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, 2015 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, 2015. 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, 2015, 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 period. Management makes its best estimate
of the outcome for these items based on historical trends and other information available when the financial statements are prepared.
Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period
when new information becomes available to management. Actual results could differ from those estimates.
|
c.
|
FAIR VALUE OF FINANCIAL INSTRUMENTS
|
For certain of the Company’s
financial instruments, including cash and cash equivalents, short term investments, trade receivables and payables, prepaid expenses,
deposits and other current assets, short-term bank borrowings, and other payables and accruals, the carrying amounts approximate
fair values due to their short maturities.
Transactions involving
related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, freemarket
dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party
transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations
can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their
related party nature.
|
d.
|
SHORT TERM INVESTMENTS
|
The Company’s
short term investments include term deposits with an original maturity from three months to one year with financial
institutions. Term deposits in the amount of $21,667,802 (RMB 140,000,000) were pledged for the credit line granted to Ruili
Group, a related party, by Bank of Ningbo for the period from March 24, 2015 to March 24, 2016. The pledge term ends two
years after the main borrowing contract expires. Term deposit in the amount of $6,190,800 (RMB 40,000,000) was pledged as
security interest for the bank acceptance notes payable issued to Hangzhou Xiangwei Wuzi Co., Ltd, a related party controlled
by the relative of Ms. Shu Ping Chi, by Zhejiang Chouzhou Commercial Bank for the period from December 17, 2015 to June
17, 2016.
Restricted cash mainly
represents bank deposits used to pledge the bank acceptance notes. The Company entered into credit agreements with commercial banks
in China (“endorsing banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits,
the Company can issue bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance notes,
the Company is generally required to make initial deposits or pledge note receivables to the endorsing banks in amounts of certain
percentage of the face amount of the bank acceptance notes to be issued by the Company. The cash in such accounts is restricted
for use over the terms of the bank acceptance notes, which are normally three to six months.
|
f.
|
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.
Notes receivable generally
due within six months are issued by some customers to pay certain outstanding receivable balances to the Company with specific
payment terms and definitive due dates. Notes receivable do not bear interest. As of March 31, 2016 and December 31, 2015, notes
receivables in the amount of $21,487,155 and $13,647,583, respectively, were pledged to endorsing banks to issue bank acceptance
notes. The banks charge discount fees if the Company chooses to discount the notes receivables for cash before the maturity of
the notes and such discount fees are included in interest expenses.
Revenue from the sale of
goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided
by several factors, including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales
price is fixed and determinable, and collection is probable. Revenue consists of the invoice value for the sale of goods and services
net of value-added tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown
in the income statement is the net sales.
Cost of sales consists
primarily of materials costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs,
employee compensation, depreciation and related costs, which are directly attributable to production. Write-down of inventories
to lower of cost or market is also recorded in cost of sales, if any.
|
j.
|
FOREIGN CURRENCY TRANSLATION
|
The Company maintains its
books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company
has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United
States dollars (“US$”). All assets and liabilities are translated at the current rate. The shareholders’ equity
accounts are translated at the appropriate historical rate. Revenue and expenses are translated at the weighted average rates in
effect on the transaction dates.
Translation adjustments
resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the
functional currency are included in the results of operations as incurred.
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 C – RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In March 2016, the FASB
issued ASU 2016-08, “
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting
Revenue Gross versus Net)”
. 'The amendments in this ASU are intended to improve the operability and understandability
of the implementation guidance on principal versus agent considerations by amending certain existing illustrative examples and
adding additional illustrative examples to assist in the application of the guidance. The effective date and transition of these
amendments is the same as the effective date and transition of ASU 2014-09,
“Revenue from Contracts with Customers (Topic
606)”.
Public entities should apply the amendments in ASU 2014-09 for annual reporting periods beginning after December
15, 2017, including interim reporting periods therein. The Company is currently in the process of evaluating the impact of the
adoption on its consolidated financial statements.
In April 2016, the FASB
issued ASU 2016- 10, “
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
”.
The amendments add further guidance on identifying performance obligations and also to improve the operability and understandability
of the licensing implementation guidance. The amendments do not change the core principle of the guidance in Topic 606. Public
entities should apply the amendments for annual reporting periods beginning after December 15, 2017, including interim reporting
periods therein. Early application for public entities is permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. The Company is currently in the process of evaluating
the impact of the adoption on its consolidated financial statements.
