Attached files
file | filename |
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EX-31.2 - SORL Auto Parts, Inc. | v203152_ex31-2.htm |
EX-31.1 - SORL Auto Parts, Inc. | v203152_ex31-1.htm |
EX-32.1 - SORL Auto Parts, Inc. | v203152_ex32-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-Q/A
Amendment No. 1 to
Amendment No. 1 to
(Mark One)
x
|
QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period
ended September 30, 2010
|
o
|
TRANSITION REPORT UNDER SECTION 13
OR 15(d) OF THE 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. 1169 Yumeng Road
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 x
No o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer or a smaller reporting company. See definition of “accelerated filer”,
“large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large Accelerated Filer
o
|
Accelerated Filer o
|
Non-Accelerated Filer o |
Smaller Reporting
Company x
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act):
Yes o No X x
APPLICABLE ONLY TO CORPORATE
ISSUERS
Indicate the number of shares
outstanding of each of the registrant classes of common equity, as of the latest
practicable date:
As of October 30, 2010 there were
19,304,921
shares of Common Stock
outstanding
SORL AUTO PARTS,
INC.
FORM 10-Q/A
Amendment No. 1
Amendment No. 1
For the Quarter Ended September 30,
2010
INDEX
Page
|
||||
PART I. |
FINANCIAL
INFORMATION (Unaudited)
|
1
|
||
Item 1. |
Financial
Statements:
|
1
|
||
Condensed
Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and
December 31, 2009
|
1
|
|||
Condensed
Consolidated Statements of Income and Comprehensive Income (Unaudited) for
the Three and Nine Months Ended September 30, 2010 and
2009
|
2
|
|||
Condensed
Consolidated Statements of Cash Flows (Unaudited) for the Three and Nine
Months Ended September 30, 2010 and 2009
|
3
|
|||
Condensed
Consolidated Statements of Stockholders’ Equity (Unaudited)
|
4
|
|||
Notes
to the Condensed Consolidated Financial Statements (Unaudited)
|
6
|
|||
|
||||
Item 2. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
20
|
||
|
||||
Item 3. |
Quantitative
and Qualitative Disclosures About Market Risk
|
33
|
||
Item 4. |
Controls
and Procedures
|
33
|
||
PART II. |
OTHER
INFORMATION
|
34
|
||
Item 6. |
Exhibits
|
34
|
||
SIGNATURES |
34
|
SORL
Auto Parts, Inc. and Subsidiaries
|
|||||
Consolidated
Balance Sheets
|
|||||
September
30, 2010 and December 31, 2009
|
September
30, 2010
|
December
31, 2009 *
|
|||||||||
(Unaudited)
|
||||||||||
Assets
|
||||||||||
Current
Assets
|
||||||||||
Cash
and Cash Equivalents
|
US$
|
2,244,711 |
US$
|
10,255,259 | ||||||
Accounts
Receivable, Net of Provision
|
52,341,726 | 47,753,974 | ||||||||
Notes
Receivable
|
17,722,265 | 13,083,691 | ||||||||
Inventory
|
27,970,237 | 23,943,279 | ||||||||
Prepayments
|
9,558,419 | 7,558,140 | ||||||||
Deferred
tax assets
|
526,631 | 220,577 | ||||||||
Other
current assets
|
4,041,842 | 5,226,713 | ||||||||
Total
Current Assets
|
114,405,831 | 108,041,633 | ||||||||
Fixed
Assets
|
||||||||||
Property,
Plant and Equipment
|
62,154,174 | 49,713,952 | ||||||||
Less:
Accumulated Depreciation
|
(21,289,024 | ) | (17,983,124 | ) | ||||||
Property,
Plant and Equipment, Net
|
40,865,150 | 31,730,828 | ||||||||
Leasehold
Improvements in Progress
|
437,161 | 477,681 | ||||||||
Land
Use Rights, Net
|
14,215,350 | 14,198,392 | ||||||||
Other
Assets
|
||||||||||
Deferred
compensation cost-stock options
|
- | - | ||||||||
Intangible
Assets
|
164,561 | 161,499 | ||||||||
Less:
Accumulated Amortization
|
(67,123 | ) | (54,380 | ) | ||||||
Intangible
Assets, Net
|
97,438 | 107,119 | ||||||||
Total
Other Assets
|
97,438 | 107,119 | ||||||||
Total
Assets
|
US$
|
170,020,930 |
US$
|
154,555,653 | ||||||
Liabilities
and Shareholders' Equity
|
||||||||||
Current
Liabilities
|
||||||||||
Accounts
Payable, including $5,322 and $1,985,291 due to related parties at
September 30, 2010 and December 31, 2009, respectively.
|
US$
|
6,325,153 |
US$
|
9,724,715 | ||||||
Deposit
Received from Customers
|
5,110,219 | 3,670,369 | ||||||||
Short
term bank loans
|
9,383,510 | - | ||||||||
Income
tax payable
|
1,258,771 | 551,900 | ||||||||
Accrued
Expenses
|
5,717,555 | 4,206,297 | ||||||||
Other
Current Liabilities, including $107,845 and $200,762 from related parties
at September 30, 2010 and December 31, 2009, respectively.
|
2,283,609 | 585,176 | ||||||||
Total
Current Liabilities
|
30,078,817 | 18,738,457 | ||||||||
Non-Current
Liabilities
|
||||||||||
Deferred
tax liabilities
|
156,895 | 115,481 | ||||||||
Total
Liabilities
|
30,235,712 | 18,853,938 | ||||||||
Stockholders'
Equity
|
||||||||||
Preferred
Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as
of September 30, 2010 and December 31, 2009
|
- | - | ||||||||
Common
Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 and 18,304,921
issued and outstanding as of September 30, 2010 and December 31,
2009
|
38,609 | 36,609 | ||||||||
Additional
Paid In Capital
|
42,199,014 | 55,268,604 | ||||||||
Reserves
|
6,051,748 | 4,554,601 | ||||||||
Accumulated
other comprehensive income
|
13,273,727 | 10,939,703 | ||||||||
Retained
Earnings
|
64,448,912 | 51,390,409 | ||||||||
Total
SORL Auto Parts, Inc. stockholders' equity
|
126,012,010 | 122,189,926 | ||||||||
Noncontrolling
Interest In Subsidiaries
|
13,773,208 | 13,511,789 | ||||||||
Total
Equity
|
139,785,218 | 135,701,715 | ||||||||
Total
Liabilities and Stockholders' Equity
|
US$
|
170,020,930 |
US$
|
154,555,653 |
The
accompanying notes are an integral part of these financial
statements
|
*
12/31/09 Consolidated Balance Sheet has been adjusted for the acquisition of a
business line under common control in the current period. Refer to Note AD for
details.
1
SORL
Auto Parts, Inc. and Subsidiaries
|
|||||||||
Consolidated
Statements of Income and Comprehensive
Income(Unaudited)
|
|||||||||
Three
Months and Nine Months Ended September 30,
2010
|
Three
Months Ended September 30,
|
Nine
Months Ended
September
30,
|
|||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||
Sales
|
US$
|
50,806,384 | 38,719,508 |
US$
|
144,593,338 | 95,110,334 | ||||||||||||
Include:
sales to related parties
|
364,669 | 181,873 | 982,266 | 383,484 | ||||||||||||||
Cost
of Sales
|
36,279,785 | 27,751,213 | 102,081,674 | 67,251,392 | ||||||||||||||
Gross
Profit
|
14,526,599 | 10,968,295 | 42,511,664 | 27,858,942 | ||||||||||||||
Expenses:
|
||||||||||||||||||
Selling
and Distribution Expenses
|
3,299,914 | 2,783,780 | 9,341,056 | 7,187,413 | ||||||||||||||
General
and Administrative Expenses
|
2,950,120 | 2,149,066 | 9,789,218 | 6,740,521 | ||||||||||||||
Research
and Development Expenses
|
1,773,044 | 624,461 | 5,326,598 | 2,545,689 | ||||||||||||||
Financial
Expenses
|
357,984 | 60,492 | 775,385 | 166,093 | ||||||||||||||
|
|
|
|
|||||||||||||||
Total
Expenses
|
8,381,062 | 5,617,799 | 25,232,257 | 16,639,716 | ||||||||||||||
Operating
Income
|
6,145,537 | 5,350,496 | 17,279,407 | 11,219,226 | ||||||||||||||
Other
Income
|
366,308 | 163,776 | 649,227 | 410,074 | ||||||||||||||
Non-Operating
Expenses
|
(68,318 | ) | (61,226 | ) | (133,215 | ) | (84,506 | ) | ||||||||||
Income
Before Provision for Income Taxes
|
6,443,527 | 5,453,046 | 17,795,419 | 11,544,794 | ||||||||||||||
Provision
for Income Taxes
|
962,210 | 802,124 | 1,780,492 | 2,140,055 | ||||||||||||||
Net
Income
|
US$
|
5,481,317 | 4,650,922 |
US$
|
16,014,927 | 9,404,739 | ||||||||||||
Other
Comprehensive Income - Foreign Currency Translation
Adjustment
|
1,816,535 | 45,431 | 2,593,662 | 86,688 | ||||||||||||||
Total
Comprehensive Income
|
7,297,852 | 4,696,353 | 18,608,589 | 9,491,427 | ||||||||||||||
Less:
|
||||||||||||||||||
Net
income attributable to Noncontrolling Interest In
Subsidiaries
|
501,616 | 465,092 | 1,459,277 | 941,468 | ||||||||||||||
Other
Comprehensive Income Attributable to Non-controlling Interest's
Share
|
181,654 | 4,543 | 259,638 | 8,669 | ||||||||||||||
Total
Comprehensive Income Attributable to Non-controlling Interest's
Share
|
683,270 | 469,635 | 1,718,915 | 950,137 | ||||||||||||||
Net
Income Attributable to Stockholders
|
4,979,701 | 4,185,830 | 14,555,650 | 8,463,271 | ||||||||||||||
Other
Comprehensive Income Attributable to Stockholders
|
1,634,881 | 40,888 | 2,334,024 | 78,019 | ||||||||||||||
Total
Comprehensive Income Attributable to Stockholders
|
6,614,582 | 4,226,718 | 16,889,674 | 8,541,290 | ||||||||||||||
Weighted
average common share - Basic
|
19,304,921 | 18,279,254 | 19,162,064 | 18,279,254 | ||||||||||||||
Weighted
average common share - Diluted
|
19,304,921 | 18,279,254 | 19,162,064 | 18,279,254 | ||||||||||||||
EPS
- Basic
|
0.26 | 0.23 | 0.76 | 0.46 | ||||||||||||||
EPS
- Diluted
|
0.26 | 0.23 | 0.76 | 0.46 |
The
accompanying notes are an integral part of these financial
statements
|
2
SORL
Auto Parts, Inc. and Subsidiaries
|
||||||||
Consolidated
Statements of Cash Flows
|
||||||||
Three
and Nine Months Ended September
30,2010
|
Three Months
Ended
September
30,
|
Nine Months
Ended
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Cash
Flows from Operating Activities
|
||||||||||||||||
Net
Income
|
4,979,701 | 4,185,830 | 14,555,650 | 8,463,271 | ||||||||||||
Adjustments
to reconcile net income (loss) to net cash from operating
activities:
|
||||||||||||||||
Noncontrolling
Interest In Subsidiaries
|
501,616 | 465,092 | 1,459,277 | 941,468 | ||||||||||||
Bad
Debt Expense
|
― | (450,102 | ) | 888,295 | 2,823 | |||||||||||
Depreciation
and Amortization
|
1,283,642 | 1,083,920 | 3,750,717 | 3,204,199 | ||||||||||||
Stock-Based
Compensation Expense
|
― | ― | ― | 9,935 | ||||||||||||
Loss
on disposal of Fixed Assets
|
― | 1,734 | ― | 11,832 | ||||||||||||
Changes
in Assets and Liabilities:
|
||||||||||||||||
Account
Receivables
|
(387,028 | ) | (2,334,276 | ) | (4,440,601 | ) | (8,176,548 | ) | ||||||||
Notes
Receivables
|
8,947,788 | (3,146,091 | ) | (4,229,708 | ) | (3,727,096 | ) | |||||||||
Other
Currents Assets
|
6,276,474 | 507,782 | 2,564,064 | 2,309,133 | ||||||||||||
Inventory
|
(2,133,243 | ) | 289,451 | (3,485,655 | ) | 5,009,918 | ||||||||||
Prepayments
|
(895,451 | ) | (4,513,075 | ) | (1,845,453 | ) | (5,066,567 | ) | ||||||||
Deferred
tax assets
|
(47,649 | ) | 161,398 | (298,504 | ) | (180,676 | ) | |||||||||
Deferred
assets
|
- | - | - | (465,484 | ) | |||||||||||
Accounts
Payable and Notes Payable
|
(1,050,966 | ) | 1,204,723 | (3,660,704 | ) | 2,066,273 | ||||||||||
Income
Tax Payable
|
5,513 | 1,281,330 | 686,379 | 2,704,200 | ||||||||||||
Deposits
Received from Customers
|
569,885 | (249,718 | ) | 1,350,813 | (112,459 | ) | ||||||||||
