UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
|
¨
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended June 30,
2010
|
|
¨
|
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
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
¨
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
¨
|
Accelerated
Filer
¨
|
Non-Accelerated
Filer
¨
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
¨
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, 2010 there were
1
9,304,921
shares of Common Stock
outstanding
SORL AUTO
PARTS, INC.
FORM
10-Q
For the
Quarter Ended June 30, 2010
INDEX
|
|
|
|
Page
|
|
PART
I.
|
FINANCIAL INFORMATION (Unaudited)
|
|
|
1
|
|
|
|
|
|
|
|
Item
1.
|
Financial Statements:
|
|
|
1
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December
31, 2009
|
|
|
1
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Income and Comprehensive Income (Unaudited) for
the Six Months Ended June 30, 2010 and 2009
|
|
|
2
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended
June 30, 2010 and 2009
|
|
|
3
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements
of Stockholders’ Equity (Unaudited) for the Six months
ended June 30, 2010 and
2009
|
|
|
4
|
|
|
|
|
|
|
|
|
Notes to the Condensed
Consolidated Financial Statements (Unaudited)
|
|
|
6
|
|
|
|
|
|
|
|
Item
2.
|
Management’s Discussion and
Analysis or Financial Condition and Results of Operations
|
|
|
17
|
|
|
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
28
|
|
|
|
|
|
|
|
Item
4.
|
Controls and
Procedures
|
|
|
28
|
|
|
|
|
|
|
|
PART
II.
|
OTHER INFORMATION
|
|
|
28
|
|
|
|
|
|
|
|
Item
6.
|
Exhibits
|
|
|
28
|
|
|
|
|
|
|
|
SIGNATURES
|
|
|
29
|
SORL
Auto Parts, Inc. and Subsidiaries
Consolidated
Balance Sheets
June
30, 2010 and December 31, 2009
|
|
|
June 30, 2010
|
|
|
December 31,
2009
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
US$
|
7,975,715
|
|
|
US$
|
10,255,259
|
|
|
Accounts
Receivable, Net of Provision
|
|
|
45,779,486
|
|
|
|
44,546,107
|
|
|
Notes
Receivable
|
|
|
26,376,540
|
|
|
|
13,083,691
|
|
|
Inventory
|
|
|
23,101,305
|
|
|
|
18,760,724
|
|
|
Prepayments
|
|
|
8,542,593
|
|
|
|
7,558,140
|
|
|
Deferred
tax assets
|
|
|
473,212
|
|
|
|
220,577
|
|
|
Other
current assets
|
|
|
1,943,481
|
|
|
|
444,281
|
|
|
Total
Current Assets
|
|
|
114,192,332
|
|
|
|
94,868,779
|
|
|
Fixed
Assets
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment
|
|
|
42,429,586
|
|
|
|
35,335,958
|
|
|
Less:
Accumulated Depreciation
|
|
|
(13,301,430
|
)
|
|
|
(11,608,920
|
)
|
|
Property,
Plant and Equipment, Net
|
|
|
29,128,156
|
|
|
|
23,727,038
|
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold
Improvements, Net
|
|
|
464,324
|
|
|
|
477,681
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
Use Rights, Net
|
|
|
14,110,375
|
|
|
|
14,198,392
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Assets
|
|
|
|
|
|
|
|
|
|
Deferred
compensation cost-stock options
|
|
|
―
|
|
|
|
―
|
|
|
Intangible
Assets
|
|
|
162,385
|
|
|
|
161,499
|
|
|
Less:
Accumulated Amortization
|
|
|
(62,383
|
)
|
|
|
(54,380
|
)
|
|
Intangible Assets, Net
|
|
|
100,002
|
|
|
|
107,119
|
|
|
Total Other Assets
|
|
|
100,002
|
|
|
|
107,119
|
|
|
Total
Assets
|
|
US$
|
157,995,189
|
|
|
US$
|
133,379,009
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
Payable, including $155,996 and $1,985,291 due to related parties at June
30, 2010 and December 31, 2009, respectively.
|
|
US$
|
7,285,529
|
|
|
US$
|
9,724,715
|
|
|
Deposit
Received from Customers
|
|
|
4,476,527
|
|
|
|
3,670,369
|
|
|
Short
term bank loans
|
|
|
4,495,264
|
|
|
|
|
|
|
Income
tax payable
|
|
|
1,236,649
|
|
|
|
551,900
|
|
|
Accrued
Expenses
|
|
|
4,803,392
|
|
|
|
4,206,297
|
|
|
Other
Current Liabilities, including $54,729 and $200,762 from related parties
at June 30, 2010 and December 31, 2009, respectively.
|
|
|
484,781
|
|
|
|
585,176
|
|
|
Total
Current Liabilities
|
|
|
22,782,142
|
|
|
|
18,738,457
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Current
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities
|
|
|
141,918
|
|
|
|
115,481
|
|
|
Total Liabilities
|
|
|
22,924,060
|
|
|
|
18,853,938
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
Preferred
Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as
of June 30, 2010 and December 31, 2009
|
|
|
―
|
|
|
|
―
|
|
|
Common
Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 and 18,304,921
issued and outstanding as of June 30, 2010 and December 31,
2009
|
|
|
38,609
|
|
|
|
36,609
|
|
|
Additional
Paid In Capital
|
|
|
46,896,379
|
|
|
|
37,498,401
|
|
|
Reserves
|
|
|
5,299,522
|
|
|
|
4,425,784
|
|
|
Accumulated
other comprehensive income
|
|
|
11,589,014
|
|
|
|
10,939,100
|
|
|
Retained
Earnings
|
|
|
57,899,291
|
|
|
|
50,231,052
|
|
|
Total
SORL Auto Parts, Inc. stockholders' equity
|
|
|
121,722,815
|
|
|
|
103,130,946
|
|
|
Noncontrolling
Interest In Subsidiaries
|
|
|
13,348,314
|
|
|
|
11,394,125
|
|
|
Total
Equity
|
|
|
135,071,129
|
|
|
|
114,525,071
|
|
|
Total
Liabilities and Stockholders' Equity
|
|
US$
|
157,995,189
|
|
|
US$
|
133,379,009
|
|
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 30,2010 and 2009
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
US$
|
49,897,229
|
|
|
|
29,740,212
|
|
|
|
84,002,283
|
|
|
|
49,983,950
|
|
|
Include:
sales to related parties
|
|
|
368,441
|
|
|
|
64,179
|
|
|
|
617,597
|
|
|
|
201,611
|
|
|
Cost
of Sales
|
|
|
36,419,878
|
|
|
|
21,318,699
|
|
|
|
60,874,960
|
|
|
|
36,049,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
13,477,351
|
|
|
|
8,421,513
|
|
|
|
23,127,323
|
|
|
|
13,934,326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
and Distribution Expenses
|
|
|
2,843,380
|
|
|
|
2,060,718
|
|
|
|
4,827,404
|
|
|
|
3,378,452
|
|
|
General
and Administrative Expenses
|
|
|
2,803,915
|
|
|
|
1,481,757
|
|
|
|
5,090,776
|
|
|
|
3,508,055
|
|
|
Research
and development expenses
|
|
|
1,738,529
|
|
|
|
791,307
|
|
|
|
3,059,582
|
|
|
|
1,557,758
|
|
|
Financial
Expenses
|
|
|
271,178
|
|
|
|
9,129
|
|
|
|
345,819
|
|
|
|
38,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Expenses
|
|
|
7,657,002
|
|
|
|
4,342,911
|
|
|
|
13,323,581
|
|
|
|
8,482,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
5,820,349
|
|
|
|
4,078,602
|
|
|
|
9,803,742
|
|
|
|
5,451,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income
