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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2021

Or

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

For the transition period from _________ to _________

Commission file number: 000-33123

China Automotive Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

33-0885775

(State or other jurisdiction of incorporation or

(I.R.S. Employer Identification No.)

organization)

 

No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District

Jing Zhou City, Hubei Province, the People’s Republic of China

(Address of principal executive offices)

(86) 716- 412- 7901

(Registrant’s telephone number, including area code)

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

Title of each class

Trading symbol

Name of each exchange on which
registered

Common Stock, $0.0001 par value

CAAS

The Nasdaq Capital Market

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

Yes                     No          

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

Yes                     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

Smaller reporting company

Emerging growth company 

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

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

Yes                     No          

As of August 12, 2021, the Company had 30,851,776 shares of common stock issued and outstanding.

Table of Contents

CHINA AUTOMOTIVE SYSTEMS, INC.

INDEX

    

 

    

Page

Part I — Financial Information

4

Item 1.

Unaudited Financial Statements.

4

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income for the Three Months and Six Months Ended June 30, 2021 and 2020

4

Condensed Unaudited Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020

6

Condensed Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2021 and 2020

7

Notes to Condensed Unaudited Consolidated Financial Statements

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

24

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

37

Item 4.

Controls and Procedures.

37

Part II — Other Information

38

Item 1.

Legal Proceedings.

38

Item 1A.

Risk Factors.

38

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

40

Item 3.

Defaults Upon Senior Securities.

40

Item 4.

Mine Safety Disclosures.

40

Item 5.

Other Information.

40

Item 6.

Exhibits.

41

Signatures

42

2

Table of Contents

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 this Quarterly Report on Form 10-Q and the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission.

3

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1.     FINANCIAL STATEMENTS.

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

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

Three Months Ended June 30, 

    

2021

    

2020

Net product sales ($15,750 and $16,105 sold to related parties for the three months ended June 30, 2021 and 2020)

$

120,604

$

83,184

Cost of products sold ($7,197 and $6,152 purchased from related parties for the three months ended June 30, 2021 and 2020)

 

104,775

 

75,353

Gross profit

 

15,829

 

7,831

Gain on other sales

 

725

 

838

Less: Operating expenses

 

 

Selling expenses

 

4,446

 

2,977

General and administrative expenses

 

6,063

 

4,759

Research and development expenses

 

5,926

 

6,125

Total operating expenses

 

16,435

 

13,861

Income from operations

 

119

 

(5,192)

Other income, net

 

1,506

 

1,257

Interest expense

 

(294)

 

(446)

Financial income/(expense), net

 

182

 

(59)

Income/(loss) before income tax expenses and equity in earnings of affiliated companies

 

1,513

 

(4,440)

Less: Income taxes expense/(benefit)

 

198

 

(31)

Add: Equity in earnings of affiliated companies

 

1,613

 

169

Net income/(loss)

 

2,928

 

(4,240)

Less: Net loss attributable to non-controlling interests

 

(279)

 

(142)

Accretion to redemption value of redeemable non-controlling interests

(7)

Net income/(loss) attributable to parent company’s common shareholders

$

3,200

$

(4,098)

Comprehensive income:

 

 

Net income/(loss)

$

2,928

$

(4,240)

Other comprehensive income:

 

 

Foreign currency translation income, net of tax

 

5,586

 

358

Comprehensive income/(loss)

 

8,514

 

(3,882)

Comprehensive income/(loss) attributable to non-controlling interests

 

73

 

(86)

Accretion to redemption value of redeemable non-controlling interests

(7)

Comprehensive income/(loss) attributable to parent company

$

8,434

$

(3,796)

 

 

Net income/(loss) attributable to parent company’s common shareholders per share -

 

 

Basic 

$

0.10

$

(0.13)

Diluted 

$

0.10

$

(0.13)

Weighted average number of common shares outstanding -

 

 

Basic

 

