Washington, D.C. 20549
No. 1169 Yumeng Road
Indicate by check mark whether the registrant (1) filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company, or an emerging growth company. See definition of “accelerated
filer”, “large accelerated filer”, “smaller reporting company”, and “emerging growth company”
in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if
the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act):
Indicate the number of shares outstanding
of each of the issuer classes of common stock, as of the latest practicable date:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2018
(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 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 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, 2017 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, 2017. 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, 2017, 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 and payable, bank acceptance notes from
customers and to vendors, inventories, current prepayments, other current assets, short term bank loans, current portion of long
term loans, deposits received from customers, deferred income and other payables and accruals, 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 consists of bank deposits
used to pledge the bank acceptance notes and short term bank loan, deposits for obtaining letters of credit from a local bank and
bank deposits used as down payment secured on behalf of a related party for potential acquisition.
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. As of
March 31, 2018 and December 31, 2017, restricted cash of $37,728,039 and $0, respectively, was used to pledge the bank acceptance
notes.
During the three months ended March 31,
2018, the Company obtained a short term bank loan in the amount of $2,972,096 from Industrial and Commercial Bank of China, which
required a pledge with bank deposits of $3,022,471. As of March 31, 2018, the bank deposits remained as the pledge for the loan.
Also see Note K for details.
The Company also obtained letters of
credit from Industrial Bank Co., Ltd., which agreed to provide guarantee that the Company would make timely payment to its sellers
for any purchases. Deposits of $286,255 and $275,474, respectively, were required for this purpose as of March 31, 2018 and December
31, 2017.
As of March 31, 2018, the Company had a
bank deposit of $5,566,069, representing an advance to Ruili Group. Also see Note E for details.
|
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 March 31, 2018 and December 31,
2017, bank acceptance notes from customers in the amount of $135,919,194 and $95,914,724, respectively, were pledged to endorsing
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 from customers for cash before the maturity of the notes and such discount fees are
included in interest expenses on the accompanying unaudited consolidated statements of income and comprehensive income.
The Company has adopted Accounting Standards
Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective as of January 1,
2018. The Company has chosen to use the full retrospective transition method, under which it is required to revise its consolidated
financial statements for the year ended December 31, 2017 as well as any applicable interim periods within the year ended December
31, 2017, as if ASC 606 had been effective for those periods. Under ASC 606, the Company recognizes revenue when a customer obtains
control of promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for the
goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps:
(1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction
price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as
the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that
the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. See Note C
for assessment on the impact of adopting ASC 606, and Note M for details on revenues from contracts with customers.
|
h
.
|
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
In May 2014, the FASB issued ASC 606. ASC
606 outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP and supersedes existing revenue
recognition guidance. The main principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. The Company applied the ASC and its related updates on a full retrospective basis as of January 1, 2018.
The adoption of ASC 606 did not impact the previously reported financial statements in any prior period nor did it result in a
cumulative effect adjustment to retained earnings. See Note M for additional information.
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 Company adopted
ASU 2016-18 effective January 1, 2018. As a result of the adoption, net cash used in investing activities was adjusted to exclude
the change in restricted cash, resulting in a decrease of $89,465 in net cash used in investing activities in the amount previously
reported for the three months ended March 31, 2017. Restricted cash was included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.
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
or financial position.
NOTE E - 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
|
|
|
|
Shanghai Dachao Electric Technology Co., Ltd. ("Shanghai Dachao")
|
|
Ruili Group holds 49% of the equity interests in Shanghai Dachao
|
|
|
|
Ruili MeiLian Air Management System (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
|
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 and Ningbo Ruili. As of March 31, 2018, the Company
did not receive all the materials from Ruili Meilian or any materials from Ningbo Ruili purchased during the three months then
ended. The unreceived purchases from those two related parties are recorded as prepayments, current on the accompanying consolidated
balance sheets.
The Company sells certain automotive products
to the Ruili Group. The Company also sells parts to Guangzhou Kormee, Shanghai Tabouk and Ruili Meilian.
The following related
party transactions occurred for the three months ended March 31, 2018 and 2017:
Three Months Ended March 31,
|
|
|
2018
|
|
|
2017
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
Guangzhou Ruili Kormee Automotive Eletronic Control Technology Co., Ltd.
|
|
$
|
-
|
|
|
$
|
335,927
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
|
355,493
|
|
|
|
355,671
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
145,618
|
|
|
|
55,230
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
2,471,243
|
|
|
|
783,070
|
|
Ruili Group Co., Ltd.
|
|
|
1,716,788
|
|
|
|
1,126,718
|
|
Wenzhou Lichuang Automobile Parts Co., Ltd.
|
|
|
1,781,716
|
|
|
|
-
|
|
Total purchases
|
|
$
|
6,470,858
|
|
|
$
|
2,656,616
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
Guangzhou Ruili Kormee Automotive Eletronic Control Technology Co., Ltd.
|
|
$
|
2,353,028
|
|
|
$
|
777,357
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
529,873
|
|
|
|
-
|
|
Ruili Group Co., Ltd.
