Form 10-K CHINA AUTOMOTIVE SYSTEMS For: Dec 31

March 30, 2021 6:17 AM EDT

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

(Mark One)

 

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

 

For the fiscal year ended December 31, 2020

Or

 

  ¨ TRANSITION REPORT PURSUANT TO 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   434000
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code – (86) 716-412-7901

 

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 

 

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

 

  Title of Class  
  None  

   

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. 

 

Yes  ¨              No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. 

 

Yes  ¨              No  x

 

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

 

Yes  x               No  ¨

 

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

 

Yes  x               No ¨

 

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

 

  Large Accelerated Filer ¨ Accelerated Filer ¨
  Non-Accelerated Filer x Smaller Reporting Company x
      Emerging Growth Company ¨

 

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

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ¨

 

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

 

Yes  ¨              No  x

 

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2020, based upon the price of $2.89 that was the closing price of the common stock as reported on The Nasdaq Stock Market under the symbol “CAAS” on such date, was approximately $31.8 million.

 

The Company has 30,851,776 shares of Common Stock outstanding as of March 30, 2021.

 

 

 

 

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

None. 

 

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CHINA AUTOMOTIVE SYSTEMS, INC.

 

FORM 10-K

 

INDEX

 

    Page
PART I   5
Item 1. Business. 5
Item 1A. Risk Factors. 13
Item 1B. Unresolved Staff Comments. 29
Item 2. Properties. 29
Item 3. Legal Proceedings. 30
Item 4. Mine Safety Disclosures. 31
     
PART II   31
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 31
Item 6. Selected Financial Data. 32
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 32
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 46
Item 8. Financial Statements and Supplementary Data. 47
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 47
Item 9A. Controls and Procedures. 47
Item 9B. Other Information. 49
     
PART III   49
Item 10. Directors, Executive Officers and Corporate Governance. 49
Item 11. Executive Compensation. 53
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 55
Item 13. Certain Relationships and Related Transactions, and Director Independence. 56
Item 14. Principal Accounting Fees and Services. 56
   
PART IV   57
Item 15. Exhibits, Financial Statement Schedules. 57
Item 16. Form 10-K Summary. 59
     
Signatures   59
Financial Statements  

 

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Cautionary Statement

 

This Annual Report on Form 10-K 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 Annual Report or other reports or documents the Company files with the Securities and Exchange Commission, the “SEC,” 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-K is filed, and the Company does not intend to update any of the forward-looking statements after the date this Annual Report on Form 10-K is filed to confirm these statements to actual results, unless required by law.

 

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PART I

 

ITEM 1. BUSINESS.

 

COMPANY HISTORY

 

China Automotive Systems, Inc., “China Automotive” or the “Company,” was incorporated in the State of Delaware on June 29, 1999. Through its subsidiary, Great Genesis Holdings Limited, “Genesis,” a corporation organized under the laws of the Hong Kong Special Administrative Region, China, it owns interests in eight Sino-joint ventures and six wholly-owned subsidiaries in the People’s Republic of China, “China” or the “PRC,” which manufacture power steering systems and/or related products for different segments of the automobile industry. Genesis also owns interests in a Brazil-based trading company, which engages mainly in the import and sales of automotive parts in Brazil.

 

Henglong USA Corporation, “HLUSA,” which was 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 (“R&D”) support.

 

Unless the context indicates otherwise, the Company uses the terms “the Company,” “we,” “our” and “us” to refer to China Automotive collectively on a consolidated basis.

 

BUSINESS OVERVIEW

 

The Company is a holding company and has no significant business operations or assets other than its interest in Genesis and HLUSA. Genesis mainly engages in the manufacture and sale of automotive systems and components through its controlled subsidiaries and the joint ventures, as described below.

 

Set forth below is an organizational chart as at December 31, 2020.

 

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China Automotive Systems, Inc. [NASDAQ:CAAS]          
    ↓100%                           ↓100%              
Great Genesis Holdings Limited                   Henglong USA Corporation      
                                         
↓100%                           ↓70%          
Hubei                           Shenyang          
Henglong                           Jinbei          
Automotive                           Henglong          
System Group                           Automotive          
Co., Ltd.                           Steering System          
"Hubei                                          
Henglong"1                           "Shenyang"2          
                                         
↓100%   ↓100%   ↓77.33%   ↓85%   ↓70%   ↓95.84%   ↓100%   ↓60%   ↓66.6%   ↓51.0%   ↓62%   ↓100%  
Jingzhou   Shashi   Wuhu   Wuhan   Chongqing   CAAS   Hubei   Jingzhou   Hubei   Hyoseong   Wuhu   Changchun  
Henglong   Jiulong   Henglong   Jielong   Henglong   Brazil's   Henglong   Qingyan   Henglong    (Wuhan)   Hongrun   Hualong  
Automotive   Power   Automotive   Electric   Hongyan   Imports And   Group   Intelligent   & KYB   Motion   New   Automotive  
Parts   Steering   Steering   Power   Automotive   Trade In   Shanghai   Automotive    Automobile   Mechatronics   Material   Technology  
Co., Ltd.   Gears   System Co.,   Steering Co.,   System Co.,   Automotive   Automotive   Technology   Electric   System   Co., Ltd.   Co., Ltd.  
    Co., Ltd.   Ltd.   Ltd.   Ltd.   Parts Ltd.   Electronics   Research   Steering   Co., Ltd.          
                        Research and   Institute   System              
                        Development   Co., Ltd.   Co., Ltd.              
                         Ltd.                      
                "Chongqing   "Brazil   “Shanghai   “Jingzhou   “Henglong   “Wuhan   “Wuhu   “Changchun  
"Henglong"3   "Jiulong"4   "Wuhu"5   "Jielong"6   Henglong"7   Henglong"8   Henglong”11   Qingyan”12   KYB”13   Hyoseong”14   Hongrun”15   Hualong”16  
                                           
↓100%           ↓85%                                  
Jingzhou           Wuhan                                  
Henglong           Chuguanjie                                  
Automotive           Automotive                                  
Technology           Science and                                  
(Testing)           Technology                                  
Center           Ltd.                                  
"Testing           "Wuhan                                  
Center"9           Chuguanjie"10                                  

  

1. 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.

 

2. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.

 

3. Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light-duty vehicles.

 

4. Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.

 

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

 

6. Jielong was established in 2006 and mainly engages in the production and sales of automobile steering columns.

 

7. 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.

 

8. 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 sale 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.

 

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9. In December 2009, Henglong, a subsidiary of Genesis, formed Testing Center, which mainly engages in the research and development of new products.

 

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.

 

In May 2020, Wuhan Chuguanjie merged with another subsidiary, Universal Sensor Application Inc., “USAI”, which was established in 2005 and mainly engages in the production and sales of sensor modules.

 

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 sale of automotive electronics.

  

12. In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology.

 

13. In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System Co., Ltd. (“Henglong KYB”), which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment.

 

14. In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd. (“Wuhan Hyoseong”), which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment.

 

15. In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd. (“Wuhu Hongrun”), which mainly engages in the development, manufacturing and sale of high polymer materials. Hubei Henglong owns 62.0% of the shares of Wuhu Hongrun and has consolidated it since its establishment.

 

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

 

The Company has business relationships with more than sixty vehicle manufacturers, including Great Wall Motors Company Limited (“Great Wall Motors”), and FAW Group, two of the five largest automobile manufacturers in China; Shenyang Brilliance Jinbei Co., Ltd, the largest light vehicle manufacturer in China; Chery Automobile Co., Ltd., the largest state-owned car manufacturer in China, and BYD Auto Co., Ltd. and Zhejiang Geely Automobile Co., Ltd., the largest privately owned car manufacturers in China. The PRC-based joint ventures of General Motors (GM), Citroen and Fiat Chrysler North America are all key customers of the Company. 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.

 

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INTELLECTUAL PROPERTY RIGHTS

 

Intellectual Property rights, “IP,” are important in helping the Company maintain its competitive position. Currently, the Company owns IP rights, including two trademarks covering automobile parts, “HL” and “JL,” and more than eighty-five patents registered in China covering power steering technology. The Company is in the process of integrating new advanced technologies such as electronic chips in power steering systems into its current production line and is pursuing aggressive strategies in technology to maintain a competitive edge within the automobile industry. In December 2009, the Company, through Henglong, formed Testing Center and cooperated with Nanyang Ind. Co. Ltd. and Tsinghua University to engage in the research and development of new products, such as Electric Power Steering (“EPS”), integral rack and pinion power steering and high pressure power steering, to optimize current products design and to develop new, cost-saving manufacturing processes. In January 2015, Hubei Henglong formed Shanghai Henglong, which mainly engages in the design and sale of automotive electronics, to capture the market opportunities for EPS, which were included in traditional hydraulic power steering products by many automobile makers. In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., which mainly engages in the research and development of intelligent automotive technology. In August 2018, Hubei Henglong established a non-wholly owned subsidiary, Hubei Henglong KYB Automobile Electric Steering System Co., Ltd., which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. In March 2019, Hubei Henglong established a non-wholly owned subsidiary, Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. 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. In April 2020, Hubei Henglong acquired 100.0% of the equity interests of Changchun Hualong Automotive Technology Co. Ltd., “Changchun Hualong”, which mainly engages in design and R&D of automotive parts.

 

STRATEGIC PLAN

 

The Company’s short to medium term strategic plan is to focus on both domestic and international market expansion. To achieve this goal and higher profitability, the Company focuses on brand recognition, quality control, cost efficiency, research and development and strategic acquisitions. Set forth below are the Company’s programs:

 

  Brand Recognition. Under the brands of Henglong and Jiulong, the Company offers four separate series of power steering sets and 310 models of power steering sets, steering columns and steering hoses.

 

  Quality Control. The Henglong and Jiulong manufacturing facilities obtained the ISO/TS 16949 System Certification in January 2004, a well-recognized quality control system in the auto industry developed by TUVRheindland of Germany.

 

  Cost Efficiency. By improving the Company’s production ability and enhancing equipment management, optimizing the process and products structure, perfecting the supplier system and cutting production cost, the Company’s goal is to achieve a more competitive profit margin.

 

  Research and Development. The Company established Testing Center for the research and development of products and, by partnering with Nanyang Ind. Co. Ltd. and Tsinghua University for the development of advanced steering systems, the Company’s objective is to gain increased market share in China.

 

  International Expansion. The Company has entered into agreements with several international vehicle manufacturers and auto parts modules suppliers and carried on preliminary negotiations regarding future development projects.

 

  Acquisitions. The Company is exploring opportunities to create long-term growth through new ventures or acquisitions of other auto component manufacturers. The Company will seek acquisition targets that meet the following criteria:

 

  · companies that can be easily integrated into product manufacturing and corporate management;

  

  · companies that have strong joint venture partners that would become major customers; and

 

  · companies involved with power steering systems.

 

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CUSTOMERS

 

The Company’s five largest customers represented 47.1% of the Company’s total sales for the year ended December 31, 2020. The following table sets forth information regarding the Company’s five largest customers.

 

   Percentage of Total 
Name of Major Customers  Revenue in 2020 
Fiat Chrysler North America   23.6%
Great Wall Motors   7.3%
Hubei Hongrun   6.0%
Beiqi Foton   5.9%
Dongfeng Auto Group   4.3%
Total   47.1%

 

The Company primarily sells its products to the above-mentioned customers, which, except for Hubei Hongrun, are original equipment manufacturing, “OEM”, customers; it also has excellent relationships with them, including serving as their first-rank supplier and developer for product development for new models. While the Company intends to continue to focus on retaining and winning this business, it cannot ensure that it will succeed in doing so. It is difficult to keep doing business with the above mentioned OEM customers as a result of severe price competition and customers’ diversification of their supply base. The Company’s business would be materially and adversely affected if it loses one or more of these major customers.

 

SALES AND MARKETING

 

The Company’s sales and marketing team has 91 sales persons, which are divided into an OEM team, a sales service team and a working group dedicated to international business. These sales and marketing teams provide a constant interface with the Company’s key customers. They are located in all major vehicle producing regions to more effectively represent the Company’s customers’ interests within the Company’s organization, to promote their programs and to coordinate their strategies with the goal of enhancing overall service and satisfaction. The Company’s ability to support its customers is further enhanced by its broad presence in terms of sales offices, manufacturing facilities, engineering technology centers and joint ventures.

 

The Company’s sales and marketing organization and activities are designed to create overall awareness and consideration of, and therefore to increase sales of the Company’s modular systems and components. To achieve that objective, the Company organized delegations to visit the United States, Korea, India and Japan and has supplied power steering gear to Fiat Chrysler North America. Through these activities, the Company has generated potential business interest as a strong base for future development.

 

DISTRIBUTION

 

The Company’s distribution system covers all of China. The Company has established sales and service offices with certain significant customers to deal with matters related to such customers in a timely fashion. The Company also established distribution warehouses close to major customers to ensure timely deliveries. The Company maintains strict control over inventories. Each of these sales and service offices sends back to the Company, through e-mail or fax, information related to the inventory and customers’ needs. The Company guarantees product delivery in 8 hours for those customers who are located within 200 km from the Company’s distribution warehouses, and 24 hours for customers who are located outside of 200 km from the Company’s distribution warehouses. Delivery time is a very important competitive factor in terms of customer decision making, together with quality, pricing and long-term relationships. The Company has two distribution warehouses in the United States, which are located in Michigan and Texas, respectively. The warehouses deliver parts to customers every day.

 

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EMPLOYEES AND FACILITIES

 

As of December 31, 2020, the Company employed approximately 4,688 persons, including approximately: 

 

· 1,317 by Henglong (including Testing Center formed by Henglong) ;
· 885 by Jiulong;
· 223 by Shenyang;
· 117 by Wuhu;
· 286 by Jielong;
· 82 by Wuhan Chuguanjie;
· 1,028 by Hubei Henglong;
· 17 by HLUSA;
· 146 by Chongqing Henglong;
· 38 by Brazil Henglong;
· 8 by Shanghai Henglong;
· 450 by Henglong KYB;
· 27 by Wuhan Hyoseong;
· 30 by Wuhu Hongrun; and
· 34 by Chuangchun Hualong.

 

As of December 31, 2020, Henglong, Jiulong, Shenyang, Chongqing, Wuhan Chuguanjie, Hubei Henglong and Wuhu had a manufacturing and administration area of 111,211 square meters, 39,478 square meters, 35,354 square meters, 57,849 square meters, 53,675 square meters, 277,269 square meters and 83,705 square meters, respectively.

 

Hubei Province, which is home to Dongfeng, one of the largest automakers in China, provides an ample supply of inexpensive but skilled labor to automotive-related industries. The annual production of one of the Company’s main products, power steering gears, was approximately 7.5 million units and 5.5 million units in 2020 and 2019, respectively. Although the production process continues to rely heavily on manual labor, the Company has invested substantially in high-level production machinery to improve capacity and production quality. Approximately $78.7 million was spent over the last three years to purchase professional-grade equipment and extend workshops.

 

RAW MATERIALS

 

The Company purchases various manufactured components and raw materials for use in its manufacturing processes. The principal components and raw materials the Company purchases include castings, finished sub-components, aluminum, steel, fabricated metal electronic parts and molded plastic parts. The most important raw material is steel. The Company enters into purchase agreements with local suppliers. The annual purchase plans are determined at the beginning of the calendar year but are subject to revision every three months as a result of customers’ orders. A purchase order is made according to monthly production plans. This protects the Company from building up inventory when the orders from customers change.

 

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The Company’s purchases from its ten largest suppliers represented in the aggregate 22.8% of all components and raw materials it purchased for the year ended December 31, 2020, and none of them provided more than 10% of total purchases.

 

All components and raw materials are available from numerous sources. The Company has not, in recent years, experienced any significant shortages of manufactured components or raw materials and normally does not carry inventories of these items in excess of what is reasonably required to meet its production and shipping schedules.

 

RESEARCH AND DEVELOPMENT

 

The Company owns the Testing Center, a Hubei Provincial-Level technical center, which has been approved by the Hubei Economic Commission. The center has a staff of about 164, including 68 engineers, primarily focusing on steering system R&D, tests, production process improvement and new material and production methodology application.

 

In addition, the Company has formed Shanghai Henglong to engage in the design and sale of automotive electronics, including key parts of EPS.

 

The Company believes that its engineering and technical expertise, together with its emphasis on continuing research and development, allow it to use the latest technologies, materials and processes to solve problems for its customers and to bring new, innovative products to market. The Company believes that continued research and development activities, including engineering, are critical to maintaining its pipeline of technologically advanced products. The Company has aggressively managed costs in other portions of its business in order to increase its total expenditures for research and development activities, including engineering, at approximately $25.7 million and $28.0 million for the years ended December 31, 2020 and 2019, respectively. In 2020 and 2019, the sales of such newly developed products accounted for about 14.8% and 19.1%, respectively, of total sales.

 

COMPETITION

 

The automotive components industry is extremely competitive. The Company’s customers consider criteria including quality, price/cost competitiveness, system and product performance, reliability and timeliness of delivery, new product and technology development capability, excellence and flexibility in operations, degree of global and local presence, effectiveness of customer service and overall management capability. The power steering system market is fragmented in China, and the Company has seven major competitors. Of these competitors, two are Sino-foreign joint ventures while the other five are state-owned. Like many competitive industries, there is pressure on downward selling prices.

 

The Company’s major competitors, including Shanghai ZF, Nexteer and First Auto FKS, “FKS,” are component suppliers to specific automobile manufacturers. Shanghai ZF is the joint venture of SAIC and ZF Germany, which is an exclusive supplier to SAIC-Volkswagen and SAIC-GM. FKS is a joint venture between First Auto Group and Japan’s Koyo Company and its main customer is FAW-Volkswagen Company.

 

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While the Chinese government limits foreign ownership of auto assemblers to 50%, there is no analogous limitation in the automotive components industry. Thus, opportunities exist for foreign component suppliers to set up factories in China. These overseas competitors employ technology that may be more advanced and may have existing relationships with global automobile assemblers, but they are generally not as competitive as the Company in China in terms of production cost and flexibility in meeting client requirements.

  

CHINESE AUTOMOBILE INDUSTRY

 

The Company is a supplier of automotive parts and most of its operations are located in China. An increase or decrease in the output and sales of Chinese vehicles could result in an increase or decrease of the Company’s results of operations. According to the latest statistics from the China Association of Automobile Manufacturers, “CAAM”, the output and sales volume of passenger vehicles in 2020 was 20.0 million and 20.2 million units respectively, a decrease of 6.5% and 6.0%, respectively, compared to 2019. The output and sales volume of commercial vehicles in 2020 was 5.2 million and 5.1 million units, respectively, an increase of 20.0% and 18.7%, respectively, compared to 2019. In 2020, the Company’s sales of steering gears for passenger vehicles decreased by 7.8% and the sales of steering gears for commercial vehicles increased by 12.1%, compared to 2019 in China.

  

ENVIRONMENTAL COMPLIANCE

 

The Company is subject to the requirements of U.S. federal, state, local and non-U.S., including China’s, environmental and occupational safety and health laws and regulations. These include laws regulating air emissions, water discharge and waste management. The Company has an environmental management structure designed to facilitate and support its compliance with these requirements globally. Although the Company intends to comply with all such requirements and regulations, it cannot provide assurance that it is at all times in compliance. The Company has made and will continue to make capital and other expenditures to comply with environmental requirements, although such expenditures were not material during the past two years. Environmental requirements are complex, change frequently and have tended to become more stringent over time. Accordingly, the Company cannot assure that environmental requirements will not change or become more stringent over time or that its eventual environmental cleanup costs and liabilities will not be material.

 

During the years ended December 31, 2020 and 2019, the Company did not make any material capital expenditures relating to environmental compliance.

