Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Act.
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.
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).
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.
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The aggregate market value of voting and
non-voting common equity held by non-affiliates of the registrant as of June 30, 2018, based upon the price of $4.32 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 $51.4 million.
The Company has 31,497,723 shares of Common
Stock outstanding as of March 28, 2019.
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.
PART I
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 nine Sino-joint ventures and five 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 support accordingly.
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, 2018.
China Automotive Systems, Inc. [NASDAQ:CAAS]
|
|
↓100%
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|
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|
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↓100%
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Great Genesis Holdings Limited
|
|
|
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Henglong USA Corporation
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↓
|
|
|
|
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↓100%
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|
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↓70%
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Hubei
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|
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Shenyang
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Henglong
|
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|
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Jinbei
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Automotive
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Henglong
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System Group
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Automotive
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Co., Ltd.
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Steering System
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Co., Ltd
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"Hubei
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Henglong"
1
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"Shenyang"
2
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↓
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↓100%
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↓100%
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↓83.34%
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↓77.33%
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↓85%
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↓70%
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↓95.84%
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↓100%
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↓60%
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↓66.60%
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Jingzhou
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Shashi
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Universal
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Wuhu
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Wuhan
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Chongqing
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CAAS
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Hubei
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Jingzhou
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Hubei
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Henglong
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Jiulong
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Sensor
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Henglong
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Jielong
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Henglong
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Brazil's
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Henglong
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Qingyan
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Henglong
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Automotive
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Power
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Application
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Automotive
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Electric
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Hongyan
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Imports And
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Group
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Intelligent
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& KYB
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Parts
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Steering
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,Inc.
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Steering
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Power
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Automotive
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Trade In
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Shanghai
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Automotive
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Automobile
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Co., Ltd.
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Gears
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System Co.,
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Steering Co.,
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System Co.,
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Automotive
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Automotive
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Technology
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Electric
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Co., Ltd.
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Ltd.
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Ltd.
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Ltd.
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Parts Ltd.,
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Electronics
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Research
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Steering
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Research and
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Institute
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System
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Development
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Co., Ltd.
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Co., Ltd.,
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Ltd.,
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"Chongqing
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"Brazil
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“Shanghai
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“Jingzhou
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“Henglong
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"Henglong"
3
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"Jiulong"
4
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"USAI"
5
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"Wuhu"
6
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"Jielong"
7
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Henglong"
8
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Henglong"
9
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Henglong”
12
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Qingyan”
13
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KYB”
14
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↓
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↓
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↓100%
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↓85%
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Jingzhou
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Wuhan
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Henglong
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Chuguanjie
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Automotive
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Automotive
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Technology
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Science and
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(Testing)
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Technology
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Center
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Ltd.,
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"Testing
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"Wuhan
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Center"
10
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Chuguanjie"
11
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1.
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On
March 7, 2007, Genesis established Hubei Henglong, formerly known as Jingzhou Hengsheng Automotive System Co., Ltd., its wholly-owned
subsidiary, to engage in the production and sales of automotive steering systems. On July 8, 2012, Hubei Henglong changed its
name to Hubei Henglong Automotive System Group Co., Ltd.
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2.
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Shenyang
was established in 2002 and focuses on power steering parts for light duty vehicles.
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3.
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Henglong
was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light-duty vehicles.
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4.
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Jiulong
was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles.
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5.
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USAI
was established in 2005 and mainly engages in the production and sales of sensor modules.
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6.
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Wuhu
was established in 2006 and mainly engages in the production and sales of automobile steering systems.
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7.
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Jielong
was established in 2006 and mainly engages in the production and sales of automobile steering columns.
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8.
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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.
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9.
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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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10.
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Testing
Center was established in 2009 and mainly engages in the research and development of new products.
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11.
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In
May 2014, 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.
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12.
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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.
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13.
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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.
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14.
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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.
|
The Company has business relationships
with more than sixty vehicle manufacturers, including FAW Group and Dongfeng Auto Group Co., Ltd., 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), Volkswagen, 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.
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.
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.
|
CUSTOMERS
The Company’s five largest customers
represented 39.3% of the Company’s total sales for the year ended December 31, 2018. The following table sets forth information
regarding the Company’s five largest customers.
|
|
Percentage of Total
|
|
Name of Major Customers
|
|
Revenue in 2018
|
|
Fiat Chrysler North America
|
|
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18.6
|
%
|
Beiqi Foton
|
|
|
6.1
|
%
|
Chery Automobile Co Ltd.
|
|
|
5.2
|
%
|
Ford Motor Company
|
|
|
4.8
|
%
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Dongfeng Auto Group Co., Ltd.
|
|
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4.6
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%
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Total
|
|
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39.3
|
%
|
The Company primarily sells its products
to the above-mentioned 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 130 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 represent more effectively 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.
EMPLOYEES AND FACILITIES
As of
December 31, 2018, the Company employed approximately 4,711 persons, including approximately:
|
·
|
1,446
by Henglong (including Testing Center formed by Henglong) ;
|
|
·
|
55
by Wuhan Chuguanjie;
|
|
·
|
1,036
by Hubei Henglong;
|
|
·
|
153
by Chongqing Henglong;
|
|
·
|
13
by Brazil Henglong; and
|
|
·
|
49
by Shanghai Henglong;
|
As of December 31, 2018, 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, 177,747 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 8.2 million units and
6.1 million units in 2018 and 2017, 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
$104.7 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.
The Company’s purchases from its
ten largest suppliers represented in the aggregate 22.5% of all components and raw materials it purchased for the year ended December
31, 2018, 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
234, including 43 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 $31.7 million and $33.5 million for
the years ended December 31, 2018 and 2017, respectively. In 2018 and 2017, the sales of such newly developed products accounted
for about 27.6% and 22.0%, 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.
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 2018 was 23.5
million and 23.7 million units respectively, a decrease of 5.2% and 4.1% compared to 2017. The output and sales volume of commercial
vehicles in 2018 was 4.3 million and 4.4 million units, respectively, an increase of 1.7% and 5.1% compared to 2017. In 2018, the
Company’s sales of steering gears for passenger vehicles decreased by 9.7% and commercial vehicles increased by 9.2%, compared
to 2017 in China.
CAAM expects that sales volume of vehicles
in China will be consistent with 2018 in 2019.
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, 2018
and 2017, 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 33, “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
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
|
71.5
|
%
|
|
|
76.8
|
%
|
|
|
99.3
|
%
|
|
|
99.2
|
%
|
United States
|
|
|
22.8
|
|
|
|
16.9
|
|
|
|
0.4
|
|
|
|
0.5
|
|
Other foreign countries
|
|
|
5.7
|
|
|
|
6.3
|
|
|
|
0.3
|
|
|
|
0.3
|
|
Total consolidated
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
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.
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 and 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.
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 and 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:
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price/cost
competitiveness;
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system
and product performance;
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reliability
and timeliness of delivery;
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new
product and technology development capability;
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excellence
and flexibility in operations;
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degree
of global and local presence;
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effectiveness
of customer service; and
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overall
management capability.
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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.
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, 2018,
approximately 18.6%, 6.1%, 5.2%, 4.8% and 4.6% of the Company’s sales were to Fiat Chrysler North America, Beiqi Foton,
Chery Automobile Co Ltd., Ford Motor Company and Dongfeng Auto Group Co Ltd., the Company’s five largest
customers in 2018, respectively. In total, these five largest customers accounted for 39.3% of total sales in 2018. For the
year ended December 31, 2017, approximately 14.3%, 6.3%, 6.1%, 5.1% and 5.0% of the Company’s sales were to Fiat
Chrysler North America, Beiqi Foton, Dongfeng Auto Group Co., Ltd., SAIC Motor and Zhejiang Geely Holding Group, the
Company’s five largest customers in 2017, respectively. In total, these five largest customers accounted for 36.8% of
total sales in 2017. 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.
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.
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 planned schedule for recall activities was due on December 31, 2018. Chongqing Changan currently is preparing documents for
reporting to AQSIQ in order to close the case.
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 planned schedule for recall activities was due on December 31, 2018. Jiangxi Changhe currently is preparing
documents for reporting to AQSIQ in order to close the case.
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.
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
62.4
% of its outstanding common stock and may have conflicts of interest with the Company’s minority
stockholders.
As of December 31, 2018, members of the
Company’s management beneficially own approximately 62.4% 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, 2018, approximately 37.6% 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, 2018, the closing price for the Company’s
common stock was $2.44. 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.
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.
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 violate 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.
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.
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.
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.
The Company’s net sales outside of China increased from $87.7 million in 2017 to $141.4 million in 2018. 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 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.
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”. Between July 2005 to December
2018, the exchange rate between the RMB and the U.S. dollar appreciated from RMB1.00 to $0.1205 to RMB1.00 to $0.1454. Any significant
appreciation of the RMB is likely to decrease the income of export products and the cash flow of the Company.
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 and twelve 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, 2018, 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.
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 its earnings to finance the development and execution of its strategy and the expansion of its business.
Registered public accounting firms
in China, including the Company’s independent registered public accounting firm, are not inspected by the U.S. Public Company
Accounting Oversight Board, which deprives the Company and its investors of the benefits of such inspection.
Auditors of companies whose shares are
registered with the U.S. Securities and Exchange Commission and traded publicly in the United States, including the Company’s
independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board, the
“PCAOB,” and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their
compliance with the laws of the United States and professional standards applicable to auditors. The Company’s independent
registered public accounting firm is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB,
notwithstanding the requirements of U.S. law, is currently unable to conduct inspections without the approval of the Chinese authorities,
which approval has not been granted for auditors such as the Company’s independent registered public accounting firm. This
lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of the Company’s
independent registered public accounting firm. As a result, the Company and investors in its common stock 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 the Company’s independent registered public
accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject
to PCAOB inspections, which could cause investors and potential investors in the Company’s stock to lose confidence in its
audit procedures and reported financial information and the quality of its financial statements.
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.
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.
In the event that the Chinese affiliates
of the “big four” become subject to additional legal challenges by the SEC or the PCAOB, depending upon the final outcome,
listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect
of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements
of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these
audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our common stock
may be adversely affected.
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.
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.).
ITEM 1B.
|
UNRESOLVED STAFF COMMENTS.
|
Not Applicable.
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
|
|
|
$
|
55,438
|
|
|
Jingzhou City, Hubei Province
|
|
|
|
|
|
13,393
|
|
|
|
13,707
|
|
|
$
|
-
|
|
|
Wuhan City, Hubei Province
|
Jiulong
|
|
Power Steering Gear
|
|
|
39,478
|
|
|
|
23,728
|
|
|
$
|
35,690
|
|
|
Jingzhou City, Hubei Province
|
Shenyang
|
|
Automotive Steering Gear
|
|
|
35,354
|
|
|
|
10,425
|
|
|
$
|
6,169
|
|
|
Shenyang City, Liaoning Province
|
Chongqing
|
|
Power Steering Gear
|
|
|
57,849
|
|
|
|
10,413
|
|
|
$
|
2,431
|
|
|
Chongqing City
|
Jielong
(1)
|
|
Electric Power Steering
|
|
|
-
|
|
|
|
-
|
|
|
$
|
4,813
|
|
|
Jingzhou City, Hubei Province
|
Wuhan Chuguanjie
|
|
Electric Power Steering
|
|
|
53,675
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Wuhan City, Hubei Province
|
USAI
(1)
|
|
Sensor Modular
|
|
|
-
|
|
|
|
-
|
|
|
$
|
1,021
|
|
|
Wuhan City, Hubei Province
|
Hubei Henglong
|
|
Automotive Steering Gear
|
|
|
177,747
|
|
|
|
65,749
|
|
|
$
|
17,438
|
|
|
Jingzhou City, Hubei Province
|
Wuhu
|
|
Automotive Steering Gear
|
|
|
83,705
|
|
|
|
27,288
|
|
|
$
|
4,610
|
|
|
Wuhu City, Anhui Province
|
Total
|
|
|
|
|
559,019
|
|
|
|
171,536
|
|
|
$
|
127,610
|
|
|
|
|
(1)
|
Jielong and USAI do not own land use rights or buildings
by themselves. They rent buildings from Jiulong and Henglong, 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.
ITEM 3.
|
LEGAL PROCEEDINGS.
|
On September 17, 2018, two purported stockholders
of the Company filed a complaint under 8 Del. C. § 211, seeking a court order requiring the Company to hold a 2018 annual
meeting of its stockholders. On September 27, 2018, the Company issued a press release announcing an annual stockholders meeting
set for December 5, 2018. On October 8, 2018, the Company moved to dismiss the complaint for failure to state a claim. On October
10, 2018, the Company filed its annual proxy statement on Schedule 14A with the Securities and Exchange Commission relating to
its December 5, 2018 annual meeting, which was held as scheduled. The case has been dismissed voluntarily.
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, Arthur Wong, Guangxun Xu and Robert Tung, 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. Management expects the
impact of the suit on the Company’s consolidated financial statements to be immaterial.
Other than as described above, (a) the
Company is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and (b)
no director, officer or affiliate of the Company, or owner of record of more than five percent of the securities of the Company,
or any associate of any such director, officer or security holder is a party adverse to the Company or has a material interest
adverse to the Company in reference to pending litigation.
ITEM 4.
|
MINE SAFETY DISCLOSURES.
|
Not applicable.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral
part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements
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 support accordingly.