30,851,776

 

31,174,045

Diluted

 

30,855,406

 

31,174,045

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

4

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China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

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

Six Months Ended June 30, 

    

2021

    

2020

Net product sales ($32,325 and $23,599 sold to related parties for the six months ended June 30, 2021 and 2020)

$

250,945

$

156,739

Cost of products sold ($15,411 and $9,286 purchased from related parties for the six months ended June 30, 2021 and 2020)

 

215,368

 

137,756

Gross profit

 

35,577

 

18,983

Gain on other sales

 

2,041

 

1,438

Less: Operating expenses

 

 

Selling expenses

 

10,055

 

5,095

General and administrative expenses

 

10,678

 

8,188

Research and development expenses

 

12,606

 

11,318

Total operating expenses

 

33,339

 

24,601

Income/(loss) from operations

 

4,279

 

(4,180)

Other income, net

 

3,229

 

1,374

Interest expense

 

(637)

 

(811)

Financial expense, net

 

(57)

 

(590)

Income/(loss) before income tax expenses and equity in earnings of affiliated companies

 

6,814

 

(4,207)

Less: Income taxes expense

 

839

 

483

Add: Equity in earnings/(loss) of affiliated companies

 

184

 

(178)

Net income/(loss)

 

6,159

 

(4,868)

Less: Net loss attributable to non-controlling interests

 

(261)

 

(742)

Accretion to redemption value of redeemable non-controlling interests

(14)

Net income/(loss) attributable to parent company’s common shareholders

$

6,406

$

(4,126)

Comprehensive income:

 

 

Net income/(loss)

$

6,159

$

(4,868)

Other comprehensive income:

 

 

Foreign currency translation income/(loss), net of tax

 

3,315

 

(4,603)

Comprehensive income/(loss)

 

9,474

 

(9,471)

Comprehensive loss attributable to non-controlling interests

 

(52)

 

(1,139)

Accretion to redemption value of redeemable non-controlling interests

(14)

Comprehensive income/(loss) attributable to parent company

$

9,512

$

(8,332)

 

 

Net income/(loss) attributable to parent company’s common shareholders per share -

 

 

Basic

$

0.21

$

(0.13)

Diluted

$

0.21

$

(0.13)

Weighted average number of common shares outstanding -

 

 

Basic

 

30,851,776

 

31,174,045

Diluted

 

30,856,571

 

31,174,045

Share-based compensation included in operating expense above is as follows:

General and administrative expenses

88

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

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China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Balance Sheets

(In thousands of USD unless otherwise indicated)

    

June 30, 2021

    

December 31, 2020

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

83,113

$

97,248

Pledged cash

 

34,204

 

30,813

Accounts and notes receivable, net - unrelated parties

 

204,782

 

216,519

Accounts and notes receivable - related parties

 

23,679

 

17,621

Inventories

 

95,971

 

88,325

Other current assets

 

34,008

 

25,132

Total current assets

 

475,757

 

475,658

Non-current assets:

 

 

Property, plant and equipment, net

 

135,899

 

141,004

Land use rights, net

10,737

10,774

Long-term investments

 

45,629

 

49,766

Other non-current assets

 

27,523

 

30,358

Total assets

$

695,545

$

707,560

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS' EQUITY

 

 

Current liabilities:

 

 

Short-term loans

$

36,415

$

44,238

Accounts and notes payable-unrelated parties

 

208,440

 

212,522

Accounts and notes payable-related parties

 

12,000

 

12,730

Accrued expenses and other payables

 

51,721

 

55,607

Other current liabilities

 

29,339

 

29,387

Total current liabilities

 

337,915

 

354,484

Long-term liabilities:

 

 

Other long-term payable

 

 

1,126

Long-term tax payable

 

21,074

 

23,884

Other non-current liabilities

 

8,153

 

8,151

Total liabilities

$

367,142

$

387,645

Commitments and Contingencies (See Note 23)

