UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
☒ QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2019
☐ TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
For
the transition period from __________ to __________
Commission
file number 000-11991
SORL
AUTO PARTS, INC.
(Exact
name of registrant as specified in its charter)
DELAWARE
|
|
30-0091294
|
(State
or other jurisdiction of
incorporation or organization)
|
|
(IRS
Employer
Identification No.)
|
No.
2666 Kaifaqu Avenue
Ruian
Economic Development District
Ruian
City, Zhejiang Province
People’s
Republic of China
(Address
of principal executive offices)
86-577-6581-7720
(Registrant’s
telephone number)
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. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
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 the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting
company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large Accelerated filer:
|
☐
|
Accelerated filer:
|
☐
|
Non-accelerated filer:
|
☒
|
Smaller reporting company:
|
☒
|
Emerging growth company:
|
☐
|
|
|
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):
Yes ☐ No ☒
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
|
|
Trading
Symbol(s)
|
|
Name
of each exchange on which registered
|
|
|
|
|
|
APPLICABLE
ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer classes of common stock, as of the latest practicable date:
As
of November 14, 2019 there were 19,304,921 shares of Common Stock outstanding.
SORL
AUTO PARTS, INC.
FORM
10-Q
For
the Quarter ended September 30, 2019
INDEX
SORL
Auto Parts, Inc. and Subsidiaries
Consolidated
Balance Sheets
September
30, 2019 and December 31, 2018
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
US$
|
16,485,401
|
|
|
US$
|
73,588,229
|
|
Accounts receivable, net, including $310,143 and $261,889 from related parties as of September 30, 2019 and December 31, 2018, respectively
|
|
|
158,188,600
|
|
|
|
150,047,797
|
|
Bank acceptance notes from customers
|
|
|
65,007,965
|
|
|
|
62,052,225
|
|
Inventories, net
|
|
|
191,178,724
|
|
|
|
204,285,427
|
|
Prepayments, current, including $3,283,579 and $3,670,573 to related party at September 30, 2019 and December 31, 2018, respectively
|
|
|
16,258,454
|
|
|
|
7,776,591
|
|
Restricted cash, current
|
|
|
13,780,187
|
|
|
|
19,307,003
|
|
Advances to related party
|
|
|
24,433,792
|
|
|
|
79,739,417
|
|
Deposits on loan agreements, current
|
|
|
4,948,465
|
|
|
|
-
|
|
Other current assets, net
|
|
|
13,610,953
|
|
|
|
15,697,448
|
|
Total Current Assets
|
|
|
503,892,541
|
|
|
|
612,494,137
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
119,103,291
|
|
|
|
96,053,386
|
|
Land use rights, net
|
|
|
36,213,965
|
|
|
|
21,124,455
|
|
Intangible assets, net
|
|
|
-
|
|
|
|
220,232
|
|
Deposits on loan agreements, non-current
|
|
|
6,362,312
|
|
|
|
10,199,324
|
|
Prepayments, non-current
|
|
|
15,253,670
|
|
|
|
31,575,238
|
|
Other assets, non-current
|
|
|
1,463,985
|
|
|
|
563,542
|
|
Restricted cash, non-current
|
|
|
16,683,397
|
|
|
|
18,067,374
|
|
Deferred tax assets
|
|
|
3,578,925
|
|
|
|
4,073,838
|
|
Total Non-current Assets
|
|
|
198,659,545
|
|
|
|
181,877,389
|
|
Total Assets
|
|
US$
|
702,552,086
|
|
|
US$
|
794,371,526
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current Liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and bank acceptance notes to vendors, including $16,438,264 and $23,805,200 due to related parties at September 30, 2019 and December 31, 2018, respectively
|
|
US$
|
159,184,839
|
|
|
US$
|
236,433,718
|
|
Deposits received from customers
|
|
|
47,433,293
|
|
|
|
51,529,795
|
|
Short term bank loans
|
|
|
201,749,179
|
|
|
|
217,940,471
|
|
Current portion of long term loans, net of unamortized debt issuance costs
|
|
|
22,199,252
|
|
|
|
21,141,029
|
|
Income tax payable, current
|
|
|
3,132,430
|
|
|
|
3,421,486
|
|
Accrued expenses
|
|
|
23,085,329
|
|
|
|
24,045,902
|
|
Due to related party
|
|
|
8,083,574
|
|
|
|
5,959,752
|
|
Deferred income
|
|
|
745,200
|
|
|
|
1,453,282
|
|
Other current liabilities
|
|
|
4,041,457
|
|
|
|
3,288,344
|
|
Total Current Liabilities
|
|
|
469,654,553
|
|
|
|
565,213,779
|
|
|
|
|
|
|
|
|
|
|
Long term loans, less current portion and net of unamortized debt issuance costs
|
|
|
4,630,198
|
|
|
|
14,429,404
|
|
Operating lease liabilities, non-current
|
|
|
628,873
|
|
|
|
-
|
|
Income tax payable, non-current
|
|
|
8,377,468
|
|
|
|
9,259,307
|
|
Total Non-current Liabilities
|
|
|
13,636,539
|
|
|
|
23,688,711
|
|
Total Liabilities
|
|
|
483,291,092
|
|
|
|
588,902,490
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of September 30, 2019 and December 31, 2018
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of September 30, 2019 and
December 31, 2018
|
|
|
38,609
|
|
|
|
38,609
|
|
Additional paid-in capital
|
|
|
(28,582,654
|
)
|
|
|
(28,582,654
|
)
|
Reserves
|
|
|
21,902,103
|
|
|
|
20,007,007
|
|
Accumulated other comprehensive income
|
|
|
259,271
|
|
|
|
6,655,803
|
|
Retained earnings
|
|
|
195,433,836
|
|
|
|
178,535,378
|
|
Total SORL Auto Parts, Inc. Stockholders’ Equity
|
|
|
189,051,165
|
|
|
|
176,654,143
|
|
Noncontrolling Interest In Subsidiaries
|
|
|
30,209,829
|
|
|
|
28,814,893
|
|
Total Equity
|
|
|
219,260,994
|
|
|
|
205,469,036
|
|
Total Liabilities and Equity
|
|
US$
|
702,552,086
|
|
|
US$
|
794,371,526
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
SORL
Auto Parts, Inc. and Subsidiaries
Consolidated
Statements of Income (Loss) and Comprehensive Income (Loss)
For
the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)
|
|
Three months ended
September 30,
|
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Sales
|
|
US$
|
112,227,452
|
|
|
US$
|
108,584,331
|
|
|
US$
|
387,820,858
|
|
|
US$
|
344,815,965
|
|
Include: sales to related parties
|
|
|
6,859,689
|
|
|
|
9,333,959
|
|
|
|
25,478,367
|
|
|
|
22,997,540
|
|
Cost of sales
|
|
|
81,294,783
|
|
|
|
82,249,456
|
|
|
|
284,098,257
|
|
|
|
253,851,334
|
|
Gross profit
|
|
|
30,932,669
|
|
|
|
26,334,875
|
|
|
|
103,722,601
|
|
|
|
90,964,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution expenses
|
|
|
13,850,387
|
|
|
|
13,160,875
|
|
|
|
43,198,784
|
|
|
|
37,154,745
|
|
General and administrative expenses
|
|
|
8,207,550
|
|
|
|
5,051,684
|
|
|
|
24,803,869
|
|
|
|
17,519,873
|
|
Research and development expenses
|
|
|
5,001,354
|
|
|
|
4,478,298
|
|
|
|
16,934,141
|
|
|
|
13,400,656
|
|
Total operating expenses
|
|
|
27,059,291
|
|
|
|
22,690,857
|
|
|
|
84,936,794
|
|
|
|
68,075,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
2,840,617
|
|
|
|
2,959,269
|
|
|
|
7,798,787
|
|
|
|
7,535,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,713,995
|
|
|
|
6,603,287
|
|
|
|
26,584,594
|
|
|
|
30,425,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
966,855
|
|
|
|
547,455
|
|
|
|
4,183,471
|
|
|
|
2,847,299
|
|
Government grants
|
|
|
70,785
|
|
|
|
2,239,250
|
|
|
|
3,570,630
|
|
|
|
2,982,775
|
|
Other income
|
|
|
35,884
|
|
|
|
229,520
|
|
|
|
130,913
|
|
|
|
432,213
|
|
Interest expenses
|
|
|
(3,010,304
|
)
|
|
|
(3,331,554
|
)
|
|
|
(10,155,849
|
)
|
|
|
(10,214,681
|
)
|
Exchange differences
|
|
|
773,420
|
|
|
|
906,538
|
|
|
|
250,290
|
|
|
|
1,396,460
|
|
Other expenses
|
|
|
(508,302
|
)
|
|
|
(55,835
|
)
|
|
|
(1,076,993
|
)
|
|
|
(1,200,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes provision
|
|
|
5,042,333
|
|
|
|
7,138,661
|
|
|
|
23,487,056
|
|
|
|
26,668,323
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
389,109
|
|
|
|
12,130,789
|
|
|
|
2,587,840
|
|
|
|
14,974,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
US$
|
4,653,224
|
|
|
US$
|
(4,992,128
|
)
|
|
US$
|
20,899,216
|
|
|
US$
|
11,693,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to noncontrolling interest in subsidiaries
|
|
|
468,322
|
|
|
|
613,086
|
|
|
|
2,105,662
|
|
|
|
2,281,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to common stockholders
|
|
US$
|
4,184,902
|
|
|
US$
|
(5,605,214
|
)
|
|
US$
|
18,793,554
|
