GTEC Greenland Technologies Holding Corporation

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF ZHONGCHAI HOLDING 

You should read the following discussion of Zhongchai Holding’s financial condition and results of operations in conjunction with its consolidated financial statements and the related notes included elsewhere in this report. The discussion in this statement contains forward-looking statements that involve risks and uncertainties, such as statements of Zhongchai Holding’s plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Zhongchai Holding’s actual results could differ materially from those discussed in these forward-looking statements. As a result of many factors, including those factors set forth in the “Risk Factors” section of our Definitive Proxy Statement filed on September 26, 2019, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

Zhongchai Holding, through its subsidiaries, is:

Zhongchai Holding’s transmission products are key components for forklift trucks used in manufacturing and logistic applications, such as factories, workshops, warehouses, fulfillment centers, shipyards and seaports. Forklifts play an important role in logistics systems of many enterprises across different industries in China and globally. Generally, the industries with the largest demand for forklifts include the transportation, warehousing logistics, electrical machinery and automobile industries.

Zhongchai Holding has experienced increased demand for forklifts in the manufacturing and logistics industries in the PRC, as revenues increased from approximately $49.1 million in 2017 to approximately $60.2 million in 2018, albeit with declined revenue of approximately $40.5 million in the nine months ended September 30 compared with approximately $48 million in the same period of 2018, primarily due to reduction in production. Based on revenue of the nine months ended September 30, 2019 and 2018, Zhongchai Holding believes that it is one of the major developers and manufacturers of transmission products for small and medium-sized forklift trucks in China.

Zhongchai Holding’s transmission products are used in 1-ton to 15-ton forklift trucks, some with mechanical shift and some with automatic shift. Zhongchai Holding sells these transmission products directly to forklift truck manufacturers. In the nine months ended September 30, 2019 and 2018, Zhongchai Holding sold, in the aggregate, more than 61,891 and 73,503 sets of transmission products, respectively, to over 100 forklift manufacturers in China.

Revenues

Zhongchai Holding’s revenues decreased by approximately $ 0.01 million, or approximately 0.1%, to approximately $11.95 million for the three months ended September 30, 2019, compared to approximately $11.96 million for the three months ended September 30, 2018. The decrease was primarily attributable to the shortage of production capacity due to the moving process into new factory in Meizhou, Zhejiang, China. The new factory was fully completed by the end of April, 2019 and the company started in June to settle into the new factory, which caused production reduction in the second quarter. The company has fully settled into the new factory by the end of Oct. 2019.

Cost of Goods Sold

Zhongchai Holding’s cost of goods sold consists primarily of material costs, freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, wages, employee compensation, amortization, depreciation and related costs, which are directly attributable to the production of products. Write-down of inventory by using NRV impairment test is also recorded in cost of goods sold. The total cost of goods sold increased by approximately $ 0.57 million, or approximately 6.1%, to approximately $9.95million for the three months ended September 30, 2019, compared to approximately $ 9.38 million for the three months ended September 30, 2018. Cost of goods sold increased due to increasing price of raw material.  

Gross Profit

Zhongchai Holding’s gross profit decreased by approximately $0.58million, or 22.5%, to approximately $2 million for the three months ended September 30, 2019, from approximately $2.58 million for the three months ended September 30, 2018. For the three months ended September 30, 2019 and 2018, Zhongchai Holding’s gross margin was approximately 16.7% and 21.6%, respectively. The decrease of gross margin was primarily due to the increase in the price of certain raw materials and labor costs.

Operating Expense

Zhongchai Holding’s operating expenses consist of selling expenses, general and administrative expenses and research and development expenses

Selling Expense

Selling expenses mainly include operating expenses such as sales staff payroll, traveling expenses and transportation expenses. Selling expenses just increased by $0.06 million, or 46.6%, to approximately $0.18 million for the three months ended September 30, 2019, as compared to approximately $0.12 million for the three months ended September 30, 2018.

