UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

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

 

For the quarterly period ended September 30, 20172020

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- 79127901 
 
Issuer’sRegistrant’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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 (Do not check if a smaller
reporting company)		¨x

Smaller reporting company

Emerging growth company 

x

¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes           ¨           No           x

 

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

Title of each classTrading symbolName of each exchange on which registered
Common Stock, $0.0001 par valueCAASThe Nasdaq Capital Market

As of November 9, 2017,12, 2020, the Company had 31,644,00430,851,776 shares of common stock issued and outstanding.

 

 

 

 

  

CHINA AUTOMOTIVE SYSTEMS, INC.

 

INDEX

 

    Page
  Part I — Financial Information  
     
Item 1. Unaudited Financial Statements. 4
  Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months and Nine Months Ended September 30, 20172020 and 20162019 4
  Condensed Unaudited Consolidated Balance Sheets as of September 30, 20172020 and December 31, 20162019 6
  Condensed Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 20172020 and 20162019 7
  Notes to Condensed Unaudited Consolidated Financial Statements 98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 3224
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 5138
Item 4. Controls and Procedures. 5138
     
  Part II — Other Information  
     
Item 1. Legal Proceedings. 5139
Item 1A. Risk Factors. 5239
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 5240
Item 3. Defaults Upon Senior Securities. 5240
Item 4. Mine Safety Disclosures. 5240
Item 5. Other Information. 5241
Item 6. Exhibits. 5241
     
Signatures   5342

 

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, 2016,2019, 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 September 30,  Three Months Ended September 30, 
 2017  2016  2020  2019 
Net product sales ($7,563 and $9,950 sold to related parties for the three months ended September 30, 2017 and 2016) $118,365  $94,626 
Cost of products sold ($6,549 and $5,869 purchased from related parties for the three months ended September 30, 2017 and 2016)  95,878   74,641 
Net product sales ($16,840 and $12,277 sold to related parties for the three months ended September 30, 2020 and 2019) $114,417  $100,542 
Cost of products sold ($7,012 and $6,474 purchased from related parties for the three months ended September 30, 2020 and 2019)  100,842   83,225 
Gross profit  22,487   19,985   13,575   17,317 
Gain on other sales  553   22   1,497   1,102 
Less: Operating expenses                
Selling expenses  4,537   3,840   3,800   3,563 
General and administrative expenses  4,390   3,741   5,142   4,429 
Research and development expenses  9,194   6,723   6,072   5,988 
Total operating expenses  18,121   14,304   15,014   13,980 
Income from operations  4,919   5,703   58   4,439 
Other income  100   420   350   171 
Interest expense  (318)  (201)  (403)  (787)
Financial income, net  1,027   800 
Income before income tax expenses and equity in earnings of affiliated companies  5,728   6,722 
Less: Income taxes  991   1,167 
Equity in earnings of affiliated companies  491   304 
Financial (expense)/income, net  (2,313)  1,552 
(Loss)/income before income tax expenses and equity in earnings/(loss) of affiliated companies  (2,308)  5,375 
Less: Income tax (benefit)/expense  (189)  948 
Equity in earnings/(loss) of affiliated companies  3,632   (226)
Net income  5,228   5,859   1,513   4,201 
Net income attributable to non-controlling interests  169   177 

Less: Net loss attributable to non-controlling interests		  (848)  (113)
Accretion to redemption value of redeemable non-controlling interests  (3)  - 
Net income attributable to parent company’s common shareholders $5,059  $5,682  $2,358  $4,314 
Comprehensive income:                
Net income $5,228  $5,859  $1,513  $4,201 
Other comprehensive income:                
Foreign currency translation gain/(loss), net of tax  6,705   (2,139)
Comprehensive income  11,933   3,720 
Comprehensive income attributable to non-controlling interests  386   119 
Comprehensive income attributable to parent company $11,547  $3,601 
Foreign currency translation income/(loss), net of tax  12,774   (9,703)
Comprehensive income/(loss)  14,287   (5,502)
Comprehensive income/(loss) attributable to non-controlling interests  80   (837)
Comprehensive income/(loss) attributable to parent company $14,207  $(4,665)
                
Net income attributable to parent company’s common shareholders per share        
Net income attributable to parent company’s common shareholders per share -        
                
Basic – $0.16  $0.18 
Basic $0.08  $0.14 
                
Diluted- $0.16  $0.18 
Weighted average number of common shares outstanding        
Diluted $0.08  $0.14 
Weighted average number of common shares outstanding -        
Basic  31,644,004   31,911,360   31,112,076   31,492,035 
Diluted  31,644,271   31,911,722   31,113,374   31,492,035 

 

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

 

4

 

China automotiveAutomotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

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

 

  Nine Months Ended September 30, 
  2017  2016 
Net product sales ($25,684 and $28,589 sold to related parties for the nine months ended September 30, 2017 and 2016) $355,333  $312,497 
Cost of products sold ($20,195 and $18,912 purchased from related parties for the nine months ended September 30, 2017 and 2016)  287,156   253,352 
Gross profit  68,177   59,145 
Gain on other sales  5,896   2,008 
Less: Operating expenses        
Selling expenses  13,160   12,273 
General and administrative expenses  14,027   11,998 
Research and development expenses  23,666   18,849 
Total operating expenses  50,853   43,120 
Income from operations  23,220   18,033 
Other (expense)/income, net  (2)  995 
Interest expense  (1,193)  (524)
Financial income, net  1,909   1,270 
Income before income tax expenses and equity in earnings of affiliated companies  23,934   19,774 
Less: Income taxes  4,367   3,416 
Equity in earnings of affiliated companies  480   561 
Net income  20,047   16,919 
Net income attributable to non-controlling interests  353   164 
Net income attributable to parent company’s common shareholders $19,694  $16,755 
Comprehensive income:        
Net income $20,047  $16,919 
Other comprehensive income:        
Foreign currency translation gain/(loss), net of tax  14,148   (8,435)
Comprehensive income  34,195   8,484 
Comprehensive gain/(loss) attributable to non-controlling interests  819   (143)
Comprehensive income attributable to parent company $33,376  $8,627 
         
Net income attributable to parent company’s common shareholders per share        
         
Basic – $0.62  $0.52 
         
Diluted- $0.62  $0.52 
Weighted average number of common shares outstanding        
Basic  31,644,004   32,038,933 
Diluted  31,647,833   32,040,514 
  Nine Months Ended September 30, 
  2020  2019 
Net product sales ($40,439 and $39,458 sold to related parties for the nine months ended September 30, 2020 and 2019) $271,156  $315,483 
Cost of products sold ($16,298 and $18,108 purchased from related parties for the nine months ended September 30, 2020 and 2019)  238,598   268,936 
Gross profit  32,558   46,547 
Gain on other sales  2,935   4,856 
Less: Operating expenses        
Selling expenses  8,895   10,507 
General and administrative expenses  13,330   13,453 
Research and development expenses  17,390   19,343 
Total operating expenses  39,615   43,303 
(Loss)/income from operations  (4,122)  8,100 
Other income, net  1,724   1,131 
Interest expense  (1,214)  (2,086)
Financial (expense)/income, net  (2,903)  2,439 
(Loss)/income before income tax expenses and equity in earnings/(loss) of affiliated companies  (6,515)  9,584 
Less: Income taxes  294   1,820 
Equity in earnings/(loss) of affiliated companies  3,454   (222)
Net (loss)/income  (3,355)  7,542 
Less: Net loss attributable to non-controlling interests  (1,590)  (688)
Accretion to redemption value of redeemable non-controlling interests  (3)  - 
Net (loss)/income attributable to parent company’s common shareholders $(1,768) $8,230 
Comprehensive income:        
Net (loss)/income $(3,355) $7,542 
Other comprehensive income:        
Foreign currency translation income/(loss), net of tax  8,171   (10,221)
Comprehensive income/(loss)  4,816   (2,679)
Comprehensive loss attributable to non-controlling interests  (1,059)  (1,454)
Comprehensive income/(loss) attributable to parent company $5,875  $(1,225)
         
Net (loss)/income attributable to parent company’s common shareholders per share -        
         
Basic $(0.06) $0.26 
         
Diluted $(0.06) $0.26 
Weighted average number of common shares outstanding -        
Basic  31,153,162   31,498,553 
Diluted  31,153,619   31,501,108 

 

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)

 

  September 30, 2017  December 31, 2016 
ASSETS        
Current assets:        
Cash and cash equivalents $55,382  $31,092 
Pledged cash  31,075   30,799 
Short-term investments  23,829   30,475 
Accounts and notes receivable, net - unrelated parties  269,943   285,731 
Accounts and notes receivable, net - related parties  17,607   20,984 
Advance payments and others - unrelated parties  12,235   10,203 
Advance payments and others - related parties  31,397   624 
Inventories  73,030   68,050 
Current deferred tax assets  7,476   7,946 
Total current assets  521,974   485,904 
Non-current assets:        
Long-term time deposits  6,027   865 
Property, plant and equipment, net  115,302   101,478 
Intangible assets, net  512   617 
Other receivables, net - unrelated parties  2,234   2,252 
Advance payment for property, plant and equipment - unrelated parties  14,222   14,506 
Advance payment for property, plant and equipment - related parties  4,813   5,005 
Long-term investments  25,341   16,431 
Non-current deferred tax assets  4,295   4,641 
Total assets $694,720  $631,699 
         
LIABILITIES AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Bank and government loans $73,594  $40,820 
Accounts and notes payable - unrelated parties  224,758   216,993 
Accounts and notes payable - related parties  5,749   6,803 
Customer deposits  869   700 
Accrued payroll and related costs  7,460   6,971 
Accrued expenses and other payables  32,883   35,882 
Accrued pension costs  4,750   4,130 
Taxes payable  3,800   11,674 
Amounts due to shareholders/directors  335   312 
Advances payable (current portion)  399   382 
Current deferred tax liabilities  190   193 
Total current liabilities  354,787   324,860 
Long-term liabilities:        
Long-term bank loan  -   608 
Advances payable  354   339 
Total liabilities $355,141  $325,807 
         
Commitments and Contingencies (See Note 29)        
         
Stockholders’ equity:        
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of September 30, 2017 and December 31, 2016, respectively $3  $3 
Additional paid-in capital  64,406   64,764 
Retained earnings-        
Appropriated  10,673   10,549 
Unappropriated  248,533   228,963 
Accumulated other comprehensive income/(loss)  12,722   (892)
Treasury stock – 694,298 and 694,298 shares as of September 30, 2017 and December 31, 2016, respectively  (2,907)  (2,907)
Total parent company stockholders' equity  333,430   300,480 
Non-controlling interests  6,149   5,412 
Total stockholders' equity  339,579   305,892 
Total liabilities and stockholders' equity $694,720  $631,699 
  September 30, 2020  December 31, 2019 
ASSETS        
Current assets:        
Cash and cash equivalents $81,767  $76,715 
Pledged cash  31,721   29,688 
Accounts and notes receivable, net - unrelated parties  189,144   211,841 
Accounts and notes receivable - related parties  19,881   21,164 
Inventories  82,011   82,931 
Other current assets  35,834   18,974 
Total current assets  440,358   441,313 
Non-current assets:        
Property, plant and equipment, net  136,058   140,481 
Land use rights, net  10,392   10,346 
Long-term investments  49,754   39,642 
Other non-current assets  30,859   28,374 
Total assets $667,421  $660,156 
         
LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY        
Current liabilities:        
Short-term loans $44,588  $46,636 
Accounts and notes payable - unrelated parties  189,915   180,175 
Accounts and notes payable - related parties  11,518   6,492 
Accrued expenses and other payables  48,866   45,341 
Other current liabilities  25,918   25,135 
Total current liabilities  320,805   303,779 
Long-term liabilities:        
Long-term government loans  -   7,167 
Other long-term payable  2,103   4,948 
Long-term tax payable  23,884   26,693 
Other non-current liabilities  8,013   8,010 
Total liabilities $354,805  $350,597 
         
Commitments and Contingencies (See Note 23)        
         
Mezzanine equity:        
Redeemable non-controlling interests  517   - 
         
Stockholders’ equity:        
Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued - 32,338,302 and 32,338,302 shares as of September 30, 2020 and December 31, 2019, respectively $3  $3 
Additional paid-in capital  64,273   64,466 
Retained earnings-        
Appropriated  11,265   11,265 
Unappropriated  218,741   221,298 
Accumulated other comprehensive income  4,181   (3,462)
Treasury stock - 1,486,526 and 1,164,257 shares as of September 30, 2020 and December 31, 2019, respectively  (5,261)  (4,261)
Total parent company stockholders' equity  293,202   289,309 
Non-controlling interests  18,897   20,250 
Total stockholders' equity  312,099   309,559 
Total liabilities, mezzanine equity and stockholders’ equity $667,421  $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)

 

  Nine Months Ended September 30, 
  2017  2016 
Cash flows from operating activities:        
Net income $20,047  $16,919 
Adjustments to reconcile net income from operations to net cash provided by operating activities:        
Share-based compensation  100   - 
Depreciation and amortization  10,933   10,732 
Increase in/(reversal of) provision for doubtful accounts  1,034   (126)
Inventory write downs  4,436   2,353 
Deferred income taxes  1,354   (142)
Equity in earnings of affiliated companies  (480)  (561)
Gain on disposal of Fujian Qiaolong  -   (698)
Gain on fixed assets disposals  (2,204)  (6)
Changes in operating assets and liabilities        
(Increase) decrease in:        
Pledged cash  1,226   9,711 
Accounts and notes receivable  32,807   (18,471)
Advance payments and others  (1,527)  (2,798)
Inventories  (6,441)  (18,244)
Increase (decrease) in:        
Accounts and notes payable  (3,023)  14,990 
Customer deposits  158   (613)
Accrued payroll and related costs  182   544 
Accrued expenses and other payables  (6,216)  1,309 
Accrued pension costs  443   (160)
Taxes payable  (9,806)  (1,582)
Advance payable  -   (75)
Net cash provided by operating activities  43,023   13,082 
Cash flows from investing activities:        
Decrease in other receivables  159   2,382 
Proceeds from disposition of a subsidiary, net of cash disposed of $1,063  -   1,953 
Cash received from property, plant and equipment sales  2,351   511 
Payments to acquire property, plant and equipment(including $7,656 and $5,662 paid to related parties for the nine months ended September 30, 2017 and 2016, respectively)  (19,187)  (27,161)
Payments to acquire intangible assets  -   (60)
Purchase of short-term investments  (25,017)  (28,181)
Purchase of long-term time deposit  (5,836)  - 
Proceeds from maturities of short-term investments  33,749   13,236 
Investment under equity method  (7,629)  (8,682)
Loan to a related party  (29,044)  - 
Net cash used in investing activities  (50,454)  (46,002)
Cash flows from financing activities:        
Proceeds from bank and government loans  69,635   12,151 
Repayments of bank and government loans  (39,271)  (7,145)
Dividends paid to the non-controlling interest holders  -   (464)
Repurchases of common stock  -   (991)
Net cash provided by financing activities  30,364   3,551 
Effects of exchange rate on cash and cash equivalents  1,357   (1,245)
Net increase/decrease in cash and cash equivalents  24,290   (30,614)
Cash and cash equivalents at beginning of period  31,092   69,676 
Cash and cash equivalents at end of period $55,382  $39,062 
  Nine Months Ended September 30, 
  2020  2019 
Cash flows from operating activities:        
Net (loss)/income $(3,355) $7,542 
Adjustments to reconcile net (loss)/income from operations to net cash provided by operating activities:        
Depreciation and amortization  15,935   13,052 
Reversal of provision for doubtful accounts  (360)  (692)
Deferred income taxes  464   (601)
Equity in (earnings)/loss of affiliated companies  (3,454)  222 
Loss/(gain) on fixed assets disposals  67   (692)
Government subsidy reclassified from government loans  287   - 
(Increase)/decrease in:        
Accounts and notes receivable  29,454   16,243 
Inventories  2,644   (1,615)
Other current assets  1,214   4,725 
Increase/(decrease) in:        
Accounts and notes payable  10,493   (28,793)
Accrued expenses and other payables  2,451   (4,374)
Long-term taxes payable  (2,809)  (2,810)
Other current liabilities  (289)  1,882 
Net cash provided by operating activities  52,741   4,089 
Cash flows from investing activities:        
Decrease in demand loans and employee housing loans included in other non-current assets  44   185 
Cash received from property, plant and equipment sales  1,444   1,164 
Payments to acquire property, plant and equipment (including $1,577 and $514 paid to related parties for the nine months ended September 30, 2020 and 2019, respectively)  (8,879)  (23,571)
Payments to acquire intangible assets  (422)  (1,435)
Investment under the equity method  (5,360)  (2,491)
Purchase of short-term investments and long-term time deposits  (42,716)  (19,647)
Government subsidy received for purchase of property, plant and equipment  -   1,898 
Proceeds from maturities of short-term investments  21,626   27,040 
Cash received from long-term investment  448   579 
Net cash used in investing activities  (33,815)  (16,278)
Cash flows from financing activities:        
Proceeds from bank loans  39,586   54,675 
Repayments of bank loans  (50,550)  (52,486)
Repayments of the borrowing for sale and leaseback transaction  (3,078)  (3,143)
Dividends paid to non-controlling interest holders of non-wholly owned subsidiaries  -   (333)
Cash received from capital contributions by non-controlling
interest holder		  722   3,542 
Deemed distribution to shareholders  (88)  - 
Acquisition of non-controlling interest  (81)  - 
Repurchase of common shares  (1,000)  (443)
Net cash (used in)/provided by financing activities  (14,489)  1,812 
Effects of exchange rate on cash, cash equivalents and pledged cash  2,647   (3,284)
Net increase/(decrease) in cash, cash equivalents and pledged cash  7,085   (13,661)
Cash, cash equivalents and pledged cash at beginning of the period  106,403   115,977 
Cash, cash equivalents and pledged cash at end of the period $113,488  $102,316 

 

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

 

7

 

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows (continued)

(In thousands of USD unless otherwise indicated)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Nine Months Ended September 30, 
  2017  2016 
Cash paid for interest $573  $219 
Cash paid for income taxes  4,343   1,396 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

  Nine Months Ended September 30, 
  2017  2016 
Property, plant and equipment recorded during the period which previously were advance payments $12,331  $12,771 
Accounts payable for acquiring property, plant and equipment  890   844 
Dividends payable to non-controlling interests  621   - 

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

8

China automotiveAutomotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 20172020 and 20162019

 

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 and the joint ventures 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 Sino-foreign joint ventures, wholly-owned subsidiaries and joint ventures organized in the People's Republic of China, the “PRC,” and Brazil as of September 30, 20172020 and December 31, 2016.2019.

 

  Percentage Interest 
Name of Entity September 30,
2017		  December 31,
2016		 
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong”1  100.00%  100.00%
JingzhouHenglong 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%  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%
JingzhouHenglong Automotive Technology (Testing) Center, “Testing Center”8  100.00%  100.00%
Beijing HainachunHenglong Automotive Steering System Co., Ltd., “Beijing Henglong”9  50.00%  50.00%
Chongqing HenglongHongyan Automotive System Co., Ltd., “Chongqing Henglong”10  70.00%  70.00%
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong”11  95.84%  80.00%
Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong”12  0.00%  0.00%
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”13  85.00%  85.00%
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”14  100.00%  100.00%
  Percentage Interest 
Name of Entity September 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  62.00%  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 May 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 JingzhouHengshengJingzhou 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.

