UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended |
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For the transition period from _________ to _________
Commission file number 000-11991
SORL AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 30-0091294 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
No. 2666 Kaifaqu Avenue1169 Yumeng Road
Ruian Economic Development District
Ruian City, Zhejiang Province
People’s Republic of China
(Address of principal executive offices)
86-577-6581-7720
86-577-6581-7720
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) 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.
YesxNo¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YesxNo¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definition of “accelerated filer”, “large accelerated filer”, “smaller reporting company”, and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer¨ | Accelerated Filer¨ | Non-Accelerated Filer¨ | Smaller Reporting Companyx |
Emerging Growth Company¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes¨Nox
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer classes of common stock, as of the latest practicable date:
As of November 14, 2017May 15, 2018 there were19,304,921shares of Common Stock outstanding.common stock outstanding
SORL AUTO PARTS, INC.
FORM 10-Q
For the QuarterThree Months Ended September 30, 2017March 31, 2018
INDEX
2
2 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2017March 31, 2018 and December 31, 20162017
September 30, 2017 | December 31, 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current Assets | ||||||||||||||||
Cash and cash equivalents | US$ | 7,653,174 | US$ | 8,057,155 | US$ | 22,682,734 | US$ | 4,221,940 | ||||||||
Accounts receivable, net, including $0 and $5,025,509 from related parties at September 30, 2017 and December 31, 2016, respectively | 125,807,155 | 102,129,294 | ||||||||||||||
Bank acceptance notes receivable | 66,563,935 | 42,697,276 | ||||||||||||||
Accounts receivable, net, including $1,369,846 and $1,297,734 from related party at March 31, 2018 and December 31, 2017, respectively | 173,176,607 | 134,384,961 | ||||||||||||||
Bank acceptance notes from customers | 141,418,791 | 116,040,688 | ||||||||||||||
Inventories | 83,079,686 | 65,776,517 | 117,758,209 | 114,300,564 | ||||||||||||
Prepayments, current, including $138,075 and $0 from related parties at September 30, 2017 and December 31, 2016, respectively | 11,811,104 | 10,797,601 | ||||||||||||||
Advances to related party | 9,011,700 | - | ||||||||||||||
Prepayments, current, including $9,690,080 and $999,527 to related parties at March 31, 2018 and December 31, 2017, respectively | 24,451,933 | 8,826,004 | ||||||||||||||
Restricted cash | 700,974 | 5,476,621 | 46,602,834 | 376,236 | ||||||||||||
Other current assets | 6,632,395 | 1,124,608 | ||||||||||||||
Deferred tax assets | 3,312,529 | 3,210,575 | ||||||||||||||
Advances to related parties | 138,038,517 | 72,318,224 | ||||||||||||||
Other current assets, net | 7,637,869 | 5,555,568 | ||||||||||||||
Total Current Assets | 314,572,652 | 239,269,647 | 671,767,494 | 456,024,185 | ||||||||||||
Property, plant and equipment, net | 72,977,873 | 53,737,706 | 83,500,305 | 79,828,006 | ||||||||||||
Land use rights, net | 14,796,670 | 8,309,333 | 15,360,639 | 14,912,134 | ||||||||||||
Intangible assets, net | 5,263 | 11,438 | - | 3,341 | ||||||||||||
Deposits on loan agreements | 11,132,138 | 10,712,865 | ||||||||||||||
Prepayments, non-current | 9,184,597 | - | 33,401,173 | 16,594,987 | ||||||||||||
Deferred tax assets | 3,487,908 | 4,240,424 | ||||||||||||||
Total Non-current Assets | 96,964,403 | 62,058,477 | 146,882,163 | 126,291,757 | ||||||||||||
Total Assets | US$ | 411,537,055 | US$ | 301,328,124 | US$ | 818,649,657 | US$ | 582,315,942 | ||||||||
Liabilities and Equity | ||||||||||||||||
Current Liabilities | ||||||||||||||||
Accounts payable and bank acceptance notes to vendors, including $2,188,003 and $1,953,707 to related parties at September 30, 2017 and December 31, 2016, respectively | US$ | 70,124,109 | US$ | 65,672,626 | ||||||||||||
Accounts payable and bank acceptance notes to vendors, including $10,104,627 and $15,896,804 due to related parties at March 31, 2018 and December 31, 2017, respectively | US$ | 192,341,749 | US$ | 118,051,633 | ||||||||||||
Deposits received from customers | 40,656,344 | 22,733,742 | 49,997,137 | 43,087,473 | ||||||||||||
Short term bank loans | 77,779,094 | 27,416,376 | 239,625,661 | 125,380,899 | ||||||||||||
Current portion of long term loans | 26,141,459 | 24,266,031 | ||||||||||||||
Income tax payable | 1,972,847 | 996,522 | 1,709,222 | 3,249,727 | ||||||||||||
Accrued expenses | 19,981,863 | 20,103,392 | 17,651,012 | 25,154,658 | ||||||||||||
Due to related party | 4,129,808 | - | ||||||||||||||
Due to related parties | 36,939,943 | 1,572,963 | ||||||||||||||
Deferred income | 927,678 | 1,020,273 | ||||||||||||||
Other current liabilities | 2,695,541 | 2,013,943 | 4,013,302 | 2,857,130 | ||||||||||||
Total Current Liabilities | 217,339,606 | 138,936,601 | 569,347,163 | 344,640,787 | ||||||||||||
Long term loans, less current portion and net of unamortized debt issuance costs | 31,773,249 | 37,383,224 | ||||||||||||||
Total Non-current Liabilities | 31,773,249 | 37,383,224 | ||||||||||||||
Total Liabilities | 217,339,606 | 138,936,601 | 601,120,412 | 382,024,011 | ||||||||||||
Equity | ||||||||||||||||
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of September 30, 2017 and December 31, 2016 | - | - | ||||||||||||||
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of September 30, 2017 and December 31, 2016 | 38,609 | 38,609 | ||||||||||||||
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of March 31, 2018 and December 31, 2017 | - | - | ||||||||||||||
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of March 31, 2018 and December 31, 2017 | 38,609 | 38,609 | ||||||||||||||
Additional paid-in capital | (28,582,654 | ) | (28,582,654 | ) | (28,582,654 | ) | (28,582,654 | ) | ||||||||
Reserves | 17,273,279 | 15,129,935 | 18,389,707 | 17,562,357 | ||||||||||||
Accumulated other comprehensive income | 13,308,933 | 6,117,042 | 23,143,269 | 15,903,188 | ||||||||||||
Retained earnings | 165,642,629 | 146,352,530 | 175,690,481 | 168,244,329 | ||||||||||||
Total SORL Auto Parts, Inc. Stockholders' Equity | 167,680,796 | 139,055,462 | 188,679,412 | 173,165,829 | ||||||||||||
Noncontrolling Interest in Subsidiaries | 26,516,653 | 23,336,061 | ||||||||||||||
Noncontrolling Interest In Subsidiaries | 28,849,833 | 27,126,102 | ||||||||||||||
Total Equity | 194,197,449 | 162,391,523 | 217,529,245 | 200,291,931 | ||||||||||||
Total Liabilities and Equity | US$ | 411,537,055 | US$ | 301,328,124 | US$ | 818,649,657 | US$ | 582,315,942 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.statements
3
3 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
For the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2018 | 2017 | |||||||||||||||||||
Sales | US$ | 101,329,628 | US$ | 63,706,397 | US$ | 267,589,953 | US$ | 192,917,633 | US$ | 107,726,682 | US$ | 74,746,394 | ||||||||||||
Include: sales to related parties | 7,401,464 | 3,315,026 | 13,479,162 | 11,518,005 | 7,701,054 | 4,008,684 | ||||||||||||||||||
Cost of sales | 74,027,933 | 44,794,499 | 194,703,290 | 136,657,152 | 77,527,196 | 53,700,458 | ||||||||||||||||||
Gross profit | 27,301,695 | 18,911,898 | 72,886,663 | 56,260,481 | 30,199,486 | 21,045,936 | ||||||||||||||||||
Expenses: | ||||||||||||||||||||||||
Selling and distribution expenses | 8,283,704 | 7,949,947 | 22,877,889 | 20,637,464 | 10,037,861 | 5,608,623 | ||||||||||||||||||
General and administrative expenses | 4,761,787 | 4,878,979 | 13,517,222 | 16,717,966 | 4,773,778 | 4,044,913 | ||||||||||||||||||
Research and development expenses | 2,941,243 | 2,409,891 | 7,477,902 | 6,533,540 | 3,590,402 | 2,055,096 | ||||||||||||||||||
Total operating expenses | 15,986,734 | 15,238,817 | 43,873,013 | 43,888,970 | 18,402,041 | 11,708,632 | ||||||||||||||||||
Other operating income, net | 473,610 | 60,659 | 1,185,958 | 144,715 | 2,197,324 | 290,237 | ||||||||||||||||||
Income from operations | 11,788,571 | 3,733,740 | 30,199,608 | 12,516,226 | 13,994,769 | 9,627,541 | ||||||||||||||||||
Interest income | 16,150 | 33,979 | 38,175 | 1,047,667 | 1,488,264 | 10,550 | ||||||||||||||||||
Government grants | 1,006,033 | 424,029 | 1,119,337 | 569,041 | 133,933 | 28,909 | ||||||||||||||||||
Other income | 47,262 | 212,513 | 47,976 | 763,534 | 27,066 | 664 | ||||||||||||||||||
Interest expenses | (804,499 | ) | (214,974 | ) | (1,827,835 | ) | (515,547 | ) | (3,353,711 | ) | (481,160 | ) | ||||||||||||
Exchange differences | (601,286 | ) | (92,732 | ) | ||||||||||||||||||||
Other expenses | (886,782 | ) | (155,261 | ) | (1,536,921 | ) | (582,820 | ) | (890,814 | ) | (114,799 | ) | ||||||||||||
Income before income taxes provision | 11,166,735 | 4,034,026 | 28,040,340 | 13,798,101 | 10,798,221 | 8,978,973 | ||||||||||||||||||
Income taxes provision | 1,627,721 | 435,534 | 4,225,404 | 1,677,987 | ||||||||||||||||||||
Provision for income taxes | 1,605,441 | 1,286,174 | ||||||||||||||||||||||
Net income | US$ | 9,539,014 | US$ | 3,598,492 | US$ | 23,814,936 | US$ | 12,120,114 | US$ | 9,192,780 | US$ | 7,692,799 | ||||||||||||
Net income attributable to noncontrolling interest in subsidiaries | 953,901 | 359,849 | 2,381,493 | 1,212,011 | 919,278 | 769,280 | ||||||||||||||||||
Net income attributable to common stockholders | US$ | 8,585,113 | US$ | 3,238,643 | US$ | 21,433,443 | US$ | 10,908,103 | US$ | 8,273,502 | US$ | 6,923,519 | ||||||||||||
Comprehensive income: | ||||||||||||||||||||||||
Net income | US$ | 9,539,014 | US$ | 3,598,492 | US$ | 23,814,936 | US$ | 12,120,114 | US$ | 9,192,780 | US$ | 7,692,799 | ||||||||||||
Foreign currency translation adjustments | 3,856,038 | (1,109,719 | ) | 7,990,990 | (4,599,246 | ) | 8,044,534 | 911,432 | ||||||||||||||||
Comprehensive income | 13,395,052 | 2,488,773 | 31,805,926 | 7,520,868 | 17,237,314 | 8,604,231 | ||||||||||||||||||
Comprehensive income attributable to noncontrolling interest in subsidiaries | 1,339,505 | 248,877 | 3,180,592 | 752,086 | 1,723,731 | 860,423 | ||||||||||||||||||
Comprehensive income attributable to common stockholders | US$ | 12,055,547 | US$ | 2,239,896 | US$ | 28,625,334 | US$ | 6,768,782 | US$ | 15,513,583 | US$ | 7,743,808 | ||||||||||||
Weighted average common share - basic | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | ||||||||||||||||||
Weighted average common share - diluted | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | 19,304,921 | ||||||||||||||||||
EPS - basic | US$ | 0.44 | US$ | 0.17 | US$ | 1.11 | US$ | 0.57 | US$ | 0.43 | US$ | 0.36 | ||||||||||||
EPS - diluted | US$ | 0.44 | US$ | 0.17 | US$ | 1.11 | US$ | 0.57 | US$ | 0.43 | US$ | 0.36 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.statements
4
4 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the NineThree Months Ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income | US$ | 23,814,936 | US$ | 12,120,114 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Allowance for doubtful accounts | 759,854 | 6,328,318 | ||||||
Depreciation and amortization | 6,623,082 | 5,357,366 | ||||||
Deferred income tax | 42,583 | (1,253,285 | ) | |||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | (19,276,498 | ) | (21,237,420 | ) | ||||
Bank acceptance notes receivable | 2,056,320 | (22,588,093 | ) | |||||
Other current assets | (2,317,124 | ) | (360,110 | ) | ||||
Inventories | (13,792,530 | ) | 8,225,129 | |||||
Prepayments, current | (1,312,081 | ) | (5,240,758 | ) | ||||
Prepaid capital lease interest | - | 86,777 | ||||||
Accounts payable and bank acceptance notes to vendors | 1,347,005 | 15,400,637 | ||||||
Income tax payable | 909,912 | 1,153,011 | ||||||
Deposits received from customers | 16,516,529 | 4,217,264 | ||||||
Other current liabilities and accrued expenses | (371,575 | ) | 1,086,934 | |||||
Net Cash Flows Provided By Operating Activities | 15,000,413 | 3,295,884 | ||||||
Cash Flows From Investing Activities | ||||||||
Change in short term investments | - | 60,567,408 | ||||||