General and Administrative Expenses

General and administrative expenses include management and office staff salaries and employee benefits, deprecation for office facility and office furniture and equipment, travel and entertainment, legal and accounting, consulting fees and other office expenses. General and administrative expenses increased by approximately $0.29 million, or approximately 375.8%, to approximately $0.36 million for the three months ended September 30, 2019, as compared to approximately $0.08 million for the three months ended September 30, 2018. The increase of general and administrative was primarily due to Zhongchai Holding’s legal and audit fee occurred in this period.

Research and Development Expenses

Research and development (“R&D”) expenses consist of R&D personnel compensation, costs of materials used in R&D projects, and depreciation costs for research-related equipment. R&D expenses decreased by approximately $0.31 million, or 41.1%, to approximately $0.45 million for the three months ended September 30, 2019, as compared to approximately $0.76 million for the three months ended September 30, 2018. The decrease of R&D expenses was primarily due to the company starting to settle into the new facility in June, caused the decreasing activities on R&D.

Income from Operations

As a result of the foregoing, income from operations for the three months ended September 30, 2019 was approximately $1.01 million, a decrease of approximately $0.61 million from the income from operations of approximately $1.62 million for the three months ended September 30, 2018.

Interest Income and Interest Expenses

Zhongchai Holding’s interest income was approximately $7,547 for the three months ended September 30, 2019, an increase of approximately $4,601, or 156.2%, as compared to approximately $2,946 for the three months ended September 30, 2018. The increase in interest income was primarily due to increase in interest   income from bank deposits.

Zhongchai Holding’s interest expenses was approximately $(0.42) million for the three months ended September 30, 2019, an increase of approximately $0.17 million, or 71.3%, as compared to approximately $(0.24)million for the three months ended September 30, 2018. The increase was primarily due to new interest expenses from a “sale and leaseback” arrangement started in early 2019.

Other Income

Zhongchai Holding’s other income was approximately $(0.31) million for the three months ended September 30, 2019, a decrease of approximately $0.8 million, or 163.6%, as compared to approximately $0.49 million for the three months ended September 30, 2018. The decrease was primarily due to the loss on disposal of a few machineries.

Income Taxes

Zhongchai Holding’s income tax was approximately $0.05 million for the three months ended September 30, 2019, compared to approximately $0.21 million for the three months ended September 30, 2018. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. However, Zhongchai Holding obtained the “high-tech enterprise” tax status in November 2016, which reduced its statutory income tax rate to 15%.

Zhongchai Holding is registered in the Hong Kong Special Administrative Region of the People’s Republic of China and is subject to 16.5% income tax for locally earned income, but is exempt from income tax for income or gains earned outside of Hong Kong. Zhongchai Holding had no sales revenue in Hong Kong for the three months ended September 30, 2019 and 2018.

Net Income (Loss)

As a result of the foregoing, net income decreased by approximately $1. 42million, to approximately $0.24 million for the three months ended September 30, 2019, from an income of approximately $1.66 million for the three months ended September 30, 2018.

(b) For the nine months ended September 30, 2019 and 2018

Revenues

Zhongchai Holding’s revenues decreased by approximately $7.5 million, or approximately 15.6%, to approximately $ 40.5 million for the nine months ended September 30, 2019, compared to approximately $ 48.0 million for the nine months ended September 30, 2018. The decrease was primarily attributable to the shortage of production capacity due to the moving process into new factory in Meizhou, Zhejiang, China. The new factory was fully completed by the end of April, 2019 and the company started in June to settle into the new factory, which caused production reduction in the third quarter. The company has fully settled into the new factory by the end of Oct. 2019. On a RMB basis, revenues for the nine months ended September 30, 2019 decreased by approximately 11.42   %.

Cost of Goods Sold

Zhongchai Holding’s cost of goods sold consists primarily of material costs, freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, wages, employee compensation, amortization, depreciation and related costs, which are directly attributable to the production of products. Write-down of inventory by using NRV impairment test is also recorded in cost of goods sold. The total cost of goods sold decreased by approximately $4.2 million, or approximately 11.8%, to approximately $31.9 million for the nine months ended September 30, 2019, compared to approximately $36.1 million for the nine months ended September 30, 2018. Cost    of goods sold decreased due to decrease of sale volume.