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8.In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which mainly engages in the research and development of new products.
9.Beijing Henglong was established in 2010 and mainly engages in the design, development and manufacture of both hydraulic and electric power steering systems and parts. According to the joint venture agreement, the Company does not have voting control of Beijing Henglong. Therefore, the Company’s consolidated financial statements do not include Beijing Henglong, and such investment is accounted for using the equity accounting method.
10.9.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.
11.
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.
12.In the second quarter of 2014, the Company acquired a 51.0% ownership interest in Fujian Qiaolong Special Purpose Vehicle Co., Ltd., “Fujian Qiaolong”, a special purpose vehicle manufacturer and dealer with automobile repacking qualifications, based in Fujian, China. Fujian Qiaolong 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. On April 17, 2016, Hubei Henglong entered into a share purchase agreement, the “Share Purchase Agreement”, with LongyanHuanyu Emergency Equipment Technology Co., Ltd., “LongyanHuanyu”. Pursuant to the Share Purchase Agreement, Hubei Henglong transferred its 51% equity interests in Fujian Qiaolong to LongyanHuanyu for total consideration of RMB 20.0 million, equivalent to $3.0 million, in the second quarter of 2016. The Company recognized a gain on disposal of Fujian Qiaolong of $0.7 million, which is included in other income in the consolidated statement of operations and comprehensive income for the year ended December 31, 2016.
13.11.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.
14.
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 62.0% 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.

 


2.2.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 Article 10 of 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, 2016.2019.

 

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.

 

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The condensed consolidated balance sheet as of December 31, 20162019 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.

  

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented herein not misleading. For further information, please refer to the financial statements and the notes thereto included in the Company’s 2016 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The results of operations for the three months and nine months ended September 30, 20172020 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2017.2020.

 

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

 

InOn January 2017,1, 2020, the FASB issuedCompany adopted Accounting Standards Update (“ASU”) No. 2016-13 ASC (Topic 326), Financial Instruments - Credit Losses. The ASU 2017-04: Intangibles—Goodwillintroduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and Other (Topic 350): Simplifying the Test for Goodwill Impairment. To simplify the subsequentadditional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement of goodwill, the Board eliminated Step 2 from the goodwill impairment test. Under the amendments in this Update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment chargeobjective for the amount by whichrecognition of credit losses at the carrying amount exceedstime the reporting unit’s fair value; however,financial asset is originated or acquired. The Company adopted the loss recognized should not exceed the total amountCECL model to recognize credit losses of goodwill allocated to that reporting unit. An entity should apply the amendments in this Update onfinancial assets using a prospective basis. An entity is required to disclose the naturemodified retrospective method of and reason for the change in accounting principle upon transition. A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates afteras of January 1, 2017.2020. The adoptionimpact of this guidance is not expected to have a material effectadopting the new standard on the Company's consolidated financial statements. 

In February 2017, the FASB issued ASU 2017-05: Clarifying the Scopestatements was a reduction of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets. ASU 2017-05 is designed$0.8 million to provide guidance on how to recognize gain and losses on sales, including partial sales, of nonfinancial assets to noncustomers. ASU 2017-05 is effective beginning January 1, 2018. Early adoption is permitted but the standard is required to be adopted concurrently with ASU 2014-09. The adoption of this guidance is not expected to have a material effect on the Company's consolidated financial statements.retained earnings.

 


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In May 2017, the FASB issued guidance within ASU 2017-09: Scope of Modification Accounting. The amendments in ASU 2017-09 to Topic 718, Compensation - Stock Compensation, provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity should account for the effects of a modification unless all of the following conditions are met: the fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified; the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The amendments should be applied prospectively to an award modified on or after the adoption date. The amendments are effective for annual periods, and interim periods within those annual periods, beginning after December 31, 2017. Early adoption is permitted, including adoption in any interim period. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

(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)).

 

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, 2016.

3.Short-term investments

Short-term investments comprise time deposits with terms of three months or more which are due within one year and wealth management financial products with maturities within one year. The carrying values of time deposits approximate fair value because of their short maturities. The interest earned is recognized in the consolidated statements of income over the contractual term of the deposits. The wealth management financial products are measured at fair value and classified as Level 2 within the fair value measurement hierarchy. The fair values weremeasured by using directly or indirectly observable inputs in the marketplace. Changes in the fair value are reflected in other income in the consolidated statements of operations and comprehensive income.

The Company’s short-term investments as of September 30, 2017 and December 31, 2016 are summarized as follows

(figures are in thousands of USD):

  September 30, 2017  December 31, 2016 
Time deposits $5,100  $30,217 
Wealth management financial products measured at fair value  18,729   258 
Total $23,829  $30,475 

As of September 30, 2017, the Company had pledged short-term investments of RMB 13.9 million, equivalent to approximately $2.1 million, to secure standby letters of credit under Bank of China and China CITIC Bank (Note 13). The use of the pledged short-term investments is restricted.

4.Accounts and notes receivable, net

 

The Company’s accounts and notes receivable, net as of September 30, 20172020 and December 31, 20162019 are summarized as follows (figures are in thousands of USD):

 

 September 30, 2017  December 31, 2016  September 30, 2020  December 31, 2019 
Accounts receivable - unrelated parties $150,696  $154,403  $130,436  $141,423 
Notes receivable - unrelated parties(1) (2)  120,438   132,409 
Total accounts and notes receivable- unrelated parties  271,134   286,812 
Notes receivable - unrelated parties  61,940   72,797 
Total accounts and notes receivable - unrelated parties  192,376   214,220 
Less: allowance for doubtful accounts - unrelated parties  (1,191)  (1,081)  (3,232)  (2,379)
Accounts and notes receivable, net - unrelated parties  269,943   285,731   189,144   211,841 
Accounts and notes receivable, net - related parties  17,607   20,984 
Accounts and notes receivable - related parties  19,881   21,164 
Accounts and notes receivable, net $287,550  $306,715  $209,025  $233,005 

  

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Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.

(1)Notes receivable represent accounts receivable in the form of bills of exchange for which acceptances are guaranteed and settlements are handled by banks.

(2)As of September 30, 2017, the Company collateralized its notes receivable in an amount of RMB 268.3 million, equivalent to approximately $40.4 million, as security for the credit facilities with banks in China and the Chinese government, including RMB 158.9 million, equivalent to approximately $23.9 million, in favor of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou”, for the purpose of obtaining the Henglong Standby Letter of Credit (as defined in Note 13), which is used as security for the non-revolving credit facility in the amount of $23.9 million provided by Industrial and Commercial Bank of China (Macau) Limited, “ICBC Macau”, RMB 30.0 million, equivalent to approximately $4.5 million, as security in favor of the Chinese government for the low interest government loan (See Note 13), and RMB 79.4 million, equivalent to approximately $12.0 million, in favor of China CITIC Bank, Wuhan Branch, “CITIC Wuhan”, for the purpose of obtaining the Henglong Standby Letter of Credit(as defined in Note 13), which was used to obtain the facility of Taishin Bank in the amount of $10.0 million(See Note 13).

 

As of September 30, 2020 and December 31, 2016,2019, the Company collateralizedpledged its notes receivable in an amountamounts of RMB 249.9$10.1 million equivalent to approximately $36.0and $9.7 million, respectively, as securitycollateral for the credit facilities withgovernment loans (See Note 7).

As of September 30, 2020 and December 31, 2019, the Company pledged its accounts and notes receivable in amounts of $1.9 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 China and the Chinese government, including RMB 224.6consolidated statements of operations amounted to $0.1 million equivalent to approximately $32.4 million, in favor of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou”, for the purposethree months ended September 30, 2020.

Provision for doubtful accounts and notes receivable reversed in the consolidated statements of obtaining the Henglong Standby Letter of Credit (as defined in Note 13), which is used as securityoperations amounted to $0.3 million for the non-revolving credit facilitynine months ended September 30, 2020.


Provision for doubtful accounts and notes receivable recognized in the amountconsolidated statements of $30.0operations amounted to $0.002 million provided by Industrial and Commercial Bank of China (Macau) Limited, “ICBC Macau”, and RMB 25.2 million, equivalent to approximately $3.6 million, as security in favor of the Chinese government for the low-interest government loan (See Note 13)three months ended September 30, 2019.  

Provision for doubtful accounts and notes receivable recognized in the consolidated statements of operations amounted to $0.2 million for the nine months ended September 30, 2019.  

During the three months ended September 30, 2020, the Company’s five largest customers accounted for 53.0% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 27.3%. During the nine months ended September 30, 2020, the Company’s five largest customers accounted for 47.8% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 23.5%. As of September 30, 2020, approximately 10.5% of accounts receivable were from trade transactions with the aforementioned customer.

During the three months ended September 30, 2019, the Company’s five largest customers accounted for 55.8% of its consolidated net product sales, with two customers individually accounting for more than 10% of consolidated net sales, i.e., 29.7% and 11.5%. During the nine months ended September 30, 2019, the Company’s five largest customers accounted for 48.3% of its consolidated net product sales, with two customers individually accounting for more than 10% of consolidated net sales, i.e., 23.2% and 10.1%. As of September 30, 2019, approximately 5.6% and 5.7% of accounts receivable were from trade transactions with the aforementioned customers and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

 

5.Advance payments and others

The Company’s advance payments and others as of September 30, 2017 and December 31, 2016 consisted of the following (figures are in thousands of USD):

  September 30, 2017  December 31, 2016 
Advance payments and others - unrelated parties $13,307  $10,203 
Less: allowance for doubtful accounts – unrelated parties(2)  (1,072)  - 
Advance payments and others, net – unrelated parties  12,235   10,203 
Advance payments and others - related parties(1)  31,397   624 
Total advance payments and others $43,632  $10,827 

(1)On March 16, 2017, in order to generate higher returns for the Company’s idle cash, one of the Company's subsidiaries, Hubei Henglong, lent RMB 200.0 million (equivalent to $30.1 million as of September 30, 2017) to Henglong Real Estate, one of the Company's related parties, through an independent financial institution by way of an entrusted loan. The term of the loan is one year and the annual interest rate is 6.35%.

(2)Provision for the doubtful accounts amounted to $1.1 million and nil for the nine months ended September 30, 2017 and 2016, respectively.

6.4.Inventories

 

The Company’s inventories as of September 30, 20172020 and December 31, 20162019 consisted of the following (figures are in thousands of USD):

 

  September 30, 2017  December 31, 2016 
Raw materials $16,637  $15,007 
Work in process  17,379   10,852 
Finished goods  39,014   42,191 
Total $73,030  $68,050 

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  September 30, 2020  December 31, 2019 
Raw materials $23,008  $21,464 
Work in process  11,761   9,469 
Finished goods  47,242   51,998 
Total $82,011  $82,931 

 

Provision for inventories amounted to $4.4The Company recorded $0.9 million and $2.4$0.9 million of inventory write-down to cost of products sold for the three months ended September 30, 2020 and 2019, respectively, and $2.3 million and $3.2 million for the nine months ended September 30, 20172020 and 2016,2019, respectively.

 

7.5.Other receivables, netLong-term investments

 

The Company’s other receivables as oflong-term investments at September 30, 20172020 and December 31, 20162019 are summarized as follows (figures are in thousands of USD):

 

  September 30, 2017  December 31,2016 
Other receivables - unrelated parties(1) $1,009  $738 
Other receivables - employee housing loans(2)  1,291   1,577 
Less: allowance for doubtful accounts - unrelated parties  (66)  (63)
Other receivables, net - unrelated parties $2,234  $2,252 

  September 30, 2017  December 31, 2016 
Other receivables - related parties(1) $576  $559 
Less: allowance for doubtful accounts - related parties  (576)  (559)
Other receivables, net - related parties $-  $- 
  September 30, 2020  December 31, 2019 
Chongqing Venture Fund $19,167  $15,085 
Hubei Venture Fund (1)  14,510   8,730 
Suzhou Venture Fund (2)  9,129   9,141 
Beijing Henglong  4,991   4,630 
Henglong Tianyu  1,057   1,122 
Chongqing Jinghua  505   523 
Jiangsu Intelligent  395   411 
Total $49,754  $39,642 

 

(1)Other receivables consist of amounts advanced to both relatedDuring the three and unrelated parties, primarily as unsecured demand loans. These receivables originate as part of the Company's normal operating activities and are periodically settled in cash.
(2)On May 28, 2014, the board of directors ofnine months ended September 30, 2020, the Company approved a loan program under whichmade equity investments of nil and $5.4 million, respectively, in the Company will lend an aggregate of up to RMB 50.0 million, equivalent to approximately $7.5 million, to the employees of the Company to assist them in purchasing houses. Employees are required to pay interest at an annual rate of 3.8%. These loans are unsecured and the term of the loans is generally five years.Hubei Venture Fund.

8.Long-term time deposits

Long-term time deposits are time deposits with maturities of longer than one year. Time deposits with original maturities of longer than one year but due within the next 12 months are included in short-term investments. As of September 30, 2017 and December 31, 2016, short-term investments include $1.0 million and $4.8 million, respectively, of time deposits with original maturities of longer than one year but due within the next 12 months.

As of September 30, 2017 and December 31, 2016, the Company had pledged long-term time deposits of nil and RMB 6.0 million (equivalent to approximately $0.9 million), respectively, to secure loans under the credit facility issued by ICBC Brazil. The use of the pledged long-term time deposits is restricted (See Note 13).

9.Long-term investments

On January 24, 2010, the Company invested $3.1 million to establish a joint venture company, Beijing Henglong, with Hainachuan. The Company owns 50% of the equity in Beijing Henglong and can exercise significant influence over Beijing Henglong’s operating and financial policies. The Company accounted for Beijing Henglong’s operational results using the equity method. As of September 30, 2017 and December 31, 2016, the Company had $4.2 million and $3.8 million, respectively, of net equity in Beijing Henglong.  

On September 22, 2014, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Suzhou Venture Fund”, which mainly focuses on investments in emerging automobiles and parts industries. Hubei Henglong has committed to make investments of RMB 50.0 million, equivalent to approximately $7.5 million, in the Suzhou Venture Fund in three installments. As of September 30, 2017, Hubei Henglong has completed a capital contribution of RMB 50.0 million, equivalent to approximately $7.5 million, representing 12.5% of the Suzhou Venture Fund’s shares. As a limited partner, Hubei Henglong has more than virtually no influence over the Suzhou Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of September 30, 2017 and December 31, 2016, the Company had $8.1 million and $5.3 million, respectively, of net equity in the Suzhou Venture Fund.

14
  
(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.

 

In May 2016, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Chongqing Venture Fund”. Hubei Henglong has committed to make investments of RMB 120.0 million, equivalent to approximately $18.1 million, in the Chongqing Venture Fund in three installments. As of September 30, 2017, Hubei Henglong has completed a capital contribution of RMB 84.0 million, equivalent to approximately $12.7 million, representing 35.0% of the Chongqing Venture Fund’s shares. As a limited partner, Hubei Henglong has more than virtually no influence over the Chongqing Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of September 30, 2017 and December 31, 2016, the Company had $12.5 million and $6.8 million, respectively, of net equity in the Chongqing Venture Fund.

In October 2016, Hubei Henglong invested RMB 3.0 million, equivalent to approximately $0.5 million, to establish a joint venture company, Chongqing Jinghua Automotive Intelligent Manufacturing Technology Research Co., Ltd., “Chongqing Jinghua”, with five other parties. The Company owns 30% of the equity in Chongqing Jinghua, and can exercise significant influence over Chongqing Jinghua’s operating and financial policies. The Company accounts for Chongqing Jinghua’s operational results with the equity method. As of September 30, 2017 and December 31, 2016, the Company had $0.5 million and $0.4 million, respectively, of net equity in Chongqing Jinghua.

The Company’s consolidated financial statements reflect the net income of non-consolidated affiliates of $0.5 million and $0.6 million for the nine months ended September 30, 2017 and 2016, respectively.


10.6.Property, plant and equipment, net

 

The Company’s property, plant and equipment, net as of September 30, 20172020 and December 31, 20162019 are summarized as follows (figures are in thousands of USD):

 

 September 30, 2017  December 31, 2016  September 30, 2020  December 31, 2019 
Land use rights and buildings $55,067  $47,448 
Costs:        
Buildings $58,373  $51,771 
Machinery and equipment  150,928   134,361   213,065   199,592 
Electronic equipment  5,636   4,979   6,588   5,799 
Motor vehicles  4,954   4,395   4,780   5,229 
Construction in progress  28,832   24,890   26,167   33,063 
Total amount of property, plant and equipment  245,417   216,073   308,973   295,454 
Less: Accumulated depreciation(1)  (130,115)  (114,595)  (172,915)  (154,973)
Total amount of property, plant and equipment, net(2)(3) $115,302  $101,478  $136,058  $140,481 

  

(1)(1)Depreciation charges were $4.9 million and $3.8 million for the three months ended September 30, 2020 and 2019, respectively, and $15.5 million and $13.0 million for the nine months ended September 30, 2020 and 2019, respectively.
(2)As of September 30, 20172020 and December 31, 2016,2019, the Company pledged property, plant and equipment with a net book value of approximately $25.9$68.3 million and $28.5$50.9 million, respectively, as security for its comprehensive credit facilities with banks in China.
(2)Depreciation charges were $3.0 million and $3.3 million for the three months ended September 30, 2017 and 2016, respectively, and $10.7 million and $10.4 million for the nine months ended September 30, 2017 and 2016, respectively.
(3)Interest costs capitalized for the three months ended September 30, 20172020 and 2016,2019, were $0.2 million and $0.1$0.2 million, respectively;respectively, and $0.5$0.8 million and $0.2$0.5 million for the nine months ended September 30, 20172020 and 2016, respectively.

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11.Intangible assets

The Company’s intangible assets as of September 30, 2017 and December 31, 2016 are summarized as follows (figures are in thousands of USD):

  September 30, 2017  December 31, 2016 
Costs:        
Patent technology $2,076  $1,986 
Management software license  1,218   1,165 
Total intangible assets  3,294   3,151 
Less: Amortization(1)  (2,782)  (2,534)
Total intangible assets, net $512  $617 

(1)Amortization expenses were $0.1 million and $0.1 million for the three months ended September 30, 2017 and 2016, respectively, and $0.2 million and $0.3 million for the nine months ended September 30, 2017 and 2016,2019, respectively.

 

12.7.Deferred income tax assets

In accordance with the provisions ofASC Topic 740, “Income Taxes”, the Company assesses, on a quarterly basis, its ability to realize its deferred tax assets. Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a valuation allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered the following significant factors: an assessment of recent years’ profitability and losses by tax authorities; the Company’s expectation of profits based on margins and volumes expected to be realized, which are based on current pricing and volume trends; the long period in all significant operating jurisdictions before the expiry of net operating losses, noting further that a portion of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.

