Sunway Global Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - EXHIBIT 32.2 - Sunway Global Inc.	v240403_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - Sunway Global Inc.	v240403_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Sunway Global Inc.	v240403_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Sunway Global Inc.	v240403_ex31-1.htm
EXCEL - IDEA: XBRL DOCUMENT - Sunway Global Inc.	Financial_Report.xls

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 SEPTEMBER 30, 2011

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

FOR THE TRANSITION FROM _______ TO ________.

COMMISSION FILE NUMBER 000-27159

SUNWAY GLOBAL INC.

(Exact Name of Registrant as Specified in its Charter)

Nevada		26-1650042
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

Daqing Hi-Tech Industry Development Zone, Daqing, Heilongjiang, People’s Republic of China, 163316

(Address of principal executive offices) (Zip Code)

Issuer's telephone Number: 86-10-51905986

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 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 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 ¨	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

As of November 18, 2011, there were 18,499,736 outstanding shares of the Registrant's Common Stock, $0.0000001 par value.

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Financial Statements	1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	32
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39
	PART II
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	39
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3.	Defaults Upon Senior Securities	40
Item 4.	(Removed and Reserved)	40
Item 5.	Other Information	40
Item 6.	Exhibits	40
SIGNATURES		41

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONTENTS		PAGES

CONSOLIDATED BALANCE SHEETS		1 - 2

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME		3-4

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY		5

CONSOLIDATED STATEMENTS OF CASH FLOWS		6-7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS		8-31

SUNWAY GLOBAL INC.

CONSOLIDATED BALANCE SHEETS

AS AT SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

(Stated in US Dollars)

	Notes	September 30, 2011 (Unaudited)		December 31, 2010 (Audited)
ASSETS
Current assets
Cash and cash equivalents	2(k)	$	4,653,073	$	9,587,765
Trade receivables, net	5		6,673,879		9,287,453
Notes receivables			208,563		-
Inventories	8		2,501,783		1,379,917
Advances to suppliers			1,478,556		1,232,297
Prepayments			498,148		95,397
Tender deposits			183,636		274,140
Travel advances to shareholders	6		27,487		332,709
Advances to employees	7		623,811		269,303
Deferred tax assets			337,999		-

Total current assets		$	17,186,935	$	22,458,981
Restricted cash	2(l)		1,094		67,091
Amount due from a related company	4		830		76,682
Property, plant and equipment, net	9		8,772,051		10,285,308
Intangibles, net	10		18,069,910		19,252,393
Deposit for technology-based designed			1,993,526		-
Deposit for purchase of plant and equipment			-		163,840

TOTAL ASSETS		$	46,024,346	$	52,304,295

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Short term bank loans	11	$	-	$	303,407
Accounts payable			418,486		341,845
Income tax payable			3,622		381,663
Turnover and other taxes			55,396		328,760
Expected warranty liabilities	12		54,947		53,308
Customer deposits			2,733,370		1,122,063
Accrued liabilities			776,383		704,065

Total current liabilities		$	4,042,204	$	3,235,111
Warrants liabilities	13		9,554,132		17,519,515
TOTAL LIABILITIES		$	13,596,336	$	20,754,626

See accompanying notes to consolidated financial statements

SUNWAY GLOBAL INC.

CONSOLIDATED BALANCE SHEETS (Continued)

AS AT SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

(Stated in US Dollars)

	Notes	September 30, 2011 (Unaudited)		December 31, 2010 (Audited)

STOCKHOLDERS’ EQUITY

Series B Convertible Preferred Stock $0.0000001 par value; 400,000 shares authorized; 160,494 shares issued and outstanding at September 30, 2011 and December 31, 2010	13	$	1	$	1

Common stock at $0.0000001 par value; 100,000,000 shares authorized; 18,499,736 shares issued and outstanding at September 30, 2011 and December 31, 2010			2		2
Additional paid-in capital			13,833,383		13,833,383
Statutory reserves			4,267,115		4,267,115
Retained earnings			7,487,155		8,542,065
Accumulated other comprehensive income			6,840,354		4,907,103
		$	32,428,010	$	31,549,669

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	46,024,346	$	52,304,295

See accompanying notes to consolidated financial statements

SUNWAY GLOBAL INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

	Notes	Nine months ended September 30,
		2011			2010

Net revenues	17	$	5,774,391		$	16,418,963
Cost of net revenues	17		(2,103,228	)		(5,339,795	)

Gross profit		$	3,671,163		$	11,079,168

Selling expenses			(1,135,426	)		(1,225,161	)
General and administrative expenses			(4,784,578	)		(2,476,970	)

Income/(loss) from operations		$	(2,248,841	)	$	7,377,037
Interest income			29,185			-
Changes in fair value of warrants			7,229,509			15,748,805
Impairment on fixed			(329,002	)		15,234
Compensation for product quality and overdue delivery			(6,048,513	)		-

Income before income/(loss) tax		$	(1,367,662	)	$	23,141,076

Income tax expense	14		312,752			(1,154,596	)

Net income/(loss)		$	(1,054,910	)	$	21,986,480

Net income/(loss) per share:
-Basic	15	$	(0.06	)	$	1.19

-Diluted	15	$	(0.05	)	$	0.82

Weighted average number of common stock
-Basic	15		18,499,736			18,499,736

-Diluted	15		23,314,556			26,934,551

See accompanying notes to consolidated financial statements

SUNWAY GLOBAL INC.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

	Notes	Three months ended September 30,
		2011			2010

Net revenues	17	$	2,370,644			5,769,462
Cost of net revenues	17		(873,061	)		(1,814,588	)

Gross profit		$	1,497,583			3,954,874

Selling expenses			(576,971	)		(474,936	)
General and administrative expenses			(1,651,826	)		(880,862	)

Income/(loss) from operations		$	(731,214	)		2,599,076
Interest income			9,216			5,972
Changes in fair value of warrants			4,163,755			16,552,201
Compensation for product quality			(6,127,737	)		-

Income before income/(loss) tax		$	(2,685,980	)		19,157,249

Income tax expense	14		109,454			(416,980	)

Net income/(loss)		$	(2,576,526	)		18,740,269

Net income per share:
-Basic	15	$	(0.14	)		1.01

-Diluted	15	$	(0.11	)		0.73
Weighted average number of common stock
-Basic	15		18,499,736			18,499,736

-Diluted	15		23,314,556			25,637,503

See accompanying notes to consolidated financial statements

SUNWAY GLOBAL INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

AS AT SEPTEMBER 30, 2011 AND DECEMBER 31, 2010

(Stated in US Dollars)

									Additional				Retained			Accumulated
	Preferred		Preferred		No. of				paid				earnings/			other
	Series		Series		shares		Common		in		Statutory		(Accumulated			comprehensive
	A		B		outstanding		stock		capital		reserves		deficit)			income		Total

Balance, January 1, 2010	$	-	$	1		18,499,736	$	2	$	13,833,383	$	3,033,855	$	(21,735,219	)	$	2,915,737	$	(1,952,241	)
Net income		-		-		-		-		-		-		31,510,544			-		31,510,544
Appropriations to statutory reserves		-		-		-		-		-		1,233,260		(1,233,260	)		-		-
Foreign currency translation adjustment		-		-		-		-		-		-		-			1,991,366		1,991,366

Balance, December 31, 2010	$	-	$	1		18,499,736	$	2	$	13,833,383	$	4,267,115	$	8,542,065		$	4,907,103	$	31,549,669

Balance, January 1, 2011	$	-	$	1		18,499,736	$	2	$	13,833,383	$	4,267,115	$	8,542,065		$	4,907,103	$	31,549,669
Net income		-		-		-		-		-		-		(1,054,910	)		-		(1,054,910	)
Foreign currency translation Adjustment		-		-		-		-		-		-		-			1,933,251		1,933,251

Balance, September 30, 2011	$	-	$	1		18,499,736	$	2	$	13,833,383	$	4,267,115	$	7,487,155		$	6,840,354	$	32,428,010

SUNWAY GLOBAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

	The Nine months ended September 30,
	2011			2010
Cash flows from operating activities
Net income	$	(1,054,910	)	$	21,986,480
Depreciation		1,443,346			1,355,059
Amortization		1,774,337			1,311,290
Changes in fair value of warrants		(7,229,509	)		(15,748,805	)
Impairment of fixed assets		329,002			-

