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CHINA AUTOMOTIVE SYSTEMS INC - Quarter Report: 2023 March (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2023

Or

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

For the transition period from                to              

Commission file number: 000-33123

China Automotive Systems, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

33-0885775

(State or other jurisdiction of incorporation or

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

organization)

 

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

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

(Address of principal executive offices)

(86) 716- 412- 7901

(Registrant’s telephone number, including area code)

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

Title of each class

Trading symbol

Name of each exchange on 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          

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

Title of each class

Trading symbol

Name of each exchange on which
registered

Common Stock, $0.0001 par value

CAAS

The Nasdaq Capital Market

As of May 12, 2023, the Company had 30,185,702 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 Ended March 31, 2023 and 2022

4

Condensed Unaudited Consolidated Balance Sheets as of March 31, 2023 and December 31, 2022

5

Condensed Unaudited Consolidated Statements of Cash Flows for the Three months Ended March 31, 2023 and 2022

6

Notes to Condensed Unaudited Consolidated Financial Statements

7

Item 2.

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

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

28

Item 4.

Controls and Procedures.

29

Part II — Other Information

30

Item 1.

Legal Proceedings.

30

Item 1A.

Risk Factors.

30

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

30

Item 3.

Defaults Upon Senior Securities.

30

Item 4.

Mine Safety Disclosures.

30

Item 5.

Other Information.

30

Item 6.

Exhibits.

31

Signatures

32

2

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Cautionary Statement

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or the Company’s future financial performance. The Company has attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continues,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “should” or “will” or the negative of these terms or other comparable terminology. Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. The Company’s expectations are as of the date this Form 10-Q is filed, and the Company does not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to conform these statements to actual results, unless required by law. All of the forward-looking statements are qualified in their entirety by reference to the factors discussed under Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission.

3

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PART I — FINANCIAL INFORMATION

Item 1.     FINANCIAL STATEMENTS.

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Operations and Comprehensive Income

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

Three Months Ended March 31, 

    

2023

    

2022

Net product sales ($13,576 and $11,004 sold to related parties for the three months ended March 31, 2023 and 2022)

$

142,243

$

136,396

Cost of products sold ($7,015 and $7,540 purchased from related parties for the three months ended March 31, 2023 and 2022)

 

120,625

 

121,662

Gross profit

 

21,618

 

14,734

Gain on other sales

 

653

 

931

Less: Operating expenses

 

 

Selling expenses

 

3,384

 

4,312

General and administrative expenses

 

4,753

 

4,754

Research and development expenses

 

6,390

 

8,137

Total operating expenses

 

14,527

 

17,203

Income/(loss) from operations

 

7,744

 

(1,538)

Other income, net

 

1,502

 

3,519

Interest expense

 

(249)

 

(402)

Financial (expense)/income, net

 

(422)

 

2,015

Income before income tax expenses and equity in earnings of affiliated companies

 

8,575

 

3,594

Less: Income taxes

 

829

 

958

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

 

137

 

(2,487)

Net income

 

7,883

 

149

Less: Net income attributable to non-controlling interests

 

1,055

 

200

Accretion to redemption value of redeemable non-controlling interests

(8)

(8)

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

$

6,820

$

(59)

Comprehensive income:

 

 

Net income

$

7,883

$

149

Other comprehensive income:

 

 

Foreign currency translation income, net of tax

 

4,554

 

1,437

Comprehensive income

 

12,437

 

1,586

Comprehensive income attributable to non-controlling interests

 

1,321

 

289

Accretion to redemption value of redeemable non-controlling interests

(8)

(8)

Comprehensive income attributable to parent company

$

11,108

$

1,289

 

 

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

 

 

Basic

$

0.23

$

(0.00)

Diluted

$

0.23

$

(0.00)

Weighted average number of common shares outstanding -

 

 

Basic

 

30,185,702

 

30,851,776

Diluted

 

30,193,082

 

30,851,776

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 Balance Sheets

(In thousands of USD unless otherwise indicated)

    

March 31, 2023

    

December 31, 2022

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

99,244

$

121,216

Pledged cash

 

43,639

 

37,735

Accounts and notes receivable, net - unrelated parties

 

232,593

 

214,308

Accounts and notes receivable, net - related parties

 

12,302

 

10,016

Inventories

 

105,498

 

112,236

Other current assets

 

35,334

 

25,207

Total current assets

 

528,610

 

520,718

Non-current assets:

 

 

Property, plant and equipment, net

 

104,931

 

106,606

Land use rights, net

9,616

9,555

Long-term investments

 

64,634

 

59,810

Other non-current assets

 

19,282

 

17,663

Total assets

$

727,073

$

714,352

LIABILITIES, MEZZANINE EQUITY AND STOCKHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

Short-term loans

$

45,684

$

45,671

Accounts and notes payable-unrelated parties

 

224,111

 

218,412

Accounts and notes payable-related parties

 

15,530

 

16,695

Accrued expenses and other payables

 

46,153

 

48,311

Other current liabilities

 

32,799

 

35,106

Total current liabilities

 

364,277

 

364,195

Long-term liabilities:

 

 

Long-term tax payable

15,805

15,805

Other non-current liabilities

 

7,168

 

6,937

Total liabilities

$

387,250

$

386,937

Commitments and Contingencies (See Note 21)

 

 

Mezzanine equity:

Redeemable non-controlling interests

561

582

Stockholders’ equity:

 

 

Common stock, $0.0001 par value - Authorized - 80,000,000 shares; Issued – 32,338,302 and 32,338,302 shares as of March 31, 2023 and December 31, 2022, respectively

$

3

$

3

Additional paid-in capital

 

63,731

 

63,731

Retained earnings-

 

 

Appropriated

 

11,851

 

11,851

Unappropriated

 

253,994

 

247,174

Accumulated other comprehensive income

 

875

 

(3,413)

Treasury stock – 2,152,600 and 2,152,600 shares as of March 31, 2023 and December 31, 2022, respectively

 

(7,695)

 

(7,695)

Total parent company stockholders’ equity

 

322,759

 

311,651

Non-controlling interests

 

16,503

 

15,182

Total stockholders’ equity

 

339,262

 

326,833

Total liabilities, mezzanine equity and stockholders’ equity

$

727,073

$

714,352

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

5

Table of Contents

China Automotive Systems, Inc. and Subsidiaries

Condensed Unaudited Consolidated Statements of Cash Flows

(In thousands of USD unless otherwise indicated)

Three Months Ended March 31, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Net income

$

7,883

$

149

Adjustments to reconcile net income from operations to net cash provided by operating activities:

 

 

Depreciation and amortization

 

4,856

 

6,207

(Reversal)/provision of credit losses

 

(217)

 

100

Deferred income taxes

 

1,019

 

286

Equity in (earnings)/loss of affiliated companies

 

(137)

 

2,487

Loss on fixed assets disposals

15

37

(Increase)/decrease in:

 

 

Accounts and notes receivable

 

(17,383)

 

(11,184)

Inventories

 

8,285

 

2,532

Other current assets and non-current assets

 

(1,206)

 

(1,281)

Increase/(decrease) in:

 

 

Accounts and notes payable

 

1,360

 

(1,407)

Accrued expenses and other payables

 

(2,868)

 

(2,041)

Other current liabilities

 

(3,023)

 

(135)

Net cash used in operating activities

 

(1,416)

 

(4,250)

Cash flows from investing activities:

 

 

(Increase)/decrease in demand loans included in other non-current assets

 

(14)

 

242

Cash received from property, plant and equipment sales

 

31

 

95

Payments to acquire property, plant and equipment (including $2,376 and $794 paid to related parties for the three months ended March 31, 2023 and 2022, respectively)

 

(3,160)

 

(1,024)

Payments to acquire intangible assets

 

 

(40)

Investment under the equity method

(5,841)

(4,724)

Purchase of short-term investments

 

(34,795)

 

(44,693)

Proceeds from maturities of short-term investments

26,541

1,801

Cash received from long-term investment

 

557

 

2,704

Net cash used in investing activities

 

(16,681)

 

(45,639)

Cash flows from financing activities:

 

 

Proceeds from bank loans

 

20,135

 

16,088

Repayments of bank loans

 

(20,534)

 

(15,701)

Repayments of the borrowing for sale and leaseback transaction

 

 

(1,130)

Net cash used in financing activities

 

(399)

 

(743)

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

 

2,428

 

583

Net decrease in cash, cash equivalents and pledged cash

 

(16,068)

 

(50,049)

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

 

158,951

 

159,498

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

$

142,883

$

109,449

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

6

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China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three months Ended March 31, 2023 and 2022

1.           Organization and business

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

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

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

The Company owns the following aggregate net interests in the following subsidiaries organized in the People’s Republic of China, the “PRC,” and Brazil as of March 31, 2023 and December 31, 2022.