Acquisition and prepayments of property, plant and equipment and land use rights | (36,882,570 | ) | (12,266,591 | ) | ||||
Deposit for acquisition of land use rights | (2,982,537 | ) | - | |||||
Advances to related party | (8,919,241 | ) | (18,247,384 | ) | ||||
Repayment of advances to related party | - | 18,247,384 | ||||||
Change in restricted cash | 4,871,113 | (4,193,003 | ) | |||||
Net Cash Flows Provided By (Used In) Investing Activities | (43,913,235 | ) | 44,107,814 | |||||
Cash Flows From Financing Activities | ||||||||
Proceeds from bank loans | 84,149,040 | 39,309,937 | ||||||
Repayment of bank loans | (36,149,680 | ) | (37,110,783 | ) | ||||
Proceeds from related parties | 93,191,843 | - | ||||||
Repayments to related parties | (113,071,629 | ) | - | |||||
Distribution to controlling shareholder in connection with plant and land use rights exchange with entity under common control | - | (70,781,668 | ) | |||||
Repayment of capital lease | - | (1,779,040 | ) | |||||
Net Cash Flows Provided By (Used In) Financing Activities | 28,119,574 | (70,361,554 | ) | |||||
Effects on changes in foreign exchange rate | 389,267 | 216,995 | ||||||
Net change in cash and cash equivalents | (403,981 | ) | (22,740,861 | ) | ||||
Cash and cash equivalents- beginning of the period | 8,057,155 | 30,230,828 | ||||||
Cash and cash equivalents - end of the period | US$ | 7,653,174 | US$ | 7,489,967 | ||||
Supplemental Cash Flow Disclosures: | ||||||||
Interest paid | US$ | 1,255,540 | US$ | 575,349 | ||||
Income taxes paid | US$ | 3,272,909 | US$ | 2,340,720 | ||||
Non-cash Investing and Financing Transactions | ||||||||
Transfer of plant and land use right to entity under common control | US$ | - | US$ | 17,342,372 | ||||
Liabilities assumed in connection with the plant and land use right exchange | US$ | - | US$ | 5,351,196 | ||||
Loans from related party in the form of bank acceptance notes | US$ | 23,515,527 | US$ | - |
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income | US$ | 9,192,780 | US$ | 7,692,799 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
Allowance for doubtful accounts | 278,397 | - | ||||||
Depreciation and amortization | 2,847,303 | 2,017,224 | ||||||
Amortization of debt issuance costs | 372,025 | - | ||||||
Deferred income tax | 900,839 | 8,453 | ||||||
Changes in assets and liabilities: | ||||||||
Account receivable | (32,888,322 | ) | (2,151,307 | ) | ||||
Bank acceptance notes from customers | 12,354,888 | (2,700,239 | ) | |||||
Other currents assets | (1,890,438 | ) | (638,653 | ) | ||||
Inventories | 996,280 | (5,594,100 | ) | |||||
Prepayments, current | (14,987,105 | ) | 1,142,387 | |||||
Accounts payable and bank acceptance notes to vendors | 63,073,488 | (4,434,657 | ) | |||||
Income tax payable | (1,635,670 | ) | 265,518 | |||||
Deposits received from customers | 5,123,039 | 3,033,848 | ||||||
Deferred income | (129,981 | ) | - | |||||
Other current liabilities and accrued expenses | (7,302,268 | ) | (2,133,534 | ) | ||||
Net Cash Flows Provided By (Used In) Operating Activities | 36,305,255 | (3,492,261 | ) | |||||
Cash Flows From Investing Activities | ||||||||
Acquisition of property, equipment and land use rights | (19,682,775 | ) | (14,320,981 | ) | ||||
Advances to related parties | (67,694,035 | ) | - | |||||
Repayments of advances to related parties | 5,821,183 | - | ||||||
Net Cash Flows Used In Investing Activities | (81,555,627 | ) | (14,320,981 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Proceeds from short term bank loans | 222,636,613 | 21,247,576 | ||||||
Repayments of short term bank loans | (115,398,302 | ) | - | |||||
Proceeds from related parties | 264,565,400 | - | ||||||
Repayments to related parties | (256,883,171 | ) | - | |||||
Repayments of long term loans | (6,401,331 | ) | - | |||||
Net Cash Flows Provided By Financing Activities | 108,519,209 | 21,247,576 | ||||||
Effects on changes in foreign exchange rate | 1,418,555 | 83,361 | ||||||
Net change in cash, cash equivalents, and restricted cash | 64,687,392 | 3,517,695 | ||||||
Cash, cash equivalents, and restricted cash - beginning of the period | 4,598,176 | 13,533,776 | ||||||
Cash, cash equivalents, and restricted cash - end of the period | US$ | 69,285,568 | US$ | 17,051,471 | ||||
Supplemental Cash Flow Disclosures: | ||||||||
Interest paid | US$ | 2,278,298 | US$ | 250,601 | ||||
Income taxes paid | US$ | 2,340,272 | US$ | 1,012,203 | ||||
Non-cash Investing and Financing Transactions | ||||||||
Repayments to related party in the form of bank acceptance notes | US$ | 5,846,083 | US$ | - | ||||
Loans from related party in the form of bank acceptance notes | US$ | 32,791,380 | US$ | - | ||||
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||
Cash and cash equivalents | US$ | 22,682,734 | US$ | 11,455,214 | ||||
Restricted cash | 46,602,834 | 5,596,257 | ||||||
Total cash, cash equivalents, and restricted cash at end of period | US$ | 69,285,568 | US$ | 17,051,471 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.statements
5
5 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
For the NineThree Months Ended September 30, 2017March 31, 2018 (Unaudited)
Number of Share | Common Stock | Additional Paid-in Capital | Reserves | Retained Earnings | Accumulated Other Comprehensive Income | Total SORL Auto Parts, Inc. Stockholders’ Equity | Noncontrolling Interest | Total Equity | Accumulated | Total SORL Auto | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2016 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 15,129,935 | $ | 146,352,530 | $ | 6,117,042 | $ | 139,055,462 | $ | 23,336,061 | $ | 162,391,523 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Number | Common | Additional Paid-in | Retained | Other Comprehensive | Parts, Inc. Stockholders' | Noncontrolling | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
of Share | Stock | Capital | Reserves | Earnings | Income | Equity | Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of December 31, 2017 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 17,562,357 | $ | 168,244,329 | $ | 15,903,188 | $ | 173,165,829 | $ | 27,126,102 | $ | 200,291,931 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | 21,433,443 | - | 21,433,443 | 2,381,493 | 23,814,936 | - | - | - | - | 8,273,502 | - | 8,273,502 | 919,278 | 9,192,780 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 7,191,891 | 7,191,891 | 799,099 | 7,990,990 | - | - | - | - | - | 7,240,081 | 7,240,081 | 804,453 | 8,044,534 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Transfer to reserve | - | - | - | 2,143,344 | (2,143,344 | ) | - | - | - | - | - | - | - | 827,350 | (827,350 | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of September 30, 2017 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 17,273,279 | $ | 165,642,629 | $ | 13,308,933 | $ | 167,680,796 | $ | 26,516,653 | $ | 194,197,449 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance as of March 31, 2018 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 18,389,707 | $ | 175,690,481 | $ | 23,143,269 | $ | 188,679,412 | $ | 28,849,833 | $ | 217,529,245 |
The accompanying notes are an integral part of these unaudited consolidated financial statements.statements
6
6 |
SORL Auto Parts, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017March 31, 2018
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”), a Delaware corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd. (the “Joint Venture” or “Ruian”). The Company distributes products both in China and internationally under SORL trademarks. The Company’s product range includes 65 categories and over 2,000 different specifications.
The Joint Venture was formed in the People’s Republic of China (“PRC” or “China”) as a Sino-Foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the “Ruili Group”), a related party under common control, and Fairford Holdings Limited (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was incorporated in China in 1987 and specializes in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture.
On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution specialist firm and an unaffiliated Taiwanese individual investor. The joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. SORL held a 60% interest in the joint venture, MGR held a 30% interest, and the Taiwanese individual investor held a 10% interest. SIH was primarily devoted to expanding SORL's international sales network in Asia-Pacific and creating a larger footprint in Europe and Africa with a target to create a truly global distribution network. In December 2015, due to the poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese investor. After this transaction, SIH ceased to be a distributor of SORL in the international market.
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NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(1) | BASIS OF PRESENTATION |
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by the rules and regulations of the United States Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures contained in this report are adequate to make the information presented not misleading. The consolidated balance sheet information as of December 31, 20162017 was derived from the consolidated audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. These consolidated financial statements should be read in conjunction with the annual consolidated audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2017, and other reports filed with the SEC.
The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole.
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(2) | SIGNIFICANT ACCOUNTING POLICIES |
a. ACCOUNTING METHOD
a. | ACCOUNTING METHOD |
The Company uses the accrual method of accounting for financial statement and tax return purposes.
b. USE OF ESTIMATES
b. | USE OF ESTIMATES |
The preparation of financial statements in conformity with U.SU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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.periods. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.
c. FAIR VALUE OF FINANCIAL INSTRUMENTS
c. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable and payable, bank acceptance notes receivable,from customers and to vendors, inventories, current prepayments, other current assets, deferred tax assets, accounts payable and bank acceptance notes to vendors, short term bank loans, current portion of long term loans, deposits received from customers, deferred income and other payables and accruals, income tax payable, accrued expenses, and other current liabilities, the carrying amounts approximate fair values due to their short maturities.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
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d. RESTRICTED CASH
d. | RESTRICTED CASH |
Restricted cash mainly representsconsists of bank deposits used to pledge the bank acceptance notes. notes and short term bank loan, deposits for obtaining letters of credit from a local bank and bank deposits used as down payment secured on behalf of a related party for potential acquisition.
The Company entered into credit agreements with commercial banks in China (“endorsing banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits, the Company can issue bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance notes, the Company is generally required to make initial deposits or pledge note receivables to the endorsing banks in amounts of certain percentage of the face amount of the bank acceptance notes to be issued by the Company. The cash in such accounts is restricted for use over the terms of the bank acceptance notes, which are normally three to six months. As of March 31, 2018 and December 31, 2017, restricted cash of $37,728,039 and $0, respectively, was used to twelve months.pledge the bank acceptance notes.
e. RELATED PARTY TRANSACTIONSDuring the three months ended March 31, 2018, the Company obtained a short term bank loan in the amount of $2,972,096 from Industrial and Commercial Bank of China, which required a pledge with bank deposits of $3,022,471. As of March 31, 2018, the bank deposits remained as the pledge for the loan. Also see Note K for details.
