UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September
30, 2014
¨ |
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
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 definitions 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):
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding
of each of the issuer classes of common stock, as of the latest practicable date:
As of November 14, 2014 there were 19,304,921
shares of common stock outstanding
SORL AUTO PARTS, INC.
FORM 10-Q
For the Quarter Ended September 30, 2014
INDEX
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2014 and December 31, 2013 |
| |
September
30, 2014 | | |
December
31, 2013 | |
| |
(Unaudited) | | |
(Audited) | |
Assets | |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash and
cash equivalents |
|
US$ | 37,902,347 | |
|
US$ | 28,241,983 | |
Accounts receivable,
net of provision | |
| 65,347,362 | | |
| 57,912,384 | |
Bank acceptance notes
from customers | |
| 14,390,355 | | |
| 20,186,787 | |
Inventories | |
| 81,310,370 | | |
| 76,364,019 | |
Prepayments | |
| 6,595,695 | | |
| 3,773,750 | |
Current portion of
prepaid capital lease interest | |
| 326,269 | | |
| 453,053 | |
Other current assets | |
| 1,871,590 | | |
| 2,537,300 | |
Deferred
tax assets | |
| 1,829,624 | | |
| 1,392,955 | |
Total
Current Assets | |
| 209,573,612 | | |
| 190,862,231 | |
Fixed Assets | |
| | | |
| | |
Machinery | |
| 50,225,617 | | |
| 46,475,961 | |
Molds | |
| 1,418,227 | | |
| 1,388,218 | |
Office equipment | |
| 2,110,131 | | |
| 1,960,476 | |
Vehicles | |
| 2,062,119 | | |
| 2,248,280 | |
Buildings | |
| 9,103,122 | | |
| 8,910,501 | |
Machinery held under
capital lease | |
| 29,012,601 | | |
| 28,396,853 | |
Less:
accumulated depreciation | |
| (50,114,599 | ) | |
| (44,175,888 | ) |
Property, plant
and equipment, net | |
| 43,817,218 | | |
| 45,204,401 | |
Leasehold improvements | |
| 220,632 | | |
| 264,612 | |
| |
| | | |
| | |
Land Use Rights,
Net | |
| 14,437,566 | | |
| 14,409,170 | |
| |
| | | |
| | |
Other Non-Current
Assets | |
| | | |
| | |
| |
| | | |
| | |
Intangible assets | |
| 81,051 | | |
| 176,302 | |
Less: accumulated
amortization | |
| (40,526 | ) | |
| (126,031 | ) |
Intangible assets,
net | |
| 40,525 | | |
| 50,271 | |
Security deposits on lease agreement | |
| 1,857,549 | | |
| 1,818,244 | |
Non-current portion of prepaid capital
lease interest | |
| 151,753 | | |
| 371,355 | |
Total
Other Non-Current Assets | |
| 2,049,827 | | |
| 2,239,870 | |
Total
Assets | |
US$ | 270,098,855 | | |
US$ | 252,980,284 | |
| |
| | | |
| | |
Liabilities
and Shareholders' Equity | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable, including
$792,275 and $810,310 due to related parties at September 30, 2014 and December 31, 2013, respectively. | |
US$ | 8,627,664 | | |
US$ | 13,290,282 | |
Deposit received from
customers | |
| 15,733,550 | | |
| 13,931,658 | |
Short term bank loans | |
| 8,187,452 | | |
| 4,526,863 | |
Income tax payable | |
| 477,655 | | |
| 494,658 | |
Accrued expenses | |
| 12,324,370 | | |
| 10,066,969 | |
Current portion of
capital lease obligations | |
| 3,715,098 | | |
| 3,636,488 | |
Other
current liabilities, including $203,560 and $94,246 due to related parties at September 30, 2014 and December 31, 2013, respectively. | |
| 1,853,114 | | |
| 256,430 | |
Total
Current Liabilities | |
| 50,918,903 | | |
| 46,203,348 | |
| |
| | | |
| | |
Non-Current Liabilities | |
| | | |
| | |
Non-current
portion of capital lease obligations | |
| 4,643,873 | | |
| 7,272,975 | |
Total
Non-Current Liabilities | |
| 4,643,873 | | |
| 7,272,975 | |
| |
| | | |
| | |
Total
Liabilities | |
US$ | 55,562,776 | | |
US$ | 53,476,323 | |
| |
| | | |
| | |
Stockholders' Equity | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock - no
par value; 1,000,000 authorized; none issued and outstanding as of September 30, 2014 and December 31, 2013 | |
| - | | |
| - | |
Common stock - $0.002
par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of September 30, 2014 and December 31, 2013 | |
| 38,609 | | |
| 38,609 | |
Additional paid-in
capital | |
| 42,199,014 | | |
| 42,199,014 | |
Reserves | |
| 11,600,638 | | |
| 10,609,435 | |
Accumulated other comprehensive
income | |
| 26,357,421 | | |
| 22,465,720 | |
Retained
earnings | |
| 113,356,629 | | |
| 104,544,120 | |
Total
SORL Auto Parts, Inc. Stockholders' Equity | |
| 193,552,311 | | |
| 179,856,898 | |
Noncontrolling
Interest In Subsidiaries | |
| 20,983,768 | | |
| 19,647,063 | |
Total
Equity | |
| 214,536,079 | | |
| 199,503,961 | |
Total
Liabilities and Stockholders' Equity | |
US$ | 270,098,855 | | |
US$ | 252,980,284 | |
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Income and
Comprehensive Income
For The Three Months and Nine Months
Ended September 30, 2014 and 2013 (Unaudited) |
| |
Three
Months Ended September 30, | | |
Nine
Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
Sales |
|
US$ | 58,702,505 | |
|
US$ | 54,488,640 | |
|
US$ | 174,419,540 | |
|
US$ | 153,317,804 | |
Include: sales to related parties | |
| 534,195 | | |
| 825,101 | | |
| 2,169,778 | | |
| 2,067,673 | |
Cost of sales | |
| 43,240,746 | | |
| 39,075,431 | | |
| 125,056,960 | | |
| 108,858,673 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 15,461,759 | | |
| 15,413,209 | | |
| 49,362,580 | | |
| 44,459,131 | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
Selling and distribution expenses | |
| 5,871,463 | | |
| 5,277,020 | | |
| 18,050,068 | | |
| 14,596,863 | |
General and administrative expenses | |
| 3,759,307 | | |
| 3,696,715 | | |
| 12,786,335 | | |
| 13,079,992 | |
Research and development expenses | |
| 2,242,620 | | |
| 2,384,902 | | |
| 5,934,377 | | |
| 5,392,513 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 11,873,390 | | |
| 11,358,637 | | |
| 36,770,780 | | |
| 33,069,368 | |
| |
| | | |
| | | |
| | | |
| | |
Other operating income | |
| 545,752 | | |
| 444,791 | | |
| 1,471,014 | | |
| 1,280,683 | |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| 4,134,121 | | |
| 4,499,363 | | |
| 14,062,814 | | |
| 12,670,446 | |
| |
| | | |
| | | |
| | | |
| | |
Other income | |
| 100,534 | | |
| 413,862 | | |
| 352,130 | | |
| 505,215 | |
Financial expenses | |
| (634,282 | ) | |
| (770,418 | ) | |
| (1,773,223 | ) | |
| (2,208,756 | ) |
Non-operating expenses | |
| (44,637 | ) | |
| (77,073 | ) | |
| (277,945 | ) | |
| (272,374 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income before provision for income taxes | |
| 3,555,736 | | |
| 4,065,734 | | |
| 12,363,776 | | |
| 10,694,531 | |
| |
| | | |
| | | |
| | | |
| | |
Provision for income
taxes | |
| 391,988 | | |
| 332,027 | | |
| 1,556,433 | | |
| 1,040,215 | |
| |
| | | |
| | | |
| | | |
| | |
Net income |
|
US$ | 3,163,748 | | |
US$ | 3,733,707 | | |
US$ | 10,807,343 | | |
US$ | 9,654,316 | |
| |
| | | |
| | | |
| | | |
| | |
Net income attributable to noncontrolling
interest in subsidiaries | |
| 262,813 | | |
| 423,087 | | |
| 1,003,631 | | |
| 1,075,525 | |
| |
| | | |
| | | |
| | | |
| | |
Net income attributable
to common stockholders | |
US$ | 2,900,935 | | |
US$ | 3,310,620 | | |
US$ | 9,803,712 | |
|
US$ | 8,578,791 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
US$ | 3,163,748 | | |
US$ | 3,733,707 | | |
US$ | 10,807,343 | | |
US$ | 9,654,316 | |
| |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustments | |
| (108,081 | ) | |
| 1,023,444 | | |
| 4,224,775 | | |
| 4,833,515 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income | |
| 3,055,667 | | |
| 4,757,151 | | |