 

FINANCIAL INFORMATION AND GEOGRAPHIC AREAS

 

Financial information about sales and long-term assets by major geographic region can be found in Note 26, “Segment Reporting” to the consolidated financial statements in this Report. The following table summarizes the percentage of sales and total assets by major geographic regions:

 

   Net Sales   Long-term assets 
   Year Ended December 31,   As of December 31, 
   2020   2019   2020   2019 
Geographic region:                    
China   70.6%   71.7%   99.1%   99.1%
United States   27.5    26.8    0.5    0.5 
Other foreign countries   1.9    1.5    0.4    0.4 
Total consolidated   100.0%   100.0%   100.0%   100.0%

 

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WEBSITE ACCESS TO SEC FILINGS

 

The Company files electronically with, or furnishes to, the SEC its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a) of the Securities Exchange Act of 1934. The Company makes available free of charge on its web site (www.caasauto.com) all such reports as soon as reasonably practicable after they are filed.

 

The SEC maintains an Internet site that contains reports, proxy information and information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is http://www.sec.gov.

 

ITEM 1A. RISK FACTORS.

 

Any investment in the Company’s securities involves a high degree of risk. You should carefully consider the risks described below, together with the information contained elsewhere in this Annual Report, before you make a decision to invest in the Company. The Company’s business, financial conditions and results of operations could be materially and adversely affected by many risk factors. Because of these risk factors, actual results might differ significantly from those projected in any forward-looking statements. Factors that might cause such differences include, among others, the following:

 

RISKS RELATED TO THE COMPANY’S BUSINESS AND INDUSTRY

 

The cyclical nature of automotive production and sales could result in a reduction in automotive sales, which could adversely affect the Company’s business and results of operations.

 

The Company’s business relies on automotive vehicle production and sales by its customers, which are highly cyclical and depend on general economic conditions and other factors, including consumer spending and preferences and the price and availability of gasoline. They also can be affected by labor relations issues, regulatory requirements and other factors. In the last two years, the price of automobiles in China has generally declined. Additionally, the volume of automotive production in China has fluctuated from year to year, which gives rise to fluctuations in the demand for the Company’s products. Therefore, any significant economic decline could result in a reduction in automotive production and sales by the Company’s customers and could have a material adverse effect on the Company’s results of operations. Moreover, if the prices of automobiles keep declining, the selling price of automotive parts also would decrease, which would result in lower revenues and profitability.

 

Increasing costs for manufactured components and raw materials may adversely affect the Company’s profitability.

 

The Company uses a broad range of manufactured components and raw materials in its products, including castings, electronic components, finished sub-components, molded plastic parts, fabricated metal, aluminum, steel and resins. Because it may be difficult to pass increased prices for these items on to the Company’s customers, a significant increase in the prices of the Company’s components and materials could materially increase the Company’s operating costs and adversely affect its profit margins and profitability.

 

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Because the Company is a holding company with substantially all of its operations conducted through its subsidiaries, its performance will be affected by the performance of its subsidiaries.

 

The Company almost has no operations independent of those of Genesis and its subsidiaries, and the Company’s principal assets are its investments in Genesis and its subsidiaries and affiliates. As a result, the Company is dependent upon the performance of Genesis and its subsidiaries and will be subject to the financial, business and other factors affecting Genesis as well as general economic and financial conditions. As substantially all of the Company’s operations are, and will be, conducted through its subsidiaries, the Company will be dependent on the cash flow of its subsidiaries to meet its obligations.

 

Because virtually all of the Company’s assets are, and will be, held by operating subsidiaries, the claims of the Company’s stockholders will be structurally subordinate to all existing and future liabilities, obligations and trade payables of such subsidiaries. In the event of the Company’s bankruptcy, liquidation or reorganization, its assets and those of its subsidiaries will be available to satisfy the claims of the Company’s stockholders only after all of its and its subsidiaries’ liabilities and obligations have been paid in full.

 

With the automobile parts markets being highly competitive and many of the Company’s competitors having greater resources than it does, the Company may not be able to compete successfully.

 

The automobile parts industry is a highly competitive business. The Company’s customers consider criteria including:

 

  · quality;
  · price/cost competitiveness;
  · system and product performance;
  · reliability and timeliness of delivery;
  · new product and technology development capability;
  · excellence and flexibility in operations;
  · degree of global and local presence;
  · effectiveness of customer service; and
  · overall management capability.

 

The Company’s competitors include independent suppliers of parts, as well as suppliers formed by spin-offs from the Company’s customers, who are becoming more aggressive in selling parts to other vehicle manufacturers. Depending on the particular product, the number of the Company’s competitors varies significantly. Many of the Company’s competitors have substantially greater revenues and financial resources than it does, as well as stronger brand names, consumer recognition, business relationships with vehicle manufacturers, and geographic presence than it has. The Company may not be able to compete favorably and increased competition may substantially harm its business, business prospects and results of operations.

 

Internationally, the Company faces different market dynamics and competition. The Company may not be as successful as its competitors in generating revenues in international markets due to the lack of recognition of its products or other factors. Developing product recognition overseas is expensive and time-consuming and the Company’s international expansion efforts may be more costly and less profitable than it expects. If the Company is not successful in its target markets, its sales could decline, its margins could be negatively impacted and it could lose market share, any of which could materially harm the Company’s business, results of operations and profitability.

 

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Pricing pressure by automobile manufacturers on their suppliers may adversely affect the Company’s business and results of operations.

 

Recently, pricing pressure from automobile manufacturers has been prevalent in the automotive parts industry in China. Virtually all vehicle manufacturers seek price reductions each year. Although the Company has tried to reduce costs and resist price reductions, these reductions have impacted the Company’s sales and profit margins. If the Company cannot offset continued price reductions through improved operating efficiencies and reduced expenditures, price reductions will have a material adverse effect on the Company's results of operations.

 

The Company’s business, revenues and profitability would be materially and adversely affected if it loses any of its large customers.

 

For the year ended December 31, 2020, approximately 23.6%, 7.3%, 6.0%, 5.9% and 4.3% of the Company’s sales were to Fiat Chrysler North America, Great Wall Motors, Hubei Hongrun, Beiqi Foton and Dongfeng Auto Group, the Company’s five largest customers in 2020, respectively. In total, these five largest customers accounted for 47.1% of total sales in 2020. For the year ended December 31, 2019, approximately 22.7%, 9.7%, 6.2%, 4.7% and 4.1% of the Company’s sales were to Fiat Chrysler North America, Beiqi Foton, Great Wall Motors, Ford Motor Company and Dongfeng Auto Group, the Company’s five largest customers in 2019, respectively. In total, these five largest customers accounted for 47.4% of total sales in 2019.  The loss of, or significant reduction in purchases by, one or more of these major customers could adversely affect the Company’s business.

 

The Company may not be able to collect receivables incurred by customers.

 

The Company currently sells its products on credit and its ability to receive payment for its products depends on the continued creditworthiness of its customers. Although the Company has long-term relationships with its major customers, the customer base may change if its sales increase because of the Company’s expanded capacity. If the Company is not able to collect its receivables, its profitability will be adversely affected.

 

In November 2020, Intermediate People's Court of Shenyang, Liaoning province, China, accepted the bankruptcy reorganization application of one of our customers. As of December 31, 2020, the Company had accounts and notes receivable with a total amount of $6.4 million due from this customer and its subsidiaries, which receivables we considered in significant doubt of collectability. As a result, the Company provided full allowance for these receivables.

 

The Company may be subject to product liability and warranty and recall claims, which may increase the costs of doing business and adversely affect the Company’s financial condition and liquidity.

 

The Company may be exposed to product liability and warranty claims if its products actually or allegedly fail to perform as expected or the use of its products results, or is alleged to result, in bodily injury and/or property damage. The Company started to pay some of its customers’ increased after-sales service expenses due to consumer rights protection policies of “recall” issued by the Chinese government in 2004, such as the recalling flawed vehicles policy. Beginning in 2004, automobile manufacturers unilaterally required their suppliers to pay a “3-R Guarantees” service charge for repair, replacement and refund in an amount of about 2%–6% of the total amount of parts supplied. Accordingly, the Company has experienced and will continue to experience higher after-sales service expenses. Product liability, warranty and recall costs may have a material adverse effect on the Company’s financial condition.

 

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On January 3, 2017, Chongqing Changan Automobile Co., Ltd. (“Chongqing Changan”) registered a recall plan with The General Administration of Quality Supervision, Inspection and Quarantine (“AQSIQ”) pursuant to the “Regulation on the Administration of Recall of Defective Auto Products”. The recall plan relates to the recall of 108,642 Eulove vehicles manufactured between November 7, 2012 and November 13, 2015. The recall commenced on March 1, 2017. According to the supplier, the torque sensor on the upper steering shaft subassembly in the recalled vehicles is subject to abnormal wear after long-term usage, posing a safety risk in extreme situations. Chongqing Changan implemented a recall to replace the upper steering shaft subassembly in the recalled vehicles free of charge to mitigate the safety risk. The case closed in 2019.

  

On January 22, 2017, Jiangxi Changhe Suzuki Automobile Co., Ltd. (“Jiangxi Changhe”) registered a recall plan with AQSIQ pursuant to the “Regulation on the Administration of Recall of Defective Auto Products”. The recall plan relates to the recall of 44,169 Liana A6 vehicles manufactured between September 7, 2013 and April 28, 2015. The recall commenced on February 24, 2017. According to the supplier, the electronic-assist ECU may malfunction under certain circumstances, which may lead the steering assist to enter safety protection status, posing a safety risk in extreme situations. Jiangxi Changhe implemented the recall to conduct a technical upgrade of the ECU in the recalled vehicles free of charge to mitigate the safety risk. The case closed in 2019.

 

Management has concluded that the defect that led to each of the recalls arose due to the erosion of the contact sensor after long-term use only in vehicles equipped with first-generation EPS. The Company has taken technical measures to reduce the contact sensor erosion in first-generation EPS. The contact sensors in current EPS products have been largely replaced by non-contact sensors.

 

The Company is subject to environmental and safety regulations, which may increase the Company’s compliance costs and may adversely affect its results of operations.

 

The Company is subject to the requirements of environmental and occupational safety and health laws and regulations in China. The Company cannot provide assurance that it has been or will be at all times in full compliance with all of these requirements, or that it will not incur material costs or liabilities in connection with these requirements. Additionally, these regulations may change in a manner that could have a material adverse effect on the Company’s business, results of operations and financial condition. The capital requirements and other expenditures that may be necessary to comply with environmental requirements could increase and become a material expense of doing business.

 

Non-performance by the Company’s suppliers may adversely affect its operations by delaying delivery or causing delivery failures, which may negatively affect demand, sales and profitability.

 

The Company purchases various types of equipment, raw materials and manufactured component parts from its suppliers. The Company would be materially and adversely affected by the failure of its suppliers to perform as expected. The Company could experience delivery delays or failures caused by production issues or delivery of non-conforming products if its suppliers fail to perform, and it also faces these risks in the event any of its suppliers becomes insolvent or bankrupt.

 

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The Company’s business and growth may suffer if it fails to attract and retain key personnel.

 

The Company’s ability to operate its business and implement its strategies effectively depends on the efforts of its executive officers and other key employees. The Company depends on the continued contributions of its senior management and other key personnel. The Company’s future success also depends on its ability to identify, attract and retain highly skilled technical staff, particularly engineers and other employees with mechanics and electronics expertise, and managerial, finance and marketing personnel. The Company does not maintain a key person life insurance policy on Mr. Hanlin Chen or Mr. Qizhou Wu. The loss of the services of any of the Company’s key employees or the failure to attract or retain other qualified personnel could substantially harm the Company’s business.

  

The Company’s management controls approximately 63.8% of its outstanding common stock and may have conflicts of interest with the Company’s minority stockholders.

 

As of December 31, 2020, members of the Company’s management beneficially own approximately 63.8% of the outstanding shares of the Company’s common stock. As a result, except for the related party transactions that require approval of the audit committee of the board of directors of the Company, these majority stockholders have control over decisions to enter into any corporate transaction, which could result in the approval of transactions that might not maximize overall stockholders’ value. Additionally, these stockholders control the election of members of the Company’s board, have the ability to appoint new members to the Company’s management team and control the outcome of matters submitted to a vote of the holders of the Company’s common stock. The interests of these majority stockholders may at times conflict with the interests of the Company’s other stockholders. The Company regularly engages in transactions with entities controlled by one or more of its officers and directors, including those controlled by Mr. Hanlin Chen, the chairman of the board of directors of the Company and its controlling stockholder.

 

There is a limited public float of the Company’s common stock, which can result in the Company’s stock price being volatile and prevent the realization of a profit on resale of the Company’s common stock or derivative securities.

 

There is a limited public float of the Company’s common stock. As of December 31, 2020, approximately 36.2% of the Company’s outstanding common stock is considered part of the public float. The term “public float” refers to shares freely and actively tradable on the NASDAQ Capital Market and not owned by officers, directors or affiliates, as such term is defined under the Securities Act. As a result of the limited public float and the limited trading volume on some days, the market price of the Company’s common stock can be volatile, and relatively small changes in the demand for or supply of the Company’s common stock can have a disproportionate effect on the market price for its common stock. This stock price volatility could prevent a security holder seeking to sell the Company’s common stock or derivative securities from being able to sell them at or above the price at which the stock or derivative securities were bought, or at a price which a fully liquid market would report.

 

The Company is subject to penny stock regulations and restrictions.

 

The SEC has adopted regulations which generally define so-called “penny stock” as an equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. As of December 31, 2020, the closing price for the Company’s common stock was $6.24. If the Company’s stock is a “penny stock”, it may become subject to Rule 15g-9 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the “Penny Stock Rule.” This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors,” generally, individuals with a net worth in excess of $1.0 million or annual incomes exceeding $0.2 million, or $0.3 million together with their spouses. For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell the Company’s securities and may affect the ability of purchasers to sell any of the Company’s securities in the secondary market.

  

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For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the SEC relating to the penny stock market. Disclosure also is required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

There can be no assurance that the Company’s common stock will qualify for exemption from the Penny Stock Rule. In any event, even if the Company’s common stock were exempt from the Penny Stock Rule, the Company would remain subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of penny stock if the SEC finds that such a restriction would be in the public interest.

 

Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware may discourage a takeover attempt.

 

Provisions in the Company’s certificate of incorporation and bylaws and the General Corporation Law of Delaware, the state in which it is organized, could make it difficult for a third party to acquire the Company, even if doing so might be beneficial to the Company’s stockholders. Provisions of the Company’s certificate of incorporation and bylaws impose various procedural and other requirements, which could make it difficult for stockholders to effect certain corporate actions and possibly prevent transactions that would maximize stockholders’ value.

 

Failure to maintain effective internal control over financial reporting could have a material adverse effect on the Company’s business, results of operations and the trading price of its shares.

 

The Company is subject to reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, the “SEC,” as required by Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring public companies to include a report of management in its annual report that contains an assessment by management of the effectiveness of such company’s internal control over financial reporting.

 

If the Company fails to maintain the adequacy of its internal controls in the future, it will not be able to ensure that it can conclude on an ongoing basis that it has effective internal control over financial reporting in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for the Company to produce reliable financial reports and are important to help prevent fraud. Any failure to maintain effective internal control over financial reporting could result in the loss of investor confidence in the reliability of the Company’s financial statements, which in turn could harm its business and negatively impact the trading price of its common stock. Furthermore, the Company may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.

 

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The Company generally does not pay cash dividends on its common stock.

 

Although the Company announced a special cash dividend of $0.18 per common share to the Company’s shareholders of record as of the close of business on June 26, 2014, it does not anticipate paying any other cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to finance operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company’s board of directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed by any financing arrangements and any other factors that the Company’s board of directors deems relevant.

  

Techniques employed by short sellers may drive down the market price of the Company’s common stock.

 

Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third party with the intention of buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than it received in the sale. As it is in the short seller’s best interests for the price of the stock to decline, many short sellers publish, or arrange for the publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and generate profits for themselves after selling a stock short. These short attacks have, in the past, led to selling of shares in the market.

 

In the recent past, public companies that have substantially all of their operations in China have been the subject of short selling. Much of the scrutiny and negative publicity has centered around allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of these companies are now conducting internal and external investigations into the allegations and, in the interim, are subject to shareholder lawsuits and/or SEC enforcement actions.

 

It is not clear what effect such negative publicity would have on the Company, if any. If the Company were to become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, the Company could have to expend a significant amount of resources to investigate such allegations and/or defend itself. While the Company would strongly defend against any such short seller attacks, the Company may be constrained in the manner in which it can proceed against the relevant short seller by principles of freedom of speech, applicable state law or issues of commercial confidentiality. Such a situation could be costly and time-consuming, and could distract the Company’s management from growing the Company. Even if such allegations are ultimately proven to be groundless, allegations against the Company could severely impact its business operations and stockholders’ equity, and any investment in the Company’s stock could be greatly reduced or rendered worthless. 

 

 The Company’s secured credit facilities contain certain financial covenants that it may not satisfy, which, if not satisfied, could result in the acceleration of the amounts due under the Company’s secured credit facilities and the limitation of the Company’s ability to borrow additional funds in the future.

 

The agreements governing the Company’s secured credit facilities subject it to various financial and other restrictive covenants with which the Company must comply on an ongoing or periodic basis. These covenants include, but are not limited to, restrictions on the utilization of the funds and the maintenance of certain financial ratios. If the Company violates any of these covenants, the Company’s outstanding debt under the Company’s secured credit facilities could become immediately due and payable, the Company’s lenders could proceed against any collateral securing such indebtedness and the Company’s ability to borrow additional funds in the future may be limited. Alternatively, the Company could be forced to refinance or renegotiate the terms and conditions of the Company’s secured credit facilities, including the interest rates, financial and restrictive covenants and security requirements of the secured credit facilities, on terms that may be significantly less favorable to the Company.

 

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Our business operations have been and may continue to be materially and adversely affected by the outbreak of the coronavirus disease (COVID-19).

 

An outbreak of respiratory illness caused by COVID-19 emerged in Wuhan city, Hubei province, PRC, where the Company’s headquarters is located, in December 2019 and has been expanding within the PRC and globally. The new strain of COVID-19 is considered to be highly contagious and poses a serious public health threat. On January 23, 2020, the PRC government announced the lockdown of Wuhan city in an attempt to quarantine the city. Since then, other measures including travel restrictions have been imposed in other major cities in the PRC and throughout the world in an effort to contain the COVID-19 outbreak. The World Health Organization (the “WHO”) is closely monitoring and evaluating the situation. On March 11, 2020, the WHO declared the outbreak of COVID-19 a pandemic, expanding its assessment of the threat beyond the global health emergency it had announced in January. As our headquarters are located in Wuhan, we closed our headquarters effective January 23, 2020 and reopened in late March 2020.

 

Any outbreak of such epidemic illness or other adverse public health developments in the PRC or elsewhere in the world may materially and adversely affect the global economy, our markets and our business.

 

We cannot foresee whether the pandemic of COVID-19 will be effectively contained, nor can we predict the severity and duration of its impact. If the pandemic of COVID-19 is not effectively and timely controlled, our business operations and financial condition may be materially and adversely affected as a result of the deteriorating market outlook for automobile sales, the slowdown in regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment, cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and materially and adversely impact our business, financial condition and results of operations.

 

RISKS RELATED TO DOING BUSINESS IN CHINA AND OTHER COUNTRIES BESIDES THE UNITED STATES

 

The Company may face a severe operating environment during times of economic recession.

 

The sales volume of the Company’s core products is largely influenced by the demand for its customers’ end products which are mostly sold in the Chinese markets. Future economic crises, either within China or without, may lead to a drastic drop in demand for the Company’s products.

 

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Inflation in China could negatively affect the Company’s profitability and growth.