The Company also obtained letters of credit from Industrial Bank Co., Ltd., which agreed to provide guarantee that the Company would make timely payment to its sellers for any purchases. Deposits of $286,255 and $275,474, respectively, were required for this purpose as of March 31, 2018 and December 31, 2017.
As of March 31, 2018, the Company had a bank deposit of $5,566,069, representing an advance to Ruili Group. Also see Note E for details.
e. | RELATED PARTY TRANSACTIONS |
A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its related parties in the ordinary course of business.
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f. BANK ACCEPTANCE NOTES RECEIVABLE
f. | BANK ACCEPTANCE NOTES RECEIVABLE |
Bank acceptance notes receivable generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of related parties and transferred to the Company as loans from related parties. Bank acceptance notes do not bear interest. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, bank acceptance notes receivablefrom customers in the amount of $54,781,712$135,919,194 and $32,916,198,$95,914,724, respectively, were pledged to endorsing banks to issue either short term bank loans or bank acceptance notes to vendors. The banks charge discount fees if the Company chooses to discount the bank acceptance notes from customers for cash before the maturity of the notes and such discount fees are included in interest expenses.expenses on the accompanying unaudited consolidated statements of income and comprehensive income.
g.
g. | REVENUE RECOGNITION |
The Company has adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective as of January 1, 2018. The Company has chosen to use the full retrospective transition method, under which it is required to revise its consolidated financial statements for the year ended December 31, 2017 as well as any applicable interim periods within the year ended December 31, 2017, as if ASC 606 had been effective for those periods. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. See Note C for assessment on the impact of adopting ASC 606, and Note M for details on revenues from contracts with customers.
Revenue from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided by several factors, including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured. Revenue consists of the invoice value for the sale of goods net of value-added tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales.
h. COST OF SALES
Cost of sales consists primarily of materials costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs, employee compensation, depreciation and related costs, which are directly attributable to production. Write-down of inventories to lower of cost or market is also recorded in cost of sales, if any.
i. FOREIGN CURRENCY TRANSLATION
h. | FOREIGN CURRENCY TRANSLATION |
The Company maintains its books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”). All assets and liabilities are translated at the current rate. The stockholders’ equity accounts are translated at the appropriate historical rates.rate. Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
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NOTE C – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASC 606. ASC 606 outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP and supersedes existing revenue recognition guidance. The main principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company applied the ASC and its related updates on a full retrospective basis as of January 2017,1, 2018. The adoption of ASC 606 did not impact the previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. See Note M for additional information.
In November 2016, the FASB issued ASU 2017-03, “Accounting Changes2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and Error Corrections (Topic 250)amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and Investments - Equity Methodrestricted cash equivalents should be included with cash and Joint Ventures (Topic 323)”. This pronouncement amendscash equivalents when reconciling the SEC’s reporting requirements for public filers in regard to new accounting pronouncementsbeginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact ofrestricted cash equivalents. The Company adopted ASU 2016-18 effective January 1, 2018. As a specific pronouncement, and provide disclosures including a descriptionresult of the effect on accounting policies thatadoption, net cash used in investing activities was adjusted to exclude the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevantchange in restricted cash, resulting in a decrease of $89,465 in net cash used in investing activities in the amount previously reported for the corrections in FASB ASU 2017-03. The Company is implementingthree months ended March 31, 2017. Restricted cash was included with cash and cash equivalents when reconciling the updated SEC requirementsbeginning-of-period and end-of-period total amounts shown on not yet adopted accounting pronouncements with thesethe consolidated financial statements.statements of cash flows.
NOTE D – RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings andor financial position.
NOTE E - RELATED PARTY TRANSACTIONS
Related parties with whom the Company conducted business consist of the following:
Name of Related Party | Nature of Relationship | |
Xiao Ping Zhang | Principal shareholder, Chairman of the Board and Chief Executive Officer | |
Shu Ping Chi | Shareholder, member of the Board, wife of Xiao Ping Zhang | |
Xiao Feng Zhang | Shareholder, member of the Board, brother of Xiao Ping Zhang | |
Ruili Group Co., Ltd. ("Ruili Group") | 10% shareholder of Joint Venture and is collectively controlled by Xiao Ping Zhang, Shu Ping Chi, and Xiao Feng Zhang | |
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. ("Guangzhou Kormee") | Controlled by Ruili Group | |
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. (“Ruian Kormee” and formerly known as “Ruian Kormee Automobile Braking Co., Ltd.”) | Wholly controlled by Guangzhou Kormee | |
Shanghai Dachao Electric Technology Co., Ltd. ("Shanghai Dachao") | Ruili Group holds 49% of the equity interests in Shanghai Dachao | |
Ruili MeiLian Air Management System (LangFang) Co., Ltd. ("Ruili Meilian") | Controlled by Ruili Group | |
Wenzhou Lichuang Automobile Parts Co., Ltd. ("Wenzhou Lichuang") | Controlled by Ruili Group | |
Ningbo Ruili Equipment Co., Ltd. ("Ningbo Ruili") | Controlled by Ruili Group | |
Shanghai Ruili Real Estate Development Co., Ltd. ("Shanghai Ruili") | Wholly owned by Ruili Group | |
Kunshan Yuetu Real Estate Development Co., Ltd. ("Kunshan Yuetu") | Collectively owned by Ruili Group and Shu Ping Chi | |
Shanghai Tabouk Auto Components Co., Ltd. ("Shanghai Tabouk") | Collectively owned by Xiao Feng Zhang and Xiao Ping Zhang | |
Hangzhou Ruili Property Development Co., Ltd. | Collectively owned by Ruili Group and Xiao Ping Zhang |
The Company continues to purchase primarily packaging materials from the Ruili Group. The Ruili Group is the minority stockholder of Joint Venture and is collectively controlled by Mr. Xiao Ping Zhang, his wife, Ms. Shu Ping Chi, and his brother, Mr. Xiao Feng Zhang. In addition, the Company purchases automotive components from four other related parties, including Guangzhou Kormee, Automotive Electronic Control Technology Co., Ltd. (“Guangzhou Kormee”), Ruian Kormee, Automobile Braking Co., Ltd. (“Ruian Kormee”), Ruili MeiLian Air Management System (LangFang) Co., Ltd. (“Ruili MeiLian”) andMeilian, Shanghai Dachao, Electric Technology Co., Ltd. (“Shanghai Dachao”). Guangzhou KormeeWenzhou Lichuang and Ningbo Ruili. As of March 31, 2018, the Company did not receive all the materials from Ruili MeiLianMeilian or any materials from Ningbo Ruili purchased during the three months then ended. The unreceived purchases from those two related parties are controlled byrecorded as prepayments, current on the Ruili Group and Ruian Kormee is the wholly-owned subsidiary of Guangzhou Kormee. Ruili Group owns 49% equity interest in Shanghai Dachao. accompanying consolidated balance sheets.
The Company sells certain automotive products to the Ruili Group. The Company also sells parts to Guangzhou Kormee, Ruian KormeeShanghai Tabouk and Ruili MeiLian.Meilian.
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The following related party transactions occurred duringfor the three and nine months ended September 30, 2017March 31, 2018 and 2016:2017:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
PURCHASES FROM: | ||||||||||||||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 124,340 | $ | 138,580 | $ | 1,449,946 | $ | 826,474 | ||||||||
Ruian Kormee Automobile Braking Co., Ltd. | 328,680 | 450,665 | 1,085,483 | 807,769 | ||||||||||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 1,457,104 | — | 3,613,415 | — | ||||||||||||
Shanghai Dachao Electric Technology Co., Ltd. | — | 82,671 | 55,230 | 116,415 | ||||||||||||
Ruili Group Co., Ltd. | 1,335,449 | 1,027,210 | 3,845,123 | 2,972,963 | ||||||||||||
Total Purchases | $ | 3,245,573 | $ | 1,699,126 | $ | 10,049,197 | $ | 4,723,621 | ||||||||
SALES TO: | ||||||||||||||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 3,125,127 | $ | 1,529,583 | $ | 4,874,568 | $ | 3,174,040 | ||||||||
Ruian Kormee Automobile Braking Co., Ltd. | 103,242 | — | 115,429 | 9,477 | ||||||||||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 245,735 | — | 634,022 | — | ||||||||||||
Ruili Group Co., Ltd. | 3,927,360 | 1,785,443 | 7,855,143 | 8,334,488 | ||||||||||||
Total Sales | $ | 7,401,464 | $ | 3,315,026 | $ | 13,479,162 | $ | 11,518,005 |
September30, | December 31, | |||||||
2017 | 2016 | |||||||
ACCOUNTS RECEIVABLE FROM RELATED PARTIES | ||||||||
Ruili Group Co., Ltd. | $ | — | $ | 4,361,010 | ||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | — | 664,499 | ||||||
Total | $ | — | $ | 5,025,509 | ||||
PREPAYMENTS TO RELATED PARTIES | ||||||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 63,025 | $ | — | ||||
Shanghai Dachao Electric Technology Co., Ltd. | 75,050 | — | ||||||
Total | $ | 138,075 | $ | — | ||||
ADVANCES TO RELATED PARTY | ||||||||
Ruili Group Co., Ltd. | $ | 9,011,700 | $ | — | ||||
Total | $ | 9,011,700 | $ | — | ||||
ACCOUNTS PAYABLE AND BANK ACCEPTANCE NOTES TO RELATED PARTIES | ||||||||
Ruian Kormee Automobile Braking Co., Ltd. | $ | — | $ | 628,310 | ||||
Shanghai Dachao Electric Technology Co., Ltd. | — | 100,441 | ||||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 2,188,003 | 1,224,956 | ||||||
Total | $ | 2,188,003 | $ | 1,953,707 | ||||
DUE TO RELATED PARTY | ||||||||
Ruian Kormee Automobile Braking Co., Ltd. | $ | 4,129,808 | $ | — | ||||
Total | $ | 4,129,808 | $ | — |
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
PURCHASES FROM: | ||||||||
Guangzhou Ruili Kormee Automotive Eletronic Control Technology Co., Ltd. | $ | - | $ | 335,927 | ||||
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. | 355,493 | 355,671 | ||||||
Shanghai Dachao Electric Technology Co., Ltd. | 145,618 | 55,230 | ||||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 2,471,243 | 783,070 | ||||||
Ruili Group Co., Ltd. | 1,716,788 | 1,126,718 | ||||||
Wenzhou Lichuang Automobile Parts Co., Ltd. | 1,781,716 | - | ||||||
Total purchases | $ | 6,470,858 | $ | 2,656,616 | ||||
SALES TO: | ||||||||
Guangzhou Ruili Kormee Automotive Eletronic Control Technology Co., Ltd. | $ | 2,353,028 | $ | 777,357 | ||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 529,873 | - | ||||||
Ruili Group Co., Ltd. | 4,411,287 | 3,026,924 | ||||||
Shanghai Tabouk Auto Components Co., Ltd. | 406,866 | 204,403 | ||||||
Total sales | $ | 7,701,054 | $ | 4,008,684 |
As of March 31, 2018 | As of December 31, 2017 | |||||||
ADVANCES TO RELATED PARTIES | ||||||||
Ruili Group Co., Ltd. | $ | - | $ | 5,711,605 | ||||
Shanghai Ruili Real Estate Development Co., Ltd. | 120,227,095 | 65,069,497 | ||||||
Kunshan Yuetu Real Estate Development Co., Ltd. | 17,811,422 | 1,537,122 | ||||||
Total advances to related parties | $ | 138,038,517 | $ | 72,318,224 | ||||
ACCOUNTS RECEIVABLE | ||||||||
Shanghai Tabouk Auto Components Co., Ltd. | $ | 1,369,846 | $ | 1,297,734 | ||||
Total accounts receivable | $ | 1,369,846 | $ | 1,297,734 | ||||
PREPAYMENTS, CURRENT | ||||||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | $ | 7,753,831 | $ | - | ||||
Ningbo Ruili Equipment Co., Ltd. | 1,936,249 | 999,527 | ||||||
Total prepayments, current | $ | 9,690,080 | $ | 999,527 | ||||
ACCOUNTS PAYABLE | ||||||||
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 1,845,566 | $ | 3,414,719 | ||||
Shanghai Dachao Electric Technology Co., Ltd. | 13,644 | 83,178 | ||||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 7,753,831 | 1,993,787 | ||||||
Wenzhou Lichuang Automobile Parts Co., Ltd. | 491,586 | 10,405,120 | ||||||
Total accounts payable | $ | 10,104,627 | $ | 15,896,804 | ||||
DUE TO RELATED PARTIES | ||||||||
Ruili Group Co., Ltd. | $ | 26,953,199 | $ | - | ||||
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. | 9,986,744 | 1,572,963 | ||||||
Total due to related parties | $ | 36,939,943 | $ | 1,572,963 |
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The balance
From time to time, the Company borrows from Ruili Group and its controlled companies for working capital purposes. In order to obtain the loans and mutually benefit both the debtor and creditor of the arrangement, the Company also advances to Ruili Group and its controlled companies in a short term. All the loans from related party represents the advances from the Company to Ruili Group.parties are non-interest bearing, unsecured and due on demand. The advances to Ruili Group are non-interest bearing, unsecured, and due on demand. Duringdemand and the nine months ended September 30, the Company advanced cash in the amountadvances to Shanghai Ruili and Kunshan Yuetu are due on demand, unsecured, and bear an interest rate of $8,919,241. The effect of changes in foreign exchange rate is $92,459.5.22% per annum.
