automobile Co., Ltd., the largest privately owned car manufacturers in China. The PRC-based joint ventures of General Motors (GM), Volkswagen, Citroen and Chrysler North America are all key customers. Starting in 2008, the Company has supplied power steering pumps and power steering gear to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gears 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. The Company has approximately 4,121 employees dedicated to design, development, manufacture and sales of its products. By leveraging its extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in automotive power steering systems and to further improve overall margins, long-term operating profitability and cash flows. To achieve these goals and to respond to industry factors and trends, the Company is continuing work to improve its operations and business structure and achieve profitable growth.

 

21

 

 

 

As a result of COVID-19 outbreak in the first quarter of 2020, the Company’s business operations, financial condition and operating results were significantly impacted. The Company’s net product sales decreased by 21.3% and gross profit margin decreased by 4.9% primarily due to the sharp decline of export sales as a result of the shut down of operations by the Company’s major customers in U.S. in the second quarter of 2020 compared with the same period of last year. The Company’s net product sales decreased by 27.4% and gross profit margin decreased by 1.5% in the first half of 2020 compared with the same period of last year. In addition, the Company’s businesses, results of operations, financial position and cash flows are anticipated to be materially and adversely affected in the rest of 2020 with potential continuing impacts on subsequent periods, including but not limited to the material adverse impact on the Company’s revenues as result of the suspension of operations, interruption of supply chain and reduction of demand by the Company’s customers. 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, 2019.

 

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. During the first quarter of 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and 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 RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts. Following the acquisition, Changchun Hualong was a wholly-owned subsidiary of the Company.

 

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.

  

22

 

 

The Company considers an accounting estimate to be critical if:

 

  · It requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate, and

 

  · Changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial condition or results of operations.

 

The table below presents information about the nature and rationale for the Company’s critical accounting estimates:

 

Balance Sheet
Caption
  Critical
Estimate
Item
  Nature of Estimates
Required
  Assumptions/Approaches
Used
  Key Factors

Accrued liabilities and other long-term liabilities

 

 

Warranty obligations

 

  Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs (Original Equipment Manufacturers) are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.   The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.    

·OEM sourcing

·OEM policy decisions regarding warranty claims

 

                 
Property, plant and equipment, intangible assets and other long-term assets  

 Valuation of long- lived assets and investments

 

  The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.   The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.   

·Future production estimates

·Customer preferences and decisions 

                 

Accounts

receivable  

 

 Allowance for

doubtful

accounts  

 

The Company is required from time to time to

review the credit of customers and make timely

provision of allowance for doubtful accounts.

  The Company estimates the collectability of the receivables based on the future cash flows using historical experiences.   Customer credit 
                 

Inventory

 

   Write-down of inventory   The Company is required from time to time to review the cash ability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories.   The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.  

·Future production estimates 

·Customer preferences and decisions

                 

Deferred income taxes

 

   Recoverability of deferred tax assets   The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.   The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry forward period, tax planning opportunities and other relevant considerations.    

·Tax law changes

·Variances in future projected profitability, including by taxing entity

 

Recent Accounting Pronouncements

 

Please see Note 2 to the consolidated financial statements under Item 1 of Part I of this report.

 

23

 

 

Results of Operations - Three Months Ended June 30, 2020 and 2019

 

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

 

   Three Months Ended June 30, 
   2020   2019   Change   Change% 
Net product sales  $83,184   $105,748   $(22,564)   -21.3%
Cost of products sold   75,353    90,563    (15,210)   -16.8 
Gain on other sales   838    2,485    (1,647)   -66.3 
Selling expenses   2,977    3,859    (882)   -22.9 
General and administrative expenses   4,759    4,434    325    7.3 
Research and development expenses   6,125    6,752    (627)   -9.3 
Other income/(expense), net   1,257    (447)   1,704    -381.2 
Interest expense   (446)   (731)   285    -39.0 
Income tax (benefit)/expense   (31)   674    (705)   -104.6 
Net (loss)/income   (4,240)   2,118    (6,358)   -300.2 
Net loss attributable to non-controlling interests   (142)   (332)   190    -57.2 
Net (loss)/income attributable to parent company’s common shareholders   (4,098)   2,450    (6,548)   -267.3%

 

Net Product Sales and Cost of Products Sold

 

   Net Product Sales   Cost of Products Sold 
   (in thousands of USD,
except percentages)
   (in thousands of USD,
except percentages)
 
