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EX-32 - EXHIBIT 32 - SORL Auto Parts, Inc. | v466343_ex32.htm |
EX-31.2 - EXHIBIT 31.2 - SORL Auto Parts, Inc. | v466343_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - SORL Auto Parts, Inc. | v466343_ex31-1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended March 31, 2017 |
¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT |
For the transition period from _________ to _________
Commission file number 000-11991
SORL AUTO PARTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE | 30-0091294 |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
No. 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
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 ¨ | Accelerated Filer ¨ | Non-Accelerated Filer ¨ | 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 ¨ No x
Emerging Growth Company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer classes of common stock, as of the latest practicable date:
As of May 15, 2017 there were 19,304,921 shares of common stock outstanding
SORL AUTO PARTS, INC.
FORM 10-Q
For the Three Months Ended March 31, 2017
INDEX
2 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2017 and December 31, 2016
March 31, 2017 | December 31, 2016 | ||||||||
(Unaudited) | |||||||||
Assets | |||||||||
Current Assets | |||||||||
Cash and cash equivalents | US$ | 11,455,214 | US$ | 8,057,155 | |||||
Accounts receivable, net, including $0 and $5,025,509 from related parties at March 31, 2017 and December 31, 2016, respectively | 104,844,561 | 102,129,294 | |||||||
Bank acceptance notes from customers | 45,638,224 | 42,697,276 | |||||||
Inventories | 71,745,365 | 65,776,517 | |||||||
Prepayments, current | 9,711,086 | 10,797,601 | |||||||
Restricted cash | 5,596,257 | 5,476,621 | |||||||
Other current assets | 1,774,940 | 1,124,608 | |||||||
Deferred tax assets | 3,219,643 | 3,210,575 | |||||||
Total Current Assets | 253,985,290 | 239,269,647 | |||||||
Property, plant and equipment, net | 54,885,852 | 53,737,706 | |||||||
Land use rights, net | 8,284,055 | 8,309,333 | |||||||
Intangible assets, net | 9,324 | 11,438 | |||||||
Prepayments, non-current | 10,448,650 | - | |||||||
Total Non-Current Assets | 73,627,881 | 62,058,477 | |||||||
Total Assets | US$ | 327,613,171 | US$ | 301,328,124 | |||||
Liabilities and Equity | |||||||||
Current Liabilities | |||||||||
Accounts payable and bank acceptance notes to vendors, including $6,234,911 and $1,953,707 due to related parties at March 31, 2017 and December 31, 2016, respectively | US$ | 60,477,514 | US$ | 65,672,626 | |||||
Deposit received from customers | 25,900,566 | 22,733,742 | |||||||
Short term bank loans | 48,871,970 | 27,416,376 | |||||||
Income tax payable | 1,268,213 | 996,522 | |||||||
Accrued expenses | 17,688,422 | 20,103,392 | |||||||
Other current liabilities, including $117,723 and $0 payables to related party at March 31, 2017 and December 31, 2016, respectively | 2,410,732 | 2,013,943 | |||||||
Total Current Liabilities | 156,617,417 | 138,936,601 | |||||||
Total Liabilities | 156,617,417 | 138,936,601 | |||||||
Equity | |||||||||
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of March 31, 2017 and December 31, 2016 | - | - | |||||||
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of March 31, 2017 and December 31, 2016 | 38,609 | 38,609 | |||||||
Additional paid-in capital | (28,582,654 | ) | (28,582,654 | ) | |||||
Reserves | 15,822,287 | 15,129,935 | |||||||
Accumulated other comprehensive income | 6,937,331 | 6,117,042 | |||||||
Retained earnings | 152,583,697 | 146,352,530 | |||||||
Total SORL Auto Parts, Inc. Stockholders' Equity | 146,799,270 | 139,055,462 | |||||||
Noncontrolling Interest In Subsidiaries | 24,196,484 | 23,336,061 | |||||||
Total Equity | 170,995,754 | 162,391,523 | |||||||
Total Liabilities and Equity | US$ | 327,613,171 | US$ | 301,328,124 |
The accompanying notes are an integral part of these unaudited consolidated financial statements
3 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
For The Three Months Ended March 31, 2017 and 2016 (Unaudited)
Three Months Ended March 31, | ||||||||||
2017 | 2016 | |||||||||
Sales | US$ | 73,895,781 | US$ | 53,836,728 | ||||||
Include: sales to related parties | 3,026,924 | 2,580,846 | ||||||||
Cost of sales | 53,348,076 | 39,397,649 | ||||||||
Gross profit | 20,547,705 | 14,439,079 | ||||||||
Expenses: | ||||||||||
Selling and distribution expenses | 5,608,623 | 5,562,432 | ||||||||
General and administrative expenses | 4,044,913 | 6,929,858 | ||||||||
Research and development expenses | 2,055,096 | 1,743,687 | ||||||||
Total operating expenses | 11,708,632 | 14,235,977 | ||||||||
Other operating income, net | 788,468 | 914,205 | ||||||||
Income from operations | 9,627,541 | 1,117,307 | ||||||||
Interest income | 10,550 | 88,102 | ||||||||
Government grants | 28,909 | 4,757 | ||||||||
Other income | 664 | 45,589 | ||||||||
Interest expenses | (481,160 | ) | (174,460 | ) | ||||||
Other expenses | (207,531 | ) | (637,629 | ) | ||||||
Income before income taxes provision (benefit) | 8,978,973 | 443,666 | ||||||||
Income taxes provision (benefit) | 1,286,174 | (34,824 | ) | |||||||
Net income | US$ | 7,692,799 | US$ | 478,490 | ||||||