The balance of due to related party represents the loans the Company obtained from related parties for working capital purposes. The borrowings from related parties are interest free, unsecured and repayable on demand.
During the ninethree months ended September 30, 2017,March 31, 2018, the Company obtained loans from related parties in the amount of $93,191,843$264,565,400 in cash including $5,829,744 from Ruian Kormee and $87,362,099 from Ruili Group. The Company also borrowed the amount of $23,515,527$32,791,380 in the form of bank acceptance notes. Repayments in cash and bank acceptance notes from Ruili Group. Cash repayments to the related parties totaled $113,071,629, including $1,742,308$256,883,171 and $5,846,083, respectively. In the same period, the Company advanced to Ruian Kormeeits related parties in the total amount of $67,694,035 and $111,329,321 toreceived cash repayments from Ruili Group amounted to $5,821,183. The cash repayments from Shanghai Ruili and Kunshan Yuetu totaled $1,378,876 during the ninethree months ended September 30, 2017. The effect of changes in foreign exchange rate is $494,067.March 31, 2018, and approximately $53,434,000 during subsequent period. Also see Note S.
The Company entered into a lease agreement with Ruili Group, seeGroup. See Note MO for more details.
The
During the three months ended March 31, 2018, the Company providedmade a guaranteebank deposit of $5,566,069 (RMB 35,000,000) as down payment to secure a potential acquisition. Initially, the Company had the intention to acquire the target company and deposited $5,566,069 into a trust account restricted for the credit line granteduse in the potential acquisition. After a few rounds of discussion, the Company gave up and Ruili Group decided to do the acquisition. As the Company and Ruili Group are under common control, the restricted deposit represented an advance to Ruili Group, by Bank of Ningbo in the amount of RMB 150,000,000 (approximately $21,623,180) for the period from May 30, 2016 to May 14, 2017. As of September 30, 2017, the guarantee was released as the credit line was fully paid off by Ruili Group.non-interest bearing, due on demand and non-secured. Also See Note B.
The Company provided a guarantee for the credit line granted to Ruili Group by the China Merchants Bank in the amount of RMB 50,000,000 (approximately $7,699,889) for a period from July 29, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line. The credit line was replaced by the one issued by the same bank in the amount of RMB 40,000,000 (approximately $5,766,181) for a period of 12 months starting on October 24, 2016,2016. The credit line was renewed on October 19, 2017 for 6 months. On April 23, 2018, Ruili Group and the bank reached into another extension agreement and the guarantee of which was continued towill be provided by the Company as of September 30, 2017 and will expire onuntil April 18, 2018.
The Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in the amount of RMB 200,000,000 (approximately $28,830,907) for the period from May 22, 2016 to May 22, 2017. As of September 30, 2017, the guarantee was released as the credit line was fully paid off by Ruili Group.23, 2021.
The Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in a maximum amount of RMB 69,000,000 (approximately $10,092,000) for the period from November 16, 2016 to January 16, 2018. The credit line was renewed on December 21, 2017 for a period of 12 months, and the guarantee was accordingly extended by the Company as of March 31, 2018 and will expire on December 20, 2018.
The Company provided a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 180,000,000 (approximately $26,328,000) for the period from June 30, 2017 to June 30, 2020.
The Company has short term bank loans guaranteed or pledged by related parties. See Note K for more details.
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NOTE F - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net, consisted of the following:
September 30, | December 31, | |||||||||||||||
2017 | 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Accounts receivable | $ | 138,797,272 | $ | 113,815,711 | $ | 187,648,836 | $ | 148,312,117 | ||||||||
Less: allowance for doubtful accounts | (12,990,117 | ) | (11,686,417 | ) | (14,472,229 | ) | (13,927,156 | ) | ||||||||
Accounts receivable, net | $ | 125,807,155 | $ | 102,129,294 | ||||||||||||
Account receivable balance, net | $ | 173,176,607 | $ | 134,384,961 |
No customer individually accounted for more than 10% of ourthe Company’s revenues or accounts receivable for the ninethree months ended September 30, 2017March 31, 2018 and 2016.2017. The changes in the allowance for doubtful accounts on September 30, 2017at March 31, 2018 and December 31, 20162017 are summarized as follows:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Beginning balance | $ | 11,686,417 | $ | 12,075,402 | $ | 13,927,156 | $ | 11,686,417 | ||||||||
Add: increase to allowance | 759,854 | 395,491 | - | 1,474,872 | ||||||||||||
Less: accounts written off | - | - | ||||||||||||||
Effects on changes in foreign exchange rate | 543,846 | (784,476 | ) | 545,073 | 765,867 | |||||||||||
Ending balance | $ | 12,990,117 | $ | 11,686,417 | $ | 14,472,229 | $ | 13,927,156 |
NOTE G - INVENTORIES
On September 30, 2017At March 31, 2018 and December 31, 2016,2017, inventories were consisted of the following:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Raw materials | $ | 23,592,541 | $ | 20,121,513 | $ | 20,308,610 | $ | 27,657,266 | ||||||||
Work-in-process | 13,382,666 | 14,843,653 | 34,233,690 | 40,805,434 | ||||||||||||
Finished goods | 46,104,479 | 30,811,351 | 63,215,909 | 45,837,864 | ||||||||||||
Less: write-down of inventories | - | - | ||||||||||||||
Total inventories | $ | 83,079,686 | $ | 65,776,517 | $ | 117,758,209 | $ | 114,300,564 |
15 |
NOTE H - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, werenet, consisted of the following on September 30, 2017at March 31, 2018 and December 31, 2016:2017:
September 30, | December 31, | March 31, | December 31, | |||||||||||||
2017 | 2016 | 2018 | 2017 | |||||||||||||
Machinery | $ | 111,277,530 | $ | 87,694,677 | $ | 126,899,893 | $ | 119,296,564 | ||||||||
Molds | 1,314,717 | 1,257,841 | 1,391,314 | 1,338,912 | ||||||||||||
Office equipment | 2,385,454 | 2,021,982 | 3,131,313 | 2,998,443 | ||||||||||||
Vehicles | 3,291,065 | 2,246,203 | 4,159,140 | 3,681,194 | ||||||||||||
Buildings | 19,042,848 | 15,826,738 | 20,943,601 | 20,127,148 | ||||||||||||
Leasehold improvements | 479,301 | 458,566 | 505,887 | 486,834 | ||||||||||||
Sub-total | 137,790,915 | 109,506,007 | 157,031,148 | 147,929,095 | ||||||||||||
Less: accumulated depreciation | (64,813,042 | ) | (55,768,301 | ) | (73,530,843 | ) | (68,101,089 | ) | ||||||||
Property, plant and equipment, net | $ | 72,977,873 | $ | 53,737,706 | $ | 83,500,305 | $ | 79,828,006 |
Depreciation expense incurredcharged to operations was $6,353,494$2,711,374 and $5,110,014$1,944,565 for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.
In May 2016, the Company, through its principal operating subsidiary, entered into a Purchase Agreement (the “Purchase Agreement”) with Ruili Group, pursuant to which the Company agreed to exchange the land use rights and factory facilities located at No. 1169 Yumeng Road, Rui'an Economic Development Zone, Rui'An City, Zhejiang Province, China (the “Dongshan Facility”), purchased in 2007 from Ruili Group, plus RMB 501.00 million (approximately $76.50 million) in cash for the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue, Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, China (the “Development Zone Facility”). As of the filing date, the Company has not obtained the property ownership certificate or land use right certificate of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 4.56 million (approximately $0.75 million) for the Dongshan Facility and RMB 15.00 million (approximately $2.30 million) for the Development Zone Facility. These amounts were determined based on a 3% tax rate on the consideration paid for the Dongshan Facility and the Development Zone Facility in the transactions, which the Company considered as the most probable amount of tax liability.
16 |
In July 2017, Ruian, a subsidiary of the Company, purchased plants and the associated land use rights from Yunding Holding Group Co., Ltd. in cash at the purchase price of RMB 60.06 million (approximately $8.87 million). The total cost including related deed tax and stamp duty is RMB 58.95 million (approximately $8.88 million) net of value-added input tax in association with the purchase, which has been fully paid in cash as of September 30, 2017. The title of the plants and the associated land use rights was transferred in July 2017. The allocated costs for the land use rights and the plants are RMB 42.35 million (approximately $6.38 million) and RMB 16.60 million (approximately $2.50 million), respectively. The plants and associated land use rights will be used to meet Ruian’s growing operational needs and is located in the east side of the International Auto Parts District, Tangxia Town, Ruian City, Zhejiang Province, China with a land use area of 33,141 square meters and a building floor area of 25,016 square meters.
NOTE I – LAND USE RIGHTS, NET
The balances for land use rights, net, as of September 30, 2017March 31, 2018 and December 31, 20162017 are as the following:
September 30, | December 31, | |||||||||||||||
2017 | 2016 | March 31, 2018 | December 31, 2017 | |||||||||||||
Cost | $ | 15,237,587 | $ | 8,473,362 | $ | 16,082,814 | $ | 15,477,081 | ||||||||
Less: accumulated amortization | (440,917 | ) | (164,029 | ) | (722,175 | ) | (564,947 | ) | ||||||||
Land use rights, net | $ | 14,796,670 | $ | 8,309,333 | $ | 15,360,639 | $ | 14,912,134 |
In connection with the execution of the Purchase Agreement in May 2016, the Company exchanged the Dongshan Facility plus RMB 501.00 million (approximately $76.50 million) in cash for Development Zone Facility, including land use rights with historical value of approximately $8.47 million. As of the filing date, the Company has not obtained the land use right certificate of the Development Zone Facility. Also see Note H for more details.
In July 2017, Ruian, a subsidiary of the Company, purchased plants and the associated land use rights from Yunding Holding Group Co., Ltd. in cash at the purchase price of RMB 60.06 million (approximately $8.87 million). The title of the plants and land use rights was transferred in July 2017. The allocated cost for the land use rights is RMB 42.35 million (approximately $6.38 million). Also see Note H for more details.
