UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended - December 31, 2019
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from
Commission file number 000-11991
SORL AUTO PARTS, INC.
(Name of Registrant in Its Charter)
| DELAWARE | 30-0091294 | |
| (State
or Other jurisdiction of Incorporation or Organization) |
(I.R.S.
Employer Identification No.) |
NO. 2666 KaiFaqu Avenue,
Ruili Industry Area,
RUIAN CITY, ZHEJIANG PROVINCE 325200
PEOPLE’S REPUBLIC OF CHINA
(Address of Principal Executive Offices, Including Zip Code.)
86-577-65817720
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| TITLE OF EACH CLASS | NAME
OF EACH | |
| COMMON STOCK: $0.002 PAR VALUE | NASDAQ GLOBAL MARKET |
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by referenced in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated Filer ☒ | Smaller Reporting Company ☒ |
| Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
State registrant’s revenues for its most recent fiscal year December 31, 2019: $540,188,479.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity as of the last business day of registrant’s most recently completed second fiscal quarter. As of June 30, 2019, the value was approximately $28.0 million.
State the number of shares outstanding of each of the registrant’s classes of common equity: 19,304,921 shares immediately prior to the completion of the Going Private transaction on May 15, 2020, and 1 share immediately after such completion.
DOCUMENTS INCORPORATED BY REFERENCE
None.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report on Form 10-K of SORL Auto Parts, Inc., other than historical facts, may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend for all such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Securities Act and the Exchange Act, as applicable by law. Such statements include, in particular, statements about our plans, strategies and prospects, and are subject to certain risks and uncertainties, as well as known and unknown risks, which could cause actual results to differ materially from those projected or anticipated. Therefore, such statements are not intended to be a guarantee of our performance in future periods. Such forward-looking statements can generally be identified by our use of forward-looking terminology such as “may,” “will,” “would,” “could,” “should,” “expect,” “intend,” “anticipate,” “estimate,” “believe,” “continue,” or other similar words. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date this Annual Report on Form 10-K is filed with the Securities and Exchange Commission, or SEC. We make no representation or warranty (express or implied) about the accuracy of any such forward-looking statements contained in this Annual Report on Form 10-K, and we do not undertake to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
Forward-looking statements that were true at the time made may ultimately prove to be incorrect or false. We caution investors not to place undue reliance on forward-looking statements, which reflect our management’s view only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results. The forward-looking statements should be read in light of the risk factors identified in the Item 1A. Risk Factors section of this Annual Report on Form 10-K.
TABLE OF CONTENTS
i
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
Incorporated on March 24, 1982, SORL Auto Parts, Inc. is a Delaware corporation. Through its 90% ownership of the Ruili Group Ruian Auto Parts Co., Ltd., a Sino-Foreign joint venture (the “Joint Venture”), SORL Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”) develops, manufactures and distributes automotive brake systems and other key safety related auto parts to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and abroad. The Company’s products are used in different types of commercial vehicles, such as trucks and buses. Automotive brake systems and other key safety related auto parts are critical components that ensure driving safety.
The Joint Venture was formed in the People’s Republic of China (“PRC” or “China”) as a Sino-Foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement (the “JV Agreement”) between the Ruili Group Co., Ltd. (the “Ruili Group”) and Fairford Holdings Limited (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was incorporated in China in 1987 and specialized in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture, which totaled $7.1 million.
On January 19, 2004 the Joint Venture acquired the business segment of the Ruili Group relating to manufacture and sale of various kinds of valves for automotive brake systems and related operations (the “Transferred Business”). The Ruili Group began its automotive air brake valve business in 1987. The acquisition was accomplished by a transfer from the Ruili Group to Fairford of relevant assets and liabilities of the Transferred Business including trade receivables, inventories and machineries, and the assumption of short and long term borrowings for a purchase price of $6,390,000. The consideration was based on a valuation provided by Rui’an Ruiyang Assets Valuation Co., Ltd., an independent PRC valuation firm. Fairford then transferred these assets and liabilities to the Joint Venture as consideration for its 90% ownership interest of the Joint Venture. The Ruili Group transferred inventory as its capital contribution for its 10% interest in the Joint Venture. The assets and liabilities transferred to the Joint Venture by Fairford and the Ruili Group represented all the assets and liabilities of the Transferred Business. Certain historical information of the Transferred Business is based on the operation of the Transferred Business when it was owned by the Ruili Group.
On November 30, 2006, the Company completed a follow-on public offering of 4,285,714 shares of common stock at $7.25 per share. Gross proceeds were approximately $31.1 million. Net proceeds after approximately $2.2 million of underwriters’ commissions and approximately $0.7 million of related offering expenses were approximately $28.2 million. On December 13, 2006, Maxim Group LLC, the lead underwriter of offering, exercised its over-allotment option in full to purchase an additional 642,857 shares of common stock. After deduction of underwriter’s discount of approximately $0.3 million, the Company received approximately $4.3 million. The aggregate net proceeds to the Company of this offering were approximately $32.5 million, which included the approximate $4.3 million as a result of the exercise of the over-allotment option granted to the underwriters.
On December 8 and 26, 2006, pursuant to the terms of the Joint Venture Agreement, as revised, through Fairford, the Company invested $32.67 million in its operating subsidiary, the Joint Venture. To maintain its 10% interest in the Joint Venture, the Ruili Group increased its capital investment by $3.63 million. Accordingly, the Company continued to hold a 90% controlling interest in the operating subsidiary. Pursuant to the JV Agreement and the Joint Venture Agreement, as revised, the total paid-in capital of the Joint Venture increased from $7.1 million to $43.4 million.
On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR, a Hong Kong-based global auto parts distribution specialty firm and an unaffiliated Taiwanese individual investor. The new joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. Fairford holds a 60% interest in SIH, MGR holds a 30% interest, and the Taiwanese individual investor holds a 10% interest. SIH is primarily devoted to expanding SORL’s international sales network in the Asia-Pacific region and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese individual investor for US$77 (HK$600), and the share transfer was approved by the Hong Kong authorities on January 14, 2016. After this transaction, SIH ceased to be a distributor of SORL in the international market.
1
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 approximately $9.4 million in its operating subsidiary, the Joint Venture. To maintain its 10% interest in the Joint Venture, the Ruili Group increased its capital investment by approximately $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, a related party under common control. 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 basis 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 Ruili Group. 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 Ruili Group other than as 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 Company accounted for the acquisition as a transaction between the entities under common control because Mr. Xiao Ping Zhang, the Chairman and CEO of the Company owns 63% of the registered capital of the Ruili Group, and, together with his wife (Ms. Shu Ping Chi) and brother (Mr. Xiao Feng Zhang), owns approximately 58.8% of the outstanding common stock of SORL. As a result, the Company accounted for the acquisition using the historical costs of the financial statements of the Ruili Group. The consolidated financial statements have been prepared as if the acquisition took place at the earliest time presented, that is, as of January 1, 2009. The asset purchase was deemed to be the acquisition of a business.
On October 30, 2015, Mr. Xiao Ping Zhang, the Chairman and CEO of the Company, together with his wife (Ms. Shu Ping Chi) and brother (Mr. Xiao Feng Zhang) (collectively, the “Consortium”) submitted a non-binding proposal (the “Proposal”) to the board of directors of the Company proposing to acquire all of the outstanding shares of the Company’s common stock not already owned by the Consortium at a price of $2.84 per share in cash and if successful in that acquisition, to cause the Company’s common stock to be delisted from NASDAQ and to be deregistered under the Securities Exchange Act of 1934, as amended. The board of directors subsequently formed a special committee (the “Special Committee”) consisting of independent directors to evaluate the Proposal. On January 8, 2016, the Consortium sent a letter to the Special Committee withdrawing the Proposal citing concerns over recent market conditions.
On May 5, 2016, through its principal operating subsidiary, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with the Ruili Group, a related party under common control, pursuant to which the Company agreed to purchase 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 Facility”). In exchange for the Development Zone Facility, the Company agreed to transfer to the Ruili Group the land use rights and factory facilities of the Dongshan Facility owned by the company, plus RMB 501,000,000 (approximately $76,533,000) in cash.
The cash consideration in the amount of RMB 481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments before June 30, 2016, and the remaining RMB 20,000,000 (approximately $3,016,000) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and the land use right as specified in the Purchase Agreement. Before the transaction, the Company was leasing 89,229 square meters of the Development Zone Facility from Ruili Group for its brake systems business, which lease was scheduled to expire on December 31, 2018. This lease was terminated upon the completion of the purchase. The transaction was approved by a committee of independent directors of the Company based on the valuation reports of a real estate appraisal firm.
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On April 26, 2019, the Company announced its receipt of a preliminary non-binding proposal letter (the “Proposal”), dated April 25, 2019, from Mr. Xiaoping Zhang, Chairman and Chief Executive Officer of the Company, Ms. Shuping Chi and Mr. Xiaofeng Zhang, directors of the Company and Ruili Group Co., Ltd. (together, the “Consortium”), to acquire all of the outstanding shares of common stock of the Company not already owned by the Consortium (the “Going Private” transaction).
On May 21, 2019, the Board of Directors of the Company formed a special committee (the “Special Committee”) of independent directors consisting of Mr. Xiao Lin and Mr. Binghua Feng, with Mr. Lin as the Chairman of the Special Committee, to evaluate the Proposal.
On November 29, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Ruili International Inc. (“Parent”), a Delaware corporation, and Ruili International Merger Sub Inc. (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of Parent. Parent was formed by Mr. Xiaoping Zhang solely for the purpose of entering into the Merger Agreement and consummating the Going Private transaction contemplated thereby. Pursuant to the Merger Agreement, subject to the terms and conditions thereof, at the effective time , Merger Sub will be merged with and into the Company (the “Merger”), with the Company being the surviving corporation, and each share of common stock of the Company issued and outstanding immediately prior to the effective time of the Merger will be automatically cancelled and converted into the right to receive $4.72 in cash (the “Merger Consideration”) without interest, except for (i) shares of common stock beneficially owned by members of the Consortium, Parent, Merger Sub or their respective affiliates, which will be automatically cancelled for no consideration at the effective time of the Merger, and (ii) shares of common stock held by stockholders who have not voted in favor of the Merger and who have properly and validly perfected and not effectively withdrawn or lost their statutory rights of appraisal in accordance with Section 262 of the General Corporation Law of the State of Delaware (“Section 262”), which will be automatically cancelled at the effective time of the Merger and will cease to have any rights with respect thereto, except the right to receive payment of the appraised value of such shares to be determined in accordance with the provisions of Section 262.
On May 8, 2020, a special meeting of the stockholders (the “Special Meeting”) was held and as of the record date of April 2, 2020, the Company had 19,304,921 shares of common stock outstanding that are entitled to vote, of which 15,393,221 shares, representing approximately 79.74% of the outstanding shares entitled to vote, voted in favor of the proposal to adopt the Merger Agreement. Specifically, 4,033,818 shares, representing approximately 50.77% of the outstanding share of common stock entitled to vote owned by the unaffiliated stockholders, voted in favor of the proposal to adopt the Merger Agreement, satisfying the majority of unaffiliated stockholders voting requirement set forth in the Merger Agreement.
On May 15, 2020, the Company completed the Merger, pursuant to the terms of the Merger Agreement by and among the Company, Parent and Merger Sub. As a result of the Merger, the Company became a wholly owned subsidiary of Parent. The aggregate consideration paid in connection with the Merger was approximately $37.5 million. The consideration was funded through equity contributions in cash as contemplated by the equity commitment letter, dated as of November 29, 2019, between Parent and Ruili Group Co., Ltd. Pursuant to the terms of the Merger Agreement, each share of Company Common Stock issued and outstanding immediately prior to the effective time of the Merger, other than shares held by Parent (representing shares contributed to Parent by Mr. Xiaoping Zhang, Ms. Shuping Chi and Mr. Xiaofeng Zhang) which shares have been cancelled for no consideration, was canceled and automatically converted into the right to receive $4.72 per share in cash, without interest. In connection with the consummation of the Merger on May 15, 2020, the following individuals submitted their resignations and ceased to be members of the board of directors of the Company: Xiaofeng Zhang, Shuping Chi, Binghua Feng, Huilin Wang, Jianghua Feng, Jinbao Liu, Xiao Lin and Yuhong Li. Xiaoping Zhang remains as the Company’s sole director following the consummation of the Merger.
3
In connection with the completion of the Merger, the Company notified the Nasdaq Stock Market (“NASDAQ”) of its intent to remove its common stock, par value $0.002 (“Company Common Stock”) from listing on NASDAQ prior to opening of trading on May 15, 2020, and NASDAQ filed a delisting application on Form 25 with the Securities and Exchange Commission (the “SEC”) to delist and deregister the Company Common Stock as of May 15, 2020. The Company has filed with the SEC a certification on Form 15 on May 26, 2020 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), requesting the suspension of the Company’s reporting obligations under the Exchange Act.
STRATEGIC PLAN
The Company’s short to medium term strategic plan is to focus on both domestic and international market expansion. In 2020, our strategic plan includes these elements:
| ● | Enhance the development of new energy products. The management projects that the New Energy Vehicle market will have a moderate growth in 2020. |
| ● | Improve
manufacturing technology and further computerize our manufacturing processes. We plan to continue improving our manufacturing
process to enhance product quality. We believe that improvement of manufacturing technology will further automate and streamline
our manufacturing processes, which could ultimately eliminate human errors, increase manufacturing efficiency, lower production
costs and at the same time ensure consistent quality of our products.
The Company believes that after the recent completion of the Going Private transaction, management will be able to focus on long term strategic goals and the Company is in the process of developing such goals. |
THE COMPANY’S PRODUCTS
Through the Joint Venture, the Company manufactures and distributes automotive brake systems and other key safety related auto parts in China and internationally. Our products are mainly used in the braking systems of different types of commercial vehicles, passenger vehicles and railway transportation vehicles, including an extensive range of products covering 140 categories and over 2,000 specifications in automotive brake systems. Automotive brake systems and other key safety related auto parts are essential components to ensure driving safety.
We seek to introduce new products for each customer. When working with a customer, our goal is to understand the need of each customer and utilize our extensive experience and innovative technology to deliver products that meet such need. We support our products with a full range of styling, design, testing and manufacturing capabilities, including just-in-time and in-sequence delivery.
ISO 9000 is a family of standards related to quality management systems and designed to help organizations ensure that they meet the needs of customers and other stakeholders. The standards are published by ISO, the International Organization for Standardization, and available through national standards bodies. ISO 9001 deals with the requirements that organizations wishing to meet the standard have to fulfil.
OHSAS 18001 is an Occupation Health and Safety Assessment Series for health and safety management systems. It is intended to help organizations to control occupational health and safety risks. It was developed in response to widespread demand for a recognized standard against which health and safety management systems are to be certified and assessed.
The Company obtained ISO9001/QS9000/VDA6.1 System Certifications in 2001. We passed the ISO/TS 16949 System Certification test (an ISO technical specification aiming to develop a quality management system which provides for continued improvement, emphasizing defect prevention and the reduction of variation and waste in the supply chain) conducted by the TUV CERT Certification Body of TUV Industries Service GmbH in 2004, and its annual review in 2015. The ISO/TS 16949 System, a higher standard replacing the ISO9001/QS9000/VDA6.1 System, was enacted by the International Automotive Task Force and is recognized by major automobile manufacturers all over the world. The annual reviews for other certifications which we passed include ISO14001 on environmental management and OHSAS18001 for health and safety management, reflecting the Company’s commitment to workplace safety, health and environmental protection.
4
CHINA AUTOMOBILE AND AUTO PARTS INDUSTRY
Based on statistics published by the China Association of Automobile Manufactures (“CAAM”) in 2019, China currently is still the world’s biggest automotive market and continued to expand, 2019 is lower than 2018. The automobile industry is one of China’s key industries, contributing significantly to the growth of China’s economy.
According to the statistics published by the CAAM in 2019, China’s automobile output and sales volume were 25.72 million units and 25.77 million units, respectively, representing decreases of 7.5% and 8.2% respectively comparing to 2018. The output and sales volume of commercial vehicles increased by 1.9% to 4.36 million units and decreased by 1.1% to 4.32 million units, respectively.
The Chinese auto parts industry is highly fragmented. Management believes that the future development areas of China’s auto parts industry will likely include:
| ● | To keep pace with the rapid development of new automobile technologies. | |
| ● | To meet the requirements of increasingly demanding OEM customers, such as zero defects, and cost reduction. | |
| ● | To partner with OEM customers in the entire process from product design, development and production to cost control, quality control and final delivery. | |
| ● | To restructure the industry and form large auto parts manufacturing groups which will enhance the overall competitiveness of Chinese auto parts manufacturers when competing with leading international manufacturers. |
MARKETS AND CUSTOMERS
We strengthened our sales and marketing efforts in 2019. The sales person headcounts for Chinese sales and international sales were 184 and 75, respectively. Products are sold under the “SORL” trademark, which we licensed on a royalty free basis from Ruili Group. The Company renewed the license from Ruili Group in 2012 which currently expires in 2022. We have an agreement with Ruili Group that the term of the license will be extended beyond 2022 as long as the registration for the trademark is renewed.
In general, The Company’s sales can be divided into three segments: Chinese OEM Market, Chinese Aftermarket, and International Market. The above identified markets account for approximately 47.6%, 37.5% and 15.0%, respectively, of the Company’s annual sales for 2019.
Chinese OEM Market - We have established long-term business relationships with most of the major vehicle manufacturers in China. We sell our products to approximately 70 major vehicle manufacturers, including a majority of the key truck manufacturers in China. In addition to heavy-duty trucks, our products are also widely used in brake systems on buses. Typically, bus manufacturers purchase a chassis from truck chassis manufacturers which already has incorporated our brake systems.
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The table below presents comparative information for 2019 and 2018 of the Company’s top five OEM customers.
| Ranking | Customer | %
of |
Customer | %
of |
|||||||||
| 1 | FAW Jiefang Automotive Co., Ltd. | 4.0 | % | FAW Jiefang Qingdao Automotive Co., Ltd. | 4.5 | % | |||||||
| 2 | FAW Jiefang Qingdao Automotive Co., Ltd. | 3.8 | % | FAW Jiefang Automotive Co., Ltd. | 4.0 | % | |||||||
| 3 | Dongfeng Dena Axle Co., Ltd. | 2.2 | % | Dongfeng Dena Axle Co., Ltd. | 3.2 | % | |||||||
| 4 | Shaanxi Heavy Duty Automobile Co., Ltd. | 2.1 | % | Shaanxi Heavy Duty Automobile Co., Ltd. | 2.7 | % | |||||||
| 5 | Shaanxi Hande Axle Co., Ltd. | 2.0 | % | Shaanxi Hande Axle Co., Ltd. | 2.3 | % | |||||||
We continue to expand our business with FAW Group, Dongfeng Motor Co., Ltd, and Shaanxi Heavy Duty Automobile Co., Ltd, which ranked in the top ten highest sales commercial vehicle manufacturers in China during 2019. The Company is a “core supplier” to the FAW Group, and a strategic partner with both Beiqi Foton Motor Co., Ltd., and Dongfeng Motor Co., Ltd. (through product co-development contracts and priority supply agreements).
Chinese Aftermarket - The Company’s Chinese aftermarket sales network consists of 56 authorized distributors covering the following seven regions throughout China: Northeast Region, North Region, Northwest Region, Southwest Region, Central Region, East Region and South Region.
The 56 authorized distributors sell only “SORL” products and further distribute the products through over 2,000 sub-distributors.
International Market - With decline in the truck production and currency depreciation in some countries in 2019, our export sales in 2019 decreased comparing to 2018. Our strategies in the export market include the following:
| ● | We focus on both the international aftermarket and OEM customers at the same time. |
| ● | The Company also actively participates in international trade shows including more than ten international exhibitions such as Automechanika in Frankfurt, Equip Auto in Paris, Automotive Aftermarket Products Expo in Las Vegas, Automechanika Middle East in Dubai and China Import and Export Fair in Guangzhou, to attract new customers and new orders. |
| ● | In December 2015, we divested all of our equity interest in SORL International Holding, Ltd., a joint venture we formed in 2009 in Hong Kong. Going forward, we plan to distribute our products in the Asia-Pacific region primarily through our in-house sales teams. |
| ● | The Company strives to create a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. The Company presently has international sales centers in the United Arab Emirates (“UAE”), the United States of America (“USA”), and Europe. They carry out localization strategies to meet the different market demands and to strengthen service support. |
6
In 2019, our export sales accounted for 15.0% of total revenue. Products are exported to more than 104 countries and regions in the world. The table below presents comparative information for 2019 and 2018 of the Company’s top five international customers.
| Ranking | Country | Customer Name | %
of |
Country | Customer Name | %
of |
|||||||||||
| 1 | USA | SAP | 1.8 | % | USA | SAP | 2.9 | % | |||||||||
| 2 | UAE | GOLDEN DRAGAN AUTO SPARE PARTS | 1.2 | % | India | HISHIKHA OVERSEAS | 1.1 | % | |||||||||
| 3 | India | HISHIKHA OVERSEAS | 0.7 | % | BRAZIL | SCHULZ | 0.9 | % | |||||||||
| 4 | BRAZIL | LNG | 0.7 | % | BRAZIL | LNG | 0.8 | % | |||||||||
| 5 | USA | CARDONE | 0.7 | % | UAE | GOLDEN DRAGAN AUTO SPARE PARTS | 0.7 | % | |||||||||
COMPETITION
We conduct our business in a complex and highly competitive industry. The global automotive parts industry principally involves the supply of systems, modules and components to vehicle manufacturers for the manufacture of new vehicles. Additionally, suppliers provide parts to other suppliers for use in the latter’s product offerings and to the aftermarket for use as replacement or enhancement parts for older vehicles. Currently, vehicle manufacturers generally only engage in assembling but not manufacturing non-key automotive parts. Rather, they source these parts through a global network of suppliers. As a result, only those automotive parts manufacturers with large-scale production capacity, advanced technology and the ability to produce system and modules can supply their products to vehicle manufacturers directly. The automotive parts industry in China is fragmented and there are many small manufacturers who mainly target at the aftermarket. However, there are not many companies which have established both nationwide aftermarket sales networks and close relationships with leading OEM manufacturers. As the largest commercial vehicle air brake system manufacturer (by sales volume) in China, we have established long-term business relationships with many major automotive manufacturers in China, such as FAW Group (a.k.a. First Auto Group), Dongfeng Motors Group, Beiqi Foton Motor Co., Ltd., Baotou North-Benz Heavy Duty Truck Co., Ltd. and Anhui Jianghuai Automobile Co., Ltd. The management believes that the keys for being a successful commercial vehicle air brake supplier are product quality, price competitiveness, development capability, new product development capacity, and timely delivery. We have strived to improve our competitiveness by recruiting highly qualified managers and employees, improving our product design capability and facilities, and providing better customer services.
Domestic Competition - Our major competitors in China are: VIE and CAFF, each as described below.
| China VIE Group, or VIE: Its principal products are main valves and unloader/governors, majorly supplied to OEMs, such as Anhui Jianghuai Automobile Co., Ltd., and the remaining portion supplied to the aftermarket and export. |
| Chongqing CAFF Automobile Braking and Steering Systems Co., Ltd., or CAFF: Its main products are air dryers and main valves. Its principal customer is Chongqing Heavy Vehicle Group Co., Ltd. |
We believe the Company has the following competitive advantages:
| ● | Brand Name: As one of China’s largest (by sales volume) commercial vehicle air brake systems manufacturer, our “SORL” brand is known nationwide. SORL was awarded as the “Well-Known Brand” issued by Chinese State Administration of Industry and Commerce. | |
| ● | Technology: We take technological innovation and leadership as the critical path to enhance our core competence. Our technology center includes a laboratory specializing in the research of automotive brake controlling technologies and development of air brake system products. We have also established a new state-of-the-art testing center in 2014, which strengthened our testing capability. | |
| ● | Product Development: Because our management has the belief that our products ultimately define our success, we continue to increase our budget for research and development activities. Through our international sales offices in the US, the Middle East and Europe we are able to promptly collect information about current trends in automotive technologies, which in turn is applied to our new product development and used to enhance our ability to provide domestic OEMs with advanced products. In addition, our software systems and strict implementation of ISO/TS16949 standards in the development process greatly shorten our development lead time and improve new product quality. The Company has developed its own independent intellectual property embedded in its air brake spring chambers. The spring chamber’s structure, performance, and quality have made it one of the Company’s key products and it enjoys a great deal of success among domestic auto manufacturers. | |
| ● | China Sales Networks: We have 56 authorized distributors covering seven regions in China. We help train their salesperson and improve their service quality. These authorized distributors in turn distribute “SORL” products through over 2,000 sub-distributors throughout China. |
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International Competition - In the international market, our largest competitors are Wabco Holdings, Inc. and Knorr-Bremse Group. While management believes our current advantage over Wabco Holdings, Inc. and Knorr-Bremse Group is our lower pricing, management also believes that the Company’s product quality and brand awareness are improving. Our competitive advantages over other competitors in the global market are:
| ● | Performance-Cost Ratio: Our products enjoy lower production costs due to the low labor costs in China. The Company’s technology and manufacturing improvements have strengthened and our products’ performance-cost ratio is increasing. | |
| ● | Quick Adaptation to Local Markets: Through our international sales channels in the U.S., the Middle East and Europe, we have been able to timely respond to local market needs. | |
| ● | Diversified Auto Products: In addition to braking system products for commercial vehicles, we also produce key safety products for passenger vehicles and braking system products for railway vehicles. This integrated product offering helps reduce customers’ transaction costs and incentives the customers to purchase such products from us. |
INTELLECTUAL PROPERTY AND INNOVATION CAPACITY
As of December 31, 2019, we had 588 technical staff members, 243 of whom possess Engineer or Senior Engineer qualifications. Our technical staff are divided as follows: 43 for information technology, 331 for new product development and design techniques, 48 for measurement and testing, and the remaining 166 for quality control and quality check.
Besides our own technical force, we also have cooperation arrangements with leading universities in the automotive engineering field, including:
| ● | In 2010, SORL created two new post-doctoral research programs. The first program is a partnership with the Automobile Institute of Jilin University. This program was established to conduct research on the recovery of electric vehicle braking energy. The second program is a partnership with the Beijing University of Technology. This program was established to conduct researches on die-casting aluminum oxide film onto auto parts. | |
| ● | We have contracts with both Tongji University at Shanghai and Harbin Institute of Technology for co-development of electronically controlled braking systems and automotive master cable technology. | |
| ● | We have contracts with both Tsinghua University E-Tech Technology Co., Ltd. and Zhejiang University for information technology projects, including the development of application software for product design innovation and production management. |
We have priority rights to acquire the intellectual properties that are developed pursuant to the arrangements with these universities. The financial arrangements as to amount and terms of payment vary depending on the type of project. Normally, we make an initial payment in the form of a research grant and then negotiate a payment schedule based upon development of the technology.
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We also consult with the technical staff of the Ruili Group from time to time at a no-cost basis. We have collaborated with other industry research groups, such as the research centers of FAW Group and Dongfeng Group.
We own a full range of processing equipment required for the development of new auto part products, including machines for molding, die casting, cutting, pressing and surface treatment. Furthermore, we are capable of designing and making over 90% of the devices, such as tools, jigs and molds, that are required for producing prototypes. Last but not the least, the partnerships with Tsinghua University and Zhejiang University in developing software for application in our new product design system have leaded to substantial time savings in our new product development cycle.
Patented Technologies
We continue to invest in research and development (“R&D”) efforts and to pursue patent protection. Currently we own 826 issued patents and 171 patent applications worldwide.
Trademarks
Our principal trademark is “SORL”, which we currently licensed on a non-exclusive royalty free basis from the Ruili Group. The license currently expires in the year of 2022 and we have an agreement with the Ruili Group that the term of the license will be extended as long as the registration for the trademark is renewed. The Ruili Group obtained the registration for “SORL” from the World Intellectual Property Organization and registered the trademark in the United States in 2007 as well.
PRODUCTION
Our production processes include fixture, jig and die making, aluminum alloy die casting, metal sheet stamping, numerical control cutting, welding, numerical control processing, surface treatment, filming, rubber/plastic processing, final assembly and packaging. We have state-of-the-art manufacturing and testing facilities sourced from the U.S., South Korea, Taiwan and mainland China, including computerized numerical control processing centers, computerized numerical control lathes, casting, stamping and cutting machines, automatic spraying and electroplating lines, cleaning machines, automatic assembly lines and three-dimensional coordinate measuring machines and projectors. We are seeking to realize automation to reduce production cost.
ENVIRONMENTAL COMPLIANCE
The Company is subject to the applicable requirements of U.S. federal, state, local and non-U.S. authorities, including China’s, environmental and occupational safety and health laws and regulations. These include laws regulating air emissions, water discharge and waste management. The Company has an environmental management structure designed to facilitate and support its compliance with these requirements globally. Although the Company intends to comply with all such requirements and regulations, it cannot assure that it is at all times in compliance. The Company has made and will continue to make capital and other expenditures to comply with environmental requirements, although such expenditures were not material during the past two years. Environmental requirements are complex, change frequently and have the tendency to become more stringent over time. Accordingly, the Company cannot assure that environmental requirements will not change or become more stringent over time or that its environmental cleanup costs and liabilities will not be material.
In 2006, we were granted ISO14001 certification on environmental management (ISO 14000 is a family of standards related to environmental management that exists to help organizations minimize the negative impact of their operations on the environment and comply with applicable environmental laws, regulations, and rules) and OHSAS18001 certification on health and safety management, which reflects the Company’s commitment to workplace safety, health and environmental protection. We conduct staff training to enhance awareness of environmental issues. We seek in all phases of our operations to employ practices for environment friendly production, reduction or prevention of pollution, and reduction of energy consumption and manufacturing costs. For example, noise intensity is listed as one of the criteria in the selection of new equipment; waste water is stored, purified and recycled in the production processes; and compressing machines are used in the disposal of aluminum and steel scraps, saving both storage space and power consumption.
During 2019, the Company did not make any material capital expenditures relating to environmental compliance.
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RAW MATERIALS
Raw materials used by the Company in the manufacture of our products primarily include steel, aluminum, other metals, rubber and various manufactured components.
All of the materials we use generally are readily available from numerous sources. We have not, in recent years, experienced any significant shortages of manufactured components or raw materials, and we normally do not carry inventories of these items in excess of what are reasonably required to meet our production and shipping schedules. Critical raw materials are generally supplied from at least two or more vendors to assure adequate supply and reasonable price. We maintain relationships with over twenty material suppliers. In 2019, our three largest suppliers were Zhejiang Hengda Aluminum Co., Ltd., Shanghai Shougang Steel Trading Co., Ltd., and Shanghai Bao Steel Trading Co., Ltd. which together accounted for 19.7% of the total purchase. None of the suppliers accounted for more than 10% of the total purchases.