Percentage Interest

 

    

March 31, 

    

December 31, 

 

Name of Entity

2023

2022

 

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

%  

100.00

%

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

%

Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 12

 

66.60

%  

66.60

%

Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 13

51.00

%  

51.00

%

Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 14

62.00

%

62.00

%

Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 15

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.
5.Wuhu was established in 2006 and mainly engages in the production and sales of automobile steering systems.
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.

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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 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.
13.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.
14.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.
15.In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.2 million, equivalent to approximately $0.2 million from an entity controlled by Hanlin Chen. Before the acquisition, 52.1% of the shares of Changchun Hualong were ultimately owned by Hanlin Chen and 47.9% of the shares were owned by third parties. Changchun Hualong mainly engages in design and R&D of automotive parts.

2.           Basis of presentation and significant accounting policies

(a)

Basis of Presentation

Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

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The condensed consolidated balance sheet as of December 31, 2022 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2023.

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

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

(b)

Recent Accounting Pronouncements

No accounting standards newly issued during the three months ended March 31, 2023, had a material impact on the Company’s financial statements or disclosures.

(c)

Significant Accounting Policies

There have been no updates to the significant accounting policies set forth in the notes to the consolidated financial statements for the year ended December 31, 2022.

3.           Accounts and notes receivable, net

The Company’s accounts and notes receivable, net as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):

    

March 31, 2023

    

December 31, 2022

Accounts receivable - unrelated parties

$

150,628

$

139,533

Notes receivable - unrelated parties

 

96,166

 

89,134

Total accounts and notes receivable - unrelated parties

 

246,794

 

228,667

Less: allowance for credit losses - unrelated parties

 

(14,201)

 

(14,359)

Accounts and notes receivable, net - unrelated parties

 

232,593

 

214,308

Accounts and notes receivable - related parties

14,006

11,779

Less: allowance for credit losses - related parties

(1,704)

(1,763)

Accounts and notes receivable, net - related parties

 

12,302

 

10,016

Accounts and notes receivable, net

$

244,895

$

224,324

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

As of March 31, 2023 and December 31, 2022, the Company pledged its notes receivable in amounts of $18.0 million and $13.7 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity (See Note 8).

Provision for doubtful accounts and notes receivable, as reversed in the unaudited consolidated statements of operations, amounted to $0.3 million for the three months ended March 31,2023.

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Provision for doubtful accounts and notes receivable, as provided in the unaudited consolidated statements of cash operations, amounted to $0.1 million for the three months ended March 31, 2022.

During the three months ended March 31, 2023, the Company’s five largest customers accounted for 45.2% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 22.2%. As of March 31, 2023, approximately 7.0% of accounts receivable were from trade transactions with the aforementioned customer.

During the three months ended March 31, 2022, the Company’s five largest customers accounted for 46.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 22.1%. As of March 31, 2022, approximately 8.7% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

4.           Inventories

The Company’s inventories as of March 31, 2023 and December 31, 2022 consisted of the following (figures are in thousands of USD):

    

March 31, 2023

    

December 31, 2022

Raw materials

$

23,961

$

24,502

Work in process

 

16,914

 

16,001

Finished goods

64,256

71,371

Cost of R&D service

 

367

 

362

Total

$

105,498

$

112,236

The Company recorded $1.2 million and $4.7 million of inventory write-down to cost of products sold for the three months ended March 31, 2023 and 2022, respectively.

5.           Long-term investments

The Company’s long-term investments as of March 31, 2023 and December 31, 2022, are summarized as follows (figures are in thousands of USD):

    

March 31, 2023

    

December 31, 2022

Sentient AB (1)

$

21,912

$

21,831

Chongqing Venture Fund

15,055

14,435

Hubei Venture Fund

 

11,792

 

11,738

Suzhou Qingshan (2)

8,584

4,179

Suzhou Venture Fund

 

5,152

 

5,473

Henglong Tianyu

 

777

 

774

Chongqing Jinghua

 

683

 

695

Jiangsu Intelligent

679

685

Total

$

64,634

$

59,810

(1)In June 2021, Hubei Henglong entered into a share purchase agreement with Jingzhou WiseDawn Electric Car Co., Ltd., “Jingzhou WiseDawn”. In accordance with the agreement, CAAS would purchase 200 shares (representing 40% of Sentient AB’s share capital) from Jingzhou WiseDawn for total consideration of RMB 155.2 million, equivalent to approximately $24.5 million at prevailing rate. The transaction was completed in March 2022. Pursuant to the share purchase agreement, Hubei Henglong has the right to appoint two directors to the board of directors, and it can exercise significant influence over Sentient AB. Therefore, the investment is accounted for using the equity method. As of March 31, 2023, Hubei Henglong has paid RMB 151.0 million, equivalent to approximately $23.1 million, and the remaining consideration of RMB 4.2 million, equivalent to approximately $0.6 million, will be paid in the remaining period of 2023.
(2)In January 2022, Hubei Henglong entered into an agreement with other parties to establish a limited partnership, Suzhou Qingshan Zhiyuan Venture Capital Fund L.P., “Suzhou Qingshan”. As of March 31, 2023, Hubei Henglong has paid RMB 60.0 million, equivalent to approximately $9.1 million, to purchase 22.56% of Suzhou Qingshan’s equity. As a limited partner, Hubei Henglong has more than virtually no influence over Suzhou Qingshan’s operating and financial policies. The investment is accounted for using the equity method.

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The condensed financial information of the Company’s significant equity investees for the three months ended March 31, 2023 and 2022, including Chongqing and Suzhou Venture Fund, is summarized as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Revenue

$

$

Gross profit

 

 

Gain/(loss) from continuing operations

 

3,957

 

(20,578)

Net gain/(loss)

$

3,957

$

(20,578)

6.           Property, plant and equipment, net

The Company’s property, plant and equipment, net as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):

    

March 31, 2023

    

December 31, 2022

Costs:

 

  

 

  

Buildings

$

65,958

$

64,928

Machinery and equipment

 

245,227

 

239,385

Electronic equipment

 

6,286

 

6,242

Motor vehicles

 

4,433

 

4,308

Construction in progress

 

6,764

 

8,238

Total amount of property, plant and equipment

 

328,668

 

323,101

Less: Accumulated depreciation (1)

 

(223,737)

 

(216,495)

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

$

104,931

$

106,606

(1)Depreciation charges were $4.5 million and $5.9 million for the three months ended March 31, 2023 and 2022, respectively.
(2)As of March 31, 2023 and December 31, 2022, the Company pledged property, plant and equipment with net book value of approximately $49.9 million and $51.6 million, respectively, as security for its comprehensive credit facilities with banks in China.