 

China’s economy has experienced rapid growth, much of it due to the issuance of debt over the last few years. This debt-fueled economic growth has led to growth in the money supply, causing rising inflation. If prices for the Company’s products rise at a rate that is insufficient to compensate for the rise in the cost of production, it may harm the Company’s profitability. In order to control inflation, the Chinese government has imposed controls on bank credit, limits on loans and other restrictions on economic activities. Such policies have led to a slowing of economic growth. Additional measures could further slow economic activity in China, which could, in turn, materially increase the Company’s costs while also reducing demand for the Company’s products.

 

The Chinese government’s macroeconomic policies could have a negative effect on the Company’s business and results of operations.

 

The Chinese government has implemented various measures from time to time to control the rate of economic growth in the PRC. Some of these measures may have a negative effect on the Company over the short or long term. Recently, to cope with high inflation and economic imbalances, the Chinese government has tightened monetary policy and implemented floating exchange rate policy. In addition, in order to alleviate some of the effects of unbalanced growth and social discontent, the Chinese government has enacted a series of social programs and anti-inflationary measures. These, in turn, have increased the costs on the financial and manufacturing sectors, without having alleviated the effects of high inflation and economic imbalances. The Chinese government’s macroeconomic policies, even if effected properly, may significantly slow down China’s economy or cause great social unrest, all of which would have a negative effect on the Company’s business and results of operations.

 

The economic, political and social conditions in China could affect the Company’s business.

 

Most of the Company’s business, assets and operations are located in China. The economy of China differs from the economies of most developed countries in many respects, including government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. The economy of China has been transitioning from a planned economy to a more market-oriented economy. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets and the establishment of sound corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the Chinese government.

 

In addition, the Chinese government continues to play a significant role in regulating industry by imposing industrial policies. It also exercises significant control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies. Therefore, the Chinese government’s involvement in the economy could adversely affect the Company’s business operations, results of operations and/or financial condition.

  

Because the Company’s operations are mostly located outside of the United States and are subject to Chinese laws, any change of Chinese laws may adversely affect its business.

 

Most of the Company’s operations are in the PRC, which exposes it to risks, such as exchange controls and currency restrictions, currency fluctuations and devaluations, changes in local economic conditions, changes in Chinese laws and regulations, exposure to possible expropriation or other PRC government actions, and unsettled political conditions. These factors may have a material adverse effect on the Company’s operations or on its business, results of operations and financial condition.

 

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The Company’s international expansion plans subject it to risks inherent in doing business internationally.

 

The Company’s long-term business strategy relies on the expansion of its international sales outside China by targeting markets, such as the United States and Brazil. Risks affecting the Company’s international expansion include challenges caused by distance, language and cultural differences, conflicting and changing laws and regulations, foreign laws, international import and export legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a wide variety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These risks could harm the Company’s international expansion efforts, which could in turn materially and adversely affect its business, operating results and financial condition.

 

On September 17, 2012, the United States filed a trade case with the World Trade Organization, “WTO,” against the PRC with respect to the PRC government’s purported provision of subsidies to the automobile and automobile-parts enterprises in the PRC. If the WTO rules against China in this trade case, the cost of sales of the Company could increase due to the imposition of any tariff and/or the Company’s ability to export products to the United States could be limited, which could affect the Company’s business and operating results.

 

In addition, under Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC has adopted additional disclosure requirements related to the source of certain “conflict minerals” for issuers for which such “conflict minerals” are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, by that issuer. The metals covered by the rules include tin, tantalum, tungsten and gold, commonly referred to as “3TG.” If these materials are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, the rules require a reasonable country of origin inquiry be conducted to determine if an issuer knows, or has reason to believe, that any of the minerals used in the production process may have originated from the Democratic Republic of the Congo or an adjoining country. In such a case, if an issuer were not able to determine that the minerals did not originate from a covered country or conclude that there is no reason to believe that the minerals used in the production process may have originated in a covered country, that issuer could be required to perform supply chain due diligence on members of its supply chain. Global supply chains can have multiple layers, thus the costs of complying with these new requirements could be substantial. These new requirements may also reduce the number of suppliers that provide conflict-free metals and may also affect a company’s ability to obtain products in sufficient quantities or at competitive prices. If the Company was to source such 3TG minerals that are necessary to the functionality or production of a product manufactured, or contracted to be manufactured, compliance costs with these rules and/or the unavailability of raw materials could have a material adverse effect on the Company’s results of operations.

  

The Company faces risks associated with currency exchange rate fluctuations; any adverse fluctuation may adversely affect its operating margins.

 

Although the Company is incorporated in the State of Delaware, in the United States, the majority of its current revenues are in Chinese currency. Conducting business in currencies other than U.S. dollars subjects the Company to fluctuations in currency exchange rates that could have a negative impact on its reported operating results. Fluctuations in the value of the U.S. dollar relative to other currencies impact the Company’s revenues, cost of revenues and operating margins and result in foreign currency translation gains and losses. Historically, the Company has not engaged in exchange rate hedging activities. Although the Company may implement hedging strategies to mitigate this risk, these strategies may not eliminate its exposure to foreign exchange rate fluctuations and involve costs and risks of their own, such as ongoing management time and expertise requirements, external costs to implement the strategy and potential accounting implications.

 

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If relations between the United States and China worsen, the Company’s stock price may decrease and the Company may have difficulty accessing the U.S. capital markets.

 

At various times during recent years, the United States and China have had disagreements over political and economic issues. Controversies may arise in the future between these two countries. Any political or trade controversies between the United States and China could adversely affect the market price of the Company’s common stock and its ability to access U.S. capital markets. Political events, international trade disputes and other business interruptions could harm or disrupt international commerce and the global economy, and could have a material adverse effect on the Company, its customers and its other business partners.

 

The Chinese government could change its policies toward private enterprise, which could adversely affect the Company’s business.

 

The Company’s business is subject to political and economic uncertainties in China and may be adversely affected by China’s political, economic and social developments. Over the past several years, the Chinese government has pursued economic reform policies including the encouragement of private economic activity and greater economic decentralization. The Chinese government may not continue to pursue these policies or may alter them to the Company’s detriment from time to time. Changes in policies, laws and regulations, or in their interpretation or the imposition of confiscatory taxation, restrictions on currency conversion, restrictions or prohibitions on dividend payments to stockholders, devaluations of currency or the nationalization or other expropriation of private enterprises could have a material adverse effect on the Company’s business. Nationalization or expropriation could result in the total loss of the Company’s investment in China.

 

Government control of currency conversion and future movements in exchange rates may adversely affect the Company’s operations and financial results.

 

The Company receives most of its revenues in Chinese Renminbi, “RMB”. A portion of such revenues will be converted into other currencies to meet the Company’s foreign currency obligations. Foreign exchange transactions under the Company’s capital account, including principal payments in respect of foreign currency-denominated obligations, continue to be subject to significant foreign exchange controls and require the approval of the State Administration of Foreign Exchange in China. These limitations could affect the Company’s ability to obtain foreign exchange through debt or equity financing, or to obtain foreign exchange for capital expenditures.

  

The Chinese government controls its foreign currency reserves through restrictions on imports and conversion of RMB into foreign currency. In July 2005, the Chinese government has adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate”. From July 2005 to December 2020, the exchange rate between the RMB and the U.S. dollar appreciated from RMB1.00 to $0.1205 to RMB1.00 to $0.1533. Any significant appreciation of the RMB is likely to decrease the income of export products and the cash flow of the Company.

 

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Because the Chinese legal system is not fully developed, the Company and its security holders’ legal protections may be limited.

 

The Chinese legal system is based on written statutes and their interpretation by the Supreme People’s Court. Although the Chinese government introduced new laws and regulations to modernize its business, securities and tax systems on January 1, 1994, China does not yet possess a comprehensive body of business law. Because Chinese laws and regulations are relatively new, interpretation, implementation and enforcement of these laws and regulations involve uncertainties and inconsistencies and it may be difficult to enforce contracts. In addition, as the Chinese legal system develops, changes in such laws and regulations, their interpretation or their enforcement may have a material adverse effect on the Company’s business operations. Moreover, interpretative case law does not have the same precedential value in China as in the United States, so legal compliance in China may be more difficult or expensive.

 

It may be difficult to serve the Company with legal process or enforce judgments against the Company or its management.

 

Most of the Company’s assets are located in China, nine of its directors and officers are non-residents of the United States, and all or substantial portions of the assets of such non-residents are located outside the United States. As a result, it may not be possible to effect service of process within the United States upon such persons to originate an action in the United States. Moreover, there is uncertainty that the courts of China would enforce judgments of U.S. courts against the Company, its directors or officers based on the civil liability provisions of the securities laws of the United States or any state, or an original action brought in China based upon the securities laws of the United States or any state.

 

The Company may be subject to fines and legal sanctions imposed by State Administration of Foreign Exchange, “SAFE”, or other Chinese government authorities if it or its Chinese directors or employees fail to comply with recent Chinese regulations relating to employee share options or shares granted by offshore listed companies to Chinese domestic individuals.

 

On December 25, 2006, the People’s Bank of China, or PBOC, issued the Administration Measures on Individual Foreign Exchange Control, and the corresponding Implementation Rules were issued by SAFE on January 5, 2007. Both of these regulations became effective on February 1, 2007. According to these regulations, all foreign exchange matters relating to employee stock holding plans, share option plans or similar plans with Chinese domestic individuals’ participation require approval from the SAFE or its authorized branch. On March 28, 2007, the SAFE issued the Application Procedure of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Holding Plan or Stock Option Plan of Overseas-Listed Company, or the Stock Option Rule. Under the Stock Option Rule, Chinese domestic individuals who are granted share options or shares by an offshore listed company are required, through a Chinese agent or Chinese subsidiary of the offshore listed company, to register with the SAFE and complete certain other procedures. As the Company is an offshore listed company, its Chinese domestic directors and employees who may be granted share options or shares shall become subject to the Stock Option Rule. Under the Stock Option Rule, employees stock holding plans, share option plans or similar plans of offshore listed companies with Chinese domestic individuals’ participation must be filed with the SAFE. After the Chinese domestic directors or employees exercise their options, they must apply for the amendment to the registration with the SAFE. As of December 31, 2020, the Company has completed such SAFE registration and other related procedures according to PRC law. If the Company or its Chinese domestic directors or employees fail to comply with these regulations in the future, the Company or its Chinese domestic directors or employees may be subject to fines or other legal sanctions imposed by the SAFE or other Chinese government authorities.

 

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Capital outflow policies in China may hamper the Company’s ability to declare and pay dividends to its stockholders.

 

China has adopted currency and capital transfer regulations. These regulations may require the Company to comply with complex regulations for the movement of capital. Although the Company’s management believes that it will be in compliance with these regulations, should these regulations or the interpretation of them by courts or regulatory agencies change, the Company may not be able to pay dividends to its stockholders outside of China. In addition, under current Chinese law, the Company’s joint-ventures and wholly-owned enterprise in China must retain a reserve equal to 10% of its net income after taxes, not to exceed 50% of its registered capital. Accordingly, this reserve will not be available to be distributed as dividends to the Company’s stockholders. The Company presently does not intend to pay dividends for the foreseeable future. The Company’s board of directors intends to follow a policy of retaining all of the Company’s earnings to finance the development and execution of its strategy and the expansion of the Company’s business.

 

The audit report included in this annual report is prepared by an auditor that is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.

 

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this report, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our investors are deprived of the benefits of such inspection.

 

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with PCAOB and audit Chinese companies that trade on U.S. exchanges.

 

On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China.

 

On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the greater risk that disclosures will be insufficient in many emerging markets, including China, compared to those made by U.S. domestic companies. In discussing the specific issues related to the greater risk, the statement again highlights the PCAOB’s inability to inspect audit work papers and practices of accounting firms in China, with respect to their audit work of U.S. reporting companies. However, it remains unclear what further actions, if any, the SEC and the PCAOB will take to address the problem.

 

Inspections of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and our investors are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

 

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

 

It is unclear if and when this proposed legislation will be enacted. Furthermore, there have been recent media reports on deliberations within the U.S. government regarding potentially limiting or restricting China-based companies from accessing U.S. capital markets. If any such deliberations were to materialize, the resulting legislation may have a material and adverse impact on the stock performance of China-based issuers listed in the United States, which include us.

 

The Company could be delisted if it is unable to timely meet the PCAOB inspection requirements established by the Holding Foreign Companies Accountable Act.

 

On December 18, 2020, the Holding Foreign Companies Accountable Act, or HFCAA, was enacted. In essence, the act requires the SEC to prohibit securities of any foreign companies from being listed on U.S. securities exchanges or traded “over-the-counter” if a company retains a foreign accounting firm that cannot be inspected by the PCAOB for three consecutive years, beginning in 2021. Our independent registered public accounting firm is located in and organized under the laws of the PRC, a jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, and therefore our auditors are not currently inspected by the PCAOB.

 

On March 24, 2021, the SEC adopted interim final amendments, which will become effective 30 days after publication in the Federal Register, relating to the implementation of certain disclosure and documentation requirements of the HFCAA. The interim final amendments will apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that the PCAOB has determined it is unable to inspect or investigate completely because of a position taken by an authority in that jurisdiction. Before any registrant will be required to comply with the interim final amendments, the SEC must implement a process for identifying such registrants. As of the date of this annual report, the SEC is seeking public comment on this identification process. Consistent with the HFCAA, the amendments will require any identified registrant to submit documentation to the SEC establishing that the registrant is not owned or controlled by a government entity in that jurisdiction, and will also require, among other things, disclosure in the registrant’s annual report regarding the audit arrangements of, and government influence on, such registrant.

 

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President's Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended that the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCAA. However, some of the recommendations were more stringent than the HFCAA. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

 

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It is unclear when the SEC will complete its rulemaking, when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The enactment of the HFCAA and the implications of any additional rulemaking efforts to increase U.S. regulatory access to audit information in China could cause investor uncertainty for affected SEC registrants, including us, and the market price of our stock could be materially adversely affected. Additionally, whether the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of our control. If we are unable to meet the PCAOB inspection requirement in time, we could be delisted from the Nasdaq Capital Market and our stock will not be permitted for trading “over-the-counter” either. Such a delisting would substantially impair your ability to sell or purchase our stock when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our stock. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition and prospects.

 

Proceedings instituted by the SEC against PRC affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in our financial statements being determined to not be in compliance with the requirements of the Exchange Act. 

 

Starting in 2011, the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. However, the firms were advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the China Securities Regulatory Commission, or the CSRC.

 

In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioners had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms were to receive matching Section 106 requests, and were required to abide by a detailed set of procedures with respect to such requests, which in substance required them to facilitate production via the CSRC. If they failed to meet specified criteria, the SEC retained authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure.

 

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Under the terms of the settlement, the underlying proceeding against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark occurred on February 6, 2019. We cannot predict whether the SEC will further challenge the four China-based accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing penalties such as suspensions. If additional remedial measures are imposed on the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, we could be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

 

If our independent registered public accounting firm were denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our common stock from the Nasdaq Capital Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our common stock in the United States.

  

The non-U.S. activities of our non-U.S. subsidiaries may be subject to U.S. taxation.

 

The majority of our subsidiaries are based in China and are subject to income taxes in the PRC. These China-based subsidiaries conduct substantially all of our operations, and generate most of our income in China. The Company is a Delaware corporation and is subject to income tax in the United States. New U.S. federal tax legislation, commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Reform”), was signed into law on December 22, 2017. The U.S. Tax Reform significantly modified the U.S. Internal Revenue Code by, among other things, reducing the statutory U.S. federal corporate income tax rate from 35% to 21% for taxable years beginning after December 31, 2017; limiting and/or eliminating many business deductions; migrating the U.S. to a territorial tax system with a one-time transition tax on a mandatory deemed repatriation of previously deferred foreign earnings of certain foreign subsidiaries; subject to certain limitations, generally eliminating U.S. corporate income tax on dividends from foreign subsidiaries; and providing for new taxes on certain foreign earnings. Taxpayers may elect to pay the one-time transition tax over eight years, or in a single lump-sum payment.

 

Certain activities conducted in the PRC or other jurisdictions outside of the U.S. may give rise to U.S. corporate income tax. These taxes would be imposed on the Company when its subsidiaries that are controlled foreign corporations (“CFCs”) generate income that is subject to Subpart F of the U.S. Internal Revenue Code, or “Subpart F”. Passive income, such as rents, royalties, interest, dividends, and gain from disposal of our investments is among the types of income subject to taxation under Subpart F. Any income taxable under Subpart F is taxable in the U.S. at federal corporate income tax rates of up to 21% for taxable years beginning after December 31, 2017. Subpart F income is taxable to the Company, even if it is not distributed to the Company.

 

The U.S. Tax Reform also includes provisions for a new tax on global intangible low-taxed income (“GILTI”) effective for tax years of non-U.S. corporations beginning after December 31, 2017. The GILTI provisions impose a tax on foreign income in excess of a deemed return on tangible assets of CFCs, subject to the possible use of foreign tax credits and a deduction equal to 50 percent to offset the income tax liability, subject to some limitations.

 

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Information technology dependency and cyber security vulnerabilities could lead to reduced revenue, liability claims, or competitive harm.

 

The Company is dependent on information technology systems and infrastructure (“IT systems”) to conduct its business. Our IT systems may be vulnerable to disruptions from human error, outdated applications, computer viruses, natural disasters, unauthorized access, cyber-attack and other similar disruptions. Any significant disruption, breakdown, intrusion, interruption or corruption of these systems or data breaches could cause the loss of data or intellectual property, equipment damage, downtime, and/or safety related issues and could have a material adverse effect on our business. We have, from time to time, experienced incidents related to our IT systems, and expect that such incidents will continue, including malware and computer virus outbreaks, unauthorized access, systems failures and disruptions. We have measures and defenses in place against such events, but we may not be able to prevent, immediately detect, or remediate all instances of such events. A material security breach or disruption of our IT systems could result in theft, unauthorized use, or publication of our intellectual property and/or confidential business information, harm our competitive position, disrupt our manufacturing, reduce the value of our investment in research and development and other strategic initiatives, impair our ability to access vendors and suppliers or otherwise adversely affect our business.

 

Additionally, we believe that utilities and other operators of critical infrastructure that serve our facilities face heightened security risks, including cyber-attack. In the event of such an attack, disruption in service from our utility providers could disrupt our manufacturing operations which rely on a continuous source of power (electrical, gas, etc.).

 

Our business is subject to natural disasters, health epidemics and other catastrophic incidents.

 

In addition to COVID-19, China has in the past experienced significant natural disasters, including earthquakes, extreme weather conditions, as well as health scares related to epidemic diseases, and any similar event could materially impact our business in the future. If a disaster or other disruption were to occur in the future that affects the regions where we operate our business, our operations could be materially and adversely affected due to loss of personnel and damage to property. Even if we are not directly affected, such a disaster or disruption could affect the operations or financial conditions of our customers, which could harm our results of operations.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS.

 

Not Applicable.

 

ITEM 2. PROPERTIES.

 

The Company’s headquarters are located at No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District, Jing Zhou City Hubei Province, the PRC. Set forth below are the manufacturing facilities operated by each joint venture. The Company has forty-five to fifty years long-term rights to use the lands and buildings (in thousands of USD, except for references to area in square meters).

