NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
The Company is principally engaged in the
manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of the
Ruili Group Ruian Auto Parts, Co., Ltd., a Sino-Foreign joint venture (the “Joint Venture” or “Ruian”)
and 60% ownership of SORL International Holding, Ltd. ("SIH") in Hong Kong. The Company distributes products both in
China and internationally under SORL trademarks. The Company’s product range includes 65 categories and over 2000 different
specifications.
On November 11, 2009, the Company entered
into a joint venture agreement with MGR Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution
specialist firm and a Taiwanese investor. The new joint venture was named SIH. SORL holds a 60% interest in the joint venture,
MGR holds a 30% interest, and the Taiwanese investor holds a 10% interest. SIH is primarily devoted to expanding SORL's international
sales network in Asia-Pacific and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly
global distribution network. Based in Hong Kong, SIH is expanding and establishing channels of distribution in international
markets.
On February 8, 2010, the Company sold 1,000,000
shares of its common stock to selected institutional investors at a price of $10.00 per share pursuant to a registered direct offering.
This transaction provided net proceeds of approximately $9.4 million. On March 9, 2010, through Fairford, SORL invested $9.4 million
in its operating subsidiary, the Joint Venture. To maintain the 10% shareholding in the Joint Venture, the Ruili Group, a related
party under common control, increased its capital investment by $1.0 million. Accordingly, SORL continues to hold a 90% controlling
interest in the operating subsidiary. The total paid-in capital of the Joint Venture increased from $43.4 million to $53.8 million.
On August 31, 2010, the Company, through
the Joint Venture, executed an Agreement to acquire the assets of the hydraulic brake, power steering, and automotive electrical
operations of the Ruili Group (the “Seller”). As a result of this acquisition, the Company's product offerings expanded
to both commercial and passenger vehicles' brake systems and other key safety-related auto parts. The purchase price was RMB 170
million, or approximately $25 million. The transaction was accounted for using the book value of assets acquired, consisting primarily
of machinery and equipment, inventory, accounts receivable and patent rights, used or usable in connection with the acquired segment
of the auto parts business of the Seller. The Company purchased the machinery and equipment, inventory, accounts receivable at
book values of $8.0 million, $8.0 million and $5.2 million, respectively. The Company did not acquire any of the assets of the
Seller other than those in the segment of Seller's business described above. The excess of consideration over the carrying value
of net assets received has been recorded as a decrease in the additional paid-in capital of the Company.
The acquisition was accounted for as a transaction
between the entities under common control because the CEO of the Company owns 63% of the registered capital of Ruili Group, and
owns more than 50% of the outstanding common stock of SORL, together with his wife and his brother. This results in the acquisition
being accounted for using the historical costs of the financial statements of the Seller. The consolidated financial statements
have been prepared as if the acquisition took place at the earliest time presented. The assets purchase was deemed to be the acquisition
of a business.
On December 15, 2015, the Company entered
into an agreement to dispose of its entire 60% equity interest in its subsidiary, SIH, to the Taiwanese investor who holds a 10%
interest in SIH, for a consideration of approximately $77 (HK$600). The loss on disposal of SIH was $3,170,821, which was reported
as “loss on disposal of subsidiary” for the year ended December 31, 2015.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. ACCOUNTING METHOD
The Company uses the accrual method of accounting
for financial statement and tax return purposes.
b. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements
include the accounts of SORL Auto Parts, Inc. and its majority owned subsidiaries. All inter-company balances and
transactions have been eliminated in the consolidation. The results of subsidiaries acquired or disposed of during the
respective periods are included in the consolidated statements of operations from the effective date of acquisition or up to
the effective date of disposal, as appropriate. The portion of the income or loss applicable to noncontrolling interest in
subsidiaries undertakings is reflected in the consolidated statements of operations.
c. USE OF ESTIMATES
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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.
d. FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company’s financial
instruments, including cash and cash equivalents, restricted cash, short term investments, trade receivables and payables, prepaid
expenses, deposits and other current assets, short-term bank borrowings, accounts payable, and other payables and accruals, the
carrying amounts approximate fair values due to their short maturities.
Transactions involving related parties cannot
be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, freemarket dealings may not
exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
e. RELATED PARTY TRANSACTIONS
A related party is generally defined as
(i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s
management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or
(iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to
be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts
business with its related parties in the ordinary course of business.
f. FINANCIAL RISK FACTORS AND FINANCIAL
RISK MANAGEMENT
The Company is exposed to the following
risk factors:
(i) Credit risks - The Company has policies
in place to ensure that sales of products are made to customers with an appropriate credit history. The Company performs ongoing
credit evaluations with respect to the financial condition of its creditors, but does not require collateral. In order to determine
the value of the Company’s accounts receivable, the Company records a provision for doubtful accounts to cover probable credit
losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collection
of outstanding accounts receivable. The Company has a concentration of credit risk due to geographic sales as a majority of its
products are marketed and sold in the PRC. The Company has no customer that accounts for more than 5.0% of its total revenues for
the year ended December 31, 2015.
(ii) Liquidity risks - Prudent liquidity risk
management implies maintaining sufficient cash, the availability of funding through an adequate amount of committed credit facilities
and ability to close out market positions.
(iii) Interest rate risk - The interest rate
of short-term bank borrowings obtained in 2015 ranged from 1.33% to 5.35% and the term ranged from approximately three months to
one year. The Company’s income and cash flows are substantially independent of changes in market interest rates.
g. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid
instruments purchased with an original maturity of three months or less to be cash equivalents.
h. SHORT TERM INVESTMENTS
The Company’s short term investments include term deposits with an original maturity from three
months to one year with financial institutions. Term deposits in the amount of $21,559,690 (RMB 140,000,000) were pledged for the
credit line granted to Ruili Group, a related party, by Bank of Ningbo for the period from March 24, 2015 to March 24, 2016. Term
deposit in the amount of $6,159,911 (RMB 40,000,000) was pledged as security interest for the bank acceptance notes payable issued
to Hangzhou Xiangwei Wuzi Co., Ltd, a related party controlled by the relative of Ms. Shu Ping Chi, by Zhejiang Chouzhou Commercial
Bank for the period from December 17, 2015 to June 17, 2016.
i. RESTRICTED CASH
Restricted cash mainly represents bank
deposits used to pledge the bank acceptance notes. The Company entered into credit agreements with commercial banks in China
(“endorsing banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits,
the Company can issue bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance
notes, the Company is generally required to make initial deposits or pledge note receivables to the endorsing banks in
amounts of certain percentage of the face amount of the bank acceptance notes to be issued by the Company. The cash in such
accounts is restricted for use over the terms of the bank acceptance notes, which are normally three to six months.