7.           Loans

Loans consist of the following as of March 31, 2023 and December 31, 2022 (figures are in thousands of USD):

    

March 31, 2023

    

December 31, 2022

Short-term bank loans

$

45,684

$

45,671

Long-term bank loans

 

742

 

528

Total

46,426

46,199

The Company entered into credit facility agreements with various banks, which were secured by property, plant and equipment and land use rights of the Company. The total credit facility amount was $146.7 million and $148.3 million, respectively, as of March 31, 2023 and December 31, 2022. As of March 31, 2023 and December 31, 2022, the Company has drawn down loans with an aggregate amount of $46.4 million and $46.2 million, respectively. The weighted average interest rate was 2.7% and 2.9%, respectively.

The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants during the three months ended March 31, 2023.

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8.           Accounts and notes payable

The Company’s accounts and notes payable as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):

    

March 31, 2023

    

December 31, 2022

Accounts payable - unrelated parties

$

126,642

$

133,882

Notes payable - unrelated parties (1)

 

97,469

 

84,530

Accounts and notes payable - unrelated parties

 

224,111

 

218,412

Accounts and notes payable - related parties

 

15,530

 

16,695

Total

$

239,641

$

235,107

(1)Notes payable represent payables in the form of notes issued by the bank. As of March 31, 2023 and December 31, 2022, the Company has pledged cash of $43.1 million and $37.6 million, respectively. As of March 31, 2023 and December 31, 2022, the Company has pledged notes receivable of $18.0 million and $13.7 million, respectively, as collateral for banks to endorse the payment of the Company’s notes payable to the noteholders upon maturity. 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 March 31, 2023 and December 31, 2022, the Company has used $36.6 million and $39.6 million, respectively, for issuing bank notes.

9.           Accrued expenses and other payables

The Company’s accrued expenses and other payables as of March 31, 2023 and December 31, 2022 are summarized as follows (figures are in thousands of USD):

    

March 31, 2023

    

December 31, 2022

Warranty reserves (1)

$

34,032

$

32,435

Payable for the investment in Sentient AB (See Note 5)

615

2,043

Accrued expenses

8,282

9,652

Payables for overseas transportation and custom clearance

 

222

 

294

Dividends payable to holders of non-controlling interests

 

437

 

431

Accrued interest

229

465

Other payables

 

2,336

 

2,991

Balance at end of year/period

$

46,153

$

48,311

(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 months ended March 31, 2023 and 2022, the warranties activities were as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Balance at beginning of the period

$

32,435

$

36,572

Additions during the period

 

4,611

 

3,888

Settlement within the period

 

(3,448)

 

(3,476)

Foreign currency translation loss

 

434

 

144

Balance at end of the period

$

34,032

$

37,128

10.         Redeemable non-controlling interests

In September 2020, one of the Company’s subsidiaries issued shares to Hubei Venture Fund amounting to $0.7 million. The shares will be transferred to the Company and the other shareholder of the subsidiary on a pro rata basis at the holder’s option if the subsidiary fails to complete a qualified IPO in a pre-agreed period of time after issuance with a transfer price of par plus 6% interest per year. As of March 31, 2023, $0.6 million of the shares are subject to purchase by the Company and are therefore accounted for as redeemable non-controlling interests in mezzanine equity.

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For the three months ended March 31, 2023 and 2022, the Company recognized accretion of $0.008 million and $0.008 million, respectively, to the redemption value of the shares over the period starting from the issuance date with a corresponding reduction to retained earnings.

11.         Additional paid-in capital

The Company’s positions in respect of the amounts of additional paid-in capital for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Balance at beginning of the period

$

63,731

$

63,731

Balance at end of the period

$

63,731

$

63,731

12.         Retained earnings

Appropriated

Pursuant to the relevant PRC laws, the profits distribution of the Company’s subsidiaries, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10% of their respective after-tax profits each year. When the statutory surplus reserve reaches 50% of the registered capital of a company, no additional reserve is required. For the three months ended March 31, 2023 and 2022, no statutory reserve was appropriated by the subsidiaries in China.

The Company’s activities in respect of the amounts of appropriated retained earnings for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Balance at beginning of the period

$

11,851

$

11,481

Balance at end of the period

$

11,851

$

11,481

Unappropriated

The Company’s activities in respect of the amounts of the unappropriated retained earnings for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Balance at beginning of the period

$

247,174

$

226,363

Net income/(loss) attributable to parent company

6,828

(51)

Accretion of redeemable non-controlling interests

(8)

(8)

Balance at end of the period

$

253,994

$

226,304

13.         Accumulated other comprehensive income

The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Balance at beginning of the period

$

(3,413)

$

24,717

Foreign currency translation adjustment attributable to parent company

 

4,288

 

1,348

Balance at end of the period

$

875

$

26,065

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14.         Treasury stock

Treasury stock represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted for under the cost method. On March 29, 2022, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $4.00 per share through March 30, 2023. As of March 31, 2023, the Company had repurchased 666,074 shares of the Company’s common stock under the program and the total number of shares held in treasury was 2,152,600. The repurchased shares are presented as “treasury stock” on the balance sheet.

15.         Non-controlling interests

The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three months ended March 31, 2023 and 2022, are summarized as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Balance at beginning of the period

$

15,182

$

15,854

Net income attributable to non-controlling interests

 

1,055

 

200

Foreign currency translation adjustment attributable to non-controlling interests

 

266

 

89

Balance at end of the period

$

16,503

$

16,143

16.         Net product sales

Revenue Disaggregation

Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 23.

Payment to Customer

The Company accounts for consideration payable to a customer as a reduction of revenue at the later of revenue recognition and the Company’s promise to pay the consideration.

Contract Assets and Liabilities

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

Contract liabilities are mainly customer deposits. As of March 31, 2023 and December 31, 2022, the Company has customer deposits of $6.7 million and $5.7 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the three months ended March 31, 2023, $2.3 million was received and $1.3 million (including $1.2 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the three months ended March 31, 2022, $2.3 million was received and $1.0 million (including $1.0 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of the customer deposit liability.

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17.         Financial (expense)/income, net

During the three months ended March 31, 2023 and 2022, the Company recorded financial (expense)/income, net which is summarized as follows (figures are in thousands of USD):

Three Months Ended March 31, 

    

2023

    

2022

Interest income

$

219

$

251

Foreign exchange (loss)/gain, net

 

(565)

 

1,910

Bank charges

 

(76)

 

(146)

Total financial (expense)/income, net

$

(422)

$

2,015

18.         Income per share

Basic income per share is computed using the weighted average number of ordinary shares outstanding during the period. Diluted income per share is computed using the weighted average number of ordinary shares and dilutive ordinary share equivalents outstanding during the period. The dilutive effect of outstanding stock options is determined based on the treasury stock method.

The calculations of basic and diluted income per share attributable to the parent company for the three months ended March 31, 2023 and 2022, were as follows (figures are in thousands of USD, except share and per share amounts):

Three Months Ended March 31, 

    

2023

    

2022

Numerator:

 

  

 

  

Net income/(loss) attributable to the parent company’s common shareholders - Basic and Diluted

$

6,820

$

(59)

Denominator:

 

 

Weighted average shares outstanding

 

30,185,702

 

30,851,776

Dilutive effects of stock options

 

7,380

 

Denominator for dilutive income per share - Diluted

 

30,193,082

 

30,851,776

Net income per share attributable to parent company’s common shareholders - Basic

$

0.23

$

(0.00)

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

$

0.23

$

(0.00)

As of March 31, 2023, the exercise prices for all outstanding stock options were below the weighted average market price of the Company’s common stock during the three months ended March 31, 2023. These stock options were included in the calculation of the diluted income per share for the corresponding periods presented.

