Greenland Technologies Holding Corp. — Q3 2020 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2020. Greenland manufactures transmission systems, primarily for forklift trucks, in China and is developing robotic cargo carriers. Its subsidiaries temporarily suspended operations in February 2020 because of COVID-19 restrictions; operations gradually resumed from late March.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $16.52M | $11.95M | $42.97M | $40.50M |
| Gross profit | $3.40M | $2.00M | $8.20M | $8.63M |
| Operating income | $2.24M | $1.01M | $3.97M | $4.99M |
| Net income | $0.46M | $0.24M | $2.26M | $3.25M |
| Net income attributable to Greenland shareholders | $0.21M | $0.16M | $1.72M | $2.83M |
| Basic and diluted EPS | $0.02 | $0.02 | $0.17 | $0.38 |
- Q3 revenue increased 38.2% year over year, with gross margin improving to 20.6% from 16.7%. Management attributed the margin improvement mainly to lower procurement costs and revenue growth to processing backlogged orders.
- For the first nine months, revenue increased 6.1% in U.S. dollars, but management reported a 10.4% decline in RMB terms. Gross margin fell to 19.1% from 21.3%; management cited higher procurement costs and lower prices under 2020 annual sales contracts.
- Year-to-date operating expenses rose 16.7% to $4.24M, including a 46.9% increase in general and administrative expenses. Operating income declined 20.6%, and net income declined 30.4%. Other expense was $0.42M, versus $0.04M of other income in the prior-year period, primarily reflecting foreign-exchange losses.
- Forklift transmission boxes generated $39.36M, or most of nine-month revenue; non-forklift products and parts generated $3.61M. The company sold 71,749 transmission sets in the first nine months, versus 62,024 in 2019.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $2.20M, down from $7.90M. Receivables, notes receivable and inventory absorbed cash; increased accounts payable provided $6.32M.
- Investing activities used $0.18M. Financing activities provided $2.20M, compared with $9.88M used in the prior-year period. Cash and restricted cash totaled $11.19M at September 30, 2020, including $10.42M unrestricted cash.
- Current assets were $59.71M and current liabilities $66.90M, producing negative working capital of approximately $7.18M, compared with positive working capital of $24.25M at December 31, 2019. The filing attributes the decline mainly to extending the maturity of a related-party receivable.
- Net accounts receivable was $15.69M, notes receivable $20.02M and inventory $12.57M. Allowance for doubtful accounts was $1.18M. The company had $37.21M due from related parties, principally $37.03M from controlling shareholder Cenntro Holding; this balance was classified as noncurrent at September 30.
- Short-term bank loans were $20.71M and bank acceptance notes payable $17.67M. Bank loans bore stated rates of approximately 4.05%–5.30%; the company reported compliance with loan covenants. Total liabilities were $69.58M. Buildings, machinery, land-use rights and receivables were pledged as collateral for borrowing or bank acceptance notes.
Outlook, risks and unusual items
- No quantified formal revenue or earnings guidance was provided. Management said it expected revenue could decline amid uncertainty in transmission-product demand and delayed robotic-carrier launches, while also expecting positive operating cash flow for the remainder of 2020 and believing available funding sources were sufficient for the next 12 months. It noted that additional funding might be needed if receivables are not collected or conditions change.
- COVID-19 disrupted production and suppliers’ ability to deliver materials and contributed to slower receivable collections. Management remained cautious about the pandemic’s ongoing effects. The robotic carrier had a production-ready sample, but launch timing and market demand remained uncertain.
- On November 21, 2020, after quarter-end, Cenntro Holding and the company extended repayment of approximately RMB251.4M (about $38.1M) due from Cenntro Holding to April 27, 2022. The filing warns that failure to collect could materially harm the balance sheet.
- The company’s disclosure controls and procedures were deemed ineffective because of a material weakness involving accounting staff experience with U.S. GAAP and SEC reporting and inadequate supervisory review. Remediation efforts were underway.
- The company reported an ongoing discussion over possible plaintiff attorneys’ fees related to a previously dismissed lawsuit. It also reported failed sale-leaseback transactions accounted for as financing obligations, and $2.31M of government subsidies recorded as long-term liabilities.
- On November 13, 2020, the board approved dismissal of BDO China Shu Lun Pan and engagement of WWC Corporation as independent auditor for fiscal 2020. Management also identified PRC regulatory, currency-conversion, customer-credit, liquidity and inflation risks. Cash held in PRC and Hong Kong bank accounts was not insured.
Important facts for investors to verify
- Collection prospects and repayment terms for the $37.03M Cenntro Holding receivable, including the post-quarter extension to April 2022.
- Near-term liquidity given negative working capital, cash-flow dependence on supplier payment terms, and short-term borrowing and bank acceptance obligations.
- Whether receivables and notes receivable are collected as expected, and whether allowances adequately reflect customer and issuer credit risk.
- Progress on internal-control remediation and the transition to the newly engaged independent auditor.
- Robotic-carrier launch timing and demand, and the extent to which COVID-19, procurement costs and foreign-exchange movements affect future results.