|
|
US$
|
9,411,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
US$
|
4,653,224
|
|
|
US$
|
(4,992,128
|
)
|
|
US$
|
20,899,216
|
|
|
US$
|
11,693,341
|
|
Foreign currency translation adjustments
|
|
|
(6,586,436
|
)
|
|
|
(8,307,355
|
)
|
|
|
(7,107,258
|
)
|
|
|
(11,275,895
|
)
|
Comprehensive income (loss)
|
|
|
(1,933,212
|
)
|
|
|
(13,299,483
|
)
|
|
|
13,791,958
|
|
|
|
417,446
|
|
Comprehensive income (loss) attributable to noncontrolling interest in subsidiaries
|
|
|
(190,322
|
)
|
|
|
(217,650
|
)
|
|
|
1,394,936
|
|
|
|
1,154,043
|
|
Comprehensive income (loss) attributable to common stockholders
|
|
US$
|
(1,742,890
|
)
|
|
US$
|
(13,081,833
|
)
|
|
US$
|
12,397,022
|
|
|
US$
|
(736,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share - basic
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share - diluted
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS - basic
|
|
US$
|
0.22
|
|
|
US$
|
(0.29
|
)
|
|
US$
|
0.97
|
|
|
US$
|
0.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS - diluted
|
|
US$
|
0.22
|
|
|
US$
|
(0.29
|
)
|
|
US$
|
0.97
|
|
|
US$
|
0.49
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
SORL
Auto Parts, Inc. and Subsidiaries
Consolidated
Statements of Cash Flows
For
the Nine Months ended September 30, 2019 and 2018 (Unaudited)
|
|
Nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
Net income
|
|
US$
|
20,899,216
|
|
|
US$
|
11,693,341
|
|
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
2,365,714
|
|
|
|
179,744
|
|
Depreciation and amortization
|
|
|
10,528,373
|
|
|
|
8,926,695
|
|
Deferred income tax
|
|
|
368,700
|
|
|
|
966,547
|
|
Gain on disposal of property and equipment
|
|
|
(30,562
|
)
|
|
|
(73,809
|
)
|
Amortization of debt issuance costs
|
|
|
441,236
|
|
|
|
520,741
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(15,844,424
|
)
|
|
|
(38,780,246
|
)
|
Bank acceptance notes from customers
|
|
|
1,258,843
|
|
|
|
68,016,837
|
|
Inventories, net
|
|
|
7,669,607
|
|
|
|
(9,983,968
|
)
|
Prepayments
|
|
|
(9,348,404
|
)
|
|
|
(52,611,953
|
)
|
Other current assets, net
|
|
|
(699,009
|
)
|
|
|
(19,823,567
|
)
|
Accounts payable and bank acceptance notes to vendors
|
|
|
(72,638,392
|
)
|
|
|
86,724,938
|
|
Deposits received from customers
|
|
|
(2,393,750
|
)
|
|
|
7,432,808
|
|
Income tax payable
|
|
|
(1,125,335
|
)
|
|
|
24,058,536
|
|
Deferred income
|
|
|
(683,529
|
)
|
|
|
(382,627
|
)
|
Other current liabilities and accrued expenses
|
|
|
301,057
|
|
|
|
(5,671,820
|
)
|
Net Cash Flows Provided By (Used in) Operating Activities
|
|
|
(58,930,659
|
)
|
|
|
81,192,197
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
Acquisition of property, equipment, plant and land use rights
|
|
|
(36,495,784
|
)
|
|
|
(40,142,267
|
)
|
Acquisition of intangible assets
|
|
|
-
|
|
|
|
(367,931
|
)
|
Advances to related parties
|
|
|
-
|
|
|
|
(214,800,362
|
)
|
Repayment of advances to related parties
|
|
|
57,010,144
|
|
|
|
222,337,244
|
|
Proceeds from disposal of property and equipment
|
|
|
42,451
|
|
|
|
-
|
|
Net Cash Flows Provided By (Used In) Investing Activities
|
|
|
20,556,811
|
|
|
|
(32,973,316
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Proceeds from short term bank loans
|
|
|
238,649,409
|
|
|
|
353,441,949
|
|
Repayment of short term bank loans
|
|
|
(248,358,539
|
)
|
|
|
(325,651,416
|
)
|
Proceeds from related parties
|
|
|
1,843,951
|
|
|
|
311,692,664
|
|
Repayments to related parties
|
|
|
-
|
|
|
|
(328,624,110
|
)
|
Repayments of long term loans
|
|
|
(16,998,572
|
)
|
|
|
(18,957,775
|
)
|
Payment of debt issuance costs
|
|
|
(108,222
|
)
|
|
|
-
|
|
Net Cash Flows Used In Financing Activities
|
|
|
(24,971,973
|
)
|
|
|
(8,098,688
|
)
|
|
|
|
|
|
|
|
|
|
Effects on changes in foreign exchange rate
|
|
|
(667,800
|
)
|
|
|
(4,557,219
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash, cash equivalents and restricted cash
|
|
|
(64,013,621
|
)
|
|
|
35,562,974
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash - beginning of the period
|
|
|
110,962,606
|
|
|
|
4,598,176
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents, and restricted cash - end of the period
|
|
US$
|
46,948,985
|
|
|
US$
|
40,161,150
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
US$
|
8,655,097
|
|
|
US$
|
7,849,753
|
|
Income taxes paid
|
|
US$
|
3,339,144
|
|
|
US$
|
5,157,755
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Transactions
|
|
|
|
|
|
|
|
|
Loans from related party in the form of bank acceptance notes
|
|
US$
|
-
|
|
|
US$
|
5,846,083
|
|
Repayments to related party in the form of bank acceptance notes
|
|
US$
|
-
|
|
|
US$
|
33,721,267
|
|
Repayments from related party in the form of bank acceptance notes
|
|
US$
|
-
|
|
|
US$
|
26,771,056
|
|
Liabilities assumed in connection with acquisition of property, plant and equipment
|
|
US$
|
1,274,693
|
|
|
US$
|
-
|
|
Property, plant and equipment and land use rights transferred from prepayments
|
|
US$
|
19,995,442
|
|
|
US$
|
-
|
|
Proceeds from long term loans in the form of bank acceptance notes
|
|
US$
|
7,169,692
|
|
|
US$
|
-
|
|
Deposits on loan agreements deducted from proceeds from long term loans
|
|
US$
|
1,433,938
|
|
|
US$
|
-
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
US$
|
16,485,401
|
|
|
US$
|
17,609,594
|
|
Restricted cash, current
|
|
|
13,780,187
|
|
|
|
19,062,778
|
|
Restricted cash, non-current
|
|
|
16,683,397
|
|
|
|
3,488,778
|
|
Total cash, cash equivalents, and restricted cash
|
|
US$
|
46,948,985
|
|
|
US$
|
40,161,150
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
SORL
Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
For the Three and Nine Months ended September 30, 2019 and
2018 (Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
Total
SORL Auto
Parts, Inc.
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Common
|
|
|
Paid-in
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Share
|
|
|
Stock
|
|
|
Capital
|
|
|
Reserves
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total
Equity
|
|
Balance
as of December 31, 2018
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
20,007,007
|
|
|
$
|
178,535,378
|
|
|
$
|
6,655,803
|
|
|
$
|
176,654,143
|
|
|
$
|
28,814,893
|
|
|
$
|
205,469,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,970,527
|
|
|
|
-
|
|
|
|
8,970,527
|
|
|
|
1,005,327
|
|
|
|
9,975,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,860,299
|
|
|
|
3,860,299
|
|
|
|
428,922
|
|
|
|
4,289,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
904,794
|
|
|
|
(904,794
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of March 31, 2019
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
20,911,801
|
|
|
$
|
186,601,111
|
|
|
$
|
10,516,102
|
|
|
$
|
189,484,969
|
|
|
$
|
30,249,142
|
|
|
$
|
219,734,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,638,125
|
|
|
|
-
|
|
|
|
5,638,125
|
|
|
|
632,013
|
|
|
|
6,270,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,329,039
|
)
|
|
|
(4,329,039
|
)
|
|
|
(481,004
|
)
|
|
|
(4,810,043
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
568,812
|
|
|
|
(568,812
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of June 30, 2019
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
21,480,613
|
|
|
$
|
191,670,424
|
|
|
$
|
6,187,063
|
|
|
$
|
190,794,055
|
|
|
$
|
30,400,151
|
|
|
$
|
221,194,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,184,902
|
|
|
|
-
|
|
|
|
4,184,902
|
|
|
|
468,322
|
|
|
|
4,653,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,927,792
|
)
|
|
|
(5,927,792
|
)
|
|
|
(658,644
|
)
|
|
|
(6,586,436
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer
to reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
421,490
|
|
|
|
(421,490
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
as of September 30, 2019
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
21,902,103
|
|
|
$
|
195,433,836
|
|
|
$
|
259,271
|
|
|
$
|
189,051,165
|
|
|
$
|
30,209,829
|
|
|
$
|
219,260,994
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
|
Total
SORL Auto
Parts, Inc.