When planning a purchase order, we compare prices of comparable goods quoted by different suppliers to receive the lowest price. In order to secure a favorable purchase price and subsequently a predictable cost of sales, we generally make a down payment to suppliers.
Normally, our annual purchase plan for raw materials, such as aluminum ingot and steel sheet, are determined at the beginning of the calendar year according to our OEM customers’ orders and our own forecast for the aftermarket and international sales. Our purchase plans with key suppliers can be revised quarterly. Our actual requirements are based on monthly production plans. Management believes that this arrangement prevents us from having excessive inventories when the orders from our customers change.
For raw materials, other than steel and aluminum, we generally maintain from five to seven days of inventory at our warehouse.
RESEARCH AND DEVELOPMENT
The Company believes that its engineering and technical expertise, together with its emphasis on continuing research and development, allow it to use the latest technologies, materials and processes to solve problems for its customers and bring new, innovative products to market. The Company believes that continued research and development activities, including engineering, are critical to maintain its pipeline of technologically advanced products.
DOING BUSINESS IN CHINA
China’s Economy
Management believes that an important factor that affects the Chinese automobile industry is the country’s economic environment. According to China’s Statistics Bureau, China’s economic growth slowed down during the last three years, with a GDP growth rate for 2017, 2018 and 2019, of 6.9%, 6.6% and 6.1%, respectively.
The Chinese Legal System
The practical effect of the legal system in China on our business operations can be viewed from two separate but intertwined considerations. First, as a matter of substantive law, the laws regarding foreign invested enterprises provide significant protection against government interference. In addition, these laws to a large extent protect the full enjoyment of the benefits of corporate organizational documents and contracts to foreign invested enterprise participants. These laws, however, do impose standards concerning corporate formation and governance, which are not qualitatively different from the general corporation laws of the several states of the United States. Similarly, the accounting standards and regulations in China mandate certain accounting practices, which are not consistent with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Chinese accounting standards and regulations require that an annual “statutory audit” be performed in accordance with China’s accounting standards and that the books of account of foreign invested enterprise are maintained in accordance with the Chinese accounting standards and regulations.
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Second, while the enforcement of substantive rights may appear less certain or reliable than under the legal system in the United States, foreign invested enterprises and wholly foreign-owned enterprises are Chinese registered companies that enjoy the same legal status as other Chinese registered companies in business-to-business dispute resolutions. Because the terms of the respective Articles of Association of the Joint Venture (“Articles of Association”) provide that all business disputes pertaining to foreign invested enterprises are to be resolved by the Arbitration Institute of the Stockholm Chamber of Commerce in Stockholm, Sweden applying Chinese substantive law, the Chinese minority partner in the Joint Venture should not enjoy a privileged position regarding such disputes. Any award rendered by this arbitration tribunal is, by the express terms of the Articles of Association, enforceable in accordance with the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). Therefore, as a practical matter, although no assurances can be given, the Chinese legal infrastructure, while different from its United States counterpart, should not present any significant impediment to the operation of foreign invested enterprises.
Economic Reform Issues
Although the Chinese government controls many productive assets in China, in the past several years the government has implemented economic reform measures which emphasize decentralization and encourage private economic activities. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:
| ● | We will be able to capitalize on economic reforms; | |
| ● | The Chinese government will continue its pursuit of economic reform policies; | |
| ● | The economic policies, even if pursued, will be successful; | |
| ● | Economic policies will not be significantly altered from time to time; and | |
| ● | Business operations in China will not become subject to the risk of nationalization. |
Since 1979, the Chinese government has embarked reforms of its economic structure. Because many reforms are unprecedented or experimental, they are subject to risks and setbacks. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or the disparities in per capita wealth between regions within China, could lead to further adjustment of the reform measures. This refining and adjustment process may negatively affect our operations.
There can be no assurance that the reforms to China’s economic systems will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, imposition of additional restrictions on currency conversion and remittance abroad, and reduction in tariff protection and other import restrictions.
EMPLOYEES AND EMPLOYMENT AGREEMENTS
The Company currently employs 6,756 employees, all of whom are employed full time and are grouped as follows: 588 technical staffs and quality control and quality check, 259 sales and marketing staffs, 5,771 production workers and 138 administrative staffs. There are employment agreements with all of the employees. We believe that the employment contracts with all our employees comply with relevant laws and regulations of China. We are not subject to any collective bargaining agreement.
The Joint Venture is subject to labor regulations applicable to Sino-Foreign equity joint venture enterprises. Only in compliance with those regulations, may the Joint Venture’s management hire and discharge employees and make other determinations with respect to wages, welfare plans, insurance coverages and disciplinary action with respect to its employees. The Joint Venture has, as required by law, established special funds for enterprise development, employee welfare and incentives, as well as a general reserve. In addition, the Joint Venture is required to provide its employees with facilities sufficient to enable the employees to carry out union activities.
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DESCRIPTION OF THE JOINT VENTURE
General
The Joint Venture was established on January 17, 2004, pursuant to the terms of the Joint Venture Agreement with the Ruili Group. Below is a description of the material terms of the Joint Venture.
Management of the Joint Venture
Pursuant to the terms of the Joint Venture Agreement, the board of directors of the Joint Venture consists of three directors. We have the right to designate two members of the board of directors and the Ruili Group has the right to designate one member. We also have the authority to appoint the Chairman of the board of directors. The majority of the board of directors is vested with the authority with respect to operating matters. As a result, we maintain operating control over the Joint Venture. However, at this time, three of the directors of the Joint Venture, Messrs. Xiao Ping Zhang, Xiao Feng Zhang and Ms. Shu Ping Chi, are also directors of us and the founders and executives of the Ruili Group, and therefore there is limited independence between the two entities. The term of the Joint Venture has got permission to be Long-Term effective from the Government on March 2018.
Distribution of Profits of the Joint Venture
After providing social welfare funds for employees and withholding applicable taxes, the profits, if any, of the Joint Venture are available for distribution to the parties in proportion to their respective capital contributions. Any such distributions must be authorized by the Joint Venture’s board of directors. To date, the Joint Venture has not distributed any profits and does not anticipate of doing so in the foreseeable future.
Transfer of Interest in the Joint Venture
Any assignment or transfer of an interest in the Joint Venture must be approved by the Chinese government. The Chinese joint venture laws also provide for preemptive rights and any proposed transfer to third parties requires the consent of all parties to the joint venture.
Liquidation of the Joint Venture
Under the Chinese joint venture laws, the Joint Venture may be liquidated in certain limited circumstances, including the expiration of the term of the Joint Venture (including extensions, if any), the inability for the joint venture to continue operations due to severe losses, force majeure, or the failure of a party to perform its obligations under the Joint Venture Agreement or the Articles of Association in such a manner as to impair the operations of the Joint Venture. The Chinese joint venture laws provide that, upon liquidation, the net asset value (based on the prevailing market value of the assets) of a joint venture shall be distributed to the parties in proportion to their respective registered capital in the joint venture.
Resolution of Disputes Related to the Joint Venture
In the event of a dispute between the parties, attempts will be made to resolve the dispute through friendly consultation or mediation. In the absence of a friendly resolution, the parties have agreed that the matter will first be referred to the China International Economic and Trade Arbitration Commission in Beijing, China, whose decisions are final and enforceable in Chinese courts.
Nationalization of Foreign Investments
The Chinese joint venture laws provide that China generally will not nationalize enterprises in which foreign funds have been invested. However, under special circumstances, for example, when public interest requires, enterprises with foreign capital may be legally nationalized and appropriate compensation will be made.
Available Information
We electronically file our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports with the SEC. Copies of our filings with the SEC may be obtained from the SEC’s website, http://www.sec.gov. Access to these filings is free of charge. In addition, we make such materials that are electronically filed with the SEC, available at www.sorl.cn as soon as reasonably practicable. They are also available in print format to any stockholder upon request.
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Our business faces many risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of, or that we currently think are immaterial, may also materially impair our business operations or financial results. If any of the events or circumstances described in the following risks actually occurs, our business, financial conditions or results of operations could suffer and the trading price of our common stock could decline.
Risks Related to the Company
The COVID-19 pandemic has adversely affected the Company’s business, and the ultimate effect on the Company’s operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted.
The effects of the COVID-19 pandemic, including actions taken by businesses and governments, have adversely affected the global economy, disrupted global supply chains and created significant volatility in the financial markets. As a result, there has been a significant reduction in demand for auto parts. If the reduced demand for auto parts continues for a prolonged period, the Company’s business, financial condition, results of operation and liquidity may be materially and adversely affected. Although the Company’s factories in the People’s Republic of China gradually returned to operations starting in late February, the Company has not regained the level of production capacity before the pandemic. The Company’s operations also may be adversely affected if significant portions of the Company’s workforce are unable to work effectively due to illness, quarantines, government actions or other restrictions in connection with future waves of COVID-19 pandemic.
The extent to which the COVID-19 pandemic adversely affects the Company’s business, financial condition, results of operation and liquidity will depend on future developments, which are uncertain and cannot be predicted. These future developments include, but are not limited to, the scope and duration of the COVID-19 pandemic and actions taken by governmental authorities and other third parties in response to the pandemic. Disruptions and/or uncertainties related to the COVID-19 pandemic for a sustained period of time could result in delays or modifications to the Company’s strategic plans and initiatives and hinder the Company’s ability to achieve its strategic goals. The COVID-19 pandemic, and the volatile regional and global economic conditions stemming from the pandemic, may also have the effect of heightening many of the other risks described in this “Risk Factors” section
If the current financial crisis and the slowdown of the global economy continues, more countries may resort to protectionist measures which would negatively affect our export sales.
As a result of global economic conditions and little or no growth in many countries, there is a risk of increased international trade protectionism. It is expected that many countries would set up trade barriers which would negatively affect our export sales, as well as increasing litigation risk in the countries to which our products are exported.
Our ability to effectively implement our business strategy depends upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced management and other key personnel and we cannot assure that we will be able to hire or retain such employees.
We must attract, recruit and retain a sizeable workforce of technically competent employees. Our ability to effectively implement our business strategy will depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced management and other key personnel. As the economy in China expands, there is increasing competition for skilled workers in China. We cannot assure that we will be able to find, hire or retain such employees, or even if we are able to do so, that the cost of these employees will not adversely affect our net income.
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Certain of our officers and directors have responsibilities to other businesses in addition to our Company and as a result, conflicts of interest between us and the other activities of those persons may occur from time to time.
Certain persons serving as our officers and directors have existing responsibilities and, in the future, may have additional responsibilities, to provide management and services to other entities in addition to us. In particular, Mr. Xiao Ping Zhang, our Chairman and Chief Executive Officer is an officer and a principal stockholder of the Ruili Group, which is engaged in the development, production and sale of various kinds of automotive parts as well as operating a hotel property and investing in the development of real property in China. The management of our Joint Venture is shared with the Ruili Group and therefore there may exist conflicts of interest between us and the Ruili Group in connection with its operation. Our Joint Venture Agreement provides that the board of directors of the Joint Venture is comprised of three persons, two of whom are appointed by us and the remaining one is appointed by the Ruili Group. However, at this time, three of the directors of the Joint Venture, Messrs. Xiao Ping Zhang, Xiao Feng Zhang and Ms. Shu Ping Chi, are also directors of us and the founders and executives of Ruili Group. There can be no assurance that in the event of a conflict between us and the Ruili Group, our interests in the Joint Venture will not be adversely affected or that our Company’s interests will always be fairly represented. The Ruili Group also provides certain services to the Company in the form of bank guaranties and licensing of certain intellectual property rights and technology. As a result, conflicts of interest between us and the Ruili Group may occur from time to time. Our officers and directors are accountable to us and our shareholders as fiduciaries, which requires that such officers and directors exercise the duty of loyalty and the duty of care in managing our affairs. However, the existing responsibilities limit the amount of time such officers and directors can spend on our affairs.
We are and will continue to be under downward pricing pressures on our products from our customers and competitors which may adversely affect our growth, profit margins and net income.
We face continuing downward pricing pressures from our customers and competitors, especially in the sales of replacement parts. To retain our existing customers and attract new ones, we must continue to keep our unit prices low. In view of our need to maintain low prices on our products, our growth, profit margins and net income will suffer if we cannot effectively continue to control our manufacturing and other costs.
Our contracts with our customers are generally short-term and do not require the purchase of a minimum amount, which may result in periods of time during which we have limited orders for our products.
Our customers generally do not provide us with firm, long-term volume purchase commitments. Although we enter into manufacturing contracts with certain of our customers who have continuing demand for a certain product, these contracts usually do not provide for firm, long-term commitments to purchase products from us. As a result of the absence of long-term contracts, we could have periods during which we have no or only limited orders for our products, but we continue to have to pay the costs to maintain our work force and our manufacturing facilities and to meet other fixed costs, without the benefit of current revenues.
We consistently face short lead times for delivery of products to customers. Failure to meet delivery deadlines in our production agreements could result in the loss of customers and damage to our reputation and goodwill.
We enter into production agreements with our customers prior to commencing production, which reduces our risk of cancellations. However, these production agreements typically contain short lead time for delivery of products, leading to production schedules that can strain our resources and reduce our profit margins on the products produced. Although we have increased our manufacturing capacity, we may lack sufficient capacity at any given time to meet all of our customers’ demands if they exceed production capacity levels. We strive for rapid response to customer demands, which can lead to reduced purchasing efficiency and increased material costs. If we are unable to sufficiently meet our customers’ demands, we may lose our customers. Moreover, failure to meet customer demands may impair our reputation and goodwill.
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Because of the short lead time in our production agreements, we may not be able to accurately or effectively plan our production or supply needs.
We make significant decisions, including determining the levels of business that we will seek and accept, production schedules, component procurement commitments, facility requirements, personnel needs, and other resource requirements, based on our production agreements with our customers. Short lead time of our customers’ commitments to their own customers and the possibility of rapid changes in demand for their products reduce our ability to estimate accurately the future requirements of those customers for our products. Because many of our costs and operating expenses are fixed, a reduction in customer demands can harm our sales, margins and operating results. We may also occasionally acquire raw materials without having customer orders based on a customer’s forecast or in anticipation of an order or to secure more favorable pricing, delivery or credit terms in view of the short lead time we often have under our customers’ orders. These purchases can expose us to losses from inventory carrying costs or inventory obsolescence.
Our operations depend highly on Mr. Xiao Ping Zhang, our Chairman and Chief Executive Officer, and Ms. Jinrui Yu, our Chief Operating Officer, and a small number of other executives, and the loss of any such executive could adversely affect our ability to conduct our business.
The success of our operations depends greatly on a small number of key managers, particularly, Mr. Xiao Ping Zhang and Ms. Jinrui Yu. The loss of the service of Mr. Zhang, or any of the other senior executives could adversely affect our ability to conduct our business. Even if we are able to find other managers to replace any of these managers, the search for such managers and the integration of such managers into our business will inevitably occur only over an extended period of time. During that time the lack of senior leadership could adversely affect our sales and manufacturing activities, as well as our research and development efforts.
We may not be able to respond effectively to rapid growth in demands for our products, which could adversely affect our customer relations and our growth prospects.
If we continue to be successful in obtaining rapid market penetration of our products, we will be required to deliver large volumes of quality products to customers on a timely basis at a reasonable cost to those customers. Meeting such increased demands will require us to expand our manufacturing facilities, to increase our ability to purchase raw materials, to increase the size of our work force, to expand our quality control capabilities and to increase the scale upon which we produce products. Such demands would require more capital and working capital than we currently have available.
We may not be able to finance the development of new products, which could negatively impact our competitiveness.
Our future operating results will depend to a significant extent on our ability to continue to provide new products that compare favorably on the basis of cost and performance with the products of our competitors. Some of our competitors have design and manufacturing capabilities and technologies to produce products that compete well with our products, particularly in markets outside of China. We are currently conducting research and development activities on a number of new products, requiring a substantial outlay of capital. To remain competitive, we must continue to incur significant costs in product development, equipment, facilities and invest in research and development of new products. These costs may result in greater fixed costs and operating expenses. All of these factors create pressures on our working capital and ability to fund our current and future manufacturing activities and the expansion of our business.
We receive a significant portion of our revenues from a small number of customers which may make it difficult to negotiate attractive prices for our products and expose us to risks of substantial losses if we lose one or more major customers.
No customer individually accounted for more than 10% of our revenues for the years ended December 31, 2019 and 2018, except for Ruili Commercial Vehicle Co., Ltd., a related party, which accounted for 11.1% and nil during the years ended December 31, 2019 and 2018, respectively. The Company sold to aftermarket customers through this related party starting in 2019. Our remaining three largest customers accounted for approximately 9.9% and 11.7% of our revenues in 2019 and 2018, respectively. Dependence on a few customers could make it difficult to negotiate attractive prices for our products and could expose us to the risk of substantial losses if one or more major customers stop purchasing our products.
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Our business depends on our ability to protect and enforce our intellectual property rights effectively which may be difficult particularly in China.
The success of our business depends on the legal protection of the intellectual property rights we hold. As of the fiscal year ended December 31, 2019, we own 826 patents and additional 171 under applications. We claim proprietary rights in various unpatented technologies, know-how, trade secrets and trademarks relating to products and manufacturing processes. We protect our proprietary rights in our products and operations through contracts, including nondisclosure agreements. If these contractual measures fail to protect our proprietary rights, any advantage that those proprietary rights provide to us would be negated. Monitoring infringement of intellectual property rights is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our intellectual property and/or know-how, particularly in China and other countries in which the laws may not protect our proprietary rights as fully as the laws of the United States. Accordingly, other parties, including competitors, may improperly duplicate our products using our proprietary technologies. Pursuing legal remedies against persons infringing our patents or otherwise improperly using our proprietary information is a costly and time consuming process that would divert management’s attention and other resources from the conduct of our normal business, and could cause delays and other problems with the marketing and sales of our products, as well as delays in deliveries.
It may be difficult to find or integrate acquisition targets which could have an adverse effect on our expansion plans.
An important component of our growth strategy is to invest in or acquire companies such as other automotive parts manufacturers and distribution companies. We may be unable to identify suitable investment or acquisition candidates, or to make these investments or acquisitions on a commercially reasonable basis, if at all. If we complete an investment or acquisition, we may not realize the anticipated benefits from the transaction.
Integrating an acquired company is a complex, distracting, time consuming and potentially expensive process. The successful integration of an acquisition target would require us to:
| ● | integrate and retain key management, sales, research and development, and other personnel; | |
| ● | incorporate the acquired products or capabilities into ours from engineering, sales and marketing perspectives; | |
| ● | coordinate research and development efforts; | |
| ● | integrate and support pre-existing supplier, distribution and customer relationships; and | |
| ● | Consolidate duplicate facilities and functions and combine administrative, accounting and order processing and supporting functions. |
The geographic distance between the companies, the complexity of the technologies and operations being integrated and the disparate corporate cultures being combined may increase the difficulties of combining an acquired company. Acquired businesses are likely to have different standards, controls, contracts, procedures and policies, making it more difficult to implement and harmonize company-wide financial, accounting, billing, information and other systems. Management’s focus on integrating operations may distract attention from our day-to-day business and may disrupt key research and development, marketing or sales efforts.
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With the automobile parts markets being highly competitive and many of our competitors having greater resources than we do, we may not be able to compete successfully.
The automobile parts industry is highly competitive. Factors considered by our customers and potential customers include:
| ● | Quality; | |
| ● | Price/cost competitiveness; | |
| ● | Product performance; | |
| ● | Reliability and timeliness of delivery; | |
| ● | New product and technology development capability; | |
| ● | Degree of global and local presence; | |
| ● | Effectiveness of customer service; and | |
| ● | Overall management capability. |
Depending on the particular product market (Chinese OEM Market or Chinese Aftermarket) and geographic market, the number of our competitors varies significantly. Many of our competitors have substantially greater revenues and financial resources than we do, as well as stronger brand names, higher consumer recognition, better business relationships with vehicle manufacturers, and broader geographic presence than we have, especially where we intend to enter a new geographic market. We may not be able to compete effectively and increased competition may substantially harm our market position.
Internationally, we face different market dynamics and competition. We may not be as successful as our competitors in generating revenues in international markets due to the lack of recognition of our brands, products or other factors. Developing product recognition overseas is expensive and time-consuming and our international expansion efforts may be more costly and less profitable than we expect.
If we are not able to expand our business in our target markets, our sales could decline, our margins could be negatively impacted and we could lose market share.
A disruption at our sole manufacturing site would significantly interrupt our production capabilities, which could have drastic consequences to us, including threatening our financial viability.
We currently manufacture all of our products at our sole commercial manufacturing facility, which is located near Rui’an City, Wenzhou, Zhejiang Province, China. Accordingly, we face risks inherent in operating a single manufacturing facility, since any disruption, such as a fire, or natural disaster, could significantly interrupt our manufacturing capability. We currently do not have alternative production plans in place or disaster-recovery facilities available. In case of a disruption, we will have to lease, acquire or build alternative manufacturing facilities. This would require substantial capital on our part, which we may not be able to obtain on commercially acceptable terms or at all. Additionally, we would likely experience months or years of production delays as we build or look for replacement facilities and seek necessary regulatory approvals. If this occurs, we will be unable to satisfy customer orders on a timely basis, if at all. Also, operating any new facilities may be more expensive than operating our current facility. For these reasons, a significant disruptive event at our manufacturing facility could have drastic consequences on us, including threatening our financial viability.
The cyclical nature of commercial vehicle production and sales could result in a reduction in automotive sales, which could adversely affect our financial liquidity.
Our sales to OEMs depend on automotive commercial vehicle production and sales by our customers, which are highly cyclical and affected by general economic conditions and other factors, including consumer spending and preferences. They also can be affected by government policies, labor relations issues, regulatory requirements, and other factors. In addition, in the last two years, the price of commercial vehicles in China has generally declined. As a result, the volume of commercial vehicle productions in China has fluctuated from year to year, which has caused fluctuations in the demand for our products.
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Increasing costs for manufactured components and raw materials may adversely affect our profitability.
We use a broad range of manufactured components and raw materials in our products, including castings, electronic components, finished sub-components, molded plastic parts, fabricated metal, aluminum and steel, and resins. Because it may be difficult to pass price increases for these items on to our customers, a significant increase in the prices of our components and materials could materially increase our operating costs and adversely affect our profit margins and profitability.
Longer product life of parts may reduce aftermarket demand for some of our products.
In 2019, approximately 52.4% of our sales were sales to the aftermarket. The average useful life of original equipment parts has been steadily increasing in recent years due to improved quality and innovations in products and technologies. Longer product lives allow vehicle owners to replace parts of their vehicles less often. Additional increases in the average useful life of automotive parts are likely to adversely affect the demand for our aftermarket products.
We may be subject to product liability, warranty and recall claims, which may increase the costs of doing business and adversely affect our financial condition and liquidity.
We face an inherent business risk of exposure to product liability and warranty claims if our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. We have not obtained product liability insurance and therefore may be exposed to potential liability without any insurance. We cannot assure you that we would not incur significant costs to defend any claims or that we will not experience any product liability losses in the future. In addition, if any of our designed products are or are alleged to be defective, we may be required to participate in a recall of such products. We cannot assure you that the future costs associated with providing product warranties and/or bearing the cost of repair or replacement of our products will not have an adverse effect on our financial condition and liquidity.
We are subject to environmental and safety regulations, which may increase our compliance costs.
We are subject to the requirements of environmental and occupational safety and health laws and regulations in China and other countries where we sell our products. To the extent that we expect to expand our operations into other geographic areas, we will become subject to such laws and regulations of those countries as well. We cannot provide assurance that we have been or will be at all times in full compliance with all of these requirements, or that we will not incur material costs or liabilities in connection with these requirements. The capital requirements and other expenditures that may be necessary to comply with environmental and safety requirements could increase and become a material expense of doing business.
Non-performance by our suppliers may adversely affect our operations by delaying delivery or causing delivery failures, which may negatively affect customer demands, sales and profitability.
We purchase various types of equipment, raw materials and manufactured component parts from our suppliers. We would be materially and adversely affected by the failure of our suppliers to perform as expected. We could experience delivery delays or failures caused by production issues or delivery of non-conforming products if our suppliers failed to perform, and we also face these risks in the event any of our suppliers becomes insolvent or bankrupt.
Our commercial viability depends significantly on our ability to operate without infringing the patents and other proprietary rights of third parties.
In the event that our technologies infringe or violate the patent or other proprietary rights of third parties, we may be prevented from pursuing product development, manufacturing or commercialization of our products that utilize such technologies. We may not be aware that our products or operations infringe upon patents or other rights held by others. In addition, given the complexities and uncertainties of patent laws, there may be patents that we currently do not believe we fringe but in the future we may ultimately be held to infringe, particularly if the claims of such patents are determined to be broader than we believe them to be. As a result, avoiding patent infringement may be difficult.
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If a third party claims that we infringe its patents, any of the following may occur:
| ● | We may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitor’s patent; | |
| ● | A court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms or at all, or which may require us to pay substantial royalties or grant cross-licenses to our patents; and | |
| ● | We may have to redesign our product so that it does not infringe upon others’ patent rights, which may not be possible or could require substantial funds or time. |
In addition, employees, consultants, contractors and others may use trade secrets of others in their work for us or disclose our trade secrets to others. Any of such conducts could lead to disputes over the ownership of inventions derived from that information or expose us to potential damages or other penalties. If any of these events occurs, our business will likely suffer and the market price of our common stock will likely decline.
Our international expansion plans subject us to risks inherent in doing business internationally.
Our long-term business strategy relies on the expansion of our international sales outside China by targeting markets, such as Europe and the United States. Risks affecting our international expansion include challenges caused by distance, language and cultural differences, conflicting and changing laws and regulations, international import and export legislation, trading and investment policies, foreign currency fluctuations, the burdens of complying with a wide variety of laws and regulations, protectionist laws and business practices that favor local businesses in some countries, foreign tax consequences, higher costs associated with doing business internationally, restrictions on the export or import of technology, difficulties in staffing and managing international operations, trade and tariff restrictions, and variations in tariffs, quotas, taxes and other market barriers. These risks could harm our international expansion efforts, which could in turn materially and adversely affect our business, operating results and financial condition.
Risks Related to Doing Business in China or Owning Shares in China-Based Business
We operate from facilities that are located in China. Our principal operating subsidiary, Ruili Group Ruian Auto Parts Co., Ltd., is a Sino-Foreign joint venture organized under the laws of China.
Changes in China’s political and economic policies and conditions could cause a substantial decline in the demand for our products and services.
Historically, we have derived a substantial portion of our revenues from China. We anticipate that China will continue to be our primary production location and an important sales base in the near future. Currently, almost all of our production assets are located in China. While the PRC government has pursued economic reforms to transform its economy from a planned economy to a market-oriented economy since 1979, a large part of the PRC economy is still being operated under varying degrees of control by the PRC government. By imposing industrial policies and other economic measures, such as restrictions on lending to certain sectors of the economy, control of foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the PRC economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental and are subject to risks and even set-backs. Other political, economic and social factors may also lead to further adjustments of the PRC reform measures. This refining and adjustment process may have a negative effect on our operations and our future business development. For example, the PRC government has in the past implemented a number of measures intended to slow down certain segments of the PRC economy that the PRC government believed to be overheating, including placing additional limitations on the ability of commercial banks to make loans by raising bank reserve-against-deposit ratios. Historically, this restrictive policy on loans had the effect of decreasing infrastructure projects resulting in a decrease in demand for heavy trucks, thus adversely impacting our product sales to our OEM customers. Because of the negative impact of the Chinese government policies on the truck manufacturers, we also were required to extend our normal credit terms to certain of these manufacturers. Our operating results may be materially and adversely affected by changes in the PRC economic and social conditions and by changes in the policies of the PRC government, such as measures to control inflation, changes in the rates or method of taxation and the imposition of additional restrictions on currency conversion.
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Changes in foreign exchange regulations in China may affect our ability to pay dividends in foreign currencies.
The official currency of the PRC, Renminbi (RMB), is not a freely convertible currency and the restrictions on currency exchanges in China may limit our ability to use revenues generated in RMB to fund our business activities outside China or to make dividends or other payments in U.S. dollars. The PRC government strictly regulates conversion of RMB into foreign currencies. Over the years, the PRC government has significantly reduced its control over routine foreign exchange transactions under current accounts, including trade-and service-related foreign exchange transactions, foreign debt service and payment of dividends. In accordance with the existing foreign exchange regulations in China, our PRC joint venture may pay dividends in foreign currencies, without pre-approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. The PRC government may, however, at its discretion, restrict access in the future to foreign currencies for current account transactions and prohibit us from converting our RMB-denominated earnings into foreign currencies. If this occurs, our PRC joint venture may not be able to pay us dividends in foreign currency without prior approval from SAFE. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or equity financing and our ability to make overseas acquisitions or investments.
Fluctuation in the value of RMB could adversely affect the value of, and dividends payable on, our shares in foreign currency terms.
The value of RMB is subject to changes in PRC government policies and depends to a large extent on China’s domestic and international economic, financial and political developments, as well as the currency’s supply and demand in the local market. For over a decade from 1994, the conversion of RMB into foreign currencies, including the U.S. dollar, was based on exchange rates set and published daily by the People’s Bank of China, the PRC central bank, based on the previous day’s interbank foreign exchange market rates in China and exchange rates on the world financial markets. The official exchange rate for the conversion of RMB into U.S. dollars remained stable until RMB was revalued in July 2005 and allowed to fluctuate by reference to a basket of foreign currencies, including the U.S. dollar. Under the new policy, RMB will be permitted to fluctuate within a band against a basket of foreign currencies. There remains significant international pressure on the PRC government to adopt a substantially more liberalized currency policy, which could result in a more volatile fluctuation in the value of RMB against the U.S. dollar, which may materially and negatively impact our costs of doing business and revenues from export sales.
The uncertain legal environment in China could limit the legal protections available to our shareholders.
The PRC legal system is a civil law system based on written statutes. Unlike the common-law system, the civil law system is a system in which decided legal cases have little precedential value. In the late 1970s, the PRC government began to promulgate a comprehensive system of laws and regulations to provide general guidance on economic and business practices in China and to regulate foreign investments. Our PRC joint venture is a Sino-Foreign joint venture and is subject to laws and regulations applicable to foreign investment in China in general and laws and regulations applicable to foreign-invested enterprises in particular. China has made significant progress in the promulgation of laws and regulations dealing with economic matters such as corporate organization and governance, foreign investment, commerce, taxation and trade. However, the promulgation of new laws, changes of existing laws and abrogation of local regulations by national laws may have a negative impact on our business and prospects. In addition, as these laws, regulations and legal requirements are relatively recent and because of the limited volume of published cases, the interpretation and enforcement of those laws, regulations and legal requirements involve significant uncertainties. These uncertainties could limit the legal protections available to foreign investors, including our shareholders. For example, it is not clear if a PRC court would enforce in China a foreign court decision made in any case brought by our shareholders against us in shareholders’ derivative actions.
