NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - 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”). The Company distributes products both in China and internationally under SORL trademarks.
The Company’s product range includes 65 categories and over 2,000 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”), a related party under common
control, 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, through its wholly owned subsidiary, Fairford, entered into a joint
venture agreement with MGR Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution specialist firm
and an unaffiliated Taiwanese investor. The joint venture was named S
ORL
International Holding, Ltd. (“SIH”) based in Hong Kong. SORL held a 60% interest in the joint venture, MGR held a 30%
interest, and the Taiwanese investor held a 10% interest. SIH was primarily devoted to expanding SORL's international sales network
in Asia-Pacific and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution
network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese
investor. After this transaction, SIH ceased to be a distributor of SORL in the international market.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Company uses the accrual method of accounting
for financial statement and tax return purposes.
|
b.
|
PRINCIPLES OF CONSOLIDATION
|
The consolidated financial statements
include the accounts of SORL Auto Parts, Inc. and its majority owned subsidiaries. All inter-company balances and
transactions have been eliminated in the consolidation. The results of subsidiaries acquired or disposed of during the
respective periods are included in the consolidated statements of income and comprehensive income from the effective
date of acquisition or up to the effective date of disposal, as appropriate. The portion of the income or loss applicable to
non-controlling interests in subsidiary undertakings is reflected in the consolidated statements of income and comprehensive income.
The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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.
|
d.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
For certain of the Company’s
financial instruments, including cash and cash equivalents, restricted cash, short term investments, accounts receivables and
payables, prepaid expenses, deposits and other current assets, short term bank loans, deposit received from customers and other payables and accruals,
the carrying amounts approximate fair values due to their short maturities.
Transactions involving related parties cannot
be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, freemarket dealings may not
exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
|
e.
|
RELATED PARTY TRANSACTIONS
|
A related party is generally defined as (i)
any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management,
(iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone
who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between related parties.
|
f.
|
FINANCIAL RISK FACTORS AND FINANCIAL RISK MANAGEMENT
|
The Company is exposed to the following risk
factors:
|
i)
|
Credit risks - The Company has policies in place to ensure that sales of products are made to customers with an appropriate
credit history. The Company performs ongoing credit evaluations with respect to the financial condition of its creditors, but does
not require collateral. In order to determine the value of the Company’s accounts receivable, the Company records a provision
for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical
experience and its evaluation of the collection of outstanding accounts receivable. The Company has a concentration of credit risk
due to geographic sales as a majority of its products are marketed and sold in the PRC. The Company has no customer that accounts
for more than 10.0% of its total revenues for the year ended December 31, 2016.
|
|
ii)
|
Liquidity risks - Prudent liquidity risk management implies maintaining sufficient cash, the availability
of funding through an adequate amount of committed credit facilities and ability to close out market positions.
|
|
iii)
|
Interest rate risk - The interest rate of short-term
bank borrowings obtained in 2016 ranged from 0.55% to 4.57% and the term ranged from approximately six months to one year. The
Company’s income and cash flows are substantially independent of changes in market interest rates.
|
|
g.
|
CASH AND CASH EQUIVALENTS
|
The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash equivalents.
|
h.
|
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.
Term deposits in the
amount of $21,667,802 (RMB 140,000,000) were pledged for the credit line granted to Ruili Group, a related party, by Bank of Ningbo
for the period from March 24, 2015 to March 24, 2016. As of December 31, 2016, the term deposits matured and the pledge was released
as the credit line was fully paid off by Ruili Group.
Term deposit in the amount of $6,190,800 (RMB
40,000,000) was pledged as security interest for the bank acceptance notes payable issued to Hangzhou Xiangwei Wuzi Co., Ltd, a
related party controlled by the relative of Ms. Shu Ping Chi, by Zhejiang Chouzhou Commercial Bank for the period from December
17, 2015 to June 17, 2016. As of December 31, 2016, the term deposit matured and the pledge was released as the bank acceptance
notes payable were paid off by Hangzhou Xiangwei Wuzi Co., Ltd.
Term deposit in the amount of $3,317,650 (RMB
22,000,000) was pledged for the credit line granted to Ruili Group, a related party, by Bank of Ningbo for the period from January
13, 2016 to July 13, 2016. As of December 31, 2016, the term deposit matured and the pledge was released as the credit line was
fully paid off by Ruili Group.
Restricted cash mainly represents bank deposits
used to pledge the bank acceptance notes. The Company entered into credit agreements with commercial banks in China (“endorsing
banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits, the Company can issue
bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance notes, the Company is generally
required to make initial deposits or pledge note receivables to the endorsing banks in amounts of certain percentage of the face
amount of the bank acceptance notes to be issued by the Company. The cash in such accounts is restricted for use over the terms
of the bank acceptance notes, which are normally three to six months.
Inventories are stated at the lower of cost
or net realizable value, with cost computed on a weighted-average basis. Cost includes all costs of purchase, cost of conversion
and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated
selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make
the sale.
|
k.
|
PROPERTY, PLANT AND EQUIPMENT
|
Property, plant and equipment are stated at
cost less accumulated depreciation and impairment losses. The initial cost of the asset comprises its purchase price and any directly
attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is calculated
using the straight-line method over the estimated useful life of the respective assets as follows:
Category
|
|
Estimated Useful Life (Years)
|
|
|
|
Buildings
|
|
10-20
|
|
|
|
Machinery and equipment
|
|
5-10
|
|
|
|
Electronic equipment
|
|
5
|
|
|
|
Motor vehicles
|
|
5-10
|
|
|
|
Leasehold improvements
|
|
The lesser of remaining lease term or 10
|
Significant improvements are capitalized when
it is probable that the expenditure resulted in an increase in the future economic benefits expected to be obtained from the use
of the asset beyond its originally assessed standard of performance. When improvements are made to real property and those improvements
are permanently affixed to the property, the title to those improvements automatically transfers to the owner of the property.
The lessee’s interest in the improvements is not a direct ownership interest but rather it is an intangible right to use
and benefit from the improvements during the term of the lease.
Routine repairs and maintenance are expensed
when incurred. Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds
less the carrying amount of the assets.
