Kaixin Auto Holdings (Nasdaq: KXIN) — FY2020 Form 20-F
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; the supplied filing text does not provide clear Q4 financial results. Amounts below are U.S. dollars unless noted.
Business context
Kaixin operates a China-focused premium used-car dealership business, supported by online channels, dealership software and financing referrals. As of year-end, it reported 14 dealerships across 14 cities in 12 provinces. Automobile sales generated 99.5% of 2020 revenue. The company operates through PRC subsidiaries and variable interest entities (VIEs).
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $33.2 million | $334.7 million |
| Gross profit (loss) | $1.0 million | ($5.5 million) |
| Gross margin | 3.0% | (1.6%) |
| Operating expenses | $7.3 million | $128.0 million |
| Operating loss | ($6.3 million) | ($133.4 million) |
| Net loss | ($5.3 million) | ($69.1 million) |
| Operating cash flow | ($3.9 million) | ($4.7 million) |
Revenue fell approximately 90% year over year. The company sold 664 vehicles in 2020 versus 6,005 in 2019; the filing also gives a different 2020 unit figure of 673 elsewhere. Selling and administrative costs were sharply lower, while operating results also benefited from a $2.9 million recovery of previously impaired assets. FY2020 net loss per share was $0.13, versus $1.39 in 2019.
At December 31, 2020, cash was $3.2 million, current assets $46.8 million, current liabilities $40.9 million, and working capital $5.85 million. Short-term debt was $15.3 million; total liabilities were $41.0 million. The company reported a $197.5 million accumulated deficit. Certain defaulted or delayed individual and other financing-company loans totaling approximately $6.8 million were reported as repaid in January 2021. Contractual operating lease commitments were $71,000.
Material changes and unusual items
- Dealership sales operations were halted around mid-2020 amid COVID-19 disruption, weak sales and margins, and disputes with dealership noncontrolling shareholders. The company said operations resumed in certain locations in 2021 after reaching settlements with a majority of those shareholders.
- In 2019, disputes had led to a $17.8 million inventory write-down and a $22.3 million write-off of prepayments and other current assets. In 2020, settlements generated a $2.9 million recovery recorded as a reduction of general and administrative expense. Seven noncontrolling shareholders had not reached settlement or provided equivalent ownership statements; $7.5 million of related inventory and other assets remained fully impaired at year-end.
- FY2019 included a $74.1 million goodwill impairment and a $65.6 million contingent-consideration fair-value gain. Those items were absent in 2020, so the year-over-year reduction in reported losses is not solely indicative of improved underlying operations.
- Headcount declined from 279 employees at year-end 2019 to 34 at year-end 2020. The company cited cost reductions in response to the sales downturn and operating halt.
Outlook, financing and key risks
Management said it expected losses to continue at least in the near term and noted that insufficient cash could require further operational reductions. It cited working capital, financing received from KX Venturas and Renren’s stated willingness to provide support for the 12 months following the report’s issuance. The filing does not give revenue or profit guidance.
Kaixin agreed to acquire Haitaoche for 74,035,502 ordinary shares; the transaction had not closed as of the report date. The company expected completion in the first half of 2021. Haitaoche reported 2020 revenue of $1.2 million and a net loss of $0.2 million. The share consideration implies substantial dilution; the filing projected Haitaoche shareholders would own 51% of Kaixin after completion. Separately, Renren invested $6 million in convertible preferred shares on March 31, 2021; KX Venturas had invested $3 million by year-end 2020, with a further $3 million expected to close in 2021.
Important risks include continuing losses and negative operating cash flow; very low cash relative to obligations; dealership disputes and inventory recoverability; dependence on a small number of financing partners (the Ping An Bank agreement expired June 30, 2020, with no near-term renewal plan); VIE enforceability and changing PRC regulation; potential additional VAT exposure from the used-car transaction structure; and dilution from the Haitaoche deal, preferred shares, warrants and equity awards.
Management concluded that disclosure controls and procedures were ineffective at December 31, 2020. The filing describes material weaknesses in complex transaction accounting, financial reporting risk assessment, control evaluation and local dealership inventory custody; these had not been remedied by year-end. The financial statements received an unqualified audit opinion, but the auditor did not audit internal-control effectiveness. The company also disclosed that it had changed its auditor in December 2020.
Investor verification priorities
- Confirm the correct 2020 vehicle-sales count: the filing reports both 664 and 673 units.
- Review the status and final share issuance for the Haitaoche acquisition, including dilution, ownership and any changes to consideration.
- Verify cash availability, debt repayment status, and whether promised or expected financing was received; distinguish year-end balances from subsequent financing.
- Track collections, settlements and legal outcomes for dealership assets, particularly the $7.5 million still fully impaired and the seven unresolved counterparties.
- Assess progress remediating material weaknesses and the reliability of inventory and complex-transaction controls.
- Monitor the Ping An Bank replacement funding relationship and any tax or regulatory challenge to the used-car VAT structure or VIE arrangements.