UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 30, 2012

 

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

For the transition period from _________ to _________

 

Commission file number 000-11991

 

SORL AUTO PARTS, INC.

(Exact name of registrant as specified in its charter)

 

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

No. 1169 Yumeng Road

Ruian Economic Development District

Ruian City, Zhejiang Province

People’s Republic Of China

(Address of principal executive offices)

 

 

86-577-6581-7720

(Registrant’s telephone number)

 

 

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

Yes x No ¨

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

Large Accelerated Filer £

Accelerated Filer £

Non-Accelerated Filer£ Smaller Reporting Company x

 

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

Yes ¨No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

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

As of November 10, 2012 there were 19,304,921 shares of Common Stock outstanding

 

 

SORL AUTO PARTS, INC.

FORM 10-Q

For the Quarter Ended September 30, 2012

 

INDEX

		Page
PART I.	FINANCIAL INFORMATION (Unaudited)	1
Item 1.	Financial Statements:	1
	Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2012 and December 31, 2011	2
	Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited) for the Nine Months Ended September 30, 2012 and 2011	3
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2012 and 2011	4
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Nine months ended September of 30, 2012 and 2011	5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management’s Discussion and Analysis or Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II.	OTHER INFORMATION	31
Item 1.	Legal Proceedings.	31
Item 1A.	Risk Factors.	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	31
Item 3.	Defaults Upon Senior Securities.	31
Item 4.	Mine Safety Disclosures.	31
Item 5.	Other Information.	31
Item 6.	Exhibits	31
SIGNATURES		32

 

 

SORL Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

  

		September 30, 2012				December 31, 2011
Assets
Current Assets
Cash and Cash Equivalents		US$	27,894,332			US$	17,116,692
Accounts Receivable, Net of Provision, including $1,518,832 and $747,053 due from related parties at September 30, 2012 and December 31, 2011, respectively.			62,505,358				65,344,441
Bank acceptance notes from customers			12,321,831				17,980,145
Inventories			55,858,143				56,377,556
Prepayments			6,551,428				2,484,026
Other current assets			1,949,043				4,960,061
Deferred tax assets			738,758				605,539
Total Current Assets			167,818,893				164,868,460
Fixed Assets
Machinery			51,620,272				49,879,491
Molds			1,376,067				1,384,825
Office equipment			1,542,569				1,439,305
Vehicles			1,999,715				1,853,111
Buildings			8,832,512				8,888,723
Machinery held under capital lease			18,097,156				18,166,087
Construction in progress			152,947				1,503,200
Less: Accumulated Depreciation			(35,918,734	)			(30,905,671	)
Property, Plant and Equipment, Net			47,702,504				52,209,071
Leasehold Improvements in Progress			348,418				375,604
Land Use Rights, Net			14,740,843				15,111,078
Other Non-Current Assets
Intangible Assets			174,758				175,871
Less: Accumulated Amortization			(104,131	)			(92,237	)
Intangible Assets, Net			70,627				83,634
Security Deposits On Lease Agreement			1,868,002				1,879,890
Total Other Non-Current Assets			1,938,629				1,963,524
Total Assets		US$	232,549,287			US$	234,527,737
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable, including $1,692,436 and $524,148 due to related parties at September 30, 2012 and December 31, 2011, respectively.		US$	7,877,553			US$	10,772,396
Bank acceptance notes to vendors			1,878,253				5,589,678
Deposit Received from Customers			5,529,296				5,074,532
Short term bank loans			12,453,336				16,448,527
Income tax payable			1,137,724				273,781
Accrued Expenses			9,481,855				8,808,788
Current Portion Of Capital Lease Obligations			2,449,040				2,305,125
Other Current Liabilities, including $217,088 and $143,950 due to related parties at September 30, 2012 and December 31, 2011, respectively.			189,921				467,850
Total Current Liabilities			40,996,978				49,740,677
Non-Current Liabilities
Non-Current Portion Of Capital Lease Obligations			8,543,777				10,469,265
Deferred tax liabilities			276,341				236,385
Total Non-Current Liabilities			8,820,118				10,705,650
Total Liabilities		US$	49,817,096			US$	60,446,327
Stockholders' Equity
Preferred Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as of September 30, 2012 and December 31, 2011			-				-
Common Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 and 19,304,921 issued and outstanding as of September 30, 2012 and December 31, 2011			38,609				38,609
Additional Paid In Capital			42,199,014				42,199,014
Reserves			9,237,054				8,375,392
Accumulated other comprehensive income			20,944,526				21,910,957
Retained Earnings			92,439,528				84,610,260
Total SORL Auto Parts, Inc. Stockholders' equity			164,858,731				157,134,232
Noncontrolling Interest In Subsidiaries			17,873,460				16,947,178
Total Equity			182,732,191				174,081,410
Total Liabilities and Stockholders' Equity		US$	232,549,287			US$	234,527,737

 

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

 

 

SORL Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
Sales		US$	46,708,959				47,583,678				143,399,372				160,683,535
Include: sales to related parties			1,092,343				1,195,634				5,046,533				2,488,750
Cost of Sales			33,485,059				34,531,204				103,779,982				116,459,662
Gross Profit			13,223,900				13,052,474				39,619,390				44,223,873
Expenses:
Selling and Distribution Expenses			3,765,768				2,923,832				10,460,168				9,452,586
General and Administrative Expenses			2,630,786				2,968,222				9,981,552				9,647,944
Research and development expenses			2,352,958				1,893,985				5,916,934				6,071,593
Financial Expenses			541,326				1,227,502				1,668,945				2,667,700
Total Expenses			9,290,838				9,013,541				28,027,599				27,839,823
Operating Income			3,933,062				4,038,933				11,591,791				16,384,050
Other Income			1,207,961				488,747				1,972,781				953,104
Non-Operating Expenses			(112,927	)			(1,796	)			(366,119	)			(41,723	)
Income (Loss) Before Provision for Income Taxes			5,028,096				4,525,884				13,198,453				17,295,431
Provision for Income Taxes			1,180,601				660,446				3,479,019				2,583,266
Net Income		US$	3,847,495				3,865,438				9,719,434				14,712,165
Other Comprehensive Income - Foreign Currency Translation Adjustment			(460,819	)			3,041,821				(1,068,653	)			6,656,889
Total Comprehensive Income			3,386,676				6,907,259				8,650,781				21,369,054
Less:
Net income attributable to Noncontrolling Interest In Subsidiaries			486,581				358,632				1,028,504				1,380,839
Other Comprehensive Income Attributable to Non-controlling Interest's Share			(45,971	)			304,278				(102,222	)			665,905
Total Comprehensive Income Attributable to Non-controlling Interest's Share			440,610				662,910				926,282				2,046,744
Net Income Attributable to Stockholders		US$	3,360,914				3,506,806				8,690,930				13,331,326
Other Comprehensive Income Attributable to Stockholders			(414,848	)			2,737,543				(966,431	)			5,990,984
Total Comprehensive Income Attributable to Stockholders		US$	2,946,066				6,244,349				7,724,499				19,322,310
Weighted average common share - Basic			19,304,921				19,304,921				19,304,921				19,304,921
Weighted average common share - Diluted			19,304,921				19,304,921				19,304,921				19,304,921
EPS - Basic			0.17				0.18				0.45				0.69
EPS - Diluted		US$	0.17				0.18				0.45				0.69

 

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

 

  

SORL Auto Parts, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months Ended September 30, 2012 and 2011

  