|
|
|
168,565
|
|
|
|
176,244
|
|
|
|
253,065
|
|
|
|
215,461
|
|
|
Non-Operating
Expenses
|
|
|
(43,854
|
)
|
|
|
(11,002
|
)
|
|
|
(56,513
|
)
|
|
|
(14,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
5,945,060
|
|
|
|
4,243,844
|
|
|
|
10,000,294
|
|
|
|
5,652,815
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
10,964
|
|
|
|
914,125
|
|
|
|
615,542
|
|
|
|
1,272,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
US$
|
5,934,096
|
|
|
|
3,329,719
|
|
|
|
9,384,752
|
|
|
|
4,380,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income - Foreign Currency Translation
Adjustment
|
|
|
688,424
|
|
|
|
60,385
|
|
|
|
722,428
|
|
|
|
41,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Income
|
|
|
6,622,520
|
|
|
|
3,390,104
|
|
|
|
10,107,180
|
|
|
|
4,421,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to Noncontrolling Interest In
Subsidiaries
|
|
|
548,868
|
|
|
|
332,972
|
|
|
|
842,775
|
|
|
|
439,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income Attributable to Non-controlling Interest's
Share
|
|
|
68,842
|
|
|
|
6,039
|
|
|
|
72,514
|
|
|
|
4,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Income Attributable to Non-controlling Interest's
Share
|
|
|
617,710
|
|
|
|
339,011
|
|
|
|
915,289
|
|
|
|
443,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income Attributable to Stockholders
|
|
|
5,385,228
|
|
|
|
2,996,747
|
|
|
|
8,541,977
|
|
|
|
3,941,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income Attributable to Stockholders
|
|
|
619,582
|
|
|
|
54,346
|
|
|
|
649,914
|
|
|
|
37,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Comprehensive Income Attributable to Stockholders
|
|
|
6,004,810
|
|
|
|
3,051,093
|
|
|
|
9,191,891
|
|
|
|
3,978,722
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common share - Basic
|
|
|
19,304,921
|
|
|
|
18,279,254
|
|
|
|
19,089,451
|
|
|
|
18,279,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common share - Diluted
|
|
|
19,304,921
|
|
|
|
18,279,254
|
|
|
|
19,089,451
|
|
|
|
18,279,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
- Basic
|
|
|
0.28
|
|
|
|
0.16
|
|
|
|
0.45
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
- Diluted
|
|
|
0.28
|
|
|
|
0.16
|
|
|
|
0.45
|
|
|
|
0.22
|
|
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 30,2010 and 2009
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
US$
|
5,385,228
|
|
|
|
2,996,747
|
|
|
|
8,541,977
|
|
|
|
3,941,658
|
|
|
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
Interest In Subsidiaries
|
|
|
548,868
|
|
|
|
332,972
|
|
|
|
842,775
|
|
|
|
439,066
|
|
|
Bad
Debt Expense
|
|
|
731,096
|
|
|
|
(97,231
|
)
|
|
|
888,295
|
|
|
|
452,925
|
|
|
Depreciation
and Amortization
|
|
|
956,043
|
|
|
|
746,805
|
|
|
|
1,811,315
|
|
|
|
1,476,238
|
|
|
Stock-Based
Compensation Expense
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
9,935
|
|
|
Loss
on disposal of Fixed Assets
|
|
|
―
|
|
|
|
10,098
|
|
|
|
―
|
|
|
|
10,098
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(5,359,127
|
)
|
|
|
(6,897,996
|
)
|
|
|
(1,942,290
|
)
|
|
|
(5,393,265
|
)
|
|
Notes
Receivable
|
|
|
(9,848,412
|
)
|
|
|
(757,995
|
)
|
|
|
(13,177,496
|
)
|
|
|
(581,005
|
)
|
|
Other
Currents Assets
|
|
|
(892,982
|
)
|
|
|
1,079,180
|
|
|
|
(1,428,984
|
)
|
|
|
3,871,962
|
|
|
Inventory
|
|
|
(2,192,139
|
)
|
|
|
(138,622
|
)
|
|
|
(4,220,975
|
)
|
|
|
2,865,795
|
|
|
Prepayments
|
|
|
(1,892,718
|
)
|
|
|
4,284,501
|
|
|
|
(950,002
|
)
|
|
|
(553,492
|
)
|
|
Deferred
tax assets
|
|
|
(150,434
|
)
|
|
|
(168,203
|
)
|
|
|
(250,855
|
)
|
|
|
(342,074
|
)
|
|
Deferred
assets
|
|
|
―
|
|
|
|
(465,484
|
)
|
|
|
―
|
|
|
|
(465,484
|
)
|
|
Accounts
Payable and Notes Payable
|
|
|
(637,151
|
)
|
|
|
2,714,776
|
|
|
|
(2,609,738
|
)
|
|
|
861,550
|
|
|
Income
Tax Payable
|
|
|
1,016,940
|
|
|
|
1,281,330
|
|
|
|
680,866
|
|
|
|
1,422,870
|
|
|
Deposits
Received from Customers
|
|
|
(324,028
|
)
|
|
|
259,233
|
|
|
|
780,928
|
|
|
|
137,259
|
|
|
Other
Current Liabilities and Accrued Expenses
|
|
|
896,405
|
|
|
|
190,883
|
|
|
|
407,999
|
|
|
|
340,719
|
|
|
Deferred
tax liabilities
|
|
|
12,868
|
|
|
|
21,367
|
|
|
|
25,701
|
|
|
|
42,730
|
|
|
Net
Cash Flows from Operating Activities
|
|
|
(11,749,543
|
)
|
|
|
5,392,361
|
|
|
|
(10,600,484
|
)
|
|
|
8,537,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of Property and Equipment
|
|
|
(3,447,536
|
)
|
|
|
(387,131
|
)
|
|
|
(6,672,691
|
)
|
|
|
(613,314
|
)
|
|
Sales
proceeds of disposal of fixed assets
|
|
|
―
|
|
|
|
2,897
|
|
|
|
―
|
|
|
|
36,692
|
|
|
Net
Cash Flows from Investing Activities
|
|
|
(3,447,536
|
)
|
|
|
(384,234
|
)
|
|
|
(6,672,691
|
)
|
|
|
(576,622
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from (Repayment of) Bank Loans
|
|
|
4,483,578
|
|
|
|
―
|
|
|
|
4,483,578
|
|
|
|
―
|
|
|
Proceeds
from Share Issuance
|
|
|
―
|
|
|
|
―
|
|
|
|
9,399,978
|
|
|
|
―
|
|
|
Capital
contributed by Minority Shareholder
|
|
|
―
|
|
|
|
―
|
|
|
|
1,038,900
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Cash flows from Financing Activities
|
|
|
4,483,578
|
|
|
|
―
|
|
|
|
14,922,456
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects
on changes in foreign exchange rate
|
|
|
68,424
|
|
|
|
7,740
|
|
|
|
71,175
|
|
|
|
5,980
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Change in Cash and Cash Equivalents
|
|
|
(10,645,077
|
)
|
|
|
5,015,867
|
|
|
|
(2,279,544
|
)
|
|
|
7,966,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents- Beginning of the period
|
|
|
18,620,792
|
|
|
|
10,746,963
|
|
|
|
10,255,259
|
|
|
|
7,795,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash Equivalents - End of the period
|
|
US$
|
7,975,715
|
|
|
|
15,762,830
|
|
|
|
7,975,715
|
|
|
|
15,762,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Paid
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
13,736
|
|
|
Tax
Paid
|
|
|
35,288
|
|
|
|
261,825
|
|
|
|
1,063,706
|
|
|
|
630,682
|
|
The
accompanying notes are an integral part of these financial
statements
SORL
Auto Parts, Inc. and Subsidiaries
Consolidated
Statements of Changes in Stockholders' Equity
For
The Three Months Ended June 30, 2010 and 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
SORL Auto
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
Retained
|
|
|
Accumu.
Other
|
|
|
Parts,
Inc.
