UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended June 30, 2015 |
¨ |
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)
N/A
(Former name, former address and former
fiscal year, if changed since last report)
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 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).
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 issuer classes of common stock, as of the latest practicable date:
As of August 14, 2015 there were 19,304,921
shares of Common Stock outstanding
SORL AUTO PARTS, INC.
FORM 10-Q
For the Quarter Ended June 30, 2015
INDEX
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2015 and December 31, 2014
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
(Unaudited) | | |
| |
Assets | |
| | | |
| | |
Current Assets | |
| | | |
| | |
Cash and cash equivalents | |
US$ | 11,624,065 | | |
US$ | 14,009,597 | |
Accounts receivable, net | |
| 76,562,017 | | |
| 68,171,387 | |
Bank acceptance notes from customers | |
| 13,675,163 | | |
| 17,626,704 | |
Short term investments | |
| 58,690,792 | | |
| 34,838,757 | |
Inventories | |
| 73,357,006 | | |
| 84,186,766 | |
Prepayments, including $267,746 and $83,206 due from related parties at June 30, 2015 and December 31, 2014, respectively. | |
| 4,712,578 | | |
| 4,663,002 | |
Current portion of prepaid capital lease interest | |
| 190,898 | | |
| 282,280 | |
Other current assets | |
| 1,021,339 | | |
| 1,282,182 | |
Deferred tax assets | |
| 3,036,623 | | |
| 1,868,371 | |
Total Current Assets | |
| 242,870,481 | | |
| 226,929,046 | |
| |
| | | |
| | |
Property, plant and equipment, net | |
| 42,153,811 | | |
| 43,550,927 | |
Land use rights, net | |
| 14,244,540 | | |
| 14,421,729 | |
Intangible assets, net | |
| 31,515 | | |
| 37,661 | |
Security deposits on lease agreement | |
| 1,869,368 | | |
| 1,867,719 | |
Non-current portion of prepaid capital lease interest | |
| 26,726 | | |
| 99,180 | |
Total Non-Current Assets | |
| 58,325,960 | | |
| 59,977,216 | |
Total Assets | |
US$ | 301,196,441 | | |
US$ | 286,906,262 | |
| |
| | | |
| | |
Liabilities and Equity | |
| | | |
| | |
Current Liabilities | |
| | | |
| | |
Accounts payable and bank acceptance notes to vendors, including $139,621 and $136,609 due to related parties at June 30, 2015 and December 31, 2014, respectively. | |
US$ | 9,411,489 | | |
US$ | 13,867,316 | |
Deposit received from customers | |
| 25,124,561 | | |
| 19,045,172 | |
Short term bank loans | |
| 18,135,575 | | |
| 9,539,476 | |
Income tax payable | |
| 1,699,942 | | |
| 1,101,103 | |
Accrued expenses | |
| 12,738,311 | | |
| 13,561,163 | |
Current portion of capital lease obligations | |
| 3,738,737 | | |
| 3,735,438 | |
Other current liabilities, including $22,973 and $17,681 due to related parties at June 30, 2015 and December 31, 2014, respectively. | |
| 2,433,690 | | |
| 2,131,527 | |
Total Current Liabilities | |
| 73,282,305 | | |
| 62,981,195 | |
| |
| | | |
| | |
Non-Current Liabilities | |
| | | |
| | |
Non-current portion of capital lease obligations | |
| 1,869,369 | | |
| 3,735,437 | |
Total Non-Current Liabilities | |
| 1,869,369 | | |
| 3,735,437 | |
Total Liabilities | |
| 75,151,674 | | |
| 66,716,632 | |
| |
| | | |
| | |
Equity | |
| | | |
| | |
| |
| | | |
| | |
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of June 30, 2015 and December 31, 2014 | |
| - | | |
| - | |
Common stock - $0.002 par value; 50,000,000 authorized,19,304,921 issued and outstanding as of June 30, 2015 and December 31, 2014 | |
| 38,609 | | |
| 38,609 | |
Additional paid-in capital | |
| 42,199,014 | | |
| 42,199,014 | |
Reserves | |
| 12,564,853 | | |
| 12,019,532 | |
Accumulated other comprehensive income | |
| 27,695,092 | | |
| 27,516,206 | |
Retained earnings | |
| 121,702,088 | | |
| 116,935,053 | |
Total SORL Auto Parts, Inc. Stockholders' Equity | |
| 204,199,656 | | |
| 198,708,414 | |
Noncontrolling Interest In Subsidiaries | |
| 21,845,111 | | |
| 21,481,216 | |
Total Equity | |
| 226,044,767 | | |
| 220,189,630 | |
Total Liabilities and Equity | |
US$ | 301,196,441 | | |
US$ | 286,906,262 | |
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 and Six Months Ended June
30, 2015 and 2014 (Unaudited)
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
| |
| | |
| | |
| | |
| |
Sales | |
US$ | 59,274,878 | | |
US$ | 65,723,746 | | |
US$ | 111,472,844 | | |
US$ | 115,717,035 | |
Include: sales to related parties | |
| 1,057,724 | | |
| 1,345,506 | | |
| 2,069,648 | | |
| 1,635,583 | |
Cost of sales | |
| 42,746,432 | | |
| 47,209,861 | | |
| 81,213,324 | | |
| 81,816,214 | |
| |
| | | |
| | | |
| | | |
| | |
Gross profit | |
| 16,528,446 | | |
| 18,513,885 | | |
| 30,259,520 | | |
| 33,900,821 | |
| |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
Selling and distribution expenses | |
| 5,086,089 | | |
| 6,473,111 | | |
| 10,437,087 | | |
| 12,178,605 | |
General and administrative expenses | |
| 7,430,223 | | |
| 4,710,874 | | |
| 10,149,595 | | |
| 9,027,028 | |
Research and development expenses | |
| 1,857,470 | | |
| 2,200,558 | | |
| 3,570,091 | | |
| 3,691,757 | |
| |
| | | |
| | | |
| | | |
| | |
Total operating expenses | |
| 14,373,782 | | |
| 13,384,543 | | |
| 24,156,773 | | |
| 24,897,390 | |
| |
| | | |
| | | |
| | | |
| | |
Other operating income | |
| 483,091 | | |
| 549,130 | | |
| 1,068,808 | | |
| 925,262 | |
| |
| | | |
| | | |
| | | |
| | |
Income from operations | |
| 2,637,755 | | |
| 5,678,472 | | |
| 7,171,555 | | |
| 9,928,693 | |
| |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 409,836 | | |
| 48,835 | | |
| 520,791 | | |
| 60,635 | |
Other income | |
| 620,547 | | |
| 213,292 | | |
| 713,938 | | |
| 251,596 | |
Interest expenses | |
| (242,544 | ) | |
| (236,974 | ) | |
| (409,200 | ) | |
| (722,730 | ) |
Other expenses | |
| (160,420 | ) | |
| (472,320 | ) | |
| (531,108 | ) | |
| (710,154 | ) |
| |
| | | |
| | | |
| | | |
| | |
Income before provision for income taxes | |
| 3,265,174 | | |
| 5,231,305 | | |
| 7,465,976 | | |
| 8,808,040 | |
| |
| | | |
| | | |
| | | |
| | |
Provision for income taxes | |
| 794,144 | | |
| 651,210 | | |
| 1,792,422 | | |
| 1,164,445 | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
US$ | 2,471,030 | | |
US$ | 4,580,095 | | |
US$ | 5,673,554 | | |
US$ | 7,643,595 | |
| |
| | | |
| | | |
| | | |
| | |
Net income attributable to noncontrolling interest in subsidiaries | |
| 208,955 | | |
| 447,621 | | |
| 361,198 | | |
| 740,818 | |
| |
| | | |
| | | |
| | | |
| | |
Net income attributable to common stockholders | |
US$ | 2,262,075 | | |
US$ | 4,132,474 | | |
US$ | 5,312,356 | | |
US$ | 6,902,777 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Net income | |
US$ | 2,471,030 | | |
US$ | 4,580,095 | | |
US$ | 5,673,554 | | |
US$ | 7,643,595 | |
| |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustments | |
| 994,826 | | |
| (25,135 | ) | |
| 181,583 | | |