Net income attributable to noncontrolling interest in subsidiaries | 769,280 | 47,849 | ||||||||
Net income attributable to common stockholders | US$ | 6,923,519 | US$ | 430,641 | ||||||
Comprehensive income: | ||||||||||
Net income | US$ | 7,692,799 | US$ | 478,490 | ||||||
Foreign currency translation adjustments | 911,432 | 1,106,640 | ||||||||
Comprehensive income | 8,604,231 | 1,585,130 | ||||||||
Comprehensive income attributable to noncontrolling interest in subsidiaries | 860,423 | 158,513 | ||||||||
Comprehensive income attributable to common stockholders | US$ | 7,743,808 | US$ | 1,426,617 | ||||||
Weighted average common share - basic | 19,304,921 | 19,304,921 | ||||||||
Weighted average common share - diluted | 19,304,921 | 19,304,921 | ||||||||
EPS - basic | US$ | 0.36 | US$ | 0.02 | ||||||
EPS - diluted | US$ | 0.36 | US$ | 0.02 |
The accompanying notes are an integral part of these unaudited consolidated financial statements
4 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Three Months Ended March 31, 2017 and 2016 (Unaudited)
Three Months Ended March 31, | ||||||||||
2017 | 2016 | |||||||||
Cash Flows From Operating Activities | ||||||||||
Net Income | US$ | 7,692,799 | US$ | 478,490 | ||||||
Adjustments to reconcile net income to net cash used in operating activities: | ||||||||||
Allowance for doubtful accounts | - | 3,676,683 | ||||||||
Depreciation and amortization | 2,017,224 | 1,733,874 | ||||||||
Deferred income tax | 8,453 | (596,802 | ) | |||||||
Changes in assets and liabilities: | ||||||||||
Accounts receivable | (2,151,307 | ) | (3,192,855 | ) | ||||||
Bank acceptance notes from customers | (2,700,239 | ) | (5,236,626 | ) | ||||||
Other currents assets | (638,653 | ) | (216,932 | ) | ||||||
Inventories | (5,594,100 | ) | 6,020,763 | |||||||
Prepayments, current | 1,142,387 | (4,828,231 | ) | |||||||
Prepaid capital lease interest | - | 40,714 | ||||||||
Accounts payable and bank acceptance notes to vendors | (4,434,657 | ) | 2,389,292 | |||||||
Income tax payable | 265,518 | - | ||||||||
Deposits received from customers | 3,033,848 | 1,221,498 | ||||||||
Other current liabilities and accrued expenses | (2,133,534 | ) | (1,900,667 | ) | ||||||
Net Cash Flows Used In Operating Activities | (3,492,261 | ) | (410,799 | ) | ||||||
Cash Flows From Investing Activities | ||||||||||
Change in short term investments | - | 2,854,289 | ||||||||
Acquisition of property and equipment | (14,320,981 | ) | (1,247,024 | ) | ||||||
Advance to related party | - | (18,695,590 | ) | |||||||
Change in restricted cash | (89,465 | ) | (284,338 | ) | ||||||
Net Cash Flows Used In Investing Activities | (14,410,446 | ) | (17,372,663 | ) | ||||||
Cash Flows From Financing Activities | ||||||||||
Proceeds from bank loans | 21,247,576 | 13,795,728 | ||||||||
Repayment of bank loans | - | (20,050,944 | ) | |||||||
Repayment of capital lease | - | (906,123 | ) | |||||||
Net Cash Flows Provided By (Used In) Financing Activities | 21,247,576 | (7,161,339 | ) | |||||||
Effects on changes in foreign exchange rate | 53,190 | 817,739 | ||||||||
Net change in cash and cash equivalents | 3,398,059 | (24,127,062 | ) | |||||||
Cash and cash equivalents - beginning of the period | 8,057,155 | 30,230,828 | ||||||||
Cash and cash equivalents - end of the period | US$ | 11,455,214 | US$ | 6,103,766 | ||||||
Supplemental Cash Flow Disclosures: | ||||||||||
Interest paid | US$ | 250,601 | US$ | 275,913 | ||||||
Income taxes paid | US$ | 1,012,203 | US$ | 677,301 |
The accompanying notes are an integral part of these unaudited consolidated financial statements
5 |
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
For The Three Months Ended March 31, 2017 (Unaudited)
Accumulated | Total SORL Auto |
|||||||||||||||||||||||||||||||||||
Additional | Other | Parts, Inc. | ||||||||||||||||||||||||||||||||||
Number of Share |
Common Stock |
Paid-in Capital |
Reserves | Retained Earnings |
Comprehensive Income |
Stockholders' Equity |
Noncontrolling Interest |
Total Equity | ||||||||||||||||||||||||||||
Balance as of December 31, 2016 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 15,129,935 | $ | 146,352,530 | $ | 6,117,042 | $ | 139,055,462 | $ | 23,336,061 | $ | 162,391,523 | ||||||||||||||||||
Net income | - | - | - | - | 6,923,519 | - | 6,923,519 | 769,280 | 7,692,799 | |||||||||||||||||||||||||||
Foreign currency translation adjustment | - | - | - | - | - | 820,289 | 820,289 | 91,143 | 911,432 | |||||||||||||||||||||||||||
Transfer to reserve | - | - | - | 692,352 | (692,352 | ) | - | - | - | - | ||||||||||||||||||||||||||
Balance as of March 31, 2017 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 15,822,287 | $ | 152,583,697 | $ | 6,937,331 | $ | 146,799,270 | $ | 24,196,484 | $ | 170,995,754 |
The accompanying notes are an integral part of these unaudited consolidated financial statements
6 |
SORL Auto Parts, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(Unaudited)
NOTE A - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”), a Delaware corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd. (the “Joint Venture” or “Ruian”). The Company distributes products both in China and internationally under SORL trademarks. The Company’s product range includes 65 categories and over 2,000 different specifications.