According to the law of China, the government
owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. Land use rights are being amortized using the straight-line method over the estimated useful life of
40 years.
|
m.
|
IMPAIRMENT OF LONG-LIVED ASSETS
|
Long-lived assets, such as property, plant
and equipment and other non-current assets, including intangible assets, are reviewed periodically for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized
when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment
exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying
value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external
appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.
Intangible assets represent mainly the patent
of technology. Intangible assets are measured initially at cost. Intangible assets are recognized if it is probable that the future
economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably.
After initial recognition, intangible assets are measured at cost less any impairment losses. Intangible assets with definite useful
lives are amortized on a straight-line basis over their useful lives.
|
o.
|
ACCOUNTS RECEIVABLES AND ALLOWANCE FOR BAD DEBTS
|
The Company presents accounts receivables,
net of allowances for doubtful accounts and returns, to ensure accounts receivable are not overstated due to being uncollectible.
The allowances are calculated based on
a detailed review of certain individual customer accounts, historical collectibiliity rates, a general provision based on aging
and an estimation of the overall economic conditions affecting the Company’s customer base. The Company reviews a customer’s
credit history before extending credit. If the financial condition of its customers were to deteriorate, resulting in an impairment
of their ability to make payments, additional allowances may be required.
The Company will write off the uncollectible
receivables once any customers are bankrupt or there is a remote possibility that the Company will collect the outstanding balance.
The write-off must be reported to the local tax authorities and the Company must receive official approval from them. To date,
the Company has not written off any account receivables.
Notes receivable, generally due within
six months, are issued by some customers to pay certain outstanding receivable balances to the Company with specific payment terms
and definitive due dates. Notes receivable do not bear interest. As of December 31, 2016, notes receivables in the amount of $32,916,198
were pledged to endorsing banks to issue bank acceptance notes. The banks charge discount fees if the Company chooses to discount
the notes receivables for cash before the maturity of the notes. The Company incurred discount fees of $135,329 and $538,517 for
the years ended December 31, 2016 and 2015, respectively, which were included in interest expenses.
Revenue from the sale of goods is recognized
when the risks and rewards of ownership of the goods have transferred to the buyer including factors such as when persuasive evidence
of an arrangement exists, delivery has occurred, the sales price is fixed and determinable, and collection is probable. Revenue
consists of the invoice value for the sale of goods and services net of value-added tax (“VAT”), rebates and discounts
and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales.
The Company accounts for income taxes under
the provision of FASB ASC 740-10,
Income Taxes
, or ASC 740-10, whereby deferred income tax assets and liabilities are computed
for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected
to be realized.
|
s.
|
FOREIGN CURRENCY TRANSLATION
|
The Company maintains its books and
accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has
adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, U.S.
dollars (“US$”). All assets and liabilities are translated at the current rate. The stockholders’ equity
accounts are translated at the appropriate historical rate. Revenue and expenses are translated at average exchange rates
during the period.
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.
Mandatory contributions are made to Government’s
health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on gross salary payments.
The cost of these payments is charged to the statement of income in the same period as the related salary costs.
|
u.
|
RESEARCH AND DEVELOPMENT EXPENSES
|
Research and development costs are classified
as general and administrative expenses and are expensed as incurred. Research and development expenses were $7,709,533 for the
year ended December 31, 2016, as compared with $7,358,563 for the year ended December 31, 2015.
|
v.
|
SHIPPING AND HANDLING COSTS
|
Shipping and handling cost are classified as
selling expenses and are expensed as incurred. Shipping and handling costs were $6,529,999 and $4,428,406 for the years ended December
31, 2016 and 2015, respectively.
Advertising costs are classified as selling
expenses and are expensed as incurred. Advertising costs were $239,301 and $285,844 for the years ended December 31, 2016 and 2015,
respectively.
The Company provides for the estimated cost
of product warranties when the products are sold. Such estimates of product warranties were based on, among other things, historical
experience, product changes, material expenses, and service and transportation expenses arising from the manufactured product.
Estimates will be adjusted on the basis of actual claims and circumstances. Warranty claims were $2,503,950 and $2,047,684 for
the years ended December 31, 2016 and 2015, respectively.
Purchase discounts represent discounts received
from vendors for purchasing raw materials and are netted in the cost of goods sold, if applicable.
The Company has adopted FASB Accounting Standard
Codification, or ASC 840,
Lease
. If the lease terms meet one or all of the following four criteria, it will be classified
as a capital lease, otherwise, it is an operating lease: (1) The lease transfers the title to the lessee at the end of the term;
(2) the lease contains a bargain purchase option; (3) the lease term is equal to 75% of the estimated economic life of the leased
property or more; (4) the present value of the minimum lease payment in the term equals or exceeds 90% of the fair value of the
leased property.
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.
Government grants include cash subsidies as
well as other subsidies received from the PRC government by the Joint Venture. Such subsidies are generally provided as incentives
from the local government to encourage the expansion of local business. Government grants are recognized when received and all
the conditions specified in the grant have been met. Capital grants received in advance of the acquisition of equipment are recorded
initially in other current liabilities and then offset against the cost of the related equipment upon acquisition.
ASC Topic 280 requires use of the “management
approach” model for segment reporting. The management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
During the years ended December 31, 2016 and 2015, the Company operated in two reportable business segments: (1) commercial vehicles
brake systems (2) passenger vehicles brake systems.
|
dd.
|
DISPOSAL OF SUBSIDIARY
|
On December 15, 2015, the Company entered into
an agreement to dispose of its entire 60% equity interest in its subsidiary, SIH, to the Taiwanese individual investor who holds
a 10% interest in SIH for a consideration of approximately $77 (HK$600).
The Company determined that the disposal of
SIH did not constitute a discontinued operation as it did not represent a strategic shift and the operation capacity of SIH was
absorbed by the Joint Venture, the other subsidiary of the Company.
|
ee.
|
RECENTLY ISSUED FINANCIAL STANDARDS
|
On April 2016, the FASB issued ASU 2016- 10,
“Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing”. The amendments
add further guidance on identifying performance obligations and also to improve the operability and understandability of the licensing
implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. Public entities should
apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.
Early application for public entities is permitted only as of annual reporting periods beginning after December 15, 2016, including
interim reporting periods within that reporting period. The Company is currently in the process of evaluating the impact of the
adoption on its consolidated financial statements.