   2020   2019   Change   2020   2019   Change 
Henglong  $35,743   $36,575   $(832)   -2.3%  $33,060   $36,311   $(3,251)   -9.0%
Jiulong   26,310    26,638    (328)   -1.2    23,823    23,339    484    2.1 
Shenyang   3,445    5,411    (1,966)   -36.3    2,755    4,208    (1,453)   -34.5 
Wuhu   2,718    4,238    (1,520)   -35.9    2,392    4,096    (1,704)   -41.6 
Hubei Henglong   11,419    27,584    (16,165)   -58.6    12,068    21,812    (9,744)   -44.7 
Henglong KYB   12,563    18,878    (6,315)   -33.5    12,060    17,676    (5,616)   -31.8 
Other Entities   12,829    15,353    (2,524)   -16.4    9,498    12,590    (3,092)   -24.6 
Total Segments   105,027    134,677    (29,650)   -22.0    95,656    120,032    (24,376)   -20.3 
Elimination   (21,843)   (28,929)   7,086    -24.5    (20,303)   (29,469)   9,166    -31.1 
Total  $83,184   $105,748   $(22,564)   -21.3%  $75,353   $90,563   $(15,210)   -16.8%

 

Net Product Sales

 

Net product sales were $83.2 million for the three months ended June 30, 2020, compared to $105.7 million for the same period in 2019, representing a decrease of $22.5 million, or 21.3%, mainly due to the impact of COVID-19.

 

Net sales of traditional steering products and parts were $67.7 million for the three months ended June 30, 2020, compared to $83.1 million for the same period in 2019, representing a decrease of $15.4 million, or18.5%. Net sales of electric power steering (“EPS”) were $15.5 million for the three months ended June 30, 2020 and $22.6 million for the same period in 2019, representing a decrease of $7.1 million, or 31.4%. As a percentage of net sales, sales of EPS were 18.6% for the three months ended June 30, 2020, compared with 21.4% for the same period in 2019.

 

24

 

 

The decrease in net product sales was due to the effects of three major factors: i) the decrease in sales volume led to a sales decrease of $10.8 million due to the decline of demand as a result of the suspension of manufacturing and operations of the Company’s customers due to the impact of COVID-19 around the world; ii) the decrease in average selling price of steering gears led to a sales decrease of $5.9 million; and iii) the depreciation of the RMB against the U.S. dollar in this quarter compared to the same quarter last year, resulting in a sales decrease of $5.8 million.

 

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

  

  · Henglong mainly engages in providing passenger vehicle steering systems. Net product sales for Henglong were $35.7 million for the three months ended June 30, 2020, compared with $36.6 million for the three months ended June 30, 2019, representing a decrease of $0.9 million, or 2.5%. A decrease in sales volume led to a sales decrease of $2.3 million, an increase in selling price led to a sales increase of $3.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $2.2 million.

   

  ·

Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for Jiulong were $26.3 million for the three months ended June 30, 2020, compared with $26.6 million for the three months ended June 30, 2019, representing a decrease of $0.3 million, or 1.1%. An increase in sales volume led to a sales increase of $2.8 million, a decrease in selling price led to a sales decrease of $2.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $1.0 million.

 

  · Shenyang mainly engages in providing vehicle steering systems to Shenyang Brilliance Jinbei Automobile Co., Ltd. (“Jinbei”), one of the major automotive manufacturers in China. Net product sales for Shenyang were $3.4 million for the three months ended June 30, 2020, compared to $5.4 million for the same period in 2019, representing a decrease of $2.0 million, or 37.0%. A decrease in sales volume led to a sales decrease of $1.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.2 million.

 

  · Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd. (“Chery”), one of the major automotive manufacturers in China. Net product sales for Wuhu were $2.7 million for the three months ended June 30, 2020, compared to $4.2 million for the same period in 2019, representing a decrease of $1.5 million, or 35.7%. A decrease in sales volumes led to a sales decrease of $1.5 million, an increase in selling prices led to a sales increase of $0.2 million and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.2 million.

 

  · Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for Hubei Henglong were $11.4 million for the three months ended June 30, 2020, compared with $27.6 million for the three months ended June 30, 2019, representing a decrease of $16.2 million, or 58.7%. A decrease in sales volume led to a sales decrease of $12.3 million, a decrease in selling price led to a sales decrease of $2.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $1.1 million.

 

  · Henglong KYB mainly engages in providing passenger EPS products. Net product sales for Henglong KYB were $12.6 million for the three months ended June 30, 2020, compared with $18.9 million for the three months ended June 30, 2019, representing a decrease of $6.3 million, or 33.3%. A decrease in sales volume led to a sales decrease of $4.5 million, a decrease in selling price led to a sales decrease of $1.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.7 million.

 

  · Net product sales for other entities were $12.8 million for the three months ended June 30, 2020, compared to $15.4 million for the same period in 2019, representing a decrease of $2.6 million, or 16.9%, mainly caused by decreases in sales of Jielong, Wuhu and Chongqing.

 

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Cost of Products Sold

 

For the three months ended June 30, 2020, the cost of products sold was $75.4 million, compared to $90.6 million for the same period of 2019, representing a decrease of $15.2 million, or 16.8%. The decrease in cost of sales was mainly due to the effect of the following major factors: i) the decrease in unit price led to a cost of sales decrease of $3.3 million; ii) the decrease in sales volume led to a cost of sales decrease of $7.0 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $4.9 million. Further analysis is as follows:

 

  · Cost of products sold for Henglong was $33.1 million for the three months ended June 30, 2020, compared to $36.3 million for the same period of 2019, representing a decrease of $3.2 million, or 8.8%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $2.2 million, an increase in unit cost resulting in a cost of sales increase of $0.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $1.8 million.