Other
Current Liabilities and Accrued Expenses
|
1,257,722 | (775,421 | ) | 1,665,721 | (434,702 | ) | ||||||||||
Deferred
tax liabilities
|
12,988 | 21,378 | 38,689 | 64,108 | ||||||||||||
Net
Cash Flows from Operating Activities
|
19,320,992 | (2,266,045 | ) | 8,998,980 | 6,623,628 | |||||||||||
Cash
Flows from Investing Activities
|
||||||||||||||||
Acquisition
of Property and Equipment
|
(4,711,042 | ) | (960,135 | ) | (11,662,205 | ) | (1,925,637 | ) | ||||||||
Acquisition
of the automotive parts business
|
(24,963,964 | ) | ― | (24,963,964 | ) | ― | ||||||||||
Sales
proceeds of disposal of fixed assets
|
― | ― | ― | 36,692 | ||||||||||||
Acquisition
of Land Use Rights
|
― | ― | ― | ― | ||||||||||||
Investment
in Intangible Assets
|
― | ― | ― | ― | ||||||||||||
Net
Cash Flows from Investing Activities
|
(29,675,006 | ) | (960,135 | ) | (36,626,169 | ) | (1,888,945 | ) | ||||||||
Cash
Flows from Financing Activities
|
||||||||||||||||
Proceeds
from (Repayment of) Bank Loans
|
4,795,871 | ― | 9,279,449 | ― | ||||||||||||
Proceeds
from Share Issuance
|
― | ― | 9,399,978 | ― | ||||||||||||
Capital
contributed by Minority S/H
|
― | ― | 1,038,900 | ― | ||||||||||||
Net
Cash flows from Financing Activities
|
4,795,871 | ― | 19,718,327 | ― | ||||||||||||
Effects
on changes in foreign exchange rate
|
(172,861 | ) | 5,992 | (101,686 | ) | 11,972 | ||||||||||
Net
Change in Cash and Cash Equivalents
|
(5,731,004 | ) | (3,220,188 | ) | (8,010,548 | ) | 4,746,655 | |||||||||
Cash
and Cash Equivalents- Beginning of the year
|
7,975,715 | 15,762,830 | 10,255,259 | 7,795,987 | ||||||||||||
Cash
and cash Equivalents - End of the period
|
2,244,711 | 12,542,642 | 2,244,711 | 12,542,642 | ||||||||||||
Supplemental
Cash Flow Disclosures:
|
||||||||||||||||
Interest
Paid
|
298,277 | ― | 298,277 | 13,736 | ||||||||||||
Tax
Paid
|
969,302 | 845,072 | 2,033,008 | 1,475,754 |
The
accompanying notes are an integral part of these financial
statements
3
SORL
Auto Parts, Inc. and Subsidiaries
|
Consolidated
Statements of Changes in Shareholders' Equity
|
For
the Year Ended on December 31, 2009
|
Number
|
Common
|
Additional
|
Reserves
|
Retained
|
Accumu.
Other
|
||||||||||||||||||||||||||||||||
of
Share
|
Stock
|
Paid-in
|
Earnings
|
Comprehensive
|
Shareholders'
|
Minority
|
Total
Equity
|
||||||||||||||||||||||||||||||
|
|
|
|
Capital
|
|
(Deficit)
|
Income
|
Equity
|
Interest
|
|
|||||||||||||||||||||||||||
Beginning
Balance - January 1, 2009
|
18,279,254 | 36,558 | 55,268,655 | 3,126,086 | 38,774,684 | 10,848,248 | 108,054,231 | 11,981,633 | 120,035,864 | ||||||||||||||||||||||||||||
Net
Income
|
- | - | - | - | 14,044,240 | - | 14,044,240 | 1,519,921 | 15,564,161 | ||||||||||||||||||||||||||||
Other
Comprehensive Income(Loss)
|
- | - | - | - | - | 91,455 | 91,455 | 10,183 | 101,638 | ||||||||||||||||||||||||||||
Stock
options exercised, net
|
25,667 | 51 | (51 | ) | - | - | - | - | - | - | |||||||||||||||||||||||||||
Capital
contributed by Minority S/H
|
- | - | - | - | - | - | 52 | 52 | |||||||||||||||||||||||||||||
Transfer
to reserve
|
- | - | - | 1,428,515 | (1,428,515 | ) | - | - | - | - | |||||||||||||||||||||||||||
Ending
Balance - December 31, 2009
|
18,304,921 | 36,609 | 55,268,604 | 4,554,601 | 51,390,409 | 10,939,703 | 122,189,926 | 13,511,789 | 135,701,715 |
The
accompanying notes are an integral part of these financial
statements
4
SORL
Auto Parts, Inc. and Subsidiaries
|
Consolidated
Statements of Changes in Stockholders' Equity
|
Nine
Months Ended September 30, 2010
|
Number
|
Common
|
Additional
|
Reserves
|
Retained
|
Accumu.
Other
|
||||||||||||||||||||||||||||||||
of
Share
|
Stock
|
Paid-in
|
Earnings
|
Comprehensive
|
Shareholders'
|
Noncontrolling
|
Total
Equity
|
||||||||||||||||||||||||||||||
|
|
|
|
Capital
|
|
(Deficit)
|
Income
|
Equity
|
Interest
|
|
|||||||||||||||||||||||||||
Beginning
Balance - January 1, 2010
|
18,304,921 | 36,609 | 55,268,604 | 4,554,601 | 51,390,409 | 10,939,703 | 122,189,926 | 13,511,789 | 135,701,715 | ||||||||||||||||||||||||||||
Net
Income
|
- | - | - | - | 14,555,650 | - | 14,555,650 | 1,459,277 | 16,014,927 | ||||||||||||||||||||||||||||
Other
Comprehensive Income(Loss)
|
- | - | - | - | - | 2,334,024 | 2,334,024 | 259,638 | 2,593,662 | ||||||||||||||||||||||||||||
Common
stock issued in public offering
|
1,000,000 | 2,000 | 9,397,978 | - | - | - | 9,399,978 | - | 9,399,978 | ||||||||||||||||||||||||||||
Capital
contributed by Minority S/H
|
- | - | - | - | - | - | - | 1,038,900 | 1,038,900 | ||||||||||||||||||||||||||||
Acquisition
of the automotive parts business of Ruili Group Co., Ltd.
|
(22,467,568 | ) | - | - | - | (22,467,568 | ) | (2,496,396 | ) | (24,963,964 | ) | ||||||||||||||||||||||||||
Transfer
to reserve
|
- | - | - | 1,497,147 | (1,497,147 | ) | - | - | - | - | |||||||||||||||||||||||||||
Ending
Balance - September 30, 2010
|
19,304,921 | 38,609 | 42,199,014 | 6,051,748 | 64,448,912 | 13,273,727 | 126,012,010 | 13,773,208 | 139,785,218 |
The
accompanying notes are an integral part of these financial
statements
5
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - DESCRIPTION OF
BUSINESS
SORL Auto
Parts, Inc.( “the Company”) 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 Company Limited
(“Ruian”) in the People’s Republic of China (“PRC” or “China”) and 60% ownership
of SORL International Holding, Ltd. ("SIH") in Hong Kong. The Company
distributes products both in China and internationally under SORL trademarks.
The Company’s product range includes 65 categories and over 2000 different
specifications.
On
November 11, 2009, the Company entered into a joint venture agreement with MGR,
a Hong Kong-based global auto parts distribution specialist firm and a
Taiwanese investor. The new joint venture was named SORL International Holding,
Ltd. ("SIH"). SORL holds a 60% interest in the joint venture, MGR holds a 30%
interest, and the Taiwanese investor holds a 10% interest. SIH is primarily
devoted to expanding SORL's international sales network in Asia-Pacific and
creating a larger footprint in Europe, the Middle East and Africa with a target
to create a truly global distribution network. Based in Hong Kong, SIH is
expanding and establishing channels of distribution in international markets
with SORL's primary products, including spring brake chambers, clutch servos,
air dryers, relay valves and hand brake valves.
On
February 8, 2010, the Company sold 1,000,000 shares of its common stock to
selected institutional investors at a price of $10.00 per share pursuant to a
registered direct offering. This transaction provided net proceeds of
approximately $9.4 million. On March 9, 2010, through Fairford, SORL invested
$9.349 million in its operating subsidiary, the Ruili Group Ruian Auto Parts
Co., Ltd.(the “Joint Venture”) To maintain its 10% shareholding in the Joint
Venture, the Ruili Group increased its capital investment by $1.039 million.
Accordingly, SORL continues to hold a 90% controlling interest in the operating
subsidiary.
On August
31, 2010, the Company, through Ruian, executed an Agreement to acquire the
assets of the hydraulic brake, power steering, and automotive electrical
operations of Ruili Group Co., Ltd. (the "Seller", a related party under common
control). 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 purchase price was RMB 170 million, or
approximately USD$25 million. The transaction was accounted for using book basis
of assets acquired, consisting primarily of machinery and equipment, inventory,
accounts receivable and patent rights, used or usable in connection with the
segment of the auto parts business of Ruili Group Co., Ltd. The Company
purchased the machinery and equipment, inventory, accounts receivable at $8.0
million, $8.0 million and $5.2 million, respectively. The Company did not
acquire any of the assets of the Seller other than those in the segment of
Seller's business described above. The excess of consideration over the carrying
value of net assets received has been recorded as a decrease in the additional
paid-in capital of the Company.
The
acquisition was accounted for as a transaction between the entities under common
control because the CEO of the Company owns 63% of registered capital of Ruili
Group Co., Ltd., and owns more than 50% of outstanding common stocks of SORL
with his wife and brother. This results in the acquisition being accounted for
using the historical costs of the financial statements of the Ruili Group Co.,
Ltd. The consolidated financial statements have been prepared as if the
acquisition took place at the earliest time presented, that is, as of January 1,
2009. The assets purchase was deemed to be the acquisition of a
business.
NOTE B - BASIS OF
PRESENTATION
The
condensed consolidated financial statements include the accounts of the Company
and its majority owned subsidiaries. All significant 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, although the Company believes that the
disclosures contained in this report are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the annual audited consolidated financial
statements and the notes thereto included in the Company’s annual report on Form
10-K and other reports filed with the SEC.
6
The
accompanying condensed 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.
NOTE C- RECENTLY ISSUED FINANCIAL
STANDARDS
In June
2009, the FASB issued FASB ASC 860-10-05 (Prior authoritative literature: FASB
Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of
FASB Statement No. 140”). FASB ASC 860-10-05 improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. FASB ASC 860-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 860-10-05 has not had a material effect on the Company’s consolidated
financial statements.
In June
2009, the FASB issued FASB ASC 810-10-05 (Prior authoritative literature: FASB
Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC
810-10-05 improves financial reporting by enterprises involved with variable
interest entities and to address (1) the effects on certain provisions of prior
authoritative literature FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities”, as a result of the elimination of
the qualifying special-purpose entity concept in prior authoritative literature
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of prior authoritative literature Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. FASB ASC 810-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 810-10-05 has not had a material effect on the Company’s consolidated
financial statements.