NOTE D - 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 three other related parties, Guangzhou Kormee Automotive Electronic Control Co.,
Ltd. (“Guangzhou Kormee”), Ruian Kormee Vehicle Brake Co., Ltd. (“Ruian Kormee”) and Shanghai Dachao Electric
Technology Co., Ltd. (“Shanghai Dachao”). Guangzhou Kormee is controlled by the Ruili Group and Ruian Kormee is the
wholly-owned subsidiary of Guangzhou Kormee. Ruili Group owns 49% equity interest in Shanghai Dachao. The Company sells certain
automotive products to the Ruili Group. The Company also sells scrap materials and parts to Guangzhou Kormee and Ruian Kormee.
In addition, during the three months ended March 31, 2016, the Company advanced $18,247,384 to Ruili Group for working capital
purpose. The Company collects dormitory utility fees from employees and pays to Ruili Group periodically which is recorded as other
payables. As of March 31, 2016, the payable balance was $97,404.
The following related
party transactions occurred for the three months ended March 31, 2016 and 2015:
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
$
|
392,924
|
|
|
$
|
286,415
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
|
130,513
|
|
|
|
74,603
|
|
Ruili Group Co., Ltd.
|
|
|
865,798
|
|
|
|
810,864
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
33,744
|
|
|
|
-
|
|
Total Purchases
|
|
$
|
1,422,979
|
|
|
$
|
1,171,882
|
|
|
|
|
|
|
|
|
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
$
|
617,846
|
|
|
$
|
94,896
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
|
573
|
|
|
|
17,315
|
|
Ruili Group Co., Ltd.
|
|
|
2,580,846
|
|
|
|
1,011,924
|
|
Total Sales
|
|
$
|
3,199,265
|
|
|
$
|
1,124,135
|
|
During the three months ended March 31,
2016 and 2015, for the sales mentioned above, the sales to Guangzhou Kormee and Ruian Kormee were sales of scrap materials and
were included in other operating income in the consolidated statements of income and comprehensive income. The sales to Ruili Group
were included in sales in the consolidated statements of income and comprehensive income.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
PREPAYMENTS TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
1,451,651
|
|
|
$
|
—
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
|
302,769
|
|
|
|
—
|
|
Total
|
|
$
|
1,754,420
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
DUE FROM RELATED PARTIES
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
18,247,384
|
|
|
$
|
—
|
|
Total
|
|
$
|
18,247,384
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
$
|
488,735
|
|
|
$
|
340,175
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
|
—
|
|
|
|
75,968
|
|
Ruili Group Co., Ltd.
|
|
|
—
|
|
|
|
697,643
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
7,411
|
|
|
|
19,751
|
|
Total
|
|
$
|
496,146
|
|
|
$
|
1,133,537
|
|
|
|
|
|
|
|
|
|
|
OTHER PAYABLES TO RELATED PARTIES
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
97,404
|
|
|
$
|
—
|
|
Total
|
|
$
|
97,404
|
|
|
$
|
—
|
|
The
Company entered into several lease agreements with related parties, see Note M for more details.
In addition, the
Company provided a guarantee for credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 168,000,000
(approximately $25,871,627) for the period from March 24, 2015 to March 24, 2016. The pledge term ends two years after the
main borrowing contract expires. As of March 31, 2016, the term deposits were still under pledge. As of March 31, 2016, the
Company pledged a 6-month fixed term deposit of RMB 54,000,000 (approximately $8,315,880) with a maturity date of May 19,
2016, and a 6-month fixed term deposit of RMB 86,000,000 (approximately $13,243,809) with a maturity date of May 18, 2016.
The balance of these fixed term deposits was included in short term investments.
The Company provided a
guarantee for the credit line granted to Ruili Group by China Everbright Bank in the amount of RMB 60,000,000 (approximately $9,239,867)
for a period from February 26, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line.
The Company provided a
guarantee for the credit line granted to Ruili Group by China Guangfa Bank in the amount of RMB 54,000,000 (approximately $8,315,880)
for a period from September 22, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit
line.