| 15,032,118 | | |
| 14,487,831 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income attributable to noncontrolling
interest in subsidiaries | |
| 193,652 | | |
| 532,333 | | |
| 1,336,705 | | |
| 1,564,259 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income
attributable to common shareholders | |
US$ | 2,862,015 | | |
US$ | 4,224,818 | |
|
US$ | 13,695,413 | | |
US$ | 12,923,572 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common share - basic | |
| 19,304,921 | | |
| 19,304,921 | | |
| 19,304,921 | | |
| 19,304,921 | |
| |
| | | |
| | | |
| | | |
| | |
Weighted average common share - diluted | |
| 19,304,921 | | |
| 19,304,921 | | |
| 19,304,921 | | |
| 19,304,921 | |
| |
| | | |
| | | |
| | | |
| | |
EPS - basic | |
US$ | 0.15 | | |
US$ | 0.17 | | |
US$ | 0.51 | | |
US$ | 0.44 | |
| |
| | | |
| | | |
| | | |
| | |
EPS - diluted | |
US$ | 0.15 | | |
US$ | 0.17 | | |
US$ | 0.51 | | |
US$ | 0.44 | |
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Nine Months Ended September 30,
2014 and 2013 (Unaudited) |
| |
Nine
Months Ended September 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
Cash Flows from
Operating Activities | |
| | | |
| | |
Net income | |
US$ | 10,807,343 | |
|
US$ | 9,654,316 | |
Adjustments to reconcile
net income to net cash | |
| | | |
| | |
from operating activities: | |
| | | |
| | |
| |
| | | |
| | |
Allowance for doubtful accounts | |
| 1,697,068 | | |
| 1,371,727 | |
Depreciation and amortization | |
| 5,597,867 | | |
| 5,617,369 | |
Deferred income tax | |
| (405,594 | ) | |
| (252,018 | ) |
Loss on disposal of fixed assets | |
| 35,655 | | |
| 5,196 | |
Changes in assets
and liabilities: | |
| | | |
| | |
Account receivable | |
| (7,790,502 | ) | |
| 8,037,713 | |
Bank acceptance notes from customers | |
| 6,153,022 | | |
| (12,252,121 | ) |
Other currents assets | |
| 755,849 | | |
| (1,756,558 | ) |
Inventories | |
| (3,305,061 | ) | |
| (12,687,012 | ) |
Prepayments | |
| (2,716,212 | ) | |
| (319,823 | ) |
Prepaid capital lease interest | |
| 362,790 | | |
| 342,776 | |
Accounts payable | |
| (4,895,398 | ) | |
| (6,259,596 | ) |
Income tax payable | |
| (26,461 | ) | |
| - | |
Deposits received from customers | |
| 1,506,420 | | |
| 7,317,768 | |
Other current liabilities and accrued
expenses | |
| 3,630,457 | | |
| 2,248,257 | |
| |
| | | |
| | |
Net Cash Flows Provided
By Operating Activities | |
| 11,407,243 | | |
| 1,067,994 | |
| |
| | | |
| | |
Cash Flows from
Investing Activities | |
| | | |
| | |
Acquisition of property and equipment | |
| (2,994,571 | ) | |
| (3,356,852 | ) |
Proceeds of disposal
of fixed assets | |
| 57,339 | | |
| 14,602 | |
Net Cash Flows Used
In Investing Activities | |
| (2,937,232 | ) | |
| (3,342,250 | ) |
| |
| | | |
| | |
Cash Flows from
Financing Activities | |
| | | |
| | |
Proceeds from bank loans | |
| 28,383,953 | | |
| 60,307,996 | |
Repayment of bank loans | |
| (24,924,952 | ) | |
| (69,079,151 | ) |
Repayment of capital lease | |
| (2,776,407 | ) | |
| (11,400,163 | ) |
Proceeds from capital
lease | |
| - | | |
| 12,783,841 | |
Net Cash flows Provided
By (Used In) Financing Activities | |
| 682,594 | | |
| (7,387,477 | ) |
| |
| | | |
| | |
Effects on changes in foreign exchange
rate | |
| 507,759 | | |
| 928,771 | |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
| 9,660,364 | | |
| (8,732,962 | ) |
| |
| | | |
| | |
Cash and Cash Equivalents-
Beginning of the Year | |
| 28,241,983 | | |
| 41,253,353 | |
| |
| | | |
| | |
Cash
and Cash Equivalents - End of the Period | |
US$ | 37,902,347 | | |
US$ | 32,520,391 | |
| |
| | | |
| | |
Supplemental
Cash Flow Disclosures: | |
| | | |
| | |
Interest paid | |
US$ | 1,126,215 | | |
US$ | 1,247,619 | |
Tax paid | |
US$ | 1,983,823 | | |
US$ | 1,772,230 | |
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in
Stockholders' Equity
For The Nine Months Ended September 30,
2014 (Unaudited)
| |
| | |
| | |
Additional | | |
| | |
| | |
Accumu. Other | | |
| | |
| | |
| |
| |
Number | | |
Common | | |
Paid-in | | |
| | |
Retained | | |
Comprehensive | | |
Shareholders' | | |
Noncontrolling | | |
Total | |
| |
of
Shares | | |
Stock | | |
Capital | | |
Reserves | | |
Earnings | | |
Income | | |
Equity | | |
Interest | | |
Equity | |
Beginning Balance
- January 1, 2014 | |
| 19,304,921 | | |
$ | 38,609 | | |
$ | 42,199,014 | | |
$ | 10,609,435 | | |
$ | 104,544,120 | | |
$ | 22,465,720 | | |
$ | 179,856,898 | | |
$ | 19,647,063 | | |
$ | 199,503,961 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 9,803,712 | | |
| - | | |
| 9,803,712 | | |
| 1,003,631 | | |
| 10,807,343 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 3,891,701 | | |
| 3,891,701 | | |
| 333,074 | | |
| 4,224,775 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Transfer to reserve | |
| - | | |
| - | | |
| - | | |
| 991,203 | | |
| (991,203 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending
Balance - September 30, 2014 | |
| 19,304,921 | | |
$ | 38,609 | | |
$ | 42,199,014 | | |
$ | 11,600,638 | | |
$ | 113,356,629 | | |
$ | 26,357,421 | | |
$ | 193,552,311 | | |
$ | 20,983,768 | | |
$ | 214,536,079 | |
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SORL Auto Parts,
Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (together with its
subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”) is principally
engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership
of Ruili Group Ruian Auto Parts Co., Ltd. (the “Joint Venture” or “Ruian”) 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 65 categories and over 2000 different specifications.
The Joint Venture was formed in the
People’s Republic of China (“PRC” or “China”) as a Sino-Foreign joint venture on January 17, 2004,
pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the “Ruili Group”) and Fairford
Holdings Limited (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was incorporated in China
in 1987 and specializes in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group
contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture.
On November 11, 2009, the Company entered
into a joint venture agreement with MGR Hong Kong Limited (‘MGR”), a Hong Kong-based global auto parts distribution
specialist firm and a Taiwanese investor. The new joint venture was named 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 August 31, 2010, the Company, through
the Joint Venture, executed an agreement to acquire the assets of the hydraulic brake, power steering, and automotive electrical
operations of the Ruili Group (a related party under common control). As a result of this acquisition, the Company’s product
offerings expanded to both commercial and passenger vehicles’ brake systems and other key safety-related auto parts. The
purchase price was RMB 170 million, or approximately US $25 million. The transaction was accounted for using the book value of
assets acquired, consisting primarily of machinery and equipment, inventory, accounts receivable and patent rights, used or usable
in connection with the acquired segment of the auto parts business of the Seller. The Company purchased the machinery and equipment,
inventory, and accounts receivable at book values of US $8.0 million, US $8.0 million and US $5.2 million, respectively. The Company
did not acquire any of the assets of the Seller other than those in the segment of Seller’s business described above. The
excess of consideration over the carrying value of net assets received has been recorded as a decrease in the additional paid-in
capital of the Company.