| 4,332,856 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income | |
| 3,465,856 | | |
| 4,554,960 | | |
| 5,855,137 | | |
| 11,976,451 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income attributable to noncontrolling interest in subsidiaries | |
| 275,327 | | |
| 445,057 | | |
| 363,895 | | |
| 1,143,053 | |
| |
| | | |
| | | |
| | | |
| | |
Comprehensive income attributable to common stockholders | |
US$ | 3,190,529 | | |
US$ | 4,109,903 | | |
US$ | 5,491,242 | | |
US$ | 10,833,398 | |
| |
| | | |
| | | |
| | | |
| | |
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$ | 0.12 | | |
US$ | 0.21 | | |
US$ | 0.28 | | |
US$ | 0.36 | |
| |
| | | |
| | | |
| | | |
| | |
EPS - Diluted | |
US$ | 0.12 | | |
US$ | 0.21 | | |
US$ | 0.28 | | |
US$ | 0.36 | |
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 Six Months Ended June 30, 2015
and 2014 (Unaudited)
| |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
Cash Flows From Operating Activities | |
| | | |
| | |
Net income | |
US$ | 5,673,554 | | |
US$ | 7,643,595 | |
Adjustments to reconcile net income to net cash | |
| | | |
| | |
from operating activities: | |
| | | |
| | |
Allowance for doubtful accounts | |
| 3,910,282 | | |
| 1,194,754 | |
Depreciation and amortization | |
| 3,911,272 | | |
| 3,732,381 | |
Deferred income tax | |
| (1,163,808 | ) | |
| (307,429 | ) |
(Gain) or loss on disposal of property and equipment | |
| (48,940 | ) | |
| 28,075 | |
Changes in assets and liabilities: | |
| | | |
| | |
Accounts receivable | |
| (12,214,909 | ) | |
| (11,133,975 | ) |
Bank acceptance notes from customers | |
| 3,957,535 | | |
| (3,098,660 | ) |
Other currents assets | |
| 261,966 | | |
| 325,030 | |
Inventories | |
| 10,876,719 | | |
| (4,449,536 | ) |
Prepayments | |
| (678,866 | ) | |
| (743,265 | ) |
Prepaid capital lease interest | |
| 163,751 | | |
| 252,772 | |
Accounts payable and bank acceptance notes to vendors | |
| (4,685,074 | ) | |
| (254,762 | ) |
Income tax payable | |
| 596,297 | | |
| 296,017 | |
Deposits received from customers | |
| 6,047,663 | | |
| (488,943 | ) |
Other current liabilities and accrued expenses | |
| (532,514 | ) | |
| 2,624,773 | |
Net Cash Flows Provided By (Used In) Operating Activities | |
| 16,074,928 | | |
| (4,379,173 | ) |
| |
| | | |
| | |
Cash Flows From Investing Activities | |
| | | |
| | |
Change in short term investments | |
| (23,761,197 | ) | |
| - | |
Acquisition of property and equipment | |
| (1,420,785 | ) | |
| (2,061,662 | ) |
Proceeds of disposal of property and equipment | |
| 48,956 | | |
| 53,437 | |
Net Cash Flows Used In Investing Activities | |
| (25,133,026 | ) | |
| (2,008,225 | ) |
| |
| | | |
| | |
Cash Flows From Financing Activities | |
| | | |
| | |
Proceeds from bank loans | |
| 24,913,667 | | |
| 22,292,424 | |
Repayment of bank loans | |
| (16,309,191 | ) | |
| (15,904,045 | ) |
Repayment of capital lease | |
| (1,864,595 | ) | |
| (1,847,655 | ) |
Net Cash Flows Provided By Financing Activities | |
| 6,739,881 | | |
| 4,540,724 | |
| |
| | | |
| | |
Effects on changes in foreign exchange rate | |
| (67,315 | ) | |
| 624,776 | |
| |
| | | |
| | |
Net change in cash and cash equivalents | |
| (2,385,532 | ) | |
| (1,221,898 | ) |
| |
| | | |
| | |
Cash and cash equivalents - beginning of the period | |
| 14,009,597 | | |
| 28,241,983 | |
| |
| | | |
| | |
Cash and cash equivalents - end of the period | |
US$ | 11,624,065 | | |
US$ | 27,020,085 | |
| |
| | | |
| | |
Supplemental Cash Flow Disclosures: | |
| | | |
| | |
Interest paid | |
US$ | 465,309 | | |
US$ | 722,728 | |
Income taxes paid | |
US$ | 2,359,836 | | |
US$ | 1,171,310 | |
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in
Equity
For The Six Months Ended June 30, 2015
(Unaudited)
| |
| | |
| | |
Additional | | |
| | |
| | |
Accumulated Other | | |
Total SORL
Auto Parts,
Inc. | | |
| | |
| |
| |
Number | | |
Common | | |
Paid-in | | |
| | |
Retained | | |
Comprehensive | | |
Stockholders' | | |
Noncontrolling | | |
Total | |
| |
of
Share | | |
Stock | | |
Capital | | |
Reserves | | |
Earnings | | |
Income | | |
Equity | | |
Interest | | |
Equity | |
Beginning Balance
- January 1, 2015 | |
| 19,304,921 | | |
$ | 38,609 | | |
$ | 42,199,014 | | |
$ | 12,019,532 | | |
$ | 116,935,053 | | |
$ | 27,516,206 | | |
$ | 198,708,414 | | |
$ | 21,481,216 | | |
$ | 220,189,630 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Net income | |
| - | | |
| - | | |
| - | | |
| - | | |
| 5,312,356 | | |
| - | | |
| 5,312,356 | | |
| 361,198 | | |
| 5,673,554 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustment | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 178,886 | | |
| 178,886 | | |
| 2,697 | | |
| 181,583 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Transfer to reserve | |
| - | | |
| - | | |
| - | | |
| 545,321 | | |
| (545,321 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Ending
Balance – June 30, 2015 | |
| 19,304,921 | | |
$ | 38,609 | | |
$ | 42,199,014 | | |
$ | 12,564,853 | | |
$ | 121,702,088 | | |
$ | 27,695,092 | | |
$ | 204,199,656 | | |
$ | 21,845,111 | | |
$ | 226,044,767 | |
The accompanying notes are an integral
part of these unaudited consolidated financial statements
SORL Auto Parts, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2015
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (together with its
subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”), a Delaware
corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution of vehicle brake systems
and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd. (the “Joint
Venture” or “Ruian”) 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 SORL International Holding, Ltd. or SIH. SORL holds
a 60% interest in SIH, 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 the Asia-Pacific region and creating a larger footprint in Europe, the Middle
East and Africa with a goal 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 Ruili Group. 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 Ruili Group other than those in the segment of its 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 owned 63% of the registered capital
of the Ruili Group, and ,together with his wife and brother, owned more than 50% of the outstanding common stock of SORL. 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 asset 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, 2014 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, 2014. 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, 2014, 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, short term investments, 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. COST OF SALES
Cost of sales consists
primarily of materials costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs,
employee compensation, depreciation and related costs, which are directly attributable to production. Write-down of inventories
to lower of cost or market is also recorded in cost of sales, if any.
