Kaixin Auto Holdings — FY 2019 Form 20-F
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter report. Kaixin operates a China-focused premium used-car dealership network and related services; it reported 14 dealerships in 14 cities across 12 provinces at year-end. Its April 30, 2019 business combination with CM Seven Star was accounted for as a reverse recapitalization, with KAG as the accounting predecessor. Financial statements are prepared under U.S. GAAP and presented in U.S. dollars.
Financial performance and position
Unless stated otherwise, amounts are in US$ millions.
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | 334.7 | 431.4 |
| Gross profit (loss) | (5.5) | 17.4 |
| Gross margin | (1.6%) | 4.0% |
| Operating loss | (133.4) | (34.1) |
| Consolidated net loss | (69.1) | (89.5) |
| Net cash used in operating activities | (4.7) | (9.7) |
| Cash and restricted cash at year-end | 3.2 | 13.8 |
- Automobile sales were US$332.6 million, 99.4% of revenue; other revenue was US$2.1 million. The company had ceased making new floor-financing loans in 2018.
- It sold 6,005 vehicles in 2019 versus 7,438 in 2018; average selling price rose to approximately US$62,000 from US$61,000.
- Year-end total assets were US$54.4 million, current assets US$52.0 million, total liabilities US$51.9 million, and total equity US$2.5 million. Current liabilities were US$51.0 million, including US$16.6 million of short-term debt. Current assets included US$21.0 million of inventory and US$27.6 million of prepaid expenses and other current assets.
- Kaixin shareholders’ equity remained in deficit at US$4.6 million; accumulated deficit was US$192.2 million. The consolidated net loss included US$23.0 million attributable to noncontrolling interests; the loss attributable to Kaixin shareholders was US$46.1 million, or US$1.39 per share.
- Operating cash outflow improved from US$9.7 million to US$4.7 million, but cash fell to US$3.2 million. Investing activities provided US$1.2 million and financing activities used US$6.3 million in 2019.
Material changes and unusual items
- Revenue declined 22% year over year, chiefly because vehicle sales volume fell amid China market headwinds, reduced inventory, and dealership restructuring that interrupted operations at some locations.
- Gross results swung to a loss, mainly reflecting a US$17.8 million inventory write-down. The company also wrote off US$22.3 million of prepaid expenses and other current assets, principally advances and amounts related to dealership disputes and detained inventory.
- Operating expenses rose to US$128.0 million, including a US$74.1 million goodwill impairment that eliminated the year-end goodwill balance. Management attributed the impairment to suspended dealerships and weaker-than-expected performance outlook for active dealerships and after-sales centers. General and administrative expenses increased to US$36.1 million, including the write-offs noted above.
- Net loss narrowed from US$89.5 million to US$69.1 million, despite the higher operating loss. A US$65.6 million noncash gain from the fair-value change in contingent consideration, which was assumed by Renren upon the business combination, was a major offset.
- Renren waived US$76.0 million of amounts due from KAG and assumed US$42.5 million of contingent liabilities in connection with the business combination. These transactions materially affected reported equity and earnings comparability.
Outlook, risks and contingencies
- Going concern: The auditor highlighted substantial doubt about Kaixin’s ability to continue as a going concern. The company reported recurring losses, negative operating cash flow, limited cash, and US$718,000 of short-term debt in default and unpaid as of June 30, 2020. Management planned cost reductions, debt-extension discussions, and additional financing, but availability was uncertain; further operating cuts might be required.
- COVID-19: Outlets and offices closed in late January 2020 and gradually reopened from March, but customer traffic remained significantly below comparable pre-outbreak levels. Management expected a significant adverse effect on 2020 results; the filing provides no quantified guidance.
- Dealership disputes: Disagreements with noncontrolling shareholders led to inventory being detained and uncertainty over recovery of advances and receivables. The company was negotiating and had initiated legal proceedings where necessary.
- Controls and reporting: Management concluded disclosure controls were ineffective as of December 31, 2019. Material weaknesses included controls over complex transactions, risk assessment, and evaluation of internal-control components; they had not been fully remediated. The annual report did not include management’s internal-control effectiveness assessment or an auditor attestation.
- Business and structure risks: Kaixin depends on a limited number of financing partners; its Ping An Bank agreement expired June 30, 2020 with no near-term renewal plan. It also relies on PRC VIE contractual arrangements, whose enforceability and regulatory treatment are uncertain. The filing highlights tax, foreign-exchange, data-security, competition, inventory, and financing risks.
- The company did not expect to pay cash dividends in the foreseeable future. It reported no material ongoing legal or administrative proceedings, while separately describing the dealership disputes.
Important facts for investors to verify
- Current liquidity, debt maturities and defaults, and whether financing or debt extensions were obtained after the filing date.
- Recoverability of the US$27.6 million of prepaid expenses and other current assets and the US$21.0 million of inventory, including outcomes of dealership disputes.
- Whether dealership restructuring restored sales volumes and margins, and the extent of continuing dealership suspensions.
- Progress in remediating material weaknesses and the effectiveness of subsequent financial reporting controls.
- COVID-19’s realized impact on 2020 revenue, cash flow, outlet operations, and the company’s ability to continue as a going concern.
- Developments in financing-partner relationships, VIE regulation, and any tax-authority challenge to the used-car transaction structure.