The components of estimated deferred income tax assets as of September 30, 2017 and December 31, 2016 are as follows (figures are in thousands of USD):

  September 30, 2017  December 31, 2016 
       
Losses carry forward (U.S.)(1) $6,389  $6,216 
Losses carry forward (Non-U.S.)(1)  2,307   2,887 
Product warranties and other reserves  4,290   4,766 
Property, plant and equipment  4,422   4,204 
Share-based compensation  220   247 
Bonus accrual  230   231 
Other accruals  1,439   1,551 
Deductible temporary difference related to revenue recognition  153   191 
Others  1,365   1,206 
Total deferred tax assets, net  20,815   21,499 
Less: Valuation allowance  (9,044)  (8,912)
Total deferred tax assets, net of valuation allowance(2) $11,771  $12,587 

(1)The net operating losses carry forward for the U.S. entities for income tax purposes are available to reduce future years' taxable income. These carry forward losses will expire, if not utilized, at various times over the next 20 years. Net operating losses carry forward for China entities can be carried forward for 5 years to offset taxable income. As of September 30, 2017, the valuation allowance was $9.0 million, including $6.6 million allowance for the Company’s deferred tax assets in the United States and $2.4 million allowance for the Company’s non-U.S. deferred tax assets. Based on the Company’s current operations in the United States, management believes that the deferred tax assets in the United States are not likely to be realized in the future. For the deferred tax assets in other countries, pursuant to certain tax laws and regulations, management believes such amount will not be used to offset future taxable income.

(2)Approximately $4.3 million and $4.6 million of net deferred income tax assets as of September 30, 2017 and December 31, 2016, respectively, are included in non-current deferred tax assets in the accompanying condensed unaudited consolidated balance sheets. The remaining $7.5 million and $7.9 million of net deferred income tax assets as of September 30, 2017 and December 31, 2016, respectively, are included in current deferred tax assets.

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13.Bank and government loansLoans

 

Loans consist of the following as of September 30, 20172020 and December 31, 20162019 (figures are in thousands of USD):

 

  September 30, 2017  December 31, 2016 
Short-term bank loan(1) $9,794  $2,162 
Short-term bank loan(2) (3) (4) (5)  30,484   35,054 
Short-term bank loans(6)  28,796   - 
Short-term government loan(7)  4,520   3,604 
Bank and government loans $73,594  $40,820 
  September 30, 2020  December 31, 2019 
Short-term bank loans (1) $35,043  $44,199 
Short-term government loan (2)  2,203   2,150 
Current portion of long-term government loans (3) (4)  7,342   287 
Subtotal  44,588   46,636 
         
Long-term government loans (3)(4)  7,342   7,454 
Less: Current portion of long-term government loans (3) (4)  (7,342)  (287)
Subtotal  -   7,167 
         
Total bank and government loans $44,588  $53,803 

 

(1)These loans areThe Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the CompanyCompany. The total credit facility amount was $148.3 million and are repayable within one year (See Note 10).$182.7 million, respectively, as of September 30, 2020 and December 31, 2019. As of September 30, 20172020 and December 31, 2016,2019, the Company has drawn down loans with an aggregate amount of $35.0 million and $44.2 million, respectively. The weighted average interest rate was 4.7%3.7% and 5.2% per annum,4.2%, respectively. Interest is to be paid monthly or quarterly on the twentieth day of the applicable month or quarter and the principal repayment is at maturity.

 


(2)On May 18, 2012,December 26, 2019, the Company entered into a credit facility agreement, the “Credit Agreement,” with ICBC Macau to obtain a non-revolving credit facility in the amount of $30.0 million, the “Credit Facility”. The Credit Facility would have expired on November 3, 2012 unless the Company drew down the line of credit in full prior to such expiration date, and the maturity date for the loan drawdown was the earlier of (i) 18 monthsborrowed from the drawdown or (ii) one month before the expiry of the standby letter of credit obtained by Henglong from ICBC Jingzhou as security for the Credit Facility, the “Henglong Standby Letter of Credit”. The interest rate of the Credit Facility is calculated based onlocal government a three-month LIBOR plus 2.25% per annum, subject to the availability of funds and fluctuation at ICBC Macau’s discretion. The interest is calculated daily based on a 360-day year and it is fixed one day before the first day of each interest period. The interest period is defined as three months from the date of drawdown. As security for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total amount of not less than $31.6 million if the Credit Facility is fully drawn.

On May 22, 2012, the Company drew down the full amount of $30.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $31.6 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB 207.1 million, equivalent to approximately $32.6 million. The Company also paid an arrangement fee of $0.1 million to ICBC Macau and $0.1 million to ICBC Jingzhou. The original maturity date of the Credit Facility was May 22, 2013 and was extended to May 12, 2017. The interest rate of the Credit Facility under the extended term is three-month LIBOR plus 0.7% per annum. Except for the above, all other terms and conditions as stipulated in the Credit Agreement remained unchanged. As of December 31, 2016, the interest rate of the Credit Facility was 1.7% per annum.

On April 20, 2017, the Company entered into a credit facility agreement, the “Credit Agreement,” with ICBC Macau to obtain a non-revolving credit facility in the amount of $20.0 million, the “Credit Facility”. The Credit Facility will expire on May 12, 2018 unless the Company draws down the line of credit in full prior to such expiration date, and the maturity date for the loan drawdown is the earlier of (i) 12 months from the date of drawdown or (ii) one month before the expiry of the standby letter of credit obtained by Henglong from ICBC Jingzhou as security for the Credit Facility, the “Henglong Standby Letter of Credit”. The interest rate of the Credit Facility is calculated based on a three-month LIBOR plus 1.30% per annum, subject to the availability of funds and fluctuation at ICBC Macau’s discretion. Interest is calculated daily based on a 360-day year and it is fixed one day before the first day of each interest period. The interest period is defined as three months from the date of drawdown. As security for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total amount of not less than $23.9 million if the Credit Facility is fully drawn.

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On May 5, 2017, the Company drew down the full amount of $20.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $23.4 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB 158.9 million, equivalent to approximately $23.9 million. The Company also paid an arrangement fee of $0.04 million to ICBC Jingzhou. The maturity date of the Credit Facility is May 12, 2018.

(3)On April 25, 2017, Great Genesis entered into a credit facility agreement, the “Taishin Bank Credit Facility”, with Taishin Bank to obtain a non-revolving credit facility in the amount of $10.0 million. The Taishin Bank Credit Facility will expire on April 25, 2018 and has an annual interest rate of 2.7%. Interest is paid quarterly and the principal repayment is payable at maturity. As security for the Taishin Bank Credit Facility, the Company’s subsidiary Henglong was required to provide Taishin Bank with the Standby Letter of Credit for a total amount of not less than $10.0 million if the Taishin Bank Credit Facility is fully drawn.

On April 28, 2017, Great Genesis drew down the full amount of $9.9 million under the Taishin Bank Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $10.0 million in favor of Taishin Bank. Henglong’s Standby Letter of Credit issued by China CITIC Bank Wuchang branch is collateralized by Henglong’s short-term investments of RMB 4.0 million, equivalent to approximately $0.6 million, and notes receivable of RMB 79.4 million, equivalent to approximately $12.0 million.

(4)On July 16, 2014, Great Genesis entered into a credit facility agreement with HSBC HK to obtain a non-revolving credit facility in the amount of $5.0 million, the “HSBC Credit Facility”. The HSBC Credit Facility expired on July 1, 2015 and had an annual interest rate of 1.7%. Interest was paid on the twentieth day of each month and the principal repayment was at maturity. As security for the HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC HK with a Standby Letter of Credit for a total amount of not less than $5.4 million if the HSBC Credit Facility was fully drawn.

On July 22, 2014, Great Genesis drew down a loan amounting to $5.0 million provided by HSBC HK and Hubei Henglong provided a Standby Letter of Credit for an amount of $5.4 million in favor of HSBC HK. Hubei Henglong’s Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan branch and is collateralized by long-term time deposits of Hubei Henglong of RMB 33.0 million, equivalent to approximately $4.8 million.

On July 7, 2016, HSBC HK agreed to extend the maturity date of the HSBC Credit Facility to July 1, 2017. Hubei Henglong provided a Standby Letter of Credit in an amount of $5.1 million in favor of HSBC HK. The Standby Letter of Credit was issued by HSBC Bank (China) Company Limited Wuhan branch and was collateralized by short-term time deposits of Hubei Henglong of RMB 36.0 million, equivalent to approximately $5.2 million. The interest rate of the HSBC Credit Facility under the extended term was revised as three-month LIBOR plus 0.8% per annum, i.e. 1.95% per annum. Except for the above, all other terms and conditions as stipulated in the Credit Agreement remained unchanged. The Company repaid this bank loan on July 14, 2017.

(5)On April 1, 2016, Brazil Henglong entered into a credit facility agreement with HSBC Brazil to obtain a credit facility in the amount of $0.1 million, the “HSBC Brazil Credit Facility”. The HSBC Brazil Credit Facility expired on October 27, 2017. As security for the HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC Brazil with the Standby Letter of Credit for a total amount of $0.1 million if the HSBC Brazil Credit Facility is fully drawn.

On May 6, 2016, Brazil Henglong drew down a loan amounting to $0.1 million provided by HSBC Brazil. The loan matured on October 9, 2017 and has an annual interest rate of 8.2%.Hubei Henglong provided a Standby Letter of Credit for an amount of $0.1 million in favor of HSBC Brazil. Hubei Henglong’s Standby Letter of Credit was issued by China CITIC Bank Wuhan branch and is collateralized by short-term investments of Hubei Henglong of RMB 0.5 million, equivalent to approximately $0.1 million. The Company repaid this bank loan on October 9, 2017.

On August 26, 2016, Brazil Henglong entered into a credit facility agreement with Bank of China (Brazil) to obtain a credit facility in the amount of $0.6 million, the “Bank of China Credit Facility”. The Bank of China Credit Facility will expire on January 15, 2018. As security for the Bank of China Credit Facility, the Company’s subsidiary Hubei Henglong is required to provide Bank of China (Brazil) with a Standby Letter of Credit for a total amount of $0.9 million if the Bank of China Credit Facility is fully drawn.

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On August 26, 2016, Brazil Henglong drew down a loan amounting to $0.6 million provided by Bank of China (Brazil). The loan will mature on January 15, 2018 and has an annual interest rate of 4.0%. Interest is paid semiannually and the principal repayment is at maturity. Hubei Henglong provided a Standby Letter of Credit for an amount of $0.9 million in favor of Bank of China (Brazil). Hubei Henglong’s Standby Letter of Credit was issued by Bank of China Jingzhou branch and is collateralized by long-term time deposits of Hubei Henglong of RMB 6.0 million, equivalent to approximately $0.9 million.

(6)On September 26, 2016, Henglong entered into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 170.0 million (equivalent to $25.6 million as of September 30, 2017), the “Henglong CITIC Credit Facility”. The Henglong CITIC Credit Facility expired on September 26, 2017. As security for the Henglong CITIC Credit Facility, Henglong’s property, plant and equipment were pledged and Hubei Henglong provided a guarantee. On March 3, 2017, Henglong drew down loans amounting to RMB 32.5 million, RMB 32.5 million and 30.6 million (equivalent to $4.9 million, $4.9 million and $4.6 million as of September 30, 2017), respectively. The loans will mature on February 5, 6 and 7, 2018, respectively. The annual interest rate of the loans is 4.99%. The principal and interest will be paid at maturity.

On September 26, 2016, Hubei Henglong entered into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 100.0 million (equivalent to $15.1 million as of September 30, 2017), the “Hubei Henglong CITIC Credit Facility”. The Hubei Henglong CITIC Credit Facility expired on September 26, 2017. Henglong provided a guarantee for the Hubei Henglong CITIC Credit Facility. On March 3, 2017, Hubei Henglong drew down loans amounting to RMB 28.7 million, RMB 28.7 million and 38.2 million (equivalent to $4.3 million, $4.3 million and $5.8 million), respectively. The loans will mature on February 2, 8 and 9, 2018, respectively. The annual interest rate of the loans is 5.0%. The principal and interest will be paid at maturity.

(7)On August 17, 2017, the Company received an interest-free Chinese government loan of RMB 20.015.0 million, equivalent to approximately $3.0$2.2 million, with an interest rate of 3.48% per annum, which will matureis due for repayment on August 16, 2018.December 25, 2020. Henglong pledged RMB 20.017.9 million, equivalent to approximately $3.0$2.5 million, of notes receivable as securitycollateral for the Chineselocal government loanloans (See Note 4)3).
(3)

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 January 2020, the Company received a notice from the government that the loan was reclassified as government subsidy. As a result, repayment of this loan was no longer required. The Company reduced the loan balance and recorded it as other income in the consolidated statements of operations for the nine months ended September 30, 2020.

(4)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 $2.9 million and $4.4 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 51.4 million, equivalent to approximately $7.6 million, of notes receivable as collateral for the local government loans (See Note 3).

 

On April 21, 2017,The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company received an interest-free Chinese government loanfails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of RMB 10.0 million, equivalent to approximately $1.5 million, which will mature on December 8, 2017. Jiulong pledged RMB 10.0 million, equivalent to approximately $1.5 million, of notes receivable as security for the Chinese government loan (See Note 4).September 30, 2020.

 

8.14.Accounts and notes payable

 

The Company’s accounts and notes payable as of September 30, 20172020 and December 31, 20162019 are summarized as follows (figures are in thousands of USD):

 

  September 30, 2017  December 31, 2016 
Accounts payable - unrelated parties $142,594  $138,053 
Notes payable - unrelated parties(1)  82,164   78,940 
Accounts and notes payable- unrelated parties  224,758   216,993 
Accounts payable - related parties  5,749   6,803 
Balance at end of period $230,507  $223,796 
  September 30, 2020  December 31, 2019 
Accounts payable - unrelated parties $121,250  $110,246 
Notes payable - unrelated parties (1)  68,665   69,929 
Accounts and notes payable - unrelated parties  189,915   180,175 
Accounts and notes payable - related parties  11,518   6,492 
Total $201,433  $186,667 

 

(1)Notes payable represent accounts payablepayables in the form of notes issued by the Company. The notes are endorsed by banks to ensure that noteholders will be paid after maturity. Thebank. As of September 30, 2020 and December 31, 2019, the Company has pledged cash deposits, short-term investments,of $31.7 million and $29.7 million, respectively. As of September 30, 2020 and December 31, 2019, the Company has pledged accounts and notes receivable of $1.9 million and certain$7.4 million, respectively. The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment to secure notes payable granted by banks.and land use rights of the Company. As of September 30, 2020 and December 31, 2019, the Company has used $40.1 million and $37.8 million, respectively, for issuing bank notes.

 


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15.9.Accrued expenses and other payables

 

The Company’s accrued expenses and other payables as of September 30, 20172020 and December 31, 20162019 are summarized as follows (figures are in thousands of USD):

 

 September 30, 2017  December 31, 2016  September 30, 2020  December 31, 2019 
Accrued expenses $7,975  $8,605  $7,121  $6,306 
Accrued interest  953   88   525   104 
Dividends payable to holders of non-controlling interests(3)  621   - 
Current portion of other long-term payable (See Note 10)  3,886   3,593 
Other payables  2,483   964   2,056   2,431 
Warranty reserves(1) (2)  20,851   26,225 
Dividends payable to holders of non-controlling interests  441   - 
Warranty reserves (1)  34,837   32,907 
Total $32,883  $35,882  $48,866  $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.

 

(2)In January 2017, the Company initiated two recalls related to the Company’s products. The Company has accrued anticipated costs for handling the recalls amounting to $5.0 million in warranty reserves for the year ended December 31, 2016.

(3)In accordance with the resolution of the Board of Directors of Shenyang, in the second quarter of 2017, Shenyang declared a dividend amounting to $2.0 million to its shareholders, of which $0.6 million was payable to the holders of the non-controlling interests. As of September 30, 2017, the dividends have not been paid.

For the three and nine months ended September 30, 20172020 and 2016,2019, the warranties activities were as follows (figures are in thousands of USD): 

 

  Three Months Ended September 30, 
  2017  2016 
Balance at beginning of the period $23,898  $21,238 
Additions during the period  4,426   1,693 
Settlement within period, by cash or actual materials  (6,814)  (2,378)
Foreign currency translation (gain)/loss  (659)  160 
Balance at end of the period $20,851  $20,713 

For the nine months ended September 30, 2017 and 2016, and for the year ended December 31, 2016, the warranties activities were as follows (figures are in thousands of USD): 

  Nine Months Ended September 30,  Year Ended 
December 31,		 
  2017  2016  2016 
Balance at beginning of the period $26,225  $23,059  $23,059 
Additions during the period  11,182   5,433   16,522 
Settlement within period, by cash or actual materials  (15,423)  (8,434)  (11,781)
Foreign currency translation loss  (1,133)  655   (1,575)
Balance at end of the period $20,851  $20,713  $26,225 

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  Three Months Ended
September 30,		  

Nine Months Ended 

September 30,

 
  2020  2019  2020  2019 
Balance at beginning of the period $34,031  $30,936  $32,907  $31,085 
Additions during the period  3,947   4,563   12,303   12,064 
Settlement within the period  (4,480)  (4,338)  (11,218)  (11,921)
Foreign currency translation loss/(gain)  1,339   (874)  845   (941)
Balance at end of the period $34,837  $30,287  $34,837   30,287 

 

16.Taxes payable

The Company’s taxes payable as of September 30, 2017 and December 31, 2016 are summarized as follows (figures are in thousands of USD):

  September 30, 2017  December 31, 2016 
Value-added tax payable $2,374  $7,662 
Income tax payable  1,019   3,390 
Other tax payable  407   622 
Total $3,800  $11,674 

17.10.AdvancesOther long-term payable

 

On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor”) and simultaneously entered into a four-year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was RMB 91.3 million (equivalent to $13.4 million as of September 30, 2020) and the sales price was RMB 100.0 million (equivalent to $14.7 million as of September 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 lease payment of approximately $1.1 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as a sale. Therefore, the transaction was accounted for as a financing transaction by the Company. As of September 30, 20172020, $3.9 million was recognized as other payable (See Note 9) and December 31, 2016, advances$2.1 million was recognized as other long-term payable to the buyer-lessor according to the contract term.

11.Redeemable non-controlling interests

In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $0.7 million. The shares shall be transferred to the Company and the other shareholder of the subsidiary on pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed period of time after their issuance with a transfer price of par plus 6% per year. $0.5 million of the shares are subject to purchase by the Company were $0.8 million and $0.7 million, respectively.are therefore accounted for as redeemable non-controlling interests in mezzanine equity and are accreted to the redemption value over the period starting from the issuance date.

 

The amounts are special subsidies made byFor the Chinese governmentthree months ended September 30, 2020, the Company recognized accretion of $0.003 million to the Company to offset the costs and charges related to the improvement of production capacities and improvementredemption value of the quality of products. Forshares over the government subsidiesperiod starting from the issuance date with no further conditionsa corresponding reduction to be met, the amounts are recorded as other income when received; for the amounts with certain operating conditions, the government subsidies are recorded as advances payable when received and will be recorded as a deduction of related expenses and cost when the conditions are met.retained earnings.

 

The balances are unsecured, interest-free and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy.