In June
2009, the FASB issued revised authoritative guidance related to variable
interest entities, which requires entities to perform a qualitative analysis to
determine whether a variable interest gives the entity a controlling financial
interest in a variable interest entity. The guidance also requires an ongoing
reassessment of variable interests and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. This guidance, which was reissued by the FASB in December 2009 as
ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities,” amends ASC Topic 810,
“Consolidation”, and became effective as of the beginning of an entity’s first
annual reporting period that begins after November 15, 2009 (January 1, 2010 for
the Company). The adoption of this guidance has not had a significant impact on
the Company’s consolidated financial statements.
In
January 2010, the FASB issued Accounting Standards Updated (ASU) No. 2010-06,
“Improving Disclosures about Fair Value Measurements,” which amends ASC 820,
“Fair Value Measures and Disclosures.” ASU No. 2010-06 amends the ASC to
require disclosure of transfers into and out of Level 1 and Level 2 fair value
measurements, and also require more detailed disclosure about the activity
within Level 3 fair value measurements. The changes to the ASC as a result of
this update are effective for annual and interim reporting periods beginning
after December 15, 2009 (January 1, 2010 for the Company), except for the
requirements related to Level 3 disclosures, which are effective for annual and
interim reporting periods beginning after December 15, 2010 (January 1, 2011 for
the Company). This guidance requires new disclosures only, and has had no impact
on the Company’s consolidated financial statements.
7
In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to
Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic
855, Subsequent Events. The update provides that SEC filers, as defined in ASU
2010-09, are no longer required to disclose the date through which subsequent
events have been evaluated in originally issued and revised financial
statements. The update also requires SEC filers to evaluate subsequent events
through the date the financial statements are issued rather than the date the
financial statements are available to be issued. The Company adopted ASU 2010-09
upon issuance. The adoption of this ASU update has no material impact on the
Company’s financial statements.
NOTE D - RELATED PARTY
TRANSACTIONS
The
Company continued to purchase other automotive products and packaging materials
from the Ruili Group Co., Ltd. The Ruili Group Co., Ltd., is the minority
shareholder of the Joint Venture and is controlled by the Zhang family, who is
also the controlling party of the Company.
The following related party transactions
are reported for the three months and nine months ended September 30, 2010 and
2009:
Three Months Ended September
30,
|
Nine Months Ended September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
PURCHASES
FROM:
|
||||||||||||||||
Ruili Group Co.,
Ltd.
|
$
|
954,700
|
$
|
282,647
|
$
|
2,074,652
|
$
|
940,539
|
||||||||
Total
Purchases
|
$
|
954,700
|
$
|
282,647
|
$
|
2,074,652
|
$
|
940,539
|
||||||||
SALES TO:
|
||||||||||||||||
Ruili Group Co.,
Ltd.
|
$
|
364,669
|
$
|
181,873
|
$
|
982,266
|
$
|
383,484
|
||||||||
Total Sales
|
$
|
364,669
|
$
|
181,873
|
$
|
982,266
|
$
|
383,484
|
||||||||
On August
31, 2010, the Company through its 90%-owned subsidiary, Ruili Group Ruian Auto
Parts Co., Ltd., completed the transaction of purchasing the segments of the
automotive parts business of Ruili Group Co., Ltd. The purchase price was RMB
170 million, or approximately USD$25 million. The transaction was accounted for
using book basis of assets acquired, consisting primarily of machinery and
equipment, inventory, accounts receivable and patent rights, used or usable in
connection with the segment of the auto parts business of Ruili Group Co.,
Ltd.
8
In
addition, Ruian Auto Parts Co., Ltd purchased approximately $0.3 million of
other automotive products and $0.7 million packaging materials from Ruili
Group during the three months ended September 30, 2010. The breakdown was
approximately $0.3 million of other automotive products and $1.8 million of packaging materials
during the nine months ended September 30, 2010.
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
||||||
OTHER
PAYABLES TO RELATED PARTIES
|
||||||||
Ruili
Group Co., Ltd.
|
107,845
|
200,762
|
||||||
Total
|
107,845
|
200,762
|
||||||
ACCOUNTS
PAYABLE TO RELATED PARTIES
|
||||||||
Ruili Group Co.,
Ltd.
|
$
|
5,322
|
$
|
1,985,291
|
||||
Total
|
$
|
5,322
|
$
|
1,985,291
|
NOTE E - ACCOUNTS
RECEIVABLE
The
changes in the allowance for doubtful accounts at September 30, 2010 and
December 31, 2009 were summarized as follows:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Beginning
balance
|
$
|
57,823
|
$
|
24,997
|
||||
Add: Increase to
allowance
|
904,079
|
32,826
|
||||||
Less:
Accounts written off
|
—
|
—
|
||||||
Ending
balance
|
$
|
961,902
|
$
|
57,823
|
||||
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
||||||
Accounts
receivable
|
$
|
53,303,628
|
$
|
47,811,797
|
||||
Less: allowance for doubtful
accounts
|
(961,902
|
) |
(57,823
|
)
|
||||
Account receivable balance,
net
|
$
|
52,341,726
|
$
|
47,753,974
|
NOTE F - INVENTORIES
On
September 30, 2010 and December 31, 2009, inventories consisted of the
following:
September
30,
|
December
31,
|
|||||||
|
2010
|
2009
|
||||||
Raw
Material
|
$
|
6,277,100
|
$
|
4,417,094
|
||||
Work in
process
|
3,767,626
|
4,573,934
|
||||||
Finished
Goods
|
17,925,511
|
14,952,251
|
||||||
Total
Inventory
|
$
|
27,970,237
|
$
|
23,943,279
|
9
NOTE G - PROPERTY, PLANT AND
EQUIPMENT
Property, plant and equipment consisted
of the following, on September 30, 2010 and December 31,
2009:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Machinery
|
$ | 50,405,332 | $ | 38,505,453 | ||||
Molds
|
1,300,973 | 1,276,757 | ||||||
Office
equipment
|
1,057,104 | 856,184 | ||||||
Vehicle
|
1,256,634 | 1,092,835 | ||||||
Building
|
8,134,131
|
7,982,723
|
||||||
Sub-Total
|
62,154,174
|
49,713,952
|
||||||
Less: Accumulated
depreciation
|
21,289,024 | ) |
(17,983,124)
|
|||||
Fixed Assets,
net
|
$ | 40,865,150 | $ | 31,730,828 |
Depreciation expense charged to
operations was $3,440,262 and $2,874,780 for the nine months ended September 30,
2010 and 2009, respectively.
NOTE
H- LEASEHOLD IMPROVEMENTS
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Cost:
|
$
|
472,025
|
$
|
478,088
|
||||
Less: Accumulated
amortization:
|
(
34,864
|
)
|
(407
|
)
|
||||
Leasehold Improvements In
Progress, net
|
$
|
437,161
|
$
|
477,681
|
By law
and practice, when improvements are made to real property and those improvements
are permanently affixed to the property, the title to those improvements
automatically transfers to the owner of the property. The lessee’s interest in
the improvements is not a direct ownership interest but rather it is an
intangible right to use and benefit from the improvements during the term of the
lease. The leasehold improvements
are amortized over the lease term.
In May
2009, the Joint Venture entered into a lease agreement with Ruili Group Co.,
Ltd. for the lease of a manufacturing plant. This manufacturing plant was
not part of the assets acquired from Ruili Group Co., Ltd. The lease term is
from June 2009 to May 2017.
In August 2009, SIH entered into
a lease agreement with MGR for the lease of an office with a five-year lease
term.
10
In August
2010, a new a lease agreement was signed between the Joint Venture and Ruili
Group Co., Ltd., the Joint Venture leased 32,410 square meters manufacturing
plant for its new purchased passenger vehicles brake systems business. The lease
term is from September 2009 to August 2020.
NOTE
I- LAND USE RIGHTS
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Cost:
|
$
|
15,224,724
|
$
|
14,941,331
|
||||
Less: Accumulated
amortization:
|
(1,009,374)
|
(742,939)
|
||||||
Land use rights,
net
|
$
|
14,215,350
|
$
|
14,198,392
|
According to the law 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. The Company purchased the land use rights from Ruili
Group for approximately $13.9 million on September 28, 2007. The Company has not
yet obtained the land use right certificate. However, the Company has
applied to obtain the land use right certificate. Amortization
expenses were $248,901 and $247,466 for the nine months ended September 30,
2010 and 2009, respectively.
NOTE J - INTANGIBLE
ASSETS
Intangible assets owned by the Company
included patent technology and management software licenses. Gross intangible
assets were $164,561, less accumulated amortization of $67,123 for net
intangible assets of $97,438 as of September 30, 2010. Gross intangible assets
were $161,499, less accumulated amortization of $54,380 for net intangible
assets of $107,119 as of December 31, 2009. Amortization expenses were $11,552
and $11,485 for the
nine months ended September 30, 2010 and 2009 respectively. Future estimated
amortization expense is as follows:
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
|||||||||||||||||
$ | 4,598 | $ | 16,150 | $ | 16,150 | $ | 16,150 | $ | 11,766 | $ | 30,753 |
NOTE K - PREPAYMENT
Prepayment
consisted of the following as of September 30, 2010 and December 31,
2009:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Raw material
suppliers
|
$ | 6,879,629 | $ | 3,059,449 | ||||
Equipment
purchase
|
2,678,790 | 4,498,691 | ||||||
Total
prepayment
|
$ | 9,558,419 | $ | 7,558,140 |
11
NOTE
L - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
Deferred tax assets consisted of the
following as of September 30, 2010
30-Sep-10
|
31-Dec-09
|
|||||||
Deferred
tax assets - current
|
||||||||
Provision
|
$ | 143,515 | $ | 7,917 | ||||
Subsidiary's
operating loss carryforwards
|
66,528 | 33,008 | ||||||
Warranty
|
451,158 | 260,295 | ||||||
Deferred
tax assets
|
661,200 | 301,220 | ||||||
Valuation
allowance
|
― | ― | ||||||
Net
deferred tax assets - current
|
$ | 661,200 | $ | 301,220 | ||||
Deferred
tax liabilities - current
|
||||||||
Revenue
(net off cost)
|
$ | 134,569 | $ | 80,643 | ||||
Deferred
tax liabilities - current
|
134,569 | 80,643 | ||||||
Net
deferred tax assets - current
|
526,631 | 220,577 | ||||||
Deferred
tax liabilities - non-current
|
||||||||
Land
use right
|
156,895 | 115,481 | ||||||
Deferred
tax liabilities - non-current
|
156,895 | 115,481 |
Deferred
taxation is calculated under the liability method in respect of taxation effect
arising from all timing differences, which are expected with reasonable
probability to realize in the foreseeable future. The Company and its
subsidiaries do not have income tax liabilities in U.S. as the Company had no
United States taxable income for the reporting period. The Company’s subsidiary
registered in the PRC is subject to income taxes within the PRC at the
applicable tax rate.
12
NOTE M - Bank
Loans
Bank
loans represented the following as of September 30, 2010 and December 31,
2009:
September
30,
2010
|
December
31,
2009
|
|||||||
Secured
|
$ | 9,383,510 | $ | — | ||||
|
||||||||
Less:
Current portion
|
$ | (9,383,510 | ) | $ | — | |||
|
||||||||
Non-current
portion
|
$ | — | $ | — |
These loans were from Agricultural Bank
of China, to finance general working capital as
well as new equipment acquisition. Guarantees were provided by Ruili Group Co., Ltd., a related
party. The Company did not provide any sort of guarantee to any other parties.
Interest rates for the loans ranged between 4.86% and 0.83% per annum. The
maturity dates of the loans were March 16, 2011 and October 22, 2010,
respectively.