f. SHORT TERM INVESTMENTS
The Company's short term investments include term deposits with an original maturity from three
months to one year with financial institutions. The balances of short term investments were $58,690,792 and $34,838,757 as
of June 30, 2015 and December 31, 2014, respectively.
g. FOREIGN CURRENCY
TRANSLATION
The Company maintains its
books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company
has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United
States dollars (“US$”). All assets and liabilities are translated at the current rate. The shareholders’ equity
accounts are translated at the 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.
h. 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 ACCOUNTING PRONOUNCEMENTS
In April 2015, the
FASB issued ASU 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance
Costs”. The amendments in the ASU are intended to simplify the presentation of debt issuance costs. These amendments
require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt
issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements
issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted
for financial statements that have not been previously issued. The Company is currently in the process of evaluating the impact
of the adoption on its consolidated financial statements.
In July 2015, the FASB
issued ASU 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory”. The amendments in ASU
2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net realizable value is
the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is unchanged for inventory measured using last-in, first-out (LIFO) or the retail inventory
method. The amendments do not apply to inventory that is measured using LIFO or the retail inventory method. The amendments apply
to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. The amendments
in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016,
and interim periods within fiscal years beginning after December 15, 2017. A reporting entity should apply the amendments prospectively
with earlier application permitted as of the beginning of an interim or annual reporting period. The Company is currently in the process
of evaluating the impact of adoption 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 stockholder of Joint Venture and is collectively
controlled by Mr. Xiao Ping Zhang, his wife Ms. Shu Ping Chi, and his brother Mr. Xiao Feng Zhang. In addition, the Company purchases
from two other related parties, Guangzhou Kormee Automotive Electronic Control 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 six months ended June 30, 2015 and 2014:
| |
Three Months Ended June 30, | | |
Six Months Ended June 30, | |
| |
2015 | | |
2014 | | |
2015 | | |
2014 | |
PURCHASES FROM: | |
| | | |
| | | |
| | | |
| | |
Guangzhou Kormee Automotive Electronic Control Co., Ltd. | |
$ | 88,134 | | |
$ | 934,065 | | |
$ | 374,549 | | |
$ | 1,472,020 | |
Ruian Kormee Vehicle Brake Co., Ltd. | |
| 403,456 | | |
| 420,691 | | |
| 478,059 | | |
| 769,957 | |
Ruili Group Co., Ltd. | |
| 817,962 | | |
| 1,109,426 | | |
| 1,628,826 | | |
| 2,043,053 | |
Total Purchases | |
$ | 1,309,552 | | |
$ | 2,464,182 | | |
$ | 2,481,434 | | |
$ | 4,285,030 | |
| |
| | | |
| | | |
| | | |
| | |
SALES TO: | |
| | | |
| | | |
| | | |
| | |
Guangzhou Kormee Automotive Electronic Control Co., Ltd. | |
$ | 167,874 | | |
$ | 934,064 | | |
$ | 262,770 | | |
$ | 974,711 | |
Ruian Kormee Vehicle Brake Co., Ltd. | |
| 10,435 | | |
| 30,266 | | |
| 27,750 | | |
| 55,739 | |
Ruili Group Co., Ltd. | |
| 1,057,724 | | |
| 381,176 | | |
| 2,069,648 | | |
| 605,133 | |
Total Sales | |
$ | 1,236,033 | | |
$ | 1,345,506 | | |
$ | 2,360,168 | | |
$ | 1,635,583 | |
During the three and six months ended June
30, 2015, for the sales mentioned above, the sales to Guangzhou Kormee and Ruian Kormee were sales of scrap materials and were
included in other operating income in the consolidated statements of income and comprehensive income. The sales to Ruili Group
were included in sales in the consolidated statements of income and comprehensive income.
| |
June 30, 2015 | | |
December 31, 2014 | |
PREPAYMENTS | |
| | | |
| | |
Guangzhou Kormee Automotive Electronic Control Co., Ltd. | |
$ | 267,746 | | |
$ | — | |
Ruian Kormee Vehicle brake Co., Ltd. | |
| — | | |
| 83,206 | |
Total | |
$ | 267,746 | | |
$ | 83,206 | |
| |
| | | |
| | |
ACCOUNTS PAYABLE | |
| | | |
| | |
Ruian Kormee Vehicle Brake Co., Ltd. | |
$ | 125,361 | | |
$ | — | |
Guangzhou Kormee Automotive Electronic Control Co., Ltd. | |
| — | | |
| 59,011 | |
Ruili Group Co., Ltd. | |
| 14,260 | | |
| 77,598 | |
Total | |
$ | 139,621 | | |
$ | 136,609 | |
| |
| | | |
| | |
OTHER PAYABLES | |
| | | |
| | |
MGR Hong Kong Limited | |
$ | 18,153 | | |
$ | 17,681 | |
Ruili Group Co., Ltd. | |
| 4,820 | | |
| — | |
Total | |
$ | 22,973 | | |
$ | 17,681 | |
The Company
entered into several lease agreements with related parties, see Note M for more details.
In addition, the Company
provided a guarantee for the credit line granted to Ruili Group by 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, which was renewed in 2014 for a term from August 22,
2014 to August 21, 2015. The Company also provides a guarantee for Ruili Group related to the credit line granted by China Zheshang
Bank in the amount of RMB 146,960,000 (approximately US$24,016,996) for the period from December 9, 2014 to December 9, 2015.
