Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2007
Or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ________ to _________

China Automotive Systems, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
 
Delaware
 
33-0885775
 
 
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
 
 
No. 1 Henglong Road, Yu Qiao Development Zone, Shashi District,
Jing Zhou City, Hubei Province, People’s Republic of China
(Address of Principal Executive Offices)

Registrant’s telephone number, including Area Code: (86) 716- 832- 9196          Registrant’s fax number: (86) 716-832-9298

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes o No x 

As of September 30, 2007, the Company had 23,959,702 shares of common stock issued and outstanding.
 
1

 
CHINA AUTOMOTIVE SYSTEMS, INC.
INDEX

   
Page
 
Part I — Financial Information
 
Item 1. Financial Statements 
   
3
 
Condensed Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2007 and 2006
   
3
 
Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months and Nine Months Ended September 30, 2007 and 2006
   
4
 
Condensed Consolidated Balance Sheets at September 30, 2007 (Unaudited) and December 31, 2006
   
7
 
Condensed Consolidated Statement of Stockholders’ Equity for the Nine Months Ended September 30, 2007 (Unaudited) and December 31, 2006
   
8
 
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2007 and 2006
   
10
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
   
11
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
25
 
Item 3. Quantitative and Qualitative Disclosures About Risk
   
39
 
Item 4. Controls and Procedures
     
Part II — Other Information
Item 1. Legal Proceedings
   
39
 
Item 1A. Risk Factors
   
39
 
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.
   
45
 
Item 3. Defaults Upon Senior Securities.
   
45
 
Item 4. Submission of matters to a Vote of Security Holders.
   
45
 
Item 5. Other Information.
   
45
 
Item 6. Exhibits    
   
45
 
Signature
   
46
 
 
2

 
PART 1 FINANCIAL INFORMATION

ITEM  1. FINANCIAL STATEMENTS

China Automotive Systems, Inc.
Condensed Consolidated Statements of Operations (Unaudited)

   
Three Months Ended September 30
 
   
2007
 
2006
 
Net product sales, including $1,635,676 and $1,100,320 to related parties in 2007 and 2006, respectively
 
$
31,202,731
 
$
22,399,673
 
Cost of product sold, including $1,276,789 and $602,127 purchased from related parties in 2007 and 2006, respectively
   
19,839,980
   
14,266,514
 
Gross profit
   
11,362,751
   
8,133,159
 
Add: Gain on other sales
   
102,371
   
56,234
 
Less: Operating expenses-
             
Selling expenses
   
2,094,157
   
1,540,030
 
General and administrative expenses
   
1,683,190
   
2,139,440
 
Research and development expenses
   
321,533
   
206,732
 
Depreciation and amortization
   
735,810
   
904,622
 
Total Operating expenses
   
4,834,690
   
4,790,824
 
Income from operations
   
6,630,432
   
3,398,569
 
Add: Other income, net
   
--
   
93,632
 
Financial (expenses)
   
(215,400
)
 
(295,121
)
Income before income taxes
   
6,415,032
   
3,197,080
 
Less: Income taxes
   
379,409
   
470,617
 
Income before minority interests
   
6,035,623
   
2,726,463
 
Less: Minority interests
   
3,461,205
   
1,194,340
 
Net income
 
$
2,574,418
 
$
1,532,123
 
Net income per common share
             
Basic and diluted
 
$
0.11
 
$
0.07
 
Weighted average number of common shares outstanding
             
Basic
   
23,959,702
   
23,287,049
 
Diluted
   
23,962,356
   
23,287,782
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
3

 
China Automotive Systems, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

   
Three Months Ended September 30
 
   
2007
 
2006
 
Net income
 
$
2,574,418
 
$
1,532,123
 
Other comprehensive income:
             
Foreign currency translation gain
   
-
   
--
 
Comprehensive income
 
$
2,574,418
 
$
1,532,123
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
4

 
China Automotive Systems, Inc.
Condensed Consolidated Statements of Operations (Unaudited)

   
Nine Months Ended September 30
 
   
2007
 
2006
 
Net product sales, including $3,711,504 and $2,478,059 to related parties in 2007 and 2006, respectively
 
$
95,898,461
 
$
68,112,037
 
               
Cost of product sold, including $3,743,223 and $1,932,329 purchased from related parties in 2007 and 2006, respectively
   
63,249,998
   
43,762,536
 
Gross profit
   
32,648,463
   
24,349,501
 
Add: Gain on other sales
   
362,458
   
256,836
 
Less: Operating expenses-
             
Selling expenses
   
6,500,969
   
5,419,420
 
General and administrative expenses
   
5,272,795
   
6,529,130
 
Research and development expenses
   
909,515
   
647,873
 
Depreciation and amortization
   
2,564,234
   
2,846,716
 
Total Operating expenses
   
15,247,513
   
15,443,139
 
Income from operations
   
17,763,408
   
9,163,198
 
Add: Other income, net
   
38,462
   
94,257
 
Financial (expenses)
   
(626,892
)
 
(806,984
)
Income before income taxes
   
17,174,978
   
8,450,471
 
Less: Income taxes
   
2,741,024
   
1,522,067
 
Income before minority interests
   
14,433,954
   
6,928,404
 
Less: Minority interests
   
7,761,281
   
3,550,247
 
Net income
 
$
6,672,673
 
$
3,378,157
 
Net income per common share
             
Basic and diluted
 
$
0.28
 
$
0.15
 
Weighted average number of common shares outstanding
             
Basic
   
23,952,573
   
23,076,215
 
Diluted
   
23,958,547
   
23,084,675
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
5

 
China Automotive Systems, Inc.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)

   
Nine Months Ended September 30
 
   
2007
 
2006
 
Net income
 
$
6,672,673
 
$
3,378,157
 
Other comprehensive income:
             
Foreign currency translation gain
   
1,265,553
   
601,399
 
Comprehensive income
 
$
7,938,226
 
$
3,979,556
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
6

 
China Automotive Systems, Inc.
Condensed Consolidated Balance Sheets

   
September 30, 2007
 
December 31, 2006
 
   
(Unaudited)
     
ASSETS
         
Current assets:
         
Cash and cash equivalents
 
$
21,791,286
 
$
27,418,500
 
Pledged cash deposits
   
2,463,874
   
3,484,335
 
Accounts and notes receivable, net, including $2,212,661 and $1,770,933 from related parties at 2007 and 2006, respectively
   
70,964,220
   
57,234,383
 
Advance payments and other, including 286,951 and $487,333 to related parties at 2007 and 2006, respectively
   
1,276,433
   
837,014
 
Inventories
   
19,446,977
   
15,464,571
 
Total current assets
 
$
115,942,790
 
$
104,438,803
 
Long-term Assets:
             