 

  ·

Cost of products sold for Jiulong was $23.8 million for the three months ended June 30, 2020, compared to $23.3 million for the same period of 2019, representing an increase of $0.5 million, or 2.1%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $2.3 million, a decrease in unit cost resulting in a cost of sales decrease of $0.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.9 million.

 

  · Cost of products sold for Shenyang was $2.8 million for the three months ended June 30, 2020, compared to $4.2 million for the same period of 2019, representing a decrease of $1.4 million, or 33.3%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $1.5 million, an increase in unit cost resulting in a cost of sales increase of $0.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.1 million.

  

  · Cost of products sold for Wuhu was $2.4 million for the three months ended June 30, 2020, compared to $4.1 million for the same period of 2019, representing a decrease of $1.7 million, or 41.5%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $1.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.2 million.

 

  · Cost of products sold for Hubei Henglong was $12.1 million for the three months ended June 30, 2020, compared to $21.8 million for the same period of 2019, representing a decrease of $9.7 million, or 44.5%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $11.4 million, an increase in unit cost resulting in a cost of sales increase of $2.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.8 million.

 

  · Cost of products sold for Henglong KYB was $12.1 million for the three months ended June 30, 2020, compared to $17.7 million for the same period of 2019, representing a decrease of $5.6 million, or 31.6%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $4.0 million, a decrease in unit cost resulting in a cost of sales decrease of $0.9 million, and the depreciation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.7 million.

 

  · Cost of products sold for other entities was $9.5 million for the three months ended June 30, 2020, compared to $12.6 million for the same period in 2019, representing a decrease of $3.1 million, or 24.6%.

 

Gross margin was 9.4% for the three months ended June 30, 2020, compared to 14.4% for the same period of 2019, representing a decrease of 5.0%, mainly due to the changes in the product mix for the three months ended June 30, 2020. There was a significant decline in export sales to United States, which were the Company’s highest gross margin products, due to COVID-19, which resulted in the temporary shutdown of operations of our major customers in the second quarter of 2020.

   

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Selling Expenses

 

Selling expenses were $3.0 million for the three months ended June 30, 2020, as compared with $3.9 million for the same period of 2019, representing a decrease of $0.9 million, or 23.1%, which was primarily due to lower freight expenses, resulting from the suspension of Hubei Henglong’s operations for most of the quarter due to the COVID-19 pandemic.

 

General and Administrative Expenses

 

General and administrative expenses were $4.8 million for the three months ended June 30, 2020, as compared to $4.4 million for the same period of 2019, representing an increase of $0.4 million, or 9.1%, which was primarily due to higher office expenses.

 

Research and Development Expenses

 

Research and development expenses were $6.1 million for the three months ended June 30, 2020, as compared to $6.8 million for the three months ended June 30, 2019, representing a decrease of $0.7 million, or 10.3%, which was mainly due to cost control on research and development expenditures.

 

Other Income/(Expense), Net

 

Other income, net was $1.3 million for the three months ended June 30, 2020, compared to other expense, net of $0.4 million for the three months ended June 30, 2019, representing an increase of $1.7 million, which was mainly due to the various government subsidies of $1.8 million received in the second quarter of 2020, whereas only $0.2 million was received in the same period of last year.

 

Interest Expense

 

Interest expense was $0.4 million for the three months ended June 30, 2020, compared to $0.7 million for the three months ended June 30, 2019, which was primarily due to higher capitalized interest recognized in the second quarter of 2020.

 

Income Taxes

 

Income tax benefit was $0.1 million for the three months ended June 30, 2020, compared to income tax expense of $0.7 million for the three months ended June 30, 2019, which was due to the increase in loss before income tax expenses of $7.4 million.

 

Net Loss Attributable to Non-controlling Interests

 

Net loss attributable to non-controlling interests amounted to $0.1 million for the three months ended June 30, 2020, compared to 0.3 million for the three months ended June 30, 2019.

 

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

 

Net loss attributable to parent company’s common shareholders was $4.1 million for the three months ended June 30, 2020, compared to net income attributable to parent company’s common shareholders of $2.5 million for the three months ended June 30, 2019, representing an increase in net loss of $6.6 million.