Adjustments to reconcile net income to net cash provided by operating activities:
Trade receivables, net		2,648,285			(3,594,595	)
Inventories		(1,062,499	)		(668,336	)
Advances to suppliers		(205,105	)		639,795
Prepayments		(393,541	)		(294,048	)
Tender deposits		97,379			(22,864	)
Travel advances to shareholders		2,673			43,947
Advances to employees		(340,794	)		43,242
Deferred tax assets		337,947			-
Accounts payable		65,094			71,983
Income tax payable		(383,655	)		148,267
Turnover and other taxes		(279,020	)		206,502
Customer deposits		1,552,059			264,837
Accrued liabilities		49,878			(5,472	)

Net cash provided by operating activities	$	(2,649,033	)	$	5,737,282

Cash flows from investing activities
Decrease in restricted cash	$	65,997		$	154,279
Purchase of plant and equipment		(242,382	)		(307,700	)
Purchase of intangibles		(1,990,086	)		(1,267,340	)

Net cash used in investing activities	$	(2,166,471	)	$	(1,420,761	)

Cash flows from financing activities	$	-		$	-
Net cash provided by financing activities	$	-		$	-

SUNWAY GLOBAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

	The Nine months ended September 30,
	2011			2010
Net in cash and cash equivalents (used)/sourced	$	(4,815,504	)	$	4,316,521
Effect of foreign currency translation on cash and cash equivalents		(119,188	)		172,931
Cash and cash equivalents–beginning of period		9,587,765			4,717,240
Cash and cash equivalents–end of period	$	4,653,073		$	9,206,692

	The Nine months ended September 30,
	2011		2010
Supplementary cash flow information:
Tax paid	$	408,901	$	1,006,328
Interest received		29,185		15,234

SUPPLEMENTAL NON-CASH DISCLOSURES:

1.	During the nine months ended September 30, 2011 and 2010, an amount of $1,342,184 and $4,065,825were transferred from “Deposit for technology-based designed” to “property, plant and equipment”, respectively.

See accompanying notes to consolidated financial statements

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

1.	ORGANIZATION AND PRINCIPAL ACTIVITIES

Sunway Global Inc. (the “Company”) was incorporated in the state of Nevada on October 18, 1971. Prior to June 6, 2007 the company had only nominal operations and assets.

On June 6, 2007, the Company consummated a reverse-merger transaction with Rise Elite International Limited (“Rise Elite (BVI)”) by an exchange of shares whereby the Company issued 210,886 shares of the Company’s Series A Convertible Preferred Stock, par value $0.0000001 per share in exchange for all shares in World Through Limited, a British Virgin Islands corporation (“World Through (BVI)”).

World Through (BVI) holds Sunway World Through Technology (Daqing) Co Ltd (“SWT” or “WFOE”), which entered into a series of agreements with Daqing Sunway Technology Co., Ltd (“Sunway”) including but not limited to management, loan, purchase option, consignment, trademark licensing, non-competition agreeements. As a result of entering the abovementioned agreements, WFOE is deemed to control Sunway as a Variable Interest Entity as required by Accounting Standards Codification ASC 810-10-05 to 10-65 which codified FASB Interpretation No. 46 (revised December 2003) Consolidated of Variable Interest Entities, an Interpretation of ARB No. 51 since SWT was the primary beneficiary. On March 16, 2008, SWT acquired Beijing Sunway New-force Medical Treatment Tech Co., Ltd (“Beijing Sunway”) as its wholly-owned subsidiary. Beijing Sunway was incorporated in Beijing, PRC on May 24, 2007.

On January 16, 2009, World Through (BVI) acquired Qingdao Liheng Textiles Co Ltd (“Liheng”) as its wholly-owned subsidiary. Liheng was incorporated in PRC on June 6, 2003.

The Company, through its subsidiaries and Sunway, (hereinafter, collectively referred to as “the Group”), is in the business of designing, manufacturing and selling logistic transport systems and medicine dispensing systems and equipment.

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)	Method of accounting

The Company maintains its general ledger and journals with the accrual method accounting for financial reporting purposes. The financial statements and notes are representations of management. Accounting policies adopted by the Company conform to generally accepted accounting principles in the United States of America and have been consistently applied in the presentation of financial statements.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(b)	Principles of consolidation

The consolidated financial statements, which include the Company and its subsidiaries, are complied in accordance with generally accepted accounting principles in the United States of America. All significant inter-company accounts and transactions have been eliminated. The consolidated financial statements include 100% of assets, liabilities, and net income or loss of those wholly-owned subsidiaries.

The Company has five subsidiaries. The detailed identities of the consolidating subsidiaries are as follows:

Name of subsidiaries	Place of incorporation	Attributable interest

World Through Ltd	British Virgin Islands	100%

Sunway World Through Technology (Daqing) Co Ltd	PRC	100%

*Daqing Sunway Technology Co Ltd	PRC	100%

Beijing Sunway New-force Medical Treatment Tech Co., Ltd	PRC	100%

Qingdao Liheng Textiles Co Ltd	PRC	100%

*Note: Deemed variable interest entity

(c)	Use of estimates

The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available at the time the estimates are made; however actual results could differ materially from those estimates.

(d)	Economic and political risks

The Group’s operations are conducted in the PRC. Accordingly, the Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environment in the PRC, and by the general state of the PRC economy.

The Group’s operations in the PRC are subject to special considerations and significant risks not typically associated with companies in North America and Western Europe. These include risks associated with, among others, the political, economic and legal environment and foreign currency exchange. The Group’s results may 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 conversion, remittances abroad, and rates and methods of taxation, among other things.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(e)	Intangibles

Intangibles are stated at cost less accumulated amortization. Amortization is provided over the respective useful lives, using the straight-line method. Estimated useful lives of the intangibles are as follows:

Land use rights		Over the lease terms
Technology-based design		10 years

(f)	Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is provided over their estimated useful lives, using the straight-line method. Estimated useful lives of the property, plant and equipment are as follows:

Buildings		20 years
Machinery and equipment		6 years
Moldings		10 years
Computer software		3 - 10 years
Office equipment and motor vehicles		6 - 10 years

The cost and related accumulated depreciation of assets sold or otherwise retired are eliminated from the accounts and any gain or loss is included in the statement of income.

(g)	Maintenance and repairs

The cost of maintenance and repairs is charged to income as incurred, whereas significant renewals and betterments are capitalized.

(h)	Accounting for the impairment of long-lived assets

The Group periodically evaluates the carrying value of long-lived assets to be held and used, including intangible assets subject to amortization, when events and circumstances warrant such a review, pursuant to the guidelines established in FASB ASC 360. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognised based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(i)	Inventories

Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.

(j)	Trade receivables

Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were no bad debts.

Outstanding accounts balances are reviewed individually for collectability. The Company do not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.

(k)	Cash and cash equivalents

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains bank accounts in the PRC and Hong Kong. The Company does not maintain any bank accounts in the United States of America.

	September 30, 2011		December 31, 2010

Bank of Communications, Branch of Daqing
City Economic Zone	$	4,145,660	$	8,612,371
China Construction Bank, Beijing Branch		454,839		471,540
Qingdao bank		1,714		66,117
Agricultural Bank of China		4,970		392,647
HSBC		1,368		34,788
Cash on hand		44,522		10,302

	$	4,653,073	$	9,587,765

(l)	Restricted cash

Restricted cash are pledged deposits in an escrow account for investor relations purpose.

(m)	Revenue recognition

Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenues from services recognizes when the agreed services have been performed, provided, completed or virtually completed at an agreed period(s) of time, and are measurable.

Revenue is recognized when all of the following criteria are met:

- Persuasive evidence of an arrangement exists;

- Delivery has occurred or services have been rendered;

- The seller’s price to the buyer is fixed or determinable; and

- Collection is reasonably assured.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(m) Revenue recognition (Continued)

Contract revenues are recognized when the manufacturing and installation of the medical equipment is completed. Generally, the company receives total contract sum from clients in 4 instalments. Deposit of 20%-30% is received from client when the contract is signed. Second payment of 30% is received when the project commences. Third payment of 30% is received after the construction is completed within 4 months. The final sum of the remaining portion is received after the construction is completed until one year.

(n)	Expected warranty liabilities

The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.

(o)	Cost of sales

Cost of sales consists primarily of material costs, employee compensation, depreciation and related expenses, which are directly attributable to the production of products. All inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of distribution network are also included. Write-down of inventory to lower of cost or market is also recorded in cost of revenues.

(p)

Leases

The Group did not have lease which met the criteria of capital lease. Leases which do not qualify as capital lease are classified as operating leases. Operating lease rental payment included in general and administrative expenses were $68,480 and $12,155, and cost of sales were $21,980 and $34,650 for the nine months ended September 30, 2011 and 2010 respectively.

(q)	Advertising

The Group expensed all advertising costs as incurred. Advertising expenses included in selling expenses were $1,856 and $10,670 for the nine months ended September 30, 2011 and 2010 respectively.

