Greenland Technologies (GTEC) - 2022 Q3 - Quarterly Report

Part I. Financial Information Financial Statements (Unaudited) The unaudited consolidated financial statements for the nine months ended September 30, 2022, show a decrease in total assets to $157.7 million and a decrease in total liabilities to $74.4 million compared to year-end 2021, with revenues declining 5.5% year-over-year to $71.7 million, while net income increased to $7.4 million from $6.8 million, and cash position ended at $15.0 million Consolidated Balance Sheets As of September 30, 2022, the company's total assets decreased to $157.7 million from $162.6 million at the end of 2021, primarily due to reductions in inventories and notes receivable, while total liabilities saw a significant reduction to $74.4 million from $87.7 million, driven by lower notes payable and accounts payable, consequently increasing total equity from $74.8 million to $83.3 million Consolidated Balance Sheet Highlights (in U.S. Dollars) | Balance Sheet Item | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $135,341,847 | $139,305,403 | | TOTAL ASSETS | $157,675,332 | $162,568,442 | | Total current liabilities | $70,262,069 | $85,463,224 | | TOTAL LIABILITIES | $74,384,253 | $87,723,776 | | TOTAL EQUITY | $83,291,079 | $74,844,666 | Consolidated Statements of Operations and Comprehensive Income (Loss) For the third quarter of 2022, revenues decreased by 5.6% to $21.8 million, while net income rose by 67.4% to $2.1 million compared to Q3 2021, and for the nine-month period, revenues fell 5.5% to $71.7 million, and net income increased by 7.9% to $7.4 million, though diluted EPS for the nine months decreased from $0.55 in 2021 to $0.39 in 2022 Q3 Operating Results (in U.S. Dollars) | Metric | Q3 2022 | Q3 2021 | Change | | :--- | :--- | :--- | :--- | | Revenues | $21,786,862 | $23,084,793 | -5.6% | | Gross Profit | $4,812,296 | $5,097,430 | -5.6% | | Income from Operations | $2,074,778 | $2,051,676 | +1.1% | | Net Income | $2,098,193 | $1,253,529 | +67.4% | | Diluted EPS | $0.10 | $0.09 | +11.1% | Nine-Month Operating Results (in U.S. Dollars) | Metric | 9M 2022 | 9M 2021 | Change | | :--- | :--- | :--- | :--- | | Revenues | $71,696,324 | $75,899,994 | -5.5% | | Gross Profit | $16,019,431 | $15,906,986 | +0.7% | | Income from Operations | $7,654,669 | $8,358,348 | -8.4% | | Net Income | $7,392,417 | $6,849,091 | +7.9% | | Diluted EPS | $0.39 | $0.55 | -29.1% | Consolidated Statements of Cash Flows For the nine months ended September 30, 2022, net cash used in operating activities was $6.1 million, a slight increase from $5.9 million in the prior year period, while investing activities provided $0.36 million in cash, a reversal from a $0.69 million use of cash in 2021, and financing activities provided $4.0 million, a significant decrease from $12.7 million in 2021, mainly due to lower proceeds from notes payable and higher loan repayments Cash Flow Summary for Nine Months Ended Sep 30 (in U.S. Dollars) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | $(6,121,235) | $(5,864,423) | | Net Cash Provided by (Used in) Investing Activities | $356,085 | $(685,761) | | Net Cash Provided by Financing Activities | $3,961,098 | $12,669,108 | | Net (Decrease) Increase in Cash | $(1,804,052) | $6,118,924 | | Cash and Restricted Cash at End of Period | $15,027,531 | $15,656,356 | Notes to Consolidated Financial Statements The notes detail the company's business activities, including manufacturing transmission products in the PRC and expanding into electric industrial vehicles in the U.S., noting a significant concentration of revenue with two customers accounting for 32.2% of sales, a substantial related-party receivable of $35.35 million due from the controlling shareholder, Cenntro Holding Limited, with repayment extended to June 2024, and a $5.2 million share offering in July 2022 - The company's primary business is developing and manufacturing transmission products for material handling machinery in the PRC, having expanded into producing and selling electric industrial vehicles in the U.S. market through its subsidiary HEVI Corp[34][35][38] - Revenue for the nine months ended Sep 30, 2022, decreased to $71.70 million from $75.90 million in the prior year, primarily due to reduced sales volume from COVID-19 lockdowns in China[36] Major Customer Concentration (Nine Months Ended Sep 30, 2022) | Customer | Revenue (USD) | % of Total Revenue | | :--- | :--- | :--- | | Company A | $13,521,896 | 18.86% | | Company B | $9,581,396 | 13.36% | | Total | $23,103,292 | 32.22% | - A significant receivable of $35.35 million is due from the controlling shareholder, Cenntro Holding Limited, with the repayment deadline for this amount extended to June 30, 2024[207][208] - On July 27, 2022, the company closed a firm commitment offering of 1,250,000 ordinary shares, raising gross proceeds of $5,212,500[173] Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the 5.5% revenue decline for the first nine months of 2022 to COVID-19 lockdowns in China, despite which gross margin improved from 21.0% to 22.3% due to a favorable product mix shift, while operating expenses rose 10.8% from increased G&A and selling costs related to business expansion, highlighting the company's expansion into electric industrial vehicles in the U.S., including a new assembly site in Baltimore, with a key liquidity factor being a $35.5 million receivable from its controlling shareholder, with repayment extended to mid-2024 Results of Operations For the nine months ended Sep 30, 2022, revenue decreased 5.5% to $71.7 million due to lower sales volume from COVID-19 lockdowns in China, while gross margin improved to 22.3% from 21.0% in the prior year, attributed to a product mix shift towards higher-value hydraulic transmission products, and operating expenses increased by 10.8% to $8.4 million, driven by higher legal, consulting, and salary costs, yet net income rose 7.9% to $7.4 million, aided by lower interest expenses and higher other income Comparison of Nine-Month Results (2022 vs 2021) | Metric | 9M 2022 | 9M 2021 | Variance | Reason for Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $71.70M | $75.90M | -5.5% | Decrease in sales volume from COVID-19 lockdowns | | Gross Margin | 22.3% | 21.0% | +1.3pp | Shift in product mix towards higher value products | | Operating Expenses | $8.36M | $7.55M | +10.8% | Increased legal/consultancy fees and staff salary | | Net Income | $7.39M | $6.85M | +7.9% | Aided by lower interest expense and higher grant income | Liquidity and Capital Resources The company funds its operations through cash flow, bank loans, and equity financing, with cash and cash equivalents at $11.31 million as of September 30, 2022, and a significant liquidity consideration being the $35.46 million due from its controlling shareholder, Cenntro Holding Limited, for which the repayment deadline has been extended to June 30, 2024, believing it has sufficient cash for the next 12 months but may need additional resources for future investments or acquisitions - The company's working capital increased to $65.08 million as of Sep 30, 2022, from $53.84 million as of Dec 31, 2021[277] - A key balance sheet item is the $35.46 million due from a related party, primarily its controlling shareholder Cenntro Holding Limited, with the repayment deadline extended from April 2022 to June 2024[274] - For the nine months ended Sep 30, 2022, the company generated a net cash inflow of $3.96 million from financing activities, mainly from short-term loans and equity financing, which was significantly lower than the $12.67 million in the same period of 2021[284] Quantitative and Qualitative Disclosures About Market Risk The company, as a smaller reporting company, is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, Greenland Technologies is exempt from the requirement to provide information on market risk[300] Controls and Procedures Management concluded that as of September 30, 2022, the company's disclosure controls and procedures were ineffective due to a material weakness in internal control over financial reporting, specifically a lack of sufficient financial reporting and accounting personnel with adequate knowledge of U.S. GAAP and SEC requirements, with a remedial plan being implemented that includes hiring more qualified personnel and formalizing accounting policies - Management identified a material weakness in internal control over financial reporting as of September 30, 2022[303] - The weakness stems from a lack of sufficient and competent financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements[303] - The company is implementing a remedial plan that includes recruiting more financial personnel, providing training, and formalizing accounting policies and procedures[304] Part II. Other Information Legal Proceedings As of the report date, management is not aware of any pending or threatened legal proceedings involving the company, its properties, directors, officers, or affiliates - The company reports no material pending or threatened legal proceedings[308] Risk