The Company owns interests in the following subsidiaries incorporated
in the PRC and Brazil as of December 31, 2018 and 2017.
|
|
Aggregate Net Interest
|
|
Name of Entity
|
|
2018
|
|
|
2017
|
|
Jingzhou Henglong Automotive Parts Co., Ltd., “
Henglong
”
1
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Shashi Jiulong Power Steering Gears Co., Ltd., “
Jiulong
”
2
|
|
|
100.00
|
%
|
|
|
100.00
|
%
|
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., “
Shenyang
”
3
|
|
|
70.00
|
%
|
|
|
70.00
|
%
|
Universal Sensor Application Inc, “
USAI
”
4
|
|
|
83.34
|
%
|
|
|
83.34
|
%
|
Wuhu Henglong Auto Steering System Co., Ltd., “
Wuhu
”
5
|
|
|
77.33
|
%
|
|
|
77.33
|
%
|
Wuhan Jielong Electric Power Steering Co., Ltd., “
Jielong
”
6
|
|
|
85.00
|
%
|
|
|
85.00
|
%
|
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
|
%
|
|
|
-
|
|
|
1.
|
Henglong
was established in 1997 and mainly engages in the production of rack and pinion power steering gears for cars and light duty vehicles.
|
|
2.
|
Jiulong
was established in 1993 and mainly engages in the production of integral power steering gears for heavy-duty vehicles
|
|
3.
|
Shenyang
was established in 2002 and focuses on power steering parts for light duty vehicles.
|
|
4.
|
USAI
was established in 2005 and mainly engages in the production and sales of sensor modules.
|
|
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
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 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 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.
|
|
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.
|
|
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.
|
|
2.
|
Basis
of Presentation and Significant Accounting Policies
|
Basis of Presentation - For the years ended
December 31, 2018 and 2017, 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 the 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.
USAI was formed in 2005. At December 31,
2018, 83.34% of USAI was owned by the Company, and 16.66% of USAI was owned by Hubei Wanlong Investment Inc., “Hubei Wanlong.”
The highest authority USAI is its board of directors, which is comprised of three directors, two of whom, 67%, are appointed by
the Company, 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. The chairman of such board of directors is appointed by the Company.
The general manager of USAI is appointed by the Company.
Jielong was formed in April 2006. As at
December 31, 2018, 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 signed 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. 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.
In 2014, Jielong formed a subsidiary, Wuhan
Chuguanjie, 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.
In November 2017, Hubei Henglong and other
two parties established Jingzhou Qingyan. 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.
In August 2018, Hubei Henglong and KYB
established Henglong KYB. Hubei Honglong owns 66.6% of the shares of Henglong KYB and the remaining shares are 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.
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.
Pledged Cash
- Pledged as guarantee
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 40%-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 terms of three months or more which are due within one year and wealth management
financial products with maturities within one year. The carrying values of time deposits approximate fair value because of their
short maturities. The interest earned is recognized in the consolidated statements of income over the contractual term of the deposits.
The wealth management financial products are measured at fair value and classified as Level 3 within the fair value measurement
hierarchy. Changes in the fair value are reflected in other income in the consolidated statements of operations and comprehensive
income.
Allowance for Doubtful Accounts
- In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts
to cover estimated credit losses. Management reviews and adjusts this allowance periodically based on historical experience and
its evaluation of the collectability of outstanding accounts receivable. The Company evaluates the credit risk of its customers
utilizing historical data and estimates of future performance.
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.
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)
|
Land use rights and buildings:
|
|
|
Land use rights
|
|
45 -50
|
Buildings
|
|
25
|
Machinery and equipment
|
|
6
|
Electronic equipment
|
|
4
|
Motor vehicles
|
|
8
|
Assets under Construction
- represent
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 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, 2018 and 2017, were $0.7 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.
In assessing long-lived assets for impairment,
management considered the Company’s product line portfolio, customers and related commercial agreements, labor 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 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, 2018 and 2017.
Business Combinations
– A
business combination is recorded using the purchase method of accounting, and the cost of an acquisition is measured as the aggregate
of the fair values at the date of exchange of the assets given, liabilities incurred and equity instruments issued as well as the
contingent considerations and all contractual contingencies as of the acquisition date. The costs directly attributable to the
acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured
separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess
of (i) the total of consideration of acquisition, fair value of the non-controlling interests and acquisition date fair value of
any previously held equity interest in the subsidiary acquired over (ii) the fair value of the identifiable net assets of the subsidiary
acquired is recorded as goodwill. If the consideration of acquisition is less than the fair value of the net assets of the subsidiary
acquired, the difference is recognized directly in the consolidated statements of income.
Revenue Recognition -
On January
1, 2018, the Company adopted ASC Topic 606 “Revenue from Contracts with Customers”, and all related amendments, using
the modified retrospective method applied to those contracts that were not completed as of January 1, 2018. Results for reporting
periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue
to be reported in accordance with the Company’s historical accounting practices under ASC Topic 605 “Revenue Recognition”.
Management has determined that the impact
of the transition to the new standard is immaterial to the Company’s revenue recognition model since the vast majority of
the Company’s revenue recognition is based on point in time transfer of control. Accordingly, the Company has not made any
adjustment to opening retained earnings.
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.
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 treats shipping and handling fees as a fulfillment
cost since control of the products is usually transferred to the customer after the delivery.
Revenue Disaggregation
Management has concluded that the disaggregation
level is the same under both the revenue standard and the segment reporting standard. Revenue under the segment reporting standard
is measured on the same basis as under the revenue standard, so management did 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, 2018 and 2017, the Company
has customer deposits of $0.8 million and $1.1 million, respectively. During the year ended December 31, 2018, $2.5 million was
received and $2.8 million (including $1.1 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.
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 within one year.
Government Subsidies
- The Company’s
PRC based subsidiaries received government subsidies according to related policy from local government. The Company’s government
subsidies consisted of specific subsidies and other subsidies. Specific subsidies are the subsidies that the Chinese government
has specified its purpose for, such as product development and renewal of production facilities. Other subsidies are the subsidies
that the Chinese government has not specified its purpose for and are not tied to future trends or performance of the Company;
receipt of such subsidy income is not contingent upon any further actions or performance of the Company and the amounts do not
have to be refunded under any circumstances. The Company recorded specific purpose subsidies as advances payable when received.
For specific purpose subsidies, upon government acceptance of the related project development or asset acquisition, the specific
purpose subsidies are recognized to reduce related R&D expenses or cost of asset acquisition. The unspecific purpose subsidies
are recognized as other income upon receipt as further performance by the Company is not required.
Sales Taxes
- The Company is subject
to value added tax, “VAT.” The applicable VAT tax rate is 16% 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.
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, 2018 and 2017, 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, 2018 and 2017, the warranties
activities were as follows (figures are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at the beginning of year
|
|
$
|
29,033
|
|
|
$
|
26,225
|
|
Additions during the year
|
|
|
24,102
|
|
|
|
23,354
|
|
Settlement within the year
|
|
|
(20,599
|
)
|
|
|
(22,034
|
)
|
Foreign currency translation
|
|
|
(1,451
|
)
|
|
|
1,488
|
|
Balance at end of year
|
|
$
|
31,085
|
|
|
$
|
29,033
|
|
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% of base salary as required by local governments.
Base salary levels are the average salary determined by the local governments.
Concentration of Credit Risk
- Financial
instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts
receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its debtors, but does not
require collateral. In order to determine the value of the Company’s accounts receivable, the Company records a provision
for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical
experience and its evaluation of the collectability of outstanding accounts receivable.
Interest Rate Ri
sk - As of December
31, 2018 and 2017, the Company had bank loans of nil and $20.6 million, respectively, which were charged at floating interest rates.
The remaining bank loans were charged at fixed interest rates. Management is monitoring the change of floating interest rates.
The Company plans to repay the bank loans with floating interest rates when the floating interest rates exceed fixed interest rates,
because such bank loans are short-term and the Company has sufficient credit lines with fixed interest rates.
Income Taxes
- The Company accounts
for income taxes using the liability method whereby deferred income taxes are recognized for the tax consequences of temporary
differences by applying statutory tax rates applicable to future years to differences between the financial statement carrying
amounts and the tax bases of certain assets and liabilities, changes in deferred tax assets and liabilities, if any, include the
impact of any tax rate changes enacted during the year.
ASC Topic 350
, “Accounting for Income Taxes,” requires
that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely
than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Additionally, the
Company accounts for uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. 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 on audit, 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 of being realized upon
settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates
payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision
for income taxes.
If the amount of the Company’s taxable
income or income tax liability is a determinant of the amount of a grant, the grant is treated as a reduction of the income tax
provision in the year the grant is realized.
Research and Development Costs
-
Research and development costs are expensed as incurred.
Advertising, Shipping and Handling Costs
– Advertising, shipping and handling costs are expensed as incurred and recorded in selling expense
s.
Shipping and
handling costs relating to sales of $6.5 million and $7.4 million were included in selling expenses for the years ended December
31, 2018 and 2017, respectively.
Income Per Share
- Basic income
per share is computed by dividing net income attributable to ordinary shareholders by the weighted average number of ordinary shares
outstanding during the period using the two-class method. Under the two-class method, net income is allocated between ordinary
shares and other participating securities, including convertible note holders, if any, based on their participating rights. Diluted
income per share is calculated by dividing net income attributable to ordinary shareholders, as adjusted for the effects on income
of participating securities as if they were dilutive ordinary shares, if any, by the weighted average number of ordinary and dilutive
ordinary equivalent shares outstanding during the period. Ordinary equivalent shares consist of ordinary shares issuable upon the
conversion of the convertible notes using the if-converted method, and shares issuable upon the exercise of stock options and warrants
for the purchase of ordinary shares using the treasury stock method. Ordinary equivalent shares are not included in the denominator
of the diluted earnings per share calculation when inclusion of such shares would be antidilutive.
Comprehensive Income
–
ASC
Topic 220
establishes standards for the reporting and display of comprehensive income, its components and accumulated balances
in a full set of general purpose financial statements.
ASC Topic 220
defines comprehensive income to include all changes
in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension
liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.
Fair Value Measurements
–
For purposes of fair value measurements, the Company applies the applicable provisions of
ASC 820
“Fair Value Measurements
and Disclosures.” Accordingly, fair value for the Company’s financial accounting and reporting purposes represents
the estimated price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the designated measurement date. With an objective to increase consistency and comparability in fair value measurements
and related disclosures, the Financial Accounting Standard Board established the fair value hierarchy which prioritizes the inputs
to valuation techniques used to measure fair value into three broad levels.
Level 1 Inputs are quoted prices (unadjusted)
in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
An active market for the asset or liability is a market in which transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable
evidence of fair value and shall be used to measure fair value whenever available. As at December 31, 2018 and 2017, the Company
did not have any fair value assets and liabilities classified as Level 1.
Level 2 Inputs are inputs other than quoted
prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability
has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
As at December 31, 2018 and 2017, the Company did not have any fair value assets and liabilities classified as Level 2.
Level 3 Inputs are unobservable inputs
for the asset or liability. Unobservable inputs are used to measure fair value to the extent that observable inputs are not available,
thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement
date. However, the fair value measurement objective remains the same, that is, an exit price from the perspective of a market participant
that holds the asset or owes the liability. Therefore, unobservable inputs shall reflect the reporting entity’s own assumptions
about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
As at December 31, 2018 and 2017, wealth management financial products were classified as Level 3.
The Company’s financial instruments
consist principally of cash and cash equivalents, pledged cash, time deposits, accounts and notes receivable, accounts and notes
payable, advance payment or payable, other receivable or payable, accrued expenses and bank loans. As of December 31, 2018 and
2017, the respective carrying values of all financial instruments approximated fair value because any changes in fair value, after
considering the discount rate, are immaterial.
Stock-Based Compensation
- The Company
may issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services
and for financing costs. The Company has adopted
ASC Topic 718
, “Accounting for Stock-Based Compensation,” which
establishes a fair value based method of accounting for stock-based compensation plans. In accordance with ASC Topic 718, the cost
of stock options and warrants issued to employees and non-employees is measured on the grant date based on the fair value. The
fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line
basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.
Foreign Currencies
- China Automotive,
the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” which is their functional
currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,”
which is their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian
reais, “BRL,” which is its functional currency. In accordance with
ASC Topic 830
, “
FASB Accounting
Standards Codification”
, foreign currency transactions denominated in currencies other than the functional currency are
remeasured into the functional currency at the rate of exchange prevailing at the balance sheet date for monetary items. Nonmonetary
items are remeasured at historical rates. Income and expenses are remeasured at the rate in effect on the transaction dates. Transaction
gains and losses, if any, are included in the determination of net income for the period.
In translating the financial statements
of the Company’s China and Brazil subsidiaries and Genesis from their functional currency into the Company's reporting currency
of United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet
date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments
resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in stockholders’ equity.