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Common
|
|
|
Paid-in
|
|
|
|
|
|
Earnings
|
|
|
Comprehensive
|
|
|
Shareholders'
|
|
|
Noncontrolling
|
|
|
Total
|
|
|
|
|
of
Share
|
|
|
Stock
|
|
|
Capital
|
|
|
Reserves
|
|
|
(Deficit)
|
|
|
Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Equity
|
|
|
Beginning
Balance - April 1, 2009
|
|
|
18,279,254
|
|
|
|
36,558
|
|
|
|
37,498,452
|
|
|
|
3,221,571
|
|
|
|
39,624,110
|
|
|
|
10,830,966
|
|
|
|
91,211,657
|
|
|
|
10,111,340
|
|
|
|
101,322,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
2,996,747
|
|
|
|
―
|
|
|
|
2,996,747
|
|
|
|
332,972
|
|
|
|
3,329,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income(Loss)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
54,346
|
|
|
|
54,346
|
|
|
|
6,039
|
|
|
|
60,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
299,675
|
|
|
|
(299,675
|
)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance - June 30, 2009
|
|
|
18,279,254
|
|
|
|
36,558
|
|
|
|
37,498,452
|
|
|
|
3,521,246
|
|
|
|
42,321,182
|
|
|
|
10,885,312
|
|
|
|
94,262,750
|
|
|
|
10,450,351
|
|
|
|
104,713,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance - April 1, 2010
|
|
|
19,304,921
|
|
|
|
38,609
|
|
|
|
46,896,379
|
|
|
|
4,751,711
|
|
|
|
53,061,874
|
|
|
|
10,969,432
|
|
|
|
115,718,005
|
|
|
|
12,730,604
|
|
|
|
128,448,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
5,385,228
|
|
|
|
―
|
|
|
|
5,385,228
|
|
|
|
548,868
|
|
|
|
5,934,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income(Loss)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
619,582
|
|
|
|
619,582
|
|
|
|
68,842
|
|
|
|
688,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
547,811
|
|
|
|
(547,811
|
)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance - June 30, 2009
|
|
|
19,304,921
|
|
|
|
38,609
|
|
|
|
46,896,379
|
|
|
|
5,299,522
|
|
|
|
57,899,291
|
|
|
|
11,589,014
|
|
|
|
121,722,815
|
|
|
|
13,348,314
|
|
|
|
135,071,129
|
|
The
accompanying notes are an integral part of these financial
statements
SORL
Auto Parts, Inc. and Subsidiaries
Consolidated
Statements of Changes in Stockholders’ Equity
For
The Six Months Ended June 30, 2010 and 2009
|
Beginning
Balance – January 1, 2009
|
|
|
18,279,254
|
|
|
|
36,558
|
|
|
|
37,498,452
|
|
|
|
3,126,086
|
|
|
|
38,774,684
|
|
|
|
10,848,248
|
|
|
|
90,284,028
|
|
|
|
10,007,166
|
|
|
|
100,291,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
3,941,658
|
|
|
|
―
|
|
|
|
3,941,658
|
|
|
|
439,066
|
|
|
|
4,380,724
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income(Loss)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
37,064
|
|
|
|
37,064
|
|
|
|
4,119
|
|
|
|
41,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
395,160
|
|
|
|
(395,160
|
)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance – June 30, 2009
|
|
|
18,279,254
|
|
|
|
36,558
|
|
|
|
37,498,452
|
|
|
|
3,521,246
|
|
|
|
42,321,182
|
|
|
|
10,885,312
|
|
|
|
94,262,750
|
|
|
|
10,450,351
|
|
|
|
104,713,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
Balance – January 1, 2010
|
|
|
18,304,921
|
|
|
|
36,609
|
|
|
|
37,498,401
|
|
|
|
4,425,784
|
|
|
|
50,231,052
|
|
|
|
10,939,100
|
|
|
|
103,130,946
|
|
|
|
11,394,125
|
|
|
|
114,525,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
8,541,977
|
|
|
|
―
|
|
|
|
8,541,977
|
|
|
|
842,775
|
|
|
|
9,384,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Comprehensive Income(Loss)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
649,914
|
|
|
|
649,914
|
|
|
|
72,514
|
|
|
|
722,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued in public offering
|
|
|
1,000,000
|
|
|
|
2,000
|
|
|
|
9,397,978
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
9,399,978
|
|
|
|
―
|
|
|
|
9,399,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
contributed by Minority Shareholder
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
1,038,900
|
|
|
|
1,038,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
873,738
|
|
|
|
(873,738
|
)
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
Balance – June 30, 2010
|
|
|
19,304,921
|
|
|
|
38,609
|
|
|
|
46,896,379
|
|
|
|
5,299,522
|
|
|
|
57,899,291
|
|
|
|
11,589,014
|
|
|
|
121,722,815
|
|
|
|
13,348,314
|
|
|
|
135,071,129
|
|
The
accompanying notes are an integral part of these financial
statements
NOTES
TO UNAUDITED CONDENSED 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 systems, air controlling systems and other
related components for different types of commercial vehicles, such as trucks,
and buses, through its 90% ownership of Ruili Group Ruian Auto Parts Company
Limited (“Ruian”) in the People’s Republic of China (“PRC” or “China”) and 60%
ownership of SORL International Holding, Ltd. ("SIH") in Hong Kong. The Company
distributes products both in China and internationally under SORL trademarks.
The Company’s product range includes 40 categories of brake systems with over
1000 different specifications.
On
November 11, 2009, the Company entered into a joint venture agreement with MGR,
a Hong Kong-based global auto parts distribution specialist firm and a
Taiwanese investor. The new joint venture was named SORL International Holding,
Ltd. ("SIH"). SORL holds a 60% interest in the joint venture, MGR holds a 30%
interest, and the Taiwanese investor holds a 10% interest. SIH is primarily
devoted to expanding SORL's international sales network in Asia-Pacific and
creating a larger footprint in Europe, the Middle East and Africa with a target
to create a truly global distribution network. Based in Hong Kong, SIH is
expanding and establishing channels of distribution in international markets
with SORL's primary products, including spring brake chambers, clutch servos,
air dryers, relay valves and hand brake valves.
On
February 8, 2010, the Company sold 1,000,000 shares of its common stock to
selected institutional investors at a price of $10.00 per share pursuant to a
registered direct offering. This transaction provided net proceeds of
approximately $9.4 million. On March 9, 2010, through Fairford, SORL invested
$9.349 million in its operating subsidiary, the Ruili Group Ruian Auto Parts
Co., Ltd.(the “Joint Venture”) To maintain its 10% shareholding in the Joint
Venture, the Ruili Group increased its capital investment by $1.039 million.
Accordingly, SORL continues to hold a 90% controlling interest in the operating
subsidiary.
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 condensed 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 June
2009, the FASB issued FASB ASC 860-10-05 (Prior authoritative literature: FASB
Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of
FASB Statement No. 140”). FASB ASC 860-10-05 improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. FASB ASC 860-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 860-10-05 has not had a material effect on the Company’s consolidated
financial statements.
In June
2009, the FASB issued FASB ASC 810-10-05 (Prior authoritative literature: FASB
Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC
810-10-05 improves financial reporting by enterprises involved with variable
interest entities and to address (1) the effects on certain provisions of prior
authoritative literature FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities”, as a result of the elimination of
the qualifying special-purpose entity concept in prior authoritative literature
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of prior authoritative literature Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. FASB ASC 810-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 810-10-05 has not had a material effect on the Company’s consolidated
financial statements.
In June
2009, the FASB issued revised authoritative guidance related to variable
interest entities, which requires entities to perform a qualitative analysis to
determine whether a variable interest gives the entity a controlling financial
interest in a variable interest entity. The guidance also requires an ongoing
reassessment of variable interests and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. This guidance, which was reissued by the FASB in December 2009 as
ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities,” amends ASC Topic 810,
“Consolidation”, and became effective as of the beginning of an entity’s first
annual reporting period that begins after November 15, 2009 (January 1, 2010 for
the Company). The adoption of this guidance has not had a significant impact on
the Company’s consolidated financial statements.
In
January 2010, the FASB issued Accounting Standards Updated (ASU) No. 2010-06,
“Improving Disclosures about Fair Value Measurements,” which amends ASC 820,
“Fair Value Measures and Disclosures.” ASU No. 2010-06 amends the ASC to
require disclosure of transfers into and out of Level 1 and Level 2 fair value
measurements, and also require more detailed disclosure about the activity
within Level 3 fair value measurements. The changes to the ASC as a result of
this update are effective for annual and interim reporting periods beginning
after December 15, 2009 (January 1, 2010 for the Company), except for the
requirements related to Level 3 disclosures, which are effective for annual and
interim reporting periods beginning after December 15, 2010 (January 1, 2011 for
the Company). This guidance requires new disclosures only, and has had no impact
on the Company’s consolidated financial statements.
In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic
855, Subsequent Events. The update provides that SEC filers, as defined in ASU
2010-09, are no longer required to disclose the date through which subsequent
events have been evaluated in originally issued and revised financial
statements. The update also requires SEC filers to evaluate subsequent events
through the date the financial statements are issued rather than the date the
financial statements are available to be issued. The Company adopted ASU 2010-09
upon issuance. The adoption of this ASU update has no material impact on the
Company’s financial statements.
NOTE
D - RELATED PARTY TRANSACTIONS
The
Company continued to purchase non-valve automotive products, components for
valve parts and packaging materials from the Ruili Group Co., Ltd. The Ruili
Group Co., Ltd., is the minority shareholder of the Joint Venture and is
controlled by the Zhang family, who is also the controlling party of the
Company.
The
following related party transactions are reported for the three months and six
months ended June 30, 2010 and 2009:
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
20
10
|
|
|
200
9
|
|
|
PURCHASES
FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
$
|
7,544,548
|
|
|
$
|
5,196,406
|
|
|
$
|
12,179,573
|
|
|
$
|
7,893,422
|
|
|
Total
Purchases
|
|
$
|
7,544,548
|
|
|
$
|
5,196,406
|
|
|
$
|
12,179,573
|
|
|
$
|
7,893,422
|
|
|
SALES
TO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
$
|
368,441
|
|
|
$
|
64,179
|
|
|
$
|
617,597
|
|
|
$
|
201,611
|
|
|
Total
Sales
|
|
$
|
368,441
|
|
|
$
|
64,179
|
|
|
$
|
617,597
|
|
|
$
|
201,611
|
|
The total
purchases from Ruili Group during the three months ended June 30, 2010 consisted
of $7.3 million of finished products of non-valve auto parts and
$0.3 million of packaging materials. During the six months ended June 30,
2010, the breakdown was approximately $11.0 million of finished
products of non-valve auto parts and $1.1 million of packaging
materials.
