SORL Auto Parts (SORL) 10-Q 2018 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2018

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT

For the transition period from _________ to _________

Commission file number 000-11991

SORL AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	30-0091294
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

No. 2666 Kaifaqu Avenue

Ruian Economic Development District

Ruian City, Zhejiang Province

People’s Republic of China

(Address of principal executive offices)

86-577-6581-7720

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.

Yesx No¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).

Yesx No¨

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

Large Accelerated Filer¨	Accelerated Filer¨	Non-Accelerated Filerx	Smaller Reporting Companyx
Emerging Growth Company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes¨ Nox

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer classes of common stock, as of the latest practicable date:

As of November 14, 2018 there were 19,304,921 shares of Common Stock outstanding.

SORL AUTO PARTS, INC.

FORM 10-Q

For the Quarter Ended September 30, 2018

INDEX

		Page
PART I.	FINANCIAL INFORMATION (Unaudited)	1
Item 1.	Financial Statements:	1
	Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017	2
	Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 (Unaudited)	4
	Consolidated Statements of Changes in Equity for the Nine Months Ended September 30, 2018 (Unaudited)	5
	Notes to Consolidated Financial Statements (Unaudited)	6
Item 2.	Management’s Discussion and Analysis or Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II.	OTHER INFORMATION	30
Item 1.	Legal Proceedings.	30
Item 1A.	Risk Factors.	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	31
Item 3.	Defaults Upon Senior Securities.	31
Item 4.	Mine Safety Disclosures.	31
Item 5.	Other Information.	31
Item 6.	Exhibits	31
SIGNATURES		32

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2018 and December 31, 2017

	September 30, 2018			December 31, 2017
		(Unaudited)
Assets
Current Assets
Cash and cash equivalents	US$	17,609,594		US$	4,221,940
Accounts receivable, net, including $1,506,254 and $1,297,734 from related party at September 30, 2018 and December 31, 2017, respectively		163,749,395			134,384,961
Bank acceptance notes from customers		101,136,391			116,040,688
Inventories		159,123,470			114,300,564
Prepayments, current, including $3,094,333 and $999,527 to related parties at September 30, 2018 and December 31, 2017, respectively		31,442,128			8,826,004
Restricted cash, current		19,062,778			376,236
Advances to related parties		49,372,965			72,318,224
Other current assets, net		14,455,642			5,555,568
Total Current Assets		555,952,363			456,024,185
Property, plant and equipment, net		86,949,053			79,828,006
Land use rights, net		21,245,899			14,912,134
Intangible assets, net		309,947			3,341
Deposits on loan agreements		10,175,602			10,712,865
Prepayments, non-current		18,474,842			16,594,987
Restricted cash, non-current		3,488,778			-
Deferred tax assets		3,549,947			4,240,424
Total Non-current Assets		144,194,068			126,291,757
Total Assets	US$	700,146,431		US$	582,315,942
Liabilities and Equity
Current Liabilities
Accounts payable and bank acceptance notes to vendors, including $22,782,059 and $15,896,804 due to related parties at September 30, 2018 and December 31, 2017, respectively	US$	211,456,843		US$	118,051,633
Deposits received from customers		63,615,939			43,087,473
Short term bank loans		143,991,909			125,380,899
Current portion of long term loans		22,147,109			24,266,031
Income tax payable, current		3,250,996			3,249,727
Accrued expenses		18,604,139			25,154,658
Due to related party		4,481,484			1,572,963
Deferred income		605,691			1,020,273
Other current liabilities		2,705,103			2,857,130
Total Current Liabilities		470,859,213			344,640,787
Long term loans, less current portion and net of unamortized debt issuance costs		19,318,534			37,383,224
Income tax payable - noncurrent		9,259,307			-
Total Non-current Liabilities		28,577,841			37,383,224
Total Liabilities		499,437,054			382,024,011
Equity
Preferred stock - no par value; 1,000,000 authorized; none issued and outstanding as of September 30, 2018 and December 31, 2017		-			-
Common stock - $0.002 par value; 50,000,000 authorized, 19,304,921 issued and outstanding as of September 30, 2018 and December 31, 2017		38,609			38,609
Additional paid-in capital		(28,582,654	)		(28,582,654	)
Reserves		19,615,826			17,562,357
Accumulated other comprehensive income		5,754,883			15,903,188
Retained earnings		175,602,568			168,244,329
Total SORL Auto Parts, Inc. Stockholders' Equity		172,429,232			173,165,829
Noncontrolling Interest In Subsidiaries		28,280,145			27,126,102
Total Equity		200,709,377			200,291,931
Total Liabilities and Equity	US$	700,146,431		US$	582,315,942

The accompanying notes are an integral part of these unaudited consolidated financial statements.

2

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)

For the Three and Nine Months Ended September 30, 2018 and 2017 (Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Sales	US$	108,584,331		US$	101,329,628		US$	344,815,965		US$	267,589,953
Include: sales to related parties		9,333,959			7,401,464			22,997,540			13,479,162
Cost of sales		82,249,456			74,027,933			253,851,334			194,703,290
Gross profit		26,334,875			27,301,695			90,964,631			72,886,663
Expenses:
Selling and distribution expenses		13,160,875			8,283,704			37,154,745			22,877,889
General and administrative expenses		5,051,684			4,761,787			17,519,873			13,517,222
Research and development expenses		4,478,298			2,941,243			13,400,656			7,477,902
Total operating expenses		22,690,857			15,986,734			68,075,274			43,873,013
Other operating income, net		2,959,269			473,610			7,535,820			1,185,958
Income from operations		6,603,287			11,788,571			30,425,177			30,199,608
Interest income		547,455			16,150			2,847,299			38,175
Government grants		2,239,250			1,006,033			2,982,775			1,119,337
Other income		229,520			47,262			432,213			47,976
Interest expenses		(3,331,554	)		(804,499	)		(10,214,681	)		(1,827,835	)
Exchange differences		906,538			(684,047	)		1,396,460			(1,193,897	)
Other expenses		(55,835	)		(202,735	)		(1,200,920	)		(343,024	)
Income before income taxes provision		7,138,661			11,166,735			26,668,323			28,040,340
Provision for income taxes		12,130,789			1,627,721			14,974,982			4,225,404
Net income (loss)	US$	(4,992,128	)	US$	9,539,014		US$	11,693,341		US$	23,814,936
Net income attributable to noncontrolling interest in subsidiaries		613,086			953,901			2,281,633			2,381,493
Net income (loss) attributable to common stockholders	US$	(5,605,214	)	US$	8,585,113		US$	9,411,708		US$	21,433,443
Comprehensive income (loss):
Net income (loss)	US$	(4,992,128	)	US$	9,539,014		US$	11,693,341		US$	23,814,936
Foreign currency translation adjustments		(8,307,355	)		3,856,038			(11,275,895	)		7,990,990
Comprehensive income (loss)		(13,299,483	)		13,395,052			417,446			31,805,926
Comprehensive income (loss) attributable to noncontrolling interest in subsidiaries		(217,650	)		1,339,505			1,154,043			3,180,592
Comprehensive income (loss) attributable to common stockholders	US$	(13,081,833	)	US$	12,055,547		US$	(736,597	)	US$	28,625,334
Weighted average common share - basic		19,304,921			19,304,921			19,304,921			19,304,921
Weighted average common share - diluted		19,304,921			19,304,921			19,304,921			19,304,921
EPS - basic	US$	(0.29	)	US$	0.44		US$	0.49		US$	1.11
EPS - diluted	US$	(0.29	)	US$	0.44		US$	0.49		US$	1.11

The accompanying notes are an integral part of these unaudited consolidated financial statements.