NOTE N - ACCRUED
EXPENSES
Accrued
expenses consisted of the following as of September 30, 2010 and December 31,
2009:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Accrued
payroll
|
$ | 1,858,239 | $ | 1,536,980 | ||||
Other accrued
expenses
|
3,859,316 | 2,669,317 | ||||||
Total accrued
expenses
|
$ | 5,717,555 | $ | 4,206,297 |
NOTE O – RESERVE
The reserve funds are comprised of the
following:
September
30,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Statutory surplus reserve
fund
|
$ | 6,051,748 | $ | 4,554,601 | ||||
Total
|
$ | 6,051,748 | $ | 4,554,601 |
Pursuant to the relevant laws and
regulations of Sino-foreign joint venture enterprises, the profits of the
Company's subsidiary, which are based on their PRC statutory financial
statements, are available for distribution in the form of cash dividends after
they have satisfied all the PRC tax liabilities, provided for losses in previous
years, and made appropriations to reserve funds, as determined at the discretion
of the board of directors in accordance with PRC accounting standards and
regulations.
As stipulated by the relevant laws and
regulations for enterprises operating in the PRC, the Company's Sino-foreign
joint venture is required to make annual appropriations to the statutory surplus
funds. In accordance with the relevant PRC regulations and the articles of
association of the respective companies, the Joint Venture is required to
allocate a certain percentage of its profits after taxation, as determined in
accordance with PRC accounting standards applicable to the Company, to the
statutory surplus reserve until such reserve reaches 50% of the registered
capital of the Company.
Net income as reported in the US GAAP
financial statements differs from that as reported in the PRC statutory
financial statements. In accordance with the relevant laws and regulations in
the PRC, the profits available for distribution are based on the statutory
financial statements. If the Joint Venture has foreign currency available after
meeting its operational needs, the Joint Venture may make its profit
distributions in foreign currency to the extent foreign currency is available.
Otherwise, it is necessary to obtain approval and convert such distributions at
an authorized bank. The reserve fund consists of retained earnings which has
been allocated to the statutory reserve fund.
13
NOTE P - INCOME
TAXES
The Joint
Venture is registered in the PRC, and is therefore subject to state and local
income taxes within the PRC at the applicable tax rate on the taxable income as
reported in the PRC statutory financial statements in accordance with relevant
income tax laws. According to applicable tax laws regarding Sino-Foreign Joint
Venture, the Joint Venture is exempted from income taxes in the PRC for the
fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture is
entitled to a 50% income tax deduction for the following three years ended
December 31, 2006, 2007, and 2008. As a result of the Joint Venture
obtaining its Sino-foreign joint venture status in 2004, in accordance with
applicable PRC tax regulations, the Joint Venture was exempted from PRC income
tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture is entitled to a
tax concession of 50% of the applicable income tax rate of 26.4% for the two
years ended December 31, 2006 and 2007. With the new PRC Enterprise Income Tax
Law, effective on 1st January 2008, the China’s enterprises are generally
subject to a PRC income tax rate of 25% and the Joint Venture is entitled to a
tax concession of 50% of the applicable income tax rate of 25% for the year
ended December 31, 2008.
Additionally,
the Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of the
People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture is eligible for additional preferential tax
treatment. For the years 2007 and 2008, the Joint Venture entitled to an income
tax exemption on all pre-tax income generated by the company above its pre-tax
income generated in the fiscal year 2006. Thereafter, the Joint Venture will
enjoy a 50% exemption from the effective income tax rate on any pre-tax income
above its 2006 pre-tax income, to be recognized in the years 2009, 2010 and
2011. The above taxation exemption was superseded, because the Joint
Venture has been awarded the Chinese government's "High-Tech Enterprise"
designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So, the
Company’s effective income tax rate will be 15% for years 2009 through
2011.
The reconciliation of the effective
income tax rate of the Joint Venture to the statutory income tax rate in the PRC
for the third quarter of 2010 and 2009 is as follows:
Sep-30-2010
|
Sep-30-2009
|
|||||||
Statutory tax
rate
|
25.0 | % | 25.0 | % | ||||
Tax holidays and
concessions
|
-10 | % | -10 | % | ||||
|
||||||||
Effective tax
rate
|
15 | % | 15 | % |
Nine
months ended September 30, 2010
|
Nine
months ended September 30, 2009
|
|||||||
Computed income tax provision at
the statutory rate
|
$ | 2,692,572 | $ | 1,731,719 | ||||
Tax refund
|
(903,699 | ) | (694,843 | ) | ||||
Deferred tax
provision
|
(259,993 | ) | (116,568 | ) | ||||
Current period permanent
differences and other reconciling items
|
251,612 | 1,219,747 | ||||||
|
||||||||
Total income
taxes
|
$ | 1,780,492 | $ | 2,140,055 |
14
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
Significant components of the Company’s net deferred tax assets and liabilities
are approximately as follows at December 31,2009. No valuation allowance is
deemed necessary. There currently is no tax benefit or burden recorded for the
United States. The tax authority may examine the tax
returns of the Company three years after the year ended. In the year of 2009,
there were no penalties and interest, which generally are recorded in the
general and administrative expenses or in the tax expenses. The provisions for
income taxes for the nine months ended September 30, 2010 and 2009,
respectively, are summarized as follows:
Sep-30-2010
|
Sep-30-2009
|
|||||||
Current
|
$ | 2,040,485 | $ | 2,256,623 | ||||
Deferred
|
(259,993 | ) | (116,568 | ) | ||||
|
||||||||
Total
|
$ | 1,780,492 | $ | 2,140,055 |
The Company adopted the provisions of
FASB ASC 740-10 (Prior authoritative literature: FIN No. 48, Accounting for
Uncertainty in Income Taxes), on January 1, 2007. As the result of the
implementation of the FASB ASC 740-10, Accounting for Uncertainty in Income
Taxes – In Interpretation of FASB ASC 740-10 (Prior authoritative literature:
FASB Statement No. 109), the Company recognized no material adjustments to
unrecognized tax benefits. At the adoption date of January 1, 2007 and as of
September 30, 2010 and 2009, the Company has no unrecognized tax
benefits.
NOTE Q - Non-controlling interest in
subsidiaries
Non-controlling
interest in subsidiaries represents a 10% non-controlling interest, owned by the
Company’s Joint Venture Partner, in the Chinese located Joint Venture, and a 40%
non-controlling interest, owned by the Company’s Joint Venture Partners, in the
Hong Kong located Joint Venture. Net income attributable to non-controlling
interests in subsidiaries amounted to $1,459,277 and $941,468 for the nine months ended September 30,
2010 and 2009, respectively.
Sep-30-2010
|
Sep-30-2009
|
|||||||
10%
non-controlling interest in Ruian
|
$ | 1,647,133 | $ | 941,468 | ||||
40%
non-controlling interest in SIH
|
$ | (187,856 | ) | ― | ||||
Total
|
$ | 1,459,277 | 941,468 |
15
NOTE R - LEASES
In December 2006, the Joint Venture
entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two
apartment buildings. These two apartment buildings are for the Joint Venture’s
management personnel and staff, respectively. The lease term is from January
2007 to December 2011 for one of the apartment buildings and from January 2007
to December 2012 for the other.
In May 2009, the Joint Venture entered
into a lease agreement with Ruili Group Co., Ltd. for the lease of a
manufacturing plant. The lease term is from June 2009 to May
2017.
In August 2009, SIH entered into
a lease agreement with MGR for the lease of an office with a five-year lease term. The
leasehold improvements are amortized over the lease term.
In August
2010, a new a lease agreement was signed between the Joint Venture and Ruili
Group Co., Ltd., the Joint Venture leased 32410 square meters manufacturing
plant for its new purchased passenger vehicles brake systems business. The lease
term is from September 2009 to August 2020.
All abovementioned leases are operating
leases. Future minimum rental payments for the years ending December 31 are as
follows:
2010
|
2011
|
2012
|
2013
|
2014
|
Thereafter
|
|||||||||||||||||||
Lease
Commitments
|
$ | 305,683 | $ | 1,140,666 | $ | 910,180 | $ | 841,897 | $ | 841,897 | $ | 4,404,811 | ||||||||||||
Total
|
$ | 305,683 | $ | 1,140,666 | $ | 910,180 | $ | 841,897 | $ | 841,897 | $ | 4,404,811 |
NOTE S - ADVERTISING
COSTS
Advertising costs were $146,873 and
$2,532 for the nine months
ended September 30, 2010 and 2009, respectively.
NOTE T- RESEARCH AND DEVELOPMENT
EXPENSE
Research and development costs are
expensed as incurred and were $5,326,598 and $2,545,689 for the nine months ended September 30,
2010 and 2009, respectively.
NOTE U - WARRANTY
CLAIMS
Warranty claims were $2,036,353
and $1,289,067 for the nine months
ended September 30, 2010 and 2009, respectively. Warranty claims are classified
as accrued expenses on the balance sheet. The movement of accrued warranty
expenses for the nine months ended September 30, 2010 was as
follows:
Beginning
balance at January 01, 2010
|
1,735,301 | |||
Aggregate
reduction for payments made
|
(763,941 | ) | ||
Aggregate
increase for new warranties issued during current period
|
2,036,353 | |||
Aggregate
changes in the liability related to pre-existing warranties (changes in
estimate)
|
― | |||
Ending
balance at September 30, 2010:
|
3,007,713 |
NOTE V – SEGMENT
INFORMATION
The
Company produces brake systems and
other related components (“commercial vehicles brake systems, etc.”) for different types of commercial
vehicles. On August 31, 2010, the Company through its 90%-owned subsidiary,
Ruili Group Ruian Auto Parts Co., Ltd., executed an Asset Purchase Agreement to
acquire, and purchased, the segment of the passenger vehicle auto parts business
(“passenger vehicles brake systems, etc.”) of Ruili Group Co., Ltd. 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.
16
The
Company has two operating segments: commercial vehicles brake systems, etc. and
passenger vehicles brake systems, etc.
Net sales from our Chinese market of
commercial vehicles brake systems, etc. were $32.8 million and $26.1 million
for the three months ended September 30, 2010 and 2009, respectively. Net sales
from international market of commercial vehicles brake systems, etc.
were $11.8 million and $7.8
million for the three months ended September 30, 2010 and 2009,
respectively.
Net sales from our Chinese market of
passenger vehicles brake systems, etc. were $8.0 million and $7.8 million for
the three months ended September 30, 2010 and 2009, respectively. Net sales from
international market of passenger vehicles brake systems, etc. were $2.3 million and $0.9 million for
the three months ended September 30, 2010 and 2009, respectively. Because of
both $4.0 million elimination of inter-company sales for the three months ended
September 30, 2010 and 2009, the consolidated sales were $50.8 million and $38.7
million for the three months ended September 30, 2010 and 2009,
respectively.
Net sales from our Chinese market of
commercial vehicles brake systems, etc. were $96.2 million and $63.1 million for
the nine months ended September 30, 2010 and 2009, respectively. Net sales from
international market of commercial vehicles brake systems, etc. were $32.3 million and $20.8 million for
the nine months ended September 30, 2010 and 2009,
respectively.
Net sales from our Chinese market of
passenger vehicles brake systems, etc. were $26.6 million and $18.9 million for
the nine months ended September 30, 2010 and 2009, respectively. Net sales from
international market of passenger vehicles brake systems, etc. were $4.5 million and $3.4 million for
the nine months ended September 30, 2010 and 2009, respectively. Because of
$15.1 million and $11.2 million elimination of inter-company sales for the nine
months ended September 30, 2010 and 2009, the consolidated sales were $144.6
million and $95.1 million for the nine months ended September 30, 2010 and 2009,
respectively.
Net Income Attributable to Stockholders
of commercial vehicles brake systems, etc. were $4.7 million and $3.8 million for
the three months ended September 30, 2010 and 2009, respectively. Net Income
Attributable to Stockholders of commercial vehicles brake systems, etc.
were $13.2 million and $7.8
million for the nine months ended September 30, 2010 and 2009,
respectively.
Net Income Attributable to Stockholders
of passenger vehicles brake systems, etc. were $0.3 million and $0.4 million for
the three months ended September 30, 2010 and 2009, respectively. Net Income
Attributable to Stockholders of passenger vehicles brake systems, etc.
were $1.3 million and $0.7 million
for the nine months ended September 30, 2010 and 2009,
respectively.