Moreover, the enforceability of contracts in China, especially with governmental entities, including state-owned enterprises, is relatively uncertain. If counterparties repudiated our contracts or defaulted on their obligations, we might not have adequate remedies. Such uncertainties or inability to enforce our contracts could materially and adversely affect our revenues and earnings.
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Our primary source of funds for dividends and other distributions from our operating subsidiary in China is subject to various legal and contractual restrictions and uncertainties as well as the practice of such subsidiary in declaring dividends, and our ability to pay dividends or make other distributions to our shareholders may be negatively affected by those restrictions, uncertainties and dividend practices.
We conduct our core business operations through the Joint Venture. As a result, our profits available for distribution to our shareholders are dependent on the profits available for distribution from the Joint Venture. Under current PRC law, the Joint Venture is regarded as a foreign-invested enterprise in China. Although dividends paid by foreign invested enterprises are not subject to any PRC corporate withholding tax, PRC law permits payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. Under PRC law, the Joint Venture is required to set aside 10% of its net income each year to fund a designated statutory reserve fund until such funds reach 50% of registered share capital. These reserves are not distributable as cash dividends. As a result, our primary internal source of funds for dividend payments is subject to these and other legal and contractual restrictions and uncertainties, which in turn may limit or impair our ability to pay dividends to our shareholders although we do not presently anticipate paying any dividends. Moreover, any transfer of funds from us to the Joint Venture, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and the Joint Venture could restrict our ability to act in response to changing market conditions. To date, the Joint Venture has not distributed any profits and does not anticipate doing so in the foreseeable future.
China’s economic reform policies, including the risk of nationalization, could result in a total investment loss in our common stock.
Since 1979, the Chinese government has reformed its economic systems. Because many reforms are unprecedented or experimental, they are subject to risks and even set-backs. Other political, economic and social factors, such as political changes, changes in the rates of economic growth, unemployment or inflation, or the disparities in per capita wealth between regions within China, could lead to further adjustment of the reform measures. This refining and adjustment process may negatively affect our operations.
Although the Chinese government controls many productive assets in China, in the past several years the government has implemented economic reform measures that emphasize decentralization and encourage private economic activities. Because these economic reform measures may be inconsistent or ineffectual, there are no assurances that:
| ● | We will be able to capitalize on economic reforms; | |
| ● | The Chinese government will continue its pursuit of economic reform policies; | |
| ● | The economic policies, even if pursued, will be successful; | |
| ● | Economic policies will not be significantly altered from time to time; and | |
| ● | Business operations in China will not become subject to the risk of nationalization. |
There can be no assurance that the reforms to China’s economic system will continue or that we will not be adversely affected by changes in China’s political, economic, and social conditions and by changes in policies of the Chinese government, such as changes in laws and regulations, measures which may be introduced to control inflation, changes in the rate or method of taxation, changes affecting currency conversion and remittance abroad, and changes in tariffs and other import controls. A material change in China’s economic reform policies, including the risk of nationalization, could result in a total loss of investment in our common stock.
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Because our principal operating company is organized under the laws of China, and substantially all of our assets are located in China, our shareholders may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing original actions in China against us or our management.
The Joint Venture is incorporated under the laws of China and substantially all of our assets are located in China. In addition, all of our directors and executive officers reside within China, and substantially all of the assets of these persons are located within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon our directors or executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state laws. Moreover, China does not have treaties providing for the reciprocal recognition and enforcement of court judgments with the United States, the United Kingdom, Japan or many other countries. As a result, recognition and enforcement in China of judgments issued by courts in the United States or any of the other jurisdictions mentioned above in relation to any matter may be difficult or impossible. Furthermore, an original action may be brought in China against us, our directors, managers, or executive officers. In connection with any such original action, a Chinese court may award civil liability, including monetary damages. However, there is no assurance that such judgment can be effectively or timely enforced in China.
It is likely that China will adopt stricter environmental regulations relating to the manufacturing, transportation, storage, use and disposal of materials used to manufacture our products or restricting the disposal of any waste by us, which would likely increase our operating costs.
National, provincial and local laws of China impose various environmental regulations relating to the manufacturing of automotive parts and/or of certain materials used in the manufacturing process of automotive parts. Although we believe that our operations are in substantial compliance with current environmental regulations, there can be no assurance that changes in such laws and regulations will not impose costly compliance requirements on us or otherwise subject us to future liabilities. In addition, China is experiencing substantial problems with environmental pollution. Accordingly, it is likely that its national, provincial and local governmental agencies will adopt stricter pollution controls. Any such regulations relating to the manufacturing, transportation, storage, use and disposal of materials used to manufacture our products or restricting the disposal of any waste by us would likely increase our operating costs.
Risks Related to Our Common Stock
The market price for our common stock may be volatile, which could result in a complete loss of your investment.
The market price for our common stock may be volatile, in response to factors, such as:
| ● | actual or anticipated fluctuations in our quarterly operating results; | |
| ● | announcements of new products by us or our competitors; | |
| ● | changes in financial forecasts by securities analysts; | |
| ● | changes in the economic performance or market valuations of other companies involved in the production of automotive parts; | |
| ● | announcements by our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments; | |
| ● | additions or departures of key personnel; | |
| ● | intellectual property or other litigation; and | |
| ● | changes in conditions in the automotive market, including change in macroeconomic conditions or other development in the market, especially in China. |
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In addition, the securities markets have from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
We may issue additional shares of our capital stock to raise additional cash to fund working capital. If we issue additional shares of our capital stock, our stockholders may experience dilution in their respective percentage ownership in us.
We may seek to further expand our operations and therefore we may issue additional shares of our capital stock to raise additional cash to fund working capital. If we issue additional shares of our capital stock, our stockholders may experience dilution in their respective percentage ownership in us.
A large portion of our common stock is controlled by a small number of stockholders and as a result, these stockholders collectively are able to control the outcome of stockholder votes on various matters.
A large portion of our common stock is held by a small number of stockholders. Mr. Xiao Ping Zhang, our Chairman and Chief Executive Officer, his wife Ms. Shu Ping Chi, and his brother Mr. Xiao Feng Zhang, all of whom are the directors of our board, holding approximately 47.1%, 5.9% and 5.9% respectively, of the Company’s outstanding common stock as of December 31, 2019. As a result, these stockholders collectively are able to control the outcome of stockholder votes on various matters, including the election of directors and other corporate transactions including business combinations.
Because of the relatively small public float of our common stock, any sale of a large number of shares of our common stock, or the market perception that such a sale could occur, may significantly affect our stock price and could impair our ability to raise future capital.
Because of the relatively small public float of our common stock, any sale of a large number of shares of our common stock, or the perception that such sale could occur, may significantly affect our stock price and could impair our ability to raise future capital through an offering of equity securities. This could have an adverse effect on our business by restricting our access to working capital to fund growth and operations.
If we cannot continue to satisfy the Nasdaq Global Market’s listing maintenance requirements and other Nasdaq rules, our common stock could be delisted, which could negatively affect the price of our common stock and your ability to sell them.
In order to maintain our listing on the Nasdaq Global Market, we will be required to comply with Nasdaq rules which include rules regarding minimum shareholders’ equity, minimum share price, and certain corporate governance requirements. We may not be able to continue to satisfy the listing maintenance requirements of the Nasdaq Global Market and other applicable Nasdaq rules. If we are unable to satisfy the NASDAQ criteria for maintaining listing, our common stock could be subject to delisting. If our common stock is delisted, trading, if any, of our common stock would thereafter be conducted in the over-the-counter market, such as the so-called “OTC Pink” or the Over-the-Counter Bulletin Board (“OTCBB”). As a consequence of any such delisting, our share price could be negatively affected and our stockholders would likely find it more difficult to dispose of, or to obtain accurate quotations as to the prices of, our common stock.
We do not intend to pay dividends on shares of our common stock in the foreseeable future.
We have never paid cash dividends on our common stock. Our current board of directors does not anticipate that we will pay cash dividends in the foreseeable future. Instead, we intend to retain future earnings for reinvestment in our business and/or to fund future acquisitions. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. Under PRC law, the Joint Venture is required to set aside a portion of its net income each year to fund designated statutory reserve funds.
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We may be required to indemnify our officers and directors, which could result in substantial expenditures, which we may be unable to recoup.
Our Bylaws provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, for damages, attorneys’ fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of us. Such indemnification obligations could result in substantial expenditures, which we may be unable to recoup.
There can be no assurance that we will have the personnel, financial resources or expertise to continue to meet requirements of Sarbanes-Oxley Act.
The US Public Company Accounting Reform and Investor Protection Act of 2002, better known as the Sarbanes-Oxley Act, was one of the most sweeping laws to affect U.S. publicly-traded companies in 70 years. The Sarbanes-Oxley Act created a set of complex and burdensome regulations. Compliance with such regulations imposes substantial burdens in terms of financial expense and commitment of personnel. There can be no assurance that we will have the personnel, financial resources or expertise to continue to meet requirements of these regulations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
Our facilities are located in Ruian City, Wenzhou Area, Zhejiang Province, People’s Republic of China, which boasts many automotive parts production facilities similar to ours. On May 5, 2016, through its principal operating subsidiary, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with the Ruili Group, a related party under common control, pursuant to which the Company agreed to purchase 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 Facility”). In exchange for the Development Zone Facility, the Company agree to transfer to the Ruili Group the land use rights and factory facilities of the Dongshan Facility, plus RMB 501,000,000 (approximately $76,533,000) in cash.
The cash consideration in the amount of RMB 481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments before June 30, 2016, and the remaining RMB 20,000,000 (approximately $3,016,000) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and the land use right as specified in the Purchase Agreement. As of the filing date, the Company has not obtained the land use right certificate nor the property ownership certificate of the Development Zone Facility. The total floor area of the Dongshan Facility is 58,714 square meters, which the Company purchased from the Ruili Group in 2007. The total floor area of the Development Zone Facility is 157,619 square meters, which will provide more manufacturing and service capacity to support the Company’s future growth. At the time of the purchase, the Company was leasing 89,229 square meters of the Development Zone Facility from Ruili Group for its brake systems business, of which the lease was going to expire on December 31, 2017. This lease was terminated upon the completion of the purchase. The purchase of the Development Zone Facility would allow the Company to acquire full ownership and control over these important production facilities. The transaction was approved by a committee of independent directors of the Company based on the valuation reports of the Development Zone Facility and the Dongshan Facility provided by an independent real estate appraisal firm.
In July 2017, Ruian, a subsidiary of the Company, purchased plants and the associated land use rights from Yunding Holding Group Co., Ltd. in cash at the purchase price of RMB 60.06 million (approximately $8.87 million). The total cost including related deed tax and stamp duty is RMB 58.95 million (approximately $8.88 million) net of value-added input tax in association with the purchase, which has been fully paid in cash as of September 30, 2017. The title of the plants and the associated land use rights was transferred in July 2017. The allocated costs for the land use rights and the plants are RMB 42.35 million (approximately $6.38 million) and RMB 16.60 million (approximately $2.50 million), respectively. The plants and associated land use rights will be used to meet Ruian’s growing operational needs and is located in the east side of the International Auto Parts District, Tangxia Town, Ruian City, Zhejiang Province, China with a land use area of 33,141 square meters and a building floor area of 25,016 square meters.
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In September 2017, Ruian entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Xianghe Road and North Wansong Road, Binhai New District, Ruian City, Zhejiang Province, China with a total area of 17,029 square meters (the “Wansong Land”). The Company prepaid the amount of RMB 51.81 million (approximately $7.93 million) as full payment. The Company obtained the title to the land use rights in April 2018.
In December 2017, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Fengjin Road and Wenhua Road, Binhai New District, Ruian City, Zhejiang Province, China. As of December 31, 2018, the purchase price of RMB 72.02 million (approximately $11.13 million) was fully paid and the payments were included in prepayments, non-current in the consolidated balance sheets. As of December 31, 2019, the Company paid related deed tax of RMB 2.33 million (approximately $330,000). The Company obtained the title to the land use rights in September 2019.
In April 2018, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Tengda Road and Wanghai Road, Economic Development District, Ruian City, Zhejiang Province, China. Prepayment of RMB 38.68 million (approximately $5.85 million) and refundable deposit of RMB 3.87 million (approximately $585,000) were made during the year ended December 31, 2018. As of December 31, 2019, the Company paid related deed tax of RMB 2.04 million (approximately $292,000). The Company obtained the title to the land use rights in July 2019.
At the production facility, the Company has production equipment, imported from the United States, Korea, and Taiwan, as well as manufactured in mainland China.
The following putative stockholder class action complaints have been filed against the Company and certain officers and directors thereof in connection with the Going Private transaction. The first, Richard Scarantino v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-00216, was filed on February 13, 2020, in the United States District Court for the District of Delaware (the “Delaware Action”). The second, Jose Carlos SanJuan Paz v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-01318, was filed on February 14, 2020, in the United States District Court for the Southern District of New York. The third, Ongarov v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-1815, was filed on March 2, 2020 in the United States District Court for the Southern District of New York. The fourth, Mark Patenaude v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-01929, was filed on March 4, 2020 in the United States District Court for the Southern District of New York. The fifth, Sherri Gough v. SORL Auto Parts, Inc., Case No. 1:20-cv-02182, was filed on March 11, 2020 in the United States District Court for the Southern District of New York. The sixth, Bruce LeBeau v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-02266, was filed on March 13, 2020 in the United States District Court for the Southern District of New York. The complaints allege that the preliminary proxy statement omitted material information with respect to the Going Private transaction that renders the preliminary proxy statement false and misleading. In March 2020, the five actions filed in the Southern District of New York—the Paz, Ongarov, Patenaude, Gough, and LeBeau matters—were consolidated with the Paz action designated as the lead case (the “Consolidated Action”). On April 16, 2020, plaintiff in the Delaware Action voluntarily dismissed his claims without prejudice. Between April 17, 2020, and April 29, 2020, plaintiffs in the Consolidated Action also voluntarily dismissed their claims without prejudice. The seventh, on May 7, 2020, Jose Carlos Sanjuan Paz and Samuel Levin, filed a Section 220 lawsuit in the Delaware Court of Chancery seeking to compel the Company to allow them to inspect certain documents identified in the complaint. The complaint seeks to enjoin defendants from consummating the Going Private transaction. The Company believes the allegations in the complaint are without merit, but cannot predict with certainty the results of the litigation.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
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ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTER AND ISSUER PURCHASES OF EQUITY SECURITIES.
Price Range of Common Stock
On April 18, 2006, our shares of common stock began trading on the Nasdaq Capital Market under the symbol “SORL”. Subsequently, our shares of common stock began trading on the Nasdaq Global Market on November 21, 2006 under the symbol “SORL”. High and low sales prices per share of our common stock as reported on Nasdaq for each quarter ended during 2019 and 2018 are as follows:
| Quarter Ended | Low | High | ||||||
| 2019 | ||||||||
| First Quarter | $ | 2.18 | $ | 3.64 | ||||
| Second Quarter | 3.12 | 3.89 | ||||||
| Third Quarter | 3.06 | 3.78 | ||||||
| Fourth Quarter | 3.08 | 4.48 | ||||||
| 2018 | ||||||||
| First Quarter | $ | 5.76 | $ | 7.42 | ||||
| Second Quarter | 3.95 | 7.09 | ||||||
| Third Quarter | 4.08 | 5.42 | ||||||
| Fourth Quarter | 1.88 | 4.15 | ||||||
These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not represent actual transactions. The high and low prices listed have been rounded up to the next highest two decimal places.
Stockholders
As of December 31, 2019, we had approximately 119 registered stockholders of record of our common stock. This number does not include shares beneficially owned by investors through brokerage clearing houses, depositories or otherwise held in “street name.”
Dividends
We have not declared or paid any cash dividends on our common stock and do not anticipate paying any cash dividends in the foreseeable future. Payment of cash dividends, if any, in the future will be at the sole discretion of our board of directors and will depend upon our debt and equity structure, earnings and financial condition, need for capital in connection with possible future acquisitions and other factors including economic conditions, regulatory restrictions and tax considerations. Additionally, amounts available for dividends are dependent on the profits available for distribution from the Joint Venture. Under current PRC law, the Joint Venture is regarded as a foreign invested enterprise in China. Although dividends paid by foreign invested enterprises are not subject to any PRC corporate withholding tax, PRC law permits payment of dividends only out of net income as determined in accordance with PRC accounting standards and regulations. Determination of net income under PRC accounting standards and regulations may differ from determination under U.S. GAAP in significant aspects, such as the use of different principles for recognition of revenues and expenses. Under PRC law, the Joint Venture is required to set aside a portion of its net income each year to fund designated statutory reserve funds. These reserves are not distributable as cash dividends. Such restrictions and requirements have materially limited or impaired our ability to pay dividends to our shareholders although we do not presently plan to declare or pay any dividends on our common stock. Moreover, any transfer of funds from us to the Joint Venture, either as a shareholder loan or as an increase in registered capital, is subject to registration with or approval by PRC governmental authorities. These limitations on the flow of funds between us and the Joint Venture could restrict our ability to act in response to changing market conditions.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report and other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those presented. Undue reliance should not be placed on these forward-looking statements, which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
The following discussion and analysis of our financial condition and results should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Annual Report on Form 10K, as well as the Risk Factors identified in Item 1A, including without limitation the impacts of COVID-19.
OVERVIEW
On May 10, 2004, we acquired all of the issued and outstanding equity interests of Fairford Holdings Limited, a Hong Kong limited liability company (“Fairford”). Until we acquired Fairford, we had only nominal assets and liabilities and limited business operations. Although Fairford became our wholly-owned subsidiary following the acquisition, because the acquisition resulted in a change of control, the acquisition was recorded as a “reverse merger” whereby Fairford was considered to be the accounting acquirer. As such, the following results of operations were those of Fairford.
Fairford was organized in Hong Kong as a limited liability company on November 3, 2003. Fairford owns 90% of the equity interest of Ruili Group Ruian Auto Parts Co., Ltd., a Sino-Foreign joint venture (the “Joint Venture”) established pursuant to the laws of China. The Joint Venture is a joint venture between our wholly-owned subsidiary Fairford, and the Ruili Group.
The Ruili Group was incorporated in the PRC in 1987 to specialize in the development, production and sale of various kinds of automotive parts. Its headquarters are located in Ruian City, Wenzhou Area, Zhejiang Province, People’s Republic of China, one of the leading automotive parts manufacturing centers of China with more than 1400 auto parts manufacturing companies. Its major product lines include valves for air brake systems, auto metering products, auto electric products, anti-lock brake systems and retarders. Some of those products were developed and are manufactured through affiliated companies of Ruili Group. Due to its leading position in the industry, the Chairman of the Ruili Group, Mr. Xiao Ping Zhang, has been elected as the Chairman of Wenzhou Auto Parts Association, one of the leading auto parts trade associations in China. Mr. Zhang is also the Chairman and Chief Executive Officer of the Company. The Joint Venture was established in the PRC as a Sino-Foreign joint venture company with limited liability by the Ruili Group and Fairford. Fairford and Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture in the aggregate amount of approximately $53.8 million.
In connection with its formation, effective January 19, 2004, the Joint Venture acquired the business of the Ruili Group relating to the manufacture and sale of various kinds of valves for automotive brake systems and related operations (the “Transferred Business”). This was accomplished by the transfer from the Ruili Group to Fairford of the relevant assets and liabilities of the Transferred Business including trade receivables, inventories and machinery, and the assumption of short and long term borrowings, at a consideration of approximately $6.39 million.
The consideration was based on a valuation by an independent PRC valuation firm. Fairford then contributed these assets and liabilities as capital contribution for its 90% interest in the Joint Venture. The Ruili Group also transferred inventory as its capital contribution for its 10% interest in the Joint Venture. The assets and liabilities transferred to the Joint Venture by Fairford and the Ruili Group represented all the relevant assets and liabilities of the Transferred Business.
Pursuant to the formation of the Joint Venture, on January 17, 2004, the Ruili Group and Fairford signed a binding Joint Venture agreement (the “JV Agreement”). Pursuant to the JV Agreement, the board of directors consists of three directors. Fairford has the right to designate two members of the board and the Ruili Group has the right to designate one member. The majority of the board has decision making authority with respect to operating matters. As a result, our wholly-owned subsidiary, Fairford, maintains operating control over the Joint Venture.
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The transactions were accounted for as a reverse spin-off in accordance with EITF 02-11 “Accounting for Spin-offs”. Accordingly, SORL Auto Parts, Inc. was deemed to be the “spinner” for accounting purposes.
In December 2006, pursuant to the terms of the Joint Venture Agreement, as revised, through Fairford, SORL invested a further approximately $32.67 million in its operating subsidiary- the Joint Venture. To maintain its 10% shareholding in the Joint Venture, the Ruili Group increased its capital investment by approximately $3.63 million. SORL Auto Parts, Inc. continues to hold a 90% controlling interest in the operating subsidiary. Pursuant to the JV Agreement and the Joint Venture Agreement, as revised, the total paid-in capital of the Joint Venture increased from $7.1 million to $43.4 million.
As a result of the foregoing, through Fairford’s 90% interest in the Joint Venture, the Company manufactures and distributes automotive brake systems and other key safety related components in China and internationally for use primarily in different types of vehicles, such as trucks and buses. There are 140 categories of valves with over 2,000 different specifications. Management believes that it is the largest manufacturer of automotive air brake systems for commercial vehicles in China.
On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR, a Hong Kong-based global auto parts distribution specialty firm and an unaffiliated Taiwanese individual investor. The new joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. Fairford holds a 60% interest in SIH, MGR holds a 30% interest, and the Taiwanese individual investor holds a 10% interest. SIH is primarily devoted to expand SORL’s international sales network in the Asia-Pacific region and create a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese individual investor for US$77 (HK$600), and the share transfer was approved by the Hong Kong authorities on January 14, 2016. After this transaction, SIH ceased to be a distributor of SORL in the international market.
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 its 10% shareholding in the Joint Venture, the Ruili Group 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”, a related party under common control). 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 US$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 approximately US$8.0 million, US$8.0 million and US$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 Company accounted for the acquisition as a transaction between the entities under common control because Mr. Xiao Ping Zhang, the Chairman and CEO of the Company, owns 63% of the registered capital of the Ruili Group, and, together with his wife (Ms. Shu Ping Chi) and brother (Mr. Xiao Feng Zhang), owns approximately 58.8% of the outstanding common stock of SORL. As a result, the Company accounted for the acquisition using the historical costs of the financial statements of the Ruili Group. The consolidated financial statements have been prepared as if the acquisition took place at the earliest time presented, that is, as of January 1, 2009. The asset purchase was deemed to be the acquisition of a business.
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On October 30, 2015, Mr. Xiao Ping Zhang, the Chairman and CEO of the Company, together with his wife (Ms. Shu Ping Chi) and brother (Mr. Xiao Feng Zhang) (collectively, the “Consortium”) submitted a non-binding proposal (the “Proposal”) to the board of directors of the Company proposing to acquire all of the outstanding shares of the Company’s common stock not already owned by the Consortium at a price of $2.84 per share in cash and if successful in that acquisition, to cause the Company’s common stock to be delisted from NASDAQ and to be deregistered under the Securities Exchange Act of 1934, as amended. The board of directors subsequently formed a special committee (the “Special Committee”) consisting of independent directors to evaluate the Proposal. On January 8, 2016, the Consortium sent a letter to the Special Committee withdrawing the Proposal citing concerns over recent market conditions.
On May 5, 2016, the Company, through its principal operating subsidiary, entered into a Purchase Agreement (the “Purchase Agreement”) with the Ruili Group, a related party under common control, pursuant to which the Company agreed to purchase 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 Facility”). In exchange for the Development Zone Facility, the Company agree to transfer to the Ruili Group the land use rights and factory facilities of the Dongshan Facility, plus RMB 501,000,000 (approximately $76,533,000) in cash.
The cash consideration in the amount of RMB 481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments before June 30, 2016, and the remaining RMB 20,000,000 (approximately $3,016,000) will be paid within 10 days of completion of the required procedures for transferring the title of the facilities and the land use right as specified in the Purchase Agreement. As of the filing date, the Company has not obtained the land use right certificate nor the property ownership certificate of the Development Zone Facility. The total floor area of the Dongshan Facility is 58,714 square meters, which the Company purchased from the Ruili Group in 2007. The total floor area of the Development Zone Facility is 157,619 square meters, which will provide more manufacturing and service capacity to support the Company’s future growth. At the time of the purchase, the Company was leasing 89,229 square meters of the Development Zone Facility from Ruili Group for its brake systems business, of which the lease was going to expire on December 31, 2017. This lease was terminated upon the completion of the purchase. The purchase of the Development Zone Facility would allow the Company to acquire full ownership and control over these important production facilities. The transaction was approved by a committee of independent directors of the Company based on the valuation reports of the Development Zone Facility and the Dongshan Facility provided by an independent real estate appraisal firm.
On April 26, 2019, the Company announced its receipt of a preliminary non-binding proposal letter (the “Proposal”), dated April 25, 2019, from Mr. Xiaoping Zhang, Chairman and Chief Executive Officer of the Company, Ms. Shuping Chi and Mr. Xiaofeng Zhang, directors of the Company and Ruili Group Co., Ltd. (together, the “Consortium”), to acquire all of the outstanding shares of common stock of the Company not already owned by the Consortium.
On May 21, 2019, the Board of Directors of the Company formed a special committee (the “Special Committee”) of independent directors consisting of Mr. Xiao Lin and Mr. Binghua Feng, with Mr. Lin as the Chairman of the Special Committee, to evaluate the Proposal.
On November 29, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Ruili International Inc. (“Parent”), a Delaware corporation, and Ruili International Merger Sub Inc. (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of Parent. Parent was formed by Mr. Xiaoping Zhang solely for the purpose of entering into the Merger Agreement and consummating the Going Private transaction contemplated thereby. Pursuant to the Merger Agreement, subject to the terms and conditions thereof, at the effective time , Merger Sub will be merged with and into the Company (the “Merger”), with the Company being the surviving corporation, and each share of common stock of the Company issued and outstanding immediately prior to the effective time of the Merger will be automatically cancelled and converted into the right to receive $4.72 in cash without interest, except for (i) shares of common stock beneficially owned by members of the Consortium, Parent, Merger Sub or their respective affiliates, which will be automatically cancelled for no consideration at the effective time of the Merger, and (ii) shares of common stock held by stockholders who have not voted in favor of the Merger and who have properly and validly perfected and not effectively withdrawn or lost their statutory rights of appraisal in accordance with Section 262 of the General Corporation Law of the State of Delaware (“Section 262”), which will be automatically cancelled at the effective time of the Merger and will cease to have any rights with respect thereto, except the right to receive payment of the appraised value of such shares to be determined in accordance with the provisions of Section 262.
On May 8, 2020, a special meeting of the stockholders (the “Special Meeting”) was held and as of the record date of April 2, 2020, the Company had 19,304,921 shares of common stock outstanding that are entitled to vote, of which 15,393,221 shares, representing approximately 79.74% of the outstanding shares entitled to vote, voted in favor of the proposal to adopt the Merger Agreement. Specifically, 4,033,818 shares, representing approximately 50.77% of the outstanding share of common stock entitled to vote owned by the unaffiliated stockholders, voted in favor of the proposal to adopt the Merger Agreement, satisfying the majority of unaffiliated stockholders voting requirement set forth in the Merger Agreement.
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On May 15, 2020, the Company completed the Merger, pursuant to the terms of the Merger Agreement by and among the Company, Parent and Merger Sub. As a result of the Merger, the Company became a wholly owned subsidiary of Parent. The aggregate consideration paid in connection with the Merger was approximately $37.5 million. The consideration was funded through equity contributions in cash as contemplated by the equity commitment letter, dated as of November 29, 2019, between Parent and Ruili Group Co., Ltd. Pursuant to the terms of the Merger Agreement, each share of Company Common Stock issued and outstanding immediately prior to the effective time of the Merger, other than shares held by Parent (representing shares contributed to Parent by Mr. Xiaoping Zhang, Ms. Shuping Chi and Mr. Xiaofeng Zhang) which shares have been cancelled for no consideration, was canceled and automatically converted into the right to receive $4.72 per share in cash, without interest. In connection with the consummation of the Merger on May 15, 2020, the following individuals submitted their resignations and ceased to be members of the board of directors of the Company: Xiaofeng Zhang, Shuping Chi, Binghua Feng, Huilin Wang, Jianghua Feng, Jinbao Liu, Xiao Lin and Yuhong Li. Xiaoping Zhang remains as the Company’s sole director following the consummation of the Merger.
In connection with the completion of the Merger, the Company notified the Nasdaq Stock Market (“NASDAQ”) of its intent to remove its common stock, par value $0.002 (“Company Common Stock”) from listing on NASDAQ prior to opening of trading on May 15, 2020, and NASDAQ filed a delisting application on Form 25 with the Securities and Exchange Commission (the “SEC”) to delist and deregister the Company Common Stock as of May 15, 2020. The Company has filed with the SEC a certification on Form 15 on May 26, 2020 under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), requesting the suspension of the Company’s reporting obligations under the Exchange Act.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with U.S. GAAP requires us to make judgments and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Those judgments and estimates have a significant effect on the consolidated financial statements because they result primarily from the need to make estimates about the effects of matters that are inherently uncertain. Actual results could differ significantly from those estimates. We periodically re-evaluate our judgments and estimates that are based upon historical experience and on various other assumptions that we believe to be reasonable under the circumstances.
We believe that the following critical accounting policies set forth below involve the most significant judgments and estimates used in the preparation of our consolidated financial statements. We evaluate these policies on an ongoing basis, based upon historical results and experience, consultation with experts, trends and other methods we consider reasonable in the particular circumstances, as well as our forecasts as to how these might change in the future.
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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.
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 | 3-5 | |
| Motor vehicles | 3-10 | |
| 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.
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.
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.
The allowances are calculated based on a detailed review of certain individual customer accounts, historical collectability rates, a general provision based on aging 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.
Lease Commitments
On January 1, 2019, the Company has adopted Accounting Standard Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Right-of-use (ROU) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. We have elected not to recognize ROU assets and lease liabilities for short-term leases for all classes of underlying assets. Short-term leases are leases with terms greater than 1 month, but less than 12 months.
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Warranties
Estimated product warranty expenses are accrued in selling expenses at the time the related sales are recognized. We base our estimate on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims and discussions with our customers.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is calculated on the weighted-average basis and includes all costs to acquire and other costs incurred in bringing the inventories to their present location and condition. The Company evaluates the net realizable value of its inventories on a regular basis and records a provision for loss to reduce the computed weighted-average cost if it exceeds the net realizable value.
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.
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Tax Act. The Company is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.
During the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company also recognized related interest and penalty in the amount of $587,821 in the year ended December 31, 2018. During the year ended December 31, 2019, the Company made the first installment payment of $881,839 and accrued $167,415 penalty and interest for late payment. As of December 31, 2019, the total estimated transition tax liability was $10,896,381, of which $2,518,913 was included in income tax payable, current as a current liability which the Company believes will be paid within one year and the remaining balance was included in income tax payable, non-current. The actual impact of the U.S. Tax Reform on the Company may differ from management’s estimates, and management may update its judgments based on future regulations or guidance issued or changes in the interpretations taken that would adjust the provisional amounts recorded.