j. INVENTORIES
Inventories are stated at the lower of cost
or net realizable value, with cost computed on a weighted-average basis. Cost includes all costs of purchase, cost of conversion
and other costs incurred in bringing the inventories to their present location and condition. Net realizable value is the estimated
selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make
the sale.
k. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated
at cost less accumulated depreciation and impairment losses. The initial cost of the asset comprises its purchase price and any
directly attributable costs of bringing the asset to its working condition and location for its intended use. Depreciation is calculated
using the straight-line method over the estimated useful life of the respective assets as follows:
Category
|
|
Estimated Useful Life (Years)
|
|
|
|
Buildings
|
|
10-20
|
|
|
|
Machinery and equipment
|
|
5-10
|
|
|
|
Electronic equipment
|
|
5
|
|
|
|
Motor vehicles
|
|
5-10
|
|
|
|
Leasehold improvements
|
|
The lesser of remaining lease term or 10
|
Significant improvements are capitalized
when it is probable that the expenditure resulted in an increase in the future economic benefits expected to be obtained from the
use of the asset beyond its originally assessed standard of performance. When improvements are made to real property and those
improvements are permanently affixed to the property, the title to those improvements automatically transfers to the owner of the
property. The lessee’s interest in the improvements is not a direct ownership interest but rather it is an intangible right
to use and benefit from the improvements during the term of the lease.
Routine repairs and maintenance are expensed
when incurred. Gains and losses on disposal of fixed assets are recognized in the income statement based on the net disposal proceeds
less the carrying amount of the assets.
l. LAND USE RIGHTS
According to the law of China, the government
owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. Land use rights are being amortized using the straight-line method over the estimated useful life of
45 years.
The Company purchased the land use rights
from Ruili Group, a related party. The Company has not yet obtained the land use right certificate.
m. IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, such as property, plant
and equipment and other non-current assets, including intangible assets, are reviewed periodically for impairment whenever events
or changes in circumstances indicate that the carrying value of an asset may not be recoverable. An impairment loss is recognized
when the estimated undiscounted cash flows associated with the asset or group of assets is less than their carrying value. If impairment
exists, an adjustment is made to write the asset down to its fair value, and a loss is recorded as the difference between the carrying
value and fair value. Fair values are determined based on quoted market values, discounted cash flows or internal and external
appraisals, as applicable. Assets to be disposed of are carried at the lower of carrying value or estimated net realizable value.
n. INTANGIBLE ASSETS
Intangible assets represent mainly the patent
of technology, plus the computer software. Intangible assets are measured initially at cost. Intangible assets are recognized if
it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and the cost of
the asset can be measured reliably. After initial recognition, intangible assets are measured at cost less any impairment losses.
Intangible assets with definite useful lives are amortized on a straight-line basis over their useful lives.
o. ACCOUNTS RECEIVABLES AND ALLOWANCE
FOR BAD DEBTS
The Company presents accounts receivables,
net of allowances for doubtful accounts and returns, to ensure accounts receivable are not overstated due to being uncollectible.
Accounts receivables generated from credit sales have general credit terms of 90 days for Chinese aftermarket customers.
The allowances are calculated based on a
detailed review of certain individual customer accounts, historical rates and an estimation of the overall economic conditions
affecting the Company’s customer base. The Company reviews a customer’s credit history before extending credit. If
the financial condition of its customers were to deteriorate, resulting in an impairment of their ability to make payments, additional
allowances may be required.
The Company will write off the uncollectible
receivables once any customers are bankrupt or there is a remote possibility that the Company will collect the outstanding balance.
The write-off must be reported to the local tax authorities and the Company must receive official approval from them. To date,
the Company has not written off any account receivables.
p. NOTES RECEIVABLE
Notes receivable generally due within six
months are issued by some customers to pay certain outstanding receivable balances to the Company with specific payment terms and
definitive due dates. Notes receivable do not bear interest. As of December 31, 2015, notes receivables in the amount of $13,647,583
were pledged to endorsing banks to issue bank acceptance notes. The banks charge discount fees if the Company chooses to discount
the notes receivables for cash before the maturity of the notes. The Company incurred discount fees of $538,517 and $726,096 for
the years ended December 31, 2015 and 2014, respectively, which were included in interest expenses.
q. REVENUE RECOGNITION
Revenue from the sale of goods is recognized
when the risks and rewards of ownership of the goods have transferred to the buyer including factors such as when persuasive evidence
of an arrangement exits, delivery has occurred, the sales price is fixed and determinable, and collection is probable. Revenue
consists of the invoice value for the sale of goods and services net of value-added tax (“VAT”), rebates and discounts
and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales.
r. INCOME TAXES
The Company accounts for income taxes under
the provision of FASB ASC 740-10,
Income Taxes
, or ASC 740-10, whereby deferred income tax assets and liabilities are computed
for differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible
amounts in the future, based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary; to reduce deferred income tax assets to the amount expected
to be realized.
s. FOREIGN CURRENCY TRANSLATION
The Company maintains its books and accounting
records in RMB, the currency of the PRC, The Company’s functional currency is also RMB. The Company has adopted FASB ASC
830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, U.S. dollars (“US$”).
All assets and liabilities are translated at the current rate. The stockholders’ equity accounts are translated at 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 include in the results of operations as incurred.
t. STOCK-BASED COMPENSATION
Stock-based compensation expense is recognized
based on grant-date fair value estimated in accordance with an authoritative pronouncement. The Company recognizes the compensation
costs net of a forfeiture rate on a straight-line basis over the requisite service period of the award with a corresponding impact
reflected in additional paid-in capital. The estimate of forfeitures will be adjusted over the requisite service period to the
extent that actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be
recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of stock compensation
expense to be recognized in future periods.
u. EMPLOYEES’ BENEFITS
Mandatory contributions are made to Government’s
health, retirement benefit and unemployment schemes at the statutory rates in force during the period, based on gross salary payments.
The cost of these payments is charged to the statement of income in the same period as the related salary costs.
v. RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are classified
as general and administrative expenses and are expensed as incurred. Research and development expenses were $7,358,563 for the
year ended December 31, 2015, as compared with $7,601,342 for the year ended December 31, 2014.
w. SHIPPING AND HANDLING COSTS
Shipping and handling cost are classified
as selling expenses and are expensed as incurred. Shipping and handling costs were $4,428,406 and $5,610,737 for the years ended
December 31, 2015 and 2014, respectively.
x. ADVERTISING COSTS
Advertising costs are classified as selling
expenses and are expensed as incurred. Advertising costs were $285,844 and $339,551 for the years ended December 31, 2015 and 2014,
respectively.
y. WARRANTY CLAIMS
The Company provides for the estimated cost
of product warranties when the products are sold. Such estimates of product warranties were based on, among other things, historical
experience, product changes, material expenses, and service and transportation expenses arising from the manufactured product.