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 Company pledged its
term deposit of RMB 40,000,000 (approximately $6,159,911) for the bank acceptance notes issued to Hangzhou Xiangwei Wuzi Co., Ltd,
a related party controlled by the relative of Ms. Shu Ping Chi, by Zhejiang Chouzhou Commercial Bank for the period from December
17, 2015 to June 17, 2016.
The Company provided a
guarantee for the credit line granted to Ruili Group by the Bank of Ningbo in the amount of RMB 108,000,000 (approximately $17,182,404)
for the period from August 22, 2014 to August 21, 2015. The pledge term ends two
years after the main borrowing contract expires.
NOTE E - ACCOUNTS RECEIVABLE
Accounts receivable, net
consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accounts receivable
|
|
$
|
87,435,754
|
|
|
$
|
83,898,730
|
|
Less: allowance for doubtful accounts
|
|
|
(15,724,494
|
)
|
|
|
(12,075,402
|
)
|
Accounts receivable, net
|
|
$
|
71,711,260
|
|
|
$
|
71,823,328
|
|
No customer individually
accounted for more than 10% of our revenues or accounts receivable for the quarters ended March 31, 2016 and 2015. The changes
in the allowance for doubtful accounts at March 31, 2016 and December 31, 2015 are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning balance
|
|
$
|
12,075,402
|
|
|
$
|
6,475,587
|
|
Add: Increase to allowance
|
|
|
3,649,092
|
|
|
|
5,599,815
|
|
Less: Accounts written off
|
|
|
—
|
|
|
|
—
|
|
Ending balance
|
|
$
|
15,724,494
|
|
|
$
|
12,075,402
|
|
NOTE F - INVENTORIES
At March 31, 2016 and December 31, 2015,
inventories consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw Materials
|
|
$
|
9,075,542
|
|
|
$
|
13,038,945
|
|
Work in process
|
|
|
26,068,514
|
|
|
|
28,786,709
|
|
Finished Goods
|
|
|
33,010,762
|
|
|
|
31,836,206
|
|
Less: Write-down of inventories
|
|
|
—
|
|
|
|
—
|
|
Total Inventory
|
|
$
|
68,154,818
|
|
|
$
|
73,661,860
|
|
NOTE G - PROPERTY, PLANT AND EQUIPMENT,
NET
Property, plant and equipment consisted of
the following at March 31, 2016 and December 31, 2015:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Machinery
|
|
$
|
53,262,624
|
|
|
$
|
50,680,639
|
|
Molds
|
|
|
1,350,468
|
|
|
|
1,343,730
|
|
Office equipment
|
|
|
2,099,591
|
|
|
|
2,077,411
|
|
Vehicles
|
|
|
2,089,777
|
|
|
|
1,983,028
|
|
Buildings
|
|
|
7,795,815
|
|
|
|
7,756,917
|
|
Machinery held under capital lease
|
|
|
27,624,655
|
|
|
|
29,012,601
|
|
Leasehold improvements
|
|
|
492,335
|
|
|
|
489,878
|
|
Sub-Total
|
|
|
94,715,265
|
|
|
|
93,344,204
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(57,661,549
|
)
|
|
|
(55,782,299
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
37,053,716
|
|
|
$
|
37,561,905
|
|
Depreciation expense charged
to operations was $1,638,817 and $1,839,283 for the three months ended March 31, 2016 and 2015, respectively.
