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 June 30,
2008
|
|
o
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE 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.
1169
Yumeng Road
Ruian
Economic Development District
Ruian
City, Zhejiang Province, Zip: 325200
People’s
Republic Of China
(Address
of principal executive offices)
(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, a non-accelerated filer or a smaller reporting company.
See
definition of “accelerated filer”, “large accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
|
Large
Accelerated Filer
o
|
Accelerated
Filer
o
|
Non-Accelerated
Filer
o
|
Smaller
Reporting Company
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
June 30, 2008 there were
18,279,254
shares
of
Common Stock outstanding
SORL
AUTO
PARTS, INC.
FORM
10-Q
For
the
Quarter Ended June 30, 2008
INDEX
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Page
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1
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1
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1
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2
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3
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4
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6
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16
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26
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26
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26
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26
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28
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PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
|
SORL
Auto Parts, Inc. and Subsidiaries
|
|
Consolidated
Balance Sheets
|
|
June
30, 2008 (unaudited) and December 31,
2007
|
|
|
|
|
|
|
|
|
|
|
Jun
30, 2008
|
|
December
31, 2007
|
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
US$
|
|
|
US$
|
|
|
|
Accounts
Receivable, Net of Provision
|
|
|
38,862,983
|
|
|
30,586,239
|
|
|
Notes
Receivable
|
|
|
12,805,169
|
|
|
9,410,385
|
|
|
Inventory
|
|
|
13,531,271
|
|
|
8,220,373
|
|
|
Prepayments
|
|
|
3,309,421
|
|
|
1,336,212
|
|
|
Other
Current Assets
|
|
|
2,259,417
|
|
|
4,275,294
|
|
|
Total
Current Assets
|
|
|
75,249,438
|
|
|
58,168,714
|
|
|
Fixed
Assets
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
30,828,160
|
|
|
27,889,182
|
|
|
Less:
Accumulated Depreciation
|
|
|
(7,676,656
|
)
|
|
(6,094,229
|
)
|
|
Property,
Plant and Equipment, Net
|
|
|
23,151,504
|
|
|
21,794,953
|
|
|
|
|
|
|
|
|
|
|
|
Land
Use Rights, Net
|
|
|
14,627,491
|
|
|
13,889,705
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
Deferred
Compensation Cost-Stock options
|
|
|
39,753
|
|
|
69,571
|
|
|
Intangible
Assets
|
|
|
160,770
|
|
|
76,150
|
|
|
Less:
Accumulated Amortization
|
|
|
(31,250
|
)
|
|
(25,116
|
)
|
|
Intangible
Assets, Net
|
|
|
129,520
|
|
|
51,034
|
|
|
Total
Other Assets
|
|
|
169,273
|
|
|
120,605
|
|
|
Total
Assets
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
Payable and Notes Payable
|
|
|
|
|
|
|
|
|
Deposit
Received from Customers
|
|
|
3,557,350
|
|
|
2,079,946
|
|
|
Short
Term Bank Loans
|
|
|
1,990,622
|
|
|
3,370,328
|
|
|
Income
Tax Payable
|
|
|
732,316
|
|
|
373,769
|
|
|
Accrued
Expenses
|
|
|
3,234,970
|
|
|
1,859,938
|
|
|
Other
Current Liabilities
|
|
|
487,979
|
|
|
463,563
|
|
|
Total
Current Liabilities
|
|
|
18,016,445
|
|
|
13,452,716
|
|
|
Minority
Interest
|
|
|
9,493,164
|
|
|
8,024,152
|
|
|
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
Common
Stock - $0.002 Par Value; 50,000,000 authorized,
|
|
|
|
|
|
|
|
|
18,279,254
Issued and Outstanding as of
|
|
|
|
|
|
|
|
|
June
30, 2008 and December 31, 2007 respectively
|
|
|
36,558
|
|
|
36,558
|
|
|
Additional
Paid In Capital
|
|
|
37,498,452
|
|
|
37,498,452
|
|
|
Reserves
|
|
|
2,661,841
|
|
|
1,882,979
|
|
|
Accumulated
Other Comprehensive Income
|
|
|
10,355,764
|
|
|
5,432,189
|
|
|
Retained
Earnings
|
|
|
35,135,482
|
|
|
27,646,931
|
|
|
|
|
|
85,688,097
|
|
|
72,497,109
|
|
|
Total
Liabilities and Shareholders' Equity
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements
|
|
SORL
Auto Parts, Inc. and Subsidiaries
|
|
Consolidated
Statements of Income and Comprehensive Income
(unaudited)
|
|
For
The Three Months and Six Months Ended June 30, 2008 and
2007
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
US$
|
42,186,119
|
|
|
29,189,572
|
|
|
72,844,561
|
|
|
53,606,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
30,776,773
|
|
|
22,829,287
|
|
|
52,793,354
|
|
|
41,555,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
11,409,346
|
|
|
6,360,285
|
|
|
20,051,207
|
|
|
12,051,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and Distribution Expenses
|
|
|
2,771,803
|
|
|
1,331,643
|
|
|
4,611,078
|
|
|
2,515,290
|
|
|
General
and Administrative Expenses
|
|
|
2,718,217
|
|
|
1,027,436
|
|
|
4,694,418
|
|
|
2,720,623
|
|
|
Financial
Expenses
|
|
|
383,320
|
|
|
114,268
|
|
|
752,996
|
|
|
257,436
|
|
|
Total
Expenses
|
|
|
5,873,340
|
|
|
2,473,347
|
|
|
10,058,492
|
|
|
5,493,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
5,536,006
|
|
|
3,886,938
|
|
|
9,992,715
|
|
|
6,557,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
222,762
|
|
|
351,932
|
|
|
333,840
|
|
|
384,272
|
|
|
Non-Operating
Expenses
|
|
|
(175,785
|
)
|
|
(80,550
|
)
|
|
(254,963
|
)
|
|
(84,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(Loss) Before Provision for Income Taxes
|
|
|
5,582,983
|
|
|
4,158,320
|
|
|
10,071,592
|
|
|
6,857,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
318,757
|
|
|
(422,721
|
)
|
|
882,231
|
|
|
(60,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Before Minority Interest
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
&
Other Comprehensive Income
|
|
US$
|
5,264,226
|
|
|
4,581,041
|
|
|
9,189,361
|
|
|
6,917,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
527,929
|
|
|
461,930
|
|
|
921,948
|
|
|
697,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Attributable to Shareholders
|
|
|
4,736,297
|
|
|
4,119,111
|
|
|
8,267,413
|
|
|
6,220,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency Translation Adjustment
|
|
|
2,110,749
|
|
|
1,075,648
|
|
|
5,470,639
|
|
|
1,697,589
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest's Share
|
|
|
211,075
|
|
|
107,565
|
|
|
547,064
|
|
|
169,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss)
|
|
|
6,635,971
|
|
|
5,087,194
|
|
|
13,190,988
|
|
|
7,748,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common share - Basic
|
|
|
18,279,254
|
|
|
18,275,126
|
|
|
18,279,254
|
|
|
18,275,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common share - Diluted
|
|
|
18,287,764
|
|
|
18,322,260
|
|
|
18,288,958
|
|
|
18,328,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
- Basic
|
|
|
0.26
|
|
|
0.23
|
|
|
0.45
