NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2019
(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”). The Company distributes products both in China and internationally under SORL trademarks.
The Company’s product range includes 140 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 individual investor. The joint venture
was named SORL 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 individual 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 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 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, 2018 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, 2018. 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, 2018, 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
|
The Company uses the accrual method of
accounting for financial statement and tax return purposes.
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 periods. 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, restricted cash, accounts receivable, bank acceptance notes from customers, inventories,
current prepayments, current portion of deposits on loan agreements, other current assets, accounts payable and bank acceptance
notes to vendors, short term bank loans, deposit received from customers, current portion of long term loans, deferred income,
income tax payable, accrued expenses and other current liabilities, 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, free market 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.
Restricted cash, current consists of bank deposits
used to pledge bank acceptance notes, and deposits for obtaining letters of credit from a local bank.
Restricted cash, non-current consists of
deposits guaranteed for construction projects and the non-current portion of certain bank deposits used to pledge for bank acceptance
notes.
|
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. The Company conducts
business with its related parties in the ordinary course of business.
|
f.
|
BANK ACCEPTANCE NOTES
RECEIVABLE FROM CUSTOMERS
|
Bank acceptance notes from customers,
generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued
by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of
related parties and transferred to the Company as loans from related parties or repayments from related parties. Bank
acceptance notes do not bear interest. As of June 30, 2019 and December 31, 2018, bank acceptance notes receivable in the
amount of $68,238,401 and $58,458,890, respectively, were pledged to banks to issue either short term bank loans or bank
acceptance notes to vendors. The banks charge discount fees if the Company chooses to discount the bank acceptance notes for
cash before the maturity of the notes and such discount fees are included in interest expenses in the accompanying unaudited
consolidated statements of income and comprehensive income (loss).
|
g.
|
FOREIGN CURRENCY TRANSLATION
|
The Company maintains its books and accounting
records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has adopted FASB ASC
830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”).
All assets and liabilities are translated at the current rate. The stockholders’ 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.
NOTE C - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On January 1, 2019, the Company adopted
Accounting Standards Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively
ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially
apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period
of adoption. As a result of electing this transition method, previously reported financial information has not been restated to
reflect the application of the new standard to the comparative periods presented. The Company elected the package of practical
expedients permitted under the transition guidance within ASC 842, which among other things, allows the Company to carry forward
certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment
of initial direct costs. The Company elected not to record assets and liabilities on its consolidated balance sheet for new or
existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line
basis over the lease term. In addition, the Company elected the land easement transition practical expedient and did not reassess
whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a
lease.
The primary impact of applying ASC Topic
842 is the initial recognition of $1.6 million of lease liabilities and corresponding right-of-use assets on the Company’s
consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under ASC Topic 840, as well as enhanced
disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained earnings or other components
of equity recognized as of January 1, 2019 and the adoption of this standard did not impact the consolidated statement of income
and comprehensive income or consolidated statement of cash flows of the Company. The Company does not have finance lease arrangements
as of June 30, 2019. See Note N for further discussion.
NOTE D - RELATED PARTY TRANSACTIONS
Related parties with whom the Company conducted
business consist of the following:
Name of Related Party
|
|
Nature of Relationship
|
Xiao Ping Zhang
|
|
Principal shareholder, Chairman of the Board and Chief Executive Officer
|
|
|
|
Shu Ping Chi
|
|
Shareholder, member of the Board, wife of Xiao Ping Zhang
|
|
|
|
Xiao Feng Zhang
|
|
Shareholder, member of the Board, brother of Xiao Ping Zhang
|
|
|
|
Ruili Group Co., Ltd. (“Ruili Group”)
|
|
10% shareholder of Joint Venture and is collectively controlled by Xiao Ping Zhang, Shu Ping Chi, and Xiao Feng Zhang
|
|
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
(“Guangzhou Kormee”)
|
|
Controlled by Ruili Group
|
|
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. (“Ruian Kormee” and formerly known as “Ruian Kormee Automobile Braking Co., Ltd.”)
