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 September 30, 2007
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT |
For the transition period from _________ to _________
Commission file number 000-11991
(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. 1169 Yumeng Road
Ruian Economic Development District
Ruian City, Zhejiang Province
People’s Republic Of China
(Address of principal executive offices)
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.
Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes o No x
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the registrant classes of common equity, as of the latest practicable date:
As of September 30, 2007 there were 18,279,254 shares of Common Stock outstanding
FORM 10-Q
For the Quarter Ended September 30, 2007
INDEX
Page | ||
PART I. | FINANCIAL INFORMATION (Unaudited) | 1 |
Item 1. | Financial Statements: | 1 |
Condensed Consolidated Balance Sheets as of September 30, 2007 (Unaudited) and December 31, 2006 (Audited) | 2 | |
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30, 2007and 2006 | 3 | |
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2007 and 2006 | 4 | |
Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three and Nine Months Ended September 30, 2007 and 2006 | 6 | |
Notes to the Condensed Consolidated Financial Statements (Unaudited) | 7 | |
Item 2. | Management’s Discussion and Analysis or Financial Condition and Results of Operations | 17 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 29 |
Item 4. | Controls and Procedures | 29 |
PART II. | OTHER INFORMATION | 30 |
Item 1. | Legal Proceedings | 30 |
Item 1A. | Risk Factors | 30 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 30 |
Item 3. | Defaults Upon Senior Securities | 31 |
Item 4. | Submission Of Matters To a Vote of Security Holders | 31 |
Item 5. | Other Information | 31 |
Item 6. | Exhibits | 31 |
SIGNATURES | 31 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2007 and December 31,2006
September 30, 2007 | December 31, 2006 | ||||||
(Unaudited) | (Audited) | ||||||
Assets | |||||||
Current Assets | |||||||
Cash and Cash Equivalents | US$ | 1,972,825 | US$ | 11,137,501 | |||
Accounts Receivable, Net of Provision | 31,351,401 | 26,750,778 | |||||
Notes Receivable | 5,953,499 | 3,494,327 | |||||
Inventory | 8,814,201 | 4,528,856 | |||||
Prepayments | 2,276,728 | 5,532,802 | |||||
Other current assets | 4,216,545 | 2,925,558 | |||||
Total Current Assets | 54,585,199 | 54,369,822 | |||||
Fixed Assets | |||||||
Property, Plant and Equipment | 26,172,629 | 20,418,557 | |||||
Less: Accumulated Depreciation | (5,410,661 | ) | (4,106,901 | ) | |||
Property, Plant and Equipment, Net | 20,761,968 | 16,311,656 | |||||
Land Use Rights, Net | 13,583,427 | - | |||||
Other Assets | |||||||
Deferred compensation cost-stock options | 84,480 | 129,207 | |||||
Intangible Assets | 74,059 | 45,779 | |||||
Less: Accumulated Amortization | (22,768 | ) | (17,655 | ) | |||
Intangible Assets, Net | 51,291 | 28,124 | |||||
Other Non-current Assets | 38,637 | 41,299 | |||||
Total Other Assets | 174,408 | 198,630 | |||||
Total Assets | US$ | 89,105,002 | US$ | 70,880,108 | |||
Liabilities and Shareholders' Equity | |||||||
Current Liabilities | |||||||
Accounts Payable and Notes Payable | US$ | 5,649,773 | US$ | 4,620,692 | |||
Deposit Received from Customers | 877,625 | 508,268 | |||||
Short term bank loans | 4,705,709 | - | |||||
Income tax payable | 540,063 | 358,367 | |||||
Accrued Expenses | 1,086,373 | 1,232,845 | |||||
Other Current Liabilities | 491,823 | 454,430 | |||||
Total Current Liabilities | 13,351,366 | 7,174,602 | |||||
Total Liabilities | 13,351,366 | 7,174,602 | |||||
Minority Interest | 7,545,894 | 6,336,557 | |||||
Shareholders' Equity | |||||||
Common Stock - $0.002 Par Value; 50,000,000 authorized, 18,279,254 and 18,275,126 issued and outstanding as of September 30, 2007 and December 31, 2006 respectively | 36,558 | 36,550 | |||||
Additional Paid In Capital | 37,498,452 | 37,444,051 | |||||
Reserves | 1,640,403 | 797,116 | |||||
Accumulated other comprehensive income | 3,553,626 | 1,102,469 | |||||
Retained Earnings | 25,478,703 | 17,988,763 | |||||
Total Shareholders' Equity | 68,207,742 | 57,368,949 | |||||
Total Liabilities and Shareholders' Equity | US$ | 89,105,002 | US$ | 70,880,108 |
The accompanying notes are an integral part of these financial statements
2
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
For The Second Quarter Ended September 30, 2007 and 2006
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
Sales | US$ | 29,703,227 | 21,288,002 | US$ | 83,309,788 | 60,824,588 | |||||||
Cost of Sales | 23,064,724 | 16,511,343 | 64,620,063 | 47,012,827 | |||||||||
Gross Profit | 6,638,503 | 4,776,659 | 18,689,725 | 13,811,761 | |||||||||
Operating Expenses | |||||||||||||
Selling and Distribution Expenses | 1,928,763 | 1,163,077 | 4,444,053 | 3,407,535 | |||||||||
General and Administrative Expenses | 1,682,071 | 1,028,862 | 4,402,694 | 2,212,113 | |||||||||
Financial Expenses | 349,056 | 259,587 | 606,492 | 767,034 | |||||||||
Total Operating Expenses | 3,959,890 | 2,451,526 | 9,453,239 | 6,386,682 | |||||||||
Operating Income | 2,678,613 | 2,325,133 | 9,236,486 | 7,425,079 | |||||||||
Other Income | 118,334 | 24,280 | 502,606 | 92,976 | |||||||||
Non-Operating Expenses | (10,357 | ) | (75,841 | ) | (94,996 | ) | (232,566 | ) | |||||
Income Before Provision for Income Taxes | 2,786,590 | 2,273,572 | 9,644,096 | 7,285,489 | |||||||||
Provision for Income Taxes | 434,139 | 311,208 | 373,883 | 898,713 | |||||||||
Net Income Before Minority Interest & Other Comprehensive Income | US$ | 2,352,451 | 1,962,364 | US$ | 9,270,213 | 6,386,776 | |||||||
Minority Interest | 239,867 | 196,236 | 936,986 | 638,677 | |||||||||
Net Income Attributable to Shareholders | 2,112,584 | 1,766,128 | 8,333,227 | 5,748,099 | |||||||||
Foreign Currency Translation Adjustment | 1,025,919 | 262,110 | 2,723,508 | 448,790 | |||||||||
Minority Interest's Share | (102,592 | ) | (26,211 | ) | (272,351 | ) | (44,879 | ) | |||||
Comprehensive Income | 3,035,911 | 2,002,027 | 10,784,384 | 6,152,010 | |||||||||
Weighted average common share - Basic | 18,278,805 | 13,346,555 | 18,276,366 | 13,346,555 | |||||||||
Weighted average common share - Diluted | 18,312,574 | 13,368,387 | 18,323,125 | 13,360,639 | |||||||||
EPS – Basic | 0.12 | 0.13 | 0.46 | 0.43 | |||||||||
EPS – Diluted | 0.12 | 0.13 | 0.45 | 0.43 |
3
Consolidated Statements of Changes in Shareholders' Equity
Three Months Ended September 30, 2007 and 2006 | |||||||||||||||||||||||||
Number of Share | Common Stock | Additional Paid-in Capital | Reserves | Retained Earnings (Deficit) | Accumu. Other Comprehensive Income | Shareholders' Equity | Minority Interest | ||||||||||||||||||
Beginning Balance - June 30, 2006 | 13,346,555 | 26,693 | 4,922,074 | - | 15,158,525 | 505,005.00 | 20,612,297 | 2,196,927 | |||||||||||||||||
Net Income | - | - | - | - | 1,766,128 | - | 1,766,128 | 196,236 | |||||||||||||||||
Other Comprehensive Income | - | - | - | - | - | 235,899 | 235,899 | 26,211 | |||||||||||||||||
Paid In Capital Contributions | - | - | - | - | - | - | - | - | |||||||||||||||||
Ending Balance - September 30, 2006 | 13,346,555 | 26,693 | 4,922,074 | 16,924,653 | 740,904 | 22,614,324 | 2,419,374 | ||||||||||||||||||
Beginning Balance - June 30, 2007 | 18,275,126 | 36,550 | 37,467,252 | 1,424,523 | 23,581,999 | 2,630,299 | 65,140,623 | 7,203,435 | |||||||||||||||||
Net Income | - | - | - | - | 2,112,584 | - | 2,112,584 | 239,867 | |||||||||||||||||
Other Comprehensive Income | - | - | - | - | - | 923,327 | 923,327 | 102,592 | |||||||||||||||||
Transfer to reserve | - | - | - | 215,880 | -215,880 | - | - | - | |||||||||||||||||