Gross Profit

Zhongchai Holding’s gross profit decreased by approximately $3.2 million, or 27.1%, to approximately $8.6 million for the nine months ended September 30, 2019, from approximately $11.8 million for the nine months ended September 30, 2018. For the nine months ended September 30, 2019 and 2018, Zhongchai Holding’s gross margin was approximately 21.3% and 24.7%, respectively. The decrease of gross margin was primarily due to the increase in the price of certain raw materials and labor costs.

Operating Expense

Zhongchai Holding’s operating expenses consist of selling expenses, general and administrative expenses and research and development expenses

Selling Expense

Selling expenses mainly include operating expenses such as sales staff payroll, traveling expenses and transportation expenses. Selling expenses just increased by $ 59,426 or 8.3%, to approximately $0.78 million for the nine months ended September 30, 2019, as compared to approximately $0.72 million for the nine months ended September 30, 2018.

General and Administrative Expenses

General and administrative expenses include management and office staff salaries and employee benefits, deprecation for office facility and office furniture and equipment, travel and entertainment, legal and accounting, consulting fees and other office expenses. General and administrative expenses decreased by approximately $0.09 million, or approximately 6.9%, to approximately $1.25 million for the nine months ended September 30, 2019, as compared to approximately $1.34 million for the nine months ended September 30, 2018. The decrease of general and administrative was primarily due to less impairment loss on receivable and inventory occurred in recent period.     

Research and Development Expenses

Research and development (“R&D”) expenses consist of R&D personnel compensation, costs of materials used in R&D projects, and depreciation costs for research-related equipment. R&D expenses decreased by approximately $0.35 million, or 18.1%, to approximately $1.6 million for the nine months ended September 30, 2019, as compared to approximately $1.95 million for the nine months ended September 30, 2018. The decrease of R&D expenses was primarily due to the company starting to settle into the new facility in June, caused the decreasing activities on R&D.

Income from Operations

As a result of the foregoing, income from operations for the nine months ended September 30, 2019 was approximately $5 million, a decrease of approximately $2.8 million, from the income from operations of approximately 7.8 million for the nine months ended September 30, 2018.

Interest Income and Interest Expenses

Zhongchai Holding’s interest income was approximately $ 20,640 for the nine months ended September 30, 2019, an increase of approximately $2,480, or 13.7%, as compared to approximately $18,160 for the nine months ended September 30, 2018. The increase in interest income was primarily due to increase in interest   income from bank deposits.

Zhongchai Holding’s interest expenses was approximately $(1.29) million for the nine months ended September 30, 2019, an increase of approximately $0.22 million, or 20.4%, as compared to approximately $(1.07) million for the nine months ended September 30, 2018. The increase was primarily due to new interest expenses from a “sale and leaseback” arrangement started in early 2019.

Other Income

Zhongchai Holding’s other income was approximately $0.15 million for the nine months ended September 30, 2019, a decrease of approximately $0.63 million, or 80.6%, as compared to approximately $0.78 million for the nine months ended September 30, 2018. The decrease was primarily due to the loss on disposal of a few machineries in recent period.

Income Taxes

Zhongchai Holding’s income tax was approximately $3.87 million for the nine months ended September 30, 2019, compared to approximately $7.54 million for the nine months ended September 30, 2018. Under the Income Tax Laws of the PRC, companies are generally subject to income tax at a rate of 25%. However, Zhongchai Holding obtained the “high-tech enterprise” tax status in November 2016, which reduced its statutory income tax rate to 15%.

Zhongchai Holding is registered in the Hong Kong Special Administrative Region of the People’s Republic of China and is subject to 16.5% income tax for locally earned income, but is exempt from income tax for income or gains earned outside of Hong Kong. Zhongchai Holding had no sales revenue in Hong Kong for the nine months ended September 30, 2019 and 2018.

Net Income

As a result of the foregoing, net income decreased by approximately $3.1 million, to approximately $3.2 million for the nine months ended September 30, 2019, from an income of approximately $6.3 million for the nine months ended September 30, 2018.

Liquidity and Capital Resources

Zhongchai Holding has funded working capital and other capital requirements primarily by equity contributions, cash flow from operations, short-term bank loans and bank acceptance notes, and long-term bank loans. Cash is required primarily to purchase raw materials, repay debts and pay salaries, office expenses, income taxes and other operating expenses.