 

Results of Operations - Six Months Ended June 30, 2020 and 2019

 

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

 

   Six Months Ended June 30, 
   2020   2019   Change   Change% 
Net product sales  $156,739   $214,941   $(58,202)   -27.1%
Cost of products sold   137,756    185,711    (47,955)   -25.8 
Gain on other sales   1,438    3,754    (2,316)   -61.7 
Selling expenses   5,095    6,944    (1,849)   -26.6 
General and administrative expenses   8,188    9,024    (836)   -9.3 
Research and development expenses   11,318    13,355    (2,037)   -15.3 
Other income, net   1,374    960    414    43.1 
Interest expense   (811)   (1,299)   488    -37.6 
Income taxes   483    872    (389)   -44.6 
Net (loss)/income   (4,868)   3,341    (8,209)   -245.7 
Net loss attributable to non-controlling interests   (742)   (575)   (167)   29.0 
Net (loss)/income attributable to parent company’s common shareholders   (4,126)   3,916    (8,042)   -205.4%

 

Net Product Sales and Cost of Products Sold

 

   Net Product Sales   Cost of Products Sold 
   (in thousands of USD,
except percentages)
   (in thousands of USD,
except percentages)
 
   2020   2019   Change   2020   2019   Change 
Henglong  $59,650   $77,539   $(17,889)   -23.1%  $56,129   $77,053   $(20,924)   -27.2%
Jiulong   39,069    48,760    (9,691)   -19.9    37,170    42,176    (5,006)   -11.9 
Shenyang   6,238    10,306    (4,068)   -39.5    5,176    8,754    (3,578)   -40.9 
Wuhu   5,521    11,236    (5,715)   -50.9    4,767    10,841    (6,074)   -56.0 
Hubei Henglong   39,551    55,759    (16,208)   -29.1    31,375    43,732    (12,357)   -28.3 
Henglong KYB   18,689    38,832    (20,143)   -51.9    18,143    36,806    (18,663)   -50.7 
Other Entities   22,311    32,649    (10,338)   -31.7    17,886    27,214    (9,328)   -34.3 
Total Segments   191,029    275,081    (84,052)   -30.6    170,646    246,576    (75,930)   -30.8 
Elimination   (34,290)   (60,140)   25,850    -43.0    (32,890)   (60,865)   27,975    -46.0 
Total  $156,739   $214,941   $(58,202)   -27.1%  $137,756   $185,711   $(47,955)   -25.8%

 

Net Product Sales

 

Net product sales were $156.7 million for the six months ended June 30, 2020, compared to $214.9 million for the same period of 2019, representing a decrease of $58.2 million, or 27.1%, mainly due to the impact of the COVID-19 pandemic.

 

Net sales of traditional steering products and parts were $133.1 million for the six months ended June 30, 2020, compared to $170.0 million for the same period in 2019, representing a decrease of $36.9 million, or 21.7%. Net sales of electric power steering (“EPS”) were $23.6 million for the six months ended June 30, 2020 and $44.9 million for the same period in 2019, representing a decrease of $21.3 million, or 47.4%. As a percentage of net sales, sales of EPS were 15.1% for the six months ended June 30, 2020, compared to 20.9% for the same period in 2019.

 

The decrease in net product sales was due to the effects of three major factors: i) the decrease in sales volume led to a sales decrease of $41.2 million due to the significant decline of demand as a result of the suspension of manufacturing and operations of the Company’s customers due to COVID-19; ii) the decrease in average selling price of steering gears led to a sales decrease of $7.5 million; and iii) the depreciation of the RMB against the U.S. dollar in this period compared to the same period last year resulted in a sales decrease of $9.5 million.

 

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

  

  Henglong mainly engages in providing passenger vehicle steering systems. Net product sales for Henglong were $59.7 million for the six months ended June 30, 2020, compared with $77.5 million for the six months ended June 30, 2019, representing a decrease of $17.8 million, or 23.0%. A decrease in sales volume led to a sales decrease of $20.1 million, an increase in selling price led to a sales increase of $5.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $2.7 million.

   

 

Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for Jiulong were $39.1 million for the six months ended June 30, 2020, compared with $48.8 million for the six months ended June 30, 2019, representing a decrease of $9.7 million, or 19.9%. A decrease in sales volume led to a sales decrease of $4.9 million, a decrease in selling price led to a sales decrease of $3.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $1.7 million.

 

  Shenyang mainly engages in providing vehicle steering systems to Shenyang Brilliance Jinbei Automobile Co., Ltd., “Jinbei”, one of the major automotive manufacturers in China. Net product sales for Shenyang were $6.2 million for the six months ended June 30, 2020, compared to $10.3 million for the same period in 2019, representing a decrease of $4.1 million, or 39.8%. A decrease in sales volumes led to a sales decrease of $3.4 million, a decrease in selling price led to a sales decrease of $0.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.4 million.

 

  Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd., “Chery”, one of the major automotive manufacturers in China. Net product sales for Wuhu were $5.5 million for the six months ended June 30, 2020, compared to $11.2 million for the same period in 2019, representing a decrease of $5.7 million, or 50.9%. A decrease in sales volume led to a sales decrease of $5.9 million, an increase in selling price led to a sales increase of $0.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.4 million.

 

  Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for Hubei Henglong were $39.6 million for the six months ended June 30, 2020, compared to $55.8 million for the same period in 2019, representing a decrease of $16.2 million, or 29.0%. A decrease in sales volume led to a sales decrease of $11.3 million, a decrease in selling price led to a sales decrease of $2.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $2.0 million.