Total assets of commercial
vehicles brake systems, etc. and
passenger vehicles brake systems, etc. were $133.4 million and $21.2 million as
of December 31, 2009, respectively.
The
consolidated income before taxes was equal to the total of income before taxes
of commercial vehicles brake systems, etc. and passenger vehicles brake systems,
etc.
All of
the Company’s long-lived assets are located in the PRC and Hong Kong. The
Company and its subsidiaries do not have long-lived assets in the United States
for the reporting periods.
For the
three months ended September 30, 2010, the Company’s three biggest customers
were Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton
Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works which accounted for
approximately 6.7%, 6.1% and 4.1% of total sales revenue, respectively. For the
three months ended September 30, 2009, Dongfeng Axle Co., Ltd., FAW Qingdao
Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty
Vehicle Works accounted for approximately 8.6%, 8.2% and 5.5% of our total sales
revenue, respectively.
For the
Nine Months ended September 30, 2010, the Company’s three biggest customers were
Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton Motor
Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works which accounted for
approximately 8.9%, 8.4% and 4.6% of total sales revenue, respectively. For the
three months ended September 30, 2009, Dongfeng Axle Co., Ltd., FAW Qingdao
Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty
Vehicle Works accounted for approximately 9.6%, 6.5% and 3.6% of our total sales
revenue, respectively.
17
NOTE W – PURCHASE
DISCOUNT
Purchase discounts represent discounts
received from vendors for purchasing raw materials. The Company did not receive
any purchase discounts during the nine months ended September 30, 2010 and
2009.
NOTE X – SHIPPING AND HANDLING
COSTS
Shipping and handling costs incurred by
the Company are included in selling expenses in the accompanying consolidated
statements of income. Shipping and handling costs were $2,471,534 and
$1,543,344 for the nine month
ended September 30, 2010 and 2009, respectively.
NOTE Y – STOCK COMPENSATION
PLAN
The
amortization of deferred stock-based compensation was $0 and
$9,935 for the nine month
ended September 30, 2010 and 2009, respectively. There were no employee
stock options or warrants outstanding as of September 30, 2010.
NOTE Z- COMMITMENTS AND
CONTINGENCIES
(1) According to the law 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. The Company purchased the land use rights from Ruili
Group for approximately $13.9 million on September 28, 2007. The Company has not
yet obtained the land use right certificate. However, the Company has applied to
obtain the land use right certificate.
(2) Information regarding
lease commitments is provided in Note R.
NOTE AA - OFF-BALANCE SHEET
ARRANGEMENTS
At September 30, 2010, we do not have
any material commitments for capital expenditures or have any transactions,
obligations or relationships that could be considered off-balance sheet
arrangements.
NOTE AB – RECLASSIFICATION OF PRIOR YEAR
FINANCIAL STATEMENTS
For the nine month ended September 30,
2010, the Company has reclassified Research and Development Expenses and
Deferred Tax Assets/Liabilities to facilitate a year over year comparison with
the same period of 2009.
NOTE AC – THE ACQUISITION AND
COMBINATION OF OPERATIONS REPORTING
All of the allocations and estimates in
the Consolidated Financial Statements are based on assumptions that management
believes are reasonable under the circumstances. However, these allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if the business we acquired from the Seller had been operated as a
part of SORL for periods prior to the
combination/acquisition.
NOTE AD – BUSINESS
ACQUISITION
On August
31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to
acquire, and purchased the assets of the hydraulic brake, power steering, and
automotive electrical operations parts business of the
Seller. Consideration paid amounted to RMB 170 million or
approximately USD$25 million. The acquisition has been accounted for as a common
control transaction at carrying amounts. The excess of consideration over the
carrying value of net assets received has been recorded as a decrease in the
additional paid-in capital of the Company.
18
Consolidated
Balance Sheets
|
December
31, 2009
|
Acquired
auto parts business
|
Combined
|
||||||||||||
December
31, 2009
|
December
31, 2009
|
December
31, 2009
|
|||||||||||
(Audited)
|
(Unaudited)
|
||||||||||||
Assets
|
|||||||||||||
Current
Assets
|
|||||||||||||
Cash
and Cash Equivalents
|
US$
|
10,255,259 | - | 10,255,259 | |||||||||
Accounts
Receivable, Net of Provision
|
44,546,107 | 3,207,867 | 47,753,974 | ||||||||||
Notes
Receivable
|
13,083,691 | - | 13,083,691 | ||||||||||
Inventory
|
18,760,724 | 5,182,555 | 23,943,279 | ||||||||||
Prepayments
|
7,558,140 | - | 7,558,140 | ||||||||||
Deferred
tax assets
|
220,577 | - | 220,577 | ||||||||||
Other
current assets
|
444,281 | 4,782,432 | 5,226,713 | ||||||||||
Total
Current Assets
|
94,868,779 | 13,172,854 | 108,041,633 | ||||||||||
Fixed
Assets
|
|||||||||||||
Property,
Plant and Equipment
|
35,335,958 | 14,377,994 | 49,713,952 | ||||||||||
Less:
Accumulated Depreciation
|
(11,608,920 | ) | (6,374,204 | ) | (17,983,124 | ) | |||||||
Property,
Plant and Equipment, Net
|
23,727,038 | 8,003,790 | 31,730,828 | ||||||||||
Leasehold
Improvements in Progress
|
477,681 | - | 477,681 | ||||||||||
Land
Use Rights, Net
|
14,198,392 | - | 14,198,392 | ||||||||||
Other
Assets
|
|||||||||||||
Deferred
compensation cost-stock options
|
- | - | - | ||||||||||
Intangible
Assets
|
161,499 | - | 161,499 | ||||||||||
Less:
Accumulated Amortization
|
(54,380 | ) | - | (54,380 | ) | ||||||||
Intangible
Assets, Net
|
107,119 | - | 107,119 | ||||||||||
Total
Other Assets
|
107,119 | - | 107,119 | ||||||||||
Total
Assets
|
US$
|
133,379,009 | 21,176,644 | 154,555,653 | |||||||||
Liabilities
and Shareholders' Equity
|
|||||||||||||
Current
Liabilities
|
|||||||||||||
Accounts
Payable
|
US$
|
9,724,715 | - | 9,724,715 | |||||||||
Deposit
Received from Customers
|
3,670,369 | - | 3,670,369 | ||||||||||
Short
term bank loans
|
- | - | |||||||||||
Income
tax payable
|
551,900 | - | 551,900 | ||||||||||
Accrued
Expenses
|
4,206,297 | - | 4,206,297 | ||||||||||
Other
Current Liabilities
|
585,176 | - | 585,176 | ||||||||||
Total
Current Liabilities
|
18,738,457 | - | 18,738,457 | ||||||||||
Non-Current
Liabilities
|
|||||||||||||
Deferred
tax liabilities
|
115,481 | - | 115,481 | ||||||||||
Total
Liabilities
|
18,853,938 | - | 18,853,938 | ||||||||||
Stockholders'
Equity
|
|||||||||||||
SORL
Auto Parts, Inc. stockholders' equity
|
103,130,946 | 19,058,980 | 122,189,926 | ||||||||||
Noncontrolling
Interest In Subsidiaries
|
11,394,125 | 2,117,664 | 13,511,789 | ||||||||||
Total
Equity
|
US$
|
114,525,071 | 21,176,644 | 135,701,715 | |||||||||
Total
Liabilities and Stockholders' Equity
|
US$
|
133,379,009 | 21,176,644 | 154,555,653 |
19
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 condensed consolidated financial
statements, as well as information relating to the plans of our current
management. 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 “believes,” “anticipates,” “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 the
Securities and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those anticipated. Undue reliance
should not be placed on these forward-looking statements that speak only as of
the date hereof. We undertake no obligation to update these forward-looking
statements.
The
following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the related notes thereto and
other financial information contained elsewhere in this Form 10-Q.
To
facilitate the analysis our financial performance, we provide the comparison of
the financial results excluding the business acquired from Ruilin Group with our
previously quarterly filings. Please note that the financial results excluding
the acquired business of Ruilin Group, as discussed below, including the financial result of the
acquired business from September 1, 2010.
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.
Management believes that it is the largest manufacturer of automotive brake
systems in China for commercial vehicles such as trucks and buses.
CRITICAL ACCOUNTING POLICIES AND
ESTIMATES
For a
summary of our accounting policies and estimates, see Item 7, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Critical Accounting Policies and Estimates” in our Annual Report on
Form 10-K for the Fiscal Year ended December 31, 2009.
See Note
P to the attached Unaudited Consolidated Financial Statements for the
information regarding changes in taxation by the government of
China.
20
Results of
Operations
(1) Results of operations for the three
months ended September 30, 2010 as compared to the three months ended September
30, 2009.
SALES
Three Months
ended
|
Three Months
ended
|
|||||||||||||||
30-Sept-10
|
30-Sept-09
|
|||||||||||||||
(U.S. dollars in
millions)
|
||||||||||||||||
Commercial vehicles brake systems,
etc.
|
$ | 40.0 | 79 | % | $ | 29.9 | 77 | % | ||||||||
Passenger vehicles brake systems,
etc.
|
$ | 10.8 | 21 | % | $ | 8.8 | 23 | % | ||||||||
Total
|
$ | 50.8 | 100 | % | $ | 38.7 | 100 | % |
Sales
consist of brake systems and other key safety-related components manufactured by
SORL and sold to domestic original equipment manufacturers (OEM), aftermarket
customers and export market as well as distribution of non-valve auto parts
sourced from related parties.
Net sales were $50,806,384 and
$38,719,508 for the
three months ended September 30, 2010 and 2009, respectively, an increase of
$12.1 million or 31.2%.
Net sales excluding acquired business of
Ruili Group were $47,851,974 and $33,989,937 for the three months ended September 30,
2010 and 2009, respectively, an increase of $13.9 million or
40.8%.
A breakdown of net sales revenue for
these markets for the third quarter of the 2010 and 2009 fiscal years,
respectively, is set forth below:
Three
Months
|
Percent
|
Three
Months
|
Percent
|
|||||||||||||||||
ended
|
of
|
ended
|
of
|
Percentage
|
||||||||||||||||
|
30-Sep-10
|
Total Sales
|
30-Sep-09
|
Total Sales
|
Change
|
|||||||||||||||
(U.S. dollars in
million)
|
||||||||||||||||||||
China OEM
market
|
$ | 27.0 | 53 | % | $ | 20.6 | 53 | % | 31.1 | % | ||||||||||
China
Aftermarket
|
$ | 9.8 | 19 | % | $ | 9.4 | 24 | % | 4.3 | % | ||||||||||
International
market
|
$ | 14.0 | 28 | % | $ | 8.7 | 22% | 60.9 | % | |||||||||||
Total
|
$ | 50.8 | 100 | % | $ | 38.7 | 99 | % |
During the
third quarter of 2010, we benefited from the robust growth of China’s economic
and automobile industry. Further, we promoted our integrated system and
modular supplies of air brake systems to our OEM customers and we
increasingly focused on the light duty, bus and agricultural vehicle market in
2010. As a result of these positive factors, our sales to the Chinese OEM
market increased by $6.4 million or 31.1%, to $27.0 million for the third
quarter of 2010, compared to $20.6 million for the same period of
2009.
We
achieved total revenue of $9.8 million in Chinese aftermarket sales for the
three months ended September 30, 2010, a slight increase compared to $9.4
million for the same period of 2009. The increased number of new vehicle sales
in China and the expiration of OEM warranties helped drive the increase in our
aftermarket business. Sales of our new model products, applicable to both OEM
and aftermarket, also grew during the nine months ended September 30, 2010. We
will continue with our strategies to further optimize our sales network, to help
further penetrate into new markets. Also, we will continue to focus on investing
in new product development for both the OEM market and the aftermarket, as a
means to increase our sales.
21
The third
quarter is the second consecutive quarter of growth in the manufacture of
commercial vehicles in all the regions of the world. With the recovery of global
economy and customers' confidence in the growth of economy in 2010, our export
sales increased by $5.3 million or 60.9%, to $14.0 million for the third quarter
of 2010, as compared to $8.7 million for the same period of
2009.