|
|
|
4,411,287
|
|
|
|
3,026,924
|
|
Shanghai Tabouk Auto Components Co., Ltd.
|
|
|
406,866
|
|
|
|
204,403
|
|
Total sales
|
|
$
|
7,701,054
|
|
|
$
|
4,008,684
|
|
|
|
As of March 31, 2018
|
|
|
As of December 31, 2017
|
|
ADVANCES TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
-
|
|
|
$
|
5,711,605
|
|
Shanghai Ruili Real Estate Development Co., Ltd.
|
|
|
120,227,095
|
|
|
|
65,069,497
|
|
Kunshan Yuetu Real Estate Development Co., Ltd.
|
|
|
17,811,422
|
|
|
|
1,537,122
|
|
Total advances to related parties
|
|
$
|
138,038,517
|
|
|
$
|
72,318,224
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS RECEIVABLE
|
|
|
|
|
|
|
|
|
Shanghai Tabouk Auto Components Co., Ltd.
|
|
$
|
1,369,846
|
|
|
$
|
1,297,734
|
|
Total accounts receivable
|
|
$
|
1,369,846
|
|
|
$
|
1,297,734
|
|
|
|
|
|
|
|
|
|
|
PREPAYMENTS, CURRENT
|
|
|
|
|
|
|
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
$
|
7,753,831
|
|
|
$
|
-
|
|
Ningbo Ruili Equipment Co., Ltd.
|
|
|
1,936,249
|
|
|
|
999,527
|
|
Total prepayments, current
|
|
$
|
9,690,080
|
|
|
$
|
999,527
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE
|
|
|
|
|
|
|
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
1,845,566
|
|
|
$
|
3,414,719
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
13,644
|
|
|
|
83,178
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
7,753,831
|
|
|
|
1,993,787
|
|
Wenzhou Lichuang Automobile Parts Co., Ltd.
|
|
|
491,586
|
|
|
|
10,405,120
|
|
Total accounts payable
|
|
$
|
10,104,627
|
|
|
$
|
15,896,804
|
|
|
|
|
|
|
|
|
|
|
DUE TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
26,953,199
|
|
|
$
|
-
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
|
9,986,744
|
|
|
|
1,572,963
|
|
Total due to related parties
|
|
$
|
36,939,943
|
|
|
$
|
1,572,963
|
|
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 non-interest
bearing, unsecured, and due on demand and the advances to Shanghai Ruili and Kunshan Yuetu are due on demand, unsecured, and bear
an interest rate of 5.22% per annum.
During the three months ended March 31, 2018,
the Company obtained loans of $264,565,400 in cash and $32,791,380 in the form of bank acceptance notes. Repayments in cash and
bank acceptance notes to related parties totaled $256,883,171 and $5,846,083, respectively. In the same period, the Company advanced
to its related parties in the total amount of $67,694,035 and received cash repayments from Ruili Group amounted to $5,821,183.
The cash repayments from Shanghai Ruili and Kunshan Yuetu totaled $1,378,876 during the three months ended March 31, 2018, and
approximately $53,434,000 during subsequent period. Also see Note S.
The Company entered
into a lease agreement with Ruili Group. See Note O for more details.
During the three months
ended March 31, 2018, the Company made a bank deposit of $5,566,069 (RMB 35,000,000) as down payment to secure a potential acquisition.
Initially, the Company had the intention to acquire the target company and deposited $5,566,069 into a trust account restricted
for the use in the potential acquisition. After a few rounds of discussion, the Company gave up and Ruili Group decided to do the
acquisition. As the Company and Ruili Group are under common control, the restricted deposit represented an advance to Ruili Group,
non-interest bearing, due on demand and non-secured. Also See Note B.
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 credit line was renewed on October 19, 2017 for 6 months. On April 23, 2018, Ruili
Group and the bank reached into another extension agreement and the guarantee will be provided by the Company until April 23,
2021.
