NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
|
(1)
|
BASIS OF PRESENTATION
|
The consolidated financial statements include
the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated
in the consolidation. Certain information and footnote disclosures normally included in financial statements prepared in conjunction
with generally accepted accounting principles have been condensed or omitted as permitted by the rules and regulations of the United
States Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures contained in
this report are adequate to make the information presented not misleading. The consolidated balance sheet information as of December
31, 2016 was derived from the consolidated audited financial statements included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2016. These consolidated financial statements should be read in conjunction with the annual consolidated
audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2016, and other reports filed with the SEC.
The accompanying unaudited interim consolidated
financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary
to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented.
The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period
or for the fiscal year taken as a whole.
|
(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, restricted cash, accounts receivable, bank acceptance notes
receivable, inventories, current prepayments, other current assets, deferred tax assets, accounts payable and bank acceptance
notes to vendors, short term bank loans, deposit received from customers, income tax payable, accrued expenses and other
current liabilities, the carrying amounts approximate fair values due to their short maturities.
Transactions involving related parties cannot
be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not
exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were
consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
d. RESTRICTED CASH
Restricted cash mainly represents bank deposits
used to pledge the bank acceptance notes. The Company entered into credit agreements with commercial banks in China (“endorsing
banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits, the Company can issue
bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance notes, the Company is generally
required to make initial deposits or pledge note receivables to the endorsing banks in amounts of certain percentage of the face
amount of the bank acceptance notes to be issued by the Company. The cash in such accounts is restricted for use over the terms
of the bank acceptance notes, which are normally three to six months.
e. RELATED PARTY TRANSACTIONS
A related party is generally defined as (i)
any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management,
(iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone
who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related
party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with
its related parties in the ordinary course of business.
f. BANK ACCEPTANCE NOTES RECEIVABLE
Bank acceptance notes receivable, 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 Ruili Group and transferred
to the Company as loans from related party. Bank acceptance notes do not bear interest. As of June 30, 2017 and December 31, 2016,
bank acceptance notes receivable in the amount of $45,552,031 and $32,916,198, respectively, were pledged to banks to issue either short term bank loans or bank acceptance notes to vendors. The banks charge discount fees if the Company chooses to discount the bank acceptance notes
for cash before the maturity of the notes and such discount fees are included in interest expenses.
g. REVENUE RECOGNITION
Revenue from the sale of goods is recognized
when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided by several factors,
including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales price is fixed or
determinable, and collection is reasonably assured. Revenue consists of the invoice value for the sale of goods net of value-added
tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement
is the net sales.
h. COST OF SALES
Cost of sales consists primarily of materials
costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs, employee compensation,
depreciation and related costs, which are directly attributable to production. Write-down of inventories to lower of cost or market
is also recorded in cost of sales, if any.
i. FOREIGN CURRENCY TRANSLATION
The Company maintains its books and accounting
records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has adopted FASB ASC
830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”).
All assets and liabilities are translated at the current rate. The stockholders’ equity accounts are translated at the appropriate
historical rate. Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.
Translation adjustments resulting from this
process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains
and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency
are included in the results of operations as incurred.
NOTE C – RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In January 2017, the FASB issued ASU 2017-03,
“
Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323)
”.
This pronouncement amends the SEC’s reporting requirements for public filers in regard to new accounting pronouncements or
existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented
an accounting standards update. Companies should disclose if they are unable to estimate the impact of a specific pronouncement,
and provide disclosures including a description of the effect on accounting policies that the registrant expects to apply. These
provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that
relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued
accounting pronouncement notes, where relevant for the corrections in FASB ASU 2017-03. The Company is implementing the updated
SEC requirements on not yet adopted accounting pronouncements with these consolidated financial statements.