 

  Henglong KYB mainly engages in providing passenger EPS products. Net product sales for Henglong KYB were $18.7 million for the six months ended June 30, 2020, compared with $38.8 million for the six months ended June 30, 2019, representing a decrease of $20.1 million, or 51.8%. A decrease in sales volume led to a sales decrease of $16.8 million, a decrease in selling price led to a sales decrease of $1.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $1.4 million.

 

  Net product sales for other entities were $22.3 million for the six months ended June 30, 2020, compared to $32.6 million for the same period in 2019, representing a decrease of $10.3 million, or 31.6%.

 

Cost of Products Sold

 

For the six months ended June 30, 2020, the cost of products sold was $137.8 million, compared to $185.7 million for the same period of 2019, representing a decrease of $47.9 million, or 25.8%. The decrease in cost of sales was mainly due to the effect of the following major factors: i) the decrease in sales volumes led to a cost of sales decrease of $35.3 million; ii) the decrease in unit cost led to a cost of sales decrease of $4.1 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $8.5 million. Further analysis is as follows:

 

  Cost of products sold for Henglong was $56.1 million for the six months ended June 30, 2020, compared to $77.1 million for the same period of 2019, representing a decrease of $21.0 million, or 27.2%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $20.3 million, an increase in unit cost resulting in a cost of sales increase of $2.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $2.7 million.

 

   •

Cost of products sold for Jiulong was $37.2 million for the six months ended June 30, 2020, compared to $42.2 million for the same period of 2019, representing a decrease of $5.0 million, or 11.8%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $4.2 million, an increase in unit cost resulting in a cost of sales increase of $0.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $1.5 million.

 

29

 

 

  Cost of products sold for Shenyang was $5.2 million for the six months ended June 30, 2020, compared to $8.8 million for the same period of 2019,representing a decrease of $3.6 million, or 40.9%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $3.1 million, a decrease in unit cost resulting in a cost of sales decrease of $0.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.3 million.
   
  Cost of products sold for Wuhu was $4.8 million for the six months ended June 30, 2020, compared to $10.8 million for the same period of 2019, representing a decrease of $6.0 million, or 55.6%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $5.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.4 million.
     

 

  Cost of products sold for Hubei Henglong was $31.4 million for the six months ended June 30, 2020, compared to $43.7 million for the same period of 2019, representing a decrease of $12.3 million, or 28.1%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $11.2 million, an increase in unit cost resulting in a cost of sales increase of $0.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $1.5 million.

 

  Cost of products sold for Henglong KYB was $18.1 million for the six months ended June 30, 2020, compared to $36.8 million for the same period of 2019, representing a decrease of $18.7 million, or 50.8%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $16.0 million, a decrease in unit cost resulting in a cost of sales decrease of $1.4 million, and the depreciation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $1.3 million.

 

  Cost of products sold for other entities was $17.9 million for the six months ended June 30, 2020, compared to $27.2 million for the same period in 2019, representing a decrease of $9.3 million, or 34.2%.

 

Gross margin was 12.1% for the six months ended June 30, 2020, compared to 13.6% for the same period of 2019.

   

Selling Expenses

 

Selling expenses were $5.1 million for the six months ended June 30, 2020, as compared with $6.9 million for the same period of 2019, representing a decrease of $1.8 million, or 26.1%, which was primarily due to the lower freight expenses, resulting from the temporary suspension of the Company’s operations due to the COVID-19 pandemic.  

 

General and Administrative Expenses

 

General and administrative expenses were $8.2 million for the six months ended June 30, 2020, as compared to $9.0 million for the same period of 2019, representing a decrease of $0.8 million, or 8.9%, which was mainly due to lower office expenses, resulting from the temporary suspension of the Company’s operations due to the COVID-19 pandemic.

 

Research and Development Expenses

 

Research and development expenses were $11.3 million for the six months ended June 30, 2020, as compared to $13.4 million for the six months ended June 30, 2019, representing a decrease of $2.1 million, or 15.7%, which was mainly due to cost control on research and development expenditures and the temporary suspension of the Company’s operations due to the COVID-19 pandemic.

 

Other Income, Net

 

Other income, net was $1.4 million for the six months ended June 30, 2020, compared to $1.0 million for the six months ended June 30, 2019, representing an increase of $0.4 million, which was mainly due to the various government subsidies of $2.3 million received in the first half of 2020, whereas only $1.6 million was received in the same period of last year.

 

Interest Expense

 

Interest expense was $0.8 million for the six months ended June 30, 2020, compared to $1.3 million for the six months ended June 30, 2019, primarily as a result of higher capitalized interest recognized in 2020.

 

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Income Taxes

 

Income tax expense was $0.5 million for the six months ended June 30, 2020, compared to $0.9 million for the six months ended June 30, 2019, which was due to the increase in loss before income tax expenses of $8.4 million.