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
- Diluted
|
|
|
0.26
|
|
|
0.22
|
|
|
0.45
|
|
|
0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements
|
SORL
Auto Parts, Inc. and Subsidiaries
|
|
Consolidated
Statements of Cash Flows
(unaudited)
|
|
For
The Three Months and Six Months Ended June 30, 2008 and
2007
|
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
US$
|
4,736,297
|
|
|
4,119,111
|
|
|
8,267,413
|
|
|
6,220,643
|
|
|
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
Interest
|
|
|
527,929
|
|
|
461,930
|
|
|
921,948
|
|
|
697,119
|
|
|
Bad
Debt Expense
|
|
|
10,450
|
|
|
(234,154
|
)
|
|
21,282
|
|
|
187,176
|
|
|
Depreciation
and Amortization
|
|
|
674,504
|
|
|
370,097
|
|
|
1,329,059
|
|
|
710,394
|
|
|
Stock-Based
Compensation Expense
|
|
|
14,909
|
|
|
38,110
|
|
|
29,818
|
|
|
53,019
|
|
|
Loss
on disposal of Fixed Assets
|
|
|
2,519
|
|
|
|
|
|
2,519
|
|
|
1,108
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Account
Receivables
|
|
|
(2,142,593
|
)
|
|
(2,100,597
|
)
|
|
(6,092,371
|
)
|
|
(4,634,961
|
)
|
|
Notes
Receivables
|
|
|
(2,102,462
|
)
|
|
(1,237,625
|
)
|
|
(2,731,319
|
)
|
|
(5,615,402
|
)
|
|
Other
Currents Assets
|
|
|
(165,931
|
)
|
|
(680,963
|
)
|
|
2,181,644
|
|
|
(912,057
|
)
|
|
Inventory
|
|
|
(2,164,427
|
)
|
|
(2,426,343
|
)
|
|
(4,642,399
|
)
|
|
(2,694,515
|
)
|
|
Prepayments
|
|
|
(712,009
|
)
|
|
1,413,829
|
|
|
(1,828,836
|
)
|
|
3,332,649
|
|
|
Accounts
Payable and Notes Payable
|
|
|
418,290
|
|
|
2,060,032
|
|
|
2,276,580
|
|
|
991,030
|
|
|
Income
Tax Payable
|
|
|
218,643
|
|
|
64,855
|
|
|
358,547
|
|
|
72,614
|
|
|
Deposits
Received from Customers
|
|
|
828,703
|
|
|
(4,080
|
)
|
|
1,311,351
|
|
|
282,352
|
|
|
Other
Current Liabilities and Accrued Expenses
|
|
|
1,220,975
|
|
|
(255,848
|
)
|
|
1,203,937
|
|
|
(385,245
|
)
|
|
Net
Cash Flows from Operating Activities
|
|
|
1,365,797
|
|
|
1,588,354
|
|
|
2,609,173
|
|
|
(1,694,076
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Property and Equipment
|
|
|
(552,037
|
)
|
|
(3,271,641
|
)
|
|
(1,109,428
|
)
|
|
(5,335,361
|
)
|
|
Investment
in Intangible Assets
|
|
|
(78,109
|
)
|
|
—
|
|
|
(78,737
|
)
|
|
(19,915
|
)
|
|
Net
Cash Flows from Investing Activities
|
|
|
(630,146
|
)
|
|
(3,271,641
|
)
|
|
(1,188,165
|
)
|
|
(5,355,276
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from (Repayment of) Bank Loans
|
|
|
930,359
|
|
|
1,492,936
|
|
|
(1,502,107
|
)
|
|
1,492,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash flows from Financing Activities
|
|
|
930,359
|
|
|
1,492,936
|
|
|
(1,502,107
|
)
|
|
1,492,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
on changes in foreign exchange rate
|
|
|
82,357
|
|
|
89,213
|
|
|
222,065
|
|
|
170,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
1,748,367
|
|
|
(101,138
|
)
|
|
140,966
|
|
|
(5,386,159
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents- Beginning of the year
|
|
|
2,732,810
|
|
|
5,852,480
|
|
|
4,340,211
|
|
|
11,137,501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash Equivalents - End of the period
|
|
US$
|
4,481,177
|
|
|
5,751,342
|
|
|
4,481,177
|
|
|
5,751,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Paid
|
|
|
77,081
|
|
|
12,914
|
|
|
103,125
|
|
|
12,914
|
|
|
Tax
Paid
|
|
|
505,146
|
|
|
495,257
|
|
|
2,388,521
|
|
|
853,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements
|
SORL
Auto Parts, Inc. and Subsidiaries
|
|
Consolidated
Statements of Changes in Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended June 30, 2008 and
2007
|
|
|
|
Number
|
|
Common
|
|
Additional
|
|
Reserves
|
|
Retained
|
|
Accumu.
Other
|
|
|
|
|
|
|
|
|
of
Share
|
|
Stock
|
|
Paid-in
|
|
|
|
Earnings
|
|
Comprehensive
|
|
Shareholders'
|
|
Minority
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
(Deficit)
|
|
Income
|
|
Equity
|
|
Interest
|
|
|
Beginning
Balance - April 1, 2007
|
|
|
18,275,126
|
|
|
36,550
|
|
|
37,444,051
|
|
|
1,008,786
|
|
|
19,878,625
|
|
|
1,662,216
|
|
|
60,030,228
|
|
|
6,633,940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,119,111
|
|
|
—
|
|
|
4,119,111
|
|
|
461,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
968,083
|
|
|
968,083
|
|
|
107,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
415,737
|
|
|
(415,737
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,128
options issued
|
|
|
—
|
|
|
—
|
|
|
23,201
|
|
|
|
|
|
—
|
|
|
—
|
|
|
23,201
|
|
|
—
|
|
|
Ending
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance - April 1, 2008
|
|
|
18,279,254
|
|
|
36,558
|
|
|
37,498,452
|
|
|
2,237,597
|
|
|
30,823,429
|
|
|
8,456,090
|
|
|
79,052,126
|
|
|
8,754,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,736,297
|
|
|
—
|
|
|
4,736,297
|
|
|
527,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,899,674
|
|
|
1,899,674
|
|
|
211,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
424,244
|
|
|
(424,244
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending
Balance - June 30, 2008
|
|
|
18,279,254
|
|
|
36,558
|
|
|
37,498,452
|
|
|
2,661,841
|
|
|
35,135,482
|
|
|
10,355,764
|
|
|
85,688,097
|
|
|
9,493,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six
Months Ended June 30, 2008 and
2007
|
|
|
|
Number
|
|
Common
|
|
Additional
|
|
Reserves
|
|
Retained
|
|
Accumu.
Other
|
|
|
|
|
|
|
|
|
of
Share
|
|
Stock
|
|
Paid-in
|
|
|
|
Earnings
|
|
Comprehensive
|
|
Shareholders'
|
|
Minority
|
|
|
|
|
|
|
|
|
Capital
|
|
|
|
(Deficit)
|
|
Income
|
|
Equity
|
|
Interest
|
|
|
Beginning
Balance - January 1, 2007
|
|
|
18,275,126
|
|
|
36,550
|
|
|
37,444,051
|
|
|
797,116
|
|
|
17,988,763
|
|
|
1,102,469
|
|
|
57,368,949
|
|
|
6,336,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,220,643
|
|
|
|
|
|
6,220,643
|
|
|
697,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,527,830
|
|
|
1,527,830
|
|
|
169,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
627,407
|
|
|
(627,407
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,128
options issued
|
|
|
—
|
|
|
—
|
|
|
23,201
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,201
|
|
|
—
|
|
|
Ending
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance - January 1, 2008
|
|
|
18,279,254
|
|
|
36,558
|
|
|
37,498,452
|
|
|
1,882,979
|
|
|
27,646,931
|
|
|
5,432,189
|
|
|
72,497,109
|
|
|
8,024,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,267,413
|
|
|
|
|
|
8,267,413
|
|
|
921,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,923,575
|
|
|
4,923,575
|
|
|
547,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
778,862
|
|
|
(778,862
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,128
options issued
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Ending
Balance - June 30, 2008
|
|
|
18,279,254
|
|
|
36,558
|
|
|
37,498,452
|
|
|
2,661,841
|
|
|
35,135,482
|
|
|
10,355,764
|
|
|
85,688,097
|
|
|
9,493,164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these financial
statements
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 1000 different specifications.