Estimates will be adjusted on the basis of actual claims and circumstances. Warranty claims were $2,047,684 and $2,374,861 for
the years ended December 31, 2015 and 2014, respectively.
z. PURCHASE DISCOUNTS
Purchase discounts represent discounts received
from vendors for purchasing raw materials and are netted in the cost of goods sold, if applicable.
aa. LEASE COMMITMENTS
The Company has adopted FASB Accounting
Standard Codification, or ASC 840,
Lease
. If the lease terms meet one or all of the following four criteria, it will be
classified as a capital lease, otherwise, it is an operating lease: (1) The lease transfers the title to the lessee at the end
of the term; (2) the lease contains a bargain purchase option; (3) the lease term is equal to 75% of the estimated economic life
of the leased property or more; (4) the present value of the minimum lease payment in the term equals or exceeds 90% of the fair
value of the leased property.
ab. COST OF SALES
Cost of sales consists primarily of materials
costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs, employee compensation,
depreciation and related costs, which are directly attributable to production. Write-down of inventories to lower of cost or market
is also recorded in cost of sales, if any.
ac. GOVERNMENT GRANTS
Government grants include cash subsidies
as well as other subsidies received from the PRC government by the Joint Venture. Such subsidies are generally provided as incentives
from the local government to encourage the expansion of local business. Government grants are recognized when received and all
the conditions specified in the grant have been met. Capital grants received in advance of the acquisition of equipment are recorded
initially in other current liabilities and then offset against the cost of the related equipment upon acquisition.
ad. SEGMENT REPORTING
ASC Topic 280 requires use of the “management
approach” model for segment reporting. The management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
During the years ended December 31, 2015 and 2014, the Company operated in two reportable business segments: (1) commercial vehicles
brake systems (2) passenger vehicles brake systems.
ae. DISPOSAL OF SUBSIDIARY
On December 15, 2015, the Company entered
into an agreement to dispose of its entire 60% equity interest in its subsidiary, SIH, to the Taiwanese investor who holds a 10%
interest in SIH for a consideration of approximately $77 (HK$600).
The Company determined that the disposal
of SIH did not constitute a discontinued operation as it did not represent a strategic shift and the operation capacity of SIH
was absorbed by the Joint Venture, the other subsidiary of the Company.
af. RECENTLY ISSUED FINANCIAL STANDARDS
In February 2015, the FASB issued ASU 2015-02,
“
Consolidation (Topic 810): Amendments to the Consolidation
Analysis
”
.
The amendments in this Update affect reporting
entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to
reevaluation under the revised consolidation model. Specifically, the amendments: 1. Modify the evaluation of whether limited partnerships
and similar legal entities are variable interest entities (VIEs) or voting interest entities. 2. Eliminate the presumption that
a general partner should consolidate a limited partnership. 3. Affect the consolidation analysis of reporting entities that are
involved with VIEs, particularly those that have fee arrangements and related party relationships. 4. Provide a scope exception
from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate
in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money
market funds. The ASU will be effective for interim and annual reporting periods beginning after December 15, 2015. Early adoption
is permitted. The adoption of ASU 2015-02 is not expected to have a material impact on the Company’s consolidated financial
statements.
In July 2015, The FASB issued ASU 2015-11,
“
Simplifying the Measurement of Inventory
”
.
The amendments in ASU 2015-11 require an entity to measure in scope inventory at the lower of cost and net realizable value. Net
realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion,
disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method.
The amendments do not apply to inventory that is measured using last-in, first-out (LIFO) or the retail inventory method. The amendments
apply to all other inventory, which includes inventory that is measured using first-in, first-out (FIFO) or average cost. For public
business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within
those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2016, and
interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively with earlier
application permitted as of the beginning of an interim or annual reporting period. The adoption of ASU 2015-11 is not expected
to have a material impact on the Company’s consolidated financial statements.
In August 2015, the FASB issued ASU 2015-14,
“
Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date
”
.
The amendments in ASU
2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Public business entities, certain not-for-profit
entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of
annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The
Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In September 2015, the FASB issued ASU 2015-16,
“
Business Combinations (Topic 805): Simplifying the Accounting
for Measurement-Period Adjustments
”
.
The amendments in
ASU 2015-16 require that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period
in the reporting period in which the adjustment amounts are determined. The amendments require that the acquirer record, in the
same period
’
s financial statements, the effect on earnings
of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the estimated amounts,
calculated as if the accounting had been completed at the acquisition date. The amendments also require an entity to present separately
on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line
item that would have been recorded in previous reporting periods if the adjustment to the estimated amounts had been recognized
as of the acquisition date. The amendments in this ASU are effective for public business entities for fiscal years beginning after
December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments
to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have
not been issued. The adoption of ASU 2015-16 is not expected to have a material impact on the Company’s consolidated financial
statements.
In November 2015, the FASB issued ASU 2015-17,
“
Income Taxes (Topic 740): Balance Sheet Classification
of Deferred Taxes
”
. The amendments in ASU 2015-17 eliminates
the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified
balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments
in this ASU are effective for public business entities for financial statements issued for annual periods beginning after December
15, 2016, and interim periods within those annual periods. The amendments may be applied prospectively to all deferred tax liabilities
and assets or retrospectively to all periods presented. The Company is currently in the process of evaluating the impact of the
adoption on its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
“
Financial Instruments-Overall (Subtopic 825-10):
Recognition and Measurement of Financial Assets and Financial Liabilities
”
.
The amendments in ASU 2016-01, among other things, requires equity investments (except those accounted for under the equity method
of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized
in net income; Requires public business entities to use the exit price notion when measuring the fair value of financial instruments
for disclosure purposes; Requires separate presentation of financial assets and financial liabilities by measurement category and
form of financial asset (i.e., securities or loans and receivables); Eliminates the requirement for public business entities to
disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial
instruments measured at amortized cost. The amendments in this ASU are effective for public companies for fiscal years beginning
after December 15, 2017, including interim periods within those fiscal years. The new guidance permits early adoption of the own
credit provision. In addition, the new guidance permits early adoption of the provision that exempts private companies and not-for-profit
organizations from having to disclose fair value information about financial instruments measured at amortized cost. The Company
is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
“
Leases (Topic 842)
”
.