The Joint Venture was formed in the People’s Republic of China (“PRC” or “China”) as a Sino-Foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the “Ruili Group”), a related party under common control, and Fairford Holdings Limited (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was incorporated in China in 1987 and specializes in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture.
On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution specialist firm and an unaffiliated Taiwanese individual investor. The joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. SORL held a 60% interest in the joint venture, MGR held a 30% interest, and the Taiwanese individual investor held a 10% interest. SIH was primarily devoted to expanding SORL's international sales network in Asia-Pacific and creating a larger footprint in Europe and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese investor. After this transaction, SIH ceased to be a distributor of SORL in the international market.
7 |
NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(1) | BASIS OF PRESENTATION |
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by the rules and regulations of the United States Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures contained in this report are adequate to make the information presented not misleading. The consolidated balance sheet information as of December 31, 2016 was derived from the consolidated audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. These consolidated financial statements should be read in conjunction with the annual consolidated audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, and other reports filed with the SEC.
The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole.
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(2) | SIGNIFICANT ACCOUNTING POLICIES |
a. | ACCOUNTING METHOD |
The Company uses the accrual method of accounting for financial statement and tax return purposes.
b. | USE OF ESTIMATES |
The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.
c. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, bank acceptance notes from customers, inventories, current prepayments, other current assets, accounts payable and bank acceptance notes to vendors, short term bank loans, deposit received from customers, income tax payable, accrued expenses, and other current liabilities, the carrying amounts approximate fair values due to their short maturities.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
10 |
d. | RESTRICTED CASH |
Restricted cash mainly represents bank deposits used to pledge the bank acceptance notes. The Company entered into credit agreements with commercial banks in China (“endorsing banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits, the Company can issue bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance notes, the Company is generally required to make initial deposits or pledge note receivables to the endorsing banks in amounts of certain percentage of the face amount of the bank acceptance notes to be issued by the Company. The cash in such accounts is restricted for use over the terms of the bank acceptance notes, which are normally three to six months.
e. | RELATED PARTY TRANSACTIONS |
A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its related parties in the ordinary course of business.
11 |
f. | BANK ACCEPTANCE NOTES FROM CUSTOMERS |
Bank acceptance notes from customers generally due within six months are issued by some customers to pay certain outstanding receivable balances to the Company with specific payment terms and definitive due dates. Bank acceptance notes from customers do not bear interest. As of March 31, 2017 and December 31, 2016, bank acceptance notes from customers in the amount of $34,621,628 and $32,916,198, respectively, were pledged to endorsing banks to issue bank acceptance notes. The banks charge discount fees if the Company chooses to discount the bank acceptance notes from customers for cash before the maturity of the notes and such discount fees are included in interest expenses.
g. | REVENUE RECOGNITION |
Revenue from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided by several factors, including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales price is fixed and determinable, and collection is probable. Revenue consists of the invoice value for the sale of goods and services net of value-added tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales.
h. | COST OF SALES |
Cost of sales consists primarily of materials costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs, employee compensation, depreciation and related costs, which are directly attributable to production. Write-down of inventories to lower of cost or market is also recorded in cost of sales, if any.
i. | FOREIGN CURRENCY TRANSLATION |
The Company maintains its books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”). All assets and liabilities are translated at the current rate. The stockholders’ equity accounts are translated at the appropriate historical rate. Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.
Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
12 |
NOTE C – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)”. This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement, and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.
NOTE D - RELATED PARTY TRANSACTIONS
The Company continues to purchase primarily packaging materials from the Ruili Group. The Ruili Group is the minority stockholder of Joint Venture and is collectively controlled by Mr. Xiao Ping Zhang, his wife Ms. Shu Ping Chi, and his brother Mr. Xiao Feng Zhang. In addition, the Company purchases automotive components from four other related parties, Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. (“Guangzhou Kormee”), Ruian Kormee Automobile Braking Co., Ltd. (“Ruian Kormee”), Ruili MeiLian Air Management System (LangFang) Co., Ltd (“Ruili MeiLian”) and Shanghai Dachao Electric Technology Co., Ltd. (“Shanghai Dachao”). Guangzhou Kormee and Ruili Meilian are controlled by the Ruili Group and Ruian Kormee is the wholly-owned subsidiary of Guangzhou Kormee. Ruili Group owns 49% equity interest in Shanghai Dachao. The Company sells certain automotive products to the Ruili Group. The Company also sells scrap materials and parts to Guangzhou Kormee and Ruian Kormee.
13 |
The following related party transactions occurred for the three months ended March 31, 2017 and 2016:
Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
PURCHASES FROM: | ||||||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 335,927 | $ | 392,924 | ||||
Ruian Kormee Automobile Braking Co., Ltd. | 355,671 | 130,513 | ||||||
Ruili MeiLian Air Management System (LangFang) Co.,Ltd. | 783,070 | — | ||||||
Shanghai Dachao Electric Technology Co., Ltd. | 55,230 | 33,744 | ||||||
Ruili Group Co., Ltd. | 1,126,718 | 865,798 | ||||||
Total Purchases | $ | 2,656,616 | $ | 1,422,979 | ||||
SALES TO: | ||||||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 777,357 | $ | 617,846 | ||||
Ruian Kormee Automobile Braking Co., Ltd. | — | 573 | ||||||
Ruili Group Co., Ltd. | 3,026,924 | 2,580,846 | ||||||
Total Sales | $ | 3,804,281 | $ | 3,199,265 |
During the three months ended March 31, 2017 and 2016, for the sales mentioned above, the sales to Guangzhou Kormee and Ruian Kormee were sales of scrap materials and the related operating results were included in other operating income, net in the consolidated statements of income and comprehensive income. The sales to Ruili Group were included in sales in the consolidated statements of income and comprehensive income.