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Common
|
|
|
Paid-in
|
|
|
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Stockholders’
|
|
|
Noncontrolling
|
|
|
|
|
|
|
Share
|
|
|
Stock
|
|
|
Capital
|
|
|
Reserves
|
|
|
Earnings
|
|
|
Income
|
|
|
Equity
|
|
|
Interest
|
|
|
Total Equity
|
|
Balance as of December 31, 2017
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
17,562,357
|
|
|
$
|
168,244,329
|
|
|
$
|
15,903,188
|
|
|
$
|
173,165,829
|
|
|
$
|
27,126,102
|
|
|
$
|
200,291,931
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,273,502
|
|
|
|
-
|
|
|
|
8,273,502
|
|
|
|
919,278
|
|
|
|
9,192,780
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,240,081
|
|
|
|
7,240,081
|
|
|
|
804,453
|
|
|
|
8,044,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
827,350
|
|
|
|
(827,350
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2018
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
18,389,707
|
|
|
$
|
175,690,481
|
|
|
$
|
23,143,269
|
|
|
$
|
188,679,412
|
|
|
$
|
28,849,833
|
|
|
$
|
217,529,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,743,420
|
|
|
|
-
|
|
|
|
6,743,420
|
|
|
|
749,269
|
|
|
|
7,492,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,911,767
|
)
|
|
|
(9,911,767
|
)
|
|
|
(1,101,307
|
)
|
|
|
(11,013,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
674,342
|
|
|
|
(674,342
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
19,064,049
|
|
|
$
|
181,759,559
|
|
|
$
|
13,231,502
|
|
|
$
|
185,511,065
|
|
|
$
|
28,497,795
|
|
|
$
|
214,008,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,605,214
|
)
|
|
|
-
|
|
|
|
(5,605,214
|
)
|
|
|
613,086
|
|
|
|
(4,992,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(7,476,619
|
)
|
|
|
(7,476,619
|
)
|
|
|
(830,736
|
)
|
|
|
(8,307,355
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfer to reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
674,342
|
|
|
|
(674,342
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2018
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
(28,582,654
|
)
|
|
$
|
19,738,391
|
|
|
$
|
175,480,003
|
|
|
$
|
5,754,883
|
|
|
$
|
172,429,232
|
|
|
$
|
28,280,145
|
|
|
$
|
200,709,377
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements.
SORL
Auto Parts, Inc. and Subsidiaries
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
September
30, 2019
(Unaudited)
NOTE
A - DESCRIPTION OF BUSINESS
SORL
Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company”
or “SORL”), a Delaware corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution
of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co.,
Ltd. (the “Joint Venture” or “Ruian”). The Company distributes products both in China and internationally
under SORL trademarks. The Company’s product range includes 140 categories and over 2,000 different specifications.
The
Joint Venture was formed in the People’s Republic of China (“PRC” or “China”) as a Sino-Foreign
joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the “Ruili
Group”), a related party under common control, and Fairford Holdings Limited (“Fairford”), a wholly owned subsidiary
of the Company. The Ruili Group was incorporated in China in 1987 and specializes in the development, production and sale of various
kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint
Venture.
On
November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR
Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution specialist firm and an unaffiliated Taiwanese
individual investor. The joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. SORL
held a 60% interest in the joint venture, MGR held a 30% interest, and the Taiwanese individual investor held a 10% interest.
SIH was primarily devoted to expanding SORL’s international sales network in Asia-Pacific and creating a larger footprint in Europe
and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of
SIH, Fairfold sold all of its interest in SIH to the Taiwanese investor. After this transaction, SIH ceased to be a distributor
of SORL in the international market.
NOTE
B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
|
(1)
|
BASIS
OF PRESENTATION
|
The
consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances
and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in
financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted
by the rules and regulations of the United States Securities and Exchange Commission (“SEC”), although the Company
believes that the disclosures contained in this report are adequate to make the information presented not misleading. The consolidated
balance sheet information as of December 31, 2018 was derived from the consolidated audited financial statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2018. These consolidated financial statements should
be read in conjunction with the annual consolidated audited financial statements and the notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2018, and other reports filed with the SEC.
The
accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which
are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of
the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to,
or indicative of, results of any other interim period or for the fiscal year taken as a whole.
|
(2)
|
SIGNIFICANT
ACCOUNTING POLICIES
|
a.
ACCOUNTING METHOD
The
Company uses the accrual method of accounting for financial statement and tax return purposes.
b.
USE OF ESTIMATES
The
preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management
makes its best estimate of the outcome for these items based on historical trends and other information available when the financial
statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is
typically in the period when new information becomes available to management. Actual results could differ from those estimates.
c.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For
certain of the Company’s financial instruments, including cash and cash equivalents, current restricted cash, accounts receivable,
bank acceptance notes from customers, inventories, current prepayments, current deposits on loan agreements, other current assets,
accounts payable and bank acceptance notes to vendors, short term bank loans, deposits received from customers, current portion
of long term loans, deferred income, income tax payable, accrued expenses and other current liabilities, the carrying amounts
approximate fair values due to their short maturities.
Transactions
involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive,
free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such
representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related
parties due to their related party nature.
d.
RESTRICTED CASH
Restricted
cash, current consists of bank deposits used to pledge bank acceptance notes, and deposits for obtaining letters of credit from
a local bank.
Restricted
cash, non-current consists of deposits guaranteed for construction projects and the non-current portion of certain bank deposits
used to pledge for bank acceptance notes.
e.
RELATED PARTY TRANSACTIONS
A
related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate
families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under
common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company.
A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related
parties. The Company conducts business with its related parties in the ordinary course of business.
f.
BANK ACCEPTANCE NOTES FROM CUSTOMERS
Bank acceptance notes from
customers, generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes
issued by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of
related parties and transferred to the Company as loans from related parties or repayments from related parties. Bank acceptance
notes do not bear interest. As of September 30, 2019 and December 31, 2018, bank acceptance notes receivable in the amount of $58,985,401
and $58,458,890, respectively, were pledged to banks to issue either short term bank loans or bank acceptance notes to vendors.
The banks charge discount fees if the Company chooses to discount the bank acceptance notes for cash before the maturity of the
notes and such discount fees are included in interest expenses in the accompanying consolidated statements of income (loss) and
comprehensive income (loss).
g.
FOREIGN CURRENCY TRANSLATION
The
Company maintains its books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is
also RMB. The Company has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting
currency, United States dollars (“US$”). All assets and liabilities are translated at the current rate. The stockholders’
equity accounts are translated at the appropriate historical rate. Revenue and expenses are translated at the weighted average
rates in effect on the transaction dates.
Translation
adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’
equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other
than the functional currency are included in the results of operations as incurred.
NOTE
C - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
On
January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11,
2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition
method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening
balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial
information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company
elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things,
allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification,
classification, and the accounting treatment of initial direct costs. The Company elected not to record assets and liabilities
on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes
lease expenses for such leases on a straight-line basis over the lease term. In addition, the Company elected the land easement
transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease
if it has not historically been accounted for as a lease.
The
primary impact of applying ASC Topic 842 is the initial recognition of $1.6 million of lease liabilities and corresponding
right-of-use assets on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating
leases under ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative
effect to retained earnings or other components of equity recognized as of January 1, 2019 and the adoption of this standard did
not impact the consolidated statement of income and comprehensive income or consolidated statement of cash flows of the Company.
The Company does not have finance lease arrangements as of September 30, 2019. See Note N for further discussion.
NOTE
D - RELATED PARTY TRANSACTIONS
Related
parties with whom the Company conducted business consist of the following:
Name
of Related Party
|
|
Nature
of Relationship
|
Xiao
Ping Zhang
|
|
Principal
shareholder, Chairman of the Board and Chief Executive Officer
|
|
|
|
Shu
Ping Chi
|
|
Shareholder,
member of the Board, wife of Xiao Ping Zhang
|
|
|
|
Xiao
Feng Zhang
|
|
Shareholder,
member of the Board, brother of Xiao Ping Zhang
|
|
|
|
Ruili
Group Co., Ltd. (“Ruili Group”)
|
|
10%
shareholder of Joint Venture and is collectively controlled by Xiao Ping Zhang, Shu Ping Chi, and Xiao Feng Zhang
|
|
|
|
Guangzhou
Ruili Kormee Automotive Electronic Control Technology Co., Ltd. (“Guangzhou Kormee”)
|
|
Controlled
by Ruili Group
|
|
|
|
Wenzhou
Ruili Kormee Automotive Electronics Co., Ltd. (“Ruian Kormee” and formerly known as “Ruian Kormee Automobile
Braking Co., Ltd.”)
|
|
Wholly
controlled by Guangzhou Kormee
|
|
|
|
Changchun
Kormee Auto Electric Co., Ltd. (“Changchun Kormee”)
|
|
Wholly
controlled by Guangzhou Kormee
|
|
|
|
Shanghai
Dachao Electric Technology Co., Ltd. (“Shanghai Dachao”)
|
|
Ruili
Group holds 66% of the equity interests in Shanghai Dachao
|
|
|
|
Ruili
MeiLian Air Management Systems (LangFang) Co., Ltd. (“Ruili Meilian”)
|
|
Controlled
by Ruili Group
|
|
|
|
Wenzhou
Lichuang Automobile Parts Co., Ltd. (“Wenzhou Lichuang”)
|
|
Controlled
by Ruili Group
|
|
|
|
Ningbo
Ruili Equipment Co., Ltd. (“Ningbo Ruili”)
|
|
Controlled
by Ruili Group
|
|
|
|
Shanghai
Ruili Real Estate Development Co., Ltd. (“Shanghai Ruili”)
|
|
Wholly
owned by Ruili Group
|
|
|
|
Kunshan
Yuetu Real Estate Development Co., Ltd. (“Kunshan Yuetu”)
|
|
Collectively
owned by Ruili Group and Shu Ping Chi
|
|
|
|
Shanghai
Tabouk Auto Components Co., Ltd. (“Shanghai Tabouk”)
|
|
Collectively
owned by Xiao Feng Zhang and Xiao Ping Zhang
|
|
|
|
Hangzhou
Ruili Property Development Co., Ltd.
|
|
Collectively
owned by Ruili Group and Xiao Ping Zhang
|
|
|
|
Hangzhou
Hangcheng Friction Material Co., Ltd. (“Hangzhou Hangcheng”)
|
|
Controlled
by Ruili Group
|
|
|
|
Hangzhou
Ruili Binkang Real Estate Development Co. Ltd.
|
|
Controlled
by Hangzhou Ruili Property Development Co., Ltd.
|
|
|
|
SHNS
Precision Die Casting (Yangzhou) Co. Ltd. (“SHNS Precision”)
|
|
Controlled
by Ruili Group
|
The
Company continues to purchase primarily packaging materials from Ruili Group. In addition, the Company purchases automotive components
from other related parties, including Guangzhou Kormee, Ruian Kormee, Ruili Meilian, Shanghai Dachao, Wenzhou Lichuang, Hangzhou
Hangcheng, and molds from Ningbo Ruili used in its production.