The acquisition was accounted for as a transaction
between the entities under common control because the CEO of the Company owns 63% of the registered capital of the Ruili Group,
and owns more than 50% of the outstanding common stock of SORL, together with his wife and brother. This results in the acquisition
being accounted for using the historical costs of the financial statements of the Seller. The consolidated financial statements
have been prepared as if the acquisition took place at the earliest time presented, that is, as of January 1, 2009. The assets
purchase was deemed to be the acquisition of a business.
NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
(1) |
BASIS OF PRESENTATION |
The consolidated financial
statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions
have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial statements
prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by the rules
and regulations of the United States Securities and Exchange Commission (“SEC”), although the Company believes that
the disclosures contained in this report are adequate to make the information presented not misleading. The consolidated balance
sheet information as of December 31, 2013 was derived from the consolidated audited financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2013. These consolidated financial statements should be read in conjunction
with the annual consolidated audited financial statements and the notes thereto included in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2013, and other reports filed with the SEC.
The accompanying unaudited
interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim
periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of
any other interim period or for the fiscal year taken as a whole.
(2) |
SIGNIFICANT ACCOUNTING POLICIES |
a. ACCOUNTING METHOD
The Company uses the accrual
method of accounting for financial statement and tax return purposes.
b. USE OF ESTIMATES
The preparation of financial
statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate
of the outcome for these items based on historical trends and other information available when the financial statements are prepared.
Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period
when new information becomes available to management. Actual results could differ from those estimates.
c. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company’s
financial instruments, including cash and cash equivalents, trade receivables and payables, prepaid expenses, deposits and other
current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate fair values due to
their short maturities.
d. REVENUE RECOGNITION
Revenue from the sale of
goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided
by several factors, including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales
price is fixed and determinable, and collection is probable. Revenue consists of the invoice value for the sale of goods and services
net of value-added tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown
in the income statement is the net sales.
e. FOREIGN CURRENCY
TRANSLATION
The Company maintains its
books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company
has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United
States dollars (“US$”). All assets and liabilities are translated at the current rate. The shareholders’ equity
accounts are translated at appropriate historical rate. Revenue and expenses are translated at the weighted average rates in effect
on the transaction dates.
Translation adjustments
resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred.
f. RECLASSIFICATIONS
Certain prior year amounts
have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and
financial position.
NOTE C- RECENTLY ISSUED FINANCIAL STANDARDS
In April 2014, the FASB
issued ASU 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity”.
The amendments in the ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. It
also addresses sources of confusion and inconsistent application related to financial reporting of discontinued operations guidance
in U.S. GAAP. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued
operations. In addition, the new guidance requires expanded disclosures about discontinued operations that will provide financial
statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The amendments
in the ASU are effective in the first quarter of 2015 for public organizations with calendar year ends. Early adoption is permitted.
The Company does not expect the adoption to have a significant impact on its consolidated financial statements.
In May 2014, the FASB issued
ASU 2014-09, “Revenue from contracts with Customers (Topic 606)”. This ASU affects any entity that either enters
into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets.
This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance.
The ASU also supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition-Construction-Type and Production-Type
Contracts. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchanged for
those goods or services. The standard is effective for annual reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. The Company is currently in the process of evaluating the impact of the adoption on its consolidated
financial statements.
In August 2014, the FASB
issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”.
The amendment in the ASU provides guidance on determining when and how to disclose going-concern uncertainties in the financial
statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue
as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures
if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The amendments
in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2016.
Earlier adoption is permitted. The Company does not expect the adoption to have a significant impact on its consolidated financial
statements.
NOTE D - RELATED PARTY TRANSACTIONS
The Company continues
to purchase packaging materials from the Ruili Group. The Ruili Group is the minority shareholder of Joint Venture and is collectively
controlled by Mr. Xiao Ping Zhang, his wife Ms. Shuping Chi, and his brother Mr. Xiao Feng Zhang. In addition, the Company purchases
from two other related parties, Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd. (“Guangzhou Kormee”)
and Ruian Kormee Vehicle brake Co., Ltd. (“Ruian Kormee”). Guangzhou Kormee is controlled by the Ruili Group and Ruian
Kormee is the wholly-owned subsidiary of Guangzhou Kormee. The Company also sells certain automotive products to Guangzhou Kormee,
Ruian Kormee and the Ruili Group. MGR holds a 30% interest in SIH. The stockholders of MGR are the management of SIH.
The following related
party transactions are reported for the three months and nine months ended September 30, 2014 and September 30, 2013:
| |
Three Months Ended September 30, | | |
Nine Months Ended September 30, | |
| |
2014 | | |
2013 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| | |
| |
PURCHASES FROM: | |
| | | |
| | | |
| | | |
| | |
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd. | |
$ | 178,095 | | |
$ | — | | |
$ | 1,650,115 | | |
$ | 551,457 | |
Ruian Kormee Vehicle Brake Co., Ltd. | |
| 326,002 | | |
| 692,079 | | |
| 1,095,959 | | |
| 1,508,268 | |
The Ruili Group | |
| 862,037 | | |
| 1,302,818 | | |
| 2,905,090 | | |
| 3,349,422 | |
| |
| | | |
| | | |
| | | |
| | |
Total Purchases | |
$ | 1,366,134 | | |
$ | 1,994,897 | | |
$ | 5,651,164 | | |
$ | 5,409,147 | |
| |
| | | |
| | | |
| | | |
| | |
SALES TO: | |
| | | |
| | | |
| | | |
| | |
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd. | |
$ | 153,236 | | |
$ | 307,816 | | |
$ | 1,127,947 | | |
$ | 597,387 | |
Ruian Kormee Vehicle Brake Co., Ltd. | |
| 12,743 | | |
| 22,135 | | |
| 68,482 | | |
| 22,135 | |
The Ruili Group | |
| 368,216 | | |
| 495,150 | | |
| 973,349 | | |
| 1,448,151 | |
| |
| | | |
| | | |
| | | |
| | |
Total Sales | |
$ | 534,195 | | |
$ | 825,101 | | |
$ | 2,169,778 | | |
$ | 2,067,673 | |
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
ACCOUNTS PAYABLE | |
| | | |
| | |
Ruian Kormee Vehicle Brake Co., Ltd. | |
$ | 38,490 | | |
$ | 445,896 | |
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd. | |
| 728,641 | | |
| — | |
The Ruili Group | |
| 25,144 | | |
| 364,414 | |
Total | |
$ | 792,275 | | |
$ | 810,310 | |
| |
| | | |
| | |
OTHER PAYABLES | |
| | | |
| | |
MGR Hong Kong Limited | |
$ | 180,099 | | |
$ | 94,246 | |
The Ruili Group | |
| 23,461 | | |
| — | |
Total | |
$ | 203,560 | | |
$ | 94,246 | |
The Company
entered into several lease agreements with a related party, the Ruili Group, see Note M for more details.
In
addition, the Company provides guarantees to the loans obtained by Ruili Group from the Bank of Ningbo in the amount of RMB
108,000,000 (approximately $17,182,404) for the period from September 26, 2013 to September 25, 2014.