The 2017 Tax Act also created a new requirement that, for the periods beginning after January 1, 2018, certain income (referred to as global intangible low-taxed income or “GILTI”) earned by foreign subsidiaries in excess of a deemed return on tangible assets of foreign corporations must be included in U.S. taxable income. The GILTI income is eligible for a deduction, which lowers the effective tax rate to 10.5% for calendar years 2018 through 2025 and 13.125% after 2025. Under U.S. GAAP, companies are allowed to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which a company is subject to the rules – the period cost method, or (ii) account for GILTI in a company’s measurement of deferred taxes – the deferred method. The Company elected to account for GILTI in the period the tax is incurred. During the years ended December 31, 2019 and 2018, the Company accrued $539,017 and $0 GILTI tax, respectively.
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 Company renewed the “High-Tech Enterprise” designation in November 2018 for another three years which will expire in 2021. Therefore, the Company is taxed at 15% tax rate for the years ended December 31, 2019 and 2018.
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Revenue Recognition
The Company has adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective January 1, 2018. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer.
FACTORS THAT MAY INFLUENCE RESULTS OF OPERATIONS
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of accounts receivable. 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.
RESULTS OF OPERATIONS
Revenue
The year ended December 31, 2019 as compared to the year ended December 31, 2018:
| Years Ended December 31, | ||||||||||||||||
| Sales | 2019 | Percent of Total sales | 2018 | Percent of Total sales | ||||||||||||
| (U.S. dollars in millions) | ||||||||||||||||
| Commercial vehicle brake systems, etc. | $ | 448.7 | 83.1 | % | $ | 386.2 | 82.5 | % | ||||||||
| Passenger vehicle brake systems, etc. | $ | 91.5 | 16.9 | % | $ | 81.9 | 17.5 | % | ||||||||
| Total | $ | 540.2 | 100.0 | % | $ | 468.0 | 100.0 | % | ||||||||
Total sales were $540.2 million and $468.0 million for the years ended December 31, 2019 and 2018, respectively, representing an increase of $72.2 million or 15.4% year over year. The increase was mainly due to the increased sales of commercial vehicle brake systems to China OEM market.
The sales from commercial vehicle brake systems increased by $62.5 million or 16.2%, to $448.7 million for the year ended December 31, 2019, compared to $386.2 million for the year ended December 31, 2018. The sales from passenger vehicle brake systems increased by $9.6 million or 11.7%, to $91.5 million for the year ended December 31, 2019, compared to $81.9 million for the year December 31, 2018. Our high quality, low cost products continued to generate higher sales and further penetrated into the vehicle market, which impacted the sales of the vehicle brake systems.
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A breakdown of sales revenue for our three principal markets, Chinese OEM market, Chinese Aftermarket and International Market, in 2019 and 2018 is as follows:
| Years Ended December 31, | ||||||||||||||||||||
| Percent of | Percent of | Percentage | ||||||||||||||||||
| 2019 | Total sales | 2018 | Total sales | Change | ||||||||||||||||
| (U.S. dollars in millions) | ||||||||||||||||||||
| Chinese OEM market | $ | 257.1 | 47.6 | % | $ | 236.1 | 50.5 | % | 8.9 | % | ||||||||||
| China Aftermarket | $ | 202.3 | 37.4 | % | $ | 147.0 | 31.4 | % | 37.6 | % | ||||||||||
| International market | $ | 80.8 | 15.0 | % | $ | 84.9 | 18.1 | % | -4.8 | % | ||||||||||
| Total | $ | 540.2 | 100.0 | % | $ | 468.0 | 100.0 | % | 15.4 | % | ||||||||||
With the increase of the production and sales of the commercial vehicle market, our sales to the Chinese OEM market increased by $21.0 million or 8.9%, to $257.1 million in 2019, from $236.1 million in 2018.
Our sales to the Chinese aftermarket increased by $55.3 million or 37.6%, to $202.3 million for the year of 2019, compared to $147.0 million for the year of 2018. The increased new vehicle sales in China and the expiration of OEM warranties helped to drive our aftermarket business. Accelerated urbanization and the Chinese government’s increased support for public transportation favor our expansion in the bus aftermarket. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets.
Our export sales decreased by $4.1 million or 4.8%, to $80.8 million for the year of 2019, as compared to $84.9 million for the year of 2018. The decrease in export sales was mainly due to the truck production decline in some countries.
Cost of Sales and Gross Profit
Cost of sales for the year ended December 31, 2019 increased to $400.0 million from $345.5 million for the year ended December 31, 2018, an increase of $54.5 million, or 15.8%.
Gross profit for the year ended December 31, 2019, increased by $17.6 million or 14.4% to $140.1 million from $122.5 million for the year ended December 31, 2018, as a result of the increased sales.
Gross margin decreased to 25.9% in 2019 from 26.2% in 2018. The decrease was primarily due to we enhanced the price promotion during the year ended December 31, 2019, to strengthen our competitiveness and increase our market share.
Cost of sales from commercial vehicle brake systems for the year ended December 31, 2019 were $335.4 million, an increase of $45.7 million or 15.8%, from $289.7 million for the year ended December 31, 2018. The gross profit from commercial vehicle brake systems increased by 17.5% to $113.3 million for the year ended December 31, 2019 from $96.5 million for the year of 2018. Gross margin from commercial vehicle brake systems increased to 25.3% for the year ended December 31, 2019 from 25.0% in 2018. The increase was primarily due to higher sales of high margin, electronically controlled products during the year ended December 31, 2019.
Cost of sales from passenger vehicle brake systems for the year ended December 31, 2019 were $64.6 million, an increase of $8.8 million or 15.8% from $55.8 million for the year ended December 31, 2018. The gross profit from passenger vehicle brake systems increased by 3.0% to $26.8 million for the year of 2019 from $26.0 million for the year of 2018. Gross margin from passenger vehicle brake systems decreased to 29.3% for the year ended December 31, 2019 from 31.8% in 2018. We intend to focus in 2020 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us increase our gross profit margins.
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Selling Expenses
Selling expenses were $60.8 million for the year ended December 31, 2019, as compared to $55.2 million for the year ended December 31, 2018, an increase of $5.7 million or 10.3%. The increase was mainly due to increased freight expense and packaging expenses as well as increased compensation for sales employees with the increase in sales. As a percentage of sales revenue, selling expenses decreased to 11.3% for the year ended December 31, 2019, as compared to 11.8% for the same period in 2018.
General and Administrative Expenses
General and administrative expenses were $35.2 million for the year ended December 31, 2019, as compared to $26.9 million for the year ended December 31, 2018, an increase of $8.3 million or 30.6%. The increase was mainly due to the increased sales. As a percentage of sales revenue, general and administrative expenses increased to 6.5% for the year ended December 31, 2019, as compared to 5.8% for the same period in 2018.
Research and Development Expense
Research and development expense was $21.4 million for the year ended December 31, 2019, as compared with $16.4 million for the year ended December 31, 2018, an increase of $5.0 million or 31.0%. The Company expects to continue to invest in new product development, particularly in upgrading traditional products and developing electronically controlled products.
Other Operating Income
For the year ended December 31, 2019, other operating income was $11.2 million compared with $10.1 million for the year ended December 31, 2018, an increase of $1.1 million or 10.9%. The increase was due to an increase in sales of raw material scrap for the year ended December 31, 2019.
Depreciation and Amortization
Depreciation and amortization expense increased to $14.5 million for the year ended December 31, 2019, compared with depreciation and amortization expense of $11.9 million for the year ended December 31, 2018. The increase in depreciation and amortization expense was due to the acquisitions of plant, property, equipment and land use rights during the year.
Interest Income
The interest income for the year ended December 31, 2019, decreased to $5.3 million from $6.1 million for the year ended December 31, 2018, mainly due to decreased interest income from advances to related parties during the year.
Interest Expenses
The interest expenses for the year ended December 31, 2019, decreased to $11.6 million from $13.6 million for the year ended December 31, 2018, mainly due to decreased interest rate during the year.
Income Tax
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Tax Act. The Company is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.
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During the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company also recognized related interest and penalty in the amount of $587,821 in the year ended December 31, 2018. During the year ended December 31, 2019, the Company made the first installment payment of $881,839 and accrued $167,415 penalty and interest for late payment. As of December 31, 2019, the total estimated transition tax liability was $10,896,381, of which $2,518,913 was included in income tax payable, current as a current liability which the Company believes will be paid within one year and the remaining balance was included in income tax payable, non-current. The actual impact of the U.S. Tax Reform on the Company may differ from management’s estimates, and management may update its judgments based on future regulations or guidance issued or changes in the interpretations taken that would adjust the provisional amounts recorded.
The 2017 Tax Act also created a new requirement that, for the periods beginning after January 1, 2018, certain income (referred to as global intangible low-taxed income or “GILTI”) earned by foreign subsidiaries in excess of a deemed return on tangible assets of foreign corporations must be included in U.S. taxable income. The GILTI income is eligible for a deduction, which lowers the effective tax rate to 10.5% for calendar years 2018 through 2025 and 13.125% after 2025. Under U.S. GAAP, companies are allowed to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which a company is subject to the rules – the period cost method, or (ii) account for GILTI in a company’s measurement of deferred taxes – the deferred method. The Company elected to account for GILTI in the period the tax is incurred. During the years ended December 31, 2019 and 2018, the Company accrued $539,017 and $0 GILTI tax, respectively.
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 Company renewed the “High-Tech Enterprise” designation in November 2018 for another three years and which will expire in 2021. Therefore, the Company is taxed at 15% tax rate for the years ended December 31, 2019 and 2018.
Income tax expense of $3.8 million and $15.8 million was recorded for the years of 2019 and 2018, respectively.
Net Income Attributable to Non-controlling Interest in Subsidiaries
Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian. Net income attributable to non-controlling interest in subsidiaries amounted to $2.9 million and $2.7 million for the years ended December 31, 2019 and 2018, respectively.
Net Income Attributable To Stockholders
The net income attributable to stockholders for the year ended December 31, 2019 increased to $25.4 million from $12.7 million for the year ended December 31, 2018 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for 2019 and 2018, were $1.32 and $0.66 per share, respectively.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
As of December 31, 2019, the Company had cash, cash equivalents and restricted cash of $45.5 million, as compared to cash, cash equivalents and restricted of $111.0 million at December 31, 2018. The Company had working capital of $51.2 million at December 31, 2019, as compared to working capital of $47.3 million at December 31, 2018, reflecting current ratios of 1.1:1 and 1.1:1, respectively.
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OPERATING - Net cash used in operating activities was $40.2 million for the year ended December 31, 2019, as compared to $161.2 million of net cash provided by operating activities for the year ended December 31, 2018, an decrease of $201.4 million, primarily due to the decreased cash inflows as a result of the change in accounts receivable collection, deposits received from customers and accounts payable and bank acceptance notes to vendors.
INVESTING - For the year ended December 31, 2019, the Company used net cash of $47.8 million in investing activities mainly for acquisition of plant, property, equipment and land use rights. During the year ended December 31, 2018, the Company used net cash of $137.8 million in investing activities.
FINANCING - For the year ended December 31, 2019, net cash provided by financing activities was $23.6 million. Net cash provided by financing activities was $85.8 million for the year ended December 31, 2018.
We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements in the foreseeable future.
OFF-BALANCE SHEET AGREEMENTS
As of December 31, 2019, and December 31, 2018, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.
Even if the Company is unable to timely resolve obtain the land use right certificate for the land and related building, the Company believes that there will be no potential adverse implication on the Company for the following reasons.
1. The Company acquired the land use rights in a transaction between the Company and the Ruili Group, a related party. The Ruili Group, as the original land use right owner, has granted the land use right to the Company by contract which is supported by valid consideration.
2. No third party would oppose the Company’s use of the land, because no third party has any interest in the land use right or property ownership right, other than the Ruili Group and the government.
a) The Ruili Group promised that the Company has the right to use the land and related building, even before the land use certificate is transferred.
b) According to the laws of China, the government owns all the land and the buildings attached to the land in China. Once the land use right is granted to Ruili Group, Ruili Group has the right to assign its land use rights to any third parties, including the Company, without interference from the government. Therefore, it is unlikely that the government will oppose the Company’s right to use the land and related building.
c) The Company has reserved tax payables in the amount of RMB 19,007,341 (approximately US$2,872.675) on its consolidated balance sheets under the line item “accrued expenses” as if no reduction or exemption of tax is approved. This amount was determined based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered as the most probable amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay if the negotiation with the local government ultimately is not successful.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations as of December 31, 2019 that require us to make future cash payments.
| Payments due by period | ||||||||||||||||||||
| Total | Less than 1 year | 1-3 years | 3-5 years | 5+ years | ||||||||||||||||
| Long term loans | $ | 49,714,338 | $ | 27,281,726 | $ | 22,432,612 | $ | - | $ | - | ||||||||||
| Operating lease obligations | 1,162,969 | 430,973 | 731,996 | - | - | |||||||||||||||
| Total | $ | 50,877,307 | $ | 27,712,699 | $ | 23,164,608 | $ | - | $ | - | ||||||||||
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company did not have any material market risk with respect to such factors as commodity prices, equity prices, and other market changes that affect market risk sensitive investments.
Although our reporting currency is the U.S. dollar, the functional currency of Joint Venture is primarily RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our RMB revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. In prior years, the RMB had been appreciating against the U.S. dollar. During the last couple of years, the RMB started to depreciate against the U.S. dollars.
Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical exchange rate and their income and expenses are translated using the average rate for the period. Therefore, we are subject to foreign exchange risk. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. The Company is adopting strategies to reduce the foreign exchange risk, such as diversifying currencies used in export sales, and negotiating of export contracts with fixed exchange rates. However, we cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business results of operations and financial condition.
As the Company’s historical debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any risk from an increase in market interest rates. However, to the extent that the Company arranges new borrowings in the future, an increase in market interest rate may cause a commensurate increase in the interest expense related to such borrowings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company’s financial statements required by this item are included on pages F-1 through F-34 of this Annual Report. See Item 15(a)(l) for a listing of financial statements provided.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of December 31, 2019 was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(b) of the Exchange Act). Based on this evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures, as of December 31, 2019, were effective, in all material respects, for the purpose stated above.
(b) Management’s Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such item is defined in Exchange Act Rules 13a-15(f) and 15d-15(f).
Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Because of its inherent limitations, internal control is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected. In evaluating the Company’s internal control over financial reporting, management has adopted the framework in Internal Control-Integrated Framework issued in 2013 by the Committee of Sponsoring Organizations of the Treadway Commission, or the Original Framework. Under the supervision, and with the participation of our management, including CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2019. Based on our evaluation under the framework in the Original Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2019.
(c) Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting that occurred during the fourth fiscal quarter of the year covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
None.
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following discussions are only relevant before the completion of the Going Private transaction on May 15, 2020. In connection with the consummation of the Merger on May 15, 2020, the following individuals submitted their resignations and ceased to be members of the board of directors of the Company: Xiaofeng Zhang, Shuping Chi, Binghua Feng, Huilin Wang, Jianghua Feng, Jinbao Liu, Xiao Lin and Yuhong Li. Xiaoping Zhang remains as the Company’s sole director following the consummation of the Merger.
We are committed to having sound corporate governance principles. Having such principles is essential to running our business efficiently and to maintaining our integrity in the marketplace. We have adopted a code of ethics that applies to all of our directors, officers and employees. A copy of our code of ethics is posted on our Internet site at http://www.sorl.cn/?p=97.
Board of Directors Leadership Structure and Role in Risk Oversight
Our Board of Directors included a majority of independent directors, and our Chief Executive Officer, Xiao Ping Zhang, serves as Chairman of the Board. Mr. Zhang has served as the Chairman of the Board since May 7, 2004. Having our Chief Executive Officer serve as Chairman of the Board is consistent with the historical practice of our Company.
In addition to a majority of our directors being independent, all of the directors on each of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee of the Company are independent directors, and each of these committees is led by a committee chair. The committee chairs set the agendas for their respective committees and report to the full Board on their work. We do not have a lead director, but our non-management directors meet in executive sessions without management present as frequently as they deem appropriate. The chairs of the independent board committees rotate as presiding director and the presiding director acts as a liaison between the non-management directors and Mr. Zhang, Chairman of the Board and Chief Executive Officer.
Our Company has employed this leadership structure of having a combined Chairman of the Board and Chief Executive Officer for many years, and we believe that this leadership structure has been effective for the Company. We believe that having a combined Chairman of the Board and Chief Executive Officer, a Board with a majority of independent directors who meet regularly in executive sessions, and independent chairs for the Board’s Audit, Compensation, and Nominating and Corporate Governance committees provides an effective form for the governance of the Company. The independent directors believe that because the Chief Executive Officer, subject to the supervision of the Board, is ultimately responsible for the day-to-day operation of the Company and for executing the Company’s strategy, and because the performance of the Company is an integral part of the board deliberations, the Chief Executive Officer is best qualified to act as the Chairman of the Board.
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Our Board is responsible for overseeing our risk management. The Board delegates many of these functions to the Audit Committee. As discussed below, under its charter, the Audit Committee is responsible for discussing management policies with respect to financial risk assessment and enterprise risk management, including guidelines to govern the process by which major financial and accounting risk assessment and management is undertaken by the Company. The Audit Committee also oversees our corporate compliance programs, as well as the internal audit function. In addition to the Audit Committee’s work in overseeing risk management, our full Board regularly engages in discussions of the material risks that the Company is facing and how these risks are being managed, and the Board receives reports on risk management from senior officers of the Company and from the chair of the Audit Committee. The Board receives periodic assessments from the Company’s ongoing enterprise risk management process that are designed to identify risk factors that may affect the achievement of the Company’s objectives.
Committees of the Board
The Board has the following three standing committees: Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee. The membership during the last fiscal year through the date of this information statement, and the function of each of the committees, are described below. During fiscal year 2019, the Board held four meetings. Each director attended at least 75% of all Board and applicable committee meetings. Although we do not have a formal policy regarding attendance by members of our Board at our annual meeting of stockholders, we encourage all of our directors to attend. Three members of our Board of Directors attended last year’s annual meeting of stockholders.
On May 21, 2019, the Board formed a special committee (the “Special Committee”) of independent directors consisting of Mr. Xiao Lin and Mr. Binghua Feng, with Mr. Lin as the Chairman of the Special Committee, to evaluate the Proposal.
The Board has determined that each member of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee is independent within the meaning of Nasdaq Rule 5605(a)(2), and that each member of the Audit Committee is independent within the meaning of applicable regulations of the SEC regarding the independence of audit committee members.
Director |
Audit Committee |
Compensation Committee |
Nominating
and Corporate Governance Committee | |||
| Yu Hong Li | X | X | ||||
| Hui Lin Wang | X | X | X | |||
| Jin Bao Liu | X | X | ||||
| Jiang Hua Feng | X | X | ||||
| Xiao Lin | ||||||
| Binghua Feng |
Audit Committee. The members of our Audit Committee are Ms. Yu Hong Li, Mr. Hui Lin Wang and Mr. Jin Bao Liu. Ms. Yu Hong Li is the chairman of the Audit Committee and serves as the Audit Committee’s “financial expert,” as defined by SEC regulations. Ms. Yu Hong Li also meets the audit committee financial expert requirements of Nasdaq. During fiscal year 2019, the Audit Committee held four meetings. Our Audit Committee assists our Board of Directors in the Board’s oversight of:
| ● | the integrity of our financial statements; |
| ● | our independent auditors’ qualifications and independence; and |
| ● | the performance of our independent auditors. |
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The Audit Committee has the sole and direct responsibility for appointing, evaluating and retaining our independent auditors, and for overseeing their work. All audit services and all non-audit services, other than de minimis non-audit services, to be provided to us by our independent auditors, must be approved in advance by our Audit Committee. We believe that the composition of our Audit Committee meets the requirements for independence under the current Nasdaq Global Market and SEC rules and regulations. We believe that the functioning of our Audit Committee complies with the applicable requirements of the Nasdaq Global Market and SEC rules and regulations. We intend to comply with future requirements as applicable.
The charter of the Audit Committee is posted on our website at http://www.sorl.cn/?p=97
Compensation Committee The members of the Compensation Committee are Mr. Hui Lin Wang, Mr. Jin Bao Liu, and Mr. Jiang Hua Feng. During the fiscal year ended 2019, the Compensation Committee held one meeting. The purpose of our Compensation Committee is to discharge the responsibilities of our Board of Directors relating to compensation of our executive officers. With respect to the processes and procedures for the consideration and determination of executive and director compensation, the scope of authority of our Compensation Committee includes:
| ● | reviewing and recommending approval of compensation of our executive officers; |
| ● | administering our stock incentive and employee stock purchase plan; and |
| ● | reviewing and making recommendations to our Board with respect to our incentive compensation and employee stock purchase plan. |
The charter of the Compensation Committees posted on our website at http://www.sorl.cn/?p=97. The Compensation Committee also has the authority to select, engage, compensation and terminate compensation consultants, legal counsel and such other advisors as it deems necessary and advisable. Compensation paid to such other parties and related expenses will be borne by the Company.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee served as an officer or employee of the Company during the year ended December 31, 2019, or formerly served as an officer of the Company. In addition, during the year ended December 31, 2019, none of our executive officers served as a member of a compensation committee (or other board committee performing equivalent functions or, in the absence of any such committee, the entire board of directors) or as a director of any entity that has one or more executive officers serving as a member of our Board of Directors.
Nominating and Corporate Governance Committee The Board of Directors has established a Nominating and Corporate Governance Committee consisting of three directors, all of whom meet the requirements for “independent directors,” and has delegated to the Nominating and Corporate Governance Committee the responsibility for reviewing and recommending to the Board nominees for directors. The members of our Nominating and Corporate Governance Committee are Mr. Jiang Hua Feng, Mr. Hui Lin Wang and Ms. Yu Hong Li. Mr. Jiang Hua Feng chairs the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee held four meetings in 2019.
The purpose of the Nominating and Corporate Governance Committee is to:
| ● | identify qualified individuals to become Board members; |
| ● | determine the composition of the Board and its committees; |
| ● | monitor a process to assess the effectiveness of the Board and Board committees; and |
| ● | ensure good corporate governance. |
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The Nominating and Corporate Governance Committee, in evaluating Board candidates, considers factors such as personal character, values and disciplines, ethical standards, diversity, other outside commitments, professional background and skills, all in the context of an assessment of the needs of the Board at the time. In addition, each director is expected to ensure that other existing and planned future commitments do not materially interfere with his or her responsibilities as a director.
The charter of the Nominating and Corporate Governance Committee is posted on our website at http://www.sorl.cn/?p=97&a=view&r=88.
Stockholder nominees
The Nominating and Corporate Governance Committee will consider stockholder nominations for candidates for membership on the Board and will evaluate such nominees in its sole discretion, giving due consideration to achieving a balance of knowledge, experience and capability of the Board.
The names of any individuals proposed for consideration by the Nominating and Corporate Governance Committee as potential Board members must be submitted at the time and in the manner specified in our bylaws and should be addressed to:
Corporate Controller
SORL Auto Parts, Inc.
No. 2666 Kaifaqu Avenue
Ruian Economic Development District
Ruian City, Zhejiang Province, Zip Code: 325200, People’s Republic of China
Director Qualifications
The Nominating and Corporate Governance Committee believes that members of the Board should have the highest professional and personal ethics and values, consistent with longstanding SORL values and standards. They should have broad experience at the policy-making level in business, government, education, technology or public interest. They should be committed to enhancing stockholder value and should have sufficient time to carry out their duties and to provide insight and practical wisdom based on experience. Their service on other boards of public companies should be limited to a number that permits them, given their individual circumstances, to perform responsibly all director duties. Each director must represent the interests of all stockholders.
Identifying and Evaluating Nominees for Director
The Nominating and Corporate Governance Committee utilizes a variety of methods for identifying and evaluating nominees for director. The Nominating and Corporate Governance Committee will periodically assess the appropriate size of the Board and whether any vacancies on the Board are expected due to retirement or otherwise. In the event that vacancies are anticipated, or otherwise arise, the Nominating and Corporate Governance Committee will consider potential candidates for director. Candidates may come to the attention of the Nominating and Corporate Governance Committee through current Board members, professional search firms, stockholders or other persons. These candidates will be evaluated at regular or special meetings of the Nominating and Corporate Governance Committee, and may be considered at any point during the year. As described above, the Nominating and Corporate Governance Committee will evaluate any stockholder nominations for candidates for the Board submitted in accordance with our bylaws. If any materials are provided by a stockholder in connection with the nomination of a director candidate, such materials will be forwarded to the Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee will also review materials provided by professional search firms or other parties in connection with a nominee who is not proposed by a stockholder.
For each of the nominees to the Board of Directors, the biographies shown below highlight the experiences and qualifications that were among the most important to the Nominating and Corporate Governance Committee in concluding that the nominee should serve as a director of the Company. The Nominating and Corporate Governance Committee considers diversity in identifying nominees for director, including personal characteristics, such as race and gender, as well as diversity in the experience and skills that contribute to the Board’s performance of its responsibilities and oversight of our business.
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Messrs. Xiao Feng Zhang and Xiao Ping Zhang are brothers. Ms. Shu Ping Chi is wife of Mr. Xiao Ping Zhang.
There is no other family relationship between any director, executive officer, or person nominated or chosen by the Company to become a director or executive officer. In addition, each of the nominees for election as director has stated that there is no arrangement or understanding of any kind between him and any other person relating to his election as a director, except that such nominees have agreed to serve as our directors if elected.
The directors in office immediately prior to the completion of the Going Private transaction were:
| Name | Age | Position | ||
| Xiao Ping Zhang | 58 | Chairman of the Board and Chief Executive Officer | ||
| Xiao Feng Zhang | 53 | Director | ||
| Shu Ping Chi | 59 | Director | ||
| Yu Hong Li | 53 | Director | ||
| Hui Lin Wang | 78 | Director | ||
| Jin Bao Liu | 77 | Director | ||
| Jiang Hua Feng | 55 | Director | ||
| Xiao Lin | 32 | Director | ||
| Binghua Feng | 46 | Director |
XIAO PING ZHANG - CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER (CEO)
Xiao Ping Zhang has been the Chief Executive Officer and Chairman of the Board since the Company’s 2004 reverse merger with Fairford Holdings Limited, a Hong Kong limited liability company (“Fairford Holdings Limited”). He founded the Ruili Group, a company specializing in a variety of automotive parts and components, in 1987, and has been serving as chairman of Ruili Group since then. In 2010, he was elected as the President of Zhejiang Province Auto Parts Association. In 2012, he was re-elected the President of Wenzhou Auto Parts Association. He is now still serving as Vice-President of China Federation of Industry and Commerce Auto & Motorbike Parts Chamber of Commerce. Mr. Zhang is also a member of the People’s Political Consultative Conference of Zhejiang Province. Mr. Zhang graduated from Zhejiang Radio and TV University in 1986 with a major in Industrial Management. Mr. Zhang was selected to serve as a director because he is the Chief Executive Officer of the Company, and his experience and knowledge regarding our Company and our industry are believed to provide significant value to the Board of Directors.
XIAO FENG ZHANG – DIRECTOR
Xiao Feng Zhang has been a member of the Board of Directors since the Company’s reverse merger with Fairford Holdings Limited. He served as Chief Operating Officer from 2004 to January 14, 2010. Mr. Zhang co-founded the Ruili Group with his brother, Mr. Xiao Ping Zhang, in 1987, and served as the General Manager of Ruili Group until March 2004. Mr. Zhang received his diploma in economics from Shanghai Fudan University in 1994. We believe Mr. Zhang’s qualifications to serve on our Board of Directors include his expertise in business and corporate strategy and his knowledge regarding our Company and our industry.
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SHU PING CHI – DIRECTOR
Shu Ping Chi has been a member of the Board of Directors since 2014. Ms. Chi has more than 30 years of experience in the auto parts industry. She is a shareholder of SORL Auto Parts Inc., holding 5.9% of the total shares outstanding. Ms. Chi is also one of the founders of Ruili Group Co., Ltd. and she is the wife of Mr. Xiaoping Zhang, Chairman of Board of the Company. Ms. Chi has served as Vice Chairman of the Board of Ruili Group Co., Ltd. since July 1979. We believe Ms. Chi’s experience in the auto parts industry qualify her to serve on our Board of Directors.
YU HONG LI – DIRECTOR
Yu Hong Li start to serve an independent director, as well as the Chairperson of the Audit Committee beginning in June 2015. Ms. Li is a senior accountant in China and has more than 25 years of experience in accounting and auditing. Ms. Li has comprehensive knowledge and experiences in directing the financial work of large-scale companies and conglomerates. Ms. Li is recognized by the Board as a capable expert in company’s internal audit and she gained in-depth accounting and auditing knowledge and experiences in various industries, including international trade, logistics, construction, real estate, wholesale and retailing. Ms. Li has been the Financial Advisor of ESCAN Construction Co., Ltd. since 2008. Ms. Li graduated from Shanxi Institute of Finance and Economics, Accounting Department in 1990. Ms. Li qualifies as an audit committee financial expert under Nasdaq rules and SEC rules and regulations. Ms. Li was recommended as a director nominee by an executive officer. We believe that Ms. Li’s professional expertise and extensive practicing experiences in accounting and auditing, and her knowledge of our industry will bring valuable resources to the Board of Directors.
HUI LIN WANG – DIRECTOR
Hui Lin Wang start to serve as an independent director beginning in June 2015. Mr. Wang has been a Professorate Senior Engineer in China since 1995 and enjoys the special government allowances of the State Council. Mr. Wang has more than 50 years of experiences in the auto industry. Mr. Wang has profound technique and skill in the auto industry and has successfully directed the manufacturing and operation work in a China’s leading auto companies for over 20 years. Mr. Wang served as the Chief Engineer in Ruili Group from 2002 to 2009. Mr. Wang is retired after 2009. Mr. Wang is a sophisticated expert in automotive braking system and has led many valuable research and innovation projects. Mr. Wang was recommended as a director nominee by an executive officer. We believe that Mr. Wang’s extensive manufacturing and operation experience, research and innovation ability, and his knowledge of the industry will bring valuable resources to the Board of Directors.
JINBAO LIU – DIRECTOR
Jin Bao Liu start to serve as an independent director beginning in June 2015. Mr. Liu has been a Professorate Senior Engineer in China since 1997 and is an experienced expert in the die casting process and mold design in auto industry. Mr. Liu served as the Vice Chief Engineer in Ruili Group from 2000 to 2003. Mr. Liu is retired after 2003. Mr. Liu has more than 40 years of experience in designing and manufacturing vehicle pneumatic braking components. Mr. Liu has profound knowledge and experiences in technique reform and improvement in auto industry. Mr. Liu has been engaged in scientific and technological work and has been responsible for various key research projects. He has been awarded ministry-level Prize for Technology Innovation for several times. Mr. Liu is a member of Society of Automotive Engineering of China and is a die casting process expert hired by Eastern China Association of Casting. Mr. Liu graduated from Hunan University, Casting Process and Equipment Department in 1968. Mr. Liu was recommended as a director nominee by an executive officer. We believe that Mr. Liu’s extensive die casting and mold design skill, technique reform and improvement ability, and his knowledge of the industry will bring valuable resources to the Board of Directors.