 

 

Mezzanine equity:

Redeemable non-controlling interests

537

523

Stockholders’ equity:

 

 

Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued - 32,338,302 and 32,338,302 shares as of June 30, 2021 and December 31, 2020, respectively

$

3

$

3

Additional paid-in capital

 

63,731

 

64,273

Retained earnings-

 

 

Appropriated

 

11,303

 

11,303

Unappropriated

 

221,897

 

215,491

Accumulated other comprehensive income

 

20,519

 

17,413

Treasury stock - 1,486,526 and 1,486,526 shares as of June 30, 2021 and December 31, 2020, respectively

 

(5,261)

 

(5,261)

Total parent company stockholders' equity

 

312,192

 

303,222

Non-controlling interests

 

15,674

 

16,170

Total stockholders' equity

 

327,866

 

319,392

Total liabilities, mezzanine equity and stockholders' equity

$

695,545

$

707,560

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

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China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(In thousands of USD unless otherwise indicated)

Six Months Ended June 30, 

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net income/(loss)

$

6,159

$

(4,868)

Adjustments to reconcile net income from operations to net cash (used in)/provided by operating activities:

 

 

Share-based compensation

 

88

 

Depreciation and amortization

 

13,117

 

10,562

Provision/(reversal) of credit losses

 

311

 

(239)

Deferred income taxes

 

469

 

21

Equity in gain/(loss) of affiliated companies

 

(184)

 

178

Government subsidy reclassified from government loans

287

Loss on fixed assets disposals

9

42

(Increase)/decrease in:

 

 

Accounts and notes receivable

 

6,887

 

41,917

Inventories

 

(7,036)

 

(1,281)

Other current assets

 

(1,250)

 

(1,355)

Increase/(decrease) in:

 

 

Accounts and notes payable

 

(6,291)

 

(11,924)

Accrued expenses and other payables

 

(4,030)

 

2,683

Long-term taxes payable

(2,809)

(2,809)

Other current liabilities

 

105

 

(1,835)

Net cash provided by operating activities

 

5,545

 

31,379

Cash flows from investing activities:

 

 

Increase in demand loans included in other non-current assets

 

(137)

 

(3)

Repayment of loan from a related party

154

Cash received from property, plant and equipment sales

 

206

 

586

Payments to acquire property, plant and equipment (including $330 and $760 paid to related parties for the six months ended June 30, 2021 and 2020, respectively)

 

(3,927)

 

(4,525)

Payments to acquire intangible assets

 

(303)

 

(390)

Investment under the equity method

(5,360)

Purchase of short-term investments

 

(31,253)

 

(27,128)

Proceeds from maturities of short-term investments

23,806

5,781

Cash received from long-term investment

 

4,785

 

448

Net cash used in by investing activities

 

(6,669)

 

(30,591)

Cash flows from financing activities:

 

 

Proceeds from bank loans

 

34,990

 

36,135

Repayments of bank loans

 

(43,081)

 

(33,890)

Repayments of the borrowing for sale and leaseback transaction

 

(2,217)

 

(2,041)

Cash received from capital contributions by non-controlling interest holder

212

Deemed distribution to shareholders

(88)

Acquisition of non-controlling interest

(538)

(81)

Net cash (used in)/provided by financing activities

 

(10,846)

 

247

Effects of exchange rate on cash, cash equivalents and pledged cash

 

1,226

 

(1,558)

Net decrease in cash, cash equivalents and pledged cash

 

(10,744)

 

(523)

Cash, cash equivalents and pledged cash at beginning of the period

 

128,061

 

106,403

Cash, cash equivalents and pledged cash at end of the period

$

117,317

$

105,880

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

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China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three Months and Six Months Ended June 30, 2021 and 2020

1.           Organization and business

China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries described below, is referred to herein as the “Company.” The Company is primarily engaged in the manufacture and sale of automotive systems and components, as described below.

Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance in Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company.

Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support accordingly.

The Company owns the following aggregate net interests in the following subsidiaries organized in the People’s Republic of China, the “PRC,” and Brazil as of June 30, 2021 and December 31, 2020.

Percentage Interest

 

    

June 30, 

    

December 31, 

 

Name of Entity

2021

2020

 

Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1

 

100.00

%  

100.00

%

Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2

 

100.00

%  

100.00

%

Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3

 

70.00

%  

70.00

%

Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 4

 

85.00

%  

85.00

%

Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 5

 

100.00

%  

77.33

%

Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 6

 

100.00

%  

100.00

%

Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 7

 

100.00

%  

100.00

%

Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 8

 

70.00

%  

70.00

%

CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 9

 

95.84

%  

95.84

%

Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 10

 

85.00

%  

85.00

%

Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 11

 

100.00

%  

100.00

%

Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”12

 

60.00

%  

60.00

%

Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”13

 

66.60

%  

66.60

%

Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”14

51.00

%  

51.00

%

Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”15

62.00

%

62.00

%

Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”16

100.00

%

100.00

%

1.Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.
2.Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.
3.Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
4.Jielong was established in 2006 and mainly engages in the production and sales of automotive steering columns.

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5.Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems. In April 2021, the Company obtained an additional 22.67% equity interest in Wuhu for total consideration of RMB 6.9 million, equivalent to approximately $1.1 million, from the other shareholder. The Company retained its controlling interest in Wuhu and the acquisition of the non-controlling interest was accounted for as an equity transaction.
6.On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd.
7.In December 2009, Henglong, a subsidiary of Genesis, formed Testing Center, which mainly engages in the research and development of new products.
8.On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts.
9.On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction.
10.In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China.
11.In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”, which mainly engages in the design and sales of automotive electronics.
12.In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology.
13.In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB”, which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment.
14.In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong”, which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment.
15.In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”, which mainly engages in the development, manufacturing and sale of high polymer materials. Hubei Henglong owns 62.0% of the shares of Wuhu Hongrun and has consolidated it since its establishment.
16.In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.2 million, equivalent to approximately $0.2 million  from an entity controlled by Hanlin Chen. Before the acquisition, 52.1% of the shares of Changchun Hualong were ultimately owned by Hanlin Chen and 47.9% of the shares were owned by third parties. Changchun Hualong mainly engages in design and R&D of automotive parts.

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2.           Basis of presentation and significant accounting policies

(a)

Basis of Presentation

Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of the Company’s management, contain all necessary adjustments, which include normal recurring adjustments, for a fair statement of the results of operations, financial position and cash flows for the interim periods presented.

The condensed consolidated balance sheet as of December 31, 2020 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The results of operations for the three months and six months ended June 30, 2021 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2021.

Estimation - The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian real, “BRL,” its functional currency. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 830, foreign currency transactions denominated in currencies other than the functional currency are remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income for the period.

(b)

Recent Accounting Pronouncements

No accounting standards newly issued during the six months ended June 30, 2021, had a material impact on the Company’s financial statements or disclosures.

(c)

Significant Accounting Policies

There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2020.

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3.           Accounts and notes receivable, net

The Company’s accounts and notes receivable, net as of June 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

    

June 30, 2021

    

December 31, 2020

Accounts receivable - unrelated parties

$

138,866

$

141,018

Notes receivable - unrelated parties

 

75,753

 

85,354

Total accounts and notes receivable - unrelated parties

 

214,619

 

226,372

Less: allowance for doubtful accounts - unrelated parties

 

(9,837)

 

(9,853)

Accounts and notes receivable, net - unrelated parties

 

204,782

 

216,519

Accounts and notes receivable - related parties

24,120

17,622

Less: allowance for doubtful accounts - related parties

(441)

(1)

Accounts and notes receivable, net - related parties

 

23,679

 

17,621

Accounts and notes receivable, net

$

228,461

$

234,140

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

As of June 30, 2021 and December 31, 2020, the Company pledged its notes receivable in amounts of nil and $8.2 million, respectively, as collateral in favor of the local government for the government loans; and pledged its notes receivable in amounts of $4.4 million and $5.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).

Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of operations, amounted to $0.6 million and $0.4 million for the three and six months ended June 30, 2021, respectively.

Provision for doubtful accounts and notes receivable reversed, as provided in the unaudited consolidated statements of operations, amounted to $0.1 million and $0.2 million for the three and six months ended June 30, 2020, respectively.

During the three months ended June 30, 2021, the Company’s five largest customers accounted for 41.8% of its consolidated net product sales, with two customers individually accounting for more than 10% of consolidated net sales, i.e., 18.3% and 10.0% respectively. During the six months ended June 30, 2021, the Company’s five largest customers accounted for 42.3% of its consolidated net product sales, with one customer accounting for more than 10% of consolidated net sales, i.e., 17.4%. As of  June 30, 2021, approximately 8.5% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

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

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4.           Inventories

The Company’s inventories as of June 30, 2021 and December 31, 2020 consisted of the following (figures are in thousands of USD):

    

June 30, 2021

    

December 31, 2020

Raw materials

$

27,014

$

24,367

Work in process

 

8,754

 

10,098

Finished goods

 

60,203

 

53,860

Total

$

95,971

$

88,325

The Company recorded $1.1 million and $0.6 million of inventory write-down to cost of product sold for the three months ended June 30, 2021 and 2020, respectively, and $2.3 million and $1.4 million for the six months ended June 30, 2021 and 2020, respectively.

5.           Long-term investments

The Company’s long-term investments at June 30, 2021 and December 31, 2020, are summarized as follows (figures are in thousands of USD):

    

June 30, 2021

    

December 31, 2020

Chongqing Venture Fund (1)

$

19,695

$

20,230

Hubei Venture Fund (3)

 

11,969

 

14,473

Suzhou Venture Fund

 

7,987

 

7,740

Beijing Henglong (2)

 

4,017

 

5,241

Henglong Tianyu

 

998

 

1,070

Chongqing Jinghua

 

550

 

599

Jiangsu Intelligent

 

413

 

413

Total

$

45,629

$

49,766

(1)In January, May and June 2021, Chongqing Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $0.8 million in the aggregate.
(2) In January 2021, Beijing Henglong made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $1.5 million.
(3)In April 2021, Hubei Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received $2.4 million.

The condensed financial information of the Company’s significant equity investees for the three and six months ended June 30, 2021 are summarized as follows (figures are in thousands of USD):

Three

Six

Months Ended

Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

Revenue

$

8,320

$

$

2,126

$

Gross profit

 

8,320

 

 

2,126

 

Income from continuing operations

 

7,705

 

(231)

 

1,512

 

(183)

Net income

$

7,705

$

(231)

$

1,512

$

(183)

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6.           Property, plant and equipment, net

The Company’s property, plant and equipment, net as of June 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

    

June 30, 2021

    

December 31, 2020

Costs:

 

  

 

  

Buildings

$

62,470

$

61,035

Machinery and equipment

 

240,136

 

233,273

Electronic equipment

 

6,612

 

6,491

Motor vehicles

 

5,113

 

5,064

Construction in progress

 

21,304

 

20,813

Total amount of property, plant and equipment

 

335,635

 

326,676

Less: Accumulated depreciation (1)

 

(199,736)

 

(185,672)

Total amount of property, plant and equipment, net (2)(3)

$

135,899

$

141,004

(1)Depreciation charges were $6.4 million and $5.3 million for the three months ended June 30, 2021 and 2020, respectively, and $12.7 million and $10.6 million for the six months ended June 30, 2021 and 2020, respectively.
(2)As of June 30, 2021 and December 31, 2020, the Company pledged property, plant and equipment with net book value of approximately $62.5 million and $66.1 million, respectively, as security for its comprehensive credit facilities with banks in China.
(3)Interest costs capitalized for the three months ended June 30, 2021 and 2020, were $0.2 million and $0.3 million, respectively, and $0.4 million and $0.6 million for the six months ended June 30, 2021 and 2020, respectively.

