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, 2016 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, 2016. 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, 2016, and other reports filed with the SEC.
The accompanying unaudited
interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim
periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of
any other interim period or for the fiscal year taken as a whole.
(2)
|
SIGNIFICANT ACCOUNTING POLICIES
|
a. ACCOUNTING
METHOD
The Company uses the
accrual method of accounting for financial statement and tax return purposes.
b. USE OF ESTIMATES
The preparation of
financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management
makes its best estimate of the outcome for these items based on historical trends and other information available when the financial
statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available to management. Actual results could differ from those estimates.
c. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the
Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, bank acceptance
notes receivable, inventories, current prepayments, other current assets, deferred tax assets, accounts payable and bank acceptance
notes to vendors, short term bank loans, deposits received from customers, 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.
d. RESTRICTED CASH
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 six to twelve months.
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
Bank acceptance notes
receivable, 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. Bank acceptance notes do not bear interest. As
of September 30, 2017 and December 31, 2016, bank acceptance notes receivable in the amount of $54,781,712 and $32,916,198, respectively,
were pledged to banks to issue either short term bank loans or bank acceptance notes to vendors. The banks charge discount fees
if the Company chooses to discount the bank acceptance notes for cash before the maturity of the notes and such discount fees
are included in interest expenses.
g. REVENUE RECOGNITION
Revenue from the sale
of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided
by several factors, including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales
price is fixed or determinable, and collection is reasonably assured. Revenue consists of the invoice value for the sale of goods
net of value-added tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown
in the income statement is the net sales.
h. COST OF SALES
Cost of sales consists
primarily of materials costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection
costs, employee compensation, depreciation and related costs, which are directly attributable to production. Write-down of inventories
to lower of cost or market is also recorded in cost of sales, if any.
i. FOREIGN CURRENCY TRANSLATION
The Company maintains
its books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company
has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United
States dollars (“US$”). All assets and liabilities are translated at the current rate. The stockholders’ equity
accounts are translated at the appropriate historical rates. 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
In January 2017, the
FASB issued ASU 2017-03, “
Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint
Ventures (Topic 323)
”. This pronouncement amends the SEC’s reporting requirements for public filers in regard
to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative
disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate
the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that
the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants.
There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated
language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The
Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial
statements.
NOTE D – RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform to the current period presentation. These
reclassifications had no impact on net earnings and financial position.
NOTE E - 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 Kormee Automotive Electronic Control Technology
Co., Ltd. (“Guangzhou Kormee”), Ruian Kormee Automobile Braking 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 parts to Guangzhou Kormee, Ruian Kormee and Ruili MeiLian.
The following related
party transactions occurred during the three and nine months ended September 30, 2017 and 2016:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
124,340
|
|
|
$
|
138,580
|
|
|
$
|
1,449,946
|
|
|
$
|
826,474
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
|
328,680
|
|
|
|
450,665
|
|
|
|
1,085,483
|
|
|
|
807,769
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
1,457,104
|
|
|
|
—
|
|
|
|
3,613,415
|
|
|
|
—
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
—
|
|
|
|
82,671
|
|
|
|
55,230
|
|
|
|
116,415
|
|
Ruili Group Co., Ltd.
|
|
|
1,335,449
|
|
|
|
1,027,210
|
|
|
|
3,845,123
|
|
|
|
2,972,963
|
|
Total Purchases
|
|
$
|
3,245,573
|
|
|
$
|
1,699,126
|
|
|
$
|
10,049,197
|
|
|
$
|
4,723,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
3,125,127
|
|
|
$
|
1,529,583
|
|
|
$
|
4,874,568
|
|
|
$
|
3,174,040
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
|
103,242
|
|
|
|
—
|
|
|
|
115,429
|
|
|
|
9,477
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
245,735
|
|
|
|
—
|
|
|
|
634,022
|
|
|
|
—
|
|
Ruili Group Co., Ltd.