For the three months ended March 31, 2022, assumed conversion of the stock options has not been reflected in the dilution calculation pursuant to ASC 260, “Earnings Per Share,” due to the anti-dilutive effect as a result of the Company’s net loss. The effects of all outstanding share options with common share equivalents of 954 shares have been excluded from the calculation of the diluted loss per share for the three months ended March 31, 2022, due to their anti-dilutive effect.

19.         Significant concentrations

A significant portion of the Company’s business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert the RMB into foreign currency for transactions that fall under the “current account”, which includes trade related receipts and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign currency for settlement of such “current account” transactions without pre-approval.

China Automotive, the parent company, may depend on dividend payments from Genesis and HLUSA, which are generated from their subsidiaries in China, “China-based Subsidiaries,” after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under PRC law China-based Subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards each year to their general reserves until the cumulative amount reaches 50% of their

15

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paid-in capital. These reserves are not distributable as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits, at the discretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed and, accordingly, would not be available for distribution to Genesis and HLUSA.

The PRC government also imposes controls on the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China. The China-based Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies. If China Automotive is unable to receive dividend payments from its subsidiaries, including the China-based subsidiaries, China Automotive may be unable to effectively finance its operations or pay dividends on its shares.

Transactions other than those that fall under the “current account” and that involve conversion of RMB into foreign currency are classified as “capital account” transactions; examples of “capital account” transactions include repatriations of investment by or loans to foreign owners, or direct equity investments in a foreign entity by a China domiciled entity. “Capital account” transactions require prior approval from China’s State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.

This system could be changed at any time and any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the People’s Republic of China, or the PRC, the Company’s China subsidiaries are restricted in their ability to transfer a portion of their net assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not limit further or eliminate the ability of the Company’s China subsidiaries to purchase foreign currencies and transfer such funds to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.

20.         Related party transactions and balances

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

Related party sales

Three Months Ended March 31, 

    

2023

    

2022

Merchandise sold to related parties

$

13,576

$

11,004

Materials and others sold to related parties

 

592

 

605

Rental income obtained from related parties

 

63

 

125

Total

$

14,231

$

11,734

Related party purchases

Three Months Ended March 31, 

    

2023

    

2022

Materials purchased from related parties

$

7,015

$

7,540

Equipment purchased from related parties

 

243

 

449

Others purchased from related parties

21

157

Total

$

7,279

$

8,146

Related party investment transaction

Three Months Ended March 31, 

    

2023

    

2022

Equity interest purchase from related parties

$

$

24,452

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Related party receivables

    

March 31, 2023

    

December 31, 2022

Accounts and notes receivable, net from related parties

$

12,302

$

10,016

Related party advance payments

    

March 31, 2023

    

December 31, 2022

Advance payments for property, plant and equipment to related parties

$

1,909

$

1,884

Advance payments and others to related parties

 

2,314

 

1,439

Total

$

4,223

$

3,323

Related party payables

    

March 31, 2023

    

December 31, 2022

Accounts and notes payable

$

15,530

$

16,695

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

As of May 12, 2023, Hanlin Chen, the chairman of the board of directors of the Company, owns 59.13% of the common stock of the Company and has the effective power to control the vote on substantially all significant matters without the approval of other stockholders.

21.         Commitments and contingencies

Legal proceedings

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

Other commitments and contingencies

In addition to the bank loans, notes payables and the related interest and other payables, the following table summarizes the Company’s major commitments and contingencies as of March 31, 2023 (figures are in thousands of USD):

Payment obligations by period

    

2023

    

2024

    

2025

    

Thereafter

    

Total

Obligations for investment contracts

5,093

5,093

Obligations for purchasing and service agreements

$

29,393

8,518

37,911

Total

$

29,393

8,518

5,093

43,004

22.         Off-balance sheet arrangements

As of March 31, 2023 and December 31, 2022, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

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23.         Segment reporting

The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2022 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.

As of March 31, 2023 and 2022, the Company had 15 product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production and sales of power steering (Henglong, Jiulong, Wuhu, Henglong KYB, Hubei Henglong and Brazil Henglong), and one holding company (Genesis). The other nine sectors were engaged in the development, manufacturing and sale of high polymer materials (Wuhu Hongrun), power steering parts (Shenyang), R&D services (Changchun Hualong), automobile steering columns (Jielong), provision of after-sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).

The Company’s product sector information for the three months ended March 31, 2023 and 2022, is as follows (figures are in thousands of USD):

Net Product Sales

Net Income/(Loss)

Three Months Ended

Three Months Ended

March 31, 

March 31, 

    

2023

    

2022

    

2023

    

2022

Henglong

$

61,631

$

62,003

$

1,609

$

1,199

Jiulong

 

16,820

 

17,728

 

(369)

 

(2,434)

Wuhu

 

7,899

 

8,872

 

452

 

2

Hubei Henglong

 

34,657

 

32,943

 

774

 

(2,837)

Henglong KYB

 

37,196

 

29,807

 

2,778

 

569

Brazil Henglong

10,762

10,484

1,370

2,815

Other Entities

 

22,115

 

23,160

 

1,177

 

1,087

Total Segments

 

191,080

 

184,997

 

7,791

 

401

Corporate

 

 

 

(150)

 

(235)

Eliminations

 

(48,837)

 

(48,601)

 

242

 

(17)

Total

$

142,243

$

136,396

$

7,883

$

149

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ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with the Company’s condensed unaudited consolidated financial statements and the related notes thereto and the other financial information contained elsewhere in this Report.

General Overview

China Automotive Systems, Inc. is a leading power steering systems supplier for the China automobile industry. The Company has business relationships with more than sixty vehicle manufacturers, including China’s top ranking domestic automobile manufacturers such as JAC motors, Changan Automobile Group, BAIC Group, Dongfeng Group, Brilliance Jinbei, Chery, BYD and Zhejiang Geely as well as Sino-foreign or foreign automobile manufacturer such as General Motors, Citroen, Fiat Chrysler North America and Ford. Starting in 2008, the Company has supplied power steering gears to the Sino-foreign joint ventures established by GM, Citroen and Volkswagen in China. The Company has supplied power steering gear to Fiat Chrysler North America since 2009 and to Ford Motor Company since 2016.

Most of the Company’s production and research and development institutes are located in China. As of March 31, 2023, the Company has approximately 3,964 employees dedicated to design, development, manufacture and sales of its products. By leveraging its extensive experience, innovative technology and geographic strengths, the Company aims to grow leading positions in automotive power steering systems and to further improve overall margins, long-term operating profitability and cash flows. To achieve these goals and to respond to industry factors and trends, the Company is continuing its work to improve its operations and business structure and achieve profitable growth.

In addition, as a result of COVID-19, the Company’s businesses, results of operations, financial position and cash flows had been affected and may continue to be affected. However, because of the significant uncertainties surrounding COVID-19, which are still evolving, the extent of the business disruption, including the duration and the related financial impact on subsequent periods cannot be reasonably estimated at this time. See “Item 1A. Risk Factors—Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19)” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Corporate Structure