NOTE E - ACCOUNTS RECEIVABLE
Accounts receivable, net
consisted of the following:
| |
June 30, 2015 | | |
December 31, 2014 | |
Accounts receivable | |
$ | 86,907,254 | | |
$ | 74,646,974 | |
Less: allowance for doubtful accounts | |
| (10,345,237 | ) | |
| (6,475,587 | ) |
Account receivable, net | |
$ | 76,562,017 | | |
$ | 68,171,387 | |
No customer individually
accounted for more than 10% of our revenues or accounts receivable for the six months ended June 30, 2015. The changes in the allowance
for doubtful accounts at June 30, 2015 and December 31, 2014 are summarized as follows:
| |
June 30, 2015 | | |
December 31, 2014 | |
Beginning balance | |
$ | 6,475,587 | | |
$ | 3,813,415 | |
Add: Increase to allowance | |
| 3,869,650 | | |
| 2,662,172 | |
| |
| | | |
| | |
Ending balance | |
$ | 10,345,237 | | |
$ | 6,475,587 | |
NOTE F - INVENTORIES
At June 30, 2015 and December 31, 2014, inventories
consisted of the following:
| |
June 30, 2015 | | |
December 31, 2014 | |
Raw materials | |
$ | 7,160,780 | | |
$ | 11,934,720 | |
Work in process | |
| 29,824,695 | | |
| 30,020,125 | |
Finished goods | |
| 36,539,812 | | |
| 42,400,202 | |
Less: Write-down of inventories | |
| (168,281 | ) | |
| (168,281 | ) |
Total inventory | |
$ | 73,357,006 | | |
$ | 84,186,766 | |
NOTE G - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of
the following at June 30, 2015 and December 31, 2014:
| |
June 30, 2015 | | |
December 31, 2014 | |
Machinery | |
$ | 53,845,391 | | |
$ | 51,619,990 | |
Molds | |
| 1,427,251 | | |
| 1,425,992 | |
Office equipment | |
| 2,177,164 | | |
| 2,257,208 | |
Vehicles | |
| 2,083,079 | | |
| 2,040,061 | |
Buildings | |
| 9,161,044 | | |
| 9,152,959 | |
Machinery held under capital lease | |
| 29,012,601 | | |
| 29,012,601 | |
Leasehold improvements | |
| 574,876 | | |
| 562,521 | |
Sub-Total | |
| 98,281,406 | | |
| 96,071,332 | |
| |
| | | |
| | |
Less: Accumulated depreciation | |
| (56,127,595 | ) | |
| (52,520,405 | ) |
| |
| | | |
| | |
Property, plant and equipment, net | |
$ | 42,153,811 | | |
$ | 43,550,927 | |
Depreciation expense charged
to operations was $3,663,280 and $3,481,100 for the six months ended June 30, 2015 and June 30, 2014, respectively.
NOTE H - DEFERRED TAX ASSETS AND DEFERRED
TAX LIABILITIES
Deferred tax assets consisted
of the following as of June 30, 2015 and December 31, 2014:
| |
June 30, 2015 | | |
December 31, 2014 | |
Deferred tax assets - current | |
| | | |
| | |
Allowance for doubtful accounts | |
$ | 1,971,190 | | |
$ | 990,496 | |
Revenue (net of cost) | |
| 27,359 | | |
| ― | |
Unpaid accrued expenses | |
| 112,856 | | |
| 180,392 | |
Warranty | |
| 925,218 | | |
| 848,566 | |
Deferred tax assets | |
| 3,036,623 | | |
| 2,019,454 | |
Valuation allowance | |
| ― | | |
| ― | |
Net deferred tax assets - current | |
$ | 3,036,623 | | |
$ | 2,019,454 | |
| |
| | | |
| | |
Deferred tax liabilities - current | |
| | | |
| | |
Revenue (net of cost) | |
$ | ― | | |
$ | 151,083 | |
Deferred tax liabilities - current | |
| ― | | |
| 151,083 | |
| |
| | | |
| | |
Net deferred tax assets - current | |
$ | 3,036,623 | | |
$ | 1,868,371 | |
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 be realized in the foreseeable future. The Company and its subsidiaries do not have
income tax liabilities in the United States as the Company had no U.S. taxable income for the reporting period. The
Company’s subsidiaries registered in the PRC are 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 June 30, 2015 and December 31, 2014:
| |
June 30, 2015 | | |
December 31, 2014 | |
Secured | |
$ | 18,135,575 | | |
$ | 9,539,476 | |
The Company obtained those
short term loans from Bank of China, Bank of Ningbo, China Construction Bank, OCBC Bank and Agricultural Bank of China, respectively,
to finance general working capital as well as new equipment acquisition. Interest rate for the loans ranged from 0.32% to 5.35%
per annum. The maturity dates of the loans, as extended, ranged from September 16, 2015 to May 14, 2016. As of June 30, 2015 and
December 31, 2014, the Company’s accounts receivables of $8,625,000 and $12,328,735, respectively, were pledged as collateral
under loan arrangements. For the three months ended June 30, 2015 and 2014, the interest expenses for short-term bank loans were
$134,430 and $176,710, respectively. For the six months ended June 30, 2015 and 2014, the interest expenses for short-term bank
loans were $161,721 and $366,590, respectively.
Corporate or personal guarantees: |
$ | 3,548,333 | | |
Guaranteed by the Ruili Group, a related party; |
$ | 11,587,193 | | |
Guaranteed by the Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders; and |
$ | 3,000,049 | | |
Guaranteed by the Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders and Jia Rui Zhang, the daughter of Mr. Xiao Ping Zhang and Ms. Shu Ping Chi. |
NOTE J –CAPITAL LEASE OBLIGATIONS
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| | |
| |
Total capital lease obligations | |
$ | 5,608,106 | | |
$ | 7,470,875 | |
Less: Current portion | |
| (3,738,737 | ) | |
| (3,735,438 | ) |
Non-current portion | |
$ | 1,869,369 | | |
$ | 3,735,437 | |
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, pursuant to which the Company mortgaged
its equipment. To reduce its financing expenses, the Company entered into a new leasing agreement with International Far Eastern
Leasing Co., Ltd. in December 2012 and terminated the original agreement. The lease inception date of the new lease agreement is
January 4, 2013 and the termination date was January 4, 2017. The duration of the new agreement was 48 months with an interest
rate of 6.4% per annum and was secured with the Company’s equipment in the original cost of $28,396,853. The capital lease
obligation obtained by the Company was RMB 91,428,571 (approximately $14,545,950) and the Company is required to maintain a security
deposit of RMB 11,428,571 (approximately $1,818,244). The Company prepaid all interests of RMB 10,705,357 (approximately $1,703,212)
after the discount and is obligated for the payment of RMB 1,904,761.9 (approximately $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.
In 2009, the Company was awarded the “High-Tech
Enterprise” certificate by the Chinese government. The High-Tech Enterprise certificate was valid for three years and provided
the Company with a reduced tax rate of 15%.. The Company passed the re-assessment of the “High-Tech Enterprise” designation
by the government in 2012 and continued to be taxed at a 15% rate in 2012 through 2014. Upon the expiration of the “High-Tech
Enterprise” certificate in 2015, the Company is undergoing the re-assessment of the certificate by the government and is
currently subject to a tax rate of 25%.
