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
|
The Company uses the accrual method of accounting
for financial statement and tax return purposes.
The preparation of financial statements in conformity
with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods. Management makes its best estimate of the outcome for
these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates
are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information
becomes available to management. Actual results could differ from those estimates.
|
c.
|
FAIR VALUE OF FINANCIAL
INSTRUMENTS
|
For certain of the Company’s financial
instruments, including cash and cash equivalents, restricted cash, accounts receivable, bank acceptance notes from customers,
inventories, current prepayments, other current assets, accounts payable and bank acceptance notes to vendors, short term bank
loans, deposit received from customers, income tax payable, accrued expenses, and other current liabilities, the carrying amounts
approximate fair values due to their short maturities.
Transactions involving related parties
cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings
may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions
were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.
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 FROM CUSTOMERS
|
Bank acceptance notes from customers generally
due within six months are issued by some customers to pay certain outstanding receivable balances to the Company with specific
payment terms and definitive due dates. Bank acceptance notes from customers do not bear interest. As of March 31, 2017 and December
31, 2016, bank acceptance notes from customers in the amount of $34,621,628 and $32,916,198, respectively, were pledged to endorsing
banks to issue bank acceptance notes. The banks charge discount fees if the Company chooses to discount the bank acceptance notes
from customers for cash before the maturity of the notes and such discount fees are included in interest expenses.
Revenue from the sale of goods is recognized
when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided by several factors,
including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales price is fixed and
determinable, and collection is probable. Revenue consists of the invoice value for the sale of goods and services net of value-added
tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement
is the net sales.
Cost of sales consists primarily of materials
costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs, employee compensation,
depreciation and related costs, which are directly attributable to production. Write-down of inventories to lower of cost or market
is also recorded in cost of sales, if any.
|
i
.
|
FOREIGN CURRENCY TRANSLATION
|
The Company maintains its books and accounting
records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has adopted FASB ASC
830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”).
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 and Ruian Kormee.
The following related party
transactions occurred for the three months ended March 31, 2017 and 2016:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
PURCHASES FROM:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
335,927
|
|
|
$
|
392,924
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
|
355,671
|
|
|
|
130,513
|
|
Ruili MeiLian Air Management System (LangFang) Co.,Ltd.
|
|
|
783,070
|
|
|
|
—
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
55,230
|
|
|
|
33,744
|
|
Ruili Group Co., Ltd.
|
|
|
1,126,718
|
|
|
|
865,798
|
|
Total Purchases
|
|
$
|
2,656,616
|
|
|
$
|
1,422,979
|
|
|
|
|
|
|
|
|
|
|
SALES TO:
|
|
|
|
|
|
|
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
$
|
777,357
|
|
|
$
|
617,846
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
|
—
|
|
|
|
573
|
|
Ruili Group Co., Ltd.
|
|
|
3,026,924
|
|
|
|
2,580,846
|
|
Total Sales
|
|
$
|
3,804,281
|
|
|
$
|
3,199,265
|
|
During the three months
ended March 31, 2017 and 2016, for the sales mentioned above, the sales to Guangzhou Kormee and Ruian Kormee were sales of scrap
materials and the related operating results were included in other operating income, net in the consolidated statements of income
and comprehensive income. The sales to Ruili Group were included in sales in the consolidated statements of income and comprehensive
income.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
ACCOUNTS RECEIVABLE FROM RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
—
|
|
|
$
|
4,361,010
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
|
—
|
|
|
|
664,499
|
|
Total
|
|
$
|
—
|
|
|
$
|
5,025,509
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE AND BANK ACCEPTANCE NOTES TO RELATED PARTIES
|
|
|
|
|
|
|
|
|
Ruian Kormee Automobile Braking Co., Ltd.
|
|
$
|
801,409
|
|
|
$
|
628,310
|
|
Guangzhou Kormee Automotive Electronic Control Technology Co., Ltd.
|
|
|
1,133,781
|
|
|
|
—
|
|
Shanghai Dachao Electric Technology Co., Ltd.
|
|
|
6,820
|
|
|
|
100,441
|
|
Ruili MeiLian Air Management System (LangFang) Co., Ltd.
|
|
|
1,771,012
|
|
|
|
1,224,956
|
|
Ruili Group Co., Ltd.
|
|
|
2,521,889
|
|
|
|
—
|
|
Total
|
|
$
|
6,234,911
|
|
|
$
|
1,953,707
|
|
|
|
|
|
|
|
|
|
|
OTHER PAYABLES TO RELATED PARTY
|
|
|
|
|
|
|
|
|
Ruili Group Co., Ltd.
|
|
$
|
117,723
|
|
|
$
|
—
|
|
Total
|
|
$
|
117,723
|
|
|
$
|
—
|
|
The Company collects
dormitory utility fees from employees and pays to Ruili Group periodically which is recorded as other payables. As of March 31,
2017 and December 31, 2016, the payable balance was $117,723 and $0, respectively.