NOTE
B - BASIS OF PRESENTATION
The
condensed consolidated financial statements include the accounts of the Company
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 as permitted by the rules and regulations of the United States
Securities and Exchange Commission, although the Company believes that the
disclosures contained in this report 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
September 2006, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No.157, “Fair Value Measurements”, which defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles (GAAP), and expands disclosures about fair value
measurements. On February 12, 2008, the FASB issued FASB Staff Position (FSP)
No.157-2, which deferred the effective date for certain portions of SFAS No.157
related to nonrecurring measurements of nonfinancial assets and liabilities.
The
provision of SFAS No.157 will be effective for the Company’s fiscal year
2009.
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
159, "The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of SFAS No.115", which allows for the option
to measure financial instruments and certain other items at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. The adoption of SFAS No. 159 has not had
a
material impact on the Company's consolidated results of operations or financial
position.
In
December 2007, the FASB issued FASB 141(R), "Business Combinations" the
objective of which is to improve the relevance, representational faithfulness,
and comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. The new standard
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement objective for
all
assets acquired and liabilities assumed; and requires the acquirer to disclose
to investors and other users all of the information they need to evaluate and
understand the nature and financial effect of the business combination.
In
December 2007, the FASB issued FASB 160 "Noncontrolling Interests in
Consolidated Financial Statements - an amendment of ARB No.51" of which the
objective is to improve the relevance, comparability, and transparency of the
financial information that a reporting entity provides in its consolidated
financial statements by establishing accounting and reporting standards by
requiring all entities to report noncontrolling (minority) interests in
subsidiaries in the same way - as an entity in the consolidated financial
statements. Moreover, Statement 160 eliminates the diversity that currently
exists in accounting for transactions between an entity and noncontrolling
interests by requiring that they be treated as equity transactions.
Both
FASB
141(R) and FASB 160 are effective for fiscal years beginning after December
15,
2008. The Company does not believe that the adoption of these standards will
have any impact on its financial statements.
In
December 2007, the SEC issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB
110 permits companies to continue to use the simplified method, under certain
circumstances, in estimating the expected term of “plain vanilla” options beyond
December 31, 2007. SAB 110 updates guidance provided in SAB 107 that previously
stated that the Staff would not expect a company to use the simplified method
for share option grants after December 31, 2007. Adoption of SAB 110 is not
expected to have a material impact on the Company’s consolidated financial
statements.
In
March
2008, the FASB issued SFAS No.161, Disclosures about Derivative Instruments
and
Hedging Activities- an amendment of FASB statement No.133.SFAS No.161 requires
enhanced disclosures about an entity’s derivative and hedging activities and
thereby improves the transparency of financial reporting. SFAS No.161 is
effective for fiscal years, and interim periods within those fiscal years,
beginning after November 15, 2008, with early application encouraged. As such,
the Company is required to adopt these provisions at the beginning of the fiscal
year ending December 31, 2009. The Company is currently evaluating the impact
of
SFAS No. 161 on its financial statements.
In
May
2008, the FASB issued SFAS No. 162, "
The
Hierarchy of Generally Accepted Accounting Principles
.”
SFAS
162 identifies the sources of accounting principles and the framework for
selecting the principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with GAAP in the
United States. SFAS 162 is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. The Company is currently evaluating the impact of SFAS 162 on its
consolidated financial statements but does not expect it to have a material
effect.
Also
in
May 2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60" (“SFAS 163”).
SFAS 163 interprets Statement 60 and amends existing accounting pronouncements
to clarify their application to the financial guarantee insurance contracts
included within the scope of that Statement. SFAS 163 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and all
interim periods within those fiscal years. As such, the Company is required
to
adopt these provisions at the beginning of the fiscal year ended December 31,
2009. The Company is currently evaluating the impact of SFAS 163 on its
consolidated financial statements but does not expect it to have a material
effect.
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 which also has a common controlling party with the
Company, the Zhang family.
The
following related party transactions are reported for the three months and
six
months ended June 30, 2008 and 2007:
|
|
|
Three
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
PURCHASES
FROM:
|
|
|
|
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
$
|
10,649,765
|
|
$
|
7,300,184
|
|
$
|
19,153,909
|
|
$
|
12,678,779
|
|
|
Total
|
|
$
|
10,649,765
|
|
$
|
7,300,184
|
|
$
|
19,153,909
|
|
$
|
12,678,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES
TO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
$
|
1,004,231
|
|
$
|
—
|
|
$
|
1,822,149
|
|
$
|
914,683
|
|
|
Total
|
|
$
|
1,004,231
|
|
$
|
—
|
|
$
|
1,822,149
|
|
$
|
914,683
|
|
The
total
purchases from Ruili Group during the three months ended June 30, 2008 consisted
of $10.3 million of finished products for non-valve auto parts and $ 0.3 million
of packaging materials. During the six months ended June 30, 2008, the breakdown
was
$16.3
million of finished products of non-valve auto parts, $2.2 million of components
for non-valve auto parts and approximately $0.6 million of packaging
materials
|
|
|
June
30,
|
|
December
31,
|
|
|
|
|
2008
|
|
2007
|
|
|
ACCOUNTS
PAYABLE
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
$
|
3,453,244
|
|
$
|
97,503
|
|
|
Total
|
|
$
|
3,453,244
|
|
$
|
97,503
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
$
|
—
|
|
$
|
1,761,007
|
|
|
Total
|
|
$
|
—
|
|
$
|
1,761,007
|
|
NOTE
E - ACCOUNTS RECEIVABLE
The
changes in the allowance for doubtful accounts at June 30, 2008 and December
31,
2007 were summarized as follows:
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Beginning
balance
|
|
$
|
27,987
|
|
$
|
8,769
|
|
|
Add:
Increase to allowance
|
|
|
3,309
|
|
|
19,218
|
|
|
Less:
Accounts written off
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
31,296
|
|
$
|
27,987
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accounts
receivable
|
|
$
|
38,894,279
|
|
$
|
30,614,226
|
|
|
Less:
allowance for doubtful accounts
|
|
|
(31,296
|
)
|
|
(27,987
|
)
|
|
Account
receivable balance, net
|
|
$
|
38,862,983
|
|
$
|
30,586,239
|
|
NOTE
F - INVENTORIES
On
June
30, 2008 and December 31, 2007, inventories consisted of the
following:
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw
Material
|
|
$
|
3,419,860
|
|
$
|
2,354,637
|
|
|
Work
in process
|
|
|
698,483
|
|
|
4,157,643
|
|
|
Finished
Goods
|
|
|
9,412,928
|
|
|
1,708,093
|
|
|
Total
Inventory
|
|
$
|
13,531,271
|
|
$
|
8,220,373
|
|
NOTE
G - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following, on June 30, 2008 and December
31, 2007:
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Machinery
|
|
$
|
20,150,149
|
|
$
|
18,118,125
|
|
|
Molds
|
|
|
1,271,005
|
|
|
1,193,488
|
|
|
Office
equipment
|
|
|
486,988
|
|
|
358,163
|
|
|
Vehicle
|
|
|
973,256
|
|
|
757,311
|
|
|
Building
|
|
|
7,946,761
|
|
|
7,462,096
|
|
|
Construction
In Progress
|
|
|
|
|
|
|
|
|
Sub-Total
|
|
|
30,828,160
|
|
|
27,889,182
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(7,676,656
|
)
|
|
(6,094,229
|
)
|
|
|
|
|
|
|
|
|
|
|
Fixed
Assets, net
|
|
$
|
23,151,504
|
|
$
|
21,794,953
|
|
Depreciation
expense charged to operations was $1,164,736 and $707,617 for the six months
ended June 30, 2008 and 2007, respectively.