On May 2016, the FASB issued ASU 2016-11, “Revenue
Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates
2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting”. The amendments rescinds SEC paragraphs
pursuant to two SEC Staff Announcements at the March 3, 2016 Emerging Issues Task Force (EITF) meeting. Specifically, registrants
should not rely on the following SEC Staff Observer comments upon adoption of Topic 606: (1) Revenue and Expense Recognition for
Freight Services in Process, which is codified in paragraph 605-20-S99-2; (2) Accounting for Shipping and Handling Fees and Costs,
which is codified in paragraph 605-45-S99-1; (3) Accounting for Consideration Given by a Vendor to a Customer (including Reseller
of the Vendor’s Products), which is codified in paragraph 605-50-S99-1; and (4) Accounting for Gas-Balancing Arrangements
(i.e., use of the “entitlements method”), which is codified in paragraph 932-10-S99-5. The amendment is effective upon
adoption of ASU 2014-09. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial
statements.
In May 2016, the FASB issued ASU 2016-12, “Revenue
from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients”. The amendments, among other
things: (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude
amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement
date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate
effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and
unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and
unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all
(or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify
that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose
the effect of the accounting change for the period of adoption. These amendments are effective for public entities for annual reporting
periods beginning after December 15, 2017, including interim reporting periods therein (i.e., January 1, 2018, for a calendar year
entity). The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
“Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments”. These amendments
provide cash flow statement classification guidance for: (1) Debt Prepayment or Debt Extinguishment Costs; (2) Settlement of Zero-Coupon
Debt Instruments or Other Debt Instruments with Coupon Interest Rates That Are Insignificant in Relation to the Effective Interest
Rate of the Borrowing; (3) Contingent Consideration Payments Made after a Business Combination; (4) Proceeds from the Settlement
of Insurance Claims; (5) Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including Bank-Owned Life Insurance
Policies; (6) Distributions Received from Equity Method Investees; (7) Beneficial Interests in Securitization Transactions; and
(8) Separately Identifiable Cash Flows and Application of the Predominance Principle. These amendments are effective for public
business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early application
is permitted, including adoption in an interim period. The Company is currently in the process of evaluating the impact of the
adoption on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-17,
“Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control”. These amendments
change the evaluation of whether a reporting entity is the primary beneficiary of a variable interest entity by changing how a
reporting entity that is a single decision maker of a variable interest entity treats indirect interests in the entity held through
related parties that are under common control with the reporting entity. If a reporting entity satisfies the first characteristic
of a primary beneficiary (such that it is the single decision maker of a variable interest entity), the amendments require that
reporting entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its
direct variable interests in a variable interest entity and, on a proportionate basis, its indirect variable interests in a variable
interest entity held through related parties, including related parties that are under common control with the reporting entity.
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. Early adoption is permitted, including adoption in an interim period. If an entity adopts
the pending content that links to this paragraph in an interim period, any adjustments should be reflected as of the beginning
of the fiscal year that includes that interim period. The Company is currently in the process of evaluating the impact of the adoption
on its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
“Statement of Cash Flows (Topic 230): Restricted Cash”. These amendments require that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The amendments in
this ASU are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within
those fiscal years. Early adoption is permitted. The Company is currently in the process of evaluating the impact of the adoption
on its consolidated financial statements.
In December 2016, the FASB issued ASU No. 2016-20,
“Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The amendments in ASU
2016-20 affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for
Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior
Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liability, Advertising Costs, Fixed
Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors to Private Funds and Public Funds. The amendments
in this ASU is effective for public companies for annual periods beginning after December 15, 2017, including interim periods within
those periods. Early adoption is permitted under certain circumstances. The amendments should be applied prospectively as of the
beginning of the period of adoption. The Company is currently in the process of evaluating the impact of the adoption on its consolidated
financial statements.
NOTE 3 - 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 4 - RELATED PARTY TRANSACTIONS
The Company continues to purchase
primarily 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 automotive components from four other related parties, Guangzhou Ruili Kormee Automotive Electronic
Co., Ltd. (“Guangzhou Kormee”), Ruian Kormee Vehicle Brake Co., Ltd. (“Ruian Kormee”), Ruili MeiLian
Air Management System (LangFang) Co., Ltd (Ruili MeiLian) and Shanghai Dachao Electric Technology Co., Ltd. (“Shanghai
Dachao”). Guangzhou Kormee and Ruili Meilian are controlled by the Ruili Group and Ruian Kormee is the wholly-owned
subsidiary of Guangzhou Kormee. Ruili Group owns 49% equity interest in Shanghai Dachao. The Company sells certain automotive
products to the Ruili Group. The Company also sells scrap materials and parts to Guangzhou Kormee and Ruian Kormee.
The following related party transactions occurred
for the years ended December 31, 2016 and 2015:
|
|
For Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
$
|
793,861
|
|
|
$
|
1,488,151
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
|
1,329,135
|
|
|
|
765,971
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd
|
|
|
1,787,921
|
|
|
|
—
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
110,446
|
|
|
|
80,603
|
|
Ruili Group Co., Ltd.
|
|
|
4,011,206
|
|
|
|
3,199,511
|
|
Total Purchases
|
|
$
|
8,032,569
|
|
|
$
|
5,534,236
|
|
|
|
|
|
|
|
|
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
$
|
719,419
|
|
|
$
|
946,061
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
|
37,325
|
|
|
|
38,753
|
|
Ruili Group Co., Ltd.
|
|
|
13,436,421
|
|
|
|
7,781,763
|
|
Total Sales
|
|
$
|
14,193,165
|
|
|
$
|
8,766,577
|
|
During the years ended December 31, 2016
and 2015, for the sales mentioned above, the sales to Guangzhou Kormee and Ruian Kormee represent sales of scrap materials
and the related operating results were included in other operating income, net 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.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
ACCOUNTS RECEIVABLE FROM RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
4,361,010
|
|
|
$
|
—
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
|
664,499
|
|
|
|
—
|
|
Total
|
|
$
|
5,025,509
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE AND BANK ACCEPTANCE NOTES TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
$
|
628,310
|
|
|
$
|
340,175
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
|
—
|
|
|
|
75,968
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
100,441
|
|
|
|
19,751
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd
|
|
|
1,224,956
|
|
|
|
—
|
|
Ruili Group Co., Ltd.
|
|
|
—
|
|
|
|
697,643
|
|
Total
|
|
$
|
1,953,707
|
|
|
$
|
1,133,537
|
|
During the year ended December 31, 2016,
the Company provided an interest- free borrowing of $18,247,384 to Ruili Group for its working capital purposes. The borrowing
was fully repaid as of December 31, 2016.