Property, plant and equipment, net
 
$
41,263,927
 
$
40,848,046
 
Intangible assets, net
   
497,623
   
3,140,548
 
Other receivables, net, including $1,036,560 and $738,510 from related parties at 2007 and 2006, respectively
   
1,645,729
   
966,715
 
Advance payment for property, plant and equipment, including $1,315,192 and $488,873 to related parties at 2007 and 2006, respectively
   
7,636,274
   
2,640,708
 
Long-term investments
   
39,474
   
73,718
 
Total assets
 
$
167,025,817
 
$
152,108,538
 
LIABILITIES AND STOCKHOLDERS' EQUITY
             
Current liabilities:
             
Bank loans
 
$
13,421,053
 
$
15,384,615
 
Accounts and notes payable, including $876,324 and $640,405 to related parties at 2007 and 2006, respectively
   
42,519,539
   
37,647,913
 
Customer deposits
   
166,193
   
146,171
 
Accrued payroll and related costs
   
2,022,180
   
1,506,251
 
Accrued expenses and other payables
   
8,509,920
   
11,078,186
 
Accrued pension costs
   
3,443,464
   
3,266,867
 
Taxes payable
   
7,420,376
   
5,914,362
 
Amounts due to shareholders/directors
   
280,180
   
358,065
 
Total current liabilities
 
$
77,782,905
 
$
75,302,430
 
Advances payable
   
321,392
   
313,151
 
Total liabilities
 
$
78,104,297
 
$
75,615,581
 
Minority interests
 
$
26,260,079
 
$
23,112,667
 
Stockholders' equity: 
             
Preferred stock, $0.0001 par value - Authorized - 20,000,000
             
Shares issued and outstanding - None
 
$
--
 
$
--
 
Common stock, $0.0001 par value - Authorized - 80,000,000
             
Shares Issued and Outstanding - 23,959,702 shares and 23,851,581 shares at September 30, 2007 and December 31, 2006, respectively
   
2,396
   
2,385
 
Additional paid-in capital
   
29,994,873
   
28,651,959
 
Retained earnings-
             
Appropriated
   
6,078,613
   
6,209,909
 
Unappropriated
   
22,851,206
   
16,047,237
 
Accumulated other comprehensive income
   
3,734,353
   
2,468,800
 
Total stockholders' equity
 
$
62,661,441
 
$
53,380,290
 
Total liabilities and stockholders' equity
 
$
167,025,817
 
$
152,108,538
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
7

 
China Automotive Systems, Inc.
Consolidated Statements of Stockholders’ Equity
Nine months ended September 30, 2007 (unaudited) and year ended December 31, 2006
 
   
Common Stock
     
Retained Earnings
         
   
Shares
 
Par Value
 
Additional Paid-in Capital
 
Appropriated
 
Unappropriated
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
Balance, December 31, 2005
   
22,574,543
 
$
2,257
 
$
18,146,722
 
$
4,923,262
 
$
12,522,180
 
$
1,332,684
 
$
36,927,105
 
Foreign currency translation gain
   
--
   
--
   
--
   
--
   
--
   
1,136,116
   
1,136,116
 
Sale of common stock
   
1,216,675
   
122
   
10,899,872
   
--
   
--
   
--
   
10,899,994
 
Exercise of stock options by independent directors
   
22,500
   
2
   
101,248
   
--
   
--
   
--
   
101,250
 
Cash paid for retaining fee, commissions and placement agent fee in connection with offering
   
--
   
--
   
(627,504
)
 
--
   
--
   
--
   
(627,504
)
Issuance of common stock related to financing services
   
37,863
   
4
   
449,996
   
--
   
--
   
--
   
450,000
 
Payment of financing services by issuance of common stock in accordance with Cornell Partners, LP
   
--
   
--
   
(450,000
)
 
--
   
--
   
--
   
(450,000
)
Issuance of a warrant to purchase common stock
   
--
   
--
   
832,639
   
--
   
--
   
--
   
832,639
 
Payment of commission and placement agent fee by issuance of common stock warrants in accordance with Cornell Partners, LP
   
--
   
--
   
(832,639
)
 
--
   
--
   
--
   
(832,639
)
Issuance of stock options to independent directors
   
--
   
--
   
131,625
   
--
   
--
   
--
   
131,625
 
Net income for the year ended December, 31, 2006
   
--
   
--
   
--
   
--
   
4,811,704
   
--
   
4,811,704
 
Appropriation of retained earnings
   
--
   
--
   
--
   
1,286,647
   
(1,286,647
)
 
--
   
--
 
Balance, December 31, 2006
   
23,851,581
 
$
2,385
 
$
28,651,959
 
$
6,209,909
 
$
16,047,237
 
$
2,468,800
 
$
53,380,290
 
Foreign currency translation gain
   
--
   
--
   
--
   
--
   
--
   
1,265,553
   
1,265,553
 
Sale of common stock
   
108,121
   
11
   
1,199,989
   
--
   
--
   
--
   
1,200,000
 
Cash paid for retaining fee, commissions and placement agent fee in connection with offering
   
--
   
--
   
(54,500
)
 
--
   
--
   
--
   
(54,500
)
Increase in connection with minority shareholders’ abandonment of all its right and interest in Joint-venture
         
--
   
197,425
   
--
   
--
   
--
   
197,425
 
Net income for nine months ended September, 30, 2007
   
--
   
--
   
--
   
--
   
6,672,673
   
--
   
6,672,673
 
Appropriation of retained earnings
   
--
   
--
   
--
   
(131,296
)
 
131,296
   
--
   
--
 
Balance, September 30, 2007
   
23,959,702
 
$
2,396
 
$
29,994,873
 
$
6,078,613
 
$
22,851,206
 
$
3,734,353
 
$
62,661,441
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
8

 
China Automotive Systems, Inc.
Condensed Consolidated Statements of Cash Flows (Unaudited)

   
Nine Months Ended September 30
 
   
2007
 
2006
 
Cash flows from operating activities:
         
Net income
 
$
6,672,673
 
$
3,378,157
 
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
             
Minority interests
   
7,761,281
   
3,550,247
 
Stock-based compensation
   
--
   
131,625
 
Depreciation and amortization
   
4,968,142
   
4,876,558
 
Allowance for doubtful accounts (Recovered)
   
(318,421
)
 
1,861,107
 
Other operating adjustments
   
38,516
   
6,242
 
Changes in operating assets and liabilities:
             
(Increase) decrease in:
             
Pledged deposits
   
1,098,996
   
(2,348,072
)
Accounts and notes receivable
   
(11,914,080
)
 
(9,911,144
)
Advance payments and other
   
(415,798
)
 
(445,239
)
Inventories
   
(3,507,361
)
 