3

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2018 and 2017 (Unaudited)

	Nine Months Ended September 30,
	2018			2017
Cash Flows From Operating Activities
Net income	US$	11,693,341		US$	23,814,936
Adjustments to reconcile net income to net cash provided by operating activities:
Allowance for doubtful accounts		179,744			759,854
Depreciation and amortization		8,926,695			6,623,082
Amortization of debt issuance costs		966,547			42,583
Gain on disposal of fixed assets		(73,809	)		-
Deferred income tax		520,741			-
Changes in assets and liabilities:
Account receivable		(38,780,246	)		(19,276,498	)
Bank acceptance notes from customers		68,016,837			2,056,320
Other currents assets		(9,983,968	)		(2,317,124	)
Inventories		(52,611,953	)		(13,792,530	)
Prepayments		(19,823,567	)		(1,312,081	)
Accounts payable and bank acceptance notes to vendors		86,724,938			1,347,005
Income tax payable		7,432,808			909,912
Deposits received from customers		24,058,536			16,516,529
Deferred income		(382,627	)		-
Other current liabilities and accrued expenses		(5,671,820	)		(371,575	)
Net Cash Flows Provided By Operating Activities		81,192,197			15,000,413
Cash Flows From Investing Activities
Acquisition of property, equipment, and land use rights		(40,142,267	)		(36,882,570	)
Deposit for acquisition of land use rights		-			(2,982,537	)
Acquisition of intangible assets		(367,931	)		-
Advances to related parties		(214,800,362	)		(8,919,241	)
Repayments of advances to related parties		222,337,244			-
Net Cash Flows Used In Investing Activities		(32,973,316	)		(48,784,348	)
Cash Flows From Financing Activities
Proceeds from short term bank loans		353,441,949			84,149,040
Repayments of short term bank loans		(325,651,416	)		(36,149,680	)
Proceeds from related parties		311,692,664			93,191,843
Repayments to related parties		(328,624,110	)		(113,071,629	)
Repayments of long term loans		(18,957,775	)		-
Net Cash Flows Provided By (Used In) Financing Activities		(8,098,688	)		28,119,574
Effects on changes in foreign exchange rate		(4,557,219	)		484,733
Net change in cash, cash equivalents, and restricted cash		35,562,974			(5,179,628	)
Cash, cash equivalents, and restricted cash - beginning of the period		4,598,176			13,533,776
Cash, cash equivalents, and restricted cash - end of the period	US$	40,161,150		US$	8,354,148
Supplemental Cash Flow Disclosures:
Interest paid	US$	7,849,753		US$	1,255,540
Income taxes paid	US$	5,157,755		US$	3,272,909
Non-cash Investing and Financing Transactions
Repayments to related party in the form of bank acceptance notes	US$	5,846,083		US$	-
Loans from related parties in the form of bank acceptance notes	US$	33,721,267		US$	23,515,527
Repayments from related party in the form of bank acceptance notes	US$	26,771,056		US$	-
Reconciliation of cash, cash equivalents, and restricted cash to the consolidated balance sheets
Cash and cash equivalents	US$	17,609,594		US$	7,653,174
Restricted cash, current		19,062,778			700,974
Restricted cash, non-current		3,488,778			-
Total cash, cash equivalents, and restricted cash	US$	40,161,150		US$	8,354,148

The accompanying notes are an integral part of these unaudited consolidated financial statements.

4

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

For The Nine Months Ended September 30, 2018 (Unaudited)

	Number of Share		Common Stock		Additional Paid-in Capital			Reserves		Retained Earnings			Accumulated Other Comprehensive Income			Total SORL Auto Parts, Inc. Stockholders' Equity			Noncontrolling Interest			Total Equity
Balance as of December 31, 2017		19,304,921	$	38,609	$	(28,582,654	)	$	17,562,357	$	168,244,329		$	15,903,188		$	173,165,829		$	27,126,102		$	200,291,931
Net income		-		-		-			-		9,411,708			-			9,411,708			2,281,633			11,693,341
Foreign currency translation adjustment		-		-		-			-		-			(10,148,305	)		(10,148,305	)		(1,127,590	)		(11,275,895	)
Transfer to reserves		-		-		-			2,053,469		(2,053,469	)		-			-			-			-
Balance as of September 30, 2018		19,304,921	$	38,609	$	(28,582,654	)	$	19,615,826	$	175,602,568		$	5,754,883		$	172,429,232		$	28,280,145		$	200,709,377

The accompanying notes are an integral part of these unaudited consolidated financial statements.

5

SORL Auto Parts, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

NOTE A - DESCRIPTION OF BUSINESS

SORL Auto Parts, Inc. (together with its subsidiaries, “we,” “us,” “our” or the “Company” or “SORL”), a Delaware corporation incorporated on March 24, 1982, is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Co., Ltd. (the “Joint Venture” or “Ruian”). The Company distributes products both in China and internationally under SORL trademarks. The Company’s product range includes 140 categories and over 2,000 different specifications.

The Joint Venture was formed in the People’s Republic of China (“PRC” or “China”) as a Sino-Foreign joint venture on January 17, 2004, pursuant to the terms of a Joint Venture Agreement between the Ruili Group Co., Ltd. (the “Ruili Group”), a related party under common control, and Fairford Holdings Limited (“Fairford”), a wholly owned subsidiary of the Company. The Ruili Group was incorporated in China in 1987 and specializes in the development, production and sale of various kinds of automotive parts. Fairford and the Ruili Group contributed 90% and 10%, respectively, of the paid-in capital of the Joint Venture.

On November 11, 2009, the Company, through its wholly owned subsidiary, Fairford, entered into a joint venture agreement with MGR Hong Kong Limited (“MGR”), a Hong Kong-based global auto parts distribution specialist firm and an unaffiliated Taiwanese individual investor. The joint venture was named SORL International Holding, Ltd. (“SIH”) based in Hong Kong. SORL held a 60% interest in the joint venture, MGR held a 30% interest, and the Taiwanese individual investor held a 10% interest. SIH was primarily devoted to expanding SORL's international sales network in Asia-Pacific and creating a larger footprint in Europe and Africa with a target to create a truly global distribution network. In December 2015, due to poor financial performance of SIH, Fairfold sold all of its interest in SIH to the Taiwanese investor. After this transaction, SIH ceased to be a distributor of SORL in the international market.

NOTE B - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

(1) BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All intercompany balances and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by the rules and regulations of the United States Securities and Exchange Commission (“SEC”), although the Company believes that the disclosures contained in this report are adequate to make the information presented not misleading. The consolidated balance sheet information as of December 31, 2017 was derived from the consolidated audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. These consolidated financial statements should be read in conjunction with the annual consolidated audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, and other reports filed with the SEC.

The accompanying unaudited interim consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year taken as a whole.

6

(2) SIGNIFICANT ACCOUNTING POLICIES

a. ACCOUNTING METHOD

The Company uses the accrual method of accounting for financial statement and tax return purposes.

b. USE OF ESTIMATES

The preparation of financial statements in conformity with U.S generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.

c. FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, accounts receivable, bank acceptance notes from customers, inventories, current prepayments, other current assets, accounts payable and bank acceptance notes to vendors, short term bank loans, deposits received from customers, current portion of long term loans, deferred income, income tax payable, accrued expenses and other current liabilities, the carrying amounts approximate fair values due to their short maturities.

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated. It is not, however, practical to determine the fair value of amounts due from/to related parties due to their related party nature.

d. RESTRICTED CASH

Restricted cash, current consists of bank deposits used to pledge bank acceptance notes and deposits for obtaining letters of credit from a local bank.

Restricted cash, non-current represents deposits guaranteed for construction projects.

The Company entered into credit agreements with commercial banks in China (“endorsing banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits, the Company can issue bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance notes, the Company is generally required to make initial deposits or pledge notes receivable to the endorsing banks in amounts of certain percentage of the face amount of the bank acceptance notes to be issued by the Company. The cash in such accounts is restricted for use over the terms of the bank acceptance notes, which are normally three to six months. As of September 30, 2018 and December 31, 2017, restricted cash of $15,995,561 and $0, respectively, was used to pledge the bank acceptance notes.

The Company obtained letters of credit from Industrial Bank Co., Ltd., which agreed to provide guarantee that the Company would make timely payment to its sellers for any purchases. Deposits of $159,902 and $275,474, respectively, were required for this purpose as of September 30, 2018 and December 31, 2017.

The Company obtained letters of credit from China Zheshang Bank, which agreed to provide guarantee for the Company’s construction projects on land use rights at the intersection of Xianghe Road and North Wansong Road, Binhai New District, Ruian City, Zhejiang Province, China. Deposits of $3,488,778 and $0, respectively, were required by China Zheshang Bank for this purpose during the construction period as of September 30, 2018 and December 31, 2017, and were included in restricted cash, non-current.

As of September 30, 2018, the Company had a bank deposit of $2,907,315 held as a guarantee for the loans obtained by Wenzhou Lichuang Automobile Parts Co., Ltd., a related party, from China Merchant Bank. Also see Note E for details.