Certain Relationships and Related Transactions
The following are the related parties of the Company. The major
shareholders of the Company directly or indirectly have interests in these related parties:
|
·
|
Jingzhou Henglong Fulida Textile Co., Ltd., “
Fulida
”
|
|
·
|
Xiamen Joylon Co., Ltd., “
Xiamen Joylon
”
|
|
·
|
Shanghai Tianxiang Automotive Parts Co., Ltd., “
Shanghai Tianxiang
”
|
|
·
|
Shanghai Jinjie Industrial & Trading Co., Ltd., “
Shanghai Jinjie
”
|
|
·
|
Changchun Hualong Automotive Technology Co., Ltd., “
Changchun Hualong
”
|
|
·
|
Jiangling Tongchuang Machining Co., Ltd., “
Jiangling Tongchuang
”
|
|
·
|
Shanghai Hongxi Investment Inc, “
Hongxi
”
|
|
·
|
Hubei Wiselink Equipment Manufacturing Co., Ltd., “
Hubei Wiselink
”
|
|
·
|
Jingzhou Derun Agricultural S&T Development Co., Ltd., “
Jingzhou Derun
”
|
|
·
|
Jingzhou Tongying Alloys Materials Co., Ltd., “
Jingzhou Tongying
”
|
|
·
|
Wuhan Dida Information S&T Development Co., Ltd., “
Wuhan Dida
”
|
|
·
|
Hubei Wanlong Investment Co., Ltd., “
Hubei Wanlong
”
|
|
·
|
Jingzhou Yude Machining Co., Ltd., “
Jingzhou Yude
”
|
|
·
|
Wiselink Holdings Limited, “
Wiselink
”
|
|
·
|
Beijing Hainachuan HengLong Automotive Steering System Co., Ltd., “
Beijing Henglong
”
|
|
·
|
Honghu Changrun Automotive Parts Co., Ltd., “
Honghu Changrun
”
|
|
·
|
Jingzhou Henglong Real Estate Co., Ltd., “
Henglong Real Estate
”
|
|
·
|
Xiamen Joylon Automotive Parts Co., Ltd.,
“Xiamen Automotive Parts
”
|
|
·
|
Jingzhou
Jiulong Machinery and Electronic Trading Co., Ltd., “
Jiulong Machinery
”
|
|
·
|
Wuhan
Tongkai Automobile Motor Co., Ltd., “
Wuhan Tongkai
”
|
|
·
|
Jingzhou
Natural Astaxanthin Inc, “
Jingzhou Astaxanthin
”
|
|
·
|
Hubei
Asta Biotech Inc, “
Hubei Asta
”
|
|
·
|
Shanghai
Yifu Automotive Electronics Technology Co., Ltd., “
Shanghai Yifu
”
|
|
·
|
Suzhou
Qingyan Venture Capital Fund L.P, “
Suzhou Qingyan
”
|
|
·
|
Chongqing
Qingyan Venture Capital Fund L.P, “
Chongqing Qingyan
”
|
|
·
|
Chongqing
Jinghua Automotive Intelligent Manufacturing Technology Research Co., Ltd., “
Chongqing Jinghua
”
|
|
·
|
Jingzhou
WiseDawn Electric Car Co., Ltd., “
Jingzhou WiseDawn
”
|
|
·
|
Hubei
Zhirong Automobile Technology Co., Ltd., “
Hubei Zhirong
”
|
|
·
|
Hubei
Tongrun Automotive Parts Industry Development Co., Ltd., “
Hubei Tongrun
”
|
Principal policies of the Company in connection with transactions
with related parties are as follows:
Products Sold to Related Parties
– The Company sold products to related parties at fair market prices, and also granted them credit of three to four months
on an open account basis. These transactions were consummated under similar terms as the Company's other customers.
Materials Purchased from Related Parties
– The Company purchased materials from related parties at fair market prices, and also received from them credit of three
to four months on an open account basis. These transactions were consummated under similar terms as the Company's other suppliers.
Equipment and Production Technology
Purchased from Related Parties
- The Company purchased equipment and production technology from related parties at fair market
prices, or reasonable cost plus pricing if fair market prices are not available and was required to pay in advance based on the
purchase agreement between the two parties, because such equipment manufacturing and technology development was required for a
long period. These transactions are consummated under similar terms as the Company's other suppliers.
Short-term Loans Extended to Related
Parties
- The Company provides short-term loans to related parties and assists the borrowing entities in addressing certain
cash flow needs. In general, the Company charges interest by referencing to the prevailing borrowing interest rates published by
PBOC. The loans to related parties are required to be approved by the audit committee.
Recent Accounting Pronouncements
New Accounting Standards Adopted
In May 2014, the FASB and the International
Accounting Standards Board (IASB) jointly issued ASU No. 2014-9, Revenue from Contracts with Customers (Topic 606), which was further
updated by ASU No. 2016-08 in March 2016, ASU No.2016-10 in April 2016 and ASU No.2016-11 in May 2016. The new guidance clarifies
the principles for recognizing revenue and develops a common revenue standard for GAAP and International Financial Reporting Standards
(IFRS). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods and services. In July 2015, the FASB approved a deferral of the ASU effective date from annual and interim periods
beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017. The Company has evaluated its
material contracts, and has concluded that the impact of adopting the standard on its consolidated financial statements and related
disclosures was not material. The Company adopted the standard on January 1, 2018.
In August 2016, the FASB issued ASU No.
2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 refines how
companies classify certain aspects of the cash flow statement in regards to debt prepayment, settlement of debt instruments, contingent
consideration payments, proceeds from insurance claims and life insurance policies, distribution from equity method investees,
beneficial interests in securitization transactions and separately identifiable cash flows. ASU 2016-15 is effective for fiscal
years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. Early adoption
is permitted. The adoption of this guidance does not have a material effect on the Company's consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory, to improve the accounting for the income tax
consequences of intra-entity transfers of assets other than inventory. The FASB decided that an entity should recognize the income
tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Consequently, the amendments
in this Update eliminate the exception for an intra-entity transfer of an asset other than inventory. Two common examples of assets
included in the scope of this Update are intellectual property and property, plant, and equipment. The Update does not change GAAP
for an intra-entity transfer of inventory. The amendments in this Update do not include new disclosure requirements; however, existing
disclosure requirements might be applicable when accounting for the current and deferred income taxes for an intra-entity transfer
of an asset other than inventory. For public business entities, the amendments in this Update are effective for annual reporting
periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption
is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual)
have not been issued or made available for issuance. The amendments in this Update should be applied on a modified retrospective
basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The adoption
of this guidance does not have a material effect on the Company's consolidated financial statements.
Statements of Cash Flows (Topic 230): Restricted
Cash. In November 2016, the FASB issued ASU 2016-18, Statements of Cash Flows (Topic 230): Restricted Cash. The guidance requires
that a statement of cash flows explain the changes during the period in the total of cash, cash equivalents, and amounts generally
described as restricted cash or restricted cash equivalents. Amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statements of cash flows. The standard is effective for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. The standard should be applied to each period presented using a retrospective transition
method. The adoption of this standard does not have a material impact on the Company’s consolidated financial statements,
but resulted in pledged cash being included with cash, cash equivalents and pledged cash when reconciling the beginning-of-period
and end-of-period total amounts shown on the statements of cash flows.
New Accounting Standards Not Yet
Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which requires that a lessee should recognize the assets and liabilities that arise from operating leases.
A lessee should recognize in the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is
permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
If a lessee makes this election, it should recognize lease expenses for such lease generally on a straight-line basis over the
lease term. The new lease standard also provides lessees with a practical expedient, by class of underlying asset, to not separate
non-lease components from the associated lease component. If a lessee makes that accounting policy election, it is required to
account for the non-lease components together with the associated lease component as a single lease component and to provide certain
disclosures. Lessors are not afforded a similar practical expedient. The amendments in this Update are effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years for public entities. For all other entities,
the amendments in this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal
years beginning after December 15, 2020. Early application of the amendments in this Update is permitted for all entities. Entities
are required to adopt the new lease standard using a modified retrospective transition method. Under that transition method, an
entity initially applies the new lease standard (subject to specific transition requirements and optional practical expedients)
at the beginning of the earliest period presented in the financial statements. In July 2018, the FASB issued ASU 2018-11, which
provides another transition method in addition to the existing transition method by allowing entities to initially apply the new
lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in
the period of adoption. This ASU also provides lessors with a practical expedient, by class of underlying asset, to not separate
non-lease components from the associated lease component, similar to the expedient provided for lessees. However, the lessor practical
expedient is limited to circumstances in which the non-lease component or components otherwise would be accounted for under the
new revenue guidance and both (1) the timing and pattern of transfer are the same for the non-lease component(s) and associated
lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease. The Company
will adopt this new guidance for the year ending December 31, 2019 and interim periods in the year ending December 31, 2019. The
Company estimates that approximately $0.6 million would be recognized as total right-of-use assets and total lease liabilities
on our consolidated balance sheet as of January 1, 2019. Other than as disclosed above, we do not expect the new standard to have
a material impact on our remaining consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates
the probable recognition threshold for credit impairments. The new guidance broadens the information that an entity must consider
in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information,
as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity
is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. For public business entities
that are SEC filers, the amendments are effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years. The Company is in the process of evaluating the impact of the amendments on its consolidated financial
statements.
In May 2017, the FASB issued guidance within
ASU 2017-09: Scope of Modification Accounting. The amendments in ASU 2017-09 to Topic 718, Compensation - Stock Compensation, provide
guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting. An entity should account for the effects of a modification unless all of the following conditions are met: the fair
value of the modified award is the same as the fair value of the original award immediately before the original award is modified;
the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the
original award is modified; and the classification of the modified award as an equity instrument or a liability instrument is the
same as the classification of the original award immediately before the original award is modified. The amendments should be applied
prospectively to an award modified on or after the adoption date. The amendments are effective for annual periods, and interim
periods within those annual periods, beginning after December 31, 2018. Early adoption is permitted, including adoption in any
interim period. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial
statements.
In February 2018, the FASB issued ASU 2018-02,
Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive
Income, to address specific consequences of the U.S. Tax Reform. The update allows a reclassification from accumulated other comprehensive
income to retained earnings for stranded tax effects resulting from the U.S. Tax Reform. The accounting update is effective January
1, 2019, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period
in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. Tax Reform is recognized. The Company
is currently evaluating the impact of the new standard on the Company's consolidated financial statements.
3.
|
Short-term Investments
|
The Company’s short-term investments
as of December 31, 2018 and 2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31
|
|
|
|
2018
|
|
|
2017
|
|
Time deposits
|
|
$
|
-
|
|
|
$
|
12,019
|
|
Wealth management financial products measured at fair value
|
|
|
17,543
|
|
|
|
17,568
|
|
Total
|
|
$
|
17,543
|
|
|
$
|
29,587
|
|
As of December 31, 2018 and 2017, the Company
had pledged short-term investments of nil and RMB 13.0 million, equivalent to approximately nil and $1.9 million, respectively,
to secure standby letters of credit under HSBC Bank (Note 12) and China CITIC Bank. The use of the pledged short-term investments
is restricted.
4.
|
Accounts and Notes Receivable
|
The Company’s accounts receivable at December 31, 2018
and 2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts receivable - unrelated parties
(1)
|
|
$
|
149,100
|
|
|
$
|
166,889
|
|
Notes receivable - unrelated parties
(2) (3)
|
|
|
90,412
|
|
|
|
109,183
|
|
Total accounts and notes receivable - unrelated parties
|
|
|
239,512
|
|
|
|
276,072
|
|
Less: allowance for doubtful accounts - unrelated parties
|
|
|
(1,993
|
)
|
|
|
(1,083
|
)
|
Accounts and notes receivable, net - unrelated parties
|
|
|
237,519
|
|
|
|
274,989
|
|
Accounts and notes receivable - related parties
|
|
|
18,825
|
|
|
|
19,086
|
|
Accounts and notes receivable, net
|
|
$
|
256,344
|
|
|
$
|
294,075
|
|
(1)
|
Notes receivable represents accounts receivable in the form of bills of exchange whose acceptances and settlements are handled by banks.
|
|
|
(2)
|
As of December 31, 2018, the Company collateralized
its notes receivable in an amount of RMB 126.3 million, equivalent to approximately $18.4 million, as security for the credit facilities
with banks in China and the Chinese government, including RMB 75.2 million, equivalent to approximately $11.0 million, in favor
of China CITIC Bank, Wuchang branch, “CITIC Wuchang” for the purpose of obtaining the new non-revolving credit facility
and RMB 51.1 million, equivalent to approximately $7.5 million, as security in favor of the Chinese government for the low-interest
government loan (See Note 12).
As of December 31, 2017, the Company collateralized
its notes receivable in an amount of RMB 258.5 million, equivalent to approximately $37.7 million, as security for the credit facilities
with banks in China and the Chinese government, including RMB 238.4 million, equivalent to approximately $34.7 million, in favor
of Industrial and Commercial Bank of China, Jingzhou Branch, “ICBC Jingzhou”, and China CITIC Bank, Wuchang branch,
“CITIC Wuchang” for the purpose of obtaining the Henglong Standby Letters of Credit (as defined in Note 12), which
are used as security for the non-revolving credit facility in the amount of $20.0 million provided by Industrial and Commercial
Bank of China (Macau) Limited, “ICBC Macau” and the non-revolving credit facility in the amount of $10.0 million provided
by Taishin Bank, and RMB 20.0 million, equivalent to approximately $2.9 million, as security in favor of the Chinese government
for the low-interest government loan (See Note 12).
|
The activity in the Company’s allowance
for doubtful accounts of accounts receivable during the years ended December 31, 2018 and 2017, is summarized as follows (figures
are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year
|
|
$
|
1,083
|
|
|
$
|
1,081
|
|
Amounts provided for during the year
|
|
|
989
|
|
|
|
31
|
|
Amounts reversed of collection during the year
|
|
|
(27
|
)
|
|
|
(90
|
)
|
Foreign currency translation
|
|
|
(52
|
)
|
|
|
61
|
|
Balance at end of year
|
|
$
|
1,993
|
|
|
$
|
1,083
|
|
5.
|
Advance Payments and Others
|
The Company’s advance payments and others as of December
31, 2018 and 2017 consisted of the following:
|
|
Year
Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Advance payments and others - unrelated parties
|
|
$
|
17,177
|
|
|
$
|
13,801
|
|
Less: allowance for doubtful accounts - unrelated parties
(2)
|
|
|
(907
|
)
|
|
|
(1,011
|
)
|
Advance payments and others, net - unrelated parties
|
|
|
16,270
|
|
|
|
12,790
|
|
Advance payments and others - related parties
(1)
|
|
|
1,281
|
|
|
|
20,841
|
|
Total advance payments and others
|
|
|
17,551
|
|
|
|
33,631
|
|
(1)
|
On March 16, 2017, in order to generate higher returns for the Company’s idle cash, one of the Company's subsidiaries, Hubei Henglong, lent RMB 200.0 million to Henglong Real Estate, one of the Company's related parties, through an independent financial institution by way of an entrusted loan. The term of the loan is one year and the annual interest rate is 6.35%. Henglong Real Estate repaid RMB 70 million and RMB 130 million to Hubei Henglong in the fourth quarter of 2017 and in the first quarter of 2018, respectively. As of December 31, 2018 and December 31, 2017, the outstanding loan balance was nil and RMB 130 million (equivalent to $19.9 million), respectively.
|
|
|
(2)
|
Provision for the doubtful accounts amounted to nil and $0.9 million for the year ended December 31, 2018 and 2017
,
respectively.
|
6. Inventories
The Company’s inventories at December 31, 2018 and 2017,
consisted of the following (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
27,190
|
|
|
$
|
20,033
|
|
Work in process
|
|
|
11,932
|
|
|
|
17,951
|
|
Finished goods
|
|
|
48,899
|
|
|
|
41,233
|
|
Balance at end of year
|
|
$
|
88,021
|
|
|
$
|
79,217
|
|
Provision for inventories amounted to $6.2
million and $5.1 million for the years ended December 31, 2018 and 2017, respectively.