The Company, through its subsidiaries, engages in the manufacture and sales of automotive systems and components. Great Genesis Holdings Limited, a company incorporated in Hong Kong on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, “Genesis,” is a wholly-owned subsidiary of the Company and the holding company of the Company’s joint ventures in the PRC. Henglong USA Corporation, “HLUSA,” incorporated on January 8, 2007 in Troy, Michigan, is a wholly-owned subsidiary of the Company, and mainly engages in marketing of automotive parts in North America, and provides after-sales service and research and development support. CAAS Brazil’s Imports And Trade In Automotive Parts Ltd., “Brazil Henglong,” was established by Hubei Henglong Automotive System Group Co., Ltd., formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., “Hubei Henglong,” as a Sino-foreign joint venture company with two Brazilian citizens in Brazil in August 2012. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction. Fujian Qiaolong was acquired by the Company in the second quarter of 2014, as a joint venture company that mainly manufactures and distributes drainage and rescue vehicles with mass flow, drainage vehicles with vertical downhole operation, crawler-type mobile pump stations,high-altitude water supply and discharge drainage vehicles, long-range control crawler-type mobile pump stations and other vehicles, which was disposed of by the Company in the second quarter of 2016. USAI was established in 2005, and the Company and Hubei Wanlong owned 83.34% and 16.66%, respectively. In May 2020, USAI merged with and into Wuhan Chuguanjie, a wholly-owned subsidiary of Wuhan Jielong, and it deregistered from the local business administration on April 28, 2020. Following the merger, 85.0% of Wuhan Chuguanjie was owned by the Company and 15.0% was owned by Hubei Wanlong. In April 2020, Hubei Henglong acquired 100.00% of the shares of Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong”, for total consideration of RMB 1.20 million, equivalent to approximately $0.2 million. Changchun Hualong mainly engages in design and R&D of automotive parts. Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” was formed in December 2019, which mainly engages in the development, manufacturing and sale of high polymer materials. In April 2021, the Company obtained an additional 22.67% equity interest in Wuhu, for total consideration of RMB 6.9 million, equivalent to approximately $1.1 million, from the other shareholder. Following the acquisition, the Company owned 100% of the equity interests of Wuhu Henglong. Jingzhou Qingyan deregistered from the local business administration on June 22, 2022.

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Critical Accounting Estimates

The Company prepares its condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amount of revenues and expenses during the reporting periods. Management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions. The following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s condensed consolidated financial statements.

The Company considers an accounting estimate to be critical if:

It requires the Company to make assumptions about matters that were uncertain at the time it was making the estimate, and
Changes in the estimate or different estimates that the Company could have selected would have had a material impact on the Company’s financial condition or results of operations.

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

Balance Sheet
Caption

    

Critical
Estimate
Item

    

Nature of Estimates
Required

    

Assumptions/Approaches
Used

    

Key Factors

Accrued liabilities and other long-term liabilities

 

Warranty obligations

 

 

Estimating warranty requires the Company to forecast the resolution of existing claims and expected future claims on products sold. OEMs (Original Equipment Manufacturers) are increasingly seeking to hold suppliers responsible for product warranties, which may impact the Company’s exposure to these costs.

 

The Company bases its estimate on historical trends of units sold and payment amounts, combined with its current understanding of the status of existing claims and discussions with its customers.

 

OEM sourcing

OEM policy decisions regarding warranty claims

 

 

 

 

 

 

 

 

 

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

Valuation of long- lived assets and investments

 

The Company is required from time to time to review the recoverability of certain of its assets based on projections of anticipated future cash flows, including future profitability assessments of various product lines.

 

The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments. 

 

Future production estimates

Customer preferences and decisions 

 

 

 

 

 

 

 

 

Accounts

receivable  

Allowance for doubtful accounts  

 

The Company is required from time to time to review the credit of customers and make timely provision of allowance for doubtful accounts.

 

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

 

Customer credit 

 

 

 

 

 

 

 

 

Inventory

 

Write-down of inventory

 

The Company is required from time to time to review the cash ability of inventory based on projections of anticipated future cash flows, including write-down of inventory for prices that are higher than market price and undesirable inventories.

 

The Company estimates cash flows using internal budgets based on recent sales data, independent automotive production volume estimates and customer commitments.

 

Future production estimates

Customer preferences and decisions

 

 

 

 

 

 

 

 

Deferred income taxes

 

Recoverability of deferred tax assets

 

The Company is required to estimate whether recoverability of its deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction.

 

The Company uses historical and projected future operating results, based upon approved business plans, including a review of the eligible carry forward period, tax planning opportunities and other relevant considerations.

 

Tax law changes

Variances in future projected profitability, including by taxing entity 

Recent Accounting Pronouncements

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

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Results of Operations - Three Months Ended March 31, 2023 and 2022

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

    

Three Months Ended March 31,

 

2023

    

2022

    

Change

    

Change %

Net product sales

$

142,243

$

136,396

$

5,847

 

4.3

%

Cost of products sold

 

120,625

 

121,662

 

(1,037)

 

(0.9)

Gain on other sales

 

653

 

931

 

(278)

 

(29.9)

Selling expenses

 

3,384

 

4,312

 

(928)

 

(21.5)

General and administrative expenses

 

4,753

 

4,754

 

(1)

 

(0.0)

Research and development expenses

 

6,390

 

8,137

 

(1,747)

 

(21.5)

Other income

 

1,502

 

3,519

 

(2,017)

 

(57.3)

Interest expense

 

249

 

402

 

(153)

 

(38.1)

Financial expense/(income), net

422

(2,015)

2,437

120.9

Income taxes

 

829

 

958

 

(129)

 

(13.5)

Net income

 

7,883

 

149

 

7,734

 

5,190.6

Net income attributable to non-controlling interests

 

1,055

 

200

 

855

 

427.5

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

6,820

(59)

6,879

 

11,659.3

%

Net Product Sales and Cost of Products Sold

    

Net Product Sales

    

Cost of Products Sold

 

(in thousands of USD,

(in thousands of USD,

 

except percentages)

except percentages)

2023

    

2022

    

Change

    

2023

    

2022

    

Change

    

Henglong

    

$

61,631

    

$

62,003

    

(372)

    

(0.6)

%  

57,151

    

$

57,441

    

(290)

    

(0.5)

%

Jiulong

 

16,820

 

17,728

 

(908)

 

(5.1)

15,531

 

17,606

 

(2,075)

 

(11.8)

Wuhu

 

7,899

 

8,872

 

(973)

 

(11.0)

7,134

 

8,302

 

(1,168)

 

(14.1)

Hubei Henglong

 

34,657

 

32,943

 

1,714

 

5.2

30,073

 

30,122

 

(49)

 

(0.2)

Henglong KYB

 

37,196

 

29,807

 

7,389

 

24.8

32,456

 

27,321

 

5,135

 

18.8

Brazil Henglong

10,762

10,484

278

2.7

8,926

9,498

(572)

(6.0)

Other Entities

 

22,115

 

23,160

 

(1,045)

 

(4.5)

17,984

 

18,860

 

(876)

 

(4.6)

Total Segments

 

191,080

 

184,997

 

6,083

 

3.3

169,255

 

169,150

 

105

 

0.1

Elimination

 

(48,837)

 

(48,601)

 

(236)

 

0.5

(48,630)

 

(47,488)

 

(1,142)

 

2.4

Total

$

142,243

$

136,396

5,847

 

4.3

%  

120,625

$

121,662

(1,037)

 

(0.9)

%

Net Product Sales

Net product sales were $142.2 million for the three months ended March 31, 2023, compared to $136.4 million for the same period in 2022, representing an increase of $5.8 million, or 4.3%, mainly due to the Company’s increased sales of electric power steering (“EPS”) systems and parts and partially offset by the impact from appreciation of USD agaist RMB.
.

Net sales of traditional steering products and parts were $94.4 million for the three months ended March 31, 2023, compared to $95.4 million for the same period in 2022. Net sales of electric power steering (“EPS”) were $47.8 million for the three months ended March 31, 2023 and $41.0 million for the same period in 2022, representing an increase of $6.8 million, or 16.6%. As a percentage of net sales, sales of EPS were 33.6% for the three months ended March 31, 2023, compared with 30.1% for the same period in 2022.

