Company Quick10K Filing
Sorl Auto Parts
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 19 $65
10-Q 2019-11-14 Quarter: 2019-09-30
10-Q 2019-08-14 Quarter: 2019-06-30
10-Q 2019-05-15 Quarter: 2019-03-31
10-K 2019-04-01 Annual: 2018-12-31
10-Q 2018-11-14 Quarter: 2018-09-30
10-Q 2018-08-14 Quarter: 2018-06-30
10-Q 2018-05-15 Quarter: 2018-03-31
10-K 2018-04-02 Annual: 2017-12-31
10-Q 2017-11-14 Quarter: 2017-09-30
10-Q 2017-08-14 Quarter: 2017-06-30
10-Q 2017-05-15 Quarter: 2017-03-31
10-K 2017-03-31 Annual: 2016-12-31
10-Q 2016-11-14 Quarter: 2016-09-30
10-Q 2016-08-15 Quarter: 2016-06-30
10-Q 2016-05-16 Quarter: 2016-03-31
10-K 2016-03-30 Annual: 2015-12-31
10-K 2016-03-30 Annual: 2015-12-31
10-Q 2015-11-16 Quarter: 2015-09-30
10-Q 2015-08-14 Quarter: 2015-06-30
10-Q 2015-05-15 Quarter: 2015-03-31
10-K 2015-03-31 Annual: 2014-12-31
10-Q 2014-11-14 Quarter: 2014-09-30
10-Q 2014-08-14 Quarter: 2014-06-30
10-Q 2014-05-15 Quarter: 2014-03-31
10-K 2014-03-31 Annual: 2013-12-31
10-Q 2013-11-14 Quarter: 2013-09-30
10-Q 2013-08-14 Quarter: 2013-06-30
10-Q 2013-05-15 Quarter: 2013-03-31
10-K 2013-04-01 Annual: 2012-12-31
10-Q 2012-11-14 Quarter: 2012-09-30
10-Q 2012-08-14 Quarter: 2012-06-30
10-Q 2012-05-15 Quarter: 2012-03-31
10-K 2012-03-30 Annual: 2011-12-31
10-Q 2011-11-14 Quarter: 2011-09-30
10-Q 2011-08-15 Quarter: 2011-06-30
10-Q 2011-05-16 Quarter: 2011-03-31
10-K 2011-03-29 Annual: 2010-12-31
10-Q 2010-11-15 Quarter: 2010-09-30
10-Q 2010-08-12 Quarter: 2010-06-30
10-Q 2010-05-14 Quarter: 2010-03-31
10-K 2010-03-29 Annual: 2009-12-31
8-K 2019-11-29 Enter Agreement, Other Events, Exhibits
8-K 2019-11-14 Regulation FD, Exhibits
8-K 2019-08-14 Regulation FD, Exhibits
8-K 2019-07-08 Regulation FD, Exhibits
8-K 2019-07-01 Other Events
8-K 2019-06-30 Officers
8-K 2019-06-18 Other Events
8-K 2019-05-24 Officers, Other Events, Exhibits
8-K 2019-05-15 Regulation FD, Exhibits
8-K 2019-04-25 Regulation FD, Exhibits
8-K 2019-04-01 Regulation FD, Exhibits
8-K 2018-11-14 Regulation FD, Exhibits
8-K 2018-08-14 Regulation FD, Exhibits
8-K 2018-05-15 Regulation FD, Exhibits
8-K 2018-04-02 Regulation FD, Exhibits
SORL 2019-09-30
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 f10q0919ex31-1_sorlauto.htm
EX-31.2 f10q0919ex31-2_sorlauto.htm
EX-32 f10q0919ex32_sorlauto.htm

Sorl Auto Parts Earnings 2019-09-30

SORL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
CVGI 220 460 324 935 131 40 83 317 14% 3.8 9%
HZN 107 605 693 833 134 -113 -41 539 16% -13.2 -19%
SUP 85 1,468 1,097 1,437 133 17 142 686 9% 4.8 1%
STRT 85 313 149 487 58 -14 6 77 12% 13.1 -5%
CAAS 66 671 362 355 56 7 31 -23 16% -0.7 1%
SORL 65 773 552 391 131 14 56 48 33% 0.9 2%
UFAB 27 111 70 160 34 -7 4 79 21% 19.3 -7%
ADOM 22 13 8 9 0 -6 -6 19 6% -3.5 -42%
MGA
IEP 24,382 12,907 9,717 376 417 1,449 4,128 4% 2.8 2%

10-Q 1 f10q0919_sorlautoparts.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

for the quarterly period ended September 30, 2019

 

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

 

For the transition period from __________ to __________

 

Commission file number 000-11991

 

SORL AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE   30-0091294
(State or other jurisdiction of
incorporation or organization)
  (IRS Employer
Identification No.)

 

No. 2666 Kaifaqu Avenue

Ruian Economic Development District

Ruian City, Zhejiang Province

People’s Republic of China

(Address of principal executive offices)

 

86-577-6581-7720

(Registrant’s telephone number)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒     No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.: 

 

Large Accelerated filer: Accelerated filer:
Non-accelerated filer: Smaller reporting company:
Emerging growth company:    

  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐   No ☒

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
         

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer classes of common stock, as of the latest practicable date:

 

As of November 14, 2019 there were 19,304,921 shares of Common Stock outstanding.

 

 

 

 

 

 

SORL AUTO PARTS, INC.

FORM 10-Q

For the Quarter ended September 30, 2019

 

INDEX

 

    Page
     
PART I. FINANCIAL INFORMATION (Unaudited)
     
Item 1. Financial Statements:
     
  Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018 1
     
  Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited) 2
     
  Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and 2018 (Unaudited) 3
     
  Consolidated Statements of Changes in Equity for the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited) 4
     
  Notes to Consolidated Financial Statements (Unaudited) 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
     
Item 4. Controls and Procedures 28
     
PART II. OTHER INFORMATION 29
     
Item 1. Legal Proceedings. 29
     
Item 1A. Risk Factors. 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 29
     
Item 3. Defaults Upon Senior Securities. 29
     
Item 4. Mine Safety Disclosures. 29
     
Item 5. Other Information. 29
     
Item 6. Exhibits 29
     
SIGNATURES 30

 

i

 

 

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2019 and December 31, 2018

 

   September 30,
2019
   December 31,
2018
 
   (Unaudited)     
Assets        
Current Assets        
Cash and cash equivalents  US$16,485,401   US$73,588,229 
Accounts receivable, net, including $310,143 and $261,889 from related parties as of September 30, 2019 and December 31, 2018, respectively   158,188,600    150,047,797 
Bank acceptance notes from customers   65,007,965    62,052,225 
Inventories, net   191,178,724    204,285,427 
Prepayments, current, including $3,283,579 and $3,670,573 to related party at September 30, 2019 and December 31, 2018, respectively   16,258,454    7,776,591 
Restricted cash, current   13,780,187    19,307,003 
Advances to related party   24,433,792    79,739,417 
Deposits on loan agreements, current   4,948,465    - 
Other current assets, net   13,610,953    15,697,448 
Total Current Assets   503,892,541    612,494,137 
           
    Property, plant and equipment, net   119,103,291    96,053,386 
Land use rights, net   36,213,965    21,124,455 
Intangible assets, net   -    220,232 
Deposits on loan agreements, non-current   6,362,312    10,199,324 
Prepayments, non-current   15,253,670    31,575,238 
Other assets, non-current   1,463,985    563,542 
Restricted cash, non-current   16,683,397    18,067,374 
Deferred tax assets   3,578,925    4,073,838 
Total Non-current Assets   198,659,545    181,877,389 
Total Assets  US$702,552,086   US$794,371,526 
           
Liabilities and Equity          
Current Liabilities          
Accounts payable and bank acceptance notes to vendors, including $16,438,264 and $23,805,200 due to related parties at September 30, 2019 and December 31, 2018, respectively  US$159,184,839   US$236,433,718 
Deposits received from customers   47,433,293    51,529,795 
Short term bank loans   201,749,179    217,940,471 
Current portion of long term loans, net of unamortized debt issuance costs   22,199,252    21,141,029 
Income tax payable, current   3,132,430    3,421,486 
Accrued expenses   23,085,329    24,045,902 
Due to related party   8,083,574    5,959,752 
Deferred income   745,200    1,453,282 
Other current liabilities   4,041,457    3,288,344 
Total Current Liabilities   469,654,553    565,213,779 
           
Long term loans, less current portion and net of unamortized debt issuance costs   4,630,198    14,429,404 
Operating lease liabilities, non-current   628,873    - 
Income tax payable, non-current   8,377,468    9,259,307 
Total Non-current Liabilities   13,636,539    23,688,711 
Total Liabilities   483,291,092    588,902,490 
           