The Company also entered into several lease
agreements with related parties, see Note 18 for more details.
During the years ended December 31, 2016 and 2015, the Company borrowed labor from Ruili Group and incurred
wage expenses of $0 and $5,052,213, respectively. The wage payable to the labor borrowed from Ruili Group was distributed to the
labor directly by the Company and was not included in the payables to Ruili Group.
In addition, the Company pledged a 6-month
fixed term deposit of RMB 22,000,000 (approximately $3,317,650) with a maturity date of July 13, 2016 for the credit line granted
to Ruili Group by Bank of Ningbo. As of December 31, 2016, the term deposit matured and the pledge was released as the credit line
was fully paid off by Ruili Group.
The Company provided a guarantee for the
credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 168,000,000 (approximately $25,871,627) for
the period from March 24, 2015 to March 24, 2016. As of December 31, 2016, the guarantee was released as the credit line was
fully paid off by Ruili Group.
The Company provided a guarantee for the credit
line granted to Ruili Group by China Everbright Bank in the amount of RMB 60,000,000 (approximately $9,239,867) for a period from
February 26, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line. As of December
31, 2016, the guarantee was released as the credit line was paid off by Ruili Group.
The Company provided a guarantee for the
credit line granted to Ruili Group by China Guangfa Bank in the amount of RMB 54,000,000 (approximately $8,315,880) for a period
from September 22, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line. As of December
31, 2016, the guarantee was released as the credit line was paid off by Ruili Group.
The Company pledged its term deposit of
RMB 40,000,000 (approximately $6,159,911) for the bank acceptance notes issued to Hangzhou Xiangwei Wuzi Co., Ltd, a related party
controlled by the relative of Ms. Shu Ping Chi, by Zhejiang Chouzhou Commercial Bank for the period from December 17, 2015 to June
17, 2016. As of December 31, 2016, the term deposit matured and the pledge was released as the bank acceptance notes payable were
paid off by Hangzhou Xiangwei Wuzi Co., Ltd.
The Company provided a guarantee for the
credit line granted to Ruili Group by the Bank of Ningbo in the amount of RMB 108,000,000 (approximately $17,182,404) for the period
from August 22, 2014 to August 21, 2015. The pledge term ends two years after the main borrowing contract expires. As of December
31, 2016, the guarantee was released as the credit line was paid off by Ruili Group.
The Company provided a guarantee for the credit line granted
to Ruili Group by Bank of Ningbo in the amount of RMB 150,000,000 (approximately $21,623,180) for the period from May 30, 2016
to May 14, 2017.
The Company provided a guarantee for the
credit line granted to Ruili Group by the China Merchants Bank in the amount of RMB 50,000,000 (approximately $7,699,889) for a
period from July 29, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line. As of
Decemer 31, 2016, the credit line was replaced by the one issued by the same bank in the the amount of RMB 40,000,000 (approximately
$5,766,181) for a period of 12 months starting on October 24, 2016, the guarantee of which was continued to be provided by the
Company.
The Company provided a guarantee for the
credit line granted to Ruili Group by China Guangfa Bank in the amount of RMB 200,000,000 (approximately $28,830,907) for the period
from May 22, 2016 to May 22, 2017.
On September 28, 2007, the Company
purchased the land use rights and factory facilities located at No. 1169 Yumeng Road, Rui'an Economic Development Zone,
Rui'an City, Zhejiang Province, the People's Republic of China (collectively, the “Dongshan Facility”) from Ruili
Group for an aggregate purchase price of approximately $20 million, including buildings with historical values of
approximately $6.7 million and land use rights with historical values of approximately $14.0 million. A third party real
estate appraisal firm appraised the total asset value at RMB 154 million (approximately $20.4 million). RMB 69.4 million
(approximately $9.1 million) of the purchase price was paid on a transfer of the Company's existing project and prepayment of
land use rights. The remaining balance was paid by the cash and a bank credit line. At the time of the transfer described
below, the Company did not obtain the land use right certificate nor the property ownership certificate of the buildings, and
the Company reserved the relevant tax amount of RMB4,560,000 (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.
On May 5, 2016, the Company, through its
principal operating subsidiary, entered into a Purchase Agreement (the “Purchase Agreement”) with Ruili Group, pursuant
to which the Company agreed to purchase the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue, Rui’an
Economic Development Zone, Rui’an City, Zhejiang Province, the People’s Republic of China (the “Development Zone
Facility”). In exchange for the Development Zone Facility, the Company agreed to transfer back to the Ruili Group the Dongshan
Facility owed by the Company, plus RMB501,000,000 (approximately $76,533,000) in cash. The total floor areas of the Dongshan Facility
and the Development Zone Facility are 58,714 square meters and 157,619 square meters, respectively.
The cash consideration in the amount of
RMB 481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments, and the remaining RMB 20,000,000 (approximately
$3,016,000) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and
the land use right as specified in the Purchase Agreement. As of the filing date, the Company has not obtained the land use right
certificate nor the property ownership certificate of the Development Zone Facility. At the time of the purchase, the Company was
leasing 89,229 square meters of the Development Zone Facility from Ruili Group for its brake systems business, of which the lease
was going to expire on December 31, 2017. This lease was terminated upon the completion of the purchase. The purchase of the Development
Zone Facility would allow the Company to acquire full ownership and control over these important production facilities. The transaction
was approved by a committee of independent directors of the Company based on the valuation reports issued by a third party real
estate appraisal firm. According to the reports, the value of the Dongshan Facility and Development Zone Facility was RMB 125 million
(approximately $19.1 million) and RMB 626 million (approximately $95.6 million), respectively. The Company reserved the relevant
tax of RMB 15.0 million (approximately $2.3 million) based on a 3% tax rate on the consideration paid in the transaction.