The
Company sells certain automotive products to the Ruili Group. The Company also sells parts to Guangzhou Kormee, Shanghai Tabouk,
Ruian Kormee, Changchun Kormee and Ruili Meilian.
The
following related party transactions occurred during the three and nine months ended September 30, 2019 and 2018:
|
|
Three Months Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
3,221,199
|
|
|
$
|
598,920
|
|
|
$
|
8,614,356
|
|
|
$
|
2,343,015
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
|
756,976
|
|
|
|
582,998
|
|
|
|
2,507,101
|
|
|
|
1,996,094
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
186,044
|
|
|
|
489,695
|
|
|
|
500,278
|
|
|
|
866,382
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
566,208
|
|
|
|
812,202
|
|
|
|
1,355,626
|
|
|
|
5,786,608
|
|
Ruili Group Co., Ltd.
|
|
|
2,190,415
|
|
|
|
2,024,487
|
|
|
|
10,418,878
|
|
|
|
5,991,237
|
|
Hangzhou Hangcheng Friction Material Co., Ltd.
|
|
|
95,925
|
|
|
|
-
|
|
|
|
216,163
|
|
|
|
-
|
|
Ningbo Ruili Equipment Co., Ltd.
|
|
|
3,045,923
|
|
|
|
2,044,168
|
|
|
|
4,410,119
|
|
|
|
2,044,168
|
|
Wenzhou Lichuang Automobile Parts Co., Ltd.
|
|
|
3,518,565
|
|
|
|
3,706,795
|
|
|
|
10,754,558
|
|
|
|
11,251,687
|
|
Total purchases
|
|
$
|
13,581,255
|
|
|
$
|
10,259,265
|
|
|
$
|
38,777,079
|
|
|
$
|
30,279,191
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
$
|
29,965
|
|
|
$
|
8,641
|
|
|
$
|
93,233
|
|
|
$
|
63,112
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
|
2,227,504
|
|
|
|
2,271,413
|
|
|
|
9,085,261
|
|
|
|
8,086,219
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
92,965
|
|
|
|
204,192
|
|
|
|
1,085,084
|
|
|
|
1,048,005
|
|
Ruili Group Co., Ltd.
|
|
|
4,193,754
|
|
|
|
6,494,382
|
|
|
|
14,235,539
|
|
|
|
12,570,554
|
|
Changchun Kormee Auto Electric Co., Ltd.
|
|
|
-
|
|
|
|
-
|
|
|
|
35,943
|
|
|
|
-
|
|
Shanghai Tabouk Auto Components Co., Ltd.
|
|
|
315,501
|
|
|
|
355,331
|
|
|
|
943,307
|
|
|
|
1,229,651
|
|
Total sales
|
|
$
|
6,859,689
|
|
|
$
|
9,333,959
|
|
|
$
|
25,478,367
|
|
|
$
|
22,997,541
|
|
|
|
As of
September 30,
2019
|
|
|
As of
December 31,
2018
|
|
ADVANCES TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
24,433,792
|
|
|
$
|
79,739,417
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,433,792
|
|
|
$
|
79,739,417
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS RECEIVABLE FROM RELATED PARTY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shanghai Tabouk Auto Components Co., Ltd
|
|
$
|
310,143
|
|
|
$
|
261,889
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
310,143
|
|
|
$
|
261,889
|
|
|
|
|
|
|
|
|
|
|
PREPAYMENTS TO RELATED PARTY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ningbo Ruili Equipment Co., Ltd.
|
|
$
|
3,283,579
|
|
|
$
|
3,670,573
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,283,579
|
|
|
$
|
3,670,573
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
6,207,669
|
|
|
$
|
7,877,485
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
266,285
|
|
|
|
56,883
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
1,518,494
|
|
|
|
5,628,155
|
|
Wenzhou Lichuang Auto Parts Co., Ltd.
|
|
|
8,258,279
|
|
|
|
9,898,777
|
|
Changchun Kormee Auto Electric Co., Ltd.
|
|
|
-
|
|
|
|
9,206
|
|
Hangzhou Hangcheng Friction Material Co., Ltd.
|
|
|
187,537
|
|
|
|
334,694
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,438,264
|
|
|
$
|
23,805,200
|
|
|
|
|
|
|
|
|
|
|
DUE TO RELATED PARTY
|
|
|
|
|
|
|
|
|
|
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.
|
|
$
|
8,083,574
|
|
|
$
|
5,959,752
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,083,574
|
|
|
$
|
5,959,752
|
|
From time to time,
the Company borrows from Ruili Group and its controlled companies for working capital purposes. In order to obtain the loans and
mutually benefit both the debtor and creditor of the arrangement, the Company also advances to Ruili Group and its controlled companies
in a short term. All the loans from related parties are non-interest bearing, unsecured and due on demand. The advances to Ruili
Group are unsecured and due on demand, and the Company charged them an interest of 5.22% per annum on the average balance advanced
to them. The Company recorded interests of $3,117,705 during the nine months ended September 30, 2019.
During
the nine months ended September 30, 2019, the Company obtained net proceeds of $1,843,951 from a related party. In the same period,
Ruili Group repaid the Company net amount of $57,010,144.
The
Company entered into a lease agreement with Ruili Group. See Note N for more details.
The
Company provided a guarantee for the credit line granted to Ruili Group by the China Merchants Bank RMB 40,000,000 (approximately
$5,828,185) for a period of 12 months starting on October 24, 2016. The credit line was renewed on October 19, 2017 for 6 months.
On April 13, 2018, Ruili Group and the bank reached another extension agreement and the guarantee was provided by the Company
until April 12, 2019.
The
Company provided a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 210,000,000
(approximately $30,597,972) for the period from July 20, 2018 to July 20, 2028.
The
Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in a maximum amount of RMB71,000,000
(approximately $10,345,029) for the period from February 12, 2019 to January 16, 2020.
The
Company provided a guarantee for the credit line granted to Ruili Group and SHNS Precision by Minsheng Bank in a maximum amount
of RMB500,000,000 (approximately $72,730,446) for the period from June 6, 2019 to June 6, 2020.
The
Company has short term bank loans guaranteed or pledged by related parties. See Note J for more details.
NOTE
E - ACCOUNTS RECEIVABLE, NET
Accounts
receivable, net, consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts receivable
|
|
$
|
173,817,824
|
|
|
$
|
163,903,305
|
|
Less: allowance for doubtful accounts
|
|
|
(15,629,224
|
)
|
|
|
(13,855,508
|
)
|
Accounts receivable, net
|
|
$
|
158,188,600
|
|
|
$
|
150,047,797
|
|
No
customer individually accounted for more than 10% of our revenues or accounts receivable for the nine months ended September 30,
2019 and 2018. The changes in the allowance for doubtful accounts on September 30, 2019 and December 31, 2018 are summarized as
follows:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Beginning balance
|
|
$
|
13,855,508
|
|
|
$
|
13,927,156
|
|
Add: Increase to allowance
|
|
|
2,215,553
|
|
|
|
610,610
|
|
Effects on changes in foreign exchange rate
|
|
|
(441,837
|
)
|
|
|
(682,258
|
)
|
Ending balance
|
|
$
|
15,629,224
|
|
|
$
|
13,855,508
|
|
NOTE
F - INVENTORIES
On
September 30, 2019 and December 31, 2018, inventories were consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw Materials
|
|
$
|
35,404,809
|
|
|
$
|
53,821,973
|
|
Work in process
|
|
|
80,909,871
|
|
|
|
89,516,949
|
|
Finished Goods
|
|
|
77,506,223
|
|
|
|
62,674,252
|
|
Less: Write-down of inventories
|
|
|
(2,642,179
|
)
|
|
|
(1,727,747
|
)
|
Total Inventory
|
|
$
|
191,178,724
|
|
|
$
|
204,285,427
|
|
The
write-down of inventories amounted to $965,656 and $nil for the nine months ended September 30, 2019 and 2018, respectively.