Equity          
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of September 30, 2019 and December 31, 2018   -    - 
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of September 30, 2019 and December 31, 2018   38,609    38,609 
Additional paid-in capital   (28,582,654)   (28,582,654)
Reserves   21,902,103    20,007,007 
Accumulated other comprehensive income   259,271    6,655,803 
Retained earnings   195,433,836    178,535,378 
Total SORL Auto Parts, Inc. Stockholders’ Equity   189,051,165    176,654,143 
Noncontrolling Interest In Subsidiaries   30,209,829    28,814,893 
Total Equity   219,260,994    205,469,036 
Total Liabilities and Equity  US$702,552,086   US$794,371,526 

  

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

1

 

 

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)

 

   Three months ended
September 30,
   Nine months ended
September 30,
 
   2019   2018   2019   2018 
Sales  US$112,227,452   US$108,584,331   US$387,820,858   US$344,815,965 
Include: sales to related parties   6,859,689    9,333,959    25,478,367    22,997,540 
Cost of sales   81,294,783    82,249,456    284,098,257    253,851,334 
Gross profit   30,932,669    26,334,875    103,722,601    90,964,631 
                     
Expenses:                    
Selling and distribution expenses   13,850,387    13,160,875    43,198,784    37,154,745 
General and administrative expenses   8,207,550    5,051,684    24,803,869    17,519,873 
Research and development expenses   5,001,354    4,478,298    16,934,141    13,400,656 
Total operating expenses   27,059,291    22,690,857    84,936,794    68,075,274 
                     
Other operating income, net   2,840,617    2,959,269    7,798,787    7,535,820 
                     
Income from operations   6,713,995    6,603,287    26,584,594    30,425,177 
                     
Interest income   966,855    547,455    4,183,471    2,847,299 
Government grants   70,785    2,239,250    3,570,630    2,982,775 
Other income   35,884    229,520    130,913    432,213 
Interest expenses   (3,010,304)   (3,331,554)   (10,155,849)   (10,214,681)
Exchange differences   773,420    906,538    250,290    1,396,460 
Other expenses   (508,302)   (55,835)   (1,076,993)   (1,200,920)
                     
Income before income taxes provision   5,042,333    7,138,661    23,487,056    26,668,323 
                     
Provision for income taxes   389,109    12,130,789    2,587,840    14,974,982 
                     
Net income (loss)  US$4,653,224   US$(4,992,128)  US$20,899,216   US$11,693,341 
                     
Net income attributable to noncontrolling interest in subsidiaries   468,322    613,086    2,105,662    2,281,633 
                     
Net income (loss) attributable to common stockholders  US$4,184,902   US$(5,605,214)  US$18,793,554   US$9,411,708 
                     
Comprehensive income (loss):                    
                     
Net income (loss)  US$4,653,224   US$(4,992,128)  US$20,899,216   US$11,693,341 
Foreign currency translation adjustments   (6,586,436)   (8,307,355)   (7,107,258)   (11,275,895)
Comprehensive income (loss)   (1,933,212)   (13,299,483)   13,791,958    417,446 
Comprehensive income (loss) attributable to noncontrolling interest in subsidiaries   (190,322)   (217,650)   1,394,936    1,154,043 
Comprehensive income (loss) attributable to common stockholders  US$(1,742,890)  US$(13,081,833)  US$12,397,022   US$(736,597)
                     
Weighted average common share - basic   19,304,921    19,304,921    19,304,921    19,304,921 
                     
Weighted average common share - diluted   19,304,921    19,304,921    19,304,921    19,304,921 
                     
EPS - basic  US$0.22   US$(0.29)  US$0.97   US$0.49 
                     
EPS - diluted  US$0.22   US$(0.29)  US$0.97   US$0.49 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements.

 

2

 

 SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months ended September 30, 2019 and 2018 (Unaudited)

  

   Nine months ended
September 30,
 
   2019   2018 
         
Cash Flows From Operating Activities        
Net income  US$20,899,216   US$11,693,341 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Allowance for doubtful accounts   2,365,714    179,744 
Depreciation and amortization   10,528,373    8,926,695 
Deferred income tax   368,700    966,547 
Gain on disposal of property and equipment   (30,562)   (73,809)
Amortization of debt issuance costs   441,236    520,741 
Changes in assets and liabilities:          
Accounts receivable   (15,844,424)   (38,780,246)
Bank acceptance notes from customers   1,258,843    68,016,837 
Inventories, net   7,669,607    (9,983,968)
Prepayments   (9,348,404)   (52,611,953)
Other current assets, net   (699,009)   (19,823,567)
Accounts payable and bank acceptance notes to vendors   (72,638,392)   86,724,938 
Deposits received from customers   (2,393,750)   7,432,808 
Income tax payable   (1,125,335)   24,058,536 
Deferred income   (683,529)   (382,627)
Other current liabilities and accrued expenses   301,057    (5,671,820)
Net Cash Flows Provided By (Used in) Operating Activities   (58,930,659)   81,192,197 
           
Cash Flows From Investing Activities          
Acquisition of property, equipment, plant and land use rights   (36,495,784)   (40,142,267)
Acquisition of intangible assets   -    (367,931)
Advances to related parties   -    (214,800,362)
Repayment of advances to related parties   57,010,144    222,337,244 
Proceeds from disposal of property and equipment   42,451    - 
Net Cash Flows Provided By (Used In) Investing Activities   20,556,811    (32,973,316)
           
Cash Flows From Financing Activities          
Proceeds from short term bank loans   238,649,409    353,441,949 
Repayment of short term bank loans   (248,358,539)   (325,651,416)
Proceeds from related parties   1,843,951    311,692,664 
Repayments to related parties   -    (328,624,110)
Repayments of long term loans   (16,998,572)   (18,957,775)
Payment of debt issuance costs   (108,222)   - 
Net Cash Flows Used In Financing Activities   (24,971,973)   (8,098,688)
           
Effects on changes in foreign exchange rate   (667,800)   (4,557,219)
           
Net change in cash, cash equivalents and restricted cash   (64,013,621)   35,562,974 
           
Cash, cash equivalents, and restricted cash - beginning of the period   110,962,606    4,598,176 
           
Cash, cash equivalents, and restricted cash - end of the period  US$46,948,985   US$40,161,150 
           
Supplemental Cash Flow Disclosures:          
Interest paid  US$8,655,097   US$7,849,753 
Income taxes paid  US$3,339,144   US$5,157,755 
           
Non-cash Investing and Financing Transactions          
Loans from related party in the form of bank acceptance notes  US$-   US$5,846,083 
Repayments to related party in the form of bank acceptance notes  US$-   US$33,721,267 
Repayments from related party in the form of bank acceptance notes  US$-   US$26,771,056 
Liabilities assumed in connection with acquisition of property, plant and equipment  US$1,274,693   US$- 
Property, plant and equipment and land use rights transferred from prepayments  US$19,995,442   US$- 
Proceeds from long term loans in the form of bank acceptance notes  US$7,169,692   US$- 
Deposits on loan agreements deducted from proceeds from long term loans  US$1,433,938   US$- 
           
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets          
Cash and cash equivalents  US$16,485,401   US$17,609,594 
Restricted cash, current   13,780,187    19,062,778 
Restricted cash, non-current   16,683,397    3,488,778 
Total cash, cash equivalents, and restricted cash  US$46,948,985   US$40,161,150 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

3

 

 

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

For the Three and Nine Months ended September 30, 2019 and 2018 (Unaudited)

 

            Additional           Accumulated Other   Total SORL Auto
Parts, Inc.
         
   Number of   Common   Paid-in       Retained   Comprehensive   Stockholders’   Noncontrolling     
   Share   Stock   Capital   Reserves   Earnings   Income   Equity   Interest   Total Equity 
Balance as of December 31, 2018   19,304,921   $38,609   $(28,582,654)  $20,007,007   $178,535,378   $6,655,803   $176,654,143   $28,814,893   $205,469,036 
                                              
Net income   -    -    -    -    8,970,527    -    8,970,527    1,005,327    9,975,854 
                                              
Foreign currency translation adjustment   -    -    -    -    -    3,860,299    3,860,299    428,922    4,289,221 
                                              
Transfer to reserve   -    -    -    904,794    (904,794)   -    -    -    - 
                                             
Balance as of March 31, 2019   19,304,921   $38,609   $(28,582,654)  $20,911,801   $186,601,111   $10,516,102   $189,484,969   $30,249,142   $219,734,111 
                                              
Net income   -    -    -    -    5,638,125    -    5,638,125    632,013    6,270,138 
                                              
Foreign currency translation adjustment   -    -    -    -    -    (4,329,039)   (4,329,039)   (481,004)   (4,810,043)
                                              
Transfer to reserve   -    -    -    568,812    (568,812)   -    -    -    - 
                                              
Balance as of June 30, 2019   19,304,921   $38,609   $(28,582,654)  $21,480,613   $191,670,424   $6,187,063   $190,794,055   $30,400,151   $221,194,206 
                                              
Net income   -    -    -    -    4,184,902    -    4,184,902    468,322    4,653,224 
                                              
Foreign currency translation adjustment   -    -    -    -    -    (5,927,792)   (5,927,792)   (658,644)   (6,586,436)
                                              
Transfer to reserve   -    -    -    421,490    (421,490)   -    -    -    - 
                                              
Balance as of September 30, 2019   19,304,921   $38,609   $(28,582,654)  $21,902,103   $195,433,836   $259,271   $189,051,165   $30,209,829   $219,260,994 

 

           Additional          

Accumulated Other

  

Total SORL Auto
Parts, Inc.