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JIANG HUA FENG - DIRECTOR
Jiang Hua Feng has been an independent director as well as a member of the Compensation Committee since August 2004. Mr. Feng is the chairman of the Nominating and Corporate Governance Committee. Since 1988, Mr. Feng has also been the principal lawyer at Yuhai Law Firm in Ruian, Zhejiang Province. Mr. Feng is a member of the China Lawyers Association. He is also a member of the standing committee of the People’s Congress in Zhejiang Province of China. Mr. Feng received his bachelor’s degree in law from East China University of Politics and Law. We believe that Mr. Feng’s extensive legal experiences, as well as knowledge of our Company and our industry are valuable resources for the Board of Directors.
XIAO LIN – DIRECTOR
Mr. Lin has been serving as the CEO and portfolio manager of Aspen Capital Management (HK) Limited since August 2017. Between August 2016 and August 2017, Mr. Lin was a portfolio manager of Pine River Capital Management (HK) Limited. Between August 2012 and August 2016, Mr. Lin was a senior associate of Goldman Sachs (Asia) L.L.C. Since April 2017, Mr. Lin has been serving as an independent director of Sichuan Meifeng Chemical Industry Co., Ltd. Mr. Lin received his Master of Finance degree from MIT in 2011 and his Bachelor of Science degree in Applied Math from Renmin University of China in 2010.
BINGHUA FENG - DIRECTOR
Mr. Feng has been serving as the Executive Vice President and Secretary-General of Zhejiang Automobile & Motorcycle Parts Chamber Of Commerce since 2010. Mr. Feng has extensive experience in the auto parts industry. Mr. Feng received his associate degree from Northeast University of Finance and Economics of China in 2013.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE OFFICERS AND CERTAIN KEY EMPLOYEES
The following table sets forth our executive officers and key employees, their ages and the positions they hold. For information on Xiao Ping Zhang, our Chief Executive Officer and Chairman of the Board, please refer to biographical information on our directors above.
| Name | Age | Position | ||
| Zong Yun Zhou | 66 | Chief Financial Officer | ||
| Jinrui Yu | 45 | Chief Operating Officer |
ZONG YUN ZHOU - CHIEF FINANCIAL OFFICER
Zong Yun Zhou has been our Chief Financial Officer since our inception. Between April 2002 and May 2004, Ms. Zhou served as the Financial Controller of Shanghai Huhao Auto Parts Manufacturing Company Limited, a joint venture between Ruili Group and Shanghai Automotive Industry Corporation. From January 1996 until April 2002, Ms. Zhou worked for the Auditing Department of Anhui Province, China, in charge of auditing state-owned companies in Anhui Province. Ms. Zhou is a Chinese Certified Public Accountant, and a member of the Institute of Internal Auditors (IIA). Ms. Zhou completed her undergraduate studies at Anhui University.
JINRUI YU - CHIEF OPERATING OFFICER
Ms. Yu has been our Chief Operating Officer since March 2012. Ms. Yu has more than 15 years of experience in the auto parts industry. Ms. Yu has served as the Company’s Production and Export Vice President since August 2009. From 2004 to 2009, Ms. Yu served as the Company’s Export Department Manager. From 1999 to 2004, Ms. Yu served as the international sales manager of Ruili Group Co., Ltd., which specializes in manufacturing auto parts, and from 1997 to 1999, she worked in the market sales department of Ruili Group Co., Ltd. Ms Yu received her Bachelor of English from Zhejiang University of Technology in 2006.
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COMPENSATION DISCUSSION AND ANALYSIS
Overview of Executive Compensation Program
The Compensation Committee is responsible for establishing, implementing and monitoring our executive compensation program philosophy and practices. The Compensation Committee seeks to ensure that the total compensation paid to our named executive officer is fair, reasonable and competitive. Generally, the types of compensation and benefits provided to the named executive officer are similar to those provided to our other officers.
Throughout this document, the individual who served as our Chief Executive Officer and who is included in the Summary Compensation Table is referred to as the “named executive officer.”
Compensation Philosophy and Objectives
The Compensation Committee believes that an effective executive compensation program should provide base annual compensation that is reasonable in relation to the individual executive’s job responsibilities and reward the achievement of both annual and long-term strategic goals of our Company.
Because of the size of our Company, the small number of executive officers in our Company, and our Company’s financial priorities, our Compensation Committee has decided not to implement or offer any retirement plans, pension benefits, deferred compensation plans, or other similar plans for our executive officers. Accordingly, the components of the executive compensation currently consist solely of a cash salary. The Compensation Committee will consider using stock option grants to provide executives with long-term incentives.
As a manufacturing company operating in Zhejiang Province, China, the Compensation Committee also takes the local average executives’ salary level into account in its compensation decisions. The Compensation Committee may reassess the proper level of equity and cash compensation in light of the Company’s improved profitability and working capital situation.
Role of Executive Officers in Compensation Decisions
The Compensation Committee makes all compensation decisions for the named executive officer and approves recommendations regarding equity awards to all of our officers. Decisions regarding the non-equity compensation of officers, other than the named executive officer, are made by the Chief Executive Officer.
The Compensation Committee and the Chief Executive Officer annually review the performance of each executive officer (other than the Chief Executive Officer, whose performance is reviewed only by the Compensation Committee). There is no pre-established policy or target for the allocation between either cash or non-cash incentive compensation. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are determined by the Compensation Committee. The Compensation Committee can exercise its discretion in modifying any recommended adjustments or awards to executives, including recommendations made by the Chief Executive Officer.
Setting Executive Compensation
Based on the foregoing objectives, the Compensation Committee has structured the Company’s annual cash and incentive-based cash and non-cash executive compensation to motivate executives to achieve the business goals set by the Company, to reward the executives for achieving such goals, and to retain the executives. In doing so, the Compensation Committee does not employ outside compensation consultants and sets the compensation of our Chief Executive Officer at the levels provided in his employment agreement with the Company.
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2019 Executive Compensation Components
For the year ended 2019, the principal component of compensation for the named executive officer was base salary.
The Company provides the named executive officer and other employees with a base salary to compensate them for services rendered during the fiscal year of 2019. Base salary range for each executive officer is based on his or her position and responsibility.
During its review of base salaries for executives, the Compensation Committee primarily considers:
| ● | The negotiated terms of each executive employment agreement; |
| ● | The whole financial result of the company; |
| ● | Team performance; |
| ● | Internal review of the executive’s compensation, both individually and relative to other executive officers; and |
| ● | Individual performance of the executive. |
Salary levels are typically considered annually as part of the Company’s performance review process, as well as upon a change in job responsibility. Merit-based increases to salaries are based on the Compensation Committee’s assessment of the individual’s performance.
Summary Compensation Table
The following table presents summary information concerning all compensation paid or accrued by us for services rendered in all capacities during 2019 and 2018 by Mr. Xiao Ping Zhang, who served as our Chief Executive Officer, and Ms. Zong Yun Zhou, who served as our Chief Financial Officer during the fiscal years ended December 31, 2019 and 2018. No executive officer received compensation in excess of $100,000 for either of the fiscal years ended December 31, 2019 and 2018.
| Name and Position | Year | Salary ($) | Bonus ($) | Stock Awards | Option Awards ($) | Total ($) | ||||||||||||||||
| Mr. Xiao Ping Zhang, CEO(1) | 2019 | 60,000 | — | — | 60,000 | |||||||||||||||||
| 2018 | 60,000 | __ | __ | 60,000 | ||||||||||||||||||
| Ms. Zong Yun Zhou, CFO (2) | 2019 | 30,000 | — | — | 30,000 | |||||||||||||||||
| 2018 | 30,000 | __ | __ | 30,000 | ||||||||||||||||||
| Ms. Jinrui Yu, COO(3) | 2019 | 50,000 | 50,000 | |||||||||||||||||||
| 2018 | 50,000 | 50,000 | ||||||||||||||||||||
| (1) | Mr. Zhang is also employed by Ruili Group that makes separate payments to him for his services thereto. Mr. Zhang did not receive any compensation, other than the cash salary of $60,000 listed herein, from the Company in each of 2019 and 2018. |
| (2) | Ms. Zhou did not receive compensation other than what listed above. |
| (3) | Ms. Yu did not receive compensation other than what listed above. |
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Employment Agreements
The Company is a party to the respective employment agreement with each of Mr. Xiao Ping Zhang, our Chief Executive Officer, and Ms. Zong Yun Zhou, our Chief Financial Officer, and Ms. Jinrui Yu, our Chief Operating Officer.
Effective May 1, 2006, the Company entered into an employment agreement with Mr. Xiao Ping Zhang as its Chief Executive Officer (the “Employment Agreement”). The term of Mr. Zhang’s employment with the Company is for a period of five years from the effective date. Following the expiration of the term of the Employment Agreement, the term shall continue thereafter for additional one year periods, unless the Board of Directors votes not to renew and provides Mr. Zhang with written notice of the Company’s intention not to renew by no later than six months prior to the expiration of the initial term, or any subsequent one-year term, of the Employment Agreement. The same Employment Agreement was updated again May 1, 2011 and May 1, 2017. The compensation of Mr. Zhang including bonuses shall be determined from time to time by the Compensation Committee of the Company’s Board of Directors taking into account the performance of Mr. Zhang and the results of operations of the Company. Mr. Zhang shall also be entitled to participate in all other employee benefits on terms commensurate with the benefits awarded management personnel of comparable status with the Company, including medical insurance. Pursuant to the Employment Agreement, the rights and obligations of the Company and Mr. Zhang shall be construed and enforced in accordance with, and governed by, the internal laws of the State of Delaware.
Effective May 1, 2006, the Company entered into an employment agreement with Ms. Zong Yun Zhou as its Chief Financial Officer (the “Employment Agreement”). The term of Ms. Zhou’s employment with the Company is for a period of five years from the effective date. Following the expiration of the term of the Employment Agreement, the term shall continue thereafter for additional one year periods, unless the Company provides Ms. Zhou with written notice of the Company’s intention not to renew by no later than six months prior to the expiration of the initial term, or any subsequent one-year term, of the Employment Agreement. The same Employment Agreement was updated again May 1, 2011 and May 1, 2017. The compensation of Ms. Zhou including bonuses shall be determined from time to time by the Compensation Committee of the Company’s Board of Directors taking into account the performance of Ms. Zhou and the results of operations of the Company. Ms. Zhou shall also be entitled to participate in all other employee benefits on terms commensurate with the benefits awarded management personnel of comparable status with the Company, including medical insurance. Pursuant to the Employment Agreement, the rights and obligations of the Company and Ms. Zhou shall be construed and enforced in accordance with, and governed by, the internal laws of the State of Delaware.
Effective March 3, 2016, the Company continued the employment agreement with Ms. Jinrui Yu as its Chief Operating Officer (the “Employment Agreement”). The term of Ms. Yu’s employment will expire on March 3, 2021. The Employment Agreement provides that the Company will pay Ms. Yu an annual base salary of $50,000. The Company will also pay Ms. Yu social insurance in accordance with national and local laws and regulations of the People’s Republic of China. Pursuant to the Employment Agreement, any disputes arising thereunder will be resolved through negotiations between the Company and Ms. Yu and, if they cannot be resolved through negotiations, they may submit such disputes to Ruian City Labor Dispute Arbitration Committee for arbitration. If the Company and Ms. Yu do not agree with the arbitration decision, they can petition to the Ruian City People’s Court.
Severance and Change of Control Arrangements
There are no severances or change of control arrangements.
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Equity Compensation Plans
Our 2005 Stock Compensation Plan, or the Plan, was adopted by our Board of Directors in July 2005.
Share Reserve. We have reserved 1,700,000 shares for issuance under the Plan. We have awarded 53,628 shares of common stock under the Plan, all of which are currently outstanding. We have also granted options to purchase aggregate of 64,128 shares under the Plan. 60,000 of such options expired without being exercised on March 1, 2009 and are not subject to being re-issued under the Plan; and 4,128 options were exercised on November 12, 2009. No stock options are presently outstanding under the Plan.
Administration. The Compensation Committee administers the Plan and has complete discretion to make all decisions relating to the Plan as are permitted therein.
Eligibility. Employees, non-employee members of our Board of Directors, advisors and consultants are eligible to participate in the Plan.
Types of Awards. Our Plan provides for awards of stock options, restricted shares, stock appreciation rights and performance shares.
Change in Control. If we are merged or consolidated with another company, and such merger or consolidation results in a change in control, any award under the Plan will be subject to the terms of the merger agreement. Such terms may provide that the option continues, is assumed or substituted, fully vests or is settled for the full value of such option in cash, followed by the cancellation of such option.
Amendments or Termination. Our Board of Directors may amend, suspend or terminate the Plan at any time. If our Board amends the Plan, it does not need to seek stockholder approval of the amendment unless such consent is required in order to comply with any NASDAQ or applicable tax or regulatory requirement. No award may be made under the Plan after the tenth anniversary of the effective date of the Plan.
Options. The Board may determine the number of shares covered by each option, the exercise price therefor, the conditions and limitations on the exercise and any restrictions on the shares issuable. Optionees may pay the exercise price by using cash, shares of common stock that the optionee already owns or, at the election of the Board, a promissory note, an immediate sale of the option shares through a broker designated by us, or other property.
Performance Shares. The Board may make performance share awards entitling recipients to acquire shares of common stock upon the attainment of specified performance goals.
Stock Appreciation Rights. A participant who exercises a stock appreciation right receives the increase in fair market value of our common stock over the fair market value on the date of grant.
Restricted Shares. Restricted shares may be awarded under the Plan. Restricted shares vest at the times and payment terms therefor shall be determined by our Compensation Committee.
Adjustments. If there is a subdivision of our outstanding shares of common stock, a dividend declared in stock or a combination or consolidation of our outstanding shares of common stock into a lesser number of shares, corresponding adjustments will be automatically made in each of the following: (a) the number of shares of common stock available for future awards under the Plan; (b) any limitation on the maximum number of shares of common stock that may be subject to awards in a fiscal year; (c) the number of shares of common stock covered by each outstanding option or stock appreciation right, as well as the exercise price under each such award; (d) the number of shares of common stock covered by the options to be granted under the automatic option grant program; or (e) the number of stock units included in any prior award that has not yet been settled.
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Stock Option Grants
None of the Company’s executive officers have received any grant of stock options or stock awards under the Plan.
Equity Compensation Plan Information
Our Plan was adopted by our Board of Directors in July 2005. We have reserved 1,700,000 shares for issuance under the Plan.
The table below presents the number of shares of our common stock remaining available for issuance under the Plan as of December 31, 2019:
| Plan Category | Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance | |||||||||
| Equity compensation plans approved by security holders | — | N/A | 1,582,244 | |||||||||
| Equity compensation plans not approved by security holders | — | — | — | |||||||||
| Total | — | N/A | 1,582,244 | |||||||||
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth certain information known to us regarding beneficial ownership of our common stock as of December 31, 2019 by:
| ● | each person known to us to be the beneficial owner of more than 5% of any class of our voting securities; |
| ● | our named executive officer; |
| ● | all directors and named executive officer as a group. |
Beneficial ownership is determined according to the rules of the SEC and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options and warrants that are currently exercisable or that become exercisable within 60 days of June 30, 2019. Information with respect to beneficial ownership has been furnished to us by each director, named executive officer or 5% or more stockholder, as the case may be. Unless otherwise indicated, to our knowledge, each stockholder possesses sole voting and investment power over the shares listed, except for shares owned jointly with that person’s spouse.
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This table lists applicable percentage ownership based on 19,304,921 shares of common stock outstanding as of December 31, 2019. The address for each of the stockholders in the table is c/o of the Company.
Name of Beneficial Owner | Amount and Nature Beneficial Owner | Position | Percent
of Class | |||||||
| NAMED EXECUTIVE OFFICER AND DIRECTORS | ||||||||||
| Xiao Ping Zhang | 9,087,527 | Chief Executive Officer and Chairman | 47.1 | |||||||
| Xiao Feng Zhang | 1,135,938 | Director | 5.9 | |||||||
| Shu Ping Chi | 1,135,938 | Director | 5.9 | |||||||
| Hui Lin Wang | 200 | Director | * | |||||||
| Jin Bao Liu | — | Director | * | |||||||
| Jianghua Feng | — | Director | * | |||||||
| Xiao Lin | — | Director | * | |||||||
| Binghua Feng | — | Director | * | |||||||
| Officers and Directors as a Group (9 persons) | 11,359,603 | 58.9 | ||||||||
PRINCIPAL STOCKHOLDERS
| * | Less than 1% |
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC reports regarding their ownership and changes in ownership of our securities. We believe that, during the fiscal year 2019, our directors, executive officers and 10% stockholders complied with all Section 16(a) filing requirements. In making this statement, we have relied upon our examination of the copies of Forms 3, 4 and 5, and amendments thereto, provided to us and the written representations of our directors, executive officers and 10% stockholders.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND DIRECTOR INDEPENDENCE
RELATED PARTY TRANSACTIONS
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| PURCHASES FROM: | ||||||||
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 13,224,103 | $ | 6,279,500 | ||||
| Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. | 4,649,266 | 3,371,361 | ||||||
| Shanghai Dachao Electric Technology Co., Ltd. | 808,831 | 720,489 | ||||||
| Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 1,899,865 | 8,438,181 | ||||||
| Ruili Group Co., Ltd. | 12,369,112 | 7,909,463 | ||||||
| Changchun Kormee Auto Electric Co., Ltd. | 15,376 | 20,045 | ||||||
| Ningbo Ruili Equipment Co., Ltd. | 8,021,011 | 4,093,773 | ||||||
| Hangzhou Hangcheng Friction Material Co., Ltd. | 362,758 | 1,056,860 | ||||||
| Wenzhou Lichuang Auto Parts Co., Ltd. | 18,117,833 | 15,933,012 | ||||||
| SHNS Precision Die Casting (Yangzhou) Co., Ltd. | 99,576 | — | ||||||
| Total Purchases | $ | 59,567,731 | $ | 47,822,684 | ||||
| SALES TO: | ||||||||
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 15,277,603 | $ | 10,020,480 | ||||
| Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. | 382,492 | 61,172 | ||||||
| Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 1,238,079 | 1,315,649 | ||||||
| Ruili Group Co., Ltd. | 16,316,774 | 17,140,343 | ||||||
| Changchun Kormee Auto Electric Co., Ltd. | 35,421 | 59,525 | ||||||
| Shanghai Tabouk Auto Components Co., Ltd. | 1,098,571 | 1,676,791 | ||||||
| SHNS Precision Die Casting (Yangzhou) Co., Ltd. | 25,882 | — | ||||||
| Ruili Commercial Vehicle Co., Ltd. | 60,076,673 | — | ||||||
| Total Sales | $ | 94,451,495 | $ | 30,273,960 | ||||
Related party transactions also include the Going Private transaction described in “Item 1: Description of Business – Business”.
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Review and Approval of Related Party Transactions
The Company’s policy with regard to any transactions between the Company and a related party is that such transactions must be on terms at least as favorable to the Company as arm’s-length transactions of similar types with unaffiliated third parties. Additionally, all related party transactions must be disclosed to, and considered and approved by, our Audit Committee prior to entering into any such transaction.
This policy has been followed with regard to all related-party transactions disclosed herein.
Directors’ Independence
Our Corporate Governance Guidelines and the Rules of the Nasdaq Global Market provide that a majority of our nine-member board of directors (the “Board”) must consist of independent directors. The Board has determined that each of the following six non-employee director, which include Jin Bao Liu, Yu Hong Li, Hui Lin Wang, Jiang Hua Feng, Xiao Lin and Binghua Feng, is independent within the meaning of Nasdaq Marketplace Rule 5605(a)(2). We do not have a lead independent director.
In determining independence, the Board reviews whether directors have any material relationship with the Company. The Board considers all relevant facts and circumstances. In assessing the materiality of a director’s relationship with us, the Board is guided by the standards set forth below and considers the issues from the director’s standpoint and from the perspective of the persons or organizations with which the director has an affiliation. The Board reviews commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, if any. An independent director must not have any material relationship with us, either directly or indirectly as a partner, stockholder or officer of an organization that has a relationship with us, or any other relationship that would interfere with the exercise of independent judgment of such director in carrying out his or her responsibilities in such capacity.
Irrespective of other potentially disqualifying factors, no director will be considered independent in the following circumstances:
(1) The director is, or has been in the past three years, an employee of SORL, or a family member of the director is, or has been in the past three years, an executive officer of SORL.
(2) The director has received, or has a family member who has received, compensation from us in aggregate in excess of $120,000 in any 12 month period in the past three years, other than compensation for board service, compensation received by the director’s family member for service as a non-executive employee, and benefits under a tax-qualified plan or other non-discretionary compensation.
(3) The director is, or has a family member who is, a current partner of our outside auditor, or was a partner or employee of our outside auditor, who worked on our audit at any time during any of the past three years.
(4) The director is a family member of an individual who is, or at any time during the past three years was, employed by the Company as an executive officer.
(5) The director is, or has a family member who is, employed as an executive officer of another entity where, at any time during the past three years, any of our executive officers served on the compensation committee of that other entity.
(6) The director is, or a family member is, a partner in, or a controlling stockholder or an executive officer of, any organization to which we made, or from which we received, payments for property or services in the current or any of the past three fiscal years that exceed the greater of 5% of the recipient’s consolidated gross revenues for that year, or $200,000.
For these purposes, a “family member” includes a director’s spouse, parents, children and siblings, whether by blood, marriage, or adoption, and anyone residing in the director’s home.
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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The audit committee has engaged MaloneBailey, LLP (“MaloneBailey”) to serve as the Company’s independent registered public accounting firm for the year ended December 31, 2019. The audit committee reserves the right, however, to select new auditors at any time in the future in its discretion if it deems such decision to be in the best interests of the Company and its stockholders. Any such decision would be disclosed to stockholders in accordance with applicable securities laws.
On July 18, 2013, the audit committee appointed MaloneBailey as the Company’s new registered public accounting firm. During the fiscal years ended December 31, 2018 and 2017, MaloneBailey served as our independent registered public accounting firm and were reappointed to serve for the fiscal year ending December 31, 2019, which reappointment was ratified by the stockholders by the corporate action by the Stockholders Written Consent as of June 30, 2019.
During the two most recent fiscal years, neither the Company nor anyone on its behalf consulted with Malone Bailey regarding (1) the application of accounting principles to a specified transaction, either completed or proposed; (2) the type of audit opinion that might be rendered on the Company’s financial statements; or (3) any matter that was either the subject of a disagreement or event identified in response to Item 304(a)(1) of Regulation S-K (there being none).
Fiscal Years Ended December 31, 2019 and 2018
Audit Fees
MaloneBailey was paid aggregate fees of approximately $288,460 and $610,060 in the fiscal years ended December 31, 2019 and December 31, 2018 for professional services rendered for the audits of the Company’s annual financial statements and for the reviews of the financial statements included in the Company’s quarterly reports on Form 10-Q for the periods ended March 31, June 30 and September 30 of 2019 and 2018.
Audit-Related Fees
MaloneBailey was not paid additional fees for the fiscal years ended December 31, 2019 or 2018 for assurance or related services reasonably related to the performance of the audit or review of the Company’s financial statements.
Tax Service Fees
MaloneBailey provided tax services and was paid around $8,000 for this service for the fiscal year ended December 31, 2019.
All Other Fees
MaloneBailey was not paid other fees for professional services during the fiscal years ended December 31, 2019 and December 31, 2018.
Audit Committee Pre-Approval Policies And Procedures
Our Audit Committee’s policy is to pre-approve all audit and permissible non-audit services provided by our independent auditors, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(b) of the Exchange Act and the rules and regulations of the SEC. These services may include audit services, audit-related services, tax services and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services. The independent auditor and management are required to periodically report to the Audit Committee regarding the extent of services provided by the independent auditor in accordance with this pre-approval.
All services rendered by MaloneBailey for the years ended December 31, 2019 and 2018 were pre-approved in accordance with the policies and procedures described above.
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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| 3. | List of Exhibits. The following documents are filed as part of this Annual Report: |
| (a) | (1) | Consolidated Financial Statements: |
The index of the consolidated financial statements contained herein is set forth on page F-1 hereof. See Item 8 for the financial statements filed with this report.
| (2) | Financial Statement Schedules: |
The financial statement schedule listed in the index to consolidated financial statements on Page F-1 hereof.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable and therefore have been omitted.
| (3) | Exhibits: |
The exhibits listed on the Exhibit Index (following the signatures section of this report) are included, or incorporated by reference, in this Annual Report.
| (b) | Exhibits: |
See Item 15(a) (3) above.
| (c) | Financial Statement Schedules: |
See Item 15(a) (2) above.