NOTE
G - PROPERTY, PLANT AND EQUIPMENT, NET
Property,
plant and equipment were consisted of the following on September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Machinery
|
|
$
|
143,807,189
|
|
|
$
|
130,912,861
|
|
Molds
|
|
|
1,236,935
|
|
|
|
1,274,729
|
|
Office equipment
|
|
|
4,520,246
|
|
|
|
3,566,772
|
|
Vehicles
|
|
|
6,220,692
|
|
|
|
5,956,822
|
|
Buildings
|
|
|
19,999,080
|
|
|
|
20,610,137
|
|
Construction in progress
|
|
|
25,305,496
|
|
|
|
8,641,271
|
|
Leasehold improvements
|
|
|
449,754
|
|
|
|
463,497
|
|
Sub-Total
|
|
|
201,539,392
|
|
|
|
171,426,089
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(82,436,101
|
)
|
|
|
(75,372,703
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
119,103,291
|
|
|
$
|
96,053,386
|
|
Depreciation
expense charged to operations was $9,738,142 and $8,399,291 for the nine months ended September 30, 2019 and 2018, respectively.
NOTE
H - LAND USE RIGHTS, NET
The
balances for land use rights, net as of September 30, 2019 and December 31, 2018 are as the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost
|
|
$
|
37,891,449
|
|
|
$
|
22,283,776
|
|
Less: Accumulated amortization
|
|
|
(1,677,484
|
)
|
|
|
(1,159,321
|
)
|
Land use rights, net
|
|
$
|
36,213,965
|
|
|
$
|
21,124,455
|
|
In December 2017, the Company
entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located
at the intersection of Fengjin Road and Wenhua Road, Binhai New District, Ruian City, Zhejiang Province, China. As of December
31, 2018, the purchase price of RMB 72.02 million (approximately $11.13 million) was fully paid and the payments were included
in prepayments, non-current in the consolidated balance sheets. During the nine months ended September 30, 2019, the Company paid
related deed tax of RMB 2.33 million (approximately $330,000). The Company obtained the title to the land use rights in September
2019. The total prepayments of RMB 74.35 million (approximately $11.46 million) were transferred to the land use right during the
nine months ended September 30, 2019.
In April 2018, the
Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land
located at the intersection of Tengda Road and Wanghai Road, Economic Development District, Ruian City, Zhejiang Province, China.
Prepayment of RMB 38.67 million (approximately $5.85 million) and refundable deposit of RMB 3.87 million (approximately $585,000)
were made during the year ended December 31, 2018. During the nine months ended September 30, 2019, the Company paid related deed
tax of RMB 2.04 million (approximately $296,000). The Company obtained the title to the land use rights in July 2019. The prepayments
in total of RMB 40.72 million (approximately $6.15 million) was transferred to the land use right during the nine months ended
September 30, 2019. The refundable deposit of RMB 3.87 million (approximately $585,000) was included in other assets, non-current
on the accompanying consolidated balance sheet as of September 30, 2019.
Amortization
expenses were $568,978 and $458,179 for the nine months ended September 30, 2019 and 2018, respectively.
NOTE
I - DEFERRED TAX ASSETS
Deferred
tax assets consisted of the following as of September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Deferred tax assets - current
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
2,528,387
|
|
|
$
|
2,205,048
|
|
Revenue (net of cost)
|
|
|
133,305
|
|
|
|
308,046
|
|
Unpaid accrued expenses
|
|
|
(58,026
|
)
|
|
|
501,276
|
|
Warranty
|
|
|
975,259
|
|
|
|
1,059,468
|
|
Deferred tax assets
|
|
|
3,578,925
|
|
|
|
4,073,838
|
|
Valuation allowance
|
|
|
―
|
|
|
|
―
|
|
Net deferred tax assets - current
|
|
$
|
3,578,925
|
|
|
$
|
4,073,838
|
|
Deferred
taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are
expected with reasonable probability to realize in the foreseeable future. The Company’s subsidiary registered in the PRC
is subject to income taxes within the PRC at the applicable tax rate.
NOTE
J - SHORT-TERM BANK LOANS
Bank
loans represented the following as of September 30, 2019 and December 31, 2018:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Secured
|
|
$
|
201,749,179
|
|
|
$
|
217,940,471
|
|
Total short-term bank loan
|
|
$
|
201,749,179
|
|
|
$
|
217,940,471
|
|
The Company obtained those
short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Minsheng Bank, Industrial Bank, and China
Construction Bank to finance general working capital as well as new equipment acquisition. Interest rate for the loans outstanding
during the nine months ended September 30, 2019 ranged from 1.35% to 5.44% per annum. The maturity dates of the loans existing
as of September 30, 2019 ranged from October 11, 2019 to July 23, 2020. The interest expenses for short term bank loans, including
discount fees, were $8,796,523 and $7,428,780 for the nine months ended September 30, 2019 and 2018, respectively.
As
of September 30, 2019, corporate or personal guarantees provided for those bank loans were as follows:
$
|
5,436,493
|
|
|
Guaranteed by Ruili Group, a related party
|
$
|
3,534,618
|
|
|
Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
5,301,927
|
|
|
Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Pledged by Ruili Group, a related party, with its properties
|
$
|
12,724,625
|
|
|
Pledged by Hangzhou Ruili Binkang Real Estate Development Co. Ltd., a related party, with its properties; Guaranteed by Hangzhou Ruili Property Development Ltd., a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
26,863,097
|
|
|
Pledged by Hangzhou Ruili Property Development Ltd., a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
8,483,083
|
|
|
Pledged by the Company with its property; Guaranteed by Hangzhou Ruili Property Development Ltd., a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
29,690,792
|
|
|
Pledged by Ruili Group, a related party, with its plant and land use rights
|
$
|
59,381,583
|
|
|
Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
|
$
|
35,346,180
|
|
|
Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Guaranteed by Shanghai Ruili, a related party
|
$
|
5,584,697
|
|
|
Pledged by the Company with its bank acceptance notes
|
$
|
7,069,236
|
|
|
Pledged by the Company with a bank deposit of $7,069,236, which was included in restricted cash on the accompanying consolidated balance sheets. Also see Note B “RESTRICTED CASH” section.
|
$
|
2,332,848
|
|
|
Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Pledged by Ruili Group, a related party, with its properties
|
NOTE
K - LONG TERM LOANS
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Aggregate outstanding principal balance
|
|
$
|
27,086,528
|
|
|
$
|
36,165,550
|
|
Less: unamortized debt issuance costs
|
|
|
(257,078
|
)
|
|
|
(595,117
|
)
|
Less: current portion
|
|
|
(22,199,252
|
)
|
|
|
(21,141,029
|
)
|
Non-current portion
|
|
$
|
4,630,198
|
|
|
$
|
14,429,404
|
|
In
November 2017, the Company entered into two identical but independent loan agreements with Far Eastern Horizon Co., Ltd. (“Far
Eastern”), each for a term of 36 months and with an effective interest rate of 8.38% per annum, payable monthly in arrears.
The total long term obligations under the two agreements amounted to RMB 200,000,000 (approximately $30,608,185), pledged by the
Company’s equipment in the original cost of RMB 205,690,574 (approximately $31,479,075). The Company paid debt issuance
costs in cash of RMB 5,000,000 (approximately $742,324). The repayments of principal totaled $7,364,365 and $7,522,125 for the
nine months ended September 30, 2019 and 2018, respectively.
In
November 2017, the Company entered into four independent loan agreements with COSCO Shipping Leasing Co., Ltd. (“COSCO”)
for a term of 36 months each. Two of the agreements were signed on November 30, 2017 with an effective interest rate of 8.50%
per annum, payable monthly in arrears. The other two agreements were entered into on November 15, 2017, with an effective interest
rate of 4.31% per annum, payable monthly in arrears. The total long term obligations under the four agreements amounted to RMB
235,000,000 (approximately $35,964,617), pledged by the Company’s equipment in the original cost of RMB 238,333,639 (approximately
$36,474,800). The Company paid debt issuance costs in cash of RMB 7,320,000 (approximately $1,025,248). The repayments of principal
totaled $8,824,792 and $11,435,650 for the nine months ended September 30, 2019 and 2018, respectively.
In
July 2019, the Company entered into a loan agreement with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of
36 months with an effective interest rate of 4.57% per annum, payable monthly in arrears. The total long term obligations under
the agreement amounted to RMB 60,000,000 (approximately $8,483,083), pledged by the Company’s equipment in the original cost
of RMB 62,298,653 (approximately $8,808,078). The Company received RMB 50,000,000 (approximately $7,069,236), after deducting deposits
of RMB 10,000,000 (approximately $1,413,847) required to maintain by COSCO, in the form of bank acceptance notes. The Company paid
debt issuance costs in cash of RMB 754,717 (approximately $108,222). The repayments of principal totaled $809,415 for
the nine months ended September 30, 2019.
The interest expenses for long term loans, including the amortization of debt issuance costs, were $1,359,326
and $2,785,901 for the nine months ended September 30, 2019 and 2018, respectively.
NOTE
L - REVENUES FROM CONTRACTS WITH CUSTOMERS
In
accordance with ASC 606, the Company disaggregates revenue from contracts with customers by product type. See Note P for information
regarding revenue disaggregation by product type.
Deferred revenue is recorded
when consideration is received from a customer prior to transferring goods to the customer under the terms of a sales contract.
As of September 30, 2019 and December 31, 2018, the Company recorded a deferred revenue liability of $47,433,293 and $51,529,795,
respectively, which was presented as “Deposits received from customers” on the accompanying consolidated balance sheets.
During the nine months ended September 30, 2019, the Company recognized $20,597,161 of deferred revenue included in the opening
balance of deposits received from customers. The amount was included in sales on the accompanying consolidated statement of income
(loss) and comprehensive income (loss).