Among other things, in the amendments in ASU 2016-02, lessees will be required to recognize the following for all leases (with
the exception of short-term leases) at the commencement date: A lease liability, which is a lessee’s obligation to make lease
payments arising from a lease, measured on a discounted basis; and A right-of-use asset, which is an asset that represents the
lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting
is largely unchanged. Certain targeted improvements were made to align, where necessary, lessor accounting with the lessee accounting
model and Topic 606, Revenue from Contracts with Customers. The amendments in this ASU are effective for public business entities
for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted
for all public business entities and all nonpublic business entities upon issuance. Lessees (for capital and operating leases)
and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements.
The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative
period presented. Lessees and lessors may not apply a full retrospective transition approach. The Company is currently in the process
of evaluating the impact of the adoption on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-03,
“
Intangibles-Goodwill and Other (Topic 350); Business
Combinations (Topic 805); Consolidation (Topic 810); Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance
”
.
The amendments in this ASU make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their
effective dates. The amendments also include transition provisions that provide that private companies are able to forgo a preferability
assessment the first time they elect the accounting alternatives within the scope of this ASU. Any subsequent change to an accounting
policy election requires justification that the change is preferable under Topic 250, Accounting Changes and Error Corrections.
The amendments in this ASU also extend the transition guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely. While
this ASU extends transition guidance for Updates 2014-07 and 2014-18, there is no intention to change how transition is applied
for those two ASUs. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial
statements.
In March 2016, the FASB issued ASU 2016-08,
“
Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
”
.
'The amendments in this ASU are intended to improve the operability and understandability of the implementation guidance on principal
versus agent considerations by amending certain existing illustrative examples and adding additional illustrative examples to assist
in the application of the guidance. The effective date and transition of these amendments is the same as the effective date and
transition of ASU 2014-09,
“
Revenue from Contracts
with Customers (Topic 606)
”
.
Public entities should apply
the amendments in ASU 2014-09 for annual reporting periods beginning after December 15, 2017, including interim reporting periods
therein. The Company is currently in the process of evaluating the impact of the adoption on its consolidated financial statements.
NOTE 3 - RECLASSIFICATIONS
Certain prior year amounts have been reclassified
to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company purchases primarily
packaging materials from the Ruili Group. The Ruili Group is the minority stockholder of Joint Venture and is collectively
controlled by Mr. Xiao Ping Zhang, his wife Ms. Shu Ping Chi, and his brother Mr. Xiao Feng Zhang. In addition, the Company
purchases automotive components from three other related parties, Guangzhou Kormee Automotive Electronic Control Co.,
Ltd. (“Guangzhou Kormee”), Ruian Kormee Vehicle Brake Co., Ltd. (“Ruian Kormee”) and Shanghai
Dachao Electric Technology Co., Ltd. (“Shanghai Dachao”). Guangzhou Kormee is controlled by the Ruili Group and
Ruian Kormee is the wholly-owned subsidiary of Guangzhou Kormee. Ruili Group owns 49% equity interest in Shanghai Dachao.
The Company sells certain automotive products to the Ruili Group. The Company also sells scrap materials and parts to Guangzhou
Kormee and Ruian Kormee. MGR holds a
30% interest in SIH. The stockholders of MGR are the management of SIH.
The following related party transactions
occurred for the years ended December 31, 2015 and 2014:
|
|
For Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
$
|
1,488,151
|
|
|
$
|
2,194,995
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
|
765,971
|
|
|
|
1,250,174
|
|
Ruili Group Co., Ltd.
|
|
|
3,199,511
|
|
|
|
3,740,032
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
80,603
|
|
|
|
—
|
|
Total Purchases
|
|
$
|
5,534,236
|
|
|
$
|
7,185,201
|
|
|
|
|
|
|
|
|
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
$
|
946,061
|
|
|
$
|
278,382
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
|
38,753
|
|
|
|
213,974
|
|
Ruili Group Co., Ltd.
|
|
|
7,781,763
|
|
|
|
1,618,349
|
|
Total Sales
|
|
$
|
8,766,577
|
|
|
$
|
2,110,705
|
|
During the years ended December 31, 2015
and 2014, for the sales mentioned above, the sales to Guangzhou Kormee and Ruian Kormee were sales of scrap materials and were
included in other operating income in the consolidated statements of income and comprehensive income. The sales to Ruili Group
were included in sales in the consolidated statements of income and comprehensive income.
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
PREPAYMENTS TO RELATED PARTY
|
|
|
|
|
|
|
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
$
|
—
|
|
|
$
|
83,206
|
|
Total
|
|
$
|
—
|
|
|
$
|
83,206
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruian Kormee Vehicle Brake Co., Ltd.
|
|
$
|
340,175
|
|
|
$
|
—
|
|
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.
|
|
|
75,968
|
|
|
|
59,011
|
|
Ruili Group Co., Ltd.
|
|
|
697,643
|
|
|
|
77,598
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
19,751
|
|
|
|
—
|
|
Total
|
|
$
|
1,133,537
|
|
|
$
|
136,609
|
|
|
|
|
|
|
|
|
|
|
OTHER PAYABLES TO RELATED PARTY
|
|
|
|
|
|
|
|
|
MGR Hong Kong Limited
|
|
$
|
—
|
|
|
$
|
17,681
|
|
Total
|
|
$
|
—
|
|
|
$
|
17,681
|
|
The Company also entered into several
lease agreements with related parties, see Note 18 for more details.
During the years ended December 31, 2015
and 2014, the Company borrowed labors from Ruili Group and incurred wage expense of $5,052,313 and $11,917,917, respectively.
The wage payable to the labors borrowed from Ruili Group was distributed to the labors directly by the Company and was not included
in the payables to Ruili Group.
In addition, the
Company provided a guarantee for credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB
168,000,000 (approximately $25,871,627) for the period from March 24, 2015 to March 24, 2016. As of December 31, 2015, the
Company pledged a 6-month fixed term deposit of RMB 54,000,000 (approximately $ 8,315,880) with a maturity date of May 19,
2016, and a 6-month fixed term deposit of RMB 86,000,000 (approximately $13,243,809) with a maturity date of May 18, 2016.
The balance of these fixed term deposits was included in short term investments.
The Company provided a guarantee for the
credit line granted to Ruili Group by China Everbright Bank in the amount of RMB 60,000,000 (approximately $9,239,867) for a
period from February 26, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line.
The Company provided a guarantee for the
credit line granted to Ruili Group by China Guangfa Bank in the amount of RMB 54,000,000 (approximately $8,315,880) for a period
from September 22, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line.
The Company provided a guarantee for the
credit line granted to Ruili Group by the China Merchants Bank in the amount of RMB 50,000,000 (approximately $7,699,889) for
a period from July 29, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line.