Common Stock issued to previous employees | 4,128 | 8 | 31,200 | - | - | 31,208 | - | ||||||||||||||||||
Ending Balance - September 30, 2007 | 18,279,254 | 36,558 | 37,498,452 | 1,640,403 | 25,478,703 | 3,553,626 | 68,207,742 | 7,545,894 |
4
Nine Months Ended September 30, 2007 and 2006 | |||||||||||||||||||||||||
Number of Share | Common Stock | Additional Paid-in Capital | Reserves | Retained Earnings (Deficit) | Accumu. Other Comprehensive Income | Shareholders' Equity | Minority Interest | ||||||||||||||||||
Beginning Balance - December 31, 2005 | 13,346,555 | 26,693 | 4,444,118 | - | 11,176,554 | 336,993 | 15,984,358 | 1,735,818 | |||||||||||||||||
Net Income | - | - | - | - | 5,748,099 | - | 5,748,099 | 638,677 | |||||||||||||||||
Other Comprehensive Income | - | - | - | - | - | 403,911 | 403,911 | 44,879 | |||||||||||||||||
Paid In Capital Contributions | - | - | 477,956 | - | - | - | 477,956 | - | |||||||||||||||||
Ending Balance - September 30, 2006 | 13,346,555 | 26,693 | 4,922,074 | - | 16,924,653 | 740,904 | 22,614,324 | 2,419,374 | |||||||||||||||||
Beginning Balance - December 31, 2006 | 18,275,126 | 36,550 | 37,444,051 | 797,116 | 17,988,763 | 1,102,469 | 57,368,949 | 6,336,557 | |||||||||||||||||
Net Income | - | - | - | - | 8,333,227 | 8,333,227 | 936,986 | ||||||||||||||||||
Other Comprehensive Income | - | - | - | - | - | 2,451,157 | 2,451,157 | 272,351 | |||||||||||||||||
Transfer to reserve | - | - | - | 843,287 | -843,287 | - | - | - | |||||||||||||||||
4,128 options issued | - | - | 23,201 | - | - | - | 23,201 | - | |||||||||||||||||
Common Stock issued to previous employees | 4,128 | 8 | 31,200 | - | - | - | 31,208 | - | |||||||||||||||||
Ending Balance - September 30, 2007 | 18,279,254 | 36,558 | 37,498,452 | 1,640,403 | 25,478,703 | 3,553,626 | 68,207,742 | 7,545,894 |
The accompanying notes are an integral part of these financial statements
5
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Third Quarter Ended September 30, 2007 and 2006
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
Cash Flows from Operating Activities | |||||||||||||
Net Income | US$ | 2,112,584 | 1,766,128 | US$ | 8,333,227 | 5,748,099 | |||||||
Adjustments to reconcile net income (loss) to net cash from operating activities: | |||||||||||||
Minority Interest | 239,867 | 196,236 | 936,986 | 638,677 | |||||||||
Bad Debt Expense | (163,553 | ) | (83,168 | ) | 23,623 | (869,618 | ) | ||||||
Depreciation and Amortization | 447,548 | 266,058 | 1,157,942 | 783,053 | |||||||||
Loss on disposal of Fixed Assets | (1,870 | ) | 2,129 | (762 | ) | 69,032 | |||||||
Stock-Based Compensation Expense | 46,117 | 89,672 | 99,136 | 259,077 | |||||||||
Changes in Assets and Liabilities: | |||||||||||||
Account Receivables | 1,198,001 | 1,250,818 | (3,436,960 | ) | (1,991,058 | ) | |||||||
Notes Receivables | 3,449,736 | (2,366,405 | ) | (2,165,666 | ) | (2,033,838 | ) | ||||||
Other Currents Assets | (238,235 | ) | (674,145 | ) | (1,150,292 | ) | (1,033,278 | ) | |||||
Inventory | (1,339,563 | ) | (923,930 | ) | (4,034,078 | ) | 214,474 | ||||||
Prepayments | 45,087 | (309,766 | ) | 3,377,736 | 82,795 | ||||||||
Account Payables and Notes payable | (252,806 | ) | 787,423 | 738,224 | 4,841,961 | ||||||||
Deposits Received from Customers | 56,601 | 161,447 | 338,953 | (356,087 | ) | ||||||||
Other Current Liabilities and Accrued Expenses | 315,101 | 366,871 | 2,470 | 643,287 | |||||||||
Net Cash Flows from Operating Activities | 5,914,615 | 529,368 | 4,220,539 | 6,996,576 | |||||||||
Cash Flows from Investing Activities | |||||||||||||
Acquisition of Property and Equipment | (5,521,198 | ) | (1,189,727 | ) | (10,856,559 | ) | (2,063,307 | ) | |||||
Acquisition of Land Use Rights | (7,377,271 | ) | - | (7,377,271 | ) | - | |||||||
Investment in Intangible Assets | (5,818 | ) | - | (25,733 | ) | - | |||||||
Net Cash Flows from Investing Activities | (12,904,287 | ) | (1,189,727 | ) | (18,259,563 | ) | (2,063,307 | ) | |||||
Cash Flows from Financing Activities | |||||||||||||
Proceeds from (Repayment of) Bank Loans | 3,159,176 | (632,227 | ) | 4,652,112 | (5,152,615 | ) | |||||||
Net Cash flows from Financing Activities | 3,159,176 | (632,227 | ) | 4,652,112 | (5,152,615 | ) | |||||||
Effects on changes in foreign exchange rate | 51,979 | 262,110 | 222,236 | 448,789 | |||||||||
Net Increase (Decrease) in Cash | (3,778,517 | ) | (1,030,476 | ) | (9,164,676 | ) | 229,443 | ||||||
Cash - Beginning of the term | 5,751,342 | 2,221,050 | 11,137,501 | 961,131 | |||||||||
Cash - End of the term | US$ | 1,972,825 | 1,190,574 | US$ | 1,972,825 | 1,190,574 | |||||||
Supplemental Cash Flow Disclosures: | |||||||||||||
Interest Paid | 105,363 | 163,862 | 118,277 | 565,802 | |||||||||
Tax Paid | 331,779 | 297,662 | 1,185,215 | 586,420 | |||||||||
Non-Cash Transaction Disclosures: | |||||||||||||
Exchange of Construction in Progress for Acquisition of Property and Equipment | 3,040,203 | ||||||||||||
Exchange of Construction in Progress for Acquisition of Land Use Rights | 6,206,156 |
The accompanying notes are an integral part of these financial statements
6
NOTE A - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (the “Company”) is principally engaged in the manufacture and distribution of automotive air brake valves and related components for commercial vehicles weighing more than three tons, such as trucks and buses, through its 90% ownership of Ruili Group Ruian Auto Parts Company Limited (the “Joint Venture”) in the People’s Republic of China (“PRC” or “China”). The Company distributes products both in China and internationally under the SORL trademarks. The Company’s product range includes approximately 40 categories of brake valves with over 800 different specifications.
NOTE B - BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of SORL Auto Parts, Inc. and its majority owned subsidiaries. All significant 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 pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K 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.
NOTE C- RECENTLY ISSUED FINANCIAL STANDARDS
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115”. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value at specified election dates. This Statement applies to all entities, including not-for-profit organizations. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended December 31, 2008. The Company is currently evaluating the impact of SFAS 159 on its consolidated financial statements.
Note D - Related Party Transactions
The Company continued to purchase non-valve automotive components and packaging materials from the Ruili Group Co., Ltd., which is the minority shareholder of the Joint Venture, and also has the common controlling party, i.e. the Zhang family. The following related party transactions occurred for the three or nine months ended September 30, 2007 and 2006:
7
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||
PURCHASES NON-VALVE PRODUCT AND PACKAGING MATERIAL FROM: | |||||||||||||
Ruili Group Co., Ltd. | $ | 7,577,793 | $ | 5,435,210 | $ | 20,256,572 | $ | 15,978,023 | |||||
Total | $ | 7,577,793 | $ | 5,435,210 | $ | 20,256,572 | $ | 15,978,023 | |||||
PURCHASES PLANT AND LAND USE RIGHTS FROM : | |||||||||||||
Ruili Group Co., Ltd. | $ | 20,237,525 | $ | — | $ | — | $ | — | |||||
$ | 20,237,525 | $ | — | $ | — | $ | — | ||||||
SALES TO: | |||||||||||||
Ruili Group Co., Ltd. | $ | — | $ | 1,768,115 | $ | 914,683 | $ | 4,398,313 | |||||
Total | $ | — | $ | 1,768,115 | $ | 914,683 | $ | 4,398,313 | |||||
1. The total purchases from Ruili Group during the three months ended September 30, 2007 consisted of $ 7.0 million of finished products for non-valve auto parts and $0.6 million of packaging materials. During the nine months ended September 30, 2007, the breakdown was $18.8 million and $1.5million, respectively.