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 credit line was renewed on December 21, 2017 for a period of 12 months,
and the guarantee was accordingly extended by the Company as of March 31, 2018 and will expire on December 20, 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:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Accounts receivable
|
|
$
|
187,648,836
|
|
|
$
|
148,312,117
|
|
Less: allowance for doubtful accounts
|
|
|
(14,472,229
|
)
|
|
|
(13,927,156
|
)
|
|
|
|
|
|
|
|
|
|
Account receivable balance, net
|
|
$
|
173,176,607
|
|
|
$
|
134,384,961
|
|
No customer individually accounted for more
than 10% of the Company’s revenues or accounts receivable for the three months ended March 31, 2018 and 2017. The changes
in the allowance for doubtful accounts at March 31, 2018 and December 31, 2017 are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Beginning balance
|
|
$
|
13,927,156
|
|
|
$
|
11,686,417
|
|
Add: increase to allowance
|
|
|
-
|
|
|
|
1,474,872
|
|
Less: accounts written off
|
|
|
-
|
|
|
|
-
|
|
Effects on changes in foreign exchange rate
|
|
|
545,073
|
|
|
|
765,867
|
|
Ending balance
|
|
$
|
14,472,229
|
|
|
$
|
13,927,156
|
|
NOTE G - INVENTORIES
At March 31, 2018 and December 31, 2017,
inventories consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
20,308,610
|
|
|
$
|
27,657,266
|
|
Work-in-process
|
|
|
34,233,690
|
|
|
|
40,805,434
|
|
Finished goods
|
|
|
63,215,909
|
|
|
|
45,837,864
|
|
Less: write-down of inventories
|
|
|
-
|
|
|
|
-
|
|
Total inventories
|
|
$
|
117,758,209
|
|
|
$
|
114,300,564
|
|
NOTE H - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consisted
of the following at March 31, 2018 and December 31, 2017:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Machinery
|
|
$
|
126,899,893
|
|
|
$
|
119,296,564
|
|
Molds
|
|
|
1,391,314
|
|
|
|
1,338,912
|
|
Office equipment
|
|
|
3,131,313
|
|
|
|
2,998,443
|
|
Vehicles
|
|
|
4,159,140
|
|
|
|
3,681,194
|
|
Buildings
|
|
|
20,943,601
|
|
|
|
20,127,148
|
|
Leasehold improvements
|
|
|
505,887
|
|
|
|
486,834
|
|
Sub-total
|
|
|
157,031,148
|
|
|
|
147,929,095
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(73,530,843
|
)
|
|
|
(68,101,089
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
83,500,305
|
|
|
$
|
79,828,006
|
|
Depreciation expense charged to operations
was $2,711,374 and $1,944,565 for the three months ended March 31, 2018 and 2017, respectively.
NOTE I – LAND USE RIGHTS, NET
The balances for land
use rights, net, as of March 31, 2018 and December 31, 2017 are as the following:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Cost
|
|
$
|
16,082,814
|
|
|
$
|
15,477,081
|
|
Less: accumulated amortization
|
|
|
(722,175
|
)
|
|
|
(564,947
|
)
|
Land use rights, net
|
|
$
|
15,360,639
|
|
|
$
|
14,912,134
|
|
In September 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 Xianghe Road and North Wansong Road, Binhai New District, Ruian City, Zhejiang Province, China (the “Wansong Land”).
Full payment of RMB 51.81 million (approximately $7.93 million) was made as of December 31, 2017. The payment was included as prepayment,
non-current as of March 31, 2018 on the accompanying consolidated balance sheets. The Company obtained the title to the land use
rights in April 2018. Also See Note S.
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. Prepayment of RMB 14.40 million (approximately
$2.14 million) was made as down payment in 2017. During the three months ended March 31, 2018, the Company paid additional amount
of RMB 57.62 million (approximately $8.99 million). As of March 31, 2018, the purchase price of RMB 72.02 (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 March 31, 2018 on the accompanying consolidated balance sheets.
Amortization expenses were $132,523 and $70,489
for the three months ended March 31, 2018 and 2017, respectively.
NOTE J - DEFERRED TAX ASSETS
Deferred tax assets consisted of the following
as of March 31, 2018 and December 31, 2017:
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Deferred tax assets – non-current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,264,083
|
|
|
$
|
2,137,837
|
|
Revenue (net of cost)
|
|
|
67,513
|
|
|
|
160,766
|
|
Unpaid accrued expenses
|
|
|
69,913
|
|
|
|
955,287
|
|
Warranty
|
|
|
1,086,399
|
|
|
|
986,534
|
|
Deferred tax assets
|
|
|
3,487,908
|
|
|
|
4,240,424
|
|
Valuation allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets – non-current
|
|
$
|
3,487,908
|
|
|
$
|
4,240,424
|
|
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 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 K - SHORT-TERM BANK LOANS
Bank loans represented the following as of
March 31, 2018 and December 31, 2017:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
$
|
239,625,661
|
|
|
$
|
125,380,899
|
|
The Company obtained those short term loans
from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Zheshang Bank, China Minsheng Bank, Industrial Bank Co.,
Ltd., Oversea-Chinese Banking Corporation Limited, China CITIC Bank, Industrial and Commercial Bank of China, Huaxia Bank, and
China Construction Bank, respectively, to finance general working capital and acquire long-lived assets. Interest rate for the
loans outstanding during the three months ended March 31, 2018 ranged from 0.90% to 5.51% per annum. The maturity dates of the
loans existing as of March 31, 2018 ranged from April 2, 2018 to March 25, 2019. As of March 31, 2018 and December 31, 2017, the
Company’s accounts receivable of $11,112,596 and $5,472,169, respectively, were pledged as collateral under loan arrangements.
The interest expenses for short term loans, including discount fees, were $2,294,328 and $460,912 for the three months ended March
31, 2018 and 2017, respectively.