 

Net Loss Attributable to Non-controlling Interests

 

Net loss attributable to non-controlling interests amounted to $0.7 million for the six months ended June 30, 2020, compared to $0.6 million for the six months ended June 30, 2019.

 

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

 

Net loss attributable to parent company’s common shareholders was $4.1 million for the six months ended June 30, 2020, compared to net income attributable to parent company’s common shareholders of $3.9 million for the six months ended June 30, 2019, representing an increase in net loss of $8.0 million.

 

Liquidity and Capital Resources

 

Capital Resources and Use of Cash

 

The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of June 30, 2020, the Company had cash and cash equivalents and short-term investments of $103.1 million, compared to $82.5 million as of December 31, 2019, representing an increase of $20.6 million, or 25.0%. 

 

The Company had working capital (total current assets less total current liabilities) of $116.7 million as of June 30, 2020, compared to $137.5 million as of December 31, 2019, representing a decrease of $20.8 million, or 15.1%.

 

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 expect that COVID-19 will have material and adverse impacts on our cash flow for the rest of 2020 with potential continuing impacts on subsequent periods. 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 $55.2 million (See Note 7) and bankers’ acceptances of $58.3 million (See Note 8) as of June 30, 2020. 

 

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 $15.0 million over the next 12 months. If the Company wishes to obtain the same amount of bank loans and banker's acceptances, it will have to provide additional mortgages of $15.0 million upon the maturity 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 $7.9 million, which is 52.9%, the mortgage rate, of $15.0 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 June 30, 2020, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD): 

 

   Bank  Due
Date
  Amount
Available (3)
   Amount
Used (4)
   Assessed
Mortgage
Value (5)
 
1.  Comprehensive credit facilities  Bank of China (2)    Sep-2020  $16,385   $12,148   $- 
                        
2.  Comprehensive credit facilities  Hubei Bank  Apr-2022   25,426    9,640    65,850 
                      
3.  Comprehensive credit facilities  Shanghai Pudong Development Bank (1)(2)  Jul-2020   18,363    9,508    20,764 
                      
4.  Comprehensive credit facilities  China CITIC Bank (1)(2)  Jun-2020   72,039    37,846    20,123 
   China CITIC Bank  Jun-2022   3,051    1,978    6,230 
                       
5.  Comprehensive credit facilities  China Everbright Bank  Mar-2021   4,238    2,842    8,983 
                      
6.  Comprehensive credit facilities  China Merchants Bank (1) (2)  Feb-2020   21,188    1,606    - 
                      
7.  Comprehensive credit facilities  Bank of Chongqing  Sep-2021   706    212    2,206 
                      
8.  Comprehensive credit facilities  Agricultural Bank of China  Mar-2021   988    988    3,925 
                      
9.  Comprehensive credit facilities  Huishang Bank  May-2021   1,413    -    - 
                      
Total        $163,797   $76,768   $128,081 

 

(1) These facilities have expired. The Company is currently in the process of negotiating with these banks to renew the credit facilities.
   
(2) The comprehensive credit facilities with Shanghai Pudong Development Bank are guaranteed by Jielong and Hubei Henglong in addition to the above pledged assets. The comprehensive credit facilities with China CITIC Bank are guaranteed by Henglong and Hubei Henglong in addition to the above pledged assets. The comprehensive credit facilities with Bank of China are guaranteed by Hubei Henglong. The comprehensive credit facilities with China Merchants Bank are guaranteed by Hubei Henglong.
   
(3) “Amount available” is used for the drawdown of bank loans and issuance of bank notes at the Company’s discretion. If the Company elects to utilize the facility by issuance of bank notes, additional collateral is requested to be pledged to the bank.
   
(4) “Amount used” represents the credit facilities used by the Company for the purpose of bank loans or notes payable during the facility contract period. The loans or notes payable under the credit facilities will remain outstanding regardless of the expiration of the relevant credit facilities until the separate loans or notes payable expire. The amount used includes bank loans of $44.9 million and notes payable of $31.9 million as of June 30, 2020.
   
(5) In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of June 30, 2020, the pledged assets included property, plant and equipment and land use rights with an aggregate assessed value of $128.1 million.

  

The Company may request the banks to issue notes payable or bank loans within its credit line using a 365-day revolving line.

 

The Company’s bank loan terms range from 6 months to 24 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 $20.8 million as security for its revolving comprehensive credit facility with Shanghai Pudong Development Bank.

 

2. Land use rights and buildings with an assessed value of approximately $20.1 million as security for its comprehensive credit facility with China CITIC Bank Wuhan branch.

 

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3. Land use rights and buildings with an assessed value of approximately $6.2 million as security for its comprehensive credit facility with China CITIC Bank Shenyang branch.

 

4. Equipment with an assessed value of approximately $65.9 million as security for its revolving comprehensive credit facility with Hubei Bank.