Since the Purchase Agreement was entered
into between entities under common control, the transaction was recorded at historical costs. The excess of total cash consideration
over the difference between the carrying value of assets received and assets transferred to Ruili Group, was reflected as a reduction
of shareholders’ equity.
NOTE 5 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable
|
|
$
|
113,815,711
|
|
|
$
|
83,898,730
|
|
Less: allowance for doubtful accounts
|
|
|
(11,686,417
|
)
|
|
|
(12,075,402
|
)
|
|
|
|
|
|
|
|
|
|
Account receivable balance, net
|
|
$
|
102,129,294
|
|
|
$
|
71,823,328
|
|
No customer individually accounted for more
than 10% of our revenues or accounts receivable for the years ended December 31, 2016 and 2015. The changes in the allowance for
doubtful accounts at December 31, 2016 and December 31, 2015 were summarized as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Beginning balance
|
|
$
|
12,075,402
|
|
|
$
|
6,475,587
|
|
Add: Increase to allowance
|
|
|
395,491
|
|
|
|
6,025,485
|
|
Less: Accounts written off
|
|
|
—
|
|
|
|
—
|
|
Effects on changes in foreign exchange rate
|
|
|
(784,476
|
)
|
|
|
(425,670
|
)
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
11,686,417
|
|
|
$
|
12,075,402
|
|
In connection with the disposal of SIH
in December 2015, the Company estimated it would be difficult to collect the accounts receivable from SIH as it no longer retained
the control. Therefore, the Company fully allowed the accounts receivables from SIH. $4,320,748 out of the increase to allowance
was related to the allowance for doubtful accounts from SIH and was included in loss on disposal of subsidiary.
NOTE 6 - INVENTORIES, NET
On December 31, 2016 and December 31, 2015,
inventories consisted of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Raw Materials
|
|
$
|
20,121,513
|
|
|
$
|
13,038,945
|
|
Work-in-process
|
|
|
14,843,653
|
|
|
|
28,786,709
|
|
Finished Goods
|
|
|
30,811,351
|
|
|
|
31,836,206
|
|
|
|
|
|
|
|
|
|
|
Less: Write-down of inventories
|
|
|
—
|
|
|
|
—
|
|
Total Inventory
|
|
$
|
65,776,517
|
|
|
$
|
73,661,860
|
|
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of
the following, on December 31, 2016 and December 31, 2015:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Machinery
|
|
$
|
87,694,677
|
|
|
$
|
50,680,639
|
|
Molds
|
|
|
1,257,841
|
|
|
|
1,343,730
|
|
Office equipment
|
|
|
2,021,982
|
|
|
|
2,077,411
|
|
Vehicles
|
|
|
2,246,203
|
|
|
|
1,983,028
|
|
Buildings
|
|
|
15,826,738
|
|
|
|
7,756,917
|
|
Machinery held under capital lease
|
|
|
-
|
|
|
|
29,012,601
|
|
Leasehold improvements
|
|
|
458,566
|
|
|
|
489,878
|
|
Sub-total
|
|
|
109,506,007
|
|
|
|
93,344,204
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(55,768,301
|
)
|
|
|
(55,782,299
|
)
|
Property, plant and equipment, net
|
|
$
|
53,737,706
|
|
|
$
|
37,561,905
|
|
Depreciation expense charged to operations
was $6,943,941 and $7,029,214 for the years ended December 31, 2016 and 2015, respectively.
During the year ended December 31, 2015,
the management identified one of the buildings of the Dongshan Facility with carrying value of $545,642, net of accumulated depreciation
of $322,388 as of December 31, 2015, was no longer able to be utilized for its intended use. The building was subsequently torn
down in January 2016. The Company recorded the impairment on long-lived assets for the amount of $561,847.
In connection with the execution of the
Purchase Agreement in May 2016, the Company exchanged the Dongshan Facility plus RMB501 million (approximately $76.5 million) in
cash for Development Zone Facility, including buildings with historical value of approximately $15.8 million. As of the filing
date, the Company has not obtained the property ownership certificate of the buildings of the Development Zone Facility. Also see
Note 4 for more details.
NOTE 8 – LAND USE RIGHTS
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Cost
|
|
$
|
8,473,362
|
|
|
$
|
16,182,560
|
|
Less: Accumulated amortization
|
|
|
(164,029
|
)
|
|
|
(2,950,411
|
)
|
Land use rights, net
|
|
$
|
8,309,333
|
|
|
$
|
13,232,149
|
|
According to the law of China, the government
owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government.
In connection with the execution of the
Purchase Agreement in May 2016, the Company exchanged the Dongshan Facility plus RMB501 million (approximately $76.5 million) in
cash for Development Zone Facility, including land use rights with historical value of approximately $8.5 million. As of the filing
date, the Company has not obtained the land use right certificate of the Development Zone Facility. Also see Note 4 for more details.
Amortization expenses were $284,717 and
$368,247 for the years of 2016 and 2015, respectively.
NOTE 9 - INTANGIBLE ASSETS
Gross intangible assets were $159,744,
less accumulated amortization of $148,306 for net intangible assets of $11,438 as of December 31, 2016. Gross intangible assets
were $178,751, less accumulated amortization of $154,897 for net intangible assets of $23,854 as of December 31, 2015. Amortization
expenses were $11,250 and $11,980 for the years ended December 31, 2016 and 2015, respectively. Future estimated amortization
expense is as follows:
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
$
|
8,291
|
|
|
$
|
3,147
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 10 - PREPAYMENTS
Prepayments consisted of the following as of
December 31, 2016 and December 31, 2015:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Raw material suppliers
|
|
$
|
5,799,649
|
|
|
$
|
3,210,160
|
|
Equipment purchases
|
|
|
4,997,952
|
|
|
|
140,447
|
|
|
|
|
|
|
|
|
|
|
Total prepayments
|
|
$
|
10,797,601
|
|
|
$
|
3,350,607
|
|
NOTE 11- DEFERRED TAX ASSETS AND DEFERRED
TAX LIABILITIES
Deferred tax assets as of December 31, 2016
and December 31, 2015 comprise of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,798,894
|
|
|
$
|
1,860,379
|
|
Revenue (net of cost)
|
|
|
76,719
|
|
|
|
45,815
|
|
Unpaid accrued expenses
|
|
|
357,352
|
|
|
|
180,174
|
|
Warranty
|
|
|
977,610
|
|
|
|
875,751
|
|
Deferred tax assets
|
|
|
3,210,575
|
|
|
|
2,962,119
|
|
Valuation allowance
|
|
|
―
|
|
|
|
―
|
|
Net deferred tax assets - current
|
|
$
|
3,210,575
|
|
|
$
|
2,962,119
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities - current
|
|
|
|
|
|
|
|
|
Others
|
|
|
―
|
|
|
|
52,390
|
|
Deferred tax liabilities - current
|
|
|
―
|
|
|
|
52,390
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets - current
|
|
$
|
3,210,575
|
|
|
$
|
2,909,729
|
|
Deferred taxation is calculated under the liability
method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize
in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as the Company had no U.S.
taxable income for the reporting period. The Company’s subsidiary registered in the PRC is subject to income taxes within
the PRC at the applicable tax rate.
