CAAS China Automotive Systems Inc

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

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

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

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

China Automotive Systems, Inc. and Subsidiaries

Notes to Condensed Unaudited Consolidated Financial Statements

Three Months and Nine Months Ended September 30, 2019 and 2018

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

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

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

The Company owns the following aggregate net interests in the following subsidiaries organized in the People's Republic of China, the “PRC,” and Brazil as of September 30, 2019 and December 31, 2018.

Basis of Presentation – The accompanying condensed unaudited consolidated financial statements include the accounts of the Company and its subsidiaries. The details of subsidiaries are disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The condensed unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions in Regulation S-X. Accordingly they do not include all of the information and footnotes required by such accounting principles for complete financial statements. These financial statements should be read in conjunction with the consolidated financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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

The condensed consolidated balance sheet as of December 31, 2018 is derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

The results of operations for the three months and nine months ended September 30, 2019 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2019.

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

Foreign Currencies - China Automotive, the parent company, and HLUSA maintain their books and records in United States Dollars, “USD,” their functional currency. The Company’s subsidiaries based in the PRC and Genesis maintain their books and records in Renminbi, “RMB,” their functional currency. The Company’s subsidiary based in Brazil maintains its books and records in Brazilian reais, “BRL,” 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. 

On January 1, 2019, the Company adopted ASU 2016-02, Leases (as amended by ASU Nos. 2018-10, 2018-11, 2018-20, and 2019-01), using the modified retrospective method. The impact of the adoption of the new standard on the consolidated financial statements is discussed in “Significant Accounting Policies” below.

The following significant accounting policies have been added or changed since the date of the Company’s 2018 Annual Report on Form 10-K.

Leases - As described in the “Recent Accounting Pronouncements” section, the Company adopted ASU 2016-02, Leases, and other related ASUs (collectively, “ASC 842”) on January 1, 2019, using the modified retrospective method of adoption.

The Company elected the transition method, which allows entities to initially apply the requirements of ASC 842 by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, prior periods have not been restated. There is no material impact on the balance of retained earnings, right of use assets or associated lease liabilities as of January 1, 2019 due to the adoption of ASC 842. The Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which includes not reassessing lease classification of existing leases. The Company did not elect the hindsight practical expedient.

The Company determines if an arrangement is a lease upon inception. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The right to control the use of an asset includes the right to obtain substantially all of the economic benefits of the underlying asset and the right to direct how and for what purpose the asset is used. The Company’s major plants and buildings are self-owned and limited temporary small offices were rented.

For leases with a term of 12 months or less, the Company makes an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term.

Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. The discount rate used to calculate present value is the Company’s incremental borrowing rate or, if available, the rate implicit in the lease. The Company determines the incremental borrowing rate for each lease based primarily on the lease term and the economic environment of the applicable country or region. The discount rate used by the Company for its operating lease was 4.49%.

The operating lease right of use assets of $0.4 million as of September 30, 2019 were included in other current assets. The current portion of operating lease liabilities of $0.1 million as of September 30, 2019 was included in other current liabilities and the non-current portion of $0.3 million was included in other non-current liabilities. The lease expenses recognized for the three and nine months ended September 30, 2019 were $2,573 and $9,236, respectively. The weighted average remaining lease term was 3 years. The Company did not have finance lease arrangements as of September 30, 2019.

The Company’s accounts and notes receivable, net as of September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):

The Company’s inventories as of September 30, 2019 and December 31, 2018 consisted of the following (figures are in thousands of USD):

The write down of inventories amounted to $0.9 million and $1.5 million for the three months ended September 30, 2019 and 2018, respectively, and $3.2 million and $5.0 million for the nine months ended September 30, 2019 and 2018, respectively.

In January 2010, the Company invested $3.1 million to establish a joint venture company, Beijing Henglong, with Hainachuan. The Company owns 50% of the equity in Beijing Henglong and can exercise significant influence over Beijing Henglong’s operating and financial policies. The Company accounts for Beijing Henglong’s operational results using the equity method. As of September 30, 2019 and December 31, 2018, the Company had $4.5 million and $4.2 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 made investments of RMB 50.0 million, equivalent to approximately $7.3 million, representing 12.5% of the Suzhou Venture Fund’s shares. In April 2019, the Suzhou Venture Fund made distributions that were proportional to each owner’s allocated share of the fund, pursuant to which Hubei Henglong received RMB 3.9 million, equivalent to approximately $0.6 million. 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 September 30, 2019 and December 31, 2018, the Company had $8.3 million and $9.7 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 $17.5 million, in three installments, representing 23.5% of the Chongqing Venture Fund’s shares. In May 2019, Hubei Henglong and the other parties agreed to reduce Hubei Henglong’s aggregate commitment from RMB 120.0 million to RMB 100.0 million, representing 18.5% of the Chongqing Venture Fund’s shares. In May 2019, Hubei Henglong made an additional investment of RMB 16.0 million, equivalent to approximately $2.3 million. As of September 30, 2019, Hubei Henglong has completed a capital contribution of RMB 100.0 million, equivalent to approximately $14.5 million. As a limited partner, Hubei Henglong has more than virtually no influence over the Chongqing Venture Fund’s operating and financial policies. The investment is accounted for using the equity method. As of September 30, 2019 and December 31, 2018, the Company had $14.6 million and $13.1 million, respectively, of net equity in the Chongqing Venture Fund.