As of March 31, 2018, corporate or personal guarantees provided
for those bank loans were as follows:
$
|
34,639,600
|
|
|
Pledged by Ruili Group, a related party, with its land use rights and properties.
|
|
|
|
|
|
$
|
69,178,290
|
|
|
Pledged by Shanghai Ruili, a related party, with its buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$
|
19,067,881
|
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$
|
6,079,940
|
|
|
Guaranteed by Ruili Group, a related party.
|
|
|
|
|
|
$
|
28,625,499
|
|
|
Pledged by Hangzhou Ruili Property 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 the Company’s principal stockholders.
|
|
|
|
|
|
$
|
68,987,452
|
|
|
Pledged by the Company with its bank acceptance notes.
|
|
|
|
|
|
$
|
10,074,903
|
|
|
Pledged by Shanghai Ruili, a related party, with its properties. Guaranteed by Ruili Group, a related party. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$
|
2,972,096
|
|
|
Pledged by the Company with bank deposits of $3,022,471, which was included as restricted cash on the accompanying unaudited consolidated balance sheets. Also see Note B “RESTRICTED CASH” section.
|
NOTE L - LONG TERM LOANS
|
|
March 31, 2018
|
|
|
December 31, 2017
|
|
Aggregate outstanding principal balance
|
|
$
|
59,428,763
|
|
|
$
|
63,471,308
|
|
Less: unamortized debt issuance costs
|
|
|
(1,514,055
|
)
|
|
|
(1,822,053
|
)
|
Less: current portion
|
|
|
(26,141,459
|
)
|
|
|
(24,266,031
|
)
|
Non-current portion
|
|
$
|
31,773,249
|
|
|
$
|
37,383,224
|
|
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 $742,324. For the three months
ended March 31, 2018, the repayments of principal totaled $3,857,306.
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 in the amount of $1,025,248. For the three months ended March 31, 2018, the repayments of principal
totaled $2,544,025.
The interest expenses for long term loans,
including the amortization of debt issuance costs, were $1,059,383 for the three months ended March 31, 2018.
NOTE M – REVENUES FROM CONTRACTS WITH CUSTOMERS
The Company accounted for revenue in accordance
with ASC 606, which was adopted on January 1, 2018, using full retrospective method. The adoption of the standard did not impact
the Company’s revenue recognition.
The Company provides a variety of standard
products to its customers. The Company’s contracts with its customers consist of a single, distinct performance obligation
or promise to transfer auto parts to the customers. Generally, the Company’s performance obligations are satisfied when the
customers take possession of the products, which normally occurs at the shipping point or destination depending on the terms of
the contracts. All sales are recorded net of value-added taxes. The Company does not recognize revenue related to product warranties.
See Note P for details concerning the expected costs associated with the Company’s assurance warranty obligations.
In accordance with
ASC 606, the Company disaggregates revenue from contracts with customers by product type. See Note Q for information regarding
revenue disaggregation by product type.
Revenues from contracts with customers
are recognized at a point in time when the merchandises are delivered to the customer in accordance with the shipping terms stated
in the contracts, which is the point when the legal title, physical possession and the risks and rewards of ownership are transferred
to the customer.
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 March 31, 2018
and December 31, 2017, the Company recorded a deferred revenue liability of $49,997,137 and $43,087,473, respectively, which was
presented as “Deposits received from customers” on the accompanying consolidated balance sheets. During the three
months March 31, 2018 and 2017, the Company recognized $12,855,707 and $4,395,837, respectively, of deferred revenue included
in the opening balances of deposits received from customers. The amounts were included in sales on the accompanying consolidated
statements of income and comprehensive income.
NOTE N - INCOME TAXES
In December 2017, the Tax Cuts and
Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that
affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1,
2018, and a recognition of the 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 upon enactment of the 2017 Act. The Company
is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff
Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Act, which allows the Company
to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company is evaluating
the impact of the 2017 Tax Act, however, as of the filing date, the Company was unable to determine a reasonable provision of the
tax effects of the 2017 Tax Act. Therefore, no provisional amounts have been recorded on the consolidated financial statements
as of December 31, 2017 and for the three months ended March 31, 2018 in accordance with SAB 118.
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. As the “High-Tech Enterprise” designation expired
in 2018, the Joint Venture is undergoing the re-assessment by the government and the Company estimates it is highly probable that
the designation will be awarded and therefore the 15% tax rate is used for the three months ended March 31, 2018.
The reconciliation of the effective income
tax rate of the Company to the statutory income tax rate in the PRC for the three months ended March 31, 2018 and 2017 is as follows:
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
US statutory income tax rate
|
|
|
21.00
|
%
|
|
|
35.00
|
%
|
Valuation allowance recognized with respect to the loss in the US company
|
|
|
-21.00
|
%
|
|
|
-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
|
|
|
-2.51
|
%
|
|
|
-2.14
|
%
|
Expenses not deductible for tax purpose
|
|
|
0.52
|
%
|
|
|
0.62
|
%
|
Other items
|
|
|
1.86
|
%
|
|
|
0.84
|
%
|
Effective tax rate
|
|
|
14.87
|
%
|
|
|
14.32
|
%
|
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. In the three months ended March
31, 2018 and 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 three months ended March 31, 2018 and 2017, respectively, are summarized
as follows:
|
|
Three Months Ended
March 31, 2018
|
|
|
Three Months Ended
March 31, 2017
|
|
Current
|
|
$
|
704,603
|
|
|
$
|
1,294,627
|
|
Deferred
|
|
|
900,838
|
|
|
|
(8,453
|
)
|
Total
|
|
$
|
1,605,441
|
|
|
$
|
1,286,174
|
|
NOTE O – 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 lease term is from January 2013 to December 2016. This lease was amended in 2013
with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000 (approximately $333,688).