During the three months ended September 30, 2017, the Company also prepaidentered into an agreement with the amountMinistry of RMB 10.01 million (approximately $1.51 million) as down paymentLand and RMB 20.00 million (approximately $3.01 million) as a refundable depositResources, Ruian, to purchase the land use rights for the land located at the intersection of Xianghe Road and North Wansong Road, Binhai New District, Rui’anRuian City, Zhejiang Province, China (the “Wansong Land”). Full payment of RMB 51.81 million (approximately $7.93 million) was made as of December 31, 2017. The payment was included as prepayment, non-current as of March 31, 2018 on the accompanying consolidated balance sheets. The Company obtained the title to the land use rights in April 2018. Also See Note S.
In December 2017, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Fengjin Road and Wenhua Road, Binhai New District, Ruian City, Zhejiang Province, China. Prepayment of RMB 14.40 million (approximately $2.14 million) was made as down payment in 2017. During the three months ended March 31, 2018, the Company paid additional amount of RMB 57.62 million (approximately $8.99 million). As of March 31, 2018, the purchase price of RMB 72.02 (approximately $11.13 million) was fully paid. As of the filing date, the title to the land use rights has not been transferred. The down payment waspayments were included in prepayments,as prepayment, non-current andas of March 31, 2018 on the refundable deposit was included in other current assets in the unauditedaccompanying consolidated balance sheets. Also see Note Q for more details.
Amortization expenses were $132,523 and $70,489 for the three months ended March 31, 2018 and 2017, respectively.
NOTE J - DEFERRED TAX ASSETS
Deferred tax assets were consisted of the following as of September 30, 2017March 31, 2018 and December 31, 2016:2017:
September 30, | December 31, | March 31, 2018 | December 31, 2017 | |||||||||||||
2017 | 2016 | |||||||||||||||
Deferred tax assets - current | ||||||||||||||||
Deferred tax assets – non-current | ||||||||||||||||
Allowance for doubtful accounts | $ | 2,019,545 | $ | 1,798,894 | $ | 2,264,083 | $ | 2,137,837 | ||||||||
Revenue (net of cost) | (128,438 | ) | 76,719 | 67,513 | 160,766 | |||||||||||
Unpaid accrued expenses | 237,055 | 357,352 | 69,913 | 955,287 | ||||||||||||
Warranty | 1,184,367 | 977,610 | 1,086,399 | 986,534 | ||||||||||||
Deferred tax assets | 3,312,529 | 3,210,575 | 3,487,908 | 4,240,424 | ||||||||||||
Valuation allowance | ― | ― | - | - | ||||||||||||
Deferred tax assets - current | $ | 3,312,529 | $ | 3,210,575 | ||||||||||||
Net deferred tax assets – non-current | $ | 3,487,908 | $ | 4,240,424 |
17 |
Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in the U.S. as the Company had no taxable income for the reporting periods.period. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.
NOTE K –- SHORT-TERM BANK LOANS
Bank loans represented the following as of September 30, 2017March 31, 2018 and December 31, 2016:2017:
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Secured | $ | 77,779,094 | $ | 27,416,376 |
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
Secured | $ | 239,625,661 | $ | 125,380,899 |
The Company obtained those short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Zheshang Bank, China Minsheng Bank, Industrial Bank Co., Ltd., Oversea-Chinese Banking Corporation Limited, China CITIC Bank, Industrial and Commercial Bank of China, Oversea-Chinese Banking Corporation LimitedHuaxia Bank, and China Construction Bank, respectively, to finance general working capital as well as new equipment acquisitions.and acquire long-lived assets. Interest ratesrate for the loans outstanding during the ninethree months ended September 30, 2017March 31, 2018 ranged from 0.55%0.90% to 5.22%5.51% per annum. The maturity dates of the loans existing as of September 30, 2017March 31, 2018 ranged from OctoberApril 2, 20172018 to September 26, 2018.March 25, 2019. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the Company’s accounts receivablesreceivable of $6,349,443$11,112,596 and $4,484,755,$5,472,169, respectively, were pledged as collateral under loan arrangements. The interest expenses for short-term bankshort term loans, including discount fees, were $804,499$2,294,328 and $214,974$460,912 for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively. The interest expenses, including discount fees, were $1,827,835 and $515,547 for the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017,March 31, 2018, corporate or personal guarantees provided for those bank loans were as follows:
$ | 5,611,817 | Guaranteed by Ruili Group, a related party. | 34,639,600 | Pledged by Ruili Group, a related party, with its land use rights and properties. | ||||
$ | 2,944,146 | Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders. | 69,178,290 | Pledged by Shanghai Ruili, a related party, with its buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||||
$ | 14,227,576 | Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders. | 19,067,881 | Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||||
$ | 24,861,004 | Pledged by the Company with its bank acceptance notes. | 6,079,940 | Guaranteed by Ruili Group, a related party. | ||||
$ | 22,600,913 | Pledged by Hangzhou Ruili Zhiye Development Ltd., a related party under common control of Ruili Group, with its properties. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders. | 28,625,499 | Pledged by Hangzhou Ruili Property Development Ltd., a related party under common control of Ruili Group, with its properties. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||||
$ | 6,026,910 | Pledged by the Company’s land and properties. Guaranteed by Ruili Group, Xiaoping Zhang, who is one of the Company’s principal stockholders. | 68,987,452 | Pledged by the Company with its bank acceptance notes. | ||||
$ | 1,506,728 | Pledged by Ruili Group, a related party, with its land and buildings. | 10,074,903 | Pledged by Shanghai Ruili, a related party, with its properties. Guaranteed by Ruili Group, a related party. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||||
$ | 2,972,096 | Pledged by the Company with bank deposits of $3,022,471, which was included as restricted cash on the accompanying unaudited consolidated balance sheets. Also see Note B “RESTRICTED CASH” section. |
18 |
NOTE L - LONG TERM LOANS
March 31, 2018 | December 31, 2017 | |||||||
Aggregate outstanding principal balance | $ | 59,428,763 | $ | 63,471,308 | ||||
Less: unamortized debt issuance costs | (1,514,055 | ) | (1,822,053 | ) | ||||
Less: current portion | (26,141,459 | ) | (24,266,031 | ) | ||||
Non-current portion | $ | 31,773,249 | $ | 37,383,224 |
In November 2017, the Company entered into two identical but independent loan agreements with Far Eastern Horizon Co., Ltd. (“Far Eastern”), each for a term of 36 months and with an effective interest rate of 8.38% per annum, payable monthly in arrears. The total long term obligations under the two agreements amounted to RMB 200,000,000 (approximately $30,608,185), pledged by the Company’s equipment in the original cost of RMB 205,690,574 (approximately $31,479,075). The Company paid debt issuance costs in cash of $742,324. For the three months ended March 31, 2018, the repayments of principal totaled $3,857,306.
In November 2017, the Company entered into four independent loan agreements with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of 36 months each. Two of the agreements were signed on November 30, 2017 with an effective interest rate of 8.50% per annum, payable monthly in arrears. The other two agreements were entered into on November 15, 2017, with an effective interest rate of 4.31% per annum, payable monthly in arrears. The total long-term obligations under the four agreements amounted to RMB 235,000,000 (approximately $35,964,617), pledged by the Company’s equipment in the original cost of RMB 238,333,639 (approximately $36,474,800). The Company paid debt issuance costs in cash in the amount of $1,025,248. For the three months ended March 31, 2018, the repayments of principal totaled $2,544,025.
The interest expenses for long term loans, including the amortization of debt issuance costs, were $1,059,383 for the three months ended March 31, 2018.
NOTE M – REVENUES FROM CONTRACTS WITH CUSTOMERS
The Company accounted for revenue in accordance with ASC 606, which was adopted on January 1, 2018, using full retrospective method. The adoption of the standard did not impact the Company’s revenue recognition.
The Company provides a variety of standard products to its customers. The Company’s contracts with its customers consist of a single, distinct performance obligation or promise to transfer auto parts to the customers. Generally, the Company’s performance obligations are satisfied when the customers take possession of the products, which normally occurs at the shipping point or destination depending on the terms of the contracts. All sales are recorded net of value-added taxes. The Company does not recognize revenue related to product warranties. See Note P for details concerning the expected costs associated with the Company’s assurance warranty obligations.
In accordance with ASC 606, the Company disaggregates revenue from contracts with customers by product type. See Note Q for information regarding revenue disaggregation by product type.
19 |
Revenues from contracts with customers are recognized at a point in time when the merchandises are delivered to the customer in accordance with the shipping terms stated in the contracts, which is the point when the legal title, physical possession and the risks and rewards of ownership are transferred to the customer.
Deferred revenue is recorded when consideration is received from a customer prior to transferring goods to the customer under the terms of a sales contract. As of March 31, 2018 and December 31, 2017, the Company recorded a deferred revenue liability of $49,997,137 and $43,087,473, respectively, which was presented as “Deposits received from customers” on the accompanying consolidated balance sheets. During the three months March 31, 2018 and 2017, the Company recognized $12,855,707 and $4,395,837, respectively, of deferred revenue included in the opening balances of deposits received from customers. The amounts were included in sales on the accompanying consolidated statements of income and comprehensive income.
NOTE N - INCOME TAXES
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Act. The Company is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company is evaluating the impact of the 2017 Tax Act, however, as of the filing date, the Company was unable to determine a reasonable provision of the tax effects of the 2017 Tax Act. Therefore, no provisional amounts have been recorded on the consolidated financial statements as of December 31, 2017 and for the three months ended March 31, 2018 in accordance with SAB 118.
The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
20 |
In 2015, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise" designation for a third time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017. As the “High-Tech Enterprise” designation expired in 2018, the Joint Venture is undergoing the re-assessment by the government and the Company estimates it is highly probable that the designation will be awarded and therefore the 15% tax rate is used for the three months ended March 31, 2018.
The reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the PRC for the ninethree months ended September 30,March 31, 2018 and 2017 and 2016 is as follows:
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | |||||||||||||
US statutory income tax rate | 35.00 | % | 35.00 | % | 21.00 | % | 35.00 | % | ||||||||
Valuation allowance recognized with respect to the loss in the US company | -35.00 | % | -35.00 | % | -21.00 | % | -35.00 | % | ||||||||
China statutory income tax rate | 25.00 | % | 25.00 | % | 25.00 | % | 25.00 | % | ||||||||
Effects of income tax exemptions and reliefs | -10.00 | % | -10.00 | % | -10.00 | % | -10.00 | % | ||||||||
Effects of additional deduction allowed for R&D expenses | -1.86 | % | -3.54 | % | -2.51 | % | -2.14 | % | ||||||||
Effects of expenses not deductible for tax purposes | 0.54 | % | 0.74 | % | ||||||||||||
Expenses not deductible for tax purpose | 0.52 | % | 0.62 | % | ||||||||||||
Other items | 1.39 | % | -0.04 | % | 1.86 | % | 0.84 | % | ||||||||
Effective tax rate | 15.07 | % | 12.16 | % | 14.87 | % | 14.32 | % |
Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit recorded for the United States. In the ninethree months ended September 30,March 31, 2018 and 2017, there were no penalties and interest, which generally are recorded in the general and administrative expenses or in the tax expenses. The provisions for income taxes for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively, are summarized as follows:
21 |
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||
Current | $ | 4,199,727 | $ | 2,942,048 | ||||
Deferred | 25,677 | (1,264,061 | ) | |||||
Total | $ | 4,225,404 | $ | 1,677,987 |
ASC 740-10 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and considered that no provision for uncertainty in income taxes was necessary as of September 30, 2017 and December 31, 2016.
Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | |||||||
Current | $ | 704,603 | $ | 1,294,627 | ||||
Deferred | 900,838 | (8,453 | ) | |||||
Total | $ | 1,605,441 | $ | 1,286,174 |
NOTE MO – OPERATING LEASES WITH RELATED PARTY
In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s management personnel and staff, respectively. The initial lease term wasis from January 2013 to December 2016. This lease was amended in 2013 with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000 (approximately $333,688).