|
|
Wholly controlled by Guangzhou Kormee
|
|
|
|
Changchun Kormee Auto Electric Co., Ltd. (“Changchun Kormee”)
|
|
Wholly controlled by Guangzhou Kormee
|
|
|
|
Shanghai Dachao Electric Technology Co., Ltd. (“Shanghai Dachao”)
|
|
Ruili Group holds 66% of the equity interests in Shanghai Dachao
|
|
|
|
Ruili MeiLian Air Management Systems (LangFang) Co., Ltd. (“Ruili Meilian”)
|
|
Controlled by Ruili Group
|
|
|
|
Wenzhou Lichuang Automobile Parts Co., Ltd. (“Wenzhou Lichuang”)
|
|
Controlled by Ruili Group
|
|
|
|
Ningbo Ruili Equipment Co., Ltd. (“Ningbo Ruili”)
|
|
Controlled by Ruili Group
|
|
|
|
Shanghai Ruili Real Estate Development Co., Ltd. (“Shanghai Ruili”)
|
|
Wholly owned by Ruili Group
|
|
|
|
Kunshan Yuetu Real Estate Development Co., Ltd. (“Kunshan Yuetu”)
|
|
Collectively owned by Ruili Group and Shu Ping Chi
|
|
|
|
Shanghai Tabouk Auto Components Co., Ltd. (“Shanghai Tabouk”)
|
|
Collectively owned by Xiao Feng Zhang and Xiao Ping Zhang
|
|
|
|
Hangzhou Ruili Property Development Co., Ltd.
|
|
Collectively owned by Ruili Group and Xiao Ping Zhang
|
|
|
|
Hangzhou Hangcheng Friction Material Co., Ltd. (“Hangzhou Hangcheng”)
|
|
Controlled by Ruili Group
|
|
|
|
Hangzhou Ruili Binkang Real Estate Development Co. Ltd.
|
|
Controlled by Hangzhou Ruili Property Development Co., Ltd.
|
|
|
|
SHNS Precision Die Casting (Yangzhou) Co. Ltd. (“SHNS
Precision”)
|
|
Controlled by Ruili Group
|
The Company continues to purchase primarily packaging
materials from Ruili Group. In addition, the Company purchases automotive components from other related parties, including Guangzhou
Kormee, Ruian Kormee, Ruili Meilian, Shanghai Dachao, Wenzhou Lichuang, Hangzhou Hangcheng, and molds from Ningbo Ruili used in
its production.
The Company sells certain automotive products
to the Ruili Group. The Company also sells parts to Guangzhou Kormee, Shanghai Tabouk, Ruian Kormee, Changchun Kormee and Ruili
Meilian.
The following related party transactions occurred
for the three and six months ended June 30, 2019 and 2018:
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
2,306,036
|
|
|
$
|
1,744,095
|
|
|
$
|
5,393,157
|
|
|
$
|
1,744,095
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
|
1,087,671
|
|
|
|
1,057,603
|
|
|
|
1,750,125
|
|
|
|
1,413,096
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
79,064
|
|
|
|
231,069
|
|
|
|
314,234
|
|
|
|
376,687
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
712,616
|
|
|
|
2,503,163
|
|
|
|
789,418
|
|
|
|
4,974,406
|
|
Ruili Group Co., Ltd.
|
|
|
6,372,826
|
|
|
|
2,249,962
|
|
|
|
8,228,463
|
|
|
|
3,966,750
|
|
Hangzhou Hangcheng Friction Material Co., Ltd.
|
|
|
105,446
|
|
|
|
-
|
|
|
|
120,238
|
|
|
|
-
|
|
Ningbo Ruili Equipment Co., Ltd.
|
|
|
826,895
|
|
|
|
-
|
|
|
|
1,364,196
|
|
|
|
-
|
|
Wenzhou Lichuang Automobile Parts Co., Ltd.
|
|
|
5,139,848
|
|
|
|
5,763,176
|
|
|
|
7,235,993
|
|
|
|
7,544,892
|
|
Total purchases
|
|
$
|
16,630,402
|
|
|
$
|
13,549,068
|
|
|
$
|
25,195,824
|
|
|
$
|
20,019,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
$
|
38,132
|
|
|
$
|
54,470
|
|
|
$
|
63,268
|
|
|
$
|
54,470
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
|
4,100,514
|
|
|
|
3,461,778
|
|
|
|
6,857,757
|
|
|
|
5,814,806
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
353,217
|
|
|
|
313,940
|
|
|
|
992,119
|
|
|
|
843,813
|
|
Ruili Group Co., Ltd.