 

      Total Area   Building Area   Original Cost of    
Name of Entity  Product  (sq.m.)   (sq.m.)   Equipment   Site
Henglong  Automotive Parts   97,818    20,226   $63,819   Jingzhou City, Hubei Province
       13,393    13,707   $-   Wuhan City, Hubei Province
Jiulong  Power Steering Gear   39,478    24,734   $42,943   Jingzhou City, Hubei Province
Shenyang  Automotive Steering Gear   35,354    18,041   $8,558   Shenyang City, Liaoning Province
Chongqing  Power Steering Gear   57,849    22,812   $3,604   Chongqing City
Jielong (1)  Electric Power Steering   -    -   $7,231   Jingzhou City, Hubei Province
Wuhan Chuguanjie  Electric Power Steering   53,675    44,054   $4,946   Wuhan City, Hubei Province
Henglong KYB (1)  Automotive Steering Gear   -    -   $10,705   Jingzhou City, Hubei Province
Hubei Henglong  Automotive Steering Gear   277,269    78,833   $93,601   Jingzhou City, Hubei Province
Wuhu  Automotive Steering Gear   83,705    27,288   $7,610   Wuhu City, Anhui Province
Wuhu Hongrun(1)  High Polymer Materials   -    -   $1,087   Wuhu City, Anhui Province
Total      658,541    249,695   $244,104    

 

  (1) Jielong, Henglong KYB and Wuhu Hongrun do not own land use rights or buildings by themselves. They rent buildings from Jiulong,  Hubei Henglong and Wuhu, respectively.

 

The Company is not involved in investments in real estate or interests in real estate, real estate mortgages, and securities of or interests in persons primarily engaged in real estate activities, as all of its land rights are used for production purposes.

 

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ITEM 3. LEGAL PROCEEDINGS.

 

On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu and Guangxun Xu and former directors Arthur Wong and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. As of November 2020, the Company reached a settlement to resolve the lawsuit for a sum of $55,998. The Company did not admit any liability in reaching the settlement. On February 5, 2021, the Court of Chancery conducted a hearing to confirm the settlement of the stockholder derivative action. The Court entered a Final Order and Judgment approving the settlement. The Court further ordered that the plaintiffs’ application for an award of attorneys’ fees and reimbursement of litigation expenses be reduced from $100,000 to $30,000. The Court’s Final Order and Judgment is publicly available on the Court of Chancery docket.

 

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

 

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ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

The Company’s common stock is traded on the Nasdaq Capital Market under the symbol “CAAS”.

 

ISSUER PURCHASES OF EQUITY SECURITIES

 

On December 18, 2015, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing markets prices or in privately negotiated transactional through December 17, 2016. The repurchase program terminated on December 17, 2016. During the year ended December 31, 2016, under the repurchase program, the Company repurchased 477,015 shares of the Company’s common stock for cash consideration of $1.9 million on the open market.

 

On December 5, 2018, the Board of Directors of the Company approved a share repurchase program under which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing markets prices or in privately negotiated transactions through December 4, 2019.  The Company has extended the program to December 4, 2020. During the year ended December 31, 2019, under the repurchase program, the Company repurchased 452,559 shares of the Company’s common stock for cash consideration of $1.0 million on the open market. During the year ended December 31, 2020, there were no common stock repurchases under such program.

 

On August 13, 2020, the Board of Directors of the Company approved a share repurchase program under which the Company is permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing market prices not to exceed $3.50 per share through August 12, 2021. During the year ended December 31, 2020, the Company repurchased 322,269 of the shares that were authorized to be repurchased under the program. There were no common stock repurchases from January 1, 2021 to the date of this report.

 

STOCKHOLDERS

 

The Company’s common shares are issued in registered form. Securities Transfer Corporation in Frisco, Texas is the registrar and transfer agent for the Company’s common stock. As of December 31, 2020, there were 32,338,302 shares of the Company’s common stock (including 1,486,526 shares of the Company’s treasury stock) issued and the Company had approximately 57 stockholders of record.

 

DIVIDENDS

 

The Company does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings, if any, to finance operations and the expansion of its business. Any future determination to pay cash dividends will be at the discretion of the Company’s board of directors and will be based upon the Company’s financial condition, operating results, capital requirements, plans for expansion, restrictions imposed by any financing arrangements and any other factors that the Company’s board of directors deems relevant.

 

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The securities authorized for issuance under equity compensation plans at December 31, 2020 are as follows:

 

   Number of securities to be   Weighted average   Number of securities 
   issued upon exercise of   exercise price of   remaining available for 
Plan category  outstanding options   outstanding options   future issuance 
Equity compensation plans approved by security holders   2,200,000   $4.79    1,563,650 

 

The stock option plan was approved at the Annual Meeting of Stockholders held on June 28, 2005 and extended for ten years at the Annual Meeting of Stockholders held on September 16, 2014. The maximum common shares for issuance under the plan are 2,200,000. The term of the plan was extended to June 27, 2025.

 

ITEM 6. SELECTED FINANCIAL DATA.

 

Not Applicable.

 

ITEM 7. 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 consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this report.

 

GENERAL OVERVIEW

 

China Automotive Systems, Inc., including, when the context so requires, its subsidiaries and the subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the “Company.” The Company, through its Sino-foreign joint ventures, engages in the manufacture and sales of automotive systems and components in the People’s Republic of China, the “PRC,” or “China.” Genesis, a company incorporated on January 3, 2003 under the Companies Ordinance of Hong Kong as a limited liability company, is a wholly-owned subsidiary of the Company. Henglong USA Corporation, “HLUSA,” which was 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. Furthermore, the Company owns the following aggregate net interests in the subsidiaries incorporated in the PRC and Brazil as of December 31, 2020 and 2019.

 

   Aggregate Net Interest 
Name of Entity  December 31, 2020   December 31, 2019 
Henglong   100.00%   100.00%
Jiulong   100.00%   100.00%
Shenyang   70.00%   70.00%
USAI   -%   83.34%
Wuhu   77.33%   77.33%
Jielong   85.00%   85.00%
Hubei Henglong   100.00%   100.00%
Testing Center   100.00%   100.00%
Chongqing Henglong   70.00%   70.00%
Brazil Henglong   95.84%   95.84%
Wuhan Chuguanjie   85.00%   85.00%
Shanghai Henglong   100.00%   100.00%
Jingzhou Qingyan   60.00%   60.00%
Henglong KYB   66.60%   66.60%
Wuhan Hyoseong   51.00%   51.00%
Wuhu Hongrun   62.00%   100.00%
Changchun Hualong   100.00%   -%

 

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RESULTS OF OPERATIONS

 

Selected highlights from our operations (in thousands of U.S. dollars):

 

   2020   2019   Change   Change% 
Net product sales  $417,636   $431,427   $(13,791)   -3.2%
Cost of products sold   362,295    368,076    (5,781)   -1.6%
Net gain on other sales   4,320    5,067    (747)   -14.7%
Selling expenses   14,506    14,270    236    1.7%
General and administrative expenses   27,581    19,976    7,605    38.1%
Research and development expenses   25,723    27,986    (2,263)   -8.1%
Other income, net   2,438    1,957    481    24.6%
Interest expense   1,592    3,034    (1,442)   -47.5%
Income taxes   2,163    586    1,577    269.1%
Net (loss)/income   (10,271)   8,385    (18,656)   -222.5%
Net loss attributable to non-controlling interest   (5,300)   (1,577)   (3,723)   236.1%
Net (loss)/income attributable to parent company’s common shareholders   (4,980)   9,962    (14,942)   -150.0%

 

Net Product Sales and Cost of Products Sold

 

For the years ended December 31, 2020 and 2019, net sales and cost of sales are summarized as follows (figures are in thousands of USD):

 

   Net Sales   Cost of sales 
   2020   2019   Change   2020   2019   Change 
Henglong  $157,715   $164,142   $(6,427)   -3.9%  $146,478   $155,667   $(9,189)   -5.9%
Jiulong   100,120    88,469    11,651    13.2    91,053    81,234    9,819    12.1 
Shenyang   14,091    20,247    (6,156)   -30.4    11,946    16,606    (4,660)   -28.1 
Wuhu   14,280    20,384    (6,104)   -29.9    13,627    19,259    (5,632)   -29.2 
Hubei Henglong   115,991    121,719    (5,728)   -4.7    92,797    94,470    (1,673)   -1.8 
Henglong KYB   52,659    70,952    (18,293)   -25.8    52,691    67,330    (14,639)   -21.7 
Other Entities   61,202    64,619    (3,417)   -5.3    48,260    51,690    (3,430)   -6.6 
Total segment   516,058    550,532    (34,474)   -6.3    456,852    486,256    (29,404)   -6.0 
Eliminations   (98,422)   (119,105)   20,683    -17.4    (94,557)   (118,180)   23,623    -20.0 
Total   417,636    431,427    (13,791)   -3.2%   362,295    368,076    (5,781)   -1.6%

 

Net Product Sales

 

Net product sales were $417.6 million for the year ended December 31, 2020, as compared to $431.4 million for the year ended December 31, 2019, representing a decrease of $13.8 million, or 3.2%. 

 

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Net sales of traditional steering products were $355.6 million for the year ended December 31, 2020, compared to $348.9 million for 2019, representing an increase of $6.7 million, or 1.9%. Net sales of EPS were $62.0 million for the year ended December 31, 2020, compared to $82.5 million for 2019, representing a decrease of $20.5 million, or 24.8%. As a percentage of net sales, the sales of EPS were 14.8% for the year ended December 31, 2020, compared to 19.1% for 2019.

  

The decrease in net product sales was due to the effects of two major factors: (i) the decrease in sales volume led to a sales decrease of $0.7 million mainly due to the decreased demand as a result of COVID-19 and (ii) the decrease in average selling price led to a sales decrease of $14.0 million.

 

The appreciation of the RMB against the U.S. dollar in 2020 led to a sales increase of $0.9 million.

 

Further analysis is as follows:

 

  Henglong mainly engages in providing passenger vehicle steering systems. Net sales for Henglong were $157.7 million for the year ended December 31, 2020, compared with $164.1 million for the year ended December 31, 2019, representing a decrease of $6.4 million, or 3.9%. A decrease in sales volume led to a sales decrease of $5.2 million, a decrease in selling price led to a sales decrease of $1.5 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.3 million.

 

  Jiulong mainly engages in providing commercial vehicle steering systems. Net sales for Jiulong were $100.1 million for the year ended December 31, 2020, compared with $88.5 million for the year ended December 31, 2019, representing an increase of $11.6 million, or 13.1%. An increase in sales volume led to a sales increase of $18.3 million, and a decrease in selling price led to a sales decrease of $6.7 million.

 

  Shenyang mainly engages in providing vehicle steering systems to Shenyang Brilliance Jinbei Automobile Co., LTD., “Jinbei”, one of the major automotive manufacturers in China. Net sales for Shenyang were $14.1 million for the year ended December 31, 2020, compared with $20.2 million for the year ended December 31, 2019, representing a decrease of $6.1 million, or 30.2%. A decrease in sales volume led to a sales decrease of $2.3 million, a decrease in selling price led to a sales decrease of $3.8 million.

 

  Wuhu mainly engages in providing vehicle steering systems to Chery Automobile Co., Ltd., “Chery”, one of the major automotive manufacturers in China. Net sales for Wuhu were $14.3 million for the year ended December 31, 2020, compared with $20.4 million for the year ended December 31, 2019, representing a decrease of $6.1 million, or 29.9%. A decrease in sales volume led to a sales decrease of $5.8 million, a decrease in selling price led to a sales decrease of $0.3 million.

 

  Hubei Henglong mainly engages in providing vehicle steering systems to Chrysler and Ford. Net sales for Hubei Henglong were $116.0 million for the year ended December 31, 2020, compared with $121.7 million for the year ended December 31, 2019, representing a decrease of $5.7 million, or 4.7%. A decrease in sales volume led to a sales decrease of $5.3 million, a decrease in selling price led to a sales decrease of $0.8 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.4 million.

  

  Henglong KYB mainly engages in providing passenger EPS products. Net sales for Henglong KYB were $52.7 million for the year ended December 31, 2020, compared with $71.0 million for the year ended December 31, 2019, representing a decrease of $18.3 million, or 25.8%. A decrease in sales volume led to a sales decrease of $17.8 million, a decrease in selling price led to a sales decrease of $0.6 million, and the effect of foreign currency translation of the RMB against the U.S. dollar led to a sales increase of $0.1 million.

 

  Net sales for Other Entities were $61.2 million for the year ended December 31, 2020, compared with $64.6 million for the year ended December 31, 2019, representing a decrease of $3.4 million, or 5.3%, mainly contributed by Jielong, which manufactures automobile steering columns for both Hydraulic Power Steering (“HPS”) and EPS.

 

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Cost of Products Sold

 

For the year ended December 31, 2020, the cost of sales was $362.3 million, compared with $368.1 million for the year ended December 31, 2019, representing a decrease of $5.8 million, or 1.6%. The decrease in cost of sales was mainly due to the effect of the following major factors: (i) the decrease in sales volumes with a cost of sales decrease of $0.2 million; (ii) the decrease in unit cost with a cost of sales decrease of $6.2 million; and (iii) the appreciation of the RMB against the U.S. dollar with a cost of sales increase of $0.6 million. Further analysis is as follows:

 

  Cost of sales for Henglong was $146.5 million for the year ended December 31, 2020, compared to $155.7 million for the year ended December 31, 2019, representing a decrease of $9.2 million, or 5.9%. A decrease in sales volumes resulted in a cost of sales decrease of $9.6 million, an increase in unit material and subcomponents costs led to a cost of sales increase of $0.1 million and the effect of foreign currency translation of the RMB against the U.S. dollar led to a cost of sales increase of $0.3 million.

 

  Cost of sales for Jiulong was $91.1 million for the year ended December 31, 2020, compared to $81.2 million for the year ended December 31, 2019, representing an increase of $9.9 million, or 12.2%.An increase in sales volumes resulted in a cost of sales increase of $17.6 million, and a decrease in unit material and subcomponents costs led to a cost of sales decrease of $7.7 million.

 

  Cost of sales for Shenyang was $11.9 million for the year ended December 31, 2020, compared with $16.6 million for the year ended December 31, 2019, representing a decrease of $4.7 million, or 28.3%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $3.3 million and a decrease in unit cost resulting in a cost of sales decrease of $1.4 million.

 

  Cost of sales for Wuhu was $13.6 million for the year ended December 31, 2020, compared to $19.3 million for the year ended December 31, 2019, representing a decrease of $5.7 million, or 29.5%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $6.2 million and an increase in unit cost resulting in a cost of sales increase of $0.5 million.

 

  Cost of sales for Hubei Henglong was $92.8 million for the year ended December 31, 2020, compared with $94.5 million for the year ended December 31, 2019, representing a decrease of $1.7 million, or 1.8%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $4.6 million, an increase in unit cost resulting in a cost of sales increase of $2.7 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.2 million.

 

  Cost of sales for Henglong KYB was $52.7 million for the year ended December 31, 2020, compared to $67.3 million for the year ended December 31, 2019, representing a decrease of $14.6 million, or 21.7%. The decrease in cost of sales was mainly due to a decrease in sales volumes resulting in a cost of sales decrease of $16.6 million, an increase in unit cost resulting in a cost of sales increase of $1.9 million, and the effect of foreign currency translation of the RMB against the U.S. dollar resulting in a cost of sales increase of $0.1 million.

  

  Cost of sales for Other Entities was $48.3 million for the year ended December 31, 2020, compared to $51.7 million for the year ended December 31, 2019, representing a decrease of $3.4 million, or 6.6%. The decrease in cost of sales for Other Entities was mainly due to the decrease in cost of sales of Jielong, primarily due to the decrease in sales.

 

Gross margin was 13.3% for the year ended December 31, 2020, representing a 1.4% decrease from 14.7% for the year ended December 31, 2019, mainly due to the decrease in selling price in 2020.

 

Net Gain on Other Sales

 

Gain on other sales mainly consisted of rental income, gain on disposal of intangible assets and property, plant and equipment, and R&D revenue. For the year ended December 31, 2020, gain on other sales amounted to $4.3 million, as compared to $5.1 million for the year ended December 31, 2019, representing a decrease of $0.8 million, mainly due the decrease in gain on disposal of intangible assets and property, plant and equipment.

 

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Selling Expenses

 

For the years ended December 31, 2020 and 2019, selling expenses are summarized as follows (figures are in thousands of USD):

 

   Year Ended December 31,         
   2020   2019   Increase/(Decrease)   Percentage 
Transportation expense  $5,839   $5,773   $66    1.1%
Marketing and office expense   3,864    3,555    309    8.7%
Salaries and wages   2,867    3,064    (197)   -6.4%
Warehousing and inventory handling expenses   1,790    1,800    (10)   -0.6%
Other expense   146    78    68    87.2%
Total  $14,506   $14,270   $236    1.6%

 

Selling expenses were $14.5 million for the year ended December 31, 2020, which was generally consistent with last year.

 

General and Administrative Expenses

 

For the years ended December 31, 2020 and 2019, general and administrative expenses are summarized as follows (figures are in thousands of USD):

 

   Year Ended December 31,         
   2020   2019   Increase/(Decrease)   Percentage 
Salaries and wages  $8,415   $8,615   $(200)   -2.3%
Allowances for credit losses   6,808    (441)   7,249    n/a 
Office expense   3,746    3,097    649    21.0%
Labor insurance expenses   2,037    2,613    (576)   -22.0%
Depreciation and amortization expense   1,963    1,474    489    33.2%
Listing expenses (1)   1,757    1,838    (81)   -4.4%
Maintenance and repair expenses   1,207    1,336    (129)   -9.7%
Property and other taxes   971    1,016    (45)   -4.4%
Other expenses   677    428    249    58.2%
Total  $27,581   $19,976   $7,605    38.1%

 

  (1) Listing expenses consisted of the costs associated with legal, accounting and auditing fees for operating a public company.

 

General and administrative expenses were $27.6 million for the year ended December 31, 2020, as compared to $20.0 million for the year ended December 31, 2019, representing an increase of $7.6 million or 38.0%, which mainly included an increase in provision of allowance for doubtful accounts of $6.4 million as a result of one of the customers’ application for bankruptcy in November 2020.

 

Research and Development Expenses

 

Research and development expenses, “R&D” expenses, were $25.7 million for the year ended December 31, 2020 as compared to $28.0 million for the year ended December 31, 2019, representing a decrease of $2.3 million, or 8.2%, which was primarily due to cost control on research and development activities and the temporary suspension of the Company’s operations due to the COVID-19 pandemic. 

 

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Other Income, Net

 

Other income, net was $2.4 million for the year ended December 31, 2020 as compared to $2.0 million for the year ended December 31, 2019, representing an increase of $0.4 million, or 20.0%, which was primarily due to an increase in the government subsidies recognized in 2020.

 

Interest Expense

 

Interest expense was $1.6 million for the year ended December 31, 2020 as compared to $3.0 million for the year ended December 31, 2019, representing a decrease of $1.4 million, or 46.7%, primarily as a result of decreased loans and lower interest rates.

 

Financial (Expense)/Income, Net

 

Financial expense, net was $4.9 million for the year ended December 31, 2020, as compared to financial income, net of $2.5 million for the year ended December 31, 2019, representing an increase in financial expense of $7.4 million, which was primarily due to an increase in the foreign exchange loss because of the exchange rate fluctuation.

 

Income Taxes

 

Income tax expense was $2.2 million for the year ended December 31, 2020 compared to $0.6 million for the year ended December 31, 2019, representing an increase in income tax expense of $1.6 million. The increase resulted primarily from the increase in valuation allowance recognized in 2020.

 

Net Loss Attributable to Non-controlling Interests

 

The Company recorded a net loss attributable to non-controlling interests of $5.3 million for the year ended December 31, 2020, compared to $1.6 million for the year ended December 31, 2019, representing an increase of $3.7 million.

 

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

 

Net loss attributable to parent company was $5.0 million for the year ended December 31, 2020, compared to net income attributable to parent company of $10.0 million for the year ended December 31, 2019, representing a decrease of $15.0 million.

 

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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 December 31, 2020, the Company had cash and cash equivalents and short-term investments of $107.4 million, compared with $82.5 million as of December 31, 2019, an increase of $24.9 million, or 30.2%.