		Nine Months Ended September 30,
		2012				2011
Cash Flows from Operating Activities
Net Income		US$	9,719,434				14,712,165
Adjustments to reconcile net income (loss) to net cash from operating activities:
Bad Debt Expense			(143,830	)			498,014
Depreciation and Amortization			5,602,370				5,253,922
Loss on disposal of Fixed Assets			10,359				-
Changes in Assets and Liabilities:
Accounts Receivable			3,102,469				(10,107,006	)
Bank acceptance notes from customers			5,587,439				7,868,796
Other Currents Assets			2,491,925				(1,291,002	)
Inventories			172,988				(14,663,142	)
Prepayments			(4,112,124	)			(1,688,537	)
Deferred tax assets			(138,079	)			(164,779	)
Accounts Payable and Bank acceptance notes to vendors			(6,544,574	)			5,354,507
Income Tax Payable			866,586				81,293
Deposits Received from Customers			487,330				(3,412,311	)
Other Current Liabilities and Accrued Expenses			373,621				1,609,813
Deferred tax liabilities			41,633				40,407
Net Cash Flows from Operating Activities			17,517,547				4,092,139
Cash Flows from Investing Activities
Acquisition of Property and Equipment			(941,286	)			(7,589,518	)
Sales proceeds of disposal of fixed assets			6,886				-
Leasehold Improvements in Progress			(31,069	)			-
Net Cash Flows from Investing Activities			(965,469	)			(7,589,518	)
Cash Flows from Financing Activities
Proceeds from (Repayment of) Bank Loans			(3,921,092	)			(1,586,011	)
Proceeds from (Repayment of) Capital lease			(1,708,171	)			11,242,350
Net Cash flows from Financing Activities			(5,629,263	)			9,656,339
Effects on changes in foreign exchange rate			(145,175	)			508,648
Net Change in Cash and Cash Equivalents			10,777,640				6,667,608
Cash and Cash Equivalents- Beginning of the year			17,116,692				6,691,078
Cash and cash Equivalents - End of the period		US$	27,894,332				13,358,686
Supplemental Cash Flow Disclosures:
Interest Paid			1,929,388				2,044,898
Tax Paid			4,765,828				2,626,344

 

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

 

  

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

For The Nine Months Ended on September 30, 2012

 

		Number  of Share				Common  Stock				Additional  Paid-in  Capital				Reserves				Retained  Earnings  (Deficit)				Accumu. Other  Comprehensive  Income				Stockholders'  Equity				Noncontrolling  Interest				Total  Equity
Beginning Balance - January 1, 2012			19,304,921				38,609				42,199,014				8,375,392				84,610,260				21,910,957				157,134,232				16,947,178				174,081,410
Net Income																			8,690,930								8,690,930				1,028,504				9,719,434
Other Comprehensive Income(Loss)																							(966,431	)			(966,431	)			(102,222	)			(1,068,653	)
Transfer to reserve															861,662				(861,662	)							-				-				-
Ending Balance - September 30, 2012			19,304,921				38,609				42,199,014				9,237,054				92,439,528				20,944,526				164,858,731				17,873,460				182,732,191

 

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

 

 

SORL Auto Parts, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders' Equity

For The Nine months Ended on September 30, 2011

 

		Number of Share				Common Stock				Additional Paid-in Capital				Reserves				Retained Earnings (Deficit)				Accumu. Other Comprehensive Income				Stockholders' Equity				Noncontrolling Interest				Total Equity
Beginning Balance - January 1, 2011			19,304,921				38,609				42,199,014				6,641,547				69,672,286				14,731,607				133,283,063				14,517,162				147,800,225
Net Income																			13,331,326								13,331,326				1,380,839				14,712,165
Other Comprehensive Income(Loss)																							5,990,984				5,990,984				665,905				6,656,889
Transfer to reserve															1,350,967				(1,350,967	)							-				-				-
Ending Balance - September 30, 2011			19,304,921				38,609				42,199,014				7,992,514				81,652,645				20,722,591				152,605,373				16,563,906				169,169,279

 

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

 

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE A - DESCRIPTION OF BUSINESS

 

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

  

NOTE B - BASIS OF PRESENTATION

 

The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in the consolidation. Certain information and footnote disclosures normally included in financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted as permitted by the rules and regulations of the United States Securities and Exchange Commission, although the Company believes that the disclosures contained in this report are adequate to make the information presented not misleading. The condensed consolidated balance sheet information as of December 31, 2011 was derived from the audited consolidated financial statements included in Form 10-K. These condensed consolidated financial statements should be read in conjunction with the annual audited consolidated financial statements and the notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2011, and other reports filed with the SEC.

 

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

 

NOTE C- RECENTLY ISSUED FINANCIAL STANDARDS

  

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04). This newly issued accounting standard clarifies the application of certain existing fair value measurement guidance and expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This ASU is effective on a prospective basis for annual and interim reporting periods beginning on or after December 15, 2011. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (ASU 2011-05). This newly issued accounting standard: (1) eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity; (2) requires the consecutive presentation of the statement of net income and other comprehensive income; and (3) requires an entity to present reclassification adjustments on the face of the financial statements from other comprehensive income to net income. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income nor do the amendments affect how earnings per share is calculated or presented.

 

 

In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05, which defers the requirement within ASU 2011-05 to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. During the deferral, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the issuance of ASU 2011-05. These ASUs are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As these accounting standards do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, the adoption of these standards did not have an impact on our consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11). This newly issued accounting standard requires an entity to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions executed under a master netting or similar arrangement and was issued to enable users of financial statements to understand the effects or potential effects of those arrangements on its financial position. This ASU is required to be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. As this accounting standard only requires enhanced disclosure, the adoption of this standard is not expected to have an impact on our consolidated financial statements.

 

NOTE D - RELATED PARTY TRANSACTIONS

 

The Company continued to purchase packaging materials from the Ruili Group Co., Ltd. The Ruili Group Co., Ltd., is the minority shareholder of Ruian and is controlled by Mr. Xiao Ping Zhang and his family, who is the CEO and also the controlling party of the Company. The Company sold certain automotive products to Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd., which is controlled by the Ruili Group Co., Ltd.

 

The following related party transactions are reported for the three months and nine months ended September 30, 2012 and 2011:

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2012				2011				2012				2011
PURCHASES FROM:
Ruili Group Co., Ltd.		$	1,610,289			$	1,396,618			$	4,193,135			$	5,031,535
Total Purchases		$	1,610,289				1,396,618			$	4,193,135				5,031,535
SALES TO:
Ruili Group Co., Ltd.		$	441,938			$	562,936			$	1,900,549			$	1,856,052
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.			650,405				632,698				3,145,984				632,698
Total Sales		$	1,092,343			$	1,195,634			$	5,046,533			$	2,488,750

 

 

		September 30,				December 31,
		2012				2011
ACCOUNTS RECEIVABLE
Guangzhou Kormee Vehicle Brake Technology Development Co., Ltd.			1,518,832				747,053
Total			1,518,832				747,053
ACCOUNTS PAYABLE
Ruili Group Co., Ltd.		$	1,692,436			$	524,148
Total		$	1,692,436			$	524,148
OTHER PAYABLES
MGR Hong Kong Limited		$	74,745			$	25,559
Ruili Group Co., Ltd.			142,343				118,391
Total		$	217,088			$	143,950

 

NOTE E - ACCOUNTS RECEIVABLE

 

No customer individually accounted for more than 10% of our revenues or accounts receivable for the quarter ended September 30, 2012. The changes in the allowance for doubtful accounts at September 30, 2012 and December 31, 2011 are summarized as follows:

  

		September 30,				December 31,
		2012				2011
Beginning balance		$	892,455			$	319,687
Add: Increase to allowance			(149,447	)			572,768
Less: Accounts written off			—				—
Ending balance		$	743,008			$	892,455

 

		September 30,				December 31,
		2012				2011
Accounts receivable		$	63,248,366			$	66,236,896
Less: allowance for doubtful accounts			(743,008	)			(892,455	)
Account receivable balance, net		$	62,505,358			$	65,344,441

  

 

NOTE F - INVENTORIES

 

On September 30, 2012 and December 31, 2011, inventories consisted of the following:

 

		September 30,				December 31,
		2012				2011
Raw Materials		$	12,799,927			$	13,019,592
Work in process			14,615,766				16,576,415
Finished Goods			28,442,450				26,781,549
Total Inventory		$	55,858,143			$	56,377,556

 

NOTE G - PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment consisted of the following, on September 30, 2012 and December 31, 2011:

 

		September 30,				December 31,
		2012				2011
Machinery		$	51,620,272			$	49,879,491
Molds			1,376,067				1,384,825
Office equipment			1,542,569				1,439,305
Vehicles			1,999,715				1,853,111
Buildings			8,832,512				8,888,723
Machinery held under capital lease			18,097,156				18,166,087
Construction in progress			152,947				1,503,200
Sub-Total			83,621,238				83,114,742
Less: Accumulated depreciation			(35,918,734	)			(30,905,671	)
Fixed Assets, net		$	47,702,504			$	52,209,071

 

Depreciation expense charged to operations was $5,251,641 and $4,927,023 for the nine months ended September 30, 2012 and 2011, respectively.

 

On September 13, 2011, the Company entered an agreement with International Far Eastern Leasing Co., Ltd. (a first party) and sold and simultaneously leased back part of its unencumbered manufacturing equipment, for a term of 60 months and an interest rate of 7.95%. Since the People's Bank of China announced to low the benchmark interest rates on July 6, 2012, Far Eastern Leasing Co., Ltd. also adjusted the loan interest rate accordingly. The new interest rate of 7.45% will be applied for the remaining term of 48 months. The sale price of the manufacturing equipment was $13,209,492. As related to this transaction, the Company put down a security deposit of $1,863,916 to be refunded back to the Company after the end of the lease. In addition, the Company paid a fee of $641,484 to this first party accounted for as financing expense in the accompanying condensed consolidated financial statements. The Company has an option, exercisable at the end of the lease term, to repurchase the manufacturing equipment for $157. The transaction was accounted for as a financing transaction and was recorded in the accompanying condensed consolidated financial statements as a capital lease.

 

 

NOTE H- LEASEHOLD IMPROVEMENTS

 

		September 30,				December 31,
		2012				2011
Cost:		$	543,763			$	517,011
Less: Accumulated amortization:			(195,345	)			(141,407	)
Leasehold Improvements In Progress, net		$	348,418			$	375,604

 

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

 

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

 

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

  

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

 

NOTE I- LAND USE RIGHTS

 

		September 30,				December 31,
		2012				2011
Cost:		$	16,572,004			$	16,677,470
Less: Accumulated amortization:			(1,831,161	)			(1,566,392	)
Land use rights, net		$	14,740,843			$	15,111,078

 

According to the law of China, the government owns all the land in China. Companies and individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. The Company purchased the land use rights from Ruili Group for approximately $13.9 million on September 28, 2007. The Company has been negotiating with the government for a reduction in or exemption from the tax being sought by the government in connection with the transfer of the land use rights, and pending resolution of that issue, we have deferred accrual or payment of the tax. Due to the lack of resolution of that issue, the land use right certificate has not been issued to the Company. There is no assurance that we can conclude the negotiations with the government and obtain a favorable result. Amortization expenses related to this were $275,877 and $259,958 for the nine months ended September 30, 2012 and 2011, respectively.

 

NOTE J - INTANGIBLE ASSETS

 

Intangible assets owned by the Company included patent technology and management software licenses. Amortization expenses were $12,533 and $12,146 for the nine months ended September 30, 2012 and 2011 respectively. Future estimated amortization expense is as follows:

 

2012				2013				2014				2015				2016				Thereafter
$	4,210			$	16,743			$	13,574			$	11,990			$	11,990			$	12,594

 

 

NOTE K - PREPAYMENT

 

Prepayment consisted of the following as of September 30, 2012 and December 31, 2011:

 

		September 30,				December 31,
		2012				2011
Raw material suppliers		$	4,473,721			$	1,773,877
Equipment purchase			2,077,707				710,149
Total prepayment		$	6,551,428			$	2,484,026

 

NOTE L - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES

 

Deferred tax assets consisted of the following as of September 30, 2012 and December 31, 2011 comprise the following:

 

		30-Sep-12				31-Dec-11
Deferred tax assets - current
Provision			110,637				133,049
Revenue (net off cost)			19,426				―
Warranty			608,695				578,225
Deferred tax assets			738,758				711,274
Valuation allowance			―				―
Net deferred tax assets - current			738,758				711,274
Deferred tax liabilities - current
Revenue (net off cost)			―				105,735
Deferred tax liabilities - current			―				105,735
Net deferred tax assets - current			738,758				605,539
Deferred tax liabilities - non-current
Land use right			276,341				236,385
Deferred tax liabilities - non-current			276,341				236,385

 

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

 

 

NOTE M – ACCEPTANCE NOTES TO VENDORS

 

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

  

Bank acceptance notes to vendors were $1,878,253 and $5,589,678 as of September 30, 2012 and December 31, 2011, respectively. The Company has pledged bank acceptance notes from customers of $1.7 million to secure the bank acceptance notes to vendors granted by banks.

 

NOTE N - BANK LOANS

 

Bank loans represented the following as of September 30, 2012 and December 31, 2011:

 

		September 30,				December 31,
		2012				2011
Secured		$	12,453,336			$	16,448,527
Less: Current portion		$	(12,453,336	)		$	(16,448,527	)
Non-current portion		$	—			$	—

 

The Company obtained those short-term loans from Bank of China and Agricultural Bank of China to finance general working capital as well as new equipment acquisition. The Company did not provide any guarantee to any other parties. Interest rate for the loans ranged from approximately 1.35% to 6.38% per annum. The maturity dates of the loans ranged from October 16, 2012 to March 25, 2013.

 

Those short-term loans were guaranteed by Ruili Group Co., Ltd., a related party of the Company, of which Mr. Xiao Ping Zhang and Ms. Shu Ping Chi are both principal shareholders.

 

NOTE O - ACCRUED EXPENSES

 

Accrued expenses consisted of the following as of September 30, 2012 and December 31, 2011:

 

		September 30,				December 31,
		2012				2011
Accrued payroll		$	1,719,568			$	1,626,544
Accrued warranty expenses			4,057,966				3,854,832
Other accrued expenses			3,704,321				3,327,412
Total accrued expenses		$	9,481,855			$	8,808,788

 

 

NOTE P –CAPITAL LEASE OBLIGATIONS

  

		September 30,				December 31,
		2012				2011
Total Capital Lease Obligations		$	10,992,817			$	12,774,390
Less: Current portion		$	(2,449,040	)		$	(2,305,125	)
Non-current portion		$	8,543,777			$	10,469,265

  

The capital lease obligation was under the agreement with International Far Eastern Leasing Co., Ltd., which was disclosed in Note G, for the remaining term of 48 months and an interest rate of 7.45% per annum, payable monthly in arrears. International Far Eastern Leasing Co., Ltd. is the subsidiary of China Sinochem Corporation (listed among the 2012 Fortune 500 company list by Fortune magazine). As related to this transaction, the Company made a security deposit of $1,863,916 to be refunded back to the Company after the end of the lease.