14 |
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
ACCOUNTS RECEIVABLE FROM RELATED PARTIES | ||||||||
Ruili Group Co., Ltd. | $ | — | $ | 4,361,010 | ||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | — | 664,499 | ||||||
Total | $ | — | $ | 5,025,509 | ||||
ACCOUNTS PAYABLE AND BANK ACCEPTANCE NOTES TO RELATED PARTIES | ||||||||
Ruian Kormee Automobile Braking Co., Ltd. | $ | 801,409 | $ | 628,310 | ||||
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. | 1,133,781 | — | ||||||
Shanghai Dachao Electric Technology Co., Ltd. | 6,820 | 100,441 | ||||||
Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 1,771,012 | 1,224,956 | ||||||
Ruili Group Co., Ltd. | 2,521,889 | — | ||||||
Total | $ | 6,234,911 | $ | 1,953,707 | ||||
OTHER PAYABLES TO RELATED PARTY | ||||||||
Ruili Group Co., Ltd. | $ | 117,723 | $ | — | ||||
Total | $ | 117,723 | $ | — |
The Company collects dormitory utility fees from employees and pays to Ruili Group periodically which is recorded as other payables. As of March 31, 2017 and December 31, 2016, the payable balance was $117,723 and $0, respectively.
The Company entered into several lease agreements with related parties. See Note K for more details.
The Company provided a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in the amount of RMB 150,000,000 (approximately $21,623,180) for the period from May 30, 2016 to May 14, 2017. As of the filing date, Ruili Group was negotiating with the bank to extend the credit line and the Company would continue to provide guarantee for the extended credit line.
The Company provided a guarantee for the credit line granted to Ruili Group by the China Merchants Bank in the amount of RMB 50,000,000 (approximately $7,699,889) for a period from July 29, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line. The credit line was replaced by the one issued by the same bank in the amount of RMB 40,000,000 (approximately $5,766,181) for a period of 12 months starting on October 24, 2016, the guarantee of which was continued to be provided by the Company.
The Company has short term bank loans guaranteed or pledged by related parties. See Note I for more details.
15 |
The Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in the amount of RMB 200,000,000 (approximately $28,830,907) for the period from May 22, 2016 to May 22, 2017.
16 |
NOTE E - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Accounts receivable | $ | 116,594,836 | $ | 113,815,711 | ||||
Less: allowance for doubtful accounts | (11,750,275 | ) | (11,686,417 | ) | ||||
Accounts receivable, net | $ | 104,844,561 | $ | 102,129,294 |
No customer individually accounted for more than 10% of our revenues or accounts receivable for the three months ended March 31, 2017 and 2016. The changes in the allowance for doubtful accounts at March 31, 2017 and December 31, 2016 are summarized as follows:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Beginning balance | $ | 11,686,417 | $ | 12,075,402 | ||||
Add: increase to allowance | — | 395,491 | ||||||
Less: accounts written off | — | — | ||||||
Effects on changes in foreign exchange rate | 63,858 | (784,476 | ) | |||||
Ending balance | $ | 11,750,275 | $ | 11,686,417 |
NOTE F - INVENTORIES
At March 31, 2017 and December 31, 2016, inventories consisted of the following:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Raw materials | $ | 16,220,912 | $ | 20,121,513 | ||||
Work-in-process | 14,586,579 | 14,843,653 | ||||||
Finished goods | 40,937,874 | 30,811,351 | ||||||
Less: write-down of inventories | — | — | ||||||
Total inventories | $ | 71,745,365 | $ | 65,776,517 |
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NOTE G - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the following at March 31, 2017 and December 31, 2016:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Machinery | $ | 90,559,680 | $ | 87,694,677 | ||||
Molds | 1,264,714 | 1,257,841 | ||||||
Office equipment | 2,049,011 | 2,021,982 | ||||||
Vehicles | 2,661,084 | 2,246,203 | ||||||
Buildings | 15,913,220 | 15,826,738 | ||||||
Leasehold improvements | 461,071 | 458,566 | ||||||
Sub-total | 112,908,780 | 109,506,007 | ||||||
Less: accumulated depreciation | (58,022,928 | ) | (55,768,301 | ) | ||||
Property, plant and equipment, net | $ | 54,885,852 | $ | 53,737,706 |
Depreciation expense charged to operations was $1,944,565 and $1,638,817 for the three months ended March 31, 2017 and 2016, respectively.
In May 2016, the Company, through its principal operating subsidiary, entered into a Purchase Agreement with Ruili Group, pursuant to which the Company agreed to exchange the land use rights and factory facilities located at No. 1169 Yumeng Road, Rui'an Economic Development Zone, Rui'an City, Zhejiang Province, the People's Republic of China (the “Dongshan Facility”), purchased in 2007 from Ruili Group, plus RMB 501 million (approximately $76.5 million) in cash for the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue, Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, the People’s Republic of China (the “Development Zone Faciliy”). As of the filing date, the Company has not obtained the property ownership certificate or land use right certificate of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220) for the Dongshan Facility and RMB 15.0 million (approximately $2.3 million) for the Development Zone Facility. These amounts were determined based on a 3% tax rate on the consideration paid for the Dongshan Facility and the Development Zone Facility in the transactions, which the Company considered as the most probable amount of tax liability.