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EXHIBIT INDEX
| (1) | Incorporated herein by reference from the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission, on June 1, 2010. |
| (2) | Incorporated herein by reference from the Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission, on March 17, 2009. |
| (3) | Incorporated herein by reference from Registrant’s Current Report on Form 8-K, and amendment thereto, as filed with the Securities and Exchange Commission on May 24, 2004. |
| (4) | Incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on March 27, 2008. |
| (5) | Incorporated herein by reference from the Registrant’s Form S-1 as filed with the Securities and Exchange Commission on August 31, 2006. |
| (6) | Incorporated herein by reference from the Registrant’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 7, 2012. |
| (7) | Furnished in accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference. |
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INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
SORL Auto Parts, Inc. and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of SORL Auto Parts, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of income and comprehensive income, stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “financial statements”). We have also audited the parent company financial statements for the years ended December 31, 2019 and 2018 included in Schedule I. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related parent company financial statements included in Schedule I, when considered in relation to the financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
Basis for Opinion
These financial statements and parent company financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements and the parent company financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
| /s/ MaloneBailey, LLP | |
| www.malonebailey.com | |
| We have served as the Company’s auditor since 2013. | |
| Houston, Texas | |
| June 8, 2020 | |
F-2
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2019 and December 31, 2018
| December
31, 2019 | December
31, 2018 | |||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | US$ | 13,374,261 | US$ | 73,588,229 | ||||
| Accounts receivable, net, including $35,115,219 and $261,889 from related parties as of December 31, 2019 and 2018, respectively | 184,237,058 | 150,047,797 | ||||||
| Bank acceptance notes from customers | 61,169,072 | 62,052,225 | ||||||
| Inventories, net | 223,484,077 | 204,285,427 | ||||||
| Prepayments, current, including $1,059,410 and $3,670,573 to related party as of December 31, 2019 and 2018, respectively | 7,594,813 | 7,776,591 | ||||||
| Restricted cash, current | 15,218,669 | 19,307,003 | ||||||
| Advances to related parties | 81,039,825 | 79,739,417 | ||||||
| Deposits on loan agreements, current | 5,017,058 | - | ||||||
| Short-term investment | 5,017,058 | - | ||||||
| Other current assets, net | 11,336,907 | 15,697,448 | ||||||
| Total Current Assets | 607,488,798 | 612,494,137 | ||||||
| Property, plant and equipment, net | 127,008,307 | 96,053,386 | ||||||
| Land use rights, net | 36,452,834 | 21,124,455 | ||||||
| Intangible assets, net | 53,529 | 220,232 | ||||||
| Deposits on loan agreements, non-current | 4,873,713 | 10,199,324 | ||||||
| Prepayments, non-current | 18,623,348 | 31,575,238 | ||||||
| Other assets, non-current | 1,634,636 | 563,542 | ||||||
| Restricted cash, non-current | 16,914,653 | 18,067,374 | ||||||
| Deferred tax assets | 4,671,526 | 4,073,838 | ||||||
| Total Non-current Assets | 210,232,546 | 181,877,389 | ||||||
| Total Assets | US$ | 817,721,344 | US$ | 794,371,526 | ||||
| Liabilities and Equity | ||||||||
| Current Liabilities | ||||||||
| Accounts payable and bank acceptance notes to vendors, including $14,296,017 and $23,805,200 due to related parties as of December 31, 2019 and 2018, respectively | US$ | 205,550,817 | US$ | 236,433,718 | ||||
| Deposits received from customers | 46,066,180 | 51,529,795 | ||||||
| Short term bank loans | 230,992,771 | 217,940,471 | ||||||
| Current portion of long term loans | 27,194,179 | 21,141,029 | ||||||
| Income tax payable, current | 4,565,436 | 3,421,486 | ||||||
| Accrued expenses | 26,085,441 | 24,045,902 | ||||||
| Due to related party | 9,495,120 | 5,959,752 | ||||||
| Deposit received from related party | 1,125,085 | - | ||||||
| Deferred income | 795,059 | 1,453,282 | ||||||
| Other current liabilities | 4,440,914 | 3,288,344 | ||||||
| Total Current Liabilities | 556,311,002 | 565,213,779 | ||||||
| Long term loans, less current portion and net of unamortized debt issuance costs | 22,357,145 | 14,429,404 | ||||||
| Operating lease liabilities, non-current | 696,730 | - | ||||||
| Income tax payable, non-current | 8,377,468 | 9,259,307 | ||||||
| Total Non-current Liabilities | 31,431,343 | 23,688,711 | ||||||
| Total Liabilities | 587,742,345 | 588,902,490 | ||||||
| Equity | ||||||||
| Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of December 31, 2019 and 2018 | - | - | ||||||
| Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of December 31, 2019 and 2018 | 38,609 | 38,609 | ||||||
| Additional paid-in capital | (28,582,654 | ) | (28,582,654 | ) | ||||
| Reserves | 22,621,044 | 20,007,007 | ||||||
| Accumulated other comprehensive income | 3,228,196 | 6,655,803 | ||||||
| Retained earnings | 201,335,272 | 178,535,378 | ||||||
| Total SORL Auto Parts, Inc. Stockholders’ Equity | 198,640,467 | 176,654,143 | ||||||
| Noncontrolling Interest In Subsidiaries | 31,338,532 | 28,814,893 | ||||||
| Total Equity | 229,978,999 | 205,469,036 | ||||||
| Total Liabilities and Equity | US$ | 817,721,344 | US$ | 794,371,526 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-3
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Income and Comprehensive Income
For The Years Ended December 31, 2019 and 2018
| 2019 | 2018 | |||||||
| Sales | US$ | 540,188,479 | US$ | 468,049,906 | ||||
| Include: sales to related parties | 94,451,495 | 30,273,960 | ||||||
| Cost of sales | 400,042,610 | 345,534,015 | ||||||
| Gross profit | 140,145,869 | 122,515,891 | ||||||
| Expenses: | ||||||||
| Selling and distribution expenses | 60,821,163 | 55,158,703 | ||||||
| General and administrative expenses | 35,178,114 | 26,939,370 | ||||||
| Research and development expenses | 21,433,016 | 16,366,393 | ||||||
| Total operating expenses | 117,432,293 | 98,464,466 | ||||||
| Other operating income, net | 11,227,075 | 10,122,416 | ||||||
| Income from operations | 33,940,651 | 34,173,841 | ||||||
| Interest income | 5,333,657 | 6,052,416 | ||||||
| Government grants | 5,475,513 | 4,307,609 | ||||||
| Other income | 389,006 | 260,448 | ||||||
| Interest expenses | (11,637,764 | ) | (13,570,956 | ) | ||||
| Other income (expenses) | (1,420,198 | ) | 43,219 | |||||
| Income before income taxes provision | 32,080,865 | 31,266,577 | ||||||
| Provision for income taxes | 3,762,450 | 15,814,600 | ||||||
| Net income | US$ | 28,318,415 | US$ | 15,451,977 | ||||
| Net income attributable to noncontrolling interest in subsidiaries | 2,904,484 | 2,716,278 | ||||||
| Net income attributable to common stockholders | US$ | 25,413,931 | US$ | 12,735,699 | ||||
| Comprehensive income: | ||||||||
| Net income | US$ | 28,318,415 | US$ | 15,451,977 | ||||
| Foreign currency translation adjustments | (3,808,452 | ) | (10,274,872 | ) | ||||
| Comprehensive income | 24,509,963 | 5,177,105 | ||||||
| Comprehensive income attributable to noncontrolling interest in subsidiaries | 2,523,639 | 1,688,791 | ||||||
| Comprehensive income attributable to common stockholders | US$ | 21,986,324 | US$ | 3,488,314 | ||||
| Weighted average common share - basic | 19,304,921 | 19,304,921 | ||||||
| Weighted average common share - diluted | 19,304,921 | 19,304,921 | ||||||
| EPS - basic | US$ | 1.32 | US$ | 0.66 | ||||
| EPS - diluted | US$ | 1.32 | US$ | 0.66 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-4
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For The Years Ended December 31, 2019 and 2018
| 2019 | 2018 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income | US$ | 28,318,415 | US$ | 15,451,977 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||
| Allowance for doubtful accounts | 6,162,390 | 1,159,061 | ||||||
| Depreciation and amortization | 14,487,918 | 11,838,692 | ||||||
| Deferred income tax | (671,151 | ) | (37,588 | ) | ||||
| Gain on disposal of property and equipment | (24,130 | ) | (40,779 | ) | ||||
| Amortization of debt issuance costs | 536,624 | 1,168,449 | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | (42,615,736 | ) | (23,258,262 | ) | ||||
| Bank acceptance notes from customers | 7,124,614 | 120,433,497 | ||||||
| Other currents assets | (148,336 | ) | (10,884,355 | ) | ||||
| Inventories, net | (22,761,161 | ) | (97,808,381 | ) | ||||
| Prepayments | (235,500 | ) | 942,352 | |||||
| Other assets | - | (577,381 | ) | |||||
| Accounts payable and bank acceptance notes to vendors | (28,588,617 | ) | 121,285,932 | |||||
| Income tax payable | 282,702 | 9,534,690 | ||||||
| Deposits received from customers | (4,681,077 | ) | 10,765,839 | |||||
| Deferred income | (641,832 | ) | 493,752 | |||||
| Other current liabilities and accrued expenses | 3,290,288 | 692,584 | ||||||
| Net Cash Flows Provided By (Used In) Operating Activities | (40,164,589 | ) | 161,160,079 | |||||
| Cash Flows From Investing Activities | ||||||||
| Refund of deposit on loan agreements | 5,073,567 | - | ||||||
| Acquisition of property, equipment, plant and land use rights | (49,126,545 | ) | (55,376,169 | ) | ||||
| Acquisition of intangible asset | - | (225,640 | ) | |||||
| Advances to related parties | (56,254,831 | ) | (211,733,387 | ) | ||||
| Repayment of advances to related parties | 57,508,702 | 129,577,381 | ||||||
| Cash paid for short-term investment | (5,073,567 | ) | - | |||||
| Proceeds from disposal of property and equipment | 42,545 | - | ||||||
| Net Cash Flows Used In Investing Activities | (47,830,129 | ) | (137,757,815 | ) | ||||
| Cash Flows From Financing Activities | ||||||||
| Proceeds from short term bank loans | 346,973,835 | 527,380,963 | ||||||
| Repayment of short term bank loans | (330,204,576 | ) | (426,390,447 | ) | ||||
| Proceeds from related parties | 3,672,811 | 9,669,326 | ||||||
| Proceeds from long term loans | 28,991,810 | - | ||||||
| Repayment of long term loans | (23,395,555 | ) | (24,859,848 | ) | ||||
| Payment of debt issuance costs | (108,222 | ) | - | |||||
| Deposit paid on loan agreements | (3,479,017 | ) | - | |||||
| Deposit received from related party | 1,125,085 | - | ||||||
| Net Cash Flows Provided By Financing Activities | 23,576,171 | 85,799,994 | ||||||
| Effects on changes in foreign exchange rate | (1,036,476 | ) | (2,837,828 | ) | ||||
| Net change in cash, cash equivalents and restricted cash | (65,455,023 | ) | 106,364,430 | |||||
| Cash, cash equivalents, and restricted cash - beginning of the year | 110,962,606 | 4,598,176 | ||||||
| Cash, cash equivalents, and restricted cash - end of the year | US$ | 45,507,583 | US$ | 110,962,606 | ||||
| Supplemental Cash Flow Disclosures: | ||||||||
| Interest paid | US$ | 12,800,635 | US$ | 11,653,031 | ||||
| Income taxes paid | US$ | 4,033,461 | US$ | 6,343,206 | ||||
| Non-cash Investing and Financing Transactions | ||||||||
| Liabilities assumed in connection with acquisition of property, plant and equipment and land use rights | US$ | 1,432,726 | US$ | 703,698 | ||||
| Land use rights transferred from prepayments | US$ | 16,045,807 | US$ | 7,733,989 | ||||
| Proceeds from long term loans in the form of bank acceptance notes | US$ | 7,169,692 | US$ | - | ||||
| Repayments from related party in the form of bank acceptance notes | US$ | - | US$ | 70,818,463 | ||||
| Repayments to related party in the form of bank acceptance notes | US$ | - | US$ | 5,097,556 | ||||
| Deposits on loan agreements deducted from proceeds from long term loans | US$ | 1,433,938 | US$ | - | ||||
| Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets | ||||||||
| Cash and cash equivalents | US$ | 13,374,261 | US$ | 73,588,229 | ||||
| Restricted cash, current | 15,218,669 | 19,307,003 | ||||||
| Restricted cash, non-current | 16,914,653 | 18,067,374 | ||||||
| Total cash, cash equivalents, and restricted cash | US$ | 45,507,583 | US$ | 110,962,606 | ||||
The accompanying notes are an integral part of these consolidated financial statements
F-5
SORL Auto Parts, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
For The Years Ended December 31, 2019 and 2018
| Additional | Accumulated Other | Total
SORL Auto Parts, Inc. | ||||||||||||||||||||||||||||||||||
| Number of | Common | Paid-in | Retained | Comprehensive | Stockholders’ | Noncontrolling | ||||||||||||||||||||||||||||||
| Share | Stock | Capital | Reserves | Earnings | Income | Equity | Interest | Total Equity | ||||||||||||||||||||||||||||
| Balance as of December 31, 2017 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 17,562,357 | $ | 168,244,329 | $ | 15,903,188 | $ | 173,165,829 | $ | 27,126,102 | $ | 200,291,931 | ||||||||||||||||||
| Net income | - | - | - | - | 12,735,699 | - | 12,735,699 | 2,716,278 | 15,451,977 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (9,247,385 | ) | (9,247,385 | ) | (1,027,487 | ) | (10,274,872 | ) | |||||||||||||||||||||||
| Transfer to reserve | - | - | - | 2,444,650 | (2,444,650 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Balance as of December 31, 2018 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 20,007,007 | $ | 178,535,378 | $ | 6,655,803 | $ | 176,654,143 | $ | 28,814,893 | $ | 205,469,036 | ||||||||||||||||||
| Net income | - | - | - | - | 25,413,931 | - | 25,413,931 | 2,904,484 | 28,318,415 | |||||||||||||||||||||||||||
| Foreign currency translation adjustment | - | - | - | - | - | (3,427,607 | ) | (3,427,607 | ) | (380,845 | ) | (3,808,452 | ) | |||||||||||||||||||||||
| Transfer to reserve | - | - | - | 2,614,037 | (2,614,037 | ) | - | - | - | - | ||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 22,621,044 | $ | 201,335,272 | $ | 3,228,196 | $ | 198,640,467 | $ | 31,338,532 | $ | 229,978,999 | ||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”), a Delaware corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd. (the “Joint Venture” or “Ruian”). The Company distributes products both in China and internationally under SORL trademarks. The Company’s product range includes 140 categories and over 2,000 different specifications.
The Joint Venture was formed in the People’s Republic of China (“PRC” or “China”) as a Sino-Foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the “Ruili Group”), a related party under common control, and Fairford Holdings Limited (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was, incorporated in China in 1987 and specializes in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture.
On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution specialist firm and an unaffiliated Taiwanese investor. The joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. SORL held a 60% interest in the joint venture, MGR held a 30% interest, and the Taiwanese investor held a 10% interest. SIH was primarily devoted to expanding SORL’s international sales network in Asia-Pacific and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese investor. After this transaction, SIH ceased to be a distributor of SORL in the international market.
On April 26, 2019, the Company announced its receipt of a preliminary non-binding proposal letter, dated April 25, 2019, from Mr. Xiao Ping Zhang, the Chairman and Chief Executive Officer of the Company, Ms. Shu Ping Chi and Mr. Xiao Feng Zhang, directors of the Company and Ruili Group Co., Ltd. (together, the “Consortium”), to acquire all of the outstanding shares of common stock of the Company not already owned by the Consortium (the “Going Private” transaction).
On November 29, 2019, the Company entered into an agreement and plan of merger (the “Merger Agreement”), with Ruili International Inc. (“Parent”), a Delaware corporation, and Ruili International Merger Sub Inc. (“Merger Sub”), a Delaware corporation and a wholly-owned subsidiary of Parent. Parent was formed by Mr. Xiao Ping Zhang solely for the purpose of entering into the Merger Agreement and consummating the Going Private transaction. Pursuant to the Merger Agreement, subject to the terms and conditions thereof, at the effective time, Merger Sub will be merged with and into the Company (the “Merger”), with the Company being the surviving corporation, and each share of common stock of the Company issued and outstanding immediately prior to the effective time of the Merger will be automatically cancelled and converted into the right to receive $4.72 in cash.
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 income and comprehensive income 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 non-controlling interests in subsidiary undertakings is reflected in the consolidated statements of income and comprehensive income.
| 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. The extent to which the COVID-19 pandemic may directly or indirectly impact our business, financial condition, and results of operations is highly uncertain and subject to change. We considered the potential impact of the COVID-19 pandemic on our estimates and assumptions and there was not a material impact to our consolidated financial statements as of and for the year ended December 31, 2019. Actual results could differ from those estimates.
F-7
| d. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
For certain of the Company’s financial instruments, including cash and cash equivalents, current restricted cash, accounts receivables, current prepayments, bank acceptance notes from customers, inventories, current deposits on loan agreements, short-term investment, other current assets, accounts payable and bank acceptance notes to vendors, accrued expenses, short term bank loans, current portion of long term loans, deposits received from customers, deferred income, current income tax payable 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.
| 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.
| f. | FINANCIAL RISK FACTORS AND FINANCIAL RISK MANAGEMENT |
The Company is exposed to the following risk factors:
| i) | Credit risks - Financial instruments that potentially subject the Company to concentrations of credit risk are cash and cash equivalents and accounts receivable arising from its normal business activities. The Company places its cash and cash equivalents in what it believes to be credit-worthy financial institutions. 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. |
| 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 2019 ranged from 3.25% to 5.44% and the term ranged from approximately one month to one year. The Company also obtained long term loans from non-financial institutions for effective interest rates ranging from 4.31% to 8.50%. 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.
F-8
| h. | RESTRICTED CASH |
Restricted cash, current consists of bank deposits used to pledge bank acceptance notes, deposits for obtaining letters of credit from a local bank, and deposits guaranteed for construction projects.
Restricted cash, non-current consists of non-current portion of deposits guaranteed for construction projects and some bank deposits used to pledge for bank acceptance notes.
| i. | 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.
| j. | SHORT-TERM INVESTMENT |
Short-term investment consists of investment in wealth management product issued by a financial institution with the contractual maturity of one year. The wealth management product is secured with a fixed interest rate. Interest income is included in the consolidated statement of income and comprehensive income.
| 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 | 3-5 | |
| Motor vehicles | 3-10 | |
| 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 40 years.
F-9
| 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. | 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.
The allowances are calculated based on a detailed review of certain individual customer accounts, historical collectability rates, a general provision based on aging 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.
| o. | BANK ACCEPTANCE NOTES FROM CUSTOMERS |
Bank acceptance notes from customers, generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of related parties and transferred to the Company as loans from related parties or repayments from related parties. Bank acceptance notes do not bear interest. As of December 31, 2019 and 2018, notes receivables in the amount of $57,471,267 and $58,458,890, respectively, were pledged to endorsing banks to issue bank acceptance notes or short term bank loans. 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 $977,600 and $1,463,837 for the years ended December 31, 2019 and 2018, respectively, which were included in interest expenses.
| p. | REVENUE RECOGNITION |
The Company has adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective January 1, 2018. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. See Note 13 for details on revenues from contracts with customers.
F-10
| q. | 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.
| r. | 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 average exchange rates during the period.
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.
| s. | 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.
| t. | RESEARCH AND DEVELOPMENT EXPENSES |
Research and development costs are expensed as incurred. Research and development expenses were $21,433,016 for the year ended December 31, 2019, as compared with $16,366,393 for the year ended December 31, 2018.
| u. | SHIPPING AND HANDLING COSTS |
Shipping and handling cost are classified as selling expenses and are expensed as incurred. Shipping and handling costs were $11,664,236 and $11,358,223 for the years ended December 31, 2019 and 2018, respectively.
| v. | ADVERTISING COSTS |
Advertising costs are classified as selling expenses and are expensed as incurred. Advertising costs were $755,947 and $737,530 for the years ended December 31, 2019 and 2018, respectively.
| w. | 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 $4,060,908 and $3,113,913 for the years ended December 31, 2019 and 2018, respectively.
| x. | PURCHASE DISCOUNTS |
Purchase discounts represent discounts received from vendors for purchasing raw materials and are netted in the cost of goods sold, if applicable.
F-11
| y. | LEASE COMMITMENTS |
On January 1, 2019, the Company has adopted Accounting Standard Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Right-of-use (ROU) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. We have elected not to recognize ROU assets and lease liabilities for short-term leases for all classes of underlying assets. Short-term leases are leases with terms greater than 1 month, but less than 12 months. See cc. – RECENTLY ISSUED FINANCIAL STANDARDS for more details.
| z. | 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 and write-down of potentially obsolete or slow-moving inventories are also recorded in cost of sales, if any.
| aa. | 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 deferred income and then offset against the cost of the related equipment upon acquisition.
| bb. | 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, 2019 and 2018, the Company operated in two reportable business segments: (1) commercial vehicles brake systems (2) passenger vehicles brake systems.
| cc. | RECENTLY ISSUED FINANCIAL STANDARDS |
On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease.
F-12
The primary impact of applying ASC Topic 842 is the initial recognition of $1.6 million of lease liabilities and corresponding right-of-use assets of $1.3 million on the Company’s consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under ASC Topic 840, as well as enhanced disclosure of the Company’s leasing arrangements. There is no cumulative effect to retained earnings or other components of equity recognized as of January 1, 2019 and the adoption of this standard did not impact the consolidated statement of income and comprehensive income or consolidated statement of cash flows of the Company. The Company does not have finance lease arrangements as of December 31, 2019. See Note 17 for further discussion.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates the probable recognition threshold for credit impairments. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company does not expect a material impact on net assets and the consolidated statement of income and comprehensive income as a result of adopting the new standard.
On December 18, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards. ASU 2019-12 removes certain exceptions from Topic 740, Income Taxes, including (i) the exception to the incremental approach for intra period tax allocation; (ii) the exception to accounting for basis differences when there are ownership changes in foreign investments; and (iii) the exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 also simplifies GAAP in several other areas of Topic 740 such as (i) franchise taxes and other taxes partially based on income; (ii) transactions with a government that result in a step up in the tax basis of goodwill; (iii) separate financial statements of entities not subject to tax; and (iv) enacted changes in tax laws in interim periods. ASU 2019-12 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements and related disclosures.
F-13
NOTE 3 - RELATED PARTY TRANSACTIONS
Related parties with whom the Company conducted business consist of the following:
| Name of Related Party | Nature of Relationship | |
| Xiao Ping Zhang | Principal shareholder, Chairman of the Board and Chief Executive Officer | |
| Shu Ping Chi | Shareholder, member of the Board, wife of Xiao Ping Zhang | |
| Xiao Feng Zhang | Shareholder, member of the Board, brother of Xiao Ping Zhang | |
| Ruili Group Co., Ltd. (“Ruili Group”) | 10% shareholder of Joint Venture and is collectively controlled by Xiao Ping Zhang, Shu Ping Chi, and Xiao Feng Zhang | |
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. (“Guangzhou Kormee”) | Controlled by Ruili Group | |
| Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. (“Ruian Kormee” and formerly known as “Ruian Kormee Automobile Braking Co., Ltd.”) | Wholly controlled by Guangzhou Kormee | |
| Changchun Kormee Auto Electric Co., Ltd. (“Changchun Kormee”) | Wholly controlled by Guangzhou Kormee | |
| Shanghai Dachao Electric Technology Co., Ltd. (“Shanghai Dachao”) | Ruili Group holds 66% of the equity interests in Shanghai Dachao | |
| Ruili MeiLian Air Management Systems (LangFang) Co., Ltd. (“Ruili Meilian”) | Controlled by Ruili Group | |
| Wenzhou Lichuang Automobile Parts Co., Ltd. (“Wenzhou Lichuang”) | Controlled by Ruili Group | |
| Ningbo Ruili Equipment Co., Ltd. (“Ningbo Ruili”) | Controlled by Ruili Group | |
| Shanghai Ruili Real Estate Development Co., Ltd. (“Shanghai Ruili”) | Wholly owned by Ruili Group | |
| Kunshan Yuetu Real Estate Development Co., Ltd. (“Kunshan Yuetu”) | Collectively owned by Ruili Group and Shu Ping Chi | |
| Shanghai Tabouk Auto Components Co., Ltd. (“Shanghai Tabouk”) | Collectively owned by Xiao Feng Zhang and Xiao Ping Zhang | |
| Hangzhou Ruili Property Development Co., Ltd. | Collectively owned by Ruili Group and Xiao Ping Zhang | |
| Hangzhou Hangcheng Friction Material Co., Ltd. (“Hangzhou Hangcheng”) | Controlled by Ruili Group | |
| Hangzhou Ruili Binkang Real Estate Development Co., Ltd. | Controlled by Hangzhou Ruili Property Development Co., Ltd. | |
| SHNS Precision Die Casting (Yangzhou) Co., Ltd. (“SHNS Precision”) | Controlled by Ruili Group | |
| Ruili Commercial Vehicle Co., Ltd. (“Ruili Commercial Vehicle”) | Collectively owned by Ruili Group and Jinrui Yu, the COO of the Company | |
| Jia Rui Zhang | Daughter of Xiao Ping Zhang |
F-14
The Company continues to purchase primarily packaging materials from Ruili Group. In addition, the Company purchases automotive components from other related parties, including Guangzhou Kormee, Ruian Kormee, Ruili Meilian, Shanghai Dachao, Wenzhou Lichuang, Hangzhou Hangcheng, Changchun Kormee, SHNS Precision, and molds from Ningbo Ruili used in its production.
The Company sells certain automotive products to the Ruili Group. The Company also sells parts to Guangzhou Kormee, Ruian Kormee, Shanghai Tabouk, Ruili Meilian, Changchun Kormee, SHNS Precision and Ruili Commercial Vehicle.
The following related party transactions occurred for the years ended December 31, 2019 and 2018:
| For the Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| PURCHASES FROM: | ||||||||
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 13,224,103 | $ | 6,279,500 | ||||
| Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. | 4,649,266 | 3,371,361 | ||||||
| Shanghai Dachao Electric Technology Co., Ltd. | 808,831 | 720,489 | ||||||
| Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 1,899,865 | 8,438,181 | ||||||
| Ruili Group Co., Ltd. | 12,369,112 | 7,909,463 | ||||||
| Changchun Kormee Auto Electric Co., Ltd. | 15,376 | 20,045 | ||||||
| Ningbo Ruili Equipment Co., Ltd. | 8,021,011 | 4,093,773 | ||||||
| Hangzhou Hangcheng Friction Material Co., Ltd. | 362,758 | 1,056,860 | ||||||
| Wenzhou Lichuang Auto Parts Co., Ltd. | 18,117,833 | 15,933,012 | ||||||
| SHNS Precision Die Casting (Yangzhou) Co., Ltd. | 99,576 | — | ||||||
| Total Purchases | $ | 59,567,731 | $ | 47,822,684 | ||||
| SALES TO: | ||||||||
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. | $ | 15,277,603 | $ | 10,020,480 | ||||
| Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. | 382,492 | 61,172 | ||||||
| Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 1,238,079 | 1,315,649 | ||||||
| Ruili Group Co., Ltd. | 16,316,774 | 17,140,343 | ||||||
| Changchun Kormee Auto Electric Co., Ltd. | 35,421 | 59,525 | ||||||
| Shanghai Tabouk Auto Components Co., Ltd. | 1,098,571 | 1,676,791 | ||||||
| SHNS Precision Die Casting (Yangzhou) Co., Ltd. | 25,882 | — | ||||||
| Ruili Commercial Vehicle Co., Ltd. | 60,076,673 | — | ||||||
| Total Sales | $ | 94,451,495 | $ | 30,273,960 | ||||
F-15
| As of December 31, | ||||||||
| 2019 | 2018 | |||||||
| DEPOSIT RECEIVED FROM RELATED PARTY | ||||||||
| Ruili Group Co., Ltd. | $ | 1,125,085 | $ | — | ||||
| Total | $ | 1,125,085 | $ | — | ||||
| ADVANCES TO RELATED PARTIES | ||||||||
| Ruili Group Co., Ltd. | $ | 67,952,784 | $ | 79,739,417 | ||||
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. | 13,087,041 | — | ||||||
| Total | $ | 81,039,825 | $ | 79,739,417 | ||||
| ACCOUNTS RECEIVABLE FROM RELATED PARTIES | ||||||||
| Ruili Commercial Vehicle Co., Ltd. | $ | 34,041,890 | $ | — | ||||
| SHNS Precision Die Casting (Yangzhou) Co., Ltd. | 836,586 | — | ||||||
| Shanghai Tabouk Auto Components Co., Ltd. | $ | 236,743 | $ | 261,889 | ||||
| Total | $ | 35,115,219 | $ | 261,889 | ||||
| PREPAYMENT TO RELATED PARTY | ||||||||
| Ningbo Ruili Equipment Co., Ltd. | $ | 1,059,410 | $ | 3,670,573 | ||||
| Total | $ | 1,059,410 | $ | 3,670,573 | ||||
| ACCOUNTS PAYABLE TO RELATED PARTIES | ||||||||
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. | $ | — | $ | 7,877,485 | ||||
| Shanghai Dachao Electric Technology Co., Ltd. | 284,833 | 56,883 | ||||||
| Ruili MeiLian Air Management System (LangFang) Co., Ltd. | 1,965,349 | 5,628,155 | ||||||
| Wenzhou Lichuang Auto Parts Co., Ltd. | 11,890,537 | 9,898,777 | ||||||
| Changchun Kormee Auto Electric Co., Ltd. | 9,057 | 9,206 | ||||||
| Hangzhou Hangcheng Friction Material Co., Ltd. | 146,241 | 334,694 | ||||||
| Total | $ | 14,296,017 | $ | 23,805,200 | ||||
| DUE TO RELATED PARTY | ||||||||
| Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. | $ | 9,495,120 | $ | 5,959,752 | ||||
| Total | $ | 9,495,120 | $ | 5,959,752 | ||||
F-16
From time to time, the Company borrows from Ruili Group and its controlled companies for working capital purposes. In order to obtain the loans and mutually benefit both the debtor and creditor of the arrangement, the Company also advances to Ruili Group and its controlled companies in a short term. All the loans from related parties are non-interest bearing, unsecured and due on demand. The advances to Ruili Group are unsecured and due on demand, and the Company charged an interest of 5.22% per annum on the average balance advanced to them. The Company recorded interests of $3,692,324 and $2,361,866 from Ruili Group for the years ended December 31, 2019 and 2018, respectively.
For the year ended December 31, 2019, the Company obtained net proceeds of $3,672,811 from a related party. In the same period, Ruili Group repaid the Company a net amount of $14,488,316, and the Company advanced Guangzhou Kormee net proceeds of $13,234,445.
During the year ended December 31, 2018, the Company obtained net proceeds of $9,669,326 in cash from related parties. Repayments in bank acceptance notes to related parties totaled $5,097,556. In the same period, the Company provided Ruili Group net proceeds of $146,944,697, and received repayment in the form of bank acceptance notes amounted to $70,818,463. The Company also advanced Shanghai Ruili and Kunshan Yuetu amounts of $49,561,855 and $15,226,835, respectively, and collected cash repayment from them in the amounts of $112,857,719 and $16,719,662, respectively. In May 2018, the Company received repayments from Shanghai Ruili and Kunshan Yuetu in full. The interests received from these two related parties amount to $741,254 for the year ended December 31, 2018.
The Company entered into a lease agreement with Ruili Group. See Note 17 for more details.
The Company has received a deposit of $1,125,085 from Ruili Group during the year ended December 31, 2019 in relation to the Going Private transaction.
The Company provided a guarantee for the credit line granted to Ruili Group by the China Merchants Bank RMB 40,000,000 (approximately $5,828,185) for a period of 12 months starting on October 24, 2016. The credit line was renewed on October 19, 2017 for 6 months. On April 13, 2018, Ruili Group and the bank reached another extension agreement and the guarantee was provided by the Company until April 12, 2019.
The Company provided a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 210,000,000 (approximately $30,597,972) for the period from July 20, 2018 to July 20, 2028.
The Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in a maximum amount of RMB 71,000,000 (approximately $10,345,029) for the period from February 12, 2019 to January 16, 2020.
F-17
The Company provided a guarantee for the credit line granted to Ruili Group and SHNS Precision by Minsheng Bank in a maximum amount of RMB 500,000,000 (approximately $72,730,446) for the period from June 6, 2019 to June 6, 2020.
The Company provided a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 210,000,000 (approximately $30,102,348) for the period from July 20, 2018 to July 20, 2028.
The Company provided a guarantee for the credit line granted to Ruili Group by China Zheshang Bank in a maximum amount of RMB 13,200,000 (approximately $1,892,147) for the period from April 16, 2019 to April 15, 2020.
The Company provided a guarantee for the credit line granted to Ruili Group by Zhejiang Zheyin Finance Leasing Co., Ltd. in an amount of RMB 220,000,000 (approximately $31,535,793) for the period from August 16, 2018 to August 15, 2021.
The Company has short term bank loans guaranteed or pledged by related parties. See Note 10 for more details.
NOTE 4 - ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consisted of the following:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Accounts receivable | $ | 203,389,497 | $ | 163,903,305 | ||||
| Less: allowance for doubtful accounts | (19,152,439 | ) | (13,855,508 | ) | ||||
| Accounts receivable, net | $ | 184,237,058 | $ | 150,047,797 | ||||
The changes in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018 were summarized as follows:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Beginning balance | $ | 13,855,508 | $ | 13,927,156 | ||||
| Add: Increase to allowance | 5,583,551 | 610,610 | ||||||
| Effects on changes in foreign exchange rate | (286,620 | ) | (682,258 | ) | ||||
| Ending balance | $ | 19,152,439 | $ | 13,855,508 | ||||
F-18
NOTE 5 - INVENTORIES
On December 31, 2019 and 2018, inventories consisted of the following:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Raw Materials | $ | 39,149,211 | $ | 53,821,973 | ||||
| Work in process | 118,626,278 | 89,516,949 | ||||||
| Finished Goods | 69,252,451 | 62,674,252 | ||||||
| Less: Write-down of inventories | (3,543,863 | ) | (1,727,747 | ) | ||||
| Total Inventory | $ | 223,484,077 | $ | 204,285,427 | ||||
The Company reversed write-down of potentially obsolete or slow-moving inventories of $611,243 and recorded lower of cost or market adjustment of $2,476,116 for the year ended December 31, 2019. The Company recorded write-down of potentially obsolete or slow-moving inventories of $808,789 and lower of cost or market adjustment of $918,958 for the year ended December 31, 2018.
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net, consisted of the following, on December 31, 2019 and 2018:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Machinery | $ | 147,982,336 | $ | 130,912,861 | ||||
| Molds | 1,254,081 | 1,274,729 | ||||||
| Office equipment | 5,634,012 | 3,566,772 | ||||||
| Vehicles | 7,076,319 | 5,956,822 | ||||||
| Buildings | 20,276,295 | 20,610,137 | ||||||
| Construction in progress | 31,671,650 | 8,641,271 | ||||||
| Leasehold improvements | 455,989 | 463,497 | ||||||
| Sub-Total | 214,350,682 | 171,426,089 | ||||||
| Less: Accumulated depreciation | (87,342,375 | ) | (75,372,703 | ) | ||||
| Property, plant and equipment, net | $ | 127,008,307 | $ | 96,053,386 | ||||
Depreciation expense charged to operations was $13,490,370 and $11,198,717 for the years ended December 31, 2019 and 2018, respectively.
F-19
NOTE 7 - LAND USE RIGHTS, NET
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Cost | $ | 38,416,678 | $ | 22,283,776 | ||||
| Less: Accumulated amortization | (1,963,844 | ) | (1,159,321 | ) | ||||
| Land use rights, net | $ | 36,452,834 | $ | 21,124,455 | ||||
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.
In September 2017, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Xianghe Road and North Wansong Road, Binhai New District, Ruian City, Zhejiang Province, China with a total area of 17,029 square meters (the “Wansong Land”). The Company prepaid the amount of RMB 51.81 million (approximately $7.93 million) as full payment. The Company obtained the title to the land use rights in April 2018.