Our sales
to the Chinese OEM market
excluding acquired business of Ruili Group were $25.0 million and $17.4
million for the three months
ended September 30, 2010 and 2009, respectively, an increase of
43.7%.
Our
Chinese aftermarket sales
excluding acquired business of Ruili Group were $9.4 million and
$8.7 million for the
three months ended September 30, 2010 and 2009, respectively, an increase of
8.0%.
Our
export sales excluding acquired
business of Ruili Group were $13.4 million and $7.8 million for the three months ended
September 30, 2010 and 2009, respectively, an increase of
71.8%.
COST OF SALES AND GROSS
PROFIT
Cost of sales for the three months ended
September 30, 2010 were $36,279,785 an increase of $8,528,572 or 30.7% from
$27,751,213 for the same period last year. Our gross profit increased by 32.4%
from $10,968,295 for the third quarter of 2009 to $14,526,599 for the third
quarter of 2010.
Gross margin increased to 28.6% from
28.3% for the three months ended September 30, 2010 compared with 2009. We
focused on increasing management efficiency, improving the technologies of our
products, and improving our product portfolio. We believe that our continued
expansion to the higher-profit new valve products will also help us to maintain
or increase our gross profit margins.
Cost of sales excluding acquired business of Ruili
Group for the three months
ended September 30, 2010 were $34,477,077, an increase of $9,360,468 or 37.3%
from $25,116,609 for the same period last year. Our gross profit increased by
50.7% from $8,873,328 for the third quarter of 2009 to $13,374,897 for the third
quarter of 2010.
Gross margin excluding acquired business
of Ruili Group increased to 28.0% from 26.1% for the three months ended
September 30, 2010 compared with 2009.
SELLING AND DISTRIBUTION
EXPENSES
Selling and distribution expenses were
$3,299,914 for the three months ended September 30, 2010, as compared to
$2,783,780 for the same
period of 2009, an increase of $516,134 or 18.5%.
The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 6.5% for the three months
ended September 30, 2010, as compared to 7.2% for the same period in
2009.
Selling and distribution expenses
excluding acquired business of Ruili Group were $2,689,478 for the three months
ended September 30, 2010, as compared to $2,131,054 for the same period of 2009, an
increase of $558,424 or 26.2%.
As a
percentage of sales revenue, selling expenses excluding acquired business of Ruili
Group decreased to 5.6% for the three months ended September 30, 2010, as
compared to 6.3% for the same period in 2009.
GENERAL AND ADMINISTRATIVE
EXPENSES
General and administrative expenses were
$2,950,120 for the three months ended September 30, 2010, as compared to
$2,149,066 for the same
period of 2009, an increase of $801,054 or 37.3%. The increase was mainly
due to increased welfare
costs for business expansion in
the third quarter of 2010. During the three months ended September 30,
2009, we reversed a bad debt provision resulting from collecting a significant
portion of accounts receivable, which had been reflected as a reduction to
general and administrative expenses. As a percentage of sales revenue,
general and administrative expenses increased to 5.8% for the three months
ended September 30, 2010, as compared to 5.6% for the same period in
2009.
22
General and administrative expenses
excluding acquired business of Ruili Group were $2,535,193 for the three months
ended September 30, 2010, as compared to $1,393,971 for the same period of 2009, an
increase of $1,141,222 or 81.9%. As a percentage of sales revenue, general
and administrative expenses increased to 5.3% for the three months ended
September 30, 2010, as compared to 4.1% for the same period in
2009.
RESEARCH AND DEVELOPMENT
EXPENSE
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, 2010,
research and development expense was $1,773,044, as compared to $624,461
for the same period of 2009, an increase of $1,148,583. The Company will
continue to invest in new product development, particularly in upgrading
traditional valve products and in developing electronically controlled
products.
For the
three months ended September 30,
2010, research and development expense excluding acquired business of Ruili
Group was $1,635,421, as compared to $410,397 for the same period of
2009.
DEPRECIATION AND
AMORTIZATION
Depreciation
and amortization expense increased to $1,283,642 for the three months ended
September 30, 2010, compared with that of $1,083,920 for the same period of
2009, an increase of $199,722. The
increase in depreciation and amortization expense was primarily due to the
purchase of production equipment.
FINANCIAL EXPENSE
Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the three
months ended September 30, 2010 increased by $297,492 to
$357,984 from $60,492 for the same period of
2009, which was mainly attributed to fluctuations in the exchange rate
between U.S. dollars and RMB. Management is studying alternative methods for
managing its risks associated with currency translation, such as the
diversification of currencies used in export sales.
The
financial expense excluding
acquired business of Ruili Group for the three months ended September 30,
2010 increased by $311,087 to $348,303 from $37,216 for the same period of
2009.
OTHER INCOME
Other
income was $366,308 for the three months ended September 30, 2010, as compared
to $163,776 for the three months ended September 30, 2009, an increase of
$202,532. The increase was mainly due to more subsidies received from local
governments for the three months ended September 30, 2009. These subsidies were
provided to the Company as economic incentives to secure business commitments
and no repayment by the Company is required.
Other
income excluding acquired business
of Ruili Group was $192,459 for the three months ended September 30,
2010, as compared to $121,567 for the three months ended September 30,
2009.
INCOME TAX
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 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 taxable income as reported in the PRC statutory
financial statements in accordance with relevant income tax laws. According to
applicable tax laws regarding Sino-Foreign Joint Ventures, the Joint
Venture was exempt from income taxes in the PRC for each of the fiscal years
ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled
to a 50% income tax deduction for each of the three years ended December
31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both
fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st
January 2008, China’s enterprises are generally subject to a PRC income tax rate
of 25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.
23
The
Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of
the People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture was eligible for additional preferential tax
treatment for the years 2007 and 2008. In those years, the Joint Venture
was entitled to an income tax exemption on all pre-tax income generated by the
Company above its pre-tax income generated in the fiscal year 2006. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006
pre-tax income. The above taxation exemption was superseded, because the Joint
Venture has been awarded the Chinese government's "High-Tech Enterprise"
designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So,
the effective income tax rate will be 15% for years 2009 through
2011.
During
the three months ended September 30, 2010 and 2009, the Joint Venture received
an income tax benefit of $0 and $694,843 in accordance with PRC
preferential income tax policy regarding the purchase of domestically
manufactured equipment, which is subject to assessment and approval from the
local state tax bureau. Income tax expense of $962,210 and
$802,124 was recorded for the quarters ended September 30, 2010 and
2009, respectively.
Income
tax expense excluding acquired
business of Ruili Group of $940,154 and
$728,322 was recorded for the quarters ended September 30, 2010 and
2009, respectively.
STOCK-BASED
COMPENSATION
On March
1, 2006, the Board of Directors approved a total of 60,000 options to be issued
to the four independent members of the Board of Directors. The contractual term
of the options was three years. Total deferred stock-based compensation
expenses related to stock options amounted to $178,904. This amount
was amortized over the three year vesting period in a manner consistent
with FASB ASC 505-50. The amortization of deferred stock-based compensation for
these equity arrangements were $0 and $0 for the three months ended
September 30, 2010 and 2009, respectively. As of December 31, 2009, the 60,000
options had expired unexercised.
On June
20, 2007, the Company granted to its previous senior manager of investor
relations, David Ming He, options to purchase 4,128 shares of its common stock
with an exercise price of $7.25 per share. In accordance with the agreement, the
option became vested and exercisable immediately on the date thereof. Total
deferred stock-based compensation expenses related to the 4,128 stock options
granted amounted to $23,201. This amount was charged to General and
administrative expenses during the fiscal year ended December 31, 2007. On
November 13, 2009, David Ming He exercised the options on a cashless basis and
received 460 shares of common stock, based on a formula provided for in the
initial grant.
On
January 5, 2006, the Company issued 100,000 warrants for financial services to
be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
exercise price of $6.25 per share. In accordance with the common stock purchase
warrant agreement, the warrants became vested and exercisable immediately on the
date thereof. As set forth in the agreement, the Company had retained Maxim
Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors
and investment bankers for a period of twelve months from the date of January 5,
2006. The agreement has now expired. Total expense associated with the 100,000
warrants amounted to $299,052, which, consistent with FASB ASC 505-50, was
recognized during the fiscal year ended December 31, 2006.
24
On
November 9, 2009, Maxim Group LLC transferred 35,000 warrants to OTA LLC and
35,000 warrants to Maxim Partners, LLC respectively. OTA LLC exercised the
warrants on a cashless basis on November 12, 2009 and received 6,609 shares of
common stock, based on a formula provided for in the initial grant. Maxim
Partners, LLC and Chardan Capital Markets, LLC transferred an additional 35,000
warrants and 30,000 warrants to OTA LLC on December 15, 2009 and December 11,
2009, respectively. OTA LLC exercised the warrants on a cashless basis on
December 18, 2009 and received 18,598 shares of common stock, based on a formula
provided for in the initial grant.
There
were no options or warrants outstanding as of September 30, 2010.
Although
the Company anticipates future issuances of stock awards could have a material
impact on reported net income in future financial statements, we do not expect
them to have a material impact on future cash flow.
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. Non-controlling interest in subsidiaries amounted to $501,616 and
$465,092 for the third quarter ended September 30, 2010 and 2009,
respectively.
Non-controlling
interest in subsidiaries excluding
acquired business of Ruili Group amounted to $489,118 and
$423,271 for the third quarter ended September 30, 2010 and 2009,
respectively.
NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net
income attributable to stockholders for the quarter ended September 30,
2010 increased by $793,871, to $4,979,701 from $4,185,830 for the quarter
ended September 30, 2009 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the quarter ended September 30, 2010 and
2009, were $0.26 and $0.23 per share, respectively.
The net
income attributable to stockholders excluding acquired business of Ruili
Group for the quarter ended September 30, 2010 increased by
$1,057,781, to $4,867,219 from $3,809,438 for the quarter ended September 30,
2009 due to the factors discussed above. Earnings per share (“EPS”), both basic
and diluted, for the quarter ended September 30, 2010 and 2009, were $0.25 and
$0.21 per share, respectively.
FINANCIAL CONDITION
Liquidity and Capital
Resources
OPERATING - Net cash generated
from operating activities was $19,320,992 for three months ended September 30,
2010 compared with negative $2,266,045 in the same period in 2009,
an increase of $21,587,037, primarily due to the decreased cash outflow
resulted by changes in notes receivable and prepayments. The decreases in notes
receivable mainly due to the notes
matured in the third quarter of 2010.
At
September 30, 2010, the Company had cash and cash equivalents of $2,244,711, as
compared to cash and cash equivalents of $10,255,259 at December 31, 2009. The
Company had working capital of $84,327,014 at September 30, 2010, as compared to
working capital of $89,303,176 at December 31, 2009, reflecting current ratios
of 3.8:1 and 5.77:1, respectively.
INVESTING
- The Company expended more cash for investing activities in the third quarter
of 2010 than in the third quarter of 2009. During the three months ended
September 30, 2009, the Company
expended net cash of $960,135 in investing activities. For the
three months ended September 30, 2010, the Company utilized $29,675,006 in
investing activities for
acquisition of the segments of the automotive parts business of the
Seller, discussed above, and new
equipment to support the growth of our business.
25
FINANCING
- During the third quarter ended September 30,
2010, after repaying loans the Company received aggregate bank loans in the
amount of $4,795,871 under
its credit facilities. The Company had no borrowings under its
credit facilities during the quarter ended September 30, 2009.
Management
of the Company has taken a number of steps to restructure its customer base and
phase out accounts which had failed to make prompt payments. The Company also
placed more emphasis on collection of accounts receivable from our customers.
During the second quarter of 2010, the Company continued developing higher
profit margin new products, and adopting steps for further cost saving such as
improving material utilization rate. Meanwhile, the Company maintains 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
for the foreseeable future.
CURRENCY
RISK AND FINANCIAL INSTRUMENTS - Although our reporting currency is the U.S.
dollar, the functional currency of Joint Venture is RMB. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be affected by fluctuations in the exchange rate between U.S. dollars and RMB.