NOTE E - ACCOUNTS RECEIVABLE
No customer individually
accounted for more than 10% of our revenues or accounts receivable for the nine months ended September 30, 2014. The changes in
the allowance for doubtful accounts at September 30, 2014 and December 31, 2013 are summarized as follows:
| |
September 30, 2014 | | |
December 31, 2013 | |
Beginning balance | |
$ | 3,813,415 | | |
$ | 998,492 | |
Add: Increase to allowance | |
| 1,782,739 | | |
| 2,814,923 | |
Less: Accounts written off | |
| — | | |
| — | |
| |
| | | |
| | |
Ending balance | |
$ | 5,596,154 | | |
$ | 3,813,415 | |
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
Accounts receivable | |
$ | 70,943,516 | | |
$ | 61,725,799 | |
Less: allowance for doubtful accounts | |
| (5,596,154 | ) | |
| (3,813,415 | ) |
| |
| | | |
| | |
Account receivable balance, net | |
$ | 65,347,362 | | |
$ | 57,912,384 | |
NOTE F - INVENTORIES
At September 30, 2014 and December 31, 2013,
inventories consisted of the following:
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Raw materials | |
$ | 8,483,140 | | |
$ | 12,380,061 | |
Work in process | |
| 35,663,894 | | |
| 31,546,330 | |
Finished goods | |
| 37,192,045 | | |
| 32,466,337 | |
Less: Write-down of inventories | |
| (28,709 | ) | |
| (28,709 | ) |
| |
| | | |
| | |
Total inventories | |
$ | 81,310,370 | | |
$ | 76,364,019 | |
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of
the following, at September 30, 2014 and December 31, 2013:
| |
September 30, 2014 | | |
December 31, 2013 | |
Machinery | |
$ | 50,225,617 | | |
$ | 46,475,961 | |
Molds | |
| 1,418,227 | | |
| 1,388,218 | |
Office equipment | |
| 2,110,131 | | |
| 1,960,476 | |
Vehicles | |
| 2,062,119 | | |
| 2,248,280 | |
Buildings | |
| 9,103,122 | | |
| 8,910,501 | |
Machinery held under capital lease | |
| 29,012,601 | | |
| 28,396,853 | |
| |
| | | |
| | |
Sub-Total | |
| 93,931,817 | | |
| 89,380,289 | |
| |
| | | |
| | |
Less: Accumulated depreciation | |
| (50,114,599 | ) | |
| (44,175,888 | ) |
| |
| | | |
| | |
Property, plant and equipment, net | |
$ | 43,817,218 | | |
$ | 45,204,401 | |
Depreciation expense charged
to operations was $5,247,145 and $5,101,292 for the nine months ended September 30, 2014 and September 30, 2013, respectively.
NOTE H - DEFERRED TAX ASSETS AND DEFERRED
TAX LIABILITIES
Deferred tax assets consisted
of the following as of September 30, 2014 and December 31, 2013:
| |
September 30, 2014 | | |
December 31, 2013 | |
Deferred tax assets - current | |
| | | |
| | |
Allowance for doubtful accounts | |
$ | 846,488 | | |
$ | 578,928 | |
Revenue (net of cost) | |
| 45,459 | | |
| 8,653 | |
Unpaid accrued expenses | |
| 122,247 | | |
| 105,558 | |
Warranty | |
| 815,430 | | |
| 699,816 | |
Deferred tax assets | |
| 1,829,624 | | |
| 1,392,955 | |
Valuation allowance | |
| ― | | |
| ― | |
Net deferred tax assets - current | |
$ | 1,829,624 | | |
$ | 1,392,955 | |
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 U.S. 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 I – SHORT-TERM BANK LOANS
Bank loans represented
the following as of September 30, 2014 and December 31, 2013:
| |
September 30, | | |
December 31, | |
| |
2014 | | |
2013 | |
Secured | |
$ | 8,187,452 | | |
$ | 4,526,863 | |
The Company obtained those short term loans
from Bank of China, Agricultural Bank of China, and China Construction Bank, to finance general working capital as well as new
equipment acquisition. Interest rate for the loans ranged from 2.73% to 3.62% per annum. The maturity dates of the loans ranged
from November 11, 2014 to November 27, 2015.
Corporate or personal guarantee: |
$5.1 Million |
|
Guaranteed by the Ruili Group, a related party; |
$3.1 Million |
|
Guaranteed by the Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders. |
NOTE J –CAPITAL LEASE OBLIGATIONS
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| | |
| |
Total capital lease obligations | |
$ | 8,358,971 | | |
$ | 10,909,463 | |
Less: Current portion | |
| (3,715,098 | ) | |
| (3,636,488 | ) |
Non-current portion | |
$ | 4,643,873 | | |
$ | 7,272,975 | |
On September 13, 2011, the Company entered
into a leasing agreement with International Far Eastern Leasing Co., Ltd., a subsidiary of China Sinochem Corporation, for a term
of 60 months and an interest rate of 7.95% per annum, payable monthly in arrears. To reduce the financing expense, the Company
entered into a new leasing agreement with International Far Eastern Leasing Co., Ltd. in December 2012 and terminated the original
agreement. The duration of the new agreement is 48 months with an interest rate of 6.4% per annum and is secured with the Company’s
equipment in the original cost of $28,396,853. The capital lease obligation obtained by the Company is RMB 91,428,571 (approximately
US $14,545,950) and the Company is required to maintain a security deposit of RMB 11,428,571 (approximately US $1,818,244). The
Company prepaid all interests of RMB 10,705,357 (approximately US $1,703,212) after the discount and is obligated for the payment
of RMB 1,904,762 (approximately US $303,041) monthly. The prepaid interest for capital lease obligation is amortized over the life
of capital lease agreement using the effective interest method.
NOTE K - 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.
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 was entitled to an income tax exemption on all pre-tax income generated by the company
above its pre-tax income generated in the year 2006. Thereafter, the Joint Venture would 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 “High-Tech Enterprise” certificate
by the Chinese government. The High-Tech Enterprise certificate is valid for three years and provided for a reduced tax rate of
15% for years 2009 through 2011. The Company used a tax rate of 25% for the first three quarters of 2012. In December 2012, the
Joint Venture passed the re-assessment of the High-Tech Enterprise certificate by the government, according to relevant PRC income
tax laws. Accordingly, it continues to be taxed at a 15% rate in 2012 through 2014.
The reconciliation of the
effective income tax rate of the Company to the statutory income tax rate in the PRC for the nine months of 2014 and 2013 is as
follows:
| |
Nine Months Ended September 30, 2014 | | |
Nine Months Ended September 30, 2013 | |
US Statutory income tax rate | |
| 35.00 | % | |
| 35.00 | % |
Valuation allowance recognized with respect to the loss in the US company | |
| -35.00 | % | |
| -35.00 | % |
HK Statutory income tax rate | |
| 16.50 | % | |
| 16.50 | % |
Valuation allowance recognized with respect to the loss in those HK company | |
| -16.50 | % | |
| -16.50 | % |
China Statutory income tax rate | |
| 25.00 | % | |
| 25.00 | % |
China Statutory income exemption | |
| -10.00 | % | |
| -10.00 | % |
Additional deduction allowed for R&D expenses | |
| -3.60 | % | |
| -4.81 | % |
Other items | |
| 1.19 | % | |
| -0.46 | % |
| |
| | | |
| | |
Effective tax rate | |
| 12.59 | % | |
| 9.73 | % |
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 mentioned above at September 30, 2014. There
currently is no tax benefit recorded for the United States. The tax authority may examine the tax returns of the Company three
years after the year ended December 31, 2014. In the nine months ended September 30, 2014, 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 nine months ended September 30, 2014 and 2013, respectively, are summarized as follows:
| |
Nine Months Ended
September 30, 2014 | | |
Nine Months Ended September 30, 2013 | |
| |
| | |
| |
Current | |
$ | 1,962,026 | | |
$ | 1,292,233 | |
Deferred | |
| (405,593 | ) | |
| (252,018 | ) |
| |
| | | |
| | |
Total | |
$ | 1,556,433 | | |
$ | 1,040,215 | |
As of September 30, 2014
and December 31, 2013, the Company had no unrecognized tax benefits.
NOTE L - NONCONTROLLING INTEREST IN SUBSIDIAIRES
Non-controlling interest
in subsidiaries represents a 10% non-controlling interest, owned by the Ruili Group, in Ruian, and a 40% non-controlling interest,
owned by the Company’s Joint Venture partners, in SIH. Net income attributable to non-controlling interests in subsidiaries
amounted to $1,003,631 and $1,075,525 for the nine months ended September 30, 2014 and 2013, respectively.
| |
Nine Months Ended September 30, 2014 | | |
Nine Months Ended September 30, 2013 | |
| |
| | |
| |
10% non-controlling interest in Ruian | |
$ | 1,101,336 | | |
$ | 941,410 | |
40% non-controlling interest in SIH | |
| (97,705 | ) | |
| 134,115 | |
| |
| | | |
| | |
Total | |
$ | 1,003,631 | | |
$ | 1,075,525 | |
NOTE M – OPERATING LEASES WITH RELATED
PARTIES
In December 2006,
Ruian entered into a lease agreement with Ruili Group for the lease of two apartment buildings. These two apartment buildings
are for Ruian’s management personnel and staff, respectively. The lease term is from January 2013 to December 2016.
This lease was amended in 2013, with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is
RMB 2,100,000 (approximately US $333,688).