|
|
|
3,927,360
|
|
|
|
1,785,443
|
|
|
|
7,855,143
|
|
|
|
8,334,488
|
|
Total Sales
|
|
$
|
7,401,464
|
|
|
$
|
3,315,026
|
|
|
$
|
13,479,162
|
|
|
$
|
11,518,005
|
|
|
|
September
30
,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ACCOUNTS RECEIVABLE FROM RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
—
|
|
|
$
|
4,361,010
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
|
—
|
|
|
|
664,499
|
|
Total
|
|
$
|
—
|
|
|
$
|
5,025,509
|
|
|
|
|
|
|
|
|
|
|
PREPAYMENTS TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
63,025
|
|
|
$
|
—
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
75,050
|
|
|
|
—
|
|
Total
|
|
$
|
138,075
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
ADVANCES TO RELATED PARTY
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
9,011,700
|
|
|
$
|
—
|
|
Total
|
|
$
|
9,011,700
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE AND BANK ACCEPTANCE NOTES TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
$
|
—
|
|
|
$
|
628,310
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
—
|
|
|
|
100,441
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
2,188,003
|
|
|
|
1,224,956
|
|
Total
|
|
$
|
2,188,003
|
|
|
$
|
1,953,707
|
|
|
|
|
|
|
|
|
|
|
DUE TO RELATED PARTY
|
|
|
|
|
|
|
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
$
|
4,129,808
|
|
|
$
|
—
|
|
Total
|
|
$
|
4,129,808
|
|
|
$
|
—
|
|
The balance of advances
to related party represents the advances from the Company to Ruili Group. The advances to Ruili Group are non-interest bearing,
unsecured and due on demand. During the nine months ended September 30, the Company advanced cash in the amount of $8,919,241.
The effect of changes in foreign exchange rate is $92,459.
The balance of due
to related party represents the loans the Company obtained from related parties for working capital purposes. The borrowings from
related parties are interest free, unsecured and repayable on demand. During the nine months ended September 30, 2017, the
Company obtained loans from related parties in the amount of $93,191,843 in cash, including $5,829,744 from Ruian Kormee and $87,362,099
from Ruili Group. The Company also borrowed the amount of $23,515,527 in the form of bank acceptance notes from Ruili Group. Cash
repayments to the related parties totaled $113,071,629, including $1,742,308 to Ruian Kormee and $111,329,321 to Ruili Group,
during the nine months ended September 30, 2017. The effect of changes in foreign exchange rate is $494,067.
The Company entered
into a lease agreement with Ruili Group, see Note M for more details.
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. As of September 30, 2017, 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 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. The credit line was replaced by the one issued by the same bank in 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 as of
September 30, 2017 and will expire on April 18, 2018.
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. As of September 30, 2017, 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 Guangfa Bank in a maximum amount of RMB 69,000,000 (approximately
$10,092,000) for the period from November 16, 2016 to January 16, 2018.
The Company provided
a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 180,000,000 (approximately
$26,328,000) for the period from June 30, 2017 to June 30, 2020.
The Company has short term bank loans guaranteed or pledged by related parties. See Note K for more details.
NOTE F - ACCOUNTS RECEIVABLE,
NET
Accounts receivable,
net, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable
|
|
$
|
138,797,272
|
|
|
$
|
113,815,711
|
|
Less: allowance for doubtful accounts
|
|
|
(12,990,117
|
)
|
|
|
(11,686,417
|
)
|
Accounts receivable, net
|
|
$
|
125,807,155
|
|
|
$
|
102,129,294
|
|
No customer individually accounted for more than 10% of our revenues or accounts receivable for the nine
months ended September 30, 2017 and 2016. The changes in the allowance for doubtful accounts on September 30, 2017 and December
31, 2016 are summarized as follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
11,686,417
|
|
|
$
|
12,075,402
|
|
Add: increase to allowance
|
|
|
759,854
|
|
|
|
395,491
|
|
Effects on changes in foreign exchange rate
|
|
|
543,846
|
|
|
|
(784,476
|
)
|
Ending balance
|
|
$
|
12,990,117
|
|
|
$
|
11,686,417
|
|
NOTE G - INVENTORIES
On September 30, 2017 and December 31,
2016, inventories were consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
23,592,541
|
|
|
$
|
20,121,513
|
|
Work-in-process
|
|
|
13,382,666
|
|
|
|
14,843,653
|
|
Finished goods
|
|
|
46,104,479
|
|
|
|
30,811,351
|
|
Total inventories
|
|
$
|
83,079,686
|
|
|
$
|
65,776,517
|
|
NOTE H - PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and
equipment were consisted of the following on September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery
|
|
$
|
111,277,530
|
|
|
$
|
87,694,677
|
|
Molds
|
|
|
1,314,717
|
|
|
|
1,257,841
|
|
Office equipment
|
|
|
2,385,454
|
|
|
|
2,021,982
|
|
Vehicles
|
|
|
3,291,065
|
|
|
|
2,246,203
|
|
Buildings
|
|
|
19,042,848
|
|
|
|
15,826,738
|
|
Leasehold improvements
|
|
|
479,301
|
|
|
|
458,566
|
|
Sub-total
|
|
|
137,790,915
|
|
|
|
109,506,007
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(64,813,042
|
)
|
|
|
(55,768,301
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
72,977,873
|
|
|
$
|
53,737,706
|
|
Depreciation expense
incurred was $6,353,494 and $5,110,014 for the nine months ended September 30, 2017 and 2016, respectively.