The reconciliation of the
effective income tax rate of the Company to the statutory income tax rate in the PRC for the six months ended June 30, 2015 and
2014 is as follows:
| |
Six Months Ended June 30, 2015 | | |
Six Months Ended June 30, 2014 | |
| |
| | |
| |
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 the HK company | |
| -16.50 | % | |
| -16.50 | % |
| |
| | | |
| | |
China Statutory income tax rate | |
| 25.00 | % | |
| 25.00 | % |
| |
| | | |
| | |
Effects of income tax exemptions and reliefs | |
| ― | | |
| -10.00 | % |
| |
| | | |
| | |
Effects of additional deduction allowed for Research and Development expenses | |
| -5.97 | % | |
| -3.14 | % |
| |
| | | |
| | |
Other items | |
| 4.98 | % | |
| 1.36 | % |
| |
| | | |
| | |
Effective tax rate | |
| 24.01 | % | |
| 13.22 | % |
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 June 30, 2015. There currently is no tax benefit recorded for the United States. The U.S. tax authority
may examine the tax returns of the Company three years after the date such taxes were due. In the
six months ended June 30, 2015, 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, 2015 and
2014, respectively, are summarized as follows:
| |
Six Months Ended June 30, 2015 | | |
Six Months Ended June 30, 2014 | |
| |
| | |
| |
Current | |
$ | 2,956,230 | | |
$ | 1,471,873 | |
Deferred | |
| (1,163,808 | ) | |
| (307,428 | ) |
| |
| | | |
| | |
Total | |
$ | 1,792,422 | | |
$ | 1,164,445 | |
ASC 740-10 requires recognition
and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated
the Company’s tax positions and considered that no provision for uncertainty in income taxes was necessary as of June 30,
2015 and December 31, 2014.
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 $361,198 and $740,818 for the six months ended June 30, 2015 and 2014, respectively.
| |
June 30, 2015 | | |
June 30, 2014 | |
| |
| | | |
| | |
10% non-controlling interest in Ruian | |
$ | 605,914 | | |
$ | 784,422 | |
| |
| | | |
| | |
40% non-controlling interest in SIH | |
| (244,716 | ) | |
| (43,604 | ) |
| |
| | | |
| | |
Total | |
$ | 361,198 | | |
$ | 740,818 | |
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 RMB2,100,000 (approximately
$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 newly 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 RMB8,
137,680 (approximately $1,293,070).
The lease expenses were
$835,150 and $814,389 for the six months ended June 30, 2015 and 2014, respectively.
NOTE N - WARRANTY CLAIMS
Warranty claims were $1,042,859
and $1,143,342 for the six months ended June 30, 2015 and 2014, respectively. Warranty claims are classified as accrued expenses
on the balance sheet. The changes of accrued warranty expenses for the six months ended June 30, 2015 was as follows:
Beginning balance at January 1, 2015 | |
$ | 5,657,106 | |
Aggregate increase for new warranties issued during current period | |
| 1,042,859 | |
Aggregate reduction for payments made | |
| (734,252 | ) |
Ending balance at June 30, 2015: | |
$ | 5,965,713 | |
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.
| |
For The Six Months Ended June 30, | |
| |
2015 | | |
2014 | |
| |
| | |
| |
NET SALES TO EXTERNAL CUSTOMERS | |
| | | |
| | |
Commercial vehicles brake systems | |
$ | 90,002,644 | | |
$ | 93,874,970 | |
Passenger vehicles brake systems | |
| 21,470,200 | | |
| 21,842,065 | |
Net sales | |
$ | 111,472,844 | | |
$ | 115,717,035 | |
INTERSEGMENT SALES | |
| | | |
| | |
Commercial vehicles brake systems | |
$ | — | | |
$ | — | |
Passenger vehicles brake systems | |
| — | | |
| — | |
| |
| | | |
| | |
Intersegment sales | |
$ | — | | |
$ | — | |
GROSS PROFIT | |
| | | |
| | |
Commercial vehicles brake systems | |
$ | 23,944,802 | | |
$ | 26,177,323 | |
Passenger vehicles brake systems | |
| 6,314,718 | | |
| 7,723,498 | |
Gross profit | |
$ | 30,259,520 | | |
$ | 33,900,821 | |
Other operating income | |
| 1,068,808 | | |
| 925,262 | |
Selling and distribution expenses | |
| 10,437,087 | | |
| 12,178,605 | |
General and administrative expenses | |
| 10,149,595 | | |
| 9,027,028 | |
Research and development expenses | |
| 3,570,091 | | |
| 3,691,757 | |
Income from operations | |
| 7,171,555 | | |
| 9,928,693 | |
Interest income | |
| 520,791 | | |
| 60,635 | |
Other Income | |
| 713,938 | | |
| 251,596 | |
Interest expenses | |
| (409,200 | ) | |
| (722,730 | ) |
Other expenses | |
| (531,108 | ) | |
| (710,154 | ) |
| |
| | | |
| | |
Income before income tax expense | |
$ | 7,465,976 | | |
$ | 8,808,040 | |
CAPITAL EXPENDITURE | |
| | | |
| | |
Commercial vehicles brake systems | |
$ | 1,154,889 | | |
$ | 1,670,876 | |
Passenger vehicles brake systems | |
| 265,896 | | |
| 390,786 | |
Total | |
$ | 1,420,785 | | |
$ | 2,061,662 | |
DEPRECIATION AND AMORTIZATION | |
| | | |
| | |
Commercial vehicles brake systems | |
$ | 3,162,162 | | |
$ | 3,022,678 | |
Passenger vehicles brake systems | |
| 749,110 | | |
| 709,703 | |
Total | |
$ | 3,911,272 | | |
$ | 3,732,381 | |
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| |
TOTAL ASSETS | |
| | | |
| | |
Commercial vehicles brake systems | |
$ | 237,553,633 | | |
$ | 234,186,022 | |
Passenger vehicles brake systems | |
| 63,642,808 | | |
| 52,720,240 | |
Total | |
$ | 301,196,441 | | |
$ | 286,906,262 | |
| |
June 30, 2015 | | |
December 31, 2014 | |
| |
| |
LONG LIVED ASSETS | |
| | | |
| | |
Commercial vehicles brake systems | |
$ | 46,001,685 | | |
$ | 48,956,149 | |
Passenger vehicles brake systems | |
| 12,324,275 | | |
| 11,021,067 | |
| |
| | | |
| | |
Total | |
$ | 58,325,960 | | |
$ | 59,977,216 | |
NOTE P – CONTINGENCIES
(1) According to the laws of China, the Chinese
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 negotiation 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. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately
$745,220). This amount was determined based on a 3% tax rate on the consideration paid for the 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. Even if it is unable to resolve
the tax issues, there will be no potential adverse implication on the Company.
(2) The Company provided the guarantee for
the credit line granted to Ruili Group by the Bank of Ningbo in the amount of RMB108,000,000 (approximately $17,182,404) for the
period from September 26, 2013 to September 25, 2014, which was renewed in 2014 for a term from August 22, 2014 to August 21, 2015.