NOTE
M - INCOME TAXES
During the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that
represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United
States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by
the U.S. Tax Reform. The Company also recognized related interest and penalty of $587,821 in the year ended December 31, 2018.
The Company recognized additional interest and penalty of $137,415 in the nine months ended September 30, 2019. The Company elected
to pay the one-time transition tax over eight years commencing in 2018. The first installment payment of $881,839 was made during
the nine months ended September 30, 2019. The actual impact of the U.S. Tax Reform on the Company may differ from management’s
estimates, and management may update its judgments based on future regulations or guidance issued or changes in the interpretations
taken that would adjust the provisional amounts recorded. As of September 30, 2019, $2,588,913 was included in income tax payable,
current as a current liability which the Company believes will be paid within one year and the remaining balance was included in
income tax payable, non-current.
The
2017 Tax Act also created a new requirement that, for the periods beginning after January 1, 2018, certain income (referred to
as global intangible low-taxed income or “GILTI”) earned by foreign subsidiaries in excess of a deemed return on tangible
assets of foreign corporations must be included in U.S. taxable income. The Company elected to account for GILTI tax in the period
the tax is incurred, and therefore included it in estimating the annual effective tax rate.
The
Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable
tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
In
2018, the Joint Venture was awarded the Chinese government’s “High-Tech Enterprise” designation for a fourth
time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2018, 2019 and 2020.
The
reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the US and the PRC for the
nine months ended September 30, 2019 and 2018 is as follows:
|
|
Nine Months Ended
September 30,
2019
|
|
|
Nine Months Ended
September 30,
2018
|
|
US statutory income tax rate
|
|
|
21.00
|
%
|
|
|
21.00
|
%
|
Valuation allowance recognized with respect to the loss in the US company
|
|
|
-21.00
|
%
|
|
|
-21.00
|
%
|
China statutory income tax rate
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
Effects of income tax exemptions and reliefs
|
|
|
-10.00
|
%
|
|
|
-10.00
|
%
|
Effects of additional deduction allowed for R&D expenses
|
|
|
-5.08
|
%
|
|
|
-3.43
|
%
|
Effects of expenses not deductible for tax purposes
|
|
|
1.62
|
%
|
|
|
2.18
|
%
|
Other items
|
|
|
-0.52
|
%
|
|
|
0.81
|
%
|
Effective tax rate
|
|
|
11.02
|
%
|
|
|
14.56
|
%
|
Income
taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The provisions for income taxes for the nine months ended September 30, 2019 and 2018, respectively, are summarized as follows:
|
|
Nine Months Ended
September 30,
2019
|
|
|
Nine Months Ended
September 30,
2018
|
|
Current
|
|
$
|
2,219,140
|
|
|
$
|
14,454,243
|
|
Deferred
|
|
|
368,700
|
|
|
|
520,739
|
|
Total
|
|
$
|
2,587,840
|
|
|
$
|
14,974,982
|
|
NOTE
N - OPERATING LEASES
The
Company entered into various operating lease agreements for certain of its staff dormitories including a lease agreement with
its related party.
In
December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd., a related party, for the lease of two apartment
buildings for Ruian’s management personnel and staff. The initial lease term was from January 2013 to December 2016. This
lease was amended in 2013, with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000
(approximately $305,980).
Balance
sheet information related to operating leases is as follows:
|
|
September 30,
2019
|
|
Operating
lease right-of-use assets1
|
|
$
|
917,151
|
|
|
|
|
|
|
Operating lease liabilities,
current2
|
|
$
|
481,167
|
|
Operating lease
liabilities, non-current
|
|
|
628,873
|
|
Total operating
lease liabilities
|
|
$
|
1,110,040
|
|
|
1
|
Operating lease right-of-use assets are recorded in other assets, non-current on the accompanying consolidated
balance sheet.
|
|
2
|
The current portion of operating lease liabilities is recorded in other current liabilities on the accompanying consolidated balance sheet.
|
For the nine months
ended September 30, 2019, the Company had operating lease costs of $428,605 and the reduction in operating lease right-of-use assets
was $378,674. Cash paid for amounts included in the measurement of operating lease liabilities was $1,025,421 during the nine months
ended September 30, 2019.
The
weighted-average remaining lease term and the weighted-average discount rate of our leases are as follows:
|
|
September 30,
2019
|
Weighted-average remaining lease term
|
|
3 years
|
|
|
|
Weighted-average discount rate
|
|
5.24%
|
The
following table summarizes the maturity of our operating lease liabilities as of September 30, 2019:
2019 (remaining)
|
|
$
|
299,264
|
|
2020
|
|
|
296,908
|
|
2021
|
|
|
296,908
|
|
2022
|
|
|
296,908
|
|
2023 and thereafter
|
|
|
-
|
|
Total lease payment
|
|
|
1,189,988
|
|
Less imputed interest
|
|
|
(79,948
|
)
|
Total lease liabilities
|
|
$
|
1,110,040
|
|
NOTE
O - WARRANTY CLAIMS
Warranty claims were
$2,889,608 and $2,507,487 for the nine months ended September 30, 2019 and 2018, respectively. Warranty claims are included in
selling and distribution expenses on the accompanying consolidated statements of income (loss) and comprehensive income (loss).
Accrued warranty expenses are included in the balances of accrued expenses on the accompanying consolidated balance sheets. The
movement of accrued warranty expenses for the nine months ended September 30, 2019 was as follows:
Beginning balance at January 1, 2019
|
|
$
|
7,063,122
|
|
Aggregate increase for new warranties issued during current period
|
|
|
2,889,608
|
|
Aggregate reduction for payments made and effect of exchange rate fluctuation
|
|
|
(3,451,002
|
)
|
Ending balance at September 30, 2019
|
|
$
|
6,501,728
|
|
NOTE
P - SEGMENT INFORMATION
The
Company produces brake systems and other related components for different types of commercial vehicles (“Commercial
Vehicles Brake Systems”). On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire
a segment of the passenger vehicles auto parts business (“Passenger Vehicles Auto Parts”, formerly known as “Passenger
Vehicles Brake System”) of Ruili Group. As a result of this acquisition, the Company’s product offerings were expanded
to both commercial and passenger vehicles’ brake systems and other key safety-related auto parts.
The Company has two operating
segments: Commercial Vehicle Brake Systems and Passenger Auto Parts.
All
of the Company’s long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets
in the United States for the reporting periods.
|
|
Nine Months Ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
319,516,542
|
|
|
$
|
276,593,442
|
|
Passenger vehicles auto parts
|
|
|
68,304,316
|
|
|
|
68,222,523
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
387,820,858
|
|
|
$
|
344,815,965
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles auto parts
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
—
|
|
|
$
|
—
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
82,320,762
|
|
|
$
|
61,974,537
|
|
Passenger vehicles auto parts
|
|
|
21,401,839
|
|
|
|
28,990,094
|
|
Gross profit
|
|
$
|
103,722,601
|
|
|
$
|
90,964,631
|
|
Selling and distribution expenses
|
|
|
43,198,784
|
|
|
|
37,154,745
|
|
General and administrative expenses
|
|
|
24,803,869
|
|
|
|
17,519,873
|
|
Research and development expenses
|
|
|
16,934,141
|
|
|
|
13,400,656
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
7,798,787
|
|
|
|
7,535,820
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
26,584,594
|
|
|
|
30,425,177
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
4,183,471
|
|
|
|
2,847,299
|
|
Government grants
|
|
|
3,570,630
|
|
|
|
2,982,775
|
|
Other income
|
|
|
130,913
|
|
|
|
432,213
|
|
Interest expenses
|
|
|
(10,155,849
|
)
|
|
|
(10,214,681
|
)
|
Exchange differences
|
|
|
250,290
|
|
|
|
1,396,460
|
|
Other expenses
|
|
|
(1,076,993
|
)
|
|
|
(1,200,920
|
)
|
Income before income tax expense
|
|
$
|
23,487,056
|
|
|
$
|
26,668,323
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
30,864,485
|
|
|
$
|
32,788,350
|
|
Passenger vehicles auto parts
|
|
|
5,631,299
|
|
|
|
7,721,848
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
36,495,784
|
|
|
$
|
40,510,198
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
8,903,845
|
|
|
$
|
7,187,308
|
|
Passenger vehicles auto parts
|
|
|
1,624,528
|
|
|
|
1,739,387
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,528,373
|
|
|
$
|
8,926,695
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
594,148,299
|
|
|
$
|
655,435,946
|
|
Passenger vehicles auto parts
|
|
|
108,403,787
|
|
|
|
138,935,580
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
702,552,086
|
|
|
$
|
794,371,526
|
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
168,006,377
|
|
|
$
|
150,067,034
|
|
Passenger vehicles auto parts
|
|
|
30,653,168
|
|
|
|
31,810,355
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
198,659,545
|
|
|
$
|
181,877,389
|
|
NOTE
Q - CONTINGENCIES
|
(1)
|
The
Company purchased the Dongshan Facility from Ruili Group in 2007 and subsequently transferred the plants and land use right to
Ruili Group. The Company has never obtained the land use rights certificate nor the property ownership certificate of the building
for the Dongshan Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount
was determined based on a 3% tax rate on the consideration paid for the Dongshan Facility in the transaction, which the Company
considered as the most probable amount of tax liability. The Dongshan Facility was transferred back to Ruili Group on May 5, 2016.
|
|
(2)
|
The
Company purchased the Development Zone Facility from Ruili Group on May 5, 2016. As of the filing date, the Company has not yet
obtained the land use rights certificate or the property ownership certificate for the building of the Development Zone Facility.