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
|
|
|
|
|
|
|
|
OTHER
PAYABLES TO RELATED PARTIES
|
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
|
54,729
|
|
|
|
200,762
|
|
|
Total
|
|
|
54,729
|
|
|
|
200,762
|
|
|
ACCOUNTS
PAYABLE TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
Ruili
Group Co., Ltd.
|
|
$
|
155,996
|
|
|
$
|
1,985,291
|
|
|
Total
|
|
$
|
155,996
|
|
|
$
|
1,985,291
|
|
NOTE
E – ACCOUNTS RECEIVABLE
The
changes in the allowance for doubtful accounts at June 30, 2010 and December 31,
2009 were summarized as follows:
|
|
|
June
30,
20
10
|
|
|
December
31,
200
9
|
|
|
Beginning
balance
|
|
$
|
57,823
|
|
|
$
|
24,997
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Increase to allowance
|
|
|
891,359
|
|
|
|
32,826
|
|
|
Less:
Accounts written off
|
|
|
—
|
|
|
|
—
|
|
|
Ending
balance
|
|
$
|
949,182
|
|
|
$
|
57,823
|
|
|
|
June
30,
|
|
December
31,
|
|
|
|
20
10
|
|
200
9
|
|
|
Accounts
receivable
|
|
$
|
46,728,668
|
|
|
$
|
44,603,930
|
|
|
Less:
allowance for doubtful accounts
|
|
|
(949,182
|
)
|
|
|
(
57,823
|
)
|
|
Account
receivable balance, net
|
|
$
|
45,779,486
|
|
|
$
|
44,546,107
|
|
NOTE
F - INVENTORIES
On June
30, 2010 and December 31, 2009, inventories consisted of the
following:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
Raw
Material
|
|
$
|
6,384,218
|
|
|
$
|
4,417,094
|
|
|
Work
in process
|
|
|
1,994,651
|
|
|
|
2,186,337
|
|
|
Finished
Goods
|
|
|
14,722,436
|
|
|
|
12,157,293
|
|
|
Total
Inventory
|
|
$
|
23,101,305
|
|
|
$
|
18,760,724
|
|
NOTE
G - PROPERTY, PLANT AND EQUIPMENT
Property,
plant and equipment consisted of the following, on June 30, 2010 and December
31, 2009:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
Machinery
|
|
$
|
31,144,552
|
|
|
$
|
24,283,034
|
|
|
Molds
|
|
|
1,283,769
|
|
|
|
1,276,757
|
|
|
Office
equipment
|
|
|
775,805
|
|
|
|
700,609
|
|
|
Vehicle
|
|
|
1,198,890
|
|
|
|
1,092,835
|
|
|
Building
|
|
|
8,026,569
|
|
|
|
7,982,723
|
|
|
Sub-Total
|
|
|
42,429,586
|
|
|
|
35,335,958
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(13,301,430
|
)
|
|
|
(
11,608,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
Assets, net
|
|
$
|
29,128,156
|
|
|
$
|
23,727,038
|
|
Depreciation
expense charged to operations was $1,622,136 and $1,303,639 for the six
months ended June 30, 2010 and 2009, respectively.
NOTE
H- LEASEHOLD IMPROVEMENTS
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Cost:
|
|
$
|
480,582
|
|
|
$
|
478,088
|
|
|
Less:
Accumulated amortization:
|
|
|
(16,258
|
)
|
|
|
(407
|
)
|
|
Leasehold
Improvements In Progress, net
|
|
$
|
464,324
|
|
|
$
|
477,681
|
|
By law
and practice, when improvements are made to real property and those improvements
are permanently affixed to the property, the title to those improvements
automatically transfers to the owner of the property. The lessee’s interest in
the improvements is not a direct ownership interest but rather it is an
intangible right to use and benefit from the improvements during the term of the
lease. The leasehold improvements are armortized over the lease
term.
In May
2009, the Joint Venture entered into a lease agreement with Ruili Group Co.,
Ltd. for the lease of a manufacturing plant. The lease term is from June
2009 to May 2017. .
In August
2009, SIH entered into a lease agreement with MGR for the lease of an office
with a five-year lease term.
NOTE
I- LAND USE RIGHTS
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
Cost:
|
|
$
|
15,023,399
|
|
|
$
|
14,941,331
|
|
|
Less:
Accumulated amortization:
|
|
|
(913,024
|
)
|
|
|
(742,939
|
)
|
|
Land
use rights, net
|
|
$
|
14,110,375
|
|
|
$
|
14,198,392
|
|
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. However, the
Company has applied to obtain the land use right
certificate. Amortization expenses were $165,346 and $164,944 for the six
months ended June 30, 2010 and 2009, respectively.
NOTE
J - INTANGIBLE ASSETS
Intangible
assets owned by the Company included patent technology and management software
licenses. Gross intangible assets were $162,385, less accumulated amortization
of $62,383 for net intangible assets of $100,002 as of June 30, 2010. Gross
intangible assets were $161,499, less accumulated amortization of $54,380 for
net intangible assets of $107,119 as of December 31, 2009. Amortization expenses
were $7,674 and $7,655 for the six months ended June 30, 2010 and 2009
respectively. Future estimated amortization expense is as follows:
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Thereafter
|
|
$
|
8,476
|
|
|
$
|
16,150
|
|
|
$
|
16,150
|
|
|
$
|
16,150
|
|
|
$
|
11,766
|
|
|
$
|
30,753
|
NOTE
K - PREPAYMENT
Prepayment
consisted of the following as of June 30, 2010 and December 31,
2009:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
Raw
material suppliers
|
|
$
|
4,026,100
|
|
|
$
|
3,059,449
|
|
|
Equipment
purchase
|
|
|
4,516,493
|
|
|
|
4,498,691
|
|
|
Total
prepayment
|
|
$
|
8,542,593
|
|
|
$
|
7,558,140
|
|
NOTE
L - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
Deferred
tax assets consisted of the following as of June 30, 2010
|
|
|
30-June-10
|
|
|
31
-Dec-0
9
|
|
|
Deferred
tax assets - current
|
|
|
|
|
|
|
|
Provision
|
|
$
|
141,617
|
|
|
$
|
7,917
|
|
|
Subsidiary's
operating loss carryforwards
|
|
|
66,528
|
|
|
|
33,008
|
|
|
Warranty
|
|
|
391,382
|
|
|
|
260,295
|
|
|
Deferred
tax assets
|
|
|
599,526
|
|
|
|
301,220
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets - current
|
|
$
|
599,526
|
|
|
$
|
301,220
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities - current
|
|
|
|
|
|
|
|
|
|
Revenue
(netoff cost)
|
|
$
|
126,314
|
|
|
$
|
80,643
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities - current
|
|
|
126,314
|
|
|
|
80,643
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets - current
|
|
|
473,212
|
|
|
|
220,577
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities - non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
use right
|
|
|
141,918
|
|
|
|
115,481
|
|
|
Deferred
tax liabilities - non-current
|
|
|
141,918
|
|
|
|
115,481
|
|
Deferred
taxation is calculated under the liability method in respect of taxation effect
arising from all timing differences, which are expected with reasonable
probability to realize in the foreseeable future. The Company and its
subsidiaries do not have income tax liabilities in U.S. as the Company had no
United States taxable income for the reporting period. The Company’s subsidiary
registered in the PRC is subject to income taxes within the PRC at the
applicable tax rate.
NOTE M -
Bank Loans
Bank
loans represented the following as of June 30, 2010 and December 31,
2009:
|
|
|
June 30,
2010
|
|
|
December 31,
2009
|
|
|
Secured
|
|
$
|
4,495,264
|
|
|
$
|
—
|
|
|
Less:
Current portion
|
|
$
|
(4,495,264
|
)
|
|
$
|
—
|
|
|
Non-current
portion
|
|
$
|
—
|
|
|
$
|
—
|
|
These
loans were from Agricultural Bank of China, to finance general working capital
as well as new equipment acquisition. Guarantees were provided by Ruili
Group Co., Ltd., a related party. The Company did not provide any sort
of guarantee to any other parties. Interest rates for the loans ranged between
0.74% and 0.83% per annum. The maturity dates of the loans are September
25, 2010 and October 22, 2010, respectively.
NOTE
N - ACCRUED EXPENSES
Accrued
expenses consisted of the following as of June 30, 2010 and December 31,
2009:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
Accrued
payroll
|
|
$
|
1,449,643
|
|
|
$
|
1,536,980
|
|
|
Other
accrued expenses
|
|
|
3,353,749
|
|
|
|
2,669,317
|
|
|
Total
accrued expenses
|
|
$
|
4,803,392
|
|
|
$
|
4,206,297
|
|
NOTE
O – RESERVE
The
reserve funds are comprised of the following:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
20
10
|
|
|
200
9
|
|
|
Statutory
surplus reserve fund
|
|
$
|
5,299,522
|
|
|
$
|
4,425,784
|
|
|
Total
|
|
$
|
5,299,522
|
|
|
$
|
4,425,784
|
|
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 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. In accordance with 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. The reserve fund consists of
retained earnings which has been allocated to the statutory reserve
fund.
NOTE
P - 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 50% income tax deduction for the following three years ended
December 31, 2006, 2007, and 2008. 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 two
years ended December 31, 2006 and 2007. With the new PRC Enterprise Income Tax
Law, effective on 1st January 2008, the China’s enterprises are generally
subject to a PRC income tax rate of 25% and the Joint Venture is entitled to a
tax concession of 50% of the applicable income tax rate of 25% for the year
ended December 31, 2008.