7

e. RELATED PARTY TRANSACTIONS

A related party is generally defined as (i) any person that holds 10% or more of the Company’s securities and their immediate families, (ii) the Company’s management, (iii) someone that directly or indirectly controls, is controlled by or is under common control with the Company, or (iv) anyone who can significantly influence the financial and operating decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or obligations between related parties. The Company conducts business with its related parties in the ordinary course of business.

f. BANK ACCEPTANCE NOTES FROM CUSTOMERS

Bank acceptance notes from customers, generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of related parties and transferred to the Company as loans from related parties or repayments from related parties. Bank acceptance notes do not bear interest. As of September 30, 2018 and December 31, 2017, bank acceptance notes from customers in the amount of $91,703,928 and $95,914,724, respectively, were pledged to banks to issue either short term bank loans or bank acceptance notes to vendors. The banks charge discount fees if the Company chooses to discount the bank acceptance notes for cash before the maturity of the notes and such discount fees are included in interest expenses in the accompanying unaudited consolidated statements of income (loss) and comprehensive income (loss).

g. REVENUE RECOGNITION

The Company has adopted Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”) effective as of January 1, 2018. The Company has chosen to use the full retrospective transition method, under which it is required to revise its consolidated financial statements for the year ended December 31, 2017 as well as any applicable interim periods within the year ended December 31, 2017, as if ASC 606 had been effective for those periods. Under ASC 606, the Company recognizes revenue when a customer obtains control of promised goods, in an amount that reflects the consideration which the Company expects to receive in exchange for the goods. To determine revenue recognition for arrangements within the scope of ASC 606, the Company performs the following five steps: (1) identify the contracts with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when or as the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods it transfers to the customer. See Note C for assessment on the impact of adopting ASC 606, and Note M for details on revenues from contracts with customers.

h. FOREIGN CURRENCY TRANSLATION

The Company maintains its books and accounting records in RMB, the currency of the PRC. The Company’s functional currency is also RMB. The Company has adopted FASB ASC 830-30 in translating financial statement amounts from RMB to the Company’s reporting currency, United States dollars (“US$”). All assets and liabilities are translated at the current rate. The stockholders’ equity accounts are translated at the appropriate historical rate. Revenue and expenses are translated at the weighted average rates in effect on the transaction dates.

Translation adjustments resulting from this process are included in accumulated other comprehensive income in the statement of stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

8

NOTE C – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In May 2014, the FASB issued ASC 606. ASC 606 outlines a single set of comprehensive principles for recognizing revenue under U.S. GAAP and supersedes the revenue recognition guidance existed at the time. The main principle of ASC 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company applied the ASC and its related updates on a full retrospective basis as of January 1, 2018. The adoption of ASC 606 did not impact the previously reported financial statements in any prior period nor did it result in a cumulative effect adjustment to retained earnings. See Note M for additional information.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash”. These amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 effective January 1, 2018. As a result of the adoption, net cash used in investing activities was adjusted to exclude the change in restricted cash, resulting in a decrease of $4,871,113 in net cash used in investing activities in the amount previously reported for the nine months ended September 30, 2017. Restricted cash was included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the consolidated statements of cash flows.

In March 2018, the FASB issued ASU 2018-05, "Income Taxes (Topic 740) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118". The amendments in this ASU add SEC paragraphs pursuant to the SEC Staff Accounting Bulletin No. 118, which expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017 - the date on which the Tax Cuts and Jobs Act was signed into law. The amendments are effective upon addition to the FASB Accounting Standards Codification. The Company adopted this standard and evaluated the impact from the Tax Cut and Jobs Act pursuant to SAB 118, see Note N for further disclosures.

In July 2018, the FASB issued ASU 2018-09, “Codification Improvements”, which affects a wide variety of Topics in the Codification and applies to all reporting entities within the scope of the affected accounting guidance. These amendments represent changes to clarify, correct errors in, or make minor improvements to the Codification, eliminating inconsistencies and providing clarifications in current guidance. Some of the amendments do not require transition guidance and will be effective upon issuance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. The Company is currently evaluating the impact of the adoption of ASU No. 2018-09 on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-10, “Codification Improvements to Topic 842, Leases”. These amendments affect narrow aspects of the guidance issued in the amendments in ASU 2016-02 including those regarding residual value guarantees, rate implicit in the lease, lessee reassessment of lease classification, lessor reassessment of lease term and purchase option, variable lease payments that depend on an index or a rate, investment tax credits, lease term and purchase option, transition guidance for amounts previously recognized in business combinations, certain transition adjustments, transition guidance for leases previously classified as capital leases under Topic 840, transition guidance for modifications to leases previously classified as direct financing or sales-type leases under Topic 840, transition guidance for sale and leaseback transactions, impairment of net investment in the lease, unguaranteed residual asset, effect of initial direct costs on rate implicit in the lease, and failed sale and leaseback transactions. For entities that early adopted Topic 842, the amendments are effective upon issuance of ASU 2018-10, and the transition requirements are the same as those in Topic 842. For entities that have not adopted Topic 842, the effective date and transition requirements will be the same as the effective date and transition requirements in Topic 842. The Company is currently evaluating the impact of the adoption of ASU 2018-10 on its consolidated financial statements.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in this ASU affect the guidance issued in ASU 2016-02, Leases (Topic 842), which is not yet effective. The amendments provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments also provide lessors with a practical expedient to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component in certain circumstances. For the entities that have not adopted Topic 842,the effective date for this ASU are the same as those for ASU 2016-02, which is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of ASU No. 2018-11 on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820), – Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement,” which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The amendments in this Update modify the disclosure requirements on fair value measurements based on the concepts in FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements, including the consideration of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the potential impacts of ASU 2018-13 on its consolidated financial statements.

NOTE D – RECLASSIFICATIONS

Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on net earnings and financial position.

9

NOTE E - RELATED PARTY TRANSACTIONS

Related parties with whom the Company conducted business consist of the following:

Name of Related Party	Nature of Relationship
Xiao Ping Zhang	Principal shareholder, Chairman of the Board and Chief Executive Officer
Shu Ping Chi	Shareholder, member of the Board, wife of Xiao Ping Zhang
Xiao Feng Zhang	Shareholder, member of the Board, brother of Xiao Ping Zhang
Ruili Group Co., Ltd. ("Ruili Group")	10% shareholder of Joint Venture and is collectively controlled by Xiao Ping Zhang, Shu Ping Chi, and Xiao Feng Zhang
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd. ("Guangzhou Kormee")	Controlled by Ruili Group
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd. (“Ruian Kormee” and formerly known as “Ruian Kormee Automobile Braking Co., Ltd.”)	Wholly controlled by Guangzhou Kormee
Shanghai Dachao Electric Technology Co., Ltd. ("Shanghai Dachao")	Ruili Group holds 49% of the equity interests in Shanghai Dachao
Ruili MeiLian Air Management System (LangFang) Co., Ltd. ("Ruili Meilian")	Controlled by Ruili Group
Wenzhou Lichuang Automobile Parts Co., Ltd. ("Wenzhou Lichuang")	Controlled by Ruili Group
Ningbo Ruili Equipment Co., Ltd. ("Ningbo Ruili")	Controlled by Ruili Group
Shanghai Ruili Real Estate Development Co., Ltd. ("Shanghai Ruili")	Wholly owned by Ruili Group
Kunshan Yuetu Real Estate Development Co., Ltd. ("Kunshan Yuetu")	Collectively owned by Ruili Group and Shu Ping Chi
Shanghai Tabouk Auto Components Co., Ltd. ("Shanghai Tabouk")	Collectively owned by Xiao Feng Zhang and Xiao Ping Zhang
Hangzhou Ruili Property Development Co., Ltd.	Collectively owned by Ruili Group and Xiao Ping Zhang

The Company continues to purchase primarily packaging materials from Ruili Group. In addition, the Company purchases automotive components from other related parties, including Guangzhou Kormee, Ruian Kormee, Ruili Meilian, Shanghai Dachao, Wenzhou Lichuang and Ningbo Ruili. As of September 30, 2018, the Company did not receive all the materials from Ningbo Ruili purchased during the three and nine months then ended. The unreceived purchases from the relate party are recorded as prepayments, current on the accompanying consolidated balance sheets.

The Company sells certain automotive products to the Ruili Group. The Company also sells parts to Guangzhou Kormee, Shanghai Tabouk, Ruian Kormee and Ruili Meilian. 