NOTE
H- LAND USE RIGHTS
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Cost:
|
|
$
|
14,874,021
|
|
$
|
13,966,870
|
|
|
Less:
Accumulated amortization:
|
|
|
246,531
|
|
|
77,165
|
|
|
Land
use rights, net
|
|
$
|
14,627,491
|
|
$
|
13,889,705
|
|
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 approximately $13.9 million on September 28, 2007.
The Company has not yet obtained the land use right certificate in the Company’s
name, from the Chinese government. The Company is in the process of applying
to
obtain the land use right certificate. Amortization expenses were $159,934
for
the six months ended June 30, 2008.
NOTE
I - INTANGIBLE ASSETS
Intangible
assets owned by the Company included patent technology and management software
licenses. Gross intangible assets were $ 160,770, less accumulated amortization
of $31,250 for net intangible assets of $ 129,520 as of June 30, 2008. Gross
intangible assets were $76,150, less accumulated amortization of $25,116 for
net
intangible assets of $51,034 as of December 31, 2007. Amortization expenses
were
$ 2,465 and $
2,775
for
the
six
months
ended
June 30, 2008 and 2007 respectively. Future estimated amortization expense
is as
follows:
|
2008
|
|
2009
|
|
2010
|
|
2011
|
2012
|
|
Thereafter
|
|
$
|
7,616
|
|
$
|
15,231
|
|
$
|
15,231
|
$
|
15,231
|
|
$
|
15,231
|
|
$
|
60,979
|
NOTE
J - PREPAYMENT
Prepayment
consisted of the following as of June 30, 2008 and December 31,
2007:
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw
material suppliers
|
|
$
|
2,643,620
|
|
$
|
929,178
|
|
|
Equipment
purchase
|
|
|
665,801
|
|
|
407,035
|
|
|
Total
prepayment
|
|
$
|
3,309,421
|
|
$
|
1,336,212
|
|
NOTE
K - BANK LOANS
Bank
loans represented the following as of June 30, 2008 and December 31,
2007:
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Secured
|
|
$
|
1,990,622
|
|
$
|
3,370,328
|
|
|
Less:
Current portion
|
|
$
|
(1,990,622
|
)
|
$
|
(3,370,328
|
)
|
|
Non-current
portion
|
|
$
|
—
|
|
$
|
—
|
|
NOTE
L - ACCRUED EXPENSES
Accrued
expenses consisted of the following as of June 30, 2008 and December 31,
2007:
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued
payroll
|
|
$
|
971,493
|
|
$
|
601,733
|
|
|
Other
accrued expenses
|
|
|
2,263,477
|
|
|
1,258,205
|
|
|
Total
accrued expenses
|
|
$
|
3,234,970
|
|
$
|
1,859,938
|
|
NOTE
M - RESERVE
The
reserve funds are comprised of the following:
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Statutory
surplus reserve fund
|
|
$
|
2,661,841
|
|
$
|
1,882,979
|
|
|
Total
|
|
$
|
2,661,841
|
|
$
|
1,882,979
|
|
Pursuant
to the relevant laws and regulations of Sino-foreign joint venture enterprises,
the profits of the Company's subsidiary, which are based on the subsidiary’s 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 subsidiary’s 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 the statutory surplus 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.
Net
income as reported in the US GAAP financial statements differs from that as
reported in the PRC statutory financial statements. Under the relevant laws
and
regulations in the PRC, the profits available for distribution are based on
the
statutory financial statements. If the Joint Venture has foreign currency
available after meeting its operational needs, the Joint Venture may make its
profit distributions in foreign currency to the extent foreign currency is
available. Otherwise, it is necessary to obtain approval and convert such
distributions at an authorized bank.
NOTE
N - INCOME TAXES
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
for the three years ended December 31, 2006, 2007, and 2008.
With
the
new PRC Enterprise Income Tax Law, taking effect on January 1, 2008, the Company
is generally subject to a PRC income tax rate of 12.5%.
The
reconciliation of the effective income tax rate of the Joint Venture to the
statutory income tax rate in the PRC for the six months ended June 30, 2008
is
as follows:
|
Statutory
tax rate
|
|
|
25.0
|
%
|
|
Tax
holidays and concessions
|
|
|
-12.5
|
%
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
12.5
|
%
|
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.
NOTE
O - LEASES
In
December 2006, the Joint Venture entered into a lease agreement with Ruili
Group
Co., Ltd. for the lease of two apartment buildings. These two apartment
buildings are for the Joint Venture’s management personnel and staff,
respectively. 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 ending December 31 are as follows:
|
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
Thereafter
|
|
Buildings
|
|
$
|
140,082
|
|
$
|
280,163
|
|
$
|
280,163
|
|
$
|
280,163
|
|
$
|
67,975
|
|
$
|
—
|
|
Total
|
|
$
|
140,082
|
|
$
|
280,163
|
|
$
|
280,163
|
|
$
|
280,163
|
|
$
|
67,975
|
|
$
|
—
|
NOTE
P - ADVERTISING COSTS
Advertising
costs were $ 4,261 and $586 for the six months ended June 30, 2008 and 2007,
respectively.
NOTE
Q - RESEARCH AND DEVELOPMENT EXPENSE
Research
and development costs are expensed as incurred and were $
1,736,962
and
$
553,672
for the
six
months
ended
June 30, 2008 and 2007, respectively.
NOTE
R - WARRANTY CLAIMS
Warranty
claims were $ 1,060,353 and $
585,888
for the
six months ended June 30, 2008 and 2007, respectively. The movement of accrued
warranty expenses
for
the
six months
ended
June 30, 2008 was as follows:
|
|
|
|
|
|
|
Beginning
balance at Jan 01, 2008
|
|
$
|
863,428
|
|
|
Accrued
during the six months ended June 30, 2008:
|
|
$
|
1,060,353
|
|
|
Less:
Actual Paid during the six months ended June 30, 2008:
|
|
$
|
706,863
|
|
|
Ending
balance at June 30, 2008
|
|
$
|
1,216,918
|
|
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. 123R,
“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.
|
|
|
|
|
|
|
Dividend
Yield
|
|
|
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
|
|
The
amortization of deferred stock-based compensation for these equity arrangements
was $ 29,818 for the six months ended June 30, 2008. As of June 30, 2008, there
was $ 39,753 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 0.7 years.
A
summary
of option activity under the Plan as of June 30, 2008 and changes during the
six
months ended June 30, 2008 is as follows:
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2006
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
Granted
|
|
|
60,000
|
|
|
4.79
|
|
|
3
Years
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
60,000
|
|
$
|
4.79
|
|
|
0.7
Years
|
|
$
|
34,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2008
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
(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 stocks
with an exercise price of $7.25 per share. The option 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. 123R,
“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 fiscal year 2007.