Additionally,
the Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of the
People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture is eligible for additional preferential tax
treatment. For the years 2007 and 2008, the Joint Venture entitled to an income
tax exemption on all pre-tax income generated by the company above its pre-tax
income generated in the fiscal year 2006. Thereafter, the Joint Venture will
enjoy a 50% exemption from the effective income tax rate on any pre-tax income
above its 2006 pre-tax income, to be recognized in the years 2009, 2010 and
2011. The above taxation exemption was superseded, because the Joint
Venture has been awarded the Chinese government's "High-Tech Enterprise"
designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So, the
Company’s effective income tax rate will be 15% for years 2009 through
2011.
The reconciliation of the effective income tax rate
of the Joint Venture to the statutory income tax rate in the PRC for the
second quarter of 2010 and 2009 is as follows:
|
|
|
June-30-2010
|
|
|
June-30-2009
|
|
|
Statutory
tax rate
|
|
|
25.0
|
%
|
|
|
25.0
|
%
|
|
Tax
holidays and concessions
|
|
|
-10
|
%
|
|
|
-10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
15
|
%
|
|
|
15
|
%
|
|
|
|
June-30-2010
|
|
|
June-30-2009
|
|
|
Computed
income tax provision at the statutory rate
|
|
$
|
1,500,044
|
|
|
$
|
847,922
|
|
|
Tax
refund
|
|
|
(903,699
|
)
|
|
|
|
|
|
Deferred
tax provision
|
|
|
(225,332
|
)
|
|
|
(299,344
|
)
|
|
Current
period permanent differences and other reconciling
items
|
|
|
244,528
|
|
|
|
723,513
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
income taxes
|
|
$
|
615,542
|
|
|
$
|
1,272,091
|
|
Income
taxes are calculated on a separate entity basis. Deferred income taxes reflect
the net tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes Significant components of the Company’s net deferred tax
assets and liabilities are approximately as follows at December 31,2009. No
valuation allowance is deemed necessary. There currently is no tax benefit or
burden recorded for the United States. The tax authority may examine the tax
returns of the Company three years after the year ended. In the year of 2009,
there were no penalties and interest, which generally are recorded in the
general and administrative expenses or in the tax expenses. The provisions for
income taxes for the six months ended June 30, 2010 and 2009, respectively, are
summarized as follows:
|
|
|
June-30-2010
|
|
|
June-30-2009
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
840,873
|
|
|
$
|
1,571,435
|
|
|
Deferred
|
|
|
(225,332
|
)
|
|
|
(299,344
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
615,542
|
|
|
$
|
1,272,091
|
|
The
Company adopted the provisions of FASB ASC 740-10 (Prior authoritative
literature: FIN No. 48, Accounting for Uncertainty in Income Taxes), on January
1, 2007. As the result of the implementation of the FASB ASC 740-10, Accounting
for Uncertainty in Income Taxes – In Interpretation of FASB ASC 740-10 (Prior
authoritative literature: FASB Statement No. 109), the Company recognized no
material adjustments to unrecognized tax benefits. At the adoption date of
January 1, 2007 and as of June 30, 2010 and 2009, the Company has no
unrecognized tax benefits.
NOTE
Q
-
Non-controlling interest in
subsidiaries
Non-controlling
interest in subsidiaries represents a 10% non-controlling interest, owned by the
Company’s Joint Venture Partner, in the Chinese located Joint Venture, and a 40%
non-controlling interest, owned by the Company’s Joint Venture Partners, in the
Hong Kong located Joint Venture. Net income attributable to non-controlling
interests in subsidiaries amounted to $842,775 and $439,066 for the six
months ended June 30, 2010 and 2009, respectively.
|
|
|
June-30-2010
|
|
|
June-30-2009
|
|
|
10%
non-controlling interest in Ruian
|
|
$
|
970,820
|
|
|
$
|
439,066
|
|
|
40%
non-controlling interest in SIH
|
|
$
|
(128,045
|
)
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
842,775
|
|
|
|
439,
0
6
6
|
|
NOTE
R - 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.
In May
2009, the Joint Venture entered into a lease agreement with Ruili Group Co.,
Ltd. for the lease of a manufacturing plant. The lease term is from June
2009 to May 2017. .
In August
2009, SIH entered into a lease agreement with MGR for the lease of an office
with a five-year lease term. The leasehold improvements are armortized over the
lease term.
Future
minimum rental payments for the years ending December 31 are as
follows:
|
|
2010
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
Lease
Commitments
|
$
|
415,488
|
|
$
|
628,179
|
|
|
$
|
397,693
|
|
|
$
|
329,410
|
|
|
$
|
329,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
415,488
|
|
$
|
6
28,179
|
|
|
$
|
397,693
|
|
|
$
|
329,410
|
|
|
$
|
329,410
|
|
NOTE
S - ADVERTISING COSTS
Advertising
costs were $146,873 and $995 for the six months ended June 30, 2010 and 2009,
respectively.
NOTE
T- RESEARCH AND DEVELOPMENT EXPENSE
Research
and development costs are expensed as incurred and were $3,059,582 and
$1,557,758 for the six months ended June 30, 2010 and 2009,
respectively.
NOTE
U - WARRANTY CLAIMS
Warranty
claims were $1,026,504 and $657,492 for the six months ended June 30, 2010 and
2009, respectively. Warranty claims are classified as accrued expenses on the
balance sheet. The movement of accrued warranty expenses for the six months
ended June 30, 2010 was as follows:
|
Beginning
balance at January 01, 2010
|
|
|
1,735,301
|
|
|
Aggregate
reduction for payments made
|
|
|
(152,594
|
)
|
|
Aggregate
increase for new warranties issued during current period
|
|
|
1,026,504
|
|
|
Aggregate
changes in the liability related to pre-existing warranties (changes in
estimate)
|
|
|
―
|
|
|
Ending
balance at June 30, 2010:
|
|
|
2,609,212
|
|
NOTE
V – SEGMENT INFORMATION
The
Company produces air brake systems, air controlling systems and other related
components for different types of commercial vehicles. Although it
manufactures about 40 varieties of products of air brake systems and
related components, they are basically one general line - air brake
systems. Management does not analyze operational income based on different
features of air brake systems but on one general line of air brake systems only.
Hence, no separate segment analysis by products is presented as the Company’s
only products are air brake systems and related components.
Net sales
from our Chinese market were $37.8 million and $21.3 million for the three
months ended June 30, 2010 and 2009, respectively. Net sales from international
market were $12.1 million and $8.4 million for the three months ended June 30,
2010 and 2009, respectively.
Net sales
from our Chinese market were $63.4 million and $37.0 million for the six months
ended June 30, 2010 and 2009, respectively. Net sales from international market
were $20.6 million and $13.0 million for the six months ended June 30, 2010 and
2009, respectively.
All of
the Company’s long-lived assets are located in the PRC and Hong Kong. The
Company and its subsidiaries do not have long-lived assets in the United States
for the reporting periods.
For the
three months ended June 30, 2010, the Company’s three biggest customers were
Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and FAW Jiefang
Automotive Co., Ltd. which accounted for approximately 13.6%, 10.4% and 6.3% of
total sales revenue, respectively. For the three months ended June 30, 2009,
Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and FAW Jiefang
Automotive Co., Ltd. accounted for approximately 14.6%, 9.8% and 4.5% of our
total sales revenue, respectively.
For the
six months ended June 30, 2010, the Company’s three biggest customers were
Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and FAW Jiefang
Automotive Co., Ltd. which accounted for approximately 11.2%, 10.8% and 6.2% of
total sales revenue, respectively. For the three months ended June 30, 2009,
Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and FAW Jiefang
Automotive Co., Ltd. accounted for approximately 9.9%, 6.6% and 4.6% of our
total sales revenue, respectively.
NOTE
W – PURCHASE DISCOUNT
Purchase
discounts represent discounts received from vendors for purchasing raw
materials. The Company did not receive any purchase discounts during the six
months ended June 30, 2010 and 2009.
NOTE
X – SHIPPING AND HANDLING COSTS
Shipping
and handling costs incurred by the Company are included in selling expenses in
the accompanying consolidated statements of income. Shipping and handling costs
were $1,274,864 and $724,919 for the six month ended June 30, 2010 and 2009,
respectively.
NOTE
Y – STOCK COMPENSATION PLAN
The amortization of deferred stock-based
compensation was $0 and $9,935 for the six month ended June 30, 2010
and 2009, respectively. There were no employee stock options or warrants
outstanding as of June 30, 2010.
NOTE
Z- COMMITMENTS AND CONTINGENCIES
(1)
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. However, the Company has applied to obtain the land use right
certificate.
(2)
Information regarding lease commitments is provided in Note R.
NOTE
AA - OFF-BALANCE SHEET ARRANGEMENTS
At June
30, 2010, 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.