The Company also provides the guarantee for Ruili Group related to the credit line granted by China Zheshang Bank in the amount
of RMB 146,960,000 (approximately $24,016,996) from December 9, 2014 to December 9, 2015.
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: risks associated with global economic or market conditions;
our ability to effectively implement our business strategy; our ownership and management structure; our ability to retain and expand
our customer base and generate revenue from their orders; our ability to handle downward pricing pressures on our products; our
ability to accurately or effectively plan our production or supply needs; our ability to meet delivery deadlines for our products;
our ability to develop new products; our ability to obtain financing on favorable terms; our ability to protect our intellectual
property rights and not infringe on the intellectual property rights of others; competitive pressures; risks associated with a
disruption at our sole manufacturing site; increased costs of components and raw materials; risks associated with product liability
and warranty and recall claims; compliance costs related to environmental and safety regulations; risks related to non-performance
by our suppliers; risks associated with international operations, including fluctuations in foreign currency exchange rates; and
risks associated with China’s legal, environmental, political and economic policies. 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, 2014, 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, 2014.
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 June
30, 2015 as compared to the three months ended June 30, 2014.
Sales
| |
Three Months Ended | | |
Three Months Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | |
| |
(U.S. dollars in millions) | |
Commercial Vehicle Brake Systems | |
$ | 46.8 | | |
| 78.9 | % | |
$ | 53.9 | | |
| 82.0 | % |
Passenger Vehicle Brake Systems | |
$ | 12.5 | | |
| 21.1 | % | |
$ | 11.8 | | |
| 18.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 59.3 | | |
| 100.0 | % | |
$ | 65.7 | | |
| 100.0 | % |
Net sales were $59,274,878 and $65,723,746
for the three months ended June 30, 2015 and 2014, respectively, a decrease of $6.4 million or 9.8%. The decrease was mainly due
to the decreased sales of commercial vehicle brake systems to China market and international market.
The sales from Commercial Vehicle Brake Systems decreased
by $7.1 million or 13.2%, to $46.8 million for the second fiscal quarter of 2015, compared to $53.9 million for the same period
of 2014. The decline of the production and sales of the commercial vehicles for the second fiscal quarter of 2015 in the automobile
industry impacted the sales of the Commercial Vehicle Brake Systems.
The sales from Passenger Vehicle Brake Systems
increased by $0.7 million or 5.9%, to $12.5 million for the second fiscal quarter of 2015, compared to $11.8 million for the same
period of 2014. The increase was mainly due to the increased sales to existing customers in the second fiscal quarter of 2015.
A breakdown of net sales
revenue for these markets for the second fiscal quarter of the 2015 and 2014, respectively, is set forth below:
| |
Three Months | | |
Percent | | |
Three Months | | |
Percent | | |
| |
| |
Ended | | |
of | | |
Ended | | |
of | | |
| |
| |
June 30, 2015 | | |
Total Sales | | |
June 30, 2014 | | |
Total Sales | | |
Percentage Change | |
| |
(U.S. dollars in millions) | | |
| |
China OEM market | |
$ | 28.4 | | |
| 47.9 | % | |
$ | 31.9 | | |
| 48.6 | % | |
| -11.0 | % |
China Aftermarket | |
$ | 14.0 | | |
| 23.6 | % | |
$ | 15.4 | | |
| 23.4 | % | |
| -9.1 | % |
International market | |
$ | 16.9 | | |
| 28.5 | % | |
$ | 18.4 | | |
| 28.0 | % | |
| -8.2 | % |
Total | |
$ | 59.3 | | |
| 100.0 | % | |
$ | 65.7 | | |
| 100.0 | % | |
| -9.7 | % |
Considering the decline
of the production and sales of the commercial vehicles for the second fiscal quarter of 2015 in the automobile industry, our sales
to the Chinese OEM market decreased by 11.0% from the second fiscal quarter of 2014, to $28.4 million.
Our sales to the China
aftermarket decreased by $1.4 million or 9.1%, to $14.0 million for the second fiscal quarter of 2015, compared to $15.4 million
for the same period of 2014. The usage of heavy-duty trucks in the construction of real estate development projects and infrastructure
projects was reduced in China in the second quarter of 2015, which resulted in the reduced replacement of auto parts. 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 international sales decreased
by $1.5 million or 8.2%, to $16.9 million for the second fiscal quarter of 2015, as compared to $18.4 million for the same
period of 2014. The decrease in export sales was mainly due to the truck production decline and currency depreciation in some countries.
Cost of Sales and Gross Profit
Cost of sales for the three months ended
June 30, 2015 were $42,746,432 a decrease of $4,463,429 or 9.5% from $47,209,861 for the three month period ended June 30, 2014.
Our gross profit decreased by 10.7% from $18,513,885 for the period of 2014 to $16,528,446 for the three month period ended June
30, 2015.
Gross margin decreased to 27.9%
from 28.2% for the three month period ended June 30, 2015 compared with 2014. One of the reasons of these decrease is that,
to strengthen our competitiveness and increase our market share, we introduced price discounts in the
aftermarket and international market in 2015. The increased labor cost also decreased our gross margin for the three months
ended June 30, 2015. We intend to focus in 2015 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 period ended June 30, 2015 were $34.2 million, a decrease of $5.3 million or 13.3% from $39.5 million
for the same period last year. The gross profit from Commercial Vehicle Brake Systems decreased by 13.4% from $14.4 million for
three month period ended June 30, 2014 to $12.5 million for the three month period ended June 30, 2015. Gross margin from Commercial
Vehicle Brake Systems decreased to 26.7% from 26.8% for the three months period ended June 30, 2015 compared to the three months
period ended June 30, 2014.
Cost of sales from Passenger Vehicle Brake Systems for the three months period ended June 30, 2015
were $8.5 million, an increase of $0.8 million or 10.2% from $7.7 million for the three month period ended June 30, 2014. The
gross profit from Passenger Vehicle Brake Systems decreased by 1.3% from $4.1 million for the three month period ended June 30,
2014 to $4.0 million for the three month period ended June 30, 2015. Gross margin from Passenger Vehicle Brake Systems decreased
to 32.1% from 34.6% for the three months ended June 30, 2015 compared to the three months period ended June 30, 2014.
Selling and Distribution Expenses
Selling and distribution
expenses were $5,086,089 for the three months ended June 30, 2015, as compared to $6,473,111 for the same period of 2014, a decrease
of $1,387,022 or 21.4%.
The decrease was mainly
due to decreased freight expense. As a percentage of sales revenue, selling expenses decreased to 8.6% for the three months
ended June 30, 2015, as compared to 9.8% for the same period in 2014.
General and Administrative Expenses
General and administrative
expenses were $7,430,223 for the three months ended June 30, 2015, as compared to $4,710,874 for the same period of 2014, an increase
of $2,719,349 or 57.7%. The increase was mainly due to the increase in allowance for doubtful accounts during this quarter. As
a percentage of sales revenue, general and administrative expenses increased to 12.5% for the three months ended June
30, 2015, as compared to 7.2% for the same period in 2014.