The Company reserved the relevant tax amount of RMB 15,030,000 (approximately $2,300,205). This amount was determined based on
a 3% tax rate on the consideration paid for the Development Zone Facility, which the Company considered as the most probable amount
of tax liability.
|
|
(3)
|
The
information of lease commitments is provided in Note N.
|
|
(4)
|
The
information of guarantees and assets pledged is provided in Note D.
|
NOTE
R - SUBSEQUENT EVENTS
During the subsequent period,
the Company obtained short-term loans in a total amount of approximately $12.30 million from Industrial Bank, Agricultural Bank,
China Construction Bank and China Zheshang Bank. Interest rate for these loans ranges from 4.35% to 4.5675% per annum. The maturity
dates of these loans existing as of the filing date range from April 13, 2020 to October 24, 2020. The Company pledged with its
bank acceptance notes to obtain loans from Industrial Bank and China Zheshang Bank, its accounts receivable from customers to obtain
the loan from China Construction Bank, and its property to obtain the loan from Agricultural Bank.
In the same period, the
Company repaid loan principals and interest expenses in the total amount of approximately $13.58 million to Agricultural Bank,
China Construction Bank, Industrial Bank, and China Zheshang Bank.
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 in 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, 2018, 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.
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, 2018.
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
Sales
The
following tables present certain financial information about our segments’ sales for the periods presented:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
|
(U.S. dollars in millions)
|
|
Commercial Vehicle Brake Systems
|
|
$
|
94.9
|
|
|
|
84.6
|
%
|
|
$
|
89.0
|
|
|
|
82.0
|
%
|
Passenger Vehicle auto parts
|
|
$
|
17.3
|
|
|
|
15.4
|
%
|
|
$
|
19.6
|
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
112.2
|
|
|
|
100.0
|
%
|
|
$
|
108.6
|
|
|
|
100.0
|
%
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
|
|
(U.S. dollars in millions)
|
|
Commercial Vehicle Brake Systems
|
|
$
|
319.5
|
|
|
|
82.4
|
%
|
|
$
|
276.6
|
|
|
|
80.2
|
%
|
Passenger Vehicle auto parts
|
|
$
|
68.3
|
|
|
|
17.6
|
%
|
|
$
|
68.2
|
|
|
|
19.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
387.8
|
|
|
|
100.0
|
%
|
|
$
|
344.8
|
|
|
|
100.0
|
%
|
The sales were $112.2
million and $108.6 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $3.6 million or
3.4%. The sales were $387.8 million and $344.8 million for the nine months ended September 30, 2019 and 2018, respectively, an
increase of $43.0 million or 12.5%. The increase was mainly due to the increased sales of commercial vehicle brake systems.
The sales from Commercial
Vehicle Brake Systems increased by $5.9 million or 6.6%, to $94.9 million for the third fiscal quarter of 2019, compared to $89.0
million for the same period of 2018. The sales from Commercial Vehicle Brake Systems increased by $42.9 million or 15.5%, to $319.5
million for the nine months ended September 30, 2019, compared to $276.6 million for the nine months ended September 30, 2018.
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 auto parts decreased by $2.3 million or 11.6%, to $17.3 million for the third fiscal quarter of 2019, compared to $19.6
million for the same period of 2018. The sales from Passenger Vehicle auto parts were $68.3 million for the nine months ended September
30, 2019, compared to $68.2 million for the same period of 2018. The decrease was mainly due to the declining sales in the passenger
vehicle market.
A
breakdown of the sales revenue for these markets for the third fiscal quarter of the 2019 and 2018, respectively, is set forth
below:
|
|
Three Months Ended
September 30,
2019
|
|
|
Percent of
Total Sales
|
|
|
Three Months Ended
September 30,
2018
|
|
|
Percent
of
Total
Sales
|
|
|
Percentage
Change
|
|
|
|
(U.S. dollars in millions)
|
|
China OEM market
|
|
$
|
48.6
|
|
|
|
43.3
|
%
|
|
$
|
50.3
|
|
|
|
46.3
|
%
|
|
|
-3.4
|
%
|
China Aftermarket
|
|
$
|
45.6
|
|
|
|
40.6
|
%
|
|
$
|
36.4
|
|
|
|
33.6
|
%
|
|
|
25.3
|
%
|
International market
|
|
$
|
18.1
|
|
|
|
16.1
|
%
|
|
$
|
21.8
|
|
|
|
20.1
|
%
|
|
|
-17.1
|
%
|
Total
|
|
$
|
112.2
|
|
|
|
100.0
|
%
|
|
$
|
108.6
|
|
|
|
100.0
|
%
|
|
|
3.3
|
%
|
A
breakdown of net sales revenues for China OEM markets, China aftermarket and international market for the nine months ended September
30, 2019 and 2018, respectively, is set forth below:
|
|
Nine Months Ended
September 30,
2019
|
|
|
Percent of
Total
Sales
|
|
|
Nine Months Ended
September 30,
2018
|
|
|
Percent of
Total Sales
|
|
|
Percentage
Change
|
|
|
|
(U.S. dollars in millions)
|
|
China OEM market
|
|
$
|
192.7
|
|
|
|
49.7
|
%
|
|
$
|
164.7
|
|
|
|
47.8
|
%
|
|
|
17.0
|
%
|
China Aftermarket
|
|
$
|
135.5
|
|
|
|
34.9
|
%
|
|
$
|
117.3
|
|
|
|
34.0
|
%
|
|
|
15.5
|
%
|
International market
|
|
$
|
59.7
|
|
|
|
15.4
|
%
|
|
$
|
62.7
|
|
|
|
18.2
|
%
|
|
|
-4.8
|
%
|
Total
|
|
$
|
387.8
|
|
|
|
100.0
|
%
|
|
$
|
344.8
|
|
|
|
100.0
|
%
|
|
|
12.5
|
%
|
Considering
the decrease of the production and sales of the commercial vehicle market, our sales to the Chinese OEM market decreased by $1.7
million or 3.4%, to $48.6 million for the third fiscal quarter of 2019, compared to $50.3 million for the same period of 2018.
Our sales to the Chinese OEM market increased by $28.0 million or 17.0%, to $192.7 million for the nine months ended September
30, 2019, compared to $164.7 million for the same period of 2018.
Our
sales to the China aftermarket increased by $9.2 million or 25.3%, to $45.6 million for the third fiscal quarter of 2019,
compared to $36.4 million for the same period of 2018. Our sales to the China aftermarket increased by $18.2 million or 15.5%,
to $135.5 million for the nine months ended September 30, 2019, compared to $117.3 million for the same period of 2018. The increased
new vehicle sales in China and the expiration of OEM warranties helped to drive our aftermarket business. Accelerated urbanization
and the Chinese government’s increased support for public transportation favor our expansion in the bus aftermarket. We
will continue with our strategies to further optimize our sales network and to help further penetrate into new markets.
Our export sales decreased
by $3.7 million or 17.1%, to $18.1 million for the third fiscal quarter of 2019, as compared to $21.8 million for the same
period of 2018. Our export sales decreased by $3.0 million or 4.8%, to $59.7 million for the nine months ended September 30, 2019,
as compared to $62.7 million for the same period of 2018. The decrease in export sales was mainly due to the truck production
decline in some countries.
Cost
of Sales and Gross Profit
Cost of sales for the
three months ended September 30, 2019 were $81.3 million, a decrease of $1.0 million or 1.2% from $82.2 million for the three month
period ended September 30, 2018. Cost of sales for the nine months ended September 30, 2019 were $284.1 million, an increase of
$30.2 million or 11.9% from $253.9 million for the same period of 2018.
Our gross profit increased
by 17.5% from $26.3 million for the period of 2018 to $30.9 million for the three month period ended September 30, 2019. Our gross
profit increased by 14.0% from $91.0 million for the period of 2018 to $103.7 million for the three month period ended September
30, 2019.
Gross margin increased
to 27.6% from 24.3% for the three month period ended September 30, 2019 compared with 2018. Gross margin increased to 26.7% from
26.4% for the nine months ended September 30, 2019, as compared with the same period of 2018. The increase was primarily due to
higher sales of the high margin, electronically controlled products during the third quarter of 2019. We intend to focus in 2019
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 period ended September 30, 2019 were $70.3 million, an increase of $0.5 million
or 0.7% from $69.8 million for the same period of 2018. Cost of sales from Commercial Vehicle Brake Systems for the nine months
ended September 30, 2019 were $237.2 million, an increase of $22.6 million or 10.5% from $214.6 million for the same period of
2018. The gross profit from Commercial Vehicle Brake Systems increased by 28.1% from $19.2 million for three month period ended
September 30, 2018 to $24.6 million for the three month period ended September 30, 2019. The gross profit from Commercial Vehicle
Brake Systems increased by 32.8% from $62.0 million for the nine months ended September 30, 2018 to $82.3 million for the nine
months ended September 30, 2019. Gross margin from Commercial Vehicle Brake Systems increased to 26.0% from 21.6% for the three
months period ended September 30, 2018 compared to the three months period ended September 30, 2019. Gross margin from Commercial
Vehicle Brake Systems increased to 25.8% from 22.4% for the nine months ended September 30, 2019 compared with the same period
of 2018.