Zhongchai Holding management believes that Zhongchai Holding has sufficient cash, together with expected profits and anticipated capital from existing funding sources, to operate for the next 12 months. Zhongchai Holding has generated, and is expected to continue to generate, positive cash flow from operations.

Zhongchai Holding may need additional cash resources in the future if it experiences failure in collection of receivables, changed business conditions or other developments, and may also need additional cash resources in the future if it wishes to pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. If it is determined that the cash requirements exceed Zhongchai Holding’s cash and cash equivalents on hand, Zhongchai Holding may seek to issue debt or equity securities.

Zhongchai Holding has expended considerable resources to build a new factory, resulting in lower levels of available cash during such periods. However, Zhongchai Holding management anticipates that cash flow will improve in the remaining months of 2019, given that the new factory construction has been completed. Furthermore, management   expects to pledge the new title deeds to banks in order to obtain additional loans and to refinance expiring loans next year, as well as to fund other working capital needs to the extent additional funds are available upon terms acceptable to Zhongchai Holding.

See “NOTE 16: Related Person Transactions” above for a description of amounts payable to, and receivable from, related parties. There is no guarantee that the amounts payable by Zhongchai Equity Holder will be repaid in whole or in part in the near future, if at all. Any such failure could have a material negative impact on Zhongchai Holding’s balance sheet.  

Cash and Cash Equivalents

Cash equivalents refers to all highly liquid investments purchased with original maturity of three months or less. As of September 30, 2019, Zhongchai Holding had approximately $3.86 million of cash and cash equivalents, an increase of approximately $0.48 million, or 14.2%, as compared to approximately $3.38 million as of September 30, 2018. The increase of cash was mainly due to the increase in positive cash flows from operating and investing activities.

Restricted Cash

Restricted cash represents amounts held by a bank as security for bank acceptance notes and therefore is not available for use until the bank acceptance notes have been fulfilled or expired, normally within a twelve-month period. As of September 30, 2019, Zhongchai Holding had approximately $2.13 million of restricted cash, a decrease of approximately $1.27 million, or 37.4%, as compared to approximately $3.40 million as of September 30, 2018. The decrease of restricted cash was due to maturity and settlement of bank acceptance notes that were subsequently released from escrow.

Accounts Receivable

As of September 30, 2019, Zhongchai Holding had approximately $11.79 million of accounts receivables, an increase of approximately $1.62 million or 15.9%, as compared to approximately $10.17 million as of September 30, 218. The increase in accounts receivable was due to the lower turnover on receivable.

Zhongchai Holding recorded approximately $0.9 million of provision for doubtful accounts as of September 30, 2019. Zhongchai Holding conducted an aging analysis of each customer’s delinquent payments to determine whether allowance for doubtful accounts is adequate. In establishing the allowance for doubtful accounts, Zhongchai Holding considers historical experience, the economic environment, and the expected collectability of past due receivables. An estimate of doubtful accounts is recorded when collection of the full amount is no longer probable. Known bad debts are written off against the allowance for doubtful accounts when identified. After Zhongchai Holding evaluated all the above considerations, Zhongchai Holding established a policy to provide a provision of 5% for accounts receivable aged within one year, provision of 20% for accounts receivable aged between one and two years, a provision of 50% for accounts receivable aged between two and three years, and a provision of 100% for accounts receivable aged over three years. Zhongchai Holding will continuously assess its potential losses based on the credit history and relationships with its customers on a regular basis to determine if its bad debt allowance on its accounts receivable is adequate. Zhongchai Holding believes that its collection policies are in line with the transmissions industry in China generally.

Notes Receivable

As of September 30, 2019, Zhongchai Holding had approximately $14.46 million of notes receivables. The decrease was approximately $1.88 million, or 11.5%, as compared to approximately $16.34 million as of September 30, 2018.

Operating Activities

Zhongchai Holding’s net cash provided by operating activities was approximately $4.54 million and $3.44 million for the nine months ended September 30, 2019 and 2018, respectively.