10

The following related party transactions occurred during the three and nine months ended September 30, 2018 and 2017:

	Nine Months Ended September 30,				Three Months Ended September 30,
	2018		2017		2018		2017
PURCHASES FROM:
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.	$	2,343,015	$	1,449,946	$	598,920	$	989,679
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.		1,996,094		1,085,483		582,998		401,132
Shanghai Dachao Electric Technology Co., Ltd.		866,382		55,230		489,695		-
Ruili MeiLian Air Management System (LangFang) Co., Ltd		5,786,608		3,613,415		812,202		1,373,241
Ruili Group Co., Ltd.		5,991,237		3,845,123		2,024,487		1,382,956
Ningbo Ruili Equipment Co., Ltd.		2,044,168		-		2,044,168		-
Wenzhou Lichuang Automobile Parts Co., Ltd.		11,251,687		-		3,706,795		-
Total purchases	$	30,279,191	$	10,049,197	$	10,259,265	$	4,147,008
SALES TO:
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.	$	8,086,219	$	4,874,568	$	2,271,413	$	972,084
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.		63,112		115,429		8,641		12,187
Ruili MeiLian Air Management System (LangFang) Co., Ltd		1,048,005		634,022		204,192		388,287
Ruili Group Co., Ltd.		12,570,554		7,855,143		6,494,382		900,859
Shanghai Tabouk Auto Components Co., Ltd.		1,229,651		-		355,331		-
Total sales	$	22,997,541	$	13,479,162	$	9,333,959	$	2,273,417

11

	As of September 30, 2018		As of December 31, 2017
	2018		2017
ADVANCES TO RELATED PARTIES
Ruili Group Co., Ltd.		49,372,965		5,711,605
Shanghai Ruili Real Estate Development Co., Ltd.		-		65,069,497
Kunshan Yuetu Real Estate Development Co., Ltd.	$	-	$	1,537,122
Total advances to related parties	$	49,372,965	$	72,318,224
		2018		2017
ACCOUNTS RECEIVABLE
Shanghai Tabouk Auto Components Co., Ltd	$	1,506,254	$	1,297,734
Total accounts receivable	$	1,506,254	$	1,297,734
PREPAYMENTS, CURRENT
Ningbo Ruili Equipment Co., Ltd.	$	3,094,333	$	999,527
Total prepayments, current	$	3,094,333	$	999,527
ACCOUNTS PAYABLE TO RELATED PARTIES
Guangzhou Ruili Kormee Automotive Electronic Control Technology Co., Ltd.		10,651,384		3,414,719
Shanghai Dachao Electric Technology Co., Ltd.		111,574		83,178
Ruili MeiLian Air Management System(LangFang)Co.,Ltd		2,682,174		1,993,787
Wenzhou Lichuang Automobile Parts Co., Ltd.		9,336,927		10,405,120
Total accounts payable to related parties	$	22,782,059	$	15,896,804
DUE TO RELATED PARTY
Wenzhou Ruili Kormee Automotive Electronics Co., Ltd.	$	4,481,484	$	1,572,963
Total due to related party	$	4,481,484	$	1,572,963

From time to time, the Company borrows from Ruili Group and its controlled companies for working capital purposes. In order to obtain the loans and mutually benefit both the debtor and creditor of the arrangement, the Company also advances to Ruili Group and its controlled companies in a short term. All the loans from related parties are non-interest bearing, unsecured and due on demand. The advances to Ruili Group are non-interest bearing, unsecured, and due on demand and the advances to Shanghai Ruili and Kunshan Yuetu are due on demand, unsecured, and bear an interest rate of 5.22% per annum. The advances to Shanghai Ruili and Kunshan Yuetu were fully repaid as of September 30, 2018.

During the nine months ended September 30, 2018, the Company obtained loans of $311,692,664 in cash and $33,721,267 in the form of bank acceptance notes from related parties. Repayments in cash and bank acceptance notes to related parties totaled $334,470,193 and $5,846,083, respectively. In the same period, the Company advanced to its related parties in the total amount of $214,800,362 and received cash repayments from related parties amounted to $222,337,244. During the nine months ended September 30, 2017, the Company obtained loans of $93,191,843 in cash and $23,515,527 in the form of bank acceptance notes from related parties. Repayments in cash to related parties amounted to $113,071,629.

The Company entered into a lease agreement with Ruili Group. See Note O for more details.

During the nine months ended September 30, 2018, the Company made a bank deposit of $2,907,315 used as a guarantee for loans obtained by Wenzhou Lichuang from China Merchant Bank. The amount was included in restricted cash, current. Also see Note B.

12

The Company provided a guarantee for the credit line granted to Ruili Group by the China Merchants Bank in the amount of RMB 50,000,000 (approximately $7,699,889) for a period from July 29, 2015 until two years after the due date of each loan withdrawn by Ruili Group under the credit line. The credit line was replaced by the one issued by the same bank in the amount of RMB 40,000,000 (approximately $5,766,181) for a period of 12 months starting on October 24, 2016. The credit line was renewed on October 19, 2017 for 6 months. On April 23, 2018, Ruili Group and the bank reached another extension agreement and the guarantee will be provided by the Company until April 23, 2021.

The Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in a maximum amount of RMB 69,000,000 (approximately $10,092,000) for the period from November 16, 2016 to January 16, 2018. The credit line was renewed on December 21, 2017 for a period of 12 months, and the guarantee was accordingly extended by the Company as of September 30, 2018 and will expire on December 20, 2018.

The Company provided a guarantee for the credit line granted to Ruili Group by Bank of Ningbo in a maximum amount of RMB 180,000,000 (approximately $26,328,000) for the period from June 30, 2017 to June 30, 2020.

The Company has short term bank loans guaranteed or pledged by related parties. See Note K for more details.

NOTE F - ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consisted of the following:

	September 30,			December 31,
	2018			2017
Accounts receivable	$	176,566,068		$	148,312,117
Less: allowance for doubtful accounts		(12,816,673	)		(13,927,156	)
Accounts receivable, net	$	163,749,395		$	134,384,961

No customer individually accounted for more than 10% of our revenues or accounts receivable for the nine months ended September 30, 2018 and 2017. The changes in the allowance for doubtful accounts on September 30, 2018 and December 31, 2017 are summarized as follows:

	September 30,			December 31,
	2018			2017
Beginning balance	$	13,927,156		$	11,686,417
Add: Increase (Decrease) to allowance		(420,037	)		1,474,872
Effects on changes in foreign exchange rate		(690,446	)		765,867
Ending balance	$	12,816,673		$	13,927,156

13

NOTE G - INVENTORIES

On September 30, 2018 and December 31, 2017, inventories were consisted of the following:

	September 30,		December 31,
	2018		2017
Raw materials	$	46,744,244	$	27,657,266
Work-in-process		46,420,898		40,805,434
Finished goods		65,958,328		45,837,864
Less: write-down of inventories		-		-
Total inventories	$	159,123,470	$	114,300,564

NOTE H - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment were consisted of the following on September 30, 2018 and December 31, 2017:

	September 30,			December 31,
	2018			2017
Machinery	$	127,444,462		$	119,296,564
Molds		1,271,764			1,338,912
Office equipment		3,831,723			2,998,443
Vehicles		4,684,074			3,681,194
Buildings		18,573,731			20,127,148
Construction in progress		2,928,101			-
Leasehold improvements		462,419			486,834
Sub-Total		159,196,274			147,929,095
Less: Accumulated depreciation		(72,247,221	)		(68,101,089	)
Property, plant and equipment, net	$	86,949,053		$	79,828,006

Depreciation expense charged to operations was $8,399,291 and $6,353,494 for the nine months ended September 30, 2018 and 2017, respectively.

14

NOTE I – LAND USE RIGHTS, NET

The balances for land use rights, net as of September 30, 2018 and December 31, 2017 are as the following:

	September 30,			December 31,
	2018			2017
Cost	$	22,231,948		$	15,477,081
Less: accumulated amortization		(986,049	)		(564,947	)
Land use rights, net	$	21,245,899		$	14,912,134

In September 2017, the Company entered into an agreement with the Ministry of Land and Resources, Ruian, to purchase the land use rights for the land located at the intersection of Xianghe Road and North Wansong Road, Binhai New District, Ruian City, Zhejiang Province, China (the “Wansong Land”). Full payment of RMB 51.81 million (approximately $7.93 million) was made as of December 31, 2017. The Company obtained the title to the land use rights in April 2018. The Wansong Land has a total area of 17,029 square meters.

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. Prepayment of RMB 14.40 million (approximately $2.14 million) was made as down payment in 2017. During the nine months ended September 30, 2018, the Company paid additional amount of RMB 57.62 million (approximately $8.99 million). As of September 30, 2018, the purchase price of RMB 72.02 (approximately $11.13 million) was fully paid. As of the filing date, the title to the land use rights has not been transferred. The payments were included in prepayment, non-current as of September 30, 2018 on the accompanying consolidated balance sheets.

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 42.54 million (approximately $6.43 million) was made during the nine months ended September 30, 2018. As of the filing date, the title to the land use rights has not been transferred. The payments were included in prepayment, non-current as of September 30, 2018 on the accompanying consolidated balance sheets.