The Company pledged its term deposit of
RMB 40,000,000 (approximately $6,159,911) for the bank acceptance notes issued to to Hangzhou Xiangwei Wuzi Co., Ltd, a related
party controlled by the relative of Ms. Shu Ping Chi, by Zhejiang Chouzhou Commercial Bank for the period from December 17, 2015
to June 17, 2016.
The Company provided a guarantee for the
credit line granted to Ruili Group by the Bank of Ningbo in the amount of RMB 108,000,000 (approximately $17,182,404) for the
period from August 22, 2014 to August 21, 2015. The Company also provides a guarantee for Ruili Group related to the credit line
granted by China Zheshang Bank in the amount of RMB 146,960,000 (approximately $24,016,996) for the period from December 9, 2014
to December 9, 2015.
NOTE 5 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the
following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Accounts receivable
|
|
$
|
83,898,730
|
|
|
$
|
74,646,974
|
|
Less: allowance for doubtful accounts
|
|
|
(12,075,402
|
)
|
|
|
(6,475,587
|
)
|
|
|
|
|
|
|
|
|
|
Account receivable balance, net
|
|
$
|
71,823,328
|
|
|
$
|
68,171,387
|
|
No customer individually accounted for more
than 10% of our revenues or accounts receivable for the years ended December 31, 2015 and 2014. The changes in the allowance for
doubtful accounts at December 31, 2015 and December 31, 2014 were summarized as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Beginning balance
|
|
$
|
6,475,587
|
|
|
$
|
3,813,415
|
|
Add: Increase to allowance
|
|
|
5,599,815
|
|
|
|
2,662,172
|
|
Less: Accounts written off
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
12,075,402
|
|
|
$
|
6,475,587
|
|
In connection with the disposal of SIH, the Company estimated it would be difficult to collect the accounts receivables from
SIH as it no longer retained the control. Therefore, the Company fully allowed the accounts receivables from SIH. $4,320,748
out of the increase to allowance was related to the allowance for doubtful accounts from SIH and was included in loss on disposal
of subsidiary.
NOTE 6 - INVENTORIES
On December 31, 2015 and December 31, 2014,
inventories consisted of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Raw Materials
|
|
$
|
13,038,945
|
|
|
$
|
11,934,720
|
|
Work-in-process
|
|
|
28,786,709
|
|
|
|
30,020,125
|
|
Finished Goods
|
|
|
31,836,206
|
|
|
|
42,400,202
|
|
|
|
|
|
|
|
|
|
|
Less: Write-down of inventories
|
|
|
—
|
|
|
|
(168,281
|
)
|
Total Inventory
|
|
$
|
73,661,860
|
|
|
$
|
84,186,766
|
|
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of
the following, on December 31, 2015 and December 31, 2014:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Machinery
|
|
$
|
50,680,639
|
|
|
$
|
51,619,990
|
|
Molds
|
|
|
1,343,730
|
|
|
|
1,425,992
|
|
Office equipment
|
|
|
2,077,411
|
|
|
|
2,257,208
|
|
Vehicles
|
|
|
1,983,028
|
|
|
|
2,040,061
|
|
Buildings
|
|
|
7,756,917
|
|
|
|
9,152,959
|
|
Machinery held under capital lease
|
|
|
29,012,601
|
|
|
|
29,012,601
|
|
Leasehold improvements
|
|
|
489,878
|
|
|
|
562,521
|
|
Sub-Total
|
|
|
93,344,204
|
|
|
|
96,071,332
|
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation
|
|
|
(55,782,299
|
)
|
|
|
(52,520,405
|
)
|
Property, plant and equipment, net
|
|
$
|
37,561,905
|
|
|
$
|
43,550,927
|
|
During the year ended December
31, 2015, the management identified a building previously purchased from Ruili Group as described in Note 8 with carrying
value of $545,642, net of accumulated depreciation of $322,388 as of December 31, 2015, was no longer able to be utilized for
its intended use. The building was subsequently torn down in January 2016. The Company recorded the impairment on long-lived
assets for the amount of $561,847.
Depreciation expense charged to operations
was $7,029,214 and $6,998,738 for the years ended December 31, 2015 and 2014, respectively.
NOTE 8 – LAND USE RIGHTS
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Cost
|
|
$
|
16,182,560
|
|
|
$
|
17,173,243
|
|
Less: Accumulated amortization
|
|
|
(2,950,411
|
)
|
|
|
(2,751,514
|
)
|
Land use rights, net
|
|
$
|
13,232,149
|
|
|
$
|
14,421,729
|
|
According to the law of China, the government
owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. The Company purchased the above land use rights from Ruili Group, a related party, as well as the building
on the land in the total amount of approximately $20 million (including buildings of approximately $6.7 million). The Company
has been negotiating with the government for a reduction in or exemption from the tax being sought by the government in connection
with the transfer of the land use rights and the building, and pending resolution of that issue. Due to the lack of resolution
of the issue, the land use right certificate and the property ownership certificate have not been issued to the Company. There
is no assurance that the Company can conclude the negotiations with the government and obtain a favorable result. The Company reserved
the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount was determined based on a 3% tax rate on the consideration
paid for the land use right in the transaction, which the Company considered as the most probable amount of tax liability. This
amount also represented the maximum amount of tax the Company expects to pay if the negotiation with the local government ultimately
is not successful. Amortization expenses were $368,247 and $374,425 for the years of 2015 and 2014, respectively.
NOTE 9 - INTANGIBLE ASSETS
Gross intangible assets were $178,751, less
accumulated amortization of $154,897 for net intangible assets of $23,854 as of December 31, 2015. Gross intangible assets were
$181,099, less accumulated amortization of $143,438 for net intangible assets of $37,661 as of December 31, 2014. Amortization
expenses were $11,980 and $13,790 for the years ended December 31, 2015 and 2014, respectively. Future estimated amortization expense
is as follows:
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
Thereafter
|
|
$
|
11,634
|
|
|
$
|
8,857
|
|
|
$
|
3,363
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE 10 - PREPAYMENTS
Prepayments consisted of the following as
of December 31, 2015 and December 31, 2014:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Raw material suppliers
|
|
$
|
3,210,160
|
|
|
$
|
2,938,396
|
|
Equipment purchases
|
|
|
140,447
|
|
|
|
1,724,606
|
|
|
|
|
|
|
|
|
|
|
Total prepayments
|
|
$
|
3,350,607
|
|
|
$
|
4,663,002
|
|
NOTE 11- DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
Deferred tax assets as of December 31, 2015
and December 31, 2014 comprise of the following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,860,379
|
|
|
$
|
990,496
|
|
Revenue (net of cost)
|
|
|
45,815
|
|
|
|
―
|
|
Unpaid accrued expenses
|
|
|
180,174
|
|
|
|
180,392
|
|
Warranty
|
|
|
875,751
|
|
|
|
848,566
|
|
Deferred tax assets
|
|
|
2,962,119
|
|
|
|
2,019,454
|
|
Valuation allowance
|
|
|
―
|
|
|
|
―
|
|
Net deferred tax assets - current
|
|
$
|
2,962,119
|
|
|
$
|
2,019,454
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities - current
|
|
|
|
|
|
|
|
|
Revenue (net of cost)
|
|
$
|
―
|
|
|
$
|
151,083
|
|
Others
|
|
|
52,390
|
|
|
|
―
|
|
Deferred tax liabilities - current
|
|
|
52,390
|
|
|
|
151,083
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets - current
|
|
$
|
2,909,729
|
|
|
$
|
1,868,371
|
|
Deferred taxation is calculated under the
liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability
to realize in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as the Company
had no U.S. taxable income for the reporting period. The Company’s subsidiary registered in the PRC is subject to income
taxes within the PRC at the applicable tax rate.