In October 2016, Hubei Henglong invested RMB 3.0 million, equivalent to approximately $0.4 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 accounts for Chongqing Jinghua’s operational results using the equity method. As of September 30, 2019 and December 31, 2018, the Company had $0.1 million and $0.2 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 $11.1 million, in three installments, representing 27.1% of the Hubei Venture Fund’s shares. As of September 30, 2019, Hubei Henglong has completed a capital contribution of RMB 38.0 million, equivalent to approximately $5.5 million. 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 September 30, 2019 and December 31, 2018, the Company had $5.3 million and $5.5 million, respectively, of net equity in the Hubei Venture Fund.

In April 2019, Hubei Henglong entered into an agreement with other parties and committed to contribute RMB 5.0 million, equivalent to approximately $0.7 million, to Jiangsu Intelligent Networking Automotive Innovation Center Co. Ltd., “Jiangsu Intelligent”, representing 19.2% of Jiangsu Intelligent’s shares and can exercise significant influence over Jiangsu Intelligent’s operational and financial policies. The Company accounts for Jiangsu Intelligent’s operational results using the equity method. As of September 30, 2019, Hubei Henglong has completed a capital contribution of RMB 1.0 million, equivalent to approximately $0.1 million. As of September 30, 2019, the Company had $0.1 million of net equity in Jiangsu Intelligent.

In June 2019, the Company invested RMB 8.0 million, equivalent to approximately $1.2 million, to establish an associate company, “Henglong Tianyu”, with Jingzhou Tianyu Auto Parts Co., Ltd. The Company owns 40% of the equity in Henglong Tianyu, and can exercise significant influence over Henglong Tianyu’s operating and financial policies. The Company accounts for Henglong Tianyu’s operational results using the equity method. As of September 30, 2019, the Company had $1.1 million of net equity in Henglong Tianyu.

The Company’s consolidated financial statements reflect the net loss of non-consolidated affiliates of $0.2 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively.

The Company’s property, plant and equipment, net as of September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):

Loans consist of the following as of September 30, 2019 and December 31, 2018 (figures are in thousands of USD):

The Company must use the loans for the purpose as prescribed in the loan contracts. If the Company fails to do so, it will be charged penalty interest and/or trigger early repayment. The Company complied with such financial covenants as of September 30, 2019, and believes it will continue to comply with them.

The Company’s accounts and notes payable as of September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):

The Company’s accrued expenses and other payables as of September 30, 2019 and December 31, 2018 are summarized as follows (figures are in thousands of USD):

For the three and nine months ended September 30, 2019 and 2018, the warranties activities were as follows (figures are in thousands of USD): 

On January 31, 2018, the Company entered into an equipment sales agreement with a third party (the “buyer-lessor”) and simultaneously entered into a four-year contract to lease back the equipment from the buyer-lessor. The carrying value of the equipment was RMB 91.3 million (equivalent to $12.9 million as of September 30, 2019) and the sales price was RMB 100 million (equivalent to $14.1 million as of September 30, 2019). 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 approximately $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 was accounted for as a financing transaction by the Company. As of September 30, 2019, $3.5 million was recognized as other payable (See Note 9) and $5.8 million was recognized as other long-term payable to the buyer-lessor according to the contract term.

The Company’s positions in respect of the amounts of additional paid-in capital for the three and nine months ended September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):

Appropriated

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, Henglong KYB, Chongqing Henglong and Wuhan Hyoseong are $10.0 million (equivalent to RMB 82.0 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), $39.0 million, $41.7 million (equivalent to RMB 320.0 million), $9.5 million (equivalent to RMB 60.0 million) and $2.9 million (equivalent to RMB 20.0 million), respectively.