In May 2009, Ruian
entered into a lease agreement with Ruili Group for the lease of a manufacturing plant. The lease term is from September 2009
to May 2017. In August 2010, a new lease agreement was signed between Ruian and Ruili Group, under which Ruian leased 32,410
square meters manufacturing plant for its new purchased Passenger Vehicle Brake Systems business. The lease term is from
September 2009 to August 2020. This lease was amended in 2013. The amended lease term is from January 1, 2013 to December 31,
2017. The annual lease expense is RMB 8,137,680 (approximately US $1,293,070).
The lease expenses were
$1,221,583 and $1,220,069 for the nine months ended September 30, 2014 and 2013, respectively.
NOTE N - WARRANTY CLAIMS
Warranty claims were $1,717,235
and $1,589,950 for the nine months ended September 30, 2014 and September 30, 2013, respectively. Warranty claims are classified
as accrued expenses on the balance sheet. The movement of accrued warranty expenses for the nine months ended September 30, 2014
was as follows:
Beginning balance at January 1, 2014 | |
$ | 4,665,439 | |
Aggregate reduction for payments made | |
| (946,477 | ) |
Aggregate increase for new warranties issued during current period | |
| 1,717,235 | |
Ending balance at September 30, 2014 | |
$ | 5,436,197 | |
NOTE O – SEGMENT INFORMATION
The Company produces brake
systems and other related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”).
On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the
passenger vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition,
the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related
auto parts.
The Company has two operating
segments: Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems.
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.
| |
Nine
Months Ended September 30, | |
| |
2014 | | |
2013 | |
| |
| | |
| |
NET SALES TO EXTERNAL CUSTOMERS | |
| | | |
| | |
Commercial Vehicle Brake
Systems | |
$ | 141,967,713 | | |
$ | 124,244,854 | |
Passenger Vehicle Brake Systems | |
| 32,451,827 | | |
| 29,072,950 | |
| |
| | | |
| | |
Net sales | |
$ | 174,419,540 | | |
$ | 153,317,804 | |
INTERSEGMENT SALES | |
| | | |
| | |
Commercial Vehicle Brake Systems | |
$ | ― | | |
$ | ― | |
Passenger Vehicle
Brake Systems | |
| ― | | |
| ― | |
| |
| | | |
| | |
Intersegment
sales | |
$ | ― | | |
$ | ― | |
GROSS PROFIT | |
| | | |
| | |
Commercial Vehicle Brake Systems | |
$ | 40,178,369 | | |
$ | 36,028,550 | |
Passenger Vehicle Brake Systems | |
| 9,184,211 | | |
| 8,430,581 | |
| |
| | | |
| | |
Gross profit | |
$ | 49,362,580 | | |
$ | 44,459,131 | |
Other operating income | |
| 1,471,014 | | |
| 1,280,683 | |
Selling and distribution expenses | |
| 18,050,068 | | |
| 14,596,863 | |
General and administrative expenses | |
| 12,786,335 | | |
| 13,079,992 | |
Research and development
expenses | |
| 5,934,377 | | |
| 5,392,513 | |
Income from operations | |
| 14,062,814 | | |
| 12,670,446 | |
Financial expenses | |
| (1,773,223 | ) | |
| (2,208,756 | ) |
Other income | |
| 352,130 | | |
| 505,215 | |
Non-operating
expenses | |
| (277,945 | ) | |
| (272,374 | ) |
| |
| | | |
| | |
Income before
income tax expense | |
$ | 12,363,776 | | |
$ | 10,694,531 | |
CAPITAL EXPENDITURE | |
| | | |
| | |
Commercial Vehicle Brake Systems | |
$ | 2,437,413 | | |
$ | 2,730,650 | |
Passenger Vehicle
Brake Systems | |
| 557,158 | | |
| 626,202 | |
| |
| | | |
| | |
Total | |
$ | 2,994,571 | | |
$ | 3,356,852 | |
DEPRECIATION AND AMORTIZATION | |
| | | |
| | |
Commercial Vehicle Brake Systems | |
$ | 4,556,349 | | |
$ | 4,552,173 | |
Passenger Vehicle
Brake Systems | |
| 1,041,518 | | |
| 1,065,196 | |
| |
| | | |
| | |
Total | |
$ | 5,597,867 | | |
$ | 5,617,369 | |
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| |
TOTAL ASSETS | |
| | | |
| | |
Commercial Vehicle Brake Systems | |
$ | 219,845,303 | | |
$ | 205,310,702 | |
Passenger Vehicle Brake Systems | |
| 50,253,552 | | |
| 47,669,582 | |
| |
| | | |
| | |
Total | |
$ | 270,098,855 | | |
$ | 252,980,284 | |
| |
September 30, 2014 | | |
December 31, 2013 | |
| |
| |
LONG LIVED ASSETS | |
| | | |
| | |
Commercial Vehicle Brake Systems | |
$ | 49,264,150 | | |
$ | 50,413,024 | |
Passenger Vehicle Brake Systems | |
| 11,261,093 | | |
| 11,705,029 | |
| |
| | | |
| | |
Total | |
$ | 60,525,243 | | |
$ | 62,118,053 | |
NOTE P – 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 and the building on the land from Ruili Group for approximately $20 million on September 28, 2007. The Company
has not yet obtained the land use right certificate nor the property ownership certificate of the building. There is no new development
of negotiations regarding taxes related to the land use rights. Although the Company plans to conclude negotiations with the local
government and to obtain the land use right certificate as soon as practicable, the Company is unable to predict when the negotiations
will be resolved or concluded. There is no assurance that the Company can obtain the land use right certificate. Even if it is
unable to resolve the tax issues and obtain the land use right certificate for the land and related building, there will be no
potential adverse implication on the Company. |
| (2) | The Company provides guarantees to the loans obtained by Ruili Group from the Bank of Ningbo in the
amount of RMB108,000,000 (approximately US $17,182,404) for the period from September 26, 2013 to September 25, 2014. |
ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s
discussion and analysis of certain significant factors that have affected our financial position and operating results during the
periods included in the accompanying consolidated unaudited financial statements, as well as information relating to the plans
of our current management. The following discussion and analysis should be read in conjunction with our consolidated unaudited
financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.
FORWARD-LOOKING STATEMENTS
This quarterly report
on Form 10-Q includes forward-looking statements. Any statements contained in this report that are not statements of historical
fact may be deemed to be forward-looking statements. Generally, the words “believe,” “anticipate,” “may,”
“will,” “should,” “expect,” “intend,” “estimate,” “continue,”
and similar expressions, or the negative thereof, or comparable terminology, are intended to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports
or documents we file with SEC from time to time, which could cause actual results or outcomes to differ materially from those anticipated.
Some of the factors that could cause actual results to differ include: our ability to effectively implement our business strategy;
our ability to handle downward pricing pressures on our products; and our ability to accurately or effectively plan our production
or supply needs. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ
from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on
Form 10-K for the fiscal year ended December 31, 2013, which is available on the SEC’s website at www.sec.gov. Undue reliance
should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise
or update these forward-looking statements.
OVERVIEW
The Company manufactures
and distributes automotive brake systems and other key safety-related components to automotive original equipment manufacturers,
or OEMs, and the related aftermarket both in China and internationally for use primarily in different types of commercial vehicles,
such as trucks and buses, and in passenger vehicles. Management believes that it is the largest manufacturer (by sales volume)
of automotive brake systems in China for commercial vehicles such as trucks and buses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of our accounting
policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical
Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Year ended December 31, 2013.
See Note K to the
attached Unaudited Consolidated Financial Statements for the information regarding changes in taxation by the government of China.
Results of Operations
Results of operations for the three months ended September
30, 2014 as compared to the three months ended September 30, 2013.
Sales
| |
Three Months Ended | | |
Three Months Ended | |
| |
September 30, 2014 | | |
September 30, 2013 | |
| |
(U.S. dollars in millions) | |
Commercial Vehicle Brake Systems | |
$ | 48.1 | | |
| 81.9 | % | |
$ | 43.3 | | |
| 79.4 | % |
Passenger Vehicle Brake Systems | |
$ | 10.6 | | |
| 18.1 | % | |
$ | 11.2 | | |
| 20.6 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 58.7 | | |
| 100.0 | % | |
$ | 54.5 | | |
| 100.0 | % |
Net sales were $58,702,505
and $54,488,640 for the three months ended September 30, 2014 and 2013, respectively, an increase of $4.2 million or 7.7%. The
increase was due to the increased sales of Commercial Vehicle Brake Systems to China market and after market.