 

5. Land use rights and buildings with an assessed value of approximately $9.0 million as security for its comprehensive credit facility with China Everbright Bank.

 

6. Land use rights and buildings with an assessed value of approximately $3.9 million as security for its comprehensive credit facility with Agricultural Bank of China.

 

7. Land use rights and buildings with an assessed value of approximately $2.2 million as security for its comprehensive credit facility with Bank of Chongqing.

 

Short-term and Long-term Loans

  

The following table summarizes the contract information of short-term and long-term borrowings between the banks, government and the Company as of June 30, 2020 (figures are in thousands of USD).

  

 Bank
Government
  Purpose   Borrowing  Date  Borrowing
Term
(Months)
   Annual
Interest
Rate
   Date of
  Interest 
Payment
  Due Date  Amount 
Payable on
Due Date
 
China CITIC Bank (1)  Working Capital  Jul 08, 2019   12    3.47%  Pay in arrear  Jul 03, 2020   1,291 
                            
China CITIC Bank (1)  Working Capital  Jul 09, 2019   12    3.47%  Pay in arrear  Jul 07, 2020   4,312 
                            
China CITIC Bank (1)  Working Capital  Jul 09, 2019   12    3.47%  Pay in arrear  Jul 07, 2020   1,760 
                            
China CITIC Bank (1)  Working Capital  Aug 06, 2019   12    5.22%  Pay monthly  Aug 06, 2020   1,978 
                            
Financial Bureau of Jingzhou Development Zone  Working Capital  Aug 07, 2019   23    3.80%  Pay annually  Jun 30, 2021   2,825 
                            
Financial Bureau of Jingzhou Development Zone  Working Capital  Sep 03, 2019   22    3.80%  Pay annually  Jun 30, 2021   4,238 
                            
China CITIC Bank  Working Capital  Sep 11, 2019   12    3.15%  Pay in arrear  Sep 09, 2020   2,533 
                            
China CITIC Bank  Working Capital  Sep 20, 2019   12    3.04%  Pay in arrear  Sep 11, 2020   1,042 
                            
Financial Bureau of Jingzhou Development Zone  Working Capital  Dec 26, 2019   12    3.48%  Pay annually  Dec 25, 2020   2,119 
                            
China Merchants Bank (1)  Working Capital  Jan 21, 2020   6    2.78%  Pay in arrear  Jul 19, 2020   2,702 
                            
Bank of Chongqing  Working Capital  Feb 18, 2020   12    4.35%  Pay monthly  Feb 17, 2021   212 
                            
Agricultural Bank of China  Working Capital  Mar 25, 2020   12    4.05%  Pay monthly  Mar 22, 2021   989 
                            
China CITIC Bank  Working Capital  Mar 27, 2020   12    2.50%  Pay in arrear  Mar 26, 2021   3,994 
                            
China CITIC Bank  Working Capital  Mar 27, 2020   12    2.50%  Pay in arrear  Mar 26, 2021   3,566 
                            
Bank of China  Working Capital  Apr 29, 2020   12    3.92%  Pay monthly  Apr 28, 2021   5,650 
                            
China CITIC Bank  Working Capital  Apr 29, 2020   12    4.35%  Pay monthly  Apr 29, 2021   1,413 
                            
China CITIC Bank  Working Capital  May 20, 2020   12    4.35%  Pay monthly  May 20, 2021   1,413 
                            
China CITIC Bank  Working Capital  May 29, 2020   12    4.00%  Pay monthly  May 29, 2021   1,413 
                            
China CITIC Bank  Working Capital  Jun 19, 2020   12    2.50%  Pay in arrear  Jun 18, 2021   2,533 
                            
China CITIC Bank  Working Capital  Jun 19, 2020   12    2.50%  Pay in arrear  Jun 18, 2021   2,711 
                            
Bank of China  Working Capital  Jun 28, 2020   12    3.80%  Pay monthly  Jun 27, 2021   6,497 
                         $55,191 

 

(1) These bank loans were repaid between July and August 2020 when they became due.

 

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The Company must use the loans for the purpose described and repay the principal outstanding on the specified date in the table. If it fails to do so, it will be charged additional 30% to 100% penalty interest.

 

The Company has complied with such financial covenants as of June 30, 2020, and management expects it will continue to comply with them.

  

Notes Payable

 

The following table summarizes the contract information of issuing notes payable between the banks and the Company as of June 30, 2020 (figures are in thousands of USD):

 

Purpose  Term (Months)   Due Date   Amount
Payable on
Due Date
 
Working Capital (1)   6    Jul. 2020    9,985 
Working Capital   6    Aug. 2020    71 
Working Capital   6    Sep. 2020    11,277 
Working Capital   6    Oct. 2020    14,873 
Working Capital   6    Nov. 2020    13,091 
Working Capital   6    Dec. 2020    8,985 
Total                     58,282 

 

  (1) The notes payable were repaid in full on their respective due dates.