The lease expenses were $148,785 and $75,887
for the three months ended March 31, 2018 and 2017, respectively.
NOTE P - WARRANTY CLAIMS
Warranty claims were $833,684 and $637,874
for the three months ended March 31, 2018 and 2017, respectively. Warranty claims are included in selling and distribution expenses
on the accompanying consolidated statements of income and comprehensive income. 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 three months
ended March 31, 2018 was as follows:
Beginning balance at January 1, 2018
|
|
$
|
6,576,895
|
|
Aggregate increase for new warranties issued during current period
|
|
|
833,684
|
|
Aggregate reduction for payments made and effect of exchange rate fluctuation
|
|
|
(440,703
|
)
|
Ending balance at March 31, 2018
|
|
$
|
6,969,876
|
|
NOTE Q – 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.
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.
|
|
Three Months Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
91,615,325
|
|
|
$
|
61,374,264
|
|
Passenger vehicles brake systems
|
|
|
16,111,357
|
|
|
|
13,372,130
|
|
Net sales
|
|
$
|
107,726,682
|
|
|
$
|
74,746,394
|
|
|
|
|
|
|
|
|
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
-
|
|
|
$
|
-
|
|
Passenger vehicles brake systems
|
|
|
-
|
|
|
|
-
|
|
Intersegment sales
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
25,769,805
|
|
|
$
|
17,280,818
|
|
Passenger vehicles brake systems
|
|
|
4,429,681
|
|
|
|
3,765,118
|
|
Gross profit
|
|
$
|
30,199,486
|
|
|
$
|
21,045,936
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
10,037,861
|
|
|
|
5,608,623
|
|
General and administrative expenses
|
|
|
4,773,778
|
|
|
|
4,044,913
|
|
Research and development expenses
|
|
|
3,590,402
|
|
|
|
2,055,096
|
|
Other operating income, net
|
|
|
2,197,324
|
|
|
|
290,237
|
|
Income from operations
|
|
|
13,994,769
|
|
|
|
9,627,541
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,488,264
|
|
|
|
10,550
|
|
Government grants
|
|
|
133,933
|
|
|
|
28,909
|
|
Other income
|
|
|
27,066
|
|
|
|
664
|
|
Interest expenses
|
|
|
(3,353,711
|
)
|
|
|
(481,160
|
)
|
Exchange loss
|
|
|
(601,286
|
)
|
|
|
(92,732
|
)
|
Other expenses
|
|
|
(890,814
|
)
|
|
|
(114,799
|
)
|
Income before income tax expense
|
|
$
|
10,798,221
|
|
|
$
|
8,978,973
|
|
|
|
|
|
|
|
|
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
16,738,232
|
|
|
$
|
11,758,957
|
|
Passenger vehicles brake systems
|
|
|
2,944,543
|
|
|
|
2,562,024
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,682,775
|
|
|
$
|
14,320,981
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
2,421,346
|
|
|
$
|
1,656,343
|
|
Passenger vehicles brake systems
|
|
|
425,957
|
|
|
|
360,881
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,847,303
|
|
|
$
|
2,017,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
696,179,668
|
|
|
$
|
492,348,129
|
|
Passenger vehicles brake systems
|
|
|
122,469,989
|
|
|
|
89,967,813
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
818,649,657
|
|
|
$
|
582,315,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
124,908,591
|
|
|
$
|
106,779,681
|
|
Passenger vehicles brake systems
|
|
|
21,973,572
|
|
|
|
19,512,076
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146,882,163
|
|
|
$
|
126,291,757
|
|
NOTE R – CONTINGENCIES
|
(1)
|
In May 2016, the Company, through its principal operating subsidiary, entered into a 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, Ruian Economic Development Zone, Ruian 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, Ruian Economic Development Zone, Ruian City, Zhejiang Province, China (the “Development Zone Facility”). As of the filing date, the Company hasn’t 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.
|
|
(2)
|
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.
|
|
(3)
|
The information of lease commitments is provided in Note O.
|
|
(4)
|
The information of guarantees and assets pledged is provided in Note E.
|
NOTE S – SUBSEQUENT
EVENTS
During the subsequent period, the Company
obtained short term loans in the total amount of approximately $47,582,000 from Agricultural Bank of China, China CITIC Bank,
China Zheshang Bank, Huaxia Bank, and Industrial and Commercial Bank of China. Interest rates for those loans ranged from 4.60%
to 5.72% per annum. The maturity dates of the loans existing as of the filing date ranged from April 29, 2018 to May 1, 2019.
The Company continuously pledged bank acceptance notes to obtain loans from Agricultural Bank of China. In the same period, the
Company sold accounts receivable from Ruili Group of approximately $6,361,000 to China Merchants Bank without recourse and received
payment of approximately $6,108,000, net of bank charges and expenses.
In the same period, the Company repaid loan
principals and interest expenses in the total amount of approximately $16,829,000 to Bank of China, China Construction Bank, and
Agricultural Bank of China.