Amortization expenses were $458,179 and $141,816 for the nine months ended September 30, 2018 and 2017, respectively.

NOTE J - DEFERRED TAX ASSETS

Deferred tax assets consisted of the following as of September 30, 2018 and December 31, 2017:

	September 30,			December 31,
	2018			2017
Deferred tax assets – non-current
Allowance for doubtful accounts	$	2,047,506		$	2,137,837
Revenue (net of cost)		414,571			160,766
Unpaid accrued expenses		(16,874	)		955,287
Warranty		1,104,744			986,534
Deferred tax assets		3,549,947			4,240,424
Valuation allowance		―			―
Net deferred tax assets – non-current	$	3,549,947		$	4,240,424

15

Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.

NOTE K – SHORT-TERM BANK LOANS

Bank loans represented the following as of September 30, 2018 and December 31, 2017:

	September 30,		December 31,
	2018		2017
Secured	$	141,375,325	$	125,380,899
Unsecured		2,616,584		-
Total short term bank loans	$	143,991,909	$	125,380,899

The Company obtained those short term loans from Bank of China, Bank of Ningbo, Agricultural Bank of China, China Zheshang Bank, China CITIC Bank, China Minsheng Bank, Industrial Bank Co., Ltd., Oversea-Chinese Banking Corporation Limited, Industrial and Commercial Bank of China, Huaxia Bank and China Construction Bank, respectively, to finance general working capital and acquire long-lived assets. Interest rate for the loans outstanding during the nine months ended September 30, 2018 ranged from 1.35% to 5.22% per annum. The maturity dates of the loans existing as of September 30, 2018 ranged from August 8, 2018 to November 16, 2019. As of September 30, 2018 and December 31, 2017, the Company’s accounts receivable of $76,540 and $5,472,169, respectively, were pledged as collateral under loan arrangements. The interest expenses for short-term bank loans, including discount fees, were $2,543,723 and $804,499 for the three months ended September 30, 2018 and 2017, respectively. The interest expenses for short-term bank loans, including discount fees, were $7,428,780 and $1,827,835 for the nine months ended September 30, 2018 and 2017, respectively. 

As of September 30, 2018, corporate or personal guarantees provided for those bank loans were as follows:

$	5,557,517	Guaranteed by Ruili Group, a related party
$	7,195,691	Guaranteed by Ruili Group, a related party; Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
$	26,165,833	Pledged by HangZhou RuiLi Property Development Co.,Ltd, a related party, with its property. Guaranteed by Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders.
$	22,650,493	Pledged by Ruili Group, a related party, with its land use rights and properties
$	16,571,694	Pledged by the Company with its bank acceptance notes
$	58,146,296	Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Xiaoping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders
$	5,087,801	Pledged by Shanghai Ruili, a related party, with its properties; Guaranteed by Xiaoping Zhang and Ms. Shu Ping Chi, both the Company’s principal stockholders; Guaranteed by Ruili Group, a related party

16

NOTE L - LONG TERM LOANS

	September 30, 2018			December 31, 2017
Aggregate outstanding principal balance	$	42,280,413		$	63,471,308
Less: unamortized debt issuance costs		(814,770	)		(1,822,053	)
Less: current portion		(22,147,109	)		(24,266,031	)
Non-current portion	$	19,318,534		$	37,383,224

In November 2017, the Company entered into two identical but independent loan agreements with Far Eastern Horizon Co., Ltd. (“Far Eastern”), each for a term of 36 months and with an effective interest rate of 8.38% per annum, payable monthly in arrears. The total long term obligations under the two agreements amounted to RMB 200,000,000 (approximately $30,608,185), pledged by the Company’s equipment in the original cost of RMB 205,690,574 (approximately $31,479,075). The Company paid debt issuance costs in cash of $742,324. For the nine months ended September 30, 2018, the repayments of principal totaled $7,522,125.

In November 2017, the Company entered into four independent loan agreements with COSCO Shipping Leasing Co., Ltd. (“COSCO”) for a term of 36 months each. Two of the agreements were signed on November 30, 2017 with an effective interest rate of 8.50% per annum, payable monthly in arrears. The other two agreements were entered into on November 15, 2017, with an effective interest rate of 4.31% per annum, payable monthly in arrears. The total long term obligations under the four agreements amounted to RMB 235,000,000 (approximately $35,964,617), pledged by the Company’s equipment in the original cost of RMB 238,333,639 (approximately $36,474,800). The Company paid debt issuance costs in cash in the amount of $1,025,248. For the nine months ended September 30, 2018, the repayments of principal totaled $11,435,650.

The interest expenses for long term loans, including the amortization of debt issuance costs, were $787,831 for the three months ended September 30, 2018. The interest expenses for long term loans, including the amortization of debt issuance costs, were $2,785,901 for the nine months ended September 30, 2018.

NOTE M – REVENUES FROM CONTRACTS WITH CUSTOMERS

The Company accounted for revenue in accordance with ASC 606, which was adopted on January 1, 2018, using full retrospective method. The adoption of the standard did not impact the Company’s revenue recognition.

The Company provides a variety of standard products to its customers. The Company’s contracts with its customers consist of a single, distinct performance obligation or promise to transfer auto parts to the customers. Generally, the Company’s performance obligations are satisfied when the customers take possession of the products, which normally occurs at the shipping point or destination depending on the terms of the contracts. All sales are recorded net of value-added taxes. The Company does not recognize revenue related to product warranties. See Note P for details concerning the expected costs associated with the Company’s assurance warranty obligations.

In accordance with ASC 606, the Company disaggregates revenue from contracts with customers by product type. See Note Q for information regarding revenue disaggregation by product type.

Revenues from contracts with customers are recognized at a point in time when the merchandises are delivered to the customer in accordance with the shipping terms stated in the contracts, which is the point when the legal title, physical possession and the risks and rewards of ownership are transferred to the customers.

Deferred revenue is recorded when consideration is received from a customer prior to transferring goods to the customer under the terms of a sales contract. As of September 30, 2018 and December 31, 2017, the Company recorded a deferred revenue liability of $63,615,939 and $43,087,473, respectively, which was presented as “Deposits received from customers” on the accompanying consolidated balance sheets. During the nine months ended September 30, 2018 and 2017, the Company recognized $18,252,438 and $7,994,579, respectively, of deferred revenue included in the opening balances of deposits received from customers. The amounts were included in sales on the accompanying consolidated statements of income (loss) and comprehensive income (loss).

17

NOTE N - INCOME TAXES

In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Tax Act. The Company is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

During the three months ended September 30, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company elected to pay the one-time transition tax over eight years commencing in 2018. 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. As of September 30, 2018, $1,763,678 was included in taxes payable as a current liability which the Company believes will be paid within one year and the remaining balance was included in long-term taxes payable. As of the filing date, no transition tax payment has been made.

The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.

In 2015, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise" designation for a third time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017. As the “High-Tech Enterprise” designation expired in 2018, the Joint Venture is undergoing the re-assessment by the government and the Company estimates it is highly probable that the designation will be awarded and therefore the 15% tax rate is used for the nine months ended September 30, 2018.

The reconciliation of the effective income tax rate of the Company to the statutory income tax rate in the US and the PRC for the nine months ended September 30, 2018 and 2017 is as follows:

	Nine Months Ended September 30
	2018			2017
US statutory income tax rate		21.00	%		35.00	%
Valuation allowance recognized with respect to the loss in the US company		-21.00	%		-35.00	%
Impact of Tax Cuts and Jobs Act		41.71	%		-
China statutory income tax rate		25.00	%		25.00	%
Effects of income tax exemptions and reliefs		-10.00	%		-10.00	%
Effects of additional deduction allowed for R&D expenses		-3.77	%		-1.90	%
Effects of expenses not deductible for tax purposes		2.30	%		0.63	%
Other items		0.92	%		1.66	%
Effective tax rate		56.15	%		15.39	%

18

Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. There currently is no tax benefit recorded for the United States. In the nine months ended September 30, 2018, there were late filing penalties of $100,000 that are recorded in the tax expenses. The provisions for income taxes for the nine months ended September 30, 2018 and 2017, respectively, are summarized as follows:

	Nine Months Ended September 30
	2018		2017
Current	$	14,454,243	$	4,199,727
Deferred		520,739		25,677
Total	$	14,974,982	$	4,225,404

NOTE O – OPERATING LEASES WITH RELATED PARTY

In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s management personnel and staff, respectively. The initial lease term was from January 2013 to December 2016. This lease was amended in 2013, with a new lease term from January 1, 2013 to December 31, 2022. The annual lease expense is RMB 2,100,000 (approximately $333,688).