2. On September 28, 2007, the Company purchased land rights, a manufacturing plant, and an office building from Ruili Group for an aggregate purchase price of approximately RMB152 million (approximately $20.2 million translated with an exchange rate of 7.5108 yuan to $1.00 at September 28, 2007). DTZ Debenham Tie Leung Ltd., an internationally recognized appraiser, appraised the total asset value at RMB154 million (approximately $20.5 million based on with an exchange rate of 7.5108 yuan to $1.00 at September 28, 2007). The purchase price was paid by the Company by transferring to Ruili Group the Company’s $9 million investment in an existing project that includes a construction-in-progress and prepayment of land use rights. The remaining balance of $11 million was paid by the cash generated from operations and a bank credit line.
September 30, 2007 | December 31, 2006 | ||||||
Prepayment | |||||||
Ruili Group Co., Ltd. | $ | — | $ | 2,309,073 | |||
Total | — | 2,309,073 | |||||
Other Accounts receivable | |||||||
Ruili Group Co., Ltd. | $ | 1,686,125 | $ | 903,304 | |||
Total | 1,686,125 | 903,304 | |||||
Accounts payable | |||||||
Ruili Group Co., Ltd. | $ | 775,166 | $ | — | |||
Total | 775,166 | — |
8
The changes in the allowance for doubtful accounts at September 30, 2007 and December 31, 2006 were summarized as follows:
September 30, 2007 | December 31, 2006 | ||||||
Beginning balance | $ | 8,769 | $ | 914,721 | |||
Add: Increase to allowance | 23,179 | (905,952 | ) | ||||
Less: Accounts written off | — | — | |||||
Ending balance | $ | 31,948 | $ | 8,769 |
September 30, 2007 | December 31, 2006 | ||||||
Accounts receivable | $ | 31,383,349 | $ | 26,759,547 | |||
Less: allowance for doubtful accounts | (31,948 | ) | (8,769 | ) | |||
Account receivable balance, net | $ | 31,351,401 | $ | 26,750,778 |
On September 30, 2007 and December 31, 2006, inventories consisted of the following:
September 30, 2007 | December 31, 2006 | ||||||
Raw Material | $ | 2,251,418 | $ | 1,081,569 | |||
Work in process | 4,122,246 | 2,429,979 | |||||
Finished Goods | 2,440,537 | 1,017,308 | |||||
Total Inventory | $ | 8,814,201 | $ | 4,528,856 |
9
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following, on September 30, 2007 and December 31, 2006:
September 30, 2007 | December 31, 2006 | ||||||
Machinery | $ | 16,732,950 | $ | 12,123,775 | |||
Molds | 1,160,722 | 1,116,441 | |||||
Office equipment | 310,282 | 226,647 | |||||
Vehicle | 711,442 | 310,681 | |||||
Building | 7,257,233 | 580,126 | |||||
Construction In Progress | — | 6,060,887 | |||||
Sub-Total | 26,172,629 | 20,418,557 | |||||
Less: Accumulated depreciation | (5,410,661 | ) | (4,106,901 | ) | |||
Fixed Assets, net | $ | 20,761,968 | $ | 16,311,656 |
Depreciation expense charged to operations was $1,153,615 and $ 778,616 for the nine months ended September 30, 2007 and 2006, respectively.
NOTE H - LAND USE RIGHTS
September 30, 2007 | December 31, 2006 | ||||||
Cost: | $ | 13,583,427 | $ | — | |||
Less: Accumulated amortization: | — | — | |||||
Land use rights, net | $ | 13,583,427 | $ | — |
According to the law 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. The company purchased the land use rights from Ruili Group for $13,583,427 on September 28, 2007. The Company has not yet obtained the land use right certificate. However, the Company is in the process of applying to obtain the land use right certificate.
NOTE I - INTANGIBLE ASSETS
Gross intangible assets were $74,059, less accumulated amortization of $22,768 for net intangible assets of $51,291 as of September 30, 2007. Gross intangible assets were $45,779, less accumulated amortization of $17,655 for net intangible assets of $28,124 as of December 31, 2006. Amortization expenses were $ 4,325 and $ 4,437 for the nine months ended September 30, 2007 and 2006 respectively. Future estimated amortization expense is as follows:
10
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | |||||||||||
$ 1,354 | $ | 5,845 | $ | 5,845 | $ | 5,845 | $ | 5,845 | $ | 26,557 |
Prepayment consisted of the following as of September 30, 2007 and December 31, 2006:
September 30, 2007 | December 31, 2006 | ||||||
Raw material suppliers | $ | 1,585,404 | $ | 5,080,452 | |||
Equipment purchase | 691,324 | 452,350 | |||||
Total prepayment | $ | 2,276,728 | $ | 5,532,802 |
Accrued expenses consisted of the following as of September 30, 2007 and December 31, 2006:
September 30, 2007 | December 31, 2006 | ||||||
Accrued payroll | $ | 583,412 | $ | 448,420 | |||
Other accrued expenses | 502,961 | 784,425 | |||||
Total accrued expenses | $ | 1,086,373 | $ | 1,232,845 |
Bank loans represented the following as of September 30, 2007 and December 31, 2006:
September 30, 2007 | December 31, 2006 | ||||||
Secured | $ | 4,705,709 | $ | — | |||
Less: Current portion | $ | (4,705,709 | ) | $ | — | ||
Non-current portion | $ | — | $ | — |
To finance new equipment acquisition from overseas suppliers, during the second quarter of 2007, the Company obtained short term dollar loans of approximately $ 1.5 million from Agricultural Bank of China, with interest at 6.15313% and 5.73750% per annum, respectively.
In the third quarter of 2007, the Company entered into an accounts receivable financing agreement with Bank of China. This facility has a credit line of $7.0M. This line is secured by eligible accounts receivable due from overseas customers. All these accounts receivable must have credit terms no longer than 180 days. In the third quarter of 2007, Bank of China advanced $3.2 million to the company, after deducting discounted interest and fees.
These loans were guaranteed by Ruili Group Co., Ltd., a related party. The Company did not provide any sort of guarantee to any other parties.
11
NOTE M - RESERVE
The reserve funds are comprised of the following:
September 30, 2007 | December 31, 2006 | ||||||
Statutory surplus reserve fund | $ | 1,640,403 | $ | 797,116 | |||
Total | $ | 1,640,403 | $ | 797,116 |
Pursuant to the relevant laws and regulations of Sino-foreign joint venture enterprises, the profits of the Company's subsidiary, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after they have satisfied all the PRC tax liabilities, provided for losses in previous years, and made appropriations to reserve funds, as determined at the discretion of the board of directors in accordance with PRC accounting standards and regulations.
As stipulated by the relevant laws and regulations for enterprises operating in the PRC, the Company's Sino-foreign joint venture is required to make annual appropriations to two reserve funds, consisting of the statutory surplus and public welfare funds. In accordance with the relevant PRC regulations and the articles of association of the respective companies, the Joint Venture is required to allocate a certain percentage of its profits after taxation, as determined in accordance with PRC accounting standards applicable to the Company, to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company.
NOTE N - INCOME TAXES
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. According to applicable tax laws regarding Sino-Foreign Joint Venture, the Joint Venture is exempted from income taxes in the PRC for the fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture is entitled to a tax concession of 50% of the statutory income tax rate of 26.4%, for the following three years ended December 31, 2006, 2007, and 2008.
The reconciliation of the effective income tax rate of the Joint Venture to the statutory income tax rate in the PRC for the third quarter ended September 30, 2007 is as follows:
26.4 | % | |||
Tax holidays and concessions | -13.2 | % | ||
Effective tax rate | 13.2 | % |
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No provision for deferred tax liabilities has been made, since the Joint Venture had no material temporary differences between the tax bases of assets and liabilities and their carrying amounts.