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 June 30, 2015, research and development
expenses were $1,857,470, as compared to $2,200,558 for the same period of 2014, a decrease of $343,088.
Other Operating Income
Other operating income was $483,091 for
the three months ended June 30, 2015, as compared to $549,130 for the three months ended June 30, 2014, a decrease of $66,039.
The decrease was mainly due to a decrease in sales of raw material scraps for the three months ended June 30, 2015.
Depreciation and Amortization
Depreciation and amortization
expense increased to $1,974,208 for the three months ended June 30, 2015, compared with that of $1,879,071 for the same period
of 2014, an increase of $95,137. The increase in depreciation and amortization expense was primarily due to the addition of purchased
production equipment.
Interest income
The interest income for
the three months ended June 30, 2015, increased by $361,001 to $409,836 from $48,835 for the same period of 2014, mainly due
to increased short term investments during the period.
Interest Expenses
The interest expenses for
the three months ended June 30, 2015, increased by $5,570 to $242,544 from $236,974 for the same period of 2014, mainly due
to increased interest expenses related to the discount of bank acceptance notes received from customers.
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 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 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. Upon the expiration of the “High-Tech Enterprise” certificate in 2015, the Company is
undergoing the re-assessment of the certificate by the government and is currently subject to a tax rate of 25%.
Income tax expense was
$794,144 for the three months ended June 30, 2015, as compared to $651,210 for the three months ended June 30, 2014.
Net Income Attributable to Non-Controlling
Interest in Subsidiaries
Net income attributable
to noncontrolling interest in subsidiaries amounted to $208,955 and $447,621 for the second fiscal quarter ended June 30, 2015
and 2014, respectively.
Net Income Attributable to Stockholders
The net income attributable
to stockholders for the fiscal quarter ended June 30, 2015, decreased by $1,870,399, to $2,262,075 from $4,132,474 for the
fiscal quarter ended June 30, 2014 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted,
for the fiscal quarter ended June 30, 2015 and 2014, were $0.12 and $0.21, respectively.
Results of operations for the six months
ended June 30, 2015 as compared to the six months ended June 30, 2014.
Sales
| |
Six Months Ended | | |
Six Months Ended | |
| |
June 30, 2015 | | |
June 30, 2014 | |
| |
(U.S. dollars in millions) |
Commercial Vehicle Brake Systems | |
$ | 90.0 | | |
| 80.7 | % | |
$ | 93.9 | | |
| 81.2 | % |
Passenger Vehicle Brake Systems | |
$ | 21.5 | | |
| 19.3 | % | |
$ | 21.8 | | |
| 18.8 | % |
| |
| | | |
| | | |
| | | |
| | |
Total | |
$ | 111.5 | | |
| 100.0 | % | |
$ | 115.7 | | |
| 100.0 | % |
Net sales were $111,472,844
and $115,717,035 for the six months ended June 30, 2015 and 2014, respectively, a decrease of $4.2 million or 3.7%. The decrease
was due to the decreased sales to China OEM market.
The sales from Commercial Vehicle Brake Systems decreased
by $3.9 million or 4.1%, to $90.0 million for the six months ended June 30, 2015, compared to $93.9 million for the six months
ended June 30, 2014. The decline of the production and sales of the commercial vehicles in 2015 in the automobile industry impacted
the sales of the Commercial Vehicle Brake Systems.
The sales from Passenger Vehicle Brake Systems
decreased by $0.3 million or 1.7%, to $21.5 million for the six months ended June 30, 2015, compared to $21.8 million for the same
period of 2014. The decrease was mainly due to the adjustment of our customer structure in 2015, 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 six months ended June 30, 2015 and 2014, respectively, is set forth
below:
| |
Six Months | | |
Percent | | |
Six Months | | |
Percent | | |
| |
| |
Eded | | |
of | | |
Ended | | |
of | | |
| |
| |
June 30,
2015 | | |
Total
Sales | | |
June 30,
2014 | | |
Total
Sales | | |
Percentage
Change | |
| |
(U.S. dollars in million) | | |
| |
China OEM market | |
$ | 54.3 | | |
| 48.7 | % | |
$ | 60.5 | | |
| 52.3 | % | |
| -10.2 | % |
China Aftermarket | |
$ | 26.4 | | |
| 23.7 | % | |
$ | 25.9 | | |
| 22.4 | % | |
| 1.9 | % |
International market | |
$ | 30.8 | | |
| 27.6 | % | |
$ | 29.3 | | |
| 25.3 | % | |
| 5.1 | % |
Total | |
$ | 111.5 | | |
| 100.0 | % | |
$ | 115.7 | | |
| 100.0 | % | |
| -3.6 | % |
Considering the decline of the production
and sales of the commercial vehicles for the six months ended June 30, 2015 in the automobile industry, our sales to the Chinese
OEM market decreased by 10.2% to $54.3 million for the six months ended June 30, 2015, compared to $60.5 million for the same
period in 2014.
Our sales to the China
aftermarket increased by $0.5 million or 1.9%, to $26.4 million for the six months ended June 30, 2015, compared to $25.9
million for the same period of 2014. The increased new vehicle sales in China and the expiration of OEM warranties helped to drive
our aftermarket business. Sales of our new model products, applicable to both the Chinese OEM Market and Chinese Aftermarket, also
increased during the six months ended June 30, 2015. 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 $1.5 million or 5.1%, to $30.8 million for the six months ended June 30, 2015, as compared to $29.3 million for the same
period of 2014. 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 six
months ended June 30, 2015 were $81,213,324, a decrease of $602,890 or 0.7% from $81,816,214 for the same period last year. Our gross profit decreased by 10.7% from $33,900,821 for the six months ended June 30, 2014 to $30,259,520 for the same period
of 2015.
Gross margin decreased
to 27.1% from 29.3% for the six months ended June 30, 2015, as compared with the same period of 2014. One of the reasons of the
decrease is that, to strengthen our competitiveness and increase our market share, we started the price promotion in the aftermarket
and international market for the six months ended June 30, 2015. The increased labor cost also decreased our gross margin for the
six months ended June 30, 2015. We intend to focus in 2015 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 six months ended June 30, 2015 were $66.1 million, a decrease of $1.6 million or 2.4% from $67.7
million for the same period of 2014. The gross profit from Commercial Vehicle Brake Systems decreased by 8.5% from $26.2 million
for the six months ended June 30, 2014 to $23.9 for the same period of 2015. Gross margin from Commercial Vehicle Brake Systems
decreased to 26.6% from 27.9% for the six months ended June 30, 2015 compared with the same period of 2014.
Cost of sales from Passenger
Vehicle Brake Systems for the six months ended June 30, 2015 were $15.2 million, an increase of $1.0 million or 7.3% from $14.1
million for the same period of 2014. The gross profit from Passenger Vehicle Brake Systems decreased by18.2% from $7.7 for the
six months ended June 30, 2014 to $6.3 for the same period of 2015. Gross margin from Passenger Vehicle Brake Systems decreased
to 29.4% from 35.4% for the six months ended June 30, 2015, as compared with the same period in 2014.