|
|
|
3,198,871
|
|
|
|
1,664,885
|
|
|
|
10,041,785
|
|
|
|
6,076,172
|
|
Changchun Kormee Auto Electric Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
35,943
|
|
|
|
-
|
|
Shanghai Tabouk Auto Components Co., Ltd.
|
|
|
281,198
|
|
|
|
467,454
|
|
|
|
627,806
|
|
|
|
874,320
|
|
Total sales
|
|
$
|
7,971,932
|
|
|
$
|
5,962,527
|
|
|
$
|
18,618,678
|
|
|
$
|
13,663,581
|
|
|
|
As of
June 30,
2019
|
|
As of
December 31,
2018
|
ADVANCES TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
76,586,592
|
|
|
$
|
79,739,417
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
76,586,592
|
|
|
$
|
79,739,417
|
|
ACCOUNTS RECEIVABLE FROM RELATED PARTY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Tabouk Auto Components Co., Ltd
|
|
$
|
333,881
|
|
|
$
|
261,889
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
333,881
|
|
|
$
|
261,889
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PREPAYMENT TO RELATED PARTY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ningbo Ruili Equipment Co., Ltd.
|
|
$
|
4,421,841
|
|
|
$
|
3,670,573
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,421,841
|
|
|
$
|
3,670,573
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
10,798,360
|
|
|
$
|
7,877,485
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
86,972
|
|
|
|
56,883
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
1,022,708
|
|
|
|
5,628,155
|
|
Wenzhou Lichuang Auto Parts Co., Ltd.
|
|
|
6,931,212
|
|
|
|
9,898,777
|
|
Changchun Kormee Auto Electric Co., Ltd.
|
|
|
-
|
|
|
|
9,206
|
|
Hangzhou Hangcheng Friction Material Co., Ltd.
|
|
|
117,241
|
|
|
|
334,694
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
18,956,493
|
|
|
$
|
23,805,200
|
|
DUE TO RELATED PARTY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
$
|
7,774,184
|
|
|
$
|
5,959,752
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,774,184
|
|
|
$
|
5,959,752
|
|
From time to time, the Company borrows from Ruili
Group and its controlled companies for working capital purposes. In order to obtain the loans and mutually benefit both the debtor
and creditor of the arrangement, the Company also advances to Ruili Group and its controlled companies in a short term. All the
loans from related parties are non-interest bearing, unsecured and due on demand. The advances to Ruili Group are unsecured and
due on demand, and the Company charged them an interest on the average balance advanced to them. The Company recorded interests
$2,507,133 during the six months ended June 30, 2019, representing an effective interest rate of approximately 6.45%.
During the six months ended June 30, 2019, the
Company obtained net proceeds of $1,843,951 from a related party. In the same period, Ruili Group repaid the Company net amount
of $5,543,910.
The Company entered into
a lease agreement with Ruili Group. See Note N for more details.
The Company provided a guarantee for the credit
line granted to Ruili Group by the China Merchants Bank RMB 40,000,000 (approximately $5,828,185) for a period of 12 months starting
on October 24, 2016. The credit line was renewed on October 19, 2017 for 6 months. On April 13, 2018, Ruili Group and the bank
reached another extension agreement and the guarantee was provided by the Company until April 12, 2019.
The Company provided a guarantee for the credit
line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 210,000,000 (approximately $30,597,972) for the period
from July 20, 2018 to July 20, 2028.
The Company provided a guarantee for the credit
line granted to Ruili Group by China Guangfa Bank in a maximum amount of RMB71,000,000 (approximately $10,345,029) for the period
from February 12, 2019 to January 16, 2020.
The Company provided a guarantee for
the credit line granted to Ruili Group and SHNS Precision by Minsheng Bank in a maximum amount of RMB500,000,000
(approximately $72,730,446) for the period from June 6, 2019 to June 6, 2020.
The Company has short term bank loans guaranteed
or pledged by related parties. See Note J for more details.