 

The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit sufficient cash in the designated account of the bank 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 a penalty interest at 50% of the loan rate that is published by the People’s Bank of China for the same period. The Company complied with such financial covenants as of June 30, 2020, and management expects it will continue to comply with them. 

 

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Cash Flows

 

(a) Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2020 was $31.4 million, compared with net cash used in operating activities of $25.7 million for the same period of 2019, representing an increase in net cash inflows by $57.1 million, which was mainly due to (1) the decrease in net income excluding non-cash items by $6.4 million and (2) the increase in cash inflows from movements of operating assets and liabilities by $63.5 million.

 

(b) Investing Activities

 

Net cash used in investing activities for the six months ended June 30, 2020 was $30.6 million, as compared to $9.8 million for the same period of 2019, representing an increase in net cash outflows by $20.8 million, which was mainly due to the net effect of (1) a decrease in payments to acquire property, plant and equipment by $5.8 million, and (2) a combination of other factors contributing an increase of cash outflows by $15.0 million, including an increase in purchase of short-term investment and long-term time deposits by $10.1 million, and the decrease in cash received from proceeds from maturities of short-term investments by $11.3 million.

   

(c) Financing Activities

 

Net cash provided by financing activities for the six months ended June 30, 2020 was $0.2 million, compared to $8.8 million for the same period of 2019, representing a decrease in net cash inflows by $8.6 million, which was mainly due to the net effect of (1) an increase in proceeds from bank loan by $7.1 million, (2) an increase in repayment of bank loans by $15.0 million, and (3) a decrease in cash received from capital contributions by non-controlling interest holder by $1.2 million.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2020 and December 31, 2019, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 regarding this matter.

   

ITEM 4. CONTROLS AND PROCEDURES.

 

A. Disclosure Controls and Procedures

 

The Company’s management, under the supervision and with the participation of its chief executive officer and chief financial officer, Messrs. Wu Qizhou and Li Jie, respectively, evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2020, 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 June 30, 2020.

 

The Company’s disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of its disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

  

  B. Changes in Internal Control Over Financial Reporting

 

There have been no changes in the Company’s internal control over financial reporting during the three months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. The directors of the Company will continue to answer this complaint. Management expects the impact of the suit on the Company’s consolidated financial statements to be immaterial.

 

Other than as described above, the Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

  

ITEM 1A. RISK FACTORS.

 

The following language is added to the risk factor “The audit report included in this annual report is prepared by an auditor that is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection” disclosed in Item 1A of the Company’s 2019 Annual Report on Form 10-K:

 

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China's, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of Congress that would require the SEC to maintain a list of issuers for which the PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for such issuers and, beginning in 2025, the delisting from national securities exchanges of issuers included on the SEC’s list for three consecutive years.

 

On May 20, 2020, the U.S. Senate passed S.945, the Holding Foreign Companies Accountable Act, or the Kennedy Bill. On July 21, 2020, the U.S. House of Representatives approved its version of the National Defense Authorization Act for Fiscal Year 2021, which contains provisions comparable to the Kennedy Bill. If either of these bills is enacted into law, it would amend the Sarbanes-Oxley Act of 2002 to direct the SEC to prohibit securities of any registrant from being listed on any of the U.S. securities exchanges or traded “over-the-counter” if the auditor of the registrant’s financial statements is not subject to PCAOB inspection for three consecutive years after the law becomes effective. Enactment of any of such legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, the market price of our shares could be adversely affected, and we could be delisted if we are unable to cure the situation to meet the PCAOB inspection requirement in time. It is unclear if and when any of such proposed legislation will be enacted. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have a material and adverse impact on the stock performance of China-based issuers listed in the United States, which include us.

 

Other than the above, there have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2019 Annual Report on Form 10-K.

  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

  

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ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

INDEX TO EXHIBITS

 

Exhibit
Number
  Description
3.1(i)   Certificate of Incorporation (incorporated by reference from the filing on Form 10SB12G File No. 000-33123).
     
3.1(ii)   Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123).
     
10.1   Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).
     
10.2   Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).
     
10.3   English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2018).
     
31.1   Rule 13a-14(a) Certification*
     
31.2   Rule 13a-14(a) Certification*
     
32.1   Section 1350 Certification*
     
32.2   Section 1350 Certification*

 

101*   The following materials from the China Automotive Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, were filed on August 14, 2020 formatted in Extensible Business Reporting Language (XBRL):
    (i)   Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income,
       
    (ii)   Condensed Unaudited Consolidated Balance Sheets,
       
    (iii)   Condensed Unaudited Consolidated Statements of Cash Flows, and
       
    (iv)   related notes
       
    *   filed herewith

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  CHINA AUTOMOTIVE SYSTEMS, INC.
  (Registrant)
     
Date: August 14, 2020 By: /s/ Qizhou Wu
    Qizhou Wu
    President and Chief Executive Officer
     
Date: August 14, 2020 By: /s/ Jie Li
    Jie Li
    Chief Financial Officer

 

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