The lease expenses were $1,304,292 and $684,252 for the nine months ended September 30, 2018 and 2017, respectively.

NOTE P - WARRANTY CLAIMS

Warranty claims were $2,507,487 and $2,261,311 for the nine months ended September 30, 2018 and 2017, respectively. Warranty claims are included in selling and distribution expenses on the accompanying consolidated statements of income (loss) and comprehensive income (loss). Accrued warranty expenses are included in the balances of accrued expenses on the accompanying consolidated balance sheet. The movement of accrued warranty expenses for the nine months ended September 30, 2018 was as follows:

Beginning balance at January 1, 2018	$	6,576,895
Aggregate increase for new warranties issued during current period		2,507,487
Aggregate reduction for payments made and effect of exchange rate fluctuation		(1,719,421	)
Ending balance at September 30, 2018	$	7,364,961

19

NOTE Q – SEGMENT INFORMATION

The Company produces brake systems and other related components for different types of commercial vehicles (“Commercial Vehicle Brake Systems”). On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire a segment of the passenger vehicle auto parts business (“Passenger Vehicle Brake Systems”) of Ruili Group. As a result of this acquisition, the Company's product offerings were expanded to both commercial and passenger vehicles' brake systems and other key safety-related auto parts. 

The Company has two operating segments: Commercial Vehicle Brake Systems and Passenger Vehicle Brake Systems.

All of the Company’s long-lived assets are located in the PRC. The Company and its subsidiaries do not have long-lived assets in the United States for the reporting periods.

	Nine Months Ended September 30,
	2018			2017
NET SALES TO EXTERNAL CUSTOMERS
Commercial vehicles brake systems	$	276,593,442		$	223,937,534
Passenger vehicles brake systems		68,222,523			43,652,419
Net sales	$	344,815,965		$	267,589,953
INTERSEGMENT SALES
Commercial vehicles brake systems	$	—		$	—
Passenger vehicles brake systems		—			—
Intersegment sales	$	—		$	—
GROSS PROFIT
Commercial vehicles brake systems	$	61,974,537		$	61,485,066
Passenger vehicles brake systems		28,990,094			11,401,597
Gross profit	$	90,964,631		$	72,886,663
Selling and distribution expenses		37,154,745			22,877,889
General and administrative expenses		17,519,873			13,517,222
Research and development expenses		13,400,656			7,477,902
Other operating income, net		7,535,820			1,185,958
Income from operations		30,425,177			30,199,608
Interest income		2,847,299			38,175
Government grants		2,982,775			1,119,337
Other income		432,213			47,976
Interest expenses		(10,214,681	)		(1,827,835	)
Exchange differences		1,396,460			(1,193,897	)
Other expenses		(1,200,920	)		(343,024	)
Income before income tax expense	$	26,668,323		$	28,040,340
CAPITAL EXPENDITURE
Commercial vehicles brake systems	$	32,788,350		$	30,791,780
Passenger vehicles brake systems		7,721,848			6,090,790
Total	$	40,510,198		$	36,882,570
DEPRECIATION AND AMORTIZATION
Commercial vehicles brake systems	$	7,187,308		$	5,538,902
Passenger vehicles brake systems		1,739,387			1,084,180
Total	$	8,926,695		$	6,623,082

20

	September 30, 2018		December 31, 2017
TOTAL ASSETS
Commercial vehicles brake systems	$	573,980,044	$	492,348,129
Passenger vehicles brake systems		126,166,387		89,967,813
Total	$	700,146,431	$	582,315,942
		September 30, 2018		December 31, 2017
LONG LIVED ASSETS
Commercial vehicles brake systems	$	118,210,297	$	106,779,681
Passenger vehicles brake systems		25,983,771		19,512,076
Total	$	144,194,068	$	126,291,757

NOTE R – CONTINGENCIES

(1) In May 2016, the Company, through its principal operating subsidiary, entered into a Purchase Agreement with Ruili Group, pursuant to which the Company agreed to exchange the land use rights and factory facilities located at No. 1169 Yumeng Road, Ruian Economic Development Zone, Ruian City, Zhejiang Province, China (the “Dongshan Facility”), purchased in 2007 from Ruili Group, plus RMB 501.00 million (approximately $76.50 million) in cash for the land use rights and factory facilities located at No. 2666 Kaifaqu Avenue, Ruian Economic Development Zone, Ruian City, Zhejiang Province, China (the “Development Zone Facility”). As of the filing date, the Company hasn’t obtained the land use rights certificate or the property ownership certificate for the building of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 15,030,000 (approximately $2,300,205). This amount was determined based on a 3% tax rate on the consideration paid for the Development Zone Facility, which the Company considered as the most probable amount of tax liability.

(2) The Company purchased the Dongshan Facility from Ruili Group in 2007 and subsequently transferred the plants and land use right to Ruili Group. The Company has never obtained the land use right certificate nor the property ownership certificate of the building for the Dongshan Facility. The Company reserved the relevant tax amount of RMB 4,560,000 (approximately $745,220). This amount was determined based on a 3% tax rate on the consideration paid for the Dongshan Facility in the transaction, which the Company considered as the most probable amount of tax liability. The Dongshan Facility was transferred back to Ruili Group on May 5, 2016.

(3) The information of lease commitments is provided in Note O.

(4) The information of guarantees and assets pledged is provided in Note E.

NOTE S – SUBSEQUENT EVENTS 

During the subsequent period, the Company obtained short term loans in an aggregate amount of $119,273,000 from Bank of China, Industrial Bank Co., Ltd., China CITIC Bank, China Minsheng Bank, Agricultural Bank of China, and China Zheshang Bank. Interest rate for those loans range from 4.39% to 5.44% per annum. The maturity dates of the loans existing as of the filing date ranged from October 22, 2018 to November 6, 2019. The Company continuously pledged bank acceptance notes to obtain loans from China Zheshang Bank.

In the same period, the Company repaid loan principals and interest expenses in the total amount of approximately $70,297,000 to Bank of China, Agricultural Bank of China, China Minsheng Bank, and China Zheshang Bank.

ITEM 2. 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 unaudited financial statements, as well as information relating to the plans of our current management. The following discussion and analysis should be read in conjunction with our consolidated unaudited financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.

21

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q includes forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Generally, the words “believe,” “anticipate,” “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 or other reports or documents we file with SEC from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Some of the factors that could cause actual results to differ include: our ability to effectively implement our business strategy; our ability to handle downward pricing pressures on our products; and our ability to accurately or effectively plan our production or supply needs. For a discussion of these and all other known risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, which is available on the SEC’s website at www.sec.gov. Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to revise or update these forward-looking statements.

OVERVIEW

The Company manufactures and distributes automotive brake systems and other key safety-related components to automotive original equipment manufacturers, or OEMs, and the related aftermarket both in China and internationally for use primarily in different types of commercial vehicles, such as trucks and buses, and in passenger vehicles.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Year ended December 31, 2017.

See Note N to the attached Unaudited Consolidated Financial Statements for the information regarding changes in taxation by the government of China.

22

RESULTS OF OPERATIONS

Sales

The following tables present certain financial information about our segments’ sales for the periods presented:

	Three Months Ended				Three Months Ended
	September 30, 2018				September 30, 2017
		(U.S.  dollars in millions)
Commercial Vehicle Brake Systems	$	89.0	82.0	%	$	85.3	84.2	%
Passenger Vehicle Brake Systems	$	19.6	18.0	%	$	16.0	15.8	%
Total	$	108.6	100.0	%	$	101.3	100.0	%

	Nine Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2017
		(U.S.  dollars in millions)
Commercial Vehicle Brake Systems	$	276.6	80.2	%	$	223.9	83.7	%
Passenger Vehicle Brake Systems	$	68.2	19.8	%	$	43.7	16.3	%
Total	$	344.8	100.0	%	$	267.6	100.0	%

The sales were $108.6 million and $101.3 million for the three months ended September 30, 2018 and 2017, respectively, an increase of $7.3 million or 7.2%. The sales were $344.8 million and $267.6 million for the nine months ended September 30, 2018 and 2017, respectively, an increase of $77.2 million or 28.9%. The increase was mainly due to the increased sales of commercial vehicle brake systems. 