In May 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 exchange the land use rights and factory facilities located at No. 1169 Yumeng Road,
Rui'an Economic Development Zone, Rui'An City, Zhejiang Province, China (the “Dongshan Facility”), purchased in 2007
from Ruili Group, plus RMB 501.00 million (approximately $76.50 million) in cash for the land use rights and factory facilities
located at No. 2666 Kaifaqu Avenue, Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, China (the “Development
Zone Facility”). As of the filing date, the Company has not obtained the property ownership certificate or land use right
certificate of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 4.56 million (approximately $0.75
million) for the Dongshan Facility and RMB 15.00 million (approximately $2.30 million) for the Development Zone Facility. These
amounts were determined based on a 3% tax rate on the consideration paid for the Dongshan Facility and the Development Zone Facility
in the transactions, which the Company considered as the most probable amount of tax liability.
In July 2017, Ruian, a subsidiary of the Company, purchased plants and the associated land use rights
from Yunding Holding Group Co., Ltd. in cash at the purchase price of RMB 60.06 million (approximately $8.87 million). The total
cost including related deed tax and stamp duty is RMB 58.95 million (approximately $8.88 million) net of value-added input tax
in association with the purchase, which has been fully paid in cash as of September 30, 2017. The title of the plants and the
associated land use rights was transferred in July 2017. The allocated costs for the land use rights and the plants are RMB 42.35
million (approximately $6.38 million) and RMB 16.60 million (approximately $2.50 million), respectively. The plants and associated
land use rights will be used to meet Ruian’s growing operational needs and is located in the east side of the International
Auto Parts District, Tangxia Town, Ruian City, Zhejiang Province, China with a land use area of 33,141 square meters and a building
floor area of 25,016 square meters.
NOTE I – LAND USE RIGHTS, NET
The balances for land
use rights, net as of September 30, 2017 and December 31, 2016 are as the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cost
|
|
$
|
15,237,587
|
|
|
$
|
8,473,362
|
|
Less: accumulated amortization
|
|
|
(440,917
|
)
|
|
|
(164,029
|
)
|
Land use rights, net
|
|
$
|
14,796,670
|
|
|
$
|
8,309,333
|
|
In connection
with the execution of the Purchase Agreement in May 2016, the Company exchanged the Dongshan Facility plus RMB 501.00 million
(approximately $76.50 million) in cash for Development Zone Facility, including land use rights with historical value of
approximately $8.47 million. As of the filing date, the Company has not obtained the land use right certificate of the
Development Zone Facility. Also see Note H for more details.
In July 2017,
Ruian, a subsidiary of the Company, purchased plants and the associated land use rights from Yunding Holding Group Co., Ltd.
in cash at the purchase price of RMB 60.06 million (approximately $8.87 million). The title of the plants and land use rights
was transferred in July 2017. The allocated cost for the land use rights is RMB 42.35 million (approximately $6.38 million).
Also see Note H for more details.
During the three months
ended September 30, 2017, the Company also prepaid the amount of RMB 10.01 million (approximately $1.51 million) as down payment
and RMB 20.00 million (approximately $3.01 million) as a refundable deposit to purchase the land use rights for the land located
at the intersection of Xianghe Road and North Wansong Road, Binhai New District, Rui’an City, Zhejiang Province, China. As
of the filing date, the title to the land use rights has not been transferred. The down payment was included in prepayments, non-current
and the refundable deposit was included in other current assets in the unaudited consolidated balance sheets. Also see Note Q for
more details.
NOTE J - DEFERRED TAX ASSETS
Deferred tax assets were
consisted of the following as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,019,545
|
|
|
$
|
1,798,894
|
|
Revenue (net of cost)
|
|
|
(128,438
|
)
|
|
|
76,719
|
|
Unpaid accrued expenses
|
|
|
237,055
|
|
|
|
357,352
|
|
Warranty
|
|
|
1,184,367
|
|
|
|
977,610
|
|
Deferred tax assets
|
|
|
3,312,529
|
|
|
|
3,210,575
|
|
Valuation allowance
|
|
|
―
|
|
|
|
―
|
|
Deferred tax assets - current
|
|
$
|
3,312,529
|
|
|
$
|
3,210,575
|
|
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 the U.S. as the Company had no taxable income for the reporting periods. The Company’s subsidiary registered in the PRC
is subject to income taxes within the PRC at the applicable tax rate.