The lease expenses were $684,252$148,785 and $1,402,658$75,887 for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.
NOTE NP - WARRANTY CLAIMS
Warranty claims were $2,261,311$833,684 and $1,741,415$637,874 for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively. Warranty claims are classified asincluded in selling and distribution expenses on the accompanying consolidated statements of income and comprehensive income. Accrued warranty expenses are included in the balances of accrued expenses on the accompanying consolidated balance sheet.sheets. The movement of accrued warranty expenses for the ninethree months ended September 30, 2017March 31, 2018 was as follows:
Beginning balance at January 1, 2017 | $ | 6,517,402 | ||
Aggregate increase for new warranties issued during current period | 2,261,311 | |||
Aggregate reduction for payments made | (1,207,221 | ) | ||
Effect of exchange rate fluctuation | 324,288 | |||
Ending balance at September 30, 2017 | $ | 7,895,780 |
18
22 |
Beginning balance at January 1, 2018 | $ | 6,576,895 | ||
Aggregate increase for new warranties issued during current period | 833,684 | |||
Aggregate reduction for payments made and effect of exchange rate fluctuation | (440,703 | ) | ||
Ending balance at March 31, 2018 | $ | 6,969,876 |
NOTE OQ – SEGMENT INFORMATION
The Company produces brake systems and other related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”). On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the passenger vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition, the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related auto parts.
The Company has two operating segments: Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems.
AllFor the reporting periods, all of the Company’s long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
SALES TO EXTERNAL CUSTOMERS | ||||||||
Commercial vehicles brake systems | $ | 223,937,534 | $ | 157,362,913 | ||||
Passenger vehicles brake systems | 43,652,419 | 35,554,720 | ||||||
Sales | $ | 267,589,953 | $ | 192,917,633 | ||||
INTERSEGMENT SALES | ||||||||
Commercial vehicles brake systems | $ | — | $ | — | ||||
Passenger vehicles brake systems | — | — | ||||||
GROSS PROFIT | ||||||||
Commercial vehicles brake systems | $ | 61,485,066 | $ | 45,768,683 | ||||
Passenger vehicles brake systems | 11,401,597 | 10,491,798 | ||||||
Gross profit | $ | 72,886,663 | $ | 56,260,481 | ||||
Selling and distribution expenses | 22,877,889 | 20,637,464 | ||||||
General and administrative expenses | 13,517,222 | 16,717,966 | ||||||
Research and development expenses | 7,477,902 | 6,533,540 | ||||||
Other operating income, net | 1,185,958 | 144,715 | ||||||
Income from operations | 30,199,608 | 12,516,226 | ||||||
Interest income | 38,175 | 1,047,667 | ||||||
Government grants | 1,119,337 | 569,041 | ||||||
Other income | 47,976 | 763,534 | ||||||
Interest expenses | (1,827,835 | ) | (515,547 | ) | ||||
Other expenses | (1,536,921 | ) | (582,820 | ) | ||||
Income before income tax expense | $ | 28,040,340 | $ | 13,798,101 | ||||
CAPITAL EXPENDITURE | ||||||||
Commercial vehicles brake systems | $ | 30,791,780 | $ | 9,994,389 | ||||
Passenger vehicles brake systems | 6,090,790 | 2,272,202 | ||||||
Total | $ | 36,882,570 | $ | 12,266,591 | ||||
DEPRECIATION AND AMORTIZATION | ||||||||
Commercial vehicles brake systems | $ | 5,538,902 | $ | 4,375,484 | ||||
Passenger vehicles brake systems | 1,084,180 | 981,882 | ||||||
Total | $ | 6,623,082 | $ | 5,357,366 |
23 |
September 30, 2017 | December 31, 2016 | |||||||
TOTAL ASSETS | ||||||||
Commercial vehicles brake systems | $ | 346,308,432 | $ | 248,023,179 | ||||
Passenger vehicles brake systems | 65,228,623 | 53,304,945 | ||||||
Total | $ | 411,537,055 | $ | 301,328,124 |
September 30, 2017 | December 31, 2016 | |||||||
LONG LIVED ASSETS | ||||||||
Commercial vehicles brake systems | $ | 81,595,545 | $ | 51,080,332 | ||||
Passenger vehicles brake systems | 15,368,858 | 10,978,145 | ||||||
Total | $ | 96,964,403 | $ | 62,058,477 |
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
NET SALES TO EXTERNAL CUSTOMERS | ||||||||
Commercial vehicles brake systems | $ | 91,615,325 | $ | 61,374,264 | ||||
Passenger vehicles brake systems | 16,111,357 | 13,372,130 | ||||||
Net sales | $ | 107,726,682 | $ | 74,746,394 | ||||
INTERSEGMENT SALES | ||||||||
Commercial vehicles brake systems | $ | - | $ | - | ||||
Passenger vehicles brake systems | - | - | ||||||
Intersegment sales | $ | - | $ | - | ||||
GROSS PROFIT | ||||||||
Commercial vehicles brake systems | $ | 25,769,805 | $ | 17,280,818 | ||||
Passenger vehicles brake systems | 4,429,681 | 3,765,118 | ||||||
Gross profit | $ | 30,199,486 | $ | 21,045,936 | ||||
Selling and distribution expenses | 10,037,861 | 5,608,623 | ||||||
General and administrative expenses | 4,773,778 | 4,044,913 | ||||||
Research and development expenses | 3,590,402 | 2,055,096 | ||||||
Other operating income, net | 2,197,324 | 290,237 | ||||||
Income from operations | 13,994,769 | 9,627,541 | ||||||
Interest income | 1,488,264 | 10,550 | ||||||
Government grants | 133,933 | 28,909 | ||||||
Other income | 27,066 | 664 | ||||||
Interest expenses | (3,353,711 | ) | (481,160 | ) | ||||
Exchange loss | (601,286 | ) | (92,732 | ) | ||||
Other expenses | (890,814 | ) | (114,799 | ) | ||||
Income before income tax expense | $ | 10,798,221 | $ | 8,978,973 | ||||
CAPITAL EXPENDITURE | ||||||||
Commercial vehicles brake systems | $ | 16,738,232 | $ | 11,758,957 | ||||
Passenger vehicles brake systems | 2,944,543 | 2,562,024 | ||||||
Total | $ | 19,682,775 | $ | 14,320,981 | ||||
DEPRECIATION AND AMORTIZATION | ||||||||
Commercial vehicles brake systems | $ | 2,421,346 | $ | 1,656,343 | ||||
Passenger vehicles brake systems | 425,957 | 360,881 | ||||||
Total | $ | 2,847,303 | $ | 2,017,224 | ||||
March 31, 2018 | December 31, 2017 | |||||||
TOTAL ASSETS | ||||||||
Commercial vehicles brake systems | $ | 696,179,668 | $ | 492,348,129 | ||||
Passenger vehicles brake systems | 122,469,989 | 89,967,813 | ||||||
Total | $ | 818,649,657 | $ | 582,315,942 | ||||
March 31, 2018 | December 31, 2017 | |||||||
LONG LIVED ASSETS | ||||||||
Commercial vehicles brake systems | $ | 124,908,591 | $ | 106,779,681 | ||||
Passenger vehicles brake systems | 21,973,572 | 19,512,076 | ||||||
Total | $ | 146,882,163 | $ | 126,291,757 |
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NOTE PR – CONTINGENCIES
(1) | In May 2016, the Company, through its principal operating subsidiary, entered into a Purchase Agreement with Ruili Group, pursuant to which the Company agreed to exchange the land use rights and factory facilities located at No. 1169 Yumeng Road, Ruian Economic Development Zone, Ruian City, Zhejiang Province, China (the “Dongshan Facility”), purchased in 2007 from Ruili Group, plus RMB 501.00 million (approximately $76.50 million) in cash for the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue, Ruian Economic Development Zone, Ruian City, Zhejiang Province, China (the “Development Zone Facility”). As of the filing date, the Company hasn’t obtained the land use rights certificate or the property ownership certificate for the building of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 15,030,000 (approximately $2,300,205). This amount was determined based on a 3% tax rate on the consideration paid for the Development Zone Facility, which the Company considered as the most probable amount of tax liability. |
(1)
(2) | The Company purchased the Dongshan Facility from Ruili Group in 2007 and subsequently transferred the plants and land use right to Ruili Group. The Company has never obtained the land use right certificate nor the property ownership certificate of the building for the Dongshan Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount was determined based on a 3% tax rate on the consideration paid for the Dongshan Facility in the transaction, which the Company considered as the most probable amount of tax liability. The Dongshan Facility was transferred back to Ruili Group on May 5, 2016. |
(3) | The information of lease commitments is provided in Note O. |
(4) | The information of guarantees and assets pledged is provided in Note E. |
NOTE S – SUBSEQUENTEVENTS
(2) The information of lease commitments is provided in Note M.
(3) The information of guarantees and assets pledged is provided in Note E.
NOTE Q – SUBSEQUENT EVENTS
During the subsequent period, the Company obtained short term loans forin the total amount of approximately $13,809,000$47,582,000 from Bank of China, Agricultural Bank of China, China CITIC Bank, China Zheshang Bank, Huaxia Bank, and Industrial and Commercial Bank Co., Ltd. to finance general working capital.of China. Interest rates for those loans ranged from 4.10%4.60% to 5.22%5.72% per annum. The maturity dates of the loans existing as of the filing date ranged from January 20,April 29, 2018 to October 11, 2018. As of the filing date, the Company pledged accounts receivable of approximately $1,387,000, as collateral under the loan arrangements of Bank of China.May 1, 2019. The Company continuously pledged bank acceptance notes to borrow moneyobtain loans from Agricultural Bank of China..China. In the same period, the Company sold accounts receivable from Ruili Group of approximately $6,361,000 to China Merchants Bank without recourse and received payment of approximately $6,108,000, net of bank charges and expenses.
In the same period, the Company repaid loan principals as well as interests forand interest expenses in the total amount of approximately $4,793,000$16,829,000 to Bank of China, China Construction Bank, and Agricultural Bank of China.
On October 20, 2017,During the subsequent period, the Company entered intoreceived repayments from Shanghai Ruili, a State-owned Construction Land Use Right Transfer Agreement with Rui’an Land Resources Bureau to purchaserelated party, in the total amount of approximately $53,434,000 (RMB 336,000,000).
In April 2018, the Company obtained the title of the land use rights located at the intersection of Xianghe Road and North Wansong Road, Binhai New District, Rui’an City, Zhejiang Province, China, with an area of 35,483 square meters for the priceWansong Land. The expiration date of RMB 50.03 million (approximately $7.54 million). As of the filing date, the Company has not paid the purchase price in full and the title to the land use rights is October 19, 2057. The Wansong Land has not been transferred. Down paymenta total area of RMB 10.01 million (approximately $1.51 million) and a refundable deposit of RMB 20.00 million (approximately $3.01 million) were paid by the Company as of September 30, 2017. The RMB 20.00 million (approximately $3.01 million) deposit which had been paid earlier was refunded to the Company as of the filing date of this report.17,029 square meters. Also see Note I for details.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included inon the accompanying consolidated unaudited financial statements, as well as information relating to the plans of our current management. The following discussion and analysis should be read in conjunction with our consolidated unaudited financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Generally, the words “believe,” “anticipate,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions, or the negative thereof, or comparable terminology, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with SEC from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Some of the factors that could cause actual results to differ include: our ability to effectively implement our business strategy; our ability to handle downward pricing pressures on our products; and our ability to accurately or effectively plan our production or supply needs. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2017, which is available on the SEC’s website at www.sec.gov. Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update these forward-looking statements.
OVERVIEW
The Company manufactures and distributes automotive brake systems and other key safety-related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally for use primarily in different types of commercial vehicles, such as trucks and buses, and in passenger vehicles. Management believes that it is the largest manufacturer of automotive brake systems in China for commercial vehicles such as trucks and buses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Year ended December 31, 2016.2017.