If the RMB depreciates against the U.S. dollar, the value of our Renminbi
revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline. In recent years, the RMB has been appreciating against
the U.S. dollar.
Assets
and liabilities of our operating subsidiaries are translated into U.S. dollars
at the exchange rate at the balance sheet date, their equity accounts are
translated at historical exchange rate and their income and expenses items are
translated using the average rate for the period. Any resulting exchange
differences are recorded in accumulated other comprehensive income or loss. The
Company is adopting such steps as the diversification of currencies used in
export sales, and the negotiation of export contracts with fixed exchange
rates.
As the
Company’s historical debt obligations are primarily short-term in nature, with
fixed interest rates, the Company does not have any risk from an increase in
market interest rates. However, to the extent that the Company arranges new
borrowings in the future, an increase in market interest rate would cause a
commensurate increase in the interest expense related to such
borrowings.
( 2) Results of operations for the nine
months ended September 30, 2010 as compared to the nine months ended September
30, 2009.
SALES
Nine months
ended
|
Nine months
ended
|
|||||||||||||||
30-Sep-10
|
30-Sep-09
|
|||||||||||||||
(U.S. dollars in
millions)
|
||||||||||||||||
Commercial vehicles brake systems,
etc.
|
$ | 112.4 | 78 | % | $ | 71.9 | 76 | % | ||||||||
Passenger vehicles brake systems,
etc.
|
$ | 32.2 | 22 | % | $ | 23.1 | 24 | % | ||||||||
Total
|
$ | 144.6 | 100 | % | $ | 95.0 | 100 | % |
Sales
consist of brake systems and other key safety-related components manufactured by
SORL and sold to domestic original equipment manufacturers (OEM), aftermarket
customers and export market as well as distribution of non-valve auto parts
sourced from related parties.
Net sales were $144,593,338 and
$95,110,334 for the nine
months ended September 30, 2010 and 2009, respectively, an increase of $49.5
million or 52.0%.
26
Net sales excluding acquired business of
Ruili Group were $131,854,257 and $83,973,887 for the nine months ended September 30,
2010 and 2009, respectively, an increase of $47.9 million or
57.0%.
A breakdown of net sales revenue for
these markets for the nine months ended September 30, 2010 and 2009 fiscal
years, respectively, is set forth below:
Nine months
|
Percent
|
Nine months
|
Percent
|
Percentage
|
||||||||||||||||
ended
|
of
|
ended
|
of
|
Change
|
||||||||||||||||
30-Sep-10
|
Total Sales
|
30-Sep-09
|
Total Sales
|
|||||||||||||||||
(U.S. dollars in
million)
|
||||||||||||||||||||
China OEM
market
|
$ | 84.6 | 59 | % | $ | 46.7 | 49 | % | 81.2 | % | ||||||||||
China
Aftermarket
|
$ | 23.2 | 16 | % | $ | 24.1 | 25 | % | -3.7 | % | ||||||||||
International market | $ | 36.8 | 25 | % | $ | 24.2 | 25 | % | 52.1 | % | ||||||||||
Total
|
$ | 144.6 | 100 | % | $ | 95.0 | 99 | % | % |
During the
nine months of 2010, we benefited from the robust growth of China’s economy and
automobile industry. Further, we promoted our integrated system and modular
supplies of air brake systems to our OEM customers and we increasingly
focused on the light duty, bus and agricultural vehicle market in 2010. As a
result of these positive factors, our sales to the Chinese OEM
market increased by $37.9 million to $84.6 million for the nine months
of 2010, compared to $46.7
million for the same period of 2009.
We
achieved total revenue of $23.2 million in Chinese aftermarket sales for the
nine months ended September 30, 2010, a slight decrease compared to $24.1
million for the same period of 2009. The increased number of new vehicle sales
in China and the expiration of OEM warranties helped drive the increase in our
aftermarket business. Sales of our new model products, applicable to both OEM
and aftermarket, also grew during the nine months of 2010. We will continue with
our strategies to further optimize our sales network, to help further penetrate
into new markets. Also, we will continue to focus on investing in new product
development for both the OEM market and the aftermarket, as a means to increase
our sales.
In prior
periods, the global financial crisis negatively affected our international
customers and caused many world currencies to depreciate against the US
dollar, while the lack of confidence in the growth of the world
macro-economy caused our customers to decrease their inventories in order
to lower their risk in the nine months of 2009. With the recovery of global
economy and customers' confidence in the growth of economy in 2010, our export
sales increased by $12.6 million or 52.1%, to $36.8 million for the nine months
ended September 30, 2010, as compared to $24.2 million for the same period
of 2009.
Our sales
to the Chinese OEM market
excluding acquired business of Ruili Group were $75.4 million and $40.7
million for the nine months
ended September 30, 2010 and 2009, respectively, an increase of
85.3%.
Our
Chinese aftermarket sales
excluding acquired business of Ruili Group were $22.5 million and
$22.4 million for the
nine months ended September 30, 2010 and 2009, respectively, an increase of
0.4%.
Our
export sales excluding acquired
business of Ruili Group were $33.9 million and $20.8 million for the nine months ended
September 30, 2010 and 2009, respectively, an increase of
63.0%.
27
COST OF SALES AND GROSS
PROFIT
For the nine months ended
September 30, 2010, cost
of sales was $102,081,674, an increase of $34,830,282, or 51.8% from $67,251,392
for the same period last year. Our gross profit
increased by 52.6% from $27,858,942 for the nine months
ended September 30, 2009 to $42,511,664 for the nine months ended September 30,
2010.
Gross margin increased by 0.1% for the
nine months ended September 30, 2010, to 29.4% from 29.3% for the same period of
2009. We focused on
increasing management efficiency, improving the technologies of our products,
and improving our product portfolio. We believe that our continued expansion to
the higher-profit new valve products will also help us to maintain or increase
our gross profit margins.
For the nine months ended
September 30, 2010, cost
of sales excluding acquired
business of Ruili Group
was $95,352,037, an increase of $34,185,804, or 55.9% from $61,166,233 for the
same period last year. Our gross profit
increased by 60.0% from $22,807,654 for the nine months
ended September 30, 2009 to $36,502,220 for the nine months ended September 30,
2010.
Gross margin excluding acquired business
of Ruili Group increased by 0.5% for the nine months ended September 30, 2010,
to 27.7% from 27.2% for the same period of 2009.
SELLING AND DISTRIBUTION
EXPENSES
Selling and distribution expenses were
$9,341,056 for the nine months ended September 30, 2010, as compared to
$7,187,413 for the
same period of 2009, an increase of $2,153,643 or 30.0%.
The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 6.5% for the nine months ended
September 30, 2010, as compared to 7.6% for the same period in
2009.
Selling and distribution expenses
excluding acquired business of Ruili Group were $7,516,882 for the nine months
ended September 30, 2010, as compared to $5,509,506 for the same period of 2009, an increase
of $2,007,376 or 36.4%.
The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 5.7% for the nine months ended
September 30, 2010, as compared to 6.6% for the same period in
2009.
GENERAL AND ADMINISTRATIVE
EXPENSES
General
and administrative expenses were $9,789,218 for the nine months ended September
30, 2010, as compared to $6,740,521 for the same period of 2009, an increase of
$3,048,697 or 45.2%.
The
increase was mainly due to increased expenses for business expansion, consistent
with the increase in revenues. As a percentage of sales revenue,
general and administrative expenses decreased to 6.8% for the nine months
ended September 30, 2010, as compared to 7.1% for the same period in
2009.
General
and administrative expenses excluding acquired business of Ruili
Group were $7,625,969 for the nine months ended September 30, 2010, as
compared to $4,902,026 for the same period of 2009, an increase of $2,723,943 or
55.6%.
As a
percentage of sales revenue, general and administrative expenses were
5.8% for the nine months ended September 30, 2010 and 2009.
28
RESEARCH AND DEVELOPMENT
EXPENSE
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 nine
months ended September 30, 2010, research and development expense was
$5,326,598, as compared to $2,545,689 for the same period of 2009, an increase
of $2,780,909. The Company will continue to invest in new product development,
particularly in upgrading traditional valve products and in developing
electronically controlled products.
For the
nine months ended September 30, 2010, research and development expense excluding
acquired business of Ruili Group was $4,695,003, as compared to $1,968,155 for
the same period of 2009, an increase of $2,726,848.
DEPRECIATION AND
AMORTIZATION
Depreciation and
amortization expense increased to $3,750,717 for the nine months
ended September 30, 2010, compared with that of $3,204,199 for the same period of
2009, an increase of $546,518. The increase in depreciation and amortization
expense was primarily due to the purchase of production
equipment.
FINANCIAL EXPENSE
Financial expense mainly consists of
interest expense and exchange loss. The financial expense for the nine
months ended September 30, 2010 increased by $609,292 to $775,385 from
$166,093 for the same
period of 2009, which was mainly attributed to fluctuations in the exchange
rate between U.S. dollars and RMB. Management is studying alternative methods
for managing its risks associated with currency translation, such as the
diversification of currencies used in export sales.
The financial expense excluding acquired business of Ruili
Group for the nine months
ended September 30, 2010 increased by $618,815 to $694,122 from
$75,307 for the same
period of 2009
OTHER INCOME
Other income was $649,227 for the nine
months ended September 30, 2010, as compared to $410,074 for the nine months ended September 30,
2009, an increase of $239,153. The increase was mainly due to an increase in
sales of raw material scraps for the nine months ended September 30,
2010.
Other income excluding acquired business of Ruili
Group was $445,524 for the
nine months ended September 30, 2010, as compared to $337,028 for the nine months ended September 30,
2009, an increase of $108,496.
INCOME TAX
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 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 taxable income as reported in the PRC statutory
financial statements in accordance with relevant income tax laws. According to
applicable tax laws regarding Sino-Foreign Joint Ventures, the Joint
Venture was exempt from income taxes in the PRC for each of the fiscal years
ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled
to a 50% income tax deduction for each of the three years ended December
31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both
fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st
January 2008, China’s enterprises are generally subject to a PRC income tax rate
of 25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.
29
The
Company increased its investment in the Joint Venture as a result of its
financing in December, 2006. In accordance with the Income Tax Law of
the People's Republic of China on Foreign-invested Enterprises and Foreign
Enterprises, the Joint Venture was eligible for additional preferential tax
treatment for the years 2007 and 2008. In those years, the Joint Venture
was entitled to an income tax exemption on all pre-tax income generated by the
Company above its pre-tax income generated in the fiscal year 2006. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006
pre-tax income. The above taxation exemption was superseded, because the Joint
Venture has been awarded the Chinese government's "High-Tech Enterprise"
designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So,
the effective income tax rate will be 15% for years 2009 through
2011.
During
the nine months ended September 30, 2010 and 2009, the Joint Venture received an
income tax benefit of $930,699 and $694,843 in accordance with PRC
preferential income tax policy regarding the purchase of domestically
manufactured equipment, which is subject to assessment and approval from the
local state tax bureau. Income tax expense of $1,780,492 and
$2,140,055 was recorded for the nine months ended September 30, 2010
and 2009, respectively.
Income
tax expense excluding acquired
business of Ruili Group of $1,555,696 and
$2,000,413 was recorded for the nine months ended September 30, 2010
and 2009, respectively.
STOCK-BASED
COMPENSATION
On March
1, 2006, the Board of Directors approved a total of 60,000 options to be issued
to the four independent members of the Board of Directors. The contractual term
of the options was three years. Total deferred stock-based compensation
expenses related to stock options amounted to $178,904. This amount
was amortized over the three year vesting period in a manner consistent
with FASB ASC 505-50. The amortization of deferred stock-based compensation for
these equity arrangements were $0 and $9,935 for the nine months ended
September 30, 2010 and 2009, respectively. As of December 31, 2009, the 60,000
options had expired unexercised.
On June
20, 2007, the Company granted to its previous senior manager of investor
relations, David Ming He, options to purchase 4,128 shares of its common stock
with an exercise price of $7.25 per share. In accordance with the agreement, the
option became vested and exercisable immediately on the date thereof. Total
deferred stock-based compensation expenses related to the 4,128 stock options
granted amounted to $23,201. This amount was charged to General and
administrative expenses during the fiscal year ended December 31, 2007. On
November 13, 2009, David Ming He exercised the options on a cashless basis and
received 460 shares of common stock, based on a formula provided for in the
initial grant.
