UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

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)

NO.2666NO. 2666 KaiFaqu Avenue,

Ruili Industry Area,

RUIAN CITY, ZHEJIANG PROVINCE 325200

PEOPLE’S REPUBLIC OF CHINA

(Address of Principal Executive Offices, including zip code.Including Zip Code.)

86-577-65817720

(Registrant’s Telephone Number, Including Area Code)

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

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¨ ☐ Noþ ☒

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¨ ☐ Noþ ☒

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. Yesþ ☒ 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). Yesþ ☒ 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.x ☐

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

Large accelerated filer¨ Accelerated filer¨ Non-accelerated¨ Smaller Reporting Companyþ

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¨ ☐ Noþ ☒

State registrant’s revenues for its most recent fiscal year ended December 31, 2016: $272,120,504.2019: $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, 2016,2019, the value was approximately $14,540,298.$28.0 million.

State the number of shares outstanding of each of the registrant’s classes of common equity: 19,304,921 shares asimmediately prior to the completion of March 31, 2017.the Going Private transaction on May 15, 2020, and 1 share immediately after such completion.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for its annual meeting of shareholders, which is expected to be filed no later than 120 days after December 31, 2016, are incorporated by reference into Part III Items 10, 11, 12, 13 and of this report.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

PART 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 aboard.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 bustrinessbusiness 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 RuianRui’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 this offering, exercised its over-allotment option in full to purchase an additional 642,857 shares of common stock. After deduction of the 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"(“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'sSORL’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.

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'sCompany’s product offerings expanded to both commercial and passenger vehicles'vehicles’ brake systems and other key safety-related auto parts. The purchase price was RMB170RMB 170 million, or approximately USD$25$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 RMB501,000,000RMB 501,000,000 (approximately $76,533,000) in cash.

The cash consideration in the amount of RMB481,000,000RMB 481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments before June 30, 2016, and the remaining RMB20,000,000RMB 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 rightsright as specified in the Purchase Agreement. As ofBefore 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,transaction, the Company was leasing 89,229 square meters of the Development Zone Facility from Ruili Group for its brake systems business. Thebusiness, which lease was goingscheduled to expire on December 31, 2017 and2018. 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 DTZ/Cushman & Wakefield, a real estate appraisal firm. The value

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 Dongshan FacilityCompany, Ms. Shuping Chi and Development Zone Facility was appraisedMr. Xiaofeng Zhang, directors of the Company and Ruili Group Co., Ltd. (together, the “Consortium”), to be RMB 125 million (approximately $19.1 million) and RMB 626 million (approximately $95.6 million), respectively.acquire all of the outstanding shares of common stock of the Company not already owned by the Consortium (the “Going Private” transaction).

STRATEGIC PLANOn 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.

With

On November 29, 2019, the implementationCompany 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 Chinese IV Emission StandardCompany 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 2015, large quantitiescash (the “Merger Consideration”) without interest, except for (i) shares of used vehicles couldcommon 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 reachvoted in favor of the standard requirementsMerger and were determinedwho 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 replaced,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 substantial increaseParent 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 auto parts sales for 2016. Additionally, in September 2016,cash, without interest. In connection with the Chinese government strictly enforcedconsummation of the rule that vehicles must notMerger on May 15, 2020, the following individuals submitted their resignations and ceased to be overloaded above weight limits, which resulted in higher demands in new vehicles that are capablemembers of loading larger weight limits. The higher demands lead to increased sales in auto parts. 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 2017,connection with the completion of the Merger, the Company expectsnotified the aforementioned law enforcementsNasdaq Stock Market (“NASDAQ”) of emission standardsits 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 weight limits will continueNASDAQ filed a delisting application on Form 25 with the Securities and Exchange Commission (the “SEC”) to boostdelist and deregister the needs in auto parts until demandsCompany Common Stock as of new vehicles are saturated. BasedMay 15, 2020. The Company has filed with the SEC a certification on Form 15 on May 26, 2020 under the above analysis,Securities and Exchange Act of 1934, as amended (the “Exchange Act”), requesting the management projectssuspension of the commercial vehicleCompany’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 will have a slight increase in 2017.expansion. In 2017,2020, our strategic plan includes these elements:

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 principallymainly used in the braking systems of different types of commercial vehicles, such as truckspassenger vehicles and buses, and includerailway transportation vehicles, including an extensive range of products covering 65140 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 such as the braking system products for passenger vehicles and railway transportation vehicles.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 fulfill.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 2013.2015. 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.

