Sutor Technology Group LTD - FORM 10-Q

Attached files

file	filename
EX-31.1 - Sutor Technology Group LTD	v221418_ex31-1.htm
EX-31.2 - Sutor Technology Group LTD	v221418_ex31-2.htm
EX-32.2 - Sutor Technology Group LTD	v221418_ex32-2.htm
EX-32.1 - Sutor Technology Group LTD	v221418_ex32-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10−Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _____________

Commission File Number: 000-51908

SUTOR TECHNOLOGY GROUP LIMITED

(Exact Name of Registrant as Specified in Its Charter)

Nevada		87-0578370
(State or other jurisdiction of incorporation		(I.R.S. Employer Identification No.)
or organization)

No 8, Huaye Road

Dongbang Industrial Park

Changshu, 215534

People’s Republic of China

(Address of principal executive offices, zip code)

(+86) 512-52680988

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has 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. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of each of the issuer’s classes of common stock, as of May 9, 2011 is as follows:

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		40,745,602

SUTOR TECHNOLOGY GROUP LIMITED

Quarterly Report on FORM 10-Q

Three Months Ended March 31, 2011

TABLE OF CONTENTS

	PART I
	FINANCIAL INFORMATION

Item 1.	Financial Statements	2

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15

	PART II
	OTHER INFORMATION

Item 1.	Legal Proceedings	16

Item 1A.	Risk Factors	16

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	(Removed and Reserved)	16

Item 5.	Other Information	16

Item 6.	Exhibits	16

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

		Page

Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and June 30, 2010		F-1

Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)		F-2

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)		F-3

Notes to Condensed Consolidated Financial Statements (Unaudited)		F-4-F-17

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,		June 30,
	2011		2010
	(unaudited)		(audited)
ASSETS
Current Assets:
Cash and cash equivalents	$	12,162,775	$	13,336,736
Restricted cash		62,875,755		48,315,962
Trade accounts receivable, net of allowance for doubtful accounts of $504,150 and $498,620, respectively		16,555,372		10,913,736
Other receivables and prepayments		1,997,451		929,507
Advances to suppliers, related parties		114,214,160		96,776,181
Advances to suppliers, net of allowance of $460,011 and $542,490, respectively		24,793,941		8,304,246
Inventory, net of allowance for obsolescence of $105,732 and $102,028, respectively		38,305,284		40,179,358
Notes receivable		15,220		73,437
Deferred income taxes		285,875		329,414

Total Current Assets		271,205,833		219,158,577

Property, Plant and Equipment, net of accumulated depreciation of $32,589,559 and $25,914,352, respectively		68,157,865		70,018,522
Intangible Assets, net of accumulated amortization of $483,266 and $415,178, respectively		3,051,210		2,995,488

TOTAL ASSETS	$	342,414,908	$	292,172,587

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	31,196,368	$	23,954,009
Advances from customers		7,485,793		6,769,481
Other payables and accrued expenses		4,678,025		4,688,324
Other payables - related parties		529,672		352,495
Short-term notes payable		93,521,167		82,128,484
Short-term notes payable - related parties		608,819		587,492

Total Current Liabilities		138,019,844		118,480,285
Long-Term Notes Payable		16,826,700		2,859,995
Total Liabilities		154,846,544		121,340,280

Stockholders' Equity
Undesignated preferred stock - $0.001 par value; 1,000,000 shares authorized; no shares outstanding		-		-
Common stock - $0.001 par value; 500,000,000 shares authorized, 40,745,602 and 40,715,602 shares outstanding at March 31, 2011 and June 30, 2010, respectively		40,745		40,715
Additional paid-in capital		42,554,997		42,465,581
Statutory reserves		12,629,151		12,629,151
Retained earnings		105,978,786		96,164,928
Accumulated other comprehensive income		26,364,685		19,531,932
Total Stockholders' Equity		187,568,364		170,832,307
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	342,414,908	$	292,172,587

The accompanying notes are an integral part of the condensed consolidated financial statements

F-1

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

AND COMPREHENSIVE INCOME

(Unaudited)

	For The Three Months Ended						For The Nine Months Ended
	March 31						March 31
	2011			2010			2011			2010

Revenue:
Revenue	$	62,521,577		$	53,393,402		$	157,802,440		$	165,933,164
Revenue from related parties		38,853,040			61,058,979			144,942,388			187,502,281
		101,374,617			114,452,381			302,744,828			353,435,445

Cost of Revenue
Cost of revenue		57,017,557			48,928,589			143,055,256			153,813,836
Cost of revenue from related party sales		35,742,344			56,209,868			133,184,740			177,272,203
		92,759,901			105,138,457			276,239,996			331,086,039

Gross Profit		8,614,716			9,313,924			26,504,832			22,349,406

Operating Expenses:

Selling expense		1,345,635			1,815,730			4,708,748			4,464,208
General and administrative expense		1,718,186			1,980,356			5,081,444			4,466,783

Total Operating Expenses		3,063,821			3,796,086			9,790,192			8,930,991
Income from Operations		5,550,895			5,517,838			16,714,640			13,418,415

Other Income (Expense):
Interest income		188,697			389,750			626,412			973,089
Other income		2,595			6,211			123,886			373,175
Interest expense		(1,986,541	)		(1,535,430	)		(5,856,643	)		(4,150,479	)
Other expense		(214,926	)		(19,043	)		(489,989	)		(341,321	)
Gain on sale of assets		4,447			(3,549	)		4,447-			(3,549	)
Total Other Income (Expense)		(2,005,728	)		(1,162,061	)		(5,591,887	)		(3,149,085	)

Income Before Taxes		3,545,167			4,355,777			11,122,753			10,269,330
Provision for income taxes		(76,958	)		(961,085	)		(1,308,895	)		(2,346,813	)

Net Income	$	3,468,209		$	3,394,692		$	9,813,858		$	7,922,517

Basic Earnings per Share	$	0.09		$	0.09		$	0.24		$	0.21
Diluted Earnings per Share	$	0.09		$	0.09		$	0.24		$	0.21

Basic Weighted Shares Outstanding		40,727,935			38,608,046			40,719,653			38,169,909
Diluted Weighted Shares Outstanding		40,727,935			38,608,046			40,719,653			38,169,909

Net Income	$	3,468,209		$	3,394,692		$	9,813,858		$	7,922,517
Foreign currency translation adjustment		1,231,987			33,378			6,832,753			226,802
Comprehensive Income	$	4,700,196		$	3,428,070		$	16,646,611		$	8,149,319

The accompanying notes are an integral part of the condensed consolidated financial statements

F-2

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For The Nine Months Ended
	March 31
	2011			2010
Cash Flows from Operating Activities:
Net income	$	9,813,858		$	7,922,517
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		5,715,855			5,260,692
Deferred income taxes		54,587			63,740
Foreign currency exchange (gain) loss		191			-
Stock based compensation		89,446			10,133
Loss (Gain) on sale of assets		(4,447	)		3,549
Changes in current assets and liabilities:
Trade accounts receivable, net		(5,228,146	)		(389,975	)
Other receivable and prepayment		(1,017,248	)		104,586
Advances to suppliers - related parties		(13,346,284	)		(37,108,212	)
Advances to suppliers		(15,922,866	)		1,561,993
Inventory		3,277,984			6,830,463
Accounts payable		6,268,337			2,980,168
Advances from customers		486,821			3,836,561
Other payables and accrued expenses		(163,136	)		1,432,592
Other payables - related parties		161,686			298,345

Net Cash (Used In) Operating Activities		(9,813,362	)		(7,192,848	)

Cash Flows from Investing Activities:
Changes in notes receivable		59,884			(1,269,427	)
Purchase of property, plant and equipment, net of value added tax refunds received		(1,335,063	)		(1,196,621	)
Proceeds from sale of assets		6,138			-
Net Cash Used In Investing Activities		(1,269,041	)		(2,466,048	)

Cash Flows from Financing Activities:
Proceeds from issuance of notes payable		96,696,227			95,709,395
Payments on notes payable		(74,409,132	)		(95,979,838	)
Proceeds from issuance of notes payable - related parties		-			199,932
Payments on notes payable - related parties		-			(985,269	)
Net change in restricted cash		(12,595,955	)		16,649,017
Distribution to shareholders		-			(6,615,825	)
Net proceeds from issuance of common stock and warrants		-			6,814,196
Net Cash Provided By Financing Activities		9,691,140			15,791,608

Effect of Exchange Rate Changes on Cash		217,302			22,772

Net Change in Cash		(1,173,961	)		6,155,484
Cash and Cash Equivalents at Beginning of Period		13,336,736			10,653,438
Cash and Cash Equivalents at End of Period	$	12,162,775		$	16,808,922

Supplemental Non-Cash Financing Activities
Offset of notes payable to related party against receivable from related parties (Note 7)	$	9,959,383		$	9,597,783
Supplemental Cash Flow Information
Cash paid during the period for interest	$	5,426,740		$	3,744,722
Cash paid during the period for income taxes	$	2,095,060		$	1,465,412

The accompanying notes are an integral part of the condensed consolidated financial statements

F-3

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Sutor Technology Group Limited and subsidiaries (the “Company”) include its wholly owned subsidiaries Sutor Steel Technology Co., Ltd. (“Sutor Steel”), Changshu Huaye Steel Strip Co., Ltd. (“Changshu Huaye”), Jiangsu Cold-Rolled Technology Co., Ltd. (“Jiangsu Cold-Rolled”), Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd. (“Ningbo Zhehua”) and Sutor Technology Co., Ltd (“Sutor Technology”).

Ningbo Zhehua was organized under the laws of the People’s Republic of China (the “PRC”) on April 5, 2004. On November 10, 2009, pursuant to an Equity Transfer Agreement (the “Agreement”), Changshu Huaye acquired 100% of the equity interests of Ningbo Zhehua from Shanghai Huaye Iron & Steel Co., Ltd., (an entity under common control with the Company) (“Shanghai Huaye”) for approximately $6,615,825 in cash. The acquisition was a transfer of equity interests between entities under common control and was recognized as a recapitalization of Ningbo Zhehua into the Company in a manner similar to the pooling-of-interests method of accounting, with the assets and liabilities of Ningbo Zhehua recognized at their historical carrying amounts.

Nature of Operations - The Company’s operations are located in the PRC. For the three months ended March 31, 2011 and 2010, approximately 87.4% and 90.6%, respectively, of the Company’s revenue was derived from sales within the PRC of steel products. For the nine months ended March 31, 2011 and 2010, approximately 91.0% and 90.3%, respectively, of the Company’s revenue was derived from sales within the PRC of steel products. A significant portion of the Company’s purchases and revenues consist of transactions with Shanghai Huaye and its subsidiaries. Changshu Huaye manufactures hot-dip galvanized steel (“HDG products) and pre-painted galvanized steel (“PPGI products”). Jiangsu Cold-Rolled operates several production lines that refine products such as cold-rolled steel, acid pickled steel and hot-dip galvanized steel. Ningbo Zhehua manufactures heavy steel pipe and purchases and resells cold-rolled and hot-dip galvanized steel. Sutor Technology Co., Ltd. has not started operation since its inception on February 24, 2010.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Statements – The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries at March 31, 2011 and for the three and nine months ended March 31, 2011 and 2010 reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the three and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. The Company follows the same accounting policies in the preparation of interim reports.

Principles of Consolidation – The accompanying condensed consolidated financial statements includes the accounts and transactions of Sutor Technology Group Limited and its subsidiaries for all periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

Functional Currency and Translating Financial Statements - The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The functional currency of the Company is the Chinese Yuan Renminbi (“RMB”); however, the accompanying condensed consolidated financial statements have been expressed in United States Dollars (“USD”). The accompanying consolidated balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The accompanying consolidated statements of operations and cash flows have been translated using the exchange rate on the dates of significant transactions or the weighted-average exchange rates prevailing during the periods of each statement. Transactions in the Company’s equity securities have been recorded at the exchange rate existing at the time of the transaction.

	March 31, 2011		March 31, 2010		June 30, 2010
Period end RMB : USD exchange rate		6.5701		6.8361		6.8086
Average 3 months RMB : USD exchange rate		6.5894		6.8360
Average 9 months RMB : USD exchange rate		6.6796		6.8377

F-4

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition - The Company recognizes revenues from the sale of products in the three segments when they are realized and earned. The Company considers revenue realized or realizable and earned when (1) it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Revenues are not recognized until products have been shipped to the client, risk of loss has transferred to the client and client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied.

The Company sells product to affiliates, who in turn sell the product to various other third party customers. Revenue is considered realized or realizable and earned when the affiliates ship the product to third party customers. A fee of 0.5% of the sale is paid to the affiliate for handling the product. The handling fees were $82,866 and $137,776 for the three months ended March 31, 2011 and 2010 respectively and have been classified as selling expenses in the statement of operations. The handling fees were $366,288 and $384,016 for the nine months ended March 31, 2011 and 2010 respectively and have been classified as selling expenses in the statement of operations.

Recently Adopted Accounting Guidance - In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. The adoption of this standard did not have a material impact to the Company’s financial statements

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial position or results of operations.

Recent Accounting Guidance Not Yet Adopted – Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

F-5

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 3 – INVENTORY

Inventory consisted of the following:

	March 31,			June 30,
	2011			2010
	(unaudited)			(audited)
Raw materials	$	18,446,138		$	22,285,980
Work in process		-			265,282
Finished goods		19,964,878			17,730,124

		38,411,016			40,281,386
Less: allowance for obsolescence		(105,732	)		(102,028	)

Total Inventory - net	$	38,305,284		$	40,179,358

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property and equipment includes value-added tax paid. Foreign invested enterprises and foreign enterprises doing business in the PRC are generally able to receive a refund of the value-added tax paid on property and equipment purchased and manufactured within the PRC. The Company recognizes refunds of value-added tax as a reduction of property and equipment when the refunds are collected. The refunds are a long-term asset as it can take up to three years to collect them from the PRC government. Investment tax credits are realized upon collection from the government. The Company has approximately $32,115,000 of property and equipment that is used as collateral for loans.

Property, plant and equipment consisted of the following:

	March 31,			June 30,
	2011			2010
	(unaudited)			(audited)
Buildings and plant	$	28,618,698		$	27,513,920
Machinery		68,690,167			66,220,305
Office and other equipment		1,095,065			994,114
Vehicles		290,754			337,454

		98,694,684			95,065,793
Less: accumulated depreciation		(32,589,559	)		(25,914,352	)

		66,105,125			69,151,441
Construction in process		2,052,740			867,081

Net property, plant and equipment	$	68,157,865		$	70,018,522

No interest has been capitalized in construction in process through March 31, 2011 as the amount is insignificant.

F-6

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT - continued

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, as follows:

	Life
Buildings and Plant	20 years
Machinery	10 years
Office and other equipment	10 years
Vehicles	5 years

Depreciation expense for the three months ended March 31, 2011 and 2010 was $1,913,961 and $1,836,144, respectively.

Depreciation expense for the nine months ended March 31, 2011 and 2010 was $5,663,707 and $5,209,750, respectively.

NOTE–5 - INTANGIBLE ASSETS

The Company’s intangible assets consist of several land use rights, which are amortized over the 50-year life of those rights. Amortization expense for the three months ended March 31, 2011 and 2010 was $17,611 and $16,985 respectively. Amortization expense for the nine months ended March 31, 2011 and 2010 was $52,148 and $50,942 respectively. Intangible information by segment is presented below:

As of March 31, 2011	Changshu Huaye			Jiangsu Cold-Rolled			Total
							(unaudited)
Gross Carrying Amount	$	2,248,961		$	1,285,515		$	3,534,476
Accumulated Amortization		(328,163	)		(155,103	)		(483,266	)
	$	1,920,798		$	1,130,412		$	3,051,210

As of June 10, 2010	Changshu Huaye			Jiangsu Cold-Rolled			Total
							(audited)
Gross Carrying Amount	$	2,170,182		$	1,240,484		$	3,410,666
Accumulated Amortization		(284,116	)		(131,062	)		(415,178	)
	$	1,886,066		$	1,109,422		$	2,995,488

The following schedule sets forth the estimated amortization expense for the periods presented:

ESTIMATED AMORTIZATION EXPENSE
Remainder of the year ending June 30, 2011	$	17,672
For the year ending June 30, 2012		70,690
For the year ending June 30, 2013		70,690
For the year ending June 30, 2014		70,690
For the year ending June 30, 2015		70,690

F-7

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE–6 - NOTES PAYABLE

The Company’s notes payable consist of short and long-term debt. All non related party short-term notes payable were due to banks. The following schedules sets forth the Company’s notes payable and notes payable – related parties as of the dates presented:

Non-related party short-term and long term notes were comprised of the following:

		March 31,		June 30,
	Maturity Date	2011		2010
		(unaudited)		(audited)
Note payable at 5.22% interest, guaranteed by related party	Renew to 1/19/2012	$	2,283,070	$	2,203,096
Note payable at 6.06% interest, guaranteed by related party	Renew to 2/29/2012		3,044,094		2,937,461
Note payable at 5.31% interest, guaranteed by related party	4/29/2011		3,044,094		2,937,461
Note payable at 5.31% interest, guaranteed by related party	5/19/2011		3,044,094		2,937,461
Note payable at 4.78% interest, guaranteed by related party	5/24/2011		5,174,959		4,993,684
Note payable at 4.78% interest, guaranteed by related party	5/26/2011		7,610,234		7,343,654
Note payable at 5.10% interest, guaranteed by related party	5/16/2011		3,044,094		2,937,461
Note payable at 6.00% interest, unsecured	11/20/2011		2,859,995		-
Note payable at 4.78% interest, guaranteed by related party	various dates from 6/20/2011 to 9/6/2011		33,028,415		-
Note payable at 5.31% interest, guaranteed by related party	8/20/2011		1,522,047		-
Note payable at 5.00% interest, guaranteed by related party	11/17/2011		6,088,187		-
Note payable at 4.78% interest, guaranteed by related party	9/30/2011		7,610,234		-
Note payable at 5.00% interest, guaranteed by related party	various dates from 10/24/2011 to 11/10/2011		10,045,509		-
Note payable at 5.91% interest, guaranteed by related party	12/26/2011		1,522,047		-
Note payable at 0.85% interest, guaranteed by related party	4/22/2011		556,000		-
Note payable at 5.81% interest, guaranteed by related party	7/5/2011		3,044,094		-
Note payable at 4.78% interest, guaranteed by related party	matured		-		30,549,599
Note payable at 4.05% interest, guaranteed by land use right	matured		-		3,231,208
Note payable at 4.80% interest, secured by property	matured		-		9,693,623
Note payable at 4.05% interest, guaranteed by related party	matured		-		1,909,350
Note payable at 5.31% interest, guaranteed by related party	matured		-		7,343,654
Note payable at 4.78% interest, guaranteed by related party	matured		-		1,321,858
Note payable at 4.86% interest, guaranteed by related party	matured		-		1,788,914

Total Short-Term Notes Payable		$	93,521,167	$	82,128,484

Long-term notes payable at 3.98% interest as of March 31, 2011, guaranteed by related party	2/21/2013		16,826,700		-
Long-term notes payable at 6.00% interest, unsecured	matured		-		2,859,995
Total long-term notes payable		$	16,826,700	$	2,859,995

As of March 31, 2011, restricted cash of $45,159,130 and $17,716,625 are held as collateral for short term and long term notes payable, respectively.

The weighted average interest rate for the non-related party short-term and long term notes payable as of March 31, 2011 is 4.99%.

F-8

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE–6 - NOTES PAYABLE- continued

Notes due to related parties were comprised of the following:

	Maturity Date	March 31, 2011		June 30, 2010
		(unaudited)		(audited)
Note payable to principal shareholder, no interest rate, unsecured	On demand	$	608,819	$	587,492
Total short-term notes payable - related parties		$	608,819	$	587,492

The note payable to the principal shareholder has a zero interest rate, the Company does not impute interest on this note payable. The Company intends to repay this note when repayment is demanded.

NOTE–7 - RELATED PARTIES

Purchases from Related Parties

The Company sells its products to and buys raw materials from various companies which are owned or controlled by the Principal Shareholders. These other companies are composed of a number of companies with which the Company conducts significant transactions. Revenues related to these transactions are shown separately in the accompanying consolidated statements of income. For the three months ended March 31, 2011 and 2010, purchases from these related parties totaled of $58,957,273 and $94,364,470, respectively. For the nine months ended March 31, 2011 and 2010, purchases from these related parties totaled of $163,121,266 and $210,563,568, respectively.

Advances to Suppliers- Related Parties

The amounts due to related parties are non-interest bearing and were incurred in the normal course of business except for certain notes payable. Receivables from, advances to suppliers, sales to, payables from advanced sales deposits, and payables from purchases from related parties have been netted due to the right of offset. At March 31, 2011 and June 30, 2010, the net amounts due from related parties were $114,214,160 and $96,776,181, respectively. The amounts charged for products to the Company by the related parties are under the same pricing, terms and conditions as those charged to third parties, and are due upon receipt. It is not uncommon for the Company with its related parties to accommodate a repayment extension of 90 to 180 days. Amounts receivable from related parties are also due upon delivery. Advances to suppliers which are related parties, are relieved once the goods are received.

Letters of Credit Held by Related Parties

At March 31, 2011, the Company had letters of credit totaling $55,006,773 in the form of banker’s acceptance notes that are held by related parties in connection with purchases from related parties. The banker’s acceptance notes carry a 0% interest rate, can be presented to the respective banks in 90 to 180 days from the dates they were written, are secured by cash on deposit with the respective banks and are guaranteed by related parties.

Notes Payable to Principal Shareholder

On December 20, 2007, Ms. Chen loaned the Company $7,099,998. The loan was for an initial period of 24 months through December 20, 2009, carried an interest rate of 5%.

On March 11, 2009, Ms. Chen loaned the Company $99,998. The loan was for a period of 36 months, carried an interest rate of 3.60%.

On April 29, 2009, Ms. Chen loaned the Company $149,998. The loan was for a period of 36 months, carried an interest rate of 5.00%.

On July 25, 2009, Ms. Chen loaned the Company $199,930. The loan was for a period of 12 months, and carried an interest rate of 2%.

The notes to Ms. Chen described above plus the accrued interest on the notes of $1,177,364 totaling $8,727,288 (along with $1,232,095 of non-interest bearing notes due to Ms. Chen) was transferred to Shanghai Huaye by Ms. Chen pursuant to an agreement between the parties dated December 10, 2009. Since the Company has a right of offset for amounts due from Shanghai Huaye, the aggregate amount of these notes and accrued interest of $9,959,383 has been recorded as a reduction of advances to related parties in the accompanying balance sheet as of March 31, 2011.

F-9

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE–7 - RELATED PARTIES - continued

On various dates from February 25, 2007 to June 30, 2009, Ms. Chen loaned the Company a total of $5.3 million. The Company during that same period paid Ms. Chen $2.5 million and as described above Ms. Chen transferred to Shanghai Huaye $1,232,095 of the notes on December 10, 2009. The Company further paid off $1 million as of March 31, 2010. The notes are due on demand and bear no interest and are included in the accompanying balance sheet under the caption short-term notes payable – related parties in the net amount of $608,819 and $587,492 at March 31, 2011 and June 30, 2010, respectively.

Rental Agreement with Principal Shareholder

On November 8, 2008, the Company entered into an agreement with the Principal Shareholder for the lease of 1,200 square meters of property in the Dongbang Industrial Park, in Changhsu, China. The terms of the agreement state that the Company will lease the property for three years, and pay the principal shareholder approximately $18,260 (RMB 120,000) per month. The Company has accrued expense for this lease of $529,672 and $352,495 that is included on the balance sheet under the caption Other payables – related parties at March 31, 2011 and June 30, 2010, respectively. The Company and the principal shareholders have renewed the lease and extended the date of agreement from November 7, 2011 to November 7, 2014.

On August 6, 2004, the Company entered into a 10 year lease agreement with its related company, Ningbo Huaye Steel Processing, Ltd. to use a factory building in the Ningbo Camel Luo Ji Dian Industrial Park. Lease payments are made quarterly at a monthly rate of approximately $12,180 (RMB 80,000).

NOTE–8 - INCOME TAXES

On March 16, 2007, the National People’s Congress of China passed the new Enterprise Income Tax Law (“EIT Law”), and on December 6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.

The EIT Law gives existing FIEs a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. Changshu Huaye is subject to an EIT of 15% from calendar year 2010 and beyond because it qualifies as high-tech enterprise for the calendar years 2010, 2011 and 2012. Changshu Huaye paid EIT at the 25% tax rate for the period between July and December 2010 and the Company expects to receive a refund on the over-paid portion of the EIT. Jiangsu Cold-Rolled is subject to EIT of 12.5% for the calendar years 2009, 2010 and 2011. Jiangsu Cold-Rolled will be subject to an EIT of 25% for the calendar year 2012 and beyond. Ningbo Zhehua is subject to an EIT of 25% and has no preferential tax treatments. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse affect on the Company’s business, fiscal condition and current operations in China.

Taxes payable are a component of other payables and accrued expenses in the accompanying condensed consolidated balance sheets and consisted of:

	March 31,			June 30,
	2011			2010
	(unaudited)			(audited)
Value added tax	$	(125,308	)	$	(584,996	)
Income tax		812,703			1,162,792
Surtax, insurance, other		120,104			136,401
Total Taxes	$	807,499		$	714,196

F-10

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE–8 - INCOME TAXES - continued

Following is a reconciliation of income taxes at the calculated statutory rate:

	For The Three Months Ended						For The Nine Months Ended
	March 31,						March 31,
	2011			2010			2011			2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Income tax calculated at statutory rates	$	882,672		$	1,088,944		$	2,777,068		$	2,567,332
Under-accrual/(tax credit) in prior years		(408,133	)		-			(438,719	)		-
Benefit of favorable rates		(269,806	)		(210,154	)		(843,957	)		(504,140	)
Operating loss carryforward		49,228			-			49,244			-
Tax effect of parent and sewer losses		(159,050	)		73,315			(216,788	)		274,641
Permanent difference		(17,953	)		8,979			(17,953	)		8,979
Provision for income taxes	$	76,958		$	961,085		$	1,308,895		$	2,346,813

Deferred taxes are comprised of the following:

	March 31,			June 30,
	2011			2010
	(unaudited)			(audited)
Net operating loss carryforward - US	$	1,198,377		$	1,183,622
Net operating loss carryforward - PRC		46,368			-
Stock based compensation		42,877			-
Allowance for doubtful trade receivables		116,952			124,685
Allowance for doubtful other receivables		56,959			79,461
Allowance for doubtful advances to suppliers		66,013			99,761
Allowance for inventory obsolescence		26,433			25,507
Other		19,520			-
Less: Valuation allowance		(1,287,623	)		(1,183,622	)
Total deferred income tax assets	$	285,875		$	329,414

As of March 31, 2011, the Company has a net operating loss from continuing operations for United States federal income tax purposes of $3,524,639 which are available to carry back five years or offset future taxable income, if any, through 2030. As of March 31, 2011, the Company determined that the net operating loss may not be utilizable, as such, a full valuation allowance has been provided.

The provision for income taxes is comprised of the following:

	For The Three Months Ended						For The Nine Months Ended
	March 31,						March 31,
	2011			2010			2011		2010
	(unaudited)			(unaudited)			(unaudited)		(unaudited)
Current	$	(7,012	)	$	1,090,365		$	1,254,308	$	2,367,133
Deferred		83,970			(129,280	)		54,587		(20,320	)
Provision for income taxes	$	76,958		$	961,085		$	1,308,895	$	2,346,813

There was no tax holiday for the three and nine months ended March 31, 2011.

F-11

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 9 – ISSUANCE OF COMMON STOCK AND WARRANTS

The following table summarizes the warrant activity as of March 31, 2011, and changes during the nine months ended March 31, 2011:

	Warrants		Weighted-average exercise price

Outstanding at June 30, 2010		685,000	$	3.76
Issued		-		-
Exercised		-		-
Expired		-		-
Outstanding at March 31, 2011		685,000	$	3.76

The aggregate intrinsic value as of March 31, 2011 and June 30, 2010 are $0.

NOTE 10 – STOCK-BASED COMPENSATION

Restricted Stock

On February 1, 2010, the Company granted to an executive 20,000 shares of restricted common stock with a grant date fair value of $3.04 per share as part of his remuneration for his service commencing February 1, 2010 for a one year period. The restricted common stock will vest on the first anniversary of the grant date. Stock-based compensation expense for the three and nine months ended March 31, 2011 was $5,163 and $35,813, respectively. The restricted stock is fully vested as of March 31, 2011.

On February 23, 2011, the Company amended an employment agreement with an executive and granted to an executive 30,000 shares of restricted common stock with a grant date fair value of $1.82 per share as part of his remuneration for his service commencing February 23, 2011 for a one year period. The restricted common stock will vest on the first anniversary of the grant date. The amended agreement calls for a stock grant on each anniversary date through the end of the agreement. Stock-based compensation expense for the three and nine months ended March 31, 2011 was $5,535 and $5,535, respectively. The remaining $49,065 stock-based compensation will be expensed over the remainder of the one year service period. The value of the non-vested stock at March 31, 2011 is $54,600.

Options

Stock Options granted to Key Employees

On April 27, 2010, the Board of Directors approved the grant of stock options to purchase 100,000 shares of the Company’s common stock under the “2009 Equity Incentive Plan” to certain key employees as reward for past services and to promote future performance. These options have an exercise price of $2.71 per share, expiring on the fifth anniversary of the grant date, and vest in three equal installments on each of the first, second and third anniversary of the vesting commencement date, which is April 27, 2010. The fair value of the options, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 2%, expected dividend yield of 0%, expected volatility of 91% and an expected life of 5 years.

Stock-based compensation expense for the three and nine months ended March 31, 2011 on the stock option was $15,695 and $47,782, respectively. The remaining $131,835 stock based compensation will be expensed over the remainder of the three years service period.

F-12

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 10 – STOCK-BASED COMPENSATION - continued

Stock Options granted to a Director

On February 23, 2011, the Board of Directors approved the grant of stock options to purchase 5,000 shares of the Company’s common stock under the “2009 Equity Incentive Plan” to a director as compensation for his service. These options have an exercise price of $2.71 per share, expiring on the fifth anniversary of the grant date, and vest in the first anniversary of the vesting commencement date, which is February 23, 2011. The fair value of the options, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 2%, expected dividend yield of 0%, expected volatility of 50% and an expected life of 5 years.

Stock-based compensation expense for the three and nine months ended March 31, 2011 on the stock option was $316 and $316, respectively. The $2,798 stock based compensation will be expensed over the remainder of the year service period.

The following table summarizes the options activity as of March 31, 2011, and changes during the nine months ended March 31, 2011:

	Options		Weighted-average exercise price		Weighted average remaining contractual life (years)		Aggregate Intrinsic Value

Outstanding at June 30, 2010		100,000	$	2.71		4.08	$	-
Issued		5,000		2.71		4.90		-
Exercised		-		-		-		-
Expired		-		-		-		-
Outstanding at March 31, 2011		105,000	$	2.71		4.12	$	-

NOTE 11 – EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share:

	For The Three Months Ended				For The Nine Months Ended
	March 31,				March 31,
	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Net income attributable to the common stockholders	$	3,468,209	$	3,394,692	$	9,813,858	$	7,922,517

Basic weighted-average common shares outstanding		40,727,935		38,608,046		40,719,653		38,169,909
Dilutive effect of options, warrants, and contingently issuable shares		-		-		-		-
Diluted weighted-average common shares outstanding		40,727,935		38,608,046		40,719,653		38,169,909

Earnings per share:
Basic	$	0.09	$	0.09	$	0.24	$	0.21
Diluted	$	0.09	$	0.09	$	0.24	$	0.21

Warrants and options to purchase 685,000, 100,000 and 5,000 shares of common stock, respectively were outstanding during the three and nine months ended March 31, 2011, but were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

F-13

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Lease commitments

On November 8, 2008, the Company entered into an agreement with the Principal Shareholder for the lease of 1,200 square meters of property in the Dongbang Industrial Park, in Changhsu, China. The terms of the agreement state that the Company will lease the property for three years, and pay the principal shareholder approximately $18,260 (RMB120,000) per month. The Company and the principal shareholders have renewed the lease and extended the date of agreement from November 7, 2011 to November 7, 2014.

On August 6, 2004, the Company entered into a 10 year lease agreement with Ningbo Huaye Steel Processing, Ltd. to use a factory building in the Ningbo Camel Luo Ji Dian Industrial Park. Lease payments are made quarterly at a monthly rate of approximately $12,180 (RMB80,000).

On October 12, 2010, the Company entered into a 2 year lease agreement with Ningbo Xin Fu Property Co. Ltd. to use an office building in Jiangdong District, Ningbo City. Lease payments are made quarterly at a monthly rate of approximately $9,360 (RMB61,494).

On January 1, 2011, the Company entered into a 2 year lease agreement with Shanghai Hongjia Property Co. Ltd. to use an office building in PuDong District, Shanghai City. Lease payments are made at a monthly rate of approximately $7,090 (RMB46,552).

Rent expense for the three months ended March 31, 2011 and 2010 were $117,044 and $198,942, respectively.

Rent expense for the nine months ended March 31, 2011 and 2010 were $312,133 and $374,417, respectively. Annual future minimum lease payments due under the operating leases are as follows:

For the Year Ending June 30,
Remainder of 2011	$	140,658
2012		562,632
2013		454,602
2014		243,527
2015		91,323
Total	$	1,492,742

Commitment for design project

On September 13, 2010, the Company signed an agreement with Suzhou Institute of Architectural Design Co., Ltd. for the design of an office building and the cost of the design is $396,847 (RMB2,623,874). The design project is still in process and the final drawing of the plan has yet to be submitted to the Company’s management for approval. As of March 31, 2011, 20% of the cost, or $79,873 (RMB524,775) has been paid as the prepayment for the design project. The remaining balance is due upon the approval of the construction design and the completion of the construction of the office building.

Economic environment - Since most of the Company’s operations are conducted in the PRC, the Company is subject to special considerations and significant risks. These risks include, among others, the political, economic and legal environments and foreign currency exchange rates. The Company’s results from operations may, among other things, be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to: laws and regulations, anti-inflationary measures, currency conversions and remittances abroad, and rates and methods of taxation.

Foreign currency remittance - The Company’s revenue is either earned in the PRC or remitted to banks within the PRC and is denominated in the PRC’s currency of RMB. The transfer of currencies outside of the PRC must be converted into other currencies. Both the conversion of RMB into foreign currencies and the remittance of those currencies outside the PRC require approval of the PRC government.

F-14

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 13 - SEGMENT INFORMATION

The Company has four reportable segments represented by its four subsidiaries Changshu Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology Co., Ltd. as described in Note 1.

Factors Management Used to Identify the Enterprise’s Reportable Segments - The Company’s reportable segments are business units that offer different products and are managed separately and require reporting to the various regulatory jurisdictions. Changshu Huaye mainly produces HDG products and PPGI products. Jiangsu Cold-Rolled manufactures cold-rolled steel strips and acid pickled steel products. Ningbo Zhehua trades steel and manufactures heavy steel pipe products and Sutor Technology Co., Ltd. has not started operation since its inception on February 24, 2010.

Certain segment information is presented below:

At March 31, 2011 and for the three months then ended	Changshu Huaye			Jiangsu Cold-Rolled		Ningbo Zhehua			Sutor Technology			Inter-Segment and Reconciling Items			Total

Revenue	$	24,212,158		$	21,426,726	$	6,775,413		$	-		$	10,107,280		$	62,521,577
Revenue from related parties		16,837,316			55,289,370		32,728			-			(33,306,374	)		38,853,040
Revenue from other operating segments		9,261,134			24,045,240		-			-			-			33,306,374
Total operating expenses		1,953,223			263,334		682,270			14,481			150,513			3,063,821
Interest income		136,956			25,285		26,456			-			-			188,697
Interest expense		250,122			1,515,642		89,301			-			131,476			1,986,541
Depreciation and amortization expense		555,047			1,151,400		225,125			-			-			1,931,572
Provision for income taxes		(200,101	)		225,011		52,048			-			-			76,958
Net segment profit		1,234,034			1,576,023		(40,941	)		(14,481	)		713,574			3,468,209
Capital expenditures, net of VAT refunds		23,566			477,390		1,902			515			-			503,373
Total assets		222,780,712			296,264,832		28,353,809			23,461,222			(228,445,667	)		342,414,908

F-15

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 13 - SEGMENT INFORMATION - CONTINUED

At March 31, 2010 and for the three months then ended	Changshu Huaye		Jiangsu Cold-Rolled			Ningbo Zhehua		Sutor Technology		Inter-Segment and Reconciling Items			Total

Revenue	$	20,086,500	$	24,129,072		$	9,177,830	$	-	$	-		$	53,393,402
Revenue from related parties		28,644,364		44,608,428			6,891,459		-		(19,085,272	)		61,058,979
Revenue from other operating segments		120,108		18,965,164			-		-		-			19,085,272
Total operating expenses		2,569,834		702,354			350,919		-		172,979			3,796,086
Interest income		357,407		10,114			22,229		-		-			389,750
Interest expense		253,412		1,158,694			3,042		-		120,282			1,535,430
Depreciation and amortization expense		541,792		1,109,023			202,314		-		-			1,853,129
Provision for income taxes		690,555		194,028			76,502		-		-			961,085
Net segment profit		2,081,827		1,358,193			247,934		-		(293,262	)		3,394,692
Capital expenditures, net of VAT refunds		12,322		(178,844	)		363,411		-		-			196,889
Total assets		223,458,218		161,036,300			58,586,365		-		(124,184,559	)		318,896,324

At March 31, 2011 and for the nine months then ended	Changshu Huaye		Jiangsu Cold-Rolled		Ningbo Zhehua		Sutor Technology			Inter-Segment and Reconciling Items			Total

Revenue	$	47,122,546	$	70,604,475	$	21,285,217	$	-		$	18,790,202		$	157,802,440
Revenue from related parties		75,324,296		166,403,515		199,461		-			(96,984,884	)		144,942,388
Revenue from other operating segments		18,602,005		78,382,879		-		-			-			96,984,884
Total operating expenses		5,416,127		1,133,303		2,699,396		14,544			526,822			9,790,192
Interest income		370,838		206,649		48,925		-			-			626,412
Interest expense		684,233		4,639,731		132,415		-			400,264			5,856,643
Depreciation and amortization expense		1,642,231		3,408,745		664,879		-			-			5,715,855
Provision for income taxes		501,002		785,114		22,779		-			-			1,308,895
Net segment profit		3,325,410		5,639,419		4,332		(14,544	)		859,241			9,813,858
Capital expenditures, net of VAT refunds		37,234		1,190,840		28,425		78,564			-			1,335,063
Total assets		222,780,712		296,264,832		28,353,809		23,461,222			(228,445,667	)		342,414,908

F-16

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011

(Unaudited)

NOTE 13 - SEGMENT INFORMATION – continued

At March 31, 2010 and for the nine months then ended	Changshu Huaye		Jiangsu Cold-Rolled		Ningbo Zhehua		Sutor Technology		Inter-Segment and Reconciling Items			Total

Revenue	$	80,074,319	$	66,768,402	$	19,090,443	$	-	$	-		$	165,933,164
Revenue from related parties		80,375,197		142,379,628		32,006,905		-		(67,259,449	)		187,502,281
Revenue from other operating segments		302,575		66,956,874				-					67,259,449
Total operating expenses		6,024,848		1,144,657		1,064,790		-		696,696			8,930,991
Interest income		809,784		19,296		144,009		-		-			973,089
Interest expense		822,489		2,910,660		15,461		-		401,869			4,150,479
Depreciation and amortization expense		1,617,614		3,061,855		581,223		-		-			5,260,692
Provision for income taxes		1,640,069		493,242		213,502		-		-			2,346,813
Net segment profit		4,945,620		3,452,691		622,771		-		(1,098,565	)		7,922,517
Capital expenditures, net of VAT refunds		27,083		740,255		429,283		-		-			1,196,621
Total assets		223,458,218		161,036,300		58,586,365		-		(124,184,559	)		318,896,324

NOTE 14 - GEOGRAPHIC INFORMATION

The following schedule summarizes the sources of the Company’s revenue by geographic regions for the three and nine months ended March 31, 2011 and 2010:

	For the Three Months Ended March 31,				For the Nine Months Ended March 31,
Geographic Area	2011		2010		2011		2010
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
People's Republic of China	$	88,602,341	$	103,722,673	$	275,374,860	$	319,221,278
Other Countries		12,772,276		10,729,708		27,369,968		34,214,167
Total	$	101,374,617	$	114,452,381	$	302,744,828	$	353,435,445

NOTE 15 – SUBSEQUENT EVENTS

On April 6, 2011, the Company invested an additional $5,052,990 into Sutor Technology Co. Ltd raising its registered capital to $28,294,360.

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q. Other than the event disclosed above, no significant events occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Condensed Consolidated Financial Statements.

F-17

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China and the current global economic crisis on our business and on our customers’ business; the factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this report, and any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended June 30, 2010 and subsequent SEC filings. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.

Use of Terms

Except as otherwise indicated by the context, all references in this Quarterly Report to: (i) “Sutor Group,” the “Company,” “we,” “us” or “our” are to Sutor Technology Group Limited, a Nevada corporation, and its direct and indirect subsidiaries; (ii) “Changshu Huaye” are to our indirect wholly-owned subsidiary Changshu Huaye Steel Strip Co., Ltd., a corporation incorporated in the People’s Republic of China; (iii) “Jiangsu Cold-Rolled” are to our indirect wholly-owned subsidiary Jiangsu Cold-Rolled Technology Co., Ltd., a corporation incorporated in the People’s Republic of China; (iv) “Ningbo Zhehua” are to our indirect wholly-owned subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd., a corporation incorporated in the People’s Republic of China; (v) “Shanghai Huaye” are to Shanghai Huaye Iron & Steel Group Co., Ltd., a corporation incorporated in the People’s Republic of China of which Lifang Chen, our major shareholder and chief executive officer, and her husband Feng Gao are 100% owners, and its subsidiaries; (vi) “Securities Act” are to the Securities Act of 1933, as amended; (vii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (viii) “RMB” are to Renminbi, the legal currency of China; (ix) “U.S. dollar,” “$” and “US$” are to the legal currency of the United States; and (x) “China” and “PRC” are to the People’s Republic of China.

Overview of our Business

We are one of the leading Chinese private manufacturers of fine finished steel products. We utilize a variety of processes and technological methodologies to convert steel manufactured by third parties into fine finished steel products. Our product offerings are focused on higher margin, value-added finished steel products, specifically, hot-dip galvanized steel (“HDG steel”) and prepainted galvanized steel (“PPGI”). In addition, we produce acid pickled steel (“AP steel”) and cold-rolled steel, which represent the least processed of our finished products. As a result of our acquisition of Ningbo Zhehua in November 2009, our product offerings include welded steel pipe products. We use a large portion of our AP steel and cold-rolled steel to produce our HDG steel and PPGI products. Our vertical integration has allowed us to maintain more stable margins for our HDG steel and PPGI products.

We sell most of our products to customers who operate primarily in the solar energy, appliances, automobile, construction, infrastructure, medical equipment and water resource industries. Most of our customers are located in China. Our primary export markets are Europe, Middle East, South America and Hong Kong.

Our manufacturing facilities, located in Changshu, China, have three HDG steel production lines, one PPGI production line, one AP steel production line and one cold-rolled steel line. Our current annual designed production capacity is approximately 700,000 metric tons, or MT, for HDG steel, 200,000 MT for PPGI, 500,000 MT for AP steel and 250,000 MT for cold-rolled steel. Ningbo Zhehua, our subsidiary located in Ningbo, currently has an annual capacity of 400,000 MT for welded steel pipe products.

Executive Overview of Quarterly Results

We continued our strategic efforts to exit the lower margin steel trading business and focus on higher margin value added products in this quarter. Our orders and production output in this quarter continued to be more heavily focused on advanced PPGI products that utilize sophisticated processing procedures and require more production time. As a result, our production volume and revenue declined in this quarter as compared to the same period last year. However, the negative effects of these reductions were partially offset by higher average sales prices as demand for our product remained strong during the quarter. Despite the revenue decrease, our gross margin and net income improved to 8.5% and $3.5 million in this quarter from 8.1% and $3.4 million in the same period last year, respectively. We believe in the long run we can strengthen our competitive position by focusing on higher-margin value added products.

The following summarizes certain key financial information for the third fiscal quarter.

Revenue: Revenue was $101.4 million for the three months ended March 31, 2011, a decrease of $13.1 million, or 11.4%, from $114.5 million for the same period last year.

Gross Profit and Margin: Gross profit was $8.6 million for the three months ended March 31, 2011 as compared to $9.3 million for the same period last year. Gross margin was 8.5% for the three months ended March 31, 2011 as compared to 8.1% for the same period last year.

Net Income: Net income was $3.5 million for the three months ended March 31, 2011, an increase of $0.1 million, or approximately 2.9%, from $3.4 million for the same period of last year.

Fully diluted net income per share: Fully diluted net income per share was approximately $0.09 for the three months ended March 31, 2011, as compared to approximately $0.09 for the same period last year.

Revenue

Our revenue is generated from sales of our HDG steel, PPGI, AP steel, cold-rolled steel products and welded steel pipe products. Our revenue has historically been affected by sales volume, product pricing and our product mix.

Our operations consist of three business segments: Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua, which are our three principal manufacturing facilities. Changshu Huaye manufactures HDG steel and PPGI products. In the three months ended March 31, 2011 and 2010, after eliminating intercompany sales, Changshu Huaye generated revenue of $41.1 million and $48.7 million, which represented 40.5% and 42.6% of our total revenue, respectively. Jiangsu Cold-Rolled manufactures AP steel, cold-rolled steel and HDG steel. In the three months ended March 31, 2011 and 2010, after eliminating the inter-company sales, Jiangsu Cold-Rolled generated revenue of $53.5 million and $49.7 million, which represented 52.8% and 43.4% of our total revenue, respectively. Ningbo Zhehua manufactures welded steel pipe products. In the three months ended March 31, 2011 and 2010, Ningbo Zhehua generated revenue of $6.8 million and $16.1 million, which represented 6.7% and 14.0% of our total revenue, respectively.

A substantial portion of our products are sold through our affiliate Shanghai Huaye, which also supplies to us a significant portion of our raw materials. Approximately 38.3% of our revenue was derived from Shanghai Huaye and its affiliates in the three months ended March 31, 2011, as compared with approximately 53.3% in the same period last year. We continue to take advantage of Shanghai Huaye’s extensive sales network as we strive to independently enhance our brand value. But we intend to continue to gradually reduce related party transactions in the future.

Cost of Revenue

Cost of revenue includes direct costs to manufacture our products, including the cost of raw materials, labor, overhead, energy cost, handling charges, and other expenses associated with the manufacture and delivery of product. Direct costs of manufacturing are generally highest when we first introduce a new product due to higher start-up costs and higher raw material costs. As production volume increases, we typically improve manufacturing efficiencies and are able to strengthen our purchasing power by buying raw materials in greater quantities.

In the three months ended March 31, 2011, approximately $59.0 million of our procurement was conducted through Shanghai Huaye. Due to the size of Shanghai Huaye and the economy of scale, it has stronger bargaining power than we do and our arrangement with Shanghai Huaye allows us to purchase raw materials at relatively lower prices than we could obtain from suppliers ourselves.

Gross Profit and Gross Margin

Gross profit is equal to the difference between our revenue and the cost of revenue. Gross margin is equal to gross profit divided by revenue. In the three months ended March 31, 2011, gross margin for domestic and international sales were approximately 7.4% and 16.4%, respectively. On a segment basis, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua’s gross margins were 11.1%, 4.5% and 12.1% in the three months ended March 31, 2011, respectively.

To gain market penetration, we price our products at levels that we believe are competitive. We continually strive to improve manufacturing efficiencies and reduce our production costs in order to offer superior products and services at competitive prices. General economic conditions, the cost of raw materials, and supply and demand of fine finished steel products within our markets influence sales prices. Our high-end, value-added products, such as the PPGI products, generally tend to have higher profit margins. As part of our effort to maintain stable profitability and mitigate our exposure to fluctuations in the price of our primary raw material steel, we generally adopt the cost-plus pricing mechanism for our products.

We operate using a vertical integration strategy where we use our own AP steel and cold-rolled steel products as raw materials for HDG steel and PPGI products. We believe our vertically integrated operations will allow us to provide customers with one-stop services, build customer loyalty and maintain stable operating margins.

Operating Expenses

Our operating expenses primarily consist of general and administrative expenses and selling expenses.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and benefits for our general management, finance and administrative staff, professional and advisory fees, bad debts reserves, and other expenses incurred in connection with general corporate purposes. We expect most components of our general and administrative expenses will increase due to inflation and as our business grows and as we incur increased costs as a public company.

Selling Expenses

Selling expenses consist primarily of compensation and benefits for our sales and marketing staff, sales commissions, the cost of advertising, promotional and travel activities, transportation expenses, after-sales support services and other sales related costs.

Our selling expenses are generally affected by the amount of international sales and our sales to unrelated parties. The transportation costs for our international sales are generally higher than domestic sales. In addition, when we sell products to Shanghai Huaye and its affiliates, Shanghai Huaye generally arranges and bears the cost of transportation. In contrast, when we sell products to customers other than Shanghai Huaye, we generally bear the transportation costs, but we are able to charge a higher price.

Provision for Income Taxes

Sutor Technology Group Limited is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as Sutor Technology Group Limited had no taxable income for the three months ended March 31, 2011.

Our direct wholly owned subsidiary Sutor Steel Technology Co., Ltd. was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income taxes.

On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law (the “EIT Law”), and on December 6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified enterprise income tax (“EIT”) of 25.0% on all domestic-invested enterprises and Foreign Invested Entities (“FIEs”) established in the PRC, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.

Despite these changes, the EIT Law gives the FIEs established before March 16, 2007 (“Old FIEs”) a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT law shall gradually increase their EIT rate by 2% per year until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for the “two-year exemption and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT law, are allowed to remain to enjoy their preference until these holidays expire.

Our subsidiary Ningbo Zhehua is subject to an EIT rate of 25% for calendar years 2010 and 2011. Our subsidiary Jiangsu Cold-Rolled is subject to an EIT rate of 12.5% for 2010 and 2011. Our subsidiary Changshu Huaye is currently subject to a reduced EIT rate of 15% after it was recognized as a High-Tech Enterprise by the Jiangsu provincial government in 2010. The preferential EIT rate is subject to renew in 2013.

Reportable Operating Segments

We have three reportable operating segments which are categorized based on manufacturing facility – Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua. Changshu Huaye manufactures and sells HDG steel and PPGI products. Jiangsu Cold-Rolled manufactures and sells AP steel, cold-rolled steel and HDG steel products. Ningbo Zhehua manufactures and sells steel pipe products. Changshu Huaye and Jiangsu Cold-Rolled are adjacent to each other and use largely the same management resources. See Note 13, “Segment Information” to the condensed consolidated financial statements included elsewhere in this report.

Results of Operations

Comparison of Three Months Ended March 31, 2011 and March 31, 2010

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

(All amounts, other than percentages, in thousands of U.S. dollars)

	Three Months Ended March 31, 2011						Three Months Ended March 31, 2010
	Amount			As a Percentage of Revenue			Amount			As a Percentage of Revenue
Revenue
Revenue from unrelated parties	$	62,522			61.7	%	$	53,393			46.7	%
Revenue from related parties		38,853			38.3	%		61,059			53.3	%
Total		101,375			100	%		114,452			100	%

Cost of Revenue
Cost of revenue		57,018			56.2	%		48,929			42.8	%
Cost of revenue from related parties		35,742			35.3	%		56,210			49.1	%
Total		92,760			91.5	%		105,138			91.9	%

Gross Profit		8,615			8.5	%		9,314			8.1	%

Operating Expenses
Selling expense		1,346			1.3	%		1,816			1.6	%
General and administrative expense		1,718			1.7	%		1,980			1.7	%
Total Operating Expenses		3,064			3.0	%		3,796			3.3	%

Income from Operations		5,551			5.5	%		5,518			4.8	%

Other Income (Expense)
Interest income		189			0.2	%		390			0.3	%
Other income		7			0	%		6			0	%
Interest expense		(1,987	)		(2.0	)%		(1,535	)		(1.3	)%
Other expense		(215	)		(0.2	)%		(19	)		0	%
Loss on sale of assets		-			-			(4	)		0	%
Total Other Expense		(2,006	)		(2.0	)%		(1,162	)		(1.0	)%

Income Before Taxes and Minority Interest		3,545			3.5	%		4,356			3.8	%
Provision for income taxes		(77	)		(0.1	)%		(961	)		(0.8	)%

Net Income	$	3,468			3.4	%	$	3,395			3.0	%

The following table sets forth revenue by geography and the percentage of our total revenue and total revenue by business segments for the three months ended March 31, 2011 and 2010.

(All amounts, other than percentages, in thousands of U.S. dollars)

	Three Months Ended March 31, 2011					Three Months Ended March 31, 2010
	Amount		As a Percentage of Revenue			Amount		As a Percentage of Revenue
Geographic Data
China	$	88,602		87.4	%	$	103,722		90.6	%
Other Countries		12,772		12.6	%		10,730		9.4	%
Total Revenue	$	101,374		100.0	%	$	114,452		100.0	%

Segment Data
Changshu Huaye	$	41,049		40.5	%	$	48,731		42.6	%
Jiangsu Cold-Rolled		53,517		52.8	%		49,653		43.4	%
Ningbo Zhehua		6,808		6.7	%		16,069		14.0	%
Total Revenue	$	101,374		100.0	%	$	114,452		100.0	%

Revenue

Revenue was $101.4 million in the third fiscal quarter of 2011 as compared to $114.5 million for the same period last year, representing a decrease of $13.1 million, or approximately 11.4%. The decrease was primarily attributable to a significant reduction in our subsidiary Ningbo Zhehua’s steel trading business. During the quarter, revenue from Ningbo Zhehua decreased by approximately $9.3 million from approximately $16.1 million for the three months ended March 31, 2010 to $6.8 million for the three months ended March 31, 2011. This accounted for the majority of our decreased revenues. In addition, we experienced lower production volume and generated less revenue from our PPGI products. As the steel industry in Chins becomes more competitive and lower end products become more of a commodity, we are working hard to shift some of our high end capacity to more specialized, higher margin products. Our goal is to separate ourselves from the industry at the highest levels and to work as efficiently as possible. As a result of this transition over the past quarter, we experienced a decrease from our overall PPGI products. Lower production volume, however, was partially offset by higher average sales prices. Our goal is to gradually transition to producing more higher-end and higher-margin products.

On a geographic basis, revenue generated from outside of mainland China was $12.8 million, accounting for 12.6% of our revenue in the three months ended March 31, 2011 as compared to $10.7 million, which was 9.4% of the total revenue for the same period last year. The increase was mainly attributable to our continuous efforts to market our products and improve our brand presence in overseas markets, as well as the timing of shipment.

On a segment basis, after eliminating intercompany sales, revenue generated by Changshu Huaye was approximately $41.0 million for the three months ended March 31, 2011, a decrease of approximately $7.6 million, from $41.1 million for the same period last year. The decrease was mainly attributable to our focus on manufacturing and selling more advanced PPGI products as discussed above. In addition, we also shifted more of our HDG steel production from Changshu Huaye to Jiangsu Cold-Rolled to take advantage of the newer 400,000 MT HDG steel production lines at Jiangsu Cold-Rolled which generally have lower production costs than that at Changshu Huaye. As a result, the overall production volume and revenue generated by Changshu Huaye decreased in this quarter.

After eliminating the intercompany sales, revenue generated by Jiangsu Cold-Rolled was $53.5 million for the three months ended March 31, 2011, an increase of $3.8 million from $49.7 million for the same period last year, mainly as a result of the increased output of the 400,000 MT HDG steel production lines.

Revenues from Ningbo Zhehua were $6.8 million for the three months ended March 31, 2011, a decrease of $9.3 million from $16.1 million for the same period last year. After our acquisition of Ningbo Zhehua, we made a strategic decision to reduce its lower-margin steel trading businesses and focus on higher-margin business lines.

In terms of sales to related parties as compared with sales to unrelated parties, our direct sales to unrelated parties in the three months ended March 31, 2011 increased to $62.5 million from $53.4 million for the same period last year.

Cost of Revenue

Cost of revenue decreased $12.4 million, or 11.8% to $92.8 million for the three months ended March 31, 2011 from $105.1 million for the same period last year. As a percentage of revenue, cost of revenue decreased to 91.5% for the three months ended March 31, 2011 from 91.9% for the same period last year. The decreased amount of cost of revenue was mainly due to the decreased sales volumes. During this quarter, the average price for our raw materials was up slightly.

Gross Profit

Gross profit decreased approximately $0.7 million to $8.6 million for the three months ended March 31, 2011 from $9.3 million for the same period last year. Gross profit as a percentage of revenue (gross margin) was 8.5% for the three months ended March 31, 2011, as compared to 8.1% for the same period last year. The slight increase in gross margin mainly resulted from significantly reduced steel trading business operations and changes in product mix.

Gross margin for Changshu Huaye decreased to 11.1% for the three months ended March 31, 2011 as compared to 14.9% for the same period last year. Gross margin for Jiangsu Cold-Rolled decreased slightly to 4.5% for the three months ended March 31, 2011 as compared to 4.6% for the same period last year. Gross margin for Ningbo Zhehua was approximately 12.1% for the three months ended March 31, 2011 as compared with approximately 3.9% in the same period last year, mainly as a result of our strategic decision to reduce its lower-margin steel trading business.

Total Operating Expenses

Our total operating expenses decreased approximately $0.7 million to $3.1 million for the three months ended March 31, 2011, from $3.8 million for the same period last year. As a percentage of revenue, our total operating expenses decreased to 3.0% for the three months ended March 31, 2011 from 3.3% for the same period last year.

Selling Expenses. Selling expenses decreased approximately $0.5 million to $1.3 million for the three months ended March 31, 2011, from $1.8 million for the same period last year. As a percentage of revenue, our selling expenses decreased to 1.3% for the three months ended March 31, 2011 from 1.6% for the same period last year. The dollar and percentage decrease were mainly due to the reduced shipping costs associated with our international sales as a result of using more FOB (Free on Board) sales than the CIF (Cost, Insurance and Freight) sales in this quarter.

General and Administrative Expenses. General and administrative expenses decreased approximately $0.3 million to $1.7 million for the three months ended March 31, 2011 from $2.0 million for the same period last year. As a percentage of revenue, general and administrative expenses remained stable at 1.7% for the three months ended March 31, 2011 and 2010. The amount decrease of general and administrative expenses was mainly due to an approximately $0.4 million decrease in bad debt allowance in the third fiscal quarter of 2011 than in the same period last year.

Interest Expense

Interest expense increased approximately $0.5 million to $2.0 million for the three months ended March 31, 2011, from $1.5 million for the same period last year. As a percentage of revenue, our interest expense increased to 2.0% for the three months ended March 31, 2011, from 1.3% for the same period last year. Interest expenses included interest expenses for bank loans and amounts discounted in connection with bank acceptance notes which accounted approximately $0.3 million and $0.2 million of the increase in interest expenses in this quarter, respectively. When the Bank of China raised interest rates in October 2010, the official interest rate for one-year term bank loans was approximately 0.75% higher in the third fiscal quarter of 2011 than in the same period last year.

Provision for Income Taxes

We incurred income tax expense of approximately $0.1 million and $1.0 million during the three months ended March 31, 2011 and 2010, respectively. The decrease was mainly because Changshu Huaye was recognized as a High-Tech Enterprise by the Jiangsu provincial government last October and therefore enjoys a lower EIT rate of 15% in 2011. We also had an approximately $0.4 million adjustment of income tax provision in this quarter.

Net Income

Net income, without including the foreign currency translation adjustment, increased approximately $0.1 million, or 2.9%, to $3.5 million for the three months ended March 31, 2011 from $3.4 million for the same period last year as a cumulative result of the above factors.

Comparison of Nine Months Ended March 31, 2011 and March 31, 2010

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

(All amounts, other than percentages, in thousands of U.S. dollars)

	Nine Months Ended March 31, 2011						Nine Months Ended March 31, 2010
	Amount			As a Percentage of Revenue			Amount			As a Percentage of Revenue
Revenue
Revenue	$	157,803			52.1	%	$	165,933			46.9	%
Revenue from related parties		144,942			47.9	%		187,502			53.1	%
Total		302,745			100	%		353,435			100.0	%

Cost of Revenue
Cost of revenue		143,055			47.3	%		153,814			43.5	%
Cost of revenue from related parties		133,185			44.0	%		177,272			50.2	%
Total		276,240			91.2	%		331,086			93.7	%

Gross Profit		26,505			8.8	%		22,349			6.3	%

Operating Expenses
Selling expense		4,709			1.6	%		4,464			1.3	%
General and administrative expense		5,081			1.7	%		4,467			1.3	%
Total Operating Expenses		9,790			3.2	%		8,931			2.5	%

Income from Operations		16,715			5.5	%		13,418			3.8	%

Other Income (Expense)
Interest income		626			0.2	%		973			0.3	%
Other income		128			0	%		373			0.1	%
Interest expense		(5,857	)		(1.9	)%		(4,150	)		(1.2	)%
Other expense		(490	)		(0.2	)%		(341	)		(0.1	)%
Loss on sale of assets		-			-			(4	)		0.0	%
Total Other Expense		(5,592	)		(1.8	)%		(3,149	)		(0.9	)%

Income Before Taxes and Minority Interest		11,123			3.7	%		10,269			2.9	%
Provision for income taxes		(1,309	)		(0.4	)%		(2,347	)		(0.7	)%

Net Income	$	9,814			3.2	%	$	7,923			2.2	%

The following table sets forth revenue by geography and the percentage of our total revenue and total revenue by business segments for the nine months ended March 31, 2011 and 2010.

(All amounts, other than percentages, in thousands of U.S. dollars)

	Nine Months Ended March 31, 2011					Nine Months Ended March 31, 2010
	Amount		As a Percentage of Revenue			Amount		As a Percentage of Revenue
Geographic Data:
China	$	275,375		91.0	%	$	319,221		90.3	%
Other Countries		27,370		9.0	%		34,214		9.7	%
Total Revenue	$	302,745		100.0	%	$	353,435		100.0	%

Segment Data:
Changshu Huaye	$	122,447		40.5	%	$	160,450		45.4	%
Jiangsu Cold-Rolled		158,813		52.5	%		141,889		40.1	%
Ningbo Zhehua		21,485		7.0	%		51,097		14.5	%
Total Revenue	$	302,745		100.0	%	$	353,435		100.0	%

Revenue

Revenue decreased $50.7 million, or 14.3%, to $302.7 million for the nine months ended March 31, 2011, from $353.4 million for the same period last year. The revenue decrease was primarily attributable to lower total production volume of our PPGI products and our strategic efforts to reduce Ningbo Zhehua’s lower-margin steel trading businesses. For the nine months ended March 31, 2011, we produced more advanced PPGI products that require sophisticated processing procedures and hence more production time than we did in the same period a year ago. In order to improve gross margin and better allocate our resources, we also reduced Ningbo Zhehua’s lower margin steel trading volumes which contributed to the lower total revenue in the nine months ended March 31, 2011. Our business strategy is to sell more higher-end and higher-margin products which we believe will improve our competitive position in the long run.

On a geographic basis, revenue generated from outside of mainland China was $27.4 million, accounting for 9.0% of our revenue in the nine months ended March 31, 2011 as compared to $34.2 million, which was 9.7% of our revenue for the same period last year. The decrease was mainly attributable to less demand from international customers in the second fiscal quarter of 2011

On a segment basis, after eliminating intercompany sales, revenue generated by Changshu Huaye was $122.5 million for the nine months ended March 31, 2011, a decrease of $38.0 million, or 23.7%, from $160.5 million for the same period last year. Due to increasing market demand, we produced more advanced PPGI products in the nine months ended March 31, 2011 which resulted in decrease of sales volume and revenue, but an increase in our gross margin. In addition, more HDG steel products were produced at Jiangsu Cold-Rolled to take advantage of its newer production lines which generally have lower production costs. As a result, the overall production volume at Changshu Huaye was reduced during the nine months ended March 31, 2011.

After eliminating the inter-company sales, revenues generated by Jiangsu Cold-Rolled were $158.8 million for the nine months ended March 31, 2011, an increase of $16.9 million from $141.9 million for the same period last year, mainly as a result of higher sales volume and the increased output of our 400,000 MT HDG production lines.

Revenues from Ningbo Zhehua were $21.5 million for the nine months ended March 31, 2011, a decrease of $29.6 million from $51.1 million for the same period last year, primarily resulting from our strategic decision to reduce its lower-margin steel trading businesses and focus on higher-margin production businesses.

In terms of sales to related parties as compared with sales to unrelated parties, our direct sales to unrelated parties in the nine months ended March 31, 2011 decreased $8.1 million, or 4.9%, to $157.8 million from $165.9 million for the same period last year.

Cost of Revenue

Cost of revenue decreased $54.8 million, or 16.6% to $276.2 million for the nine months ended March 31, 2011 from $331.1 million for the same period last year. As a percentage of revenue, the cost of revenue decreased to 91.2% for the nine months ended March 31, 2011 from 93.7% for the same period last year. Decreased cost of revenue was mainly due to the decreased sales volume.

Gross Profit

Gross profit increased $4.2 million to $26.5 million for the nine months ended March 31, 2011 from $22.3 million for the same period last year. Gross profit as a percentage of revenue (gross margin) was 8.8% for the nine months ended March 31, 2011, as compared to 6.3% for the same period last year. The increased gross margin mainly resulted from reduced low margin steel trading business operations and changes in product mix as discussed above.

Gross margin for Changshu Huaye increased to 10.9% for the nine months ended March 31, 2011 as compared to 9.7% for the same period last year, mainly because it produced and sold more higher-margin advanced PPGI products in the nine months ended March 31, 2011. Gross margin for Jiangsu Cold-Rolled increased to 5.3% for the nine months ended March 31, 2011 as compared to 3.6% for the same period last year, mainly due to the higher capacity utilization of the new HDG production lines and increase of average sales prices. Gross margin for Ningbo Zhehua was approximately 14.1% for the nine months ended March 31, 2011 as compared with approximately 3.4% in the same period last year, mainly because we reduced our lower-margin steel trading business.

Total Operating Expenses

Our total operating expenses increased approximately $0.9 million to $9.8 million for the nine months ended March 31, 2011, from $8.9 million for the same period last year. As a percentage of revenue, our total operating expenses increased to 3.2% for the nine months ended March 31, 2011 from 2.5% for the same period last year.

Selling Expenses. Selling expenses increased approximately $0.2 million to $4.7 million for the nine months ended March 31, 2011, from $4.5 million for the same period last year. As a percentage of revenue, our selling expenses increased to 1.6% for the nine months ended March 31, 2011 from 1.3% for the same period last year. The dollar and percentage increase were mainly due to the increased shipping costs for our international sales.

General and Administrative Expenses. General and administrative expenses increased approximately $0.6 million to $5.1 million for the nine months ended March 31, 2011 from $4.5 million for the same period last year. As a percentage of revenue, general and administrative expenses increased to 1.7% for the nine months ended March 31, 2011 from 1.3% for the same period last year. Such dollar and percentage increase was partially due to opening of two new offices by Changshu Huaye and Ningbo Zhehua, overall cost inflation in China and reversing of bad debt allowances in the same period last year. We recently opened two new offices in metropolitan Ningbo and Shanghai in an effort to attract talents, improve brand recognition and better service customers.

Interest Expense

Interest expense increased $1.7 million to $5.9 million for the nine months ended March 31, 2011, from $4.2 million for the same period last year. As a percentage of revenue, our interest expenses increased to 1.9% for the nine months ended March 31, 2011, from 1.2% for the same period last year. Interest expenses consist of both interest expenses on bank loans and amount discounted in connection with bank acceptance notes. The increased amount was mainly due to the higher cost of discount on the bank acceptance notes received during the current period than the same period last year. The interest expenses associated with our bank loans were also higher as the Bank of China began to raise interest rates in October 2010.

Provision for Income Taxes

We incurred income tax expense of $1.3 million and $2.3 million during the nine months ended March 31, 2011 and 2010, respectively. The decrease was primarily attributable to the lower average effective income tax rate. We generated a bigger portion and amount of revenue from Jiangsu Cold-Rolled and a smaller portion of revenue from Changshu Huaye in the nine months ended March 31, 2011 as compared to the same period last year. Jiangsu Cold-Rolled had a lower income tax rate than Changshu Huaye. We also benefit from the lower income tax rate enjoyed by Changshu Huaye in 2011. Changshu Huaye was recognized as a High-Tech Enterprise by the Jiangsu provincial government last October and therefore enjoys a three-year preferential income tax rate of 15% which started in 2010 and is subject to renewal in 2013.

Net Income

Net income, without including the foreign currency translation adjustment, increased $1.9 million, or 23.9%, to $9.8 million for the nine months ended March 31, 2011 from $7.9 million for the same period last year as a cumulative result of the above factors.

Liquidity and Capital Resources

Our major sources of liquidity for the periods covered by this quarterly report were borrowings through short-term bank and private loans. Our operating activities used approximately $9.8 million of cash in the nine months ended March 31, 2011. As of March 31, 2011, our total indebtedness to non-related parties under existing short-term loans was approximately $93.5 million, our short-term notes payable to related parties totaled approximately $0.6 million, and we had long-term notes payable of approximately $16.8 million.

Short-term bank and private loans are likely to continue to be our key sources of financing for the foreseeable future, although in the future we may raise additional capital by issuing shares of our capital stock in an equity financing. We expect to renew our short term loans when they become due.

Our liquidity and working capital may be affected by a material decrease in cash flow due to factors such as the continued use of cash in operating activities resulting from a decrease in sales due to the current global economic crisis, increased competition, decreases in the availability, or increases in the cost of raw materials, unexpected equipment failures, or regulatory changes.

A portion of our operations is funded through short-term bank loans. As these loans become due, we may repay them in full at maturity or elect to refinance them. We are exposed to a variety of risks associated with short-term borrowings including adverse fluctuations in fixed interest rates for short-term borrowings and unfavorable increases in variable interest rates, potential inability to service our short term indebtedness through cash flow from operations and the overall reduction of credit in the current economic environment.

Our liquidity and working capital may also be affected by the substantial amount of our outstanding short-term loans, which represent our primary source of financing in China. Depending on the level of cash used in our operating activities and the level of our indebtedness, (i) it may become more difficult for us to satisfy our existing or future liabilities or obligations, which could in turn result in an event of default on such obligations, (ii) we may have to dedicate a substantial portion of our cash flows from borrowings to our operating activities and to debt service payments, thereby reducing the availability of cash for working capital and capital expenditures, acquisitions, general corporate purposes or other purposes, (iii) our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may become impaired, (iv) our ability to withstand a downturn in our business, the industry in which we operate or the economy generally may be diminished, (v) we may experience limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and (vi) we may find ourselves at a competitive disadvantage compared to competitors that have proportionately less debt. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all, which could cause us to default on our debt service obligations and be subject to foreclosure on such loans. Additionally, we could incur additional indebtedness in the future and, if new debt is added to our current debt levels, the risks above could intensify.

As some of our loans become due, we may elect to refinance, rather than repay, the indebtedness. However, there is no assurance that additional financing will become available on terms acceptable to us. We believe that we will have the ability to refinance our indebtedness when and if we elect to do so. While we currently are not in a position to know the terms of such refinancing, we expect to refinance our indebtedness at prevailing market rates and on prevailing market terms.

As of March 31, 2011, we had cash and cash equivalents (excluding restricted cash) of $12.2 million and restricted cash of $62.9 million. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.

Cash Flow

(All amounts in thousands of U.S. dollars)

	Nine Months Ended March 31,
	2011			2010
Net cash (used in) operating activities	$	(9,813	)	$	(7,193	)
Net cash (used in) investing activities		(1,269	)		(2,466	)
Net cash provided by financing activities		9,691			15,792
Effect of foreign currency translation on cash and cash equivalents		217			23
Net cash flows		1,174			6,155

Operating Activities

Net cash used in operating activities was $9.8 million for the nine months ended March 31, 2011, an increase of $2.6 million from $7.2 million for the same period last fiscal year. The increase in net cash used in operating activities was primarily due to reduced advances from customers and higher inventory, partially offset by lower advances to suppliers for the nine months ended March 31, 2011 as compared with the same period last year.

Investing Activities

Our main uses of cash for investing activities are payments relating to the acquisition of property, plant and equipment and restricted cash pledged as deposits for bankers’ acceptance bills.

Net cash used in investing activities during the nine months ended March 31, 2011 was $1.3 million as compared to $2.5 million for the same period in 2010. Capital expenditures for the current period related mostly to the construction of a new cold-rolling facility with an expected annual design facility of 500,000 metric tons. We expect the new facility to start operation in the first half of calendar year 2012.

Financing Activities

Net cash provided by financing activities for the nine months ended March 31, 2011 totaled $9.7 million, as compared to $15.8 million for the same period last year. The decrease in net cash provided by financing activities was mainly due to an increase in restricted cash balance, partially offset by a decrease in cash outflow from payment on notes payable in the current period.

The table below sets forth the amount, starting date, maturity date and guarantor of each of our bank loans as of March 31, 2011:

(All amounts in million of U.S. dollars)

Lender	Amount*		Starting Date		Maturity Date		Guarantor**
Industrial and Commercial Bank of China, Changshu Branch	$	3.04		2010-05-20		2011-05-19	None
The Agricultural Bank of China, Changshu Branch		7.61		2010-05-27		2011-05-26	Shanghai Huaye, Jiangsu Cold-Rolled
Communications Bank of China, Changshu Branch		3.04		2010-11-17		2011-05-16	Shanghai Huaye
Construction Bank of China, Changshu Branch		3.04		2010-11-18		2011-11-17	Shanghai Huaye
Construction Bank of China, Changshu Branch		3.04		2010-11-22		2011-11-17	Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		3.04		2010-04-30		2011-04-29	Changshu Huaye
The Agricultural Bank of China, Changshu Branch		5.17		2010-05-26		2011-05-24	None
The Agricultural Bank of China, Changshu Branch		9.89		2010-07-09		2011-06-20	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		3.81		2010-07-09		2011-07-08	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		7.15		2010-07-30		2011-07-28	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		6.09		2010-08-25		2011-08-22	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		6.09		2010-09-08		2011-09-06	Changshu Huaye, Shanghai Huaye
The Agricultural Bank of China, Changshu Branch		7.61		2010-10-15		2011-09-30	None
The Agricultural Bank of China, Changshu Branch		2.44		2010-10-26		2011-10-24	None
The Agricultural Bank of China, Changshu Branch		7.61		2010-11-12		2011-11-10	Changshu Huaye, Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		1.52		2010-12-27		2011-12-26	Changshu Huaye
The Agricultural Bank of China, Changshu Branch		0.56		2010-12-22		2011-04-22	Changshu Huaye, Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		2.28		2011-01-21		2012-01-19	Changshu Huaye, Shanghai Huaye
Industrial and Commercial Bank of China, Changshu Branch		3.04		2011-03-02		2012-02-29	Changshu Huaye, Shanghai Huaye
Shenzhen Development Bank, Ningbo Branch		1.52		2010-08-20		2011-08-20	Changshu Huaye
The Agricultural Bank of China, Ningbo Branch		3.04		2011-01-11		2011-07-05	Changshu Huaye
Macao International Bank Co., LTD		6.99		2011-02-23		2013-02-21	Sutor Steel Technology Co., Ltd.
Macao International Bank Co., LTD		5.06		2011-03-11		2013-02-21	Sutor Steel Technology Co., Ltd.
Macao International Bank Co., LTD		4.78		2011-03-23		2013-02-21	Sutor Steel Technology Co., Ltd.
Chen, Lifang		0.61		N/A		N/A	None
Lin, GuiHua		2.86		2008-11-20		2011-11-20	None
Total	$	110.96

* Calculated on the basis that $1 = RMB 6.57.

** We do not pay any consideration to Shanghai Huaye or its affiliated companies, which are controlled by our CEO and her spouse, for the guarantees of our loans.

The loan agreements with banks contain debt covenants that require us to maintain certain inventory levels, among other things. We were in material compliance with these debt covenants as of March 31, 2011.

In the coming 12 months, we have approximately $94.1 million in bank loans that will mature. We plan to replace these loans with new bank loans in approximately the same aggregate amounts.

We believe that our currently available working capital, credit facilities referred to above and the expected additional credit facility should be adequate to sustain our operations at the current level for at least the next twelve months. However, depending on our future needs and changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional equity or debt financing in the private or public markets.

Critical Accounting Policies

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.

Recent Accounting Pronouncements

See Note 2 (Significant Accounting Policies) to our unaudited condensed consolidated financial statements included elsewhere in this report.

Seasonality

Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

Off Balance Sheet Arrangements

We do not have any off-balance arrangements.

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 (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Ms. Lifang Chen, and Chief Financial Officer, Mr. Yongfei Jiang, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on our assessment, Ms. Chen and Mr. Jiang determined that, as of March 31, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting

During the quarter ended March 31, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

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.

(REMOVED AND RESERVED).

ITEM 5.

OTHER INFORMATION.

We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

ITEM 6.

EXHIBITS.

The following exhibits are filed as part of this report or incorporated by reference:

Exhibit No.		Description
31.1		Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: May 10, 2011	SUTOR TECHNOLOGY GROUP LIMITED

	By:	/s/ Lifang Chen
		Lifang Chen, Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Yongfei Jiang
		Yongfei Jiang, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Sutor Technology Group LTD - FORM 10-Q - May 10, 2011

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