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

Henglong mainly engages in providing passenger vehicle steering systems. Net product sales for Henglong were $61.6 million for the three months ended March 31, 2023, which is stable compared to $62.0 million for the same period of 2022.
Jiulong mainly engages in providing commercial vehicle steering systems. Net product sales for Jiulong were $16.8 million for the three months ended March 31, 2023, compared with $17.7 million for the three months ended March 31, 2022, representing a

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decrease of $0.9 million, or 5.1%. The decrease was mainly due to the decline in demand of commercial vehicles, offset by the increase in average selling price due to change in product mix.
Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd. (“Chery”), one of the major automotive manufacturers in China. Net product sales for Wuhu were $7.9 million for the three months ended March 31, 2023, compared to $8.9 million for the same period in 2022, representing a decrease of $1.0 million, or 11.2%. The decrease was mainly due to the decrease in sales volume of products used in passenger vehicles from Chery.
Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net product sales for Hubei Henglong were $34.7 million for the three months ended March 31, 2023, compared with $32.9 million for the three months ended March 31, 2022, representing an increase of $1.8 million, or 5.5%. The increase was mainly due to the increase in average selling prices of products used in passenger vehicles from Chrysler.
Henglong KYB mainly engages in providing passenger EPS products. Net product sales for Henglong KYB were $37.2 million for the three months ended March 31, 2023, compared with $29.8 million for the three months ended March 31, 2022, representing an increase of $7.4 million, or 24.8%. The increase was mainly due to the increase in sales volume of EPS products used in passenger vehicles and the increase in average selling prices.
Net product sales for Brazil Henglong were $10.8 million for the three months ended March 31, 2023, compared to $10.5 million for the same period in 2022, representing an increase of $0.3 million, or 2.9%. The increase was mainly due to the increase in demand of Fiat in Brazil.
Net product sales for other entities were $22.1 million for the three months ended March 31, 2023, compared to $23.2 million for the same period in 2022, representing a decrease of $1.1 million, or 4.7%. The decrease was mainly due to the decrease in sales of Chongqing Henglong.

Cost of Products Sold

For the three months ended March 31, 2023, the cost of products sold was $120.6 million, compared to $121.7 million for the same period of 2022, representing a decrease of $1.1 million, or 0.9%. The decrease in cost of sales was mainly due to the impact from foreign exchange rate fluctuation and the decrease in unit cost offset by the increase in sales volume. Further analysis is as follows:

Cost of products sold for Henglong was $57.2 million for the three months ended March 31, 2023, which is stable compared to $57.4 million for the same period of 2022.
Cost of products sold for Jiulong was $15.5 million for the three months ended March 31, 2023, compared to $17.6 million for the same period of 2022, representing a decrease of $2.1 million, or 11.9%. The decrease was mainly due to the decrease in sales volumes and change in product mix.
Cost of products sold for Wuhu was $7.1 million for the three months ended March 31, 2023, compared to $8.3 million for the same period of 2022, representing a decrease of $1.2 million, or 14.5%. The decrease was mainly due to the decrease in sales volumes.
Cost of products sold for Hubei Henglong was $30.1 million for the three months ended March 31, 2023, which is stable compared to $30.1 million for the same period of 2022.
Cost of products sold for Henglong KYB was $32.5 million for the three months ended March 31, 2023, compared to $27.3 million for the same period of 2022, representing an increase of $5.2 million, or 19.0%. The increase was mainly due to the increase in sales volume of EPS products used in passenger vehicles.
Cost of products sold for Brazil Henglong was $8.9 million for the three months ended March 31, 2023, compared to $9.5 million for the same period in 2022, representing a decrease of $0.6 million, or 6.3%. The decrease was mainly due to the decrease in unit cost as a result of reduced overseas transportation cost, offset by the increase in sales volume.
Cost of products sold for other entities was $18.0 million for the three months ended March 31, 2023, compared to $18.9 million for the same period in 2022, representing a decrease of $0.9 million, or 4.8%.

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Gross margin was 15.2% for the three months ended March 31, 2023, compared to 10.8% for the same period of 2022, representing an increase of 4.4%. The increase was mainly due to a change in our product mix and increase in average selling price for the three months ended March 31, 2023.

Selling Expenses

Selling expenses were $3.4 million for the three months ended March 31, 2023, as compared to $4.3 million for the same period of 2022, representing a decrease of $0.9 million, or 21%, which was primarily due to a decrease in transportation expenses, marketing and office expense and the impact from appreciation of USD against RMB.

General and Administrative Expenses

General and administrative expenses were $4.8 million for the three months ended March 31, 2023, which is stable compared to $4.8 million for the same period of 2022.

Research and Development Expenses

Research and development expenses were $6.4 million for the three months ended March 31, 2023, as compared to $8.1 million for the same period of 2022, representing a decrease of $1.7 million, or 21%, which was mainly due to a decrease of tooling charge and the depreciation of the RMB against the USD in the three months ended March 31, 2023 as compared to the three months ended March 31, 2022.

Other Income, net

Other income, net was $1.5 million for the three months ended March 31, 2023, as compared to $3.5 million for the three months ended March 31, 2022, representing a decrease of $2.0 million, which was mainly due to the government subsidies received for the three months ended March 31, 2023 being less than the amount received for the three months ended March 31, 2022.

Interest Expense

Interest expense was $0.2 million for the three months ended March 31, 2023, as compared to $0.4 million for the three months ended March 31, 2022, representing a decrease of $0.2 million, which is mainly due to the decrease in short-term loan and weighted average interest rate.

Financial Expense/(Income), net

Financial expense, net was $0.4 million for the three months ended March 31, 2023, as compared to financial income, net of $2.0 million for the three months ended March 31, 2022, representing a decrease in financial income of $2.4 million, which was primarily due to an increase in the foreign exchange loss due to the appreciation of RMB against USD.

Income Taxes

Income tax expense was $0.8 million for the three months ended March 31, 2023, compared to income tax expense of $1.0 million for the three months ended March 31, 2022, which was primarily due to the valuation allowance recognized in the three months ended March 31, 2022 whereas no significant valuation allowance was recognized in the three months ended March 31, 2023.

Net Income Attributable to Non-controlling Interests

Net income attributable to non-controlling interests amounted to $1.1 million for the three months ended March 31, 2023, compared to net income attributable to non-controlling interests of $0.2 million for the three months ended March 31, 2022.

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

Net income attributable to parent company’s common shareholders was $6.8 million for the three months ended March 31, 2023, compared to net loss attributable to parent company’s common shareholders of $0.1 million for the three months ended March 31, 2022, representing an increase in net income attributable to parent company’s common shareholders of $6.9 million.

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Table of Contents

Liquidity and Capital Resources

Capital Resources and Use of Cash

The Company has historically financed its liquidity requirements from a variety of sources, including short-term borrowings under bank credit agreements, bankers’ acceptances, issuances of capital stock and notes and internally generated cash. As of March 31, 2023, the Company had cash and cash equivalents and short-term investments of $120.6 million, compared to $134.1 million as of December 31, 2022, representing a decrease of $13.5 million, or 10.1%.

The Company had working capital (total current assets less total current liabilities) of $164.3 million as of March 31, 2023, compared to $156.5 million as of December 31, 2022, representing an increase of $7.8 million, or 5.0%.

Except for the expected distribution of dividends from the Company’s PRC subsidiaries to the Company in order to fund the payment of the one-time transition tax due to the U.S. Tax Reform, the Company intends to indefinitely reinvest the funds in subsidiaries established in the PRC.

We cannot predict the impact COVID-19 may have on our cash flow for the rest of 2023. However, based on our liquidity assessment, we believe that our cash flow from operations and proceeds from our financing activities will be sufficient to meet our anticipated cash needs, including our cash needs for working capital and capital expenditures, for the foreseeable future and for at least twelve months subsequent to the filing of this report.

Capital Source

The Company’s capital source is multifaceted, such as bank loans and banks’ acceptance facilities. In financing activities and operating activities, the Company’s banks require the Company to sign line of credit agreements and repay such facilities within one to two years. On the condition that the Company can provide adequate mortgage security and has not violated the terms of the line of credit agreement, such facilities can be extended for another one to two years.