In addition, in accordance with China's relevant regulations of income taxes, there is a benefit of a refund of 40% of domestic equipment purchases from increased income taxes for the purchasing year over those of the previous year.
NOTE O - LEASES
Commencing in 2004, the Joint Venture has a lease agreement with Ruili Group Co., Ltd., a related party, for the lease of a manufacturing plant. The lease is for a ten year term ending in February 2014. The Joint Venture purchased the plant in September 2007. As a result, the lease has been terminated according to the purchase agreement with Ruili Group Co., Ltd. The office building purchased in the quarter ended September 30, 2007 is not part of the lease.
In December 2006, the Joint Venture entered into one new lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are respectively for its management personnel and staff. The lease term is from January 2007 to December 2011 for one of the apartment buildings and from January 2007 to December 2012 for the other.
Future minimum rental payments for the years ended December 31, are as follows:
2007 | 2008 | 2009 | 2010 | 2011 | Thereafter | ||||||||||||||
Rental of apartment buildings | 54,108 | 242,043 | 242,043 | 242,043 | 242,043 | 58,727 | |||||||||||||
Total | 54,108 | 242,043 | 242,043 | 242,043 | 242,043 | 58,727 |
Advertising costs are expensed as incurred and are classified as selling expenses. Advertising costs were $107,023 and $23,358 for the nine months ended September 30, 2007 and 2006, respectively
NOTE Q - RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs are expensed as incurred and were $ 953,174 and $ 468,942 for the nine months ended September 30, 2007 and 2006, respectively.
NOTE R - WARRANTY CLAIMS
Warranty claims were $912,623 and $1,174,437 for the nine months ended September 30, 2007 and 2006, respectively. The movement of accrued warranty expenses for the nine months ended September 30, 2007 is as follows. Accrued warranty expenses are included in Accrued Expenses.
Beginning balance at Jan 01, 2007 | $ | 613,917 | ||
Accrued during the nine months ended September 30, 2007: | $ | 912,623 | ||
Less: Actual Paid during the nine months ended September 30, 2007: | $ | 1,212,312 | ||
Ending balance at September 30, 2007 | $ | 314,228 |
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NOTE S - STOCK COMPENSATION PLAN
(1) The Company’s 2005 Stock Compensation Plan (the Plan) permits the grant of share options and shares to its employees for up to 1,700,000 shares of common stock. The Company believes that such awards better align the interests of its employees with those of its shareholders. Option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant.
Pursuant to the Plan, the Company issued 60,000 options with an exercise price of $4.79 per share on March 1, 2006. In accordance with the vesting provisions of the grants, the options will become vested and exercisable under the following schedule.
Number of Shares | % of Shares Issued | Initial Vesting Date | ||
60,000 | 100% | March 1, 2009 |
The Company accounts for stock-based compensation in accordance with SFAS No. 123 Revised, “Share-Based Payment.” The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model that uses the assumptions noted in the following table.
0.00 | % | |||
Expected Volatility | 96.54 | % | ||
Risk-Free Interest Rate | 4.59 | % | ||
Contractual Term | 3 years | |||
Stock Price at Date of Grant | $ | 4.79 | ||
Exercise Price | $ | 4.79 |
Total deferred stock-based compensation expenses related to the 60,000 stock options granted amounted to $178,904. This amount is amortized over three years in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R). The amortization of deferred stock-based compensation for these equity arrangements was $44,727 and $ 34,788 respectively for the nine months ended September 30, 2007 and the nine months ended September 30, 2006. As of September 30, 2007, there was $84,480 of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the plan. The cost is expected to be recognized over a period of 1.3 years.
A summary of option activity under the Plan as of September 30, 2007 and changes during the nine months ended September 30, 2007 is as follows:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
January 1, 2006 | — | $ | — | — | $ | — | |||||||
Granted | 60,000 | 4.79 | 3Years | — | |||||||||
Exercised | — | — | — | — | |||||||||
Forfeited | — | — | — | — | |||||||||
Outstanding at September 30, 2007 | 60,000 | $ | 4.79 | 1.3Years | $ | 1 80,000 ` | |||||||
Exercisable at September 30, 2007 | — | — | — | — |
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(ii). Subject to all the terms and provisions of the 2005 Stock Compensation Plan, on June 20, 2007, the Company granted to its previous senior manager of investor relations, David Ming He, options to purchase 4,128 shares of its common stock with an exercise price of $7.25 per share. The options became vested and exercisable immediately on the date thereof.
Number of Shares | % of Shares Issued | Initial Vesting Date | ||
4,128 | 100% | June 20, 2007 |
The Company accounts for stock-based compensation in accordance with SFAS No. 123 Revised, “Share-Based Payment.” The fair value of each warrant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model that uses the assumptions noted in the following table.
Dividend Yield | 0.00 | % | ||
Expected Volatility | 141.47 | % | ||
Risk-Free Interest Rate | 5.14 | % | ||
Contractual Term | 3 years | |||
Stock Price at Date of Grant | $ | 7.09 | ||
Exercise Price | $ | 7.25 |
Total stock-based compensation expenses related to the 4,128 stock options granted amounted to $23,201. This amount is charged to G&A during the second quarter of 2007.
A summary of option activity under the Plan as of September 30, 2007 and changes during the nine months ended September 30, 2007 is as follows:
Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
January 1, 2007 | — | $ | — | — | $ | — | |||||||
Granted | 4,128 | $ | 7.25 | 3Years | — | ||||||||
Exercised | — | — | — | — | |||||||||
Forfeited | — | — | — | — | |||||||||
Outstanding at September 30, 2007 | 4,128 | $ | 7.25 | 2.8Years | $ | 2,229 | |||||||
Exercisable at September 30, 2007 | 4,128 | $ | 7.25 | 2.8Years | $ | 2,229 |
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(2) On January 5, 2006, the Company issued 100,000 warrants for financial services to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise price of $6.25 per share. In accordance with the common stock purchase warrant agreement, the warrants became vested and exercisable immediately on the date thereof. As set forth in the agreement, the Company will retain Maxim Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors and investment bankers for a period of twelve months.
% of Shares Issued | Initial Vesting Date | |||
100,000 | 100% | January 5, 2006 |
The Company accounts for stock-based compensation in accordance with SFAS No. 123 Revised, “Share-Based Payment.” The fair value of each warrant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model that uses the assumptions noted in the following table.
Dividend Yield | 0.00 | % | ||
Expected Volatility | 95.01 | % | ||
Risk-Free Interest Rate | 4.36 | % | ||
Contractual Term | 4 years | |||
Stock Price at Date of Grant | $ | 4.70 | ||
Exercise Price | $ | 6.25 |
Total deferred stock-based compensation expenses related to the 100,000 warrants granted amounted to $299,052. This amount is amortized over one year in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R). The amortization of deferred stock-based compensation for these equity arrangements was $299,052 for the fiscal year ended December 31, 2006.
A summary of option activity with respect to the warrants as of September 30, 2007 and changes during the nine months ended September 30, 2007 is as follows:
Warrants | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||
January 1, 20 06 | — | $ | — | — | $ | — | |||||||
Granted | 100,000 | $ | 6.25 | 4Years | — | ||||||||
Exercised | — | — | — | — | |||||||||
Forfeited | — | — | — | — | |||||||||
Outstanding at September 30, 2007 | 100,000 | $ | 6.25 | 2.3Years | $ | 154,000 | |||||||
Exercisable at September 30, 2007 | 100,000 | $ | 6.25 | 2.3Years | $ | 154,000 |
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None.
NOTE U - OFF-BALANCE SHEET ARRANGEMENTS
At September 30, 2007, we do not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
None.
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 in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. 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 the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10Q.
OVERVIEW
On May 10, 2004, we acquired all of the issued and outstanding equity interests of Fairford Holdings Limited, a Hong Kong limited liability company (“Fairford”). Until we acquired Fairford, we had only nominal assets and liabilities and limited business operations. Although Fairford became a wholly-owned subsidiary following the acquisition, because the acquisition resulted in a change of control, the acquisition was recorded as a “reverse merger” whereby Fairford is considered to be the accounting acquirer. As such, the following results of operations are those of Fairford.
Fairford was organized in Hong Kong as a limited liability company on November 3, 2003. Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts Co., Ltd., a Sino-foreign joint venture (the “Joint Venture”) established pursuant to the laws of the People’s Republic of China (“PRC” or “China”). The Joint Venture is a joint venture between Fairford and Ruili Group Co., Ltd. (the “Ruili Group”).