NOTE D - RELATED PARTY TRANSACTIONS
The Company continues to purchase primarily
packaging materials from the Ruili Group. The Ruili Group is the minority stockholder of Joint Venture and is collectively controlled
by Mr. Xiao Ping Zhang, his wife, Ms. Shu Ping Chi, and his brother, Mr. Xiao Feng Zhang. In addition, the Company purchases automotive
components from four other related parties, Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd. (“Guangzhou
Kormee”), Ruian Kormee Automobile Braking Co., Ltd. (“Ruian Kormee”), Ruili MeiLian Air Management System (LangFang)
Co., Ltd. (“Ruili MeiLian”) and Shanghai Dachao Electric Technology Co., Ltd. (“Shanghai Dachao”). Guangzhou
Kormee and Ruili MeiLian are controlled by the Ruili Group and Ruian Kormee is the wholly-owned subsidiary of Guangzhou Kormee.
Ruili Group owns 49% equity interest in Shanghai Dachao. The Company sells certain automotive products to the Ruili Group. The
Company also sells scrap materials and parts to Guangzhou Kormee, Ruian Kormee and Ruili MeiLian.
The following related party transactions occurred
for the three and six months ended June 30, 2017 and 2016:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
989,679
|
|
|
$
|
294,970
|
|
|
$
|
1,325,606
|
|
|
$
|
687,894
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
|
401,132
|
|
|
|
226,591
|
|
|
|
756,803
|
|
|
|
357,104
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
1,373,241
|
|
|
|
—
|
|
|
|
2,156,311
|
|
|
|
—
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
—
|
|
|
|
—
|
|
|
|
55,230
|
|
|
|
33,744
|
|
Ruili Group Co., Ltd.
|
|
|
1,382,956
|
|
|
|
1,079,955
|
|
|
|
2,509,674
|
|
|
|
1,945,753
|
|
Total Purchases
|
|
$
|
4,147,008
|
|
|
$
|
1,601,516
|
|
|
$
|
6,803,624
|
|
|
$
|
3,024,495
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
972,084
|
|
|
$
|
1,026,611
|
|
|
$
|
1,749,441
|
|
|
$
|
1,644,457
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
|
12,187
|
|
|
|
—
|
|
|
|
12,187
|
|
|
|
573
|
|
Ruili MeiLian Air Management System (LangFang) Co.,Ltd
|
|
|
388,287
|
|
|
|
—
|
|
|
|
388,287
|
|
|
|
—
|
|
Ruili Group Co., Ltd.
|
|
|
900,859
|
|
|
|
3,968,105
|
|
|
|
3,927,783
|
|
|
|
6,548,951
|
|
Total Sales
|
|
$
|
2,273,417
|
|
|
$
|
4,994,716
|
|
|
$
|
6,077,698
|
|
|
$
|
8,193,981
|
|
During the
three and six months ended June 30, 2017 and 2016, for the sales mentioned above, the sales to Guangzhou Kormee, Ruian Kormee
and Ruili MeiLian were sales of scrap materials and parts, and the related operating results were included in other operating
income, net in the consolidated statements of income and comprehensive income. The sales to Ruili Group were included in
sales in the consolidated statements of income and comprehensive income.
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ACCOUNTS RECEIVABLE FROM RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
—
|
|
|
$
|
4,361,010
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
|
—
|
|
|
|
664,499
|
|
Total
|
|
$
|
—
|
|
|
$
|
5,025,509
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE AND BANK ACCEPTANCE NOTES TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
$
|
832,606
|
|
|
$
|
628,310
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
|
1,161,913
|
|
|
|
—
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
280
|
|
|
|
100,441
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd
|
|
|
2,069,195
|
|
|
|
1,224,956
|
|
Total
|
|
$
|
4,063,994
|
|
|
$
|
1,953,707
|
|
DUE TO RELATED PARTY
Due to related party consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Ruili Group Co., Ltd.
|
|
$
|
23,299,371
|
|
|
$
|
—
|
|
Total
|
|
$
|
23,299,371
|
|
|
$
|
—
|
|
The
balance of due to related party represents the loans the Company obtained from Ruili Group in the form of cash and bank
acceptance notes for working capital purposes. The loans owed to the related party are interest free, unsecured and repayable
on demand. During the six months ended
June 30, 2017, the Company obtained the loans in the amount of $62,786,671 in
cash and $14,375,855 in bank acceptance notes and repaid $54,076,148 in cash. The effect of changes in foreign exchange rate
is $212,993.