(r)	Shipping and handling

All shipping and handling are expensed as incurred. Shipping and handling expenses included in selling expenses were $107,084 and $48,477 for the nine months ended September 30, 2011 and 2010 respectively.

(s)	Research and development

All research and development costs are expensed as incurred. The research and development costs included in general and administrative expenses were $33,181 and $127,255 for the nine months ended September 30, 2011 and 2010 respectively.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(t)	Retirement benefits

Retirement benefits in the form of contributions under defined contribution retirement plans to the relevant authorities are charged to the statements of income as incurred. The retirement benefit expenses included in general and administrative expenses were $164,516 and $156,943 for the nine months ended September 30, 2011 and 2010 respectively.

(u)	Income taxes

The Group accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for 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. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Group is able to realize their benefits, or that future realization is uncertain.

(v)	Foreign currency translation

The accompanying financial statements are presented in United States dollars. The reporting currency of the Group is the U.S. dollar ($). SWT, Sunway, Beijing Sunway and Liheng use its local currency, Renminbi (RMB), as its functional currency. Results of operations and cash flow are translated at average exchange rates during the period, and assets and liabilities are translated at the end of period exchange rates. Translation adjustments resulting from this process are included in accumulated other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.

The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Group because it has not engaged in any significant transactions that are subject to the restrictions.

The exchange rates used to translate amounts in RMB into USD for the purposes of preparing the consolidated financial statements were as follows:

	September 30, 2011		December 31, 2010		September 30, 2010
Twelve months ended
RMB : USD exchange rate		-		6.5918		-
Nine months ended
RMB : USD exchange rate		6.3952		-		6.6981
Average nine months ended
RMB : USD exchange rate		6.4132		-		6.7803
Average three months ended
RMB : USD exchange rate		6.4972				6.8164

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into USD at the rates used in translation.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(w)	Statutory reserves

As stipulated by the PRC’s Company Law and as provided in the SWT, Sunway, Beijing Sunway and Liheng’s Articles of Association, SWT, Sunway, Beijing Sunway and Liheng’s net income after taxation can only be distributed as dividends after appropriation has been made for the following:

(i)

Making up cumulative prior years’ losses, if any;

(ii)

Allocations to the “Statutory surplus reserve” of at least 10% of income after tax, as determined under PRC accounting rules and regulations, until the fund amounts to 50% of the Company's registered capital, which is restricted for set off against losses, expansion of production and operation or increase in registered capital;

(iii)

Allocations of 5-10% of income after tax, as determined under PRC accounting rules and regulations, to the Company's “Statutory common welfare fund”, which is restricted for capital expenditure for the collective benefits of the Company's employees; and

(iv)

Allocations to the discretionary surplus reserve, if approved in the shareholders’ general meeting.

(x)	Comprehensive income

Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, all items that are required to be recognized under current accounting standards as components of comprehensive income are required to be reported in a financial statement that is presented with the same prominence as other financial statements. The Group’s current component of other comprehensive income is the foreign currency translation adjustment.

(y)	Warrant Liability

Effective January 1, 2009, the Company adopted the provisions of FASB ASC Topic 815, "Derivatives and Hedging" ("ASC 815") (previously ElTF 07-5, "Determining Whether an instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock"). As a result of adopting ASC 815, the outstanding warrants of the Company previously treated as equity pursuant to the derivative treatment exemption were no longer afforded equity treatment as there was a down-round protection (full-ratchet down round protection). As a result, the warrants are not considered indexed to the Company's own stock, and as such, all future changes in the fair value of these warrants will be recognized currently in earnings until such time as the warrants are exercised or expire.

As such, effective January 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in June 2007. On January 1, 2009 the Company recorded as a cumulative effect adjustment by decreasing additional paid-in capital amounting to $3,990,942 and decreasing beginning retained earnings by the amount of $65,910,931 and recording $69,901,873 as a warrant liability to recognize the fair value of such warrants on January 1, 2009. The fair value of the warrants was $9,554,132 and $17,519,515 on September 30, 2011 and December 31, 2010 respectively. The Company recognized $7,229,509 as income and $15,748,805 as income from the change in fair value of warrants for the nine months ended September 30, 2011 and 2010 respectively.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(z) Recent accounting pronouncements

ASC Update (“ASU”) No. 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash. This update clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. This ASU codified the consensus reached in EITF Issue No. 09-E “Accounting for Stock Dividends, Including Distributions to Shareholders with Components of Stock and Cash”. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of this update did not have any material impact on the Company’s financial statements.

ASC Update (“ASU”) No. 2010-02, Consolidation (Topics 810) – Accounting and Reporting for Decreases in Ownership of a Subsidiary - A Scope Clarification. This update provides guidance for non-controlling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. The adoption of this update did not have any material impact on the Company’s financial statements.

ASC Update (“ASU”) No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. This update requires some new disclosures and clarifies some existing disclosure requirements about fair value measurement as set forth in Codification Subtopic 820-10. The FASB’s objective is to improve these disclosures and, thus, increase the transparency in financial reporting. Specifically, ASU 2010-06 amends Codification Subtopic 820-10 to now require:

•A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers; and

•In the reconciliation for fair value measurements using significant unobservable inputs, a reporting entity should present separately information about purchases, sales, issuances, and settlements.

In addition, ASU 2010-06 clarifies the requirements of the following existing disclosures:

•For purposes of reporting fair value measurement for each class of assets and liabilities, a reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities; and

•A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(z) Recent accounting pronouncements (Continued)

ASU 2010-06 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. Early application is permitted.

ASC Update (“ASU”) No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. This update is to remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

In addition, the amendments in the ASU requires an entity that is a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of issuance of its financial statements and must disclose such date. All of the amendments in the ASU were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment is effective for interim or annual periods ending after June 15, 2010.

ASC Update (“ASU”) No. 2010-10, Consolidation (Topic 810): Amendments for Certain Investment Funds. This update is to defer the effective date of certain amendments to the consolidation requirements of FASB Accounting Standards CodificationTM (Codification) Topic 810, Consolidation, resulting from the issuance of FASB Accounting Standard No. 167, Amendments to FASB Interpretation 46(R). Specifically, the amendments to the consolidation requirements of Topic 810 resulting from the issuance of Statement 167 are deferred for a reporting entity’s interest in an entity:

•That has all the attributes of an investment company; or

•For which it is industry practice to apply measurement principles for financial reporting purposes that are consistent with those followed by investment companies.

The ASU does not defer the disclosure requirements in the Statement 167 amendments to Topic 810. The amendments in this ASU are effective as of the beginning of a reporting entity's first annual period that begins after November 15, 2009, and for interim for interim periods within that first annual reporting period. Early application is not permitted.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

2.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

(z) Recent accounting pronouncements (Continued)

ASC Update (“ASU”) No. 2010-13, Compensation – Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. This update is to codify the consensus reached in EITF Issue No. 09-J, “Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades.” The amendments to the Codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or services condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The adoption of this update did not have any material impact on the Company’s financial statements.

ASC Update (“ASU”) No. 2010-21, Accounting for Technical Amendments to Various SEC Rules and Schedules. This update amends various SEC paragraphs in the FASB Accounting Standards Codification pursuant to SEC Final Rule, “Technical Amendments to Rules Forms, Schedules and Codification of Financial Reporting Policies”. The adoption of this update did not have any material impact on the Company’s financial statements.

ASC Update (“ASU”) No. 2010-22, Accounting for Various Topics. This update amends various SEC paragraphs in the FASB Accounting Standards Codification based on external comments received and the issuance of Staff Accounting Bulletin (SAB) No. 112 which amends or rescinds portion of certain SAB topics. SAB 112 was issued to bring existing SEC guidance into conformity with ASC 805 “Business Combination” and ASC 810 “Consolidation”. The adoption of this update did not have any material impact on the Company’s financial statements.

ASC Update (“ASU”) No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. This update reflects the decision reached in EITF Issue No. 10-G. The amendments in this ASU affect any public entity as defined by Topic 805, Business Combinations, that enters into business combinations that are material on an individual or aggregate basis. The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.

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 the Company’s financial statements upon adoption.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

3.	CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMERS

Financial instruments which potentially expose the Group to concentrations of credit risk, consists of cash and trade receivables as of September 30, 2011 and December 31, 2010. The Group performs ongoing evaluations of its cash position and credit evaluations to ensure collections and minimize losses.

As of September 30, 2011 and December 31, 2010, the Group’s bank deposits were all placed with banks in the PRC and Hong Kong where there is currently no rule or regulation in place for obligatory insurance of bank accounts.

For the nine months ended September 30, 2011, the Group’s sales were generated from the PRC and Western Europe. Trade receivables as of September 30, 2011 and December 31, 2010 arose in the PRC and Europe.