A
summary
of option activity under the Plan as of June 30, 2008 and changes during the
six
months ended June 30, 2008 is as follows:
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2007
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
Granted
|
|
|
4,128
|
|
$
|
7.25
|
|
|
3
Years
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
4,128
|
|
$
|
7.25
|
|
|
2
Years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2008
|
|
|
4,128
|
|
$
|
7.25
|
|
|
2
Years
|
|
$
|
—
|
|
(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. The Company’s agreements with Maxim Group LLC and Chardan Capital
Markets, LLC have been terminated.
|
Number
of Shares
|
|
%
of Shares Issued
|
|
Initial
Vesting Date
|
|
|
|
|
|
|
|
100,000
|
|
100%
|
|
January
5, 2006
|
The
Company accounts for these warrants in accordance with SFAS No. 123R,
“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 June 30, 2008 and changes
during the six months ended June 30, 2008 is as follows:
|
|
|
Warrants
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
1, 2006
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
|
Granted
|
|
|
100,000
|
|
$
|
6.25
|
|
|
4
Years
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
100,000
|
|
$
|
6.25
|
|
|
1.5
Years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2008
|
|
|
100,000
|
|
$
|
6.25
|
|
|
1.5
Years
|
|
$
|
—
|
|
NOTE
T- COMMITMENTS AND CONTINGENCIES
|
Information
regarding land use rights and lease commitments is provided in Notes
H and
O.
|
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 anticipated. 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 10-Q.
OVERVIEW
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 one thousand different specifications. Management believes that it
is
the largest manufacturer of automotive brake valves in China.
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” in our Annual Report on Form 10-K for
the Fiscal Year ended December 31, 2007.
See
Note
N to the attached Unaudited Consolidated Financial Statements for the
information regarding changes in taxation by the government of
China.
Results
of Operations
|
(1)
|
Results
of operations for the three months ended June 30, 2008 as compared
to the
three months ended June 30,
2007.
|
SALES
|
|
|
Three
Months ended
|
|
Three
Months ended
|
|
|
|
|
30-Jun-08
|
|
30-Jun-07
|
|
|
|
|
(U.S.
dollars in millions)
|
|
|
Air
brake valves & related components
|
|
$
|
31.6
|
|
|
75
|
%
|
$
|
22.2
|
|
|
76
|
%
|
|
Non-valve
products
|
|
$
|
10.5
|
|
|
25
|
%
|
$
|
7
|
|
|
24
|
%
|
|
Total
|
|
$
|
42.1
|
|
|
100
|
%
|
$
|
29.2
|
|
|
100
|
%
|
Sales
consist of air brake valves and related components manufactured by SORL and
sold
to domestic original equipment manufacturers (OEM), aftermarket customers and
export market as well as distribution of non-valve auto parts sourced from
the
Ruili Group.
Net
sales
were $42,186,119 and $ 29,189,572 for the three months ended June 30, 2008
and
2007, respectively. Compared with the same period of 2007, net sales for the
three months ended June 30, 2008 increased by $13.0 million or 44.5% to $ 42.2
million. The increase in sales was a result of the increased demand for
commercial vehicle parts in China and continued expansion of our export sales.
A
breakdown of net sales revenue for these markets for the second quarter of
the
2008 and 2007 fiscal years, respectively, is set forth below:
|
|
|
|
Three
Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
|
|
ended
|
|
|
|
|
|
|
|
|
30-Jun-08
|
|
|
%
|
|
|
30-Jun-07
|
|
|
%
|
|
|
|
|
(U.S.
dollars in millions)
|
|
|
China
OEM market
|
|
$
|
17.5
|
|
|
42
|
%
|
$
|
12
|
|
|
41
|
%
|
|
China
Aftermarket
|
|
$
|
10.5
|
|
|
25
|
%
|
$
|
6.3
|
|
|
22
|
%
|
|
International
market
|
|
$
|
14.1
|
|
|
33
|
%
|
$
|
10.9
|
|
|
37
|
%
|
|
Total
|
|
$
|
42.1
|
|
|
100
|
%
|
$
|
29.2
|
|
|
100
|
%
|
During
the second quarter of 2008, the national transportation system in China was
recovering from the impact caused by the significant snow storms occurred in
the
first two months of 2008. With the approaching of implementation of the China
III emission standard beginning July 1, 2008, the consumption of trucks equipped
with China II engines was significantly spurred before the policy was enforced,
which in turn boosted the output and sales volume of vehicles made in China.
As
a result, our Chinese OEM sales achieved an approximately 45.8% year over year
growth, increasing from $12.0 million in the second quarter of 2007 to $17.5
million.
However,
we take a conservative view on whether the increased consumption of trucks
will
continue in the coming two quarters. We think that the additional costs required
to achieve China III compliance will lead to higher vehicle prices, which will
likely to discourage demand for various vehicles. Further, during 2008 Beijing
Olympic Games period, our major customers, such as FAW Qiongdao, Beiqi Foton
Zhucheng and Beiqi Foton Aumen will halt production due to the traffic control
in the regions around Beijing. Consequently, our near-term OEM sales in the
second half year might be cut back.
Due
to
our well established sales networks and our increased production capacity,
the
Company achieved total revenue of $10.5 million in the Chinese aftermarket
sales
for the three months ended June 30, 2008, an increase of $4.2 million, or 66.7%
compared to the same period of last year.
Our
export sales grew by $ 3.2 million or approximately 29.4% for the three months
ended June 30, 2008, as compared to $10.9 million for the same period of 2007.
This increase reflects the introduction of new
products,
the improvement in technological support, the expansion of the contract sales
force and the implementation of a market plan focusing on the export market
segment.
COST
OF SALES
Cost
of
sales for the three months ended June 30, 2008 increased to $ 30,776,773 from
$
22,829,287 for the same period of 2007, a $ 7,947,486 or 34.8% increase,
compared with total sales growth of 44.5% for the period.
GROSS
PROFIT
From
$6,360,285 for the second quarter of 2007 to $11,409,346 for the second quarter
of 2008, our gross profit grew by 79.4%, exceeding our revenue growth rate.
Therefore, gross margin increased 5.2% for the three months ended June 30,
2008,
to 27.0% from 21.8 % for the same period of 2007.
The
higher gross margin was the result of raising prices and cutting production
costs. The Joint Venture continued to improve production methods in its
manufacturing process. This has resulted in reducing the manufacturing cycle,
reducing waste, and thereby reducing production cost. Also, favorable changes
in
product and market mix helped raise the average selling price of our products.
For the Chinese OEM market, we have sold more system products as opposed to
individual components. For the Chinese and the international aftermarkets,
we
have been able to pass part of our cost increases to the end users, largely
due
to an uptrend in the prices for truck parts from China. The successful expansion
of our sales into the higher margin municipal bus market has also contributed
to
the gross margin improvement of the Joint Venture since the last quarter of
2007.
SELLING
AND DISTRIBUTION EXPENSES
Selling
and distribution expenses were $2,771,803 for the three months ended June 30,
2008, as compared to $ 1,331,643 for the same period of 2007, an increase of
$
1,440,160 or 108.1%.