NOTE E - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the
following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts receivable
|
|
$
|
199,629,288
|
|
|
$
|
163,903,305
|
|
Less: allowance for doubtful accounts
|
|
|
(15,527,994
|
)
|
|
|
(13,855,508
|
)
|
Accounts receivable, net
|
|
$
|
184,101,294
|
|
|
$
|
150,047,797
|
|
No customer individually accounted for more
than 10% of our revenues or accounts receivable for the six months ended June 30, 2019 and 2018. The changes in the allowance for
doubtful accounts at June 30, 2019 and December 31, 2018 are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
13,855,508
|
|
|
$
|
13,927,156
|
|
Add: Increase to allowance
|
|
|
1,713,258
|
|
|
|
610,610
|
|
Effects on changes in foreign exchange rate
|
|
|
(40,772
|
)
|
|
|
(682,258
|
)
|
Ending balance
|
|
$
|
15,527,994
|
|
|
$
|
13,855,508
|
|
NOTE F - INVENTORIES
At June 30, 2019 and December 31, 2018,
inventories consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw Materials
|
|
$
|
40,101,063
|
|
|
$
|
53,821,973
|
|
Work in process
|
|
|
85,168,552
|
|
|
|
89,516,949
|
|
Finished Goods
|
|
|
60,826,780
|
|
|
|
62,674,252
|
|
Less: Write-down of inventories
|
|
|
(2,577,123
|
)
|
|
|
(1,727,747
|
)
|
Total Inventory
|
|
$
|
183,519,272
|
|
|
$
|
204,285,427
|
|
The write-down of inventories amounted to $852,266
and $nil for the six months ended June 30, 2019 and 2018, respectively.
NOTE G - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of
the following at June 30, 2019 and December 31, 2018:
|
|
|
June 30,
|
|
|
|
December 31,
|
|
|
|
|
2019
|
|
|
|
2018
|
|
Machinery
|
|
$
|
140,564,252
|
|
|
$
|
130,912,861
|
|
Molds
|
|
|
1,272,597
|
|
|
|
1,274,729
|
|
Office equipment
|
|
|
4,531,256
|
|
|
|
3,566,772
|
|
Vehicles
|
|
|
6,303,244
|
|
|
|
5,956,822
|
|
Buildings
|
|
|
20,575,660
|
|
|
|
20,610,137
|
|
Construction in progress
|
|
|
20,086,738
|
|
|
|
8,641,271
|
|
Leasehold improvements
|
|
|
462,721
|
|
|
|
463,497
|
|
Sub-Total
|
|
|
193,796,468
|
|
|
|
171,426,089
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(81,460,346
|
)
|
|
|
(75,372,703
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
112,336,122
|
|
|
$
|
96,053,386
|
|
Depreciation expense charged
to operations was $6,395,006 and $5,531,002 for the six months ended June 30, 2019 and 2018, respectively.
NOTE H - LAND USE RIGHTS, NET
The balances for land use rights, net, as
of June 30, 2019 and December 31, 2018 are as the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost
|
|
$
|
22,246,500
|
|
|
$
|
22,283,776
|
|
Less: Accumulated amortization
|
|
|
(1,500,900
|
)
|
|
|
(1,159,321
|
)
|
Land use rights, net
|
|
$
|
20,745,600
|
|
|
$
|
21,124,455
|
|
In December 2017, the Company entered into an
agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection
of Fengjin Road and Wenhua Road, Binhai New District, Ruian City, Zhejiang Province, China. As of December 31, 2018, the purchase
price of RMB 72.02 million (approximately $11.13 million) was fully paid. As of the filing date, the title to the land use rights
has not been transferred. The payments were included as prepayment, non-current as of June 30, 2019 and December 31, 2018
on the accompanying consolidated balance sheets.
In April 2018, the Company entered into an agreement
with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Tengda
Road and Wanghai Road, Economic Development District, Ruian City, Zhejiang Province, China. Prepayment of RMB 42.54 million (approximately
$6.43 million) was made during the year ended December 31, 2018. During the six months ended June 30, 2019, the Company paid additional
amount of RMB 2.04 million (approximately $296,000). The total payments of RMB 44.58 million (approximately $6.48 million) was
included in prepayment, non-current as of June 30, 2019 on the accompanying consolidated balance sheets. The title to the land
use rights was transferred to the Company in July 2019.