The Company entered into a lease agreement with Ruili Group, see
Note K for more details.
The Company provided a guarantee for the credit line granted to
Ruili Group by Bank of Ningbo in the amount of RMB 150,000,000 (approximately $21,623,180) for the period from May 30, 2016 to
May 14, 2017. As of June 30, 2017, the guarantee was released as the credit line was fully paid off by Ruili Group.
The Company provided a guarantee for the credit
line granted to Ruili Group by the China Merchants Bank in the amount of RMB 50,000,000 (approximately $7,699,889) for a period
from July 29, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line. The credit line
was replaced by the one issued by the same bank in the amount of RMB 40,000,000 (approximately $5,766,181) for a period of 12 months
starting on October 24, 2016, the guarantee of which was continued to be provided by the Company as of June 30, 2017.
The Company provided a guarantee for the credit
line granted to Ruili Group by China Guangfa Bank in the amount of RMB 200,000,000 (approximately $28,830,907) for the period from
May 22, 2016 to May 22, 2017. As of June 30, 2017, the guarantee was released as the credit line was fully paid off by Ruili Group.
The Company provided a guarantee for the credit
line granted to Ruili Group by China Guangfa Bank in a maximum amount of RMB 69,000,000 (approximately $10,092,000) for the period
from November 16, 2016 to November 16, 2018.
The Company provided a guarantee for the credit
line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 180,000,000 (approximately $26,328,000) for the period
from June 30, 2017 to June 30, 2020.
The Company has short term bank loans guaranteed
or pledged by related parties. See Note I for more details.
NOTE E - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable
|
|
$
|
133,548,015
|
|
|
$
|
113,815,711
|
|
Less: allowance for doubtful accounts
|
|
|
(12,352,152
|
)
|
|
|
(11,686,417
|
)
|
Accounts receivable, net
|
|
$
|
121,195,863
|
|
|
$
|
102,129,294
|
|
No customer individually accounted for more
than 10% of our revenues or accounts receivable for the six months ended June 30, 2017 and 2016. The changes in the allowance for
doubtful accounts at June 30, 2017 and December 31, 2016 are summarized as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
11,686,417
|
|
|
$
|
12,075,402
|
|
Add: increase to allowance
|
|
|
381,715
|
|
|
|
395,491
|
|
Effects on changes in foreign exchange rate
|
|
|
284,020
|
|
|
|
(784,476
|
)
|
Ending balance
|
|
$
|
12,352,152
|
|
|
$
|
11,686,417
|
|
NOTE F – INVENTORIES
At June 30, 2017 and December
31, 2016, inventories consisted of the following:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
21,829,534
|
|
|
$
|
20,121,513
|
|
Work-in-process
|
|
|
13,134,775
|
|
|
|
14,843,653
|
|
Finished goods
|
|
|
49,046,483
|
|
|
|
30,811,351
|
|
Total inventories
|
|
$
|
84,010,792
|
|
|
$
|
65,776,517
|
|
NOTE G - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the
following at June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery
|
|
$
|
103,063,924
|
|
|
$
|
87,694,677
|
|
Molds
|
|
|
1,288,032
|
|
|
|
1,257,841
|
|
Office equipment
|
|
|
2,097,303
|
|
|
|
2,021,982
|
|
Vehicles
|
|
|
2,980,904
|
|
|
|
2,246,203
|
|
Buildings
|
|
|
16,206,613
|
|
|
|
15,826,738
|
|
Leasehold improvements
|
|
|
469,572
|
|
|
|
458,566
|
|
Sub-total
|
|
|
126,106,348
|
|
|
|
109,506,007
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(61,209,111
|
)
|
|
|
(55,768,301
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
64,897,237
|
|
|
$
|
53,737,706
|
|
Depreciation expense charged to operations
was $4,041,628 and $3,265,445 for the six months ended June 30, 2017 and 2016, respectively.