On
January 5, 2006, the Company issued 100,000 warrants for financial services to
be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
exercise price of $6.25 per share. In accordance with the common stock purchase
warrant agreement, the warrants became vested and exercisable immediately on the
date thereof. As set forth in the agreement, the Company had retained Maxim
Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors
and investment bankers for a period of twelve months from the date of January 5,
2006. The agreement has now expired. Total expense associated with the 100,000
warrants amounted to $299,052, which, consistent with FASB ASC 505-50, was
recognized during the fiscal year ended December 31, 2006.
On
November 9, 2009, Maxim Group LLC transferred 35,000 warrants to OTA LLC and
35,000 warrants to Maxim Partners, LLC respectively. OTA LLC exercised the
warrants on a cashless basis on November 12, 2009 and received 6,609 shares of
common stock, based on a formula provided for in the initial grant. Maxim
Partners, LLC and Chardan Capital Markets, LLC transferred an additional 35,000
warrants and 30,000 warrants to OTA LLC on December 15, 2009 and December 11,
2009, respectively. OTA LLC exercised the warrants on a cashless basis on
December 18, 2009 and received 18,598 shares of common stock, based on a formula
provided for in the initial grant.
30
There
were no options or warrants outstanding as of September 30, 2010.
Although
the Company anticipates future issuances of stock awards could have a material
impact on reported net income in future financial statements, we do not expect
them to have a material impact on future cash flow.
NET
INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES
Non-controlling
interest in subsidiaries represents a 10% non-controlling interest in the
Chinese located Joint Venture and 40% non-controlling interest in the Hong Kong
located Joint Venture, in each case held by our Joint Venture Partners. Net
income attributable to non-controlling interest in subsidiaries amounted to
$1,459,277 and $941,468 for the nine months ended September 30, 2010 and 2009,
respectively.
Net
income attributable to non-controlling interest in subsidiaries excluding acquired business of Ruili
Group amounted to $1,331,893 and $862,337 for the nine months ended
September 30, 2010 and 2009, respectively.
NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS
The net
income attributable to stockholders for the nine months ended September 30,
2010 increased by $6,092,379, to $14,555,650 from $8,463,271 for
the nine months ended September 30, 2009 due to the factors discussed above.
Earnings per share (“EPS”), both basic and diluted, for the nine months ended
September 30, 2010 and 2009, were $0.76 and $0.46 per share,
respectively.
The net
income attributable to stockholders excluding acquired business of Ruili
Group for the nine months ended September 30, 2010 increased by
$5,658,100, to $13,409,196 from $7,751,096 for the nine months ended
September 30, 2009 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the nine months ended September 30, 2010
and 2009, were $0.7 and $0.42 per share, respectively.
FINANCIAL CONDITION
Liquidity and Capital
Resources
OPERATING - Net cash generated
from operating activities was $8,998,980 for nine months ended September
30, 2010 compared with $6,623,628 of net cash provided in operating
activities in the same period in 2009, an increase of $2,375,352,
primarily due to the increased cash flow resulted by changes in accounts receivable and
prepayments.
At
September 30, 2010, the Company had cash and cash equivalents of $2,244,711, as
compared to cash and cash equivalents of $10,255,259 at December 31, 2009. The
Company had working capital of $84,327,014 at September 30, 2010, as compared to
working capital of $89,303,176 at December 31, 2009, reflecting current ratios
of 3.80:1 and 5.77:1, respectively.
INVESTING
- During the nine months ended September 30, 2010, the Company expended net cash of
$36,626,169 in investing activities, mainly for acquisition of the
segments of the automotive parts business of Ruili Group Co., Ltd. and new equipment to support the growth of
the business. For the nine months ended September 30, 2009, the Company utilized
$1,888,945 in
investing activities.
FINANCING
- During the nine months ended September
30, 2010, after repaying loans the Company received aggregate bank loans in the amount
of $9,279,449 under its
credit facilities. During the nine months ended September 30, 2010, net
cash provided by financing activities was primarily attributable to the net
proceeds of our public offering of approximately $9,399,978. Additionally,
another capital increase of $1,038,900 was contributed by Ruili Group to the
Joint Venture. Net cash provided
by financing activities was $19,718,327 for nine months ended
September 30, 2010 compared with $0 in the same period in 2009. The
Company had no borrowings under its credit facilities during the nine
months ended September 30, 2009.
31
Management
of the Company has taken a number of steps to restructure its customer base and
phase out accounts which had failed to make prompt payments. The Company also
placed more emphasis on collection of accounts receivable from our customers.
During the second quarter of 2010, the Company continued developing higher
profit margin new products, and adopting steps for further cost saving such as
improving material utilization rate. Meanwhile, the Company maintains 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
for the foreseeable future.
CURRENCY
RISK AND FINANCIAL INSTRUMENTS - Although our reporting currency is the U.S.
dollar, the functional currency of Joint Venture is RMB. As a result, we are
exposed to foreign exchange risk as our revenues and results of operations may
be affected by fluctuations in the exchange rate between U.S. dollars and RMB.
If the RMB depreciates against the U.S. dollar, the value of our Renminbi
revenues, earnings and assets as expressed in our U.S. dollar financial
statements will decline. In recent years, the RMB has been appreciating against
the U.S. dollar.
Assets
and liabilities of our operating subsidiaries are translated into U.S. dollars
at the exchange rate at the balance sheet date, their equity accounts are
translated at historical exchange rate and their income and expenses items are
translated using the average rate for the period. Any resulting exchange
differences are recorded in accumulated other comprehensive income or loss. The
Company is adopting such steps as the diversification of currencies used in
export sales, and the negotiation of export contracts with fixed exchange
rates.
As the
Company’s historical debt obligations are primarily short-term in nature, with
fixed interest rates, the Company does not have any risk from an increase in
market interest rates. However, to the extent that the Company arranges new
borrowings in the future, an increase in market interest rate would cause a
commensurate increase in the interest expense related to such
borrowings.
OFF-BALANCE
SHEET AGREEMENTS
At
September 30, 2010, we do not have any material commitments for capital
expenditures or have any transactions, obligations or relationships that could
be considered off-balance sheet arrangements.
SUPPLEMENTAL FINANCIAL
INFORMATION
To
facilitate analysis of our financial performance, we provide below non-GAAP
information relating to our financial results for the three and nine months
ended September 30, 2010. The comparison presented below excludes results of the
acquired business for all periods other than the month of September 2010. This
information should be read together with our GAAP financial statements contained
in Item 1 of this report as well as the discussion of our results set forth
above in this Management’s Discussion and
Analysis.
Statements
of Income
|
||||||||||||||||
Three
Months and Nine Months Ended September 30, 2010
(Excluding
Results of Acquired Business for All Periods other than the One Month
Ended September 30, 2010)
|
||||||||||||||||
Three
Months Ended
September 30, |
Nine
Months Ended
September
30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Sales
|
US$
|
47,851,974 | 33,989,937 | 131,854,257 | 83,973,887 | |||||||||||
Cost
of Sales
|
34,477,077 | 25,116,609 | 95,352,037 | 61,166,233 | ||||||||||||
Gross
Profit
|
13,374,897 | 8,873,328 | 36,502,220 | 22,807,654 | ||||||||||||
Expenses:
|
||||||||||||||||
Selling
and Distribution Expenses
|
2,689,478 | 2,131,054 | 7,516,882 | 5,509,506 | ||||||||||||
General
and Administrative Expenses
|
2,535,193 | 1,393,971 | 7,625,969 | 4,902,026 | ||||||||||||
Research
and development expenses
|
1,635,421 | 410,397 | 4,695,003 | 1,968,155 | ||||||||||||
Financial
Expenses
|
348,303 | 37,216 | 694,122 | 75,307 | ||||||||||||
|
|
|
|
|||||||||||||
Total
Expenses
|
7,208,395 | 3,972,638 | 20,531,976 | 12,454,994 | ||||||||||||
Operating
Income
|
6,166,502 | 4,900,690 | 15,970,244 | 10,352,660 | ||||||||||||
Other
Income
|
192,459 | 121,567 | 445,524 | 337,028 | ||||||||||||
Non-Operating
Expenses
|
(62,470 | ) | (61,226 | ) | (118,983 | ) | (75,842 | ) | ||||||||
Income
(Loss) Before Provision for Income Taxes
|
6,296,491 | 4,961,031 | 16,296,785 | 10,613,846 | ||||||||||||
Provision
for Income Taxes
|
940,154 | 728,322 | 1,555,696 | 2,000,413 | ||||||||||||
Net
Income
|
US$
|
5,356,337 | 4,232,709 | 14,741,089 | 8,613,433 | |||||||||||
Other
Comprehensive Income - Foreign Currency Translation
Adjustment
|
1,816,535 | 45,431 | 2,538,963 | 86,614 | ||||||||||||
Total
Comprehensive Income
|
7,172,872 | 4,278,140 | 17,280,052 | 8,700,047 | ||||||||||||
Less:
|
||||||||||||||||
Net
income attributable to Noncontrolling Interest In
Subsidiaries
|
489,118 | 423,271 | 1,331,893 | 862,337 | ||||||||||||
Other
Comprehensive Income Attributable to Non-controlling Interest's
Share
|
181,654 | 4,543 | 254,168 | 8,662 | ||||||||||||
Total
Comprehensive Income Attributable to Non-controlling Interest's
Share
|
670,772 | 427,814 | 1,586,061 | 870,999 | ||||||||||||
Net
Income Attributable to Stockholders
|
4,867,219 | 3,809,438 | 13,409,196 | 7,751,096 | ||||||||||||
Other
Comprehensive Income Attributable to Stockholders
|
1,634,881 | 40,888 | 2,284,795 | 77,952 | ||||||||||||
Total
Comprehensive Income Attributable to Stockholders
|
6,502,100 | 3,850,326 | 15,693,991 | 7,829,048 | ||||||||||||
Weighted
average common share - Basic
|
19,304,921 | 18,279,254 | 19,120,959 | 18,279,254 | ||||||||||||
Weighted
average common share - Diluted
|
19,304,921 | 18,279,254 | 19,120,959 | 18,279,254 | ||||||||||||
EPS
- Basic
|
0.25 | 0.21 | 0.70 | 0.42 | ||||||||||||
EPS
- Diluted
|
0.25 | 0.21 | 0.70 | 0.42 |
32
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the
discussion in Item 2 above, “Liquidity and Capital Resources”.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures:
As of the
end of the period covered by this report, management, including our principal
executive officer and principal financial officer, evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
(“Exchange Act”)). Based upon that evaluation, our principal executive officer
and principal financial officer concluded that the disclosure controls and
procedures were effective in all material respects to ensure that information
required to be disclosed in reports we file or submit under the Exchange Act is
(1) recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and
(2) accumulated and communicated to our management to allow their timely
decisions regarding required disclosure.
33
Changes
in Internal Control over Financial Reporting:
There
were no changes in the Company’s internal control over financial reporting
during the quarter ended September 30, 2010 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.
PART
II OTHER INFORMATION
ITEM 6. EXHIBITS
(a)
|
Exhibits:
|
31.1
|
Certification of Principal
Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated
under the Securities and Exchange Act of 1934, as
amended.
|
|||||
31.2
|
Certification of Principal
Accounting Officer pursuant to Rule 13a-14 and Rule 15d-14(a) promulgated
under the Securities and Exchange Act of 1934, as
amended.
|
|||||
32.1
|
Certification pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.
|
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 18,
2010
|
SORL AUTO
PARTS, INC.
|
||
|
By:
|
/s/ Xiao Ping Zhang | |
Name: Xiao Ping
Zhang
|
|||
Title: Chief Executive
Officer
|
|||
|
By:
|
/s/ Zong Yun Zhou | |
Name: Zong Yun
Zhou
|
|||
Title: Chief Financial
Officer
(Principal Financial
Officer)
|
|||
34