Amortization expenses were $347,083 and $301,556
for the six months ended June 30, 2019 and 2018, respectively.
NOTE I - DEFERRED TAX ASSETS
Deferred tax assets consisted of the following
as of June 30, 2019 and December 31, 2018:
|
|
June 30,
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,489,916
|
|
|
$
|
2,205,048
|
|
Revenue (net of cost)
|
|
|
182,141
|
|
|
|
308,046
|
|
Unpaid accrued expenses
|
|
|
802,043
|
|
|
|
501,276
|
|
Warranty
|
|
|
1,049,766
|
|
|
|
1,059,468
|
|
Deferred tax assets
|
|
|
4,523,866
|
|
|
|
4,073,838
|
|
Valuation allowance
|
|
|
―
|
|
|
|
―
|
|
Net deferred tax assets - current
|
|
$
|
4,523,866
|
|
|
$
|
4,073,838
|
|
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’s subsidiary registered in the PRC is subject to income taxes within the
PRC at the applicable tax rate.
NOTE J - SHORT TERM BANK LOANS
Bank loans represented the following as of
June 30, 2019 and December 31, 2018:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
$
|
224,366,412
|
|
|
$
|
217,940,471
|
|
Total short term bank loan
|
|
$
|
224,366,412
|
|
|
$
|
217,940,471
|
|
The Company
obtained those short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Minsheng, Industrial Bank
and China Construction Bank to finance general working capital as well as new equipment acquisition. Interest rate for the loans
outstanding during the three months ended June 30, 2019 ranged from 1.35% to 5.44% per annum. The maturity dates of the loans existing
as of June 30, 2019 ranged from July 25, 2019 to June 27, 2020. The interest expenses for short term bank loans, including
discount fees, were $2,733,192 and $2,590,729 for the three months ended June 30, 2019 and 2018, respectively. The interest expenses
for short term bank loans, including discount fees, were $6,168,608 and $4,885,057 for the six months ended June 30, 2019 and 2018,
respectively.
As of June 30, 2019, corporate or personal guarantees
provided for those bank loans were as follows:
$
|
5,593,229
|
|
|
Guaranteed by Ruili Group, a related party
|
$
|
6,326,094
|
|
|
Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
27,637,570
|
|
|
Pledged by Hangzhou Ruili Property Development Co.,
Ltd., a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s
principal stockholders
|
$
|
32,001,396
|
|
|
Pledged by Ruili Group, a related party, with its land use rights and properties
|
$
|
7,273,045
|
|
|
Pledged by the Company with a bank deposit of $7,273,045, which was included in restricted cash on the accompanying unaudited consolidated balance sheets. Also see Note B “RESTRICTED CASH” section.
|
$
|
6,909,392
|
|
|
Pledged by the Company with its bank acceptance notes
|
$
|
36,365,223
|
|
|
Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Guaranteed by Shanghai Ruili, a related party
|
$
|
75,639,664
|
|
|
Pledged by Shanghai Ruili, a related party, with its properties. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
13,091,480
|
|
|
Pledged by Hangzhou Ruili Binkang Real Estate
Development Co. Ltd., a related party, with its properties; Guaranteed by Hangzhou Ruili Property Development Co., Ltd., a
related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
2,401,559
|
|
|
Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.; Pledged by Ruili Group, a related party, with its properties
|
$
|
2,400,105
|
|
|
Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Pledged by Ruili Group, a related party, with its properties
|
$
|
8,727,654
|
|
|
Pledged by the Company with its property; Guaranteed by Hangzhou
Ruili Property Development Co., Ltd., a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the
Company’s principal stockholders
|
NOTE K - LONG TERM LOANS
|
|
June 30,
|
|
December 31,
|
|
|
2019
|
|
|
2018
|
|
Aggregate outstanding principal balance
|
|
$
|
25,144,713
|
|
|
$
|
36,165,550
|
|
Less: unamortized debt issuance costs
|
|
|
(272,200
|
)
|
|
|
(595,117
|
)
|
Less: current portion
|
|
|
(21,976,961
|
)
|
|
|
(21,141,029
|
)
|
Non-current portion
|
|
$
|
2,895,552
|
|
|
$
|
14,429,404
|
|
In November 2017, the Company entered into
two identical but independent loan agreements with Far Eastern Horizon Co., Ltd. (“Far Eastern”), each for a term
of 36 months and with an effective interest rate of 8.38% per annum, payable monthly in arrears. The total long term obligations
under the two agreements amounted to RMB 200,000,000 (approximately $30,608,185), pledged by the Company’s equipment in
the original cost of RMB 205,690,574 (approximately $31,479,075). The Company paid debt issuance costs in cash of RMB 5,000,000
(approximately $742,324). The repayments of principal totaled $4,941,721 and $5,083,153 for the six months ended June 30, 2019
and 2018, respectively.