NOTE 12 –
SHORT
TERM BANK LOANS
Bank loans represented the following as of
December 31, 2015 and December 31, 2014:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Secured
|
|
$
|
23,367,207
|
|
|
$
|
9,539,476
|
|
The Company obtained those
short term loans from Bank of China, Bank of Ningbo, China Construction Bank and Agricultural Bank of China, respectively, to finance
general working capital as well as new equipment acquisition. Interest rate for the loans outstanding during the year ended December
31, 2015 ranged from 1.33% to 5.35% per annum. The maturity dates of the loans existing as of December 31, 2015 ranged from January
4, 2016 to May 17, 2016. As of December 31, 2015 and 2014, the Company’s accounts receivables of $15,836,158 and $12,328,735,
respectively, were pledged as collateral under loan arrangements. The interest expense for short-term bank loans were $730,574
and $393,154 for the years ended December 31, 2015 and 2014, respectively.
As of December 31, 2015, corporate or
personal guarantees provided for those bank loans were as follows:
$ 3,539,978
|
|
Pledged and guaranteed by Ruili Group, a related party, with its land and buildings.
|
$ 16,827,229
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
$ 3,000,000
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders and Jia Rui Zhang, the daughter of Mr. Xiao Ping Zhang and Ms. Shu Ping Chi.
|
NOTE 13 - ACCRUED EXPENSES
Accrued expenses consisted of the following
as of December 31, 2015 and December 31, 2014:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
Accrued payroll
|
|
$
|
4,049,357
|
|
|
$
|
2,859,430
|
|
Accrued warranty expenses
|
|
|
5,838,343
|
|
|
|
5,657,106
|
|
Other accrued expenses
|
|
|
3,982,887
|
|
|
|
5,044,627
|
|
Total accrued expenses
|
|
$
|
13,870,587
|
|
|
$
|
13,561,163
|
|
NOTE 14 –CAPITAL LEASE OBLIGATIONS
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Total capital lease obligations
|
|
$
|
3,519,949
|
|
|
$
|
7,470,875
|
|
Less: current portion
|
|
|
(3,519,949
|
)
|
|
|
(3,735,438
|
)
|
Non-current portion
|
|
$
|
―
|
|
|
$
|
3,735,437
|
|
On September 13, 2011, the Company entered
into a leasing agreement with International Far Eastern Leasing Co., Ltd., a subsidiary of China Sinochem Corporation, for a term
of 60 months and an interest rate of 7.95% per annum, payable monthly in arrears. To reduce the financing expense, the Company
entered into a new leasing agreement with International Far Eastern Leasing Co., Ltd. in December 2012 and terminated the original
agreement. The lease inception date of the new lease agreement is January 4, 2013 and the termination date is January 4, 2017.
The duration of the new agreement is 48 months with an interest rate of 6.4% per annum and is secured with the Company’s
equipment in the original cost of $28,396,853. The capital lease obligation obtained by the Company is RMB 91,428,571 (approximately
$14,545,950) and the Company is required to maintain a security deposit of RMB 11,428,571 (approximately $1,818,244). The Company
prepaid all interests of RMB 10,705,357 (approximately $1,703,212) after the discount and is obligated for the payment of RMB 1,904,761.9
(approximately $303,041) monthly. The prepaid interest for capital lease obligation is amortized over the life of capital lease
agreement using the effective interest method.
NOTE 15 – RESERVE
The reserve funds were comprised of the
following:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Statutory surplus reserve fund
|
|
$
|
13,207,972
|
|
|
$
|
12,019,532
|
|
Total
|
|
$
|
13,207,972
|
|
|
$
|
12,019,532
|
|
Pursuant to the relevant laws and regulations
of Sino-Foreign joint venture enterprises, the profits of the Company's subsidiary, which are based on their PRC statutory financial
statements, are available for distribution in the form of cash dividends after they have satisfied all the PRC tax liabilities,
provided for losses in previous years, and made appropriations to reserve funds, as determined at the discretion of the board of
directors in accordance with PRC accounting standards and regulations.
As stipulated by the relevant laws and regulations
for enterprises operating in the PRC, Ruian is required to make annual appropriations to the statutory surplus funds. In accordance
with the relevant PRC regulations and the articles of association of the respective companies, Ruian is required to allocate a
certain percentage of its profits after taxation, as determined in accordance with PRC accounting standards applicable to the Company,
to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company.
Net income as reported in the U.S. GAAP financial
statements differs from that as reported in the PRC statutory financial statements. In accordance with the relevant laws and regulations
in the PRC, the profits available for distribution are based on the statutory financial statements. If Ruian has foreign currency
available after meeting its operational needs, Ruian may make its profit distributions in foreign currency to the extent foreign
currency is available. Otherwise, it is necessary to obtain approval and convert such distributions at an authorized bank. The
reserve fund consists of retained earnings which have been allocated to the statutory reserve fund.
NOTE 16 - INCOME TAXES
The Joint Venture is registered in the PRC,
and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported
in the PRC statutory financial statements in accordance with relevant income tax laws.
In 2009, the Joint Venture was awarded the
Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years
and provided for a reduced tax rate of 15% for years 2009 through 2011. The Company used a tax rate of 25% for the first three
quarters of 2012. In December 2012, the Joint Venture passed the re-assessment of “High-Tech Enterprise” designation
by the government, according to relevant PRC income tax laws. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate for years 2012 through 2014. In the fourth quarter of 2015, the Joint Venture passed the re-assessment
by the government, based on PRC income tax laws. Accordingly, it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017.