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NOTE H - DEFERRED TAX ASSETS
Deferred tax assets consisted of the following as of March 31, 2017 and December 31, 2016:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Deferred tax assets - current | ||||||||
Allowance for doubtful accounts | $ | 1,754,918 | $ | 1,798,894 | ||||
Revenue (net of cost) | 92,062 | 76,719 | ||||||
Unpaid accrued expenses | 344,876 | 357,352 | ||||||
Warranty | 1,027,787 | 977,610 | ||||||
Deferred tax assets | 3,219,643 | 3,210,575 | ||||||
Valuation allowance | ― | ― | ||||||
Deferred tax assets - current | $ | 3,219,643 | $ | 3,210,575 |
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Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as the Company had no taxable income for the reporting period. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.
NOTE I - SHORT-TERM BANK LOANS
Bank loans represented the following as of March 31, 2017 and December 31, 2016:
March 31, | December 31, | |||||||
2017 | 2016 | |||||||
Secured | $ | 48,871,970 | $ | 27,416,376 |
The Company obtained those short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Zheshang Bank, and China Construction Bank, respectively, to finance general working capital as well as new equipment acquisition. Interest rate for the loans outstanding during the three months ended March 31, 2017 ranged from 0.55% to 4.48% per annum. The maturity dates of the loans existing as of March 31, 2017 ranged from April 28, 2017 to March 9, 2018. As of March 31, 2017 and December 31, 2016, the Company’s accounts receivable of $8,668,980 and $4,484,755, respectively, were pledged as collateral under loan arrangements. In addition, the Company also pledged bank acceptance notes of $10,712,681 as collateral under loan arrangements, as of March 31, 2017. The interest expense for short-term bank loans were $460,912 and $75,698 for the three months ended March 31, 2017 and 2016, respectively.
As of March 31, 2017, corporate or personal guarantees provided for those bank loans were as follows:
$ | 1,998,753 | Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Ruili Group, a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||
$ | 2,832,171 | Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||
$ | 14,358,993 | Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||
$ | 5,824,852 | Guaranteed by Ruili Group, a related party. | ||
$ | 7,247,112 | Pledged by Hangzhou Ruili Zhiye Development Ltd., a related party under common control of Ruili Group, with its property. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders. | ||
$ | 10,712,681 | Pledged by the Company with its bank acceptance notes. | ||
$ | 5,897,408 | Pledged by the Company with its accounts receivable. |
NOTE J - 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.
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In 2015, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise" designation for a third time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017.
The reconciliation of the effective income tax rate of Ruian to the statutory income tax rate in the PRC for the three months ended March 31, 2017 and 2016 is as follows:
Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | |||||||
US statutory income tax rate | 35.00 | % | 35.00 | % | ||||
Valuation allowance recognized with respect to the loss in the US company | -35.00 | % | -35.00 | % | ||||
China statutory income tax rate | 25.00 | % | 25.00 | % | ||||
Effects of income tax exemptions and reliefs | -10.00 | % | -10.00 | % | ||||
Effects of additional deduction allowed for R&D expenses | -2.14 | % | -29.48 | % | ||||
Expenses not deductible for tax purpose | 0.62 | % | 6.63 | % | ||||
Other items | 0.84 | % | — | |||||
Effective tax rate | 14.32 | % | -7.85 | % |
Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit recorded for the United States. The tax authority may examine the tax returns of the Company three years after the year ended December, 31, 2015. In the three months ended March 31, 2017 and 2016, there were no penalties and interest, which generally are recorded in the general and administrative expenses or in the tax expenses. The provisions for income taxes for the three months ended March 31, 2017 and 2016, respectively, are summarized as follows:
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Three Months Ended March 31, 2017 | Three Months Ended March 31, 2016 | |||||||
Current | $ | 1,294,627 | $ | 561,978 | ||||
Deferred | (8,453 | ) | (596,802 | ) | ||||
Total | $ | 1,286,174 | $ | (34,824 | ) |
ASC 740-10 requires recognition and measurement of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s tax positions and considered that no provision for uncertainty in income taxes was necessary as of March 31, 2017 and December 31, 2016.
NOTE K – OPERATING LEASES WITH RELATED PARTIES
In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s management personnel and staff, respectively. The lease term is from January 2013 to December 2016. This lease was amended in 2013 with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB2,100,000 (approximately $333,688).
The lease expenses were $75,887 and $422,611 for the three months ended March 31, 2017 and 2016, respectively.
NOTE L - WARRANTY CLAIMS
Warranty claims were $637,874 and $495,385 for the three months ended March 31, 2017 and 2016, respectively. Warranty claims are classified as accrued expenses on the balance sheet. The movement of accrued warranty expenses for the three months ended March 31, 2017 was as follows:
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Beginning balance at January 1, 2017 | $ | 6,517,402 | ||
Aggregate increase for new warranties issued during current period | 637,874 | |||
Aggregate reduction for payments made | (339,795 | ) | ||
Effect of exchange rate fluctuation | 36,431 | |||
Ending balance at March 31, 2017 | $ | 6,851,912 |
NOTE M – SEGMENT INFORMATION
The Company produces brake systems and other related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”). On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the passenger vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition, the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related auto parts.
The Company has two operating segments: Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems.
For the reporting periods, all of the Company’s long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.