In November 2017, the Company entered into four
independent loan agreements with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of 36 months each. Two of the
agreements were signed on November 30, 2017 with an effective interest rate of 8.50% per annum, payable monthly in arrears. The
other two agreements were entered into on November 15, 2017, with an effective interest rate of 4.31% per annum, payable monthly
in arrears. The total long term obligations under the four agreements amounted to RMB 235,000,000 (approximately $35,964,617),
pledged by the Company’s equipment in the original cost of RMB 238,333,639 (approximately $36,474,800). The Company paid
debt issuance costs in cash of RMB7,320,000 (approximately $1,025,248). The repayments of principal totaled $6,137,259 and $7,717,633
for the six months ended June 30, 2019 and 2018, respectively.
The interest expenses for long term loans, including
the amortization of debt issuance costs, were $976,937 and $1,998,070 for the six months ended June 30, 2019 and 2018, respectively.
NOTE L - REVENUES FROM CONTRACTS WITH
CUSTOMERS
In accordance with ASC 606, the Company disaggregates
revenue from contracts with customers by product type. See Note P for information regarding revenue disaggregation by product type.
Deferred revenue is recorded when consideration
is received from a customer prior to transferring goods to the customer under the terms of a sales contract. As of June 30, 2019
and December 31, 2018, the Company recorded a deferred revenue liability of $60,023,972 and $51,529,795, respectively, which was
presented as “Deposits received from customers” on the accompanying consolidated balance sheets. During six months
ended June 30, 2019, the Company recognized $17,587,688 of deferred revenue included in the opening balance of deposits received
from customers. The amount was included in sales on the accompanying consolidated statement of income and comprehensive income.
NOTE M - INCOME TAXES
During the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that
represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United
States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by
the U.S. Tax Reform. The Company also recognized related interest and penalty of $587,821 in the year ended December 31, 2018.
The Company recognized additional interest and penalty of $107,415 in
the
six months ended June 30, 2019. The Company elected to pay the one-time transition tax over eight years commencing in 2018. The
first installment payment of $881,839 was made during the six months ended June 30, 2019. The actual impact of the U.S. Tax Reform
on the Company may differ from management’s estimates, and management may update its judgments based on future regulations
or guidance issued or changes in the interpretations taken that would adjust the provisional amounts recorded. As of June 30, 2019,
$2,558,913 was included in income tax payable as a current liability which the Company believes will be paid within one year and
the remaining balance was included in income tax payable, non-current.
The 2017 Tax Act also created a new requirement
that, for the periods beginning after January 1, 2018, certain income (referred to as global intangible low-taxed income or “GILTI”)
earned by foreign subsidiaries in excess of a deemed return on tangible assets of foreign corporations must be included in U.S.
taxable income. The Company elected to account for GILTI tax in the period the tax is incurred, and therefore included it in estimating
the annual effective tax rate.
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 2018, the Joint Venture was awarded the
Chinese government’s “High-Tech Enterprise” designation for a fourth time, which is valid for three years
and it continues to be taxed at the 15% tax rate in 2018, 2019 and 2020.