Cost
of sales from Passenger Vehicle auto parts for the three months period ended September 30, 2019 were $11.0 million, a decrease
of $1.4 million or 11.6% from $12.5 million for the three month period ended September 30, 2018. Cost of sales from Passenger Vehicle
auto parts for the nine months ended September 30, 2019 were $46.9 million, an increase of $7.7 million or 19.6% from $39.2 million
for the same period of 2018. The gross profit from Passenger Vehicle auto parts decreased by 11.3% from $7.1 million for the three
month period ended September 30, 2018 to $6.3 million for the three month period ended September 30, 2019. The gross profit from
Passenger Vehicle auto parts decreased by 26.2% from $29.0 million for the nine months ended September 30, 2018 to $21.4 million
for the same period of 2019. Gross margin from Passenger Vehicle auto parts was 36.3% for the three months ended September 30,
2019 and 2018. Gross margin from Passenger Vehicle auto parts
decreased to 31.3% for the nine months ended September 30, 2019, as compared to 42.5% for the same period in 2018.
Selling
and Distribution Expenses
Selling
and distribution expenses were $13.9 million for the three months ended September 30, 2019, as compared to $13.2 million for the
same period of 2018, an increase of $0.7 million or 5.2%. Selling and distribution expenses were $43.2 million for the nine months
ended September 30, 2019, as compared to $37.2 million for the same period of 2018, an increase of $6.0 million or 16.3%. The
increase was mainly due to increased freight expense and packaging expenses.
As
a percentage of sales revenue, selling expenses increased to 12.3% for the three months ended September 30, 2019, as compared
to 12.1% for the same period in 2018. As a percentage of sales revenue, selling expenses increased to 11.1% for the
nine months ended September 30, 2019, as compared to 10.8% for the same period in 2018.
General
and Administrative Expenses
General
and administrative expenses were $8.2 million for the three months ended September 30, 2019, as compared to $5.1 million for the
same period of 2018, an increase of $3.2 million or 62.5%. General and administrative expenses were $24.8 million for the
nine months ended September 30, 2019, as compared to $17.5 million for the same period of 2018, an increase of $7.3 million or
41.6%. The increase was mainly due to the increase in employee salaries for the nine months ended September 30, 2019.
As
a percentage of sales revenue, general and administrative expenses was 7.3% for the three months ended September 30,
2019, as compared to 4.7% for the same period in 2018. As a percentage of sales revenue, general and administrative
expenses was 6.4% for the nine months ended September 30, 2019, as compared to 5.1% for the same period in 2018.
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 third-party development costs. For the three months ended September 30, 2019, research
and development expenses were $5.0 million, as compared to $4.5 million for the same period of 2018, an increase of $0.5 million.
For the nine months ended September 30, 2019, research and development expenses were $16.9 million, as compared to $13.4 million
for the same period of 2018, an increase of $3.5 million.
Other
Operating Income
Other
operating income was $2.8 million for the three months ended September 30, 2019, as compared to $3.0 million for the three months
ended September 30, 2018, a decrease of $0.2 million. Other operating income was $7.8 million for the nine months ended September
30, 2019, as compared to $7.5 million for the nine months ended September 30, 2018, an increase of $0.3 million. The increase
was mainly due to an increase in sales of raw material scrap.
Depreciation
and Amortization
Depreciation
and amortization expense was $3.6 million for the three months ended September 30, 2019, compared with that of $3.1 million for
the same period of 2018. Depreciation and amortization expenses increased to $10.5 million for the nine months ended September
30, 2019, compared with that of $8.9 million for the same period of 2018, an increase of $1.6 million. The increase was mainly
due to some new addition in PPE and the purchase of land after September 30, 2018.
Interest
income
The
interest income for the three months ended September 30, 2019, increased to $1.0 million from $0.5 million for the same period
of 2018. The interest income for the nine months ended September 30, 2019, increased to $4.2 million from $2.8 million for
the same period of 2018, mainly due to increased interest income from advances to related parties during the period.
Interest
Expenses
The interest expenses
for the three months ended September 30, 2019, decreased to $3.0 million from $3.3 million for the same period of 2018, mainly due
to decreased interest rate and decreased amount of average loans outstanding during the period. The interest expenses were $10.2
million for the nine months ended September 30, 2019 and 2018.
Income
Tax
During
the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s
estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s
share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company
also recognized related interest and penalty of $587,821 in the year ended December 31, 2018. The Company recognized additional
interest and penalty of $137,415 in the nine months ended September 30, 2019. The Company elected to pay the one-time transition
tax over eight years commencing in 2018. The first installment payment of $881,839 was made during the nine months ended September
30, 2019. The actual impact of the U.S. Tax Reform on the Company may differ from management’s estimates, and management
may update its judgments based on future regulations or guidance issued or changes in the interpretations taken that would adjust
the provisional amounts recorded. As of September 30, 2019, $2,588,913 was included in income tax payable as a current liability
which the Company believes will be paid within one year and the remaining balance was included in income tax payable, non-current.
The
2017 Tax Act also created a new requirement that, for the periods beginning after January 1, 2018, certain income (referred to
as global intangible low-taxed income or “GILTI”) earned by foreign subsidiaries in excess of a deemed return on tangible
assets of foreign corporations must be included in U.S. taxable income. The Company elected to account for GILTI tax in the period
the tax is incurred, and therefore included it in estimating the annual effective tax rate.
The
Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable
tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
In
2018, the Joint Venture was awarded the Chinese government’s “High-Tech Enterprise” designation for a fourth
time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2018, 2019 and 2020.
Income
tax expense was $0.4 million for the three months ended September 30, 2019, as compared to $12.1 million for the three months
ended September 30, 2018. Income tax expense was $2.6 million for the nine months ended September 30, 2019, as compared to $15.0
million for the nine months ended September 30, 2018.
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 noncontrolling interest in subsidiaries amounted to $0.5 million and $0.6 million for the third fiscal
quarter ended September 30, 2019 and 2018, respectively. Net income attributable to non-controlling interest in subsidiaries amounted
to $2.1 million and $2.3 million for the nine months ended September 30, 2019 and 2018, respectively.
Net
Income Attributable to Stockholders
The
net income attributable to stockholders for the fiscal quarter ended September 30, 2019, increased by $9.8 million, to $4.2
net income from $5.6 million net loss for the fiscal quarter ended September 30, 2018 due to the factors discussed above. The
net income attributable to stockholders for the nine months ended September 30, 2019, increased by $9.4 million, to $18.8
million from $9.4 million for the nine months ended September 30, 2018 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the fiscal quarter ended September 30, 2019 and 2018, were $0.22 and $(0.29),
respectively. EPS, both basic and diluted, for the nine months ended September 30, 2019 and 2018, were $0.97 and $0.49, respectively.
FINANCIAL
CONDITION
Liquidity
and Capital Resources
As
of September 30, 2019, the Company had cash and cash equivalents of $16.5 million, as compared to cash and cash equivalents of
$73.6 million as of December 31, 2018. The Company had working capital of $34.2 million on September 30, 2019, as compared to
working capital of $47.3 million on December 31, 2018, reflecting current ratios of 1.1:1 and 1.1:1, respectively.
OPERATING
- Net cash used in operating activities was $58.9 million for nine months ended September 30, 2019, a decrease of $140.1
million, as compared with $81.2 million of net cash provided by operating activities in the same period in 2019. Such change was
primarily due to the increased cash outflow resulted by changes in accounts payable and bank acceptance notes to vendors.
INVESTING
- During the nine months ended September 30, 2019, the Company had cash inflow from investing activities of $20.6 million
mainly due to repayment of advances to related parties. For the nine months ended September 30, 2018, the Company expended net
cash of $33.0 million in investing activities.
FINANCING - During
the nine month period ended September 30, 2019, the net cash used in financing activities was $25.0 million. For the nine months
ended September 30, 2018, the net cash used in financing activities was $8.1 million. Such increase was primarily due to decreased
proceeds from short term bank loans.
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 September 30, 2019, 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 September 30, 2019, 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 19,007,341 (approximately US$2,872,675) 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 September 30, 2019, we had no material changes outside the ordinary course of business in our contractual obligations.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
Applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures:
We
maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports
pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and
forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial
officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls
and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our
judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. As required by
Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2019 was performed under the supervision
and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the
Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure
controls and procedures (as defined in Rules 13a-15(b) and 15d-15(b) of the Exchange Act). Based on this evaluation, the Company’s
management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures, as of September
30, 2019, were effective, in all material respects, for the purpose stated above.
Changes
in Internal Control over Financial Reporting:
There
were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2019
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial
reporting.
PART
II OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None.
ITEM
1A. RISK FACTORS
Not
applicable.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
|
(1)
|
Incorporated
herein by reference from the Registrant’s Form 8-K Current Report filed with the Securities and Exchange Commission, on
June 1, 2010.
|
|
(2)
|
Incorporated
herein by reference from the Registrant’s Form 8-K Current Report as filed with the Securities and Exchange Commission,
on March 17, 2009.
|
|
(3)
|
Furnished
in accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section
18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated
by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the
registrant specifically incorporates it by reference.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated
: November 14, 2019
|
SORL
AUTO PARTS, INC.
|
|
|
|
By:
|
/s/ Xiao Ping Zhang
|
|
Name:
|
Xiao Ping Zhang
|
|
Title:
|
Chief Executive Officer
(Principal Executive Officer)
|
|
By:
|
/s/ Zong Yun Zhou
|
|
Name:
|
Zong Yun Zhou
|
|
Title:
|
Chief Financial Officer
(Principal Accounting Officer)
|
30
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