18.12.Additional paid-in capital

 

The Company’s positions in respect of the amounts of additional paid-in capital for the three and nine months ended September 30, 20172020 and 2016, and the year ended December 31, 20162019, are summarized as follows (figures are in thousands of USD):

 

 Nine Months Ended September 30,  Year Ended 
December 31,		  

Three Months Ended

September 30,

  

Nine Months Ended 

September 30,

 
 2017  2016  2016  2020  2019  2020  2019 
Balance at beginning of the period $64,764  $64,627  $64,627  $64,273  $64,466  $64,466  $64,466 
Acquisition of the non-controlling interest in Brazil Henglong(1)  (458)  -   - 
Share-based compensation(2)  100   -   137 
Acquisition of the non-controlling interest in USAI  -   -   (29)  - 
Acquisition of the non-controlling interest in Changchun Hualong (1)  -   -   (76)  - 
Deemed distribution to shareholders (1)  -   -   (88)  - 
Balance at end of the period $64,406  $64,627  $64,764  $64,273  $64,466  $64,273  $64,466 

  

(1)In May 2017,April 2020, the Company obtained an additional 15.84% equity interest in Brazil Henglongacquired Changchun Hualong for nil consideration. The Company retained itstotal consideration of $0.2 million. Before acquisition, Hanlin Chen, the Company’s ultimate controlling interest in Brazil Henglongshareholder owned 52.1% of Changchun Hualong’s shares and the acquisition of the non-controlling interestremaining 47.9% were owned by third parties. Therefore, this transaction was accounted for as an equity transaction.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.

 

(2)On December 2, 2016 and August 16, 2017, the Company granted 22,500 and 22,500 stock options, respectively, to the Company’s independent directors, with the exercise price equal to the closing price of the Company’s common stock traded on NASDAQ one day before the date of grant and on the date of grant. The fair value of the stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield assumption is based on historical patterns and future expectations for the Company’s dividends.

21

Assumptions used to estimate the fair value of the stock options on the grant dates are as follows:

Issuance Date Expected volatility  Risk-free rate  Expected term (years)  Dividend yield 
             
December 2, 2016  134.8%  1.84%  5   0.00%
August 16, 2017  139.2%  1.79%  5   0.00%

The stock options granted during 2017 and 2016 were exercisable immediately. Their fair values on the grant dates using the Black-Scholes option pricing model were$0.1 million and $0.1 million, respectively. For the nine months ended September 30, 2017 and the year ended December 31, 2016, the Company recognized stock-based compensation expenses of $0.1 million and $0.1 million, respectively. 

19.13.Retained earnings

 

Appropriated

 

Pursuant to the relevant PRC laws, the profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory financial statements, other than the financial statement that was prepared in accordance with generally accepted accounting principles in the United States of America, 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 September 30, 2020 and 2019, no longer required. However,statutory reserve was appropriated by the reserve cannot be distributed to joint venture partners. Based on the business licenses of the PRC subsidiaries the registered capital of Henglong, Jiulong, Shenyang, USAI, Jielong, Wuhu, Hubei Henglong and Chongqing are $10.0 million, $4.2 million (equivalent to RMB 35.0 million), $8.1 million (equivalent to RMB 67.5 million), $2.6 million, $6.0 million, $3.8 million (equivalent to RMB 30.0 million), $39.0 million and $9.5 million (equivalent to RMB 60.0 million), respectively.in China.

 

The Company’s activities in respect of the amounts of appropriated retained earnings for the three and nine months ended September 30, 20172020 and 2016, and the year ended December 31, 20162019, are summarized as follows (figures are in thousands of USD):

 

 Nine Months Ended September 30,  Year Ended  
December 31,		  

Three Months Ended

September 30,

  

Nine Months Ended 

September 30,

 
 2017 2016 2016  2020  2019  2020  2019 
Balance at beginning of the period $10,549  $10,379  $10,379  $11,265  $11,104  $11,265  $11,104 
Appropriation of retained earnings  124   142   170 
Balance at end of the period $10,673  $10,521  $10,549  $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 nine months ended September 30, 20172020 and 2016, and the year ended December 31, 20162019, are summarized as follows (figures are in thousands of USD):

 

 Nine Months Ended September 30,  Year Ended
December 31,		  

Three Months Ended

September 30,

  

Nine Months Ended 

September 30,

 
 2017  2016  2016  2020  2019  2020  2019 
Balance at beginning of the period $228,963  $206,622  $206,622  $216,383  $215,413  $221,298  $211,497 
Net income attributable to parent company  19,694   16,755   22,511 
Appropriation of retained earnings  (124)  (142)  (170)
Cumulative effect of accounting change - credit loss  -   -   (789)  - 
Accretion of redeemable non-controlling interests  (3)  -   (3)  - 
Net income/(loss) attributable to parent company  2,361   4,314   (1,765)  8,230 
Balance at end of the period $248,533  $223,235  $228,963  $218,741  $219,727  $218,741  $219,727 

 


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20.14.Accumulated other comprehensive income

 

The Company’s activities in respect of the amounts of the accumulated other comprehensive income for the three and nine months ended September 30, 20172020 and 2016, and the year ended December 31, 20162019, are summarized as follows (figures are in thousands of USD): 

 

 Nine Months Ended September 30,  Year Ended
December 31,		  

Three Months Ended

September 30,

  

Nine Months Ended 

September 30,

 
 2017  2016  2016  2020  2019  2020  2019 
Balance at beginning of the period $(892) $18,412  $18,412  $(7,668) $1,379  $(3,462) $1,855 
Other comprehensive income related to the non-controlling interests acquired by the Company  (67)  -   - 
Foreign currency translation adjustment attributable to parent company  13,681   (8,128)  (19,304)  11,849   (8,979)  7,643   (9,455)
Balance at end of the period $12,722  $10,284  $(892) $4,181  $(7,600) $4,181  $(7,600)

 

21.15.Treasury stock
Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On August 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $3.50 per share through August 12, 2021. As of September 30, 2020, the Company had repurchased 322,269 shares of the Company’s common stock that were authorized to be repurchased under the program that was approved on August 13, 2020. The repurchased shares are presented as “treasury stock” on the balance sheet.

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 18, 2015, 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 or in privately negotiated transactions through December 17, 2016. The repurchase program terminated on December 17, 2016. During the year ended December 31, 2016, under the repurchase program, the Company repurchased 477,015 shares of the Company’s common stock for cash consideration of $1.9 million on the open market. The repurchased shares are presented as “treasury stock” on the balance sheet.

 

22.16.Non-controlling interests

 

The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three and nine months ended September 30, 20172020 and 2016, and the year ended December 31, 20162019, are summarized as follows (figures are in thousands of USD):  

 

  Nine Months Ended September 30,  Year Ended
December 31,		 
  2017  2016  2016 
Balance at beginning of the period $5,412  $8,252  $8,252 
Income attributable to non-controlling interests  353   164   466 
Dividends declared to the non-controlling interest holders of joint-venture companies (See Note 15)  (608)  (464)  (464)
Acquisition of the non-controlling interest in Brazil Henglong  458   -   - 
Other comprehensive income related to the non-controlling
interests acquired by the Company		  67   -   - 
Non-controlling interests change due to the disposal of Fujian Qiaolong  -   (2,150)  (2,150)
Foreign currency translation adjustment attributable to non-controlling interests  467   (307)  (692)
Balance at end of the period $6,149  $5,495  $5,412 

23
  

Three Months Ended

September 30,

  

Nine Months Ended 

September 30,

 
  2020  2019  2020  2019 
Balance at beginning of the period $18,603  $19,525  $20,250  $19,037 
Net loss attributable to non-controlling interests  (848)  (113)  (1,590)  (688)
Acquisition of the non-controlling interest in USAI  -   -   29   - 
Acquisition of the non-controlling interest in Changchun Hualong  -   -   (5)  - 
Cumulative effect of accounting change - credit loss  -   -   (102)  - 
Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries  -   -   (430)  (333)
Contribution by non-controlling shareholder of Wuhan Hyoseong  -   2,104   -   3,542 
Contribution by non-controlling shareholder of Wuhu Hongrun  217   -   217   - 
Foreign currency translation adjustment attributable to non-controlling interests  925   (724)  528   (766)
Balance at end of the period $18,897  $20,792  $18,897  $20,792 

 

23.17.Gain on otherNet product sales

 

GainRevenue Disaggregation

Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 25.

17

Contract Assets and Liabilities

Contract assets, such as costs to obtain or fulfill contracts, are an insignificant component of the Company’s revenue recognition process. The majority of the Company’s cost of fulfillment as a manufacturer of products is classified as inventory, fixed assets and intangible assets, which are accounted for under the respective guidance for those asset types. Other costs of contract fulfillment are immaterial due to the nature of the Company’s products and their respective manufacturing processes.

Contract liabilities are mainly customer deposits. As of September 30, 2020 and December 31, 2019, the Company has customer deposits of $2.6 million and $1.3 million, respectively, which were included in other current liabilities on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, and scraps. Forthe consolidated balance sheets. During the nine months ended September 30, 2017, gain on other2020, $2.2 million was received and $0.9 million (including $0.9 million from the beginning balance of customer deposits) was recognized as net product sales amountedrevenue. Customer deposits represent cash deposits for customers to $5.9 million as comparedsecure rights to $2.0 million for the nine months ended September 30, 2016, representing an increaseamount of $3.9 million. During the second quarter of 2017,products produced by the Company disposedunder supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of a building located in Jingzhou and recognized a gain of $2.2 million.  the customer deposit liability.

 

24.18.Financial (expense)/income, net

 

During the three and nine months ended September 30, 20172020 and 2016,2019, the Company recordedCompany’s financial (expense)/income net which is summarized as follows (figures are in thousands of USD):

 

  Nine Months Ended September 30, 
  2017  2016 
       
Interest income $2,474  $1,777 
Foreign exchange loss, net  (173)  (30)
Gain of cash discount, net  -   3 
Bank fees  (392)  (480)
Total financial income, net $1,909  $1,270 
  

Three Months Ended 

September 30,

  

Nine Months Ended 

September 30,

 
  2020  2019  2020  2019 
Interest income $393  $661  $1,142  $2,138 
Foreign exchange (loss)/gain, net  (2,672)  1,105   (3,797)  709 
Bank charges  (34)  (214)  (248)  (408)
Total financial (expense)/income, net $(2,313) $1,552  $(2,903) $2,439 

 

25.19.Income tax rate

 

The Company’s subsidiaries registered in the PRC are subject to nationalIncome tax benefit was $0.2 million and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential terms according to the China income tax law, such as assessment as a “High & New Technology Enterprise” by the government, the enterprise will be subject to enterprise income tax at a rate of 15%.

Pursuant to the New China Income Tax Law and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign investors are considered non-resident enterprises without any establishment or place within China or if the dividends payable have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

Genesis, the Company’s wholly-owned subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China to its direct holding company in Hong Kong will be subject to withholding tax at a rate of no more than 5%, if the foreign investor directly owns at least 25% of the shares of the foreign-invested enterprise. Under the New CIT, if Genesis is regarded as a non-resident enterprise, it is required to pay an additional 5% withholding tax for any dividends payable to it from the PRC subsidiaries.

According to PRC tax regulation, the Company should withhold income taxes for the profits distributed from the PRC subsidiaries to Genesis, the subsidiaries’ holding company incorporated in Hong Kong. For the profits that the PRC subsidiaries intended to distribute to Genesis, the Company accrues the withholding income tax as deferred tax liabilities. As of September 30, 2017, the Company has recognized deferred tax liabilities of $0.2expense was $0.9 million for the remaining undistributed profits to Genesis of $4.5 million. The Company intended to re-invest the remaining undistributed profits generated from the PRC subsidiaries in those subsidiaries permanently. As ofthree months ended September 30, 20172020 and December 31, 2016, the Company still had undistributed earnings of approximately $266.42019, respectively. Income tax expense was $0.3 million and $239.8$1.8 million respectively, from investment in the PRC subsidiaries that are considered permanently reinvested. Had the undistributed earnings been distributed to Genesis and not permanently reinvested, the tax provision as of September 30, 2017 and December 31, 2016 of approximately $13.3 million and $12.0 million, respectively, would have been recorded. Such undistributed profits will be reinvested in Genesis and not further distributed to the parent company incorporated in the United States going forward.

24

In 2014, Jiulong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax at a rate of 15% from 2014 to 2016. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 and continue to qualify as “High & New Technology Enterprise”.

In 2014, Henglong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income tax at a rate of 15% from 2014 to 2016. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 and continue to qualify as “High & New Technology Enterprise”.

In 2009, Shenyang was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2009, 2010 and 2011. In 2012, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continued to be taxed at the 15% tax rate in 2012, 2013 and 2014. In 2015, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017.

In 2012, Wuhu was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2013 and 2014. In 2015, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate in 2015 and 2016. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 and continue to qualify as “High & New Technology Enterprise”.

In 2013, Jielong was awarded the title of “High & New Technology Enterprise” and, based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2013, 2014 and 2015. In 2016, the Company passed the re-assessment of the government based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate from 2016 to 2018.

In 2011, Hubei Henglong was awarded the title of “High & New Technology Enterprise”. Based on the PRC income tax law, it was subject to enterprise income tax at a rate of 15% for 2013. The Company has passed the re-assessment in 2014 and continues to qualify as a “High & New Technology Enterprise”. Accordingly, it continues to be taxed at the 15% tax rate in 2014, 2015 and 2016. The Company estimated the applied tax rate in 2017 to be 15% as it is probable to pass the re-assessment in 2017 and continue to qualify as “High & New Technology Enterprise”.

According to the New CIT, USAI, Wuhan Chuguanjie, Shanghai Henglong and Testing Center are subject to income tax at a rate of 25% in 2016 and 2017.

Chongqing Henglong was established in 2012. According to the New CIT, Chongqing Henglong is subject to income tax at a uniform rate of 25%. No provision for Chongqing Henglong is made as it had no assessable income for the nine months ended September 30, 20172020 and 2016.

Based on Brazilian2019, respectively. The increase in income tax laws, Brazil Henglong is subject tobenefit primarily resulted from the increase in loss before income tax at a uniform rate of 15%, and a resident legal person is subject to additional tax at a rate of 10% for the part of taxable income over $0.12 million, equivalent to approximately BRL 0.24 million. The Company had no assessable income in Brazil for the nine months ended September 30, 2017 and 2016.

The profits tax rate of Hong Kong is 16.5%. No provision for Hong Kong tax is made as Genesis is an investment holding company, and had no assessable income in Hong Kong for the nine months ended September 30, 2017 and 2016.

The enterprise income tax rate of the United States is 35%. No provision for U.S. tax is made for CAAS and HLUSA as a whole, as the Company had no assessable income in the United States for the nine months ended September 30, 2017 and 2016.

25

The Company’s effective tax rate was 17.3% and 18.2% for the three months and nine months ended September 30, 2017, respectively, compared with 17.4% and 17.3% for the three months and nine months ended September 30, 2016, respectively.expenses.

 

26.20.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 calculationcalculations of basic and diluted income per share attributable to the parent company for the three months ended September 30, 20172020 and 2016, was2019, were as follows (figures are in thousands of USD, except share and per share amounts):

 

  Three Months Ended September 30, 
  2017  2016 
Numerator:        
Net income attributable to the parent company’s common shareholders – Basic and Diluted $5,059  $5,682 
Denominator:        
Weighted average shares outstanding  31,644,004   31,911,360 
Dilutive effects of stock options  267   362 
Denominator for dilutive income per share – Diluted  31,644,271   31,911,722 
         
Net income per share attributable to parent company’s common shareholders – Basic $0.16  $0.18 
Net income per share attributable to parent company’s common shareholders – Diluted $0.16  $0.18 
  Three Months Ended September 30, 
  2020  2019 
Numerator:      
Net income attributable to the parent company’s common shareholders - Basic and Diluted $2,358  $4,314 
Denominator:        
Weighted average shares outstanding - Basic  31,112,076   31,492,035 
Dilutive effects of stock options  1,298   - 
Denominator for dilutive income per share - Diluted  31,113,374   31,492,035 
         
Net income per share attributable to parent company’s common shareholders - Basic $0.08  $0.14 
Net income per share attributable to parent company’s common shareholders - Diluted $0.08  $0.14 


 

The calculationcalculations of basic and diluted income per share attributable to the parent company for the nine months ended September 30, 20172020 and 2016, was2019, were as follows (figures are in thousands of USD, except share and per share amounts):

 

  Nine Months Ended September 30, 
  2017  2016 
Numerator:        
Net income attributable to the parent company’s common shareholders – Basic and Diluted $19,694  $16,755 
Denominator:        
Weighted average shares outstanding  31,644,004   32,038,933 
Dilutive effects of stock options  3,829   1,581 
Denominator for dilutive income per share – Diluted  31,647,833   32,040,514 
         
Net income per share attributable to parent company’s common shareholders – Basic $0.62  $0.52 
Net income per share attributable to parent company’s common shareholders – Diluted $0.62  $0.52 
  Nine Months Ended September 30, 
  2020  2019 
Numerator:        
Net (loss)/income attributable to the parent company’s common shareholders - Basic and Diluted $(1,768) $8,230 
Denominator:        
Weighted average shares outstanding - Basic  31,153,162   31,498,553 
Dilutive effects of stock options  457   2,555 
Denominator for dilutive income per share - Diluted  31,153,619   31,501,108 
         
Net (loss)/income per share attributable to parent company’s common shareholders - Basic $(0.06) $0.26 
Net (loss)/income per share attributable to parent company’s common shareholders - Diluted $(0.06) $0.26 

 

As of September 30, 20172020 and 2016,2019, the exercise prices for 90,00022,500 shares and 82,50030,000 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the three months ended September 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 September 30, 2020 and 2019, the exercise prices for 22,500 shares and 22,500 shares, respectively, of outstanding stock options were above the weighted average market price of the Company’s common stock during the nine months ended September 30, 20172020 and 2016, respectively, and2019, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.

 

26

27.21.Significant concentrations

 

A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the "current account,"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. However, pursuant to applicable regulations, foreign-invested enterprises

China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, may pay“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 their accumulated profits if any,as determined in accordance with theaccounting standards and regulations in China. Under PRC law. In calculating accumulated profits, foreign investment enterprises in Chinalaw China-based Subsidiaries are required to allocateset aside at least 10% of their annual net incomeafter-tax profit based on PRC accounting standards each year if any, to fund certain reserve funds, including mandated employee benefits funds, unless thesetheir general reserves have reacheduntil 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 registered capitaldiscretion 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 enterprises.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 USD,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 PRCChina 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 PRCChina 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.

  

The Company grants credit to its customers including Xiamen Joylon, Xiamen Automotive Parts, Shanghai Fenglong and JingzhouYude, which are related parties of the Company. The Company’s customers are mostly located in the PRC.