(5,128,427
)
Increase (decrease) in:
             
Accounts and notes payable
   
3,857,355
   
3,728,392
 
Customer deposits
   
16,472
   
130,645
 
Accrued payroll and related costs
   
473,542
   
86,369
 
Accrued expenses and other payables
   
(231,276
)
 
2,413,794
 
Accrued pension costs
   
90,383
   
247,269
 
Taxes payable
   
1,318,795
   
1,034,402
 
Advances payable
   
--
   
(62
)
Net cash provided by operating activities
 
$
9,909,219
 
$
3,611,863
 
Cash flows from investing activities:
             
(Increase) decrease in other receivables
   
(547,216
)
 
275,791
 
Cash received from equipment sales
   
599,294
   
--
 
Cash paid to acquire property, plant and equipment
   
(9,589,831
)
 
(4,790,102
)
Cash paid to acquire intangible assets
   
(173,107
)
 
(140,899
)
Net cash (used in) investing activities
 
$
(9,710,860
)
$
(4,655,210
)
Cash flows from financing activities:
             
(Decrease) increase in proceeds from bank loans
   
(2,182,860
)
 
1,414,898
 
Dividends paid to the minority interest holders of Joint-venture companies
   
(5,153,764
)
 
(864,430
)
Increase (decrease) in amounts due to shareholders/directors
   
(89,800
)
 
(507,117
)
Proceeds from issuance of common stock
   
1,145,500
   
5,027,240
 
Capital Contribution from the minority interest holders of Joint-venture companies
   
--
   
1,420,926
 
Net cash provided by (used in) financing activities
 
$
(6,280,924
)
$
6,491,517
 
Cash and cash equivalents effected by foreign currency
 
$
455,351
 
$
601,399
 
Net (decrease) increase in cash and cash equivalents
   
(5,627,214
)
 
6,049,569
 
Cash and cash equivalents at beginning of period
   
27,418,500
   
12,374,944
 
Cash and cash equivalents at end of period
 
$
21,791,286
 
$
18,424,513
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
9

 
China Automotive Systems, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited) (continued)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

   
Nine Months Ended September 30
 
   
2007
 
2006
 
Cash paid for interest
 
$
630,832
 
$
596,871
 
Cash paid for income taxes
 
$
857,404
 
$
958,507
 

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
.
   
Nine Months Ended September 30
 
   
2007
 
2006
 
Issuance of common shares on a non-cash basis
 
$
 
$
4
 
Financing services fee related to issuance of common shares
   
   
(4
)
Increase in capital by minority shareholders of Joint-venture companies on a non-cash basis
   
   
921,785
 
Dividends payable to minority shareholders of Joint-venture companies being converted into capital
   
   
(921,785
)
Decrease in minority interests as a result of minority shareholder’s withdrawal from Joint-venture.
   
(2,830,545
)
 
 
Withdrawal of invested intangible assets by minority shareholder of Joint-venture
   
2,600,204
   
 
Increase in equity in connection with minority shareholder’s withdrawal from Joint-venture
 
$
230,341
 
$
 

The accompanying notes are an integral part of these condensed consolidated financial statements.
 
10

 
China Automotive Systems, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
1. ORGANIZATION AND BUSINESS
 
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 and the subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the “Company”. The Company, through its Sino-foreign joint ventures described below, is primarily engaged in the manufacture and sale of automotive systems and components in the People’s Republic of China, the “PRC” or “China”, as described below.
 
Great Genesis Holding Limited, a company incorporated on January 3, 2003 under The Companies Ordinance in Hong Kong as a limited liability company, “Great Genesis”, is a wholly-owned subsidiary of the Company.  Ji Long Enterprise Investment Limited was incorporated on October 8, 1992 under The Companies Ordinance in Hong Kong as a limited liability company, “Ji Long”. Ji Long is an investment holding company. Effective March 4, 2003, all of the shareholders of Ji Long exchanged their 100% shareholder interest for a 100% shareholder interest in Great Genesis, as a result of which Ji Long became a wholly-owned subsidiary of Great Genesis. 
 
Henglong USA Corporation, “HLUSA”, which was 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 eight Sino-foreign joint ventures organized in the PRC as of September 30, 2007 and 2006.
 
   
Percentage Interest
 
Name of Entity
 
September 30, 2007
 
September 30, 2006
 
           
Shashi Jiulong Power Steering Gears Co., Ltd., "Jiulong"
   
81.00
%
 
81.00
%
Jingzhou Henglong Automotive Parts Co., Ltd., "Henglong"
   
44.50
%
 
44.50
%
Shenyang Jinbei Henglong Automotive Steering System Co., Ltd., ”Shenyang"
   
70.00
%
 
70.00
%
Zhejiang Henglong & Vie Pump-Manu Co., Ltd., "Zhejiang"
   
51.00
%
 
51.00
%
Universal Sensor Application Inc., “USAI”
   
85.71
%
 
60.00
%
Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”
   
85.00
%
 
85.00
%
Wuhu HengLong Automotive Steering System Co., Ltd., “Wuhu”
   
77.33
%
 
77.33
%
Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”
   
100.00
%
 
--
 

Jiulong was established in 1993 and mainly engaged in the production of integral power steering gear for heavy-duty vehicles.

Henglong was established in 1997 and mainly engaged in the production of rack and pinion power steering gear for cars and light duty vehicles.

Shenyang was established in 2002 and focuses on power steering parts for light duty vehicles.
 
Zhejiang was established in 2002 to focus on power steering pumps.

On April 12, 2005, Great Genesis entered into a Joint-venture agreement with Shanghai Hongxi Investment Inc., “Hongxi”, a company controlled by Mr. Hanlin Chen, the Company’s Chairman, and Sensor System Solution Inc., “Sensor”, to establish a joint venture, Universal Sensor Application Inc., “USAI”, in the Wuhan East Lake development zone to engage in production and sales of sensor modulars. The registered capital of the Joint-venture is $10 million. Great Genesis and Hongxi intended to invest $6 million and $1 million, respectively, including cash and land and building, which would account for 60% and 10% of the total registered capital, respectively. Sensor would invest $3 million in technology, accounting for 30% of the total registered capital. As of March 20, 2007, the three parties of USAI, Great Genesis, Hongxi, and Sensor, entered into an agreement, which led to Sensor’s withdrawal from USAI and abandonment of all its rights and interests in USAI. The registered capital of the Joint-venture has changed to $7,000,000, with 85.71% owned by the Company, and 14.29% owned by Hongxi. Since the withdrawal of intangible assets, another technology supplier is being sought.