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, 2019 and 2018 is as follows:
|
|
Six Months Ended
June 30,
2019
|
|
|
Six Months Ended
June 30,
2018
|
|
US statutory income tax rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
Valuation allowance recognized with respect to the loss in the US company
|
|
|
-21.00
|
%
|
|
|
-21.00
|
%
|
China statutory income tax rate
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
Effects of income tax exemptions and reliefs
|
|
|
-10.00
|
%
|
|
|
-10.00
|
%
|
Effects of additional deduction allowed for R&D expenses
|
|
|
-3.96
|
%
|
|
|
-3.43
|
%
|
Effects of expenses not deductible for tax purposes
|
|
|
1.70
|
%
|
|
|
2.18
|
%
|
Other items
|
|
|
-0.82
|
%
|
|
|
0.81
|
%
|
Effective tax rate
|
|
|
11.92
|
%
|
|
|
14.56
|
%
|
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. The provisions for income taxes for the six months
ended June 30, 2019 and 2018 are summarized as follows:
|
|
Six Months Ended
June 30,
2019
|
|
|
Six Months Ended
June 30,
2018
|
|
Current
|
|
$
|
2,659,828
|
|
|
$
|
2,201,850
|
|
Deferred
|
|
|
(461,097
|
)
|
|
|
642,343
|
|
Total
|
|
$
|
2,198,731
|
|
|
$
|
2,844,193
|
|
NOTE N - OPERATING LEASE
The Company entered into various operating lease
agreements for certain of its staff dormitories including a lease agreement with its related party.
In December 2006, Ruian entered into a lease
agreement with Ruili Group Co., Ltd., a related party, for the lease of two apartment buildings for Ruian’s management personnel
and staff. The initial lease term was from January 2013 to December 2016. This lease was amended in 2013, with a new lease term
from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000 (approximately $305,980).
Balance sheet information related to operating
leases is as follows:
|
|
June 30,
2019
|
|
Operating lease right of use assets
1
|
|
$
|
1,070,693
|
|
|
|
|
|
|
Operating lease liabilities, current
2
|
|
$
|
488,687
|
|
Operating lease liabilities, non-current
|
|
|
714,307
|
|
Total operating lease liabilities
|
|
$
|
1,202,994
|
|
|
1
|
Operating lease right of use assets are recorded in other assets, non-current in the accompanying consolidated balance sheets.
|
|
2
|
The current portion of operating lease liabilities is recorded
in other current liabilities in the accompanying consolidated balance sheets.
|
For the six months ended June 30, 2019, the
Company had operating lease costs of $288,113 and the reduction in operating lease right of use assets was $253,380. Cash paid
for amounts included in the measurement of operating lease liabilities was $689,299 during the six months ended June 30, 2019.
The weighted-average remaining lease term and
the weighted-average discount rate of our leases are as follows:
|
|
June 30,
2019
|
|
Weighted-average remaining lease term
|
|
|
3 years
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
5.24
|
%
|
The following table summarizes the maturity
of our operating lease liabilities as of June 30, 2019:
2019 (remaining)
|
|
$
|
384,259
|
|
2020
|
|
|
305,468
|
|
2021
|
|
|
305,468
|
|
2022
|
|
|
305,458
|
|
2023 and thereafter
|
|
|
-
|
|
Total lease payment
|
|
|
1,300,663
|
|
Less imputed interest
|
|
|
(97,669
|
)
|
Total lease liabilities
|
|
$
|
1,202,994
|
|
NOTE O - WARRANTY CLAIMS
Warranty claims were $7,063,122 and $1,828,168
for the six months ended June 30, 2019 and 2018, respectively. Warranty claims are included in selling and distribution expenses
on the accompanying consolidated statements of income and comprehensive income (loss). Accrued warranty expenses are included in
the balances of accrued expenses on the accompanying consolidated balance sheets. The movement of accrued warranty expenses for
the six months ended June 30, 2019 was as follows:
Beginning balance at January 1, 2019
|
|
$
|
7,063,122
|
|
Aggregate increase for new warranties issued during current period
|
|
|
2,044,227
|
|
Aggregate reduction for payments made and effect of exchange rate fluctuation
|
|
|
(2,108,907
|
)
|
Ending balance at June 30, 2019
|
|
$
|
6,998,442
|
|
NOTE P - SEGMENT INFORMATION
The Company produces brake systems and other
related components for different types of commercial vehicles (“Commercial Vehicles Brake Systems”). On August
31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire a segment of the passenger vehicles auto parts
business (“Passenger Vehicles Auto Parts”, formerly known as “Passenger Vehicles Brake System”) 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 Vehicles Auto Parts.