During the nine months ended September 30, 2017, the Company’s ten largest customers accounted for 56.1% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales i.e., 14.75%. As of September 30, 2017, approximately 6.6% 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 nine months ended September 30, 2016, the Company’s ten largest customers accounted for 62.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 12.9%. As of September 30, 2016, approximately 3.8% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

27

28.22.Related party transactions and balances

 

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

 

Related sales

 

 Three Months Ended September 30,  Three Months Ended September 30, 
 2017  2016  2020  2019 
Merchandise sold to related parties $7,563  $9,950  $16,840  $12,277 
Materials and others sold to related parties  479   353 
Rental income obtained from related parties  20   23   70   85 
Materials and others sold to related parties  376   551 
Total $7,959  $10,524  $17,389  $12,715 

 

 Nine Months Ended September 30,  Nine Months Ended September 30, 
 2017  2016  2020  2019 
Merchandise sold to related parties $25,684  $28,589  $40,439  $39,458 
Materials and others sold to related parties  1,179   1,250 
Rental income obtained from related parties  66   91   311   286 
Materials and others sold to related parties  1,186   1,231 
Total $26,936  $29,911  $41,929  $40,994 

 

Related purchases

 

  Three Months Ended September 30, 
  2017  2016 
Materials purchased from related parties $6,549  $5,869 
Technology purchased from related parties  -   135 
Equipment purchased from related parties  4,857   4,370 
Others purchased from related parties  156   149 
Total $11,562  $10,523 

  Three Months Ended September 30, 
  2020  2019 
Materials purchased from related parties $7,012  $6,474 
Equipment purchased from related parties  280   405 
Others purchased from related parties  22   7 
Total $7,314  $6,886 

 

  Nine Months Ended September 30, 
  2017  2016 
Materials purchased from related parties $20,195  $18,912 
Technology purchased from related parties  -   362 
Equipment purchased from related parties  9,281   7,900 
Others purchased from related parties  371   524 
Total $29,847  $27,698 

Loan transaction to a related party 

  Nine Months Ended September 30, 
  2017  2016 
Related party loan $29,182  $- 

  Nine Months Ended September 30, 
  2020  2019 
Materials purchased from related parties $16,298  $18,108 
Equipment purchased from related parties  867   2,676 
Others purchased from related parties  26   28 
Total $17,191  $20,812 

 

Related receivables

 

  September 30, 2017  December 31, 2016 
Accounts and notes receivable from related parties $17,607  $20,984 
  September 30, 2020  December 31, 2019 
Accounts and notes receivable from related parties $19,881  $21,164 
         

 

Related advances and loan balanceadvance payments

 

  September 30, 2017  December 31, 2016 
Advance payments for property, plant and equipment to related parties $4,813  $5,005 
Advance payments and others to related parties  31,397   624 
Total $36,210  $5,629 

28
  September 30, 2020  December 31, 2019 
Advance payments for property, plant and equipment to related parties $3,094  $2,311 
Advance payments and others to related parties  493   1,287 
Total $3,587  $3,598 

 

Related payables

 

  September 30, 2017  December 31, 2016 
Accounts and notes payable $5,749  $6,803 
  September 30, 2020  December 31, 2019 
Accounts and notes payable $11,518  $6,492 
         

 

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

 

As of November 9, 2017,12, 2020, Hanlin Chen, the Company’s Chairman,chairman of the board of directors of the Company, owns 56.4%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.

 

29.23.Commitments and contingencies

 

Legal proceedings

 

On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. As of October 2020, the plaintiffs and defendants were negotiating to reach a settlement to resolve the lawsuit for a nominal sum. The Company does not expect to admit any liability in reaching the settlement. The settlement will be submitted to the Delaware Court of Chancery for approval in accordance with Delaware law. Management expects the impact of the complaint 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. In addition,proceedings and no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest adverse to the Company in reference to pending litigation.

 


Other commitments and contingencies

In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of September 30, 20172020 (figures are in thousands of USD):

 

29

 Payment obligations by period  Payment obligations by period 
 2017 (1) 2018 2019 2020 Thereafter Total  2020  2021  2022 and thereafter  Total 
Obligations for investment contracts(1)  -  $5,424  $-  $-  $-  $5,424  $2,144  $441  $-  $2,585 
Obligations for purchasing and service agreements  16,496   5,650   2,530   -   -   24,676   17,116   9,201   -   26,317 
Total $16,496  $11,074  $2,530  $-  $-  $30,100  $19,260  $9,642  $-  $28,902 

 

(1)

In May 2016,April 2019, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Chongqing Venture Fund”. Hubei Henglong hasand committed to make investments ofcontribute RMB 120.05.0 million, equivalent to approximately $18.1$0.7 million, in the Chongqing Venture Fund in three installments.to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s shares. As of September 30, 2017,2020, Hubei Henglong has completed a capital contribution of RMB 84.03.0 million, equivalent to approximately $12.7 million, representing 35.0% of the Chongqing Venture Fund’s shares.$0.4 million. According to the agreement, the remaining capital commitment of RMB 36.02.0 million, equivalent to approximately $5.4$0.3 million, will be paid upon capital calls received fromin 2020.

In November 2019, Hubei Henglong entered into an agreement with other parties and committed to purchase 70% of the Chongqing Venture Fund.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 September 30, 2020, Hubei Henglong has paid the amount of RMB 18.0 million, equivalent to approximately $2.6 million, which was reported in other non-current assets as the transfer of shares had not been consummated. According to the agreement, of the remaining consideration of RMB 15.6 million, equivalent to approximately $2.3 million, $1.9 million will be paid in 2020 and the remaining $0.4 million will be paid in 2021.

 

30.24.Off-balance sheet arrangements

 

As of September 30, 20172020 and December 31, 2016,2019, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

31.25.Segment reporting

 

The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 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 segmentinter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.


 

As of September 30, 2017,2020, the Company had 1115 product sectors, fivesix 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 sixnine sectors were engaged in the productiondevelopment, manufacturing and sale of sensor modular (USAI)high polymer materials (Wuhu Hongrun), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after salesafter-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), and manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie). Since the revenues, net income, research and net assetsdevelopment of these six sectors collectively are less than 10%intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of consolidated revenues, net incomeautomotive motors and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these six sectors into “Other Sectors.”electromechanical integrated systems (Wuhan Hyoseong).

 

As of September 30, 2016,2019, the Company had eleven15 product sectors, fivesix 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 sixnine sectors were engaged in the production and sale of sensor modular (USAI), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after salesafter-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong), and manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie). Since the revenues, net income, research and net assetsdevelopment of these seven sectors collectively are less than 10%intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of consolidated revenues, net incomeautomotive motors and net assets, respectively, in the condensed unaudited consolidated financial statements, the Company incorporated these six sectors into “Other Sectors.” electromechanical integrated systems (Wuhan Hyoseong).

30

 

The Company’s product sector information for the three months and nine months ended September 30, 20172020 and 2016,2019, is as follows (figures are in thousands of USD):

 

  Net Product Sales  Net Income (Loss) 
  Three Months Ended  Three Months Ended 
  September 30  September 30 
  2017  2016  2017  2016 
Henglong $55,790  $57,530  $689  $3,771 
Jiulong  26,067   17,787   478   1,083 
Shenyang  10,103   8,239   486   457 
Wuhu  6,503   5,088   118   21 
Hubei Henglong  24,812   13,912   2,680   735 
Other Sectors  14,961   11,588   777   (269)
Total Segments  138,236   114,144   5,228   5,798 
Corporate  -   -   317   808 
Eliminations  (19,871)  (19,518)  (317)  (747)
Total $118,365  $94,626  $5,228  $5,859 

 

 Net Product Sales Net Income (Loss)  Net Product Sales  Net (Loss)/Income 
 Nine Months Ended Nine Months Ended  Three Months Ended Three Months Ended 
 September 30 September 30  September 30,  September 30, 
 2017 2016 2017 2016  2020  2019  2020  2019 
Henglong $191,093  $195,940  $6,300  $13,389  $41,001  $38,971  $193  $1,300 
Jiulong  75,525   54,976   3,739   2,219   25,879   17,211   823   (726)
Shenyang  28,777   24,898   1,271   995   3,622   4,267   (5)  160 
Wuhu  18,254   15,897   215   96   3,221   3,047   (100)  (190)
Hubei Henglong  66,855   42,815   5,518   2,286   37,014   33,664   3,239   2,425 
Other Sectors  40,821   29,558   1,341   162 
Henglong KYB  14,298   15,971   (2,045)  (426)
Other Entities  16,743   14,120   150   1,031 
Total Segments  421,325   364,084   18,384   19,147   141,778   127,251   2,255   3,574 
Corporate  -   -   3,367   (1,317)  -   -   (678)  14 
Eliminations  (65,992)  (51,587)  (1,704)  (911)  (27,361)  (26,709)  (64)  613 
Total $355,333  $312,497  $20,047  $16,919  $114,417  $100,542  $1,513  $4,201 

  Net Product Sales  Net (Loss)/Income 
  Nine Months Ended  Nine Months Ended 
  September 30,  September 30, 
  2020  2019  2020  2019 
Henglong $100,651  $116,510  $(298) $1,379 
Jiulong  64,948   65,971   (53)  1,637 
Shenyang  9,860   14,573   330   566 
Wuhu  8,742   14,283   223   (577)
Hubei Henglong  76,565   89,423   5,391   6,209 
Henglong KYB  32,987   54,803   (3,484)  (2,280)
Other Entities  39,054   46,769   (2,370)  3,776 
Total Segments  332,807   402,332   (261)  10,710 
Corporate  -   -   (1,766)  (1,450)
Eliminations  (61,651)  (86,849)  (1,328)  (1,718)
Total $271,156  $315,483  $(3,355) $7,542 

 

31

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 2009.2009 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 3,0003,998 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.

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 14.2% and gross profit margin decreased by 3.0% 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 the U.S. for the nine months ended September 30, 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.

24

 

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 JingzhouHengshengJingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations, high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016. USAI was established in 2005, and the Company and Hubei Wanlong owned 83.34% and 16.66%, respectively. In May 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and it deregistered from the local business administration on April 28, 2020. Following the merger, 85.0% of Wuhan Chuguanjie was owned by the Company and 15.0% was owned by Hubei Wanlong. In April 2020, Hubei Henglong acquired 100.00% of the shares of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts.

 

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.

  

32

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

         

Inventory

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

33
   

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

Tax payable and deferred tax assets/liabilities

Uncertain tax positions

The Company is required to determine and assess all material positions, including all significant uncertain positions in all tax years that are still subject to assessment or challenge under relevant tax statutes.  The Company applies a more likely than not threshold and a two-step approach for tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement.

·An allocation or a shift of income between jurisdictions

·The characterization of income or a decision to exclude reporting taxable income in a tax return

·A decision to classify a transaction, entity, or other position in a tax return as tax exempt

In addition, there are other items within the Company’s financial statements that require estimation, but are not as critical as those discussed above, including provision of accounts and notes receivable. Although not significant in recent years, changes in estimates used in these and other items could have a significant effect on the Company’s consolidated financial statements.

 

Recent Accounting Pronouncements

 

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

 

34

 

Results of Operations

  

Results of Operations—Three Months Ended September 30, 20172020 and 20162019

 

  Net Product Sales  Cost of Products Sold 
  (in thousands of USD,
except percentages)		  (in thousands of USD,
except percentages)		 
  2017  2016  Change  2017  2016  Change 
Henglong $55,790  $57,529   (1,739)  -3.02% $47,639  $47,616  $23   0.05%
Jiulong  26,067   17,787   8,280   46.55   22,804   14,934   7,870   52.70 
Shenyang  10,103   8,239   1,864   22.62   8,757   7,070   1,687   23.85 
Wuhu  6,503   5,089   1,414   27.79   5,926   4,696   1,230   26.20 
Hubei Henglong  24,812   13,913   10,899   78.34   17,656   10,270   7,386   71.92 
Other Sectors  14,961   11,589   3,372   29.10   12,653   9,606   3,047   31.72 
Total Segments  138,236   114,146   24,090   21.10   115,435   94,192   21,243   22.55 
Elimination  (19,871)  (19,520)  (351)  1.80   (19,557)  (19,551)  (6)  0.03 
Total $118,365  $94,626  $23,739   25.09% $95,878  $74,641  $21,237   28.45%

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

  Three Months Ended September 30, 
  2020  2019  Change  Change% 
Net product sales $114,417  $100,542  $13,875   13.8%
Cost of products sold  100,842   83,225   17,617   21.2 
Gain on other sales  1,497   1,102   395   35.8 
Selling expenses  3,800   3,563   237   6.7 
General and administrative expenses  5,142   4,429   713   16.1 
Research and development expenses  6,072   5,988   84   1.4 
Other income, net  350   171   179   104.7 
Interest expense  (403)  (787)  384   -48.8 
Income tax (benefit)/expense  (189)  948   (1,137)  -119.9 
Net income  1,513   4,201   (2,688)  -64.0 
Net loss attributable to non-controlling interests  (848)  (113)  (735)  650.4 
Net income attributable to parent company’s common shareholders  2,358   4,314   (1,956)  -45.3%

 

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 $41,001  $38,971  $2,030   5.2% $37,940  $35,328  $2,612   7.4%
Jiulong  25,879   17,211   8,668   50.4   22,589   16,560   6,029   36.4 
Shenyang  3,622   4,267   (645)  -15.1   2,934   3,480   (546)  -15.7 
Wuhu  3,221   3,047   174   5.7   2,968   2,859   109   3.8 
Hubei Henglong  37,014   33,664   3,350   10.0   32,366   26,900   5,466   20.3 
Henglong KYB  14,298   15,971   (1,673)  -10.5   14,764   13,831   933   6.7 
Other Entities  16,743   14,120   2,623   18.6   13,706   10,628   3,078   29.0 
Total Segments  141,778   127,251   14,527   11.4   127,267   109,586   17,681   16.1 
Elimination  (27,361)  (26,709)  (652)  2.4   (26,425)  (26,361)  (64)  0.2 
Total $114,417  $100,542  $13,875   13.8% $100,842  $83,225  $17,617   21.2%

Net Product Sales

Net product sales were $118.4$114.4 million for the three months ended September 30, 2017,2020, compared to $94.6$100.5 million for the same period in 2016,2019, representing an increase of $23.8$13.9 million, or 25.2%.13.8%, mainly due to the market recovery after COVID-19.

 

The Company’s net product sales were affected by the change in the product mix. Net sales of traditional steering products and parts were $92.7$97.7 million for the three months ended September 30, 2017,2020, compared to $69.0$82.0 million for the same period in 2016,2019, representing an increase of $23.7$15.7 million, or 34.3%19.1%. Net sales of EPSelectric power steering (“EPS”) were $25.7$16.7 million for the three months ended September 30, 2017, consistent with $25.62020 and $18.5 million for the same period in 2016.2019, representing a decrease of $1.8 million, or 9.7%. As a percentage of net sales, sales of EPS were 21.7%14.6% for the three months ended September 30, 2017,2020, compared to 27.0%with 18.4% for the same period in 2016. 2019.

The increase in net product sales was mainly due to increasedthe effects of three major factors: i) the increase in sales volume led to a sales increase of $20.1 million due to the increase in demand as a result of the recovery of manufacturing and operations of the changesCompany’s customers after COVID-19 around the world; ii) the decrease in average selling price of steering gears led to a sales decrease of $7.2 million; and iii) the product mix in the three months ended September 30, 2017.

The foreign exchange rateappreciation of the RMB against the U.S. dollar infor the third quarter of 2017 was generally consistent withthree months ended September 30, 2020 compared to the same period last year resulted in 2016, so there was no significant impact on the Company’s revenue and costs as a resultsales increase of foreign currency translation differences.$1.0 million.

 

In summary, due toFurther analysis by segment (before elimination) is as follows:

Henglong mainly engages in providing passenger vehicle steering systems. Net product sales for Henglong were $41.0 million for the recoverythree months ended September 30, 2020, compared with $39.0 million for the three months ended September 30, 2019, representing an increase of Chinese automobile industry, the sales of steering gears started to grow, which led to an$2.0 million, or 5.2%. An increase in sales volume and contributedled to a sales increase of $11.6 million. Some of the Company’s subsidiaries are gradually shifting their strategy from focusing on sales volume to focusing on high gross margin products and developing new markets such as exports, and the change$3.4 million, a decrease in product mix led to an increase in average selling price of steering gears and contributedled to a sales increasedecrease of $12.3 million. The$1.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decreaseincrease of $0.2$0.4 million.

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

   

Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for HenglongJiulong were $55.8$25.9 million for the three months ended September 30, 2017,2020, compared with $57.5$17.2 million for the three months ended September 30, 2016,2019, representing an increase of $8.7 million, or 50.6%. The increase was primarily due to the increased demand in the China commercial vehicle market after the COVID-19 pandemic along with China’s economic stimulus policies. An increase in sales volume led to a sales increase of $12.5 million, a decrease in selling price led to a sales decrease of $4.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.2 million.


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 $3.6 million for the three months ended September 30, 2020, compared to $4.3 million for the same period in 2019, representing a decrease of $1.7$0.7 million, or 3.0%16.3%. A decrease in sales volume led to a sales decrease of $13.3$0.5 million, and an increasea decrease in average selling price led to a sales increasedecrease of $11.6$0.2 million.

 

35

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 JiulongWuhu were $26.1$3.2 million for the three months ended September 30, 2017, compared with $17.8 million for the three months ended September 30, 2016, representing an increase of $8.3 million, or 46.6%. Jiulong is gradually shifting its strategy from focusing on sales volume to focusing on high gross margin products and developing new markets such as exports. An increase in sales volume led to a sales increase of $6.2 million and an increase in average selling price led to a sales increase of $2.1 million.

Net product sales for Shenyang were $10.1 million for the three months ended September 30, 2017,2020, compared to $8.2$3.0 million for the same period in 2016,2019, representing an increase of $1.9$0.2 million, or 23.2%6.7%. Shenyang’s products are mainly sold to Shenyang Brilliance Jinbei Co., Ltd., “Brilliance Jinbei”, one of China’s largest commercial car manufacturers. The sales of Shenyang are mainly impacted by the demand of Brilliance Jinbei. An increase in sales volumes led to a sales increase of $0.4 million, and an increasea decrease in average selling priceprices led to a sales increasedecrease of $1.5$0.2 million.

 

Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for WuhuHubei Henglong were $6.5$37.0 million for the three months ended September 30, 2017,2020, compared to $5.1with $33.7 million for the same period in 2016,three months ended September 30, 2019, representing an increase of $1.4$3.3 million, or 27.5%9.8%. An increase in sales volumesvolume led to a sales increase of $2.0$4.1 million, and a decrease in average selling price led to a sales decrease of $0.6$1.1 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.3 million.

 

Henglong KYB mainly engages in providing passenger EPS products. Net product sales for Hubei Henglong KYB were $24.8$14.3 million for the three months ended September 30, 2017,2020, compared to $13.9with $16.0 million for the same period in 2016,three months ended September 30, 2019, representing an increasea decrease of $10.9$1.7 million, or 78.4%10.6%. Hubei Henglong’s products are mainly sold to Chrysler and Ford. The significant increase in the sales of Hubei Henglong was mainly due to the new products developed for Chrysler and Ford that began mass production at the end of 2016. An increaseA decrease in sales volumesvolume led to a sales increasedecrease of $15.2$1.6 million, and a decrease in average selling price led to a sales decrease of $4.3$0.1 million.

Net product sales for Other Sectorsother entities were $15.0$16.7 million for the three months ended September 30, 2017,2020, compared to $11.6$14.1 million for the same period in 2016,2019, representing an increase of $3.4$2.6 million, or 29.3%18.4%, primarily due to an increasemainly caused by increases in average selling pricesales of Jielong which manufactures automobile steering columns for both HPS and EPS.Chongqing.