The sales from Commercial Vehicle Brake Systems increased
by $4.8 million or 11.1%, to $48.1 million for the third fiscal quarter of 2014, compared to $43.3 million for the same period
of 2013. Our high quality, low cost products continued to generate higher sales and further penetrated the commercial vehicle market,
which impacted the sales of the Commercial Vehicle Brake Systems.
The sales from Passenger Vehicle Brake Systems
decreased by $0.6 million or 5.4%, to $10.6 million for the third fiscal quarter of 2014, compared to $11.2 million for the same
period of 2013. The decrease was mainly due to the adjustment of our customer structure in the third fiscal quarter of 2014, namely
reducing or suspending sales to customers who have long term overdue payment or who makes relatively small amount of orders.
A breakdown of net sales
revenue for China OEM market, China aftermarket and international market for the third fiscal quarter of the 2014 and 2013, respectively,
is set forth below:
| |
Three Months | | |
| | |
Three Months | | |
| | |
| |
| |
Ended | | |
Percent | | |
Ended | | |
Percent | | |
| |
| |
September 30, 2014 | | |
of Total Sales | | |
September 30, 2013 | | |
of Total Sales | | |
Percentage Change | |
| |
(U.S. dollars in million) | | |
| |
China OEM market | |
$ | 24.0 | | |
| 40.9 | % | |
$ | 22.3 | | |
| 40.8 | % | |
| 7.8 | % |
China Aftermarket | |
$ | 17.2 | | |
| 29.3 | % | |
$ | 13.1 | | |
| 24.1 | % | |
| 31.5 | % |
International market | |
$ | 17.5 | | |
| 29.8 | % | |
$ | 19.1 | | |
| 35.1 | % | |
| -8.7 | % |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 58.7 | | |
| 100.0 | % | |
$ | 54.5 | | |
| 100.0 | % | |
| 7.7 | % |
Our sales to the Chinese
OEM market increased by 7.8% from the third fiscal quarter of 2013, to $24.0 million. This increase is mainly a result of continued
market demand of commercial vehicles that meet the Chinese National III standard for vehicles in the third fiscal quarter of 2014..
Our sales to the China
aftermarket increased by $4.1 million or 31.5%, to $17.2 million for the third fiscal quarter of 2014, compared to $13.1 million
for the same period of 2013. The reasons of the increase are: (1) Our large portfolio of products for the aftermarket provides
us with a competitive advantage, enabling us to further penetrate and capture additional share in this segment; (2) Our new products
with advanced features have increased our ability to service a wider range of vehicles coming off warranty, driving unit growth
in both the OEM and aftermarket in the third fiscal quarter of 2014. (3) Accelerated urbanization and the Chinese government’s
increased support for public transportation favor our expansion in the bus aftermarket. We will continue with our strategies to
further optimize our sales network and to help further penetrate into new markets.
Our export sales decreased
by $1.6 million or 8.7%, to $17.5 million for the third fiscal quarter of 2014, as compared to $19.1 million for the same
period of 2013. The decrease was mainly due to the weak economy in Europe and the crisis in Ukraine.
Cost of Sales and Gross Profit
Cost of sales for the three
months ended September 30, 2014 were $43,240,746, an increase of $4.2 million or 10.7% from $39,075,431 for the three months ended
September 30, 2013. Our gross profit increased by 0.3% from $15,413,209 for the period of 2013 to $15,461,759 for the three months
ended September 30, 2014.
Gross margin decreased
to 26.3% from 28.3% for the three months ended September 30, 2014 compared with the same period of 2013. One of the reasons for
the decrease is that, to strengthen our competitiveness and increase our market share, we started the product promotion in the
third fiscal quarter of 2014. The increased labor cost also decreased our gross margin for the three months ended September 30,
2014. We intend to focus in 2014 on increasing production efficiency, improving the technologies of products, and improving our
product portfolio, to help us to maintain or increase our gross profit margins.
Cost of sales from Commercial
Vehicle Brake Systems for the three months ended September 30, 2014 were $35.4 million, an increase of $4.4 million or 14.1% from
$31.0 million for the same period last year. The gross profit from Commercial Vehicle Brake Systems increased by 3.4% from $12.2
million for three months ended September 30, 2013 to $12.7 million for the three months ended September 30, 2014. Gross margin
from Commercial Vehicle Brake Systems decreased to 26.3% from 28.3% for the three months ended September 30, 2014 compared to the
three months ended September 30, 2013. This decrease is resulted from product promotion and increased labor cost as explained above.
Cost of sales from Passenger
Vehicle Brake Systems for the three months ended September 30, 2014 were $7.8 million, an decrease of $0.2 million or 2.7%
from $8.0 million for the three month ended September 30, 2013. The gross profit from Passenger Vehicle Brake Systems decreased
by 11.8% from $3.2 million for the three month ended September 30, 2013 to $2.8 million for the three month ended
September 30, 2014. Gross margin from Passenger Vehicle Brake Systems decreased to 26.3% from 28.3% for the three months ended
September 30, 2014, as compared with the same period in 2013. This decrease is resulted from product promotion and increased labor
cost as explained above.
Selling and Distribution Expenses
Selling and distribution
expenses were $5,871,463 for the three months ended September 30, 2014, as compared to $5,277,020 for the same period of 2013,
an increase of $0.6 million or 11.3%.
The increase was mainly
due to increased freight expense and packaging expenses. As a percentage of sales revenue, selling expenses increased
to 10.0% for the three months ended September 30, 2014, as compared to 9.7% for the same period in 2013.
General and Administrative Expenses
General and administrative
expenses were $3,759,307 for the three months ended September 30, 2014, as compared to $3,696,715 for the same period of 2013,
an increase of $62,592 or 1.7%. The increase was mainly due to increases in labor expenses and administrative expenses. As a percentage
of sales revenue, general and administrative expenses decreased to 6.4% for the three months ended September 30, 2014,
as compared to 6.8% for the same period in 2013.
Research and Development Expenses
Research and development
expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research
and development expenses also include third-party development costs. For the three months ended September 30, 2014, research and
development expenses were $2,242,620, as compared to $2,384,902 for the same period of 2013, a decrease of $142,282.
Other Operating Income
Other operating income
was $545,752 for the three months ended September 30, 2014, as compared to $444,791 for the three months ended September 30, 2013,
an increase of $100,961. The increase was mainly due to the increase in sales of raw material scraps for the three months ended
September 30, 2014.
Depreciation and Amortization
Depreciation and amortization
expense decreased to $1,865,486 for the three months ended September 30, 2014, compared with that of $1,992,254 for the same period
of 2013, a decrease of $126,768. The decrease in depreciation and amortization expense was primarily due to the fact that more
production equipment was depreciated to residual value and stopped being further depreciated for the three months ended September
30, 2014.
Financial Expenses
Financial expenses mainly
consist of interest expenses, the financing expenses associated with our capital lease transaction and exchange loss. The financial
expenses for the three months ended September 30, 2014, decreased by $136,136 to $634,282 from $770,418 for the same period
of 2013, which was mainly due to decreased interest expense related bank loans and discounted bank and trade acceptance
notes.
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 statements in accordance with relevant income tax laws.
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 year 2006. This tax exemption was superseded
as a result of the Joint Venture having been awarded the "High-Tech Enterprise" certificate by the Chinese government.
The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate for years 2009 through 2011.
The Company used a tax rate of 25% for the first three quarters of 2012. In December 2012, the Joint Venture passed the re-assessment
of the High-Tech Enterprise certificate by the government, according to the relevant PRC income tax laws. Accordingly, it continues
to be taxed at a 15% rate in 2012 through 2014.
Income tax expense was
$391,988 for the three months ended September 30, 2014, as compared to $332,027 for
the three months ended September 30, 2013.
Net Income Attributable to Non-Controlling
Interest in Subsidiaries
Noncontrolling interest
in subsidiaries represents a 10% noncontrolling interest in Ruian and 40% noncontrolling interest in SIH, in each case held by
our Joint Venture partners. Net income attributable to noncontrolling interest in subsidiaries amounted to $262,813 and $423,087
for the third fiscal quarter ended September 30, 2014 and 2013, respectively.