On April 14, 2006, Great Genesis entered into a Joint-venture agreement with Hong Kong Tongda, “Tongda”, to establish a joint venture, Wuhan Jielong Electric Power Steering Co., Ltd., “Jielong”, in the Wuhan East Lake development zone. Jielong is mainly engaged in the production and sales of electric power steering, “EPS”. The registered capital of the Joint-venture is $6 million. Great Genesis and Tongda will invest $5,100,000 and $900,000, respectively, amounting to 85% and 15% of the total registered capital, respectively.

On March 31, 2006, as amended on May 2, 2006, Great Genesis, entered into a Joint-venture agreement with Wuhu Chery Technology Co., Ltd., “Chery Technology”, to establish a Joint-venture, Wuhu Henglong Automotive Steering System Co., Ltd., “Wuhu”, in the Wuhu Technological Development Zone. Wuhu is mainly engaged in the production and sales of automobile steering systems. The registered capital of the Joint-venture is $3,750,387, the equivalent of RMB 30,000,000. Great Genesis and Chery Technology invested $2,900,300, the equivalent of RMB 23,200,000, and $848,938, the equivalent of RMB 6,800,000, respectively, which accounts for 77.33% and 22.67% of the total registered capital, respectively.
 
11

 
On March 7, 2007, Great Genesis established a wholly-owned subsidiary, Jingzhou Hengsheng Automotive System Co., Ltd, “Hengsheng”, to engage in production and sales of automotive steering systems. The registered capital of Hengsheng is $10,000,000.

2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - For the nine months ended September 30, 2007 and 2006, the accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and Sino-foreign joint ventures, including eight Sino-foreign Joint-ventures disclosed in Note 1. Significant inter-company balances and transactions have been eliminated upon consolidation. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America.

Foreign Currencies - The Company maintains its books and records in Renminbi, “RMB”, the currency of the PRC, its functional currency. Foreign currency transactions in RMB are reflected using the temporal method. Under this method, all monetary items are translated into the functional currency at the rate of exchange prevailing at the balance sheet date. Non-monetary items are translated at historical rates. Income and expenses are translated at the rate in effect on the transaction dates. Transaction gains and losses, if any, are included in the determination of net income (loss) for the period.

In translating the financial statements of the Company from its functional currency into its reporting currency in United States dollars, balance sheet accounts are translated using the closing exchange rate in effect at the balance sheet date and income and expense accounts are translated using an average exchange rate prevailing during the reporting period. Adjustments resulting from the translation, if any, are included in cumulative other comprehensive income (loss) in stockholders’ equity.

Income Per Share - Basic income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated based on the treasury stock method, assuming the issuance of common shares, if dilutive, resulting from the exercise of warrants.

Actual weighted average shares outstanding used in calculating basic and diluted income per share were:

   
Three Months Ended
September 30,
 
   
2007
 
2006
 
Weighted average shares outstanding
   
23,959,702
   
23,287,049
 
Effect of dilutive securities
   
2,654
   
733
 
Diluted shares outstanding
   
23,962,356
   
23,287,782
 

   
Nine Months Ended
September 30,
 
   
2007
 
2006
 
Weighted average shares outstanding
   
23,952,573
   
23,076,215
 
Effect of dilutive securities
   
5,974
   
8,460
 
Diluted shares outstanding
   
23,958,547
   
23,084,675
 
 
12

 
The 156,250 shares underlying warrants issued to Cornell Capital Partners, LP on March 20, 2006, and 22,500 options issued to independent directors on July 16, 2006 have not been included in the computation of diluted income per share for the three months ended September 30, 2007, because such inclusion would have had an anti-dilutive effect.

Stock-Based Compensation - The Company may periodically issue shares of common stock for services rendered or for financing costs. Such shares will be valued based on the market price on the transaction date. The Company may periodically issue stock options to employees and stock options or warrants to non-employees in non-capital raising transactions for services and for financing costs.

In July 2004, the Company adopted a stock incentive plan. The maximum number of common shares for issuance under this plan is 2,200,000 with a period of 10 years. The stock incentive plan provides for the issuance, to the Company’s officers, directors, management and employees, of options to purchase shares of the Company’s common stock. As of September 30, 2007, the Company has issued 67,500 stock options under this plan and there remain 2,132,500 stock options issuable in the future.

The Company has adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Accounting for Stock-Based Compensation”, which establishes a fair value method of accounting for stock-based compensation plans. In accordance with SFAS No. 123R, the cost of stock options and warrants issued to employees and non-employees is measured at the grant date based on the fair value. The fair value is determined using the Black-Scholes option pricing model. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive benefit, which is generally the vesting period.

Comprehensive Income - The Company has adopted the provisions of Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS No. 130”). SFAS No. 130 establishes standards for the reporting and display of comprehensive income, its components and accumulated balances in a full set of general purpose financial statements. SFAS No. 130 defines comprehensive income to include all changes in equity except those resulting from investments by owners and distributions to owners, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on marketable securities.

Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowance for doubtful accounts and notes receivables, valuation and costing of inventory, depreciation of property, plant and equivalent, impairment of long-lived assets and accrued liabilities. Actual results could differ from those estimates.

Reclassifications - Certain comparative amounts have been reclassified to conform to the current year’s presentation.

Comments - The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management of the Company, contain all adjustments, which include normal recurring adjustments, necessary to present fairly the financial position, the results of operations and cash flows for the three months and nine months ended September 30, 2007 and 2006.

The consolidated balance sheet as of December 31, 2006 is derived from the Company’s audited financial statements.

Certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission, although the Company’s management believes that the disclosures contained in these financial statements are adequate to make the information presented therein not misleading. For further information, refer to the financial statements and the notes thereto included in the Company’s 2006 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission.

The results of operations for the three months and nine months ended September 30, 2007 are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2007.

 3. ACCOUNTS AND NOTES RECEIVABLE

The Company’s accounts receivable at September 30, 2007 (unaudited) and December 31, 2006 are summarized as follows:
 
   
September 30, 2007
 
December 31, 2006
 
Accounts receivable
 
$
48,153,929
 
$
41,174,404
 
Notes receivable
   
26,783,009
   
20,146,197
 
Less: allowance for doubtful accounts
   
(3,972,718
)
 
(4,086,218
)
Balance at the end of the period
 
$
70,964,220
 
$
57,234,383
 

13

 
Notes receivable represents accounts receivable in the form of bills of exchange whose acceptances and settlements are handled by banks.
 