In May 2016, the Company, through its principal
operating subsidiary, entered into a Purchase Agreement with Ruili Group, pursuant to which the Company agreed to exchange the
land use rights and factory facilities located at No. 1169 Yumeng Road, Rui'an Economic Development Zone, Rui'an City, Zhejiang
Province, the People's Republic of China (the “Dongshan Facility”), purchased in 2007 from Ruili Group, plus RMB 501.0
million (approximately $76.5 million) in cash for the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue,
Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, the People’s Republic of China (the “Development
Zone Faciliy”). As of the filing date, the Company has not obtained the property ownership certificate or land use right
certificate of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220)
for the Dongshan Facility and RMB 15.0 million (approximately $2.3 million) for the Development Zone Facility. These amounts were
determined based on a 3% tax rate on the consideration paid for the Dongshan Facility and the Development Zone Facility in the
transactions, which the Company considered as the most probable amount of tax liability.
NOTE H - DEFERRED TAX ASSETS
Deferred tax assets consisted of the following
as of June 30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,922,409
|
|
|
$
|
1,798,894
|
|
Revenue (net of cost)
|
|
|
26,995
|
|
|
|
76,719
|
|
Unpaid accrued expenses
|
|
|
216,951
|
|
|
|
357,352
|
|
Warranty
|
|
|
1,116,571
|
|
|
|
977,610
|
|
Deferred tax assets
|
|
|
3,282,926
|
|
|
|
3,210,575
|
|
Valuation allowance
|
|
|
―
|
|
|
|
―
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets - current
|
|
$
|
3,282,926
|
|
|
$
|
3,210,575
|
|
Deferred taxation is calculated under the liability
method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize
in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as the Company had no taxable
income for the reporting periods. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC
at the applicable tax rate.
NOTE I – SHORT-TERM BANK LOANS
Bank loans represented the following as of June
30, 2017 and December 31, 2016:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Secured
|
|
$
|
47,005,701
|
|
|
$
|
27,416,376
|
|
The Company obtained those short term loans from
Bank of China, Bank of Ningbo, Agricultural Bank of China, China Zheshang Bank, and China Construction Bank, respectively, to finance
general working capital as well as new equipment acquisition. Interest rate for the loans outstanding during the six months ended
June 30, 2017 ranged from 0.55% to 4.60% per annum. The maturity dates of the loans existing as of June 30, 2017 ranged from July
3, 2017 to June 14, 2018. As of June 30, 2017 and December 31, 2016, the Company’s accounts receivables of $4,480,490 and
$4,484,755, respectively, were pledged as collateral under loan arrangements. In addition, the Company also pledged bank acceptance
notes of $11,350,540 as collateral under loan arrangements, as of June 30, 2017. The interest expenses for short-term bank loans
were $542,176 and $82,431 for the three months ended June 30, 2017 and 2016, respectively. The interest expenses for short-term
bank loans were $1,003,088 and $158,129 for the six months ended June 30, 2017 and 2016, respectively.
As of June 30, 2017, corporate or personal guarantees
provided for those bank loans were as follows:
$
|
2,588,616
|
|
|
Guaranteed by Ruili Group, a related party
|
|
|
|
|
|
$
|
2,035,605
|
|
|
Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Ruili Group, a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders.
|
|
|
|
|
|
$
|
2,884,388
|
|
|
Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders.
|
|
|
|
|
|
$
|
6,889,171
|
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders.
|
|
|
|
|
|
$
|
11,350,540
|
|
|
Pledged by the Company with its bank acceptance notes.
|
|
|
|
|
|
$
|
11,809,164
|
|
|
Pledged by Hangzhou Ruili Zhiye Development Ltd., a related party under common control of Ruili Group, with its property. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both of who are the Company’s principal stockholders.
|
|
|
|
|
|
$
|
5,904,582
|
|
|
Pledged by the Company with its land and property. Guaranteed by Ruili Group, a related party, and Mr. Xiao Ping Zhang, who is the Company’s principal stockholder.
|
|
|
|
|
|
$
|
3,543,635
|
|
|
Pledged by the Company with its accounts receivable. Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms.