 

Cost of Products Sold

 

For the three months ended September 30, 2017,2020, the cost of products sold was $95.9$100.8 million, compared to $74.6$83.2 million for the same period of 2016,2019, representing an increase of $21.3$17.6 million, or 28.6%21.2%. The increase in the cost of products soldsales was mainly due to the effect of an increasethe following major factors: i) the decrease in sales volumes whichunit price led to a cost of products sold increasesales decrease of $10.0 million and an$0.4 million; ii) the increase in unit cost whichsales volume led to a cost of products soldsales increase of $11.3$17.1 million; and iii) the appreciation of the RMB against the U.S. dollar resulted in a cost of sales increase of $0.9 million. Further analysis is as follows:

 

Cost of products sold for Henglong was $47.6$37.9 million for the three months ended September 30, 2017, consistent with $47.62020, compared to $35.3 million for the same period of 2016. A decrease2019, representing an increase of $2.6 million, or 7.4%. The increase in cost of sales was mainly due to an increase in sales volume led tovolumes resulting in a cost of products soldsales increase of $3.0 million, a decrease of $10.8 million and an increase in unit cost led toresulting in a cost of products soldsales decrease of $0.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $10.8$0.3 million.

 

 •Cost of products sold for Jiulong was $22.8$22.6 million for the three months ended September 30, 2017,2020, compared to $14.9$16.6 million for the same period of 2016,2019, representing an increase of $7.9$6.0 million, or 53.0%36.1%. AnThe increase in cost of sales was mainly due to an increase in sales volume led tovolumes resulting in a cost of sales increase of $11.0 million, a decrease in unit cost resulting in a cost of sales decrease of $5.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.2 million.
ŸCost of products sold for Shenyang was $2.9 million for the three months ended September 30, 2020, compared to $3.5 million for the same period of 2019, representing a decrease of $0.6 million, or 17.1%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $0.4 million, and a decrease in unit cost resulting in a cost of sales decrease of $0.2 million.


Ÿ Cost of products sold for Wuhu was $3.0 million for the three months ended September 30, 2020, compared to $2.9 million for the same period of 2019, representing an increase of $5.8$0.1 million, andor 3.4%. The increase in cost of sales was mainly due to an increase in unit cost led tosales volumes resulting in a cost of products soldsales increase of $2.1$0.4 million, and a decrease in unit cost resulting in a cost of sales decrease of $0.3 million.

 

Cost of products sold for ShenyangHubei Henglong was $8.8$32.4 million for the three months ended September 30, 2017,2020, compared to $7.1$26.9 million for the same period of 2016,2019, representing an increase of $1.7$5.5 million, or 23.9%20.4%. The increase in cost of products soldsales was mainly due to an increase in sales volumes which led toresulting in a cost of products soldsales increase of $0.4$2.7 million, and an increase in unit cost which led toresulting in a cost of products soldsales increase of $1.3$2.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.3 million.

 

Cost of products sold for WuhuHenglong KYB was $5.9$14.8 million for the three months ended September 30, 2017,2020 compared to $4.7$13.8 million for the same period of 2016,2019, representing an increase of $1.2$1.0 million, or 25.5%. The increase7.2%.The decrease in cost of products soldsales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $1.3 million, and an increase in sales volumes, which led tounit cost resulting in a cost of products soldsales increase of $1.9 million, and a decrease in unit cost, which led to a cost of products sold decrease of $0.7$2.3 million.

 

36

Cost of products sold for Hubei Henglongother entities was $17.7$13.7 million for the three months ended September 30, 2017,2020, compared to $10.3$10.6 million for the same period in 2019, representing a decrease of 2016, representing an increase of $7.4$3.1 million, or 71.8%29.2%. The increase in cost of products sold was mainly due to an increase in sales volumes, which led to a cost of products sold increase of $11.3 million, and a decrease in unit cost, which led to a cost of products sold decrease of $3.9 million.

 

Cost of products sold for Other Sectors

Gross margin was $12.7 million11.9% for the three months ended September 30, 2017,2020, compared to $9.6 million17.2% for the same period of 2016, representing an increase of $3.1 million, or 32.3%, primarily due to the increase in unit cost of Jielong.

Gross margin was 19.0% for the three months ended September 30, 2017, compared to 21.1% for the same period of 2016,2019, representing a decrease of 2.1%5.3%, mainly due to the changes in the product mix for the three months ended September 30, 2017.

Gain on Other Sales

Gain on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, land use rights, and scraps. For the three months ended September 30, 2017, gain on other sales amounted to $0.6 million, as compared to$0.1 million for the three months ended September 30, 2016, representing an increase of $0.5 million. The increase was mainly due to increased sales volume of materials.2020.

   

Selling Expenses

 

Selling expenses were $4.5$3.8 million for the three months ended September 30, 2017,2020, as compared to $3.8with $3.6 million for the same period of 2016,2019, representing an increase of $0.7$0.2 million, or 18.4%5.6%, which was mainlyprimarily due to increased logistics fees related to the increase in revenue.marketing and office expenses along with the increased sales volume.  

 

General and Administrative Expenses

 

General and administrative expenses were $4.4$5.1 million for the three months ended September 30, 2017,2020, as compared to $3.7$4.4 million for the same period of 2016,2019, representing an increase of $0.7 million, or 18.9%15.9%, which was mainlyprimarily due to higher payroll expenses.the increase in professional services fees.

Research and Development Expenses

 

Research and development expenses were $9.2$6.1 million for the three months ended September 30, 2017, as compared to $6.72020, generally consistent with the $6.0 million for the three months ended September 30, 2016, representing an increase of $2.5 million, or 37.3%, which was mainly due to increased expenditures on R&D activities for EPS products. The Company’s research and development expenses were mainly used for the development and trial production of EPS and other new products. The Company’s research and development expenditures have continued to be significant in the past several years.2019.

The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce innovative products on a cost-competitive basis. In the past several years, the Company has continued to purchase advanced manufacturing equipment for newly developed products, hiring senior technicians and actively seeking external technical support.

Income from Operations

Income from operations was $4.9 million for the three months ended September 30, 2017, compared to $5.7 million for the three months ended September 30, 2016, representing a decrease of $0.8 million, or 14.0%,including an increase of $2.5 million in gross profit, an increase of $0.5 million in gain on other sales and an increase of $3.8 million in operating expenses.

37

 

Other Income Net

 

Other income, net was $0.1 million for the three months ended September 30, 2017, compared to other income, net of $0.4 million for the three months ended September 30, 2016, representing a decrease of $0.3 million, or 75.0%, primarily as a result of the gain on disposal of a subsidiary amounting to $0.7 million in 2016, whereas there was no such gain in the current quarter.

Interest Expense

Interest expense was $0.3 million for the three months ended September 30, 2017,2020, compared to interest expense of $0.2 million for the three months ended September 30, 2016, representing an increase of $0.1 million, or 50.0%, primarily due to the new bank loans borrowed in 2017.

Financial Income, Net

Financial income, net, was $1.0 million for the three months ended September 30, 2017, compared to financial income of $0.8 million for the three months ended September 30, 2016, representing an increase of $0.2 million, or 25%, which was mainly due to the interest income of $0.5 million generated from the loan to Henglong Real Estate, one of the Company’s related parties (See Note 5).

Income Before Income Tax Expenses and Equity in Earnings of Affiliated Companies

Income before income tax expenses and equity in earnings of affiliated companies was $5.7 million for the three months ended September 30, 2017, compared to $6.7 million for the three months ended September 30, 2016, representing a decrease of $1.0 million, or 14.9%, which was mainly due to a decrease in operating income of $0.8 million, a decrease in other income of $0.3 million, an increase in interest expense of $0.1 million and an increase in financial income of $0.2 million.

Income Taxes

Income tax expense was $1.0 million for the three months ended September 30, 2017, compared to $1.2 million of income tax expense for the three months ended September 30, 2016, representing a decrease of $0.2 million, or 16.7%. The income before income tax decreased to $5.7 million for the three months ended September 30, 2017 from $6.7 million for the same period in 2016 and the effective tax rate decreased to 17.3% from 17.4% for the same period in 2016.

Net Income

Net income was $5.2 million for the three months ended September 30, 2017, compared to net income of $5.9 million for the three months ended September 30, 2016, representing a decrease of $0.7 million, or 11.9%, which was mainly due to a decrease in income before income tax expenses and equity in earnings of affiliated companies of $1.0 million, a decrease in income tax of $0.2 million and an increase in equity in earnings of affiliated companies of $0.2 million.  

38

Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests amounted to $0.2 million for the three months ended September 30, 2017, substantially consistent with2019, representing an increase of $0.2 million, which was primarily due to the increase in income from short-term investments.


Interest Expense

Interest expense was $0.4 million for the three months ended September 30, 2020, compared to $0.8 million for the three months ended September 30, 2019, primarily as a result of decreased loans and lower interest rates.

Income Taxes

Income tax benefit was $0.2 million for the three months ended September 30, 2016.2020, compared to income tax expense of $0.9 million for the three months ended September 30, 2019, which was due to the loss before income tax expenses of $2.3 million, whereas income before income tax expenses was $5.4 million in the same period last year.

  

The Company owns equityNet Loss Attributable to Non-controlling Interests

Net loss attributable to non-controlling interests in nine non-wholly owned subsidiaries established inamounted to $0.8 million for the PRC and Brazil, through which it conducts its operations. Except for Beijing Henglong and Chongqing Jinghua, which are accounted for under the equity method, all of the operating results of these non-wholly owned subsidiaries were consolidated in the Company’s financial statements as ofthree months ended September 30, 2017 and 2016.2020, compared to $0.1 million for the three months ended September 30, 2019.

 

Net Income Attributable to Parent Company’s Common Shareholders

 

Net income attributable to parent company’s common shareholders was $5.1$2.4 million for the three months ended September 30, 2017,2020, compared to net income attributable to parent company’s common shareholders of $5.7$4.3 million for the three months ended September 30, 2016,2019, representing a decrease of $0.6 million, which was mainly due to a decreasean increase in net incomeloss attributable to parent company’s common shareholders of $0.7$6.7 million.

 

Results of Operations—Operations - Nine Months Ended September 30, 20172020 and 20162019

 

  Net Product Sales  Cost of Products Sold 
  (in thousands of USD,
except percentages)		  (in thousands of USD,
except percentages)		 
  2017  2016  Change  2017  2016  Change 
Henglong $191,093  $195,940   (4,847)  -2.47% $164,765  $165,421  $(656)  -0.40%
Jiulong  75,525   54,976   20,549   37.38   65,358   47,583   17,775   37.36 
Shenyang  28,777   24,898   3,879   15.58   25,123   21,710   3,413   15.72 
Wuhu  18,254   15,897   2,357   14.83   16,891   14,459   2,432   16.82 
Hubei Henglong  66,855   42,815   24,040   56.15   46,220   31,418   14,802   47.11 
Other Sectors  40,821   29,558   11,263   38.11   34,492   24,216   10,276   42.43 
Total Segments  421,325   364,084   57,241   15.72   352,849   304,807   48,042   15.76 
Elimination  (65,992)  (51,587)  (14,405)  27.92   (65,693)  (51,455)  (14,238)  27.67 
Total $355,333  $312,497  $42,836   13.71% $287,156  $253,352  $33,804   13.34%

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

  Nine Months Ended September 30, 
  2020  2019  Change  Change% 
Net product sales $271,156  $315,483  $(44,327)  -14.1%
Cost of products sold  238,598   268,936   (30,338)  -11.3 
Gain on other sales  2,935   4,856   (1,921)  -39.6 
Selling expenses  8,895   10,507   (1,612)  -15.3 
General and administrative expenses  13,330   13,453   (123)  -0.9 
Research and development expenses  17,390   19,343   (1,953)  -10.1 
Other income, net  1,724   1,131   593   52.4 
Interest expense  (1,214)  (2,086)  872   -41.8 
Income taxes  294   1,820   (1,526)  -83.8 
Net (loss)/income  (3,355)  7,542   (10,897)  -144.5 
Net loss attributable to non-controlling interests  (1,590)  (688)  (902)  131.1 
Net (loss)/income attributable to parent company’s common shareholders  (1,768)  8,230   (9,998)  -121.5%

 

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 $100,651  $116,510  $(15,859)  -13.6% $94,069  $112,381  $(18,312)  -16.3%
Jiulong  64,948   65,971   (1,023)  -1.6   59,759   58,736   1,023   1.7 
Shenyang  9,860   14,573   (4,713)  -32.3   8,111   12,234   (4,123)  -33.7 
Wuhu  8,742   14,283   (5,541)  -38.8   7,735   13,700   (5,965)  -43.5 
Hubei Henglong  76,565   89,423   (12,858)  -14.4   63,740   70,632   (6,892)  -9.8 
Henglong KYB  32,987   54,803   (21,816)  -39.8   32,907   50,637   (17,730)  -35.0 
Other Entities  39,054   46,769   (7,715)  -16.5   31,591   37,842   (6,251)  -16.5 
Total Segments  332,807   402,332   (69,525)  -17.3   297,912   356,162   (58,250)  -16.4 
Elimination  (61,651)  (86,849))  25,198   -29.0   (59,314)  (87,226)  27,912   -32.0 
Total $271,156  $315,483  $(44,327)  -14.1% $238,598  $268,936  $(30,338)  -11.3%

30

Net Product Sales

 

Net product sales were $355.3$271.2 million for the nine months ended September 30, 2017,2020, compared to $312.5$315.5 million for the same period in 2016,of 2019, representing an increasea decrease of $42.8$44.3 million, or 13.7%.14.4%, mainly due to the impact of the outbreak of the COVID-19 pandemic.

 

The Company’s net product sales were affected by the change in the product mix. Net sales of traditional steering products and parts were $270.2$231.1 million for the nine months ended September 30, 2017,2020, compared to $226.8$252.1 million for the same period in 2016,2019, representing an increasea decrease of $43.4$21.0 million, or 19.1%8.3%. Net sales of EPSelectric power steering (“EPS”) were $85.1$40.1 million for the nine months ended September 30, 2017, compared to $85.72020 and $63.4 million for the same period in 2016,2019, representing a decrease of $0.6$23.3 million, or 0.7%36.8%. As a percentage of net sales, sales of EPS were 24.0%14.8% for the nine months ended September 30, 2017,2020, compared to 27.4%20.1% for the same period in 2016. 2019.

The increasedecrease in net product sales was mainly due to increasedthe effects of three major factors: i) the decrease in sales volume led to a sales decrease of $21.1 million due to the significant decline of demand as a result of the suspension of manufacturing and operations of the changesCompany’s customers due to COVID-19; ii) the decrease in average selling price of steering gears led to a sales decrease of $14.7 million; and iii) the product mix for the nine months ended September 30, 2017.

The depreciation of China’s currency, the RMB against the U.S. dollar in the first nine months of 2017 asthis period compared to the first nine months of 2016 had a negative impact on net sales as more than 80% of the Company’s business is conductedsame period last year resulted in China.

In summary, due to the recovery of Chinese automobile industry, the sales of steering gears started to grow, which led to an increase in sales volume and contributed to a sales increase of $52.2 million. Some of the Company’s subsidiaries are gradually shifting their strategy from focusing on sales volume to focusing on high gross margin products and developing new markets such as exports, and the change in product mix led to an increase in average selling price of steering gears and contributed to a sales increase of $4.5 million. The effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $13.9$8.5 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 $191.1$100.7 million for the nine months ended September 30, 2017,2020, compared with $195.9$116.5 million for the nine months ended September 30, 2016,2019, representing a decrease of $4.8$15.8 million, or 2.5%13.6%. A decrease in sales volume led to a sales decrease of $1.7$16.7 million, an increase in average selling price led to a sales increase of $4.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $7.1 million.

Net product sales for Jiulong were $75.5 million for the nine months ended September 30, 2017, compared with $55.0 million for the nine months ended September 30, 2016, representing an increase of $20.5 million, or 37.3%. Jiulong is gradually shifting its strategy from focusing on sales volume to focusing on high gross margin products and developing new markets such as exports. An increase in sales volume led to a sales increase of $17.6 million, an increase in average selling price led to a sales increase of $5.2$3.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $2.3 million.

   

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Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for ShenyangJiulong were $28.8$64.9 million for the nine months ended September 30, 2017,2020, compared with $66.0 million for the nine months ended September 30, 2019, representing a decrease of $1.1 million, or 1.7%. An increase in sales volume led to a sales increase of $7.6 million, a decrease in selling price led to a sales decrease of $7.2 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $1.5 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 $9.9 million for the nine months ended September 30, 2020, compared to $24.9$14.6 million for the same period in 2016,2019, representing an increasea decrease of $3.9$4.7 million, or 15.7%32.2%. Shenyang’s products are mainly sold to Shenyang Brilliance Jinbei Co., Ltd., “Brilliance Jinbei”, one of China’s largest commercial car manufacturers. The sales of Shenyang are mainly impacted by the demand of Brilliance Jinbei. An increaseA decrease in sales volumes led to a sales increasedecrease of $4.4$4.0 million, an increasea decrease in average selling price led to a sales increasedecrease of $0.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.9$0.3 million.

 

•Net product sales for Wuhu were $18.3 million for the nine months ended September 30, 2017, compared to $15.9 million for the same period in 2016, representing an increase of $2.4 million, or 15.1%. An increase in sales volumes led to a sales increase of $4.2 million, a decrease in average selling price led to a sales decrease of $1.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales decrease of $0.5 million.
•Net product sales for Hubei Henglong were $66.9 million for the nine months ended September 30, 2017, compared to $42.8 million for the same period in 2016, representing an increase of $24.1 million, or 56.3%. Hubei Henglong’s products are mainly sold to Chrysler and Ford. The significant increase in the sales of Hubei Henglong was mainly due to the new products developed for Chrysler and Ford that began mass production at the end of 2016. An increase in sales volumes led to a sales increase of $32.8 million, a decrease in average selling price led to a sales decrease of $6.7 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.

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 Other SectorsWuhu were $40.8$8.7 million for the nine months ended September 30, 2017,2020, compared to $29.6$14.3 million for the same period in 2016, representing an increase of $11.2 million, or 37.8%, primarily due to an increase in the sales of Jielong, which manufactures automobile steering columns for both HPS and EPS.

Cost of Products Sold

For the nine months ended September 30, 2017, the cost of products sold was $287.2 million, compared to $253.4 million for the same period of 2016, representing an increase of $33.8 million, or 13.3%. The increase in the cost of products sold was mainly due to the net effect of a net increase in sales volumes which led to a cost of products sold increase of $41.1 million, an increase in unit cost which led to a cost of products sold increase of $4.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led to a cost of products sold decrease of $11.6 million. Further analysis is as follows: 

Cost of products sold for Henglong was $164.8 million for the nine months ended September 30, 2017, compared to $165.4 million for the same period of 2016,2019, representing a decrease of $0.6$5.6 million, or 0.4%39.2%. A decrease in sales volumesvolume led to a cost of products soldsales decrease of $1.0$5.5 million, an increase in unit costselling price led to a cost of products soldsales increase of $6.4$0.3 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a cost of products soldsales decrease of $6.0$0.4 million.