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Three Months Ended March 31, | ||||||||
2017 | 2016 | |||||||
SALES TO EXTERNAL CUSTOMERS | ||||||||
Commercial vehicles brake systems | $ | 60,676,304 | $ | 44,080,072 | ||||
Passenger vehicles brake systems | 13,219,477 | 9,756,656 | ||||||
Sales | $ | 73,895,781 | $ | 53,836,728 | ||||
INTERSEGMENT SALES | ||||||||
Commercial vehicles brake systems | $ | — | $ | — | ||||
Passenger vehicles brake systems | — | — | ||||||
Intersegment sales | $ | — | $ | — | ||||
GROSS PROFIT | ||||||||
Commercial vehicles brake systems | $ | 16,400,238 | $ | 11,960,732 | ||||
Passenger vehicles brake systems | 4,147,467 | 2,478,347 | ||||||
Gross profit | $ | 20,547,705 | $ | 14,439,079 | ||||
Selling and distribution expenses | 5,608,623 | 5,562,432 | ||||||
General and administrative expenses | 4,044,913 | 6,929,858 | ||||||
Research and development expenses | 2,055,096 | 1,743,687 | ||||||
Other operating income, net | 788,468 | 914,205 | ||||||
Income from operations | 9,627,541 | 1,117,307 | ||||||
Interest income | 10,550 | 88,102 | ||||||
Government grants | 28,909 | 4,757 | ||||||
Other income | 664 | 45,589 | ||||||
Interest expenses | (481,160 | ) | (174,460 | ) | ||||
Other expenses | (207,531 | ) | (637,629 | ) | ||||
Income before income tax provision (benefit) | $ | 8,978,973 | $ | 443,666 | ||||
CAPITAL EXPENDITURE | ||||||||
Commercial vehicles brake systems | $ | 11,758,957 | $ | 1,021,063 | ||||
Passenger vehicles brake systems | 2,562,024 | 225,961 | ||||||
Total | $ | 14,320,981 | $ | 1,247,024 | ||||
DEPRECIATION AND AMORTIZATION | ||||||||
Commercial vehicles brake systems | $ | 1,656,343 | $ | 1,419,696 | ||||
Passenger vehicles brake systems | 360,881 | 314,178 | ||||||
Total | $ | 2,017,224 | $ | 1,733,874 |
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March 31, 2017 | December 31, 2016 | |||||||
TOTAL ASSETS | ||||||||
Commercial vehicles brake systems | $ | 269,003,175 | $ | 248,023,179 | ||||
Passenger vehicles brake systems | 58,609,996 | 53,304,945 | ||||||
Total | $ | 327,613,171 | $ | 301,328,124 |
March 31, 2017 | December 31, 2016 | |||||||
LONG LIVED ASSETS | ||||||||
Commercial vehicles brake systems | $ | 51,876,467 | $ | 51,080,332 | ||||
Passenger vehicles brake systems | 11,302,764 | 10,978,145 | ||||||
Total | $ | 63,179,231 | $ | 62,058,477 |
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NOTE N – CONTINGENCIES
(1) | The Company purchased the Dongshan Facility from Ruili Group in 2007 and subsequently transferred the plants and land use right to Ruili Group. The Company has never obtained the land use right certificate nor the property ownership certificate of the building for the Dongshan Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount was determined based on a 3% tax rate on the consideration paid for the Dongshan Facility in the transaction, which the Company considered as the most probable amount of tax liability. The Dongshan Facility was transferred back to Ruili Group on May 5, 2016. |
(2) | The information of lease commitments is provided in Note K. |
(3) | The information of guarantees and assets pledged is provided in Note D. |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated unaudited financial statements, as well as information relating to the plans of our current management. The following discussion and analysis should be read in conjunction with our consolidated unaudited financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q includes forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Generally, the words “believe,” “anticipate,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions, or the negative thereof, or comparable terminology, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with SEC from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Some of the factors that could cause actual results to differ include: our ability to effectively implement our business strategy; our ability to handle downward pricing pressures on our products; and our ability to accurately or effectively plan our production or supply needs. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which is available on the SEC’s website at www.sec.gov. Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update these forward-looking statements.
OVERVIEW
The Company manufactures and distributes automotive brake systems and other key safety-related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally for use primarily in different types of commercial vehicles, such as trucks and buses, and in passenger vehicles. Management believes that it is the largest manufacturer of automotive brake systems in China for commercial vehicles such as trucks and buses.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Year ended December 31, 2016.
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See Note J to the attached Unaudited Consolidated Financial Statements for the information regarding changes in taxation by the government of China.
RESULTS OF OPERATIONS
The following statements are about results of operations for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016.
Sales
Three Months Ended | Three Months Ended | |||||||||||||||
March 31, 2017 | March 31, 2016 | |||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||
Commercial vehicle brake systems | $ | 60.7 | 82 | % | $ | 44.0 | 82 | % | ||||||||
Passenger vehicle brake systems | $ | 13.2 | 18 | % | $ | 9.8 | 18 | % | ||||||||
Total | $ | 73.9 | 100 | % | $ | 53.8 | 100 | % |
The sales were $73.9 million and $53.8 million for the three months ended March 31, 2017 and 2016, respectively, an increase of $20.1 million or 37.4%. The increase was mainly due to the increased sales of commercial vehicle brake systems to China OEM and aftermarket market.
The sales from commercial vehicle brake systems increased by $16.7 million or 38.0%, to $60.7 million for the first fiscal quarter of 2017, compared to $44.0 million for the same period of 2016. Our high quality, low cost products continued to generate higher sales and further penetrated into the commercial vehicle market, which impacted the sales of the commercial vehicle brake systems.
The sales from passenger vehicle brake systems increased by $3.4 million or 34.7%, to $13.2 million for the first fiscal quarter of 2017, compared to $9.8 million for the same period of 2016. The increase was mainly due to the increase of passenger vehicle market in the first fiscal quarter of 2017.