7.           Loans

Loans consist of the following as of June 30, 2021 and December 31, 2020 (figures are in thousands of USD):

    

June 30, 2021

    

December 31, 2020

Short-term bank loans (1)

$

36,415

$

36,575

Current portion of long-term government loan (2)

7,663

Subtotal

36,415

44,238

Long-term government loans (2)

 

 

7,663

Less: Current portion of long-term government loans (2)

(7,663)

Subtotal

Total bank and government loans

$

36,415

$

44,238

(1)The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. The total credit facility amount was $173.0 million and $172.7 million, respectively, as of June 30, 2021 and December 31, 2020. As of June 30, 2021, and December 31, 2020, the Company has drawn down loans with an aggregate amount of $36.4 million and $36.6 million, respectively. The weighted average interest rate was 3.4% and 3.7%, respectively.
(2)On August 7 and September 3, 2019, the Company borrowed from the local government loans of RMB 20.0 million and RMB 30.0 million, equivalent to approximately $3.0 million and $4.6 million, respectively. These loans were due for repayment on June 30, 2021 and have an interest rate of 3.80% per annum. As of June 30, 2021 and December 31, 2020, Henglong pledged nil and RMB 53.5 million, equivalent to approximately nil and $8.2 million, respectively, of notes receivable as collateral for the local government loans (See Note 3). The Company repaid these government loans on April 15, 2021.

The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of June 30, 2021.

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8.           Accounts and notes payable

The Company’s accounts and notes payable as of June 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

    

June 30, 2021

    

December 31, 2020

Accounts payable - unrelated parties

$

129,094

$

132,349

Notes payable - unrelated parties (1)

 

79,346

 

80,173

Accounts and notes payable - unrelated parties

 

208,440

 

212,522

Accounts and notes payable - related parties

 

12,000

 

12,730

Total

$

220,440

$

225,252

(1)Notes payable represent payables in the form of notes issued by the bank. As of June 30, 2021 and December 31, 2020, the Company has pledged cash of $34.2 million and $30.8 million, respectively. As of June 30, 2021 and December 31, 2020, the Company has pledged notes receivable of $4.4 million and $5.5 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity. The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. As of June 30, 2021 and December 31, 2020, the Company has used $45.3 million and $43.9 million, respectively, for issuing bank notes.

9.           Accrued expenses and other payables

The Company’s accrued expenses and other payables as of June 30, 2021 and December 31, 2020 are summarized as follows (figures are in thousands of USD):

    

June 30, 2021

    

December 31, 2020

Warranty reserves (1)

$

36,537

$

36,215

Accrued expenses

8,752

8,627

Current portion of other long-term payable (See Note 10)

3,242

4,131

Payables for overseas transportation and custom clearance

 

1,358

 

3,278

Dividends payable to holders of non-controlling interests

 

464

 

460

Accrued interest

144

646

Other payables

 

1,224

 

2,250

Balance at end of year

$

51,721

$

55,607

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

For the three and six months ended June 30, 2021 and 2020, the warranties activities were as follows (figures are in thousands of USD):

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Balance at beginning of the period

$

35,985

$

32,642

$

36,215

$

32,907

Additions during the period

 

4,017

 

4,927

 

7,698

 

8,355

Settlement within the period

 

(4,085)

 

(3,564)

 

(7,730)

 

(6,739)

Foreign currency translation loss/(gain)

 

620

 

26

 

354

 

(492)

Balance at end of the period

$

36,537

$

34,031

$

36,537

$

34,031

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10.         Other long-term payable