NOTE H - DEFERRED TAX ASSETS
Deferred tax assets consisted
of the following as of March 31, 2016 and December 31, 2015:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,407,989
|
|
|
$
|
1,860,379
|
|
Revenue (net of cost)
|
|
|
62,060
|
|
|
|
45,815
|
|
Unpaid accrued expenses
|
|
|
145,979
|
|
|
|
180,174
|
|
Warranty
|
|
|
890,786
|
|
|
|
875,751
|
|
Deferred tax assets
|
|
|
3,506,814
|
|
|
|
2,962,119
|
|
Valuation allowance
|
|
|
|
|
|
|
―
|
|
Net deferred tax assets - current
|
|
$
|
3,506,814
|
|
|
$
|
2,962,119
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities - current
|
|
|
|
|
|
|
|
|
Others
|
|
$
|
―
|
|
|
$
|
52,390
|
|
Deferred tax liabilities - current
|
|
$
|
―
|
|
|
$
|
52,390
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets - current
|
|
$
|
3,506,814
|
|
|
$
|
2,909,729
|
|
Deferred taxation is calculated
under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable
probability to realize in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as
the Company had no 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 I - SHORT-TERM BANK LOANS
Bank loans represented
the following as of March 31, 2016 and December 31, 2015:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
$
|
17,447,655
|
|
|
$
|
23,367,207
|
|
The Company obtained those
short term loans from Bank of China, Bank of Ningbo, China Construction Bank and Agricultural Bank of China, respectively, to finance
general working capital as well as new equipment acquisition. Interest rate for the loans outstanding during the three months ended
March 31, 2016 ranged from 1.33% to 5.35% per annum. The maturity dates of the loans existing as of March 31, 2016 ranged from
April 12, 2016 to January 21, 2017. As of March 31, 2016 and December 31, 2015, the Company's accounts receivables of $7,681,558
and $15,836,158, respectively, were pledged as collateral under loan arrangements. The interest expense for short-term bank loans
were $75,698 and $27,291 for three months ended March 31, 2016 and 2015, respectively.
As of March 31, 2016, corporate or personal guarantees provided for those bank loans were as follows:
|
$
|
1,547,700
|
|
|
Pledged and guaranteed by Ruili Group, a related party, with its land and buildings.
|
$
|
12,884,911
|
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
$
|
3,015,044
|
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders and Jia Rui Zhang, the daughter of Mr. Xiao Ping Zhang and Ms. Shu Ping Chi.
|
NOTE J – CAPITAL LEASE OBLIGATIONS
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Total capital lease obligations
|
|
$
|
2,653,200
|
|
|
$
|
3,519,949
|
|
Less: current portion
|
|
|
(2,653,200
|
)
|
|
|
(3,519,949
|
)
|
Non-current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
On September 13, 2011,
the Company entered into a leasing agreement with International Far Eastern Leasing Co., Ltd., a subsidiary of China Sinochem Corporation,
for a term of 60 months and an interest rate of 7.95% per annum, payable monthly in arrears. To reduce the financing expense, the
Company entered into a new leasing agreement with International Far Eastern Leasing Co., Ltd. in December 2012 and terminated the
original agreement. The lease inception date of the new lease agreement is January 4, 2013 and the termination date is January
4, 2017. The duration of the new agreement is 48 months with an interest rate of 6.4% per annum and is secured with the Company’s
equipment in the original cost of $28,396,853. The capital lease obligation obtained by the Company is RMB91,428,571 (approximately
$14,545,950) and the Company is required to maintain a security deposit of RMB 11,428,571 (approximately $1,818,244). The Company
prepaid all interests of RMB 10,705,357 (approximately $1,703,212) after the discount and is obligated for the payment of RMB 1,904,761.9
(approximately $303,041) monthly. The prepaid interest for capital lease obligation is amortized over the life of capital lease
agreement using the effective interest method.
NOTE K - INCOME TAXES
The Joint Venture is
registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the
taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
In 2009, the 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 current income tax rate
used by the Company for the three months ended March 31, 2016 is 15%.
The reconciliation of the
effective income tax rate of Ruian to the statutory income tax rate in the PRC for the three months ended March 31, 2016 and 2015
is as follows:
|
|
Three Months Ended
March 31, 2016
|
|
|
Three Months Ended
March 31, 2015
|
|
US statutory income tax rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Valuation allowance recognized with respect to the loss in the US company
|
|
|
-35.00
|
%
|
|
|
-35.00
|
%
|
HK statutory income tax rate
|
|
|
-
|
|
|
|
16.50
|
%
|
Valuation allowance recognized with respect to the loss in the HK company
|
|
|
-
|
|
|
|
-16.50
|
%
|
China statutory income tax rate
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
Effects of income tax exemptions and reliefs
|
|
|
-10.00
|
%
|
|
|
-
|
|
Effects of additional deduction allowed for R&D expenses
|
|
|
-29.48
|
%
|
|
|
-5.10
|
%
|
Expenses not deductible for tax purpose
|
|
|
6.63
|
%
|
|
|
3.86
|
%
|
Effective tax rate
|
|
|
-7.85
|
%
|
|
|
23.76
|
%
|
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. The tax authority may examine the tax returns of the Company three years after the
year ended December 31, 2015. In the three months ended March 31, 2016 and 2015, there were no penalties and interest, which generally
are recorded in the general and administrative expenses or in the tax expenses. The provisions (benefit) for income taxes for the
three months ended March 31, 2016 and 2015, respectively, are summarized as follows:
|
|
Three Months Ended
March 31, 2016
|
|
|
Three Months Ended
March 31, 2015
|
|
Current
|
|
$
|
561,978
|
|
|
$
|
1,161,153
|
|
Deferred
|
|
|
(596,802
|
)
|
|
|
(162,875
|
)
|
Total
|
|
$
|
(34,824
|
)
|
|
$
|
998,278
|
|
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 March 31,
2016 and December 31, 2015.