NOTE 12 –
SHORT TERM BANK LOANS
Bank loans represented the following as of
December 31, 2016 and December 31, 2015:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Secured
|
|
$
|
27,416,376
|
|
|
$
|
23,367,207
|
|
The Company obtained those short term loans
from Bank of China, Bank of Ningbo, Agricultural Bank of China, and China Construction Bank, respectively, to finance general working
capital as well as new equipment acquisition. Interest rate for the loans outstanding during the year ended December 31, 2016 ranged
from 0.55% to 5.35% per annum. The maturity dates of the loans existing as of December 31, 2016 ranged from April 28, 2017 to December
23, 2017. As of December 31, 2016 and 2015, the Company’s accounts receivables of $4,484,755 and $15,836,158, respectively,
were pledged as collateral under loan arrangements. The interest expense for short-term bank loans were $751,768 and $730,574 for
the years ended December 31, 2016 and 2015, respectively.
As of December 31, 2016, corporate or personal
guarantees provided for those bank loans were as follows:
|
$1,987,891
|
|
Pledged and guaranteed by Ruili Group, a related party, with its land and buildings. Guaranteed by Ruili Group, a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$2,816,780
|
|
Pledged and guaranteed by Ruili Group, a related party, with its land and buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$11,052,328
|
|
Guaranteed by Ruili Group., a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$5,793,196
|
|
Guaranteed by Ruili Group, a related party.
|
NOTE 13 - ACCRUED EXPENSES
Accrued expenses consisted of the following
as of December 31, 2016 and December 31, 2015:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
Accrued payroll
|
|
$
|
6,267,794
|
|
|
$
|
4,049,357
|
|
Accrued warranty expenses
|
|
|
6,517,402
|
|
|
|
5,838,343
|
|
Other accrued expenses
|
|
|
7,318,196
|
|
|
|
3,982,887
|
|
Total accrued expenses
|
|
$
|
20,103,392
|
|
|
$
|
13,870,587
|
|
NOTE 14 –CAPITAL
LEASE OBLIGATIONS
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Total capital lease obligations
|
|
$
|
―
|
|
|
$
|
3,519,949
|
|
Less: current portion
|
|
|
―
|
|
|
|
(3,519,949
|
)
|
Non-current portion
|
|
$
|
―
|
|
|
$
|
―
|
|
On September 13, 2011, the Company
entered into a leasing agreement with International Far Eastern Leasing Co., Ltd., a subsidiary of China Sinochem
Corporation, for a term of 60 months and an interest rate of 7.95% per annum, payable monthly in arrears. To reduce the
financing expense, the Company entered into a new leasing agreement with International Far Eastern Leasing Co., Ltd. in
December 2012 and terminated the original agreement. The lease inception date of the new lease agreement is January 4, 2013
and the termination date is January 4, 2017. The duration of the new agreement is 48 months with an interest rate of 6.4% per
annum and is secured with the Company’s equipment in the original cost of $28,396,853. The capital lease obligation
obtained by the Company is RMB 91,428,571 (approximately $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. As of December 31, 2016, the lease expired and all the capital lease obligation was paid off.
NOTE 15 – RESERVE
The reserve funds were comprised
of the following:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Statutory surplus reserve fund
|
|
$
|
15,129,935
|
|
|
$
|
13,207,972
|
|
Total
|
|
$
|
15,129,935
|
|
|
$
|
13,207,972
|
|
Pursuant to the relevant laws and regulations
of Sino-Foreign joint venture enterprises, the profits of the Company's subsidiary, which are based on its PRC statutory financial
statements, are available for distribution in the form of cash dividends after it has satisfied all the PRC tax liabilities,
provided for losses in previous years, and made appropriations to reserve funds, as determined at the discretion of the board of
directors in accordance with PRC accounting standards and regulations.
As stipulated by the relevant laws and regulations
for enterprises operating in the PRC, Ruian is required to make annual appropriations to the statutory surplus funds. In accordance
with the relevant PRC regulations and the articles of association of the respective companies, Ruian is required to allocate a
certain percentage of its profits after taxation, as determined in accordance with PRC accounting standards applicable to the Company,
to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company.
Net income as reported in the U.S. GAAP financial
statements differs from that as reported in the PRC statutory financial statements. In accordance with the relevant laws and regulations
in the PRC, the profits available for distribution are based on the statutory financial statements. If Ruian has foreign currency
available after meeting its operational needs, Ruian may make its profit distributions in foreign currency to the extent foreign
currency is available. Otherwise, it is necessary to obtain approval and convert such distributions at an authorized bank. The
reserve fund consists of retained earnings which have been allocated to the statutory reserve fund.
NOTE 16 - 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 Joint Venture was awarded the
Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years
and provided for a reduced tax rate of 15% for years 2009 through 2011. The Company used a tax rate of 25% for the first three
quarters of 2012. In December 2012, the Joint Venture passed the re-assessment of “High-Tech Enterprise” designation
by the government, according to relevant PRC income tax laws. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate for years 2012 through 2014. In 2015, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise"
designation for a third time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2015, 2016 and
2017.