The Company entered
into several lease agreements with related parties. See Note K for more details.
The Company provided
a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in the amount of RMB 150,000,000 (approximately $21,623,180)
for the period from May 30, 2016 to May 14, 2017. As of the filing date, Ruili Group was negotiating with the bank to extend the
credit line and the Company would continue to provide guarantee for the extended credit line.
The Company provided
a guarantee for the credit line granted to Ruili Group by the China Merchants Bank in the amount of RMB 50,000,000 (approximately
$7,699,889) for a period from July 29, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the
credit line. The credit line was replaced by the one issued by the same bank in the amount of RMB 40,000,000 (approximately $5,766,181)
for a period of 12 months starting on October 24, 2016, the guarantee of which was continued to be provided by the Company.
The Company has short
term bank loans guaranteed or pledged by related parties. See Note I for more details.
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.
NOTE E - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Accounts receivable
|
|
$
|
116,594,836
|
|
|
$
|
113,815,711
|
|
Less: allowance for doubtful accounts
|
|
|
(11,750,275
|
)
|
|
|
(11,686,417
|
)
|
Accounts receivable, net
|
|
$
|
104,844,561
|
|
|
$
|
102,129,294
|
|
No customer individually accounted for more
than 10% of our revenues or accounts receivable for the three months ended March 31, 2017 and 2016. The changes in the allowance
for doubtful accounts at March 31, 2017 and December 31, 2016 are summarized as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Beginning balance
|
|
$
|
11,686,417
|
|
|
$
|
12,075,402
|
|
Add: increase to allowance
|
|
|
—
|
|
|
|
395,491
|
|
Less: accounts written off
|
|
|
—
|
|
|
|
—
|
|
Effects on changes in foreign exchange rate
|
|
|
63,858
|
|
|
|
(784,476
|
)
|
Ending balance
|
|
$
|
11,750,275
|
|
|
$
|
11,686,417
|
|
NOTE F - INVENTORIES
At March 31, 2017 and December 31, 2016, inventories
consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Raw materials
|
|
$
|
16,220,912
|
|
|
$
|
20,121,513
|
|
Work-in-process
|
|
|
14,586,579
|
|
|
|
14,843,653
|
|
Finished goods
|
|
|
40,937,874
|
|
|
|
30,811,351
|
|
Less: write-down of inventories
|
|
|
—
|
|
|
|
—
|
|
Total inventories
|
|
$
|
71,745,365
|
|
|
$
|
65,776,517
|
|
NOTE G - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consisted of the
following at March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Machinery
|
|
$
|
90,559,680
|
|
|
$
|
87,694,677
|
|
Molds
|
|
|
1,264,714
|
|
|
|
1,257,841
|
|
Office equipment
|
|
|
2,049,011
|
|
|
|
2,021,982
|
|
Vehicles
|
|
|
2,661,084
|
|
|
|
2,246,203
|
|
Buildings
|
|
|
15,913,220
|
|
|
|
15,826,738
|
|
Leasehold improvements
|
|
|
461,071
|
|
|
|
458,566
|
|
Sub-total
|
|
|
112,908,780
|
|
|
|
109,506,007
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated depreciation
|
|
|
(58,022,928
|
)
|
|
|
(55,768,301
|
)
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
54,885,852
|
|
|
$
|
53,737,706
|
|
Depreciation expense charged to operations was
$1,944,565 and $1,638,817 for the three months ended March 31, 2017 and 2016, respectively.
In May 2016, the Company, through its principal
operating subsidiary, entered into a Purchase Agreement with Ruili Group, pursuant to which the Company agreed to exchange the
land use rights and factory facilities located at No. 1169 Yumeng Road, Rui'an Economic Development Zone, Rui'an City, Zhejiang
Province, the People's Republic of China (the “Dongshan Facility”), purchased in 2007 from Ruili Group, plus RMB 501
million (approximately $76.5 million) in cash for the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue,
Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, the People’s Republic of China (the “Development
Zone Faciliy”). As of the filing date, the Company has not obtained the property ownership certificate or land use right
certificate of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220)
for the Dongshan Facility and RMB 15.0 million (approximately $2.3 million) for the Development Zone Facility. These amounts were
determined based on a 3% tax rate on the consideration paid for the Dongshan Facility and the Development Zone Facility in the
transactions, which the Company considered as the most probable amount of tax liability.
NOTE H - DEFERRED TAX ASSETS
Deferred tax assets consisted of the following
as of March 31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Deferred tax assets - current
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
1,754,918
|
|
|
$
|
1,798,894
|
|
Revenue (net of cost)
|
|
|
92,062
|
|
|
|
76,719
|
|
Unpaid accrued expenses
|
|
|
344,876
|
|
|
|
357,352
|
|
Warranty
|
|
|
1,027,787
|
|
|
|
977,610
|
|
Deferred tax assets
|
|
|
3,219,643
|
|
|
|
3,210,575
|
|
Valuation allowance
|
|
|
―
|
|
|
|
―
|
|
Deferred tax assets - current
|
|
$
|
3,219,643
|
|
|
$
|
3,210,575
|
|
Deferred taxation is calculated under the liability
method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize
in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as the Company had no taxable
income for the reporting period. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC
at the applicable tax rate.
NOTE I - SHORT-TERM BANK LOANS
Bank loans represented the following as of March
31, 2017 and December 31, 2016:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
Secured
|
|
$
|
48,871,970
|
|
|
$
|
27,416,376
|
|
The Company obtained those short term loans from
Bank of China, Bank of Ningbo, Agricultural Bank of China, China Zheshang Bank, and China Construction Bank, respectively, to finance
general working capital as well as new equipment acquisition. Interest rate for the loans outstanding during the three months ended
March 31, 2017 ranged from 0.55% to 4.48% per annum. The maturity dates of the loans existing as of March 31, 2017 ranged from
April 28, 2017 to March 9, 2018. As of March 31, 2017 and December 31, 2016, the Company’s accounts receivable of $8,668,980
and $4,484,755, respectively, were pledged as collateral under loan arrangements. In addition, the Company also pledged bank acceptance
notes of $10,712,681 as collateral under loan arrangements, as of March 31, 2017. The interest expense for short-term bank loans
were $460,912 and $75,698 for the three months ended March 31, 2017 and 2016, respectively.
As of March 31, 2017, corporate or personal guarantees provided
for those bank loans were as follows:
$
|
1,998,753
|
|
|
Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Ruili Group, a related party, and Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$
|
2,832,171
|
|
|
Pledged by Ruili Group, a related party, with its land and buildings. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$
|
14,358,993
|
|
|
Guaranteed by Ruili Group, a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$
|
5,824,852
|
|
|
Guaranteed by Ruili Group, a related party.
|
|
|
|
|
|
$
|
7,247,112
|
|
|
Pledged by Hangzhou Ruili Zhiye Development Ltd., a related party under common control of Ruili Group, with its property. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
|
|
|
|
|
|
$
|
10,712,681
|
|
|
Pledged by the Company with its bank acceptance notes.
|
|
|
|
|
|
$
|
5,897,408
|
|
|
Pledged by the Company with its accounts receivable.
|
NOTE J - INCOME TAXES
The Joint Venture is registered
in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income
as reported in the PRC statutory financial statements in accordance with relevant income tax laws.
In 2015, the Joint Venture
was awarded the Chinese government's "High-Tech Enterprise" designation for a third time, which is valid for three
years and it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017.
The reconciliation of the effective income tax
rate of Ruian to the statutory income tax rate in the PRC for the three months ended March 31, 2017 and 2016 is as follows:
|
|
Three Months Ended
March 31, 2017
|
|
|
Three Months Ended
March 31, 2016
|
|
US statutory income tax rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Valuation allowance recognized with respect to the loss in the US company
|
|
|
-35.00
|
%
|
|
|
-35.00
|
%
|
China statutory income tax rate
|
|
|
25.00
|
%
|
|
|
25.00
|
%
|
Effects of income tax exemptions and reliefs
|
|
|
-10.00
|
%
|
|
|
-10.00
|
%
|
Effects of additional deduction allowed for R&D expenses
|
|
|
-2.14
|
%
|
|
|
-29.48
|
%
|
Expenses not deductible for tax purpose
|
|
|
0.62
|
%
|
|
|
6.63
|
%
|
Other items
|
|
|
0.84
|
%
|
|
|
—
|
|
Effective tax rate
|
|
|
14.32
|
%
|
|
|
-7.85
|
%
|
Income taxes are calculated on a separate
entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit
recorded for the United States. The tax authority may examine the tax returns of the Company three years after the year ended December,
31, 2015. In the three months ended March 31, 2017 and 2016, there were no penalties and interest, which generally are recorded
in the general and administrative expenses or in the tax expenses. The provisions for income taxes for the three months ended March
31, 2017 and 2016, respectively, are summarized as follows:
|
|
Three Months Ended
March 31, 2017
|
|
|
Three Months Ended
March 31, 2016
|
|
Current
|
|
$
|
1,294,627
|
|
|
$
|
561,978
|
|
Deferred
|
|
|
(8,453
|
)
|
|
|
(596,802
|
)
|
Total
|
|
$
|
1,286,174
|
|
|
$
|
(34,824
|
)
|
ASC 740-10 requires recognition and measurement
of uncertain income tax positions using a “more-likely-than-not” approach. The management evaluated the Company’s
tax positions and considered that no provision for uncertainty in income taxes was necessary as of March 31, 2017 and December
31, 2016.