NOTE
AB
–
RECLASSIFICATION OF PRIOR
YEAR FINANCIAL STATEMENTS
For the
six month ended June 30, 2010, the Company has reclassified Research and
Development Expenses and Deferred Tax Assets/Liabilities to facilitate a year
over year comparison with the same period of 2009.
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 condensed consolidated financial
statements, as well as information relating to the plans of our current
management. This quarterly report on Form 10-Q includes forward-looking
statements. Any statements contained in this report that are not statements of
historical fact may be deemed to be forward-looking statements. Generally, the
words “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
condensed consolidated financial statements and the related notes thereto and
other financial information contained elsewhere in this Form 10-Q.
The Company manufactures and distributes automotive air brake
systems, air controlling systems and other related components to automotive
original equipment manufacturers, or OEMs, and the related aftermarket both in
China and internationally for use primarily in different types of commercial
vehicles, such as trucks and buses. There are forty categories of air brake
systems with over one thousand different specifications. Management believes
that it is the largest manufacturer of automotive brake systems in China for
commercial vehicles such as tucks and buses.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
For a
summary of our accounting policies and estimates, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates” in our Annual Report on
Form 10-K for the Fiscal Year ended December 31, 2009.
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, 2010 as compared to
the three months ended June 30, 2009.
SALES
|
|
|
Three
Months ended
|
|
|
Three
Months ended
|
|
|
|
|
30-Jun-10
|
|
|
30-Jun-09
|
|
|
|
|
(U.S.
dollars in millions)
|
|
|
Air
brake systems & related components
|
|
$
|
42.8
|
|
|
|
86
|
%
|
|
$
|
24.7
|
|
|
|
83
|
%
|
|
Non-valve
products
|
|
$
|
7.1
|
|
|
|
14
|
%
|
|
$
|
5.0
|
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49.9
|
|
|
|
100
|
%
|
|
$
|
29.7
|
|
|
|
100
|
%
|
Sales
consist of air brake systems 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
related parties.
Net sales
were $49,897,229 and $29,740,212 for the three months ended June 30, 2010 and
2009, respectively, an increase of $20.2 million or 68.0%.
A
breakdown of net sales revenue for these markets for the second quarter of the
2010 and 2009 fiscal years, respectively, is set forth below:
|
|
|
Three
Months
|
|
Percent
|
|
|
Three
Months
|
|
Percent
|
|
|
|
|
|
|
ended
|
|
of
|
|
|
ended
|
|
of
|
|
Percentage
|
|
|
|
|
30-Jun-10
|
|
Total Sales
|
|
|
30-Jun-09
|
|
Total Sales
|
|
Change
|
|
|
|
|
(U.S. dollars in million)
|
|
|
|
|
China
OEM market
|
|
$
|
31.2
|
|
|
|
63
|
%
|
|
$
|
14.1
|
|
|
|
48
|
%
|
|
|
121.3
|
%
|
|
China
Aftermarket
|
|
$
|
6.7
|
|
|
|
13
|
%
|
|
$
|
7.2
|
|
|
|
24
|
%
|
|
|
(6.9
|
)%
|
|
International
market
|
|
$
|
12.0
|
|
|
|
24
|
%
|
|
$
|
8.4
|
|
|
|
28
|
%
|
|
|
42.9
|
%
|
|
Total
|
|
$
|
49.9
|
|
|
|
100
|
%
|
|
$
|
29.7
|
|
|
|
100
|
%
|
|
|
68.0
|
%
|
Global
financial conditions, involving a worldwide macroeconomic decline and weak
global auto market, caused the demand for our products to decline
during the second quarter of 2009. However, the Chinese government’s 4
trillion RMB stimulus package, which positively affected the development of
China’s automobile industry, materially benefited our results in second
quarter of 2010. Further, we promoted our integrated system and modular
supplies of air brake systems to our OEM customers and we increasingly
focused on the light duty, bus and agricultural vehicle market in 2010. As a
result of these positive factors, our sales to the Chinese OEM
market increased by $17.1 million or 121.3%, to $31.2 million for the
second quarter of 2010, compared to $14.1 million for the same period of
2009.
We
achieved total revenue of $6.7 million in Chinese aftermarket sales for the
three months ended June 30, 2010, a slight increase compared to $6.4 million for
the first quarter of 2010. The increased number of new vehicle sales in China
and the expiration of OEM warranties helped drive the increase in our
aftermarket business. Sales of our new model products, applicable to both OEM
and aftermarket, also grew during the first half of 2010. We will continue with
our strategies to further optimize our sales network, to help further penetrate
into new markets. Also, we will continue to focus on investing in new product
development for both the OEM market and the aftermarket, as a means to increase
our sales.
The global
financial crisis has negatively affected our international customers and caused
many world currencies to depreciate against the US dollar, while
the lack of confidence in the growth of the world macro-economy
caused our customers to decrease their inventories in order to lower their
risk in the second quarter of 2009. With the recovery of global economy and
customers' confidence in the growth of economy in 2010, our export sales
increased by $3.6 million or 42.9%, to $12.0 million for the second quarter of
2010, as compared to $8.4 million for the same period of 2009.
COST
OF SALES AND GROSS PROFIT
Cost of
sales for the three months ended June 30, 2010 were $36,419,878
an increase of $15,101,179 or 70.8% from $21,318,699 for the same
period last year. Our gross profit increased by 59.6% from $ 8,421,513
for the second quarter of 2009 to $13,477,351 for the second quarter of
2010.
Gross
margin decreased to 27.0% from 28.3% for the three months ended June 30, 2010
compared with 2009. The decrease in gross margin was primarily due to the
increased costs of primary raw materials and payroll. We focused on
increasing management efficiency, improving the technologies of our products,
and improving our product portfolio to offset our gross profit margin decrease.
We believe that our continued expansion to the higher-profit new valve products
will also help us to maintain or increase our gross profit margins.
SELLING
AND DISTRIBUTION EXPENSES
Selling
and distribution expenses were $2,843,380 for the three months ended June
30, 2010, as compared to $2,060,718 for the same period of 2009,
an increase of $782,662 or 38.0%.
The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 5.7% for the three months
ended June 30, 2010, as compared to 6.9% for the same period in
2009.
GENERAL
AND ADMINISTRATIVE EXPENSES
General
and administrative expenses were $2,803,915 for the three months ended June
30, 2010, as compared to $1,481,757 for the same period of 2009,
an increase of $1,322,158 or 89.2%. The increase was mainly due to
increased professional expenses and provisions for doubtful
accounts. Because of the impact of the U.S. financial crisis and weakening
international macroeconomic factors, the Company extended the payment term for
accounts receivable for our international customers. As a percentage of
sales revenue, general and administrative expenses increased to 5.6%
for the three months ended June 30, 2010, as compared to 5.0% for the same
period in 2009.
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, 2010, research and development expense was $1,738,529, as
compared to $791,307 for the same period of 2009, an increase of $947,222. The
Company will continue to invest in new product development, particularly in
upgrading traditional valve products and in developing electronically
controlled products.
DEPRECIATION
AND AMORTIZATION
Depreciation
and amortization expense increased to $956,043 for the three months ended June
30, 2010, compared with that of $746,805 for the same period of 2009, an
increase of $209,238. The Company will continue to invest in new product
development, particularly in upgrading traditional valve products and in
developing electronically controlled products.
FINANCIAL
EXPENSE
Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the three months ended June 30, 2010 increased by $262,049
to $271,178 from $9,129 for the same period of 2009, which was
mainly attributed to fluctuations in the exchange rate between U.S. dollars
and RMB. Management is studying alternative methods for managing its risks
associated with currency translation, such as the diversification of currencies
used in export sales.
OTHER
INCOME
Other
income was $168,565 for the three months ended June 30, 2010, as compared to
$176,244 for the three months ended June 30, 2009, a decrease of $7,679. The
decrease was mainly due to more subsidies received from local governments for
the three months ended June 30, 2009. These subsidies were provided to the
Company as economic incentives to secure business commitments and no repayment
by the Company is required.
INCOME
TAX
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 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 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 Ventures, the Joint
Venture was exempt from income taxes in the PRC for each of the fiscal years
ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled
to a 50% income tax deduction for each of the three years ended December
31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both
fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st
January 2008, China’s enterprises are generally subject to a PRC income tax rate
of 25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.
The
Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of
the People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture was eligible for additional preferential tax
treatment for the years 2007 and 2008. In those years, the Joint Venture
was entitled to an income tax exemption on all pre-tax income generated by the
Company above its pre-tax income generated in the fiscal year 2006. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006
pre-tax income. The above taxation exemption was superseded, because the Joint
Venture has been awarded the Chinese government's "High-Tech Enterprise"
designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So,
the effective income tax rate will be 15% for years 2009 through
2011.
During
the second quarter ended June 30, 2010 and 2009, the Joint Venture received an
income tax benefit of $930,699 and $0 in accordance with PRC
preferential income tax policy regarding the purchase of domestically
manufactured equipment, which is subject to assessment and approval from the
local state tax bureau
. Income
tax expense of $10,964 and $914,125 was recorded for the quarters
ended June 30, 2010 and 2009, respectively.