The maximum amount of loss due to credit risk that the group would incur if the counter parties to the financial instruments failed to perform is represented by the carrying amount of each financial asset in the balance sheet.

Normally the Group does not obtain collateral from customers or debtors.

Details of the customers accounting for 10% or more of the Group’s revenue are as follows:

	For the nine months ended September 30,
	2011		2010
Customer A	$	-	$	1,694,443
Customer B		1,099,855

Details of customers accounting for 10% or more of the Group’s trade receivables are as follows:

	September 30, 2011		December 31, 2010

Customer A	$	454,536	$	671,940
Customer B		572,669		851,516
Customer C		440,702		541,585
Customer D		535,728		836,952
Customer E		558,268		874,686
Customer F		438,258		500,458

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

4.	AMOUNT DUE FROM A RELATED COMPANY

Amount due from Rise Elite International Ltd (Rise Elite) was $830, a related company where Mr. Liang Deli, the Company’s Chief Executive Officer and Chairman is a shareholder. The amount is held by Rise Elite for the initial setup expenses. The amount is unsecured, interest free and repayable on demand.

5.	TRADE RECEIVABLES, NET

Trade receivables comprise the followings:

	September 30, 2011			December 31, 2010

Trade receivables, gross	$	6,714,674		$	9,327,032
Provision for doubtful debts		(40,795	)		(39,579	)

Trade receivables, net	$	6,673,879		$	9,287,453

All of the above trade receivables are due within one year of aging.

An analysis of the allowance for doubtful accounts for the nine months ended September 30, 2011 and 2010 is as follows:

	September 30, 2011		September 30, 2010

Balance at beginning of period	$	39,579	$	17,983
Foreign exchange adjustment		1,216		373

Balance at end of period	$	40,795	$	18,356

Allowance was made when collection of the full amount is no longer probable. Management reviews and adjusts this allowance periodically based on historical experience, current economic climate as well as its evaluation of the collectability of outstanding accounts. The Group evaluates the credit risks of its customers utilizing historical data and estimates of future performance.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

6.	TRAVEL ADVANCES TO SHAREHOLDERS

Travel advances were made to certain shareholders who are also management of the company to to enable execution of their operational duties such as marketing and sales promotion. The following table provides the details of the outstanding accounts. They are unsecured, interest free and repayable on demand.

	September 30, 2011		December 31, 2010

Bo Liu	$	-	$	319,697
Deli Liang		27,487		13,012

	$	27,487	$	332,709

The following table provides the activity in the travel advances to shareholders:

	September 30, 2011			December 31, 2010

Beginning balance	$	332,709		$	71,372

Add: Advanced during the period/year		84,772			570,554

Less: Transferred to income statement		(45,236	)		(43,887	)
Repayment by directors		(344,758	)		(265,330	)

Ending balance	$	27,487		$	332,709

ADVANCES TO EMPLOYEES

Advances to employees are advances for purchases and travelling. They are unsecured, interest free and repayable on demand. The following table provides the activity in the advances to employees:

	September 30, 2011			December 31, 2010

Beginning balance	$	269,303		$	217,865
Add: Advanced during the period/year		1,345,200			688,121

Less: Transferred to income statement		(815,324	)		(314,842	)
Recollected from employees		(175,368	)		(321,841	)

Ending balance	$	623,811		$	269,303

8. INVENTORIES

Inventories comprise the followings:

	September 30, 2011		December 31, 2010

Finished goods	$	1,678,625	$	943,148
Work in process		348,942		116,157
Raw materials		474,216		320,612

	$	2,501,783	$	1,379,917

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

9.	PROPERTY, PLANT AND EQUIPMENT, NET

Property, plant and equipment, net comprise the followings:

	September 30, 2011			December 31, 2010
At cost
Buildings	$	2,576,950		$	2,128,873
Machinery and equipment		1,500,497			1,257,656
Moldings		9,586,291			9,300,380
Computer software		2,266,811			2,186,190
Office equipment and motor vehicles		697,201			653,781

	$	16,627,750		$	15,526,880
Less: accumulated depreciation		(7,895,981	)		(6,551,027	)

	$	8,731,769		$	8,975,853
Construction in progress		40,282			1,309,455

	$	8,772,051		$	10,285,308

Construction in progress represents direct costs of construction incurred for factory infrastructure. Capitalization of these costs ceases and the construction in progress is transferred to property, plant and equipment when substantially all the activities necessary to prepare the assets for their intended use are completed. No depreciation is provided until it is completed and ready for intended use.

Depreciation expenses are included in the statement of income as follows:

	Nine months ended September 30,
	2011		2010
Cost of net revenues	$	1,293,045	$	1,222,724
General and administrative expenses		94,792		81,784
Selling expenses		55,509		50,551

Total depreciation expenses	$	1,443,346	$	1,355,059

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

10.	INTANGIBLES, NET

Details of intangibles are as follows:

	September 30, 2011			December 31, 2010

Land use rights, at cost	$	2,785,760		$	2,702,675
Technology-based design, at cost		20,988,007			20,362,041

	$	23,773,767		$	23,064,716
Less: accumulated amortization		(5,703,857	)		(3,812,322	)
Total intangibles, net	$	18,069,910		$	19,252,393

During 2009, the Group acquired the rights to use a parcel of land totaling 9,082 square meters, for a consideration of $89,552 (RMB613,035), located at Qingdao Hi-Tech Industry Development Zone, Qingdao, Shandong in the People’s Republic of China for a term of 48 years from November 3, 2006 to July 24, 2053. The Group acquired secondly the rights to use a parcel of land totaling 10,841 square meters, for a consideration of $106,709 (RMB730,485), located at Qingdao Hi-Tech Industry Development Zone, Qingdao, Shandong in the People’s Republic of China for a term of 50 years from January 14, 2009 to January 13, 2059. Our Liheng facility is erected on these parcels of land.

During 2009, the Group acquired a design and internal device control of medicine dispensing and packing machine, for a consideration of $6,988,882 (RMB47,300,000).

Amortization expense included in the general and administrative expenses for the nine months ended September 30, 2011 and 2010 were $1,774,337 and $1,311,290 respectively.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

11.	SHORT-TERM BANK LOANS

A short-term bank loan was initiated on August 31, 2010 and paid-off on February 25, 2011 by a director.

As of September 30, 2011, the bank loan balance was as follows:

	September 30, 2011			December 31, 2010

Loans from Bank of Qingdao, interest rates at 6.37% per annum, due August 30, 2011	$	303,407		$	303,407
Less: Repayment during the period		(303,407	)		-

	$	-		$	303,407

12.	EXPECTED WARRANTY LIABILITIES

An analysis of the expected warranty liabilities for the nine months ended September 30, 2011 and 2010 is as follows:

	September 30, 2011		December 31, 2010

Beginning balance	$	53,308	$	32,618
Warranty expense for the year		-		19,476
Foreign currency difference		1,639		1,214

Ending balance	$	54,947	$	53,308

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

13.	SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS

On June 5, 2007, the Company entered into a purchase agreement, whereby the company agreed to sell 165,432 shares of the Company’s Series B Preferred shares and various stock purchase warrants to purchase up to 18,686,054 shares of the Company’s common stock. The exercise price, expiration date and number of shares eligible to be purchased upon exercise of the warrants is summarized in the following table:

	Investment Amount		Preferred B		A Warrant		B Warrant		J Warrant		C Warrant		D Warrant
Vision Opportunity Master Fund, Ltd.		6,500,000		160,494		4,814,815		2,407,407		4,362,416		4,362,416		2,181,208
Columbia China Capital Group, Inc.		200,000		4,938		148,148		74,074		134,228		134,228		67,114

Series of Warrant	Number of shares		Exercise Price		Expiry Date
Series A		4,962,963	$	1.76	6 /5 /2012
Series B		2,481,481		2.30	6 /5 /2012
Series J		4,496,644		1.49	6 /5 /2008
Series C		4,496,644		1.94	6 /5 /2012
Series D		2,248,322		2.53	6 /5 /2012

On June 6, 2007, we issued to Kuhns Brothers, Inc. and its designees an aggregate of 17,646 shares of Series A Preferred and a Series J warrant to purchase an aggregate of 496,296 shares of common stock of the Company at a price of $1.62 per share in connection with the reverse merger transaction pursuant to the placement agent agreement with the Kuhns Brothers, Inc.