NOTE L – NON-CONTROLLING INTEREST
IN SUBSIDIAIRES
Non-controlling interest
in subsidiaries represents a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian, and a 40% non-controlling
interest, owned by the Company’s Joint Venture Partners, in SIH. On December 15, 2015, the Company disposed of its entire
60% equity interest in SIH. The non-controlling interest in SIH was fully removed. The results of SIH disposed of are included
in the consolidated statements of income up to the effective date of disposal. Net income attributable to non-controlling interests
in subsidiaries amounted to $47,849 and $152,243 for the three months ended March 31, 2016 and 2015, respectively.
|
|
March 31, 2016
|
|
|
March 31, 2015
|
|
10% non-controlling interest in Ruian
|
|
$
|
47,849
|
|
|
$
|
350,927
|
|
40% non-controlling interest in SIH
|
|
|
—
|
|
|
|
(198,684
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,849
|
|
|
$
|
152,243
|
|
NOTE M – OPERATING LEASES WITH RELATED
PARTIES
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 RMB2,100,000
(approximately $333,688).
In May 2009, Ruian
entered into a lease agreement with Ruili Group Co., Ltd. for the lease of a manufacturing plant. The lease term is from September
2009 to May 2017. In August 2010, a new lease agreement was signed between Ruian and Ruili Group Co., Ltd., under which Ruian leased
89,229 square meters manufacturing plant for its new purchased passenger vehicles brake systems business. The lease term is from
September 2009 to August 2020. This lease was amended in 2013. The amended lease term is from January 1, 2013 to December 31, 2017.
The annual lease expense is RMB8,137,680 (approximately $1,293,070). The lease will be terminated upon the completion of the purchase
of the leased properties incurred in the period subsequent to March 31, 2016. See Note Q for details.
The lease expenses were
$422,611 and $417,483 for the three months ended March 31, 2016 and 2015, respectively.
NOTE N - WARRANTY CLAIMS
Warranty claims were $495,385
and $485,334 for the three months ended March 31, 2016 and 2015, respectively. Warranty claims are classified as accrued expenses
on the balance sheet. The movement of accrued warranty expenses for the three months ended March 31, 2016 was as follows:
Beginning balance at January 1, 2016
|
|
$
|
5,838,343
|
|
Aggregate increase for new warranties issued during current period
|
|
|
495,385
|
|
Aggregate reduction for payments made
|
|
|
(446,510
|
)
|
Ending balance at March 31, 2016
|
|
$
|
5,887,218
|
|
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. Before the disposal of SIH, the Company also had long-lived assets located in Hong Kong.
