SORL Auto Parts, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - SORL Auto Parts, Inc.	v239393_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - SORL Auto Parts, Inc.	v239393_ex31-1.htm
EX-32.1 - EXHIBIT 32.1 - SORL Auto Parts, Inc.	v239393_ex32-1.htm
EXCEL - IDEA: XBRL DOCUMENT - SORL Auto Parts, Inc.	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2011

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

For the transition period from _________ to _________

Commission file number 000-11991

SORL AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

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

No. 1169 Yumeng Road

Ruian Economic Development District

Ruian City, Zhejiang Province

People’s Republic Of China

(Address of principal executive offices)

86-577-6581-7720

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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

Large Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer ¨

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 o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the registrant classes of common equity, as of the latest practicable date:

As of September 30, 2011 there were 19,304,921 shares of Common Stock outstanding

SORL AUTO PARTS, INC.

FORM 10-Q

For the Quarter Ended September 30, 2011

INDEX

		Page

PART I.	FINANCIAL INFORMATION (Unaudited)	1

Item 1.	Financial Statements:	1

	Condensed Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010	3

	Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	4

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2011 and 2010	5

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Nine months ended September 30, 2011 and 2010	6

	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis or Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

PART II.	OTHER INFORMATION	30

Item 6.	Exhibits	30

SIGNATURES		30

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2011 and December 31, 2010

	September 30, 2011			December 31, 2010
	(Unaudited)
Assets
Current Assets
Cash and Cash Equivalents	US$	12,414,533		US$	6,691,078
Pledged Cash Deposits		944,153			-
Accounts Receivable, Net of Provision, including $747,053 and $0 due from related parties at September 30, 2011 and December 31, 2010, respectively.		66,617,297			54,168,856
Bank acceptance notes from customers		20,146,099			27,318,361

Inventory		48,310,396			31,960,053
Prepayments		10,991,708			7,632,674
Other current assets, including $75,809 and $52,743 due from related parties at September 30, 2011 and December 31, 2010, respectively.		6,025,462			3,497,659
Total Current Assets		165,449,648			131,268,681
Fixed Assets
Machinery		45,958,339			55,889,093
Molds		1,371,847			1,316,374
Office equipment		1,410,887			1,142,754
Vehicles		1,589,018			1,347,516
Building		8,577,260			8,230,424

Machinery held under capital lease		18,011,723			-

Less: Accumulated Depreciation		(28,829,278	)		(23,032,160	)
Property, Plant and Equipment, Net		48,089,796			44,894,001
Leasehold Improvements in Progress		389,951			424,881

Land Use Rights, Net		14,634,982			14,298,522

Other Non-Current Assets

Intangible Assets		174,377			166,510
Less: Accumulated Amortization		(87,303	)		(71,868	)
Intangible Assets, Net		87,074			94,642

Security Deposit on Lease Agreement		1,863,916			-

Deferred tax assets		583,656			398,034
Total Other Non-Current Assets		2,534,646			492,676
Total Assets	US$	231,099,023		US$	191,378,761

Liabilities and Shareholders' Equity
Current Liabilities
Accounts Payable, including $1,244,523 and $3,151,493 due to related parties at September 30, 2011 and December 31, 2010, respectively.	US$	6,833,607		US$	10,672,514
Bank acceptance notes to vendors		10,827,865			966,373
Deposit Received from Customers		4,285,355			7,484,839
Short term bank loans		14,859,316			15,770,448
Income tax payable		1,309,722			1,174,976
Accrued Expenses		8,090,561			6,777,830
Current Portion of Capital Lease Obligations		3,210,140			-
Other Current Liabilities, including $311,777 and $64,600 due to related parties at September 30, 2011 and December 31, 2010, respectively.		2,293,237			559,575
Total Current Liabilities		51,709,803			43,406,555

Non-Current Liabilities
Non-Current Portion of Capital Lease Obligations		9,999,352			-
Deferred tax liabilities		220,589			171,981
Total Non-Current Liabilities		10,219,941			171,981

Total Liabilities	US$	61,929,744			43,578,536

Stockholders' Equity

Preferred Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as of September 30, 2011 and December 31, 2010		-			-
Common Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 and 19,304,921 issued and outstanding as of September 30, 2011 and December 31, 2010		38,609			38,609
Additional Paid In Capital		42,199,014			42,199,014
Reserves		7,992,514			6,641,547
Accumulated other comprehensive income		20,722,591			14,731,607
Retained Earnings		81,652,645			69,672,286
Total SORL Auto Parts, Inc. stockholders' equity		152,605,373			133,283,063
Noncontrolling Interest In Subsidiaries		16,563,906			14,517,162
Total Equity		169,169,279			147,800,225
Total Liabilities and Stockholders' Equity	US$	231,099,023		US$	191,378,761

The accompanying notes are an integral part of these financial statements

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Income and Comprehensive Income

Three Months and Nine Months Ended September 30, 2011 and 2010

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010

Sales	US$	47,583,678			50,806,384		US$	160,683,535			144,593,338
Include: sales to related parties		1,195,634			364,669			2,488,750			982,266
Cost of Sales		34,531,204			36,279,785			116,459,662			102,081,674

Gross Profit		13,052,474			14,526,599			44,223,873			42,511,664

Expenses:
Selling and Distribution Expenses		2,923,832			3,299,914			9,452,586			9,341,056
General and Administrative Expenses		2,968,222			2,950,120			9,647,944			9,789,218
Research and development expenses		1,893,985			1,773,044			6,071,593			5,326,598
Financial Expenses		1,227,502			357,984			2,667,700			775,385

Total Expenses		9,013,541			8,381,062			27,839,823			25,232,257

Operating Income		4,038,933			6,145,537			16,384,050			7,279,407

Other Income		488,747			366,308			953,104			649,227
Non-Operating Expenses		(1,796	)		(68,318	)		(41,723	)		(133,215	)

Income Before Provision for Income Taxes		4,525,884			6,443,527			17,295,431			17,795,419

Provision for Income Taxes		660,446			962,210			2,583,266			1,780,492

Net Income	US$	3,865,438			5,481,317		US$	14,712,165			16,014,927

Other Comprehensive Income - Foreign Currency Translation Adjustment		3,041,821			1,816,535			6,656,889			2,593,662

Total Comprehensive Income		6,907,259			7,297,852			21,369,054			18,608,589

Less:
Net income attributable to Noncontrolling Interest In Subsidiaries		358,632			501,616			1,380,839			1,459,277

Other Comprehensive Income Attributable to Non-controlling Interest's Share		304,278			181,654			665,905			259,638

Total Comprehensive Income Attributable to Non-controlling Interest's Share		662,910			683,270			2,046,744			1,718,915

Net Income Attributable to Stockholders		3,506,806			4,979,701			13,331,326			14,555,650

Other Comprehensive Income Attributable to Stockholders		2,737,543			1,634,881			5,990,984			2,334,024

Total Comprehensive Income Attributable to Stockholders		6,244,349			6,614,582			19,322,310			16,889,674

Weighted average common share - Basic		19,304,921			19,304,921			19,304,921			19,162,064

Weighted average common share - Diluted		19,304,921			19,304,921			19,304,921			19,162,064

EPS – Basic		0.18			0.26			0.69			0.76

EPS – Diluted		0.18			0.26			0.69			0.76

The accompanying notes are an integral part of these financial statements

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Three Months and Nine Months Ended September 30, 2011 and 2010

	Nine Months Ended September 30,
	2011			2010
Cash Flows from Operating Activities
Net Income	US$	14,712,165			16,014,927
Adjustments to reconcile net income to net cash from operating activities:
Bad Debt Expense		498,014			888,295
Depreciation and Amortization		5,253,922			3,750,717
Changes in Assets and Liabilities:
Pledged Cash Deposits		(935,563	)		-
Accounts Receivable		(10,107,006	)		(4,440,601	)
Bank acceptance notes from customers		7,868,796			(4,229,708	)

Other Currents Assets		(1,291,002	)		2,564,064
Inventory		(14,663,142	)		(3,485,655	)
Prepayments		(1,688,537	)		(1,845,453	)
Deferred tax assets		(164,779	)		(298,504	)
Accounts Payable and Bank acceptance notes to vendors		5,354,507			(3,660,704	)

Income Tax Payable		81,293			686,379
Deposits Received from Customers		(3,412,311	)		1,350,813
Other Current Liabilities and Accrued Expenses		1,609,813			1,665,721
Deferred tax liabilities		40,407			38,689
Net Cash Flows from Operating Activities		3,156,577			8,998,980

Cash Flows from Investing Activities
Acquisition of Property and Equipment		(7,589,518	)		(11,662,205	)

Acquisition of automotive parts business		-			(24,963,964	)

Net Cash Flows from Investing Activities		(7,589,518	)		(36,626,169	)

Cash Flows from Financing Activities
Proceeds from (Repayment of) Bank Loans		(1,586,011	)		9,279,449
Proceeds from capital lease obligations, net of security deposit		11,242,350			-

Proceeds from Share Issuance		-			9,399,978

Capital contributed by Minority Stockholders		-			1,038,900

Net Cash flows from Financing Activities		9,656,339			19,718,327

Effects on changes in foreign exchange rate		500,057			(101,686	)

Net Change in Cash and Cash Equivalents		5,723,455			(8,010,548	)

Cash and Cash Equivalents- Beginning of the year		6,691,078			10,255,259

Cash and cash Equivalents - End of the period	US$	12,414,533			2,244,711


Supplemental Cash Flow Disclosures:
Interest Paid		2,044,898			298,277
Tax Paid		2,626,344			2,033,008

The accompanying notes are an integral part of these financial statements

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

For The Nine months Ended on September 30, 2011

	Number of Share		Common Stock		Additional Paid-in Capital		Reserves		Retained Earnings (Deficit)			Accumu. Other Comprehensive Income		Shareholders' Equity		Noncontrolling Interest		Total Equity
Beginning Balance - January 1, 2011		19,304,921		38,609		42,199,014		6,641,547		69,672,286			14,731,607		133,283,063		14,517,162		147,800,225

Net Income										13,331,326					13,331,326		1,380,839		14,712,165

Other Comprehensive Income(Loss)													5,990,984		5,990,984		665,905		6,656,889

Transfer to reserve								1,350,967		(1,350,967	)				-		-		-

Ending Balance - September 30, 2011		19,304,921		38,609		42,199,014		7,992,514		81,652,645			20,722,591		152,605,373		16,563,906		169,169,279

The accompanying notes are an integral part of these financial statements

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - DESCRIPTION OF BUSINESS

SORL Auto Parts, Inc.( “the Company”) is principally engaged in the manufacture and distribution of vehicle brake systems and other key safety-related components, through its 90% ownership of Ruili Group Ruian Auto Parts Company Limited (“Ruian”) in the People’s Republic of China (“PRC” or “China”) and 60% ownership of SORL International Holding, Ltd. ("SIH") in Hong Kong. The Company distributes products both in China and internationally under SORL trademarks. The Company’s product range includes 65 categories and over 2000 different specifications.

On November 11, 2009, the Company entered into a joint venture agreement with MGR, a Hong Kong-based global auto parts distribution specialist firm and a Taiwanese investor. The new joint venture was named SIH. SORL holds a 60% interest in SIH, MGR holds a 30% interest, and the Taiwanese investor holds a 10% interest. SIH is primarily devoted to expanding SORL's international sales network in Asia-Pacific and creating a larger footprint in Europe, the Middle East and Africa with a target to create a truly global distribution network. Based in Hong Kong, SIH is expanding and establishing channels of distribution in international markets.

On February 8, 2010, the Company sold 1,000,000 shares of its common stock to selected institutional investors at a price of $10.00 per share pursuant to a registered direct offering. This transaction provided net proceeds of approximately $9.4 million. On March 9, 2010, through Fairford, SORL invested $9.349 million in its operating subsidiary, Ruian. To maintain its 10% shareholding in Ruian, the Ruili Group increased its capital investment by $1.039 million. Accordingly, SORL continues to hold a 90% controlling interest in the operating subsidiary.

On August 31, 2010, the Company, through Ruian, executed an Agreement to acquire the assets of the hydraulic brake, power steering, and automotive electrical operations of the Ruili Group (the "Seller", a related party under common control). As a result of this acquisition, the Company's product offerings expanded to include both commercial and passenger vehicles' brake systems and other key safety-related auto parts. The purchase price was RMB 170 million, or approximately USD$25 million. The transaction was accounted for using the book value of assets acquired, consisting primarily of machinery and equipment, inventory, accounts receivable and patent rights, used or usable in connection with the acquired segment of the auto parts business of the Seller. The Company purchased the machinery and equipment, inventory, accounts receivable at book values of $8.0 million, $8.0 million and $5.2 million, respectively. The Company did not acquire any of the assets of the Seller other than those in the segment of Seller's business described above. The excess of consideration over the carrying value of net assets received has been recorded as a decrease in the additional paid-in capital of the Company.

The acquisition was accounted for as a transaction between the entities under common control because the CEO of the Company owns 63% of the registered capital of Ruili Group Co., Ltd., and owns more than 50% of the outstanding common stock of SORL, together with his wife and brother. This results in the acquisition being accounted for using the historical costs of the financial statements of the Seller. The consolidated financial statements have been prepared as if the acquisition took place at the earliest time presented, that is, as of January 1, 2010. The assets purchase was deemed to be the acquisition of a business.

NOTE B - BASIS OF PRESENTATION

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

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

NOTE C- RECENTLY ISSUED FINANCIAL STANDARDS

In January 2010, the FASB issued Accounting Standards Updated (ASU) No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC 820, “Fair Value Measures and Disclosures.” ASU No. 2010-06 amends the ASC to require disclosure of transfers into and out of Level 1 and Level 2 fair value measurements, and also require more detailed disclosure about the activity within Level 3 fair value measurements. The changes to the ASC as a result of this update are effective for annual and interim reporting periods beginning after December 15, 2009 (January 1, 2010 for the Company), except for the requirements related to Level 3 disclosures, which are effective for annual and interim reporting periods beginning after December 15, 2010 (January 1, 2011 for the Company). This guidance requires new disclosures only, and has had no impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements, which amends FASB ASC Topic 855, Subsequent Events. The update provides that SEC filers, as defined in ASU 2010-09, are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The update also requires SEC filers to evaluate subsequent events through the date the financial statements are issued rather than the date the financial statements are available to be issued. The Company adopted ASU 2010-09 upon issuance. The adoption of this ASU update has no material impact on the Company’s financial statements.

NOTE D - RELATED PARTY TRANSACTIONS

The Company continued to purchase certain automotive products and packaging materials from the Ruili Group Co., Ltd. The Ruili Group Co., Ltd., is the minority shareholder of Ruian and is controlled by the Zhang family, who is also the controlling party of the Company. The Company sold certain automotive products to Guangzhou Kormee Vehicle brake technology development Co., Ltd., which is controlled by the Ruili Group Co., Ltd.

The following related party transactions are reported for the three months and nine months ended September 30, 2011 and 2010:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010

PURCHASES FROM:
Ruili Group Co., Ltd.	$	1,396,618	$	954,700	$	5,031,535	$	2,074,652
Total Purchases	$	1,396,618		954,700	$	5,031,535		2,074,652

SALES TO:
Ruili Group Co., Ltd.	$	562,936	$	364,669	$	1,856,052	$	982,266
Guangzhou Kormee Vehicle brake technology development Co., Ltd.		632,698		—		632,698		—
Total Sales	$	1,195,634	$	364,669	$	2,488,750	$	982,266

On August 31, 2010, the Company through its 90%-owned subsidiary, Ruian, completed the transaction of purchasing certain assets of the automotive parts business of Ruili Group Co., Ltd. The purchase price was RMB 170 million, or approximately USD$25 million. The transaction was accounted for using book basis of assets acquired, consisting primarily of machinery and equipment, inventory, accounts receivable and patent rights, used or usable in connection with the segment of the auto parts business of Ruili Group Co., Ltd.

	September 30,		December 31,
	2011		2010
ACCOUNTS RECEIVABLE
Guangzhou Kormee Vehicle brake technology development Co., Ltd.	$	747,053	$	—
Total	$	747,053	$	—

ACCOUNTS PAYABLE
Ruili Group Co., Ltd.	$	1,244,523	$	3,151,493
Total	$	1,244,523	$	3,151,493

OTHER PAYABLES
MGR Hong Kong Limited	$	30,733	$	60,376
Ruili Group Co., Ltd.		281,044		4,224
Total	$	311,777	$	64,600

OTHER ACCOUNTS RECEIVABLE
MGR Hong Kong Limited	$	75,809	$	52,743
Ruili Group Co., Ltd.		—		—
Total	$	75,809	$	52,743

NOTE E – PLEDGED CASH DEPOSITS

Pledged cash deposits act as guarantee for its bank acceptance notes to vendors, the Company regularly pays some of its suppliers by bank notes. The Company has to deposit a cash deposit, equivalent to 20%-30% of the face value of the relevant bank note, at a bank in order to obtain the bank note.

NOTE F - ACCOUNTS RECEIVABLE

No customer individually accounted for more than 10% of our revenues or accounts receivable for the quarter ended September 30, 2011. The changes in the allowance for doubtful accounts at September 30, 2011 and December 31, 2010 are summarized as follows:

	September 30,		December 31,
	2011		2010
Beginning balance	$	319,687	$	57,823
Add: Increase to allowance		525,236		261,864
Less: Accounts written off		—		—
Ending balance	$	844,923	$	319,687

	September 30,			December 31,
	2011			2010
Accounts receivable	$	67,462,220		$	54,488,543
Less: allowance for doubtful accounts		(844,923	)		(319,687	)
Account receivable balance, net	$	66,617,297		$	54,168,856

NOTE G - INVENTORIES

On September 30, 2011 and December 31, 2010, inventories consisted of the following:

	September 30,		December 31,
	2011		2010
Raw Material	$	11,160,159	$	6,762,760
Work in process		7,628,017		3,704,236
Finished Goods		29,522,220		21,493,057
Total Inventory	$	48,310,396	$	31,960,053

NOTE H - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following, on September 30, 2011 and December 31, 2010:

	September 30, 2011			December 31, 2010
Machinery	$	45,958,339		$	55,889,093
Molds		1,371,847			1,316,374
Office equipment		1,410,887			1,142,754
Vehicle		1,589,018			1,347,516
Building		8,577,260			8,230,424
Machinery held under capital lease		18,011,723			—
Sub-Total		76,919,074			67,926,161

Less: Accumulated depreciation		(28,829,278	)		(23,032,160	)

Fixed Assets, net	$	48,089,796		$	44,894,001

Depreciation expense charged to operations was $4,927,023 and $3,440,262 for the nine months ended September 30, 2011 and 2010, respectively.

On September 13, 2011, the Company entered an agreement with International Far Eastern Leasing Co., Ltd.(a third party) and sold and simultaneously leased back part of its unencumbered manufacturing equipment, for a term of 60 months and an interest rate of 7.95%. The sale price of the manufacturing equipment was $13,209,492. As related to this transaction, the Company put down a security deposit of $1,863,916 to be refunded back to the Company after the end of the lease. In addition, the Company paid a fee of $641,484 to this third party accounted for as financing expense in the accompanying condensed consolidated financial statements. The Company has an option, exercisable at the end of the lease term, to repurchase the manufacturing equipment for $157. The transaction was accounted for as a financing transaction and was recorded in the accompanying condensed consolidated financial statements as a capital lease.

NOTE I- LEASEHOLD IMPROVEMENTS

	September 30,			December 31,
	2011			2010
Cost:	$	512,721		$	492,544

Less: Accumulated amortization:		(122,770	)		(67,663	)
Leasehold Improvements In Progress, net	$	389,951		$	424,881

By law and practice, when improvements are made to real property and those improvements are permanently affixed to the property, the title to those improvements automatically transfers to the owner of the property. The lessee’s interest in the improvements is not a direct ownership interest but rather it is an intangible right to use and benefit from the improvements during the term of the lease. The leasehold improvements are amortized over the lease term.

In May 2009, Ruian entered into a lease agreement with Ruili Group Co., Ltd. for the lease of a manufacturing plant. This manufacturing plant was not part of the assets acquired from Ruili Group Co., Ltd. The lease term is from September 2009 to May 2017.

In August 2009, SIH entered into a lease agreement with MGR for the lease of an office with a five-year lease term.

In August 2010, a new a lease agreement was signed between Ruian and Ruili Group Co., Ltd., under which Ruian leased 32,410 square meters manufacturing plant for its new purchased passenger vehicles brake systems business. The lease term is from September 2009 to August 2020.

NOTE J- LAND USE RIGHTS

	September 30,			December 31,
	2011			2010
Cost:	$	16,054,132		$	15,404,955
Less: Accumulated amortization:		(1,419,150	)		(1,106,433	)
Land use rights, net	$	14,634,982		$	14,298,522

According to the law of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately $13.9 million on September 28, 2007. The company has been negotiating with the government for a reduction in or exemption from the tax being sought by the government in connection with the transfer of the land use rights, and pending resolution of that issue, we have deferred accrual or payment of the tax. Due to the lack of resolution of that issue, the land use right certificate has not been issued to the Company. We plan to conclude negotiations with the government and to obtain the land use rights certificate as soon as practicable. Amortization expenses were $259,958 and $248,901 for the nine months ended September 30, 2011 and 2010, respectively.

NOTE K - INTANGIBLE ASSETS

Intangible assets owned by the Company included patent technology and management software licenses. Amortization expenses were $12,146 and $11,552 for the nine months ended September 30, 2011 and 2010, respectively. Future estimated amortization expense is as follows:

2011				2012				2013				2014				2015				Thereafter
$	4,505			$	16,651			$	16,651			$	12,982			$	10,249			$	21,458

NOTE L - PREPAYMENT

Prepayment consisted of the following as of September 30, 2011 and December 31, 2010:

	September 30,		December 31,
	2011		2010
Raw material suppliers	$	7,718,644	$	5,358,706
Equipment purchase		3,273,064		2,273,968
Total prepayment	$	10,991,708	$	7,632,674

NOTE M - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES

Deferred tax assets consisted of the following as of September 30, 2011 and December 31, 2010 comprise the following:

	Sep 30, 2011		Dec 31, 2010
Deferred tax assets - current
Provision		125,926		47,173
Subsidiary's operating loss carryforwards
Warranty		553,268		477,526
Deferred tax assets		679,194		524,699
Valuation allowance		―		―
Net deferred tax assets - current		679,194		524,699

Deferred tax liabilities - current
Revenue (netoff cost)		95,537		126,665
Deferred tax liabilities - current		95,537		126,665

Net deferred tax assets - current		583,656		398,034

Deferred tax liabilities - non-current
Land use right		220,589		171,981
Deferred tax liabilities - non-current		220,589		171,981

Deferred taxation is calculated under the liability method in respect of taxation effect arising from all timing differences, which are expected with reasonable probability to realize in the foreseeable future. The Company and its subsidiaries do not have income tax liabilities in U.S. as the Company had no United States taxable income for the reporting period. The Company’s subsidiary registered in the PRC is subject to income taxes within the PRC at the applicable tax rate.

NOTE N – BANK ACCEPTANCE NOTES TO VENDORS

Bank acceptance notes to vendors represent accounts payable in the form of bills of exchange whose acceptances are guaranteed and settlements are handled by banks. From time to time we receive bank acceptance notes payable to the Company from our customers, for goods we sell to those customers. If the notes are not yet due and payable, we may exchange them at a bank in exchange for notes payable to our suppliers, and deliver those notes to our vendors. In such cases, we pay a small service fee to the banks. The bank acceptance notes usually mature and are payable to vendors by the banks in six months. The Company does not have to pay any interest to the banks on these notes. The vendors would pay interest if they discounted the bank acceptance notes to vendors at the banks.

Bank acceptance notes to vendors were $10,827,865 and $966,373 as of September 30, 2011 and December 31, 2010, respectively. The Company has pledged cash deposits and bank acceptance notes from customers to secure the bank acceptance notes to vendors granted by banks.

NOTE O - BANK LOANS

Bank loans represented the following as of September 30, 2011 and December 31, 2010:

	September 30,			December 31,
	2011			2010
Secured	$	14,859,316		$	15,770,448
Less: Current portion	$	(14,859,316	)	$	(15,770,448	)
Non-current portion	$	—		$	—

The Company obtained those short term loans from Bank of China and Bank of Shanghai, respectively, to finance general working capital as well as new equipment acquisition. The Company did not provide any guarantee to any other parties. Interest rate for the loans ranged from 4.86% to 6.67% per annum. The maturity dates of the loans ranged from October 8, 2011 to March 20, 2012.

Corporate or personal guarantee:
$7.0 million	Guaranteed by Ruili Group Co., Ltd., a related party;
$7.9 million	Guaranteed by Ruili Group Co., Ltd., a related party, Mr. Xiao Ping Zhang and Ms. Shu Ping Chi, both principal shareholders.

NOTE P - ACCRUED EXPENSES

Accrued expenses consisted of the following as of September 30, 2011 and December 31, 2010:

	September 30,		December 31,
	2010		2010
Accrued payroll	$	2,446,674	$	1,940,649
Other accrued expenses		5,643,887		4,837,181
Total accrued expenses	$	8,090,561	$	6,777,830

NOTE Q –CAPITAL LEASE OBLIGATIONS

	September 30,			December 31,
	2011			2010
Total Capital Lease Obligations	$	13,209,492		$	—
Less: Current portion	$	(3,210,140	)	$	—
Non-current portion	$	9,999,352		$	—

The capital lease obligation was under the agreement with International Far Eastern Leasing Co., Ltd., which was disclosed in NOTE G, for a term of 60 months and an interest rate of 7.95% per annum, payable monthly in arrears.

NOTE R – RESERVE

The reserve funds are comprised of the following:

	September 30,		December 31,
	2010		2010
Statutory surplus reserve fund	$	7,992,514	$	6,641,547
Total	$	7,992,514	$	6,641,547

Pursuant to the relevant laws and regulations of Sino-foreign joint venture enterprises, the profits of the Company's subsidiary, which are based on their PRC statutory financial statements, are available for distribution in the form of cash dividends after they have satisfied all the PRC tax liabilities, provided for losses in previous years, and made appropriations to reserve funds, as determined at the discretion of the board of directors in accordance with PRC accounting standards and regulations.

As stipulated by the relevant laws and regulations for enterprises operating in the PRC, Ruian is required to make annual appropriations to the statutory surplus funds. In accordance with the relevant PRC regulations and the articles of association of the respective companies, Ruian is required to allocate a certain percentage of its profits after taxation, as determined in accordance with PRC accounting standards applicable to the Company, to the statutory surplus reserve until such reserve reaches 50% of the registered capital of the Company.

Net income as reported in the US GAAP financial statements differs from that as reported in the PRC statutory financial statements. In accordance with the relevant laws and regulations in the PRC, the profits available for distribution are based on the statutory financial statements. If Ruian has foreign currency available after meeting its operational needs, Ruian may make its profit distributions in foreign currency to the extent foreign currency is available. Otherwise, it is necessary to obtain approval and convert such distributions at an authorized bank. The reserve fund consists of retained earnings which have been allocated to the statutory reserve fund.

NOTE S - INCOME TAXES

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

The Company increased its investment in Ruian as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, Ruian was eligible for additional preferential tax treatment. For the years 2007 and 2008, Ruian was entitled to an income tax exemption on all pre-tax income generated by the company above its pre-tax income generated in the fiscal year 2006. Thereafter, Ruian was entitled to a 50% exemption from the effective income tax rate on any pre-tax income above its 2006 pre-tax income, to be recognized in the years 2009, 2010 and 2011. The above taxation exemption was superseded, because Ruian has been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate of 15% for years 2009 through 2011. So, the Company’s effective income tax rate will be 15% for years 2009 through 2011.

The reconciliation of the effective income tax rate of Ruian to the statutory income tax rate in the PRC for the third quarter of 2011 and 2010 is as follows:

	September-30-2011			September-30-2010
US Statutory income tax rate		35.00	%		35.00	%
Valuation allowance recognized with respect to the loss in the US company		-35.00	%		-35.00	%
HK Statutory income tax rate		16.50	%		16.50	%
Valuation allowance recognized with respect to the loss in those HK company		-16.50	%		-16.50	%
China Statutory income tax rate		25.00	%		25.00	%
China Statutory income exemption		-10.00	%		-10.00	%
Tax refund		―			-4.65	%
Other items		-0.06	%		-0.35	%

Effective tax rate		14.94	%		10.01	%

	Nine months ended			Nine months ended
	September-30-2011			September-30-2010
Computed income tax provision at the statutory rate	$	4,398,503		$	4,576,903
Tax exemption		(1,759,401	)		(1,830,761	)
Tax refund		―			(903,699	)
Deferred tax provision		(124,372	)		(259,993	)
Current period permanent differences and other reconciling items		68,536			198,042
Total income taxes	$	2,583,266		$	1,780,492

Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets and liabilities are approximately as mentioned above at September 30, 2011. There currently is no tax benefit or burden recorded for the United States. The tax authority may examine the tax returns of the Company three years after the year ended. In the year of 2010, there were no penalties and interest, which generally are recorded in the general and administrative expenses or in the tax expenses. The provisions for income taxes for the nine months ended September 30, 2011 and 2010, respectively, are summarized as follows:

	Nine months ended			Nine months ended
	September-30-2011			September-30-2010

Current	$	2,707,638		$	2,040,485
Deferred		(124,372	)		(259,993	)

Total	$	2,583,266		$	1,780,492

The Company adopted the provisions of FASB ASC 740-10 (Prior authoritative literature: FIN No. 48, Accounting for Uncertainty in Income Taxes), on January 1, 2007. As the result of the implementation of the FASB ASC 740-10, Accounting for Uncertainty in Income Taxes – In Interpretation of FASB ASC 740-10 (Prior authoritative literature: FASB Statement No. 109), the Company recognized no material adjustments to unrecognized tax benefits. At the adoption date of January 1, 2007 and as of September 30, 2011 and December 31, 2010, the Company has no unrecognized tax benefits.

NOTE T - Non-controlling interest in subsidiaries

Non-controlling interest in subsidiaries represents a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian, and a 40% non-controlling interest, owned by the Company’s Joint Venture Partners, in SIH. Net income attributable to non-controlling interests in subsidiaries amounted to $1,380,839 and $1,459,277 for the nine months ended September 30, 2011 and 2010, respectively.

	September-30-2011			September-30- 2010
10% non-controlling interest in Ruian	$	1,501,075		$	1,647,133
40% non-controlling interest in SIH	$	( 120,236	)		(187,856	)

Total	$	1,380,839			1,459,277

NOTE U - LEASES

In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s management personnel and staff, respectively. The lease term is from January 2007 to December 2011 for one of the apartment buildings and from January 2007 to December 2012 for the other.

In May 2009, Ruian entered into a lease agreement with Ruili Group Co., Ltd. for the lease of a manufacturing plant. The lease term is from September 2009 to May 2017.

In August 2009, SIH entered into a lease agreement with MGR for the lease of an office with a five-year lease term. The leasehold improvements are amortized over the lease term.

The lease expenses were $162,591 and $154,571 for the three months ended September 30, 2011 and 2010, respectively. The lease expenses were $480,908 and $461,362 for the nine months ended September 30, 2011 and 2010, respectively.

Future minimum rental payments for the years ending December 31 are as follows:

	2011		2012		2013		2014		2015		Thereafter
Operating Lease Commitments	$	148,888	$	410,034	$	339,632	$	339,632	$	339,632	$	679,264

Total	$	148,888	$	410,034	$	339,632	$	339,632	$	339,632	$	679,264

NOTE V - ADVERTISING COSTS

Advertising costs were $0 and $146,873 for the nine months ended September 30, 2011 and 2010, respectively.

NOTE W- RESEARCH AND DEVELOPMENT EXPENSE

Research and development costs are expensed as incurred and were $6,071,593 and $5,326,598 for the nine months ended September 30, 2011 and 2010, respectively.

NOTE X - WARRANTY CLAIMS

Warranty claims were $1,787,155 and $2,036,353 for the nine months ended September 30, 2011 and 2010, respectively. Warranty claims are classified as accrued expenses on the balance sheet. The movement of accrued warranty expenses for the nine months ended September 30, 2011 was as follows:

Beginning balance at January 01, 2011	3,183,502
Aggregate reduction for payments made	(1,282,203	)
Aggregate increase for new warranties issued during current period	1,787,155
Aggregate changes in the liability related to pre-existing warranties (changes in estimate)	―
Ending balance at September 30, 2011:	3,688,454

NOTE Y – SEGMENT INFORMATION

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

The Company has two operating segments: commercial vehicles brake systems, etc. and passenger vehicles brake systems, etc.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
NET SALES TO EXTERNAL CUSTOMERS
Commercial vehicles brake systems	$	35,876,417	$	40,032,114	$	125,146,226	$	112,309,694
Passenger vehicles brake systems		11,707,261		10,774,270		35,537,309		32,283,644

Net sales	$	47,583,678	$	50,806,384	$	160,683,535	$	144,593,338
INTERSEGMENT SALES
Commercial vehicles brake systems	$		$		$		$
Passenger vehicles brake systems		―		4,045,866		―		15,105,487

Intersegment sales	$	―	$	4,045,866	$	―	$	15,105,487
GROSS PROFIT
Commercial vehicles brake systems	$	9,914,184	$	13,374,897	$	34,707,120	$	35,865,231
Passenger vehicles brake systems		3,138,290		1,151,702		9,516,753		6,646,433
All other
Gross profit	$	13,052,474	$	14,526,599	$	44,223,873	$	42,511,664
Selling and distribution expenses		2,923,832		3,299,914		9,452,586		9,341,056
General and administrative expenses		2,968,222		2,950,120		9,647,944		9,789,218
Research and development expenses		1,893,985		1,773,044		6,071,593		5,326,598
Financial Expenses		1,227,502		357,984		2,667,700		775,385
Income (loss) from operations		4,038,933		6,145,537		16,384,050		17,279,407
Other income (expense), net		486,951		297,990		911,381		516,012
Income (loss) before income tax expense (benefit)	$	4,525,884	$	6,443,527	$	17,295,431	$	17,795,419

CAPITAL EXPENDITURES
Commercial vehicles brake systems	$	2,144,618	$	4,989,514	$	5,910,995	$	11,662,205
Passenger vehicles brake systems		589,028		24,685,492		1,678,523		24,963,964

Total	$	2,733,646	$	29,675,006	$	7,589,518	$	36,626,169
DEPRECIATION AND AMORTIZATION
Commercial vehicles brake systems	$	1,162,952	$	997,041	$	4,091,947	$	2,808,356
Passenger vehicles brake systems		659,003		286,601		1,161,975		942,361

Total	$	1,821,955	$	1,283,642	$	5,253,922	$	3,750,717

	30-Sep-11		31-Dec-10

TOTAL ASSETS
Commercial vehicles brake systems	$	179,988,388	$	152,778,427
Passenger vehicles brake systems		51,110,635		38,600,334

Total	$	231,099,023	$	191,378,761

	30-Sep-11		31-Dec-10

LONG LIVED ASSETS
Commercial vehicles brake systems	$	50,675,566	$	51,701,542
Passenger vehicles brake systems		14,390,153		8,408,538

Total	$	65,065,719	$	60,110,080

NOTE Z – PURCHASE DISCOUNT

Purchase discounts represent discounts received from vendors for purchasing raw materials. The Company did not receive any purchase discounts during the nine months ended September 30, 2011 and 2010.

NOTE AA – SHIPPING AND HANDLING COSTS

Shipping and handling costs incurred by the Company are included in selling expenses in the accompanying consolidated statements of income. Shipping and handling costs were $3,420,200 and $2,471,534 for the nine month ended September 30, 2011 and 2010, respectively.

NOTE AB – STOCK COMPENSATION PLAN

We had no stock-based compensation expense during the nine months ended September 30, 2011 and 2010, respectively. There were no employee stock options or warrants outstanding as of September 30, 2011.

NOTE AC- COMMITMENTS AND CONTINGENCIES

(1) According to the law of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately $13.9 million on September 28, 2007. The Company has not yet obtained the land use right certificate. However, the Company has applied to obtain the land use right certificate.

(2) Information regarding lease commitments is provided in Note U.

NOTE AD - OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2011, we do not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

NOTE AE – RECLASSIFICATION OF PRIOR YEAR FINANCIAL STATEMENTS

For the nine months ended September 30, 2011, the Company has reclassified Research and Development Expenses and Deferred Tax Assets/Liabilities to facilitate a year over year comparison with the same period of 2010.

NOTE AF – THE ACQUISITION AND COMBINATION OF OPERATIONS REPORTING

All of the allocations and estimates in the Consolidated Financial Statements are based on assumptions that management believes are reasonable under the circumstances. However, these allocations and estimates are not necessarily indicative of the costs and expenses that would have resulted if the business we acquired from the Seller had been operated as a part of SORL for periods prior to the combination/acquisition.

NOTE AG – BUSINESS ACQUISITION

On August 31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to acquire, and purchased the assets of the hydraulic brake, power steering, and automotive electrical operations parts business of the Seller. Consideration paid amounted to RMB 170 million or approximately USD$25 million. The acquisition has been accounted for as a common control transaction at carrying amounts. The excess of consideration over the carrying value of net assets received has been recorded as a decrease in the additional paid-in capital of the Company.

NOTE AH – SUBSEQUENT EVENTS

The Company has no significant subsequent events from September 30, 2011 through the consolidated financial statements issue date of this report.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying unaudited condensed consolidated financial statements, as well as information relating to the plans of our current management. This quarterly report on Form 10-Q includes forward-looking statements. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue,” and similar expressions, or the negative thereof, or comparable terminology, are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those anticipated. Undue reliance should not be placed on these forward-looking statements that speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto and other financial information contained elsewhere in this Form 10-Q.

OVERVIEW

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Fiscal Year ended December 31, 2010.

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

Results of Operations

(1) Results of operations for the three months ended September 30, 2011 as compared to the three months ended September 30, 2010.

SALES

	Three Months ended				Three Months ended
	30-Sept-11				30-Sept-10
	(U.S. dollars in millions)

Commercial vehicle brake systems, etc.	$	35.9	75	%	$	40.0	79	%
Passenger vehicle brake systems, etc.	$	11.7	25	%	$	10.8	21	%

Total	$	47.6	100	%	$	50.8	100	%

Net sales were $47,583,678 and $50,806,384 for the three months ended September 30, 2011 and 2010, respectively, a decrease of $3.2 million or 6.3%.

The sales from commercial vehicle brake systems decreased by $4.1 million or 10.3%, to $35.9 million for the third quarter of 2011, compared to $40.0 million for the same period of 2010. Due to the slowdown of the commercial vehicle market in the third quarter of 2011, the sales from the OEM market decreased, which impacted the sales of the commercial vehicle brake systems.

Due to the good situation of the passenger vehicle market this year, the sales from passenger vehicle brake systems increased by $0.9 million or 8.3%, to $11.7 million for the third quarter of 2011, compared to $10.8 million for the same period of 2010.

A breakdown of net sales revenue for these markets for the third quarter of the 2011 and 2010 fiscal year, respectively, is set forth below:

	Three					Three Months
	Months		Percent			ended		Percent
	ended 30-Sept-11		of Total Sales			30- Sept -10		of Total Sales			Percentage Change
	(U.S. dollars in million)
China OEM market	$	20.8		44	%	$	27.0		53	%		-22.8	%
China Aftermarket	$	11.6		24	%	$	9.8		19	%		18.2	%
International market	$	15.2		32	%	$	14.0		28	%		8.4	%
Total	$	47.6		100.0	%	$	50.8		100.0	%		-6.3	%

Starting in early 2011, China’s specialty truck and cargo truck markets have been sluggish, with declines experienced in several months. There are two main causes for this: first, the Chinese government’s auto-related stimulus policies of 2009 and 2010 accelerated commercial vehicle purchases into those time periods, and sales have weakened following the expiry of the government’s stimulus policies. Second, economic policies adopted by the Chinese government to help control domestic inflation, especially tighter regulation in the real estate market, have caused a deceleration of economic and investment growth in China. These factors negatively affected the Chinese automotive market, particularly for commercial vehicles. According to industry data, Chinese commercial vehicle production was 706,400 in the three months ended September 31, 2011, down 23.5% from the same period in 2010. Within that category, specialty truck production was 270,700 units, down 30.21% from the same period in 2010. Cargo truck production was 296,600 units, down 16.31% compared with the prior three-month period. SORL has made inroads into construction equipment and expanded its market share in the bus market, which partially offset the effects of these declines. Our third-quarter OEM sales declined 22.8% from 2010’s third quarter, to $20.8 million, which management considers to be a solid performance in view of these difficult market conditions.

Our sales to the Chinese aftermarket increased by $1.8 million or 18.2%, to $11.6 million for the third quarter of 2011, compared to $9.8 million for the same period of 2010. The increased number of vehicles in service in China and the expiration of OEM warranties helped increase our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the three months ended September 30, 2011. We will continue with our strategies to further optimize our sales network, to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion in the bus aftermarket.

Our export sales increased by $1.2 million or 8.4%, to $15.2 million for the third quarter of 2011, as compared to $14.0 million for the same period of 2010. A part of our strategy is to strengthen and extend our distribution networks to increase our exposure with end users. The increase in export sales was mainly due to our improved customer base and market position.

COST OF SALES AND GROSS PROFIT

Cost of sales for the three months ended September 30, 2011 were $34,531,204 a decrease of $1,748,581 or 4.8% from $36,279,785 for the same period last year. Our gross profit decreased by 10.1% from $14,526,599 for the third quarter of 2010 to $13,052,474 for the third quarter of 2011.

Gross margin decreased to 27.4% from 28.6% for the three months ended September 30, 2011 compared with 2010. Gross margin is being affected by rising labor expenses, the appreciation of the Chinese currency, and higher raw material prices. We intend to focus in 2011 on increasing production efficiency, improving the technologies of products, and improving our product portfolio, to help us to maintain or increase our gross profit margins.

Cost of sales from commercial vehicle brake systems for the three months ended September 30, 2011 were $25,962,233 a decrease of $694,984 or 2.6% from $26,657,217 for the same period last year. The gross profit from commercial vehicle brake systems decreased by 25.9% from $13,374,897 for the third quarter of 2010 to $9,914,184 for the third quarter of 2011. Gross margin from commercial vehicle brake systems decreased to 27.6% from 33.4% for the three months ended September 30, 2011 compared with 2010. The decrease is being affected by rising labor expenses, the appreciation of the Chinese currency, and higher raw material prices.

Cost of sales from passenger vehicle brake systems for the three months ended September 30, 2011 were $8,568,971 a decrease of $1,053, 597 or 10.9% from $9,622,568 for the same period last year. The gross profit from passenger vehicle brake systems increased by 172.5% from $1,151,702 for the third quarter of 2010 to $3,138,290 for the third quarter of 2011. Gross margin from passenger vehicle brake systems increased to 26.8% from 10.7% for the three months ended September 30, 2011 compared with 2010. The increase was mainly due to improvements in product technologies and in our product portfolio.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses were $2,923,832 for the three months ended September 30, 2011, as compared to $3,299,914 for the same period of 2010, a decrease of $376,082 or 11.4%.

The decrease was mainly due to decreased accrued warranty expenses. As a percentage of sales revenue, selling expenses decreased to 6.1% for the three months ended September 30, 2011, as compared to 6.5% for the same period in 2010.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $2,968,222 for the three months ended September 30, 2011, as compared to $2,950,120 for the same period of 2010, an increase of $18,102 or 0.6%. The increase was mainly due to increases in salaries and wages expenses and labor insurance expenses. As a percentage of sales revenue, general and administrative expenses increased to 6.2% for the three months ended September 30, 2011, as compared to 5.8% for the same period in 2010.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the three months ended September 30, 2011, research and development expense was $1,893,985, as compared to $1,773,044 for the same period of 2010, an increase of $120,941.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $1,821,955 for the three months ended September 30, 2011, compared with that of $1,283,642 for the same period of 2010, an increase of $538,313. The Company will continue to invest in new product development, particularly in upgrading traditional valve products and in developing electronically controlled products.

FINANCIAL EXPENSE

Financial expense mainly consists of interest expense, the financing expense associated with our capital lease transaction and exchange loss. The financial expense for the three months ended September 30, 2011 increased by $869,518 to $1,227,502 from $357,984 for the same period of 2010, which was mainly increased interest expense and the financing expense associated with our capital lease transaction. On September 13, 2011, the Company entered an agreement with International Far Eastern Leasing Co., Ltd.(a third party) and sold and simultaneously leased back part of its unencumbered manufacturing equipment, for a term of 60 months and an interest rate of 7.95%. The Company paid a fee of $641,484 to this third party accounted for as financing expense in the accompanying condensed consolidated financial statements.

OTHER INCOME

Other income was $488,747 for the three months ended September 30, 2011, as compared to $366,308 for the three months ended September 30, 2010, an increase of $122,439. The increase was mainly due to an increase in sales of raw material scraps for the three months ended September 30, 2011.

INCOME TAX

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

The Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential tax treatment for the years 2007 and 2008. In those years, the Joint Venture was entitled to an income tax exemption on all pre-tax income generated by the Company above its pre-tax income generated in the fiscal year 2006. This tax exemption was superseded as a result of the Joint Venture having been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate for years 2009 through 2011. Thus, our effective income tax rate is 15% for years 2009 through 2011.

Income tax expense of $660,446 and $962,210 was recorded for the quarters ended September 30, 2011 and 2010, respectively.

STOCK-BASED COMPENSATION

None; there were no options or warrants outstanding through September 30, 2011.

Although the Company anticipates that future issuances of stock awards could have a material impact on reported net income in future financial statements, we do not expect them to have a material impact on future cash flows.

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our Joint Venture Partners. Net income attributable to non-controlling interest in subsidiaries amounted to $358,632 and $501,616 for the third quarter ended September 30, 2011 and 2010, respectively.

NET INCOME ATTRIBUTABLE TO STOCKHOLDERS

The net income attributable to stockholders for the quarter ended September 30, 2011 decreased by $1,472,895, to $3,506,806 from $4,979,701 for the quarter ended September 30, 2010 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the quarter ended September 30, 2011 and 2010, were $0.18 and $0.26 per share, respectively.

( 2) Results of operations for the nine months ended September 30, 2011 as compared to the nine months ended September 30, 2010.

SALES

	Nine months ended				Nine months ended
	30-Sept-11				30-Sept-10
	(U.S. dollars in millions)

Commercial vehicles brake systems, etc.	$	125.1	78	%	$	112.4	78	%
Passenger vehicles brake systems, etc.	$	35.6	22	%	$	32.2	22	%

Total	$	160.7	100.0	%	$	144.6	100.0	%

Net sales were $160,683,535 and $144,593,338 for the nine months ended September 30, 2011 and 2010, respectively, an increase of $16.1 million or 11.1%.

The sales from commercial vehicle brake systems increased by $12.7 million or 11.3%, to $125.1 million for the nine months of 2011, compared to $112.4 million for the same period of 2010, due to the rapid increase in the aftermarket and international market.

Due to the good situation of the passenger vehicle market this year, the sales from passenger vehicle brake systems increased by $3.4 million or 10.6%, to $35.6 million for the nine months of 2011, compared to $32.2 million for the same period of 2010.

A breakdown of net sales revenue for these markets for the nine months ended September 30, 2011 and 2010 fiscal years, respectively, is set forth below:

	Nine		Percent			Nine		Percent
	months		of			months		of
	ended 30-Sept-11		Total Sales			ended 30-Sept-10		Total Sales			Percentage Change
	(U.S. dollars in million)
China OEM market	$	85.5		53	%	$	84.6		59	%		1.1	%
China Aftermarket	$	32.9		21	%	$	23.2		16	%		41.7	%
International market	$	42.3		26	%	$	36.8		25	%		14.9	%
Total	$	160.7		100.0	%	$	144.6		100.0	%		11.1	%

During the first nine months of 2011, we promoted our integrated system and modular supplies of air brake systems to our OEM customers and we increasingly focused on the light duty, bus and agricultural vehicle market. As a result, our sales to the Chinese OEM market increased by $0.9 million to $85.5 million for the nine months of 2011, compared to $84.6 million for the same period of 2010.

Our sales to the Chinese aftermarket increased by $9.7 million or 41.7%, to $32.9 million for the nine months year of 2011, compared to $23.2 million for the nine months year of 2010. The increased number of vehicles in service in China and the expiration of OEM warranties helped increase our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the nine months ended September 30, 2011. We will continue with our strategies to further optimize our sales network, to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion in the bus aftermarket.

Our export sales increased by $5.5 million or 14.9%, to $42.31 million for the nine months of 2011, as compared to $36.8 million for the same period of 2010. A part of our strategy is to strengthen and extend our distribution networks to increase our exposure with end users. The increase in export sales was mainly due to improvement in global economic conditions and our improved customer base and market position.

COST OF SALES AND GROSS PROFIT

For the nine months ended September 30, 2011, cost of sales was $116,459,662, an increase of $14,377,988, or 14.1% from $102,081,674 for the same period last year. Our gross profit increased by 4.0% from $42,511,664 for the nine months ended September 30, 2010 to $44,223,873 for the nine months ended September 30, 2011.

Gross margin decreased by 1.9% for the nine months ended September 30, 2011, to 27.5% from 29.4% for the same period of 2010.

Cost of sales from commercial vehicle brake systems for the nine months ended September 30, 2011 were $90,439,106, an increase of $13,994,643 or 18.3% from $76,444,463 for the same period last year. The gross profit from commercial vehicle brake systems decreased by 3.2% from $35,865,231 for the nine months of 2010 to $34,707,120 for the nine months of 2011. Gross margin from commercial vehicle brake systems decreased to 27.7% from 31.9% for the nine months ended September 30, 2011 compared with 2010. The decrease is being affected by rising labor expenses, the appreciation of the Chinese currency, and higher raw material prices.

Cost of sales from passenger vehicle brake systems for the nine months ended September 30, 2011 were $26,020,556, an increase of $383,345 or 1.5% from $25,637,211 for the same period last year. The gross profit from passenger vehicle brake systems increased by 43.2% from $6,646,433 for the nine months of 2010 to $9,516,753 for the nine months of 2011. Gross margin from passenger vehicle brake systems increased to 26.8% from 20.6% for the nine months ended September 30, 2011 compared with 2010. The increase was mainly due to the technologies of products improved and our product portfolio improved.

SELLING AND DISTRIBUTION EXPENSES

Selling and distribution expenses were $9,452,586 for the nine months ended September 30, 2011, as compared to $9,341,056 for the same period of 2010, an increase of $111,530 or 1.2%.

The increase was mainly due to the increased transportation expense as a result of increased sales. As a percentage of sales revenue, selling expenses decreased to 5.9% for the nine months ended September 30, 2011, as compared to 6.5% for the same period in 2010.

GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses were $9,647,944 for the nine months ended September 30, 2011, as compared to $9,789,218 for the same period of 2010, a decrease of $141,274 or 1.4%.

The decrease was mainly due to decreased bad debts provision. As a percentage of sales revenue, general and administrative expenses decreased to 6.0% for the nine months ended September 30, 2011, as compared to 6.8% for the same period in 2010.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses include payroll, employee benefits, and other headcount-related expenses associated with product development. Research and development expenses also include third-party development costs. For the nine months ended September 30, 2011, research and development expense was $6,071,593, as compared to $5,326,598 for the same period of 2010, an increase of $744,995. The Company will continue to invest in new product development, particularly in upgrading traditional valve products and in developing electronically controlled products.

DEPRECIATION AND AMORTIZATION

Depreciation and amortization expense increased to $5,253,922 for the nine months ended September 30, 2011, compared with that of $3,750,717 for the same period of 2010, an increase of $1,503,205.

FINANCIAL EXPENSE

Financial expense mainly consists of interest expense, the financing expense associated with our capital lease transaction and exchange loss. The financial expense for the nine months ended September 30, 2011 increased by $1,892,315 to $2,667,700 from $775,385 for the same period of 2010, which was mainly increased interest expense and the financing expense associated with our capital lease transaction. On September 13, 2011, the Company entered an agreement with International Far Eastern Leasing Co., Ltd.(a third party) and sold and simultaneously leased back part of its unencumbered manufacturing equipment, for a term of 60 months and an interest rate of 7.95%. The Company paid a fee of $641,484 to this third party accounted for as financing expense in the accompanying condensed consolidated financial statements.

OTHER INCOME

Other income was $953,104 for the nine months ended September 30, 2011, as compared to $649,227 for the nine months ended September 30, 2010, an increase of $303,877. The increase was mainly due to an increase in sales of raw material scraps for the nine months ended September 30, 2011.

INCOME TAX

Income tax expense of $2,583,266 and $1,780,492 was recorded for the nine months ended September 30, 2011 and 2010, respectively.

STOCK-BASED COMPENSATION

None; there were no options or warrants outstanding through September 30, 2011.

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our Joint Venture Partners. Net income attributable to non-controlling interest in subsidiaries amounted to $1,380,839 and $1,459,277 for the nine months ended September 30, 2011 and 2010, respectively.

NET INCOME ATTRIBUTABLE TO STOCKHOLDERS

The net income attributable to stockholders for the nine months ended September 30, 2011 decreased by $1,224,324, to $13,331,326 from $14,555,650 for the nine months ended September 30, 2010 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the nine months ended September 30, 2011 and 2010, were $0.69 and $0.76 per share, respectively.

FINANCIAL CONDITION

Liquidity and Capital Resources

OPERATING - Net cash provided from operating activities was $3,156,577 for nine months ended September 30, 2011 compared with $8,998,980 of net cash provided in operating activities in the same period in 2010, a decrease of $5,842,403, primarily due to the decreased cash inflow resulted by changes in inventory and accounts receivable.

At September 30, 2011, the Company had cash and cash equivalents of $12,414,533, as compared to cash and cash equivalents of $6,691,078 at December 31, 2010. The Company had working capital of $113,739,845 at September 30, 2011, as compared to working capital of $87,862,126 at December 31, 2010, reflecting current ratios of 3.2 and 3.02:1, respectively.

INVESTING - During the nine months ended September 30, 2011, the Company expended net cash of $7,589,518 in investing activities, mainly for acquisition of new equipment to support the growth of the business. For the nine months ended September 30, 2010, the Company utilized $36,626,169 in investing activities.

FINANCING - During the nine months ended September 30, 2011, net cash provided by financing activities was $9,656,339. The Company repaid bank loans of $1,586,011 during the nine months ended September 30, 2011. On September 13, 2011, the Company entered an agreement with International Far Eastern Leasing Co., Ltd.(a third party) and sold and simultaneously leased back part of its unencumbered manufacturing equipment, for a term of 60 months and an interest rate of 7.95%. The sale price of the manufacturing equipment was $13,209,492. As related to this transaction, the Company put down a security deposit of $1,863,916 to be refunded back to the Company after the end of the lease. During the nine months ended September 30, 2010, net cash provided by financing activities was primarily attributable to the net proceeds of our public offering of approximately $9,399,978. Additionally, another capital increase of $1,038,900 was contributed by Ruili Group to Ruian. The cash provided by financing activities was $19,718,327 for nine months ended September 30, 2010.

Management of the Company has taken a number of steps to restructure our customer base and phase out accounts which failed to make prompt payments. We also placed more emphasis on collection of accounts receivable from our customers. During 2011, we continued developing higher profit margin new products, and adopting steps for further cost saving such as improving material utilization rate. We maintain good relationships with local banks. We believe that our current cash and cash equivalents and anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements for the foreseeable future.

CURRENCY RISK AND FINANCIAL INSTRUMENTS - Although our reporting currency is the U.S. dollar, the functional currency of Joint Venture is RMB. As a result, we are exposed to foreign exchange risk as our revenues and results of operations may be affected by fluctuations in the exchange rate between U.S. dollars and RMB. If the RMB depreciates against the U.S. dollar, the value of our Renminbi revenues, earnings and assets as expressed in our U.S. dollar financial statements will decline. In recent years, the RMB has been appreciating against the U.S. dollar.

Assets and liabilities of our operating subsidiaries are translated into U.S. dollars at the exchange rate at the balance sheet date, their equity accounts are translated at historical exchange rate and their income and expenses items are translated using the average rate for the period. Any resulting exchange differences are recorded in accumulated other comprehensive income or loss. The Company is adopting such steps as the diversification of currencies used in export sales, and the negotiation of export contracts with fixed exchange rates.

As the Company’s historical debt obligations are primarily short-term in nature, with fixed interest rates, the Company does not have any risk from an increase in market interest rates. However, to the extent that the Company arranges new borrowings in the future, an increase in market interest rate would cause a commensurate increase in the interest expense related to such borrowings.

OFF-BALANCE SHEET AGREEMENTS

At September 30, 2011 we do not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See the discussion in Item 2 above, “Liquidity and Capital Resources”.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures:

As of the end of the period covered by this report, management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (“Exchange Act”)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that the disclosure controls and procedures were effective in all material respects to ensure that information required to be disclosed in reports we file or submit under the Exchange Act is (1) recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and (2) accumulated and communicated to our management to allow their timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting:

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 6. EXHIBITS

(a)	Exhibits:

	31.1	Certification of Principal Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended.

	31.2	Certification of Principal Accounting Officer pursuant to Rule 13a-14 and Rule 15d-14(a) promulgated under the Securities and Exchange Act of 1934, as amended.

	32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

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

Dated : November 14, 2011	SORL AUTO PARTS, INC.

	By: /s/ Xiao Ping Zhang
	Name: Xiao Ping Zhang
	Title: Chief Executive Officer

	By: /s/ Zong Yun Zhou
	Name: Zong Yun Zhou
	Title: Chief Financial Officer (Principal Accounting Officer)

SORL Auto Parts, Inc. - FORM 10-Q - November 14, 2011

Attached files

SORL Auto Parts, Inc. Reports