         
   Number of   Common   Paid-in       Retained   Comprehensive  

Stockholders’

   Noncontrolling     
   Share   Stock   Capital   Reserves   Earnings   Income   Equity   Interest   Total Equity 
Balance as of December 31, 2017   19,304,921   $38,609   $(28,582,654)  $17,562,357   $168,244,329   $15,903,188   $173,165,829   $27,126,102   $200,291,931 
                                              
Net income   -    -    -    -    8,273,502    -    8,273,502    919,278    9,192,780 
                                              
Foreign currency translation adjustment   -    -    -    -    -    7,240,081    7,240,081    804,453    8,044,534 
                                              
Transfer to reserve   -    -    -    827,350    (827,350)   -    -    -    - 
                                              
Balance as of March 31, 2018   19,304,921   $38,609   $(28,582,654)  $18,389,707   $175,690,481   $23,143,269   $188,679,412   $28,849,833   $217,529,245 
                                              
Net income   -    -    -    -    6,743,420    -    6,743,420    749,269    7,492,689 
                                              
Foreign currency translation adjustment   -    -    -    -    -    (9,911,767)   (9,911,767)   (1,101,307)   (11,013,074)
                                              
Transfer to reserve   -    -    -    674,342    (674,342)   -    -    -    - 
                                              
Balance as of June 30, 2018   19,304,921   $38,609   $(28,582,654)  $19,064,049   $181,759,559   $13,231,502   $185,511,065   $28,497,795   $214,008,860 
                                              
Net income (loss)   -    -    -    -    (5,605,214)   -    (5,605,214)   613,086    (4,992,128)
                                              
Foreign currency translation adjustment   -    -    -    -    -    (7,476,619)   (7,476,619)   (830,736)   (8,307,355)
                                              
Transfer to reserve   -    -    -    674,342    (674,342)   -    -    -    - 
                                              
Balance as of September 30, 2018   19,304,921   $38,609   $(28,582,654)  $19,738,391   $175,480,003   $5,754,883   $172,429,232   $28,280,145   $200,709,377 

 

The accompanying notes are an integral part of these unaudited consolidated financial statements. 

4

 

  

SORL Auto Parts, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2019

(Unaudited)

 

NOTE A - DESCRIPTION OF BUSINESS

 

SORL Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”), a Delaware corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd. (the “Joint Venture” or “Ruian”). The Company distributes products both in China and internationally under SORL trademarks. The Company’s product range includes 140 categories and over 2,000 different specifications.

 

The Joint Venture was formed in the People’s Republic of China (“PRC” or “China”) as a Sino-Foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the “Ruili Group”), a related party under common control, and Fairford Holdings Limited (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was incorporated in China in 1987 and specializes in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture.

 

On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution specialist firm and an unaffiliated Taiwanese individual investor. The joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. SORL held a 60% interest in the joint venture, MGR held a 30% interest, and the Taiwanese individual investor held a 10% interest. SIH was primarily devoted to expanding SORL’s international sales network in Asia-Pacific and creating a larger footprint in Europe and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese investor. After this transaction, SIH ceased to be a distributor of SORL in the international market.

 

NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

 

(1)BASIS OF PRESENTATION

 

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by the rules and regulations of the United States Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures contained in this report are adequate to make the information presented not misleading. The consolidated balance sheet information as of December 31, 2018 was derived from the consolidated audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. These consolidated financial statements should be read in conjunction with the annual consolidated audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and other reports filed with the SEC. 

 

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole.

 

5

 

 

(2)SIGNIFICANT ACCOUNTING POLICIES

 

a. ACCOUNTING METHOD

 

The Company uses the accrual method of accounting for financial statement and tax return purposes.

  

b. USE OF ESTIMATES

 

The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.

 

c. FAIR VALUE OF FINANCIAL INSTRUMENTS

 

For certain of the Company’s financial instruments, including cash and cash equivalents, current restricted cash, accounts receivable, bank acceptance notes from customers, inventories, current prepayments, current deposits on loan agreements, other current assets, accounts payable and bank acceptance notes to vendors, short term bank loans, deposits received from customers, current portion of long term loans, deferred income, income tax payable, accrued expenses and other current liabilities, the carrying amounts approximate fair values due to their short maturities.

 

Transactions involving related parties cannot be presumed to be carried out on an arm’s-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm’s-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.

 

d. RESTRICTED CASH

 

Restricted cash, current consists of bank deposits used to pledge bank acceptance notes, and deposits for obtaining letters of credit from a local bank. 

 

Restricted cash, non-current consists of deposits guaranteed for construction projects and the non-current portion of certain bank deposits used to pledge for bank acceptance notes.

 

e. RELATED PARTY TRANSACTIONS

 

A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its related parties in the ordinary course of business.

 

6

 

 

f. BANK ACCEPTANCE NOTES FROM CUSTOMERS

 

Bank acceptance notes from customers, generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of related parties and transferred to the Company as loans from related parties or repayments from related parties. Bank acceptance notes do not bear interest. As of September 30, 2019 and December 31, 2018, bank acceptance notes receivable in the amount of $58,985,401 and $58,458,890, respectively, were pledged to banks to issue either short term bank loans or bank acceptance notes to vendors. The banks charge discount fees if the Company chooses to discount the bank acceptance notes for cash before the maturity of the notes and such discount fees are included in interest expenses in the accompanying consolidated statements of income (loss) and comprehensive income (loss).

 

g. FOREIGN CURRENCY TRANSLATION

  

The Company maintains its books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”). All assets and liabilities are translated at the current rate. The stockholders’ equity accounts are translated at the appropriate historical rate. Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.

 

 Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

 

NOTE C - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS 

 

On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease. 

 

The primary impact of applying ASC Topic 842 is the initial recognition of $1.6 million of lease liabilities and corresponding right-of-use assets on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained earnings or other components of equity recognized as of January 1, 2019 and the adoption of this standard did not impact the consolidated statement of income and comprehensive income or consolidated statement of cash flows of the Company. The Company does not have finance lease arrangements as of September 30, 2019. See Note N for further discussion. 

 

7

 

 

NOTE D - RELATED PARTY TRANSACTIONS

 

Related parties with whom the Company conducted business consist of the following:

 

Name of Related Party   Nature of Relationship
Xiao Ping Zhang   Principal shareholder, Chairman of the Board and Chief Executive Officer
     
Shu Ping Chi   Shareholder, member of the Board, wife of Xiao Ping Zhang
     
Xiao Feng Zhang   Shareholder, member of the Board, brother of Xiao Ping Zhang
     
Ruili Group Co., Ltd. (“Ruili Group”)   10% shareholder of Joint Venture and is collectively controlled by Xiao Ping Zhang, Shu Ping Chi, and Xiao Feng Zhang
     
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. (“Guangzhou Kormee”)   Controlled by Ruili Group
     
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. (“Ruian Kormee” and formerly known as “Ruian Kormee Automobile Braking Co., Ltd.”)   Wholly controlled by Guangzhou Kormee
     
Changchun Kormee Auto Electric Co., Ltd. (“Changchun Kormee”)   Wholly controlled by Guangzhou Kormee
     
Shanghai Dachao Electric Technology Co., Ltd. (“Shanghai Dachao”)   Ruili Group holds 66% of the equity interests in Shanghai Dachao
     
Ruili MeiLian Air Management Systems (LangFang) Co., Ltd. (“Ruili Meilian”)   Controlled by Ruili Group
     
Wenzhou Lichuang Automobile Parts Co., Ltd. (“Wenzhou Lichuang”)   Controlled by Ruili Group
     
Ningbo Ruili Equipment Co., Ltd. (“Ningbo Ruili”)   Controlled by Ruili Group
     
Shanghai Ruili Real Estate Development Co., Ltd. (“Shanghai Ruili”)   Wholly owned by Ruili Group
     
Kunshan Yuetu Real Estate Development Co., Ltd. (“Kunshan Yuetu”)   Collectively owned by Ruili Group and Shu Ping Chi
     
Shanghai Tabouk Auto Components Co., Ltd. (“Shanghai Tabouk”)   Collectively owned by Xiao Feng Zhang and Xiao Ping Zhang
     
Hangzhou Ruili Property Development Co., Ltd.   Collectively owned by Ruili Group and Xiao Ping Zhang
     
Hangzhou Hangcheng Friction Material Co., Ltd. (“Hangzhou Hangcheng”)   Controlled by Ruili Group
     
Hangzhou Ruili Binkang Real Estate Development Co. Ltd.   Controlled by Hangzhou Ruili Property Development Co., Ltd.
     