The sales from Commercial Vehicle Brake Systems increased by $3.7 million or 4.4%, to $89.0 million for the third fiscal quarter of 2018, compared to $85.3 million for the same period of 2017. The sales from Commercial Vehicle Brake Systems increased by $52.7 million or 23.5%, to $276.6 million for the nine months ended September 30, 2018, compared to $223.9 million for the nine months ended September 30, 2017. Our high quality, low cost products continued to generate higher sales and further penetrated into the commercial vehicle market, which impacted the sales of the commercial vehicle brake systems.

The sales from Passenger Vehicle Brake Systems increased by $3.6 million or 22.5%, to $19.6 million for the third fiscal quarter of 2018, compared to $16.0 million for the same period of 2017. The sales from Passenger Vehicle Brake Systems increased by $24.5 million or 56.3%, to $68.2 million for the nine months ended September 30, 2018, compared to $43.7 million for the same period of 2017. The increase was mainly due to the increase of passenger vehicle market.

23

A breakdown of the sales revenue for these markets for the third fiscal quarter of the 2018 and 2017, respectively, is set forth below:

	Three Months Ended September 30, 2018		Percent of Total Sales			Three Months Ended September 30, 2017		Percent of Total Sales			Percentage Change
		(U.S. dollars in millions)
China OEM market	$	50.3		46.3	%	$	50.5		49.8	%		-0.4	%
China Aftermarket	$	36.4		33.6	%	$	31.5		31.1	%		15.7	%
International market	$	21.8		20.1	%	$	19.3		19.1	%		13.1	%
Total	$	108.6		100.0	%	$	101.3		100.0	%		7.2	%

A breakdown of net sales revenues for China OEM markets, China aftermarket and international market for the nine months ended September 30, 2018 and 2017, respectively, is set forth below:

	Nine Months Ended September 30, 2018		Percent of Total Sales			Nine Months Ended September 30, 2017		Percent of Total Sales			Percentage Change
		(U.S. dollars in millions)
China OEM market	$	164.7		47.8	%	$	141.8		53.0	%		16.2	%
China Aftermarket	$	117.3		34.0	%	$	72.3		27.0	%		62.3	%
International market	$	62.7		18.2	%	$	53.5		20.0	%		17.2	%
Total	$	344.8		100.0	%	$	267.6		100.0	%		28.8	%

Considering the increase of the production and sales of the commercial vehicle market, our sales to the Chinese OEM market decreased by $0.2 million or 0.4%, to $50.3 million for the third fiscal quarter of 2018, compared to $50.5 million for the same period of 2017. Our sales to the Chinese OEM market increased by $22.9 million or 16.2%, to $164.7 million for the nine months ended September 30, 2018, compared to $141.8 million for the same period of 2017.

Our sales to the China aftermarket increased by $4.9 million or 15.7%, to $36.4 million for the third fiscal quarter of 2018, compared to $31.5 million for the same period of 2017. Our sales to the China aftermarket increased by $45.0 million or 62.3%, to $117.3 million for the nine months ended September 30, 2018, compared to $72.3 million for the same period of 2017. The increased new vehicle sales in China and the expiration of OEM warranties helped to drive our aftermarket business. Accelerated urbanization and the Chinese government’s increased support for public transportation favor our expansion in the bus aftermarket. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets.

24

Our export sales increased by $2.5 million or 13.1%, to $21.8 million for the third fiscal quarter of 2018, as compared to $19.3 million for the same period of 2017. Our export sales increased by $9.2 million or 17.2%, to $62.7 million for the nine months ended September 30, 2018, as compared to $53.5 million for the same period of 2017. The increase in export sales was mainly due to our broadened customer base.

Cost of Sales and Gross Profit

Cost of sales for the three months ended September 30, 2018 were $82.2 million, an increase of $8.2 million or 11.1% from $74.0 million for the three month period ended September 30, 2018. Cost of sales for the nine months ended September 30, 2018 were $253.9 million, an increase of $59.1 million or 30.4% from $194.7 million for the same period of 2017.

Our gross profit decreased by 3.5% from $27.3 million for the period of 2017 to $26.3 million for the three month period ended September 30, 2018. Our gross profit increased by 24.8% from $72.9 million for the period of 2017 to $91.0 million for the three month period ended September 30, 2018.

Gross margin decreased to 24.3% from 26.9% for the three month period ended September 30, 2018 compared with 2017. Gross margin decreased to 26.4% from 27.2% for the nine months ended September 30, 2018, as compared with the same period of 2017. The decrease was mainly due to the price increase of the raw materials and our further price promotion to strengthen our competitiveness and increase our market share for the nine months ended September 30, 2018. We intend to focus in 2018 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit margins.

Cost of sales from Commercial Vehicle Brake Systems for the three months period ended September 30, 2018 were $69.8 million, an increase of $7.9 million or 12.8% from $61.9 million for the same period of 2017. Cost of sales from Commercial Vehicle Brake Systems for the nine months ended September 30, 2018 were $214.6 million, an increase of $52.2 million or 32.1% from $162.5 million for the same period of 2017. The gross profit from Commercial Vehicle Brake Systems decreased by 17.9% from $23.4 million for three month period ended September 30, 2017 to $19.2 million for the three month period ended September 30, 2018. The gross profit from Commercial Vehicle Brake Systems increased by 0.8% from $61.5 million for the nine months ended September 30, 2017 to $62.0 million for the nine months ended September 30, 2018. Gross margin from Commercial Vehicle Brake Systems decreased to 21.6% from 27.4% for the three months period ended September 30, 2017 compared to the three months period ended September 30, 2018. Gross margin from Commercial Vehicle Brake Systems decreased to 22.4% from 27.5% for the nine months ended September 30, 2018 compared with the same period of 2017.

Cost of sales from Passenger Vehicle Brake Systems for the three months period ended September 30, 2018 were $12.5 million, an increase of $0.4 million or 3.3% from $12.1 million for the three month period ended September 30, 2017. Cost of sales from Passenger Vehicle Brake Systems for the nine months ended September 30, 2018 were $39.2 million, an increase of $7.0 million or 21.6% from $32.3 million for the same period of 2017. The gross profit from Passenger Vehicle Brake Systems increased by 82.1% from $3.9 million for the three month period ended September 30, 2017 to $7.1 million for the three month period ended September 30, 2018. The gross profit from Passenger Vehicle Brake Systems increased by 154.3% from $11.4 million for the nine months ended September 30, 2017 to $29.0 million for the same period of 2018. Gross margin from Passenger Vehicle Brake Systems increased to 36.3% for the three months ended September 30, 2018, as compared to 24.4% for the three months period ended September 30, 2017. Gross margin from Passenger Vehicle Brake Systems increased to 42.5% for the nine months ended September 30, 2018, as compared to 26.1% for the same period in 2017.

25

Selling and Distribution Expenses

Selling and distribution expenses were $13.2 million for the three months ended September 30, 2018, as compared to $8.3 million for the same period of 2017, an increase of $4.9 million or 58.9%. Selling and distribution expenses were $37.2 million for the nine months ended September 30, 2018, as compared to $22.9 million for the same period of 2017, an increase of $14.3 million or 62.4%. The increase was mainly due to increased freight expense and packaging expenses.

As a percentage of sales revenue, selling expenses increased to 12.1% for the three months ended September 30, 2018, as compared to 8.2% for the same period in 2017. As a percentage of sales revenue, selling expenses increased to 10.8% for the nine months ended September 30, 2018, as compared to 8.5% for the same period in 2017.

General and Administrative Expenses

General and administrative expenses were $5.1 million for the three months ended September 30, 2018, as compared to $4.8 million for the same period of 2017, an increase of $0.3 million or 6.1%. General and administrative expenses were $17.5 million for the nine months ended September 30, 2018, as compared to $13.5 million for the same period of 2017, an increase of $4.0 million or 29.6%. The increase was mainly due to the increase in employee salaries for the nine months ended September 30, 2018. 

As a percentage of sales revenue, general and administrative expenses was 4.7% for the three months ended September 30, 2018, as compared to 4.7% for the same period in 2017. As a percentage of sales revenue, general and administrative expenses was 5.1% for the nine months ended September 30, 2018, as compared to 5.1% for the same period in 2017.

Research and Development Expenses

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the three months ended September 30, 2018, research and development expenses were $4.5 million, as compared to $2.9 million for the same period of 2017, an increase of $1.5 million. For the nine months ended September 30, 2018, research and development expenses were $13.4 million, as compared to $7.5 million for the same period of 2017, an increase of $5.9 million.

26

Other Operating Income

Other operating income was $3.0 million for the three months ended September 30, 2018, as compared to $0.5 million for the three months ended September 30, 2017, an increase of $2.5 million. Other operating income was $7.5 million for the nine months ended September 30, 2018, as compared to $1.2 million for the nine months ended September 30, 2017, an increase of $6.3 million. The increase was mainly due to an increase in sales of raw material scrap.