 

NOTE Q – RESERVE

 

The reserve funds are comprised of the following:

 

		September 30,				December 31,
		2012				2011
Statutory surplus reserve fund		$	9,237,054			$	8,375,392
Total		$	9,237,054			$	8,375,392

 

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

 

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

 

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

 

 

NOTE R - INCOME TAXES

 

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

 

The Company increased its investment in Ruian as a result of its financing in December 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, Ruian was eligible for additional preferential tax treatment. For the years 2007 and 2008, Ruian was entitled to an income tax exemption on all pre-tax income generated by the company above its pre-tax income generated in the fiscal year 2006. Thereafter, Ruian was entitled to a 50% exemption from the effective income tax rate on any pre-tax income above its 2006 pre-tax income, to be recognized in the years 2009, 2010 and 2011. The above taxation exemption was superseded, because Ruian has been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate is valid for three years and provides for a reduced tax rate of 15% for years 2009 through 2011. So, the Company’s statutory income tax rate was 15% for years 2009 through 2011. For the quarter ended September 30, 2012, the statutory income tax rate was 25%. However, the Company is in the process of renewing its “High-Tech Enterprise” certificate, a certificate awarded by the government of China for qualified enterprises with high and new technologies that are encouraged by the government. If this renewal is successful, according to the China Corporate Income Tax Law, which came into effect on January 1, 2008, the effective income tax rate for qualified high and new technology enterprises, such as the Company, may be reduced to 15% later in 2012.

 

The reconciliation of the effective income tax rate of Ruian to the statutory income tax rate in the PRC for the nine months of 2012 and 2011 is as follows:

 

		Nine months ended September 30, 2012				Nine months ended September 30, 2011
US Statutory income tax rate			35.00	%			35.00	%
Valuation allowance recognized with respect to the loss in the US company			-35.00	%			-35.00	%
HK Statutory income tax rate			16.50	%			16.50	%
Valuation allowance recognized with respect to the loss in those HK company			-16.50	%			-16.50	%
China Statutory income tax rate			25.00	%			25.00	%
China Statutory income exemption			―				-10.00	%
Other items			0.44	%			-0.06	%
Effective tax rate			25.44	%			14.94	%

  

 

		Nine months ended September 30, 2012				Nine months ended September 30, 2011
Computed income tax provision at the statutory rate		$	3,263,348			$	4,398,503
Tax exemption			―				(1,759,401	)
Deferred tax provision			(96,445	)			(124,372	)
Current period permanent differences and other reconciling items			312,116				68,536
Total income taxes		$	3,479,019			$	2,583,266

 

Income taxes are calculated on a separate entity basis. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred tax assets and liabilities are approximately as mentioned above on September 30, 2012. There currently is no tax benefit recorded for the United States. The tax authority may examine the tax returns of the Company three years after the year ended. In the year of 2012, there were known penalties in the amount of $40,000 related to tax years 2007 and 2008, which the Company is in the process of settlement with the U.S. tax authority. The provisions for income taxes for the nine months ended September 30, 2012 and 2011, respectively, are summarized as follows:

 

		Nine months ended September 30, 2012				Nine months ended September 30, 2011
Current		$	3,575,464			$	2,707,638
Deferred			(96,445	)			(124,372	)
Total		$	3,479,019			$	2,583,266

 

The Company adopted the provisions of FASB ASC 740-10 (Prior authoritative literature: FIN No. 48, Accounting for Uncertainty in Income Taxes) on January 1, 2007. As the result of the implementation of the FASB ASC 740-10, Accounting for Uncertainty in Income Taxes – In Interpretation of FASB ASC 740-10 (Prior authoritative literature: FASB Statement No. 109), the Company recognized no material adjustments to unrecognized tax benefits. On the adoption date of January 1, 2007 and as of September 30, 2012 and December 31, 2011, the Company has no unrecognized tax benefits.

 

NOTE S - Non-controlling interest in subsidiaries

 

Non-controlling interest in subsidiaries represents a 10% non-controlling interest, owned by Ruili Group Co., Ltd., in Ruian, and a 40% non-controlling interest, owned by the Company’s Joint Venture partners, in SIH. Net income attributable to non-controlling interests in subsidiaries amounted to $1,028,504 and $1,380,839 for the nine months ended September 30, 2012 and 2011, respectively.

 

		September 30, 2012				September 30, 2011
10% non-controlling interest in Ruian		$	957,402			$	1,501,075
40% non-controlling interest in SIH		$	71,102				(120,236	)
Total		$	1,028,504				1,380,839

 

 

NOTE T - LEASES

 

In December 2006, Ruian entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two apartment buildings. These two apartment buildings are for Ruian’s management personnel and staff, respectively. The lease term is from January 2007 to December 2011 for one of the apartment buildings and from January 2007 to December 2012 for the other. In December 2011, a new lease agreement was signed for the lease of two apartment buildings. The lease term is from January 2012 to December 2016.

 

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

 

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

 

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

 

The lease expenses were $890,953 and $480,908 for the nine months ended September 30, 2012 and September 30, 2011, respectively.

 

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

 

		2012				2013				2014				2015				2016				Thereafter
Operating Lease Commitments		$	287,112			$	1,053,408			$	1,053,408			$	1,053,408			$	1,053,408			$	2,644,529

 

NOTE U - ADVERTISING COSTS

 

Advertising costs were $183,950 and $166,707 for the nine months ended September 30, 2012 and 2011, respectively.

 

NOTE V - RESEARCH AND DEVELOPMENT EXPENSE

 

Research and development costs are expensed as incurred and were $5,916,934 and $6,071,593 for the nine months ended September 30, 2012 and 2011, respectively.

 

NOTE W - WARRANTY CLAIMS

 

Warranty claims were $1,474,058 and $1,787,155 for the nine months ended September 30, 2012 and 2011, respectively. Warranty claims are classified as accrued expenses on the balance sheet. The movement of accrued warranty expenses for the nine months ended September 30, 2012 was as follows:

 

Beginning balance at January 01, 2012			3,854,832
Aggregate reduction for payments made			(1,244,423	)
Aggregate increase for new warranties issued during current period			1,474,058
Effect on changes in foreign exchange rate			(26,501	)
Ending balance at September 30, 2012:			4,057,966

 

 

NOTE X – SEGMENT INFORMATION

 

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

 

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

 

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

 