The Series B preferred stock has liquidation rights senior to our common stock and Series A preferred stock. In the event of a liquidation of the Company, holders of Series B preferred stock are entitled to receive a distribution equal to $40.50 per share of Series B preferred stock prior to any distribution to the holders of common stock and Series A preferred stock. The Series B preferred stock is entitled to non-cumulative dividends only upon declaration of dividends by the Company. To date, no dividends have been declared or accrued. The Series B preferred stock will participate based on their respective as-if conversion rates if the Company declares any dividends. After an amendment to the Company’s Articles of Incorporation as filed to effect the a reverse split, each share of Series B preferred stock would be convertible into 30 shares of Common Stock at a price of $1.35 per share, which both may be adjusted from time to time pursuant to the conversion rate.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

13. SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS

(Continued)

The holders of Series B preferred stock shall be entitled to voting rights by applicable law and the right to vote together with the holders of Common and Series A Preferred Stock.

The gross proceeds of the transaction were $6.7 million. The proceeds from the transaction were allocated to the Series B preferred stock, warrants and beneficial conversion feature based on the relative fair value of the securities. The value of the Preferred Series B was determined by reference to the market price of the common shares into which it converts, and the gross value of the warrants was calculated using the Black –Scholes model with the following assumptions: expected life of 1 year, volatility of 117% and an interest rate of 4.99%.

The Company recognized a beneficial conversion feature discount on the Series B preferred stock at its intrinsic value, which was the fair value of the common stock at the commitment date for the Series B preferred stock investment, less the effective conversion price but limited to the $6.7 million of proceeds received from the sale. The Company recognized the $6.7 million beneficial conversion feature as an increase in paid in capital in the accompanying consolidated balance sheets on the date of issuance of the Series B preferred shares since the Series B preferred shares were convertible at the issuance date.

The agreement, also provided that if a Registration Statement is not effective within a certain period of time or the common shares are not listed on the NASDAQ or AMEX by December 31, 2008, the Company will pay the holders of the shares a penalty that can range from $67,000 to $670,000 and certain principal shareholders would issue up to 1,000,000 additional shares to the purchasers of the Preferred Series B shares. The company is accounting for these penalties in accordance with ASC 450 “Contingencies” which codified FAS 5 - Accounting for Contingencies, whereby the penalty will not be recorded as a liability until and if it is probable the penalty will be incurred. No penalty has been recorded in the accompanying financial statements for this contingency.

Under the agreement, Warrant J expired on June 5, 2008. On that day, Vision Opportunity Master Fund Ltd. converted all the Warrant J, totally 4,362,416 shares into 4,362,416 of common stock.

On February 7, 2008, 12 shareholders of Preferred Series A converted 228,530 shares into 13,711,831 shares of common stock, in which Rise Elite International Limited, Vision Opportunity Master Fund, Ltd and Kuhns Brothers, Inc converted 210,886, 7,990 and 2,647 shares of Preferred Series A into 12,653,160, 479,400 and 158,820 shares of common stock respectively.

On June 18, 2008, Columbia China Capital Group, Inc. converted 4,938 shares of Preferred Series B into 148,140 shares of common stock.

On November 10, 2008, Columbia China Capital Group, Inc. converted the Warrant J, totally 53,691 shares into 53,691 of common stock.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

13. SERIES B CONVERTIBLE PREFERRED STOCK AND ASSOCIATED WARRANTS

(Continued)

As such, effective January 1, 2009, the Company reclassified the fair value of these warrants from equity to liability, as if these warrants were treated as a derivative liability since their issuance in June 2007. On January 1, 2009 the Company recorded as a cumulative effect adjustment by decreasing additional paid-in capital amounting to $3,990,942 and decreasing beginning retained earnings by the amount of $65,910,931 and recording $69,901,873 as a warrant liability to recognize the fair value of such warrants on January 1, 2009. The fair value of the warrants was $9,554,132 and $25,059,522 on September 30, 2011 and 2010 respectively. The Company recognized $7,229,509 and $15,748,805 as income from the change in fair value of warrants for the nine months ended September 30, 2011 and 2010 respectively.

As of December 31, 2010, the Company adopted lattice model with Monte Carlo Simulations to measure the various outcome so as to calculate the most likely expected future value of the convertible shares at a define time period. The Company believes that the lattice model can improve the valuation of the existing warrants with consideration of early exercise rights and down ratchet exercise price reset provision. The change is accounted for as change in accounting estimates. As opposed to closed form model like Black Scholes which assumes warrants be exercised on expiry date, the lattice model assumes a low probability of early exercise due to declining stock prices and sample different price paths using Monte Carlo simulation.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

14.	INCOME TAXES

The Company, being incorporated in the State of Nevada and conducting all of its business through its subsidiaries incorporated in PRC, is not subject to federal income tax until the operating profits are rebounded back to United States. The subsidiaries are SWT, Sunway, Beijing Sunway, Liheng (see note 1).

SWT, Sunway, Beijing Sunway and Liheng, being registered in the PRC, are subject to PRC’s Corporate Income Tax (“CIT”). Under applicable income tax laws and regulations, an enterprise located in PRC, including the district where our operations are located, is subject to a rate of 25% for the nine months ended September 30, 2011 and 2010.

However, Sunway is a high technology company, and in accordance with the relevant regulations regarding the favorable tax treatment for high technology companies, Sunway is entitled to a reduced tax rate of 15% as long as Sunway is physically located and registered in the high and advance technology development zone.

The Group uses the asset and liability method, where deferred tax assets and liabilities are determined based on the expected future tax consequences of temporary differences between the carrying amounts of assets and liabilities for financial and income tax reporting purposes. There are temporary differences on deferred tax asset $337,999 on net operating loss as of September 30, 2011 and no deferred tax asset and liabilities as of December 31, 2010.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

14.	INCOME TAXES (Continued)

A reconciliation between the income tax computed at the U.S. statutory rate and the Group’s provision for income tax is as follows:

	September 30, 2011			December 31, 2010

U.S. statutory rate		34	%		34	%
Foreign income not recognized in the U.S.		(34	)%		(34	)%
PRC CIT		25	%		25	%
Tax holiday		(10	)%		(10	)%

Provision for income taxes		15	%		15	%

The provision for income taxes consists of the following:

	September 30, 2011			December 31, 2010

Current tax - PRC CIT	$	25,247		$	1,532,991

Deferred tax provision		(337,999	)		-

Income tax expenses	$	(312,752	)	$	1,532,991

Reconciliation of these items is as follows:

	September 30, 2011			December 31, 2010

Income before taxation	$	(1,367,662	)	$	33,043,535
Add: Impairment of property, plant & equipment		329,002			429,263
Other non-tax deductible items		8,436,482			35,954

Less: Change in fair value of warrants		(7,229,509	)		(23,288,812	)

Taxable income (adjusted)	$	168,313		$	10,219,940

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

15.	EARNINGS PER SHARE

The calculation of the basic and diluted earnings per share attributable to the common stock holders is based on the following data:

	For the nine months ended September 30,
	2011			2010
Income:
Income for the purpose of basic earnings per share	$	(1,054,910	)	$	21,986,480
Effect of dilutive potential common stock

Income for the purpose of dilutive earnings per share	$	(1,054,910	)	$	21,986,480

Number of shares:
Weighted average number of common stock for the purpose of basic earnings per share		18,499,736			18,499,736
Effect of dilutive potential common stock
-conversion of Series A
convertible preferred stock		-			-
-conversion of Series B
convertible preferred stock		4,814,820			4,814,820
-conversion of Warrant Series A		-			1,771,357
-conversion of Warrant Series B		-			396,057
-conversion of Warrant Series J		-			1,285,728
-conversion of Warrant Series C		-			166,853
-conversion of Warrant Series D		-			-

Weighted average number of common stock for the purpose of dilutive earnings per share		23,314,556			26,934,551

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

16.	COMMITMENTS AND CONTINGENCIES

The Group has entered into a tenancy agreement for factory expiring in 2011. Total rental expenses for the nine months ended September 30, 2011 and 2010 amounted to $90,460and $26,009 respectively.

As at September 30, 2011, the Group’s commitments for minimum lease payments under these leases for the next one year are as follows:

September 30,
2011	$	35,194
2012 and thereafter		25,816

	$	61,010

17.	SEGMENT INFORMATION

The Group currently is engaged in the manufacturing and selling of logistic transport systems. Its operations are categorized in one segment. The Group has contracted with customers with primarily four types of product altogether as follows: workstation type A, workstation type B, workstation type C and Sunway Automatic Dispensing and Packing (“SADP”). Workstation types A, B and C are of the same function but with different product design.