In December 2017, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Fengjin Road and Wenhua Road, Binhai New District, Ruian City, Zhejiang Province, China. As of December 31, 2018, the purchase price of RMB 72.02 million (approximately $11.13 million) was fully paid and the payments were included in prepayments, non-current in the consolidated balance sheets. During the year ended December 31, 2019, the Company paid related deed tax of RMB 2.33 million (approximately $330,000). The Company obtained the title to the land use rights in September 2019. The total prepayments of RMB 74.35 million (approximately $11.46 million) were transferred to the land use right during the year ended December 31, 2019.
In April 2018, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Tengda Road and Wanghai Road, Economic Development District, Ruian City, Zhejiang Province, China. Prepayment of RMB 38.68 million (approximately $5.85 million) and refundable deposit of RMB 3.87 million (approximately $585,000) were made during the year ended December 31, 2018. The prepayment and deposit were included in prepayment, non-current in the consolidated balance sheet as of December 31, 2018. During the year ended December 31, 2019, the Company paid related deed tax of RMB 2.04 million (approximately $292,000). The Company obtained the title to the land use rights in July 2019. The prepayments in total of RMB 40.72 million (approximately $6.15 million) was transferred to the land use right during the year ended December 31, 2019. The refundable deposit of RMB 3.87 million (approximately $585,000) was included in other assets, non-current on the accompanying consolidated balance sheet as of December 31, 2019.
In December 2019, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at Kaifaqu Avenue, Ruian Economic Development District, Ruian City, Zhejiang Province, China. Prepayment of RMB 5.95 million (approximately $853,000) was made during the year ended December 31, 2019. As of the filing date, the title to the land use rights has not been transferred to the Company.
F-20
Amortization expenses were $832,575 and $636,717 for the years ended December 31, 2019 and 2018, respectively.
The following table summarizes the future amortization associated with the land use rights:
| Amount | ||||
| For the years ending December 31, | ||||
| 2020 | $ | 1,030,506 | ||
| 2021 | 1,030,506 | |||
| 2022 | 1,030,506 | |||
| 2023 | 1,030,506 | |||
| 2024 | 1,030,506 | |||
| Thereafter | 31,300,304 | |||
| Total | $ | 36,452,834 | ||
NOTE 8 - PREPAYMENTS
Prepayments consisted of the following as of December 31, 2019 and 2018:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Raw material suppliers | $ | 7,594,813 | $ | 7,776,591 | ||||
| Equipment and land use rights purchases | 18,623,348 | 31,575,238 | ||||||
| Total prepayments | $ | 26,218,161 | $ | 39,351,829 | ||||
As of December 31, 2019, prepayments to raw material suppliers totaled $7,594,813, including prepayments to Ningbo Ruili, a related party under common control, in the amount of $1,059,410. As of December 31, 2018, prepayments to raw material suppliers totaled $7,776,591, including prepayments to Ningbo Ruili in the amount of $3,670,573. Also see Note 3 for details.
As of December 31, 2019 and 2018, the Company has prepayments of RMB 5.95 million (approximately $853,000) and RMB 100.16 million (approximately $15.42 million), respectively, for the land use rights as described in Note 7.
F-21
NOTE 9 - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
Deferred tax assets as of December 31, 2019 and 2018 comprise of the following:
| December 31, | December 31, | |||||||
| 2019 | 2018 | |||||||
| Deferred tax assets | ||||||||
| Allowance for doubtful accounts | $ | 3,083,393 | $ | 2,205,048 | ||||
| Revenue (net of cost) | 420,245 | 308,046 | ||||||
| Unpaid accrued expenses | 158,622 | 501,276 | ||||||
| Warranty | 1,009,266 | 1,059,468 | ||||||
| Deferred tax assets | 4,671,526 | 4,073,838 | ||||||
| Valuation allowance | ― | ― | ||||||
| Net deferred tax assets | $ | 4,671,526 | $ | 4,073,838 | ||||
Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law. The 2017 Tax Act includes provisions for a new tax on global intangible low-taxed income (“GILTI”) effective for tax years beginning after December 31, 2017. The GILTI provision imposes a tax to U.S. companies on the foreign income in excess of a deemed return on tangible assets of controlled foreign corporations, subject to certain deductions and limitations. The Company reports the tax impact of GILTI as a period cost when incurred. Accordingly, the Company is not providing deferred taxes for basis differences expected to reverse as GILTI in the future, as applicable. See Note 15 for more details.
NOTE 10 - SHORT TERM BANK LOANS
Bank loans represented the following as of December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||
| Secured | $ | 230,992,771 | $ | 217,940,471 | ||||
| Total short-term bank loan | $ | 230,992,771 | $ | 217,940,471 | ||||
The Company obtained those short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Minsheng Bank, Industrial Bank, Shanghai Pudong Development 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 year ended December 31, 2019 ranged from 1.35% to 5.44% per annum. The maturity dates of the loans existing as of December 31, 2019 ranged from January 2, 2020 to December 25, 2020. As of December 31, 2019 and 2018, the Company’s accounts receivables of $1,834,555 and $0, respectively, were pledged as collateral under loan arrangements. The interest expenses, including discount fees, were $9,964,876 and $9,780,598 for the years ended December 31, 2019 and 2018, respectively.
As of December 31, 2019, corporate or personal guarantees provided for those bank loans were as follows:
| $ | 30,102,348 | Pledged by Ruili Group, a related party, with its plant and land use rights | ||
| $ | 60,204,696 | Pledged by Hangzhou Ruili Property Development Ltd., a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders | ||
| $ | 12,901,007 | Pledged by Hangzhou Ruili Binkang Real Estate Development Co. Ltd., a related party, with its properties; Guaranteed by Hangzhou Ruili Property Development Ltd., a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders | ||
| $ | 5,375,419 | Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Pledged by Ruili Group, a related party, with its properties | ||
| $ | 2,365,184 | Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Pledged by Ruili Group, a related party, with its properties | ||
| $ | 93,173,934 | Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders | ||
| $ | 8,600,671 | Pledged by Ruian Auto Parts Co., Ltd. with its property; Guaranteed by Hangzhou Ruili Property Development Ltd., a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders | ||
| $ | 7,167,226 | Pledged by the Company with a bank deposit of $7,167,226, which was included in restricted cash on the accompanying consolidated balance sheets. | ||
| $ | 4,156,991 | Pledged by Ruili Group, a related party, with its properties | ||
| $ | 1,433,445 | Pledged by Ruian Auto Parts Co., Ltd., with its account receivables | ||
| $ | 5,511,850 | Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders, and Ms. Jia Rui Zhang, the daughter of Xiao Ping Zhang |
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NOTE 11 - ACCRUED EXPENSES
Accrued expenses consisted of the following as of December 31, 2019 and 2018:
| December 31, 2019 | December 31, 2018 | |||||||
| Accrued payroll | $ | 14,461,232 | $ | 11,679,870 | ||||
| Accrued warranty expenses | 6,728,438 | 7,063,122 | ||||||
| Other accrued expenses | 4,895,771 | 5,302,910 | ||||||
| Total accrued expenses | $ | 26,085,441 | $ | 24,045,902 | ||||
NOTE 12 - LONG TERM LOANS
| December 31, 2019 | December 31, 2018 | |||||||
| Aggregate outstanding principal balance | $ | 49,714,338 | $ | 36,165,550 | ||||
| Less: unamortized debt issuance costs | (163,014 | ) | (595,117 | ) | ||||
| Less: current portion | (27,194,179 | ) | (21,141,029 | ) | ||||
| Non-current portion | $ | 22,357,145 | $ | 14,429,404 | ||||
In November 2017, the Company entered into two identical but independent loan agreements with Far Eastern Horizon Co., Ltd. (“Far Eastern”), each for a term of 36 months and with an effective interest rate of 6.16% per annum, payable monthly in arrears. The total long term obligations under the two agreements amounted to RMB 200,000,000 (approximately $30,608,185), pledged by the Company’s equipment in the original cost of RMB 205,690,574 (approximately $31,479,075). The Company paid debt issuance costs in cash of RMB 5,000,000 (approximately $742,324). In connection with the loan agreements, the Company paid deposits in cash for an aggregated amount of RMB 35,000,000 (approximately $5,196,271), with an annual interest of 7%. The deposits were returned to the Company in December 2019. In the same period, the Company invested the refunded deposits of RMB 35,000,000 in a fixed-income wealth management product issued by a financial institution for a contractual maturity period of one year with Far Eastern being the investment consultant of the product. The repayments of principal totaled $9,779,123 and $9,931,000 for the years ended December 31, 2019 and 2018, respectively. The Company also received interest of $363,907 and $296,600 from Far Eastern during the years ended December 31, 2019 and 2018, respectively.
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In November 2017, the Company entered into four independent loan agreements with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of 36 months each. Two of the agreements were signed on November 30, 2017 with an effective interest rate of 8.50% per annum, payable monthly in arrears. The other two agreements were entered into on November 15, 2017, with an effective interest rate of 4.31% per annum, payable monthly in arrears. The total long term obligations under the four agreements amounted to RMB 235,000,000 (approximately $35,964,617), pledged by the Company’s equipment in the original cost of RMB 238,333,639 (approximately $36,474,800). The Company paid debt issuance costs in cash of RMB 6,905,660 (approximately $1,025,248). The repayments of principal totaled $11,253,726 and $14,928,000 for the years ended December 31, 2019 and 2018, respectively.
In July 2019, the Company entered into a loan agreement with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of 36 months with an effective interest rate of 4.57% per annum, payable monthly in arrears. The total long term obligations under the agreement amounted to RMB 60,000,000 (approximately $8,603,630), pledged by the Company’s equipment in the original cost of RMB 62,298,653 (approximately $8,808,078). The Company received RMB 50,000,000 (approximately $7,169,692), after deducting deposits of RMB 10,000,000 (approximately $1,433,938) required to maintain by COSCO, in the form of bank acceptance notes. The Company paid debt issuance costs in cash of RMB 754,717 (approximately $108,222). The repayments of principal totaled $1,724,886 for the year ended December 31, 2019.
In November 2019 the Company entered into a loan agreement with Huarong Leasing Co., Ltd. for a term of 36 months with an effective rate of 5.03% per annum, payable monthly in arrears. The total long term obligations under the agreement amounted to RMB 200,000,000 (approximately $28,991,810), pledged by the Company’s equipment in the original cost of RMB 245,582,893 (approximately $35,202,960). The Company received cash proceeds in the amount of RMB 200,000,000 (approximately $28,991,810). In connection with the loan agreement, the Company paid deposits in cash for an aggregated amount of RMB 24,000,000 (approximately $3,479,017), which bear no interest and will be refunded when the loan is paid off. The repayments of principal totaled $637,820 for the year ended December 31, 2019.
The interest expense for long term loans was in the amount of $1,672,888 and $3,267,868 for the years ended December 31, 2019 and 2018, respectively.
The following table summarizes the aggregate required repayments of principal amounts of the Company’s long term loans in the succeeding five years and thereafter:
| Amount | ||||
| For the years ending December 31, | ||||
| 2020 | $ | 27,281,726 | ||
| 2021 | 11,877,494 | |||
| 2022 | 10,555,118 | |||
| 2023 and thereafter | - | |||
| Total | 49,714,338 | |||
NOTE 13 - REVENUES FROM CONTRACTS WITH CUSTOMERS
The Company provides a variety of standard products to its customers. The Company’s contracts with its customers consist of a single, distinct performance obligation or promise to transfer auto parts to the customers. Generally, the Company’s performance obligations are satisfied at a point in time when the control of the products is transferred to the customs, which normally occurs upon the delivery of products at shipping point or destination depending on the terms of the contracts. Payment term with our customers are established based on industry and regional practices and vary by customers. The Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses. The Company provides assurance type warranties, which are not separate performance obligations. See Note 18 for details concerning the expected costs associated with the Company’s assurance warranty obligations.
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In accordance with ASC 606, the Company disaggregates revenue from contracts with customers by product type. See Note 19 for information regarding revenue disaggregation by product type.
Deferred revenue is recorded when consideration is received from a customer prior to transferring goods to the customer under the terms of a sales contract. As of the years ended December 31, 2019 and 2018, the Company recorded a deferred revenue liability of $46,066,180 and $51,529,795, respectively, which was presented as “Deposits received from customers” on the accompanying consolidated balance sheets. During the years ended December 31, 2019 and 2018, the Company recognized $23,244,523 and $24,659,985, respectively, of deferred revenue included in the opening balances of deposits received from customers. The amounts were included in sales on the accompanying consolidated statements of income and comprehensive income.
NOTE 14 - RESERVE
The reserve funds were comprised of the following:
| December 31, 2019 | December 31, 2018 | |||||||
| Statutory surplus reserve fund | $ | 22,621,044 | $ | 20,007,007 | ||||
| Total | $ | 22,621,044 | $ | 20,007,007 | ||||
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 15 - INCOME TAXES
United States
In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Tax Act. The Company is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.
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During the year ended December 31, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company also recognized related interest and penalty in the amount of $587,821 in the year ended December 31, 2018. During the year ended December 31, 2019, the Company made the first installment payment of $881,839 and accrued $167,415 penalty and interest for late payment. As of December 31, 2019, the total estimated transition tax liability was $10,896,381, of which $2,518,913 was included in income tax payable, current as a current liability which the Company believes will be paid within one year and the remaining balance was included in income tax payable, non-current. The actual impact of the U.S. Tax Reform on the Company may differ from management’s estimates, and management may update its judgments based on future regulations or guidance issued or changes in the interpretations taken that would adjust the provisional amounts recorded.
The 2017 Tax Act also created a new requirement that, for the periods beginning after January 1, 2018, certain income (referred to as global intangible low-taxed income or “GILTI”) earned by foreign subsidiaries in excess of a deemed return on tangible assets of foreign corporations must be included in U.S. taxable income. The GILTI income is eligible for a deduction, which lowers the effective tax rate to 10.5% for calendar years 2018 through 2025 and 13.125% after 2025. Under U.S. GAAP, companies are allowed to make an accounting policy election to either (i) account for GILTI as a component of tax expense in the period in which a company is subject to the rules – the period cost method, or (ii) account for GILTI in a company’s measurement of deferred taxes – the deferred method. The Company elected to account for GILTI in the period the tax is incurred. During the years ended December 31, 2019 and 2018, the Company accrued $539,017 and $0 GILTI tax, respectively.
PRC
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 Company renewed the “High-Tech Enterprise” designation in November 2018 for another three years which will expire in 2021. Therefore, the Company is taxed at 15% tax rate for the years ended December 31, 2019 and 2018.
The reconciliation of the effective income tax rate of the Company to the respective statutory income tax rates in the United States and the PRC for the years ended December 31, 2019 and 2018 is as follows:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| US statutory income tax rate | 21.00 | % | 21.00 | % | ||||
| Valuation allowance recognized with respect to the loss in the US company | -21.00 | % | -21.00 | % | ||||
| Impact of Tax Cuts and Jobs Act | 2.20 | % | 37.45 | % | ||||
| 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 | -3.86 | % | -4.42 | % | ||||
| Effects of expenses not deductible for tax purposes | -0.81 | % | 2.32 | % | ||||
| Other items | -0.80 | % | 0.23 | % | ||||
| Effective tax rate | 11.73 | % | 50.58 | % | ||||
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Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The provisions for income taxes for the years ended December 31, 2019 and 2018, respectively, are summarized as follows:
| Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Current | $ | 4,433,601 | $ | 15,852,188 | ||||
| Deferred | (671,151 | ) | (37,588 | ) | ||||
| Total | $ | 3,762,450 | $ | 15,814,600 | ||||
Accounting for Uncertainty in Income Taxes
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises complete their relevant tax filings. Therefore, the Company’s PRC entities’ tax filings results are subject to change. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s PRC entities’ tax filings, which may lead to additional tax liabilities.
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, 2019 and 2018.
NOTE 16 - NON-CONTROLLING INTEREST IN SUBSIDIARIES
Non-controlling interest in subsidiaries represents a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian.
Net income attributable to non-controlling interest in subsidiaries amounted to $2,904,484 and $2,716,278 for the years ended December 31, 2019 and 2018, respectively.
| 2019 | 2018 | |||||||
| 10% non-controlling interest in Ruian | $ | 2,904,484 | $ | 2,716,278 | ||||
| Total | $ | 2,904,484 | $ | 2,716,278 | ||||
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NOTE 17 - OPERATING LEASES
The Company entered into various operating lease agreements for certain of its staff dormitories, local warehouses and offices including a lease agreement with its related party and several short term lease agreements.
In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd., a related party, for the lease of two apartment buildings for Ruian’s management personnel and staff. The initial lease term was from January 2013 to December 2016. This lease was amended in 2013, with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000 (approximately $305,980).
Balance sheet information related to operating leases is as follows:
| December 31, 2019 | ||||
| Operating lease right-of-use assets1 | $ | 1,080,223 | ||
| Operating lease liabilities, current2 | $ | 383,493 | ||
| Operating lease liabilities, non-current | 696,730 | |||
| Total operating lease liabilities | $ | 1,080,223 | ||
| 1 | Operating lease right-of-use assets are recorded in other assets, non-current on the accompanying consolidated balance sheet. |
| 2 | The current portion of operating lease liabilities is recorded in other current liabilities on the accompanying consolidated balance sheet. |
On January 1, 2019, the Company adopted the provisions of ASC 842 using the modified retrospective method and elected not to apply ASC 842 to arrangements with lease terms of 12 month or less. For the year ended December 31, 2019, the Company had operating lease costs of $524,010 and short term lease costs of $1,082,930. Cash paid for amounts included in the measurement of operating lease liabilities was $611,906 for the year ended December 31, 2019. During the year ended December 31, 2019, the Company entered into a new lease agreement and the related right-of-use assets obtained in exchange for new operating lease liabilities is $284,828. During the same period, the Company has terminated a lease agreement with a gain of $146,648, and the related operating lease liability of $197,887 and right-of-use asset of $52,871 were distinguished. The operating lease expenses were $668,088 for the year ended December 31, 2018.
The weighted-average remaining lease term and the weighted-average discount rate of our leases are as follows:
| December 31, 2019 | ||||
| Weighted-average remaining lease term | 2.77 years | |||
| Weighted-average discount rate | 5.24 | % | ||
The following table summarizes the maturity of our operating lease liabilities as of December 31, 2019:
| 2020 | $ | 430,973 | ||
| 2021 | 430,973 | |||
| 2022 | 301,023 | |||
| 2023 and thereafter | - | |||
| Total lease payment | 1,162,969 | |||
| Less imputed interest | (82,746 | ) | ||
| Total operating lease liabilities | $ | 1,080,223 |
NOTE 18 - WARRANTY LIABILITY
Accrued warranty expenses are included in accrued expenses on the accompanying consolidated balance sheets. The movements of accrued warranty expenses for the year ended December 31, 2019 are as follows:
| Beginning balance at January 1, 2019 | $ | 7,063,122 | ||
| Aggregate increase for new warranties issued during current year | 4,060,908 | |||
| Aggregate reduction for payments made and effect of exchange rate fluctuation | (4,395,592 | ) | ||
| Ending balance at December 31, 2019 | $ | 6,728,438 |
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NOTE 19 - 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. The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.
| During the years ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| NET SALES TO EXTERNAL CUSTOMERS | ||||||||
| Commercial vehicles brake systems | $ | 448,727,141 | $ | 386,181,206 | ||||
| Passenger vehicles brake systems | 91,461,338 | 81,868,700 | ||||||
| Net sales | $ | 540,188,479 | $ | 468,049,906 | ||||
| INTERSEGMENT SALES | ||||||||
| Commercial vehicles brake systems | $ | — | $ | — | ||||
| Passenger vehicles brake systems | — | — | ||||||
| Intersegment sales | $ | — | $ | — | ||||
| GROSS PROFIT | ||||||||
| Commercial vehicles brake systems | $ | 113,329,974 | $ | 96,475,100 | ||||
| Passenger vehicles brake systems | 26,815,895 | 26,040,791 | ||||||
| Gross profit | $ | 140,145,869 | $ | 122,515,891 | ||||
| Selling and distribution expenses | 60,821,163 | 55,158,703 | ||||||
| General and administrative expenses | 35,178,114 | 26,939,370 | ||||||
| Research and development expenses | 21,433,016 | 16,366,393 | ||||||
| Other operating income, net | 11,227,075 | 10,122,416 | ||||||
| Income from operations | 33,940,651 | 34,173,841 | ||||||
| Interest income | 5,333,657 | 6,052,416 | ||||||
| Government grants | 5,475,513 | 4,307,609 | ||||||
| Other income | 389,006 | 260,448 | ||||||
| Interest expenses | (11,637,764 | ) | (13,570,956 | ) | ||||
| Other income (expenses) | (1,420,198 | ) | 43,219 | |||||
| Income before income tax expense | $ | 32,080,865 | $ | 31,266,577 | ||||
| CAPITAL EXPENDITURE | ||||||||
| Commercial vehicles brake systems | $ | 40,809,421 | $ | 45,877,053 | ||||
| Passenger vehicles brake systems | 8,317,124 | 9,724,756 | ||||||
| Total | $ | 49,126,545 | $ | 55,601,809 | ||||
| DEPRECIATION AND AMORTIZATION | ||||||||
| Commercial vehicles brake systems | $ | 12,035,113 | $ | 9,768,105 | ||||
| Passenger vehicles brake systems | 2,452,805 | 2,070,587 | ||||||
| Total | $ | 14,487,918 | $ | 11,838,692 | ||||
| December 31, 2019 | December 31, 2018 | |||||||
| TOTAL ASSETS | ||||||||
| Commercial vehicles brake systems | $ | 679,281,120 | $ | 655,435,946 | ||||
| Passenger vehicles brake systems | 138,440,224 | 138,935,580 | ||||||
| Total | $ | 817,721,344 | $ | 794,371,526 | ||||
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| December 31, 2019 | December 31, 2018 | |||||||
| LONG LIVED ASSETS | ||||||||
| Commercial vehicles brake systems | $ | 174,640,176 | $ | 150,067,034 | ||||
| Passenger vehicles brake systems | 35,592,370 | 31,810,355 | ||||||
| Total | $ | 210,232,546 | $ | 181,877,389 | ||||
NOTE 20 - COMMITMENTS AND CONTINGENCIES
(1) The Company purchased the Dongshan Facility from Ruili Group in 2007 and subsequently transferred the plants and land use right to Ruili Group. The Company has never obtained the land use rights certificate nor the property ownership certificate of the building for the Dongshan Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount was determined based on a 3% tax rate on the consideration paid for the Dongshan Facility in the transaction, which the Company considered as the most probable amount of tax liability. The Dongshan Facility was transferred back to Ruili Group on May 5, 2016.
(2) The Company purchased the Development Zone Facility from Ruili Group on May 5, 2016. As of the filing date, the Company has not yet obtained the land use rights certificate or the property ownership certificate for the building of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 15,030,000 (approximately $2,300,205). This amount was determined based on a 3% tax rate on the consideration paid for the Development Zone Facility, which the Company considered as the most probable amount of tax liability.
(3) The following putative stockholder class action complaints have been filed against the Company and certain officers and directors thereof in connection with the Going Private transaction. The first, Richard Scarantino v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-00216, was filed on February 13, 2020, in the United States District Court for the District of Delaware (the “Delaware Action”). The second, Jose Carlos SanJuan Paz v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-01318, was filed on February 14, 2020, in the United States District Court for the Southern District of New York. The third, Ongarov v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-1815, was filed on March 2, 2020 in the United States District Court for the Southern District of New York. The fourth, Mark Patenaude v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-01929, was filed on March 4, 2020 in the United States District Court for the Southern District of New York. The fifth, Sherri Gough v. SORL Auto Parts, Inc., Case No. 1:20-cv-02182, was filed on March 11, 2020 in the United States District Court for the Southern District of New York. The sixth, Bruce LeBeau v. SORL Auto Parts, Inc., et al., Case No. 1:20-cv-02266, was filed on March 13, 2020 in the United States District Court for the Southern District of New York. The complaints allege that the preliminary proxy statement omitted material information with respect to the Going Private transaction that renders the preliminary proxy statement false and misleading. In March 2020, the five actions filed in the Southern District of New York—the Paz, Ongarov, Patenaude, Gough, and LeBeau matters—were consolidated with the Paz action designated as the lead case (the “Consolidated Action”). On April 16, 2020, plaintiff in the Delaware Action voluntarily dismissed his claims without prejudice. Between April 17, 2020 and April 29, 2020, plaintiffs in the Consolidated Action also voluntarily dismissed their claims without prejudice. The seventh, on May 7, 2020, Jose Carlos Sanjuan Paz and Samuel Levin, filed a Section 220 lawsuit in the Delaware Court of Chancery seeking to compel the Company to allow them to inspect certain documents identified in the complaint. The complaint seeks to enjoin defendants from consummating the Going Private transaction. The Company believes the allegations in the complaint are without merit, but cannot predict with certainty the results of the litigation.
(4) The information of lease commitments is provided in Note 17.
(5) The information of guarantees and assets pledged is provided in Note 3 and Note 10.
NOTE 21 – CONCENTRATION
Ruili Commercial Vehicle, a related party, accounted for 11.1% of the Company’s total revenues for the year ended December 31, 2019 and 18.5% of the Company’s total net accounts receivable as of December 31, 2019. No other customer individually accounted for more than 10% of the Company’s total revenues or total net accounts receivable for the year ended December 31, 2019.
There is no customer accounted for more than 10% of the Company’s total revenues for the year ended December 31, 2018 or the Company’s total net accounts receivable as of December 31, 2018.
There is no vendor accounted for more than 10% of the Company’s total purchases for the years ended December 31, 2019 and 2018 or the Company’s total outstanding accounts payable as of December 31, 2019 and 2018.
F-30
NOTE 22 - SUBSEQUENT EVENTS
During the subsequent period, the Company obtained short term loans for an aggregate amount of approximately $273.2 million from China Construction Bank, Agricultural Bank of China, China Zheshang Bank, Wenzhou Bank, China Citic Bank, Hangzhou Bank, Guangfa Bank and Industrial Bank. Interest rates for those loans ranged from 2.13% to 5.22% per annum. The maturity dates of the loans existing as of the filing date ranged from August 31, 2020 to May 27, 2021. The Company continuously pledged bank acceptance notes to obtain loans from China Zheshang Bank and Bank of Ningbo, its accounts receivable for loan from China Construction Bank, and its properties for loans from Guangfa Bank.
In addition, the Company obtained long term loans for an aggregate amount of approximately $26.7 million from Agricultural Bank of China. Interest rates for those loans ranged from 4.55% to 4.99% per annum. The maturity dates of the loans ranged from May 30, 2023 to April 2, 2030. The Company pledged its properties for loans from Agricultural Bank of China.
In the same period, the Company repaid loan principals and interest expenses in the total amount of approximately $147.8 million to Industrial Bank, China Construction Bank, China Zheshang Bank, Bank of China and Agricultural Bank of China.
During the subsequent period, the Company continued to advance to Ruili Group. See Note 3 for detail arrangement between the Company and Ruili Group.
On May 8, 2020, a special meeting of the stockholders was held by the Company and its stockholders voted in favor of the proposal to adopt the Merger Agreement. On May 15, 2020, the Company completed the Merger, pursuant to the terms of the Merger Agreement by and among the Company, Parent and Merger Sub. As a result of the Merger, the Company becomes a wholly owned subsidiary of Ruili International Inc., and the Company has filed a delisting application on Form 25 with the Securities and Exchange Commission to delist and deregister the Company’s Common Stock as of May 15, 2020.
As a result of the COVID-19 outbreak in the first quarter of 2020, the Company has experienced suspension of operations, interruption of supply chain and decline in demand by the Company’s customers. The Company’s businesses, results of operations, financial position and cash flows were adversely affected in the first quarter of 2020 with potential continuing impacts on subsequent periods. Because of the risks and uncertainties posed by COVID-19, which are still evolving, the extent of the business disruption and the related financial impact on subsequent periods cannot be reasonably estimated at this time.
ADDITIONAL INFORMATION─FINANCIAL STATEMENT SCHEDULE I
This financial statements schedule has been prepared in conformity with U.S. GAAP.