7. Other Receivables
The Company’s other receivables at
December 31, 2018 and 2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Other receivables - unrelated parties
(1)
|
|
$
|
1,686
|
|
|
$
|
1,109
|
|
Other receivables - employee housing loans
(2)
|
|
|
212
|
|
|
|
1,187
|
|
Less: allowance for doubtful accounts - unrelated parties
|
|
|
(99
|
)
|
|
|
(108
|
)
|
Balance at end of year
|
|
$
|
1,799
|
|
|
$
|
2,188
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Other receivables - related parties
|
|
$
|
547
|
|
|
$
|
585
|
|
Less: allowance for doubtful accounts - related parties
|
|
|
(547
|
)
|
|
|
(585
|
)
|
Balance at end of year
|
|
$
|
-
|
|
|
$
|
-
|
|
|
(1)
|
Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans. These receivables originate as part of the Company's normal operating activities and are periodically settled in cash.
|
|
|
|
|
(2)
|
On May 28, 2014, the board of directors of the Company approved a loan program under which the Company will lend an aggregate of up to RMB 50.0 million (equivalent to approximately $7.3 million) to the employees of the Company to assist them in purchasing houses. Employees are required to pay interest at an annual rate of 3.8%. These loans are unsecured and the term of the loans is generally for five years.
|
The activity in the Company’s allowance for doubtful accounts
of other receivables during the years ended December 31, 2018 and 2017, are summarized as follows (figures are in thousands of
USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year - unrelated parties
|
|
$
|
108
|
|
|
$
|
63
|
|
Amounts provided for during the year - unrelated parties
|
|
|
-
|
|
|
|
41
|
|
Amounts reversed of collection during the year - unrelated parties
|
|
|
(4
|
)
|
|
|
-
|
|
Foreign currency translation - unrelated parties
|
|
|
(5
|
)
|
|
|
4
|
|
Balance at end of year
|
|
$
|
99
|
|
|
$
|
108
|
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Balance at beginning of year - related parties
|
|
$
|
585
|
|
|
$
|
559
|
|
Amounts provided for during the year - related parties
|
|
|
-
|
|
|
|
18
|
|
Amounts reversed due to collection during the year - related parties
|
|
|
(11
|
)
|
|
|
(26
|
)
|
Foreign currency translation- related parties
|
|
|
(27
|
)
|
|
|
34
|
|
Balance at end of year
|
|
$
|
547
|
|
|
$
|
585
|
|
8. Long-term Investments
In January 2010, the Company invested $3.1
million to establish a joint venture company, Beijing Henglong, with Hainachuan. The Company owns 50% equity in Beijing Henglong
and can exercise significant influence over Beijing Henglong’s operating and financial policies. The Company accounted for
Beijing Henglong’s operational results with the equity method. As of December 31, 2018 and 2017, the Company had $4.2 million
and $4.1 million, respectively, of net equity in Beijing Henglong.
In September 2014, Hubei Henglong entered
into an agreement with other parties to establish a venture capital fund, the “Suzhou Venture Fund”, which mainly focuses
on investments in emerging automobiles and parts industries. Hubei Henglong has committed to make investments of RMB 50.0 million,
equivalent to approximately $7.6 million, in the Suzhou Venture Fund in three installments. As of December 31, 2018, Hubei Henglong
has completed a capital contribution of RMB 50.0 million, equivalent to approximately $7.6 million, representing 12.5% of the Suzhou
Venture Fund’s shares. As a limited partner, Hubei Henglong has more than virtually no influence over the Suzhou Venture
Fund’s operating and financial policies. The investment is accounted for using the equity method. As of December 31, 2018
and 2017, the Company had $9.7 million and $10.3 million, respectively, of net equity in the Suzhou Venture Fund.
In May 2016, Hubei Henglong entered into
an agreement with other parties to establish a venture capital fund, the “Chongqing Venture Fund”. Hubei Henglong has
committed to make investments of RMB 120.0 million, equivalent to approximately $18.1 million, representing 17.1% of Chongqing
Venture Fund’s shares. As of December 31, 2018, Hubei Henglong has completed a capital contribution of RMB 84.0 million,
equivalent to approximately $12.7 million, representing 23.5% of Chongqing Venture Fund’s shares. As a limited partner, Hubei
Henglong has more than virtually no influence over Chongqing Venture Fund’s operating and financial policies. The investment
is accounted for using the equity method. As of December 31, 2018 and 2017, the Company had $13.1 million and $12.7 million, respectively,
of net equity in Chongqing Venture Fund.
In October 2016, Hubei Henglong invested
RMB 3.0 million, equivalent to approximately $0.5 million, to establish an associate company, Chongqing Jinghua Automotive Intelligent
Manufacturing Technology Research Co., Ltd., “Chongqing Jinghua”, with five other parties. The Company owns 30% of
the equity in Chongqing Jinghua, and can exercise significant influence over Chongqing Jinghua’s operating and financial
policies. The Company accounted for Chongqing Jinghua’s operational results with the equity method. As of December 31, 2018
and 2017, the Company had $0.2 million and $0.5 million, respectively, of net equity in Chongqing Jinghua.
In March 2018, Hubei Henglong entered into
an agreement with other parties to establish a venture capital fund, the “Hubei Venture Fund”. Hubei Henglong has committed
to make investments of RMB 76.0 million, equivalent to approximately $11.5 million, in the Hubei Venture Fund in three installments.
As of December 31, 2018, Hubei Henglong has completed a capital contribution of RMB 38.0 million, equivalent to approximately $5.5
million, representing 19.0% of the Hubei Venture Fund’s shares. As a limited partner, Hubei Henglong has more than virtually
no influence over the Hubei Venture Fund’s operating and financial policies. The investment is accounted for using the equity
method. As of December 31, 2018 and 2017, the Company had $5.5 million and nil, respectively, of net equity in the Hubei Venture
Fund.
The Company’s consolidated financial
statements reflect the net income of non-consolidated affiliates of $1.1 million and $2.5 million for the years ended December
31, 2018 and 2017, respectively.
9. Property, Plant and Equipment
The Company’s property, plant and
equipment at December 31, 2018 and 2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Costs:
|
|
|
|
|
|
|
|
|
Land use rights and buildings
|
|
$
|
60,593
|
|
|
$
|
63,173
|
|
Machinery and equipment
|
|
|
192,538
|
|
|
|
165,863
|
|
Electronic equipment
|
|
|
5,810
|
|
|
|
5,819
|
|
Motor vehicles
|
|
|
4,852
|
|
|
|
4,945
|
|
Construction in progress
|
|
|
12,526
|
|
|
|
22,352
|
|
|
|
|
276,319
|
|
|
|
262,152
|
|
Less: Accumulated depreciation
|
|
|
(146,466
|
)
|
|
|
(136,119
|
)
|
Balance at end of year
|
|
$
|
129,853
|
|
|
$
|
126,033
|
|
Depreciation charges for the years ended December 31, 2018 and
2017, were $16.5 million and $14.4 million, respectively.
As of December 31, 2018 and 2017, the Company
has pledged property, plant and equipment with a net book value of approximately $55.9 million and $68.4 million, respectively,
as security for its comprehensive credit facilities with banks in China.
During the year ended December 31, 2018
and 2017, nil and $0.5 million, respectively, of government subsidy was recorded as a reduction of the cost of property, plant
and equipment.
10. Intangible Assets
The Company’s intangible assets at December 31, 2018 and
2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Costs:
|
|
|
|
|
|
|
Patent technology
|
|
$
|
2,063
|
|
|
$
|
2,108
|
|
Management software license
|
|
|
1,504
|
|
|
|
1,441
|
|
Total intangible assets - at cost
|
|
|
3,567
|
|
|
|
3,549
|
|
Less: Accumulated amortization
|
|
|
(2,962
|
)
|
|
|
(2,888
|
)
|
Balance at end of the year, net
|
|
$
|
605
|
|
|
$
|
661
|
|
|
(1)
|
Amortization expenses were $0.3 million and $0.3 million for the years ended December 31, 2018
and 2017, respectively. The estimated amortization expenses for each of the years from 2019 to 2023 are $0.2 million, $0.1 million,
$0.1 million, $0.1 million and $0.1 million, respectively.
|
11. Deferred Income Tax Assets and Liabilities
In accordance with the provisions of
ASC
Topic 740
“Income Taxes,” the Company assesses, on a quarterly basis, its ability to realize its deferred tax assets.
Based on the more likely than not standard in the guidance and the weight of available evidence, the Company believes a valuation
allowance against its deferred tax assets is necessary. In determining the need for a valuation allowance, the Company considered
the following significant factors: an assessment of recent years’ profitability and losses by tax authorities; the Company’s
expectation of profits based on margins and volumes expected to be realized (which are based on current pricing and volume trends);
the long period in all significant operating jurisdictions before the expiry of net operating losses, noting further that a portion
of the deferred tax asset is composed of deductible temporary differences that are subject to an expiry period until realized under
tax law. The Company will continue to evaluate the provision of valuation allowance in future periods.
The components of deferred tax assets and
liabilities at December 31, 2018 and 2017 were as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Losses carryforward (U.S.)
(1)
|
|
$
|
3,023
|
|
|
$
|
3,580
|
|
Losses carryforward (Non-U.S.)
(1)
|
|
|
5,132
|
|
|
|
2,178
|
|
Product warranties and other reserves
|
|
|
5,695
|
|
|
|
5,264
|
|
Property, plant and equipment
|
|
|
4,884
|
|
|
|
4,607
|
|
Share-based compensation
|
|
|
131
|
|
|
|
156
|
|
Bonus accrual
|
|
|
363
|
|
|
|
287
|
|
Other accruals
|
|
|
1,858
|
|
|
|
1,535
|
|
Deductible temporary difference related to revenue recognition
|
|
|
1,756
|
|
|
|
1,619
|
|
Others
|
|
|
1,528
|
|
|
|
1,353
|
|
Total deferred tax assets
|
|
|
24,370
|
|
|
|
20,579
|
|
Less: valuation allowance
(1)
|
|
|
(7,522
|
)
|
|
|
(6,058
|
)
|
Total deferred tax assets, net of valuation allowance
|
|
|
16,848
|
|
|
|
14,521
|
|
|
|
|
|
|
|
|
|
|
Deferred withholding tax for dividend distribution from PRC subsidiaries
|
|
|
4,198
|
|
|
|
4,393
|
|
Other taxable temporary differences
|
|
|
1,512
|
|
|
|
1,154
|
|
Total deferred tax liabilities
|
|
$
|
5,710
|
|
|
$
|
5,547
|
|
|
(1)
|
The net operating loss
carry forwards for the U.S. entity for income tax purposes are available to reduce future years' taxable income. These carry forwards
will not expire if not utilized, and the Company may carry the losses forward indefinitely. Net operating loss carryforwards for
China entities can be carried forward for 5 years to offset taxable income. However, as of December 31, 2018, valuation allowance
was $7.5 million, including $3.2 million allowance for the Company’s deferred tax assets in the United States and $4.3 million
allowance for the Company’s non-U.S. deferred tax assets primarily in China. Based on the Company’s current operations,
management believes that all deferred tax assets in the United States and certain deferred tax assets in non-U.S. regions are
not likely to be realized in the future.