Net revenues and cost of revenues by product:

For the nine months	Workstation			Workstation			Workstation
ended September 30, 2011	Type A			Type B			Type C			SADP			Other			Consolidated

Net revenues	$	96,990		$	263,867		$	3,010,844		$	1,918,596		$	484,094		$	5,774,391
Cost of net revenues		(31,409	)		(106,897	)		(1,017,139	)		(628,336	)		(319,447	)		(2,103,228	)

	$	65,581		$	156,970		$	1,993,705		$	1,290,260		$	164,647		$	3,671,163

For the nine months	Workstation			Workstation			Workstation
ended September 30, 2010	Type A			Type B			Type C			SADP			Other			Consolidated

Net revenues	$	3,815,445		$	204,190		$	11,434,287		$	648,746		$	316,295		$	16,418,963
Cost of net revenues		(1,184,175	)		(50,624	)		(3,840,028	)		(250,099	)		(14,869	)		(5,339,795	)

	$	2,631,270		$	153,566		$	7,594,259		$	398,647		$	301,426		$	11,079,168

The Group’s operations are located in the PRC. All revenues are derived from customers in the PRC and Europe. All of the Group’s assets are located in the PRC. Sales of workstations are carried out in the PRC. Accordingly, no analysis of the Group's sales and assets by geographical market is presented.

SUNWAY GLOBAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Stated in US Dollars) (Unaudited)

18.	FAIR VALUE MEASUREMENTS

The Company has adopted FASB Statement No. 157, Fair Value Measurements (ASC 820), establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under FASB Statement No. 157 are described as follows:

Level 1	Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets.
Level 2	Inputs to the valuation methodology include
	·	quoted prices for similar assets or liabilities in active markets
	·	quoted prices for identical or similar assets or liabilities in inactive markets
	·	inputs other than quoted prices that are observable for the asset or liability
	·	inputs that are derived principally from or corroborated by observable market data by correlation or other means
	If the asset or liability has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset or liability.
Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value.

Warrant Liability: As of December 31, 2010, the Company adopted the lattice valuation method to improve the valuation of the existing warrants with early exercise rights and down ratchet exercise price reset provision. The change is accounted for as change in accounting estimates. As opposed to closed form model like Black Scholes which assumes warrants be exercised on expiry date, the lattice model assumes a low probability of early exercise due to declining stock prices and sample different price paths using Monte Carlo simulation.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Overview

Since June 27, 2007, the Company has operated as a holding company for entities that, through contractual relationships, control the business of Daqing Sunway Technology Co., Ltd. (“Daqing Sunway”), a company organized under the laws of the PRC that designs, manufactures and sells logistic transport systems and medicine dispensing systems and equipment that are principally used by hospitals and other medical facilities in the PRC. Currently our Company is the only producer of these two systems in the PRC: pneumatic transport systems (“PTS”) and Sunway Automatic Dispensing and Packing (“SADP”). We have served approximately 350 customers in the PRC from our facilities in Qingdao. We generate our revenue from sales in two product categories: PTS and SADP. In April, 2011, we closed our Daqing factory as mandated by the Daquing government in its effectuation of a municipal plan. We plan to build a new factory to provide PTS in Qingdao in the future.

This discussion and analysis focuses on the business results of Sunway Group (consisting of Daqing Sunway, the Company’s primary operating entity, along with its other indirectly-owned subsidiaries Beijing Sunway New-force Medical Treatment Tech Co., Ltd. and Qingdao Liheng Textile Co., Ltd), comparing its results in the three and nine months periods ended September 30, 2011 to the three and nine months ended September 30, 2010.

Three-month period ended September 30, 2011 and September 30, 2010

Results of Operations

In the three months ended September 30, 2011, the Company’s net revenues, gross profit and operating income decreased substantially as compared with the same period in 2010. These decreases were primarily attributable to the closing of the Company’s Daqing factory as mandated by the Daqing government because of a municipal plan and a resulting shortage in products to supply our customers. The Company is permitted to rebuild the factory in the industrial zone in Daqing provided it goes through the requisite approval process. We continue to supply the same products from our Qingdao facility but not enough to meet the needs of our customers. Currently, the Company’s board and management have decided not to build a factory in the Daquing industrial zone but instead to re-build in Qingdao.

The following table summarizes the results of our operations during the three months ended September 30, 2011 and 2010, respectively, and provides information regarding the dollar and percentage increase (or decrease) from the three months ended September 30, 2011 and 2010.

	Three Months Ended September 30,
	2011			2010			Change			Change rate
Net Revenues	$	2,370,644		$	5,769,462		$	(3,398,818	)		(58.91	) %
Cost of net revenues	$	873,061		$	1,814,588		$	(941,527	)		(51.89	) %
Gross Profit	$	1,497,583		$	3,954,874		$	(2,457,291	)		(62.13	) %
Gross Margin		63.17	%		68.55	%					(5.38	) %
Operating Income/(loss)	$	(731,214	)	$	2,599,076		$	(3,330,290	)		(128.13	) %
Changes in fair value of warrants	$	4,163,755		$	16,552,201		$	(12,388,446	)		(74.84	) %
Compensation for product quality and overdue delivery		(6,127,737	)		-			(6,127,737	)		-
Net Income/(loss)	$	(2,576,526	)	$	18,740,269		$	(21,316,795	)		(113.75	) %
Net profit/(loss) margin		(108.68	) %		324.82	%					(433.50	) %

Net Revenues

Net revenues for the three months ended September 30, 2011, which resulted entirely from sales, was $2,370,644, a decrease of 58.91% as compared with net revenues of $5,769,462 for the three months ended September 30, 2010. In the three months ended September 30, 2011, we sold 190 workstations, a decrease of 81.90% as compared with 1050 workstations sold in the three months ended September 30, 2010. The decrease resulted because the Company was required to close and cease its operations at its Daqing factory as required by the Daqing Government. The closing resulted in shortages of our products to meet all of the demand of our customers. During the three months ended September 30, 2011, we also sold 4 units of SADP, as compared with 2 unit of SADP for the three months ended September 30, 2010.

The following table breaks down application categories as percentage of total net revenue:

	Three Months Ended September 30,
	2011					2010
	sales		% of total sales			sales		% of total sales
PTS	$	1,796,341		75.77	%	$	5,467,590		94.77	%
SADP	$	529,724		22.35	%	$	172,472		2.99	%
Other	$	44,579		1.88	%		129,400		2.24	%
Total net revenue	$	2,370,644		100.00	%	$	5,769,462		100.00	%

Gross Profit

Gross profit decreased 62.13% to $1,497,583 for the three months ended September 30, 2011, as compared to $3,954,874 for the three months ended September 30, 2010. Our gross profit margin fell 5.38% from 68.55% for the three months ended September 30, 2010 to 63.17% for the same period of 2011, mainly due to the closing of our Daqing factory, resulting in a shortage of products to supply our customers. In an effort to increase supply, we hired new employees at our Qingdao factory. However, many of these new employees did not have sufficient experience in manufacturing which affected the quality of some of our products. These new employees will need to adapt and learn our techniques, as a result, we have added direct labor fees.

The table below presents information about our gross profit for the periods indicated:

	Three Months Ended September 30,
	2011					2010
	US$		Gross profit margin			US$		Gross profit margin
Gross Profit	$	1,497,583		63.17	%	$	3,954,874		68.55	%

Income from Operations

Operating loss was $731,214 for the three months ended September 30, 2011, as compared with operating income of $2,599,076 for the three months ended September 30, 2010. The loss was primarily attributable to the closing of our Daqing factory, and a resulting reduction in the supply of our products.

Cost of Net Revenue

Cost of net revenue decreased to $873,061 for the three months ended September 30, 2011, representing a 51.89% decrease as compared with $1,814,588 for the same period of 2010. The decrease was primarilydue to decrease in sale.

The table below presents information about our cost of net revenue for the periods indicated:

	Three Months Ended September 30,
	2011		2010		Change
Cost of net revenue	$	873,061	$	1,814,588		(51.89	)%

Operating Expenses

Operating expenses were $2,228,797 for the three months ended September 30, 2011, an increase as compared with $1,355,798 for the same period of 2010. The increase was primarily due to two factors: (i) selling expenses increased $102,035, or 21.48% to $576,971 in the three months ended September 30, 2011 from $474,936 for the same period of 2010; and (ii) general and administration expenses increased $770,964, or 87.52% to $1,651,826 for the three months ended September 30, 2011 from $880,862 for the same period of 2010. Due to the closingof our Daqing factory, we incurred general and administration expenses such as manufacturing employee’s salaries, depreciation expense.