NOTE K –
SHORT-TERM BANK LOANS
Bank loans represented
the following as of September 30, 2017 and December 31, 2016:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Secured
|
|
$
|
77,779,094
|
|
|
$
|
27,416,376
|
|
The Company
obtained those short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Zheshang Bank,
Industrial and Commercial Bank of China, Oversea-Chinese Banking Corporation Limited and China Construction Bank,
respectively, to finance general working capital as well as new equipment acquisitions. Interest rates for the loans
outstanding during the nine months ended September 30, 2017 ranged from 0.55% to 5.22% per annum. The maturity dates of the
loans existing as of September 30, 2017 ranged from October 2, 2017 to September 26, 2018. As of September 30, 2017 and
December 31, 2016, the Company’s accounts receivables of $6,349,443 and $4,484,755, respectively, were pledged as
collateral under loan arrangements. The interest expenses for short-term bank loans were $804,499 and $214,974 for the three
months ended September 30, 2017 and 2016, respectively. The interest expenses, including discount fees, were $1,827,835
and $515,547 for the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017, corporate or
personal guarantees provided for those bank loans were as follows:
$
|
5,611,817
|
|
|
Guaranteed by Ruili Group, a related party.
|
$
|
2,944,146
|
|
|
Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders.
|
$
|
14,227,576
|
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders.
|
$
|
24,861,004
|
|
|
Pledged by the Company with its bank acceptance notes.
|
$
|
22,600,913
|
|
|
Pledged by Hangzhou Ruili Zhiye Development Ltd., a related party under common control of Ruili Group, with its properties. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders.
|
$
|
6,026,910
|
|
|
Pledged by the Company’s land and properties. Guaranteed by Ruili Group, Xiaoping Zhang, who is one of the Company’s principal stockholders.
|
$
|
1,506,728
|
|
|
Pledged by Ruili Group, a related party, with its land and buildings.
|
NOTE L - 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 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 Company to the statutory income tax rate in the PRC for the nine months ended September
30, 2017 and 2016 is as follows:
|
|
Nine Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2016
|
|
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
|
%
|
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
|
|
|
-1.86
|
%
|
|
|
-3.54
|
%
|
Effects of expenses not deductible for tax purposes
|
|
|
0.54
|
%
|
|
|
0.74
|
%
|
Other items
|
|
|
1.39
|
%
|
|
|
-0.04
|
%
|
Effective tax rate
|
|
|
15.07
|
%
|
|
|
12.16
|
%
|
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 recorded for the United States. In the nine months ended September 30, 2017, there were no penalties and interest,
which generally are recorded in the general and administrative expenses or in the tax expenses. The provisions for income taxes
for the nine months ended September 30, 2017 and 2016, respectively, are summarized as follows:
|
|
Nine Months Ended
September 30, 2017
|
|
|
Nine Months Ended
September 30, 2016
|
|
Current
|
|
$
|
4,199,727
|
|
|
$
|
2,942,048
|
|
Deferred
|
|
|
25,677
|
|
|
|
(1,264,061
|
)
|
Total
|
|
$
|
4,225,404
|
|
|
$
|
1,677,987
|
|
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 September 30, 2017 and December 31, 2016.
NOTE M – OPERATING LEASES WITH
RELATED PARTY
In December 2006, Ruian
entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings
are for Ruian’s management personnel and staff, respectively. 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 $333,688).
The lease expenses were
$684,252 and $1,402,658 for the nine months ended September 30, 2017 and 2016, respectively.
NOTE N - WARRANTY CLAIMS
Warranty claims were
$2,261,311 and $1,741,415 for the nine months ended September 30, 2017 and 2016, respectively. Warranty claims are classified
as accrued expenses on the balance sheet. The movement of accrued warranty expenses for the nine months ended September 30, 2017
was as follows:
Beginning balance at January 1, 2017
|
|
$
|
6,517,402
|
|
Aggregate increase for new warranties issued during current period
|
|
|
2,261,311
|
|
Aggregate reduction for payments made
|
|
|
(1,207,221
|
)
|
Effect of exchange rate fluctuation
|
|
|
324,288
|
|
Ending balance at September 30, 2017
|
|
$
|
7,895,780
|
|
NOTE O – SEGMENT
INFORMATION
The Company produces
brake systems and other related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”).