		Nine Months Ended September 30,								Three Months Ended September 30,
		2012				2011				2012				2011
NET SALES TO EXTERNAL CUSTOMERS
Commercial vehicle brake systems		$	111,678,786			$	125,146,226			$	36,277,690			$	35,876,417
Passenger vehicle brake systems			31,720,586				35,537,309				10,431,269				11,707,261
Net sales		$	143,399,372			$	160,683,535			$	46,708,959			$	47,583,678
INTERSEGMENT SALES
Commercial vehicle brake systems		$				$				$				$
Passenger vehicle brake systems			―				―				―				―
Intersegment sales		$	―			$	―			$	―			$	―
GROSS PROFIT
Commercial vehicle brake systems		$	30,813,735			$	34,707,120			$	9,744,787			$	9,914,184
Passenger vehicle brake systems			8,805,655				9,516,753				3,479,112				3,138,290
All other
Gross profit		$	39,619,390			$	44,223,873			$	13,223,899			$	13,052,474
Selling and distribution expenses			10,460,168				9,452,586				3,765,768				2,923,832
General and administrative expenses			9,981,552				9,647,944				2,630,785				2,968,222
Research and development expenses			5,916,934				6,071,593				2,352,958				1,893,985
Financial Expenses			1,668,945				2,667,700				541,326				1,227,502
Income (loss) from operations			11,591,791				16,384,050				3,933,062				4,038,933
Other income (expense), net			1,606,662				911,381				1,095,034				486,951
Income (loss) before income tax expense (benefit)		$	13,198,453			$	17,295,431			$	5,028,096			$	4,525,884
CAPITAL EXPENDITURE
Commercial vehicle brake systems		$	742,865			$	5,910,995			$	408,523			$	2,144,618
Passenger vehicle brake systems			198,421				1,678,523				117,467				589,028
Total		$	941,286			$	7,589,518			$	525,990			$	2,733,646
DEPRECIATION AND AMORTIZATION
Commercial vehicle brake systems		$	4,393,112			$	4,091,947			$	1,409,505			$	1,162,952
Passenger vehicle brake systems			1,209,258				1,161,975				405,289				659,003
Total		$	5,602,370			$	5,253,922			$	1,814,794			$	1,821,955

 

		September 30, 2012				December 31, 2011
TOTAL ASSETS
Commercial vehicle brake systems		$	181,108,339			$	185,276,912
Passenger vehicle brake systems			51,440,948				49,250,825
Total		$	232,549,287			$	234,527,737

 

		September 30, 2012				December 31, 2011
LONG LIVED ASSETS
Commercial vehicle brake systems		$	50,411,740			$	55,030,829
Passenger vehicle brake systems			14,318,654				14,628,448
Total		$	64,730,394			$	69,659,277

 

 

NOTE Y – PURCHASE DISCOUNT

 

Purchase discounts represent discounts received from vendors for purchasing raw materials. The Company did not receive any purchase discounts during the nine months ended September 30, 2012 and 2011.

 

NOTE Z – SHIPPING AND HANDLING COSTS

 

Shipping and handling costs incurred by the Company are included in selling expenses in the accompanying consolidated statements of income. Shipping and handling costs were $3,267,552 and $3,420,200 for the nine month ended September 30, 2012 and 2011, respectively.

 

NOTE AA – STOCK COMPENSATION PLAN

 

We had no stock-based compensation expense during the nine months ended September 30, 2012 and 2011, respectively. There were no employee stock options or warrants outstanding as of September 30, 2012.

 

NOTE AB - COMMITMENTS AND CONTINGENCIES

 

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

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

  

NOTE AC - OFF-BALANCE SHEET ARRANGEMENTS

 

On September 30, 2012, we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

 

NOTE AD – THE ACQUISITION AND COMBINATION OF OPERATIONS REPORTING

 

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

  

NOTE AE – SUBSEQUENT EVENTS

 

The Company has no significant subsequent events from September 30, 2012 through the consolidated financial statements issue date of this report.

 

 

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

 

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

 

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

 

OVERVIEW

 

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

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

For a summary of our accounting policies and estimates, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the Fiscal Year ended December 31, 2011.

 

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

 

Results of Operations

 

On November 5, 2012, SORL announced the Company received a 400-unit order for its new electric air compressor from Shen Zhen Wuzhoulong Motors Group. Released in July 2012, the new electric air compressor is selling at 8,000 RMB per unit. In addition to Wuzhoulong, the Company has also received indication of purchasing interest for the same products from other large bus manufacturers in China.

 

On October 15, 2012, SORL announced that the Company obtained a patent in the People’s Republic of China (“PRC”) for a new proprietary electric air dryer that is specifically designed for new energy electric buses and specialty commercial vehicles. Equipped with an internal electronic control unit to achieve continuing desiccant regeneration, SORL’s new electric air dryer has a prolonged useful life and improves the working environment of the vehicle’s air control system. As a result, the dryer extends the operating life of the entire air control system and improves the vehicles’ safety performance. The patent will be in effect from 2012 through 2030.

 

On September 24, 2012, the Company announced that it won a new contract from Shanxi Automobile Group Co., Ltd. (“Shanqi”) to supply 90% of the re-card spring brake chambers for the Delong F3000 heavy-duty truck models. The Delong F3000 series is one of the heavy-duty truck models from Shaanxi Auto and it possesses the versatility to be used in logistics, heavy loads, construction and bridge building, ore transportation, municipal sanitation and the transportation of dangerous goods. The new F3000 provides superior quality for its customers.

 

On August 27, 2012, SORL announced the launch of its newly developed electrically controlled power steering pump, marking a technological breakthrough for the electric bus market. SORL’s electrically controlled power steering pump is specifically designed for use in new energy electric buses.

 

 

On July 18, 2012, Company announced it had launched a new generation of electric air brake compressors to be used in electric buses. Air brake compressors used in traditional vehicles are powered by an internal combustion engine. SORL's new generation of electric air brake compressors are powered by an electric motor, thereby increasing fuel conservation and reducing pollution. The new compressors have an extended life span as it is far easier to make them start or stop working. An electric air compressor is a necessity for all electric buses with an air brake system. 

 

Results of operations for the three months ended September 30, 2012 as compared to the three months ended September 30, 2011.

 

SALES

 

		Three Months ended								Three Months ended
		September 30, 2012								September 30, 2011
		(U.S.  dollars in millions)
Commercial vehicle brake systems, etc.		$	36.3				77.7	%		$	35.9				75.4	%
Passenger vehicle brake systems, etc.		$	10.4				22.3	%		$	11.7				24.6	%
Total		$	46.7				100.0	%		$	47.6				100.0	%

  

Net sales were $46,708,959 and $47,583,678 for the three months ended September 30, 2012 and 2011, respectively, a decrease of $0.9 million or 1.9%.

 

The sales from commercial vehicle brake systems increased by $0.4 million or 1.1%, to $36.3 million for the third quarter of 2012, compared to $35.9 million for the same period of 2011.

 

The sales from passenger vehicle brake systems decreased by $1.3 million or 11.1%, to $10.4 million for the third quarter of 2012, compared to $11.7 million for the same period of 2011.

 

A breakdown of net sales revenue for these markets for the third quarter of the 2012 and 2011 fiscal years, respectively, is set forth below:

 

 

		Three Months								Three Months
		ended				Percent				ended				Percent
		September 30, 2012				of Total Sales				September   30, 2011				of Total Sales				Percentage Change
		(U.S. dollars in millions)
China OEM market		$	18.7				40.0	%		$	20.8				43.8	%			-10.1	%
China Aftermarket		$	12.2				26.1	%		$	11.6				24.3	%			5.2	%
International market		$	15.8				33.8	%		$	15.2				32.0	%			3.9	%
Total		$	46.7				100.0	%		$	47.6				100.0	%			-1.9	%

 

Chinese domestic macro-economic environment, including consumer confidence and industrial activities, as well as relevant policies and regulations resulted in a low-growth environment for the automotive industry in the nine months of 2012, caused the growth rate in vehicle sales decline from the comparable period of 2011. For the first time in China’s industrialization and urbanization era, the growth rate of automotive vehicle sales declined over the nine month periods in two consecutive years, 2011 and 2012. However, this low-growth development is also partially a result of the significant and possibly one-time only increases in vehicle sales experienced in 2009 and 2010, and the PRC government is guiding the automotive industry to develop at a more rational long-term growth rate. To prevent sales to the OEM market from deteriorating, the Company enhanced its product line with a broader range of products through innovative new products as well as penetrating new market segments, such as the bus and the light-duty vehicle markets. As a result, our sales to the Chinese OEM market decreased by $2.1 million or 10.1%, to $18.7 million for the third quarter of 2012, compared to $20.8 million for the three month period ended September 30 of 2011.