The reconciliation of the effective income
tax rate of the Joint Venture to the statutory income tax rate in the PRC for the years ended on December 31, 2015 and 2014 is
as follows:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
US Statutory income tax rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Valuation allowance recognized with respect to the loss in the US company
|
|
|
-35.00
|
%
|
|
|
-35.00
|
%
|
HK Statutory income tax rate
|
|
|
16.50
|
%
|
|
|
16.50
|
%
|
Valuation allowance recognized with respect to the loss in the HK company
|
|
|
-16.50
|
%
|
|
|
-16.50
|
%
|
China statutory income tax rate
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
Effect of income tax exemptions and reliefs
|
|
|
-10.00
|
%
|
|
|
-10.00
|
%
|
Effects of additional deduction allowed for R&D expenses
|
|
|
-3.33
|
%
|
|
|
-1.81
|
%
|
Effects of expenses not deductible for tax purposes
|
|
|
1.26
|
%
|
|
|
1.47
|
%
|
Other items
|
|
|
-0.64
|
%
|
|
|
1.26
|
%
|
Effective tax rate
|
|
|
12.29
|
%
|
|
|
15.92
|
%
|
Income taxes are calculated on a separate
entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit
or burden recorded for the entity located in U.S. The tax authority may examine the tax returns of the Company three years after
the year ended. In the years of 2015 and 2014, there were no penalties and interest, which generally are recorded in the general
and administrative expenses or in the tax expenses. The provisions for income taxes for the years ended December 31, 2015 and 2014,
respectively, are summarized as follows:
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
3,179,989
|
|
|
$
|
3,304,552
|
|
Deferred
|
|
|
(1,145,213
|
)
|
|
|
(431,640
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,034,776
|
|
|
$
|
2,872,912
|
|
ASC 740-10 requires recognition and measurement
of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company‘s
tax positions and considered that no provision for uncertainty in income taxes was necessary as of December 31, 2015 and 2014.
NOTE 17 –NON-CONTROLLING INTEREST IN SUBSIDIARIES
Non-controlling interest in subsidiaries
represents a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian, and a 40% non-controlling interest, owned
by the Company’s Joint Venture Partners, in SIH. On December 15, 2015, the Company disposed of its entire 60% equity interest in SIH. The non-controlling interest in SIH was
fully removed. The results of SIH disposed of are included in the consolidated statements of income up to the effective date
of disposal. Net income attributable to non-controlling interest in subsidiaries amounted
to $1,216,581 and $1,366,456 for the years ended December 31, 2015 and 2014, respectively.
|
|
2015
|
|
|
2014
|
|
10% non-controlling interest in Ruian
|
|
$
|
1,320,489
|
|
|
$
|
1,566,774
|
|
40% non-controlling interest in SIH
|
|
|
(103,908
|
)
|
|
|
(200,318
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,216,581
|
|
|
$
|
1,366,456
|
|
NOTE 18 – OPERATING LEASES WITH RELATED PARTIES
In December 2006, Ruian entered into a lease
agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s
management personnel and staff, respectively. The lease term is from January 2013 to December 2016. This lease was amended in 2013
with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB2,100,000 (approximately USD$333,688).
In May 2009, Ruian entered into a lease
agreement with Ruili Group Co., Ltd. for the lease of a manufacturing plant. The lease term is from September 2009 to May 2017.
In August 2010, a new lease agreement was signed between Ruian and Ruili Group Co., Ltd., under which Ruian leased 32,410 square
meters manufacturing plant for its new purchased passenger vehicles brake systems business. The lease term is from September 2009
to August 2020. This lease was amended in 2013. The amended lease term is from January 1, 2013 to December 31, 2017. The annual
lease expense is RMB8,137,680 (approximately USD$1,293,070).
The lease expenses were $1,623,405 and $1,650,640
for the years ended December 31, 2015 and 2014, respectively. As of December 31, 2015, future minimum rental payments are as follows:
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Lease Commitments
|
|
$
|
1,576,580
|
|
|
$
|
1,576,580
|
|
|
$
|
323,395
|
|
|
$
|
323,395
|
|
|
$
|
323,395
|
|
|
$
|
646,791
|
|
NOTE 19 – WARRANTY CLAIMS
Warranty claims were $2,047,684 and $2,374,861
for the years ended December 31, 2015 and 2014, respectively. Warranty claims are classified as accrued expenses on the balance
sheet. The movement of accrued warranty expenses for the year ended December 31, 2015 is as follows:
Beginning balance at January 1, 2014
|
|
$
|
5,657,106
|
|
Aggregate increase for new warranties issued during current period
|
|
|
2,047,684
|
|
Aggregate reduction for payments made
|
|
|
(1,866,447
|
)
|
Ending balance at December 31, 2015
|
|
$
|
5,838,343
|
|
NOTE 20– SEGMENT INFORMATION
The Company produces brake systems and other
related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”). On August
31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the passenger
vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition, the
Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related
auto parts.
The Company has two operating segments: Commercial
Vehicle Brake Systems and Passenger Vehicle Brake Systems.
All of the Company’s long-lived
assets are located in the PRC. Before the disposal of SIH, the Company also had long-lived assets located in Hong Kong. The
Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.