 

The Company had working capital (current assets less current liabilities) of $121.2 million as of December 31, 2020, compared with $137.4 million as of December 31, 2019, representing a decrease of $16.2 million, or 11.8%.

 

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.

 

The pandemic of COVID-19 has had material impacts on our cash flow for the year of 2020 with potential continuing impacts on subsequent periods. However, based on our liquidity assessment, we believe that our current cash position, 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 12 months subsequent to the filing of this annual 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 $44.2 million, and bankers’ acceptance notes payable of $80.2 million as of December 31, 2020.

 

The Company currently expects to be able to obtain similar bank loans, i.e., RMB loans, and bankers’ acceptance facilities in the future if it can provide adequate mortgage security following the termination of the above-mentioned agreements, see the table under “Bank Arrangements” below for more information. If the Company is not able to do so, it will have to refinance such debt as it becomes due or repay that debt to the extent it has cash available from operations or from the proceeds of additional issuances of capital stock. Due to a depreciation of assets, the value of the mortgages securing the above-mentioned bank loans and banker's acceptances is expected to be reduced by approximately $16.3 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 $16.3 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 lines of credit with a reduction of $8.6 million, which is 52.9%, the mortgage ratio, of $16.3 million, if it cannot provide additional mortgages. The Company expects that the reduction in bank loans will not have a material adverse effect on its liquidity.

 

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Bank Facilities

 

As of December 31, 2020, 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 (3)   Used (4)   Value (5) 
1. Comprehensive credit facilities  China Everbright Bank (1)   Mar 2021    4,598    2,509    9,747 
                        
2. Comprehensive credit facilities  Shanghai Pudong Development Bank (2)   Oct 2021    19,924    10,713    22,544 
                        
3. Comprehensive credit facilities  China CITIC Bank (2)    Aug 2022    65,135    30,888    21,834 
   China CITIC Bank (2)   Aug 2021    10,728    4,052    - 
   China CITIC Bank   Jun 2022    2,146    2,146    6,759 
                        
4. Comprehensive credit facilities  Hubei Bank   Mar 2022    26,054    15,636    71,448 
                        
5. Comprehensive credit facilities  Bank of Chongqing   Sep 2021    766    766    2,394 
                        
6. Comprehensive credit facilities  Bank of China (2)   Sep 2020    17,778    13,180    - 
                        
7. Comprehensive credit facilities  China Merchants Bank (2)   Oct 2021    22,989    -    - 
                        
8. Comprehensive credit facilities  Agricultural Bank of China (1)   Mar 2021    1,073    1,073    4,257 
                        
9. Comprehensive credit facilities  Huishang Bank   May 2021    1,533    -    - 
Total          $172,724   $80,963   $138,983 

   

(1) These facilities have expired. The Company is currently in the process of negotiating with these banks to renew the credit facilities.
   
(2) The comprehensive credit facilities with Shanghai Pudong Development Bank are guaranteed by Henglong in addition to the above pledged assets. The comprehensive credit facilities with China CITIC Bank are guaranteed by Henglong and Hubei Henglong in addition to the above pledged assets. The comprehensive credit facilities with Bank of China are guaranteed by Hubei Henglong. The comprehensive credit facilities with China Merchants Bank are guaranteed by Hubei Henglong.
   
(3) “Amount available” is used for the drawdown of bank loans and issuance of bank notes at the Company’s discretion. If the Company elects to utilize the facility by issuance of bank notes, additional collateral is requested to be pledged to the bank.
   
(4) “Amount used” represents the credit facilities used by the Company for the purpose of bank loans or notes payable during the facility contract period. The loans or notes payable under the credit facilities will remain outstanding regardless of the expiration of the relevant credit facilities until the separate loans or notes payable expire. The amount used includes bank loans of $36.6 million, notes payable of $43.9 million and letter of credit of $0.5 million as of December 31, 2020.
   
(5) In order to obtain lines of credit, the Company needs to pledge certain assets to banks. As of December 31, 2020, the pledged assets included property, plant and equipment and land use rights with assessed value of $139.0 million.

  

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

 

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The Company renewed its existing short-term loans and borrowed new loans during 2020 at annual interest rates ranging from 2.50% to 5.22%, and the Company’s loan terms range from 9 months to 23 months. The large spread in interest rates was due to the different lenders (interest rates for government loans are normally lower than for commercial bank loans). Pursuant to the comprehensive credit line arrangement, the Company pledged and guaranteed:

 

1. Land use rights and buildings with an assessed value of approximately $71.4 million as security for its revolving comprehensive credit facility with Hubei Bank.

 

2. Buildings with an assessed value of approximately $22.6 million as security for its comprehensive credit facility with Shanghai Pudong Development Bank.

 

3. Land use rights and buildings with an assessed value of approximately $21.8 million as security for its comprehensive credit facility with China CITIC Bank Wuhan branch.

 

4. Land use rights and buildings with an assessed value of approximately $6.8 million as security for its revolving comprehensive credit facility with China CITIC Bank Shenyang Branch.

 

5. Land use rights and buildings with an assessed value of approximately $9.7 million as security for its comprehensive credit facility with China Everbright Bank.

 

6. Buildings with an assessed value of approximately $2.4 million as security for its comprehensive credit facility with Bank of Chongqing.

 

7. Buildings with an assessed value of approximately $4.3 million as security for its comprehensive credit facility with Agricultural Bank of China.

 

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Cash Requirements

 

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

 

   Payment Due Dates 
   (in thousands of USD) 
       Less than 1           More than 5 
   Total   year   1-3 years   3-5 years   Years 
Short-term and long-term loans including
interest payable
  $45,320   $45,320   $-   $-   $- 
Notes payable (1)   80,173    80,173    -    -    - 
Taxes payable and withholding tax liabilities due to U.S. Tax Reform (See Note 21)     26,693       2,809       8,078       15,806       -  
Obligation for investment contract (2)   2,697    2,697    -    -    - 
Other contractual purchase commitments,
including service agreements
   22,287    21,047    1,240    -    - 
Total  $177,170   $152,046   $9,318   $15,806   $- 

 

  (1) Notes payable do not bear interest.

 

  (2)

In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s shares. As of December 31, 2020, Hubei Henglong has completed a capital contribution of RMB 3.0 million, equivalent to approximately $0.4 million. According to the agreement, the remaining capital commitment of RMB 2.0 million, equivalent to approximately $0.3 million, will be paid in 2021.

 

In November 2019, Hubei Henglong entered into an agreement with other parties and committed to purchase 70% of the shares of Hefei Senye Light Plastic Technology Co., Ltd. for total consideration of RMB 33.6 million, equivalent to approximately $4.8 million. As of December 31, 2020, Hubei Henglong has paid the amount of RMB 18.0 million, equivalent to approximately $2.6 million, which was reported in other non-current assets as the transfer of shares had not been consummated. According to the agreement, the remaining consideration of RMB 15.6 million, equivalent to approximately $2.4 million, will be paid in 2021.

 

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Short-term and Long-term Loans

 

The following table summarizes the contract information of short-term and long-term borrowings between the banks, government and the Company as of December 31, 2020 (figures are in thousands of USD).

 

Bank     Borrowing    Borrowing   Annual   Date of     Amount 
Government     Date   Term   Interest   Interest     Payable on 
   Purpose      (Months)   Rate   Payment  Due Date  Due Date 
Agricultural Bank of
China (1)
  Working
Capital
   Mar 25, 2020    12    4.05%  Pay
monthly
  Mar 22, 2021   1,073 
                              
China CITIC Bank (1)  Working
Capital
   Mar 27, 2020    12    2.50%  Pay in
arrear
  Mar 26, 2021   4,332 
                              
China CITIC Bank (1)  Working
Capital
   Mar 27, 2020    12    2.50%  Pay in
arrear
  Mar 26, 2021   3,869 
                              
Bank of China  Working
Capital
   Apr 29, 2020    12    3.92%  Pay
monthly
  Apr 28, 2021   6,130 
                              
China CITIC Bank  Working
Capital
   Apr 29, 2020    12    4.35%  Pay
monthly
  Apr 29, 2021   1,533 
                              
China CITIC Bank  Working
Capital
   May 20, 2020    12    4.35%  Pay
monthly
  May 20, 2021   1,533 
                              
China CITIC Bank  Working
Capital
   May 29, 2020    12    4.00%  Pay
monthly
  May 29, 2021   1,533 
                              
China CITIC Bank  Working
Capital
   Jun 19, 2020    12    2.50%  Pay in
arrear
  Jun 18, 2021   2,749 
                              
China CITIC Bank  Working
Capital
   Jun 19, 2020    12    2.50%  Pay in
arrear
  Jun 18, 2021   2,943 
                              
Bank of China  Working
Capital
   Jun 28, 2020    12    3.80%  Pay
monthly
  Jun 27, 2021   7,050 
                              
Financial Bureau of
Jingzhou Development
Zone
  Working
Capital
   Aug 07, 2019    23    3.80%  Pay
annually
  Jun 30, 2021   3,065 
                              
Financial Bureau of
Jingzhou Development
Zone
  Working
Capital
   Sep 03, 2019    22    3.80%  Pay
annually
  Jun 30, 2021   4,598 
                              
China CITIC Bank  Working
Capital
   Sep 03, 2020    12    4.35%  Pay
monthly
  Sep 03, 2021   1,533 
                              
China CITIC Bank  Working
Capital
   Sep 11, 2020    12    5.22%  Pay
monthly
  Sep 11, 2021   1,533 
                              
Bank of Chongqing  Working
Capital
   Sep 14, 2020    12    4.05%  Pay
monthly
  Sep 13, 2021   76 
                              
Bank of Chongqing  Working
Capital
   Sep 28, 2020    12    4.05%  Pay
monthly
  Sep 19, 2021   459 
                              
Bank of Chongqing  Working
Capital
   Dec 29, 2020    9    4.05%  Pay
monthly
  Sep 19, 2021   229 
                              
Total                          $44,238 

 

(1) These bank loans were repaid between January and March 2021 when they became due.

 

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

 

The Company had complied with such financial covenants as of December 31, 2020. 

 

Notes Payable

 

The following table summarizes the contract information of issuing notes payable between the banks and the Company as of December 31, 2020 (figures are in thousands of USD):

 

          Amount Payable on 
Purpose  Term (Month)   Due Date  Due Date 
Working Capital (1)   6   Jan. 2021  $11,012 
Working Capital (1)   6   Feb. 2021   9,625 
Working Capital (1)   6   Mar. 2021   15,976 
Working Capital   6   Apr. 2021   13,266 
Working Capital   6   May 2021   14,795 
Working Capital   6     Jun. 2021   15,499 
Total          $80,173 

 

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

  

The Company must use notes payable for the purpose described in the table. If it fails to do so, the banks will no longer issue the notes payable, and it may have an adverse effect on the Company’s liquidity and capital resources. The Company has to deposit 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 December 31, 2020, and management believes it will continue to comply with them. 

 

Cash flows

 

  (a) Operating Activities

 

Net cash provided by operating activities for the year ended December 31, 2020 was $57.4 million, compared with $30.3 million for the year ended December 31, 2019, representing an increase of $27.1 million, which was mainly due to (1) the decrease in net income excluding non-cash items by $7.2 million offset by (2) the increase in cash inflows from movements of operating assets and liabilities by $34.3 million.

 

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  (b) Investing Activities

 

The Company had net cash of $23.8 million used in investing activities for the year ended December 31, 2020, compared with $27.3 million in 2019, representing a decrease in cash outflow of $3.5 million, which was mainly due to the net effect of (1) a decrease in the payment to acquire property, plant and equipment and land use rights by $18.6 million, (2) an increase in purchase of short-term investments and long-term time deposits of $40.5 million, and (3) a combination of other factors contributed an increase of cash inflows by $25.4 million, including an increase in proceeds from maturities of short-term investments of $22.1 million, the decrease in government subsidy received for purchase of property, plant and equipment, and the increase in cash received from the exit of long-term investments.

 

  (c) Financing Activities

 

During the year ended December 31, 2020, the Company had net cash of $19.8 million used in financing activities, compared to $10.7 million in 2019, representing an increase in outflow of $9.1 million, which was mainly due to the net effect of (1) a decrease in proceeds from bank loan by $17.3 million, (2) a decrease in repayment of bank loans by $12.6 million, (3) an increase in payment to broker agents for repurchase of common stock by $1.7 million, and (4) a decrease in cash received from capital contributions by non-controlling interest holder by $2.8 million.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

SUBSEQUENT EVENTS

 

None.

 

INFLATION AND CURRENCY MATTERS

 

China’s economy has experienced rapid growth recently, mostly through the issuance of debt. Debt-induced economic growth can lead to growth in the money supply and rising inflation. If prices for the Company’s products rise at a rate that is insufficient to compensate for the rise in the cost of supplies, it may harm the Company’s profitability. In order to control inflation, the Chinese government has imposed controls on bank credit, limits on loans for fixed assets and restrictions on state bank lending. Such policies can lead to a slowing of economic growth. Rises in interest rates by the central bank would likely slow economic activity in China which could, in turn, materially increase the Company’s costs and also reduce demand for the Company’s products.

 

Foreign operations are subject to certain risks inherent in conducting business abroad, including price and currency exchange controls, and fluctuations in the relative value of currencies. During 2020, the Company mainly supplied products to North America and settled in cash in U.S. dollars. As a result, appreciation or currency fluctuation of the RMB against the U.S. dollar would increase the cost of export products, and adversely affect the Company’s financial performance.

 

In July 2005, the Chinese government adjusted its exchange rate policy from “Fixed Rate” to “Floating Rate.” During December 2019 to December 2020, the exchange rate between RMB and U.S. dollar appreciated from RMB1.00 to $0.1433 to RMB1.00 to $0.1533. The appreciation of the RMB may continue. Significant appreciation of the RMB is likely to increase the Company’s income generated from China. 

 

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RECENT ACCOUNTING PRONOUNCEMENTS

 

Information regarding new accounting pronouncements is included in Note 2 to the Consolidated Financial Statements.

 

SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES

 

The Company prepares its 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 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 critical accounting estimates:

 

    Critical            
Balance Sheet   Estimate       Assumptions/Approaches    
Caption   Item   Nature of Estimates Required   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 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   Provision for inventory impairment   The Company is required, from time to time, to review the turnover of inventory based on projections of anticipated future cash flows, including provision of inventory impairment for over 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

 

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

 

The Company is exposed to market risk from changes in interest rates and foreign currency exchange rates. For purposes of specific risk analysis, the Company uses sensitivity analysis to determine the effects that market risk exposures may have.

 

FOREIGN CURRENCY RISK

 

The Company’s reporting currency is the U.S. dollar and the majority of its revenues will be settled in RMB and U.S. dollars. The Company’s currency exchange rate risks come primarily from the sales of products to international customers. Most of the Company’s assets are denominated in RMB except for part of cash and accounts receivable. As a result, the Company is exposed to foreign exchange risk as its revenues and results of operations may be affected by fluctuations in the exchange rate between the U.S. dollar and the RMB.

 

The value of the RMB fluctuates and is affected by, among other things, changes in China's political and economic conditions. In addition, the RMB is not readily convertible into U.S. dollars or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rate quoted by the People’s Bank of China. The conversion of RMB into foreign currencies such as the U.S. dollar has been generally based on rates set by the People's Bank of China, which are set daily based on the previous day's interbank foreign exchange market rates and current exchange rates on the world financial markets. On December 31, 2020 and 2019, the exchange rates of RMB against U.S. dollar were RMB1.00 to $0.1533 and RMB1.00 to $0.1436, respectively. Any significant future appreciation of the RMB is likely to decrease the Company’s profits generated from overseas.

 

In order to mitigate the currency exchange rate risk, the Company and its international customers established a price negotiation mechanism that provides that, if the currency exchange rate fluctuation is more than 8% since the last price negotiation, the Company and the customers would adjust the prices for future sales. Normally the adjustment to future sales prices would reflect half of the impact from the change in exchange rate.

 

CREDIT RISK

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable. The Company does not require collateral or other security to support client receivables since most of its customers are large, well-established companies. The Company's credit risk is also mitigated because its customers are all selected enterprises supported by the local government. One customer, Fiat Chrysler North America, accounted for more than 10% (23.6%) of the Company’s consolidated revenues in 2020. The Company maintains an allowance for doubtful accounts for any potential credit losses related to its trade receivables. The Company does not use foreign exchange contracts to hedge the risk in receivables denominated in foreign currencies and the Company does not hold or issue derivative financial instruments for trading or speculative purposes.

 

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INTEREST RATE RISK

 

The Company’s exposure to changes in interest rates results primarily from its credit facility borrowings. As of December 31, 2020, the Company had nil of outstanding indebtedness, which is subject to interest rate fluctuations.

 

The Company’s level of outstanding indebtedness fluctuates from time to time and may result in additional payable.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

(a)

The financial statements required by this item begin on page 61.

 

(b) Selected quarterly financial data for the past two years are summarized in the following table (figures are in thousands of USD, except those for items headed “Basic” and “Diluted”):  

 

    Quarterly Results of Operations  
    First     Second     Third     Fourth  
    2020     2019     2020     2019     2020     2019     2020     2019  
Net sales   $ 73,555     $ 109,193     $ 83,184     $ 105,748     $ 114,417     $ 100,542     $ 146,480     $ 115,944  
Gross profit       11,152       14,045       7,831       15,185       13,575       17,317       22,783       16,804  
Income/(loss) from operations     1,012       1,036       (5,192 )     2,625       58       4,439       (4,027 )     (1,914 )
Net (loss)/income     (628 )     1,223       (4,240 )     2,118       1,513       4,201       (6,916 )     843  
Net loss attributable to non-controlling interest     (600 )     (243 )     (142 )     (332 )     (848 )     (113 )     (3,710 )     (889 )
Net (loss)/income attributable to parent company’s common shareholders     (28 )     1,466       (4,098 )     2,450       2,358       4,314       (3,212 )     1,732  
Net (loss)/income attributable to parent company’s common shareholders per share-                                                                
Basic   $ -     $ 0.05     $ (0.13 )   $ 0.08     $ 0.08     $ 0.14     $ (0.10 )   $ 0.06  
Diluted   $ -     $ 0.05     $ (0.13 )   $ 0.08     $ 0.08     $ 0.14     $ (0.10 )   $ 0.06  

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

Evaluation of 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 December 31, 2020, the end of the period covered by this Report. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this Form 10-K, 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 chief executive officer and chief financial officer, 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 December 31, 2020.

 

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Management’s Report on Internal Control Over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting.

 

Internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act, is a process designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by the board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that:

 

  a. pertain to the maintenance of records that, in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets;

 

  b. provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with appropriate authorization of the Company’s management and board of directors; and

 

  c. provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

 

In making its assessment of internal control over financial reporting, management, under the supervision and with the participation of the chief executive officer and chief financial officer, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in "Internal Control—Integrated Framework (2013)."

  

Management has assessed the effectiveness of internal control over financial reporting as of December 31, 2020 and determined that internal control over financial reporting was effective as of December 31, 2020.

 

This report does not include an auditors' report on the effectiveness of internal control over financial reporting due to SEC rules that exempt smaller reporting companies such as CAAS from providing such a report.

 

Inherent Limitations on Effectiveness of Controls

 

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

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Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the three month ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION.

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

The following table and text set forth the names and ages of all directors and executive officers of the Company as of December 31, 2020. The Board of Directors is comprised of only one class. All of the directors will serve until the next annual meeting of stockholders and until their successors are elected and qualified, or until their earlier death, retirement, resignation or removal. Also provided herein are brief descriptions of the business experience of each director and executive officer during the past five years and an indication of directorships held by each director in other companies subject to the reporting requirements under the federal securities laws.