Depreciation and Amortization

Depreciation and amortization expense was $3.1 million for the three months ended September 30, 2018, compared with that of $2.4 million for the same period of 2017. Depreciation and amortization expenses increased to $8.9 million for the nine months ended September 30, 2018, compared with that of $6.6 million for the same period of 2017, an increase of $2.3 million. The increase was mainly due to some new addition in PPE and the purchase of land after September 30, 2018.

Interest income

The interest income for the three months ended September 30, 2018, increased to $0.5 million from $0.02 million for the same period of 2017. The interest income for the nine months ended September 30, 2018, increased to $2.8 million from $0.04 million for the same period of 2017, mainly due to increased interest income from advances to related parties during the period.

Interest Expenses

The interest expenses for the three months ended September 30, 2018, increased to $3.3 million from $0.8 million for the same period of 2017. The interest expenses for the nine months ended September 30, 2018, increased to $10.2 million from $1.8 million for the same period of 2017, mainly due to increased interest rate and increased amount of average loans outstanding during the period.

Income Tax

In December 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted into law and the new legislation contains several key tax provisions that affected the Company, including, among others, a reduction of the federal corporate income tax rate to 21% effective January 1, 2018, and a recognition of the U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company upon enactment of the 2017 Act. The Company is required to recognize the effect of the 2017 Tax Act in the period of enactment. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), Income Tax Accounting Implications of the 2017 Tax Cuts and Jobs Act, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.

During the three months ended September 30, 2018, the Company recognized a one-time transition tax of $11,022,985 that represented management’s estimate of the amount of U.S. corporate income tax based on the deemed repatriation to the United States of the Company’s share of previously deferred earnings of certain non-U.S. subsidiaries of the Company mandated by the U.S. Tax Reform. The Company elected to pay the one-time transition tax over eight years commencing in April 2018. 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 by the U.S. Department of the Treasury, and specific actions the Company may take in the future. As of September 30, 2018, $1,763,678 was included in taxes payable as a current liability which the Company believes will be paid within one year and the remaining balance was included in long-term taxes payable. As of the filing date, no transition tax payment has been made.

27

The Joint Venture is registered in the PRC, and is therefore subject to state and local income taxes within the PRC at the applicable tax rate on the taxable income as reported in the PRC statutory financial statements in accordance with relevant income tax laws.

In 2015, the Joint Venture was awarded the Chinese government's "High-Tech Enterprise" designation for a third time, which is valid for three years and it continues to be taxed at the 15% tax rate in 2015, 2016 and 2017. As the “High-Tech Enterprise” designation expired in 2018, the Joint Venture is undergoing the re-assessment by the government and the Company estimates it is highly probable that the designation will be awarded and therefore the 15% tax rate is used for the nine months ended September 30, 2018.

Income tax expense was $12.1 million for the three months ended September 30, 2018, as compared to $1.6 million for the three months ended September 30, 2017. Income tax expense was $15.0 million for the nine months ended September 30, 2018, as compared to $4.2 million for the nine months ended September 30, 2017.

Net Income Attributable to Non-Controlling Interest in Subsidiaries

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our joint venture partners. On December 15, 2015, the Company disposed of its entire 60% equity interest in SIH. Net income attributable to noncontrolling interest in subsidiaries amounted to $0.6 million and $1.0 million for the third fiscal quarter ended September 30, 2018 and 2017, respectively. Net income attributable to non-controlling interest in subsidiaries amounted to $2.3 million and $2.4 million for the nine months ended September 30, 2018 and 2017, respectively.

Net Income Attributable to Stockholders

The net income attributable to stockholders for the fiscal quarter ended September 30, 2018, decreased by $14.2 million, to $5.6 million net loss from $8.6 million net income for the fiscal quarter ended September 30, 2017 due to the factors discussed above. The net income attributable to stockholders for the nine months ended September 30, 2018, decreased by $12.0 million, to $9.4 million from $21.4 million for the nine months ended September 30, 2017 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the fiscal quarter ended September 30, 2018 and 2017, were $(0.29) and $0.44, respectively. EPS, both basic and diluted, for the nine months ended September 30, 2018 and 2017, were $0.49 and $1.11, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

As of September 30, 2018, the Company had cash and cash equivalents of $40.2 million, as compared to cash and cash equivalents of $4.6 million as of December 31, 2017. The Company had working capital of $85.0 million on September 30, 2018, as compared to working capital of $111.4 million on December 31, 2017, reflecting current ratios of 1.2:1 and 1.3:1, respectively.

OPERATING - Net cash provided by operating activities was $81.2 million for nine months ended September 30, 2018, an increase of $66.2 million, as compared with $15.0 million of net cash provided in operating activities in the same period in 2017. Such change was primarily due to the increased cash inflow resulted by changes in accounts payable and bank acceptance notes to vendors.

28

INVESTING - During the nine months ended September 30, 2018, the Company expended net cash of $33.0 million in investing activities mainly for mainly for acquisition of property, equipment, land use right, and intangible assets. For the nine months ended September 30, 2017, the Company expended net cash of $48.8 million in investing activities.

FINANCING - During the nine month period ended September 30, 2018, the net cash used in financing activities was $8.1 million. For the nine months ended September 30, 2017, the net cash provided by financing activities was $28.1 million. Such decrease was primarily due to the repayments to related parties and repayments of long term loans.

The Company has taken a number of steps to improve the management of our cash flow. We place more emphasis on collection of accounts receivable from our customers, and we maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements in the foreseeable future.

OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2018, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

Even if the Company is unable to timely resolve obtain the land use right certificate for the land and related building, the Company believes that there will be no potential adverse implication on the Company for the following reasons.

1.       The Company acquired the land use rights in a transaction between the Company and the Ruili Group, a related party. The Ruili Group, as the original land use right owner, has granted the land use right to the Company by contract which is supported by valid consideration.

2.       No third party would oppose the Company’s use of the land, because no third party has any interest in the land use right or property ownership right, other than the Ruili Group and the government.

a)        The Ruili Group promised that the Company has the right to use the land and related building, even before the land use certificate is transferred.

b)       According to the laws of China, the government owns all the land and the buildings attached to the land in China. Once the land use right is granted to Ruili Group, Ruili Group has the right to assign its land use rights to any third parties, including the Company, without interference from the government. Therefore, it is unlikely that the government will oppose the Company’s right to use the land and related building.

c)       The Company has reserved tax payables in the amount of RMB 19,007,341 (approximately US$2,872.675) on its consolidated balance sheets under the line item “accrued expenses” as if no reduction or exemption of tax is approved. This amount was determined based on a 3% tax rate on the consideration paid for the land use right in the transaction, which the Company considered as the most probable amount of tax liability. This amount also represented the maximum amount of tax the Company expects to pay if the negotiation with the local government ultimately is not successful.

29

CONTRACTUAL OBLIGATIONS

As of September 30, 2018, we had no material changes outside the ordinary course of business in our contractual obligations

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the rules and forms, and that such information is accumulated and communicated to us, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating whether the benefits of the controls and procedures that we adopt outweigh their costs. As required by Rules 13a-15(b) and 15d-15(b) of the Exchange Act, an evaluation as of September 30, 2018 was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(b) and 15d-15(b) of the Exchange Act). Based on this evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures, as of September 30, 2018, were effective, in all material respects, for the purpose stated above.

Changes in Internal Control over Financial Reporting:

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

30

ITEM 1A. RISK FACTORS

Not applicable.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1	Amended and Restated Articles of Incorporation, as further amended (approved May 27, 2010). (1)
3.2	Amended and Restated Bylaws effective as of March 14, 2009. (2)
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3)
101.1NS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definitions Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(1) Incorporated herein by reference from the Registrant’s Form 8-K Current Report filed with the Securities and Exchange Commission, on June 1, 2010.

(2) Incorporated herein by reference from the Registrant’s Form 8-K Current Report as filed with the Securities and Exchange Commission, on March 17, 2009.

(3) Furnished in accordance with Item 601(b) (32) of Regulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

31

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated : November 14, 2018	SORL AUTO PARTS, INC.
	By: /s/ Xiao Ping Zhang
	Name: Xiao Ping Zhang
	Title: Chief Executive Officer (Principal Executive Officer)

By: /s/ Zong Yun Zhou

Name: Zong Yun Zhou

Title: Chief Financial Officer

(Principal Accounting Officer) 

32