Selling
and distribution expenses include salaries and wages, transportation expense,
packaging expense, warranty expense, expenses associated with traveling,
advertising, promotions, trade shows and seminars, and other expenses. Selling
and distribution expenses for the three months ended June 30, 2008 increased
primarily
due
to
these factors:
|
|
(1)
|
Increased
transportation expense: During the second quarter of 2008, transportation
costs increased by $601,609 as compared to $ 335,397 for the same
period
of 2007. The increase in transportation expense was mainly due to
increased sales and the rise in the transportation cost resulted
from the
increased price of oil and the increased number of loads necessitated
by
the overloading control measures imposed by the Chinese government
since
the third quarter of 2007.
|
|
|
(2)
|
Increased
packaging expense: Packaging costs were $737,920 for the three months
ended June 30, 2008, an increase of $274,166 as compared with the
same
period of 2007, which was consistent with the revenue growth.
|
|
|
(3)
|
Increased
product warranty expense. The Company recorded $612,994 of product
warranty expenses for the three months ended June 30, 2008, as compared
to
$
321,083
for the three months ended June 30, 2007, an increase of $291,911.
|
GENERAL
AND ADMINISTRATIVE EXPENSES
General
and administrative expenses were $ 2,718,217 for the three months ended June
30,
2008, as compared to $ 1,027,436 for the same period of 2007, an increase of
$
1,690,781 or 164.6 % mainly due to the following factors:
|
|
(1)
|
The
expansion of economic activities, facilities and workforce resulted
in
increased depreciation, office expenses, staff salary, work insurance
and
welfare, travel expenses and other miscellaneous fees totaling an
increase
of $ 437,985 as compared to the same period of
2007.
|
|
|
(2)
|
R&D
expense, which is included in general and administrative expenses,
increased by $936,867, as compared to $330,797 of R&D expense for the
same period of 2007, as discussed
below.
|
|
|
(3)
|
During
the three months ended June 30, 2007, the reversal of the bad debt
provision resulted in a negative $ 234,154 for bad debt provision,
which
was included in the General and Administrative expenses. Even though
the
bad debt provision recognized during the three months ended June
30, 2008
was $ 10,450, such number combined with the negative $234,154 number
results in an increase of $244,604 in General and Administrative
expenses.
|
RESEARCH
AND DEVELOPMENT EXPENSE
Research
and development expenses include payroll, employee benefits, and other
headcount-related expenses associated with product development. Research and
development expenses also include third-party development costs. For the
three
months ended June 30, 2008, research and development expense was $ 1,267,664,
as
compared to $ 330,797 for the same period of 2007, an increase of $ 936,867,
as
a result of the Company’s enhanced research and development activities on truck
electronics.
DEPRECIATION
AND AMORTIZATION
Depreciation
and amortization expense increased to $674,504 for the three months ended June
30, 2008, compared with that of $ 370,097 for the same period of 2007, an
increase of $304,407. The increase in depreciation and amortization expense
was
primarily due to the purchase of plant and land use rights, and additional
production equipment in the second half of 2007.
FINANCIAL
EXPENSE
Financial
expense mainly consists of interest expense and exchange loss. The financial
expense for the three months ended June 30, 2008 increased by $269,052 to
$383,320 from $ 114,268 for the same period of 2007, which was mainly attributed
to a $106,725 increase in exchange loss resulted from the accelerated
appreciation of Chinese currency against the U.S. dollar. Management is studying
alternative methods for managing the risks associated with currency translation,
such as the diversification of currencies used in export sales.
OTHER
INCOME
Other
income was $222,762 for the three months ended June 30, 2008, as compared to
$
351,932 for the three months ended June 30, 2007, a decrease of $129,170.The
decrease was mainly due to a decrease in subsidy income from local governments
for the three months ended June 30, 2008.
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
for the three years ended December 31, 2006, 2007, and 2008. With the new PRC
Enterprise Income Tax Law, effective on 1st January 2008, the Company is
generally subject to a PRC income tax rate of 12.5%. 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 and 2008, the Joint Venture received an income tax benefit
of $991,133 and 384,342 for purchase of domestic equipment, respectively, which
has been reflected as a reduction to current
income
tax expense. As a result, income tax expense was $318,757 for the second quarter
ended June 30, 2008 compared with negative $422,721 for the second quarter
ended
June 30, 2007, an increase of $ 741,478.
STOCK-BASED
COMPENSATION
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 both $14,909 for the three months ended June 30, 2008 and 2007.
Although
the Company anticipates future issuances of stock awards to have a material
impact on reported net income, we do not expect these awards 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 $527,929 and $
461,930
for the
quarters ended June 30, 2008 and 2007, respectively.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
OPERATING
- Net cash provided in operating activities was $1,365,797 for the three months
ended June 30, 2008 compared with $
1,588,354
of net
cash provided in operating activities in the same period in 2007, a decrease
of
$222,557.
During
the three months ended June 30, 2008, our higher sales revenue resulted in
increased accounts receivable. At the same time, i
n
accordance with the increase in sales orders, the Company maintained a higher
level of inventory to meet the requirements of sales and production.
Additionally, China’s metal market experienced and is still experiencing price
increases, which has resulted in an increase in our level of prepayments for
metal raw materials. These factors resulted in an increased use of cash of
approximately $2.8 million for the
three
months ended June 30, 2008 as compared to the same period of 2007. The
i
ncreased
use of cash was partly offset by the higher levels of deposits received from
customers and accrued expense.
As
of
June 30, 2008, the Company had cash and cash equivalents of $ 4,481,177, as
compared to cash and cash equivalents of
$4,340,211
as of
December 31, 2007. The Company had working capital of $57,232,993
as
of
June 30, 2008, as compared to working capital of
44,715,988
as of
December 31, 2007, reflecting current ratios of 4.18:1 and
4.32:
1,
respectively.
INVESTING
- During the three months ended June 30, 2008, the Company expended net cash
of
$630,146 in investing activities, including $552,037 for acquisition of property
and equipment to support the growth of the business. For the three months ended
June 30, 2007, the Company utilized $
3,271,641
in
investing activities.
FINANCING
-
In the
second quarter of 2007, the cash inflows mainly attributable to a $1,492,396
increase in proceeds from borrowing due to one new loan being secured for new
equipment purchases.
D
uring
the
second quarter ended June 30, 2008
,
the
Company received new borrowing at $1,967,686 and repaid $1,037,327of its
outstanding debt.
Management
of the Company has taken a number of steps to restructure its customer base
and
phase out accounts which had failed to make prompt payments. The Company also
placed more emphasis on receivable
collection.
In addition, 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.
CURRENCY
RISK AND FINANCIAL INSTRUMENTS -
Although
our reporting currency is the U.S. dollar, the functional currency of Joint
Venture is RMB. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. dollars and RMB. If the RMB depreciates against
the
U.S. dollar, the value of our Renminbi revenues, earnings and assets as
expressed in our U.S. dollar financial statements will decline. In recent years,
the RMB has been appreciating against the U.S. dollar.
Assets
and liabilities of our operating subsidiaries are translated into U.S. dollars
at the exchange rate at the balance sheet date, their equity accounts are
translated at historical exchange rate and their income and expenses items
are
translated using the average rate for the period. Any resulting exchange
differences are recorded in accumulated other comprehensive income or loss.
Because of the approximately 2.3 % appreciation of the RMB against the USD
during the quarter ended on June 30, 2008, (i) we recorded an exchange loss
of
$243,431 from export sales for which the payments to us were in USD, meanwhile,
(ii) we also recorded a foreign currency translation adjustment of $1,899,674
for the quarter, a positive number due to our functional currency in RMB and
the
appreciation of the RMB against the USD. The Company is adopting such steps
as
the diversification of currencies used in export sales, and the negotiation
of
export contract with fixed exchange rate.
As
the
Company’s historical debt obligations are primarily short-term in nature, with
fixed interest rates, the Company does not have any risk from an increase in
market interest rates. However, to the extent that the Company arranges new
borrowings in the future, an increase in market interest rate would cause a
commensurate increase in the interest expense related to such
borrowings.
|
(2)
|
Results
of operations for the six months ended June 30, 2008 as compared
to the
six months ended June 30,
2007.
|
SALES
|
|
|
Six
Months ended
|
|
Six
Months ended
|
|
|
|
|
30-Jun-08
|
|
30-Jun-07
|
|
|
|
|
(U.S.
dollars in millions)
|
|
|
Air
brake valves & related components
|
|
$
|
55.7
|
|
|
77
|
%
|
$
|
41.3
|
|
|
77
|
%
|
|
Non-valve
products
|
|
$
|
17.1
|
|
|
23
|
%
|
$
|
12.3
|
|
|
23
|
%
|
|
Total
|
|
$
|
72.8
|
|
|
100
|
%
|
$
|
53.6
|
|
|
100
|
%
|
Sales
consist of air brake valves and related components manufactured by SORL and
sold
to domestic original equipment manufacturers (OEM), aftermarket customers and
export market as well as distribution of non-valve auto parts sourced from
the
Ruili Group.