|
|
For Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
NET SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
178,672,655
|
|
|
$
|
193,984,778
|
|
Passenger vehicles brake systems
|
|
|
39,984,231
|
|
|
|
43,670,087
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
218,656,886
|
|
|
$
|
237,654,865
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles brake systems
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
—
|
|
|
$
|
—
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
48,652,822
|
|
|
$
|
54,575,006
|
|
Passenger vehicles brake systems
|
|
|
10,757,596
|
|
|
|
12,285,991
|
|
Gross profit
|
|
$
|
59,410,418
|
|
|
$
|
66,860,997
|
|
Selling and distribution expenses
|
|
|
22,681,469
|
|
|
|
23,676,176
|
|
General and administrative expenses
|
|
|
14,100,715
|
|
|
|
18,011,110
|
|
Impairment on long-lived assets
|
|
|
561,847
|
|
|
|
-
|
|
Research and development expenses
|
|
|
7,358,563
|
|
|
|
7,601,342
|
|
|
|
|
|
|
|
|
|
|
Other operating income
|
|
|
3,204,286
|
|
|
|
2,270,147
|
|
Loss on disposal of subsidiary
|
|
|
(3,170,821
|
)
|
|
|
-
|
|
Income from operations
|
|
|
14,741,289
|
|
|
|
19,842,516
|
|
Interest income
|
|
|
1,102,447
|
|
|
|
343,889
|
|
Government grants
|
|
|
768,607
|
|
|
|
301,572
|
|
Other income
|
|
|
2,217,204
|
|
|
|
304,540
|
|
Interest expenses
|
|
|
(1,269,091
|
)
|
|
|
(1,119,250
|
)
|
Other expenses
|
|
|
(1,000,613
|
)
|
|
|
(1,632,869
|
)
|
Income before income tax expense
|
|
$
|
16,559,843
|
|
|
$
|
18,040,398
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
2,511,143
|
|
|
$
|
3,267,571
|
|
Passenger vehicles brake systems
|
|
|
551,226
|
|
|
|
735,599
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,062,369
|
|
|
$
|
4,003,170
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
6,054,254
|
|
|
$
|
6,029,569
|
|
Passenger vehicles brake systems
|
|
|
1,355,187
|
|
|
|
1,357,384
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,409,441
|
|
|
$
|
7,386,953
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
261,924,719
|
|
|
$
|
234,186,022
|
|
Passenger vehicles brake systems
|
|
|
58,629,337
|
|
|
|
52,720,240
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
320,554,056
|
|
|
$
|
286,906,262
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
42,961,388
|
|
|
$
|
48,956,149
|
|
Passenger vehicles brake systems
|
|
|
9,616,495
|
|
|
|
11,021,067
|
|
Total
|
|
$
|
52,577,883
|
|
|
$
|
59,977,216
|
|
NOTE 21 – COMMITMENTS AND CONTINGENCIES
(1) According to the laws of China, the Chinese government owns
all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted
by the Chinese government. The Company purchased the land use rights and all buildings on the land from Ruili Group for approximately
$20 million on September 28, 2007. The Company has not yet obtained the land use right certificate nor the property ownership
certificate of the building. There is no new development of negotiation regarding taxes related to the land use rights. Although
the Company plans to conclude negotiations with the local government and to obtain the land use right certificate as soon as practicable,
the Company is unable to predict when the negotiations will be resolved or concluded. There is no assurance that the Company can
obtain the land use right certificate. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220).
This amount was determined based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the
Company considered as the most probable amount of tax liability. This amount also represented the maximum amount of tax the Company
expects to pay if the negotiation with the local government ultimately is not successful. Even if it is unable to resolve the tax
issues and obtain the land use right certificate for the land and related building, there will be no potential adverse implication
on the Company. Also see Note 8.
(2) The information of
lease commitments is provided in Note 14 and Note 18.
(3) The information of
guarantees and assets pledged is provided in Note 4.
ADDITIONAL INFORMATION–FINANCIAL
STATEMENT SCHEDULE I
This financial statements schedule
has been prepared in conformity with U.S. GAAP.
SORL AUTO PARTS,
INC.
This financial statements schedule has been
prepared in conformity with U.S. GAAP. The parent company financial statements have been prepared using the same accounting principles
and policies described in the notes to the consolidated financial statements, with the only exception being that the Company accounts
for its subsidiaries using the equity method. Please refer to the notes to the consolidated financial statements presented above
for additional information and disclosures with respect to these financial statements.
Financial Information of Parent Company
BALANCE SHEETS
December 31, 2015 and 2014
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
80,910
|
|
|
$
|
81,036
|
|
Other current assets
|
|
|
6,161
|
|
|
|
6,161
|
|
Total Current Assets
|
|
|
87,071
|
|
|
|
87,197
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries
|
|
|
187,423,606
|
|
|
|
175,539,210
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
187,510,677
|
|
|
$
|
175,626,407
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Other current liability
|
|
|
2,921,411
|
|
|
|
2,921,488
|
|
Total Current Liabilities
|
|
|
2,921,411
|
|
|
|
2,921,488
|
|
Total Liabilities
|
|
|
2,921,411
|
|
|
|
2,921,488
|
|
Stockholders' Equity:
|
|
|
|
|
|
|
|
|
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of December 31, 2015 and 2014
|
|
|
-
|
|
|
|
-
|
|
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of December 31, 2015 and 2014
|
|
|
|
|
|
|
|
|
|
|
|
38,609
|
|
|
|
38,609
|
|
Additional paid-in capital
|
|
|
42,199,014
|
|
|
|
42,199,014
|
|
Retained earnings
|
|
|
142,351,643
|
|
|
|
130,467,296
|
|
Total Stockholders' Equity
|
|
|
184,589,266
|
|
|
|
172,704,919
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
187,510,677
|
|
|
$
|
175,626,407
|
|
Financial Information of Parent Company
STATEMENTS OF INCOME
For The Years Ended December 31, 2015
and 2014
|
|
For Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Investment income
|
|
$
|
11,884,396
|
|
|
$
|
14,100,968
|
|
Gain from disposal of subsidiary
|
|
|
77
|
|
|
|
-
|
|
Financial expenses
|
|
|
126
|
|
|
|
-
|
|
Net income attributable to stockholders
|
|
$
|
11,884,347
|
|
|
$
|
14,100,968
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share - Basic
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share - Diluted
|
|
|
19,304,921
|
|
|
|
19,304,921
|
|
|
|
|
|
|
|
|
|
|
EPS - Basic
|
|
$
|
0.62
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
EPS - Diluted
|
|
$
|
0.62
|
|
|
$
|
0.73
|
|
Financial Information of Parent Company
STATEMENTS OF CASH FLOWS
For The Years Ended December 31, 2015 and 2014
|
|
For Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
11,884,347
|
|
|
$
|
14,100,968
|
|
Adjustments to reconcile net income to net cash used in operating activities :
|
|
|
|
|
|
|
|
|
Investment in subsidiaries
|
|
|
(11,884,396
|
)
|
|
|
(14,100,968
|
)
|
Other current liabilities
|
|
|
(77
|
)
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(126
|
)
|
|
|
-
|
|
Net change in cash and cash equivalents
|
|
|
(126
|
)
|
|
|
-
|
|
Cash and cash equivalents, beginning of the year
|
|
|
81,036
|
|
|
|
81,036
|
|
Cash and cash equivalents, end of the year
|
|
$
|
80,910
|
|
|
$
|
81,036
|
|
Financial Information
of Parent Company
STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
For The Years
Ended December 31, 2015 and 2014
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Common
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Stockholders'
|
|
|
|
of Share
|
|
|
Stock
|
|
|
Capital
|
|
|
Earnings
|
|
|
Equity
|
|
Balance – December 31, 2013
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
42,199,014
|
|
|
$
|
116,366,328
|
|
|
$
|
158,603,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14,100,968
|
|
|
|
14,100,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2014
|
|
|
19,304,921
|
|
|
|
38,609
|
|
|
|
42,199,014
|
|
|
|
130,467,296
|
|
|
|
172,704,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,884,347
|
|
|
|
11,884,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2015
|
|
|
19,304,921
|
|
|
$
|
38,609
|
|
|
$
|
42,199,014
|
|
|
$
|
142,351,643
|
|
|
$
|
184,589,266
|
|