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The Ruili Group was incorporated in the PRC in 1987 to specialize in the development, production and sale of various kinds of automotive parts. Its headquarter was located in Ruian City of Wenzhou Area, one of the leading automotive parts manufacturing centers of China with more than 1400 auto parts manufacturing companies. Its major product lines included valves for air brake systems, auto metering products, auto electric products, anti-lock brake systems and retarders. Some of those products were developed and manufactured through affiliated companies of Ruili Group. Due to its leading position in the industry, the Chairman of the Ruili Group, Mr. Xiao Ping Zhang, has been elected as the Chairman of Wenzhou Auto Parts Association, one of the leading auto parts trade associations in China. Mr. Zhang is also Chairman and Chief Executive Officer of the Company. The Joint Venture was established in the PRC as a Sino-foreign joint venture company with limited liability by the Ruili Group and Fairford. Fairford and Ruili Group contributed 90% and 10%, respectively, of the paid-in capital in the aggregate amount of approximately $43.4 million.
In connection with its formation, effective January 19, 2004 the Joint Venture acquired the business of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the “Transferred Business”). This was accomplished by the transfer from the Ruili Group to Fairford of the relevant assets and liabilities of the Transferred Business including trade receivables, inventories and machinery, and the assumption of short and long term borrowings, at a consideration of approximately $6.39million.
The transactions were accounted for as a reverse spin-off in accordance with EITF 02-11 “Accounting for Spin-offs.” Accordingly SORL Auto Parts, Inc. was deemed to be the “spinnor” for accounting purposes.
In December 2006, through Fairford, SORL invested a further approximately $32.67 million in its operating subsidiary- the Joint Venture. To maintain its 10% shareholding in the Joint Venture, the Ruili Group increased its capital investment by approximately $3.63million. SORL Auto Parts, Inc. continues to hold a 90% controlling interest in the operating subsidiary.
As a result of the foregoing, through Fairford’s 90% interest in the Joint Venture, the Company manufactures and distributes automotive air brake valves and related components in China and internationally for use primarily in vehicles weighing over three tons, such as trucks and buses. There are forty categories of valves with over eight hundred different specifications. Management believes that it is the largest manufacturer of automotive brake valves in China.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Below is a description of accounting policies, which we consider critical to the preparation and understanding of our financial statements. In addition, certain amounts included in or affecting our financial statements and related disclosure must be estimated, which requires us to make assumptions with respect to values or conditions which cannot be known with certainty at the time the financial statements are prepared. Actual results may differ from these estimates under different assumptions or conditions. The selection of critical accounting policies, the judgments and other uncertainties affecting the application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors to be considered when reviewing our consolidated financial statements.
The Company uses the accrual method of accounting which recognizes revenues when earned and expenses when incurred.
Accounts Receivable and Allowance for Doubtful Accounts
The Company presents accounts receivable, net of allowance for doubtful accounts. The allowance is calculated based on review of individual customer accounts.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is calculated on the weighted-average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted-average cost if it exceeds the net realizable value.
Income Taxes
Taxes are calculated in accordance with taxation principles currently effective in the PRC. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets and liabilities that, based on available evidence, are not expected to be realized.
Under a Tax Holiday in PRC, the Joint Venture was granted an exemption from income taxes for two years commencing from the first cumulative profit-making year and a 50% reduction in the income tax rates for the following three years. Fiscal year ended December 31, 2004 was the first accumulative profit-making year. The Joint Venture is entitled to a 50% income tax reduction in the fiscal years ended December 31, 2006, 2007 and 2008. The statutory income tax rate is 26.4% in Ruian City which is located in the coastal economic development zones, the Joint Venture was subject to a tax rate of 13.2% from the years of 2006 to 2008.
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In accordance with the provisions of Staff Accounting Bulletin No. 103, revenue is recognized when merchandise is shipped and title passes to the customer and collectability is reasonably assured. Revenues consist of the invoice value of the sale of goods and services net of value added tax, rebates and discounts.
The Company does not receive revenue for shipping and handling costs to customers. Shipping and handling expenses incurred by the Company are included in selling expenses in the accompanying consolidated statements of income.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. The Company performs ongoing credit evaluations with respect to the financial condition of its creditors, but does not require collateral. In order to determine the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding accounts receivable.
Results of Operations
(1) Results of operations for the three months ended September 30, 2007 as compared to the three months ended September 30, 2006.
SALES
Three Months ended 30-Sep-07 | three Months ended 30-Sep-06 | ||||||||||||
Air brake valves & related components | $ | 22.4 | M | 75 | % | $ | 15.9 | M | 75 | % | |||
Non-valve products | $ | 7.3 | M | 25 | % | $ | 5.4 | M | 25 | % | |||
Total | $ | 29.7 | M | 100 | % | $ | 21.3 | M | 100 | % |
Sales consist of air brake valves and related components manufactured by SORL and sold to domestic original equipment manufacturers (OEM) and aftermarket customers as well as distribution of non-valve auto parts sourced from the Ruili Group.
Net sales were $29,703,227 and $21,288,002 for the three months ended September 30, 2007 and 2006, respectively. Compared with the same period of 2006, net sales for the three months ended September 30, 2007 increased by $8.4 million or 39.4% to $29.7 million. The increase in sales was mainly from domestic OEM, domestic aftermarket and the international market. This increase was a result of the Company’s efforts to develop more customers and penetrate these market segments.
A breakdown of net sales revenue for our three market segments, domestic OEM, domestic aftermarket and the international market, for the three months ended September 30, 2007 and 2006 is as follows:
20
Three Months ended 30-Sep-07 | % | Three Months ended 30-Sep-06 | % | ||||||||||
(U.S. dollars in million) | |||||||||||||
China OEM market | $ | 9.2 | 31 | % | $ | 6.7 | 32 | % | |||||
China Aftermarket | $ | 7.7 | 26 | % | $ | 5.2 | 24 | % | |||||
International market | $ | 12.8 | 43 | % | $ | 9.4 | 44 | % | |||||
Total | $ | 29.7 | 100 | % | $ | 21.3 | 100 | % |
During the three months ended September 30, 2007, the Chinese commercial vehicle segment continued to develop rapidly. To expand its OEM market share, the Joint Venture took advantage of its established relationship with major OEM customers and continued with new product R&D while enhancing unit production efficiency, lowering the product defect ratio and shortening the overall logistic cycle. In this quarter, the Company’s sales to the OEM market increased by approximately $2.5 million or 37.3% for the third quarter ended September 30, 2007, as compared with the third quarter ended September 30, 2006.
As of September 30 , 2007, the Joint Venture had 28 authorized distributors covering nearly all regions in China, who in turn sold our products to over 800 sub-distributors. Based on the well established sales networks as well as increased production capacity, the Joint Venture achieved total revenue of $7.7 million in domestic aftermarket sales for the three months ended September 30, 2007, an increase of $2.5 million, or 48.1% as compared to the same period of last year.
Export sales grew by $3.4 million or approximately 36.2% for the three months ended September 30, 2007, as compared to $9.4 million for the same period of 2006. This increase reflects our continued focus on customer service, strong execution, introduction of new products, increased productivity of our expanded contract sales force, more efficient targeted marketing spending on our catalogs, web sites and international trade shows as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels in this market segment.
COST OF SALES
Cost of sales for the three months ended September 30, 2007 increased to $23.1 million from $ 16.5 million for the same period of 2006, a $6.6 million or 40 % increase which was consistent with the increase in revenues.
GROSS PROFIT
For the three months ended September 30, 2007, gross profit was $6,638,503, as compared to $4,776,659 for the same period of 2006, an increase of $1,861,844 or 39%. Gross margin was 22.3% for the three months ended September 30, 2007, slightly down 0.1% from 22.4% for the same period of 2006.
In view of the increase of primary raw materials price and the negative impact associated with the appreciation of RMB against the U.S. dollar , during the three months ended September 30, 2007, the Joint Venture took various measures to lower the cost per product,. Those measures included selecting the suppliers which are physically close to the Joint Venture to reduce the cost of transportation; reducing inventories of raw material in excess of those required to meet production when the market price is volatile; having short-term pricing agreements with some of our suppliers that reduce our exposure to raw material price increases; and optimizing production techniques to reduce raw material consumption. In the remaining three months of 2007, the Joint Venture plans to improve gross margin by economies of scale, shift of products mix and the introduction of new valve products with higher profit margins.