The Company had short-term loans of $45.7 million, long-term loans of $0.7 million (See Note 7) and bankers’ acceptances of $105.5 million (See Note 8) as of March 31, 2023.

The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker’s acceptances is expected to be reduced by approximately $16.7 million over the next 12 months. If the Company wishes to maintain the same amount of bank loans and banker’s acceptances in the future, it may be required by the banks to provide additional mortgages of $16.7 million as of the maturity date of such line of credit agreements, see the table under “Bank Arrangements” below for more information. The Company can still obtain a reduced line of credit with a reduction of $9.4 million, which is 56.1%, the mortgage ratio, of $16.7 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.

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Table of Contents

Bank Arrangements

As of March 31, 2023, the principal outstanding under the Company’s credit facilities and lines of credit was as follows (figures are in thousands of USD):

    

    

    

    

    

Assessed

Due

Amount

Amount

Mortgage

Bank

    

Date

Available(2)

Used(3)

Value(4)

1. Comprehensive credit facilities

China CITIC Bank (1)

Aug-2024

 

70,579

42,860

27,818

2. Comprehensive credit facilities

Hankou Bank(1)

Mar-2024

 

14,552

2,838

3. Comprehensive credit facilities

Hubei Bank(1)

Mar-2024

 

24,739

14,229

75,382

4. Comprehensive credit facilities

Chongqing Bank

Mar-2025

 

1,019

786

1,858

5. Comprehensive credit facilities

China Construction Bank

Sep-2025

 

2,910

2,328

6,605

6. Comprehensive credit facilities

China Merchants Bank(1)

June-2024

 

14,552

2,949

7. Comprehensive credit facilities

Bank of China(1)

Aug-2023

 

13,243

5,821

8. Comprehensive credit facilities

China Everbright Bank

Dec-2025

4,366

2,117

9,142

9. Comprehensive credit facilities

China Industrial Bank

Mar-2024

728

2,876

Total

$

146,688

$

73,928

$

123,681

(1)The comprehensive credit facilities with China CITIC Bank are guaranteed by Henglong and Hubei Henglong in addition to the above pledged assets. The comprehensive credit facilities with Hankou Bank are guaranteed by Henglong and certain account receivables in addition to the above pledged assets. The comprehensive credit facilities with Hubei Bank are guaranteed by Chen Hanlin in addition to the above pledged assets. The comprehensive credit facilities with Merchants Bank are guaranteed by Hubei Henglong, Chen Hanlin and certain account receivables in addition to the above pledged assets. The comprehensive credit facilities with Bank of China are guaranteed by Hubei Henglong in addition to the above pledged assets.
(2)“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.
(3)“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 $37.3 million and notes payable of $36.6 million as of March 31, 2023.
(4)In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of March 31, 2023, the pledged assets included property, plant and equipment and land use rights with an aggregate assessed value of $123.7 million.

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

The Company’s bank loan terms range from 3 months to 35 months. Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:

1. Land use rights and buildings with an assessed value of approximately $27.8 million as security for its comprehensive credit facility with China CITIC Bank Wuhan Branch.

2. Equipment with an assessed value of approximately $75.4 million as security for its revolving comprehensive credit facility with Hubei Bank.

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Table of Contents

3. Buildings with an assessed value of approximately $1.9 million as security for its comprehensive credit facility with Chongqing Bank.

4. Land use rights and buildings with an assessed value of approximately $6.6 million as security for its revolving comprehensive credit facility with China Constitution Bank.

5. Land use rights and buildings with an assessed value of approximately $9.1 million as security for its revolving comprehensive credit facility with China Everbright Bank.

6. Land use rights and buildings with an assessed value of approximately $2.9 million as security for its revolving comprehensive credit facility with China Industrial Bank.

Short-term and Long-term Loans

The following table summarizes the contract information of short-term borrowings between the banks and the Company as of March 31, 2023 (figures are in thousands of USD).

    

    

    

    

Borrowing

    

    

    

Annual

    

Date of

    

    

Bank

Borrowing

Term

Interest

Interest

Government

Purpose

Date

(Months)

Principal

Rate

Payment

Due Date

Bank of China

Working Capital

October 28, 2022

12

2,910

3.00

%  

Pay monthly

October 28, 2023

Bank of China

Working Capital

September 28, 2022

12

2,910

3.00

%  

Pay monthly

September 27, 2023

China CITIC Bank

Working Capital

September 26, 2022

12

728

3.65

%  

Pay monthly

September 25, 2023

China CITIC Bank

Working Capital

September 26, 2022

12

728

3.65

%  

Pay monthly

September 25, 2023

China CITIC Bank

Working Capital

March 2, 2023

12

1,455

3.65

%  

Pay monthly

March 1, 2024

China CITIC Bank

Working Capital

 

March 23, 2023

 

12

728

 

3.65

%  

Pay monthly

 

March 23, 2024

China Constitution Bank

Working Capital

 

September 28, 2022

 

12

1,455

 

3.50

%  

Pay monthly

 

September 26, 2023

Chongqing Bank(1)

Working Capital

 

April 14, 2022

 

12

15

 

3.80

%  

Pay semiannually

 

April 14, 2023

Chongqing Bank

Working Capital

 

April 14, 2022

 

18

15

 

3.80

%  

Pay semiannually

 

October 14, 2023

Chongqing Bank

Working Capital

 

April 14, 2022

 

35

39

 

3.80

%  

Pay semiannually

 

March 20, 2025

Chongqing Bank

Working Capital

April 27, 2022

35

122

3.80

%  

Pay semiannually

March 20, 2025

Chongqing Bank

Working Capital

May 12, 2022

34

76

3.80

%  

Pay semiannually

March 20, 2025

Chongqing Bank

Working Capital

May 24, 2022

34

55

3.80

%  

Pay semiannually

March 20, 2025

Chongqing Bank

Working Capital

June 16, 2022

33

44

3.80

%  

Pay semiannually

March 20, 2025

Chongqing Bank

Working Capital

 

June 29, 2022

 

33

118

 

3.80

%  

Pay semiannually

 

March 20, 2025

Chongqing Bank

Working Capital

 

July 28, 2022

 

33

81

 

3.80

%  

Pay semiannually

 

April 13, 2025

Chongqing Bank

Working Capital

 

January 16, 2023

 

27

164

 

3.80

%  

Pay semiannually

 

April 13, 2025

Chongqing Bank

Working Capital

 

February 20, 2023

 

26

20

 

3.80

%  

Pay semiannually

 

April 13, 2025

Chongqing Bank

Working Capital

 

March 21, 2023

 

25

23

 

3.80

%  

Pay semiannually

 

April 13, 2025

China CITIC Bank

Working Capital

 

June 16, 2022

 

12

6,965

 

2.30

%  

Pay in arrear

 

June 15, 2023

China CITIC Bank

Working Capital

 

March 28, 2023

 

12

5,619

 

2.70

%  

Pay in arrear

 

March 27, 2024

China CITIC Bank

Working Capital

 

June 16, 2022

 

12

4,975

 

2.30

%  

Pay in arrear

 

June 15, 2023

Hankou Bank

Working Capital

 

March 30, 2023

 

9

2,789

 

2.30

%  

Pay in arrear

 

December 25, 2023

China CITIC Bank

Working Capital

March 28, 2023

12

4,671

2.70

%  

Pay in arrear

March 26, 2024

China CITIC Bank(1)

Working Capital

October 20, 2022

6

1,444

1.65

%  

Pay in arrear

April 8, 2023

26

Table of Contents

China CITIC Bank(1)

Working Capital

November 21, 2022

5

434

1.65

%  

Pay in arrear

April 8, 2023

China CITIC Bank(1)