 

Cost of products soldHubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for Jiulong was $65.4Hubei Henglong were $76.6 million for the nine months ended September 30, 2017,2020, compared to $47.6$89.4 million for the same period in 2019, representing a decrease of 2016, representing an increase of $17.8$12.8 million, or 37.4%14.3%. An increaseA decrease in sales volume led to a costsales decrease of products sold increase of $15.6$7.2 million, an increasea decrease in unit costselling price led to a costsales decrease of products sold increase of $4.3$4.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a cost of products soldsales decrease of $2.1$1.6 million.

 

Cost of products soldHenglong KYB mainly engages in providing passenger EPS products. Net product sales for Shenyang was $25.1Henglong KYB were $33.0 million for the nine months ended September 30, 2017,2020, compared to $21.7with $54.8 million for the same periodnine months ended September 30, 2019, representing a decrease of 2016, representing an increase of $3.4$21.8 million, or 15.7%39.8%. The increase in cost of products sold was mainly due to an increaseA decrease in sales volumes, whichvolume led to a costsales decrease of products sold increase$18.4 million, a decrease in selling price led to a sales decrease of $4.2$2.0 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led to a cost of products soldsales decrease of $0.8$1.4 million.

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Cost of products soldNet product sales for Wuhu was $16.9other entities were $39.1 million for the nine months ended September 30, 2017,2020, compared to $14.5$46.8 million for the same period in 2019, representing a decrease of $7.7 million, or 16.5%.

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Cost of Products Sold

For the nine months ended September 30, 2020, the cost of products sold was $238.6 million, compared to $268.9 million for the same period of 2016,2019, representing an increasea decrease of $2.4$30.3 million, or 16.6%11.3%. The increasedecrease in cost of products soldsales was mainly due to an increasethe effect of the following major factors: i) the decrease in sales volumes which led to a cost of products sold increasesales decrease of $4.0 million, a$18.2 million; ii) the decrease in unit cost which led to a cost of sales decrease of $4.7 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $7.6 million. Further analysis is as follows:

Cost of products sold for Henglong was $94.1 million for the nine months ended September 30, 2020, compared to $112.4 million for the same period of 2019, representing a decrease of $1.1$18.3 million, or 16.3%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $16.5 million, an increase in unit cost resulting in a cost of sales increase of $0.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led toresulting in a cost of products soldsales decrease of $0.5$2.4 million.

 •Cost of products sold for Jiulong was $59.8 million for the nine months ended September 30, 2020, compared to $58.7 million for the same period of 2019, representing an increase of $1.1 million, or 1.9%. The increase in cost of sales was mainly due to an increase in sales volumes resulting in a cost of sales increase of $6.8 million, a decrease in unit cost resulting in a cost of sales decrease of $4.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $1.2 million.

•Cost of products sold for Shenyang was $8.1 million for the nine months ended September 30, 2020, compared to $12.2 million for the same period of 2019, representing a decrease of $4.1 million, or 33.6%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $3.5 million, a decrease in unit cost resulting in a cost of sales decrease of $0.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $0.2 million.
•Cost of products sold for Wuhu was $7.7 million for the nine months ended September 30, 2020, compared to $13.7 million for the same period of 2019, representing a decrease of $6.0 million, or 43.8%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $5.3 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 $0.5 million.

    

Cost of products sold for Hubei Henglong was $46.2$63.7 million for the nine months ended September 30, 2017,2020, compared to $31.4$70.6 million for the same period of 2016,2019, representing an increasea decrease of $14.8$6.9 million, or 47.1%9.8%. The increasedecrease in cost of products soldsales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $7.0 million, an increase in sales volumes, which led tounit cost resulting in a cost of products soldsales increase of $23.7 million, a decrease in unit cost, which led to a cost of products sold decrease of $7.8$1.4 million, and the effect of foreign currency translation of the RMB against the U.S. dollar which led toresulting in a cost of products soldsales decrease of $1.1$1.3 million.

 

Cost of products sold for Other SectorsHenglong KYB was $34.5$32.9 million for the nine months ended September 30, 2017, 2020, compared to $24.2$50.6 million for the same period of 2016,2019, representing an increasea decrease of $10.3$17.7 million, or 42.6%, primarily35.0%. The decrease in cost of sales was mainly due to the increasea decrease in sales volumes resulting in a cost of Jielong.sales decrease of $17.3 million, an increase in unit cost resulting in a cost of sales increase of $0.9 million, and the depreciation of the RMB against the U.S. dollar resulting in a cost of sales decrease of $1.3 million.

 

Gross margin

Cost of products sold for other entities was 19.2% for the nine months ended September 30, 2017, compared to 18.9% for the same period of 2016, representing an increase of 0.3%, mainly due to increased sales and the changes in the product mix in the nine months ended September 30, 2017.

Gain on Other Sales

Gain on other sales mainly consisted of net amount retained from sales of materials, property, plant and equipment, land use rights, and scraps. For the nine months ended September 30, 2017, gain on other sales amounted to $5.9 million, as compared to $2.0$31.6 million for the nine months ended September 30, 2016,2020, compared to $37.8 million for the same period in 2019, representing an increasea decrease of $3.9 million. The increase$6.2 million, or 16.4%.

Gross margin was 12.0% for the nine months ended September 30, 2020, compared to 14.8% for the same period of 2019, representing a decrease of 2.8%, mainly due to the gain on disposal of a building of $2.2 million and increased sales volume of materials.changes in the product mix for the three months ended September 30, 2020.

 


Selling Expenses

 

Selling expenses were $13.2$8.9 million for the nine months ended September 30, 2017,2020, as compared to $12.3with $10.5 million for the same period of 2016,2019, representing an increasea decrease of $0.9$1.6 million, or 7.3%15.2%, which was mainlyprimarily due to increased logistics fees relatedthe lower freight expenses, resulting from the temporary suspension of the Company’s operations due to the increase in revenue.COVID-19 pandemic. 

 

General and Administrative Expenses

 

General and administrative expenses were $14.0$13.3 million for the nine months ended September 30, 2017,2020, as compared to $12.0$13.5 million for the same period of 2016,2019, representing an increasea decrease of $2.0$0.2 million, or 16.7%1.5%, which was mainly due to lower office expenses, resulting from the allowance for doubtful accountstemporary suspension of $1.0 million and higher payroll expenses.the Company’s operations due to the COVID-19 pandemic.

Research and Development Expenses

 

Research and development expenses were $23.7$17.4 million for the nine months ended September 30, 2017,2020, as compared to $18.8$19.3 million for the nine months ended September 30, 2016,2019, representing an increasea decrease of $4.9$1.9 million, or 26.1%9.8%, which was mainly due to increased expenditurescost control on R&D activities for EPS products. The Company’s research and development expenses were mainly used for the development and trial production of EPS and other new products. The Company’s research and development expenditures have continuedand the temporary suspension of the Company’s operations due to be significant in the past several years.

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The global automotive parts industry is highly competitive; winning and maintaining new business requires suppliers to rapidly produce innovative products on a cost-competitive basis. In the past several years, the Company has continued to purchase advanced manufacturing equipment for newly developed products, hiring senior technicians and actively seeking external technical support.COVID-19 pandemic.

 

Other Income, from OperationsNet

 

Income from operationsOther income, net was $23.2$1.7 million for the nine months ended September 30, 2017,2020, compared to $18.0$1.1 million for the nine months ended September 30, 2016,2019, representing an increase of $5.2$0.6 million, or 28.9%, including an increasewhich was mainly due to the various government subsidies of $9.0$2.6 million received in gross profit, an increase of $3.9 million in gain on other sales and an increase of $7.7 million in operating expenses.

Other Expense/Income, Net

Other expense, net was $0.1 million for the first nine months ended September 30, 2017, compared to other income, net of $1.02020, whereas only $1.7 million for the nine months ended September 30, 2016, representing an increase in other expense of $1.1 million, primarily as a result of the gain on disposal of a subsidiary amounting to $0.7 million in 2016 whereas there was no such gainreceived in the current period. same period of last year.

 

Interest Expense

 

Interest expense was $1.2 million for the nine months ended September 30, 2017,2020, compared to interest expense of $0.5$2.1 million for the nine months ended September 30, 2016, representing an increase2019, primarily as a result of $0.7 million, primarily due to the new bankdecreased loans borrowed in 2017 and higherlower interest rates.

Financial Income, Net

Financial income, net, was $1.9 million for the nine months ended September 30, 2017, compared to financial income, net of $1.3 million for the nine months ended September 30, 2016, representing an increase of $0.6 million, or 46.2%, which was mainly due to the interest income of $0.9 million generated from the loan to Henglong Real Estate, one of the Company’s related parties (See Note 5).

Income Before Income Tax Expenses and Equity in Earnings of Affiliated Companies

Income before income tax expenses and equity in earnings of affiliated companies was $23.9 million for the nine months ended September 30, 2017, compared to $19.8 million for the nine months ended September 30, 2016, representing an increase of $4.1 million, or 20.7%, which was mainly due to an increase in operating income of $5.2 million, an increase in other expense of $1.1 million, an increase in interest expense of $0.7 million and an increase in financial income of $0.6 million.

 

Income Taxes

 

Income tax expense was $4.4$0.3 million for the nine months ended September 30, 2017,2020, compared to $3.4 million of income tax expense for the nine months ended September 30, 2016, representing an increase of $1.0 million, or 29.4%. The income before income tax increased to $23.9$1.8 million for the nine months ended September 30, 2017 from $19.82019, which was due to the loss before income tax expenses of $6.5 million, forwhereas income before income tax expenses was $9.6 million in the same period in 2016 and the effective tax rate increased to 18.2% from 17.3%.last year.

 

Net IncomeLoss Attributable to Non-controlling Interests

 

Net income was $20.0loss attributable to non-controlling interests amounted to $1.6 million for the nine months ended September 30, 2017,2020, compared to net income of $16.9$0.7 million for the nine months ended September 30, 2016, representing an increase of $3.1 million, or 18.3%, which was mainly due to an increase in income before income tax expenses and equity in earnings of affiliated companies of $4.1 million, an increase in income tax of $1.0 million and a decrease in equity in earnings of affiliated companies of $0.1 million. 

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Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests amounted to $0.4 million for the nine months ended September 30, 2017, compared to $0.2 million for the nine months ended September 30, 2016.

The Company owns equity interests in nine non-wholly owned subsidiaries established in the PRC and Brazil, through which it conducts its operations. Except for Beijing Henglong and Chongqing Jinghua, which are accounted for under the equity method, all the operating results of these non-wholly owned subsidiaries were consolidated in the Company’s financial statements as of September 30, 2017 and 2016.2019.

 

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

 

Net incomeloss attributable to parent company’s common shareholders was $19.7$1.8 million for the nine months ended September 30, 2017,2020, compared to net income attributable to parent company’s common shareholders of $16.8$8.2 million for the nine months ended September 30, 2016,2019, representing an increase of $2.9 million, or 17.3%, which was mainly due to an increase in net income of $3.1 million and an increase in net incomeloss attributable to non-controlling interestsparent company’s common shareholders of $0.2$10.0 million.

Privatization Proposal

On August 2, 2017, the Company issued a press release announcing the appointment by the special committee (the “Special Committee”) of the Company’s board of directors (the “Board”) of HoulihanLokey Capital, Inc. as its financial advisor and Kirkland & Ellis as its U.S. legal counsel in connection with its review and evaluation of the previously announced preliminary non-binding proposal letter that the Board received on May 14, 2017 from Mr.Hanlin Chen, the Chairman of the Board of the Company, relating to a possible “going private” transaction, as well as in connection with its review and evaluation of any other sale, merger, business combination or other corporate transaction, with Mr. Chen or any other party, and any other strategic alternatives.

As previously announced, Mr. Chen has submitted a preliminary non-binding proposal to the Board to acquire all of the outstanding shares of common stock of the Company not already beneficially owned by Mr. Chen for $5.45 per share of common stock in cash. Mr. Chen and his affiliates currently beneficially own approximately 56.4% of the issued and outstanding shares of common stock of the Company on a fully diluted and as-converted basis. The proposal is expressly conditioned on approval by a special committee of the Board comprised of independent directors and is subject to a non-waivable condition requiring approval by a majority vote of the Company’s unaffiliated stockholders. The Special Committee, consisting of Mr. Arthur Wong, Mr. Robert Tung and Mr. Guangxun Xu, is empowered to, and will be responsible for, among other things, investigating, evaluating, negotiating and making a recommendation to the Board with respect to the proposal. The Special Committee is also empowered to retain its own independent advisors to assist in the evaluation of the proposal and any alternative proposals.

The Board cautions the Company's shareholders, and others considering trading in its securities, that it has only received a proposal. No decision has been made with respect to the Company's response to the proposal. There can be no assurance that any definitive offer will be made, that any agreement will be executed or that a transaction with Mr. Chen or any other transaction will be approved or consummated. The Company is not obligated to make, and does not at this time anticipate making, any further public statements about this matter or the activities of the special committee unless and until either the Company enters into a definitive agreement for a transaction or the special committee determines that no such transaction will be effected.

 

Liquidity and Capital Resources

 

Capital Resources and Use of Cash

 

The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of September 30, 2017,2020, the Company had cash and cash equivalents and time deposits included in short-term investments of $79.2$105.3 million, compared to $61.6$82.5 million as of December 31, 2016,2019, representing an increase of $17.6$22.8 million, or 28.7%27.7%. Short-term investments included pledged short-term investments of $2.1 million and $5.7 million as of September 30, 2017 and December 31, 2016, respectively.

 

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The Company had working capital (total current assets less total current liabilities) of $167.2$119.6 million as of September 30, 2017,2020, compared to $161.0$137.5 million as of December 31, 2016,2019, representing an increasea decrease of $6.2$17.9 million, or 3.9%13.0%.

 

TheExcept 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.

 

The Company believesWe expect that in viewCOVID-19 will have material and adverse impacts on our cash flow for the rest of its current2020 with potential continuing impacts on subsequent periods. However, based on our liquidity assessment, we believe that our cash position, the cash expected to be generatedflow from the operations and funds availableproceeds from bank borrowings as detailed in subsequent paragraphsour financing activities will be sufficient to meet itsour anticipated cash needs, including our cash needs for working capital and capital expenditure requirements, includingexpenditures, for the repayment of bank loans,foreseeable future and for at least twelve months commencing fromsubsequent to the datefiling of this report.

 

Capital Source

 

The Company’s capital source is multifaceted, such as bank loans and banker’sbanks’ acceptance facilities. In financing activities and operating activities, the Company’s banks require the Company to sign line of credit agreements and repay all existing borrowings under such facilities within one year.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 one year facilities can be extended for another year.one to two years. 

 

The Company had short-term loans of $73.6$44.6 million (See Note 13)7) and bankers’ acceptances of $79.9$72.9 million (See Note 14)8) as of September 30, 2017.2020.

 

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, seeagreements. 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. OwingDue to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances willis expected to be reduced by approximately $12.3$15.6 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 $12.3$15.6 million as ofupon the maturity date of such line of credit agreements, seeagreements. See the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $8.9$8.3 million, which is 72.0%52.9%, the mortgage rate, of $12.3$15.6 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 Due
Date		 Amount
Available
(4)		  Amount
Used		  Assessed
Mortgage
Value(5)		 
1.  Comprehensive credit facilities Hubei Bank(6) Sep-2017 $27,121  $6,192  $56,193 
    　  　    　     　  
2.  Comprehensive credit facilities China Construction Bank Dec-2017  4,520   653   10,604 
    　  　    　     　  
3.  Comprehensive credit facilities Shanghai Pudong Development Bank(1)(6) Oct-2017  19,587   9,608   15,559 
                 
4.  Comprehensive credit facilities China CITIC Bank (1) Sep-2017  60,269   52,990   9,256 
                 
  China CITIC Bank (1) Jul-2019  3,255   2,260   5,730 
                 
5.  Comprehensive credit facilities Hua Xia Bank(1) Jul-2017  30,135   1,784   - 
                 
6.  Comprehensive credit facilities China Everbright Bank Dec-2017  4,520   2,728   7,715 
                 
7.  Comprehensive credit facilities ICBC Macau May-2018  23,844   20,000   23,945 
                 
8.  Comprehensive credit facilities HSBC (Brazil) Company Limited Oct-2017  70   4   75 
                 
9.  Comprehensive credit facilities Bank of China (Brazil) Feb-2018  610   622   904 
                 
10.  Comprehensive credit facilities Bank of China(1) Apr-2018  22,601   8,109   - 
                 
11.  Comprehensive credit facilities  China Merchants Bank(1) Apr-2018  15,067   2,117   - 
                 
12.  Comprehensive credit facilities Taishin International Bank Apr-2018  10,000   9,858   12,570 
                 
Total     $221,599  $116,925(2) $142,551(3)

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Bank Arrangements

 

As of September 30, 2017,2020, 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 (1)(2)   Sep-2020 $17,034  $12,629  $- 
            　    　 
2.  Comprehensive credit facilities Hubei Bank Apr-2022  26,431   14,758   68,455 
                 
3.  Comprehensive credit facilities Shanghai Pudong Development Bank (1)(2) Jul-2020  19,089   5,770   21,586 
                 
4.  Comprehensive credit facilities China CITIC Bank (2) Aug-2022  74,889   34,596   20,919 
  China CITIC Bank Jun-2022  3,172   1,900   6,476 
            　     
5.  Comprehensive credit facilities China Everbright Bank Mar-2021  4,405   3,740   9,338 
                 
6.  Comprehensive credit facilities Bank of Chongqing Sep-2021  734   734   2,294 
                 
7.  Comprehensive credit facilities Agricultural Bank of China      Mar-2021  1,028   1,028   4,080 
                 
8.  Comprehensive credit facilities Huishang Bank May-2021  1,468   -   - 
                 
Total     $148,250  $75,155  $133,148 

 

(1)EachThese facilities have expired. The Company is currently in the process of Hubei Henglong’snegotiating with these banks to renew the credit facilities.
(2)The comprehensive credit facilities with Shanghai Pudong Development Bank is required to beare guaranteed by Jielong and Hubei Henglong in addition to the above pledged assets. Each of Hubei Henglong, Henglong, Jiulong, Jielong, Chuguanjie and USAI’sThe comprehensive credit facilities with China CITIC Bank is required to beare guaranteed by Henglong and Hubei Henglong in addition to the above pledged assets and Henglong’s comprehensive credit facilities with Hua Xia Bank are required to be guaranteed by Hubei Henglong. Each of Hubei Henglong, Henglong, Jiulong, Jielong’sassets. The comprehensive credit facilities with Bank of China is required to be guaranteed by Hubei Henglong and Henglong, and Henglong’s comprehensive credit facilities with China Merchants Bank are required to be guaranteed by Hubei Henglong.
  
(2)(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 $69.1$35.0 million and notes payable of $46.5$40.1 million as of September 30, 2017. The remainder of $4.5 million of government loan and $35.7 million of notes payable was secured by bank notes or time deposits without utilization of credit lines.2020.
  
(3)(5)In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of September 30, 2017,2020, the pledged assets included $35.9 million accountsproperty, plant and notes receivable, $1.6 million of time depositsequipment and other pledged assetsland use rights with an aggregate assessed value of $105.1$133.1 million.