The reconciliation of the effective income
tax rate of the Joint Venture to the statutory income tax rate in the PRC for the years ended on December 31, 2016 and 2015 is
as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
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
|
%
|
Effect of income tax exemptions and reliefs
|
|
|
-10.00
|
%
|
|
|
-10.00
|
%
|
Effects of additional deduction allowed for R&D expenses
|
|
|
-2.88
|
%
|
|
|
-3.33
|
%
|
Effects of expenses not deductible for tax purposes
|
|
|
0.61
|
%
|
|
|
1.26
|
%
|
Other items
|
|
|
0.54
|
%
|
|
|
-0.64
|
%
|
Effective tax rate
|
|
|
13.27
|
%
|
|
|
12.29
|
%
|
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. There currently is no tax benefit or burden recorded
for the entity located in U.S. The tax authority may examine the tax returns of the Company three years after the year ended. In
the years of 2016 and 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 years ended December 31, 2016 and 2015, respectively,
are summarized as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
2,763,510
|
|
|
$
|
3,179,989
|
|
Deferred
|
|
|
502,903
|
|
|
|
(1,145,213
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,266,413
|
|
|
$
|
2,034,776
|
|
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 December 31, 2016 and 2015.
NOTE 17 –NON-CONTROLLING INTEREST
IN SUBSIDIARIES
Non-controlling interest in subsidiaries represents
a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian, and a 40% non-controlling interest, owned by the Company’s
Joint Venture Partners, in SIH. On December 15, 2015, the Company disposed of its entire 60% equity interest in SIH. The non-controlling
interest in SIH was fully removed. The results of SIH disposed of are included in the consolidated statements of income up to the
effective date of disposal.
Net income attributable to non-controlling
interest in subsidiaries amounted to $2,135,516 and $1,216,581 for the years ended December 31, 2016 and 2015, respectively.
|
|
2016
|
|
|
2015
|
|
10% non-controlling interest in Ruian
|
|
$
|
2,135,516
|
|
|
$
|
1,320,489
|
|
40% non-controlling interest in SIH
|
|
|
—
|
|
|
|
(103,908
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,135,516
|
|
|
$
|
1,216,581
|
|
NOTE 18 – OPERATING LEASES WITH RELATED
PARTIES
In December 2006, Ruian entered into a
lease agreement with Ruili Group to rent 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 89,229 square meters manufacturing
plant for its new purchased passenger vehicles 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 was terminated in May 2016 when the Developed Zone Facility was purchased by the Company.
Also see Note 4 for more details.
The lease expenses were $716,656 and $1,623,405
for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, future minimum rental payments are as follows:
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Commitments
|
|
$
|
302,725
|
|
|
$
|
302,725
|
|
|
$
|
302,725
|
|
|
$
|
302,725
|
|
|
$
|
302,725
|
|
|
$
|
302,724
|
|
NOTE 19 – WARRANTY CLAIMS
Warranty claims were $2,503,950 and $2,047,684
for the years ended December 31, 2016 and 2015, respectively. Warranty claims are classified as accrued expenses on the balance
sheet. The movement of accrued warranty expenses for the year ended December 31, 2016 is as follows:
Beginning balance at January 1, 2016
|
|
$
|
5,838,343
|
|
Aggregate increase for new warranties issued during current period
|
|
|
2,503,950
|
|
Aggregate reduction for payments made and effect of exchange rate fluctuation
|
|
|
(1,824,891
|
)
|
Ending balance at December 31, 2016
|
|
$
|
6,517,402
|
|
NOTE 20– 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. Before the disposal of SIH, the Company also had long-lived assets located in Hong Kong. The Company and
its subsidiaries do not have long-lived assets in the United States for the reporting periods.
|
|
Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
223,995,265
|
|
|
$
|
178,672,655
|
|
Passenger vehicles brake systems
|
|
|
48,125,239
|
|
|
|
39,984,231
|
|
Net sales
|
|
$
|
272,120,504
|
|
|
$
|
218,656,886
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles brake systems
|
|
|
—
|
|
|
|
—
|
|
Intersegment sales
|
|
$
|
—
|
|
|
$
|
—
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
62,760,714
|
|
|
$
|
48,652,822
|
|
Passenger vehicles brake systems
|
|
|
10,143,567
|
|
|
|
10,757,596
|
|
Gross profit
|
|
$
|
72,904,281
|
|
|
$
|
59,410,418
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
29,837,757
|
|
|
|
22,681,469
|
|
General and administrative expenses
|
|
|
15,206,423
|
|
|
|
14,100,715
|
|
Impairment on long-lived assets
|
|
|
-
|
|
|
|
561,847
|
|
Research and development expenses
|
|
|
7,709,533
|
|
|
|
7,358,563
|
|
Loss on disposal of subsidiary
|
|
|
-
|
|
|
|
3,170,821
|
|
Total operating expenses
|
|
|
52,753,713
|
|
|
|
47,873,415
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
3,041,701
|
|
|
|
3,204,286
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
23,192,269
|
|
|
|
14,741,289
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,047,667
|
|
|
|
1,102,447
|
|
Government grants
|
|
|
832,264
|
|
|
|
768,607
|
|
Other income
|
|
|
1,244,078
|
|
|
|
2,217,204
|
|
Interest expenses
|
|
|
(887,097
|
)
|
|
|
(1,269,091
|
)
|
Other expenses
|
|
|
(807,858
|
)
|
|
|
(1,000,613
|
)
|
Income before income tax expense
|
|
$
|
24,621,323
|
|
|
$
|
16,559,843
|
|
|
|
|
|
|
|
|
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
13,078,806
|
|
|
$
|
2,511,143
|
|
Passenger vehicles brake systems
|
|
|
2,810,887
|
|
|
|
551,226
|
|
Total
|
|
$
|
15,889,693
|
|
|
$
|
3,062,369
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
5,959,168
|
|
|
$
|
6,054,254
|
|
Passenger vehicles brake systems
|
|
|
1,280,740
|
|
|
|
1,355,187
|
|
Total
|
|
$
|
7,239,908
|
|
|
$
|
7,409,441
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
248,023,179
|
|
|
$
|
261,924,719
|
|
Passenger vehicles brake systems
|
|
|
53,304,945
|
|
|
|
58,629,337
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
301,328,124
|
|
|
$
|
320,554,056
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
51,080,332
|
|
|
$
|
42,961,388
|
|
Passenger vehicles brake systems
|
|
|
10,978,145
|
|
|
|
9,616,495
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,058,477
|
|
|
$
|
52,577,883
|
|
NOTE 21 – COMMITMENTS AND CONTINGENCIES
(1) As described in Note 7, the Company purchased
the Dongshan Facility from Ruili Group in 2007 and subsequently transferred the plants and land use right to Ruili Group. The Company
has never obtained the land use right certificate nor the property ownership certificate of the building for the Dongshan Facility.