The activity in the Company’s allowance for doubtful accounts during the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows: 
 
   
September 30, 2007
 
December 31, 2006
 
Balance at beginning of period
 
$
4,086,218
 
$
2,856,025
 
Add: amounts (recovered) provided during the period
   
(221,033
)
 
1,099,092
 
Add: foreign currency translation
   
107,533
   
131,101
 
Balance at the end of the period
 
$
3,972,718
 
$
4,086,218
 

4. OTHER RECEIVABLES
 
The Company’s other receivables at September 30, 2007 (unaudited) and December 31, 2006 are summarized as follows:
 
   
September 30, 2007
 
December 31, 2006
 
Other receivables
 
$
2,468,114
 
$
1,864,918
 
Less: allowance for doubtful accounts
   
(822,385
)
 
(898,203
)
 Balance at the end of the period
 
$
1,645,729
 
$
966,715
 
 
Other receivables consist of amounts advanced to both related and unrelated parties, primarily as unsecured demand loans, with no stated interest rate or due date.
 
The activity in the Company’s allowance for doubtful accounts of other receivable during the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Balance at beginning of the period
 
$
898,203
 
$
1,040,169
 
Less: recovered amounts during the period
   
(99,455
)
 
(210,861
)
Add: foreign currency translation
   
23,637
   
68,895
 
Balance at the end of the period
 
$
822,385
 
$
898,203
 
 
14

 
5. INVENTORIES
 
The Company’s inventories at September 30, 2007 (unaudited) and December 31, 2006 consisted of the following:
 
   
September 30, 2007
 
December 31, 2006
 
Raw materials
 
$
6,920,278
 
$
5,381,372
 
Work in process
   
4,060,907
   
3,253,192
 
Finished goods
   
9,640,977
   
7,548,218
 
     
20,622,162
   
16,182,782
 
Less: provision for loss
   
(1,175,185
)
 
(718,211
)
Balance at the end of the period
 
$
19,446,977
 
$
15,464,571
 
 
6. PROPERTY, PLANT AND EQUIPMENT

The Company’s property, plant and equipment at September 30, 2007 (unaudited) and December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Land use rights and buildings
 
$
19,282,465
 
$
17,384,534
 
Machinery and equipment
   
37,141,442
   
33,466,198
 
Electronic equipment
   
2,915,167
   
2,945,454
 
Motor vehicles
   
2,365,083
   
2,095,169
 
Construction in progress
   
2,776,944
   
3,280,279
 
     
64,481,101
   
59,171,634
 
Less: Accumulated depreciation
   
(23,217,174
)
 
(18,323,588
)
Balance at the end of the period
 
$
41,263,927
 
$
40,848,046
 
 
Depreciation charge for the nine months ended September 30, 2007 and the year ended December 31, 2006 are $4,740,908 and $5,816,922 respectively.
 
7. INTANGIBLE ASSETS
 
The activities in the Company’s intangible asset account at September 30, 2007 (unaudited) and December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Balance at beginning of period
 
$
3,140,548
 
$
3,503,217
 
Add: additions during the period-
             
Patent technology
   
144,390
   
109,073
 
Management software license
   
28,718
   
65,852
 
Foreign currency translation
   
11,405
   
121,698
 
Less: decrease during the period-
             
Patent technology*
   
(2,600,204
)
 
--
 
     
724,857
   
3,799,840
 
Less: Amortization for the period
   
(227,234
)
 
(659,292
)
Balance at the end of the period
 
$
497,623
 
$
3,140,548
 
 
15

 
*When USAI was established in 2005, Sensor contributed $3,000,000 as capital, being the fair market value of the intangible assets, including the sensor product and the technology for sensor production, as well as the Joint-venture’s technical personnel training. As of March 20, 2007 Sensor withdrew from USAI, abandoned all its right and interest in the Joint-venture, and repossessed the rights to the intangible assets at the carrying value of $2,600,204. Please see Note 1 and Note 14.

8. BANK LOANS
 
At September 30, 2007, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $13,421,053, with weighted average interest rate at 6.53% per annum. These loans are secured with some of the property and equipment of the Company and are repayable within one year.
 
At December 31, 2006, the Company, through its Sino-foreign joint ventures, had outstanding fixed-rate short-term bank loans of $15,384,615, with weighted average interest rate at 5.90% per annum. These loans are secured with some of the property and equipment of the Company, and are repayable within one year.
 
9. ACCOUNTS AND NOTES PAYABLE

The Company’s accounts and notes payable at September 30, 2007 (unaudited) and December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Accounts payable
 
$
30,279,625
 
$
22,517,260
 
Notes payable*
   
12,239,914
   
15,130,653
 
Balance at the end of the period
 
$
42,519,539
 
$
37,647,913
 
 
*Notes payable represent accounts payable in the form of bills of exchange whose acceptances and settlements are handled by banks. 
 
The Company has pledged cash deposits, notes receivable and certain property plant and machinery to secure trade financing granted by banks. 
 
10. ACCRUED EXPENSES AND OTHER PAYABLES

The Company’s accrued expenses and other payables at September 30, 2007 (unaudited) and December 31, 2006 are summarized as follows:
 
16


   
September 30, 2007
 
December 31, 2006
 
Accrued expenses
 
$
1,282,642
 
$
1,695,188
 
Other payables
   
1,236,508
   
1,987,540
 
Warranty reserves*
   
4,269,306
   
2,954,326
 
Dividend payable to minority shareholders of Joint-ventures
   
1,721,464
   
4,441,132
 
Balance at the end of the period
 
$
8,509,920
 
$
11,078,186
 
 
*The Company provides for the estimated cost of product warranties when the products are sold. Such estimates of product warranties were based on, among other things, historical experience, product changes, material expenses, service and transportation expenses arising from the manufactured products. Estimates will be adjusted on the basis of actual claims and circumstances. 
 
For the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006, the warranties activities were as follows:
 
   
September 30, 2007
 
December 31, 2006
 
Balance at the beginning of period
 
$
2,954,326
 
$
1,787,869
 
Additions during the reporting period 
   
3,646,463
   
3,956,521
 
Settlement within reporting period, by cash or actual material
   
(2,409,228
)
 
(2,858,829
)
Foreign currency translation
   
77,745
   
68,765
 
Accrual balance at end of period
 
$
4,269,306
 
$
2,954,326
 
 
11. ACCRUED PENSION COSTS

Since the Company’s operations are all located in China, all the employees are located in China. The Company records pension costs and various employment benefits in accordance with the relevant Chinese social security laws, which is approximately at a total of 31% of salary as required by local governments. Base salary levels are the average salary determined by the local governments.