 

Our sales to the Chinese aftermarket increased by $0.6 million or 5.2%, to $12.2 million for the third quarter of 2012, compared to $11.6 million for the same period of 2011, due to overall slowdown in the auto parts market in China. The increased number of new vehicle sales in China and the expiration of OEM warranties helped drive our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the three months ended September 30, 2012. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion in the bus aftermarket.

 

Our export sales increased by $0.6 million or 3.9%, to $15.8 million for the third quarter of 2012, as compared to $15.2 million for the same period of 2011. It was mainly due to the improving conditions in the U.S. market and a broadening customer base, as well as the Company’s continuous strategy to strengthen and extend its distribution networks to focus on increasing recognition of SORL’s products by end users.

 

We will take the following measures to ensure future growth in the international market:

(1) Enhance the Company brand image through industry exhibitions.

(2) Maintenance of our customer base and market position while penetrating new markets and capturing new customers.

(3) Building a stronger international marketing network with the focus on exploring high-value foreign markets, and active marketing to the large automotive chain stores that directly sell to end users.

(4) Further targeting the international OEM market by actively supporting initiatives that promote our overseas sales.

 

COST OF SALES AND GROSS PROFIT

 

Cost of sales for the three months ended September 30, 2012 were $33,485,059, a decrease of $1,046,145 or 3.0%, from $34,531,204 for the three month period ended September 30, 2011. Our gross profit increased by 1.3% from $13,052,474 for the same period in 2011 to $13,223,900 for the three month period ended September 30, 2012.

 

 

Gross margin increased to 28.3% from 27.4% for the three month period ended September 30, 2012 compared with 2011, primarily resulted from the increase of gross margin of our passenger vehicle business, but partly offset by the decrease in the gross margin of our commercial vehicle business. Gross margin is being affected by labor expenses, the fluctuation of the Chinese currency, and raw material costs, as well as our product mix in each of our commercial vehicle and passenger vehicle businesses.

 

Cost of sales from commercial vehicle brake systems for the three months period ended September 30, 2012 were $26.5 million, an increase of $0.5 million or 2.2% from $ 26.0 million for the same period last year. Such increase was primarily resulted from the increase of sales from commercial vehicle brake systems by $0.4 million or 1.1%. Since the increase of our cost of sales in the commercial vehicle business outpaced our increase in the sales from commercial vehicle business, the gross profit from commercial vehicle brake systems decreased by 1.7% from $9.9 million for three month period ended September 30, 2011, to $9.7 million for the three month period ended September 30, 2012. Gross margin from commercial vehicle brake systems decreased to 26.9% from 27.6% for the three months period ended September 30, 2012, compared to the three month period ended September 30, 2011. The decrease was mainly due to rising labor expenses, the appreciation of the Chinese currency, and higher raw material prices.

 

Cost of sales from passenger vehicle brake systems for the three months period ended September 30, 2012 were $7.0 million, a decrease of $1.6 million or 18.9%, from $8.6 million for the three month period ended September 30, 2011. Such decrease primarily resulted from the decrease of sales by $1.3 million, or 11.1% in our passenger vehicle business. The gross profit from passenger vehicle brake systems increased by 10.9% from $3.1 million for the three month period ended September 30, 2011, to $3.5 million for the three month period ended September 30, 2012.

 

Gross margin from passenger vehicle brake systems increased to 33.4% from 26.8% for the three months ended September 30, 2012, as compared with 2011. The increase of our gross margin primarily resulted from the increase of our production efficiency and the increase of the weight of higher value-added, more technologically advanced products in our product portfolio in our passenger vehicle business, and partly offset by the increase in labor expenses, the appreciation of the Chinese currency, and higher raw material costs.

 

SELLING AND DISTRIBUTION EXPENSES

 

Selling and distribution expenses were $3,765,768 for the three months ended September 30, 2012, as compared to $2,923,832 for the same period of 2011, an increase of $841,936 or 28.8%. The increase was mainly due to increased packaging expense and selling- and distribution- related travel expenses.

 

Selling and distribution expenses as a percentage of sales revenue increased to 8.1% for the three months ended September 30, 2012, as compared to 6.1% for the same period in 2011, primarily due to the increase of total amount of selling and distribution expenses and the decrease of sales by $0.9 million from $47.6 million from the three months ended September 30, 2011 to $46.7 million from the three months ended September 30, 2012.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

General and administrative expenses were $2,630,786 for the three months ended September 30, 2012, as compared to $2,968,222 for the same period of 2011, a decrease of $337,436 or 11.4%. The general and administrative expenses decreased as a result of certain adjustments for the prior period and decreased sales for the current period. The Company incurred fewer expenses in relation to reduced sales .Since the decrease of our general and administrative expenses outpaced the decrease of our sales, general and administrative expenses, as a percentage of sales revenue,  decreased from 6.2% for the same period in 2011 to 5.6% for the three months ended September 30, 2012.

 

 

RESEARCH AND DEVELOPMENT EXPENSE

 

Research and development expenses include payroll, employee benefits, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development costs. For the three months ended September 30, 2012, research and development expense was $2,352,958, as compared to $1,893,985 for the same period of 2011, an increase of $458,973.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expense decreased by $7,161 to $1,814,794 for the three months ended September 30, 2012, compared with that of $1,821,955 for the same period of 2011. The de minis decrease in depreciation and amortization expense primarily resulted from a stable portfolio of production equipment and facilities.

 

FINANCIAL EXPENSE

 

Financial expense mainly consists of interest expense, the financing expense associated with our capital lease transaction and exchange loss. The financial expense for the three months ended September 30, 2012, decreased by $686,176 to $541,326 from $1,227,502 for the same period of 2011, which was mainly due to lower interest rates.

 

OTHER INCOME

 

Other income was $1,207,961 for the three months ended September 30, 2012, as compared to $488,747 for the three months ended September 30, 2011, an increase of $719,214. The increase was mainly due to an increase in sales of raw material scrap for the three months ended September 30, 2012.

 

INCOME TAX

   

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

 

The Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential tax treatment for the years 2007 and 2008. In those years, the Joint Venture was entitled to an income tax exemption on all pre-tax income generated by the Company above its pre-tax income generated in the fiscal year 2006. This tax exemption was superseded as a result of the Joint Venture having been awarded the Chinese government's "High-Tech Enterprise" designation. The High-Tech Enterprise certificate was valid for three years and provided for a reduced tax rate for years 2009 through 2011. Thus, our effective income tax rate was 15% for years 2009 through 2011. For the quarter ended September 30, 2012, the effective income tax rate was 25%. However, the Company is in the process of renewing its “High-Tech Enterprise” certificate. If this renewal is successful, the effective income tax rate may be reduced to 15% later in 2012.

 

Income tax expense of $1,180,601 and $660,446 was recorded for the quarters ended September 30, 2012 and 2011, respectively. The increase was due to the increase of the income before provision for income taxes from $4.5 million for the three months ended September 30, 2011 to $5.0 million for the three months ended September 30, 2012, and the increase of our effective tax from 15% to 25% for the same period.