F-31
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, 2019 and 2018
| December 31, 2019 | December 31, 2018 | |||||||
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | - | $ | - | ||||
| Other current assets | 86,828 | 86,828 | ||||||
| Total Current Assets | 86,828 | 86,828 | ||||||
| Investments in subsidiaries | 210,772,664 | 184,632,301 | ||||||
| TOTAL ASSETS | $ | 210,859,492 | $ | 184,719,129 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Income tax payable - current | 3,177,931 | 2,451,499 | ||||||
| Due to subsidiary | 881,839 | - | ||||||
| Other current liability | 2,921,411 | 2,921,411 | ||||||
| Total Current Liabilities | 6,981,181 | 5,372,910 | ||||||
| Income tax payable - noncurrent | 8,377,468 | 9,259,307 | ||||||
| Total Non-current Liabilities | ||||||||
| Total Liabilities | 15,358,649 | 14,632,217 | ||||||
| Stockholders’ Equity: | ||||||||
| Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of December 31, 2019 and 2018 | - | - | ||||||
| Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of December 31, 2019 and 2018 | 38,609 | 38,609 | ||||||
| Additional paid-in capital | (28,582,654 | ) | (28,582,654 | ) | ||||
| Retained earnings | 224,044,888 | 198,630,957 | ||||||
| Total Stockholders’ Equity | 195,500,843 | 170,086,912 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | 210,859,492 | $ | 184,719,129 | ||||
F-32
Financial Information of Parent Company
STATEMENTS OF INCOME
For the Years Ended December 31, 2019 and 2018
| For Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Investment income | $ | 26,140,363 | $ | 24,446,505 | ||||
| General and administrative expenses | 20,000 | — | ||||||
| Provision for income taxes | 706,432 | 11,710,806 | ||||||
| Net income attributable to stockholders | $ | 25,413,931 | $ | 12,735,699 | ||||
| Weighted average common share - Basic | 19,304,921 | 19,304,921 | ||||||
| Weighted average common share - Diluted | 19,304,921 | 19,304,921 | ||||||
| EPS - Basic | $ | 1.32 | $ | 0.66 | ||||
| EPS - Diluted | $ | 1.32 | $ | 0.66 | ||||
F-33
Financial Information of Parent Company
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2019 and 2018
| For Years Ended December 31, | ||||||||
| 2019 | 2018 | |||||||
| Cash flow from operating activities: | ||||||||
| Net income | $ | 25,413,931 | $ | 12,735,699 | ||||
| Adjustments to reconcile net income to net cash used in operating activities : | ||||||||
| Investment in subsidiaries | (26,140,363 | ) | (24,446,505 | ) | ||||
| Income tax payable | 726,432 | 11,710,806 | ||||||
| Net cash used in operating activities | - | - | ||||||
| Net change in cash and cash equivalents | - | - | ||||||
| Cash and cash equivalents, beginning of the year | - | - | ||||||
| Cash and cash equivalents, end of the year | $ | - | $ | - | ||||
F-34
Financial Information of Parent Company
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2019 and 2018
| Additional | ||||||||||||||||||||
| Number | Common | Paid-in | Retained | Shareholders’ | ||||||||||||||||
| of Share | Stock | Capital | Earnings | Equity | ||||||||||||||||
| Balance - December 31, 2017 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 185,895,258 | $ | 157,351,213 | ||||||||||
| Net income | - | - | - | 12,735,699 | 12,735,699 | |||||||||||||||
| Balance - December 31, 2018 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 198,630,957 | $ | 170,086,912 | ||||||||||
| Net income | - | - | 25,413,931 | 25,413,931 | ||||||||||||||||
| Balance - December 31, 2019 | 19,304,921 | $ | 38,609 | $ | (28,582,654 | ) | $ | 224,044,888 | $ | 195,500,843 | ||||||||||
F-35
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 8th day of June 2020.
| SORL AUTO PARTS, INC. | ||
| By: | /s/ Xiao Ping Zhang | |
| Xiao Ping Zhang | ||
Chief Executive Officer (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Registrant and in the capacities.
| Name | Position | Date | ||
| /s/ Xiao Ping Zhang | Chief Executive Officer and Chairman | June 8, 2020 | ||
| Xiao Ping Zhang | (Principal Executive Officer) | |||
| /s/ Zong Yun Zhou | Chief Financial Officer | June 8, 2020 | ||
| Zong Yun Zhou | (Principal Financial Officer and Principal Accounting Officer) | |||
| /s/ Jinrui Yu | Chief Operating Officer | June 8, 2020 | ||
| Jinrui Yu | ||||
| /s/ Xiao Feng Zhang | Director | June 8, 2020 | ||
| Xiao Feng Zhang | ||||
| /s/ Yu Hong Li | Director | June 8, 2020 | ||
| Yu Hong Li | ||||
| /s/ Hui Lin Wang | Director | June 8, 2020 | ||
| Hui Lin Wang | ||||
| /s/ Jin Bao Liu | Director | June 8, 2020 | ||
| Jin Bao Liu | ||||
| /s/ Jiang Hua Feng | Director | June 8, 2020 | ||
| Jiang Hua Feng | ||||
| /s/ Shu Ping Chi | Director | June 8, 2020 | ||
| Shu Ping Chi |
58
Exhibit 31.1
SARBANES-OXLEY SECTION 302(A) CERTIFICATION
PRINCIPAL EXECUTIVE OFFICER
I, Xiao Ping Zhang, certify that:
| (1) | I have reviewed this annual report on Form 10-K of SORL Auto Parts, Inc.; |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 8, 2020 | By: | /s/ Xiao Ping Zhang |
| Xiao Ping Zhang | ||
|
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
SARBANES-OXLEY SECTION 302(A) CERTIFICATION
PRINCIPAL FINANCIAL OFFICER
I, Zong Yun Zhou, certify that:
| (1) | I have reviewed this annual report on Form 10-K of SORL Auto Parts, Inc.; |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| (4) | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| (5) | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: June 8, 2020 | By: | /s/ Zong Yun Zhou |
| Zong Yun Zhou | ||
|
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Annual Report of SORL AUTO PARTS, INC. (the “Company”) on Form 10-K for the year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “report”), we, Xiao Ping Zhang and Zong Yun Zhou, Chief Executive Officer and Chief Financial Officer, respectively, of the Registrant, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| (2) | The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
| Dated June 8, 2020 | By: | /s/ Xiao Ping Zhang |
| Xiao Ping Zhang | ||
|
Chief Executive Officer (Principal Executive Officer) | ||
| By: | /s/ Zong Yun Zhou | |
| Zong Yun Zhou | ||
|
Chief Financial Officer (Principal Financial Officer) |
Summary of Significant Accounting Policies (Details) |
12 Months Ended |
|---|---|
Dec. 31, 2019 | |
| Buildings [Member] | Minimum [Member] | |
| Estimated Useful Life (Years) | 10 years |
| Buildings [Member] | Maximum [Member] | |
| Estimated Useful Life (Years) | 20 years |
| Machinery and equipment [Member] | Minimum [Member] | |
| Estimated Useful Life (Years) | 5 years |
| Machinery and equipment [Member] | Maximum [Member] | |
| Estimated Useful Life (Years) | 10 years |
| Electronic equipment [Member] | Minimum [Member] | |
| Estimated Useful Life (Years) | 3 years |
| Electronic equipment [Member] | Maximum [Member] | |
| Estimated Useful Life (Years) | 5 years |
| Motor vehicles [Member] | Minimum [Member] | |
| Estimated Useful Life (Years) | 3 years |
| Motor vehicles [Member] | Maximum [Member] | |
| Estimated Useful Life (Years) | 10 years |
| Leasehold improvements [Member] | |
| Estimated Useful Life, description | The lesser of remaining lease term or 10 |
Related Party Transactions (Details 2) - USD ($) |
Dec. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| DEPOSIT RECEIVED FROM RELATED PARTY | $ 1,125,085 | |
| Ruili Group Co., Ltd. [Member] | ||
| DEPOSIT RECEIVED FROM RELATED PARTY | $ 1,125,085 |
Related Party Transactions (Details 6) - USD ($) |
Dec. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| ACCOUNTS PAYABLE TO RELATED PARTIES | $ 14,296,017 | $ 23,805,200 |
| Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. [Member] | ||
| ACCOUNTS PAYABLE TO RELATED PARTIES | 7,877,485 | |
| Shanghai Dachao Electric Technology Co., Ltd. [Member] | ||
| ACCOUNTS PAYABLE TO RELATED PARTIES | 284,833 | 56,883 |
| Ruili MeiLian Air Management System (LangFang) Co., Ltd. [Member] | ||
| ACCOUNTS PAYABLE TO RELATED PARTIES | 1,965,349 | 5,628,155 |
| Wenzhou Lichuang Auto Parts Co., Ltd. | ||
| ACCOUNTS PAYABLE TO RELATED PARTIES | 11,890,537 | 9,898,777 |
| Changchun Kormee Auto Electric Co., Ltd. [Member] | ||
| ACCOUNTS PAYABLE TO RELATED PARTIES | 9,057 | 9,206 |
| Hangzhou Hangcheng Friction Material Co., Ltd. [Member] | ||
| ACCOUNTS PAYABLE TO RELATED PARTIES | $ 146,241 | $ 334,694 |
Non-Controlling Interest in Subsidiaries (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2019 |
Dec. 31, 2018 |
|
| Non-Controlling Interest in Subsidiaries (Textual) | ||
| Total | $ 2,904,484 | $ 2,716,278 |
| Ruian [Member] | ||
| Non-Controlling Interest in Subsidiaries (Textual) | ||
| Non-controlling interest, percenatge | 10.00% | |
Long Term Loans (Details) - USD ($) |
Dec. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Debt Disclosure [Abstract] | ||
| Aggregate outstanding principal balance | $ 49,714,338 | $ 36,165,550 |
| Less: unamortized debt issuance costs | (163,014) | (595,117) |
| Less: current portion | (27,194,179) | (21,141,029) |
| Non-current portion | $ 22,357,145 | $ 14,429,404 |
Short-Term Bank Loans (Details) - USD ($) |
Dec. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Total short-term bank loan | $ 230,992,771 | $ 217,940,471 |
| Secured [Member] | ||
| Total short-term bank loan | $ 230,992,771 | $ 217,940,471 |
Income Taxes (Details) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2019 |
Dec. 31, 2018 |
|
| Income Tax Disclosure [Abstract] | ||
| US statutory income tax rate | 21.00% | 21.00% |
| Valuation allowance recognized with respect to the loss in the US company | (21.00%) | (21.00%) |
| Impact of Tax Cuts and Jobs Act | 0.0220 | 0.3745 |
| 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 | (3.86%) | (4.42%) |
| Effects of expenses not deductible for tax purposes | (0.81%) | 2.32% |
| Other items | (0.80%) | 0.23% |
| Effective tax rate | 11.73% | 50.58% |
Description of Business |
12 Months Ended |
|---|---|
Dec. 31, 2019 | |
| Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
| DESCRIPTION OF BUSINESS | NOTE 1 - DESCRIPTION OF BUSINESS
SORL Auto Parts, Inc. (together with its subsidiaries, "we," "us," "our" or the "Company" or "SORL"), a Delaware corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd. (the "Joint Venture" or "Ruian"). The Company distributes products both in China and internationally under SORL trademarks. The Company's product range includes 140 categories and over 2,000 different specifications.
The Joint Venture was formed in the People's Republic of China ("PRC" or "China") as a Sino-Foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the "Ruili Group"), a related party under common control, and Fairford Holdings Limited ("Fairford"), a wholly owned subsidiary of the Company. The Ruili Group was, incorporated in China in 1987 and specializes in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture.
On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR Hong Kong Limited ("MGR"), a Hong Kong-based global auto parts distribution specialist firm and an unaffiliated Taiwanese investor. The joint venture was named SORL International Holding, Ltd. ("SIH") based in Hong Kong. SORL held a 60% interest in the joint venture, MGR held a 30% interest, and the Taiwanese investor held a 10% interest. SIH was primarily devoted to expanding SORL's international sales network in Asia-Pacific and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese investor. After this transaction, SIH ceased to be a distributor of SORL in the international market.
On April 26, 2019, the Company announced its receipt of a preliminary non-binding proposal letter, dated April 25, 2019, from Mr. Xiao Ping Zhang, the Chairman and Chief Executive Officer of the Company, Ms. Shu Ping Chi and Mr. Xiao Feng Zhang, directors of the Company and Ruili Group Co., Ltd. (together, the "Consortium"), to acquire all of the outstanding shares of common stock of the Company not already owned by the Consortium (the "Going Private" transaction).
On November 29, 2019, the Company entered into an agreement and plan of merger (the "Merger Agreement"), with Ruili International Inc. ("Parent"), a Delaware corporation, and Ruili International Merger Sub Inc. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of Parent. Parent was formed by Mr. Xiao Ping Zhang solely for the purpose of entering into the Merger Agreement and consummating the Going Private transaction. Pursuant to the Merger Agreement, subject to the terms and conditions thereof, at the effective time, Merger Sub will be merged with and into the Company (the "Merger"), with the Company being the surviving corporation, and each share of common stock of the Company issued and outstanding immediately prior to the effective time of the Merger will be automatically cancelled and converted into the right to receive $4.72 in cash. |
Inventories |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| INVENTORIES |
NOTE 5 - INVENTORIES
On December 31, 2019 and 2018, inventories consisted of the following:
The Company reversed write-down of potentially obsolete or slow-moving inventories of $611,243 and recorded lower of cost or market adjustment of $2,476,116 for the year ended December 31, 2019. The Company recorded write-down of potentially obsolete or slow-moving inventories of $808,789 and lower of cost or market adjustment of $918,958 for the year ended December 31, 2018. |
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Deferred Tax Assets and Deferred Tax Liabilities |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Components of Deferred Tax Assets and Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES |
NOTE 9 - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
Deferred tax assets as of December 31, 2019 and 2018 comprise of the following:
Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company's subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.
In December 2017, the Tax Cuts and Jobs Act (the "2017 Tax Act") was enacted into law. The 2017 Tax Act includes provisions for a new tax on global intangible low-taxed income ("GILTI") effective for tax years beginning after December 31, 2017. The GILTI provision imposes a tax to U.S. companies on the foreign income in excess of a deemed return on tangible assets of controlled foreign corporations, subject to certain deductions and limitations. The Company reports the tax impact of GILTI as a period cost when incurred. Accordingly, the Company is not providing deferred taxes for basis differences expected to reverse as GILTI in the future, as applicable. See Note 15 for more details. |
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Deferred Tax Assets and Deferred Tax Liabilities (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Components of Deferred Tax Assets and Liabilities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of deferred tax assets |
|
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Inventories (Tables) |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Dec. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Inventory Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of inventories |
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Summary of Significant Accounting Policies (Policies) |
12 Months Ended | ||||||||||||||||||||
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Dec. 31, 2019 | |||||||||||||||||||||
| Accounting Policies [Abstract] | |||||||||||||||||||||
| ACCOUNTING METHOD |
The Company uses the accrual method of accounting for financial statement and tax return purposes. |
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| 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 income and comprehensive income 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 non-controlling interests in subsidiary undertakings is reflected in the consolidated statements of income and comprehensive income. |
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| 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. The extent to which the COVID-19 pandemic may directly or indirectly impact our business, financial condition, and results of operations is highly uncertain and subject to change. We considered the potential impact of the COVID-19 pandemic on our estimates and assumptions and there was not a material impact to our consolidated financial statements as of and for the year ended December 31, 2019. Actual results could differ from those estimates. |
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| FAIR VALUE OF FINANCIAL INSTRUMENTS |
For certain of the Company's financial instruments, including cash and cash equivalents, current restricted cash, accounts receivables, current prepayments, bank acceptance notes from customers, inventories, current deposits on loan agreements, short-term investment, other current assets, accounts payable and bank acceptance notes to vendors, accrued expenses, short term bank loans, current portion of long term loans, deposits received from customers, deferred income, current income tax payable 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. |
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| 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. |
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| FINANCIAL RISK FACTORS AND FINANCIAL RISK MANAGEMENT |
The Company is exposed to the following risk factors:
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| 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. |
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| RESTRICTED CASH |
Restricted cash, current consists of bank deposits used to pledge bank acceptance notes, deposits for obtaining letters of credit from a local bank, and deposits guaranteed for construction projects.
Restricted cash, non-current consists of non-current portion of deposits guaranteed for construction projects and some bank deposits used to pledge for bank acceptance notes. |
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| 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. |
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| SHORT-TERM INVESTMENT |
Short-term investment consists of investment in wealth management product issued by a financial institution with the contractual maturity of one year. The wealth management product is secured with a fixed interest rate. Interest income is included in the consolidated statement of income and comprehensive income. |
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| 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:
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. |
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| 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 40 years. |
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| 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. |
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| 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.
The allowances are calculated based on a detailed review of certain individual customer accounts, historical collectability rates, a general provision based on aging 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. |
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| BANK ACCEPTANCE NOTES FROM CUSTOMERS |
Bank acceptance notes from customers, generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of related parties and transferred to the Company as loans from related parties or repayments from related parties. Bank acceptance notes do not bear interest. As of December 31, 2019 and 2018, notes receivables in the amount of $57,471,267 and $58,458,890, respectively, were pledged to endorsing banks to issue bank acceptance notes or short term bank loans. 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 $977,600 and $1,463,837 for the years ended December 31, 2019 and 2018, respectively, which were included in interest expenses. |
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| REVENUE RECOGNITION |
The Company has adopted Accounting Standards Codification Topic 606, "Revenue from Contracts with Customers" ("ASC 606") effective January 1, 2018. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. See Note 13 for details on revenues from contracts with customers. |
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| 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. |
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| 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 average exchange rates during the period.
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. |
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| 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. |
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| RESEARCH AND DEVELOPMENT EXPENSES |
Research and development costs are expensed as incurred. Research and development expenses were $21,433,016 for the year ended December 31, 2019, as compared with $16,366,393 for the year ended December 31, 2018. |
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| SHIPPING AND HANDLING COSTS |
Shipping and handling cost are classified as selling expenses and are expensed as incurred. Shipping and handling costs were $11,664,236 and $11,358,223 for the years ended December 31, 2019 and 2018, respectively. |
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| ADVERTISING COSTS |
Advertising costs are classified as selling expenses and are expensed as incurred. Advertising costs were $755,947 and $737,530 for the years ended December 31, 2019 and 2018, respectively. |
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| 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 $4,060,908 and $3,113,913 for the years ended December 31, 2019 and 2018, respectively. |
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| PURCHASE DISCOUNTS |
Purchase discounts represent discounts received from vendors for purchasing raw materials and are netted in the cost of goods sold, if applicable. |
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| LEASECOMMITMENTS |
On January 1, 2019, the Company has adopted Accounting Standard Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Right-of-use (ROU) assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. The present value of lease payments is determined primarily using the incremental borrowing rate based on the information available at the lease commencement date. We have elected not to recognize ROU assets and lease liabilities for short-term leases for all classes of underlying assets. Short-term leases are leases with terms greater than 1 month, but less than 12 months. See cc. – RECENTLY ISSUED FINANCIAL STANDARDS for more details. |
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| 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 and write-down of potentially obsolete or slow-moving inventories are also recorded in cost of sales, if any. |
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| 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 deferred income and then offset against the cost of the related equipment upon acquisition. |
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| 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, 2019 and 2018, the Company operated in two reportable business segments: (1) commercial vehicles brake systems (2) passenger vehicles brake systems. |
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| RECENTLY ISSUED FINANCIAL STANDARDS |
On January 1, 2019, the Company adopted Accounting Standards Update (ASU) 2016-02, Leases (as amended by ASU 2018-01, 2018-10, 2018-11, 2018-20, and 2019-01, collectively ASC Topic 842), using the modified retrospective method. The Company elected the transition method which allows entities to initially apply the requirements by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As a result of electing this transition method, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. The Company elected the package of practical expedients permitted under the transition guidance within ASC 842, which among other things, allows the Company to carry forward certain historical conclusions reached under ASC Topic 840 regarding lease identification, classification, and the accounting treatment of initial direct costs. The Company elected not to record assets and liabilities on its consolidated balance sheet for new or existing lease arrangements with terms of 12 months or less. The Company recognizes lease expenses for such leases on a straight-line basis over the lease term. In addition, the Company elected the land easement transition practical expedient and did not reassess whether an existing or expired land easement is a lease or contains a lease if it has not historically been accounted for as a lease.
The primary impact of applying ASC Topic 842 is the initial recognition of $1.6 million of lease liabilities and corresponding right-of-use assets of $1.3 million on the Company's consolidated balance sheet as of January 1, 2019, for leases classified as operating leases under ASC Topic 840, as well as enhanced disclosure of the Company's leasing arrangements. There is no cumulative effect to retained earnings or other components of equity recognized as of January 1, 2019 and the adoption of this standard did not impact the consolidated statement of income and comprehensive income or consolidated statement of cash flows of the Company. The Company does not have finance lease arrangements as of December 31, 2019. See Note 17 for further discussion.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which eliminates the probable recognition threshold for credit impairments. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. ASU 2016-13 is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2019. The Company does not expect a material impact on net assets and the consolidated statement of income and comprehensive income as a result of adopting the new standard.
On December 18, 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12") as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards. ASU 2019-12 removes certain exceptions from Topic 740, Income Taxes, including (i) the exception to the incremental approach for intra period tax allocation; (ii) the exception to accounting for basis differences when there are ownership changes in foreign investments; and (iii) the exception in interim period income tax accounting for year-to-date losses that exceed anticipated losses. ASU 2019-12 also simplifies GAAP in several other areas of Topic 740 such as (i) franchise taxes and other taxes partially based on income; (ii) transactions with a government that result in a step up in the tax basis of goodwill; (iii) separate financial statements of entities not subject to tax; and (iv) enacted changes in tax laws in interim periods. ASU 2019-12 is effective for annual reporting periods and interim periods within those years beginning after December 15, 2020, and early adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2019-12 on its consolidated financial statements and related disclosures. |
Revenues from Contracts with Customers |
12 Months Ended |
|---|---|
Dec. 31, 2019 | |
| Revenues from Contracts with Customers [Abstract] | |
| REVENUES FROM CONTRACTS WITH CUSTOMERS | NOTE 13 - REVENUES FROM CONTRACTS WITH CUSTOMERS
The Company provides a variety of standard products to its customers. The Company's contracts with its customers consist of a single, distinct performance obligation or promise to transfer auto parts to the customers. Generally, the Company's performance obligations are satisfied at a point in time when the control of the products is transferred to the customs, which normally occurs upon the delivery of products at shipping point or destination depending on the terms of the contracts. Payment term with our customers are established based on industry and regional practices and vary by customers. The Company elected to treat shipping and handling activities as fulfillment activities, and the related costs are recorded as selling expenses. The Company provides assurance type warranties, which are not separate performance obligations. See Note 18 for details concerning the expected costs associated with the Company's assurance warranty obligations.
In accordance with ASC 606, the Company disaggregates revenue from contracts with customers by product type. See Note 19 for information regarding revenue disaggregation by product type.
Deferred revenue is recorded when consideration is received from a customer prior to transferring goods to the customer under the terms of a sales contract. As of the years ended December 31, 2019 and 2018, the Company recorded a deferred revenue liability of $46,066,180 and $51,529,795, respectively, which was presented as "Deposits received from customers" on the accompanying consolidated balance sheets. During the years ended December 31, 2019 and 2018, the Company recognized $23,244,523 and $24,659,985, respectively, of deferred revenue included in the opening balances of deposits received from customers. The amounts were included in sales on the accompanying consolidated statements of income and comprehensive income. |
Operating Leases |
12 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Leases, Operating [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| OPERATING LEASES | NOTE 17 - OPERATING LEASES
The Company entered into various operating lease agreements for certain of its staff dormitories, local warehouses and offices including a lease agreement with its related party and several short term lease agreements.
In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd., a related party, for the lease of two apartment buildings for Ruian's management personnel and staff. The initial lease term was from January 2013 to December 2016. This lease was amended in 2013, with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000 (approximately $305,980).
Balance sheet information related to operating leases is as follows:
On January 1, 2019, the Company adopted the provisions of ASC 842 using the modified retrospective method and elected not to apply ASC 842 to arrangements with lease terms of 12 month or less. For the year ended December 31, 2019, the Company had operating lease costs of $524,010 and short term lease costs of $1,082,930. Cash paid for amounts included in the measurement of operating lease liabilities was $611,906 for the year ended December 31, 2019. During the year ended December 31, 2019, the Company entered into a new lease agreement and the related right-of-use assets obtained in exchange for new operating lease liabilities is $284,828. During the same period, the Company has terminated a lease agreement with a gain of $146,648, and the related operating lease liability of $197,887 and right-of-use asset of $52,871 were distinguished. The operating lease expenses were $668,088 for the year ended December 31, 2018.
The weighted-average remaining lease term and the weighted-average discount rate of our leases are as follows:
The following table summarizes the maturity of our operating lease liabilities as of December 31, 2019:
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Concentration |
12 Months Ended |
|---|---|
Dec. 31, 2019 | |
| Concertration [Abstract] | |
| CONCENTRATION | NOTE 21 – CONCENTRATION
Ruili Commercial Vehicle, a related party, accounted for 11.1% of the Company's total revenues for the year ended December 31, 2019 and 18.5% of the Company's total net accounts receivable as of December 31, 2019. No other customer individually accounted for more than 10% of the Company's total revenues or total net accounts receivable for the year ended December 31, 2019.
There is no customer accounted for more than 10% of the Company's total revenues for the year ended December 31, 2018 or the Company's total net accounts receivable as of December 31, 2018.
There is no vendor accounted for more than 10% of the Company's total purchases for the years ended December 31, 2019 and 2018 or the Company's total outstanding accounts payable as of December 31, 2019 and 2018. |
Description of Business (Details) |
1 Months Ended | |||
|---|---|---|---|---|
Nov. 29, 2019 |
Dec. 31, 2019 |
Nov. 11, 2009 |
Jan. 17, 2004 |
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| Description of Business (Textual) | ||||
| Ownership percentage | 10.00% | |||
| Joint Venture [Member] | ||||
| Description of Business (Textual) | ||||
| Ownership percentage | 90.00% | |||
| Investor [Member] | ||||
| Description of Business (Textual) | ||||
| Ownership percentage | 10.00% | |||
| MGR Hong Kong Limited [Member] | ||||
| Description of Business (Textual) | ||||
| Ownership percentage | 30.00% | |||
| SORL International Holding, Ltd [Member] | ||||
| Description of Business (Textual) | ||||
| Ownership percentage | 60.00% | |||
| Ruili Group Co., Ltd. [Member] | ||||
| Description of Business (Textual) | ||||
| Ownership percentage | 10.00% | |||
| Fairford [Member] | ||||
| Description of Business (Textual) | ||||
| Ownership percentage | 90.00% | |||
| Ruili Group [Member] | ||||
| Description of Business (Textual) | ||||
| Merger agreement, description | The Company entered into an agreement and plan of merger (the "Merger Agreement"), with Ruili International Inc. ("Parent"), a Delaware corporation, and Ruili International Merger Sub Inc. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of Parent. Parent was formed by Mr. Xiao Ping Zhang solely for the purpose of entering into the Merger Agreement and consummating the Going Private transactions. Pursuant to the Merger Agreement, subject to the terms and conditions thereof, at the effective time, Merger Sub will be merged with and into the Company (the "Merger"), with the Company being the surviving corporation, and each share of common stock of the Company issued and outstanding immediately prior to the effective time of the Merger will be automatically cancelled and converted into the right to receive $4.72 in cash. |
Non-Controlling Interest in Subsidiaries (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||
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Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||
| Non-Controlling Interest in Subsidiaries [Abstract] | |||||||||||||||||||||||||||||||||||||
| Schedule of non-controlling interest in subsidiaries |
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Accrued Expenses (Tables) |
12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payables and Accruals [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of accrued expenses |
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Warranty Liability (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2019
USD ($)
| |
| Warranty Claims [Abstract] | |
| Beginning balance at January 1, 2019 | $ 7,063,122 |
| Aggregate increase for new warranties issued during current year | 4,060,908 |
| Aggregate reduction for payments made and effect of exchange rate fluctuation | (4,395,592) |
| Ending balance at December 31, 2019 | $ 6,728,438 |
Accounts Receivable, Net (Details 1) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2019 |
Dec. 31, 2018 |
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| Accounts Receivable, after Allowance for Credit Loss [Abstract] | ||
| Beginning balance | $ 13,855,508 | $ 13,927,156 |
| Add: Increase to allowance | 5,583,551 | 610,610 |
| Effects on changes in foreign exchange rate | (286,620) | (682,258) |
| Ending balance | $ 19,152,439 | $ 13,855,508 |
Property, Plant and Equipment, Net (Details Textual) - USD ($) |
12 Months Ended | |
|---|---|---|
Dec. 31, 2019 |
Dec. 31, 2018 |
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| Property, Plant and Equipment, Net (Details Textual) | ||
| Depreciation | $ 13,490,370 | $ 11,198,717 |
Subsequent Events (Details) |
12 Months Ended |
|---|---|
|
Dec. 31, 2019
USD ($)
| |
| Repaid loan principals and interest expenses | $ 147,800,000 |
| Short term loans total amount | $ 273,200,000 |
| Maturity dates, description | The maturity dates of the loans existing as of the filing date ranged from August 31, 2020 to May 27, 2021. |
| Agricultural Bank of China [Member] | |
| Short term loans total amount | $ 26,700,000 |
| Maturity dates, description | The maturity dates of the loans ranged from May 30, 2023 to April 2, 2030. |
| Minimum [Member] | |
| Interest rate | 2.13% |
| Minimum [Member] | Agricultural Bank of China [Member] | |
| Interest rate | 4.55% |
| Maximum [Member] | |
| Interest rate | 5.22% |
| Maximum [Member] | Agricultural Bank of China [Member] | |
| Interest rate | 4.99% |
Subsequent Events |
12 Months Ended |
|---|---|
Dec. 31, 2019 | |
| Subsequent Events [Abstract] | |
| SUBSEQUENT EVENTS | NOTE 22 - SUBSEQUENT EVENTS
During the subsequent period, the Company obtained short term loans for an aggregate amount of approximately $273.2 million from China Construction Bank, Agricultural Bank of China, China Zheshang Bank, Wenzhou Bank, China Citic Bank, Hangzhou Bank, Guangfa Bank and Industrial Bank. Interest rates for those loans ranged from 2.13% to 5.22% per annum. The maturity dates of the loans existing as of the filing date ranged from August 31, 2020 to May 27, 2021. The Company continuously pledged bank acceptance notes to obtain loans from China Zheshang Bank and Bank of Ningbo, its accounts receivable for loan from China Construction Bank, and its properties for loans from Guangfa Bank.
In addition, the Company obtained long term loans for an aggregate amount of approximately $26.7 million from Agricultural Bank of China. Interest rates for those loans ranged from 4.55% to 4.99% per annum. The maturity dates of the loans ranged from May 30, 2023 to April 2, 2030. The Company pledged its properties for loans from Agricultural Bank of China.
In the same period, the Company repaid loan principals and interest expenses in the total amount of approximately $147.8 million to Industrial Bank, China Construction Bank, China Zheshang Bank, Bank of China and Agricultural Bank of China.
During the subsequent period, the Company continued to advance to Ruili Group. See Note 3 for detail arrangement between the Company and Ruili Group.
On May 8, 2020, a special meeting of the stockholders was held by the Company and its stockholders voted in favor of the proposal to adopt the Merger Agreement. On May 15, 2020, the Company completed the Merger, pursuant to the terms of the Merger Agreement by and among the Company, Parent and Merger Sub. As a result of the Merger, the Company becomes a wholly owned subsidiary of Ruili International Inc., and the Company has filed a delisting application on Form 25 with the Securities and Exchange Commission to delist and deregister the Company's Common Stock as of May 15, 2020.
As a result of the COVID-19 outbreak in the first quarter of 2020, the Company has experienced suspension of operations, interruption of supply chain and decline in demand by the Company's customers. The Company's businesses, results of operations, financial position and cash flows were adversely affected in the first quarter of 2020 with potential continuing impacts on subsequent periods. Because of the risks and uncertainties posed by COVID-19, which are still evolving, the extent of the business disruption and the related financial impact on subsequent periods cannot be reasonably estimated at this time. |
Reserve |
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| Reserve [Abstract] | ||||||||||||||||||||||||||||
| RESERVE | NOTE 14 - RESERVE
The reserve funds were comprised of the following:
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. |
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Warranty Liability |
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| Warranty Claims [Abstract] | |||||||||||||||||||||
| WARRANTY LIABILITY | NOTE 18 - WARRANTY LIABILITY
Accrued warranty expenses are included in accrued expenses on the accompanying consolidated balance sheets. The movements of accrued warranty expenses for the year ended December 31, 2019 are as follows:
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Income Taxes (Tables) |
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| Income Tax Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of reconciliation effective income tax rate |
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| Schedule of provisions for income taxes |
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Short-Term Bank Loans (Tables) |
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| Schedule of bank loans |
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| Schedule of personal or corporate guarantees |
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Segment Information (Tables) |
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| Segment Reporting [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of segment Information, by segment |
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Inventories (Details) - USD ($) |
Dec. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Inventory Disclosure [Abstract] | ||
| Raw Materials | $ 39,149,211 | $ 53,821,973 |
| Work in process | 118,626,278 | 89,516,949 |
| Finished Goods | 69,252,451 | 62,674,252 |
| Less: Write-down of inventories | (3,543,863) | (1,727,747) |
| Total Inventory | $ 223,484,077 | $ 204,285,427 |
Land Use Rights, Net (Details) - USD ($) |
Dec. 31, 2019 |
Dec. 31, 2018 |
|---|---|---|
| Land Use Rights [Abstract] | ||
| Cost | $ 38,416,678 | $ 22,283,776 |
| Less: Accumulated amortization | (1,963,844) | (1,159,321) |
| Land use rights, net | $ 36,452,834 | $ 21,124,455 |