|
The deferred tax assets and liabilities are classified in the
consolidated balance sheets as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
$
|
15,336
|
|
|
$
|
13,367
|
|
Deferred tax liabilities
|
|
|
4,198
|
|
|
|
4,393
|
|
The activity in the Company’s valuation allowance for
deferred tax assets during the years ended December 31, 2018 and 2017, are summarized as follows (figures are in thousands of
USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
6,058
|
|
|
$
|
8,912
|
|
Amounts provided for during the year
|
|
|
2,288
|
|
|
|
860
|
|
Amounts used during the year
|
|
|
(713
|
)
|
|
|
(1,309
|
)
|
The effect of change in the tax rate due to the U.S. Tax Reform
|
|
|
-
|
|
|
|
(2,490
|
)
|
Foreign currency translation
|
|
|
(111
|
)
|
|
|
85
|
|
Balance at end of year
|
|
$
|
7,522
|
|
|
$
|
6,058
|
|
12. Bank and Government Loans
Loans consist of the following as of
December 31, 2018 and 2017 (figures are in thousands of USD):
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Short-term bank loans
(1)
|
|
$
|
29,146
|
|
|
$
|
9,948
|
|
Short-term bank loans
(2) (3) (4)
|
|
|
-
|
|
|
|
30,454
|
|
Short-term bank loans
(5)
|
|
|
24,521
|
|
|
|
29,248
|
|
Short-term government loan
(6)
|
|
|
7,285
|
|
|
|
3,061
|
|
Total short-term bank and government loans
|
|
$
|
60,952
|
|
|
$
|
72,711
|
|
Long-term government loan
(7)
|
|
|
291
|
|
|
|
306
|
|
Total bank and government loans
|
|
$
|
61,243
|
|
|
$
|
73,017
|
|
|
(1)
|
These loans are secured by
property, plant and equipment of the Company and are repayable within one year (See Note 9). As of December 31, 2018 and 2017,
the weighted average interest rate was 5.3% and 4.7% per annum, respectively. Interest is to be paid monthly or quarterly on the
twentieth day of the applicable month or quarter and the principal repayment is at maturity.
|
(2)
|
On April 20, 2017, the Company entered
into a credit facility agreement with ICBC Macau to obtain a non-revolving credit facility in the amount of $20.0 million, the
“ICBC Macau Credit Facility”. The ICBC Macau Credit Facility expired on May 12, 2018 unless the Company draws down
the line of credit in full prior to such expiration date, and the maturity date for the loan drawdown is the earlier of (i) 12
months from the date of drawdown or (ii) one month before the expiry of the standby letter of credit obtained by Henglong from
ICBC Jingzhou as security for the Credit Facility, the “Henglong Standby Letter of Credit”. The interest rate of the
ICBC Macau Credit Facility is calculated based on a three-month LIBOR plus 1.30% per annum, subject to the availability of funds
and fluctuation at ICBC Macau’s discretion. Interest is calculated daily based on a 360-day year and it is fixed one day
before the first day of each interest period. The interest period is defined as three months from the date of drawdown. As security
for the ICBC Macau Credit Facility, the Company was required to provide ICBC Macau with the Henglong Standby Letter of Credit for
a total amount of not less than $23.2 million if the ICBC Macau Credit Facility is fully drawn.
On May 5, 2017, the Company drew down the
full amount of $20.0 million under the ICBC Macau Credit Facility and provided the Henglong Standby Letter of Credit for an amount
of $23.2 million in favor of ICBC Macau. The Henglong Standby Letter of Credit issued by ICBC Jingzhou is collateralized by Henglong’s
notes receivable of RMB 159.0 million, equivalent to approximately $23.2 million.
The original maturity date of the Credit
Facility was May 12, 2018 and was extended to November 11, 2018. The Company repaid $1.0 million to ICBC Macau on May 4, 2018.
The maturity date for the loan under the extended term was the earlier of (i) 18 months from the date of drawdown or (ii) one month
before the expiry of the Henglong Standby Letter of Credit. Except for the above, all other terms and conditions as stipulated
in the Credit Agreement remained unchanged. As of December 31, 2018, the interest rate of the Credit Facility was 4.1% per annum.
The Company repaid this bank loan on October 10, 2018.
|
|
|
(3)
|
On April 25, 2017, Great Genesis entered into a credit facility agreement, the “Taishin Bank Credit Facility”, with Taishin Bank to obtain a non-revolving credit facility in the amount of $10.0 million. The Taishin Bank Credit Facility expired on April 25, 2018 and had an annual interest rate of 2.7%. Interest was paid quarterly and the principal repayment was payable at maturity. As security for the Taishin Bank Credit Facility, the Company’s subsidiary Henglong was required to provide Taishin Bank with the Standby Letter of Credit for a total amount of not less than $10.0 million if the Taishin Bank Credit Facility was fully drawn.
On April 28, 2017, Great Genesis drew down the amount of $9.9 million under the Taishin Bank Credit Facility and provided the Henglong Standby Letter of Credit for an amount of $10.0 million in favor of Taishin Bank. Henglong’s Standby Letter of Credit issued by China CITIC Bank Wuchang branch was collateralized by Henglong’s short-term investments of RMB 4.0 million, equivalent to approximately $0.6 million, and notes receivable of RMB 79.4 million, equivalent to approximately $11.6 million. The Company repaid this bank loan on September 17, 2018.
|
|
|
(4)
|
On April 1, 2016, Brazil Henglong entered
into a credit facility agreement with HSBC Brazil to obtain a credit facility in the amount of $0.1 million, the “HSBC Brazil
Credit Facility”. The HSBC Brazil Credit Facility expired on October 27, 2017. As security for the HSBC Credit Facility,
the Company’s subsidiary Hubei Henglong was required to provide HSBC Brazil with the Standby Letter of Credit for a total
amount of $0.1 million if the HSBC Brazil Credit Facility is fully drawn.
On May 6, 2016, Brazil Henglong drew down
a loan amounting to $0.1 million provided by HSBC Brazil. The loan matured on October 9, 2017 and has an annual interest rate of
8.2%. Hubei Henglong provided a Standby Letter of Credit for an amount of $0.1 million in favor of HSBC Brazil. Hubei Henglong’s
Standby Letter of Credit was issued by China CITIC Bank Wuhan branch and is collateralized by short-term investments of Hubei Henglong
of RMB 0.5 million, equivalent to approximately $0.1 million. The Company repaid this bank loan on October 9, 2017.
On August 26, 2016, Brazil Henglong entered
into a credit facility agreement with Bank of China (Brazil) to obtain a credit facility in the amount of $0.6 million, the “Bank
of China Credit Facility”. The Bank of China Credit Facility expired on January 15, 2018. As security for the Bank of China
Credit Facility, the Company’s subsidiary Hubei Henglong is required to provide Bank of China (Brazil) with a Standby Letter
of Credit for a total amount of $0.9 million if the Bank of China Credit Facility is fully drawn.
On August 26, 2016, Brazil Henglong drew
down a loan amounting to $0.6 million provided by Bank of China (Brazil). The loan matured on January 15, 2018 and has an annual
interest rate of 4.05%. Interest is paid semiannually and the principal repayment is at maturity. Hubei Henglong provided a Standby
Letter of Credit for an amount of $0.9 million in favor of Bank of China (Brazil). Hubei Henglong’s Standby Letter of Credit
was issued by Bank of China Jingzhou branch and is collateralized by long-term time deposits of Hubei Henglong of RMB 6.0 million,
equivalent to approximately $0.9 million. The Company repaid this bank loan on January 16, 2018.
|
(5)
|
On September 26, 2016, Henglong entered
into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 170.0 million (equivalent
to approximately $24.8 million
),
the “Henglong CITIC Credit
Facility”. The Henglong CITIC Credit Facility expired on September 26, 2017. As security for the Henglong CITIC Credit Facility,
Henglong’s property, plant and equipment were pledged and Hubei Henglong provided a guarantee. On March 3, 2017, Henglong
drew down loans amounting to RMB 32.5 million, RMB 32.5 million and 30.6 million (equivalent to $4.7 million, $4.7 million and
$4.5 million as of December 31, 2018), respectively. The loans matured on February 5, 6 and 7, 2018, respectively. The annual interest
rate of the loans is 4.99%. The principal and interest have been repaid on respective maturity dates.
On October 27, 2017, Henglong entered into
a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 224.0 million (equivalent to
$32.6 million as of December 31, 2018), the “Henglong CITIC Credit Facility”. The Henglong CITIC Credit Facility expired
on October 27, 2018. As security for the Henglong CITIC Credit Facility, Henglong’s property, plant and equipment were pledged
and Hubei Henglong provided a guarantee. Henglong provided Jielong with a Standby Letter of Credit under the Credit Facility. On
August 21, 2018, Henglong drew down loans amounting to RMB 23.2 million and RMB 48.1 million (equivalent to $3.4 million and $7.0
million), respectively. On August 23 and September 7, 2018, Henglong drew down loans amounting to RMB 19.3 million and RMB 5.8
million (equivalent to $2.8 million and $0.8 million), respectively. The annual interest rate of the loans was 3.63%, 3.98%, 3.79%
and 3.95%, respectively.
On September 26, 2016, Hubei Henglong entered
into a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 100.0 million (equivalent
to approximately $14.6 million), the “Hubei Henglong CITIC Credit Facility”. The Hubei Henglong CITIC Credit Facility
expired on September 26, 2017. Henglong provided a guarantee for the Hubei Henglong CITIC Credit Facility. On March 3, 2017, Hubei
Henglong drew down loans amounting to RMB 28.7 million, RMB 28.7 million and 38.2 million (equivalent to $4.2 million, $4.2 million
and $5.6 million), respectively. The loans matured on February 2, 8 and 9, 2018, respectively. The annual interest rate of the
loans was 4.99%. The principal and interest have been repaid.
On October 27, 2017, Henglong entered into
a credit facility agreement with China CITIC Bank to obtain credit facilities in the amount of RMB 140.0 million (equivalent to
$20.4 million as of December 31, 2018), the “Hubei Henglong CITIC Credit Facility”. The Hubei Henglong CITIC Credit
Facility expired on October 27, 2018. Henglong provided a guarantee for the Hubei Henglong CITIC Credit Facility. Hubei Henglong
provided Jiulong with a Standby Letter of Credit under the Credit Facility. On August 10, 2018, Hubei Henglong drew down loans
amounting to RMB 11.5 million and RMB 27.0 million (equivalent to $1.7 million and $3.9 million), respectively. On August 22 and
September 6, 2018, Hubei Henglong drew down loans amounting to RMB 26.0 million and RMB 7.6 million (equivalent to $3.8 million
and $1.1 million), respectively. The annual interest rate of the loans was 3.93%, 3.84%, 3.98% and 4.01%, respectively.
|
|
|
(6)
|
On August 17, 2017, the Company
received a Chinese government loan of RMB 20.0 million, equivalent to approximately $3.1 million, with an interest rate of 1.50%
per annum, which matured on August 16, 2018. Henglong pledged RMB 20.0 million, equivalent to approximately $2.9 million, of notes
receivable as security for the Chinese government loan (See Note 4). The Company repaid this loan on August 14, 2018.
On September 27, 2018, the Company received
a Chinese government loan of RMB 50.0 million, equivalent to approximately $7.3 million, with an interest rate of 3.48% per annum,
which will mature on June 28, 2019. Henglong pledged RMB 51.0 million, equivalent to approximately $7.4 million, of notes receivable
as security for the Chinese government loan (See Note 4).
|
|
|
(7)
|
On November 13, 2017, the Company received a Chinese government loan of RMB 2.0 million, equivalent to approximately $0.3 million, with an interest rate of 4.75% per annum, which will mature on November 12, 2020.
|
The Company must use the loans for the purpose specified in
the borrowing agreement. If it fails to do so, it may be charged penalty interest or triggered early repayment. The Company complied
with such financial covenants as of December 31, 2018, and management believes it will continue to comply with them.
13. Accounts and Notes Payable
The Company’s accounts and notes
payable at December 31, 2018 and 2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Accounts payable - unrelated parties
|
|
$
|
124,610
|
|
|
$
|
149,200
|
|
Notes payable - unrelated parties
(1)
|
|
|
81,033
|
|
|
|
83,848
|
|
Accounts and notes payable - unrelated parties
|
|
|
205,643
|
|
|
|
233,048
|
|
Accounts and notes payable - related parties
|
|
|
4,477
|
|
|
|
7,168
|
|
Balance at end of year
|
|
$
|
210,120
|
|
|
$
|
240,216
|
|
(1)
|
Notes payable represent payables in the form of notes issued by the Company. The notes are endorsed by banks to ensure that noteholders will be paid after maturity. The Company has pledged cash, notes receivable and certain property, plant and equipment to secure notes payable granted by banks.
|
14. Accrued Expenses and Other Payables
The Company’s accrued expenses and
other payables at December 31, 2018 and 2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
8,341
|
|
|
$
|
7,944
|
|
Warranty reserves
(1)
|
|
|
31,085
|
|
|
|
29,033
|
|
Other payables
|
|
|
3,783
|
|
|
|
1,803
|
|
Current portion of other long-term payable (See Note 17)
|
|
|
3,400
|
|
|
|
-
|
|
Accrued interest
|
|
|
423
|
|
|
|
1,347
|
|
Balance at end of year
|
|
$
|
47,032
|
|
|
$
|
40,127
|
|
(1)
|
The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties are based on, among other things, historical experience, product changes, material expenses, services and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances.
|
15. Taxes Payable
The Company’s
taxes payable at December 31, 2018 and 2017, are summarized as follows (figures are in thousands of USD):
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Value-added tax payable
|
|
$
|
3,790
|
|
|
$
|
1,813
|
|
Income tax payable
|
|
|
3,778
|
|
|
|
3,450
|
|
Other tax payable
|
|
|
3,569
|
|
|
|
664
|
|
Short-term taxes payable
|
|
|
11,137
|
|
|
|
5,927
|
|
Long-term taxes payable
(1)
|
|
|
29,503
|
|
|
|
32,719
|
|
Taxes payable
|
|
$
|
40,640
|
|
|
$
|
38,646
|
|
(1)
|
A one-time transition tax of $35.6 million was recognized in the fourth quarter of 2017 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company elected to pay the one-time transition tax over eight years commencing in April 2018. As of December 31, 2018 and 2017, $2.8 million was included in taxes payable as a current liability which the Company believes it will be paid within one year and the remaining balance was included in long-term taxes payable. See Note 27 for more details about the U.S. Tax Reform.
|
16. Advances Payable
On December 31, 2018 and 2017, advances
payable of the Company was $2.1 million and $0.7 million, respectively.