(4)The amount available is used for the drawdown of bank loans and issuance of bank notes. For the drawdown of bank loans, this amount represents the amount that the Company can borrow immediately; for issuance of bank notes, the Company needs to pledge additional collateral in order to utilize these bank facilities.
(5)The pledged cash deposits were not included in the assessed mortgage value.
(6)As at the date of this report, the comprehensive credit facilities with Hubei Bank and Shanghai Pudong Development Bank have expired. The Company is negotiating the renewals of the credit facilities with the banks and expects to obtain the renewals in late November 2017. As the Company has obtained sufficient comprehensive lines of credit from other banks, the Company does not anticipate any significant adverse impact on its financial position if the Company fails to renew these credit facilities.

  

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 eleven12 months to eighteen23 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:

 

1. Equipment with an assessed value of approximately $56.2 million as security for its revolving comprehensive credit facility with Hubei Bank.

2. Land use rights, buildings and equipment with an assessed value of approximately $10.6 million as security for its revolving comprehensive credit facility with China Construction Bank.

3. Land use rights and buildings with an assessed value of approximately $15.6$21.6 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 $20.9 million as security for its comprehensive credit facility with China CITIC Bank Wuhan branch.


3. Land use rights and buildings with an assessed value of approximately $6.5 million as security for its comprehensive credit facility with China CITIC Bank Shenyang branch.

4. Equipment with an assessed value of approximately $68.5 million as security for its revolving comprehensive credit facility with Hubei Bank.

5. Land use rights and buildings with an assessed value of approximately $9.3 million as security for its comprehensive credit facility with China CITIC Bank Wuhan branch.

46

5. Land use rights and buildings with an assessed value of approximately $5.7 million as security for its comprehensive credit facility with China CITIC Bank Shenyang branch.Everbright Bank.

 

6. Land use rights and buildings with an assessed value of approximately $7.7$4.1 million as security for its comprehensive credit facility with China Everbright Bank.Agricultural Bank of China.

 

7. On April 20, 2017, the Company entered into a Credit AgreementLand use rights and buildings with ICBC Macau to obtain the Credit Facility. The interest ratean assessed value of the Credit Facility is calculated based on a three-month LIBOR plus 1.30% per annum, subject to the availability of funds and fluctuation at ICBC Macau’s discretion. Interest is calculated daily based on a 360-day year and it is fixed one day before the first day of each interest period. The interest period is definedapproximately $2.3 million as three months from the date of drawdown.

As security for the Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for a total amount of not less than $23.9 million if the Credit Facility is fully drawn.

On May 5, 2017, the Company drew down the full amount of $20.0 million under the Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $23.9 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s notes receivable of RMB 158.5 million, equivalent to approximately $23.9 million. The Company also paid an arrangement fee of $0.04 million to ICBC Jingzhou. The maturity date of the Credit Facility is May 12, 2018.

8. On April 1, 2016, Brazil Henglong entered into aits comprehensive credit facility agreement with HSBC Brazil to obtain a credit facility in the amount of $0.1 million, the “HSBC Brazil Credit Facility”. The HSBC Brazil Credit Facility expired on October 27, 2017. As security for the HSBC Credit Facility, the Company’s subsidiary Hubei Henglong was required to provide HSBC Brazil with the Standby Letter of Credit for a total amount of $0.1 million if the HSBC Brazil Credit Facility was fully drawn.

On May 6, 2016, Brazil Henglong drew down a loan amounting to $0.1 million provided by HSBC Brazil. The loan matured on October 9, 2017 and had an annual interest rate of 8.2%.Hubei Henglong provided a Standby Letter of Credit for an amount of $0.1 million in favor of HSBC Brazil. Hubei Henglong’s Standby Letter of Credit was issued by China CITIC Bank Wuhan branch and was collateralized by short-term investments of Hubei Henglong of RMB 0.5 million, equivalent to approximately $0.1 million. The Company repaid this bank loan in October 9, 2017.

9. On August 26, 2016, Brazil Henglong entered into a credit facility agreement with Bank of China (Brazil) to obtain a credit facility in the amount of $0.6 million, the “Bank of China Credit Facility”. The Bank of China Credit Facility will expire on January 15, 2018. As security for the Bank of China Credit Facility, the Company’s subsidiary Hubei Henglong is required to provide Bank of China (Brazil) with a Standby Letter of Credit for a total amount of $0.9 million if the Bank of China Credit Facility is fully drawn.Chongqing.

 

On August 26, 2016, Brazil Henglong drew down a loan amounting to $0.6 million provided by Bank of China (Brazil). The loan will mature on January 15, 2018Short-term and has an annual interest rate of 4.0%. Interest is paid semiannually and the principal repayment is at maturity. Hubei Henglong provided a Standby Letter of Credit for an amount of $0.9 million in favor of Bank of China (Brazil). Hubei Henglong’s Standby Letter of Credit was issued by Bank of China Jingzhou branch and is collateralized by long-term time deposits of Hubei Henglong of RMB 6.0 million, equivalent to approximately $0.9 million.

10. On April 25, 2017, Great Genesis entered into a credit facility agreement with Taishin Bank to obtain a non-revolving credit facility in the amount of $10.0 million, the “Taishin Bank Credit Facility”. The Taishin Bank Credit Facility will expire on April 25, 2018 and has an annual interest rate of 2.7%. Interest is paid quarterly and the principal repayment is payable at maturity. As security for the Taishin Bank Credit Facility, the Company’s subsidiary Henglong is required to provide Taishin Bank with the Standby Letter of Credit for a total amount of not less than $10.0 million if the Taishin Bank Credit Facility is fully drawn.

47

On April 28, 2017, Great Genesis drew down the full amount of $9.9 million under the Taishin Bank Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $10.0 million in favor of Taishin Bank. Henglong’s Standby Letter of Credit issued by China CITIC Bank Wuchang branch is collateralized by Henglong’s short-term investments of RMB 4.0 million, equivalent to approximately $0.6 million, and notes receivable of RMB 79.4 million, equivalent to approximately $12.0 million.

Cash Requirements

The following table summarizes the Company’s expected cash outflows resulting from financial contracts and commitments (in thousands of USD). The Company has not included information on its recurring purchases of materials for use in its manufacturing operations. These amounts are generally consistent from year to year, closely reflecting the Company’s levels of production, and are not long-term in nature (being less than three months in length).

     Payment Due Dates 
  Total  Less than 1 year  1-3 years  3-5 years  More than 5 Years 
Short-term loan including interest payable $74,951  $74,951  $-  $-  $- 
Notes payable(1)  82,165   82,165   -   -   - 
Obligation for investment contract(2)  5,424   -   5,424   -   - 
Other contractual purchase commitments, including service agreements  24,676   16,496   8,180   -   - 
Total $187,216  $173,612  $13,604  $-  $- 

(1)Notes payable do not bear interest.
(2) In May 2016, Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Chongqing Venture Fund”. Hubei Henglong has committed to make investments of RMB 120.0 million, equivalent to approximately $18.1 million, into the Chongqing Venture Fund in three installments. As of September 30, 2017, Hubei Henglong has completed a capital contribution of RMB 84.0 million, equivalent to approximately $12.7 million, representing 35.0% of the Chongqing Venture Fund’s shares. According to the agreement, the remaining capital commitment of RMB 36.0 million, equivalent to approximately $5.4 million, will be paid upon capital calls received from the Chongqing Venture Fund.

48

Short-term Bank and GovernmentLong-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 September 30, 20172020 (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		  Purpose 

 

Borrowing 

Date

 

Borrowing 

Term 

(Months)

 

Annual 

Interest 

Rate

 

Date of 

Interest 

Payment

 Due Date 

Amount 

Payable on

Due Date

 
Bank of China (Brazil) Working Capital Aug. 26, 2016  18   4.01% Pay semi annually Jan. 15, 2018  622 
Financial Bureau of Jingzhou Development Zone Working Capital Aug 07, 2019  23   3.80% Pay annually Jun 30, 2021  2,937 
                                        
HSBC (Brazil) Company Limited Working Capital May 6, 2016  17   8.21% Pay quarterly Oct. 9, 2017  4 
Financial Bureau of Jingzhou Development Zone Working Capital Sep 03, 2019  22   3.80% Pay annually Jun 30, 2021  4,405 
              
Financial Bureau of Jingzhou Development Zone Working Capital Dec 26, 2019  12   3.48% Pay annually Dec 25, 2020  2,203 
              
Bank of Chongqing Working Capital Feb 18, 2020  12   4.35% Pay monthly Feb 17, 2021  220 
                    
Agricultural Bank of China Working Capital Mar 25, 2020  12   4.05% Pay monthly Mar 22, 2021  1,028 
                    
China CITIC Bank Working Capital Mar 27, 2020  12   2.50% Pay in arrear Mar 26, 2021  4,151 
                    
China CITIC Bank Working Capital Mar 27, 2020  12   2.50% Pay in arrear Mar 26, 2021  3,707 
                    
Bank of China Working Capital Apr 29, 2020  12   3.92% Pay monthly Apr 28, 2021  5,874 
                                  
China CITIC Bank Working Capital Nov. 4, 2016  12   5.22% Pay monthly Nov. 4, 2017  2,260  Working Capital Apr 29, 2020  12   4.35% Pay monthly Apr 29, 2021  1,468 
                                  
China CITIC Bank Working Capital Mar. 3, 2017  11   4.99% Pay in arrear Feb. 5, 2018  4,896  Working Capital May 20, 2020  12   4.35% Pay monthly May 20, 2021  1,468 
                                  
China CITIC Bank Working Capital Mar. 3, 2017  11   4.99% Pay in arrear Feb. 6, 2018  4,895  Working Capital May 29, 2020  12   4.00% Pay monthly May 29, 2021  1,468 
                                  
China CITIC Bank Working Capital Mar. 3, 2017  11   4.99% Pay in arrear Feb. 7, 2018  4,607  Working Capital Jun 19, 2020  12   2.50% Pay in arrear Jun 18, 2021  2,634 
                                  
China CITIC Bank Working Capital Mar. 3, 2017  11   4.99% Pay in arrear Feb. 8, 2018  4,318  Working Capital Jun 19, 2020  12   2.50% Pay in arrear Jun 18, 2021  2,820 
                                  
Bank of China Working Capital Jun 28, 2020  12   3.80% Pay monthly Jun 27, 2021  6,755 
                    
China CITIC Bank Working Capital Mar. 3, 2017  11   4.99% Pay in arrear Feb. 2, 2018  4,322  Working Capital Sep 03, 2020  12   4.35% Pay monthly Sep 03, 2021  1,468 
                                        
China CITIC Bank Working Capital Mar. 3, 2017  11   4.99% Pay in arrear Feb. 9, 2018  5,758  Working Capital Sep 11, 2020  12   5.22% Pay monthly Sep 11, 2021  1,468 
                                        
Financial Bureau of Jingzhou Development Zone Working Capital Apr. 21, 2017  8   0.00% N/A Dec. 8, 2017  1,507 
Bank of Chongqing Working Capital Sep 14, 2020  12   4.05% Pay monthly Sep 13, 2021  73 
                                        
ICBC Macau Working Capital May 5, 2017  12   2.63% Pay quarterly May 4, 2018  20,000 
Bank of Chongqing Working Capital Sep 28, 2020  12   4.05% Pay monthly Sep 19, 2021  441 
                                     $44,588 
Taishin International Bank Working Capital Apr. 28, 2017  12   2.65% Pay quarterly Apr. 23, 2018  9,858 
                    
Financial Bureau of Jingzhou Development Zone Working Capital Aug. 17, 2017  12   1.50% Pay in arrear Aug. 16, 2018  3,013 
                    
Bank of China (JingzhouShashi) Working Capital Sep. 28, 2017  12   4.57% Pay monthly Sep. 27, 2018  7,534 
Total               $73,594 

 


The Company must use the loans for the purpose described in the table. For the two bank loans with ICBC Macau and HSBC Bank (China) Company Limited, if the Company fails to do so, it will be charged a penalty interest at 60% to 100% of the specified loan rate listed in the table above. Except for the loan granted by ICBC Macau as disclosed in the section “Capital Source” above, the Company has to pay interest at the interest rate described in the table on the 20th of each month, quarter or semiannual period, as applicable. If the Company fails to do so, it will be charged compound interest at the specified rate in the above table. The Company has to repay the principal outstanding on the specified datedates in the table. If it fails to do so, it will be charged aadditional 30% to 100% penalty interest at 50% of the specified loan rate.interest.

 

Management believes that theThe Company has complied with such financial covenants as of September 30, 2017,2020, and management expects it will continue to comply with them.

  

49

Notes Payable

 

The following table summarizes the contract information of issuing notes payable between the banks and the Company as of September 30, 20172020 (figures are in thousands of USD):

 

Purpose Term (Month) Due Date Amount
Payable on
Due Date		  Term (Months)  Due Date Amount
Payable on
Due Date		 
Working Capital (1) 6 Oct. 2017 $18,501   6  Oct. 2020  17,464 
Working Capital 6 Nov. 2017  12,057   6  Nov. 2020  13,609 
Working Capital 12 Nov. 2017  2,260   6  Dec. 2020  9,353 
Working Capital 6 Dec. 2017  11,553   6  Jan. 2021  8,393 
Working Capital 6 Jan. 2018  10,982   6  Feb. 2021  8,972 
Working Capital 6 Feb. 2018  11,338   6  Mar. 2021  15,116 
Working Capital 6 Mar. 2018  15,474 
Total (See Note 15)     $82,165 
Total (See Note 8)      72,907 

 

(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 September 30, 2017,2020, and believesmanagement expects it will continue to comply with them.


Cash Flows

 

(a)Operating Activities

Net cash provided by operating activities for the nine months ended September 30, 20172020 was $43.0$52.7 million, compared with net cash provided by operating activities of $13.1$4.1 million for the same period of 2016,2019, representing an increase in net cash inflows by $48.6 million, which was mainly due to (1) the decrease in net income excluding non-cash items by $9.2 million, (2) the increase in cash inflows from movements of $29.9accounts and notes receivable by $13.2 million, (3) the decrease in the cash outflows from movements of accounts and notes payable by $39.3 million, and (4) a combination of other factors contributing an increase of cash inflows by $5.3 million.

(b)Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2020 was $33.8 million, as compared to $16.3 million for the same period of 2019, representing an increase in net cash outflows by $17.5 million, which was mainly due to the net effect of (1) the increasea decrease in net income excluding non-cash itemspayments to acquire property, plant and equipment by $6.7$14.7 million, and (2) the increase in cash inflows from movementsa combination of operating assets and liabilities by $23.2 million. The increase in cash inflows was primarily due to the offsetting effect of (1) thedecrease in cash inflows due to the movement of pledged deposits by $8.5 million, (2) the increase in cash outflows due to the movement of accounts and notes payable by $18.0 million, (3) the increase in cash inflows due to the movement of accounts and notes receivable by $51.3 million, (4) the decrease in cash outflows due to the movement of inventories by $11.8 million, (5) the increase in cash outflows due to the movement of accrued expenses and other payables by $7.5 million and (6) the increase in cash outflows due to the movement of tax payable by $8.2 million.

(b)Investing Activities

The Company used net cash of $50.5 million in investment activities during the nine months ended September 30, 2017, compared to $46.0 million for the same period of 2016, representingfactors contributing an increase of cash outflows by $4.5$32.2 million, which was mainly due to (1) a decreaseprimarily including an increase in purchasespurchase of property, plantshort-term investment and equipment of $8.0long-term time deposits by $23.1 million, (2) a decrease in cash used in purchases of short-term investments of $3.2 million, (3) an increase in other receivables of $2.2 million, (4) an increase in cash used in purchase of long-term time deposit by $5.8 million, (5) an increase inreceived from proceeds from maturities of short-term investments by $20.5$5.4 million, and (6) an increase in cash outflows due to a loan to a related partyinvestment under the equity method by $29.0$2.9 million.

   

 50

(c)Financing Activities

 

Net cash provided byused in financing activities for the nine months ended September 30, 20172020 was $30.4$14.5 million, compared to net cash provided by financing activities of $3.6$1.8 million for the same period of 2016,2019, representing an increase of $26.8in net cash outflows by $16.3 million, which was mainly due to the net effect of (1) increaseda decrease in proceeds of $57.9 million from bank loan by $15.1 million, (2) a decrease in repayment of bank loans by $1.9 million, and government loans and (2) increased repayments of $32.1 million to banks and the government.(3) a decrease in cash received from capital contributions by non-controlling interest holder by $2.8 million.

Off-Balance Sheet Arrangements

 

As of September 30, 20172020 and December 31, 2016,2019, 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, 20162019 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 September 30, 2017,2020, 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 September 30, 2017.2020.


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 September 30, 20172020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II. — OTHER INFORMATION

 

ITEM 1.LEGAL PROCEEDINGS.

 

On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. As of October 2020, the plaintiffs and defendants were negotiating to reach a settlement to resolve the lawsuit for a nominal sum. The Company does not expect to admit any liability in reaching the settlement. The settlement will be submitted to the Delaware Court of Chancery for approval in accordance with Delaware law. 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. In addition,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.

  

51

ITEM 1A.RISK FACTORS.

 

There

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 20162019 Annual Report on Form 10-K.

 

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

 

None.(c) Purchase of Equity Securities by the Issuer and Affiliated Purchasers

 

The following table provides information about the Company’s share repurchase activity for the three months ended September 30, 2020 (in thousands of USD):

Issuer Purchases of Equity Securities
Period Total number of
shares purchased		  Average price
paid per share		  Total number of
shares purchased
as part of publicly
announced
programs (1)		  Approximate
dollar value of
shares that may
yet be purchased
as part of publicly
announced
program		 
July 1, 2020 to July 31, 2020  -  $-   -  $5,000 
August 1, 2020 to August 31, 2020  -  $-   -  $5,000 
September 1, 2020 to September 30, 2020  322,269  $3.10   322,269  $4,000 
Total  322,269  $3.10   322,269  $4,000 

(1) On August 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $3.50 per share through August 12, 2021.

ITEM 3.DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.MINE SAFETY DISCLOSURES.

 

Not applicable.


ITEM 5.OTHER INFORMATION.

 

None.

 

ITEM 6.EXHIBITS.

 

INDEX TO EXHIBITS

 

Exhibit
Number
Number		 Description
   
3.1(i) Certificate of Incorporation (incorporated by reference from the filing on Form10SB12G File No. 000-33123).
   
3.1(ii) Bylaws (incorporated by reference from the Form10SB12G 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).
   
31.110.3 Rule 13a-14(a) Certification*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).
   
31.231.1 Rule 13a-14(a) Certification*
   
32.131.2 Section 1350Rule 13a-14(a) Certification*
   
32.232.1 Section 1350 Certification*
32.2Section 1350 Certification*
   
101* The following materials from the China Automotive Systems, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2017,2020, were filed on November 9, 201712, 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)
(Registrant)
   
Date: November 9, 201712, 2020By:/s/Qizhou Wu
  Qizhou Wu
  President and Chief Executive Officer
   
Date: November 9, 201712, 2020By:/s/Jie Li
  Jie Li
  Chief Financial Officer

 

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