 

Name   Age   Position(s)
         
Hanlin Chen   63   Chairman of the Board
         
Tong Kooi Teo   64   Director
         
Guangxun Xu   70   Director
         
Heng Henry Lu   55   Director
         
Qizhou Wu   56   Chief Executive Officer and Director
         
Jie Li   51   Chief Financial Officer
         
Andy Tse   50   Senior Vice President
         
Yijun Xia   58   Vice President
         
Haimian Cai   57   Vice President

  

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BIOGRAPHIES OF DIRECTORS AND EXECUTIVE OFFICERS

 

Directors

 

Hanlin Chen has served as the chairman of the board of directors and an executive officer since March 2003. Since January 2013, Mr. Chen has been a standing committee member of the Chinese People’s Political Consultative Conference and vice president of Foreign Investors Association of Hubei Province. From 1993 to 1997, Mr. Chen was the general manager of Shashi Jiulong Power Steering Gears Co., Ltd. Since 1997, he has been the chairman of the Board of Henglong Automotive Parts, Ltd. Mr. Hanlin Chen is the brother-in-law of the Company’s senior vice president, Mr. Andy Tse.

 

Qizhou Wu has served as a director since March 2003 and as the chief executive officer of the Company since September 2007. He served as chief operating officer from 2003 to 2007. He was the executive general manager of Shashi Jiulong Power Steering Gears Co., Ltd. from 1993 to 1999 and the general manager of Henglong Automotive Parts Co., Ltd. from 1999 to 2002. Mr. Wu graduated from Tsinghua University in Beijing with a Master’s degree in automobile engineering.

 

Heng Henry Lu has served as an independent director of the Company since July 2019. He has been an adviser to NBS Group since February 2016. Dr. Lu was a partner of SVC China from 2012 to 2014 and Chief Representative of William Blair & Company, L.L.C., Shanghai Representative Office from 2006 to 2011. Prior to that, Dr. Lu was with McKinsey & Company advising global and domestic companies on their growth and financial strategies. Dr. Lu received a Doctor of Philosophy from Columbia University in 1997 and a Master of Business Administration from University of Chicago Business School in 2000.

 

Tong Kooi Teo has served as an independent director of the Company since July 2019. He is the Chief Executive Officer of DPS Corporate Advisory Company Limited, Beijing, China, a member of Head International Group, China since March 2018. He is non-executive Chairman of Rubberex Corporation (M) Bhd, a company listed on the Kuala Lumpur Stock Exchange since September 2020. He is a Non-Executive Director of Guocoland (China) Limited since February 2018.  He was the Managing Director of Guoco Investment (China) Ltd., Hong Kong from 2014 to 2018, after serving as the Group Managing Director of Guocoland (China) Ltd. from 2012 to 2014. Prior to that, Mr. Teo was the Chief Executive Officer (China and Vietnam Operations) of WCT Holdings Bhd, Malaysia from 2011 to 2012. He was the Chief Executive Officer of Hong Leong Asia Ltd (HLA), which is listed on the Singapore Stock Exchange from 2004 to 2010. From 2003 to 2004, Mr. Teo was the Managing Director of Tasek Corporation Bhd, Malaysia, which is listed on the Kuala Lumpur Stock Exchange. From 1994 to 2002, Mr. Teo was General Manager of Corporate Banking Division and Chief Operating Officer of Hong Leong Bank Malaysia. From 1989 to 1994, Mr. Teo was with Deutsche Bank Malaysia where his last held position was Head of Corporate Banking.

 

Guangxun Xu has served as an independent director of the Company since December 2009. He is a member of the nominating and compensation committees, and the chairman of the audit committee of the Board of Directors. Mr. Xu has been the Chief Representative of NASDAQ in China and a managing director of the NASDAQ Stock Market International, Asia for over 10 years. With a professional career in the finance field spanning over 30 years, Mr. Xu’s practice focuses on providing package services on U.S. and U.K. listings, advising on and arranging for private placements, PIPEs, IPOs, pre-IPO restructuring, M&A, corporate and project finance, corporate governance, post-IPO IR compliance and risk control. 

 

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Executive Officers

 

Jie Li has served as the chief financial officer since September 2007. Prior to that position he served as the corporate secretary from December 2004. Prior to joining the Company in September 2003, Mr. Li was the assistant president of Jingzhou Jiulong Industrial Inc. from 1999 to 2003 and the general manager of Jingzhou Tianxin Investment Management Co. Ltd. from 2002 to 2003. Mr. Li has a Bachelor's degree from the University of Science and Technology of China. He also completed his graduate studies in economics and business management at the Hubei Administration Institute.

 

Andy Tse has served as a senior vice president of the Company since March 2003. He has also served as chairman of the board of Shenyang. He was the vice GM of Jiulong from 1993 to 1997 and the vice GM of Henglong. Mr. Tse has over 10 years of experience in automotive parts sales and strategic development. Mr. Tse has an MBA from the China People University. He is brother in-law to Hanlin Chen.

 

Yijun Xia has served as a vice president of the Company since December 2009. He also served as the general manager of Henglong from April 2005 to December 2011. Prior to that position he served as the Vice-G.M. of Henglong from December 2002. Mr. Xia graduated from Wuhan University of Water Transportation Engineering with a bachelor degree in Metal Material and Heat Treatment.

 

Haimian Cai was an independent director of the Company from September 2003 to December 2009, and also a member of the Company’s Audit, Compensation and Nominating Committees. Dr. Cai is a technical specialist in the automotive industry. Prior to that, Dr. Cai was a staff engineer in ITT Automotive Inc. Dr. Cai has written more than fifteen technical papers and co-authored a technical book regarding the Powder Metallurgy industry for automotive application. Dr. Cai has more than ten patents including pending patents. Dr. Cai holds a B.S. Degree in Automotive Engineering from Tsinghua University and a M.S. and Ph. D. in manufacturing engineering from Worcester Polytechnic Institute. Since December 2009, Mr. Cai has not served as independent director and a member of the Company’s Audit Committee, Compensation and Nominating Committees, because he was nominated as vice president of the Company.

 

BOARD COMPOSITION AND COMMITTEES

 

Audit Committee and Independent Directors

 

The Company has a standing Audit Committee of the Board of Directors established in accordance with Section 3(a)(58)(A) of the Exchange Act, as amended. The Audit Committee is operated under a written charter. The Audit Committee consists of the following individuals, all of whom the Company considers to be independent, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence: Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr. Heng Henry Lu. Mr. Guangxun Xu is the Chairman of the Audit Committee. The Board has determined that Mr. Guangxun Xu is the audit committee financial expert, as defined in Item 407(d)(5) of Regulation S-K, serving on the Company’s Audit Committee.

 

Compensation Committee

 

The Company has a standing Compensation Committee of the Board of Directors. The Compensation Committee is responsible for determining compensation for the Company’s executive officers. Three of the Company’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr. Heng Henry Lu serve on the Compensation Committee. Mr. Tong Kooi Teo is the Chairman of the Compensation Committee. The Board has determined that all members of the Compensation Committee are independent directors under the rules of the Nasdaq Stock Market, as applicable. The Compensation Committee administers the Company’s benefit plans, reviews and administers all compensation arrangements for executive officers, and establishes and reviews general policies relating to the compensation and benefits of the Company’s officers and employees. The Compensation Committee operates under a written charter that is made available on the Company’s website, www.caasauto.com.

 

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The Company’s Compensation Committee is empowered to review and approve the annual compensation and compensation procedures for the executive officers of the Company. The primary goals of the Compensation Committee of the Company’s Board of Directors with respect to executive compensation are to attract and retain the most talented and dedicated executives possible and to align executives’ incentives with stockholder value creation. The Compensation Committee evaluates individual executive performance with a goal of setting compensation at levels the committee believes are comparable with executives in other companies of similar size and stage of development operating in similar industry while taking into account the Company’s relative performance and its strategic goals.

 

The Company has not retained a compensation consultant to review its policies and procedures with respect to executive compensation. The Company conducts an annual review of the aggregate level of its executive compensation, as well as the mix of elements used to compensate its executive officers. The Company compares compensation levels with amounts currently being paid to executives in its industry and most importantly with local practices in China. The Company is satisfied that its compensation levels are competitive with local conditions.

 

Nominating Committee

 

The Company has a standing Nominating Committee of the Board of Directors. Director candidates are nominated by the Nominating Committee. The Nominating Committee will consider candidates based upon their business and financial experience, personal characteristics, and expertise that are complementary to the background and experience of other Board members, willingness to devote the required amount of time to carry out the duties and responsibilities of Board membership, willingness to objectively appraise management performance, and any such other qualifications the Nominating Committee deems necessary to ascertain the candidates’ ability to serve on the Board. The Nominating Committee will not consider nominee recommendations from security holders, other than the recommendations received from a security holder or group of security holders that beneficially owned more than 5 percent of the Company’s outstanding common stock for at least one year as of the date the recommendation is made. Three of the Company’s independent directors, as defined under the SEC’s rules and regulations and the Nasdaq’s definition of independence, Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr. Heng Henry Lu, serve on the Nominating Committee. Mr. Xu is the Chairman of the Nominating Committee.

 

Stockholder Communications

 

Stockholders interested in communicating directly with the Board of Directors, or individual directors, may email the Company’s independent director Mr. Guangxun Xu at guangxunxu@hotmail.com. Mr. Xu will review all such correspondence and will regularly forward to the board of directors of the Company copies of all such correspondence that deals with the functions of the Board or committees thereof or that he otherwise determines requires their attention. Directors may at any time review all of the correspondence received that is addressed to members of the board of directors of the Company and request copies of such correspondence. Concerns relating to accounting, internal controls or auditing matters will immediately be brought to the attention of the Audit Committee and handled in accordance with procedures established by the Audit Committee with respect to such matters.

 

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Family Relationships

 

Mr. Hanlin Chen and Mr. Andy Tse are brothers-in-law.

 

Code of Ethics and Conduct

 

The Board of Directors has adopted a Code of Ethics and Conduct which is applicable to all officers, directors and employees. The Code of Ethics and Conduct was filed as an exhibit to the Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission on March 25, 2010.

 

ITEM 11. EXECUTIVE COMPENSATION.

 

COMPENSATION DISCUSSION AND ANALYSIS

 

In 2003, the Board of Directors established a Compensation Committee consisting only of independent Board members, which is responsible for setting the Company’s policies regarding compensation and benefits and administering the Company’s benefit plans. At the end of fiscal year 2020, the Compensation Committee consisted of Mr. Tong Kooi Teo, Mr. Guangxun Xu and Mr. Heng Henry Lu. The members of the Compensation Committee approved the amount and form of compensation paid to executive officers of the Company and set the Company’s compensation policies and procedures during these periods.

 

The primary goals of the Company’s compensation committee with respect to executive compensation are to attract and retain highly talented and dedicated executives and to align executives’ incentives with stockholder value creation.

  

The Compensation Committee will conduct an annual review of the aggregate level of the Company’s executive compensation, as well as the mix of elements used to compensate the Company’s executive officers. The Company compares compensation levels with amounts currently being paid to executives at similar companies in the same area and the same industry. Most importantly, the Company compares compensation levels with local practices in China. The Company believes that its compensation levels are competitive with local conditions.

  

Elements of Compensation

 

The Company’s executive compensation consists of the following elements:

 

Base Salary

 

In determining the amount of base salaries for our named executive officers (“Named Executive Officers”), the Compensation Committee strives to establish base salaries that are similar to those paid by other companies to executives in similar positions and with similar responsibilities. Base salaries are adjusted from time to time to realign salaries with market levels after considering individual responsibilities, performance and experience. The Compensation Committee established a salary structure to determine base salaries and is responsible for initially setting executive officer compensation in employment arrangements with each individual. The base salary amounts are intended to reflect the Company’s philosophy that the base salary should attract experienced individuals who will contribute to the success of the Company’s business goals and represent cash compensation that is commensurate with the compensation of individuals at similarly situated companies.

  

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The Company’s Board of Directors and Compensation Committee have approved the current salaries for executives: RMB 2.5 million (equivalent to approximately $0.38 million) for the Chairman, RMB 1.6 million (equivalent to approximately $0.25 million) for the CEO and RMB 1.0 million (equivalent to approximately $0.15 million) individually for other officers in 2020.

 

Performance Bonus  

 

The Company did not have any performance bonus plan in 2020.

 

Stock Option Awards

  

The stock options plan proposed by management, which aims to incentivize and retain core employees, to meet employees’ benefits, the Company’s long term operating goals and stockholder benefits, was approved at the Annual Meeting of Stockholders held on June 28, 2005, and extended for ten years at the Annual Meeting of Stockholders held on September 16, 2014. The maximum common shares available for issuance under the plan is 2,200,000. The term of the plan was extended to June 27, 2025.

 

There were no stock options granted to management in 2020.

 

Other Compensation

 

Other than the base salary for the Company’s Named Executive Officers, the performance bonus and the stock option awards referred to above, the Company does not have any other benefits and perquisites for its Named Executive Officers. However, the Compensation Committee in its discretion may provide benefits and perquisites to these executive officers if it deems advisable to do so.

  

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Compensation Tables

 

Executive Officers

 

The compensation that Named Executive Officers received for their services for fiscal years 2020 and 2019 were as follows (figures are in thousands of USD):

 

Name and principal position  Year  Salary  (1)     Bonus  (2)     Option Awards  (3)   Total 
Hanlin Chen (Chairman)  2020  $330   $ -   $ -   $330 
   2019  $312   $ -   $ -   $312 
                          
Qizhou Wu (CEO)  2020  $220   $ -   $ -   $220 
   2019  $208   $ -   $ -   $208 
                          
Jie Li (CFO)  2020  $132   $ -   $ -   $132 
   2019  $125   $ -   $ -   $125 
                          
Haimian Cai (Vice President)  2020  $337   $ -   $ -   $337 
   2019  $327   $ -   $ -   $327 

  

  (1) Salary – Please refer to Base Salary disclosed under “Elements of compensation” section above for further details.

 

  (2) Bonus – Please refer to Performance Bonus disclosed under “Elements of compensation” section above for further details.

 

  (3) Option Awards – Please refer to Stock Option Awards disclosed under “Elements of compensation” section above for further details.

 

Compensation for Directors

 

Based on the number of the board of directors’ service years, workload and performance, the Company decides on their pay. The management believes that the pay for the members of the Board of Directors was appropriate as of December 31, 2020. The compensation that directors received for serving on the Board of Directors for fiscal year 2020 was as follows (figures are in thousands of USD):

 

Name  Fees earned or paid in cash   Option awards (1)   Total 
Tong Kooi Teo  $30   $          -   $30 
Guangxun Xu  $59   $-   $59 
Heng Henry Lu  $30   $-   $30 

 

  (1) Other than the cash payment based on the number of a director’s service years, workload and performance, the Company grants option awards to each director every year. In accordance with ASC Topic 718, the cost of the above mentioned stock options issued to directors was measured on the grant date based on their fair value. The fair value is determined using the Black-Scholes option pricing model and certain assumptions. The Company did not grant option awards to its directors in 2020.

 

The cost of the above-mentioned compensation paid to directors was measured based on investment, operating, technology, and consulting services they provided. All other directors did not receive compensation for their service on the Board of Directors.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

 

As used in this section, the term beneficial ownership with respect to a security is defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as consisting of sole or shared voting power, including the power to vote or direct the vote, and/or sole or shared investment power, including the power to dispose of or direct the disposition of, with respect to the security through any contract, arrangement, understanding, relationship or otherwise, subject to community property laws where applicable. The percentage ownership is based on 30,851,776 shares of common stock outstanding at December 31, 2020 (exclusive of 1,486,526 shares of treasury stock). 

  

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Name/Title  Total Number of Shares   Percentage Ownership 
Hanlin Chen, Chairman (1)   17,849,014    57.85%
Li Ping Xie (1)   17,849,014    57.85%
Wiselink Holdings Limited, “Wiselink” (1)   17,849,014    57.85%
Qizhou Wu, CEO and Director   1,325,136    4.30%
Guangxun Xu, Director   -    -%
Tong Kooi Teo, Director   -    -%
Heng Henry Lu, Director   -    -%
Haimian Cai, VP   -    -%
Jie Li, CFO (2)   91,031    0.30%
Tse Andy, Sr. VP   400,204    1.30%
Yijun Xia, VP   17,200    0.06%
All Directors and Executive Officers (9 persons)   19,682,585    63.80%

   

  (1) These 17,849,014 shares of common stock include: (i) 13,322,547 shares of common stock beneficially owned by Mr. Hanlin Chen; (ii) 1,502,925 shares of common stock beneficially owned by Ms. Liping Xie, Mr. Hanlin Chen’s wife; and (iii) 3,023,542 shares of common stock beneficially owned by Wiselink, a company controlled by Mr. Hanlin Chen.

 

  (2) Includes 50,000 shares held as nominee for Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd. On October 13, 2014, the Company issued 4,078,000 of its common shares in a private placement to nominee holders of Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd. for the acquisition of the 19.0% and 20.0% equity interest in Jiulong and Henglong held by Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd., respectively. All of the nominee holders of Jingzhou Jiulong Machinery and Electronic Manufacturing Co., Ltd. are unrelated parties except for Mr. Jie Li (CFO).

  

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

For the information required by Item 13 please refer to Note 2 (Basis of Presentation and Significant Accounting Policies–Certain Relationships and Related Transactions) and Note 24 (Related Party Transactions) to the consolidated financial statements in this Report.

 

The Company’s Audit Committee’s charter provides that one of its responsibilities is to review and approve related party transactions defined as those transactions required to be disclosed under Item 404 of Regulation S-K of the rules and regulations under the Exchange Act. The Company has a formal written set of policies and procedures for the review, approval or ratification of related party transactions. Where a related party transaction is identified, the Audit Committee reviews and, where appropriate, approves the transaction based on whether it believes that the transaction is at arm’s length and contains terms that are no less favorable than what the Company could have obtained from an unaffiliated third party.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

The following table sets forth the aggregate fees for professional audit services rendered by PricewaterhouseCoopers for the audit of the Company’s annual financial statements and other services provided in the fiscal years 2020 and 2019. The Audit Committee has approved the following fees (figures are in thousands of USD):

 

   Fiscal Year Ended 
   2020   2019 
Audit Fees  $638   $670 
           

  

AUDIT COMMITTEE’S PRE-APPROVAL POLICY

 

During the fiscal years ended December 31, 2020 and 2019, the Audit Committee of the Board of Directors adopted policies and procedures for the pre-approval of all audit and non-audit services to be provided by the Company’s independent auditor and for the prohibition of certain services from being provided by the independent auditor. The Company may not engage the Company’s independent auditor to render any audit or non-audit service unless the service is approved in advance by the Audit Committee or the engagement to render the service is entered into pursuant to the Audit Committee’s pre-approval policies and procedures. On an annual basis, the Audit Committee may pre-approve services that are expected to be provided to the Company by the independent auditor during the fiscal year. At the time such pre-approval is granted, the Audit Committee specifies the pre-approved services and establishes a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy. For any pre-approval, the Audit Committee considers whether such services are consistent with the rules of the Securities and Exchange Commission on auditor independence.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

(a)(1) FINANCIAL STATEMENTS

 

1. Report of Independent Registered Public Accounting Firm, PricewaterhouseCoopers Zhong Tian LLP
   
2. Consolidated Balance Sheets as of December 31, 2020 and 2019
   
3. Consolidated Statements of Income or Loss for the years ended December 31, 2020 and 2019
   
4. Consolidated Statements of Comprehensive Income or Loss for the years ended December 31, 2020 and 2019
   
5. Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019
   
6. Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019
   
7. Notes to Consolidated Financial Statements

 

(b) EXHIBITS

 

The following is a list of exhibits filed as part of this Annual Report on Form 10-K. Where so indicated by footnote, exhibits that were previously filed are incorporated by reference.