Working Capital

October 20, 2022

6

433

1.65

%

Pay in arrear

April 11, 2023

China CITIC Bank(1)

Working Capital

November 21, 2022

5

1,175

1.65

%  

Pay in arrear

April 28, 2023

China CITIC Bank

Working Capital

November 21, 2022

6

433

1.65

%  

Pay in arrear

May 16, 2023

China CITIC Bank

Working Capital

December 19, 2022

5

1,156

1.65

%  

Pay in arrear

May 29, 2023

China CITIC Bank

Working Capital

December 19, 2022

5

51

1.65

%  

Pay in arrear

May 30, 2023

China CITIC Bank(1)

Working Capital

January 16, 2023

3

144

2.50

%  

Pay in arrear

April 28, 2023

China CITIC Bank

Working Capital

January 16, 2023

4

288

2.50

%  

Pay in arrear

May 29, 2023

China CITIC Bank

Working Capital

January 28, 2023

4

338

2.60

%  

Pay in arrear

May 29, 2023

China CITIC Bank

Working Capital

February 24, 2023

3

289

2.55

%  

Pay in arrear

May 29, 2023

China CITIC Bank

Working Capital

January 10, 2023

6

250

1.80

%  

Pay in arrear

June 30, 2023

China CITIC Bank

Working Capital

January 10, 2023

6

433

1.80

%  

Pay in arrear

June 30, 2023

China CITIC Bank

Working Capital

January 28, 2023

5

432

2.60

%  

Pay in arrear

June 30, 2023

China CITIC Bank

Working Capital

February 17, 2023

4

432

2.50

%  

Pay in arrear

June 30, 2023

China CITIC Bank

Working Capital

January 10, 2023

6

115

1.80

%  

Pay in arrear

July 3, 2023

China CITIC Bank

Working Capital

January 10, 2023

6

866

1.80

%  

Pay in arrear

July 4, 2023

China CITIC Bank

Working Capital

February 16, 2023

5

288

2.50

%  

Pay in arrear

July 17, 2023

China CITIC Bank

Working Capital

February 17, 2023

5

720

2.52

%  

Pay in arrear

July 17, 2023

Total

46,426

(1)These bank loans were repaid during April 2023 when they became due.

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

The Company had complied with such financial covenants as of March 31, 2023.

Notes Payable

The following table summarizes the contract information of issuing notes payable between the banks and the Company as of March 31, 2023 (figures are in thousands of USD):

Amount

Payable on

Purpose

    

Term (Months)

    

Due Date

    

  Due Date

Working Capital(1)

 

6

 

Apr. 2023

 

22,892

Working Capital(1)

 

6

 

May. 2023

 

16,957

Working Capital

 

6

 

Jun. 2023

 

13,283

Working Capital

 

6

 

Jul. 2023

 

15,828

Working Capital

 

6

 

Aug.2023

 

13,593

Working Capital

 

6

 

Sep. 2023

 

22,913

Total (See Note 8)

 

  

$

105,466

(1)

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

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Table of Contents

The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit a sufficient amount of cash on the due date of notes payable for payment to the suppliers. If the bank has advanced payment for the Company, it will be charged an additional 50% penalty interest. The Company complied with such financial covenants as of March 31, 2023. 

Cash Flows

(a)Operating Activities

Net cash used in operating activities for the three months ended March 31, 2023 was $1.4 million, compared to net cash used in operating activities of $4.3 million for the same period of 2022, representing a decrease in net cash outflows by $2.9 million, which was mainly due to (1) the increase in net income excluding non-cash items by $4.1 million, (2) the increase in the cash inflows from movements of inventory by $5.8 million, (3) the increase in the cash outflows from movements of accounts and notes receivable by $6.2 million, (4) the increase in the cash outflows from movements of accrued expenses and others by $0.8 million, and (5) a combination of other factors contributing an increase of cash outflows by $0.1 million.

(b)Investing Activities

Net cash used in investing activities for the three months ended March 31, 2023 was $16.7 million, as compared to net cash used in investing activities of $45.6 million for the same period of 2022, representing a decrease in net cash outflows by $28.9 million, which was mainly due to the net effect of (1) a decrease in purchase of short-term investments of $9.9 million, (2) an increase in proceeds from maturities of short-term investments by $24.7 million, (3) an increase in payments to acquire investments under the equity method by $1.1 million, and (4) a combination of other factors contributing an increase of cash outflows by $4.5 million, primarily including a decrease in cash received from long-term investment by $2.1 million and an increase in payments to acquire property, plant and equipment by $2.1 million.

(c)Financing Activities

Net cash used in financing activities for the three months ended March 31, 2023 was $0.4 million, compared to net cash used in financing activities of $0.7 million for the same period of 2022, representing a decrease in net cash outflows by $0.3 million, which was mainly due to the net effect of (1) an increase in repayment of bank loan by $4.8 million, (2) an increase in proceeds from bank loan by $4.0 million, and (3) a decrease in repayments of the borrowing for sale and leaseback transaction by $1.1 million.

Off-Balance Sheet Arrangements

As of March 31, 2023 and December 31, 2022, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

ITEM 3.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There were no material changes to the disclosure made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 regarding this matter.

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Table of Contents

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 March 31, 2023, the end of the period covered by this Report. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-Q, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, Messrs. Wu and Li concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2023.

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

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 March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II. — OTHER INFORMATION

ITEM 1.          LEGAL PROCEEDINGS.

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

ITEM 1A.        RISK FACTORS.

There have been no material changes from the risk factors previously disclosed in Item 1A of the Company’s 2022 Annual Report on Form 10-K.

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

None.

ITEM 3.          DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4.          MINE SAFETY DISCLOSURES.

Not applicable.

ITEM 5.          OTHER INFORMATION.

None.

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Table of Contents

ITEM 6.          EXHIBITS.

INDEX TO EXHIBITS

Exhibit
Number

     

Description

 

 

 

3.1(i)

 

Certificate of Incorporation (incorporated by reference from the filing on Form 10SB12G File No. 000-33123).

 

 

 

3.1(ii)

 

Bylaws (incorporated by reference from the Form 10SB12G File No. 000-33123).

 

 

 

10.1

 

Joint-venture Agreement, dated March 31, 2006, as amended on May 2, 2006, between Great Genesis Holdings Limited and Wuhu Chery Technology Co., Ltd. (incorporated by reference to Exhibit 10.8 to the Company’s Form 10-Q Quarterly Report on May 10, 2006).

 

 

 

10.2

 

Stock Exchange Agreement dated August 11, 2014 by and among Jingzhou City Jiulong Machinery Electricity Manufacturing Co., Ltd., China Automotive Systems, Inc. and Hubei Henglong Automotive System Group Co., Ltd. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-Q Quarterly Report on August 13, 2014).

 

 

 

10.3

 

English translation of Joint Venture Contract, dated as of April 27, 2018, by and between Hubei Henglong Automotive System Group Co., Ltd. and KYB (China) Investment Co., Ltd. (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 27, 2018).

 

 

 

31.1

 

Rule 13a-14(a) Certification*

 

 

 

31.2

 

Rule 13a-14(a) Certification*

 

 

 

32.1

 

Section 1350 Certification*

 

 

 

32.2

 

Section 1350 Certification*

 

 

 

101.INS*

 

XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*

XBRL Taxonomy Extension Schema Document

101.CAL*

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104*

Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

*filed herewith

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Table of Contents

SIGNATURES

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

 

CHINA AUTOMOTIVE SYSTEMS, INC.

 

(Registrant)

 

 

 

Date: May 12, 2023

By: 

/ s/ Qizhou Wu

 

Qizhou Wu

 

 

President and Chief Executive Officer

 

 

 

Date: May 12, 2023

By:

/s/ Jie Li

 

 

Jie Li

 

 

Chief Financial Officer

32