On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor") and simultaneously entered into a four-year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was RMB 91.3 million (equivalent to $14.1 million as of June 30, 2021) and the sales price was RMB 100.0 million (equivalent to  $15.5 million as of June 30, 2021). Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments over four years with a quarterly lease payment of approximately $1.1 million and is entitled to obtain the ownership of this equipment at a nominal price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as a sale. Therefore, the transaction was accounted for as a financing transaction by the Company. As of June 30, 2021, $3.2 million was recognized as other payable (See Note 9) and nil was recognized as the other long-term payable.

11.       Redeemable non-controlling interests

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

For the three and six months ended June 30, 2021, the Company recognized accretion of $0.007 million and $0.014 million respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings, respectively.

12.         Additional paid-in capital

The Company’s positions in respect of the amounts of additional paid-in capital for the three and six months ended June 30, 2021 and 2020, are summarized as follows (figures are in thousands of USD):

Three Months Ended June 30, 

 

Six Months Ended June 30, 

    

2021

    

2020

    

2021

    

2020

Balance at beginning of the period

$

64,361

$

64,437

$

64,273

$

64,466

Share-based compensation

88

Acquisition of the non-controlling interest in Wuhu

(630)

(630)

Acquisition of the non-controlling interest in Universal Sensor Application Inc., "USAI"

(29)

Acquisition of the non-controlling interest in Changchun Hualong

(76)

(76)

Deemed distribution to shareholders

(88)

(88)

Balance at end of the period

$

63,731

$

64,273

$

63,731

$

64,273

13.       Stock Options

The Company’s stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended to June 27, 2025 at the Annual Meeting of Stockholders held on September 16, 2014. The maximum common shares available for issuance under this plan is 2,200,000. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees who served over three years or have given outstanding performance, of options to purchase shares of the Company’s common stock. The Company has issued 658,850 stock options under this plan, and there remain 1,541,150 stock options issuable in the future as of June 30, 2021.

Under the aforementioned plan, the stock options granted will have an exercise price equal to the closing price of the Company’s common stock traded on NASDAQ one day before the date of grant, and will expire two to five years after the grant date. The stock options granted during the three months ended June 30, 2021 were exercisable immediately on the grant date. Stock options will be settled in shares of the Company’s common stock upon exercise and are recorded in the Company’s consolidated balance sheets under the caption “Additional paid-in capital.” As of June 30, 2021, the Company has sufficient unissued registered common stock for settlement of the stock incentive plan mentioned above.

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The fair value of stock options was determined at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected term represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve in relation to the contractual life of stock-based compensation instruments. The dividend yield assumption is based on historical patterns and future expectations for the Company dividends.

For the stock options granted during the six months ended June 30, 2021, assumptions used to estimate the fair value of stock options on the grant date is as follows:

Issuance Date

    

Expected volatility

    

Risk-free rate

    

Expected term (years)

    

Dividend yield

 

February 3, 2021

 

76.91

%  

0.46

%  

5

 

0.00

%

The stock options granted during the six months ended June 30, 2021 were exercisable immediately and their fair value on the grant date using the Black-Scholes option pricing model was $0.1 million. For the six months ended June 30, 2021 and 2020, the Company recognized stock-based compensation expenses of $0.1 million and nil, respectively.

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

Weighted-

Weighted-

Average

Average

Contractual

    

Shares

    

Exercise Price

    

Term (years)

Outstanding - January 1, 2020

 

30,000

$

4.99

 

5

Expired

 

(7,500)

 

5.58

 

5

Outstanding - December 31, 2020

 

22,500

$

4.79

 

5

Granted

 

22,500

 

6.26

 

5

Outstanding - June 30, 2021

 

45,000

$

5.52

 

5

The following is a summary of the range of exercise prices for stock options that are outstanding and exercisable at June 30, 2021: