UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from _________ to _________

Commission file number 000-11991

SORL AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

No. 2666 Kaifaqu Avenue1169 Yumeng Road

Ruian Economic Development District

Ruian City, Zhejiang Province

People’s Republic of China

(Address of principal executive offices)

86-577-6581-7720

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.

YesxNo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YesxNo¨

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

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, 2017May 15, 2018 there were19,304,921shares of Common Stock outstanding.common stock outstanding

SORL AUTO PARTS, INC.

FORM 10-Q

For the QuarterThree Months Ended September 30, 2017March 31, 2018

INDEX

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2017March 31, 2018 and December 31, 20162017

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

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Income and Comprehensive Income

For the Three and Nine Months Ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited)

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

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the NineThree Months Ended September 30,March 31, 2018 and 2017 and 2016 (Unaudited)

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

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Equity

For the NineThree Months Ended September 30, 2017March 31, 2018 (Unaudited)

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

SORL Auto Parts, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2017March 31, 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 65 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 the 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

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, 20162017 was derived from the consolidated audited financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2017. 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, 2016,2017, 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.

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.SU.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.periods. Management makes its best estimate of the outcome for these items based on historical trends and other information available when the financial statements are prepared. Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Actual results could differ from those estimates.

c. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

Restricted cash mainly representsconsists of bank deposits used to pledge the bank acceptance notes. notes and short term bank loan, deposits for obtaining letters of credit from a local bank and bank deposits used as down payment secured on behalf of a related party for potential acquisition.

The Company entered into credit agreements with commercial banks in China (“endorsing banks”) which agree to provide credit within stipulated limits. Within the stipulated credit limits, the Company can issue bank acceptance notes to its suppliers as payments for the purchases. In order to issue bank acceptance notes, the Company is generally required to make initial deposits or pledge note receivables to the endorsing banks in amounts of certain percentage of the face amount of the bank acceptance notes to be issued by the Company. The cash in such accounts is restricted for use over the terms of the bank acceptance notes, which are normally three to six months. As of March 31, 2018 and December 31, 2017, restricted cash of $37,728,039 and $0, respectively, was used to twelve months.pledge the bank acceptance notes.

e. RELATED PARTY TRANSACTIONSDuring the three months ended March 31, 2018, the Company obtained a short term bank loan in the amount of $2,972,096 from Industrial and Commercial Bank of China, which required a pledge with bank deposits of $3,022,471. As of March 31, 2018, the bank deposits remained as the pledge for the loan. Also see Note K for details.

The Company also 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 $286,255 and $275,474, respectively, were required for this purpose as of March 31, 2018 and December 31, 2017.

As of March 31, 2018, the Company had a bank deposit of $5,566,069, representing an advance to Ruili Group. Also see Note E for details.

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

f. BANK ACCEPTANCE NOTES RECEIVABLE

Bank acceptance notes receivable generally due within six months and with specific payment terms and definitive due dates, are comprised of the notes issued by some customers to pay certain outstanding receivable balances to the Company, and the notes issued by the customers of related parties and transferred to the Company as loans from related parties. Bank acceptance notes do not bear interest. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, bank acceptance notes receivablefrom customers in the amount of $54,781,712$135,919,194 and $32,916,198,$95,914,724, respectively, were pledged to endorsing 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 from customers for cash before the maturity of the notes and such discount fees are included in interest expenses.expenses on the accompanying unaudited consolidated statements of income and comprehensive income.

g.

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.

Revenue from the sale of goods is recognized when the risks and rewards of ownership of the goods have transferred to the buyer. The transfer is decided by several factors, including factors such as when persuasive evidence of an arrangement exits, delivery has occurred, the sales price is fixed or determinable, and collection is reasonably assured. Revenue consists of the invoice value for the sale of goods net of value-added tax, rebates and discounts and returns. The Company nets sales return in gross revenue, i.e., the revenue shown in the income statement is the net sales.

h. COST OF SALES

Cost of sales consists primarily of materials costs, applicable local government levies, freight charges, purchasing and receiving costs, inspection costs, employee compensation, depreciation and related costs, which are directly attributable to production. Write-down of inventories to lower of cost or market is also recorded in cost of sales, if any.

i. FOREIGN CURRENCY TRANSLATION

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

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

NOTE C – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In 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 existing revenue recognition guidance. 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 in exchange for those goods or services. The Company applied the ASC and its related updates on a full retrospective basis as of January 2017,1, 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 2017-03, “Accounting Changes2016-18, “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 Error Corrections (Topic 250)amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and Investments - Equity Methodrestricted cash equivalents should be included with cash and Joint Ventures (Topic 323)”. This pronouncement amendscash equivalents when reconciling the SEC’s reporting requirements for public filers in regard to new accounting pronouncementsbeginning-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 existing pronouncements that have not yet been adopted. Companies are to provide qualitative disclosures if they have not yet implemented an accounting standards update. Companies should disclose if they are unable to estimate the impact ofrestricted cash equivalents. The Company adopted ASU 2016-18 effective January 1, 2018. As a specific pronouncement, and provide disclosures including a descriptionresult of the effect on accounting policies thatadoption, net cash used in investing activities was adjusted to exclude the registrant expects to apply. These provisions apply to all pronouncements that have not yet been implemented by registrants. There are additional provisions that relate to corrections to several other prior FASB pronouncements. The Company has incorporated language into other recently issued accounting pronouncement notes, where relevantchange in restricted cash, resulting in a decrease of $89,465 in net cash used in investing activities in the amount previously reported for the corrections in FASB ASU 2017-03. The Company is implementingthree months ended March 31, 2017. Restricted cash was included with cash and cash equivalents when reconciling the updated SEC requirementsbeginning-of-period and end-of-period total amounts shown on not yet adopted accounting pronouncements with thesethe consolidated financial statements.statements of cash flows.

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 andor financial position.

NOTE E - RELATED PARTY TRANSACTIONS

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

The Company continues to purchase primarily packaging materials from the Ruili Group. The Ruili Group is the minority stockholder of Joint Venture and is collectively controlled by Mr. Xiao Ping Zhang, his wife, Ms. Shu Ping Chi, and his brother, Mr. Xiao Feng Zhang. In addition, the Company purchases automotive components from four other related parties, including Guangzhou Kormee, Automotive Electronic Control Technology Co., Ltd. (“Guangzhou Kormee”), Ruian Kormee, Automobile Braking Co., Ltd. (“Ruian Kormee”), Ruili MeiLian Air Management System (LangFang) Co., Ltd. (“Ruili MeiLian”) andMeilian, Shanghai Dachao, Electric Technology Co., Ltd. (“Shanghai Dachao”). Guangzhou KormeeWenzhou Lichuang and Ningbo Ruili. As of March 31, 2018, the Company did not receive all the materials from Ruili MeiLianMeilian or any materials from Ningbo Ruili purchased during the three months then ended. The unreceived purchases from those two related parties are controlled byrecorded as prepayments, current on the Ruili Group and Ruian Kormee is the wholly-owned subsidiary of Guangzhou Kormee. Ruili Group owns 49% equity interest in Shanghai Dachao. accompanying consolidated balance sheets.

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

The following related party transactions occurred duringfor the three and nine months ended September 30, 2017March 31, 2018 and 2016:2017:

The balance

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 party represents the advances from the Company to Ruili Group.parties are non-interest bearing, unsecured and due on demand. The advances to Ruili Group are non-interest bearing, unsecured, and due on demand. Duringdemand and the nine months ended September 30, the Company advanced cash in the amountadvances to Shanghai Ruili and Kunshan Yuetu are due on demand, unsecured, and bear an interest rate of $8,919,241. The effect of changes in foreign exchange rate is $92,459.5.22% per annum.

The balance of due to related party represents the loans the Company obtained from related parties for working capital purposes. The borrowings from related parties are interest free, unsecured and repayable on demand.

During the ninethree months ended September 30, 2017,March 31, 2018, the Company obtained loans from related parties in the amount of $93,191,843$264,565,400 in cash including $5,829,744 from Ruian Kormee and $87,362,099 from Ruili Group. The Company also borrowed the amount of $23,515,527$32,791,380 in the form of bank acceptance notes. Repayments in cash and bank acceptance notes from Ruili Group. Cash repayments to the related parties totaled $113,071,629, including $1,742,308$256,883,171 and $5,846,083, respectively. In the same period, the Company advanced to Ruian Kormeeits related parties in the total amount of $67,694,035 and $111,329,321 toreceived cash repayments from Ruili Group amounted to $5,821,183. The cash repayments from Shanghai Ruili and Kunshan Yuetu totaled $1,378,876 during the ninethree months ended September 30, 2017. The effect of changes in foreign exchange rate is $494,067.March 31, 2018, and approximately $53,434,000 during subsequent period. Also see Note S.

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

The

During the three months ended March 31, 2018, the Company providedmade a guaranteebank deposit of $5,566,069 (RMB 35,000,000) as down payment to secure a potential acquisition. Initially, the Company had the intention to acquire the target company and deposited $5,566,069 into a trust account restricted for the credit line granteduse in the potential acquisition. After a few rounds of discussion, the Company gave up and Ruili Group decided to do the acquisition. As the Company and Ruili Group are under common control, the restricted deposit represented an advance to Ruili Group, by Bank of Ningbo in the amount of RMB 150,000,000 (approximately $21,623,180) for the period from May 30, 2016 to May 14, 2017. As of September 30, 2017, the guarantee was released as the credit line was fully paid off by Ruili Group.non-interest bearing, due on demand and non-secured. Also See Note B.

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, 2016,2016. The credit line was renewed on October 19, 2017 for 6 months. On April 23, 2018, Ruili Group and the bank reached into another extension agreement and the guarantee of which was continued towill be provided by the Company as of September 30, 2017 and will expire onuntil April 18, 2018.

The Company provided a guarantee for the credit line granted to Ruili Group by China Guangfa Bank in the amount of RMB 200,000,000 (approximately $28,830,907) for the period from May 22, 2016 to May 22, 2017. As of September 30, 2017, the guarantee was released as the credit line was fully paid off by Ruili Group.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 March 31, 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:

No customer individually accounted for more than 10% of ourthe Company’s revenues or accounts receivable for the ninethree months ended September 30, 2017March 31, 2018 and 2016.2017. The changes in the allowance for doubtful accounts on September 30, 2017at March 31, 2018 and December 31, 20162017 are summarized as follows:

NOTE G - INVENTORIES

On September 30, 2017At March 31, 2018 and December 31, 2016,2017, inventories were consisted of the following:

NOTE H - PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, werenet, consisted of the following on September 30, 2017at March 31, 2018 and December 31, 2016:2017:

Depreciation expense incurredcharged to operations was $6,353,494$2,711,374 and $5,110,014$1,944,565 for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively.

In May 2016, the Company, through its principal operating subsidiary, entered into a Purchase Agreement (the “Purchase Agreement”) with Ruili Group, pursuant to which the Company agreed to exchange the land use rights and factory facilities located at No. 1169 Yumeng Road, Rui'an Economic Development Zone, Rui'An City, Zhejiang Province, 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, Rui’an Economic Development Zone, Rui’an City, Zhejiang Province, China (the “Development Zone Facility”). As of the filing date, the Company has not obtained the property ownership certificate or land use right certificate of the Development Zone Facility. The Company reserved the relevant tax amount of RMB 4.56 million (approximately $0.75 million) for the Dongshan Facility and RMB 15.00 million (approximately $2.30 million) for the Development Zone Facility. These amounts were determined based on a 3% tax rate on the consideration paid for the Dongshan Facility and the Development Zone Facility in the transactions, which the Company considered as the most probable amount of tax liability.