A breakdown of net sales revenue for these markets for the first fiscal quarter of the 2017 and 2016, respectively, is set forth below:
Three Months | Percent | Three Months | Percent | |||||||||||||||||
Ended | of | Ended | of | Percentage | ||||||||||||||||
March 31, 2017 | Total Sales | March 31, 2016 | Total Sales | Change | ||||||||||||||||
(U.S. dollars in millions) | ||||||||||||||||||||
China OEM market | $ | 41.8 | 56.6 | % | $ | 28.1 | 52.3 | % | 48.8 | % | ||||||||||
China aftermarket | $ | 18.1 | 24.5 | % | $ | 13.2 | 24.5 | % | 37.1 | % | ||||||||||
International market | $ | 14.0 | 18.9 | % | $ | 12.5 | 23.2 | % | 12.0 | % | ||||||||||
Total | $ | 73.9 | 100.0 | % | $ | 53.8 | 100.0 | % | 37.4 | % |
Considering the increase of the production and sales of the trucks for the first fiscal quarter of 2017 in the automobile industry, our sales to the Chinese OEM Market increased by 48.8% from the first fiscal quarter of 2016, to $41.8 million for the first fiscal quarter of 2017.
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Our sales to the China aftermarket increased by $4.9 million or 37.1%, to $18.1 million for the first fiscal quarter of 2017, compared to $13.2 million for the same period of 2016. The increased new vehicle sales in China and the expiration of OEM warranties helped to drive our aftermarket business. Sales of our new model products, applicable to both the Chinese OEM Market and Chinese Aftermarket, also increased during the three months ended March 31, 2017. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor our expansion in the bus aftermarket.
Our export sales increased by $1.5 million or 12.0%, to $14.0 million for the first fiscal quarter of 2017, as compared to $12.5 million for the same period of 2016. The increase in export sales was mainly due to our broadened customer base.
Cost of Sales and Gross Profit
Cost of sales for the three months ended March 31, 2017 were $53.3 million, an increase of $13.9 million or 35.3%, from $39.4 million for the same period last year. Our gross profit increased by 42.4% from $14.4 million for the first fiscal quarter of 2016 to $20.5 million for the first fiscal quarter of 2017.
Gross margin increased to 27.8% from 26.8% for the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The increase was mainly due to increased sales of higher margin products in the first fiscal quarter of 2017. We intend to focus in 2017 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit margins.
Cost of sales from commercial vehicle brake systems for the three months ended March 31, 2017 were $44.3 million, an increase of $12.2 million or 38.0% from $32.1 million for the same period last year. The gross profit from commercial vehicle brake systems increased by 36.7% from $12.0 million for the first fiscal quarter of 2016 to $16.4 million for the first fiscal quarter of 2017. Gross margin from commercial vehicle brake systems decreased to 27.0% from 27.1% for the three months ended March 31, 2017 compared with 2016. To strengthen our competitiveness and increase our market share, we started the price promotion in the aftermarket and international market for the three months ended March 31, 2017. The increased labor cost also decreased our gross margin for the three months ended March 31, 2017.
Cost of sales from passenger vehicle brake systems for the three months ended March 31, 2017 were $9.0 million, an increase of $1.7 million or 23.3% from $7.3 million for the same period last year. The gross profit from passenger vehicle brake systems increased by 64.0% from $2.5 million for the first fiscal quarter of 2016 to $4.1 million for the first fiscal quarter of 2017. Gross margin from passenger vehicle brake systems increased to 31.0% from 25.4% for the three months ended March 31, 2017 compared with 2016. The increase was mainly due to increased sales of higher margin products in the first fiscal quarter of 2017.
Selling and Distribution Expenses
Selling and distribution expenses were $5.61 million for the three months ended March 31, 2017, as compared to $5.56 million for the same period of 2016, an increase of $0.05 million or 0.8%.
The increase was mainly due to increased freight expense and packaging expense. As the percentage of sales revenue, selling expenses percentage decreased to 7.6% for the three months ended March 31, 2017, as compared to 10.3% for the same period of 2016.
General and Administrative Expenses
General and administrative expenses were $4.0 million for the three months ended March 31, 2017, as compared to $6.9 million for the same period of 2016, a decrease of $2.9 million or 41.6%. The decrease was mainly due to the decrease in allowance for doubtful accounts during this quarter. As a percentage of sales revenue, general and administrative expenses decreased to 5.5% for the three months ended March 31, 2017, as compared to 12.9% for the same period of 2016.
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Research and Development Expenses
Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include first-party development costs. For the three months ended March 31, 2017, research and development expenses were $2.1 million, as compared to $1.7 million for the same period of 2016, an increase of $0.3 million.
Other Operating Income
Other operating income was $0.8 million for the three months ended March 31, 2017, as compared to $0.9 million for the three months ended March 31, 2016, a decrease of $0.1 million. The decrease was mainly due to a decrease in sales of raw material scraps for the three months ended March 31, 2017.
Depreciation and Amortization
Depreciation and amortization expense increased to $2.0 million for the three months ended March 31, 2017, as compared to that of $1.7 million for the same period of 2016, an increase of $0.3 million. The increase was mainly due to some new addition in PPE and the land and factory transaction with Ruili Group for the three months ended March 31, 2017.
Interest Income
Interest income for the three months ended March 31, 2017 decreased by $0.08 million to $0.01 million from $0.09 million for the same period of 2016, mainly due to decreased short term investments during the period.
Interest Expenses
The interest expenses for the three months ended March 31, 2017 increased by $0.3 million to $0.5 million from $0.2 million for the same period of 2016, mainly due to increased interest rate and increased amount of average loans outstanding during the period.
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 statements in accordance with relevant income tax laws.
In 2009, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate for years 2009 through 2011. In December 2012, the Joint Venture passed the re-assessment of the High-Tech Enterprise certificate by the government, according to the relevant PRC income tax laws. Accordingly, it continued to be taxed at a 15% rate in 2012 through 2014. The Company used a tax rate of 25% for the first three quarters of 2015. In the fourth quarter of 2015, the Joint Venture passed the re-assessment by the government, based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017.The current income tax rate used by the Company for the three month ended March 31, 2017 is 15%.