Shu Ping Chi, both of who are the Company's principal stockholders.
|
NOTE J - INCOME TAXES
The Joint Venture is registered in the PRC,
and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported
in the PRC statutory financial statements in accordance with relevant income tax laws.
In 2015, the Joint Venture was awarded the
Chinese government's "High-Tech Enterprise" designation for a third time, which is valid for three years and it
continues to be taxed at the 15% tax rate in 2015, 2016 and 2017.
The reconciliation of the effective income
tax rate of the Company to the statutory income tax rate in the PRC for the six months ended June 30, 2017 and 2016 is as follows:
|
|
Six Months Ended
June 30, 2017
|
|
|
Six Months Ended
June 30, 2016
|
|
US statutory income tax rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Valuation allowance recognized with respect to the loss in the US company
|
|
|
-35.00
|
%
|
|
|
-35.00
|
%
|
China statutory income tax rate
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
Effects of income tax exemptions and reliefs
|
|
|
-10.00
|
%
|
|
|
-10.0
|
%
|
Effects of additional deduction allowed for R&D expenses
|
|
|
-1.90
|
%
|
|
|
-3.16
|
%
|
Effects of expenses not deductible for tax purposes
|
|
|
0.63
|
%
|
|
|
0.51
|
%
|
Other items
|
|
|
1.66
|
%
|
|
|
0.37
|
%
|
Effective tax rate
|
|
|
15.39
|
%
|
|
|
12.72
|
%
|
Income taxes are calculated on a separate entity
basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit recorded for the
United States. The tax authority may examine the tax returns of the Company three years after the year ended December 31, 2015.
In the six months ended June 30, 2017, 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 six months ended June 30, 2017 and 2016, respectively,
are summarized as follows:
|
|
Six Months Ended
June 30, 2017
|
|
|
Six Months Ended
June 30, 2016
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
2,610,023
|
|
|
$
|
2,203,680
|
|
Deferred
|
|
|
(12,340
|
)
|
|
|
(961,227
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,597,683
|
|
|
$
|
1,242,453
|
|
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 June 30, 2017 and December 31,
2016.
NOTE K – OPERATING LEASE WITH RELATED
PARTY
In December 2006, Ruian entered into a lease
agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s
management personnel and staff, respectively. The lease term is from January 2013 to December 2016. This lease was amended in 2013,
with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB2,100,000 (approximately $333,688).
The lease expenses were $487,794 and $796,829
for the six months ended June 30, 2017 and 2016, respectively.
NOTE L - WARRANTY CLAIMS
Warranty claims were $1,416,614 and $1,172,033
for the six months ended June 30, 2017 and 2016, respectively. Warranty claims are classified as accrued expenses on the balance
sheet. The movement of accrued warranty expenses for the six months ended June 30, 2017 was as follows:
Beginning balance at January 1, 2017
|
|
$
|
6,517,402
|
|
Aggregate increase for new warranties issued during current period
|
|
|
1,416,614
|
|
Aggregate reduction for payments made
|
|
|
(657,227
|
)
|
Effect of exchange rate fluctuation
|
|
|
167,016
|
|
Ending balance at June 30, 2017
|
|
$
|
7,443,805
|
|
NOTE M – SEGMENT INFORMATION
The Company produces brake systems and other
related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”). On August
31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the passenger
vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition, the
Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related
auto parts.
The Company has two operating segments: Commercial
Vehicle Brake Systems and Passenger Vehicle Brake Systems.
For the reporting periods, all of the Company’s
long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets in the United States for
the reporting periods.