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 Dongshan Facility in the transaction, which the Company considered as the most probable
amount of tax liability. The Dongshan Facility was transferred back to Ruili Group on May 5, 2016.
(2) The information of lease
commitments is provided in Note 14 and Note 18.
(3) The information of guarantees
and assets pledged is provided in Note 4.
NOTE 22 – SUBSEQUENT
EVENTS
On January 19, 2017,
the Company entered into a loan agreement with Rui’An Branch, Agricultural Bank of China to borrow RMB 30,000,000 (approximately
$4,324,636) for working capital purposes. The loan is due on January 18, 2018 with a fixed annual interest rate of the 1-year fixed
loan prime rate on the day prior to the contract date plus 5 basis points.
On March 10, 2017, the Company entered
into a loan agreement with Rui’An Branch, Agricultural Bank of China to borrow RMB 30,000,000 (approximately $4,324,636)
for working capital purposes. The loan is due on March 9, 2018 with a fixed annual interest rate of the 1-year fixed loan prime
rate on the day prior to the contract date plus 9.35 basis points. The loan is pledged by the 47 sets of office rooms in Hangzhou
City Ruili Jianghehui Tower owned by Hangzhou Ruili Zhiye Development Ltd., a related party under common control of Ruili Group.
The loan is also guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
On March 10, 2017, the Company entered
into a loan agreement with Rui’An Branch, Agricultural Bank of China to borrow RMB 20,000,000 (approximately $2,883,091)
for working capital purposes. The loan is due on March 9, 2018 with a fixed annual interest rate of the 1-year fixed loan prime
rate on the day prior to the contract date plus 9.35 basis points. The loan is pledged by the 47 sets of office rooms in Hangzhou
City Ruili Jianghehui Tower owned by Hangzhou Ruili Zhiye Development Ltd., a related party under common control of Ruili Group.
The loan is also guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
ADDITIONAL INFORMATION─FINANCIAL STATEMENT
SCHEDULE I
This financial statements schedule has been
prepared in conformity with U.S. GAAP.
SORL AUTO PARTS, INC.
This financial statements schedule has been
prepared in conformity with U.S. GAAP. The parent company financial statements have been prepared using the same accounting principles
and policies described in the notes to the consolidated financial statements, with the only exception being that the Company accounts
for its subsidiaries using the equity method. Please refer to the notes to the consolidated financial statements presented above
for additional information and disclosures with respect to these financial statements.
Financial Information of Parent Company
BALANCE SHEETS
December 31, 2016 and 2015
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
-
|
|
|
$
|
80,910
|
|
Other current assets
|
|
|
86,828
|
|
|
|
6,161
|
|
Total Current Assets
|
|
|
86,828
|
|
|
|
87,071
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
136,058,544
|
|
|
|
187,423,606
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
136,145,372
|
|
|
$
|
187,510,677
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Other current liability
|
|
|
2,921,411
|
|
|
|
2,921,411
|
|
Total Current Liabilities
|
|
|
2,921,411
|
|
|
|
2,921,411
|
|
Total Liabilities
|
|
|
2,921,411
|
|
|
|
2,921,411
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of December 31, 2016 and 2015
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of December 31, 2016 and 2015
|
|
|
38,609
|
|
|
|
38,609
|
|
Additional paid-in capital
|
|
|
(28,582,654
|
)
|
|
|
42,199,014
|
|
Retained earnings
|
|
|
161,768,006
|
|
|
|
142,351,643
|
|
Total Stockholders' Equity
|
|
|
133,223,961
|
|
|
|
184,589,266
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
136,145,372
|
|
|
$
|
187,510,677
|
|
Financial Information of Parent Company
STATEMENTS OF INCOME
For The Years Ended December 31, 2016 and
2015
|
|
For Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
19,416,606
|
|
|
$
|
11,884,396
|
|
Gain from disposal of subsidiary
|
|
|
-
|
|
|
|
77
|
|
Financial expenses
|
|
|
243
|
|
|
|
126
|
|
Net income attributable to stockholders
|
|
$
|
19,416,363
|
|
|
$
|
11,884,347
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share - Basic
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share - Diluted
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
|
|
|
|
|
|
|
EPS - Basic
|
|
$
|
1.01
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
EPS - Diluted
|
|
$
|
1.01
|
|
|
$
|
0.62
|
|
Financial Information of Parent Company
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2016 and
2015
|
|
For Years Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
19,416,363
|
|
|
$
|
11,884,347
|
|
Adjustments to reconcile net income to net cash used in operating activities :
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
(19,416,606
|
)
|
|
|
(11,884,396
|
)
|
Other current liabilities
|
|
|
(80,667
|
)
|
|
|
(77
|
)
|
Net cash used in operating activities
|
|
|
(80,910
|
)
|
|
|
(126
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(80,910
|
)
|
|
|
(126
|
)
|
Cash and cash equivalents, beginning of the year
|
|
|
80,910
|
|
|
|
81,036
|
|
Cash and cash equivalents, end of the year
|
|
$
|
-
|
|
|
$
|
80,910
|
|
Financial Information of Parent Company
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
For The Years Ended December 31, 2016
and 2015
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Shareholders'
|
|
|
|
of Share
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
Balance - December 31, 2014
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
42,199,014
|
|
|
$
|
130,467,296
|
|
|
$
|
172,704,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
11,884,347
|
|
|
|
11,884,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2015
|
|
|
19,304,921
|
|
|
|
38,609
|
|
|
|
42,199,014
|
|
|
|
142,351,643
|
|
|
|
184,589,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,416,363
|
|
|
|
19,416,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution to controlling shareholders in connection with plant and land use rights exchange with entity under common control
|
|
|
-
|
|
|
|
-
|
|
|
|
(70,781,668
|
)
|
|
|
-
|
|
|
|
(70,781,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2016
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
161,768,006
|
|
|
$
|
(133,223,961
|
)
|