During the subsequent period, the Company
received repayments from Shanghai Ruili, a related party, in the total amount of approximately $53,434,000 (RMB 336,000,000).
In April 2018, the Company obtained the
title of the land use rights for the Wansong Land. The expiration date of the land use rights is October 19, 2057. The Wansong
Land has a total area of 17,029 square meters. Also see Note I for details.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion
and analysis of certain significant factors that have affected our financial position and operating results during the periods
included on the accompanying consolidated unaudited financial statements, as well as information relating to the plans of our current
management. The following discussion and analysis should be read in conjunction with our consolidated unaudited financial statements
and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes
forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to
be forward-looking statements. Generally, the words “believe,” “anticipate,” “may,” “will,”
“should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions, or
the negative thereof, or comparable terminology, are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with SEC
from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Some of the factors
that could cause actual results to differ include: our ability to effectively implement our business strategy; our ability to handle
downward pricing pressures on our products; and our ability to accurately or effectively plan our production or supply needs. For
a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained
in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal
year ended December 31, 2017, which is available on the SEC’s website at www.sec.gov. Undue reliance should not be placed
on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update these
forward-looking statements.
OVERVIEW
The Company manufactures and distributes
automotive brake systems and other key safety-related components to automotive original equipment manufacturers, or OEMs, and the
related aftermarket both in China and internationally for use primarily in different types of commercial vehicles, such as trucks
and buses, and in passenger vehicles. Management believes that it is the largest manufacturer of automotive brake systems in China
for commercial vehicles such as trucks and buses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of our accounting policies
and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical
Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Year ended December 31, 2017.
See Note N to the attached Unaudited
Consolidated Financial Statements for the information regarding changes in taxation by the government of China.
RESULTS OF OPERATIONS
The following statements are about results of operations
for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017.
Sales
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31, 2018
|
|
|
March 31, 2017
|
|
|
|
(U.S. dollars in millions)
|
|
Commercial vehicle brake systems
|
|
$
|
91.6
|
|
|
|
85
|
%
|
|
$
|
61.3
|
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Passenger vehicle brake systems
|
|
$
|
16.1
|
|
|
|
15
|
%
|
|
$
|
13.4
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
107.7
|
|
|
|
100
|
%
|
|
$
|
74.7
|
|
|
|
100
|
%
|
The sales were $107.7 million and $74.7 million
for the three months ended March 31, 2018 and 2017, respectively, an increase of $33.0 million or 44.1%. The increase was mainly
due to the increased sales of commercial vehicle brake systems to China OEM and aftermarket market.
The sales from commercial vehicle brake systems increased
by $30.3 million or 49.3%, to $91.6 million for the first fiscal quarter of 2018, compared to $61.3 million for the same period
of 2017. Our high quality, low cost products continued to generate higher sales and further penetrated into the commercial vehicle
market, which impacted the sales of the commercial vehicle brake systems.
The sales from passenger vehicle brake systems
increased by $2.7 million or 20.5%, to $16.1 million for the first fiscal quarter of 2018, compared to $13.4 million for the same
period of 2017. The increase was mainly due to the increase of passenger vehicle market in the first fiscal quarter of 2018.
A breakdown of net sales revenue for these
markets for the first fiscal quarter of the 2018 and 2017, respectively, is set forth below:
|
|
Three Months
|
|
|
Percent
|
|
|
Three Months
|
|
|
Percent
|
|
|
|
|
|
|
Ended
|
|
|
of
|
|
|
Ended
|
|
|
of
|
|
|
Percentage
|
|
|
|
March 31, 2018
|
|
|
Total Sales
|
|
|
March 31, 2017
|
|
|
Total Sales
|
|
|
Change
|
|
|
|
(U.S. dollars in millions)
|
|
|
|
|
China OEM market
|
|
$
|
51.8
|
|
|
|
48.1
|
%
|
|
$
|
38.7
|
|
|
|
51.9
|
%
|
|
|
33.5
|
%
|
China aftermarket
|
|
$
|
38.0
|
|
|
|
35.3
|
%
|
|
$
|
22.0
|
|
|
|
29.4
|
%
|
|
|
73.2
|
%
|
International market
|
|
$
|
17.9
|
|
|
|
16.6
|
%
|
|
$
|
14.0
|
|
|
|
18.7
|
%
|
|
|
27.9
|
%
|
Total
|
|
$
|
107.7
|
|
|
|
100.0
|
%
|
|
$
|
74.7
|
|
|
|
100.0
|
%
|
|
|
44.1
|
%
|
Considering the increase of the production
and sales of the trucks for the first fiscal quarter of 2018 in the automobile industry, our sales to the Chinese OEM Market increased
by 33.5% from the first fiscal quarter of 2017, to $51.8 million for the first fiscal quarter of 2018.
Our sales to the China aftermarket increased
by $16.0 million or 73.2%, to $38.0 million for the first fiscal quarter of 2018, compared to $22.0 million for the same period
of 2017. The increased new vehicle sales in China and the expiration of OEM warranties helped to drive our aftermarket business.