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See Note LN to the attached Unaudited Consolidated Financial Statements for the information regarding changes in taxation by the government of China.
RESULTS OF OPERATIONS
The following statements are about results of operations for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.
Sales
The following tables present certain financial information about our segments’ sales for the periods presented:
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2018 | March 31, 2017 | |||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||
Commercial vehicle brake systems | $ | 91.6 | 85 | % | $ | 61.3 | 82 | % | ||||||||
Passenger vehicle brake systems | $ | 16.1 | 15 | % | $ | 13.4 | 18 | % | ||||||||
Total | $ | 107.7 | 100 | % | $ | 74.7 | 100 | % |
Three Months Ended | Three Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||
Commercial Vehicle Brake Systems | $ | 85.3 | 84.2 | % | $ | 52.5 | 82.4 | % | ||||||||
Passenger Vehicle Brake Systems | $ | 16.0 | 15.8 | % | $ | 11.2 | 17.6 | % | ||||||||
Total | $ | 101.3 | 100.0 | % | $ | 63.7 | 100.0 | % |
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2017 | September 30, 2016 | |||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||
Commercial Vehicle Brake Systems | $ | 223.9 | 83.7 | % | $ | 157.3 | 81.6 | % | ||||||||
Passenger Vehicle Brake Systems | $ | 43.7 | 16.3 | % | $ | 35.6 | 18.4 | % | ||||||||
Total | $ | 267.6 | 100.0 | % | $ | 192.9 | 100.0 | % |
The sales were $101.3$107.7 million and $63.7$74.7 million for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively, an increase of $37.6$33.0 million or 59.0%. The sales were $267.6 million and $192.9 million for the nine months ended September 30, 2017 and 2016, respectively, an increase of $74.7 million or 38.7%44.1%. The increase was mainly due to the increased sales of commercial vehicle brake systems. systems to China OEM and aftermarket market.
The sales from Commercial Vehicle Brake Systemscommercial vehicle brake systems increased by $32.8$30.3 million or 62.5%49.3%, to $85.3$91.6 million for the thirdfirst fiscal quarter of 2017,2018, compared to $52.5$61.3 million for the same period of 2016. The sales from Commercial Vehicle Brake Systems increased by $66.6 million or 42.3%, to $223.9 million for the nine months ended September 30, 2017, compared to $157.3 million for the nine months ended September 30, 2016.2017. Our high quality, low cost products continued to generate higher sales and further penetrated into the commercial vehicle market, which impacted the sales of the commercial vehicle brake systems.
The sales from Passenger Vehicle Brake Systemspassenger vehicle brake systems increased by $4.8$2.7 million or 42.9%20.5%, to $16.0$16.1 million for the thirdfirst fiscal quarter of 2017,2018, compared to $11.2$13.4 million for the same period of 2016. The sales from Passenger Vehicle Brake Systems increased by $8.1 million or 22.8%, to $43.7 million for the nine months ended September 30, 2017, compared to $35.6 million for the same period of 2016.2017. The increase was mainly due to the increase of passenger vehicle market.market in the first fiscal quarter of 2018.
A breakdown of thenet sales revenue for these markets for the thirdfirst fiscal quarter of the 20172018 and 2016, respectively, is set forth below:
Three Months | Three Months | |||||||||||||||||||
Ended | Percent | Ended | Percent | |||||||||||||||||
September 30, 2017 | of Total Sales | September 30, 2016 | of Total Sales | Percentage Change | ||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||
China OEM market | $ | 50.5 | 49.8 | % | $ | 29.6 | 46.5 | % | 70.6 | % | ||||||||||
China Aftermarket | $ | 31.5 | 31.1 | % | $ | 17.9 | 28.1 | % | 76.0 | % | ||||||||||
International market | $ | 19.3 | 19.1 | % | $ | 16.2 | 25.4 | % | 19.1 | % | ||||||||||
Total | $ | 101.3 | 100.0 | % | $ | 63.7 | 100.0 | % | 59.0 | % |
A breakdown of net sales revenues for China OEM markets, China aftermarket and international market for the nine months ended September 30, 2017, and 2016, respectively, is set forth below:
Nine Months | Nine Months | Three Months | Percent | Three Months | Percent | |||||||||||||||||||||||||||||||||||
Ended | Percent | Ended | Percent | Ended | of | Ended | of | Percentage | ||||||||||||||||||||||||||||||||
September 30, 2017 | of Total Sales | September 30, 2016 | of Total Sales | Percentage Change | March 31, 2018 | Total Sales | March 31, 2017 | Total Sales | Change | |||||||||||||||||||||||||||||||
(U.S. dollars in million) | (U.S. dollars in millions) | |||||||||||||||||||||||||||||||||||||||
China OEM market | $ | 141.8 | 53.0 | % | $ | 96.3 | 49.9 | % | 47.2 | % | $ | 51.8 | 48.1 | % | $ | 38.7 | 51.9 | % | 33.5 | % | ||||||||||||||||||||
China Aftermarket | $ | 72.3 | 27.0 | % | $ | 49.9 | 25.9 | % | 44.9 | % | ||||||||||||||||||||||||||||||
China aftermarket | $ | 38.0 | 35.3 | % | $ | 22.0 | 29.4 | % | 73.2 | % | ||||||||||||||||||||||||||||||
International market | $ | 53.5 | 20.0 | % | $ | 46.7 | 24.2 | % | 14.6 | % | $ | 17.9 | 16.6 | % | $ | 14.0 | 18.7 | % | 27.9 | % | ||||||||||||||||||||
Total | $ | 267.6 | 100.0 | % | $ | 192.9 | 100.0 | % | 41.4 | % | $ | 107.7 | 100.0 | % | $ | 74.7 | 100.0 | % | 44.1 | % |
Considering the increase of the production and sales of the commercial vehicle market,trucks for the first fiscal quarter of 2018 in the automobile industry, our sales to the Chinese OEM marketMarket increased by $20.9 million or 70.6%, to $50.5 million for33.5% from the thirdfirst fiscal quarter of 2017, compared to $29.6$51.8 million for the same periodfirst fiscal quarter of 2016. Our sales to the Chinese OEM market increased by $45.5 million or 47.2%, to $141.8 million for the nine months ended September 30, 2017, compared to $96.3 million for the same period of 2016.2018.
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Our sales to the China aftermarket increased by $13.6$16.0 million or 76.0%73.2%, to $31.5$38.0 million for the thirdfirst fiscal quarter of 2017,2018, compared to $17.9$22.0 million for the same period of 2016. Our sales to the China aftermarket increased by $22.4 million or 44.9%, to $72.3 million for the nine months ended September 30, 2017, compared to $49.9 million for the same period of 2016.2017. The increased new vehicle sales in China and the expiration of OEM warranties helped to drive our aftermarket business. Accelerated urbanization andSales of our new model products, applicable to both the Chinese government’sOEM Market and Chinese Aftermarket, also increased support for public transportation favor our expansion induring the bus aftermarket.three months ended March 31, 2018. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor our expansion in the bus aftermarket.
Our export sales increased by $3.1$3.9 million or 19.1%27.9%, to $19.3$17.9 million for the thirdfirst fiscal quarter of 2017,2018, as compared to $16.2$14.0 million for the same period of 2016. Our export sales increased by $6.8 million or 14.6%, to $53.5 million for the nine months ended September 30, 2017, as compared to $46.7 million for the same period of 2016.2017. The increase in export sales was mainly due to our broadened customer base.
Cost of Sales and Gross Profit
Cost of sales for the three months ended September 30, 2017March 31, 2018 were $74.0$77.5 million, an increase of $29.2$23.8 million or 65.3%44.4%, from $44.8 million for the three month period ended September 30, 2016. Cost of sales for the nine months ended September 30, 2017 were $194.7 million, an increase of $58.0 million or 42.5% from $136.7$53.7 million for the same period of 2016.
last year. Our gross profit increased by 44.4%43.5% from $18.9$21.0 million for the periodfirst fiscal quarter of 20162017 to $27.3$30.2 million for the three month period ended September 30, 2017. Our gross profit increased by 29.6% from $56.3 million for the periodfirst fiscal quarter of 2016 to $72.9 million for the three month period ended September 30, 2017.2018.
Gross margin decreasedchanged to 26.9% from 29.7%28.0% for the three month periodmonths ended September 30, 2017 compared with 2016. Gross margin decreased to 27.2%March 31, 2018 from 29.2%28.2% for the ninethree months ended September 30, 2017, as compared with the same period of 2016.March 31, 2017. The decreasechange was mainly due to change of sales of larger quantity and varieties of products in the price increasefirst fiscal quarter of the raw materials and our further price promotion to strengthen our competitiveness and increase our market share for the nine months ended September 30, 2017.2018. We intend to focus in 20172018 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit margins.
Cost of sales from Commercial Vehicle Brake Systemscommercial vehicle brake systems for the three months period ended September 30, 2017 were $61.9March 31, 2018 was $65.8 million, an increase of $25.3$21.8 million or 69.1%49.3% from $36.6$44.1 million for the same period of 2016. Cost of sales from Commercial Vehicle Brake Systems for the nine months ended September 30, 2017 were $162.5 million, an increase of $50.9 million or 45.6% from $111.6 million for the same period of 2016.last year. The gross profit from Commercial Vehicle Brake Systemscommercial vehicle brake systems increased by 47.1%49.1% from $15.9 million for three month period ended September 30, 2016 to $23.4$17.3 million for the three month period ended September 30, 2017. The gross profit from Commercial Vehicle Brake Systems increased by 34.3% from $45.8first fiscal quarter of 2017 to $25.8 million for the nine months ended September 30, 2016 to $61.5 million for the nine months ended September 30, 2017.first fiscal quarter of 2018. Gross margin from Commercial Vehicle Brake Systemscommercial vehicle brake systems decreased to 27.4%28.1% from 30.3%28.2% for the three months period ended September 30, 2017March 31, 2018 compared towith 2017. To strengthen our competitiveness and increase our market share, we continued the price promotion in the aftermarket and international market for the three months period ended September 30, 2016. GrossMarch 31, 2018. The increased labor cost also decreased our gross margin from Commercial Vehicle Brake Systems decreased to 27.5% from 29.1% for the ninethree months ended September 30, 2017 compared with the same period of 2016.March 31, 2018.
Cost of sales from Passenger Vehicle Brake Systemspassenger vehicle brake systems for the three months period ended September 30, 2017 were $12.1March 31, 2018 was $11.7 million, an increase of $3.9$2.1 million or 48.2%21.6% from $8.2 million for the three month period ended September 30, 2016. Cost of sales from Passenger Vehicle Brake Systems for the nine months ended September 30, 2017 were $32.3 million, an increase of $7.2 million or 28.7% from $25.1$9.6 million for the same period of 2016.last year. The gross profit from Passenger Vehicle Brake Systemspassenger vehicle brake systems increased by 29.7%by17.7% from $3.0$3.8 million for the three month period ended September 30, 2016first fiscal quarter of 2017 to $3.9$4.8 million for the three month period ended September 30, 2017. The gross profit from Passenger Vehicle Brake Systems increased by 8.7% from $10.5 million for the nine months ended September 30, 2016 to $11.4 million for the same periodfirst fiscal quarter of 2017.2018. Gross margin from Passenger Vehicle Brake Systems decreasedpassenger vehicle brake systems changed to 24.4%27.5% from 28.2% for the three months ended September 30, 2017, asMarch 31, 2018 compared with 2017. The change was mainly due to 27.0% for the three months period ended September 30, 2016. Gross margin from Passenger Vehicle Brake Systems decreased to 26.1% forstronger price promotion in the nine months ended September 30, 2017, as compared to 29.5% for the same period in 2016.first fiscal quarter of 2018.
Selling and Distribution Expenses
Selling and distribution expenses were $8.3$10.0 million for the three months ended September 30, 2017,March 31, 2018, as compared to $7.9$5.6 million for the same period of 2016,2017, an increase of $0.4$4.4 million or 5.1%79.0%. Selling and distribution expenses were $22.9 million for the nine months ended September 30, 2017, as compared to $20.6 million for the same period of 2016, an increase of $2.3 million or 11.2%.