  

Exhibit    
Number   Description
     
3.1(i)   Certificate of Incorporation (incorporated by reference to Exhibit 3(i) to the Company's Form 10-SB filed on August 27, 2001)
     
3.1.1(i)   Certificate of Amendment of Certificate of Incorporation, filed May 19, 2003 (incorporated by reference to Exhibit 4.1.1 to the Company’s Registration Statement on Form S-3 (File No. 333-133331) filed on April 17, 2006)
     
3.1(ii)    Bylaws (incorporated by reference to Exhibit 3(ii) to the Company's Form 10-SB filed on August 27, 2001)
     
4.1   Description of the Company’s Securities*
     
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 filed on May 10, 2006)
     
10.2   Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to exhibit 99.1 to the Company’s Form 8-K filed on April 2, 2008) Translation of the Equity Transfer Agreement dated March 31, 2008 in English (incorporated by reference to Exhibit 99.1 of the Company’s Form 8-K filed on April 2, 2008)
     
10.3   English Translation of the Sino-Foreign Equity Joint Venture Contract dated January 24, 2010 between Great Genesis Holdings Limited and Beijing Hainachuan Auto Parts Co., Ltd. (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-K for the year ended December 31, 2010 filed on March 25, 2010)

 

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10.4   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 filed on August 13, 2014)
     
10.5   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)
     
21   Schedule of Subsidiaries (incorporated by reference to Note 1 of the consolidated financial statements of the Company in this Annual Report on Form 10-K)
     
23.1   Consent of PricewaterhouseCoopers Zhong Tian LLP*
     
31.1   Rule 13a-14(a) Certification*
     
31.2   Rule 13a-14(a) Certification*
     
32.1   Section 1350 Certification*
     
32.2   Section 1350 Certification*
     
101*   The following materials from the China Automotive Systems, Inc. Annual Report on Form 10-K for the year ended December 31, 2020, filed on March 30, 2021, formatted in Extensible Business Reporting Language (XBRL):

 

  (i) Consolidated Balance Sheets;

 

  (ii) Consolidated Statements of Income or Loss;

 

  (iii) Consolidated Statements of Comprehensive Income or Loss;

 

  (iv) Consolidated Statements of Changes in Stockholders’ Equity;

 

  (v) Consolidated Statements of Cash Flows; and

 

  (vi) Related notes.

 

* Filed herewith.

  

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ITEM 16. FORM 10-K SUMMARY

 

Not Applicable.

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    CHINA AUTOMOTIVE SYSTEMS, INC.
     
Dated: March 30, 2021   /s/ Qizhou Wu
     
  Name:    Qizhou Wu
     
  Title:    Chief Executive Officer and President

 

POWER OF ATTORNEY

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Qizhou Wu his attorney-in-fact and agent, with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or substitutes, may do or cause to be done by virtue hereof.

 

In accordance with the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.

 

Dated: March 30, 2021   /s/ Hanlin Chen
  Name: Hanlin Chen
  Title: Chairman and Director
     
Dated: March 30, 2021   /s/ Qizhou Wu
  Name: Qizhou Wu
  Title: Chief Executive Officer, President and Director
    (Principal Executive Officer)
     
Dated: March 30, 2021   /s/ Jie Li
  Name: Jie Li
  Title: Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)
     
Dated: March 30, 2021   /s/ Tong Kooi Teo
  Name: Tong Kooi Teo
  Title: Director

 

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Dated: March 30, 2021   /s/ Guangxun Xu
  Name: Guangxun Xu
  Title: Director
     
Dated: March 30, 2021   /s/ Heng Henry Lu
  Name: Heng Henry Lu
  Title: Director

 

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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TO BOARD OF DIRECTORS AND STOCKHOLDERS OF

CHINA AUTOMOTIVE SYSTEMS, INC.

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of China Automotive Systems, Inc. and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of income or loss, of comprehensive income or loss, of changes in stockholders’ equity and of cash flows for the years then ended, including the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

 

Change in Accounting Principles

 

As discussed in Notes 2 and 3 to the consolidated financial statements, the Company changed the manner in which it accounts for current expected credit losses on certain financial instruments in 2020.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

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Critical Audit Matters

 

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

 

Valuation of unlisted investments of limited partnerships

 

As described in Notes 2 and 8 to the consolidated financial statements, as of December 31, 2020, the Company’s long-term investments include investments in limited partnerships with an aggregated amount of $42.4 million which are accounted for using equity method. These limited partnerships are venture capital funds. They accounted for their investments in private companies at fair value classified under Level 3 in the fair value hierarchy (the “Level 3 Investments”). The fair value of the Level 3 Investments were determined using valuation techniques based on market approach or income approach with unobservable inputs, which required significant judgment made by management with respect to the assumptions and estimates for revenue growth rate, discount rate, price-to-earnings ratio, price-to-book ratio, lack of marketability discounts, and expected volatility. Such fair value of Level 3 Investments was reflected in the equity in earnings of affiliated companies of the consolidated statements of income or loss and the carrying amount of the Company’s long-term investments under the equity method accounting.

 

The principal considerations for our determination that performing procedures relating to the valuation of unlisted investments of limited partnerships is a critical audit matter are (i) there was significant judgment made by management to determine the fair value of these investments using valuation techniques with unobservable inputs, which in turn led to a high degree of auditor judgment and subjectivity in designing and applying procedures relating to evaluating the reasonableness of management’s significant assumptions and estimates; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge in evaluating certain audit evidence.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s determination of the fair values of the Level 3 Investments, including controls over the Company’s development of the significant assumptions and estimates related to the fair value measurements. These procedures also included, among others, reading the investment agreements, testing management’s process for determining the fair value measurements of the Level 3 Investments, evaluating the appropriateness of the valuation models, testing the completeness, accuracy, and relevance of underlying data used, and evaluating the reasonableness of significant assumptions and estimates used by management, including the revenue growth rate, discount rate, price-to-earnings ratio, price-to-book ratio, lack of marketability discounts and expected volatility. Evaluating management’s assumptions and estimates for the revenue growth rate involved considering the past performance of the investees’ businesses, as well as economic and industry forecasts. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the Company’s valuation approach and the reasonableness of management’s assumptions and estimates for the discount rate, price-to-earnings ratio, price-to-book ratio, lack of marketability discounts and expected volatility.

 

/s/ PricewaterhouseCoopers Zhong Tian LLP  
Shanghai, the People’s Republic of China  
March 30, 2021  

 

We have served as the Company's auditor since 2010.

 

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China Automotive Systems, Inc. and Subsidiaries

 

Consolidated Balance Sheets

 

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

 

   December 31, 
   2020   2019 
ASSETS        
Current assets:          
Cash and cash equivalents  $97,248   $76,715 
Pledged cash   30,813    29,688 
Short-term investments   10,139    5,832 
Accounts and notes receivable, net - unrelated parties (Allowance for credit losses of $9,853 and $2,379, respectively)   216,519    211,841 
Accounts and notes receivable, net - related parties (Allowance for credit losses of $1 and nil, respectively)   17,621    21,164 
Advance payments and others, net - unrelated parties (Allowance for credit losses of $58 and $73, respectively)   14,471    11,855 
Advance payments and others - related parties   522    1,287 
Inventories   88,325    82,931 
Total current assets   475,658    441,313 
Non-current assets:          
Property, plant and equipment, net   141,004    140,481 
Land use rights, net   10,774    10,346 
Intangible assets, net   1,730    1,352 
Operating lease assets   257    376 
Long-term time deposits   4,688    - 
Other receivables, net (Allowance for credit losses of $58 and $89, respectively)   179    307 
Advance payment for property, plant and equipment - unrelated parties   3,615    6,157 
Advance payment for property, plant and equipment - related parties   3,284    2,311 
Long-term investments   49,766    39,642 
Deferred tax assets   13,846    15,291 
Other non-current assets   2,759    2,580 
Total assets  $707,560   $660,156 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Bank and government loans  $44,238   $46,636 
Accounts and notes payable - unrelated parties   212,522    180,175 
Accounts and notes payable - related parties   12,730    6,492 
Customer deposits   1,482    1,303 
Accrued payroll and related costs   10,213    8,400 
Accrued expenses and other payables   55,607    45,341 
Accrued pension costs   3,192    3,161 
Taxes payable   13,149    11,493 
Operating lease liabilities - current portion   122    116 
Amounts due to shareholders/directors   344    309 
Advances payable (current portion)   885    353 
Total current liabilities   354,484    303,779 
Long-term liabilities:          
Long-term government loan   -    7,167 
Advances payable   3,722    3,486 
Operating lease liabilities - non-current portion   149    271 
Other long-term payable   1,126    4,948 
Deferred tax liabilities   4,280    4,253 
Long-term taxes payable   23,884    26,693 
           
Total liabilities   387,645    350,597 
Commitments and Contingencies (Note 25)          
           
Mezzanine equity:          
Redeemable non-controlling interests   523    - 
           
Stockholders’ Equity          
Common stock, $0.0001 par value - Authorized - 80,000,000 shares Issued - 32,338,302 and 32,338,302 shares at December 31, 2020 and 2019, respectively   3    3 
Additional paid-in capital   64,273    64,466 
Retained earnings-          
Appropriated   11,303    11,265 
Unappropriated   215,491    221,298 
Accumulated other comprehensive income/(loss)   17,413    (3,462)
Treasury stock - 1,486,526 and 1,164,257 shares at December 31, 2020 and 2019, respectively   (5,261)   (4,261)
Total parent company stockholders’ equity   303,222    289,309 
Non-controlling interests   16,170    20,250 
Total stockholders’ equity   319,392    309,559 
Total liabilities, mezzanine equity and stockholders’ equity  $707,560   $660,156 

 

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

 

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China Automotive Systems, Inc. and Subsidiaries

 

Consolidated Statements of Income or Loss

 

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

 

    Year Ended December 31,  
    2020     2019  
Net product sales ($53,222 and $50,740 sold to related parties for the years ended December 31, 2020 and 2019)   $ 417,636     $ 431,427  
Cost of products sold ($23,879 and $23,814 purchased from related parties for the years ended December 31, 2020 and 2019)     362,295       368,076  
Gross profit     55,341       63,351  
Net gain on other sales     4,320       5,067  
Operating expenses:                
Selling expenses     14,506       14,270  
General and administrative expenses     27,581       19,976  
Research and development expenses     25,723       27,986  
Total operating expenses     67,810       62,232  
Operating (loss)/income     (8,149 )     6,186  
Other income, net     2,438       1,957  
Interest expense     (1,592 )     (3,034 )
Financial (expense)/income, net     (4,897 )     2,456  
(Loss)/income before income tax expenses and equity in earnings of affiliated companies     (12,200 )     7,565  
Less: Income taxes     2,163       586  
Add: Equity in earnings of affiliated companies     4,092       1,406  
Net (loss)/income     (10,271 )     8,385  
Net loss attributable to non-controlling interest     (5,300 )     (1,577 )
Accretion to redemption value of redeemable non-controlling interests     (9 )     -  
Net (loss)/income attributable to parent company’s common shareholders     (4,980 )     9,962  
                 
Net (loss)/income attributable to parent company’s common shareholders per share -                
Basic   $ (0.16 )   $ 0.32  
                 
Diluted   $ (0.16 )   $ 0.32  
                 
Weighted average number of common shares outstanding -                
Basic     31,077,196       31,456,828  
Diluted     31,077,196       31,458,926  

 

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

  

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Consolidated Statements of Comprehensive Income or Loss

 

(In thousands of USD unless otherwise indicated)

 

   Year Ended December 31, 
   2020   2019 
Net (loss)/income   (10,271)   8,385 
Other comprehensive loss:          
Foreign currency translation gain/(loss)   22,386    (5,736)
Comprehensive income   12,115    2,649 
Comprehensive loss attributable to non-controlling interest   (3,780)   (1,997)
Comprehensive income attributable to parent company  $15,895   $4,646 

 

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

  

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Consolidated Statements of Changes in Stockholders’ Equity

 

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

 

   2020   2019 
Common Stock          
Balance at January 1, 2020 and 2019 - 32,338,302 and 32,338,302 shares, respectively  $3   $3 
Balance at December 31, 2020 and 2019 - 32,338,302 and 32,338,302 shares, respectively  $3   $3 
           
Additional Paid-in Capital          
Balance at January 1  $64,466   $64,466 
Acquisition of the non-controlling interest in USAI   (29)   - 
Acquisition of the non-controlling interest in Changchun Hualong   (76)   - 
Deemed distribution to shareholders   (88)   - 
Balance at December 31  $64,273   $64,466 
           
Retained Earnings - Appropriated          
Balance at January 1  $11,265   $11,104 
Appropriation of retained earnings   38    161 
Balance at December 31  $11,303   $11,265 
           
Unappropriated          
Balance at January 1  $221,298   $211,497 
Net (loss)/income attributable to parent company   (4,971)   9,962 
Accretion of redeemable non-controlling interests   (9)   - 
Cumulative effect of accounting change - credit loss   (789)   - 
Appropriation of retained earnings   (38)   (161)
Balance at December 31  $215,491   $221,298 
           
Accumulated Other Comprehensive (Loss)/Income          
Balance at January 1  $(3,462)  $1,855 
Net foreign currency translation adjustment attributable to parent company   20,875    (5,317)
Balance at December 31  $17,413   $(3,462)
           
Treasury Stock          
Balance at January 1, 2020 and 2019 - 1,164,257 and 711,698 shares, respectively  $(4,261)  $(2,953)
Repurchase of common stock in 2020 and 2019 - 322,269 shares and 452,559 shares, respectively   (1,000)   (1,308)
Balance at December 31, 2020 and 2019 - 1,486,526 and 1,164,257 shares, respectively  $(5,261)  $(4,261)
           
Total parent company stockholders’ equity  $303,222   $289,309 
           
Non-controlling Interest          
Balance at January 1  $20,250   $19,037 
Net foreign currency translation adjustment attributable to non-controlling interest   1,511    (419)
Net loss attributable to non-controlling interest   (5,300)   (1,577)
Cumulative effect of accounting change - credit loss   (102)   - 
Acquisition of the non-controlling interest in USAI   29    - 
Acquisition of the non-controlling interest in Changchun Hualong   (5)   - 
Contribution by non-controlling shareholder of Wuhu Hongrun   217    - 
Contribution by non-controlling shareholder of Wuhan Hyoseong   -    3,542 
Dividends declared to non-controlling interest holders of non-wholly owned subsidiaries   (430)   (333)
Balance at December 31  $16,170   $20,250 
           
Total stockholders' equity  $319,392   $309,559 

 

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

  

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Consolidated Statements of Cash Flows

 

(In thousands of USD unless otherwise indicated)

   

   Year Ended December 31, 
   2020   2019 
Cash flows from operating activities:          
Net income  $(10,271)  $8,385 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   22,057    17,852 
Deferred income taxes   2,205    16 
Allowance for credit losses   6,238    (441)
Equity in net earnings of affiliates   (4,092)   (1,406)
Loss/(gain) on disposal of fixed assets   129    (632)
Government subsidy reclassified from government loans   287    - 
(Increase)/decrease in:          
Accounts and notes receivable   7,295    21,044 
Advance payments and others   1,176    4,733 
Inventories   (109)   3,992 
Increase/(decrease) in:          
Accounts and notes payable   27,248    (22,138)
Customer deposits   93    561 
Accrued payroll and related costs   1,239    1,115 
Accrued expenses and other payables   7,069    (1,353)
Accrued pension costs   (166)   (96)
Taxes payable   (3,474)   (1,326)
Advances payable   502    - 
Net cash provided by operating activities   57,426    30,306 
           
Cash flows from investing activities:          
Purchase of short-term investments and long-term time deposits   (60,055)   (19,647)
Proceeds from maturities of short-term investments   53,393    31,268 
Decrease in demand loans and employee housing loans included in other receivables   165    1,504 
Loan to a related party   (151)   - 
Cash received from property, plant and equipment sales   1,495    1,561 
Government subsidy received for purchase of property, plant and equipment   -    1,898 
Cash paid to acquire property, plant and equipment and land use rights (including $2,668 and $5,238 paid to related parties for the years ended December 31, 2020 and 2019, respectively)   (15,825)   (34,409)
Cash paid to acquire intangible assets   (741)   (1,505)
Cash received from long-term investment   3,322    579 
Investment under equity method   (5,360)   (6,018)
Cash prepaid for acquisition of a subsidiary   -    (2,560)
Net cash used in by investing activities   (23,757)   (27,329)
           
Cash flows from financing activities:          
Proceeds from bank and government loans   39,813    57,101 
Repayment of bank loans   (53,046)   (65,576)
Payment to broker agents for repurchase of common stock   (2,990)   (1,308)
Repayments of the borrowing for sale and leaseback transaction   (4,163)   (4,164)
Deemed distribution to shareholders   (88)   - 
Acquisition of non-controlling interest   (81)   - 
Dividends paid to the non-controlling interest holders of non-wholly owned subsidiaries   -    (333)
Cash received from capital contributions by non-controlling interest holder   722    3,542 
Net cash used in financing activities   (19,833)   (10,738)
           
Cash and cash equivalents affected by foreign currency   7,822    (1,813)
Net increase/(decrease) in cash and cash equivalents   21,658    (9,574)
Cash, cash equivalents and pledged cash at beginning of year   106,403    115,977 
Cash, cash equivalents and pledged cash at end of year  $128,061   $106,403 

 

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

 

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Consolidated Statements of Cash Flows (continued)

 

(In thousands of USD unless otherwise indicated)

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

   Year Ended December 31, 
   2020   2019 
Cash paid for interest  $2,751   $3,390 
Cash paid for income taxes  $3,229   $4,607 

 

SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:

 

Non-cash investing activities:

 

   Year Ended December 31, 
   2020   2019 
Property, plant and equipment recorded during the year which previously were advance payments  $11,838   $13,964 
Accounts payable for acquiring property, plant and equipment  $2,024   $782 
Accounts receivable in exchange for short-term investments  $223   $- 
Property, plant and equipment and inventories used for investment in an associated company  $-   $492 

 

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

 

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Notes to Consolidated Financial Statements 

 

  1. Organization and Business

 

China Automotive Systems, Inc., “China Automotive,” was incorporated in the State of Delaware on June 29, 1999 under the name of Visions-In-Glass, Inc. China Automotive, including, when the context so requires, its subsidiaries, 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 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.

 

Henglong USA Corporation, “HLUSA,” which was 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 (“R&D”) support.

 

The Company owns interests in the following subsidiaries incorporated in the PRC and Brazil as of December 31, 2020 and 2019.

 

   Percentage Interest 
Name of Entity  December 31,
2020
   December 31,
2019
 
Shashi Jiulong Power Steering Gears Co., Ltd., “Jiulong” 1   100.00%   100.00%
Jingzhou Henglong Automotive Parts Co., Ltd., “Henglong” 2   100.00%   100.00%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “Shenyang” 3   70.00%   70.00%
Universal Sensor Application Inc., “USAI” 4   -    83.34%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong” 5   85.00%   85.00%
Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu” 6   77.33%   77.33%
Hubei Henglong Automotive System Group Co., Ltd., “Hubei Henglong” 7   100.00%   100.00%
Jingzhou Henglong Automotive Technology (Testing) Center, “Testing Center” 8   100.00%   100.00%
Chongqing Henglong Hongyan Automotive System Co., Ltd., “Chongqing Henglong” 9   70.00%   70.00%
CAAS Brazil’s Imports and Trade In Automotive Parts Ltd., “Brazil Henglong” 10   95.84%   95.84%
Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie” 11   85.00%   85.00%
Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong” 12   100.00%   100.00%
Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan” 13   60.00%   60.00%
Hubei Henglong & KYB Automobile Electric Steering System Co., Ltd., “Henglong KYB” 14   66.60%   66.60%
Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd., “Wuhan Hyoseong” 15   51.00%   51.00%
Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun” 16   62.00%   100.00%
Changchun Hualong Automotive Technology Co., Ltd., “Changchun Hualong” 17   100.00%   - 

  

1. Jiulong was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.

 

2. Henglong was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.

 

3. Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.