NOTE K – OPERATING LEASES WITH RELATED PARTIES
In December 2006, Ruian
entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings
are for Ruian’s management personnel and staff, respectively. The lease term is from January 2013 to December 2016. This
lease was amended in 2013 with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB2,100,000
(approximately $333,688).
The lease expenses were $75,887 and $422,611
for the three months ended March 31, 2017 and 2016, respectively.
NOTE L - WARRANTY CLAIMS
Warranty claims were $637,874 and $495,385 for
the three months ended March 31, 2017 and 2016, respectively. Warranty claims are classified as accrued expenses on the balance
sheet. The movement of accrued warranty expenses for the three months ended March 31, 2017 was as follows:
Beginning balance at January 1, 2017
|
|
$
|
6,517,402
|
|
Aggregate increase for new warranties issued during current period
|
|
|
637,874
|
|
Aggregate reduction for payments made
|
|
|
(339,795
|
)
|
Effect of exchange rate fluctuation
|
|
|
36,431
|
|
Ending balance at March 31, 2017
|
|
$
|
6,851,912
|
|
NOTE M – SEGMENT INFORMATION
The Company produces brake
systems and other related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”).
On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased, a segment of the
passenger vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition,
the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related
auto parts.
The Company has two operating
segments: Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems.
For the reporting periods,
all of the Company’s long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets
in the United States for the reporting periods.
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
SALES TO EXTERNAL CUSTOMERS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
60,676,304
|
|
|
$
|
44,080,072
|
|
Passenger vehicles brake systems
|
|
|
13,219,477
|
|
|
|
9,756,656
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
73,895,781
|
|
|
$
|
53,836,728
|
|
INTERSEGMENT SALES
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
—
|
|
|
$
|
—
|
|
Passenger vehicles brake systems
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Intersegment sales
|
|
$
|
—
|
|
|
$
|
—
|
|
GROSS PROFIT
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
16,400,238
|
|
|
$
|
11,960,732
|
|
Passenger vehicles brake systems
|
|
|
4,147,467
|
|
|
|
2,478,347
|
|
Gross profit
|
|
$
|
20,547,705
|
|
|
$
|
14,439,079
|
|
Selling and distribution expenses
|
|
|
5,608,623
|
|
|
|
5,562,432
|
|
General and administrative expenses
|
|
|
4,044,913
|
|
|
|
6,929,858
|
|
Research and development expenses
|
|
|
2,055,096
|
|
|
|
1,743,687
|
|
|
|
|
|
|
|
|
|
|
Other operating income, net
|
|
|
788,468
|
|
|
|
914,205
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,627,541
|
|
|
|
1,117,307
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
10,550
|
|
|
|
88,102
|
|
Government grants
|
|
|
28,909
|
|
|
|
4,757
|
|
Other income
|
|
|
664
|
|
|
|
45,589
|
|
Interest expenses
|
|
|
(481,160
|
)
|
|
|
(174,460
|
)
|
Other expenses
|
|
|
(207,531
|
)
|
|
|
(637,629
|
)
|
Income before income tax provision (benefit)
|
|
$
|
8,978,973
|
|
|
$
|
443,666
|
|
CAPITAL EXPENDITURE
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
11,758,957
|
|
|
$
|
1,021,063
|
|
Passenger vehicles brake systems
|
|
|
2,562,024
|
|
|
|
225,961
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,320,981
|
|
|
$
|
1,247,024
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
1,656,343
|
|
|
$
|
1,419,696
|
|
Passenger vehicles brake systems
|
|
|
360,881
|
|
|
|
314,178
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,017,224
|
|
|
$
|
1,733,874
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
TOTAL ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
269,003,175
|
|
|
$
|
248,023,179
|
|
Passenger vehicles brake systems
|
|
|
58,609,996
|
|
|
|
53,304,945
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
327,613,171
|
|
|
$
|
301,328,124
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
LONG LIVED ASSETS
|
|
|
|
|
|
|
|
|
Commercial vehicles brake systems
|
|
$
|
51,876,467
|
|
|
$
|
51,080,332
|
|
Passenger vehicles brake systems
|
|
|
11,302,764
|
|
|
|
10,978,145
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
63,179,231
|
|
|
$
|
62,058,477
|
|
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.
|