21
SELLING EXPENSES
Selling expenses were $1,928,763 for the three months ended September 30, 2007, as compared to $1,163,077 for the same period of 2006, an increase of $765,686 or 65.8%. The increase was mainly due to the effect of the following factors:
(1) | Increased transportation expenses for domestic sales: Because of the shorter lead time resulting from the delivery requirements of the OEM’s, products needed to be shipped more frequently in smaller quantities. Accordingly, the associated transportation expenses increased by $ 261,746 for the three months ended September 30, 2007, as compared to $196,821 for the same period of 2006, even though the Company had taken many steps to optimize its shipping management. , . |
(2) | Packaging costs were $ 484,539 for the three months ended September 30, 2007, an increase of $162,467 as compared with the same period of 2006 , as a result of the increase in international sales which generally require a higher standard for packaging material. |
(3) | Advertising costs were $ 106,437 for the three months ended September 30, 2007, as compared to $1,335 for the same period of 2006, an increase of $105,102. |
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1,682,071 for the three months ended September 30, 2007, as compared to $1,028,862 for the same period of 2006, an increase of $653,209 or 63.5%. The increase was mainly due to the following factors:
(1) | The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary and welfare, travel expenses, supplies and utilities totaling $ 479,420, as compared to the same period of 2006. |
(2) | R&D expense, which is included in general and administrative expenses, increased by $ 152,696, as compared to the same period of 2006, as discussed below. |
(3) | Additionally, there was an increase in professional fees of $69,281. The professional fees included audit and legal fees associated with SEC filings, related consulting fees, stock transfer fees and other items associated with the costs of being a public entity. The aforementioned increases were partly offset by a decreased stock-based compensation expenses at $43,555. |
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense was $381,502 for the three months ended September 30, 2007, as compared to $228,806 for the same period of 2006, an increase of $152,696, as a result of the Company’s investment in new R&D instrument purchases and the establishment of a team to develop new innovative products.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $447,548 for the three months ended September 30, 2007, compared with that of $266,058 for the same period of 2006, an increase of $181,490, as a result of new investments in fixed assets, mainly production equipment and tools.
22
FINANCIAL EXPENSE
Financial expense for the three months ended September 30, 2007 increased by $89,496 to $349,056 from $259,587 for the same period of 2006. Financial expense mainly consists of interest expense and exchange loss. The interest expense decreased by $87,389 to $76,473 for the three months ended September 30, 2006, compared with $163,862 for the same period of 2006, mainly due to the lower outstanding average debt balance during current period. The funds were mainly used for new equipment purchases, as well as working capital purposes. Because a large part of our accounts receivable arose from export sales denominated in US dollars, the appreciation of the RMB against the U.S. dollar resulted in a larger exchange loss during the third quarter ended September 30, 2007.The Company recognized the exchange losses of $297,570 and $95,809 for the third quarters of 2007 and 2006, respectively.
OTHER INCOME
Other income was $118,334 for the three months ended September 30, 2007, as compared to $ 24,280 for the three months ended September 30, 2006, an increase of $94,054.The increase was mainly due to $ 63,466 of subsidy income from local governments for the three months ended September 30, 2007. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required.
INCOME TAX
There was no income tax expense for the fiscal year ended December 31, 2005 and 2004. As a result of the Joint Venture obtaining its Sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% for the three years ended December 31, 2006, 2007, and 2008. Income tax expense of $434,139 and $311,208 was recorded for the third quarter ended September 30, 2007 and 2006, respectively.
STOCK—BASED COMPENSATION
On January 5, 2006 the Company issued 100,000 warrants for the financial services to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise price of $6.25 per share and a contractual term of four years. In accordance with the common stock purchase warrant agreement, the warrants became vested and exercisable immediately on the date thereof. Total deferred stock-based compensation expenses related to the 100,000 warrants amounted to $299,052. This amount is amortized over one year in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R). The amortization of deferred stock-based compensation for these equity arrangements was $ 74,763 for the three months ended September 30, 2006.
On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors. The contractual term of the options is three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904. This amount is amortized over the three year vesting period in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R. The amortization of deferred stock-based compensation for these equity arrangements was $ 14,909 for each of the three months ended September 30, 2007 and 2006.
Although the Company anticipates future issuances of stock awards to have a material impact on net income, in future financial statements, we do not expect these transactions to have a material impact on future cash flow.
MINORITY INTEREST
Minority interest represents a 10% non-controlling interest in the Joint Venture. Minority interest in income amounted to $ 239,867 and $ 196,236 for the three months ended September 30, 2007 and 2006, respectively.
23
FINANCIAL CONDITION
Liquidity and Capital Resources
OPERATING - Net cash provided in operating activities was $ 5,914,614 for the third quarter ended September 31, 2007 compared with $529,368 of net cash provided in operating activities in the same period in 2006, an increase of $ 5,385,246.
Our primary cash flows from net income were realized through the sale of automotive parts. The timely collection of account receivables will improve our liquidity. In the third quarter of 2007, cash flow from account receivables and notes receivables increased by $ 5.8 million as compared with the same period of 2006. In accordance with the increase of sales orders, the Company maintained a higher level of inventory to meet the requirements from OEM and overseas customers and required more raw materials to keep its production capacity. This resulted in a negative cash flow of approximately $ 0.4 million. Additionally, cash flows contributed from account payables and notes payables decreased by approximately $1.0 million for the three months ended September 30, 2007 as compared to the same period of 2006.
As of September 30, 2007, the Company had cash and cash equivalents of $1,972,825, as compared to cash and cash equivalents of $11,137,501 at December 31, 2006. The Company had working capital of $ 41,233,833 at September 30, 2007, as compared to working capital of $47,195,220 at December 31, 2006, reflecting current ratios of 4.09:1 and 7.58:1, respectively.
INVESTING - During the three months ended September 30, 2007, the Company expended net cash of $ 12,904,287 in investing activities, mainly for acquisition of a plant, land use rights and new equipments to support the growth of business. For the three months ended September 30, 2006, the Company utilized $ 1,189,727 in investing activities.
FINANCING -Net cash provided by financing activities was $3,159,176 for the three months ended September 30, 2007 compared to $632,227 used in financing activities in the same period in 2006. In the third quarter of 2007, the cash inflows were mainly attributable to a $3,159,176 increase in proceeds from borrowing due to one new secured loan for new equipment purchases and working capital. During the three months ended September 30, 2006, the Company paid down its outstanding debt by $3,251,788, while receiving an aggregate of $2,619,561 in bank loans under its credit facilities.
Management of the Company has taken a number of steps to restructure its customer base and phase out the accounts which had failed to make prompt payments. The Company also placed more emphasis on receivable collection. During the three months ended September 30, 2007, the Company continued developing higher profit margin new products, and adopting steps for further cost saving such as improving material utilization rate. Meanwhile, the Company maintains 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 for the foreseeable future.
( 2) Results of operations for the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006.
Nine Months ended 30-Sep-07 | Nine Months ended 30-Sep-06 | ||||||||||||
Air brake valves & related components | $ | 63.7 | M | 76 | % | $ | 44.6 | M | 73 | % | |||
Non-valve products | $ | 19.6 | M | 24 | % | $ | 16.2 | M | 27 | % | |||
Total | $ | 83.3 | M | 100 | % | $ | 60.8 | M | 100 | % |
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Sales consist of air brake valves and related components manufactured by SORL and sold to domestic original equipment manufacturers (OEM) and aftermarket customers as well as distribution of non-valve auto parts sourced from the Ruili Group.
Net sales were $83,309,788 and $60,824,588 for the nine months ended September 30, 2007 and 2006, respectively. Compared with the same period of 2006, net sales for the nine months ended September 30, 2007 increased by $22.5 million or 37.0% to $83.3 million,. The increase in sales was mainly from domestic OEM, domestic aftermarket and the international market. This increase was a result of the Company’s efforts to develop more customers and penetrate these market segments.
A breakdown of net sales revenue for our three market segments, domestic OEM, domestic aftermarket and the international market, for the nine months ended September 30, 2007 and 2006 is as follows:
Nine Months ended 30-Sep-07 | % | Nine Months ended 30-Sep-06 | % | ||||||||||
(U.S. dollars in million) | |||||||||||||
China OEM market | $ | 30.1 | 36 | % | $ | 18.5 | 30 | % | |||||
China Aftermarket | $ | 21.1 | 25 | % | $ | 17.9 | 29 | % | |||||
International market | $ | 32.1 | 39 | % | $ | 24.4 | 41 | % | |||||
Total | $ | 83.3 | 100 | % | $ | 60.8 | 100 | % |
During the nine months ended September 30, 2007, the Chinese commercial vehicle segment experienced a high growth. In response to this growth, the Joint Venture installed new equipment to increase production capacity and to meet the growing demand. In addition, the Joint Venture took advantage of its established relationship with major OEM customers and continued with new product R&D while enhancing unit production efficiency, lowering the product defect ratio and shortening the overall logistic cycle. The Joint Venture further expanded its OEM market share in the three quarters of 2007.The Joint Venture’s sales to the OEM market increased by approximately $11.6 million or 62.7% for the nine months ended September 30, 2007, as compared with the nine months ended September 30, 2006.