Net
sales
were $ 72,844,561 and $ 53,606,561 for the six months ended June 30, 2008 and
2007,
respectively
.
Compared with the same period of 2007, Net sales for the six months ended June
30, 2008 increased by $19.2 million or 35.9% to $72.8 million. The increase
in
sales was a result of the increased demand for commercial vehicle parts in
China
and continued expansion of our export sales.
A
breakdown of net sales revenue for these markets for the six months ended on
June 30, 2008 and 2007, respectively, is set forth below:
|
|
|
|
Six
Months
|
|
|
|
|
|
Six
Months
|
|
|
|
|
|
|
|
|
ended
|
|
|
|
|
|
ended
|
|
|
|
|
|
|
|
|
30-Jun-08
|
|
|
%
|
|
|
30-Jun-07
|
|
|
%
|
|
|
|
|
|
(U.S.
dollars in million)
|
|
|
China
OEM market
|
|
$
|
28.2
|
|
|
39
|
%
|
$
|
20.9
|
|
|
39
|
%
|
|
China
Aftermarket
|
|
$
|
20.4
|
|
|
28
|
%
|
$
|
13.4
|
|
|
25
|
%
|
|
International
market
|
|
$
|
24.2
|
|
|
33
|
%
|
$
|
19.3
|
|
|
36
|
%
|
|
Total
|
|
$
|
72.8
|
|
|
100
|
%
|
$
|
53.6
|
|
|
100
|
%
|
Although
during the first two months of 2008, transportation in China was heavily
affected by significant snow storms in central and east China, our Chinese
OEM
sales achieved an approximately 34.9% year-over-year growth, increasing from
$20.9 million in the first half year of 2007 to $28.2 million. With the
approaching of implementation of the China III emission standard beginning
July
1, 2008, the consumption of trucks equipped with China II engines was
significantly spurred before the policy was enforced, which in turn boosted
the
output and sales volume of vehicles made in China.
However,
we take a conservative view on whether the increased consumption of trucks
will
continue in the next two quarters. We think that the additional costs required
to achieve China III compliance will lead to higher vehicle prices, which will
likely to discourage demand for various vehicles. Further, during 2008 Beijing
Olympic Games period, our major customers, such as FAW Qiongdao, Beiqi Foton
Zhucheng and Beiqi Foton Aumen will halt production due to the traffic control
in the regions around Beijing. Consequently, our near-term OEM sales in the
second half year might be cutback.
Due
to on
our well established sales networks and our increased production capacity,
the
Company achieved total revenue of $20.4 million in Chinese aftermarket sales
for
the six months ended June 30, 2008, an increase of $7.0 million, or 52.2% as
compared to the same period of last year.
Our
export sales grew by $4.9 million or approximately 25.4% for the six months
ended June 30, 2008, as compared to $19.3 million for the same period of 2007.
This increase reflects the introduction of new products, the improvement in
technological support, the expansion of the contract sales force and the
implementation of a market plan focusing on the export market
segment.
COST
OF SALES
Cost
of
sales for the six months ended June 30, 2008 increased to $52,793,354 from
$
41,555,339 for the same period of 2007, a $11,238,015 or 27.0% increase,
compared with total sales growth of 35.9% for the period.
GROSS
PROFIT
From
$
12,051,222 for the six months of 2007 to $ 20,051,207 for the six months of
2008, our gross profit grew by 66.4%, exceeding our revenue growth rate.
Therefore, gross margin increased 5.0% for the six months ended June 30, 2008,
to 27.5% from 22.5 % for the same period of 2007.
The
higher gross margin was the result of raising prices and cutting production
costs. The Joint Venture continued to improve production methods in its
manufacturing process. This has resulted in reducing the manufacturing cycle,
reducing waste, and thereby reducing production cost. Also, favorable changes
in
product and market mix helped raise the average selling price of our products.
For the Chinese OEM market, we have sold more system products as opposed to
individual components. For the Chinese and the international aftermarkets,
we
have been able to pass part of our cost increases to the end users, largely
due
to an uptrend in the prices for truck parts from China. The successful expansion
of our sales into the higher margin municipal bus market has also contributed
to
the gross margin improvement of the Joint Venture since the last quarter of
2007.
SELLING
AND DISTRIBUTION EXPENSES
Selling
and distribution expenses were $
4,611,078
for the six months ended June 30, 2008, as compared to $ 2,515,290 for the
same
period of 2007, an increase of $ 2,095,788 or 83.3%.
Selling
and distribution expenses include salaries and wages, transportation expense,
packaging expense, warranty expense, expenses associated with traveling,
advertising, promotions, trade shows and seminars, and other expenses. Selling
and distribution expenses for the six months ended June 30, 2008 increased
primarily
due
to
these factors:
|
|
(1)
|
Increased
transportation expense: During
the
six months
of
2008, transportation costs increased by $865,519 as compared to $584,397
for the same period of 2007. The increase in transportation expense
was
mainly due to increased sales and the rise in the transportation
cost
resulted from the increased price of oil and the increased number
of loads
necessitated by the overloading control measures imposed by the Chinese
government since the third quarter of 2007.
|
|
|
(2)
|
Increased
packaging expense: Packaging costs were $1,311,023 for
the
six months
ended June 30, 2008, an increase of $ 409,458 as compared with the
same
period of 2007, which was consistent with the revenue growth.
|
|
|
(3)
|
Increased
product warranty expense. The Company recorded $1,060,353 of product
warranty expenses for
the
six months
ended June 30, 2008, as compared to $
585,888
for the six months ended June 30, 2007, an increase of $474,465.
|
GENERAL
AND ADMINISTRATIVE EXPENSES
General
and administrative expenses were $ 4,694,418 for the six months ended June
30,
2008, as compared to $2,720,623 for the same period of 2007, an increase of
$
1,973,795 or 72.6% mainly due to the following factors:
|
|
(1)
|
The
expansion of economic activities, facilities and workforce resulted
in
increased depreciation, office expenses, staff salary, work insurance
and
welfare, travel expenses and other miscellaneous fees totaling $2,506,665,
an increase of $739,624 as compared to the same period of
2007.
|
|
|
(2)
|
R&D
expense, which is included in general and administrative expenses,
increased by $1,096,616, as compared to $ 553,672 of R&D expense for
the same period of 2007, as discussed below.
|
RESEARCH
AND DEVELOPMENT EXPENSE
Research
and development expenses include payroll, employee benefits, and other
headcount-related expenses associated with product development. Research and
development expenses also include third-party development costs. For the
six
months ended June 30, 2008, research and development expense was $1,736,962,
as
compared to $ 553,672 for the same period of 2007, an increase of
$1,183,290
,
as a
result of the Company’s enhanced research and development activities on truck
electronics.
DEPRECIATION
AND AMORTIZATION
Depreciation
and amortization expense increased to $1,329,059 for the six months ended June
30, 2008, compared with that of $710,394 for the same period of 2007, an
increase of $618,665. The increase in depreciation and amortization expense
was
primarily due to the purchase of plant and land use rights, and additional
production equipment in the second half of 2007.