SHNS Precision Die Casting (Yangzhou) Co. Ltd. (“SHNS Precision”)   Controlled by Ruili Group

 

The Company continues to purchase primarily packaging materials from Ruili Group. In addition, the Company purchases automotive components from other related parties, including Guangzhou Kormee, Ruian Kormee, Ruili Meilian, Shanghai Dachao, Wenzhou Lichuang, Hangzhou Hangcheng, and molds from Ningbo Ruili used in its production.

 

The Company sells certain automotive products to the Ruili Group. The Company also sells parts to Guangzhou Kormee, Shanghai Tabouk, Ruian Kormee, Changchun Kormee and Ruili Meilian. 

 

8

 

 

The following related party transactions occurred during the three and nine months ended September 30, 2019 and 2018:

  

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2019   2018   2019   2018 
PURCHASES FROM:                    
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.  $3,221,199   $598,920   $8,614,356   $2,343,015 
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.   756,976    582,998    2,507,101    1,996,094 
Shanghai Dachao Electric Technology Co., Ltd.   186,044    489,695    500,278    866,382 
Ruili MeiLian Air Management System (LangFang) Co., Ltd.   566,208    812,202    1,355,626    5,786,608 
Ruili Group Co., Ltd.   2,190,415    2,024,487    10,418,878    5,991,237 
Hangzhou Hangcheng Friction Material Co., Ltd.   95,925    -    216,163    - 
Ningbo Ruili Equipment Co., Ltd.   3,045,923    2,044,168    4,410,119    2,044,168 
Wenzhou Lichuang Automobile Parts Co., Ltd.   3,518,565    3,706,795    10,754,558    11,251,687 
Total purchases  $13,581,255   $10,259,265   $38,777,079   $30,279,191 
SALES TO:                    
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.  $29,965   $8,641   $93,233   $63,112 
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.   2,227,504    2,271,413    9,085,261    8,086,219 
Ruili MeiLian Air Management System (LangFang) Co., Ltd.   92,965    204,192    1,085,084    1,048,005 
Ruili Group Co., Ltd.   4,193,754    6,494,382    14,235,539    12,570,554 
Changchun Kormee Auto Electric Co., Ltd.   -    -    35,943    - 
Shanghai Tabouk Auto Components Co., Ltd.   315,501    355,331    943,307    1,229,651 
Total sales  $6,859,689   $9,333,959   $25,478,367   $22,997,541 

 

   As of
September 30,
2019
   As of
December 31,
2018
 
ADVANCES TO RELATED PARTIES        
         
Ruili Group Co., Ltd.  $24,433,792   $79,739,417 
           
Total  $24,433,792   $79,739,417 
           
ACCOUNTS RECEIVABLE FROM RELATED PARTY          
           
Shanghai Tabouk Auto Components Co., Ltd  $310,143   $261,889 
           
Total  $310,143   $261,889 
           

PREPAYMENTS TO RELATED PARTY

          
           
Ningbo Ruili Equipment Co., Ltd.  $3,283,579   $3,670,573 
           
 Total  $3,283,579   $3,670,573 
           
ACCOUNTS PAYABLE TO RELATED PARTIES          
           
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.  $6,207,669   $7,877,485 
Shanghai Dachao Electric Technology Co., Ltd.   266,285    56,883 
Ruili MeiLian Air Management System (LangFang) Co., Ltd.   1,518,494    5,628,155 
Wenzhou Lichuang Auto Parts Co., Ltd.   8,258,279    9,898,777 
Changchun Kormee Auto Electric Co., Ltd.   -    9,206 
Hangzhou Hangcheng Friction Material Co., Ltd.   187,537    334,694 
           
Total  $16,438,264   $23,805,200 
           
DUE TO RELATED PARTY      
       
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.  $8,083,574   $5,959,752 
           
Total  $8,083,574   $5,959,752 

 

9

 

 

From time to time, the Company borrows from Ruili Group and its controlled companies for working capital purposes. In order to obtain the loans and mutually benefit both the debtor and creditor of the arrangement, the Company also advances to Ruili Group and its controlled companies in a short term. All the loans from related parties are non-interest bearing, unsecured and due on demand. The advances to Ruili Group are unsecured and due on demand, and the Company charged them an interest of 5.22% per annum on the average balance advanced to them. The Company recorded interests of $3,117,705 during the nine months ended September 30, 2019.

 

During the nine months ended September 30, 2019, the Company obtained net proceeds of $1,843,951 from a related party. In the same period, Ruili Group repaid the Company net amount of $57,010,144.

 

The Company entered into a lease agreement with Ruili Group. See Note N for more details. 

 

The Company provided a guarantee for the credit line granted to Ruili Group by the China Merchants Bank RMB 40,000,000 (approximately $5,828,185) for a period of 12 months starting on October 24, 2016. The credit line was renewed on October 19, 2017 for 6 months. On April 13, 2018, Ruili Group and the bank reached another extension agreement and the guarantee was provided by the Company until April 12, 2019.

 

The Company provided a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 210,000,000 (approximately $30,597,972) for the period from July 20, 2018 to July 20, 2028.

 

The Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in a maximum amount of RMB71,000,000 (approximately $10,345,029) for the period from February 12, 2019 to January 16, 2020.

 

The Company provided a guarantee for the credit line granted to Ruili Group and SHNS Precision by Minsheng Bank in a maximum amount of RMB500,000,000 (approximately $72,730,446) for the period from June 6, 2019 to June 6, 2020.

 

The Company has short term bank loans guaranteed or pledged by related parties. See Note J for more details.

 

NOTE E - ACCOUNTS RECEIVABLE, NET

 

Accounts receivable, net, consisted of the following:

 

   September 30,   December 31, 
   2019   2018 
Accounts receivable  $173,817,824   $163,903,305 
Less: allowance for doubtful accounts   (15,629,224)   (13,855,508)
Accounts receivable, net  $158,188,600   $150,047,797 

 

No customer individually accounted for more than 10% of our revenues or accounts receivable for the nine months ended September 30, 2019 and 2018. The changes in the allowance for doubtful accounts on September 30, 2019 and December 31, 2018 are summarized as follows:

 

   September 30,   December 31, 
   2019   2018 
Beginning balance  $13,855,508   $13,927,156 
Add: Increase to allowance   2,215,553    610,610 
Effects on changes in foreign exchange rate   (441,837)   (682,258)
Ending balance  $15,629,224   $13,855,508 

 

NOTE F - INVENTORIES

 

On September 30, 2019 and December 31, 2018, inventories were consisted of the following:

 

   September 30,   December 31, 
   2019   2018 
Raw Materials  $35,404,809   $53,821,973 
Work in process   80,909,871    89,516,949 
Finished Goods   77,506,223    62,674,252 
Less: Write-down of inventories   (2,642,179)   (1,727,747)
Total Inventory  $191,178,724   $204,285,427 

 

The write-down of inventories amounted to $965,656 and $nil for the nine months ended September 30, 2019 and 2018, respectively.

 

10

 

 

NOTE G - PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment were consisted of the following on September 30, 2019 and December 31, 2018:

 

   September 30,   December 31, 
   2019   2018 
Machinery  $143,807,189   $130,912,861 
Molds   1,236,935    1,274,729 
Office equipment   4,520,246    3,566,772 
Vehicles   6,220,692    5,956,822 
Buildings   19,999,080    20,610,137 
Construction in progress   25,305,496    8,641,271 
Leasehold improvements   449,754    463,497 
Sub-Total   201,539,392    171,426,089 
           
Less: Accumulated depreciation   (82,436,101)   (75,372,703)
           
Property, plant and equipment, net  $119,103,291   $96,053,386 

 

Depreciation expense charged to operations was $9,738,142 and $8,399,291 for the nine months ended September 30, 2019 and 2018, respectively.

 

NOTE H - LAND USE RIGHTS, NET

 

The balances for land use rights, net as of September 30, 2019 and December 31, 2018 are as the following:

 

   September 30,   December 31, 
   2019   2018 
Cost  $37,891,449   $22,283,776 
Less: Accumulated amortization   (1,677,484)   (1,159,321)
Land use rights, net  $36,213,965   $21,124,455 

 

In December 2017, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Fengjin Road and Wenhua Road, Binhai New District, Ruian City, Zhejiang Province, China. As of December 31, 2018, the purchase price of RMB 72.02 million (approximately $11.13 million) was fully paid and the payments were included in prepayments, non-current in the consolidated balance sheets. During the nine months ended September 30, 2019, the Company paid related deed tax of RMB 2.33 million (approximately $330,000). The Company obtained the title to the land use rights in September 2019. The total prepayments of RMB 74.35 million (approximately $11.46 million) were transferred to the land use right during the nine months ended September 30, 2019.