The table below presents information about our operating expenses for the periods indicated:

	Three Months Ended September 30,
	2011		2010		Change
Selling expenses	$	576,971	$	474,936		21.48	%
General & Administrative expenses	$	1,651,826	$	880,862		87.52	%
Total operating expenses	$	2,228,797	$	1,355,798		64.39	%

Changes in fair value of warrants

Changes in fair value of warrants were $4,163,755 for the three months ended September 30, 2011. This is recorded as a non-cash income, which resulted from the change in fair value of warrants issued to investors in conjunction with the Company’s issuance of warrants in June of 2007 pursuant to provisions of FASB ASC Topic 815, “Derivative and Hedging” (ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. On March 18, 2010, the Company entered into a Securities Exchange Agreement intending to exchange all warrants into common stock. The agreement provides that on the closing date of the agreement, the Company would issue 2,000,000 shares of common stock in exchange for the retirement of all of the outstanding warrants owned by Vision Opportunity Master Fund Ltd. and its affiliates. The closing of the agreement is conditioned upon a closing of a financing with minimum proceeds of $10 million to the Company.

Compensation for product quality and overdue delivery

Compensation for product quality and overdue delivery was $6,127,737 for the three months ended September 30, 2011.Due to the closing of our factory in Daqing in the second quarter of 2011, we were unable to timely deliver products to some of our clients. Also, in an effort to increase output at our Qingdao factory we hired many new employees to meet our customers’ needs. However, many of these new employees did not have sufficient experience in manufacturing which affected the quality of some of our products. We agreed to compensate our clients who were affected by the foregoing with a combination of cash payments and reduction in their account balances with us.

Net Income

Net loss was $2,576,526 for the three months ended September 30, 2011, as compared with $18,740,269 in net income for the same period of 2010. In the third quarter of 2011, our net income was impacted by a non-cash income of $4,163,755 unrelated to the Company’s operations. Excluding the changes in fair value of warrants in non-cash income, the Company’s net loss from operations would have been $612,544 for the three months ended September 30, 2011 and net income from operations of $2,188,068 for the three months ended September 30, 2010. The decrease was primarily due to the closing of our Daqing factory which resulted in compensation to our customers for product quality and overdue delivery related to our PTS projects.

Earnings per Share

Basic and diluted loss per share for the three months ended September 30, 2011 were $0.14 and $0.11 compared with $1.01 and $0.73 for the same period of 2010. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 18,499,736 for the three months ended September 30, 2011 and September 30, 2010, respectively. The weighted average number of shares outstanding to calculate diluted EPS was 23,314,556 and 25,637,503 for the three months ended September 30, 2011 and 2010.

Nine-month period ended September 30, 2011 and September 30, 2010

Results of Operations

In the nine months ended September 30, 2011, the company’s net revenues, gross profit, and operating income decreased as compared with the same period of 2010. These decreases were primarily attributable to the closing of our Daqing factory. As a result, our PTS’ installation project for customers was delayed. Also contributing to the decrease was the fact that we hired new employees at our Qingdao factory to meet our customers’ needs, but many of these new employees did not have sufficient experience in manufacturing, which affected product quality.

The following table summarizes the results of our operations during the nine months ended September 30, 2011 and 2010, respectively, and provides information regarding the dollar and percentage increase (or decrease) for the nine months ended September 30, 2010 and 2011.

	Nine months ended September 30,
	2011			2010			Change			Change rate
Net Revenue	$	5,774,391		$	16,418,963		$	(10,644,572	)		(64.83	) %
Cost of net revenue	$	2,103,228		$	5,339,795		$	(3,236,567	)		(60.61	)%
Gross Profit	$	3,671,163		$	11,079,168		$	(7,408,005	)		(66.86	) %
Gross Margin		63.58	%		67.48	%		-			(3.90	) %
Operating Income/(loss)	$	(2,248,841	)	$	7,377,037		$	(9,625,878	)		(130.48	) %
Compensation for product quality and overdue delivery		(6,048,513	)		-			(6,048,513	)		-
Change in fair value of warrants	$	7,229,509		$	15,748,805		$	(8,519,296	)		(54.09	) %
Net Income/(loss)	$	(1,054,910	)	$	21,986,480		$	(23,041,390	)		(104.80	) %
Net profit margin		(18.27	) %		133.91	%		-			(152.18	) %

Net Revenues

Net revenues for the nine months ended September 30, 2011, which resulted entirely from decrease in sale, was $5,774,391, a decrease of 64.83% as compared with net revenue of $16,418,963 for the nine months ended September 30, 2010. In the nine months ended September 30, 2011, we sold 542 workstations, a decrease of 81.92% as compared with 2,998 workstations sold for the nine months ended September 30, 2010. During the same period of 2011, we also sold 20 units of SADP, an increase of 185.71% as compared with 7 units of SADP for the nine months ended September 30, 2010. The decrease in PTS was due primarily to the closing of our Daqing factory. As a result, we did not have enough products to meet all of our customers’ needs.

The following table breaks down application categories as percentage of total net revenue.

	Nine months ended September 30,
	2011					2010
	sales		% of total sales			sales		% of total sales
PTS	$	3,371,701		46.55	%	$	15,453,922		94.12	%
SADP	$	1,918,596		40.64	%	$	648,746		3.95	%
OTHER	$	484,094		12.81	%	$	316,295		1.93	%
Total net revenue	$	5,774,391		100.00	%	$	16,418,963		100.00	%

Gross Profit

Gross profit decreased 66.86% to $3,671,163 for the nine months ended September 30, 2011, as compared to $11,079,168 for the nine months ended September 30, 2010. Our gross profit margin fell 3.90% from 67.48% for the nine months ended September 30, 2010 to 63.58% for the same period of 2011, mainly due to the closing of our Daqing factory, resulting in a shortage of products to supply our customers. In an effort to increase supply to meet all of our customers’ needs, our Qingdao factory hired many new employees in the third quarter. These new employees will need to adapt and learn our techniques, as a result, we have added direct labor fees.

The table below presents information about our gross profit for the periods indicated:

	Nine months ended September 30,
	2011					2010
	US$		Gross profit margin			US$		Gross profit margin

Gross Profit	$	3,671,163		63.58	%	$	11,079,168		67.48	%

Income from Operations

Operating loss decreased 130.48% to $2,248,841 for the nine months ended September 30, 2011, as compared to operating income of $7,377,037 for the nine months ended September 30, 2010. The loss was primarily attributable to the closing of our Daqing factory and a resulting shortage in supply of products to our customers.

Cost of Net Revenues

Cost of net revenues decreased to $2,103,228 for the nine months ended September 30, 2011, representing a 60.61% decrease as compared with $5,339,795 for the same period of 2010. The decrease was primarily due to a sharp decrease in sales.

The table below presents information about our cost of net revenue for the periods indicated:

	Nine months ended September 30,
	2010		2009		Change
Cost of net revenue	$	2,103,228	$	5,339,795		(60.61	) %

Operating Expenses

Operating expenses were $5,920,004 for the nine months ended September 30, 2011, an increase as compared with $3,702,131 for the same period of 2010. The increase was a result of two factors: (i) selling expenses decreased $89,735, or 7.32% to $1,135,161 for the nine months ended September 30, 2011 from $1,225,161 for the same period of 2010; and (ii) general and administration expenses increased $2,307,608, or 93.16% to $4,784,578 for the nine months ended September 30, 2011 from $2,476,970 for the same period of 2010. In the nine months ended September 30, 2011, our Daqing factory was closed as mandated by the Daqing government. Reflecting this change, the manufacturing salary, depreciation expenses, removal expenses was recorded in general and administration expenses in nine months ended September 30, 2011.

The table below presents information about our operating expenses for the periods indicated:

	Nine months ended September 30,
	2011		2010		Change
Selling expenses	$	1,135,426	$	1,225,161		(7.32	) %
General & Administrative expenses	$	4,784,578	$	2,476,970		93.16	%
Total operating expenses	$	5,920,004	$	3,702,131		59.91	%

Changes in fair value of warrants

Changes in fair value of warrants were $7,229,509 for the nine months ended September 30, 2011. This is recorded as a non-cash charges, which resulted from the change in fair value of warrants issued to investors in conjunction with the Company’s issuance of warrants in June of 2007 pursuant to provisions of FASB ASC Topic 815, “Derivative and Hedging” (ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. On March 18, 2010, the Company entered into a Security Exchange Agreement intending to exchange all warrants into common stock. The agreement provides that on the closing date of the agreement, the Company would issue 2,000,000 shares of common stock in exchange for the retirement of all of the outstanding warrants owned by Vision Opportunity Master Fund Ltd. and its affiliates. The closing of the agreement is conditioned upon a closing of a financing with minimum proceeds of $10 million to the Company.