The activities in the Company’s pension account during the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows:
 
   
September 30, 2007
 
December 31, 2006
 
Balance at beginning of the period
 
$
3,266,867
 
$
2,653,064
 
Amounts provided during the period
   
907,850
   
1,287,609
 
Settlement during the period
   
(817,223
)
 
(789,265
)
Foreign currency translation
   
85,970
   
115,459
 
Balance at end of period
 
$
3,443,464
 
$
3,266,867
 
 
17

 
12. TAXES PAYABLE

The Company’s taxes payable at September 30, 2007 (unaudited) and December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Value-added tax payable
 
$
5,806,260
 
$
6,274,698
 
Income tax payable*
   
1,545,874
   
(362,267
)
Other tax payable
   
68,242
   
1,931
 
Balance at the end of the period
 
$
7,420,376
 
$
5,914,362
 

*The Company’s subsidiaries registered in the PRC are subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in their PRC statutory financial statements in accordance with the relevant income tax laws applicable to foreign invested enterprise. The Company’s PRC subsidiaries are generally subject to enterprise income tax at a statutory rate of 33%, which comprises 30% national income tax and 3% local income tax.

On January 1, 1996, one of the subsidiaries of the Company, Jiulong, was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 1996, and a 50% enterprise national income tax deduction and a 100% local income tax deduction for the next nine years thereafter, from 1998 to 2006, for income tax purposes. In 2007, Jiulong continued to be granted a 100% local income tax exemption.

On January 1, 1999, one of the subsidiaries of the Company, Henglong, was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 1999, and a 50% enterprise national income tax deduction and a 100% local income tax deduction for the next nine years thereafter, from 2001 to 2009, for income tax purposes.

On January 1, 2003, one of the subsidiaries of the Company, Shenyang, was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2003, and a 75% enterprise national income tax deduction and a 100% local income tax deduction for the next three years thereafter, from 2005 to 2007, for income tax purposes.

On January 1, 2004, one of the subsidiaries of the Company, Zhejiang, was granted an enterprise income tax holiday of a 100% enterprise income tax exemption for two years commencing from 2004, and a 50% enterprise national income tax deduction and a 50% local income tax deduction for the next three years thereafter, from 2006 to 2008, for income tax purposes.

USAI, Wuhu, Jielong and Hengsheng are at their start up stage and accordingly, there is no assessable profit for the period ended September 30, 2007 subject to PRC enterprise income tax.

No provision for Hong Kong tax is made as Jilong and Great Genesis are both investment holding companies, and have no assessable income in Hong Kong for the nine months ended September 30, 2007 and the year ended December 31, 2006.

No provision for US tax is made as the Company has no assessable income in the US for the nine months ended September 30, 2007 and the year ended December 31, 2006.

The Company’s activities of income taxes during the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Tax rate
   
7.5%-30.0
%
 
7.5%-16.5
%
Balance at beginning of the period(a)
   
($362,267
)
 
($624,707
)
Add: additions during the period-
             
Accrual taxation
   
4,068,355
   
2,597,189
 
Less: decrease during the period-
             
Income tax refund (b)
   
(1,327,331
)
 
(928,108
)
Settlement during the period
   
(857,404
)
 
(1,382,614
)
Foreign currency translation
   
24,521
   
(24,027
)
Balance at the end of the period
 
$
1,545,874
   
($362,267
)
 
18

 
(a)At the end of the fiscal year, the Company must pay income tax in advance, and the government will settle with the Company within the three months after the end of the fiscal year.

(b)For the nine months ended September 30, 2007 and the year ended December 31, 2006, two of the Company’s Sino-foreign joint ventures received an income tax benefit of $1,327,331 and $928,108, respectively, for purchase of domestic equipment, which has been reflected as a reduction to income tax expense in the respective period of the Company’s consolidated statements of operations.

13. AMOUNTS DUE TO SHAREHOLDERS/DIRECTORS

The Company’s activities in the amounts due to shareholders/directors during the nine moths ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Balance at the beginning of period
 
$
358,065
 
$
766,642
 
Decrease during the reporting period
   
(89,900
)
 
(429,061
)
Foreign currency translation
   
12,015
   
20,484
 
Balance at end of period
 
$
280,180
 
$
358,065
 

The amounts due to shareholders/directors were unsecured, interest-free and repayable on demand.

14. MINORITY INTERESTS

The Company’s activities in respect of the amounts of the minority interests’ equity during the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Balance at beginning of the period
 
$
23,112,667
 
$
21,751,043
 
Add: Additions during the period-
             
contribution by minority shareholders
   
--
   
2,332,470
 
Minority interest’s income
   
7,761,281
   
5,545,350
 
Increase in connection with minority shareholders’ abandonment of all its right and interest in Joint-venture.
   
32,916
   
--
 
Foreign currency translation
   
570,140
   
1,468,787
 
Less: decrease during the period-
             
Dividends declared to the minority interest holders of Joint-venture companies
   
(2,386,380
)
 
(7,984,983
)
Decrease in minority interests as a result of minority shareholders’ withdrawal from Joint-venture *
   
(2,830,545
)
 
--
 
Balance at end of period
 
$
26,260,079
 
$
23,112,667
 
 
19

 
*As of March 20, 2007, Great Genesis, Hongxi and Sensor entered into an agreement, which led to Sensor’s withdrawal from USAI, its withdrawal of intangible assets, and abandonment of all its right and interest in USAI. Please see Note 1.

The calculation of the withdrawal of Sensor is summarized as follows:
 
       
Sensor’s
 
Additional paid-in capital
 
   
  Equity of USAI (before Sensor’s withdrawal at March 20, 2007)
 
Withdrawal of equity in USAI
   
Carrying value of intangible assets withdrawn
 
Abandoned interest
 
The Company’s
   
Hongxi’s
 
   
a
 
b
 
c
 
d=b-c
 
e=d*85.71%
 
f=d*14.29%
 
Additional paid-in capital
 
$
4,337,291
 
$
3,000,000
 
$
2,600,204
 
$
399,796
 
$
342,665
 
$
57,131
 
Foreign currency translation
   
219,927
   
183,923
   
--
   
183,923
   
157,640
   
26,283
 
Stockholders' deficit
   
(1,177,928
)
 
(353,378
)
 
--
   
(353,378
)
 
(302,880
)
 
(50,498
)
Equity
 
$
3,379,290
 
$
2,830,545
 
$
2,600,204
 
$
230,341
 
$
197,425
 
$
32,916
 

Sensor’s withdrawal from USAI, its withdrawal of intangible assets, and abandonment of all its right and interest in USAI, was charged to minority interests of $2,830,545, and credited to intangible assets of $2,600,204. The abandoned interest of $230,341, recognized as additional paid-in capital of USAI, was credited into additional paid-in capital and minority interests of $197,425 and $32,916, respectively.