As of September 30 , 2007, the Joint Venture had 28 authorized distributors covering nearly all regions in China, who in turn sold our products to over 800 sub-distributors. Based on the well established sales networks as well as increased production capacity, the Joint Venture achieved total revenue of $21.1 million in domestic aftermarket sales for the nine months ended September 30, 2007, an increase of $3.2 million, or 17.9% as compared to the same period of last year.
Export sales grew by $7.7 million or approximately 31.6% for the three months ended September 30, 2007, as compared to $24.4 million for the same period of 2006. This increase reflects our continued focus on customer service, strong execution, introduction of new products, increased productivity of our expanded contract sales force, more efficient targeted marketing spending on our catalogs, web sites and international trade shows as well as the continued success of our customer acquisition and retention efforts resulting from improved service levels in this market segment.
COST OF SALES
Cost of sales for the nine months ended September 30, 2007 increased to $64.6 million from $47 million for the same period of 2006, a $17.6 million or 37.4% increase which was consistent with the increase in revenue.
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GROSS PROFIT
For the nine months ended September 30, 2007, gross profit was $ 18,689,725, as compared to $ 13,811,761 for the same period of 2006, an increase of $ 4,877,964 or 35.3%. Gross margin was 22.4% for the nine months ended September 30, 2007, slightly down0.3% from 22.7% for the same period of 2006.
In view of the increase of primary raw materials price and the negative impact associated with the appreciation of RMB against the U.S. dollar , during the nine months ended September 30, 2007, the Joint Venture took various measures to lower the cost per product,. Those measures included selecting the suppliers which are physically close to the Joint Venture to reduce the cost of transportation; reducing inventories of raw material in excess of those required to meet production when the market price is volatile; having short-term pricing agreements with some of our suppliers that reduce our exposure to raw material price increases; and optimizing production techniques to reduce raw material consumption. In the remaining three months of 2007, the Joint Venture plans to improve gross margin by economies of scale, shift of products mix and the introduction of new valve products with higher profit margins.
SELLING EXPENSES
Selling expenses were $4,444,053 for the nine months ended September 30, 2007, as compared to $3,407,535 for the same period of 2006, an increase of $ 1,036,518 or 30.4%. The increase was mainly due to the effect of the following factors:
(1) | Increased transportation expenses for domestic sales: Because of the shorter lead time resulting from the delivery requirements of the OEM’s, products needed to be shipped more frequently in smaller quantities. Accordingly, the associated transportation expenses increased by $$ 473,121 for the nine months ended September 30, 2007, as compared to $451,377 for the same period of 2006, even though the Company had taken many steps to optimize its shipping management. |
(2) | Packaging costs were $ 1,386,103 for the nine months ended September 30, 2007, an increase of $804,890 as compared with the same period of 2006 , as a result of the increase in international sales which generally require a higher standard for packaging material. |
(3) | Advertising costs were $ 107,023 for the nine months ended September 30, 2007, as compared to $23,358 for the same period of 2006, an increase of $83,682. |
(4) | The Company recorded product warranty expenses at $ 912,623 for the nine months ended September 30, 2006, as compared to $1,174,437 for the same period of 2006, a decrease of $261,814. During the nine months ended September 30, 2006, there was one large amount of a one-time indemnification payment to an OEM customer, resulting from miscommunication in certain technical parameters for the products. |
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $4,402,694 for the nine months ended September 30, 2007, as compared to $ 2,212,113 for the same period of 2006, an increase of $ 2,190,581 or 99%.The increase was mainly due to the following factors:
(1) | The expansion of economic activities, facilities and workforce resulted in increased depreciation, office expenses, staff salary and welfare, travel expenses, supplies and utilities totaling $708,993, as compared to the same period of 2006. |
(2) | R&D expense, which is included in general and administrative expenses, increased by $ 466,232, as compared to the same period of 2006, as discussed below. |
(3) | Stock-based compensation expenses decreased by $ 191,149, as compared to $259,077 for the same period of 2006. |
(4) | During the nine months ended September 30, 2006, the Joint Venture reversed a bad debt provision resulting from collecting a significant portion of accounts receivable with aging over one year, which had been reflected as a reduction to general and administrative expenses. Compared with the negative $869,463 of bad debt provision for the nine month ended September 30, 2006, the bad debt provision included in general and administrative expenses was $23,623 for the nine months ended September 30, 2007, an increase of by $893,086. |
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RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense was $ 935,174 for the nine months ended September 30, 2007, as compared to $ 468,942 for the same period of 2006, an increase of $466,232, as a result of the Company’s investment in new R&D instrument purchases and the establishment of a team to develop new innovative products..
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased to $1,157,942 for the nine months ended September 30, 2007, compared with that of $783,053 for the same period of 2006, an increase of $ 374,889 or 47.9%, as a result of new investments in fixed assets, mainly production equipment and tools.
FINANCIAL EXPENSE
Financial expense for the nine months ended September 30, 2007 decreased by $ 160,542 to $ 606,492 from $ 767,034 for the same period of 2006. Financial expense mainly consists of interest expense and exchange loss. The interest expense decreased by $475,759 to $ 89,387 for the nine months ended September 30, 2007, compared to the $ 565,146 for the same period of 2006, mainly due to the lower outstanding average debt balance during the year. The funds were used for new equipment purchases, as well as working capital. Because a large part of our accounts receivable arose from export sales denominated in US dollars, the appreciation of the RMB against the U.S dollar resulted in a larger exchange loss during the nine months ended September 30, 2007. The Company recognized the exchange losses of $578,704 and $140,306 for the nine months ended September 30, 2007 and 2006 respectively.
OTHER INCOME
Other income was $502,606 for the nine months ended September 30, 2007, as compared to $92,976 for the nine months ended September 30, 2006, an increase of $409,630.The increase was mainly due to $329,204 of subsidy income from local governments for the nine months ended September 30, 2007. These subsidies were provided to the Company as economic incentives to secure business commitments and no repayment by the Company is required.
INCOME TAX
There was no income tax expense for the fiscal year ended December 31, 2005 and 2004. As a result of the Joint Venture obtaining its Sino-foreign joint venture status in 2004, in accordance with applicable PRC tax regulations, the Joint Venture was exempted from PRC income tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture is entitled to a tax concession of 50% of the applicable income tax rate of 26.4% commencing the three years ended December 31, 2006, 2007, and 2008. In accordance with China's relevant regulations of income taxes, the Joint Venture has a benefit of a refund of 40% of domestic equipment purchases from increased income taxes for the purchasing year over those of the previous year. During the second quarter ended June 30, 2007, the Joint Venture received an income tax benefit of $991,133 for purchase of domestic equipment, which has been reflected as a reduction to current income tax expense. As a result, income tax expense was $373,883 for the nine months ended September 30, 2007 compared with $898,713 for the nine months ended September 30, 2006, a decrease of $524,830.
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STOCK—BASED COMPENSATION
On January 5, 2006 the Company issued 100,000 warrants for the financial services to be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an exercise price of $6.25 per share and a contractual term of four years. In accordance with the common stock purchase warrant agreement, the warrants became vested and exercisable immediately on the date thereof. Total deferred stock-based compensation expenses related to the 100,000 warrants granted amounted to $299,052. This amount is amortized over one year in a manner consistent with Financial Accounting Standards Board Interpretation No. 123 (R). The amortization of deferred stock-based compensation for these equity arrangements was $ 224,289 for the nine months ended September 30, 2006.
On March 1, 2006, the Board of Directors approved a total of 60,000 options to be issued to the four independent members of the Board of Directors. The contractual term of the options is three years. Total deferred stock-based compensation expenses related to stock options amounted to $178,904. This amount is amortized over the three year vesting period in a manner consistent with Financial Accounting Standards Board Interpretation No. 123R. The amortization of deferred stock-based compensation for these equity arrangements was $ 44,727 for the nine months ended September 30, 2007 ,as compared to $ 34,788 for the same period ended September 30, 2006.
On June 20, 2007, the Company granted to its previous senior manager of investor relations, David Ming He, options to purchase 4,128 shares of its common stock with an exercise price of $7.25 per share. In accordance with the agreement, the options became vested and exercisable imme diately on the date thereof. Total deferred stock-based compensation expenses related to the 4,128 stock options granted amounted to $23,201. This amount was charged to G&A during six months ended June 30, 2007.