The amounts are special subsidies made
by the Chinese government to the Company, to offset the cost and charges related to the improvement of production capacities
and improvement of the quality of products. For the government subsidies with no further conditions to be met, the amounts are
recorded as other income when received; for the amounts with certain operating conditions, the government subsidies are recorded
as advances payable when received and will be recorded as a deduction of related expenses and cost when the conditions are met.
The balances are unsecured and interest-free
and will be repayable to the Chinese government if the usage of such advance does not continue to qualify for the subsidy.
17. Other Long-term Payable
On January 31, 2018, the Company entered
into an equipment sales agreement with a third party (the “buyer-lessor”) and simultaneously entered into a four-year
contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was $13.3 million and the sales
price was $14.6 million. Pursuant to the terms of the contract, the Company is required to pay to the buyer-lessor lease payments
over 4 years with a quarterly lease payment of $1.0 million and is entitled to obtain the ownership of this equipment at a nominal
price upon the expiration of the lease. The Company is of the view that the transaction does not qualify as a sale. Therefore,
the transaction is accounted for as a financing transaction by the Company. As of December 31, 2018, $3.4 million is recognized
as other payable (See Note 14) and $8.7 million is recognized as other long-term payable to the buyer-lessor according to the contract
term.
18. Additional Paid-In Capital
The Company’s positions in respect of the amounts of additional
paid-in capital for the year ended December 31, 2018 and 2017, are summarized as follows (figures are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
64,406
|
|
|
$
|
64,764
|
|
Acquisition of the non-controlling interest in Brazil Henglong
(1)
|
|
|
-
|
|
|
|
(458
|
)
|
Share-based compensation
(2)
|
|
|
23
|
|
|
|
100
|
|
Balance at end of year
|
|
$
|
64,429
|
|
|
$
|
64,406
|
|
(1)
|
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.
|
|
|
(2)
|
On December 5, 2018 and August 16, 2017, the Company granted 22,500 and 22,500 stock options, respectively, to the Company’s independent directors, with the exercise price equal to the closing price of the Company’s common stock traded on NASDAQ one day before the date of grant and on the date of grant, respectively.
|
19. Stock Options
The stock option plan was approved at the
Annual Meeting of Stockholders held on June 28, 2005, and extended to June 27, 2025 at the Annual Meeting of Stockholders held
on September 16, 2014. The maximum common shares available for issuance under this plan is 2,200,000. The stock incentive plan
provides for the issuance, to the Company’s officers, directors, management and employees who served over three years or
have given outstanding performance, of options to purchase shares of the Company’s common stock. The Company has issued 636,350
stock options under this plan, and there remain 1,563,650 stock options issuable in the future as of December 31, 2018.
Under the aforementioned plan, the stock
options granted will have an exercise price equal to the closing price of the Company’s common stock traded on NASDAQ one
day before the date of grant, and will expire two to five years after the grant date. Except for the 298,850 options granted to
management in December 2008, which became exercisable on a ratable basis over the vesting period (3 years), the others were exercisable
immediately on the grant date. Stock options will be settled in shares of the Company’s common stock upon exercise and are
recorded in the Company’s consolidated balance sheets under the caption “Additional paid-in capital.” As of December
31, 2018, the Company has sufficient unissued registered common stock for settlement of the stock incentive plan mentioned above.
The fair value of stock options was determined
at the date of grant using the Black-Scholes option pricing model. The Black-Scholes option model requires management to make various
estimates and assumptions, including expected term, expected volatility, risk-free rate, and dividend yield. The expected term
represents the period of time that stock-based compensation awards granted are expected to be outstanding and is estimated based
on considerations including the vesting period, contractual term and anticipated employee exercise patterns. Expected volatility
is based on the historical volatility of the Company’s stock. The risk-free rate is based on the U.S. Treasury yield curve
in relation to the contractual life of stock-based compensation instruments. The dividend yield assumption is based on historical
patterns and future expectations for the Company dividends.
For 2018 and 2017, assumptions used to
estimate the fair value of stock options on the grant dates are as follows:
Issuance Date
|
|
Expected volatility
|
|
|
Risk-free rate
|
|
|
Expected term (years)
|
|
|
Dividend yield
|
|
August 16, 2017
|
|
|
54.80
|
%
|
|
|
1.79
|
%
|
|
|
5
|
|
|
|
0.00
|
%
|
December 5, 2018
|
|
|
44.72
|
%
|
|
|
2.79
|
%
|
|
|
5
|
|
|
|
0.00
|
%
|
The stock options granted during 2018 and
2017 were exercisable immediately and their fair value on the grant date using the Black-Scholes option pricing model were $0.02
million and $0.1 million, respectively. For the years ended December 31, 2018 and 2017, the Company recognized stock-based compensation
expenses of $0.02 million and $0.1 million, respectively.
The activities of stock options are summarized
as follows, including granted, exercised and forfeited.
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Weighted-Average
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Term (years)
|
|
Outstanding - January 1, 2017
|
|
|
112,500
|
|
|
$
|
7.31
|
|
|
|
5
|
|
Granted
|
|
|
22,500
|
|
|
|
5.04
|
|
|
|
5
|
|
Outstanding - December 31, 2017
|
|
|
135,000
|
|
|
$
|
6.93
|
|
|
|
5
|
|
Granted
|
|
|
22,500
|
|
|
|
2.37
|
|
|
|
5
|
|
Expired
|
|
|
(22,500
|
)
|
|
|
10.00
|
|
|
|
5
|
|
Outstanding - December 31, 2018
|
|
|
135,000
|
|
|
$
|
5.66
|
|
|
|
5
|
|
The following is a summary of the range of exercise prices for
stock options that are outstanding and exercisable at December 31, 2018:
|
|
Outstanding Stock
|
|
|
Weighted Average
|
|
|
Weighted Average
|
|
|
Number of Stock
|
|
Range of Exercise Prices
|
|
Options
|
|
|
Remaining Life
|
|
|
Exercise Price
|
|
|
Options Exercisable
|
|
$3.50 - $10.00
|
|
|
135,000
|
|
|
|
2.83
|
|
|
$
|
5.66
|
|
|
|
135,000
|
|
As of December 31, 2018 and 2017, the total
intrinsic value of the Company’s stock options that were exercisable was $0.1 million and $0.1 million, respectively.
For the years ended December 31, 2018 and
2017, no Company’s stock options were exercised.
During the years ended December 31, 2018
and 2017, the weighted average fair value of the Company’s stock options granted was $1.01 and $4.46, respectively.
20. Retained Earnings
Pursuant to the relevant PRC laws, the
profits distribution of the Company’s Sino-foreign subsidiaries, which are based on their PRC statutory financial statements,
other than the financial statement that was prepared in accordance with generally accepted accounting principles in the United
States of America, are available for distribution in the form of cash dividends after these subsidiaries have paid all relevant
PRC tax liabilities, provided for losses in previous years, and made appropriations to statutory surplus at 10%.
When the statutory surplus reserve reaches
50% of the registered capital of a company, additional reserve is no longer required. However, the reserve cannot be distributed
to shareholders. Based on the business licenses of the PRC subsidiaries, the registered capital of Henglong, Jiulong, Shenyang,
USAI, Jielong, Wuhu, Hubei Henglong and Chongqing are $10.0 million, $4.2 million (equivalent to RMB 35.0 million), $8.1
million (equivalent to RMB 67.5 million), $2.6 million, $6.0 million, $3.8 million (equivalent to RMB 30.0 million), $39 million
and $9.5 million (equivalent to RMB 60.0 million), respectively.
For the years ended December 31, 2018 and
2017, the subsidiaries in China appropriated statutory reserves of $0.4 million and $0.2 million, respectively, in respect of the
dividends that were declared.
21. Accumulated Other Comprehensive
Income
The Company’s activities in respect
of the amounts of the accumulated other comprehensive income for the year ended December 31, 2018 and 2017, are summarized as follows
(figures are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
17,780
|
|
|
$
|
(892
|
)
|
Other comprehensive income related to the non-controlling interests acquired by the Company
|
|
|
-
|
|
|
|
(67
|
)
|
Foreign currency translation adjustment attributable to parent company
|
|
|
(15,925
|
)
|
|
|
18,739
|
|
Balance at end of year
|
|
$
|
1,855
|
|
|
$
|
17,780
|
|
22. Treasury Stock
Treasury stock
represents shares repurchased by the Company that are no longer outstanding and are held by the Company. Treasury stock is accounted
for under the cost method. On December 5, 2018, the Board of Directors of the Company approved a share repurchase program under
which the Company was permitted to repurchase up to $5.0 million of its common stock from time to time in the open market at prevailing
market prices not to exceed $4.00 per share through December 4, 2019. During the year ended December 31, 2018, the Company repurchased
17,400 shares of the Company’s common stock for cash consideration of $0.05 million on the open market. As of December 31,
2018, the Company had cumulatively repurchased 711,698 shares of the Company’s common stock since inception. The repurchased
shares are presented as “treasury stock” on the balance sheet.
23. Non-controlling Interests
The Company’s
activities in respect of the amounts of the non-controlling interests’ equity for the year ended December 31, 2018 and 2017,
are summarized as follows (figures are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
6,681
|
|
|
$
|
5,412
|
|
(Loss)/income attributable to non-controlling interests
|
|
|
(2,298
|
)
|
|
|
707
|
|
Contribution by non-controlling shareholder of Henglong KYB
|
|
|
15,728
|
|
|
|
-
|
|
Dividends declared to the non-controlling interest holders of joint-venture companies
|
|
|
(538
|
)
|
|
|
(608
|
)
|
Acquisition of the non-controlling interest in Brazil Henglong
|
|
|
-
|
|
|
|
458
|
|
Other comprehensive income related to the non-controlling interests acquired by the Company
|
|
|
-
|
|
|
|
67
|
|
Foreign currency translation adjustment attributable to non-controlling interests
|
|
|
(623
|
)
|
|
|
645
|
|
Balance at end of year
|
|
$
|
18,950
|
|
|
$
|
6,681
|
|
24. Gain on Other Sales
Gain on other sales mainly consists of
net amount retained from sales of materials, property, plant and equipment and scraps.
25. Other Income, Net
The Company recorded government subsidies
received with no further condition to be met as other income. As of December 31, 2018 and 2017, the Company has recognized such
subsidies in the amounts of $1.9 million and $1.2 million, respectively.
The Chinese government provides subsidies
to support enterprises in their Research and development, “R&D,” and renewal of equipment. Government subsidies
are generally classified as specific purpose subsidies, such as R&D activities and renewal of equipment, and unspecified purpose
subsidies. For specific purpose subsidies, accounting by the occurred evidence, subsidies for the R&D activities first offset
related R&D expenses that occurred, and subsidies for renewal of equipment offset the cost of related assets. Unspecific purpose
subsidies are generally recognized as other income.
26. Financial Income, Net
During the years ended December 31,
2018 and 2017, the Company recorded financial income/(expenses) which are summarized as follows (figures are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
2,275
|
|
|
$
|
3,438
|
|
Foreign exchange gain/(loss), net
|
|
|
457
|
|
|
|
(778
|
)
|
Bank fees
|
|
|
(570
|
)
|
|
|
(480
|
)
|
Total financial income, net
|
|
$
|
2,162
|
|
|
$
|
2,180
|
|
27. Income Taxes
PRC Corporate Income Tax
The Company’s subsidiaries registered
in the PRC are subject to national and local income taxes within the PRC at the applicable tax rate of 25% on the taxable income
as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested
enterprise, unless preferential tax treatment is granted by local tax authorities. If the enterprise meets certain preferential
terms according to the China income tax law, such as assessment as a “High & New Technology Enterprise” by the
government, then, the enterprise will be subject to enterprise income tax at a rate of 15%.
Pursuant to the New China Income Tax Law
and the Implementing Rules, “New CIT”, which became effective as of January 1, 2008, dividends generated after January
1, 2008 and payable by a foreign-invested enterprise to its foreign investors will be subject to a 10% withholding tax if the foreign
investors are considered as non-resident enterprises without any establishment or place within China or if the dividends payable
have no connection with the establishment or place of the foreign investors within China, unless any such foreign investor’s
jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Genesis, the Company’s wholly-owned
subsidiary and the direct holder of the equity interests in the Company’s subsidiaries in China, is incorporated in Hong
Kong. According to the Mainland China and Hong Kong Taxation Arrangement, dividends paid by a foreign-invested enterprise in China
to its direct holding company in Hong Kong would be subject to withholding tax at a rate of 10% if Genesis could not obtain the
Hong Kong tax resident certificate from the Hong Kong Inland Revenue Department. If Genesis obtains the Hong Kong tax resident
certificate, owns directly at least 25% of the shares of the foreign invested enterprise and is qualified as the beneficial owner,
it could benefit from a lower rate of 5%.
According to PRC tax regulation, the Company
should withhold income taxes for the profits distributed from the PRC subsidiaries to Genesis, the subsidiaries’ holding
company incorporated in Hong Kong. For the profits that the PRC subsidiaries intended to distribute to Genesis, the Company accrues
the withholding income tax as deferred tax liabilities. As of December 31, 2018, the Company has recognized deferred tax liabilities
of $4.2 million for the undistributed profits of $42.3 million which are expected to be distributed to Genesis in the future. The
Company intended to re-invest the remaining undistributed profits generated from the PRC subsidiaries in those subsidiaries indefinitely.