The Company’s activities in respect of the amounts of appropriated retained earnings for the three and nine months ended September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):

The Company’s activities in respect of the amounts of accumulated other comprehensive income for the three and nine months ended September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD): 

The Company’s activities in respect of the amounts of the non-controlling interests’ equity for the three and nine months ended September 30, 2019 and 2018, are summarized as follows (figures are in thousands of USD):  

Revenue Disaggregation

Management has concluded that the disaggregation level is the same under both the revenue standard and the segment reporting standard. Please refer to Note 24.

Contract Assets and Liabilities

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

Contract liabilities are mainly customer deposits. As of September 30, 2019 and December 31, 2018, the Company has customer deposits of $2.1 million and $0.8 million, respectively, which were included in other current liabilities on the consolidated balance sheets. During the nine months ended September 30, 2019, $7.7 million was received and $6.4 million (including $0.8 million from the beginning balance of customer deposits) was recognized as net product sales revenue. Customer deposits represent non-refundable cash deposits for customers to secure rights to an amount of products produced by the Company under supply agreements. When the products are shipped to customers, the Company will recognize revenue and bill the customers to reduce the amount of the customer deposit liability.

During the three months ended September 30, 2019 and 2018, and the nine months ended September 30, 2019 and 2018, the Company recorded financial income, net which is summarized as follows (figures are in thousands of USD):

The Company’s effective tax rates were 18.1% and 18.6% for the three months ended September 30, 2019 and 2018, respectively, and 19.0% and 15.8% for the nine months ended September 30, 2019 and 2018, respectively. The changes in valuation allowance were $0.2 million and $0.1 million for the three and nine months ended September 30, 2019, respectively.

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

The calculations of basic and diluted income per share attributable to the parent company for the three months ended September 30, 2019 and 2018, were as follows (figures are in thousands of USD, except share and per share amounts):

The calculations of basic and diluted income per share attributable to the parent company for the nine months ended September 30, 2019 and 2018, were as follows (figures are in thousands of USD, except share and per share amounts):

As of September 30, 2019 and 2018, the exercise prices for 30,000 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 three months ended September 30, 2019 and 2018, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.

As of September 30, 2019 and 2018, the exercise prices for 22,500 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 nine months ended September 30, 2019 and 2018, respectively. Therefore, these stock options were excluded from the calculation of the diluted income per share for the corresponding periods presented.

 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. 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.

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 USD, 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 PRC, the Company’s PRC 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 PRC 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 in the ordinary course of its business, including Xiamen Joylon, Xiamen Automotive Parts, Shanghai Jinjie and Jingzhou Yude, which are related parties of the Company. The Company’s customers are mostly located in the PRC.

During the nine months ended September 30, 2019, the Company’s five largest customers accounted for 48.3% of its consolidated net product sales, with two customers individually accounting for more than 10% of consolidated net sales, i.e., 23.3% and 10.1%. As of September 30, 2019, approximately 11.3% of accounts receivable were from trade transactions with the aforementioned customers and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

During the nine months ended September 30, 2018, the Company’s five largest customers accounted for 39.7% of its consolidated net product sales, with one customer individually accounting for more than 10% of consolidated net sales, i.e., 19.2%. As of September 30, 2018, approximately 6.7% of accounts receivable were from trade transactions with the aforementioned customer and there was no individual customer with a receivables balance of more than 10% of total accounts receivable.

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

Related sales

Related purchases

Related receivables

Related advance payments

Related payables

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

As of November 12, 2019, 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.

Legal proceedings

On January 7, 2019, three purported stockholders of the Company filed a stockholder derivative complaint on behalf of the Company against the Company’s directors Hanlin Chen, Qizhou Wu, Arthur Wong, Guangxun Xu and Robert Tung in the Delaware Court of Chancery, alleging that they had (a) breached their fiduciary duties by approving and paying excessive compensation to the non-employee directors of the Company, Arthur Wong, Guangxun Xu and Robert Tung, and (b) failed to make full and accurate disclosure of all material information with respect to director qualification and director compensation paid in 2017 in the Company’s annual proxy statement on Schedule 14A filed on October 10, 2018. The directors have engaged their own counsel to answer this complaint. On April 9, 2019, the Company moved to dismiss the complaint. The motion to dismiss was denied on July 17, 2019. The directors of the Company will continue 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.

Other commitments and contingencies

In addition to the bank loans, notes payables and the related interest, the following table summarizes the Company’s major commitments and contingencies as of September 30, 2019 (figures are in thousands of USD):

As of September 30, 2019 and December 31, 2018, the Company did not have any significant transactions, obligations or relationships that could be considered off-balance sheet arrangements.