 

STOCK-BASED COMPENSATION

 

There were no options or warrants outstanding as of September 30, 2012.

 

 

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

 

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES

 

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH, in each case held by our Joint Venture partners. Net income attributable to non-controlling interest in subsidiaries amounted to $486,581 and $358,632 for the third quarter ended September 30, 2012 and 2011, respectively.

 

NET INCOME ATTRIBUTABLE TO STOCKHOLDERS

 

The net income attributable to stockholders for the quarter ended September 30, 2012, decreased by $145,892, to $3,360,914 from $3,506,806 for the quarter ended September 30, 2011 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the quarter ended September 30, 2012 and 2011, were $0.17 and $0.18 per share, respectively.

  

Results of operations for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011.

 

SALES

 

		Nine months ended								Nine months ended
		September 30, 2012								September 30, 2011
		(U.S.  dollars in millions)
Commercial vehicles brake systems, etc.		$	111.7				77.9	%		$	125.1				77.9	%
Passenger vehicles brake systems, etc.		$	31.7				22.1	%		$	35.6				22.2	%
Total		$	143.4				100.0	%		$	160.7				100.0	%

 

Net sales were $143,399,372 and $160,683,535 for the nine months ended September 30, 2012 and 2011, respectively, a decrease of $17.3 million or 10.8%.

 

The sales from commercial vehicle brake systems decreased by $13.4 million or 10.7%, to $111.7 million for the nine months ended September 30, 2012, compared to $125.1 million for the same period of 2011. Due to the slowdown of the commercial vehicle market in the nine months ended September 30, 2012, the sales from the OEM market decreased, which impacted the sales of the commercial vehicle brake systems.

 

The sales from passenger vehicle brake systems decreased by $3.9 million or 11.0%, to $31.7 million for the nine months ended September 30, 2012, compared to $35.6 million for the same period of 2011.

 

 

A breakdown of net sales revenues for China OEM markets, China Aftermarket and International markets for the nine months ended September 30, 2012 and 2011 fiscal years, respectively, is set forth below:

 

		Nine months				Percent				Nine months				Percent
		ended				of				ended				of
		September 30, 2012				Total Sales				September 30, 2011				Total Sales				Percentage Change
		(U.S. dollars in millions)
China OEM market		$	70.1				53.2	%		$	85.5				53	%			-18.0	%
China Aftermarket		$	33.7				22.2	%		$	32.9				21	%			2.4	%
International market		$	39.6				24.6	%		$	42.3				26	%			-6.4	%
Total		$	143.4				100.0	%		$	160.7				100.0	%			-10.8	%

 

Chinese domestic macro-economic environment, including consumer confidence and industrial activities, as well as relevant policies and regulations have resulted in a low-growth environment for the automotive industry in the nine months of 2012, caused the growth rate in vehicle sales again declined from the low base in the comparable period of 2011. For the first time in China’s industrialization and urbanization era, the growth rate of automotive vehicle sales has declined over the nine month periods in two consecutive years, 2011 and 2012. However, this low-growth development is also partially a result of the significant and possibly one-time only increases in vehicle sales experienced in the 2009 and 2010 years, and the PRC government is guiding the automotive industry to develop at a more rational long-term growth rate. To prevent sales to the OEM market from deteriorating further, the Company has maintained its market position in the Chinese OEM market by enhancing its product line with a broader range of products through innovative new products as well as penetrating new market segments such as the bus and the light-duty vehicle markets. As a result, our sales to the Chinese OEM market decreased by $15.4 million or 18.0%, to $51.4 million for the nine months ended September 30, 2012, compared to $85.5 million for the same period of 2011.

 

Our sales to the Chinese aftermarket increased by $0.8 million or 2.4%, to $33.7 million for the nine months ended September 30, 2012, compared to $32.9 million for the same period of 2011. The increased number of new vehicle sales in China and the expiration of OEM warranties helped drive the increase in our aftermarket business. Sales of our new model products, applicable to both OEM and aftermarket, also grew during the nine months ended September 30, 2012. We will continue with our strategies to further optimize our sales network and to help further penetrate into new markets. Accelerated urbanization and the Chinese government’s increased support for public transportation favor expansion in the bus aftermarket.

 

Our export sales decreased by $2.7 million or 6.4%, to $39.6 million for the nine months of 2012, as compared to $42.3 million for the same period of 2011. The debt crisis in Europe and the currency depreciation in some countries caused some of our customers to reduce their inventories. Moreover, the instability of the political situation in the Middle Eastern countries restricted the purchases of our customers from us. We will take the following measures to ensure future growth in the international market:

 

(1) Enhance the Company brand image through industry exhibitions;

(2) Maintain our customer base and market position while penetrating new markets and capturing new customers;

(3) Build a stronger international marketing network with the focus on exploring high-value foreign markets, and actively market to the large automotive chain stores that directly sell to end users, and

(4) Further target the international OEM market by actively support initiatives that promote our overseas sales.

 

 

COST OF SALES AND GROSS PROFIT

 

Cost of sales for the nine months ended September 30, 2012 were $103,779,982, a decrease of $12,679,680 or 10.9% from $116,459,662 for the same period last year. Our gross profit decreased by 10.4% from $44,223,873 for the nine months ended September 30, 2011 to $39,619,390 for the same period of 2012. Both the decrease of cost of sales and gross profit primarily resulted from the decrease of sales from $161 million from the nine months ended September 30, 2011 to $143 million for the nine months ended September 30, 2012.

 

Gross margin increased to 27.6% from 27.5% for the nine months ended September 30, 2012, as compared with the same period of 2011, primarily resulted from the increase of gross margin of our passenger vehicle business, but offset by the decrease in the gross margin of our commercial vehicle business. Gross margin is being affected by labor expenses, the fluctuation of the Chinese currency, and raw material costs, as well as our product mix in each of our commercial vehicle and passenger vehicle businesses.

 

Cost of sales from commercial vehicle brake systems for the nine months ended September 30, 2012 were $80.9 million, a decrease of $9.6 million or 10.6% from $90.4 million for the same period of 2011. The gross profit from commercial vehicle brake systems decreased by 11.2% from $34.7 million for the nine months ended September 30, 2011 to $30.8 million for the same period of 2012. Both the decrease of cost of sales and the decrease of gross profit primarily resulted from the decrease of sales from $125.1 million from the nine months ended September 30, 2011 to $111.7 million for the nine months ended September 30, 2012 for our commercial vehicle business.

 

Gross margin from commercial vehicle brake systems decreased to 27.6% from 27.7% for the nine months ended September 30, 2012 compared with the same period of 2011. The decrease in the gross margin was mainly due to rising labor expenses, the appreciation of the Chinese currency, and higher raw material costs.

 

Cost of sales from passenger vehicle brake systems for the nine months ended September 30, 2012 were $22.9 million, a decrease of $3.1 million or 11.9% from $26.0 million for the same period of 2011. The gross profit from passenger vehicle brake systems decreased by 7.5% from $9.5 million for the nine months ended September 30, 2011 to $8.8 million for the same period of 2012. Both the decrease of cost of sales and the decrease of gross profit from our passenger vehicle business primarily resulted from the decrease of our sales from passenger vehicle business from $35.6 million for the nine months ended September 30, 2011 to $31.7 million for the nine months ended September 30, 2012.