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 was three years. Total deferred stock-based compensation expenses
related to stock options amounted to $178,904. This amount was amortized
over the three year vesting period in a manner consistent with FASB ASC 505-50.
The amortization of deferred stock-based compensation for these equity
arrangements were $0 and $0 for the three months ended June 30, 2010
and 2009, respectively. As of December 31, 2009, the 60,000 options had expired
unexercised.
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
option became vested and exercisable immediately 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 General and
administrative expenses during the fiscal year ended December 31, 2007. On
November 13, 2009, David Ming He exercised the options on a cashless basis and
received 460 shares of common stock, based on a formula provided for in the
initial grant.
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 had retained Maxim
Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors
and investment bankers for a period of twelve months from the date of January 5,
2006. The agreement has now expired. Total expense associated with the 100,000
warrants amounted to $299,052, which, consistent with FASB ASC 505-50, was
recognized during the fiscal year ended December 31, 2006.
On
November 9, 2009, Maxim Group LLC transferred 35,000 warrants to OTA LLC and
35,000 warrants to Maxim Partners, LLC respectively. OTA LLC exercised the
warrants on a cashless basis on November 12, 2009 and received 6,609 shares of
common stock, based on a formula provided for in the initial grant. Maxim
Partners, LLC and Chardan Capital Markets, LLC transferred an additional 35,000
warrants and 30,000 warrants to OTA LLC on December 15, 2009 and December 11,
2009, respectively. OTA LLC exercised the warrants on a cashless basis on
December 18, 2009 and received 18,598 shares of common stock, based on a formula
provided for in the initial grant.
There
were no options or warrants outstanding as of June 30, 2010.
Although
the Company anticipates future issuances of stock awards could have a material
impact on reported net income in future financial statements, we do not expect
them to have a material impact on future cash flow.
NET
INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES
Non-controlling
interest in subsidiaries represents a 10% non-controlling interest in the
Chinese located Joint Venture and 40% non-controlling interest in the Hong Kong
located Joint Venture, in each case held by our Joint Venture Partners.
Non-controlling interest in subsidiaries amounted to $548,868 and $332,972 for
the second quarter ended June 30, 2010 and 2009,
respectively.
NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net
income attributable to stockholders for the quarter ended June 30,
2010 increased by $2,388,481, to $5,385,228 from $2,996,747 for the quarter
ended June 30, 2009 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the quarter ended June 30, 2010 and 2009,
were $0.28 and $0.16 per share, respectively.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
OPERATING
- Net cash used in operating activities was $11,749,543 for three months ended
June 30, 2010 compared with $5,392,361 of net cash provided in operating
activities in the same period in 2009, a decrease of $17,141,904, primarily
due to the increased cash outflow resulted by changes in accounts receivable,
notes receivable, inventory and prepayments. Most accounts receivable of our OEM
customers were converted into notes receivable during the three months ended
June 30, 2010. Those notes mature within one to six months and may be
transferred to our material suppliers as a payment at anytime. We therefore do
not believe that the notes receivable decrease our current
liquidity.
At June
30, 2010, the Company had cash and cash equivalents of $7,975,715, as compared
to cash and cash equivalents of $10,255,259 at December 31, 2009. The Company
had working capital of $91,410,190 at June 30, 2010, as compared to working
capital of $76,130,322 at December 31, 2009, reflecting current ratios
of 5.01:1 and 5.06:1, respectively.
INVESTING
- The Company expended more cash for investing activities in the second quarter
of 2010 than in the second quarter of 2009. During the three months ended
June 30, 2009, the Company expended net cash of $384,234 in investing
activities. For the three months ended June 30, 2010, the Company utilized
$3,447,536 in investing activities for acquisition of property and equipment to
support the growth of the business.
FINANCING
- During the second quarter ended June 30, 2010, the Company received aggregate
bank loans in the amount of $4,483,578 under its credit facilities. The
Company had no borrowings under its credit facilities during the
quarter ended June 30, 2009.
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 collection of accounts receivable from our customers.
During the second quarter of 2010, 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.
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. The
Company is adopting such steps as the diversification of currencies used in
export sales, and the negotiation of export contracts with fixed exchange
rates.
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
At June
30, 2010, 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.
(
2) Results of operations for the six months ended June 30, 2010 as compared to
the six months ended June 30, 2009.
SALES
|
|
Six
months ended
|
|
Six
months ended
|
|
|
|
30-Jun-10
|
|
30-Jun-09
|
|
|
|
(U.S.
dollars in millions)
|
|
|
Air
brake systems & related components
|
$
|
72.3
|
|
|
|
86
|
%
|
$
|
42.1
|
|
|
|
84
|
%
|
|
Non-valve
products
|
$
|
11.7
|
|
|
|
14
|
%
|
$
|
7.9
|
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
84.0
|
|
|
|
100
|
%
|
$
|
50.0
|
|
|
|
100
|
%
|
Sales
consist of air brake systems 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
related parties.
Net sales
were $84,002,283 and $49,983,950 for the six months ended June 30, 2010 and
2009, respectively, an increase of $34.0 million or 68.1%.
A
breakdown of net sales revenue for these markets for the six months ended June
30, 2010 and 2009 fiscal years, respectively, is set forth below:
|
|
|
Six
months
|
|
|
Percent
|
|
|
Six
months
|
|
|
Percent
|
|
|
Percentage
|
|
|
|
|
ended
|
|
|
of
|
|
|
ended
|
|
|
of
|
|
|
Change
|
|
|
|
|
30-Jun-10
|
|
|
Total
Sales
|
|
|
30-Jun-09
|
|
|
Total
Sales
|
|
|
|
|
|
|
|
(U.S. dollars in million)
|
|
|
|
|
|
China
OEM market
|
|
$
|
50.4
|
|
|
|
60
|
%
|
|
$
|
23.3
|
|
|
|
47
|
%
|
|
|
116.3
|
%
|
|
China
Aftermarket
|
|
$
|
13.1
|
|
|
|
16
|
%
|
|
$
|
13.7
|
|
|
|
27
|
%
|
|
|
(
4.4
|
)
%
|
|
International
market
|
|
$
|
20.5
|
|
|
|
24
|
%
|
|
$
|
13.0
|
|
|
|
26
|
%
|
|
|
57.7
|
%
|
|
Total
|
|
$
|
84.0
|
|
|
|
100
|
%
|
|
$
|
50.0
|
|
|
|
100
|
%
|
|
|
68.
0
|
%
|
Global
financial conditions, involving a worldwide macroeconomic decline and weak
global auto market, caused the demand for our products to decline
during the first half year of 2009. However, the Chinese government’s 4
trillion RMB stimulus package, which positively affected the development of
China’s automobile industry, materially benefited our results in the first
half year of 2010. Further, we promoted our integrated system and modular
supplies of air brake systems to our OEM customers and we increasingly
focused on the light duty, bus and agricultural vehicle market in 2010. As a
result of these positive factors, our sales to the Chinese OEM
market increased by $27.1 million to $50.4 million for the first half
year of 2010, compared to $23.3 million for the same period of
2009.
We
achieved total revenue of $13.1 million in Chinese aftermarket sales for the six
months ended June 30, 2010, a slight decrease compared to $13.7 million for the
same period of 2009. The increased number of new vehicle sales in China and the
expiration of OEM warranties helped drive the increase in our aftermarket
business. Sales of our new model products, applicable to both OEM and
aftermarket, also grew during the first half of 2010. We will continue with our
strategies to further optimize our sales network, to help further penetrate into
new markets. Also, we will continue to focus on investing in new product
development for both the OEM market and the aftermarket, as a means to increase
our sales.
The global
financial crisis has negatively affected our international customers and caused
many world currencies to depreciate against the US dollar, while
the lack of confidence in the growth of the world macro-economy
caused our customers to decrease their inventories in order to lower their
risk in the first half year of 2009. With the recovery of global economy and
customers' confidence in the growth of economy in 2010, our export sales
increased by $7.5 million or 57.7%, to $20.5 million for the six months ended
June 30, 2010, as compared to $13.0 million for the same period of
2009.
COST
OF SALES AND GROSS PROFIT
For the
six months ended June 30,
20
10
, cost of sales was $60,874,960, an
increase of $24,825,336, or 68.9% from $36,049,624 for the same period last
year.
Our g
ross profit
in
creased by
6
6.0
%
f
rom
$
13,934,326
for the six months ended June 30,
200
9
to $
23,127,323
for the six months ended June 30,
20
10
.
Gross
margin decreased by 0.4% for the six months ended June 30, 2010, to 27.5% from
27.9% for the same period of 2009. The decrease in gross margin was
primarily due to the increased costs of primary raw materials and payroll.
We focused on increasing management efficiency, improving the technologies of
our products, and improving our product portfolio to offset our gross profit
margin decrease. We believe that our continued expansion to the higher-profit
new valve products will also help us to maintain or increase our gross profit
margins.