Sales of our new model products, applicable to both the Chinese OEM Market and Chinese Aftermarket, also increased during the three
months ended March 31, 2018. We will continue with our strategies to further optimize our sales network and to help further penetrate
into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor
our expansion in the bus aftermarket.
Our export sales increased by $3.9 million
or 27.9%, to $17.9 million for the first fiscal quarter of 2018, as compared to $14.0 million for the same period of 2017.
The increase in export sales was mainly due to our broadened customer base.
Cost of Sales and Gross Profit
Cost of sales for the three months ended
March 31, 2018 were $77.5 million, an increase of $23.8 million or 44.4%, from $53.7 million for the same period last year. Our
gross profit increased by 43.5% from $21.0 million for the first fiscal quarter of 2017 to $30.2 million for the first fiscal quarter
of 2018.
Gross margin changed to 28.0% for the three
months ended March 31, 2018 from 28.2% for the three months ended March 31, 2017. The change was mainly due to change of sales
of larger quantity and varieties of products in the first fiscal quarter of 2018. We intend to focus in 2018 on increasing production
efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our
gross profit margins.
Cost of sales from commercial vehicle brake
systems for the three months ended March 31, 2018 was $65.8 million, an increase of $21.8 million or 49.3% from $44.1 million for
the same period last year. The gross profit from commercial vehicle brake systems increased by 49.1% from $17.3 million for the
first fiscal quarter of 2017 to $25.8 million for the first fiscal quarter of 2018. Gross margin from commercial vehicle brake
systems decreased to 28.1% from 28.2% for the three months ended March 31, 2018 compared with 2017. To strengthen our competitiveness
and increase our market share, we continued the price promotion in the aftermarket and international market for the three months
ended March 31, 2018. The increased labor cost also decreased our gross margin for the three months ended March 31, 2018.
Cost of sales from passenger vehicle brake
systems for the three months ended March 31, 2018 was $11.7 million, an increase of $2.1 million or 21.6% from $9.6 million for
the same period last year. The gross profit from passenger vehicle brake systems increased by17.7% from $3.8 million for the first
fiscal quarter of 2017 to $4.8 million for the first fiscal quarter of 2018. Gross margin from passenger vehicle brake systems
changed to 27.5% from 28.2% for the three months ended March 31, 2018 compared with 2017. The change was mainly due to the stronger
price promotion in the first fiscal quarter of 2018.
Selling and Distribution Expenses
Selling and distribution expenses were $10.0
million for the three months ended March 31, 2018, as compared to $5.6 million for the same period of 2017, an increase of $4.4
million or 79.0%.
The increase was mainly due to increased
freight expense, packaging expense and labor costs. As the percentage of sales revenue, selling expenses percentage increased
to 9.3% for the three months ended March 31, 2018, as compared to 7.6% for the same period of 2017.
General and Administrative Expenses
General and administrative expenses were
$4.7 million for the three months ended March 31, 2018, as compared to $4.0 million for the same period of 2017, an increase of
$0.7 million or 18.0%. The increase was mainly due to the increase in allowance for doubtful accounts during this quarter. As
a percentage of sales revenue, general and administrative expenses decreased to 4.4% for the three months ended March
31, 2018, as compared to 5.5% for the same period of 2017.
Research and Development Expenses
Research and development expenses include
payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development
expenses also include first-party development costs. For the three months ended March 31, 2018, research and development expenses
were $3.6 million, as compared to $2.1 million for the same period of 2017, an increase of $1.5 million.
Other Operating Income
Other operating income was $2.2 million for
the three months ended March 31, 2018, as compared to $0.3 million for the three months ended March 31, 2017, an increase of $1.9
million. The increase was mainly due to an increase in sales of raw material scraps for the three months ended March 31, 2018.
Depreciation and Amortization
Depreciation and amortization expense increased
to $2.8 million for the three months ended March 31, 2018, as compared to that of $2.0 million for the same period of 2017, an
increase of $0.8 million. The increase was mainly due to some new addition in PPE and the purchase of land in the third quarter
of 2017.
Interest Income
Interest income for the three months ended
March 31, 2018 increased by $1.5 million to $1.5 million from $0.01 million for the same period of 2017, mainly due
to increased interest income from advances to related parties during the period.
Interest Expenses
The interest expenses for the three months
ended March 31, 2018 increased by $2.9 million to $3.4 million from $0.5 million for the same period of 2017, mainly due
to increased amount of average loans outstanding during the period.
Income Tax
In December 2017, the Tax Cuts and Jobs
Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected
the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and
a recognition of the 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 upon enactment of the 2017 Act. The Company is
required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting
Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Cuts and Jobs Act, which allows the
Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. The Company
is proactively evaluating the impact of the Tax Act, however, as of the filing date, the Company was unable to determine a reasonable
provision of the tax effects of the Tax Act. Therefore, no provisional amounts have been recorded on the consolidated financial
statements as of December 31, 2017 and for the three months ended March 31, 2018 in accordance with SAB 118.