Net loss

Net loss was $1,054,910 for the nine months ended September 30, 2011, a decrease as compared with $21,986,480 for the same period in 2010. In the nine months ended September 30, 2011, our net loss was impacted by a non-cash charge of $6,900,507 unrelated to the Company’s operations. Excluding the changes in fair value of warrants and impairment on fixed in non-cash charge, the Company’s net loss from operations would have been $7,955,417 for the nine months ended September 30, 2011 and $6,237,675 for the nine months ended September 30, 2010. The decrease was primarily due to a sharp drop in PTS’ sale and compensation for product quality and overdue delivery.

Earnings Per Share

Basic and diluted loss per share for the nine months ended September 30, 2011 were $0.06 and $0.05 compared with earning $1.19 and $0.82 for the same period of 2010. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 18,499,736 for the nine months ended September 30, 2011 and 2010, respectively. The weighted average number of shares outstanding to calculate diluted EPS was 23,314,556 and 26,934,551 for the nine months ended September 30, 2011 and 2010.

Trade Receivables, net

Trade receivables, net decreased 28.14% to $6,673,897 as of September 30, 2011, compared with $9,287,453 as of December 31, 2010. The decrease in trade receivables was primarily attributable to decrease in sale.

Inventory

Inventory consists of raw materials, finished goods and work in progress. As of September 30, 2011, the recorded value of our inventory increased 95.11% to $2,501,783 from $1,379,917 as of December 31, 2010. The increase was mainly due to an increase of 77.98% in finished goods from $943,148 as of December 31, 2010 to $1,678,625 as of September 30, 2011; an increase of 47.91% in raw material from $320,612 as of December 31, 2010 to $474,783 as of September 30, 2011, an increase of 200.41% in work in progress from $116,157 as of December 31, 2010 to $348,942 as of September 30, 2011. The increase was primarily attributable to our Qingdao factory’s augmented output of the SADP and PTS, so that we have adequate supply to meet our customers’ needs.

The table below presents information about our inventory for the periods indicated:

Item	June 30, 2011		December 31, 2010		Change
Finished goods	$	1,678,625	$	943,148		77.98	%
Work in progress	$	348,942	$	116,157		200.41	%
Raw material	$	474,216	$	320,612		47.91	%
Total	$	2,501,783	$	1,379,917		81.30	%

Accounts Payable

Accounts payable was $418,486 as of September 30, 2011, an increase as compared with $341,845 as of December 31, 2010. The increase was primarily attributable to the fact that our Qingdao factory started to choose new local suppliers for PTS, the new local suppliers ask for deposits more than Daqing’s old supplier, resulted in an increase in purchase volume.

Liquidity and Capital Resources

We have historically financed our operations and capital expenditures principally through private placements of debt and equity offerings and cash provided by operations.

The table below presents information about our cash flow for the periods indicated:

	Nine months ended September 30,
	2011			2010			Change
Net cash provided by (used in) operating activities	$	(2,649,033	)	$	5,737,282		$	(8,386,315	)
cash provided by (used in) investing activities	$	(2,166,471	)	$	(1,420,761	)	$	(745,710	)
Net cash provided by (used in) financing activities	$	-		$	-		$	-
Effect of foreign currency translation on cash and cash equivalents	$	(119,188	)	$	172,931		$	(292,119	)
Beginning cash and cash equivalent	$	9,587,765		$	4,717,240		$	4,870,525
Ending cash and cash equivalent	$	4,653,073		$	9,206,692		$	(4,553,619	)

Operating Activities

For the nine months ended September 30, 2011, net cash used in operating activities was $2,649,033. This was primarily attributable to net loss of $1,054,910, adjusted by an add-back of non-cash expenses mainly consisting of depreciation, amortization and change in fair value of warrants $3,682,824 offset by a $2,088,701 increase in working capital. Specifically, the working capital increase was primarily due to (i) a $2,648,285 trade receivables decrease driven by decrease in sale; (ii) a $1,062,499 inventories increase, principally in work in process and finished goods, due to increase in purchasing volume; (iii) a $205,105 increase in advance to suppliers to choose new suppliers for PTS in Qingdao Liheng factory; (iv) a $296,336 increase in prepayments, travel advances to directors, tender deposits and advances to employees, consisting primarily of prepayments for raw materials and supplies in advance of shipment, working capital for sales staff and payment of client deposits; partially offset by a $1,004,356 increase in accounts payable, tax payable, loans from unrelated parties, amount due from a director, customer deposits and accrued liabilities.

Investing Activities

For the nine months ended September 30, 2011, net cash used in investing activities was $2,166,471. This was primarily attributable to: (i) a $242,384 capital expenditure for purchase of new plant and equipment; (ii) a $1,990,086 capital expenditure for purchase of new intangible assets; (iii) a $65,997 in restricted cash.

Cash and Cash Equivalents

Our cash and cash equivalents on January 1, 2011 were $9,587,765 and decreased to $4,653,073 by the end of the period on September 30, 2011. The decrease was primarily attributable to the compensation for product quality and overdue delivery.

In future periods, we believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next six months. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue.

Trends

We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.

Inflation

We believe that inflation has not had a material or significant impact on our revenue or our results of operations.

Obligations under Material Contracts

We do not have any material contractual obligations as of September 30, 2011.

Critical Accounting Policies

Management's discussion and analysis of its financial condition and results of operations is based upon Sunway’s consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Sunway’s financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Sunway believes that the following reflect the more critical accounting policies that currently affect Sunway’s financial condition and results of operations.

Impairment of long-lived assets. We account for impairment of property, plant and equipment and amortizable intangible assets in accordance with SFAS No. SFAS No. 144. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. During the reporting years, there was no impairment loss incurred. Competitive pricing pressure and changes in interest rates, could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets.

Inventories. Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.

Trade receivable. Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were no bad debts.

Revenue recognition. Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenue is recognized when all of the following criteria are met:

- Persuasive evidence of an arrangement exists;

- Delivery has occurred or services have been rendered;

- The seller’s price to the buyer is fixed or determinable, and

- Collection is reasonably assured.

Contract revenues are recognized when the manufacturing and installation of the medical equipment is completed. Generally, the company receives total contract sum from clients in 4 installments. Deposit of 20%-30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. Third payment of 30% is received after the construction is completed within 4 months. The final sum of the remaining portion is received after the construction is completed until one year.

Expected warranty liabilities. The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as of September 30, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

N/A.

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Exchange Act) that is designed to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive officer and principal financial officer or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the period ended September 30, 2011. Based upon that evaluation, the Company’s management concluded that, as of the date of evaluation, the Company’s disclosure controls and procedures were not effective. Based upon that evaluation and due to the material weaknesses existing in our internal controls as of December 31, 2010 (as described in the Company's form 10-K) which have not been fully remediated as of September 30, 2011, we have concluded that as of September 30, 2011, our disclosure controls and procedures were not effective.

Changes in internal control over financial reporting

There were no changes in our internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

To our knowledge, there is no material litigation pending or threatened against us.

ITEM 1A. RISK FACTORS.

N/A

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

To our knowledge, there are no material defaults upon senior securities.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

Due to the closing of our factory in Daqing in the second quarter of 2011, we were unable to timely deliver products to some of our clients. Also, in an effort to increase output at our Qingdao factory we hired many new employees to meet our customers’ needs. However, many of these new employees did not have sufficient experience in manufacturing which affected the quality of some of our products. We agreed to compensate our clients who were affected by the foregoing with a combination of cash payments and reduction in their account balances with us. For the three months ended September 30, 2011, compensation for product quality and overdue delivery was $6,127,737.

ITEM6 - EXHIBITS.

Exhibit No.		Description of Exhibit
31.1		Certification by Chief Executive Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.
31.2		Certification by Chief Financial Officer pursuant to Sarbanes Oxley Act of 2002 Section 302.
32.1		Certification by Chief Executive Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906.
32.2		Certification by Chief Financial Officer pursuant to Sarbanes-Oxley Act of 2002 Section 906.

101.INS XBRL Instance Document*

101.SCH XBRL Schema Document*

101.CAL XBRL Calculation Linkbase Document*

101.LAB XBRL Label Linkbase Document*

101.PRE XBRL Presentation Linkbase Document*

101. DEF XBRL Definition Linkbase Document*

* Attached as Exhibit 101 to this report are the following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements tagged as blocks of text. The XBRL-related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of those sections.

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.

	SUNWAY GLOBAL, INC.

Dated: November 21, 2011	By:	/s/ Liang Deli
		Name: Liang Deli
		Title: Chief Executive Officer (Principal Executive Officer)

Dated: November 21, 2011	By:	/s/ Samuel Sheng
		Name: Samuel Sheng
		Title: Chief Financial Officer (Principal Financial and Accounting officer)

Sunway Global Inc. - FORM 10-Q - November 21, 2011

Attached files

Sunway Global Inc. Reports