 

 In April 2018, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Tengda Road and Wanghai Road, Economic Development District, Ruian City, Zhejiang Province, China. Prepayment of RMB 38.67 million (approximately $5.85 million) and refundable deposit of RMB 3.87 million (approximately $585,000) were made during the year ended December 31, 2018. During the nine months ended September 30, 2019, the Company paid related deed tax of RMB 2.04 million (approximately $296,000). The Company obtained the title to the land use rights in July 2019. The prepayments in total of RMB 40.72 million (approximately $6.15 million) was transferred to the land use right during the nine months ended September 30, 2019. The refundable deposit of RMB 3.87 million (approximately $585,000) was included in other assets, non-current on the accompanying consolidated balance sheet as of September 30, 2019.

 

Amortization expenses were $568,978 and $458,179 for the nine months ended September 30, 2019 and 2018, respectively.

 

11

 

 

NOTE I - DEFERRED TAX ASSETS

 

Deferred tax assets consisted of the following as of September 30, 2019 and December 31, 2018:

 

   September 30,  December 31,
   2019  2018
Deferred tax assets - current      
Allowance for doubtful accounts  $2,528,387   $2,205,048 
Revenue (net of cost)   133,305    308,046 
Unpaid accrued expenses   (58,026)   501,276 
Warranty   975,259    1,059,468 
Deferred tax assets   3,578,925    4,073,838 
Valuation allowance        
Net deferred tax assets - current  $3,578,925   $4,073,838 

  

Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.

 

NOTE J - SHORT-TERM BANK LOANS

 

Bank loans represented the following as of September 30, 2019 and December 31, 2018:

 

   September 30,  December 31,
   2019  2018
       
Secured  $201,749,179   $217,940,471 
Total short-term bank loan  $201,749,179   $217,940,471 

 

 

12

 

 

The Company obtained those short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Minsheng Bank, Industrial Bank, and China Construction Bank to finance general working capital as well as new equipment acquisition. Interest rate for the loans outstanding during the nine months ended September 30, 2019 ranged from 1.35% to 5.44% per annum. The maturity dates of the loans existing as of September 30, 2019 ranged from October 11, 2019 to July 23, 2020. The interest expenses for short term bank loans, including discount fees, were $8,796,523 and $7,428,780 for the nine months ended September 30, 2019 and 2018, respectively.

 

As of September 30, 2019, corporate or personal guarantees provided for those bank loans were as follows:

 

$5,436,493   Guaranteed by Ruili Group, a related party
$3,534,618   Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
$5,301,927   Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Pledged by Ruili Group, a related party, with its properties
$12,724,625   Pledged by Hangzhou Ruili Binkang Real Estate Development Co. Ltd., a related party, with its properties; Guaranteed by Hangzhou Ruili Property Development Ltd., a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
$26,863,097   Pledged by Hangzhou Ruili Property Development Ltd., a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
$8,483,083   Pledged by the Company with its property; Guaranteed by Hangzhou Ruili Property Development Ltd., a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
$29,690,792   Pledged by Ruili Group, a related party, with its plant and land use rights
$59,381,583   Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
$35,346,180   Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Guaranteed by Shanghai Ruili, a related party
$5,584,697   Pledged by the Company with its bank acceptance notes
$7,069,236   Pledged by the Company with a bank deposit of $7,069,236, which was included in restricted cash on the accompanying consolidated balance sheets. Also see Note B “RESTRICTED CASH” section.
$2,332,848   Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Pledged by Ruili Group, a related party, with its properties

 

13

 

 

NOTE K - LONG TERM LOANS

 

   September 30,   December 31, 
   2019   2018 
Aggregate outstanding principal balance  $27,086,528   $36,165,550 
Less: unamortized debt issuance costs   (257,078)   (595,117)
Less: current portion   (22,199,252)   (21,141,029)
Non-current portion  $4,630,198   $14,429,404 

 

In November 2017, the Company entered into two identical but independent loan agreements with Far Eastern Horizon Co., Ltd. (“Far Eastern”), each for a term of 36 months and with an effective interest rate of 8.38% per annum, payable monthly in arrears. The total long term obligations under the two agreements amounted to RMB 200,000,000 (approximately $30,608,185), pledged by the Company’s equipment in the original cost of RMB 205,690,574 (approximately $31,479,075). The Company paid debt issuance costs in cash of RMB 5,000,000 (approximately $742,324). The repayments of principal totaled $7,364,365 and $7,522,125 for the nine months ended September 30, 2019 and 2018, respectively.    

 

In November 2017, the Company entered into four independent loan agreements with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of 36 months each. Two of the agreements were signed on November 30, 2017 with an effective interest rate of 8.50% per annum, payable monthly in arrears. The other two agreements were entered into on November 15, 2017, with an effective interest rate of 4.31% per annum, payable monthly in arrears. The total long term obligations under the four agreements amounted to RMB 235,000,000 (approximately $35,964,617), pledged by the Company’s equipment in the original cost of RMB 238,333,639 (approximately $36,474,800). The Company paid debt issuance costs in cash of RMB 7,320,000 (approximately $1,025,248). The repayments of principal totaled $8,824,792 and $11,435,650 for the nine months ended September 30, 2019 and 2018, respectively.  

 

In July 2019, the Company entered into a loan agreement with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of 36 months with an effective interest rate of 4.57% per annum, payable monthly in arrears. The total long term obligations under the agreement amounted to RMB 60,000,000 (approximately $8,483,083), pledged by the Company’s equipment in the original cost of RMB 62,298,653 (approximately $8,808,078). The Company received RMB 50,000,000 (approximately $7,069,236), after deducting deposits of RMB 10,000,000 (approximately $1,413,847) required to maintain by COSCO, in the form of bank acceptance notes. The Company paid debt issuance costs in cash of RMB 754,717 (approximately $108,222). The repayments of principal totaled $809,415  for the nine months ended September 30, 2019.

 

The interest expenses for long term loans, including the amortization of debt issuance costs, were $1,359,326 and $2,785,901 for the nine months ended September 30, 2019 and 2018, respectively.

 

NOTE L - REVENUES FROM CONTRACTS WITH CUSTOMERS

 

In accordance with ASC 606, the Company disaggregates revenue from contracts with customers by product type. See Note P for information regarding revenue disaggregation by product type.

 

Deferred revenue is recorded when consideration is received from a customer prior to transferring goods to the customer under the terms of a sales contract. As of September 30, 2019 and December 31, 2018, the Company recorded a deferred revenue liability of $47,433,293 and $51,529,795, respectively, which was presented as “Deposits received from customers” on the accompanying consolidated balance sheets. During the nine months ended September 30, 2019, the Company recognized $20,597,161 of deferred revenue included in the opening balance of deposits received from customers. The amount was included in sales on the accompanying consolidated statement of income (loss) and comprehensive income (loss).

 

14

 

 

NOTE M - INCOME TAXES 

 

During the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company also recognized related interest and penalty of $587,821 in the year ended December 31, 2018. The Company recognized additional interest and penalty of $137,415 in the nine months ended September 30, 2019. The Company elected to pay the one-time transition tax over eight years commencing in 2018. The first installment payment of $881,839 was made during the nine months ended September 30, 2019. The actual impact of the U.S. Tax Reform on the Company may differ from management’s estimates, and management may update its judgments based on future regulations or guidance issued or changes in the interpretations taken that would adjust the provisional amounts recorded. As of September 30, 2019, $2,588,913 was included in income tax payable, current as a current liability which the Company believes will be paid within one year and the remaining balance was included in income tax payable, non-current.

 

The 2017 Tax Act also created a new requirement that, for the periods beginning after January 1, 2018, certain income (referred to as global intangible low-taxed income or “GILTI”) earned by foreign subsidiaries in excess of a deemed return on tangible assets of foreign corporations must be included in U.S. taxable income. The Company elected to account for GILTI tax in the period the tax is incurred, and therefore included it in estimating the annual effective tax rate. 

 

The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.  

 

In 2018, the Joint Venture was awarded the Chinese government’s “High-Tech Enterprise” designation for a fourth time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2018, 2019 and 2020. 

 

The reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the US and the PRC for the nine months ended September 30, 2019 and 2018 is as follows:

 

   Nine Months Ended
September 30,
2019
   Nine Months Ended
September 30,
2018
 
US statutory income tax rate   21.00%   21.00%
Valuation allowance recognized with respect to the loss in the US company   -21.00%   -21.00%
China statutory income tax rate   25.00%   25.00%
Effects of income tax exemptions and reliefs   -10.00%   -10.00%
Effects of additional deduction allowed for R&D expenses   -5.08%   -3.43%
Effects of expenses not deductible for tax purposes   1.62%   2.18%
Other items   -0.52%   0.81%
Effective tax rate   11.02%   14.56%

 

15

 

 

Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The provisions for income taxes for the nine months ended September 30, 2019 and 2018, respectively, are summarized as follows:

 

   Nine Months Ended
September 30,
2019
   Nine Months Ended
September 30,
2018
 
Current  $2,219,140   $14,454,243 
Deferred   368,700    520,739 
Total  $2,587,840   $14,974,982 

 

NOTE N - OPERATING LEASES

 

The Company entered into various operating lease agreements for certain of its staff dormitories including a lease agreement with its related party. 