 

Gross margin from passenger vehicle brake systems increased to 27.8% from 26.8% for the nine months ended September 30, 2012, as compared with the same period in 2011. The increase of our gross margin primarily resulted from the increase of our production efficiency and the increase of the weight of higher value-added, more technologically advanced products in our product portfolio in our passenger vehicle business, partly offset by the increase in labor expenses, the appreciation of the Chinese currency, and higher raw material costs.

 

 

SELLING AND DISTRIBUTION EXPENSES

 

Selling and distribution expenses were $10,460,168 for the nine months ended September 30, 2012, as compared to $9,452,586 for the same period of 2011, an increase of $1,007,582 or 10.7%.

 

The increase was mainly due to increased packaging expense and selling- and distribution- related travel expenses. As a percentage of sales revenue, selling expenses increased to 7.3% for the nine months ended September 30, 2012, as compared to 5.9% for the same period in 2011, primarily because as the total selling and distribution expenses increased, our total sales revenues decreased about 10.8%.

 

GENERAL AND ADMINISTRATIVE EXPENSES

 

General and administrative expenses were $9,981,552 for the nine months ended September 30, 2012, as compared to $9,647,944 for the same period of 2011, an increase of $333,608 or 3.5%.

 

The increase was mainly due to increases in labor and salary expenses related to general and administrative functions of the Company and the increases in expenses related to general business development. As a percentage of sales revenue, general and administrative expenses increased to 7.0% for the nine months ended September 30, 2012, as compared to 6.0% for the same period in 2011, primarily because as the total general and administrative expenses increased, while our total sales revenues decreased about 10.8%.

 

RESEARCH AND DEVELOPMENT EXPENSE

 

Research and development expenses include payroll, employee benefits, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development costs. For the nine months ended September 30, 2012, research and development expenses were $5,916,934, as compared to $6,071,593 for the same period of 2011, a decrease of $154,659.

 

DEPRECIATION AND AMORTIZATION

 

Depreciation and amortization expenses increased to $5,602,370 for the nine months ended September 30, 2012, compared with that of $5,253,922 for the same period of 2011, an increase of $348,448. The increase in depreciation and amortization expenses was primarily due to the increased pool of the capital equipment resulted from the purchase of production equipment.

 

FINANCIAL EXPENSE

 

Financial expense mainly consists of interest expenses and exchange losses. The financial expense for the nine months ended September 30, 2012, decreased by $998,755 to $1,668,945 from $2,667,700 for the same period of 2011, which was mainly due to lower interest expenses.

 

OTHER INCOME

  

Other income was $1,972,781 for the nine months ended September 30, 2012, as compared to $953,104 for the nine months ended September 30, 2011, an increase of $1,019,677. The increase was mainly due to an increase in sales of raw material scrap for the nine months ended September 30, 2012.

 

INCOME TAX

 

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

 

 

The Company increased its investment in the Joint Venture as a result of its financing in December, 2006. In accordance with the Income Tax Law of the People's Republic of China on Foreign-invested Enterprises and Foreign Enterprises, the Joint Venture was eligible for additional preferential tax treatment for the years 2007 and 2008. In those years, the Joint Venture was entitled to an income tax exemption on all pre-tax income generated by the Company above its pre-tax income generated in the fiscal year 2006. This tax exemption was superseded as a result of the Chinese government awarded "High-Tech Enterprise" designation to the Joint Venture. The High-Tech Enterprise certificate is valid for three years and it provides the Joint Venture a reduced tax rate of 15% for years 2009 through 2011. Thus, our effective income tax rate is 15% for years 2009 through 2011. For the nine months ended September 30, 2012, the effective income tax rate is 25%. However, the Company is in the process of renewing its “High-Tech Enterprise” certificate. If this renewal is successful, the effective income tax rate may be reduced to 15% in later 2012.

 

Income tax expenses of $3,479,019 and $2,583,266 were recorded for the nine months ended September 30, 2012 and 2011, respectively.   The increase was primarily due to (i) the increase the increase of our effective tax from 15% from the nine months ended September 30, 2011 to 25% for the same period in 2012, and (ii) the decrease of the income before provision for income taxes from $17.3 million for the nine months ended September 30, 2011 to $13.2 million for the three months ended September 30, 2012.

 

STOCK-BASED COMPENSATION

 

There were no options or warrants outstanding as of September 30, 2012.

 

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

 

NET INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES

 

Non-controlling interest in subsidiaries represents a 10% non-controlling interest in Ruian and 40% non-controlling interest in SIH. Each of the non-controlling interest is held by our Joint Venture partners. Net income attributable to non-controlling interest in subsidiaries amounted to $1,028,504 and $1,380,839 for the nine months ended September 30, 2012 and 2011, respectively.

 

NET INCOME ATTRIBUTABLE TO STOCKHOLDERS

 

The net income attributable to stockholders for the nine months ended September 30, 2012, decreased by $4,640,396, to $8,690,930 from $13,331,326 for the nine months ended September 30, 2011 due to the factors discussed above. Earnings per share (“EPS”), both basic and diluted, for the nine months ended September 30, 2012 and 2011, were $0.45 and $0.69 per share, respectively.

 

FINANCIAL CONDITION

 

Liquidity and Capital Resources

OPERATING - Net cash provided by operating activities was $17,517,547 for nine months ended September 30, 2012, an increase of $13,425,408, as compared with $4,092,139 of net cash provided in operating activities in the same period in 2011. Such increase was primarily due to increased cash inflow resulting from changes in accounts receivable and inventories. Most accounts receivable of our OEM customers were converted into bank acceptance notes from customers during the nine months ended September 30, 2011.

 

At September 30, 2012, the Company had cash and cash equivalents of $27,894,332, as compared to cash and cash equivalents of $17,116,692 at December 31, 2011. The Company had working capital of $126,821,915 at September 30, 2012, as compared to working capital of $115,127,783 at December 31, 2011, reflecting current ratios of 4.09:1 and 3.31:1, respectively.

 

INVESTING - During the nine months ended September 30, 2012, the Company expended net cash of $965,469 in investing activities. For the nine months ended September 30, 2011, the Company utilized $7,589,518 in investing activities, mainly for acquisition of new equipment to support the growth of the business.

 

 

FINANCING - During the nine month period ended September 30, 2012, the Company repaid the bank loans and a capital lease in the aggregate amount or $5,629,263. Net cash provided by financing activities was $9,656,339 for the nine months ended September 30, 2011.

 

Management has taken a number of steps to restructure the Company’s customer base and phase out accounts which failed to make prompt payments. We also placed more emphasis on collection of accounts receivable from our customers. During 2012, we continued to develop new products that we believe will have a higher profit margin, and adopting steps for further cost saving such as improving the material utilization rate. We maintain good relationships with local banks. We believe that our current cash, cash equivalents, anticipated cash flow generated from operations and our bank lines of credit will be sufficient to finance our working capital requirements for the foreseeable future.

 

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

 

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

 

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

 

OFF-BALANCE SHEET AGREEMENTS

 

On September 30, 2012 we did not have any material commitments for capital expenditures or have any transactions, obligations or relationships that could be considered off-balance sheet arrangements.

  

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures:

 

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

 

Changes in Internal Control over Financial Reporting:

 

There were no changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

None.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS

 

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C 1350) (1)

 

   

(1)

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

 

 SIGNATURES

 

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

 

Dated : November 14, 2012	SORL AUTO PARTS, INC.
	By: /s/ Xiao Ping Zhang
	Name: Xiao Ping Zhang
	Title: Chief Executive Officer

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