The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
44,080,072
|
|
|
$
|
43,253,546
|
|
Passenger vehicles brake systems
|
|
|
9,756,656
|
|
|
|
8,944,420
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
53,836,728
|
|
|
$
|
52,197,966
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles brake systems
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
—
|
|
|
$
|
—
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
11,960,732
|
|
|
$
|
11,378,176
|
|
Passenger vehicles brake systems
|
|
|
2,478,347
|
|
|
|
2,352,898
|
|
Gross profit
|
|
$
|
14,439,079
|
|
|
$
|
13,731,074
|
|
Selling and distribution expenses
|
|
|
5,562,432
|
|
|
|
5,350,998
|
|
General and administrative expenses
|
|
|
6,929,858
|
|
|
|
2,719,372
|
|
Research and development expenses
|
|
|
1,743,687
|
|
|
|
1,712,621
|
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
914,205
|
|
|
|
585,717
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
1,117,307
|
|
|
|
4,533,800
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
88,102
|
|
|
|
110,955
|
|
Government grants
|
|
|
4,757
|
|
|
|
25,980
|
|
Other income
|
|
|
45,589
|
|
|
|
67,411
|
|
Interest expenses
|
|
|
(174,460
|
)
|
|
|
(166,656
|
)
|
Other expenses
|
|
|
(637,629
|
)
|
|
|
(370,688
|
)
|
Income before income tax expense
|
|
$
|
443,666
|
|
|
$
|
4,200,802
|
|
|
|
|
|
|
|
|
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
1,021,063
|
|
|
$
|
712,065
|
|
Passenger vehicles brake systems
|
|
|
225,961
|
|
|
|
147,248
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,247,024
|
|
|
$
|
859,313
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
1,419,696
|
|
|
$
|
1,605,137
|
|
Passenger vehicles brake systems
|
|
|
314,178
|
|
|
|
331,927
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,733,874
|
|
|
$
|
1,937,064
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
259,738,759
|
|
|
$
|
261,924,719
|
|
Passenger vehicles brake systems
|
|
|
57,480,048
|
|
|
|
58,629,337
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
317,218,807
|
|
|
$
|
320,554,056
|
|
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
42,620,352
|
|
|
$
|
42,961,388
|
|
Passenger vehicles brake systems
|
|
|
9,431,861
|
|
|
|
9,616,495
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
52,052,213
|
|
|
$
|
52,577,883
|
|
NOTE P – CONTINGENCIES
|
(1)
|
According to the laws of China, the Chinese government owns all the land in China. Companies and individuals
are authorized to possess and use the land only through land use rights granted by the Chinese government. The Company purchased
the land use rights and all buildings on the land located at No. 1169 Yumeng Road, Rui’an Economic Development Zone, Rui’an
City, Zhejiang Province, the People’s Republic of China (the “Dongshan Facility”) from Ruili Group for approximately
$20 million on September 28, 2007. The Company has not yet obtained the land use right certificate nor the property ownership certificate
of the building. There is no new development of negotiation regarding taxes related to the land use rights. Although the Company
plans to conclude negotiations with the local government and to obtain the land use right certificate as soon as practicable, the
Company is unable to predict when the negotiations will be resolved or concluded. There is no assurance that the Company can obtain
the land use right certificate. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount
was determined based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered
as the most probable amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay
if the negotiation with the local government ultimately is not successful. Even if it is unable to resolve the tax issues and obtain
the land use right certificate for the land and related building, there will be no potential adverse implication on the Company.
Also see Note Q.
|
|
(2)
|
The information of lease commitments is provided in Note J and Note M.
|
|
(3)
|
The information of guarantees and assets pledged is provided in Note D.
|
Note Q – SUBSEQUENT EVENTS
On May 5, 2016, the Company
entered into a Purchase Agreement (the “Purchase Agreement”) with the Ruili Group through Ruian, a related party under
common control, pursuant to which the Company agreed to purchase the land use rights and factory facilities located at No. 2666
Kaifaqu Avenue, Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, the People’s Republic of China
(the “Development Zone Facility”). In exchange for the Development Zone Facility, the Company will transfer to the
Ruili Group the land use rights and factory facilities of the Dongshan Facility that Ruian currently owns, plus RMB501,000,000
(approximately $77,540,000) in cash. The total floor areas of the Dongshan Facility and the Development Zone Facility are 58,714
square meters and 157,619 square meters, respectively.
The cash consideration
in the amount of RMB481,000,000 (approximately $74,444,000) will be paid to the Ruili Group before June 30, 2016, and the remaining
RMB20,000,000 (approximately $3,096,000) will be paid within 10 days of completion of the required procedures for transferring
the title of the facilities and the land use right as specified in the Purchase Agreement.
The Company is currently
leasing 89,229 square meters of the Development Zone Facility from Ruili Group for its brake systems business, which lease will
expire on December 31, 2017. This lease will be terminated upon the completion of the purchase.
The transaction was approved
by a committee of independent directors of the Company based on the valuation reports of a third party real estate appraisal firm.