On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the
passenger vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition,
the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related
auto parts.
The Company has two
operating segments: Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems.
All of the Company’s
long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets in the United States
for the reporting periods.
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
223,937,534
|
|
|
$
|
157,362,913
|
|
Passenger vehicles brake systems
|
|
|
43,652,419
|
|
|
|
35,554,720
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
267,589,953
|
|
|
$
|
192,917,633
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles brake systems
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
61,485,066
|
|
|
$
|
45,768,683
|
|
Passenger vehicles brake systems
|
|
|
11,401,597
|
|
|
|
10,491,798
|
|
Gross profit
|
|
$
|
72,886,663
|
|
|
$
|
56,260,481
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
22,877,889
|
|
|
|
20,637,464
|
|
General and administrative expenses
|
|
|
13,517,222
|
|
|
|
16,717,966
|
|
Research and development expenses
|
|
|
7,477,902
|
|
|
|
6,533,540
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
1,185,958
|
|
|
|
144,715
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
30,199,608
|
|
|
|
12,516,226
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
38,175
|
|
|
|
1,047,667
|
|
Government grants
|
|
|
1,119,337
|
|
|
|
569,041
|
|
Other income
|
|
|
47,976
|
|
|
|
763,534
|
|
Interest expenses
|
|
|
(1,827,835
|
)
|
|
|
(515,547
|
)
|
Other expenses
|
|
|
(1,536,921
|
)
|
|
|
(582,820
|
)
|
Income before income tax expense
|
|
$
|
28,040,340
|
|
|
$
|
13,798,101
|
|
|
|
|
|
|
|
|
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
30,791,780
|
|
|
$
|
9,994,389
|
|
Passenger vehicles brake systems
|
|
|
6,090,790
|
|
|
|
2,272,202
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,882,570
|
|
|
$
|
12,266,591
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
5,538,902
|
|
|
$
|
4,375,484
|
|
Passenger vehicles brake systems
|
|
|
1,084,180
|
|
|
|
981,882
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,623,082
|
|
|
$
|
5,357,366
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
346,308,432
|
|
|
$
|
248,023,179
|
|
Passenger vehicles brake systems
|
|
|
65,228,623
|
|
|
|
53,304,945
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
411,537,055
|
|
|
$
|
301,328,124
|
|
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
81,595,545
|
|
|
$
|
51,080,332
|
|
Passenger vehicles brake systems
|
|
|
15,368,858
|
|
|
|
10,978,145
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
96,964,403
|
|
|
$
|
62,058,477
|
|
NOTE P – 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 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 M.
(3) The information of guarantees and assets
pledged is provided in Note E.
NOTE Q – SUBSEQUENT EVENTS
During the subsequent period, the Company
obtained short term loans for the total amount of approximately $13,809,000 from Bank of China, Agricultural Bank of China, and
Industrial Bank Co., Ltd. to finance general working capital. Interest rates for those loans ranged from 4.10% to 5.22% per annum.
The maturity dates of the loans existing as of the filing date ranged from January 20, 2018 to October 11, 2018. As of the filing
date, the Company pledged accounts receivable of approximately $1,387,000, as collateral under the loan arrangements of Bank of
China. The Company continuously pledged bank acceptance notes to borrow money from Agricultural Bank of China..
In the same period,
the Company repaid loan principals as well as interests for the total amount of approximately $4,793,000 to Bank of China and
Agricultural Bank of China.
On October
20, 2017, the Company entered into a State-owned Construction Land Use Right Transfer Agreement with Rui’an Land
Resources Bureau to purchase the land use rights located at the intersection of Xianghe Road and North Wansong Road, Binhai
New District, Rui’an City, Zhejiang Province, China, with an area of 35,483 square meters for the price of RMB 50.03
million (approximately $7.54 million). As of the filing date, the Company has not paid the purchase price in full and the
title to the land use rights has not been transferred. Down payment of RMB 10.01 million (approximately $1.51 million) and a
refundable deposit of RMB 20.00 million (approximately $3.01 million) were paid by the Company as of September 30, 2017. The
RMB 20.00 million (approximately $3.01 million) deposit which had been paid earlier was refunded to the Company as of the
filing date of this report.