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 provides for a reduced tax rate for years 2009 through 2011. In December 2012, the Joint Venture passed the re-assessment
of the High-Tech Enterprise certificate by the government, according to the relevant PRC income tax laws. Accordingly, it continued
to be taxed at a 15% rate in 2012 through 2014. The Company used a tax rate of 25% for the first three quarters of 2015. In
the fourth quarter of 2015, the Joint Venture passed the re-assessment by the government, based on PRC income tax laws. Accordingly,
it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017. The Company is required to re-apply for the certificate in
2018. The current income tax rate used by the Company for the three months ended March 31, 2018 is 15%.
Income tax expenses
of $1.6 million and $1.3 million were recorded for the fiscal quarter ended March 31, 2018 and 2017, respectively.
Net Income Attributable to Non-Controlling Interest in Subsidiaries
Non-controlling interest in subsidiaries
represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our joint venture
partners. On December 15, 2015, the Company disposed of its entire 60% equity interest in SIH. Net income attributable to non-controlling
interest in subsidiaries amounted to $0.9 million and $0.8 million for the first fiscal quarter ended March 31, 2018 and 2017,
respectively.
Net Income Attributable to Stockholders
The net income attributable to stockholders
for the fiscal quarter ended March 31, 2018 increased by $1.4 million, to $8.3 million from $6.9 million for the fiscal quarter
ended March 31, 2017 due to the increased sales and change in gross profit. Earnings per share (“EPS”), both basic
and diluted, for the fiscal quarter ended March 31, 2018 and 2017, were $0.43 and $0.36.
Liquidity and Capital Resources
CASH FLOWS
As of March 31, 2018, the Company had cash,
cash equivalents, and restricted cash of $69.3 million, as compared to cash, cash equivalents, and restricted cash of $4.6 million
as of December 31, 2017. The Company had working capital of $102.4 million at March 31, 2018, as compared to working capital of
$111.4 million at December 31, 2017, reflecting current ratios of 1.2:1 and 1.3:1, respectively.
OPERATING - Net cash provided by operating
activities was $36.3 million for the three months ended March 31, 2018 compared with $3.5 million of net cash used in operating
activities in the same period of 2017, an increase of $39.8 million, primarily due to the increased cash inflow resulted by
changes in bank acceptance notes receivable and accounts payable and bank acceptance notes to vendors.
INVESTING - During the three months ended
March 31, 2018, the Company expended net cash of $81.6 million in investing activities, mainly for acquisition of new equipment
and land use rights to support the growth of the business and advances to related parties. For the three months ended March 31,
2017, the Company expended net cash of $14.3 million in investing activities.
FINANCING - During the three months ended
March 31, 2018, the cash provided by financing activities was $108.5 million. The cash provided by financing activities was $21.2
million for the three months ended March 31, 2017. The increase was due to the increased short term bank loans obtained from local
commercial banks and advances from related parties.
The Company has taken a number of steps to
improve the management of our cash flow. We place more emphasis on collection of accounts receivable from our customers, and we
maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated
from operations and our bank lines of credit will be sufficient to finance our working capital requirements in the foreseeable
future.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2018,
we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could
be considered off-balance sheet arrangements.
According to the laws of China, the government
owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. In 2007, the Company purchased the land use rights from the Ruili Group, a related party. The Company
also purchased the buildings on the land in the same transaction. The purchase price of land use right and building amounted to
approximately $20 million. On May 5, 2016, the Company entered into a Purchase Agreement with the Ruili Group through Ruian, pursuant
to which the Company agreed to exchange the Dongshan Facility plus RMB501 million (approximately $76.5 million) in cash for Development
Zone Facility. The value of the Dongshan Facility and Development Zone Facility was appraised to be RMB 125 million (approximately
$19.1 million) and RMB 626 million (approximately $95.6 million), respectively. As of March 31, 2018, total amount of RMB481 million
(approximately $73.5 million) was paid to the Ruili Group in installments, and the remaining RMB20 million (approximately $3.0
million) 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.
Even if the Company
is unable to timely resolve obtain the land use right certificate for the land and related building, the Company believes that
there will be no potential adverse implication on the Company for the following reasons.
1.
The Company acquired the land use rights in a transaction between the Company and the Ruili Group, a related party. The Ruili Group,
as the original land use right owner, has granted the land use right to the Company by contract which is supported by valid consideration.
2.
No third party would oppose the Company’s use of the land, because no third party has any interest in the land use right
or property ownership right, other than the Ruili Group and the government.
a)
The Ruili Group promised that the Company has the right to use the land and related building, even before the land use certificate
is transferred.
b)
According to the laws of China, the government owns all the land and the buildings attached to the land in China. Once the land
use right is granted to Ruili Group, Ruili Group has the right to assign its land use rights to any third parties, including the
Company, without interference from the government. Therefore, it is unlikely that the government will oppose the Company’s
right to use the land and related building.
c) The
Company has reserved tax payables in the amount of RMB 19,590,000 (approximately US$2,891,580) on its consolidated balance sheets
under the line item “accrued expenses” as if no reduction or exemption of tax is approved. This amount was determined
based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered as the
most probable amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay if the
negotiation with the local government ultimately is not successful.
CONTRACTUAL OBLIGATIONS
As of March 31, 2018,
we had no material changes outside the ordinary course of business in our contractual obligations.