15. SHARE CAPITAL

The Company’s activities in its share capital account during the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
   
Common Stock
 
Par Value
 
Common Stock
 
Par Value
 
                   
Balance at beginning of the period
   
23,851,581
 
$
2,385
   
22,574,543
 
$
2,257
 
Add: Additions during the period
                         
Issuance of common stock for cash in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP*
   
108,121
   
11
   
1,216,675
   
122
 
Exercise of stock option by independent directors
   
--
   
--
   
22,500
   
2
 
Commissions and placement agent fee payable in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP
   
--
   
--
   
37,863
   
4
 
Balance at end of period
   
23,959,702
 
$
2,396
   
23,851,581
 
$
2,385
 
 
20

 
*On January 17, 2007, the Company raised gross amounts of $1,200,000 in a private placement (PIPE) to Cornell Capital Partners, LP (“Investor”) by issuing 108,121 shares of common stock.

16. ADDITIONAL PAID-IN CAPITAL

The Company’s activities in the Company’s additional paid-in capital account during the nine months ended September 30, 2007 (unaudited) and the year ended December 31, 2006 are summarized as follows:

   
September 30, 2007
 
December 31, 2006
 
Balance at beginning of the period
 
$
28,651,959
 
$
18,146,722
 
Add: Additions during the period-
           
Issuance of common stock for cash in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP.
   
1,199,989
   
10,899,872
 
Exercise of stock option by independent directors
   
--
   
101,248
 
Issuance of stock options to independent directors
   
--
   
131,625
 
Issuance of common stock in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP
   
--
   
449,996
 
Issuance of common stock warrants in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP
   
--
   
832,639
 
Increase in connection with minority shareholders’ abandonment of all its right and interest in Joint-venture.
   
197,425
   
--
 
Less: decreases during the period
             
Payment of commissions and placement agent fee by issuance of common stock in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP
   
--
   
(449,996
)
Payment of commissions and placement agent fee by issuance of common stock warrants in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP
   
--
   
(832,639
)
Cash paid for retaining fee, commissions and placement agent fee in connection with offering.
   
(54,500
)
 
(627,504
)
Payment of commissions and placement agent fee by issuance of common stock in accordance with the standby equity distribution agreement with Cornell Capital Partners, LP
   
--
   
(4
)
Balance at end of period
 
$
29,994,873
 
$
28,651,959
 

17. SIGNIFICANT CONCENTRATIONS

The Company grants credit to its customers, generally on an open account basis.  The Company’s customers are all located in the PRC.

During the nine months ended September 30, 2007 (unaudited), the Company’s ten largest customers accounted for 67.6% of the Company’s consolidated net sales, with each of four customers individually accounting for more than 10% of consolidated net sales, i.e. 16.7%, 13.4%, 11.5% and 10.0% individually, or an aggregate of 51.6%.  At September 30, 2007, approximately 38.8% of accounts receivable were from trade transactions with the aforementioned four customers.

During the nine months ended September 30, 2006 (unaudited), the Company’s ten largest customers accounted for 65.5% of the Company’s consolidated net sales, with each of four customers individually accounting for more than 10% of consolidated net sales, i.e. 15.6%, 13.9%, 11.0% and 10.5% individually, or an aggregate of 51.0%.  At September 30, 2006, approximately 34.1% of accounts receivable were from trade transactions with the aforementioned four customers.
 
21

 
18. RELATED PARTY TRANSACTIONS AND BALANCES

Related party transactions with companies with common directors are as follows:

Related sales (unaudited): 

   
Nine Months Ended September 30
 
   
2007
 
2006
 
Merchandise Sold to Related Parties
 
$
3,711,504
 
$
2,478,059
 

Related purchases (unaudited): 

   
Nine Months Ended September 30
 
   
2007
 
2006
 
Materials Purchased from Related Parties
 
$
3,743,223
 
$
1,932,329
 
Technology Purchased from Related Parties
   
64,103
   
188,640
 
Equipment Purchased from Related Parties
   
626,455
   
291,673
 
Total
 
$
4,433,781
 
$
2,412,642
 

Related receivables (September 30, 2007 unaudited):

   
September 30, 2007
 
December 31, 2006
 
Accounts receivable
 
$
2,212,662
 
$
1,770,933
 
Other receivables
   
1,036,560
   
738,510
 
Total
 
$
3,249,222
 
$
2,509,443
 

Related advances (September 30, 2007 unaudited):

   
September 30, 2007
 
December 31, 2006
 
Advanced Equipment Payment to Related Parties
 
$
1,315,192
 
$
488,873
 
Advanced Expenses and Others to Related Parties
   
286,951
   
487,333
 
Total
 
$
1,602,143
 
$
976,206
 
 
22

 
Related payables:

   
September 30, 2007
 
December 31, 2006
 
Accounts payable (September 30, 2007 unaudited)
 
$
876,324
 
$
640,405
 

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

19. COMMITMENTS AND CONTINGENCIES:

Legal Proceedings - The Company is not currently a party to any threatened or pending legal proceedings, other than incidental litigation arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows.

The following table summarizes the Company‘s major contractual payment obligations and commitments as of September 30, 2007 (unaudited):
 
   
Payment Obligations by Period
 
   
2007(a)
 
2008
 
2009
 
2010
 
Thereafter
 
Total
 
Obligations for service agreements
 
$
--
 
$
110,000
 
$
110,000
 
$
110,000
 
$
110,000
 
$
440,000
 
Obligations for purchasing agreements
   
6,211,304
   
2,461,748
   
61,456
   
--
   
--
   
8,734,508
 
Total
 
$
6,211,304
 
$
2,571,748
 
$
171,456
 
$
110,000
 
$
110,000
 
$
9,174,508
 

(a) Remaining three months in 2007

20. OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2007 and 2006, the Company did not have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

21. SEGMENT REPORTING

The accounting policies of the product sectors are the same as those described in the summary of significant accounting policies 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.

During the three months and nine months ended September 30, 2007 (unaudited), the Company had nine product sectors, five of them were principal profit makers, which were reported as separate sectors which engaged in the production and sales of power steering (Henglong), power steering (Jiulong), power steering (Shenyang), power pumps (Zhejiang), and power steering (Wuhu). The other four sectors which were established in 2005, 2006, 2007 and 2007 respectively, engaged in the production and sales of sensor modular (USAI), electronic power steering (Jielong), power steering (Hengsheng), and provider of after sales and R&D services (HLUSA).Since the revenues, net income and net assets of these four sectors are less than 10% of its segment in the consolidated financial statements, the Company incorporated these four sectors into “other sectors”.