Factors The company outlines significant risks, including business and industry risks such as cash intensity and customer concentration; risks of doing business in China, such as regulatory uncertainty and potential government intervention; and risks related to its ordinary shares, including price volatility and lack of dividends, with a key operational risk being the new electric vehicle venture, and a major financial risk being the large receivable from its controlling shareholder Risks Related to Business and Industry Key business risks include the cash-intensive nature of operations, reliance on a limited number of customers for a significant portion of revenue (48.10% from the top five in 9M 2022), and intense competition, with the company also highlighting the risks and uncertainties associated with its new electric industrial vehicle business, volatile steel prices impacting raw material costs, and a substantial balance of $35.35 million due from its controlling shareholder - The company's revenues are highly dependent on a limited number of customers, with the five largest customers contributing 48.10% of revenues in the first nine months of 2022[325] - The new business of producing and selling electric industrial vehicles subjects the company to additional risks, as it has limited experience in this area and may not generate sufficient revenue to cover investments[329][331] - A significant risk is a $35.35 million receivable from Cenntro Holding Limited, the company's controlling shareholder, with no guarantee it will be repaid by the extended June 2024 deadline[346] Risks Related to Doing Business in China The company faces risks from China's evolving political, economic, and legal landscape, including uncertainties in the interpretation and enforcement of PRC laws, potential government intervention, and complex regulations regarding overseas listings and data security, noting the Holding Foreign Companies Accountable Act (HFCA Act) but stating its U.S.-based auditor, WWC P.C., was inspected by the PCAOB in November 2021, mitigating immediate delisting risk under the act - The PRC government's substantial influence and the evolving legal system create uncertainties that could materially affect business operations and the value of the company's securities[363][367] - The company believes it is not currently required to obtain approval from the CSRC or other PRC authorities for its U.S. listing, but acknowledges that future regulations or changes in interpretation could create such requirements[371][374] - While the HFCA Act poses a risk to China-based companies, the company's auditor, WWC P.C., is U.S.-based and was inspected by the PCAOB in November 2021, making it not subject to the PCAOB's 2021 non-inspection determination[417] Risks Related to Our Ordinary Shares Investment risks for ordinary shares include potential price declines from future share sales by the company or existing shareholders, as the company does not expect to pay dividends in the foreseeable future, meaning investors must rely on share price appreciation for returns, and additionally, the company notes the risk of negative impacts from short-seller reports, a common issue for U.S.-listed companies with substantial China operations - The company does not expect to pay dividends in the foreseeable future, and investors must rely on price appreciation for any return on investment[422] - Future sales of ordinary shares by the company or its shareholders could cause the trading price to decline[419] - The company acknowledges the risk of being targeted by short sellers, which could drive down the market price of its shares and require significant resources to defend against[425][427] Unregistered Sales of Equity Securities and Use of Proceeds During the nine months ended September 30, 2022, the company had no sales of unregistered equity securities that were not previously disclosed in SEC filings - There were no unregistered sales of the Company's equity securities during the nine months ended September 30, 2022, that were not previously disclosed[428] Exhibits This section lists all exhibits filed with the Form 10-Q, including the company's articles of association, equity incentive plans, recent loan agreements, and required certifications by the CEO and CFO under the Sarbanes-Oxley Act - The report includes various exhibits, such as certifications pursuant to the Sarbanes-Oxley Act (31.1, 31.2, 32.1, 32.2) and English translations of recent loan agreements entered into by its PRC subsidiary[430]