 

In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd., a related party, for the lease of two apartment buildings for Ruian’s management personnel and staff. The initial lease term was from January 2013 to December 2016. This lease was amended in 2013, with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000 (approximately $305,980).

 

Balance sheet information related to operating leases is as follows:

 

   September 30,
2019
 

Operating lease right-of-use assets1

  $917,151 
      
Operating lease liabilities, current2  $481,167 
Operating lease liabilities, non-current   628,873 
Total operating lease liabilities  $1,110,040 

 

1 Operating lease right-of-use assets are recorded in other assets, non-current on the accompanying consolidated balance sheet.

2 The current portion of operating lease liabilities is recorded in other current liabilities on the accompanying consolidated balance sheet.

 

 

16

 

 

For the nine months ended September 30, 2019, the Company had operating lease costs of $428,605 and the reduction in operating lease right-of-use assets was $378,674. Cash paid for amounts included in the measurement of operating lease liabilities was $1,025,421 during the nine months ended September 30, 2019.  

 

The weighted-average remaining lease term and the weighted-average discount rate of our leases are as follows: 

 

   September 30,
2019
Weighted-average remaining lease term  3 years
    
Weighted-average discount rate  5.24%

 

The following table summarizes the maturity of our operating lease liabilities as of September 30, 2019: 

 

2019 (remaining)  $299,264 
2020   296,908 
2021   296,908 
2022   296,908 
2023 and thereafter   - 
Total lease payment   1,189,988 
  Less imputed interest   (79,948)
Total lease liabilities  $1,110,040 

 

NOTE O - WARRANTY CLAIMS

 

Warranty claims were $2,889,608 and $2,507,487 for the nine months ended September 30, 2019 and 2018, respectively. Warranty claims are included in selling and distribution expenses on the accompanying consolidated statements of income (loss) and comprehensive income (loss). Accrued warranty expenses are included in the balances of accrued expenses on the accompanying consolidated balance sheets. The movement of accrued warranty expenses for the nine months ended September 30, 2019 was as follows:

 

Beginning balance at January 1, 2019  $7,063,122 
Aggregate increase for new warranties issued during current period   2,889,608 
Aggregate reduction for payments made and effect of exchange rate fluctuation   (3,451,002)
Ending balance at September 30, 2019  $6,501,728 

 

17

 

 

NOTE P - SEGMENT INFORMATION

 

The Company produces brake systems and other related components for different types of commercial vehicles (“Commercial Vehicles Brake Systems”). On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire a segment of the passenger vehicles auto parts business (“Passenger Vehicles Auto Parts”, formerly known as “Passenger Vehicles Brake System”) of Ruili Group. As a result of this acquisition, the Company’s product offerings were expanded to both commercial and passenger vehicles’ brake systems and other key safety-related auto parts.

 

The Company has two operating segments: Commercial Vehicle Brake Systems and Passenger Auto Parts.

 

All of the Company’s long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.

 

  

   Nine Months Ended
September 30,
 
   2019   2018 
         
NET SALES TO EXTERNAL CUSTOMERS        
Commercial vehicles brake systems  $319,516,542   $276,593,442 
Passenger vehicles auto parts   68,304,316    68,222,523 
           
Net sales  $387,820,858   $344,815,965 
INTERSEGMENT SALES          
Commercial vehicles brake systems  $   $ 
Passenger vehicles auto parts        
           
Intersegment sales  $   $ 
GROSS PROFIT          
Commercial vehicles brake systems  $82,320,762   $61,974,537 
Passenger vehicles auto parts   21,401,839    28,990,094 
Gross profit  $103,722,601   $90,964,631 
Selling and distribution expenses   43,198,784    37,154,745 
General and administrative expenses   24,803,869    17,519,873 
Research and development expenses   16,934,141    13,400,656 
           
Other operating income, net   7,798,787    7,535,820 
           
Income from operations   26,584,594    30,425,177 
           
Interest income   4,183,471    2,847,299 
Government grants   3,570,630    2,982,775 
Other income   130,913    432,213 
Interest expenses   (10,155,849)   (10,214,681)
Exchange differences   250,290    1,396,460 
Other expenses   (1,076,993)   (1,200,920)
Income before income tax expense  $23,487,056   $26,668,323 
CAPITAL EXPENDITURE          
Commercial vehicles brake systems  $30,864,485   $32,788,350 
Passenger vehicles auto parts   5,631,299    7,721,848 
           
Total  $36,495,784   $40,510,198 
DEPRECIATION AND AMORTIZATION          
Commercial vehicles brake systems  $8,903,845   $7,187,308 
Passenger vehicles auto parts   1,624,528    1,739,387 
           
Total  $10,528,373   $8,926,695 

 

18

 

 

   September 30,
2019
   December 31,
2018
 
         
TOTAL ASSETS        
Commercial vehicles brake systems  $594,148,299   $655,435,946 
Passenger vehicles auto parts   108,403,787    138,935,580 
           
Total  $702,552,086   $794,371,526 

 

    September 30,
2019
    December 31,
2018
 
             
LONG LIVED ASSETS            
Commercial vehicles brake systems   $ 168,006,377     $ 150,067,034  
Passenger vehicles auto parts     30,653,168       31,810,355  
                 
Total   $ 198,659,545     $ 181,877,389  

 

NOTE Q - CONTINGENCIES

 

(1)The Company purchased the Dongshan Facility from Ruili Group in 2007 and subsequently transferred the plants and land use right to Ruili Group. The Company has never obtained the land use rights certificate nor the property ownership certificate of the building for the Dongshan Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount was determined based on a 3% tax rate on the consideration paid for the Dongshan Facility in the transaction, which the Company considered as the most probable amount of tax liability. The Dongshan Facility was transferred back to Ruili Group on May 5, 2016.

  

(2)The Company purchased the Development Zone Facility from Ruili Group on May 5, 2016. As of the filing date, the Company has not yet obtained the land use rights certificate or the property ownership certificate for the building of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 15,030,000 (approximately $2,300,205). This amount was determined based on a 3% tax rate on the consideration paid for the Development Zone Facility, which the Company considered as the most probable amount of tax liability.

 

(3)The information of lease commitments is provided in Note N.

 

(4)The information of guarantees and assets pledged is provided in Note D.

 

NOTE R - SUBSEQUENT EVENTS

  

During the subsequent period, the Company obtained short-term loans in a total amount of approximately $12.30 million from Industrial Bank, Agricultural Bank, China Construction Bank and China Zheshang Bank. Interest rate for these loans ranges from 4.35% to 4.5675% per annum. The maturity dates of these loans existing as of the filing date range from April 13, 2020 to October 24, 2020. The Company pledged with its bank acceptance notes to obtain loans from Industrial Bank and China Zheshang Bank, its accounts receivable from customers to obtain the loan from China Construction Bank, and its property to obtain the loan from Agricultural Bank.

 

In the same period, the Company repaid loan principals and interest expenses in the total amount of approximately $13.58 million to Agricultural Bank, China Construction Bank, Industrial Bank, and China Zheshang Bank.

 

 

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 consolidated unaudited financial statements, as well as information relating to the plans of our current management. The following discussion and analysis should be read in conjunction with our consolidated unaudited financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q. 

 

FORWARD-LOOKING STATEMENTS

 

This quarterly report on Form 10-Q includes forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Generally, the words “believe,” “anticipate,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions, or the negative thereof, or comparable terminology, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with SEC from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Some of the factors that could cause actual results to differ include: our ability to effectively implement our business strategy; our ability to handle downward pricing pressures on our products; and our ability to accurately or effectively plan our production or supply needs. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, which is available on the SEC’s website at www.sec.gov. Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update these forward-looking statements.

 

OVERVIEW

 

The Company manufactures and distributes automotive brake systems and other key safety-related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally for use primarily in different types of commercial vehicles, such as trucks and buses, and in passenger vehicles.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Year ended December 31, 2018.

 

See Note N to the attached Unaudited Consolidated Financial Statements for the information regarding changes in taxation by the government of China.