FINANCIAL
EXPENSE
Financial
expense mainly consists of interest expense and exchange loss. The financial
expense for the six months ended June 30, 2008 increased by $495,560 to $752,996
from $ 257,436 for the same period of 2007, which was mainly attributed to
a
$302,884 increase in exchange loss resulted from the accelerated appreciation
of
Chinese currency against the U.S. dollar. Management is studying alternative
methods for managing the risks associated with currency translation, such as
the
diversification of currencies used in export sales.
OTHER
INCOME
Other
income was $333,840 for the six months ended June 30, 2008, as compared to
$
384,272 for the six months ended June 30, 2007, a decrease of $50,432. The
decrease was mainly due to a decrease in subsidy income from local governments
for the six months ended June 30, 2008.
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
for the three years ended December 31, 2006, 2007, and 2008.
With
the
new PRC Enterprise Income Tax Law, effective on 1st January 2008, the Company
is
generally subject to a PRC income tax rate of 12.5%. 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 and 2008, the Joint Venture received an income tax benefit
of $991,133 and 384,342 for purchase of domestic equipment, respectively, which
has been reflected as a reduction to current income tax expense. As a result,
income tax expense was $882,231for the six months ended June 30, 2008 compared
with negative $60,256 for the six months ended June 30, 2007, an increase of
$942,487.
STOCK-BASED
COMPENSATION
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 both $ 29,818 for the six months ended June 30, 2008 and 2007.
Although
the Company anticipates future issuances of stock awards to have a material
impact on reported net income, we do not expect these awards 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 $921,948 and $
697,119
for
the
six months ended June 30, 2008 and 2007, respectively.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
OPERATING
- Net cash provided in operating activities was $ 2,609,173 for the six months
ended June 30, 2008 compared with $
1,694,076
of
net
cash used in operating activities in the same period in 2007, an increase of
$4,303,249. During the six months ended June 30, 2008, our higher sales revenue
resulted in increased accounts receivable. At the same time, i
n
accordance with the increase in sales orders, the Company maintained a higher
level of inventory to meet the requirements of sales and production.
Additionally, China’s metal market experienced and is still experiencing price
increases, which has resulted in an increase in our level of prepayments for
metal raw materials. These factors resulted in an increased use of cash of
approximately $5.7 million for the
six
months ended June 30, 2008 as compared to the same period of 2007.
The
i
ncreased
use of cash was offset by the higher levels of deposits received from customers,
accrued expense, accounts
payable
and notes payable and other current assets and liability
.
As
of
June 30, 2008, the Company had cash and cash equivalents of $ 4,481,177, as
compared to cash and cash equivalents of
$4,340,211
as
of
December 31, 2007. The Company had working capital of $57,232,993
as
of
June 30, 2008, as compared to working capital of
44,715,988
as of
December 31, 2007, reflecting current ratios of 4.18:1 and
4.32:
1,
respectively.
INVESTING
- During the six months ended June 30, 2008, the Company expended net cash
of
$1,188,165 in investing activities, including $1,109,428 for acquisition of
property and equipment to support the growth of the business. For the six months
ended June 30, 2007, the Company utilized $
5,355,276
in
investing activities.
FINANCING
-
Net cash
used by financing activities was $1,502,107 for the six months ended June 30,
2008 compared to $1,492,396 used in financing activities in the same period
in
2007. During the six months ended June 30, 2007, the cash inflows were mainly
attributable to a $1,492,396 increase in proceeds from borrowing due to one
new
loan being secured for new equipment purchases. During the six months ended
June
30, 2008, the Joint Venture received aggregate bank loans in the amount of
$1,967,686 under its credit facilities; the impact of these cash inflows was
offset by repayments of $3,469,793 on its outstanding debt.
Management
of the Company has taken a number of steps to restructure its customer base
and
phase out accounts which had failed to make prompt payments. The Company also
placed more emphasis on receivable collection. In addition, 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.
CURRENCY
RISK AND FINANCIAL INSTRUMENTS -
Although
our reporting currency is the U.S. dollar, the functional currency of Joint
Venture is RMB. As a result, we are exposed to foreign exchange risk as our
revenues and results of operations may be affected by fluctuations in the
exchange rate between U.S. dollars and RMB. If the RMB depreciates against
the
U.S. dollar, the value of our Renminbi revenues, earnings and assets as
expressed in our U.S. dollar financial statements will decline. In recent years,
the RMB has been appreciating against the U.S. dollar.
Assets
and liabilities of our operating subsidiaries are translated into U.S. dollars
at the exchange rate at the balance sheet date, their equity accounts are
translated at historical exchange rate and their income and expenses items
are
translated using the average rate for the period. Any resulting exchange
differences are recorded in accumulated other comprehensive income or loss.
Because of the approximately 6.1 % appreciation of the RMB against the USD
during the six months ended on June 30, 2008, (i) we recorded an exchange loss
of $583,978 from export sales for which the payments to us were in USD,
meanwhile, (ii) we also recorded a foreign currency translation adjustment
of
$4,923,575 for the six-month period, a positive number due to our functional
currency in RMB and the appreciation of the RMB against the USD. The Company
is
adopting such steps as the diversification of currencies used in export sales,
and the negotiation of export contract with fixed exchange rate.
As
the
Company’s historical debt obligations are primarily short-term in nature, with
fixed interest rates, the Company does not have any risk from an increase in
market interest rates. However, to the extent that the Company arranges new
borrowings in the future, an increase in market interest rate would cause a
commensurate increase in the interest expense related to such
borrowings.
OFF-BALANCE
SHEET AGREEMENTS
As
of
June 30, 2008, 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.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
information is not required for smaller reporting companies.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
As
required by Rule 13a-15(b) and Rule 15d-15(b) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), our management, including our
Chief Executive Officer and Chief Financial Officer, evaluated, as of June
30,
2008, the effectiveness of our disclosure controls and procedures as defined
in
Exchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures, as of June 30, 2008, were effective for
the
purpose of ensuring that information required to be disclosed by us in this
report is recorded, processed, summarized and reported within the time periods
specified by the rules and forms of the Exchange Act and is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosures.
We
believe, however, that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud or error, if any, within a
company have been detected.
Changes
in Internal Control over Financial Reporting
There
was
no change in our internal controls over financial reporting during the fiscal
quarter ended June 30, 2008 covered by this Quarterly Report on Form 10-Q that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART
II OTHER INFORMATION
ITEM
6. EXHIBITS
|
EXHIBIT
NO.
|
DOCUMENT
DESCRIPTION
|
|
3.1
(1)
|
Articles
of Incorporation
|
|
4.1
(2)
|
Form
of Underwriters’ Common Stock Purchase
Warrants
|
|
4.2
(2)
|
Specimen
Common Stock Certificate
|
|
31.1
(3)
|
Certification
of Principal Executive Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a), promulgated under the Securities and Exchange Act of
1934, as
amended.
|
|
31.2
(3)
|
Certification
of Principal Financial Officer pursuant to Rule 13a-14(a) and Rule
15d-14(a), promulgated under the Securities and Exchange Act of
1934, as
amended.
|
|
32.1
(4)
|
Certifications
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002 (Chief Executive Officer and Chief
Financial Officer).
|
|
(1)
|
Incorporated
herein by reference from the Registrant’s Form 10-QSB filed with the
Securities and Exchange Commission on May 28,
2003.
|
|
(2)
|
Incorporated
herein by reference from the Registrant’s Registration Statement on Form
S-1, Commission File No. 333-137019, as filed with the Securities
and
Exchange Commission on August 31,
2006.
|
|
(3)
|
Filed
herewith.
|
|
(4)
|
Furnished
herewith. 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.
|
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
: August 13, 2008
|
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
|
|
|
|
|
|
|
|
|
|
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