In the nine months ended September 30, 2019, the main sources of cash inflow from operating activities were net income, change in inventories and other receivables, of approximately $3.25 million,$2.42 million and $3.95 million, respectively. The main causes of cash outflow were change in account receivable and note payable, of approximately $(2.18) million and $(3.85) million, respectively.

In the nine months ended September 30, 2018, the main sources of cash inflow from operating activities were net income, change in note receivable and account payable, of approximately $ 6.34 million, $3.49 million and $3.85 million, respectively. The main causes of cash outflow were change in account receivable and inventories, of approximately $(6.12) million and $(4.63) million, respectively.

Investing Activities

Net cash provided in investing activities was approximately $1.67 million for the nine months ended September 30, 2019. Cash provided in investing activities for the nine months ended September 30, 2019 was mainly due to the short-term investment in cash management products provided of approximately $2.19 million offset by approximately $ (0.41) million cash used for increase in construction-in-progress for the new factory.

Net cash provided in investing activities was approximately $(2.32) million for the nine months ended September 30, 2018. Cash provided in investing activities for the nine months ended September 30, 2018 was mainly due to the short-term investment in cash management products provided of approximately $2.57 million offset by approximately $(3.52) million cash used for increase in construction-in-progress for the new factory.

Financing Activities

Net cash used in financing activities was approximately $(6.67) million for the nine months ended September 30, 2019, mainly attributable to approximately $21.73 million proceeds from short-term bank loans, offset by repayments of short-term bank loans for approximately $(22.18) million, repayments of long-term bank loans for approximately $(4.74) million, approximately $(2.92) million repayment of loans from third parties, as well as approximately $(1.97) million repayment of loans from related parties.

Net cash used in financing activities was approximately $(1.63) million for the nine months ended September 30,2018 mainly attributable to repayment of short-term and long-term bank loans of approximately $(8.87) million and $(0.38) million, repayment of loans from third parties of approximately $(3.06) million, respectively, mitigated by additional proceeds from short-term bank loans of approximately $11.93 million

Credit Risk

Credit risk is one of the most significant risks for Zhongchai Holding’s business. Accounts receivable are typically unsecured and derived from revenues earned from customers, thereby exposing Zhongchai Holding to credit risk. Credit risk is controlled by the application of credit approvals, limits and monitoring procedures. Zhongchai Holding identifies credit risk collectively based on industry, geography and customer type. This information is monitored regularly by management. In measuring the credit risk of sales to customers, Zhongchai Holding mainly reflects the “probability of default” by the customer on its contractual obligations and considers the current financial position of the customer and the exposures to the customer and its likely future development.

Liquidity Risk

Zhongchai Holding is also exposed to liquidity risk that it is unable to provide sufficient capital resources and liquidity to meet its commitments and/or business needs. Liquidity risk is managed by the application of financial position analysis to test if Zhongchai Holding is in danger of liquidity issues and also by application of monitoring procedures to constantly observing its conditions and movements. When necessary, Zhongchai Holding resorts to other financial institutions to obtain additional short-term funding to meet the liquidity shortage.

Inflation Risk

Zhongchai Holding is also exposed to inflation risk. Inflationary factors, such as increases in raw material and overhead costs, could impair Zhongchai Holding’s operating results. Although Zhongchai Holding does not believe that inflation has had a material impact on its financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on its ability to maintain current levels of gross margin and operating expenses as a percentage of sales revenues if the selling prices of its products do not increase with such increased costs.

Off Balance Sheet Arrangements

None.

(a) Financial Statements of Business Acquired.

In accordance with Item 9.01(a), Zhongchai Holding’s audited financial statements for the year ended December 31, 2018 and 2017, and unaudited financial statements for the six months ended June 30, 2019 are attached to the Report as Exhibit 99.1 hereto. Zhongchai Holding’s unaudited financial statements as of September 30, 2019 are filed herein as Exhibit 99.3.

(b) Pro Forma Financial Information.

In accordance with Item 9.01(b), unaudited pro forma condensed combined financial statements for the nine months ended August 31, 2019 and year ended November 30, 2018 are attached to the Report as Exhibit 99.2 hereto. Unaudited pro forma condensed combined financial statements as of September 30, 2019 are attached to this Current Report as Exhibit 99.4.

(d) Exhibits