SELLING
AND DISTRIBUTION EXPENSES
Selling
and distribution expenses were $4,827,404 for the six months ended June 30,
2010, as compared to $3,378,452 for the same period of 2009,
an increase of $1,448,952 or 42.9%.
The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 5.7% for the six months ended
June 30, 2010, as compared to 6.8% for the same period in
2009.
GENERAL
AND ADMINISTRATIVE EXPENSES
General
and administrative expenses were $5,090,776 for the six months ended June 30,
2010, as compared to $3,508,055 for the same period of 2009, an increase of
$1,582,721or 45.1%.
The
increase was mainly due to increased welfare costs for business expansion and
provisions for doubtful accounts. Because of the impact of the U.S.
financial crisis and weakening international macroeconomic factors, the Company
extended the payment term for accounts receivable for our international
customers. As a percentage of sales revenue, general and administrative
expenses decreased to 6.1% for the six months ended June 30, 2010, as
compared to 7.0% for the same period in 2009.
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, 2010,
research and development expense was $3,059,582, as compared to $1,557,758 for
the same period of 2009, an increase of $1,501,824. The Company will continue to
invest in new product development, particularly in upgrading traditional valve
products and in developing electronically controlled
products.
DEPRECIATION
AND AMORTIZATION
Depreciation and amortization expense
increased to $
1,811,315
for the six months ended
June 30, 20
10
, compared with that of $
1,476,
238
for the same period of 200
9
, an increase of $
335,077
. The increase in depreciation and
amortization expense was primarily due to the purchase of production
equipment
.
FINANCIAL
EXPENSE
Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the six months ended June 30, 2010 increased by
$307,728 to $345,819 from $38,091 for the same period of 2009,
which was mainly attributed to fluctuations in the exchange rate between
U.S. dollars and RMB. Management is studying alternative methods for managing
its risks associated with currency translation, such as the diversification of
currencies used in export sales.
OTHER
INCOME
Other
income was $253,065 for the six months ended June 30, 2010, as compared to
$215,461 for the six months ended June 30, 2009, an increase of
$37,604. The increase was mainly due to an increase in sales of raw
material scraps for the six months ended June 30, 2010.
INCOME
TAX
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 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 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 Ventures, the Joint
Venture was exempt from income taxes in the PRC for each of the fiscal years
ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled
to a 50% income tax deduction for each of the three years ended December
31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both
fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st
January 2008, China’s enterprises are generally subject to a PRC income tax rate
of 25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.
The
Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of
the People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture was eligible for additional preferential tax
treatment for the years 2007 and 2008. In those years, the Joint Venture
was entitled to an income tax exemption on all pre-tax income generated by the
Company above its pre-tax income generated in the fiscal year 2006. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006
pre-tax income. The above taxation exemption was superseded, because the Joint
Venture has been awarded the Chinese government's "High-Tech Enterprise"
designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So,
the effective income tax rate will be 15% for years 2009 through
2011.
During
the six months ended June 30, 2010 and 2009, the Joint Venture received an
income tax benefit of $930,699 and $0 in accordance with PRC preferential
income tax policy regarding the purchase of domestically manufactured equipment,
which is subject to assessment and approval from the local state tax bureau.
Income tax expense of $615,542 and $1,272,091 was recorded for
the six months ended June 30, 2010 and 2009, respectively.
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 was three years. Total deferred stock-based compensation
expenses related to stock options amounted to $178,904. This amount
was amortized over the three year vesting period in a manner consistent
with FASB ASC 505-50. The amortization of deferred stock-based compensation for
these equity arrangements were $0 and $9,935 for the six months ended
June 30, 2010 and 2009, respectively. As of December 31, 2009, the 60,000
options had expired unexercised.
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
option became vested and exercisable immediately 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 General and
administrative expenses during the fiscal year ended December 31, 2007. On
November 13, 2009, David Ming He exercised the options on a cashless basis and
received 460 shares of common stock, based on a formula provided for in the
initial grant.
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 had retained Maxim
Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors
and investment bankers for a period of twelve months from the date of January 5,
2006. The agreement has now expired. Total expense associated with the 100,000
warrants amounted to $299,052, which, consistent with FASB ASC 505-50, was
recognized during the fiscal year ended December 31, 2006.
On
November 9, 2009, Maxim Group LLC transferred 35,000 warrants to OTA LLC and
35,000 warrants to Maxim Partners, LLC respectively. OTA LLC exercised the
warrants on a cashless basis on November 12, 2009 and received 6,609 shares of
common stock, based on a formula provided for in the initial grant. Maxim
Partners, LLC and Chardan Capital Markets, LLC transferred an additional 35,000
warrants and 30,000 warrants to OTA LLC on December 15, 2009 and December 11,
2009, respectively. OTA LLC exercised the warrants on a cashless basis on
December 18, 2009 and received 18,598 shares of common stock, based on a formula
provided for in the initial grant.
There
were no options or warrants outstanding as of June 30, 2010.
Although
the Company anticipates future issuances of stock awards could have a material
impact on reported net income in future financial statements, we do not expect
them to have a material impact on future cash flow.
NET
INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES
Non-controlling
interest in subsidiaries represents a 10% non-controlling interest in the
Chinese located Joint Venture and 40% non-controlling interest in the Hong Kong
located Joint Venture, in each case held by our Joint Venture Partners. Net
income attributable to non-controlling interest in subsidiaries amounted to
$842,775 and $439,066 for the six months ended June 30, 2010 and 2009,
respectively.
NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net
income attributable to stockholders for the six months ended June 30,
2010 increased by $4,600,319, to $8,541,977 from $3,941,658 for the
six months ended June 30, 2009 due to the factors discussed above. Earnings per
share (“EPS”), both basic and diluted, for the six months ended June 30, 2010
and 2009, were $0.45 and $0.22 per share, respectively.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
OPERATING
- Net cash used in operating activities was $10,600,484 for six months
ended June 30, 2010 compared with $8,537,485 of net cash provided in operating
activities in the same period in 2009, a decrease of $19,137,969, primarily
due to the increased cash outflow resulted by changes in accounts receivable,
notes receivable, inventory and prepayments, accounts Payable and notes payable.
Most accounts receivable of our OEM customers were converted into notes
receivable during the six months ended June 30, 2010. Those notes mature within
one to six months and may be transferred to our material suppliers as a payment
at anytime. We therefore do not believe that the notes receivable decrease
our current liquidity.
At June 30, 2010, the Company had cash
and cash equivalents of $7,975,715, as compared to cash and cash equivalents of
$10,255,259 at December 31, 2009. The Company had working capital of
$
91,410,190
at June 30,
2010, as compared to working capital of $76,130,322 at December 31, 2009,
reflecting current ratios of 5.01:1 and 5.06:1,
respectively.
INVESTING
- During the six months ended June 30, 2010, the Company expended net cash
of $6,672,691 in investing activities, mainly for acquisition of new equipment
to support the growth of the business. For the six months ended June 30, 2009,
the Company utilized $576,622 in investing activities.
FINANCING
- During the second quarter ended June 30, 2010, the Company received aggregate
bank loans in the amount of $4,483,578 under its credit facilities. During the
three months ended March 31, 2010, net cash provided by financing activities was
primarily attributable to the net proceeds of our public offering of
approximately $9,399,978. Additionally, another capital increase of $1,038,900
was contributed by Ruili Group to the Joint Venture. Net cash provided
by financing activities was $14,922,456 for six months ended June 30,
2010 compared with $0 in the same period in 2009. The Company had no
borrowings under its credit facilities during the six months ended
June 30, 2009.
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 collection of accounts receivable from our customers.
During the second quarter of 2010, 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.
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. The
Company is adopting such steps as the diversification of currencies used in
export sales, and the negotiation of export contracts with fixed exchange
rates.
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
At June
30, 2010, 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
See the
discussion in Item 2 above, “Liquidity and Capital Resources”.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures:
As of the
end of the period covered by this report, management, including our chief
executive officer and chief financial officer, evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(“Exchange Act”)). Based upon that evaluation, our chief executive officer and
chief financial officer concluded that the disclosure controls and procedures
were effective to ensure that information required to be disclosed in reports we
file or submit under the Exchange Act is (1) recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and (2) accumulated and communicated
to our management to allow their timely decisions regarding required
disclosure.
Changes
in Internal Control over Financial Reporting:
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended June 30, 2010 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II OTHER INFORMATION
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(a)
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Exhibits:
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31.1
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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.
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31.2
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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.
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32.1
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Certification
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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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.
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Dated
: August 12, 2010
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SORL
AUTO PARTS, INC.
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By: /s/ Xiao Ping Zhang
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Name:
Xiao Ping Zhang
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Title:
Chief Executive Officer
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By: /s/ Zong Yun Zhou
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Name:
Zong Yun Zhou
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|
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Title:
Chief Financial Officer
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|
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(Principal
Financial Officer)
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