Selling and Distribution Expenses
Selling and distribution
expenses were $10,437,087 for the six months ended June 30, 2015, as compared to $12,178,605 for the same period of 2014, a decrease
of $1,741,518 or 14.3%.
The decrease was mainly
due to decreased freight expense and salaries of the sales force. As a percentage of sales revenue, selling expenses decreased
to 9.4% for the six months ended June 30, 2015, as compared to 10.5% for the same period in 2014.
General and Administrative Expenses
General and administrative
expenses were $10,149,595 for the six months ended June 30, 2015, as compared to $9,027,028 for the same period of 2014, an increase
of $1,122,567, or 12.4%.
The increase was mainly
due to the increase in allowance for doubtful accounts during this quarter. As a percentage of sales revenue, general
and administrative expenses increased to 9.1% for the six months ended June 30, 2015, as compared to 7.8% for the same
period in 2014.
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 six months ended June 30, 2015, research and development
expenses were $3,570,091, as compared to $3,691,757 for the same period of 2014, a decrease of $121,666.
Other Operating Income
Other operating income
was $1,068,808 for the six months ended June 30, 2015, as compared to $925,262 for the six months ended June 30, 2014, an increase
of $143,546. The increase was mainly due to an increase in sales of raw material scrap for the six months ended June 30, 2015.
Depreciation and Amortization
Depreciation and amortization
expenses increased to $3,911,272 for the six months ended June 30, 2015, compared with that of $3,732,381 for the same period of
2014, an increase of $178,891. The increase in depreciation and amortization expenses was primarily due to the purchase of production
equipment.
Interest income
The interest income for
the six months ended June 30, 2015, increased by $460,156 to $520,791 from $60,635 for the same period of 2014, mainly due
to increased short term investments during the period.
Interest Expenses
The interest expenses for
the six months ended June 30, 2015, decreased by $313,530 to $409,200 from $722,730 for the same period of 2014, mainly due
to decreased interest rate and decreased amount of average loans outstanding during the period. In addition, the interest expenses
related to the discount of bank acceptance notes received from customers also decreased.
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. Upon the expiration of the “High-Tech Enterprise” certificate in 2015,
the Company is undergoing the re-assessment of the certificate by the government and is currently subject to a tax rate of 25%.
Income tax expense was
$1,792,422 for the six months ended June 30, 2015, as compared to $1,164,445 for the six months ended June 30, 2014.
Net Income Attributable to Non-Controlling
Interest in Subsidiaries
Net income attributable to non-controlling interest in subsidiaries amounted to $361,198 and $740,818 for
the six months ended June 30, 2015 and 2014, respectively.
Net Income Attributable to Stockholders
The net income attributable to stockholders
for the six months ended June 30, 2015, decreased by $1,590,421, to $5,312,356 from $6,902,777 for the six months ended
June 30, 2014. EPS, both basic and diluted, for the six months ended June 30, 2015 and 2014, were $0.28 and $0.36, respectively.
FINANCIAL CONDITION
Liquidity and Capital Resources
As of June 30, 2015, the
Company had cash and cash equivalents of $11,624,065, as compared to cash and cash equivalents of $14,009,597 as of December 31,
2014. The Company had working capital of $169,588,176 at June 30, 2015, as compared to working capital of $163,947,851 at December
31, 2014, reflecting current ratios of 3.31:1 and 3.60:1, respectively.
OPERATING - Net cash provided
by operating activities was $16,074,928 for six months ended June 30, 2015 an increase of $20,454,101, as compared with $4,379,173
of net cash used in operating activities in the same period in 2014. Such increase was primarily due to the increased cash inflow
resulted by changes in inventories and deposits received from customers.
INVESTING - During the
six months ended June 30, 2015, the Company expended net cash of $25,133,026 in investing activities mainly for short term
investments. For the six months ended June 30, 2014, the Company expended net cash of $2,008,225 in investing activities.
FINANCING - During the
six month period ended June 30, 2015, the cash provided by financing activities was $6,739,881. Cash provided by financing activities
was $4,540,724 for the six months ended June 30, 2014.
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 June 30, 2015,
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 will continue negotiations in furtherance of our effort 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, the Company believes that
there will be no potential adverse implication on the Company for the following reasons.
1. The
Company acquired the land use rights in a transaction between the Company and the Ruili Group, a related party. The Ruili Group,
as the original land use right owner, has granted the land use right to the Company by contract which is supported by valid consideration.
2. No
third party would oppose the Company’s use of the land, because no third party has any interest in the land use right or
property ownership right, other than the Ruili Group and the government.
a) The
Company intends to enter into an agreement with Ruili Group pursuant to which the Ruili Group will represent and warrant that the
Company will have the right to use the land and related building, even before the land use certificate is transferred. The Company,
however, can offer no assurances that the parties will ultimately enter into such an agreement.
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 US$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.
CONTRACTUAL OBLIGATIONS
As of June 30, 2015, we
had no material changes outside the ordinary course of business in our contractual obligations
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
We maintain disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange
Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information
is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize
that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving
the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating
whether the benefits of the controls and procedures that we adopt outweigh their costs. As required by Rules 13a-15(b) and 15d-15(b)
of the Exchange Act, an evaluation as of June 30, 2015 was performed under the supervision and with the participation of the Company’s
management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the
effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b)
and 15d-15(b) of the Exchange Act). Based on this evaluation, the Company’s management, including the CEO and CFO, concluded
that the Company’s disclosure controls and procedures, as of June 30, 2015, were effective, in all material respects, for
the purpose stated above.
Changes in Internal Control over Financial Reporting:
There were no changes in the Company’s
internal control over financial reporting during the three months ended June 30, 2015 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
We are involved in litigation matters and are subject to claims arising in the ordinary course of business that we do not
believe will have a material adverse effect upon our business, financial condition or results of operations, although we can
offer no assurance as to the ultimate outcome of any such matters.
ITEM 1A. RISK FACTORS
Part I, Item 1A. “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2014 includes
a detailed discussion of risk factors that could materially affect our business, financial condition or results of operations.
There have been no material changes from the risk factors disclosed in that report.
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 |
Amended and Restated Articles of Incorporation, as further amended (approved May 27, 2010). (1) |
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3.2 |
Amended and Restated Bylaws effective as of March 14, 2009. (2) |
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31.1 |
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31.2 |
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32 |
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3) |
EX-101.INS |
XBRL Instance Document |
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EX-101.SCH |
XBRL Taxonomy Extension Schema |
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EX-101.CAL |
XBRL Taxonomy Extension Calculation Linkbase |
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EX-101.DEF |
XBRL Taxonomy Extension Definition Linkbase |
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EX-101.LAB |
XBRL Taxonomy Extension Label Linkbase |
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EX-101.PRE |
XBRL Taxonomy Extension Presentation |
| (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, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated : August 14, 2015 |
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 |
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(Principal Accounting 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 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: August 14, 2015 |
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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 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: August 14, 2015 |
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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 Accounting 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, 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 June 30, 2015 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: August 14, 2015 |
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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)
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