The accounting policies of the product sectors (each entity manufactures and sells different products and represents a different product sector) are the same as those described in the summary of significant accounting policies disclosed in the Company’s 2018 Annual Report on Form 10-K except that the disaggregated financial results for the product sectors have been prepared using a management approach, which is consistent with the basis and manner in which management internally disaggregates financial information for the purposes of assisting them in making internal operating decisions. Generally, the Company evaluates performance based on stand-alone product sector operating income and accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, at current market prices. Each product sector is considered a reporting segment.

As of September 30, 2019, the Company had 14 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 eight 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), research and development of intelligent automotive technology (Jingzhou Qingyan) and manufacture and sales of automotive motors and electromechanical integrated systems (Wuhan Hyoseong).

As of September 30, 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).

The Company’s product sector information for the three months and nine months ended September 30, 2019 and 2018, is as follows (figures are in thousands of USD):

Recent Accounting Pronouncements

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

Net Product Sales

Net product sales were $100.5 million for the three months ended September 30, 2019, compared to $112.1 million for the same period in 2018, representing a decrease of $11.6 million, or 10.3%.

Net sales of traditional steering products and parts were $82.0 million for the three months ended September 30, 2019, compared to $91.1 million for the same period in 2018, representing a decrease of $9.1 million, or 10.0%. Net sales of electric power steering (“EPS”) were $18.5 million for the three months ended September 30, 2019 and $21.0 million for the same period in 2018, representing a decrease of $2.5 million, or 11.9%. As a percentage of net sales, sales of EPS were 18.4% for the three months ended September 30, 2019, compared with 18.7% for the same period in 2018.

The decrease in net product sales was due to the effects of three major factors: i) the decrease in sales volume led to a sales decrease of $5.5 million due to the soft demand in the China domestic brand automobile market; ii) the decrease in average selling price of steering gears led to a sales decrease of $2.6 million; and iii) the depreciation of the RMB against the U.S. dollar in this quarter compared to the same quarter last year, resulting in a sales decrease of $3.5 million.

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

Cost of Products Sold

For the three months ended September 30, 2019, the cost of products sold was $83.2 million, compared to $96.7 million for the same period of 2018, representing a decrease of $13.5 million, or 14.0%. The decrease in cost of sales was mainly due to the effect of the following major factors: i) the decrease in sales volumes led to a cost of sales decrease of $8.1 million; ii) the decrease in unit cost led to a cost of sales decrease of $2.3 million; and iii) the depreciation of the RMB against the U.S. dollar resulted in a cost of sales decrease of $3.1 million. Further analysis is as follows:

Gross margin was 17.2% for the three months ended September 30, 2019, compared to 13.7% for the same period of 2018, representing an increase of 3.5%, mainly due to the changes in the product mix for the three months ended September 30, 2019.

Selling Expenses

Selling expenses were $3.6 million for the three months ended September 30, 2019, substantially consistent with $3.4 million for the same period of 2018.

General and Administrative Expenses

General and administrative expenses were $4.4 million for the three months ended September 30, 2019, as compared to $3.7 million for the same period of 2018, representing an increase of $0.7 million, or 18.9%, which was primarily due to increased professional service fees.

Research and Development Expenses

Research and development expenses were $6.1 million for the three months ended September 30, 2019, as compared to $7.0 million for the three months ended September 30, 2018, representing a decrease of $0.9 million, or 12.9%, which was mainly due to cost control on research and development expenditures.

Other Income/(Expense), Net

Other income, net was $0.2 million for the three months ended September 30, 2019, compared to other expense, net of $0.5 million for the three months ended September 30, 2018, representing an increase of $0.7 million in other income, which was primarily due to a donation of $0.7 million made by the Company to a charity in July 2018.

Interest Expense

Interest expense was $0.8 million for the three months ended September 30, 2019, compared to $0.4 million for the three months ended September 30, 2018, which was primarily due to higher interest rates.

Income Taxes

Income tax expense was $0.9 million for the three months ended September 30, 2019, compared to $0.3 million for the three months ended September 30, 2018. The income before income tax increased to $5.3 million for the three months ended September 30, 2019 from $1.8 million for the same period in 2018 and the effective tax rate decreased to 18.1% from 18.6% for the same period in 2018, which was due to a lower valuation allowance provided for the deferred tax assets of Genesis.

Net (Loss)/Income Attributable to Non-controlling Interests

Net loss attributable to non-controlling interests amounted to $0.2 million for the three months ended September 30, 2019, compared to nil for the three months ended September 30, 2018.

Net Income Attributable to Parent Company’s Common Shareholders

Net income attributable to parent company’s common shareholders was $4.2 million for the three months ended September 30, 2019, compared to $0.4 million for the three months ended September 30, 2018, representing an increase of $3.8 million.