 

20

 

 

RESULTS OF OPERATIONS

 

Sales

 

The following tables present certain financial information about our segments’ sales for the periods presented:

 

   Three Months Ended   Three Months Ended 
   September 30, 2019   September 30, 2018 
   (U.S.  dollars in millions) 
Commercial Vehicle Brake Systems  $94.9    84.6%  $89.0    82.0%
Passenger Vehicle auto parts  $17.3    15.4%  $19.6    18.0%
                      
Total  $112.2    100.0%  $108.6    100.0%

 

   Nine Months Ended   Nine Months Ended 
   September 30, 2019   September 30, 2018 
   (U.S.  dollars in millions) 
Commercial Vehicle Brake Systems  $319.5    82.4%  $276.6    80.2%
Passenger Vehicle auto parts  $68.3    17.6%  $68.2    19.8%
                     
Total  $387.8    100.0%  $344.8    100.0%

 

The sales were $112.2 million and $108.6 million for the three months ended September 30, 2019 and 2018, respectively, an increase of $3.6 million or 3.4%. The sales were $387.8 million and $344.8 million for the nine months ended September 30, 2019 and 2018, respectively, an increase of $43.0 million or 12.5%. The increase was mainly due to the increased sales of commercial vehicle brake systems. 

 

The sales from Commercial Vehicle Brake Systems increased by $5.9 million or 6.6%, to $94.9 million for the third fiscal quarter of 2019, compared to $89.0 million for the same period of 2018. The sales from Commercial Vehicle Brake Systems increased by $42.9 million or 15.5%, to $319.5 million for the nine months ended September 30, 2019, compared to $276.6 million for the nine months ended September 30, 2018. Our high quality, low cost products continued to generate higher sales and further penetrated into the commercial vehicle market, which impacted the sales of the commercial vehicle brake systems.

 

The sales from Passenger Vehicle auto parts decreased by $2.3 million or 11.6%, to $17.3 million for the third fiscal quarter of 2019, compared to $19.6 million for the same period of 2018. The sales from Passenger Vehicle auto parts were $68.3 million for the nine months ended September 30, 2019, compared to $68.2 million for the same period of 2018. The decrease was mainly due to the declining sales in the passenger vehicle market. 

 

21

 

 

A breakdown of the sales revenue for these markets for the third fiscal quarter of the 2019 and 2018, respectively, is set forth below:

 

   Three Months Ended
September 30,
2019
   Percent of
Total Sales
   Three Months Ended
September 30,
2018
   Percent
of
Total
Sales
   Percentage
Change
 
   (U.S. dollars in millions) 
China OEM market  $      48.6          43.3%  $      50.3          46.3%         -3.4%
China Aftermarket  $45.6    40.6%  $36.4    33.6%   25.3%
International market  $18.1    16.1%  $21.8    20.1%   -17.1%
Total  $112.2    100.0%  $108.6    100.0%   3.3%

 

A breakdown of net sales revenues for China OEM markets, China aftermarket and international market for the nine months ended September 30, 2019 and 2018, respectively, is set forth below:

 

   Nine Months Ended
September 30,
2019
   Percent of
Total Sales
   Nine Months Ended
September 30,
2018
   Percent of
Total Sales
   Percentage
Change
 
   (U.S. dollars in millions) 
China OEM market  $     192.7         49.7%  $     164.7         47.8%        17.0%
China Aftermarket  $135.5    34.9%  $117.3    34.0%   15.5%
International market  $59.7    15.4%  $62.7    18.2%   -4.8%
Total  $387.8    100.0%  $344.8    100.0%   12.5%

 

Considering the decrease of the production and sales of the commercial vehicle market, our sales to the Chinese OEM market decreased by $1.7 million or 3.4%, to $48.6 million for the third fiscal quarter of 2019, compared to $50.3 million for the same period of 2018. Our sales to the Chinese OEM market increased by $28.0 million or 17.0%, to $192.7 million for the nine months ended September 30, 2019, compared to $164.7 million for the same period of 2018.

 

Our sales to the China aftermarket increased by $9.2 million or 25.3%, to $45.6 million for the third fiscal quarter of 2019, compared to $36.4 million for the same period of 2018. Our sales to the China aftermarket increased by $18.2 million or 15.5%, to $135.5 million for the nine months ended September 30, 2019, compared to $117.3 million for the same period of 2018. The increased new vehicle sales in China and the expiration of OEM warranties helped to drive our aftermarket business. Accelerated urbanization and the Chinese government’s increased support for public transportation favor our expansion in the bus aftermarket. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets.

 

Our export sales decreased by $3.7 million or 17.1%, to $18.1 million for the third fiscal quarter of 2019, as compared to $21.8 million for the same period of 2018. Our export sales decreased by $3.0 million or 4.8%, to $59.7 million for the nine months ended September 30, 2019, as compared to $62.7 million for the same period of 2018. The decrease in export sales was mainly due to the truck production decline in some countries.

 

22

 

 

Cost of Sales and Gross Profit

 

Cost of sales for the three months ended September 30, 2019 were $81.3 million, a decrease of $1.0 million or 1.2% from $82.2 million for the three month period ended September 30, 2018. Cost of sales for the nine months ended September 30, 2019 were $284.1 million, an increase of $30.2 million or 11.9% from $253.9 million for the same period of 2018.

 

Our gross profit increased by 17.5% from $26.3 million for the period of 2018 to $30.9 million for the three month period ended September 30, 2019. Our gross profit increased by 14.0% from $91.0 million for the period of 2018 to $103.7 million for the three month period ended September 30, 2019.

 

Gross margin increased to 27.6% from 24.3% for the three month period ended September 30, 2019 compared with 2018. Gross margin increased to 26.7% from 26.4% for the nine months ended September 30, 2019, as compared with the same period of 2018. The increase was primarily due to higher sales of the high margin, electronically controlled products during the third quarter of 2019. We intend to focus in 2019 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit margins.

 

Cost of sales from Commercial Vehicle Brake Systems for the three months period ended September 30, 2019 were $70.3 million, an increase of $0.5 million or 0.7% from $69.8 million for the same period of 2018. Cost of sales from Commercial Vehicle Brake Systems for the nine months ended September 30, 2019 were $237.2 million, an increase of $22.6 million or 10.5% from $214.6 million for the same period of 2018. The gross profit from Commercial Vehicle Brake Systems increased by 28.1% from $19.2 million for three month period ended September 30, 2018 to $24.6 million for the three month period ended September 30, 2019. The gross profit from Commercial Vehicle Brake Systems increased by 32.8% from $62.0 million for the nine months ended September 30, 2018 to $82.3 million for the nine months ended September 30, 2019. Gross margin from Commercial Vehicle Brake Systems increased to 26.0% from 21.6% for the three months period ended September 30, 2018 compared to the three months period ended September 30, 2019. Gross margin from Commercial Vehicle Brake Systems increased to 25.8% from 22.4% for the nine months ended September 30, 2019 compared with the same period of 2018.

 

Cost of sales from Passenger Vehicle auto parts for the three months period ended September 30, 2019 were $11.0 million, a decrease of $1.4 million or 11.6% from $12.5 million for the three month period ended September 30, 2018. Cost of sales from Passenger Vehicle auto parts for the nine months ended September 30, 2019 were $46.9 million, an increase of $7.7 million or 19.6% from $39.2 million for the same period of 2018. The gross profit from Passenger Vehicle auto parts decreased by 11.3% from $7.1 million for the three month period ended September 30, 2018 to $6.3 million for the three month period ended September 30, 2019. The gross profit from Passenger Vehicle auto parts decreased by 26.2% from $29.0 million for the nine months ended September 30, 2018 to $21.4 million for the same period of 2019. Gross margin from Passenger Vehicle auto parts was 36.3% for the three months ended September 30, 2019 and 2018.  Gross margin from Passenger Vehicle auto parts decreased to 31.3% for the nine months ended September 30, 2019, as compared to 42.5% for the same period in 2018. 

 

Selling and Distribution Expenses

 

Selling and distribution expenses were $13.9 million for the three months ended September 30, 2019, as compared to $13.2 million for the same period of 2018, an increase of $0.7 million or 5.2%. Selling and distribution expenses were $43.2 million for the nine months ended September 30, 2019, as compared to $37.2 million for the same period of 2018, an increase of $6.0 million or 16.3%. The increase was mainly due to increased freight expense and packaging expenses.

 

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As a percentage of sales revenue, selling expenses increased to 12.3% for the three months ended September 30, 2019, as compared to 12.1% for the same period in 2018. As a percentage of sales revenue, selling expenses increased to 11.1% for the nine months ended September 30, 2019, as compared to 10.8% for the same period in 2018.

 

General and Administrative Expenses

 

General and administrative expenses were $8.2 million for the three months ended September 30, 2019, as compared to $5.1 million for the same period of 2018, an increase of $3.2 million or 62.5%. General and administrative expenses were $24.8 million for the nine months ended September 30, 2019, as compared to $17.5 million for the same period of 2018, an increase of $7.3 million or 41.6%. The increase was mainly due to the increase in employee salaries for the nine months ended September 30, 2019. 