Net Income Attributable to Stockholders
The net income attributable
to stockholders for the fiscal quarter ended September 30, 2014, decreased by $409,685, to $2,900,935 from $3,310,620
for the fiscal quarter ended September 30, 2013 due to the increase in cost of sales and decrease of the gross margin. Earnings
per share (“EPS”), both basic and diluted, for the fiscal quarter ended September 30, 2014 and 2013, were $0.15 and
$0.17.
Results of operations for the nine months
ended September 30, 2014 as compared to the nine months ended September 30, 2013.
Sales
| |
Nine Months Ended | | |
Nine Months Ended | |
| |
September 30, 2014 | | |
September 30, 2013 | |
| |
(U.S. dollars in
millions) | |
Commercial Vehicle Brake Systems | |
$ | 142.0 | | |
| 81.4 | % | |
$ | 124.2 | | |
| 81.0 | % |
Passenger Vehicle Brake Systems | |
$ | 32.4 | | |
| 18.6 | % | |
$ | 29.1 | | |
| 19.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 174.4 | | |
| 100.0 | % | |
$ | 153.3 | | |
| 100.0 | % |
Net sales were $174,419,540
and $153,317,804 for the nine months ended September 30, 2014 and 2013, respectively, an increase of $21.1 million or 13.8%. The
increase was due to the increased sales to China market and after market.
The sales from Commercial
Vehicle Brake Systems increased by $17.8 million or 14.3%, to $142.0 million for the nine months ended September 30, 2014,
compared to $124.2 million for the same period of 2013. Due to the recovery of the commercial vehicle market during the nine months
ended September 30, 2014, the sales from the OEM market increased, which impacted the sales of the Commercial Vehicle Brake Systems.
The sales from Passenger Vehicle Brake Systems
increased by $3.3 million or 11.6%, to $32.4 million for the nine months ended September 30, 2014, compared to $29.1 million for
the same period of 2013. The increase was mainly due to the adjustment of our customer structure in the nine months ended September
30, 2014, namely reducing or suspending sales to customers who have long term overdue payment or who makes relatively small amount
of orders.
A breakdown of net sales revenues for China
OEM markets, China aftermarket and international market for the nine months ended September 30, 2014 and 2013, respectively, is
set forth below:
| |
Nine Months | | |
Percent | | |
Nine Months | | |
Percent | | |
| |
| |
Ended | | |
of | | |
Ended | | |
of | | |
| |
| |
September 30, 2014 | | |
Total Sales | | |
September 30, 2013 | | |
Total Sales | | |
Percentage Change | |
| |
(U.S. dollars in million) | | |
| |
China OEM market | |
$ | 84.5 | | |
| 48.5 | % | |
$ | 75.7 | | |
| 49.3 | % | |
| 11.6 | % |
China Aftermarket | |
$ | 43.1 | | |
| 24.7 | % | |
$ | 35.1 | | |
| 22.9 | % | |
| 22.8 | % |
International market | |
$ | 46.8 | | |
| 26.8 | % | |
$ | 42.5 | | |
| 27.8 | % | |
| 9.9 | % |
Total | |
$ | 174.4 | | |
| 100.0 | % | |
$ | 153.3 | | |
| 100.0 | % | |
| 13.8 | % |
The favorable Chinese vehicle
license plate policies toward the National III standard vehicles are set to expire by January 1, 2015, which resulted in the higher
demand for commercial vehicles in China for the nine months ended September 30, 2014. As a result, our sales to the Chinese OEM market increased by 11.6% from the nine months ended September 30, 2014, to
$84.5 million.
Our sales to the China
aftermarket increased by $8.0 million or 22.8%, to $43.1 million for the nine months ended September 30, 2014, compared to
$35.1 million for the same period of 2013. Our large portfolio of products for the aftermarket provides us with a competitive advantage,
enabling us to further penetrate and capture additional share in this segment. Our new products with advanced features have increased
our ability to service a wider range of vehicles coming off warranty, driving unit growth in both the OEM and aftermarket during
the nine months ended September 30, 2014. We will continue with our strategies to further optimize our sales network and to help
further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation
favor our expansion in the bus aftermarket.
Our export sales increased
by $4.3 million or 9.9%, to $46.8 million for the nine months ended September 30, 2014, as compared to $42.5 million for the
same period of 2013. A part of our strategy is to strengthen and extend our distribution networks to increase our exposure
with end users. The increase in export sales was mainly due to our broadened customer base.
Cost of Sales and Gross Profit
Cost of sales for the nine
months ended September 30, 2014 were $125,056,960, an increase of $16.2 million or 14.9% from $108,858,673 for the same period
last year. Our gross profit increased by 11.0% from $44,459,131 for the nine months ended September 30, 2013 to $49,362,580 for
the same period of 2014.
Gross margin decreased
to 28.3% from 29.0% for the nine months ended September 30, 2014, as compared with the same period of 2013. One of the reasons
for the decrease is that, to strengthen our competitiveness and increase our market share, we started the product promotion in
the nine month period ended September 30, 2014. The increased labor cost also decreased our gross margin for the nine month period
ended September 30, 2014. We intend to focus in 2014 on increasing production efficiency, improving the technologies of products,
and improving our product portfolio, to help us to maintain or increase our gross profit margins.
Cost of sales from Commercial
Vehicle Brake Systems for the nine months ended September 30, 2014 were $101.8 million, an increase of $13.6 million or 15.4% from
$88.2 million for the same period of 2013. The gross profit from Commercial Vehicle Brake Systems increased by 11.5% from $36.0
million for the nine months ended September 30, 2013 to $40.2 for the same period of 2014. Gross margin from Commercial Vehicle
Brake Systems decreased to 28.3% from 29.0% for the nine months ended September 30, 2014 compared with the same period of 2013.
Cost of sales from Passenger
Vehicle Brake Systems for the nine months ended September 30, 2014 were $23.3 million, an increase of $2.6 million or 12.7% from
$20.6 million for the same period of 2013. The gross profit from Passenger Vehicle Brake Systems increased by 8.9% from $8.4 million
for the nine months ended September 30, 2013 to $9.2 for the same period of 2014. Gross margin from Passenger Vehicle Brake Systems
decreased to 28.3% from 29.0% for the nine months ended September 30, 2014, as compared with the same period in 2013.
Selling and Distribution Expenses
Selling and distribution
expenses were $18,050,068 for the nine months ended September 30, 2014, as compared to $14,596,863 for the same period of 2013,
an increase of $3,453,205 or 23.7%.
The increase was mainly
due to increased freight expense and packaging expenses. As a percentage of sales revenue, selling expenses increased to 10.3%
for the nine months ended September 30, 2014, as compared to 9.5% for the same period in 2013.
General and Administrative Expenses
General and administrative
expenses were $12,786,335 for the nine months ended September 30, 2014, as compared to $13,079,992 for the same period of 2013,
a decrease of $0.3 million or 2.2%.
The decrease was mainly
due to the cost control measures implemented during this quarter. As a percentage of sales revenue, general and administrative
expenses decreased to 7.3% for the nine months ended September 30, 2014, as compared to 8.5% for the same period in 2013.
Research and Development Expenses
Research and development
expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research
and development expenses also include third-party development costs. For the nine months ended September 30, 2014, research and
development expenses were $5,934,377, as compared to $5,392,513 for the same period
of 2013, an increase of $0.5 million.
Other Operating Income
Other operating income
was $1,471,014 for the nine months ended September 30, 2014, as compared to $1,280,683 for the nine months ended September 30,
2013, an increase of $190,331. The increase was mainly due to an increase in sales of raw material scrap for the nine months ended
September 30, 2014.
Depreciation and Amortization
Depreciation and amortization
expenses decreased to $5,597,867 for the nine months ended September 30, 2014, compared with that of $5,617,369 for the same period
of 2013, a decrease of $19,502. The decrease in depreciation and amortization expense was primarily due to the fact that more production
equipment was depreciated to residual value and stopped being further depreciated for the nine months ended September 30, 2014.
Financial Expenses
Financial expenses mainly
consist of interest expenses, the financing expense associated with our capital lease transaction and exchange losses. The
financial expenses for the nine months ended September 30, 2014, decreased by $435,533 to $1,773,223 from $2,208,756 for the
same period of 2013, which was mainly due to decreased exchange losses and interest expense.