During the three months and nine months ended September 30, 2006 (unaudited), the Company had seven product sectors, four of them were principal profit makers, which were reported as separate sectors which engaged in the production and sales of power steering for cars (Henglong), power steering for trucks (Jiulong), power steering for light duty vehicles (Shenyang), and power pumps (Zhejiang). To conform with the year 2007, power steering (Wuhu) was reported separately. The other two sectors which were established in 2005 and 2006 respectively, engaged in the production and sales of sensor modular (USAI), and electronic power steering (Jielong).Since the revenues, net income and net assets of these two sectors are less than 10% of its segment in the consolidated financial statements, the Company incorporated these two sectors into “other sectors”
 
23

 
The Company’s product sectors information is as follows:
 
   
Henglong
 
Jiulong
 
Shenyang
 
Zhejiang
 
Wuhu
 
Other Sectors
 
Other (1)
 
Total
 
For the Three Months Ended:
 
 
   
 
 
 
 
 
 
 
 
 
 
 
 
September 30,2007
                                 
Revenue
                                 
Net product sales - external
 
$
10,251,971
 
$
8,106,377
 
$
5,719,242
 
$
2,911,860
 
$
4,222,181
   
($8,900
)
$
0
 
$
31,202,731
 
Net product sales - internal
   
5,635,023
   
537,459
   
410,175
   
(270
)
 
0
   
0
   
(6,582,387
)
 
0
 
Gain on other sales and other income - external
   
99,880
   
(12,106
)
 
16,720
   
(767
)
 
0
   
0
   
(1,356
)
 
102,371
 
Total revenue
 
$
15,986,874
 
$
8,631,730
 
$
6,146,137
 
$
2,910,823
 
$
4,222,181
   
($8,900
)
 
($6,583,743
)
$
31,305,102
 
Net income
 
$
1,298,825
 
$
423,236
 
$
526,819
 
$
309,971
   
($189,573
)
 
($401,957
)
$
607,097
 
$
2,574,418
 
 
For the three months ended
                                                 
September 30,2006
                                                 
Revenue
                                                 
Net product sales - external
 
$
10,147,596
 
$
6,430,790
 
$
3,451,379
 
$
2,333,260
 
$
0
 
$
36,648
 
$
0
 
$
22,399,673
 
Net product sales - internal
   
2,706,952
   
972,972
   
214,555
   
(87,031
)
 
0
   
0
   
(3,807,448
)
 
0
 
Gain on other sales and other income - external
   
117,077
   
29,384
   
8,205
   
(4,534
)
 
0
   
0
   
(266
)
 
149,866
 
Total revenue
 
$
12,971,625
 
$
7,433,146
 
$
3,674,139
 
$
2,241,695
 
$
0
 
$
36,648
   
($3,807,714
)
$
22,549,539
 
Net income
 
$
469,197
 
$
638,282
 
$
778,963
 
$
221,273
   
($48,858
)
 
($153,344
)
 
($373,390
)
$
1,532,123
 
 
24

 
   
Henglong
 
Jiulong
 
Shenyang
 
Zhejiang
 
Wuhu
 
Other Sectors
 
Other (1)
 
Total
 
For the nine Months Ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2007
                                 
Revenue
                                 
Net product sales - external
 
$
32,025,588
 
$
25,457,167
 
$
14,660,207
 
$
9,697,822
 
$
14,041,721
 
$
15,956
 
$
0
 
$
95,898,461
 
Net product sales - internal
   
21,285,580
   
2,426,271
   
1,821,863
   
29,882
   
0
   
0
   
(25,563,596
)
 
0
 
Gain on other sales and other income - external
   
320,519
   
52,349
   
35,088
   
(4,932
)
 
2,499
   
(579
)
 
(4,024
)
 
400,920
 
Total revenue
 
$
53,631,687
 
$
27,935,787
 
$
16,517,158
 
$
9,722,772
 
$
14,044,220
 
$
15,377
   
($25,567,620
)
$
96,299,381
 
Net income
 
$
4,806,602
 
$
1,965,930
 
$
1,491,555
 
$
1,134,895
   
($645,822
)
 
($637,418
)
 
($1,443,069
)
$
6,672,673
 
 
For the nine months ended
                                                 
September 30, 2006
                                                 
Revenue
                                                 
Net product sales - external
 
$
32,235,160
 
$
17,839,550
 
$
10,979,886
 
$
6,910,874
 
$
0
 
$
146,567
 
$
0
 
$
68,112,037
 
Net product sales - internal
   
6,237,499
   
2,384,889
   
555,947
   
311,256
   
0
   
0
   
(9,489,591
)
 
0
 
Gain on other sales and other income - external
   
212,344
   
113,940
   
21,879
   
5,400
   
0
   
0
   
(2,470
)
 
351,093
 
Total revenue
 
$
38,685,003
 
$
20,338,379
 
$
11,557,712
 
$
7,227,530
 
$
0
 
$
146,567
   
($9,492,061
)
$
68,463,130
 
Net income
 
$
1,868,714
 
$
1,182,693
 
$
1,288,636
 
$
608,652
   
($48,858
)
 
($455,035
)
 
($1,066,645
)
$
3,378,157
 

(1)Other includes activity not allocated to the product sectors and elimination of inter-sector transactions.
 
22. SUBSEQUENT EVENTS 

None
 
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995:
 
This Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended.  Generally, the words “believes”, “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements which include, but are not limited to, statements concerning the Company’s expectations regarding its working capital requirements, financing requirements, business prospects, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends, and similar expressions concerning matters that are not historical facts.  Such statements are subject to certain risks and uncertainties, including the matters set forth in this Quarterly Report or other reports or documents the Company files with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected.  Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof.  The Company undertakes no obligation to update these forward-looking statements.  In addition, the forward-looking statements in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2007 involve known and unknown risks, uncertainties and other factors that could cause the actual results, performance or achievements of the Company to differ materially from those expressed in or implied by the forward-looking statements contained herein.  Please see the discussion on risk factors in Item 1A of Part II of this quarterly report on Form 10-Q.
 
25

 
GENERAL OVERVIEW:

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 and the subsidiaries’ interests in the Sino-foreign joint ventures described below, is referred to herein as the “Company”. The Company, through its Sino-foreign joint ventures described below, is primarily engaged in the manufacture and sale of automotive systems and components in the People’s Republic of China, the “PRC” or “China”, as described below.

Great Genesis Holding Limited, a company incorporated on January 3, 2003 under The Companies Ordinance in Hong Kong as a limited liability company, “Great Genesis”, is a wholly-owned subsidiary of the Company.  Ji Long Enterprise Investment Limited was incorporated on October 8, 1992 under The Companies Ordinance in Hong Kong as a limited liability company, “Ji Long”. Ji Long is an investment holding company. Effective March 4, 2003, all of the shareholders of Ji Long exchanged their 100% shareholder interest for a 100% shareholder interest in Great Genesis, as a result of which Ji Long became a wholly-owned subsidiary of Great Genesis.

Henglong USA Corporation, “HLUSA”, which was 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 Sino-foreign joint ventures organized in the PRC as of September 30, 2007 and 2006 (unaudited).
 
   
Percentage Interest