For the reporting periods, all of the Company’s
long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets in the United States for
the reporting periods.
|
|
Six Months Ended
June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
224,606,242
|
|
|
$
|
187,578,450
|
|
Passenger vehicles auto parts
|
|
|
50,987,164
|
|
|
|
48,653,184
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
275,593,406
|
|
|
$
|
236,231,634
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles auto parts
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
—
|
|
|
$
|
—
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
57,680,410
|
|
|
$
|
42,734,721
|
|
Passenger vehicles auto parts
|
|
|
15,109,522
|
|
|
|
21,895,035
|
|
Gross profit
|
|
$
|
72,789,932
|
|
|
$
|
64,629,756
|
|
Selling and distribution expenses
|
|
|
29,348,397
|
|
|
|
23,993,870
|
|
General and administrative expenses
|
|
|
16,596,319
|
|
|
|
12,468,189
|
|
Research and development expenses
|
|
|
11,932,787
|
|
|
|
8,922,358
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
4,958,170
|
|
|
|
4,576,551
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
19,870,599
|
|
|
|
23,821,890
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
3,216,616
|
|
|
|
2,299,844
|
|
Government grants
|
|
|
3,499,845
|
|
|
|
743,525
|
|
Other income
|
|
|
95,029
|
|
|
|
202,693
|
|
Interest expenses
|
|
|
(7,145,545
|
)
|
|
|
(6,883,127
|
)
|
Exchange differences
|
|
|
(523,130
|
)
|
|
|
489,922
|
|
Other expenses
|
|
|
(568,691
|
)
|
|
|
(1,145,085
|
)
|
Income before income tax expense
|
|
$
|
18,444,723
|
|
|
$
|
19,529,662
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
22,914,212
|
|
|
$
|
27,215,974
|
|
Passenger vehicles auto parts
|
|
|
4,564,157
|
|
|
|
6,496,986
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,478,369
|
|
|
$
|
33,712,960
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
5,776,731
|
|
|
$
|
4,650,734
|
|
Passenger vehicles auto parts
|
|
|
1,150,636
|
|
|
|
1,181,824
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,927,367
|
|
|
$
|
5,832,558
|
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
644,665,601
|
|
|
$
|
492,348,129
|
|
Passenger vehicles auto parts
|
|
|
128,407,430
|
|
|
|
89,967,813
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
773,073,031
|
|
|
$
|
582,315,942
|
|
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
164,704,260
|
|
|
$
|
106,779,681
|
|
Passenger vehicles auto parts
|
|
|
32,806,545
|
|
|
|
19,512,076
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,510,805
|
|
|
$
|
126,291,757
|
|
NOTE Q - CONTINGENCIES
|
(1)
|
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 rights 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 Company purchased the
Development Zone Facility from Ruili Group on May 5, 2016. As of the filing date, the Company has not yet obtained the land use
rights certificate or the property ownership certificate for the building of the Development Zone Facility. The Company reserved
the relevant tax amount of RMB 15,030,000 (approximately $2,300,205). This amount was determined based on a 3% tax rate on the
consideration paid for the Development Zone Facility, which the Company considered as the most probable amount of tax liability.
|
|
(3)
|
The information of lease
commitments is provided in Note N.
|
|
(4)
|
The information of guarantees
and assets pledged is provided in Note D.
|
NOTE R - SUBSEQUENT EVENTS
During
the subsequent period, the Company obtained a short term loan in an amount of approximately $4.4 million from China Construction
Bank. Interest rate was 4.35% per annum. The maturity date of this loan existing as of the filing date is July 23, 2020. The Company
pledged its property to obtain this loan from China Construction Bank.
In
July 2019, the Company entered into three loan agreements with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term
of 36 months each. The total long term obligations under the three agreements amounted to RMB 180,000,000 (approximately $26.2
million).
Total proceeds under these loan agreements totaled $21.8 million in the form of bank
acceptance notes.
In
the same period, the Company repaid loan principals and interest expenses in the total amount of approximately $7.1 million to
China Construction Bank and Industrial Bank Co., Ltd.