The increase was mainly due to increased freight expense, packaging expense and packaging expenses.
labor costs. As athe percentage of sales revenue, selling expenses decreasedpercentage increased to 8.2%9.3% for the three months ended September 30, 2017,March 31, 2018, as compared to 12.8%7.6% for the same period in 2016. As a percentage of sales revenue, selling expenses decreased to 8.5% for the nine months ended September 30, 2017, as compared to 10.9% for the same period in 2016.2017.
General and Administrative Expenses
General and administrative expenses were $4.8$4.7 million for the three months ended September 30, 2017,March 31, 2018, as compared to $4.9$4.0 million for the same period of 2016, a decrease2017, an increase of $0.1$0.7 million or 2.0%. General and administrative expenses were $13.5 million for the nine months ended September 30, 2017, as compared to $16.7 million for the same period of 2016, a decrease of $3.2 million or 19.2%18.0%. The decreaseincrease was mainly due to the decreaseincrease in bad debt expenseallowance for the nine months ended September 30, 2017.
doubtful accounts during this quarter. As a percentage of sales revenue, general and administrative expenses decreased to 4.7%4.4% for the three months ended September 30, 2017,March 31, 2018, as compared to 7.9%5.5% for the same period in 2016. As a percentage of sales revenue, general and administrative expenses decreased to 5.1% for the nine months ended September 30, 2017, as compared to 8.8% for the same period in 2016.2017.
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Research and Development Expenses
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-partyfirst-party development costs. For the three months ended September 30, 2017,March 31, 2018, research and development expenses were $2.9$3.6 million, as compared to $2.4$2.1 million for the same period of 2016,2017, an increase of $0.5$1.5 million. For the nine months ended September 30, 2017, research and development expenses were $7.5 million, as compared to $6.5 million for the same period of 2016, an increase of $1.0 million.
Other Operating Income
Other operating income was $0.5$2.2 million for the three months ended September 30, 2017,March 31, 2018, as compared to $0.3 million for the three months ended September 30, 2016,March 31, 2017, an increase of $0.2 million. Other operating income was $1.2 million for the nine months ended September 30, 2017, as compared to $0.7 million for the nine months ended September 30, 2016, an increase of $0.5$1.9 million. The increase was mainly due to an increase in sales of raw material scrap.scraps for the three months ended March 31, 2018.
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Depreciation and Amortization
Depreciation and amortization expense was $2.4increased to $2.8 million for the three months ended September 30, 2017,March 31, 2018, as compared withto that of $1.9$2.0 million for the same period of 2016. Depreciation2017, an increase of $0.8 million. The increase was mainly due to some new addition in PPE and amortization expenses increased to $6.6 millionthe purchase of land in the third quarter of 2017.
Interest Income
Interest income for the ninethree months ended September 30, 2017, compared with that of $5.4March 31, 2018 increased by $1.5 million to $1.5 million from $0.01 million for the same period of 2016, an increase of $1.2 million. The increase in depreciation and amortization expenses was primarily2017, mainly due to the purchase of production equipment and the land and factory transaction with Ruili Group which occurred in May of 2016.
Interest income
Theincreased interest income for the three months ended September 30, 2017, decreased by $0.01 millionfrom advances to $0.02 million from $0.03 million for the same period of 2016. The interest income for the nine months ended September 30, 2017, decreased by $0.96 million to $0.04 million from $1.0 million for the same period of 2016. The decrease was primarily due to decreased short term investmentsrelated parties during the period.
Interest Expenses
The interest expenses for the three months ended September 30, 2017,March 31, 2018 increased by $0.6$2.9 million to $0.8 million from $0.2 million for the same period of 2016. The interest expenses for the nine months ended September 30, 2017, increased by $1.3 million to $1.8$3.4 million from $0.5 million for the same period of 2016,2017, mainly due to increased interest rate and increased amount of average loans outstanding during the period.
Income Tax
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Act. The Company is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Cuts and Jobs Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company is proactively evaluating the impact of the Tax Act, however, as of the filing date, the Company was unable to determine a reasonable provision of the tax effects of the Tax Act. Therefore, no provisional amounts have been recorded on the consolidated financial statements as of December 31, 2017 and for the three months ended March 31, 2018 in accordance with SAB 118.
The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
In 2009, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate for years 2009 through 2011. In December 2012, the Joint Venture passed the re-assessment of the High-Tech Enterprise certificate by the government, according to the relevant PRC income tax laws. Accordingly, it continued to be taxed at a 15% rate in 2012 through 2014. The Company used a tax rate of 25% for the first three quarters of 2015. In the fourth quarter of 2015, the Joint Venture passed the re-assessment by the government, based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017. The Company is required to re-apply for the certificate in 2018. The current income tax rate used by the Company for the ninethree months ended September 30, 2017March 31, 2018 is 15%.
Income tax expense wasexpenses of $1.6 million and $1.3 million were recorded for the three monthsfiscal quarter ended September 30,March 31, 2018 and 2017, as compared to $0.4 million for the three months ended September 30, 2016. Income tax expense was $4.2 million for the nine months ended September 30, 2017, as compared to $1.7 million for the nine months ended September 30, 2016.respectively.
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Net Income Attributable to Non-Controlling Interest in Subsidiaries
Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our joint venture partners. On December 15, 2015, the Company disposed of its entire 60% equity interest in SIH. Net income attributable to noncontrolling interest in subsidiaries amounted to $1.0 million and $0.4 million for the third fiscal quarter ended September 30, 2017 and 2016, respectively. Net income attributable to non-controlling interest in subsidiaries amounted to $2.4$0.9 million and $1.2$0.8 million for the nine monthsfirst fiscal quarter ended September 30,March 31, 2018 and 2017, and 2016, respectively.
Net Income Attributable to Stockholders
The net income attributable to stockholders for the fiscal quarter ended September 30, 2017,March 31, 2018 increased by $5.4$1.4 million, to $8.6$8.3 million from $3.2$6.9 million for the fiscal quarter ended September 30, 2016March 31, 2017 due to the factors discussed above. The net income attributable to stockholders for the nine months ended September 30, 2017, increased by $10.5 million, to $21.4 million from $10.9 million for the nine months ended September 30, 2016 due to the factors discussed above.sales and change in gross profit. Earnings per share (“EPS”), both basic and diluted, for the fiscal quarter ended September 30,March 31, 2018 and 2017, were $0.43 and 2016, were $0.44 and $0.17, respectively. EPS, both basic and diluted, for the nine months ended September 30, 2017 and 2016, were $1.11 and $0.57, respectively. The increase was primarily due to increased sales and gross profit.
FINANCIAL CONDITION$0.36.
Liquidity and Capital Resources
CASH FLOWS
As of September 30, 2017,March 31, 2018, the Company had cash, and cash equivalents, and restricted cash of $7.7$69.3 million, as compared to cash, and cash equivalents, and restricted cash of $8.1$4.6 million as of December 31, 2016.2017. The Company had working capital of $97.2$102.4 million on September 30, 2017,at March 31, 2018, as compared to working capital of $100.3$111.4 million onat December 31, 2016,2017, reflecting current ratios of 1.45:1.2:1 and 1.72:1.3:1, respectively.
OPERATING - Net cash provided by operating activities was $15.0$36.3 million for ninethe three months ended September 30, 2017, an increase of $11.7 million, asMarch 31, 2018 compared with $3.3$3.5 million of net cash providedused in operating activities in the same period in 2016. Suchof 2017, an increase wasof $39.8 million, primarily due to the increased salescash inflow resulted by changes in bank acceptance notes receivable and deposits received from customers.accounts payable and bank acceptance notes to vendors.
INVESTING - During the ninethree months ended September 30,March 31, 2018, the Company expended net cash of $81.6 million in investing activities, mainly for acquisition of new equipment and land use rights to support the growth of the business and advances to related parties. For the three months ended March 31, 2017, the Company expended net cash of $43.9$14.3 million in investing activities mainly for acquisitions of property, plant, and equipment and land use rights. For the nine months ended September 30, 2016, net cash of $44.1 million was provided by investing activities.
FINANCING - During the nine month periodthree months ended September 30, 2017,March 31, 2018, the net cash provided inby financing activities was $28.1$108.5 million. NetThe cash used inprovided by financing activities was $70.4$21.2 million for the ninethree months ended September 30, 2016.March 31, 2017. The increase was due to the increased short term bank loans obtained from local commercial banks and advances from related parties.
The Company has taken a number of steps to improve the management of our cash flow. We place more emphasis on collection of accounts receivable from our customers, and we maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements in the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2017,March 31, 2018, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
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According to the laws of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. In 2007, the Company purchased the land use rights from the Ruili Group, a related party. The Company also purchased the buildings on the land in the same transaction. The purchase price of land use right and building amounted to approximately $20 million. On May 5, 2016, the Company entered into a Purchase Agreement with the Ruili Group through Ruian, pursuant to which the Company agreed to exchange the Dongshan Facility plus RMB501 million (approximately $76.5 million) in cash for Development Zone Facility. The value forof the Dongshan Facility and Development Zone Facility werewas appraised to be RMB125RMB 125 million (approximately $19.1 million) and RMB626RMB 626 million (approximately $95.6 million), respectively. As of Sep 30, 2017,March 31, 2018, total amount of RMB481 million (approximately 73.5$73.5 million) was paid to the Ruili Group in installments, and the remaining RMB20 million (approximately $3.0 million) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and the land use rightsright as specified in the Purchase Agreement.
Even if the Company is unable to timely resolve obtain the land use right certificate for the land and related building, the Company believes that there will be no potential adverse implication on the Company for the following reasons.
1. The Company acquired the land use rights in a transaction between the Company and the Ruili Group, a related party. The Ruili Group, as the original land use right owner, has granted the land use right to the Company by contract which is supported by valid consideration.
2. No third party would oppose the Company’s use of the land, because no third party has any interest in the land use right or property ownership right, other than the Ruili Group and the government.
a) The Ruili Group promised that the Company has the right to use the land and related building, even before the land use certificate is transferred.
b) According to the laws of China, the government owns all the land and the buildings attached to the land in China. Once the land use right is granted to Ruili Group, Ruili Group has the right to assign its land use rights to any third parties, including the Company, without interference from the government. Therefore, it is unlikely that the government will oppose the Company’s right to use the land and related building.
c) The Company has reserved tax payables in the amount of RMB 19,590,000 (approximately US$2,891,580) on its consolidated balance sheets under the line item “accrued expenses” as if no reduction or exemption of tax is approved. This amount was determined based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered as the most probable amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay if the negotiation with the local government ultimately is not successful.
CONTRACTUAL OBLIGATIONS
As of September 30, 2017,March 31, 2018, we had no material changes outside the ordinary course of business in our contractual obligationsobligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2017March 31, 2018 was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(b) of the Exchange Act). Based on this evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures, as of September 30, 2017,March 31, 2018, were effective, in all material respects, for the purpose stated above.
Changes in Internal Control over Financial Reporting:
There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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ITEM 1. LEGAL PROCEEDINGSPROCEEDINGS.
None.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSPROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIESSECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURESDISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATIONINFORMATION.
None.
101.1NS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
(1) | Incorporated herein by reference from the Registrant’s Form 8-K Current Report filed with the Securities and Exchange Commission, on June 1, 2010. |
(2) | Incorporated herein by reference from the Registrant’s Form 8-K Current Report as filed with the Securities and Exchange Commission, on March 17, 2009. |
(3) | Furnished in accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated : May 15, 2018 | SORL AUTO PARTS, INC. | ||
By: | |||
Name: Xiao Ping Zhang | |||
Title: Chief Executive Officer | |||
(Principal Executive Officer) | |||
By: | |||
Name: Zong Yun Zhou | |||
Title: Chief Financial Officer | |||
(Principal Accounting Officer) |
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