As of December 31, 2018 and 2017, the Company still has undistributed earnings of approximately $296.3 million and $294.2 million,
respectively, from investment in the PRC subsidiaries that are considered indefinitely reinvested. Had the undistributed earnings
been distributed to Genesis and not indefinitely reinvested, the tax provision as of December 31, 2018 and 2017, of approximately
$29.6 million and $29.4 million, respectively, would have been recorded. Such undistributed profits will be reinvested in Genesis
and not further distributed to the parent company incorporated in the United States going forward.
In 2014, Jiulong was awarded the title
of “High & New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income
tax at a rate of 15% from 2014 to 2016. It passed the reassessment of “High & New Technology Enterprise” in 2017.
Therefore, it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2014, Henglong was awarded the title
of “High & New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income
tax at a rate of 15% from 2014 to 2016. It passed the reassessment of “High & New Technology Enterprise” in 2017.
Therefore, it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2014, Hubei Henglong was awarded the
title of “High & New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise
income tax at a rate of 15% from 2014 to 2016. It passed the reassessment of “High & New Technology Enterprise”
in 2017. Therefore, it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2014, Wuhu was awarded the title of
“High & New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income tax
at a rate of 15% from 2014 to 2016. It passed the reassessment of “High & New Technology Enterprise” in 2017. Therefore,
it is subject to enterprise income tax at a rate of 15% from 2017 to 2019.
In 2015, Shenyang was awarded the title
of “High & New Technology Enterprise”, and based on the PRC income tax law, it was subject to enterprise income
tax at a rate of 15% from 2015 to 2017. The Company estimated the applied tax rate in 2018 to be 15% as it is probable to pass
the reassessment in 2018 and continue to qualify as “High & New Technology Enterprise”.
In 2013, Jielong was awarded the title
of “High & New Technology Enterprise” and, based on the PRC income tax law, it is subject to enterprise income
tax at a rate of 15% from 2016 to 2018. The Company estimated the applied tax rate in 2019 to be 15% as it is probable to pass
the reassessment in 2019 and continue to qualify as “High & New Technology Enterprise”.
According to the New CIT, USAI, Wuhan Chuguanjie,
Shanghai Henglong, Testing Center, Chongqing Henglong and Henglong KYB are subject to income tax at a rate of 25%.
Brazil Corporate Income Tax
Based on Brazilian income tax laws, Brazil
Henglong is subject to income tax at a uniform rate of 15%, and a resident legal person is subject to additional tax at a rate
of 10% for the part of taxable income over $0.12 million, equivalent to approximately BRL 0.24 million. The Company had no assessable
income in Brazil for the years ended December 31, 2018 and 2017.
Hong Kong Corporate Income Tax
The profits tax rate of Hong Kong is 16.5%.
No provision for Hong Kong tax is made as Genesis is an investment holding company, and had no assessable income in Hong Kong for
the years ended December 31, 2018 and 2017.
U.S. Corporate Income Tax
The Company is a Delaware corporation that
is subject to U.S. corporate income tax on its taxable income at a rate of up to 21% for taxable years beginning after December
31, 2017 and U.S. corporate income tax on its taxable income of up to 35% for prior tax years. Recent 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.
The U.S. Tax Reform also includes provisions
for a new tax on GILTI effective for tax years of foreign 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 controlled foreign corporations (“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.
To the extent that portions of the Company’s
U.S. taxable income, such as Subpart F income or GILTI, are determined to be from sources outside of the U.S., subject to certain
limitations, the Company may be able to claim foreign tax credits to offset its U.S. income tax liabilities. If dividends that
the Company receives from its subsidiaries are determined to be from sources outside of the U.S., subject to certain limitations,
the Company will generally not be required to pay U.S. corporate income tax on those dividends. Any liabilities for U.S. corporate
income tax will be accrued in the Company’s consolidated statements of comprehensive income and estimated tax payments will
be made when required by U.S. law.
One-Time Transition Tax Related to U.S.
Tax Reform
In the fourth quarter of 2017, the Company
recognized a one-time transition tax of $35.6 million that represented management’s estimate of the amount of U.S. corporate
income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of
certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company elected to pay the one-time transition
tax over eight years commencing in April 2018. The actual impact of the U.S. Tax Reform on the Company may differ from management’s
estimates, and management may update its judgments based on future regulations or guidance issued by the U.S. Department of the
Treasury, and specific actions the Company may take in the future.
The provision for income taxes was calculated
as follows (figures are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Tax rate
|
|
|
21
|
%
|
|
|
35
|
%
|
Income before income taxes
|
|
$
|
(2,501
|
)
|
|
$
|
20,375
|
|
Income tax at federal statutory tax rate
|
|
|
(525
|
)
|
|
|
7,131
|
|
Tax benefit of super deduction of R&D expense
|
|
|
(3,731
|
)
|
|
|
(5,328
|
)
|
Effect of differences in foreign tax rate
|
|
|
(749
|
)
|
|
|
(1,830
|
)
|
Change in provision on valuation allowance for deferred income tax - U.S.
|
|
|
(583
|
)
|
|
|
(2,725
|
)
|
Change in provision on valuation allowance for deferred income tax - Non-U.S.
|
|
|
2,158
|
|
|
|
(128
|
)
|
One-time transition tax related to U.S. Tax Reform
|
|
|
-
|
|
|
|
35,564
|
|
Withholding tax resulting from the distribution of dividends from PRC subsidiaries
|
|
|
-
|
|
|
|
3,952
|
|
Effect of change in the tax rate due to the U.S. Tax Reform
|
|
|
-
|
|
|
|
2,490
|
|
Other differences
|
|
|
1,965
|
|
|
|
2,507
|
|
Total income tax expense
|
|
$
|
(1,465
|
)
|
|
$
|
41,633
|
|
The combined effects of the income tax
exemption and reduction available to the Company are as follows (figures are in thousands of USD unless otherwise indicated):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Tax holiday effect
|
|
$
|
749
|
|
|
$
|
1,830
|
|
Basic net income per share effect
|
|
|
0.02
|
|
|
|
0.06
|
|
Diluted net income per share effect
|
|
|
0.02
|
|
|
|
0.06
|
|
The Company is subject to examination in
the United States and China. The Company's tax years for 2014 through 2018 are still open for examination in China. The Company's
tax years for 2009 through 2018 are still open for examination in the United States.
Uncertain Tax Positions
The Company did not have any uncertain tax positions for the
years ended December 31, 2018 and 2017.
28. Income Per Share
Basic net income per share is computed
using the weighted average number of the ordinary shares outstanding during the year.
For diluted income per share, the Company
uses the treasury stock method for options, assuming the issuance of common shares, if dilutive, resulting from the exercise of
options.
The calculations of basic and diluted income per share attributable
to the parent company were (figures are in thousands of USD):
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income/(loss) attributable to the parent company’s common shareholders - Basic and Diluted
|
|
$
|
2,377
|
|
|
|
(19,346
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding - Basic
|
|
|
31,643,813
|
|
|
|
31,644,004
|
|
Dilutive effects of stock options
|
|
|
1,781
|
|
|
|
2,893
|
|
Denominator for dilutive income per share - Diluted
|
|
|
31,645,594
|
|
|
|
31,646,897
|
|
Net income/(loss) per share attributable to the parent company’s common shareholders
|
|
|
|
|
|
|
|
|
Basic
|
|
|
0.08
|
|
|
|
(0.61
|
)
|
Diluted
|
|
|
0.08
|
|
|
|
(0.61
|
)
|
As of December 31, 2018 and 2017, the exercise
prices for 112,500 shares and 112,500 shares, respectively, of outstanding stock options were above the weighted average
market price of the Company’s common stock during the year ended December 31, 2018 and 2017, respectively, and these stock
options were excluded from the calculation of the diluted income per share for the corresponding periods presented.
29. Significant Concentrations
A significant portion of the Company’s
business is conducted in China where the currency is the RMB. Regulations in China permit foreign owned entities to freely convert
the RMB into foreign currency for transactions that fall under the "current account", which includes trade related receipts
and payments, interest and dividends. Accordingly, the Company’s Chinese subsidiaries may use RMB to purchase foreign exchange
for settlement of such "current account" transactions without pre-approval.
China Automotive, the parent company, may depend
on Genesis and HLUSA dividend payments, which are generated from their subsidiaries in China, “China-based Subsidiaries,”
after they receive payments from the China-based Subsidiaries. Regulations in the PRC currently permit payment of dividends of
a PRC company only out of accumulated profits as determined in accordance with accounting standards and regulations in China. Under
PRC law China-based Subsidiaries are required to set aside at least 10% of their after-tax profit based on PRC accounting standards
each year to their general reserves until the cumulative amount reaches 50% of their paid-in capital. These reserves are not distributable
as cash dividends, or as loans or advances. These foreign-invested enterprises may also allocate a portion of their after-tax profits,
at the discretion of their boards of directors, to their staff welfare and bonus funds. Any amounts so allocated may not be distributed
and, accordingly, would not be available for distribution to Genesis and HLUSA.
The PRC government also imposes controls on
the convertibility of RMB into foreign currencies and, in certain cases, the remittance of currencies out of China, the China-based
Subsidiaries may experience difficulties in completing the administrative procedures necessary to obtain and remit foreign currencies.
If China Automotive is unable to receive dividend payments from its subsidiaries and China-based subsidiaries, China Automotive
may be unable to effectively finance its operations or pay dividends on its shares.
Transactions other than those that fall under
the "current account" and that involve conversion of RMB into foreign currency are classified as "capital account"
transactions; examples of "capital account" transactions include repatriations of investment by or loans to foreign owners,
or direct equity investments in a foreign entity by a China domiciled entity. "Capital account" transactions require
prior approval from China's State Administration of Foreign Exchange, or SAFE, or its provincial branch to convert a remittance
into a foreign currency, such as U.S. Dollars, and transmit the foreign currency outside of China.
This system could be changed at any time and
any such change may affect the ability of the Company or its subsidiaries in China to repatriate capital or profits, if any, outside
China. Furthermore, SAFE has a significant degree of administrative discretion in implementing the laws and has used this discretion
to limit convertibility of current account payments out of China. Whether as a result of a deterioration in the Chinese balance
of payments, a shift in the Chinese macroeconomic prospects or any number of other reasons, China could impose additional restrictions
on capital remittances abroad. As a result of these and other restrictions under the laws and regulations of the People's Republic
of China, or the PRC, the Company’s China subsidiaries are restricted in their ability to transfer a portion of their net
assets to the parent. The Company has no assurance that the relevant Chinese governmental authorities in the future will not limit
further or eliminate the ability of the Company’s Chinese subsidiaries to purchase foreign currencies and transfer such funds
to the Company to meet its liquidity or other business needs. Any inability to access funds in China, if and when needed for use
by the Company outside of China, could have a material and adverse effect on the Company’s liquidity and its business.
The Company grants credit to its customers
including Xiamen Joylon, Shanghai Fenglong, Beijing Henglong and Jiangling Yude, which are related parties of the Company. The
Company’s customers are mostly located in the PRC except for Fiat Chrysler North America, which is in the U.S.
In 2018, the Company’s five largest customers
accounted for 39.3 % of the Company’s consolidated sales, with one customer accounting for more than 10% of consolidated
sales (18.6% of consolidated sales, which comprised a total of $91.4 million in sales included in the Hubei Henglong segment (Note
33)).
In 2017, the Company’s five largest customers
accounted for 36.8% of the Company’s consolidated sales, with one customer accounting for more than 10% of consolidated sales
(14.5% of consolidated sales, which comprised a total of $72.2 million in sales included in the Hubei Henglong segment (Note 33)).
At December 31, 2018 and 2017, approximately
6.2% and 4.3% of accounts receivable were from trade transactions with the aforementioned customer (accounting for more than 10%
of consolidated sales).
30. Related Party Transactions
The Company’s related party transactions
include product sales, material purchases, and sales and purchases of equipment and technology. These transactions were consummated
at fair market price and under similar terms as those with the Company's customers and suppliers.