Income tax expense of $1.3 million and income tax benefit of $0.03 million was recorded for the fiscal quarter ended March 31, 2017 and 2016, respectively. The increase was mainly due to increased pre-tax income.
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Net Income Attributable to Non-Controlling Interest in Subsidiaries
Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our joint venture partners. On December 15, 2015, the Company disposed of its entire 60% equity interest in SIH. Net income attributable to non-controlling interest in subsidiaries amounted to $0.8 million and $0.05 million for the first fiscal quarter ended March 31, 2017 and 2016, respectively.
Net Income Attributable to Stockholders
The net income attributable to stockholders for the fiscal quarter ended March 31, 2017 increased by $6.5 million, to $6.9 million from $0.4 million for the fiscal quarter ended March 31, 2016 due to the increased sales and decrease in our general and administrative expenses. Earnings per share (“EPS”), both basic and diluted, for the fiscal quarter ended March 31, 2017 and 2016, were $0.36 and $0.02, respectively.
Liquidity and Capital Resources
CASH FLOWS
As of March 31, 2017, the Company had cash and cash equivalents of $11.5 million, as compared to cash and cash equivalents of $8.1 million as of December 31, 2016. The Company had working capital of $107.8 million at March 31, 2017, as compared to working capital of $100.3 million at December 31, 2016, reflecting current ratios of 1.69:1 and 1.72:1, respectively.
OPERATING - Net cash used in operating activities was $3.5 million for the three months ended March 31, 2017 compared with $0.4 million of net cash used in operating activities in the same period of 2016, an increase of $3.1 million, primarily due to the increased cash outflow resulted by changes in inventories and accounts payable and bank acceptance notes to vendors.
INVESTING - During the three months ended March 31, 2017, the Company expended net cash of $14.4 million in investing activities, mainly for acquisition of new equipment to support the growth of the business. For the three months ended March 31, 2016, the Company expended net cash of $17.4 million in investing activities.
FINANCING - During the three months ended March 31, 2017, the cash provided by financing activities was $21.2 million. The cash used in financing activities was $7.2 million for the three months ended March 31, 2016.
The Company has taken a number of steps to improve the management of our cash flow. We place more emphasis on collection of accounts receivable from our customers, and we maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements in the foreseeable future.
OFF-BALANCE SHEET ARRANGEMENTS
As of March 31, 2017, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
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According to the laws of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. In 2007, the Company purchased the land use rights from the Ruili Group, a related party. The Company also purchased the buildings on the land in the same transaction. The purchase price of land use right and building amounted to approximately $20 million. On May 5, 2016, the Company entered into a Purchase Agreement with the Ruili Group through Ruian, pursuant to which the Company agreed to exchange the Dongshan Facility plus RMB501 million (approximately $76.5 million) in cash for Development Zone Facility. The value of the Dongshan Facility and Development Zone Facility was appraised to be RMB 125 million (approximately $19.1 million) and RMB 626 million (approximately $95.6 million), respectively. As of March 31, 2017, total amount of RMB481 million (approximately $73.5 million) was paid to the Ruili Group in installments, and the remaining RMB20 million (approximately $3.0 million) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and the land use right as specified in the Purchase Agreement.
Even if the Company is unable to timely resolve obtain the land use right certificate for the land and related building, the Company believes that there will be no potential adverse implication on the Company for the following reasons.
1. The Company acquired the land use rights in a transaction between the Company and the Ruili Group, a related party. The Ruili Group, as the original land use right owner, has granted the land use right to the Company by contract which is supported by valid consideration.
2. No third party would oppose the Company’s use of the land, because no third party has any interest in the land use right or property ownership right, other than the Ruili Group and the government.
a) The Ruili Group promised that the Company has the right to use the land and related building, even before the land use certificate is transferred.
b) According to the laws of China, the government owns all the land and the buildings attached to the land in China. Once the land use right is granted to Ruili Group, Ruili Group has the right to assign its land use rights to any third parties, including the Company, without interference from the government. Therefore, it is unlikely that the government will oppose the Company’s right to use the land and related building.
c) The Company has reserved tax payables in the amount of RMB 19,590,000 (approximately US$2,891,580) on its consolidated balance sheets under the line item “accrued expenses” as if no reduction or exemption of tax is approved. This amount was determined based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered as the most probable amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay if the negotiation with the local government ultimately is not successful.
CONTRACTUAL OBLIGATIONS
As of March 31, 2017, we had no material changes outside the ordinary course of business in our contractual obligations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures:
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of March 31, 2017 was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(b) of the Exchange Act). Based on this evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures, as of March 31, 2017, were effective, in all material respects, for the purpose stated above.
Changes in Internal Control over Financial Reporting:
There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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None.
Not applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
3.1 | Amended and Restated Articles of Incorporation, as further amended (approved May 27, 2010). (1) |
3.2 | Amended and Restated Bylaws effective as of March 14, 2009. (2) |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3) |
(1) | Incorporated herein by reference from the Registrant’s Form 8-K Current Report filed with the Securities and Exchange Commission, on June 1, 2010. |
(2) | Incorporated herein by reference from the Registrant’s Form 8-K Current Report as filed with the Securities and Exchange Commission, on March 17, 2009. |
(3) | Furnished in accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated : May 15, 2017 | SORL AUTO PARTS, INC. |
By: /s/ Xiao Ping Zhang | |
Name: Xiao Ping Zhang | |
Title: Chief Executive Officer | |
(Principal Executive Officer) | |
By: /s/ Zong Yun Zhou | |
Name: Zong Yun Zhou | |
Title: Chief Financial Officer | |
(Principal Accounting Officer) |
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