 

As a percentage of sales revenue, general and administrative expenses was 7.3% for the three months ended September 30, 2019, as compared to 4.7% for the same period in 2018. As a percentage of sales revenue, general and administrative expenses was 6.4% for the nine months ended September 30, 2019, as compared to 5.1% for the same period in 2018.

 

Research and Development Expenses

 

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the three months ended September 30, 2019, research and development expenses were $5.0 million, as compared to $4.5 million for the same period of 2018, an increase of $0.5 million. For the nine months ended September 30, 2019, research and development expenses were $16.9 million, as compared to $13.4 million for the same period of 2018, an increase of $3.5 million.

  

Other Operating Income

 

Other operating income was $2.8 million for the three months ended September 30, 2019, as compared to $3.0 million for the three months ended September 30, 2018, a decrease of $0.2 million. Other operating income was $7.8 million for the nine months ended September 30, 2019, as compared to $7.5 million for the nine months ended September 30, 2018, an increase of $0.3 million. The increase was mainly due to an increase in sales of raw material scrap.

 

Depreciation and Amortization

 

Depreciation and amortization expense was $3.6 million for the three months ended September 30, 2019, compared with that of $3.1 million for the same period of 2018. Depreciation and amortization expenses increased to $10.5 million for the nine months ended September 30, 2019, compared with that of $8.9 million for the same period of 2018, an increase of $1.6 million. The increase was mainly due to some new addition in PPE and the purchase of land after September 30, 2018.

 

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Interest income

 

The interest income for the three months ended September 30, 2019, increased to $1.0 million from $0.5 million for the same period of 2018. The interest income for the nine months ended September 30, 2019, increased to $4.2 million from $2.8 million for the same period of 2018, mainly due to increased interest income from advances to related parties during the period.

 

Interest Expenses 

 

The interest expenses for the three months ended September 30, 2019, decreased to $3.0 million from $3.3 million for the same period of 2018, mainly due to decreased interest rate and decreased amount of average loans outstanding during the period. The interest expenses were $10.2 million for the nine months ended September 30, 2019 and 2018.

 

Income Tax

 

During the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company also recognized related interest and penalty of $587,821 in the year ended December 31, 2018. The Company recognized additional interest and penalty of $137,415 in the nine months ended September 30, 2019. The Company elected to pay the one-time transition tax over eight years commencing in 2018. The first installment payment of $881,839 was made during the nine months ended September 30, 2019. The actual impact of the U.S. Tax Reform on the Company may differ from management’s estimates, and management may update its judgments based on future regulations or guidance issued or changes in the interpretations taken that would adjust the provisional amounts recorded. As of September 30, 2019, $2,588,913 was included in income tax payable as a current liability which the Company believes will be paid within one year and the remaining balance was included in income tax payable, non-current.

 

The 2017 Tax Act also created a new requirement that, for the periods beginning after January 1, 2018, certain income (referred to as global intangible low-taxed income or “GILTI”) earned by foreign subsidiaries in excess of a deemed return on tangible assets of foreign corporations must be included in U.S. taxable income. The Company elected to account for GILTI tax in the period the tax is incurred, and therefore included it in estimating the annual effective tax rate.

 

The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.

 

In 2018, the Joint Venture was awarded the Chinese government’s “High-Tech Enterprise” designation for a fourth time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2018, 2019 and 2020.

 

Income tax expense was $0.4 million for the three months ended September 30, 2019, as compared to $12.1 million for the three months ended September 30, 2018. Income tax expense was $2.6 million for the nine months ended September 30, 2019, as compared to $15.0 million for the nine months ended September 30, 2018.

 

Net Income Attributable to Non-Controlling Interest in Subsidiaries

 

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our joint venture partners. On December 15, 2015, the Company disposed of its entire 60% equity interest in SIH. Net income attributable to noncontrolling interest in subsidiaries amounted to $0.5 million and $0.6 million for the third fiscal quarter ended September 30, 2019 and 2018, respectively. Net income attributable to non-controlling interest in subsidiaries amounted to $2.1 million and $2.3 million for the nine months ended September 30, 2019 and 2018, respectively.

 

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Net Income Attributable to Stockholders

 

The net income attributable to stockholders for the fiscal quarter ended September 30, 2019, increased by $9.8 million, to $4.2 net income from $5.6 million net loss for the fiscal quarter ended September 30, 2018 due to the factors discussed above. The net income attributable to stockholders for the nine months ended September 30, 2019, increased by $9.4 million, to $18.8 million from $9.4 million for the nine months ended September 30, 2018 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the fiscal quarter ended September 30, 2019 and 2018, were $0.22 and $(0.29), respectively. EPS, both basic and diluted, for the nine months ended September 30, 2019 and 2018, were $0.97 and $0.49, respectively.

 

FINANCIAL CONDITION

 

Liquidity and Capital Resources

 

As of September 30, 2019, the Company had cash and cash equivalents of $16.5 million, as compared to cash and cash equivalents of $73.6 million as of December 31, 2018. The Company had working capital of $34.2 million on September 30, 2019, as compared to working capital of $47.3 million on December 31, 2018, reflecting current ratios of 1.1:1 and 1.1:1, respectively.

 

OPERATING - Net cash used in operating activities was $58.9 million for nine months ended September 30, 2019, a decrease of $140.1 million, as compared with $81.2 million of net cash provided by operating activities in the same period in 2019. Such change was primarily due to the increased cash outflow resulted by changes in accounts payable and bank acceptance notes to vendors. 

 

INVESTING - During the nine months ended September 30, 2019, the Company had cash inflow from investing activities of $20.6 million mainly due to repayment of advances to related parties. For the nine months ended September 30, 2018, the Company expended net cash of $33.0 million in investing activities.

 

FINANCING - During the nine month period ended September 30, 2019, the net cash used in financing activities was $25.0 million. For the nine months ended September 30, 2018, the net cash used in financing activities was $8.1 million. Such increase was primarily due to decreased proceeds from short term bank loans.

 

The Company has taken a number of steps to improve the management of our cash flow. We place more emphasis on collection of accounts receivable from our customers, and we maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements in the foreseeable future.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

As of September 30, 2019, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

According to the laws of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. In 2007, the Company purchased the land use rights from the Ruili Group, a related party. The Company also purchased the buildings on the land in the same transaction. The purchase price of land use right and building amounted to approximately $20 million. On May 5, 2016, the Company entered into a Purchase Agreement with the Ruili Group through Ruian, pursuant to which the Company agreed to exchange the Dongshan Facility plus RMB501 million (approximately $76.5 million) in cash for Development Zone Facility. The value of the Dongshan Facility and Development Zone Facility was appraised to be RMB 125 million (approximately $19.1 million) and RMB 626 million (approximately $95.6 million), respectively. As of September 30, 2019, total amount of RMB481 million (approximately $73.5 million) was paid to the Ruili Group in installments, and the remaining RMB20 million (approximately $3.0 million) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and the land use right as specified in the Purchase Agreement.

 

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Even if the Company is unable to timely resolve obtain the land use right certificate for the land and related building, the Company believes that there will be no potential adverse implication on the Company for the following reasons.

 

1. The Company acquired the land use rights in a transaction between the Company and the Ruili Group, a related party. The Ruili Group, as the original land use right owner, has granted the land use right to the Company by contract which is supported by valid consideration.

 

2. No third party would oppose the Company’s use of the land, because no third party has any interest in the land use right or property ownership right, other than the Ruili Group and the government.

 

a) The Ruili Group promised that the Company has the right to use the land and related building, even before the land use certificate is transferred.

 

b) According to the laws of China, the government owns all the land and the buildings attached to the land in China. Once the land use right is granted to Ruili Group, Ruili Group has the right to assign its land use rights to any third parties, including the Company, without interference from the government. Therefore, it is unlikely that the government will oppose the Company’s right to use the land and related building.

 

c) The Company has reserved tax payables in the amount of RMB 19,007,341 (approximately US$2,872,675) on its consolidated balance sheets under the line item “accrued expenses” as if no reduction or exemption of tax is approved. This amount was determined based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered as the most probable amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay if the negotiation with the local government ultimately is not successful. 

 

CONTRACTUAL OBLIGATIONS

 

As of September 30, 2019, we had no material changes outside the ordinary course of business in our contractual obligations.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures:

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2019 was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(b) of the Exchange Act). Based on this evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures, as of September 30, 2019, were effective, in all material respects, for the purpose stated above.

 

Changes in Internal Control over Financial Reporting:

 

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Not applicable.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

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)
     
101.1NS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definitions Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

(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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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Dated : November 14, 2019 SORL AUTO PARTS, INC.
   
  By: /s/ Xiao Ping Zhang
  Name:  Xiao Ping Zhang
  Title: Chief Executive Officer
(Principal Executive Officer)

 

  By: /s/ Zong Yun Zhou
  Name:  Zong Yun Zhou
  Title: Chief Financial Officer
(Principal Accounting Officer) 

 

 

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