Related party transactions during the years ended December 31, 2018
and 2017, are as shown below (figures are in thousands of USD):
Merchandise Sold to Related Parties
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beijing Henglong
|
|
$
|
31,291
|
|
|
$
|
31,089
|
|
Xiamen Automotive Parts
|
|
|
5,739
|
|
|
|
6,042
|
|
Wuhan Tongkai
|
|
|
455
|
|
|
|
290
|
|
Shanghai Jinjie
|
|
|
119
|
|
|
|
161
|
|
Hubei Wiselink
|
|
|
2
|
|
|
|
-
|
|
Jingzhou Yude
|
|
|
-
|
|
|
|
1
|
|
Total
|
|
$
|
37,606
|
|
|
$
|
37,583
|
|
Rental Income Obtained from Related Parties
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Rental Income
|
|
$
|
375
|
|
|
$
|
147
|
|
Materials Sold to Related Parties
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Honghu Changrun
|
|
$
|
637
|
|
|
$
|
575
|
|
Jingzhou Yude
|
|
|
636
|
|
|
|
711
|
|
Jingzhou Tongying
|
|
|
279
|
|
|
|
288
|
|
Jiangling Tongchuang
|
|
|
-
|
|
|
|
27
|
|
Beijing Henglong
|
|
|
-
|
|
|
|
2
|
|
Other Related Parties
|
|
|
1
|
|
|
|
2
|
|
Total
|
|
$
|
1,553
|
|
|
$
|
1,605
|
|
Materials Purchased from Related Parties
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Jingzhou Tongying
|
|
$
|
9,091
|
|
|
$
|
11,078
|
|
Jiangling Tongchuang
|
|
|
7,066
|
|
|
|
7,930
|
|
Wuhan Tongkai
|
|
|
6,849
|
|
|
|
7,454
|
|
Honghu Changrun
|
|
|
1,665
|
|
|
|
1,157
|
|
Hubei Wiselink
|
|
|
884
|
|
|
|
1,374
|
|
Other Related Parties
|
|
|
3
|
|
|
|
1
|
|
Total
|
|
$
|
25,558
|
|
|
$
|
28,994
|
|
Technology and Services Purchased from Related Parties (R&D
Expenses)
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Changchun Hualong
|
|
$
|
496
|
|
|
$
|
454
|
|
Jingzhou Yude
|
|
|
263
|
|
|
|
117
|
|
Jingzhou T
ong
ying
|
|
|
42
|
|
|
|
-
|
|
Jingzhou Derun
|
|
|
25
|
|
|
|
46
|
|
Hubei Wiselink
|
|
|
7
|
|
|
|
507
|
|
Hubei Asta
|
|
|
2
|
|
|
|
10
|
|
Jiulong Machinery
|
|
|
-
|
|
|
|
25
|
|
Total
|
|
$
|
835
|
|
|
$
|
1,159
|
|
Property, Plant and Equipment Purchased from Related Parties
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Hubei Wiselink
|
|
$
|
5,281
|
|
|
$
|
9,113
|
|
Henglong Real Estate
|
|
|
2
|
|
|
|
-
|
|
Total
|
|
$
|
5,283
|
|
|
$
|
9,113
|
|
As of December 31, 2018 and 2017, accounts
receivable, other receivables, accounts payable and advance payments between the Company and related parties are as shown below
(figures are in thousands of USD):
Accounts and Notes Receivable from Related Parties
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Beijing Henglong
|
|
$
|
13,640
|
|
|
$
|
13,533
|
|
Xiamen Automotive Parts
|
|
|
2,527
|
|
|
|
2,601
|
|
Jingzhou Yude
|
|
|
1,398
|
|
|
|
1,559
|
|
Xiamen Joylon
|
|
|
1,129
|
|
|
|
1,186
|
|
Shanghai Jinjie
|
|
|
91
|
|
|
|
101
|
|
Wuhan Tongkai
|
|
|
40
|
|
|
|
90
|
|
Jingzhou Tongying
|
|
|
-
|
|
|
|
16
|
|
Total
|
|
$
|
18,825
|
|
|
$
|
19,086
|
|
Accounts and Notes Payable to Related Parties
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Jingzhou Tongying
|
|
$
|
1,199
|
|
|
$
|
2,720
|
|
Wuhan Tongkai
|
|
|
1,081
|
|
|
|
2,259
|
|
Hubei Wiselink
|
|
|
914
|
|
|
|
1,379
|
|
Jiangling Tongchuang
|
|
|
584
|
|
|
|
739
|
|
Wuhan Dida
|
|
|
355
|
|
|
|
-
|
|
Honghu Changrun
|
|
|
325
|
|
|
|
57
|
|
Shanghai Tianxiang
|
|
|
11
|
|
|
|
12
|
|
Jingzhou Yude
|
|
|
8
|
|
|
|
2
|
|
Total
|
|
$
|
4,477
|
|
|
$
|
7,168
|
|
Advance Payments for Property, Plant and Equipment to Related Parties
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Hubei Wiselink
|
|
$
|
7,679
|
|
|
$
|
5,158
|
|
Henglong Real Estate
|
|
|
1,044
|
|
|
|
106
|
|
Total
|
|
$
|
8,723
|
|
|
$
|
5,264
|
|
Other Advance Payments and Others to Related Parties
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
J
ing
zhou WiseDawn
|
|
$
|
533
|
|
|
$
|
-
|
|
Honghu Changrun
|
|
|
470
|
|
|
|
481
|
|
Jingzhou Yude
|
|
|
120
|
|
|
|
-
|
|
Changchun Hualong
|
|
|
73
|
|
|
|
76
|
|
Wuhan Tongkai
|
|
|
57
|
|
|
|
188
|
|
Henglong Real Estate
|
|
|
-
|
|
|
|
19,895
|
|
Jingzhou Derun
|
|
|
-
|
|
|
|
118
|
|
Other Related Parties
|
|
|
28
|
|
|
|
83
|
|
Total
|
|
$
|
1,281
|
|
|
$
|
20,841
|
|
As of March 28, 2019, the date the Company
issued the financial statements, Hanlin Chen, Chairman, owns 56.4% of the common stock of the Company and has the effective
power to control the vote on substantially all significant matters without the approval of other stockholders.
31. Commitments and Contingencies
On September 17, 2018, two purported stockholders
of the Company filed a complaint under 8 Del. C. § 211, seeking a court order requiring the Company to hold a 2018 annual
meeting of its stockholders. On September 27, 2018, the Company issued a press release announcing an annual stockholders meeting
set for December 5, 2018. On October 8, 2018, the Company moved to dismiss the complaint for failure to state a claim. On October
10, 2018, the Company filed its annual proxy statement on Schedule 14A with the Securities and Exchange Commission relating to
its December 5, 2018 annual meeting, which was held as scheduled. The case has been dismissed voluntarily.
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, Arthur Wong, Guangxun Xu and Robert Tung, 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. Management
expects the impact of the suit on the Company’s consolidated financial statements to be immaterial.
Other than as described above, (a) the Company
is not a party to any pending or, to the best of the Company’s knowledge, any threatened legal proceedings and (b) 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.
b. Commitments
In addition to bank loans, notes payables and the related interest,
the following table summarizes the Company’s non-cancelable commitments and contingencies as of December 31, 2018 (figures
are in thousands of USD):
|
|
Payment Obligations by Period
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
Total
|
|
Obligations for investment contracts
(1)
|
|
$
|
10,782
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
10,782
|
|
Obligations for purchasing and service
|
|
|
28,935
|
|
|
$
|
3,274
|
|
|
|
-
|
|
|
|
-
|
|
|
|
32,209
|
|
Total
|
|
$
|
39,717
|
|
|
$
|
3,274
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
42,991
|
|
|
(1)
|
In May 2016, Hubei Henglong entered into an agreement with other parties to establish a venture
capital fund, the “Chongqing Venture Fund”. Hubei Henglong has committed to make investments of RMB 120.0 million,
equivalent to approximately $17.5 million, representing 17.1% of Chongqing Venture Fund’s shares. As of December 31, 2018,
Hubei Henglong has completed a capital contribution of RMB 84.0 million, equivalent to approximately $12.2 million, representing
35.0% of Chongqing Venture Fund’s shares. According to the agreement, the remaining capital commitment of RMB 36.0 million,
equivalent to approximately $5.2 million, will be paid upon capital calls received from the Chongqing Venture Fund.
|
In March 2018,
Hubei Henglong entered into an agreement with other parties to establish a venture capital fund, the “Hubei Venture Fund”.
Hubei Henglong has committed to make an investment of RMB 76.0 million, equivalent to approximately $11.1 million, in the Hubei
Venture Fund in three installments, representing 38% of the Hubei Venture Fund’s shares. As of December 31, 2018, Hubei Henglong
has completed a capital contribution of RMB 38.0 million, equivalent to approximately $5.5 million. According to the agreement,
the remaining capital commitment of RMB 38.0 million, equivalent to approximately $5.5 million, will be paid upon capital calls
received from the Hubei Venture Fund.
32. Off-Balance Sheet Arrangements
At December 31, 2018 and 2017, the Company
did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
33. Segment Reporting
The accounting policies of the product sectors
are the same as those described in the summary of significant accounting policies except that the disaggregated financial results
for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which
management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions.
Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter segment
sales and transfers as if the sales or transfers were to third parties, at current market prices.
As of December 31, 2018, the Company had 13
product sectors, six of which were principal profit makers and were reported as separate sectors and engaged in the production
and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu, Henglong KYB and Hubei Henglong), and one holding company (Genesis).
The other seven sectors were engaged in the production and sale of sensor modular (USAI), automobile steering columns (Jielong),
provision of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil
Henglong), manufacture and sales of automobile electronic systems and parts (Wuhan Chuguanjie) and research and development of
intelligent automotive technology (Jingzhou Qingyan).
As of December 31, 2017, the Company had 12
product sectors, five of which were principal profit makers and were reported as separate sectors and engaged in the production
and sales of power steering (Henglong, Jiulong, Shenyang, Wuhu and Hubei Henglong), and one holding company (Genesis). The other
seven sectors were engaged in the production and sale of sensor modular (USAI), automobile steering column (Jielong), provision
of after sales and R&D services (HLUSA), production and sale of power steering (Chongqing Henglong), trade (Brazil Henglong),
manufacture and sale of automobile electronic systems and parts (Wuhan Chuguanjie) and research and development of intelligent
automotive technology (Jingzhou Qingyan).
The Company’s product sector information
from continuing operations is as follows (figures are in thousands of USD):
|
|
Net Sales
|
|
|
Net Income (Loss)
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henglong
|
|
$
|
250,532
|
|
|
$
|
279,706
|
|
|
$
|
(469
|
)
|
|
$
|
3,737
|
|
Jiulong
|
|
|
102,994
|
|
|
|
100,776
|
|
|
|
932
|
|
|
|
4,064
|
|
Shenyang
|
|
|
25,941
|
|
|
|
40,182
|
|
|
|
(148
|
)
|
|
|
2,107
|
|
Wuhu
|
|
|
30,356
|
|
|
|
25,599
|
|
|
|
(1,067
|
)
|
|
|
264
|
|
Hubei Henglong
|
|
|
123,237
|
|
|
|
92,293
|
|
|
|
8,957
|
|
|
|
10,416
|
|
Henglong KYB
|
|
|
23,423
|
|
|
|
-
|
|
|
|
(6,560
|
)
|
|
|
-
|
|
Other Entities
|
|
|
72,421
|
|
|
|
59,075
|
|
|
|
3,637
|
|
|
|
1,358
|
|
Total Segments
|
|
|
628,904
|
|
|
|
597,631
|
|
|
|
5,282
|
|
|
|
21,946
|
|
Corporate
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,150
|
)
|
|
|
(39,069
|
)
|
Eliminations
|
|
|
(132,746
|
)
|
|
|
(98,568
|
)
|
|
|
(2,053
|
)
|
|
|
(1,516
|
)
|
Total consolidated
|
|
$
|
496,158
|
|
|
|
499,063
|
|
|
$
|
79
|
|
|
$
|
(18,639
|
)
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
Capital Expenditures
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Henglong
|
|
$
|
4,633
|
|
|
$
|
4,721
|
|
|
$
|
6,622
|
|
|
$
|
4,183
|
|
Jiulong
|
|
|
2,876
|
|
|
|
2,901
|
|
|
|
3,439
|
|
|
|
3,477
|
|
Shenyang
|
|
|
595
|
|
|
|
605
|
|
|
|
610
|
|
|
|
1,265
|
|
Wuhu
|
|
|
617
|
|
|
|
597
|
|
|
|
256
|
|
|
|
81
|
|
Hubei Henglong
|
|
|
6,003
|
|
|
|
5,500
|
|
|
|
15,513
|
|
|
|
21,309
|
|
Henglong KYB
|
|
|
187
|
|
|
|
-
|
|
|
|
6,089
|
|
|
|
-
|
|
Other Entities
|
|
|
1,863
|
|
|
|
1,991
|
|
|
|
2,558
|
|
|
|
3,600
|
|
Total Segments
|
|
|
16,774
|
|
|
|
16,315
|
|
|
|
35,087
|
|
|
|
33,915
|
|
Corporate
|
|
|
42
|
|
|
|
56
|
|
|
|
-
|
|
|
|
-
|
|
Eliminations
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,050
|
)
|
|
|
-
|
|
Total consolidated
|
|
$
|
16,816
|
|
|
$
|
16,371
|
|
|
$
|
29,037
|
|
|
$
|
33,915
|
|
|
|
Total Assets
|
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Henglong
|
|
$
|
305,311
|
|
|
$
|
346,199
|
|
Jiulong
|
|
|
81,063
|
|
|
|
82,940
|
|
Shenyang
|
|
|
36,728
|
|
|
|
44,693
|
|
Wuhu
|
|
|
32,763
|
|
|
|
26,008
|
|
Hubei Henglong
|
|
|
358,445
|
|
|
|
318,422
|
|
Henglong KYB
|
|
|
63,364
|
|
|
|
-
|
|
Other Entities
|
|
|
96,881
|
|
|
|
88,850
|
|
Total Segments
|
|
|
974,555
|
|
|
|
907,112
|
|
Corporate
|
|
|
81,218
|
|
|
|
121,756
|
|
Eliminations
|
|
|
(365,274
|
)
|
|
|
(311,499
|
)
|
Total consolidated
|
|
$
|
690,499
|
|
|
$
|
717,369
|
|
Financial information segregated by geographic
region is as follows (figures are in thousands of USD):
|
|
Net Sales
(1)
|
|
|
Long-term assets
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
$
|
354,749
|
|
|
$
|
383,415
|
|
|
$
|
177,870
|
|
|
$
|
169,346
|
|
United States
|
|
|
113,124
|
|
|
|
84,240
|
|
|
|
770
|
|
|
|
797
|
|
Other foreign countries
|
|
|
28,285
|
|
|
|
31,408
|
|
|
|
490
|
|
|
|
596
|
|
Total consolidated
|
|
$
|
496,158
|
|
|
$
|
499,063
|
|
|
$
|
179,130
|
(2)
|
|
$
|
170,739
|
(2)
|
(1)
|
Revenue is attributed to
each country based on location of customers.
|
(2)
|
Pursuant to ASC 280-10-50-41,
the deferred tax assets of $15.3 million and $13.4 million and the intangible assets, net of $0.6 million and $0.7
million were excluded from long-term assets as of December 31, 2018 and 2017, respectively.
|