 

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4. USAI was established in 2005 and mainly engages in the production and sales of sensor modules. It was merged with Wuhan Chuguanjie in May 2020.

 

5. Jielong was established in 2006 and mainly engages in the production and sales of automobile steering columns.

 

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

  

7. On March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its name to Hubei Henglong Automotive System Group Co., Ltd.

 

8. In December 2009, Henglong, a subsidiary of Genesis, formed the Testing Center, which mainly engages in the research and development of new products.

 

9. On February 21, 2012, Hubei Henglong and SAIC-IVECO Hongyan Company, “SAIC-IVECO,” established a Sino-foreign joint venture company, Chongqing Henglong, to design, develop and manufacture both hydraulic and electric power steering systems and parts.

 

10. On August 21, 2012, Brazil Henglong was established as a Sino-foreign joint venture company by Hubei Henglong and two Brazilian citizens, Ozias Gaia Da Silva and Ademir Dal’ Evedove. Brazil Henglong engages mainly in the import and sales of automotive parts in Brazil. In May 2017, the Company obtained an additional 15.84% equity interest in Brazil Henglong for nil consideration. The Company retained its controlling interest in Brazil Henglong and the acquisition of the non-controlling interest was accounted for as an equity transaction.

 

11. In May 2014, together with Hubei Wanlong, Jielong formed a subsidiary, Wuhan Chuguanjie Automotive Science and Technology Ltd., “Wuhan Chuguanjie”, which mainly engages in research and development, manufacture and sales of automobile electronic systems and parts. Wuhan Chuguanjie is located in Wuhan, China.

 

12. In January 2015, Hubei Henglong formed Hubei Henglong Group Shanghai Automotive Electronics Research and Development Ltd., “Shanghai Henglong”, which mainly engages in the design and sale of automotive electronics.

 

13. In November 2017, Hubei Henglong formed Jingzhou Qingyan Intelligent Automotive Technology Research Institute Co., Ltd., “Jingzhou Qingyan”, which mainly engages in the research and development of intelligent automotive technology.

 

14. In August 2018, Hubei Henglong and KYB (China) Investment Co., Ltd. (“KYB”) established Hubei Henglong KYB Automobile Electric Steering System Co., Ltd. (“Henglong KYB”), which mainly engages in design, manufacture, sales and after-sales service of automobile electronic systems. Hubei Henglong owns 66.6% of the shares of this entity and has consolidated it since its establishment.

 

15. In March 2019, Hubei Henglong and Hyoseong Electric Co., Ltd. established Hyoseong (Wuhan) Motion Mechatronics System Co., Ltd. (“Wuhan Hyoseong”), which mainly engages in the design, manufacture and sales of automotive motors and electromechanical integrated systems. Hubei Henglong owns 51.0% of the shares of Wuhan Hyoseong and has consolidated it since its establishment.

 

16. In December 2019, Hubei Henglong formed Wuhu Hongrun New Material Co., Ltd., “Wuhu Hongrun”, which mainly engages in the development, manufacturing and sale of high polymer materials. Hubei Henglong owns 62.0% of the shares of Wuhu Hongrun and has consolidated it since its establishment.

 

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

 

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2. Basis of Presentation and Significant Accounting Policies

 

Basis of Presentation - For the years ended December 31, 2020 and 2019, the consolidated financial statements include the accounts of the Company and its subsidiaries, which are described in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

 

Shenyang was formed in 2002, with 70% owned and controlled by the Company, and 30% owned by Shenyang Automotive Industry Investment Corporation, “JB Investment.” The highest authority of Shenyang is its board of directors, which is comprised of seven directors, four of whom, 57%, are appointed by the Company, and three of whom, 43%, are appointed by JB Investment. As for day-to-day operating matters, approval by more than two-thirds of the members of such board of directors, 67%, is required. The chairman of such board of directors is appointed by the Company. In March 2003, the Company and Jinbei entered into an act-in-concert agreement, under which the directors appointed by Jinbei agree to act in concert with the directors appointed by the Company. As a result, the Company obtained control of Shenyang in March 2003. The general manager of Shenyang is appointed by the Company.

  

Jielong was formed in April 2006. As at December 31, 2020, 85% of Jielong was owned by the Company, and 15% of Jielong was owned by Hubei Wanlong. The highest authority of Jielong is its board of directors, which is comprised of three directors, two of whom, 67%, are appointed by the Company, and one of whom, 33%, is appointed by Hubei Wanlong. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is required. Both the chairman of such board of directors and the general manager of Jielong are appointed by the Company.

 

Wuhu was formed in May 2006, with 77.33% owned by the Company, and 22.67% owned by Wuhu Chery Technology Co., Ltd., “Chery Technology.” The highest authority of Wuhu is its board of directors, which is comprised of five directors, three of whom, 60%, are appointed by the Company, and two of whom, 40%, are appointed by Chery Technology. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is required. The directors of the Company and Chery Technology executed an “Act in Concert” agreement, resulting in the Company having voting control in Wuhu. The chairman of such board of directors is appointed by the Company. The general manager of Wuhu is appointed by the Company.

  

Chongqing Henglong was formed in 2012, with 70% owned by the Company and 30% owned by SAIC-IVECO. The highest authority of the Chongqing Henglong is its board of directors, which is comprised of five directors, three of whom, 60%, are appointed by the Company, and two of whom, 40%, are appointed by SAIC-IVECO. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is required. In February 2012, the Company and SAIC-IVECO entered into an “Act in Concert” agreement. According to the agreement, the directors appointed by SAIC-IVECO agreed to execute the “Act in Concert” agreement with the directors designated by the Company, resulting in the Company having voting control of Chongqing Henglong. The chairman of such board of directors and the general manager of Chongqing Henglong are both appointed by the Company.

 

Brazil Henglong was formed in 2012, with 80% owned by the Company and 20% owned by Mr. Ozias Gaia Da Silva and Mr. Ademir Dal’ Evedove. 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. After the acquisition, the Company owns 95.84% of Brazil Henglong’s shares. The highest authority of Brazil Henglong is its board of directors. In making operational decision, approval by voting rights representing at least 3/4 of the capital, 75%, is required and 95.84% of voting rights were owned by the Company. The chairman of such board of directors is appointed by the Company. The general manager is Mr. Ozias Gaia Da Silva.

 

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Wuhan Chuguanjie was formed in 2014, with 85% owned by the Company and 15% owned by Hubei Wanlong. The highest authority of Wuhan Chuguanjie is its board of directors, which is comprised of three directors, two of whom, 67%, are appointed by the Company, and one of whom, 33%, is appointed by Hubei Wanlong. As for day-to-day operating matters, approval by at least two-thirds of the members of such board of directors is required. Both of the chairman of such board of directors and the general manager of Chuguanjie are appointed by the Company.

 

Jingzhou Qingyan was formed in 2017, with 60% owned by the Company and 40% owned by the other two parties. Hubei Honglong owns 60% of the shares of Jingzhou Qingyan and the remaining shares were owned by the other two parties. The highest authority of Jingzhou Qingyan is its board of directors, which is comprised of five directors, three of whom are appointed by the Company, and two of whom were appointed by the other two parties. As for day-to-day operating matters, approval by at least three-fifths of the members of such board of directors is required. Both of the chairman of the board of directors and the general manager are appointed by the Company.

  

Henglong KYB was formed in 2018, with 66.60% owned by the Company and 33.40% owned by KYB. The highest authority of Henglong KYB is its board of directors, which is comprised of five directors, three of whom are appointed by the Company, and two of whom are appointed by KYB. As for day-to-day operating matters, approval by at least three-fifths of the members of such board of directors is required. The chairman of such board of directors is appointed by the Company and the general manager is appointed by KYB.

 

Wuhan Hyoseong was formed in 2019, with 51% owned by the Company and 49% owned by Hyoseong. The highest authority of Wuhan Hyoseong is its board of directors, which is comprised of five directors, three of whom are appointed by the Company, and two of whom are appointed by Hyoseong. As for day-to-day operating matters, approval by at least three-fifths of the members of such board of directors is required. The chairman of such board of directors is appointed by the Company and the vice chairman is appointed by Wuhan Hyoseong.

 

Wuhu Hongrun was formed in 2019, with 62% owned by the Company and 38% owned by the other two parties. The highest authority of Wuhu Hongrun is its board of directors, which is comprised of five directors. The directors are elected by the general meeting of shareholders. As for day-to-day operating matters, approval by at least three-fifths of the members of such board of directors is required. The chairman and the general management are appointed by the board of directors.

 

Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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. The Company is of the opinion that the significant estimates related to valuation of long term assets and investment, the realizable value of accounts receivable and inventories, the accrual of warranty obligations and the recoverability of deferred tax assets. Actual results could differ from those estimates.

 

Cash and Cash Equivalents - Cash and cash equivalents include all highly-liquid investments with an original maturity of three months or less at the date of purchase.

   

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Pledged Cash - Pledged as collateral for the Company's notes payable and restricted to use. The Company regularly pays some of its suppliers by bank notes. The Company has to deposit a cash deposit, equivalent to 30%-100% of the face value of the relevant bank note, in order to obtain the bank note. 

 

Short-term Investments - Short-term investments are comprised of time deposits with original terms of three months to one year and wealth management financial products maturing within one year. The carrying values of time deposits approximate fair value because of their short-term maturities. The interest earned is recognized in the consolidated statements of income or loss over the contractual term of the deposits. The wealth management financial products are measured at fair value and classified as Level 3 within the fair value measurement hierarchy. Changes in the fair value are reflected in other income in the consolidated statements of income or loss.

 

Current Expected Credit Losses - In 2016, the FASB issued ASU No. 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASC Topic 326”), which amends previously issued guidance regarding the impairment of financial instruments by creating an impairment model that is based on expected losses rather than incurred losses. The Company adopted this ASC Topic 326 and several associated ASUs on January 1, 2020 using a modified retrospective approach with a cumulative effect recorded as reduction of beginning retained earnings with amount of $0.8 million. As of January 1, 2020, the Company’s accounts and notes receivable, advance payments and other receivables are within the scope of ASC Topic 326. The Company has identified the relevant risk characteristics of its customers and the related receivables, advance payments, and other receivables which include type of the products the Company provides, nature of the customers or a combination of these characteristics. Receivables with similar risk characteristics have been grouped into pools. For each pool, the Company considers the historical credit loss experience, current economic conditions, supportable forecasts of future economic conditions, and any recoveries in assessing the lifetime expected credit losses. Other key factors that influence the expected credit loss analysis include customer demographics, payment terms offered in the normal course of business to customers, and industry-specific factors that could impact the Company’s receivables. Additionally, external data and macroeconomic factors are also considered.

 

For the year ended December 31, 2020, the Company recorded $6.3 million expected credit loss expense in general and administrative expenses. As of December 31, 2020, the expected credit loss provision for the current and non-current assets were $9.4 million and $0.1 million, respectively.

 

Inventories - Inventories are stated at the lower of cost and net realizable value. Cost is calculated on the moving-average basis and includes all costs to acquire and other costs to bring the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed moving-average cost if it exceeds the net realizable value.

 

Advance Payments - These amounts represent advances to acquire various assets to be utilized in the future in the Company’s normal business operations, such as machine equipment, raw materials and technology. Such amounts are paid according to their respective contract terms. Advance payment for machinery and equipment is classified as advance payment for property, plant and equipment in the consolidated balance sheet and advance payment of raw materials and technology are classified as advance payments and others in the consolidated balance sheet. 

 

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Property, Plant and Equipment – Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized; minor replacements and maintenance and repairs are charged to operations. Depreciation is calculated on the straight-line method over the estimated useful lives of the respective assets as follows:

 

Category   Estimated Useful Life (Years)
Buildings   25
Machinery and equipment   6
Electronic equipment   4
Motor vehicles   8

 

Land use rights – Land use rights represent acquisition costs to purchase land use rights from the PRC government, which are evidenced by property certificates. The periods of these purchased land use rights are either 45 years or 50 years. The Company classifies land use rights as long-term assets on the balance sheet and cash outflows related to acquisition of land use rights as investing activities.

 

Land use rights are carried at cost less accumulated amortization and impairment losses, if any. Amortization is computed using the straight-line method over the term specified in the land use right certificate for 45 years or 50 years, as applicable. Amortization expenses of land use rights were $0.2 million and $0.2 million for the years ended December 31, 2020 and 2019, respectively.

 

As of December 31, 2020 and 2019, the Company had pledged land use rights with a net book value of approximately $5.7 million and $5.5 million, respectively, as security for its comprehensive credit facilities with banks in China.

 

Construction in Progress – Construction in progress, which represents buildings under construction and plant and equipment pending installation, are stated at cost. Cost includes construction and acquisitions, and interest charges arising from borrowings used to finance assets during the period of construction or installation and testing. No provision for depreciation is made on assets under construction until such time as the relevant assets are completed and ready for their intended commercial use.

 

Gains or losses on disposal of property, plant and equipment are determined as the difference between the net disposal proceeds and the carrying amount of the relevant asset, and are recognized in the consolidated statements of income or loss on the date of disposal.

 

Interest Costs Capitalized - Interest costs incurred in connection with borrowings for the acquisition, construction or installation of property, plant and equipment are capitalized and depreciated as part of the asset’s total cost when the respective asset is placed into service. Interest costs capitalized for the years ended December 31, 2020 and 2019, were $0.9 million and $0.7 million, respectively.

  

Intangible Assets - Intangible assets, representing patents and technical know-how acquired, are stated at cost less accumulated amortization and impairment losses. Amortization is calculated on the straight-line method over the estimated useful life of 5 to 15 years.

 

Long-Lived Assets - The Company has adopted the provisions of ASC Topic 360, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Property, plant and equipment and definite life intangible assets are reviewed periodically for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If required, an impairment loss is recognized as the difference between the carrying value and the fair value of the assets.

  

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In assessing long-lived assets for impairment, management considered the Company’s product line portfolio, customers and related commercial agreements, and other factors in grouping assets and liabilities at the lowest level for which identifiable cash flows are largely independent. The Company considers projected future undiscounted cash flows, trends and other factors in its assessment of whether impairment conditions exist. Whilst the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such factors as future automotive production volumes, customer pricing, economics and productivity and cost saving initiatives, could significantly affect its estimates. In determining fair value of long-lived assets, management uses appraisals, management estimates or discounted cash flow calculations.

  

Long-term Investments – The Company’s long-term investments include investments in corporations and investments in limited partnerships. Investments in corporations which the Company has the ability to exert significant influence are accounted for using the equity method. Investments in limited partnerships which the Company has more than virtually no influence are accounted for using the equity method. The limited partnerships accounted for its investments at fair value that were classified under Level 1 for their investees whose shares were listed and actively traded on stock exchange, or Level 3 for the investees that were private companies, in the fair value hierarchy. The fair value of the limited partnerships’ Level 3 investments were determined using valuation techniques based on market approach or income approach with unobservable inputs, which required significant judgment made by management with respect to the assumptions and estimates for revenue growth rate, discount rate, price-to-earnings ratio, price-to-book ratio, lack of marketability discounts, and expected volatility. Such fair value of the limited partnerships’ Level 3 investments was reflected in the equity in earnings of affiliated companies of the consolidated statements of income or loss and the carrying amount of the Company’s long-term investments under the equity method accounting.

 

The Company continually reviews its investment to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value and the financial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fair value, including general market conditions, industry-specific or investee-specific reasons, changes in valuation subsequent to the balance sheet date and the Company’s intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the security is written down to fair value. There were no impairment losses for its long-term investment in the years ended December 31, 2020 and 2019.

 

Revenue Recognition - The Company has adopted ASC Topic 606 “Revenue from Contracts with Customers”. Products sales to customers are made pursuant to master agreements entered into between the Company and its customers that provide for transfer of both title and risk of loss upon the Company’s delivery to the location specified in the contracts. The Company’s sales arrangements generally do not contain variable considerations and are short-term in nature. A period of credit term is granted to the customers after the delivery and before making payment. The Company recognizes revenue at a point in time based on management’s evaluation of when the customer obtains control of the products. Revenue is recognized when all performance obligations under the terms of a contract with the customer are satisfied and control of the product has been transferred to the customer. Sales of goods do not include multiple product and/or service elements. 

  

Revenue is measured as the amount of consideration management expects the Company to receive in exchange for transferring goods pursuant to the contracts. Value-added tax that the Company collects concurrent with revenue-producing activities is excluded from revenue. Incidental contract costs that are not material in the context of the delivery of goods and services are recognized as expense.

 

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At the time revenue is recognized, allowances are recorded, with the related reduction to revenue, for estimated price discounts based upon historical experience and related terms of customer arrangements. Where the Company has offered product warranties, the Company also establishes liabilities for estimated warranty costs based upon historical experience and specific warranty provisions. Warranty liabilities are adjusted when experience indicates the expected outcome will differ from initial estimates of the liability.

 

The Company accounts for shipping and handling fees as a fulfillment cost since control of the products is usually transferred to the customer after the delivery.

 

Revenue Disaggregation

 

Revenue disaggregation under the segment reporting standard is measured on the same basis as under the revenue standard. Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard, and does not repeat the disaggregation of revenue under both standards.

 

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.

 

Customer Deposits

 

As of December 31, 2020 and 2019, the Company has customer deposits of $1.5 million and $1.3 million, respectively. During the year ended December 31, 2020, $3.1 million was received and $2.9 million (including $1.3 million from the beginning balance of customer deposits) was recognized as net product sales revenue. During the year ended December 31, 2019, $2.0 million was received and $1.5 million (including $0.8 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.

 

Practical Expedient and Exemptions

 

The Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

  

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The Company does not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers promised goods to the customers and when the customers pay for the goods will be less than one year.

 

Government Subsidies - The Company’s PRC based subsidiaries received government subsidies according to related policy from local government. For the subsidies for which the Chinese government has specified their purpose, such as product development and renewal of production facilities, the Company recorded specific purpose subsidies as advances payable when received. Upon government acceptance of the related project development or assets acquisition, the specific purpose subsidies are recognized to reduce related R&D expenses or cost of acquired assets. The Company recognized the subsidies that do not have specific purpose as other income upon receipt. 

 

Sales Taxes - The Company is subject to value added tax, “VAT.” The applicable VAT tax rate is 13% for products sold in the PRC. Products exported overseas are exempted from VAT. The amount of VAT liability is determined by applying the applicable tax rate to the invoiced amount of goods sold less VAT paid on purchases made with the relevant supporting invoices. VAT is collected from customers by the Company on behalf of the PRC tax authorities and is therefore not charged to the consolidated statements of income or loss.

 

Uncertain Tax Positions - In order to assess uncertain tax positions, the Company applies a more likely than not threshold and a two-step approach for tax position measurement and financial statement recognition. For the two-step approach, the first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon settlement. As of December 31, 2020 and 2019, the Company has no uncertain tax positions.

 

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

 

For the years ended December 31, 2020 and 2019, the warranties activities were as follows (figures are in thousands of USD):

 

    Year Ended December 31,  
    2020     2019  
Balance at the beginning of year   $ 32,907     $ 31,085  
Additions during the year     17,801       18,991  
Settlement within the year     (16,859 )     (16,670 )
Foreign currency translation loss/(gain)     2,366       (499 )
Balance at end of year   $ 36,215     $ 32,907  

  

Pension - Most of the operations and employees of the Company are located in China. The Company records pension costs and various employment benefits in accordance with the relevant Chinese social security laws, which is approximately at a total of 30% and 34% of base salary for the years ended December 31, 2020 and 2019, respectively. Base salary levels are the average salary determined by the local governments. For employees in overseas countries (mainly U.S. and Brazil), the Company records pension costs and various em