Although the Company anticipates future issuances of stock awards to have a material impact on net income, in future financial statements we do not expect these transactions to have a material impact on future cash flow.
MINORITY INTEREST
Minority interest represents a 10% non-controlling interest in the Joint Venture. Minority interest in income amounted to $ 936,986 and $ 638,677 for the nine months ended September 30, 2007 and 2006, respectively.
FINANCIAL CONDITION
Liquidity and Capital Resources
OPERATING - Net cash provided in operating activities was $4,220,538 for the nine months ended September 30, 2007, as compared to $6,996,576 of net cash provided by operating activities for the nine months ended September 30, 2006, a decrease of $2,776,038.
Our primary cash flows from net income were realized through the sale of automotive parts. The timely collection of account receivables will improve our liquidity. Cash flows from accounts receivable and notes receivables decreased by approximately $1.6 million for the nine months ended September 30, 2007 as compared with the same period of 2006, as a result of a high level of accounts receivable and notes receivables as of September 30, 2007. The increase of accounts receivable was primarily due to the increase of sales volumes. The ending balance of accounts receivables as of September 30, 2007 was consistent with the Joint Venture’s normal practice. During the nine months ended September 30,2007, most of the accounts receivable were collected by bank acceptance, hence the increase in notes receivables. In accordance with the increase in sales orders, the Company maintained a higher level of inventory to meet the requirements from OEM and overseas customers and required more raw materials to keep its production capacity. This resulted in a decreased negative cash flow of approximately $ 4.2 million. Additionally, cash flows contributed from prepayments and account payables and notes payables decreased by approximately $0.8 million for the nine months ended September 30, 2007 as compared to the same period of 2006.
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As of September 30, 2007, the Company had cash and cash equivalents of $1,972,825, as compared to cash and cash equivalents of $11,137,501 at December 31, 2006. The Company had working capital of $ 41,233,833 at September 30, 2007, as compared to working capital of $47,195,220 at December 31, 2006, reflecting current ratios of 4.09:1and 7.58:1, respectively.
INVESTING – During the nine months ended September 30, 2007, the Company expended net cash of $18,259,563 in investing activities, mainly including the funds for acquisition of plant, land use rights and new equipment to support the growth of business. For the nine months ended September 30, 2006, the Company utilized $2,063,307 in investing activities.
FINANCING -Net cash provided by financing activities was $4,644,122 for the nine months ended September 30, 2007 compared to $5,152,615 used in financing activities in the same period in 2006. During the nine months ended September 30, 2006, the Company received aggregate bank loans in the amount of $ 9,733,125 under its credit facilities, and the Company repaid $ 15,030,530 on its outstanding debt. During the nine months ended September 30, 2007, the cash inflows were mainly attributable to a $4,644,122 increase in proceeds from borrowing due to a short term bank loan being secured for new equipment purchases and working capital requirements .
Management of the Company has taken a number of steps to restructure its customer base and phase out the accounts which had failed to make prompt payments, the Company also placed more emphasis on receivable collection. During the quarter, the Company continued to develop high profit margin new products, as well as adopting steps for further cost saving such as improving material utilization rate. While we believe that funds generated from operations and our revolving bank lines of credit will be sufficient to finance our working capital requirements for the foreseeable future, we continue our efforts to raise capital to finance further expansion of production, build our international sales networks in new markets, strengthen our R&D workforce, and supplement our working capital.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have any market risk with respect to such factors as commodity prices, equity prices, and other market changes that affect market risk sensitive investments.
With respect to foreign currency exchange rates, the appreciation or fluctuation of the RMB against the USD did not have a material adverse effect on the Company’s operations, even though the Company has over one third of its total revenue denominated in USD. This is because of the relatively small change and our ability to absorb such change through cost saving approaches. It is believed that further RMB appreciation against USD, if any, would be on a gradual basis with relatively small adjustments, so as to avoid a material impact on the Chinese economy as a whole.
ITEM 4. CONTROLS AND PROCEDURES
(a) | Evaluation of Disclosure Controls and Procedures. |
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports that the Company files or submits pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (SEC) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
In conjunction with the close of the fiscal quarter and under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company conducted an update, a review and an evaluation of the effectiveness of the Company’s disclosure controls and procedures. As defined in Rule 13a-15(e), it is the conclusion of the Company’s Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, that the Company’s disclosure controls and procedures were effective.
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(b) | Changes in Internal Controls. |
During the period covered by the Quarterly Report on Form 10-Q, there were no changes in our internal controls over financial reporting as defined in Rule 13a-15(f) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
On November 30, 2006, SORL completed its follow-on public offering of 4,285,714 shares of common stock at $7.25 per share. Maxim Group LLC and Charton Capital Market, LLC acted as representatives of the underwriters. Gross proceeds were approximately $31.1 million. Net proceeds after approximately $2.2 million of underwriters’ commission and approximately $0.7 million of related offering expense were approximately $2.8 million. On December 13, 2006, Maxim Group LLC, the lead underwriter of follow-on offering, exercised the over-allotment option in full to purchase an additional 642,857 shares of common stock. After deduction of the underwriter’s discount of $0.3 million, approximately $4.3 million was received by the Company. The aggregate net proceeds to the Company of this offering were approximately $32.5 million, which included $4.3 million as the result of the exercise of the over-allotment option.
As of December 31, 2006, the Company used approximately $22.7 million out of the net proceeds for working capital or new projects, including approximately $16.6 million for temporary repayment of a short-term bank loan and $6.1 million as capital expenditures for the purchase of the land use right from the Ruili Group (a related party) and for the construction of the new plant. The Company had reached agreement with a local bank to temporarily repay its outstanding obligations when it had sufficient cash on account before spending the funds according to its business plan.
During the first and second quarter of 2007, approximately $3.5 million, $2.1 million, and $0.6 million out of the net offering proceeds were used for new machinery purchase, construction of the new plant, and R&D efforts, respectively. Also, the Joint Venture began to re-enter a debt position with approximately $1.5 million short term bank loan occurring in the second quarter of 2007.
On September 28, 2007, Ruili Group Ruian Auto Parts Co. Ltd., a subsidiary of the Company purchased land rights, a manufacturing plant, and an office building from Ruili Group Co. Ltd., a related party, for an aggregate purchase price of approximately RMB152 million (approximately US$20.2 million). DTZ Debenham Tie Leung Ltd., an internationally recognized appraiser, appraised the total asset value at RMB154 million (approximately US$20.5 million). The purchase price was paid by the Company by transferring to Ruili Group the Company’s $9 million investment in an existing project that includes a new-facility-in-progress and prepayment of land use rights. The remaining balance of $11 million was paid by the cash generated from operations and a bank credit line.
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Other than the payments to Ruili Group as mentioned above, none of the net offering proceeds were paid, directly or indirectly, to directors, officers and persons who beneficially own ten percent or more of our equity securities.
None.
On September 24, 2007, the Company held its Annual Meeting of Stockholders. At the Meeting, the stockholders elected Xiao Ping Zhang, Xiao Feng Zhang, Jung Lang Chang, Li Min Zhang, Zhi Zhong Wang, Yi Guang Huo and Jiang Hua Feng as directors and ratified the appointment of Rotenberg & LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2007. The following table sets forth the votes for, against and votes withheld with respect to each matter.
1. | Election of Directors |
For | Withheld | |
Xiao Ping Zhang | 17,141,525 | 182,362 |
Xiao Feng Zhang | 17,215,219 | 108,668 |
Jung Kang Chang | 17,207,719 | 116,168 |
Li Min Zhang | 17,258,051 | 65,836 |
Zhi Zhong Wang | 17,258,651 | 65,236 |
Yi Guang Huo | 17,258,651 | 65,236 |
Jiang Hua Feng | 17,258,051 | 65,836 |
2. | Ratification of Auditors |
For | Against | Abstain |
17,273,934 | 21,985 | 27,968 |
None.
(a) Exhibits:
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. | |
31.2 | Certification of Principal Accounting Officer pursuant to Rule 13a-14 and Rule 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended. | |
32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated :November 12, 2007 | SORL AUTO PARTS, INC. | |
By: | /s/ Xiao Ping Zhang | |
Name: Xiao Ping Zhang | ||
Title: Chief Executive Officer | ||
By: | /s/ Zong Yun Zhou | |
Name: Zong Yun Zhou | ||
Title: Chief Financial Officer (Principal Financial Officer) |
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