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
136,869,275
|
|
|
$
|
103,378,620
|
|
Passenger vehicles brake systems
|
|
|
27,241,136
|
|
|
|
23,993,840
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
164,110,411
|
|
|
$
|
127,372,460
|
|
|
|
|
|
|
|
|
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles brake systems
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
36,979,900
|
|
|
$
|
28,771,643
|
|
Passenger vehicles brake systems
|
|
|
7,275,092
|
|
|
|
6,261,852
|
|
Gross profit
|
|
$
|
44,254,992
|
|
|
$
|
35,033,495
|
|
Selling and distribution expenses
|
|
|
14,594,185
|
|
|
|
12,687,517
|
|
General and administrative expenses
|
|
|
8,755,435
|
|
|
|
11,838,987
|
|
Research and development expenses
|
|
|
4,536,659
|
|
|
|
4,123,649
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
2,042,324
|
|
|
|
2,399,144
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
18,411,037
|
|
|
|
8,782,486
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
22,025
|
|
|
|
1,013,688
|
|
Government grants
|
|
|
113,304
|
|
|
|
145,012
|
|
Other income
|
|
|
714
|
|
|
|
890,754
|
|
Interest expenses
|
|
|
(1,023,336
|
)
|
|
|
(300,573
|
)
|
Other expenses
|
|
|
(650,139
|
)
|
|
|
(767,292
|
)
|
Income before income tax expense
|
|
$
|
16,873,605
|
|
|
$
|
9,764,075
|
|
|
|
|
|
|
|
|
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
24,631,178
|
|
|
$
|
5,914,317
|
|
Passenger vehicles brake systems
|
|
|
4,930,415
|
|
|
|
1,400,730
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
29,561,593
|
|
|
$
|
7,315,047
|
|
|
|
|
|
|
|
|
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
3,489,621
|
|
|
$
|
2,792,836
|
|
Passenger vehicles brake systems
|
|
|
698,190
|
|
|
|
643,841
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,187,811
|
|
|
$
|
3,436,677
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
313,772,565
|
|
|
$
|
248,023,179
|
|
Passenger vehicles brake systems
|
|
|
57,731,774
|
|
|
|
53,304,945
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
371,504,339
|
|
|
$
|
301,328,124
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
75,845,257
|
|
|
$
|
51,080,332
|
|
Passenger vehicles brake systems
|
|
|
13,954,953
|
|
|
|
10,978,145
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
89,800,210
|
|
|
$
|
62,058,477
|
|
NOTE N – CONTINGENCIES
(1) The Company purchased the Dongshan Facility
from Ruili Group in 2007 and subsequently transferred the plants and land use right to Ruili Group. The Company has never obtained
the land use right certificate nor the property ownership certificate of the building for the Dongshan Facility. The Company reserved
the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount was determined based on a 3% tax rate on the consideration
paid for the Dongshan Facility in the transaction, which the Company considered as the most probable amount of tax liability. The
Dongshan Facility was transferred back to Ruili Group on May 5, 2016.
(2) The information of lease commitments is provided
in Note K.
(3) The information of guarantees and assets pledged
is provided in Note D.
NOTE O – SUBSEQUENT EVENTS
On July 4, 2017, Ruian, a subsidiary of the Company, obtained
the plants and associated land use rights it purchased from Yunding Holding Group Co., Ltd. in cash at a purchase price of RMB60.06
million (approximately US$8.87 million). The related stamp duty and deed tax were also fully paid by the Company as of June 30,
2017. The plants and associated land use rights will be used to meet Ruian's growing operational needs and is located in International
Auto Parts District (east district), Tangxia Town, Ruian City, Zhejiang Province, China with a land use area of 33,141.00 square
meters and a building floor area of 25,016.11 square meters. The land use rights will expire on March 23, 2046. The total cash
payments are included as prepayments, non-current in the accompanying unaudited consolidated balance sheets.
During the subsequent period,
the Company obtained totaling approximately $15,794,000 short term loans from Bank of China, Agricultural Bank of China,
Oversea-Chinese Banking Corp., and China Construction Bank to finance general working capital as well as new non-current
assets acquisitions. Interest rates for those loans range from 2.75% to 4.39% per annum. The maturity dates of the loans
existing as of the filing date ranged from December 9, 2017 to August 8, 2018. As of the filing date, the Company pledged
accounts receivable and bank acceptance notes of approximately $2,273,000 and $3,690,000, respectively, as collateral under
the above loan arrangements.
In the same period, the Company repaid loan principals as well
as interests of totaling approximately $5,014,000 to Bank of China and Agricultural Bank of China.