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 statements in accordance with relevant income tax laws.
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 year 2006. This tax exemption was superseded
as a result of the Joint Venture having been awarded the "High-Tech Enterprise" certificate by the Chinese government.
The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate for years 2009 through 2011.
The Company used a tax rate of 25% for the first three quarters of 2012. In December 2012, the Joint Venture passed the re-assessment
of the High-Tech Enterprise certificate by the government, according to the relevant PRC income tax laws. Accordingly, it continues
to be taxed at a 15% rate in 2012 through 2014.
Income tax expense was
$1,556,433 for the nine months ended September 30, 2014, as compared to $1,040,215
for the nine months ended September 30, 2013. The increase was mainly due to increased pre-tax income.
Net Income Attributable to Non-Controlling
Interest in Subsidiaries
Noncontrolling interest
in subsidiaries represents a 10% noncontrolling interest in Ruian and 40% non-controlling interest in SIH. Each of the noncontrolling
interest is held by our Joint Venture partners. Net income attributable to noncontrolling interest in subsidiaries amounted to
$1,003,631 and $1,075,525 for the nine months ended September 30, 2014 and 2013, respectively.
Net Income Attributable to Stockholders
The net income
attributable to stockholders for the nine months ended September 30, 2014, increased by $1,224,921, to
$9,803,712 from $8,578,791 for the nine months ended September 30, 2013,
due to increased net income, which was caused by increased sales. The main factors contributing to our sales increase in the
nine months ended September 30, 2014 include expansion of our portfolio of products and our adoption of product promotion
strategy. Earnings per share (“EPS”), both basic and diluted, for the nine months ended September 30, 2014 and
2013, were $0.51 and $0.44, respectively.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of September 30, 2014,
the Company had cash and cash equivalents of $37,902,347, as compared to cash and cash equivalents of $28,241,983 as of December
31, 2013. The Company had working capital of $158,654,709 at September 30, 2014, as compared to working capital of $144,658,883
at December 31, 2013, reflecting current ratios of 4.12:1 and 4.13:1, respectively.
OPERATING - Net cash provided
by operating activities was $11,407,243 for nine months ended September 30, 2014, an increase of $10,399,249, as compared
with $1,067,994 of net cash provided by operating activities in the same period in 2013. Such increase was primarily due to the
increased cash inflow resulted by changes in bank acceptance notes from customers.
INVESTING - During the
nine months ended September 30, 2014, the Company expended net cash of $2,937,232 in investing activities mainly for acquisition
of new equipment to support the growth of the business. For the nine months ended September 30, 2013, the Company expended net
cash of $3,342,250 in investing activities.
FINANCING - During the
nine month ended September 30, 2014, the cash provided by financing activities was $682,594. Cash used in financing activities
was $7,387,477 for the nine months ended September 30, 2013.
The Company has taken a
number of steps to improve the management of its cash flow. We place more emphasis on collection of accounts receivable from our
customers. We maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated
cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements
for the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2014,
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.
According to the laws of
China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through
land use rights granted by the Chinese government. The Company purchased the land use rights from the Ruili Group, a related party.
The Company also purchased a building on the land in the same transaction. The purchase price of land use right and building amounted
to approximately $20 million.
The Company has been negotiating
with the government for a reduction in or exemption from the tax being sought by the government in connection with the transfer
of the land use rights. Because of the change in personnel of the local government, there is no new development of negotiations
regarding taxes related to the land use rights. Due to the lack of resolution of that issue, the land use right certificate and
the property ownership certificate have not been issued to the Company. There is no assurance that we can conclude the negotiations
with the government and obtain a favorable result. We plan to conclude negotiations with the government and to obtain the land
use rights certificate as soon as practicable.
Even if the Company is
unable to timely resolve obtain the land use right certificate for the land and related building, there will be no potential adverse
implication on the Company for the following reasons.
1. The Company acquired the
land use rights in a transaction between the Company and Ruili Group, a related party. Ruili Group, as the original land use right
owner, has granted the land use right to the Company by contract which is supported by valid consideration.
2. No third party would oppose
the Company’s use of the land, because no third party has any interest in the land use right or property ownership right,
other than the Ruili Group and the government.
a) The Ruili
Group promised that the Company has the right to use the land and related building, even before the land use certificate is transferred.
b) According
to the laws of China, the government owns all the land and the buildings attached to the land in China. Once the land use right
is granted to Ruili Group, Ruili Group has the right to assign its land use rights to any third parties, including the Company,
without interference from the government. Therefore, it is unlikely that the government will oppose the Company’s right to
use the land and related building.
c) The Company
has reserved tax payables in the amount of RMB 4,560,000 (approximately $724,580) on its consolidated balance sheets under the
line item “accrued expenses” as if no reduction or exemption of tax is approved. This amount was determined based on
a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered as the most probable
amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay if the negotiation with
the local government ultimately is not successful.
ITEM 3. CONTRACTUAL OBLIGATIONS
As of September 30, 2014,
we had no material changes outside the ordinary course of business in our contractual obligations
ITEM 4. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not Applicable.
ITEM 5. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
As of the end of the period covered by this
report, the 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 as of September 30, 2014 were effective in all material respects 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 nine months ended September 30, 2014 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
3.1 |
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Amended and Restated Articles of Incorporation, as further amended (approved May 27, 2010). (1) |
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3.2 |
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Amended and Restated Bylaws effective as of March 14, 2009. (2) |
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31.1 |
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Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
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Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 |
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Certification of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (3) |
| (1) | Incorporated herein by reference from the Registrant’s Form 8-K Current Report filed with
the Securities and Exchange Commission, on June 1, 2010. |
| (2) | Incorporated herein by reference from the Registrant’s Form 8-K Current Report as filed with
the Securities and Exchange Commission, on March 17, 2009. |
| (3) | Furnished in accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed”
for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will
not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except
to the extent that the registrant specifically incorporates it by reference. |
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated : November 14, 2014 |
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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(Principal Executive Officer) |
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By: /s/ Zong Yun Zhou |
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Name: Zong Yun Zhou |
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Title: Chief Financial Officer
(Principal Financial Officer) |
EXHIBIT 31.1
Certification of Principal Executive
Officer
pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Xiao Ping Zhang,
certify that:
1. I have reviewed this
quarterly report on Form 10-Q of SORL AUTO PARTS, INC.;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this
report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All significant
deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether
or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: November 14, 2014 |
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/s/ Xiao Ping Zhang |
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Xiao Ping Zhang |
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Chief Executive Officer |
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(Principal Executive Officer)
EXHIBIT 31.2
Certification of Principal Financial
Officer
pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Zong Yun Zhou, certify that:
1. I have reviewed this
quarterly report on Form 10-Q of SORL AUTO PARTS, INC.;
2. Based on my knowledge,
this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by
this report;
3. Based on my knowledge,
the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s
other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f)
and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure
controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal
control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness
of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report
any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most
recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s
other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing
the equivalent functions):
(a) All significant deficiencies
and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether
or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Dated: November 14, 2014 |
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/s/ Zong Yun Zhou |
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Zong Yun Zhou |
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Chief Financial Officer |
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(Principal Financial Officer)
EXHIBIT 32
CERTIFICATION OF THE PRINCIPAL EXECUTIVE
OFFICER AND PRINCIPAL FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT
OF 2002
The undersigned, Xiao
Ping Zhang, Chief Executive Officer of SORL AUTO PARTS, INC., and Zong Yun Zhou, Chief Financial Officer of SORL AUTO PARTS, INC.,
certify that, to their knowledge, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that the Quarterly Report of SORL AUTO PARTS, INC. on Form 10-Q for the fiscal quarter ended September 30, 2014 fully
complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained
in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations
of SORL AUTO PARTS, INC.
Dated: November 14, 2014 |
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/s/ Xiao Ping Zhang |
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Xiao Ping Zhang
Chief Executive Officer
(Principal Executive Officer) |
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/s/ Zong Yun Zhou |
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Zong Yun Zhou |
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Chief Financial Officer |
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(Principal Financial Officer)
The foregoing certification
is being furnished with the Company’s Quarterly Report on Form 10-Q for the period ended September 30, 2014 pursuant to 18
U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and it
is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless
of any general information language in such filing, except to the extent that the Company specifically incorporates by reference.
A signed original of this
written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.
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