CHINA AUTOMOBILE AND AUTO PARTS INDUSTRY

Based on statistics published by the China Association of Automobile ManufacturersManufactures (“CAAM”) in 2016,2019, China currently is still the world’s biggest automotive market and continued to expand, hitting an all-time high in 2016.2019 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 2016,2019, China’s automobile output and sales volume both reached record high levels of 28.12were 25.72 million units and 28.0325.77 million units, respectively, representing increasesdecreases of 14.46%7.5% and 13.65%8.2% respectively comparedcomparing to 2015.2018. The output and sales volume of commercial vehicles increased by 8.01%1.9% to 3.704.36 million units and 5.80%decreased by 1.1% to 3.654.32 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:

MARKETS AND CUSTOMERS

We strengthened our sales and marketing efforts in 2016.2019. The sales person headcounts for Chinese sales and international sales were 66184 and 64,75, respectively. Products are sold under the “SORL” trademark, which we licensed on a royalty free basis from the Ruili Group. The Company renewed the license from Ruili Group in 2012 which currently expires in 2022. We have an agreement with the 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 auto parts marketThe Company’s sales can be divided into three segments: Chinese OEM Market, Chinese Aftermarket, and International Market. The above identified markets account for approximately 48.5%47.6%, 29.7%37.5% and 21.8%15.0%, respectively, of the Company’s annual sales for 2016.2019.

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 havehas incorporated our brake systems.

The table below presents comparative information for 20162019 and 20152018 of the Company’s top five OEM customers.

We continue to expand our business with Beiqi Foton Motor Co., Ltd.,FAW Group, Dongfeng Motor Co., Ltd, and FAW Group,Shaanxi Heavy Duty Automobile Co., Ltd, which ranked in the top ten highest sales commercial vehicle manufacturers in China during 2016.2019. 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). The Company achieved a new business breakthrough with several top tiered vehicle manufacturers such as Sinotruck and Shaanxi Automobile Group Co., Ltd, as we expanded our businesses with them from supplying only automotive electric components to delivering entire air-brake systems. Furthermore, Baotou Bei Ben Heavy-Duty Truck and Valin, two fast-growing companies in the heavy truck market, continued to be our major customers.

Chinese Aftermarket - The Company’s Chinese aftermarket sales network consists of 2656 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 2656 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 2016,2019, our export sales in 20162019 decreased comparedcomparing to 2015.2018. Our strategies in the export market include the following:

In 2016,2019, our export sales accounted for 21.8%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 20162019 and 20152018 of the Company’s top five international customers.

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.

We believe the Company has the following competitive advantages:

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:

INTELLECTUAL PROPERTY AND INNOVATION CAPACITY

As of December 31, 2016,2019, we had 265588 technical staff members, 110243 of whom possess Engineer or Senior Engineer qualifications. Our technical staff are divided as follows: 2243 for information technology, 155331 for new product development and design techniques, 2348 for measurement and testing, and the remaining 65166 for quality management.control and quality check.

Besides our own technical force, we also have cooperation arrangements with leading universities in the automotive engineering field, including:

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.

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.

Capitalizing on these resources, we developed innovative products and technologies, such as a new type of clutch servo with sensor; a combined air dryer with a built-in temperature-control device and unloader; and an inner-breath spring chamber which enables internal air circulation.

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 leadleaded 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 544826 issued patents and 647171 patent applications worldwide.

Trademarks

Our principal trademark is “SORL”, which we currently licenselicensed 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 2016,2019, the Company did not make any material capital expenditures relating to environmental compliance.

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 2016,2019, our three largest suppliers were Shanghai Bao Steel TradingZhejiang Hengda Aluminum Co., Ltd., Ningbo Bonded Area HangzhouShanghai Shougang Steel Trading Co., Ltd., and Shanghai Jin Shi MaterialBao Steel Trading Co., Ltd. which together accounted for 14.9%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, isare 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 inventoryinventories 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 2014, 20152017, 2018 and 2016,2019, of 7.4%6.9%, 6.9%6.6% and 6.7%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.

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:

Since 1979, the Chinese government has embarked on 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 3,4906,756 employees, all of whom are employed full time and are grouped as follows: 20 for588 technical staffs and quality control and quality check, 265 technical staffs, 153259 sales and marketing staffs, 3,0025,771 production workers and 50138 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.

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 will expirehas got permission to be Long-Term effective from the Government on March 4, 2019, although we anticipate that we will be able to extend such term. Extension of the agreement will be subject to negotiation with the Ruili Group and approval of the Chinese government.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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ITEM 1A. RISK FACTORS

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. ManyIt is expected that many countries would set up trade barriers which would negatively affect our export sales, as well as increaseincreasing 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.

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 operation ofoperating a hotel property and investmentinvesting 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 the 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 a 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.

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. Jin RuiJinrui 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. Jin RuiJinrui 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.

Although noNo customer individually accounted for more than 10% of our revenues for the yearyears ended December 31, 2016, our2019 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 12.7%9.9% and 11.2%11.7% of our revenues in 20162019 and 2015,2018, 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.

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, 2016,2019, we own 544826 patents and an additional 647171 under application.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:

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.

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:

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 RuianRui’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 productionproductions in China has fluctuated from year to year, which has caused fluctuations in the demand for our products.

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 2016,2019, approximately 29.7%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.

If a third party claims that we infringe its patents, any of the following may occur:

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 conductconducts 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.

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.

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:

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.

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:

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, holdholding approximately 47.1%, 5.9% and 5.9%, respectively, of the Company’s outstanding common stock as of December 31, 2016.2019. 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 NasdaqNASDAQ 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.

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 ofSarbanes-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.

ITEM 2. PROPERTIES

Our facilities are located in Ruian City, Wenzhou Area, Zhejiang Province, the 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 RMB501,000,000RMB 501,000,000 (approximately $76,533,000) in cash.

The cash consideration in the amount of RMB481,000,000RMB 481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments before June 30, 2016, and the remaining RMB20,000,000RMB 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.

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.

ITEM 3. LEGAL PROCEEDINGS

Neither our company nor any of our subsidiaries is a party to any legal proceedings that, individually orThe 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 aggregate,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—thePaz,Ongarov,Patenaude, Gough, andLeBeaumatters—were consolidated with thePazaction 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 material to our financial statements, as a whole.without merit, but cannot predict with certainty the results of the litigation.

ITEM 4. MINE SAFETY DISCLOSURES.

Not applicable.

PART II

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 20162019 and 20152018 are as follows:

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

At March 16, 2017,As of December 31, 2019, we had approximately 660119 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.

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.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, the 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.

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 “spinnor”“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,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 65140 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"(“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'sSORL’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"“Seller”, a related party under common control). As a result of this acquisition, the Company'sCompany’s product offerings expanded to both commercial and passenger vehicles'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'sSeller’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.,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, 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 RMB501,000,000RMB 501,000,000 (approximately $76,533,000) in cash.

The cash consideration in the amount of RMB481,000,000RMB 481,000,000 (approximately $73,478,000) was paid to the Ruili Group in installments before June 30, 2016, and the remaining RMB20,000,000RMB 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.

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.

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:

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.

Warranties

Estimated product warranty expenses are accrued in cost of goods soldselling 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

Taxes are calculated in accordance with taxation principles currently effective inThe Company accounts for income taxes under the PRC. Deferredprovision of FASB ASC 740-10,Income Taxes, or ASC 740-10, whereby deferred income tax assets and liabilities are recognizedcomputed for the future tax consequences attributable to differences between the financial statement carrying amountsstatements and tax bases of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured usingthat will result in taxable or deductible amounts in the future, based on enacted tax laws and rates expectedapplicable to apply to taxable income in the yearsperiods in which those temporarythe differences are expected to be recovered or settled. The effect onaffect 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 liabilitiesJobs 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 change inrecognition of the U.S. corporate income tax ratesbased 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 recognized as income or lossrequired to recognize the effect of the 2017 Tax Act in the period that includesof 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. A valuation allowance is provided for

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 deferredU.S. corporate income tax assets and liabilities that, based on available evidence, is not expectedthe deemed repatriation to be realized.

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 increased its investmentalso recognized related interest and penalty in the Joint Venture as a resultamount of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential tax treatment. For the years ended December 31, 2007 and 2008, the Joint Venture was entitled to an income tax exemption on all pre-tax income generated by the company above its pre-tax income generated$587,821 in the year ended December 31, 2006. Thereafter,2018. During the Joint Ventureyear 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 entitled$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 50% exemption fromdeemed 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 income tax rate on any pre-tax income above its 2006 pre-tax income, to be recognized10.5% 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, 2009, 20102019 and 2011. However,2018, the aboveCompany accrued $539,017 and $0 GILTI tax, exemption was superseded, as a result of therespectively.

The Joint Venture having been awardedis registered in the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificatePRC, and is valid for three yearstherefore subject to state and provides for a reducedlocal income taxes within the PRC at the applicable tax rate fromon the year ended December 31, 2009 throughtaxable income as reported in the year ended December 31, 2011. The Company used a tax rate of 25% for the first three quarters of 2012. In December 2012, the Joint Venture passed the re-assessment of "High-Tech Enterprise" designation by the government, according toPRC statutory financial statements in accordance with relevant PRC income tax laws. Accordingly, it was taxed at a 15% rate through the year ended December 31, 2014.

In 2015, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise"government’s “High-Tech Enterprise” designation for a third time, which is valid for three years and it continuedcontinues to be taxed at the 15% tax rate in 2015, and 2016 and 2017. The Company renewed the “High-Tech Enterprise” designation in November 2018 for another three years which will beexpire in 2021. Therefore, the Company is taxed at this15% tax rate in 2017.for the years ended December 31, 2019 and 2018.

Revenue Recognition

In accordance with the provisions of Staff Accounting Bulletin No. 103, revenue from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales price is fixed and determinable, and collection is probable. The Company generally records sales upon shipment of product to customers and transfer of title under standard commercial terms. Revenue consists of the invoice value for the sale of goods and services net of value-added tax (“VAT”), rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales. The Company is subject to the following surtaxes, which are recorded as deductions from gross sales: Education Tax and City Construction Tax.

The Company does not receive revenue for shipping and handling costs to customers. Shipping and handling expenses incurred byhas adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective January 1, 2018. Under ASC 606, the Company are includedrecognizes revenue when a customer obtains control of promised goods, in selling and administrative expensesan 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 accompanying consolidated statements of income.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, 20162019 as compared to the year ended December 31, 2015:2018: