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, 2010





o
            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 EmployerIdentification
      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 xNoo





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 Filero
            Accelerated Filero
            Non-Accelerated
      Filer o
            Smaller Reporting
      Companyx





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


YesoNo Xx





APPLICABLE ONLY TO CORPORATE
ISSUERS





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


As of October 30, 2010 there were19,304,921shares of Common Stock
outstanding









SORL AUTO PARTS,
INC.


FORM 10-Q


For the Quarter Ended September 30,
2010





INDEX






PagePART I.
            FINANCIAL
      INFORMATION (Unaudited)
            1Item 1.
            Financial
      Statements:
            1Condensed
      Consolidated Balance Sheets as of September 30, 2010 (Unaudited) and
      December 31, 2009
            1Condensed
      Consolidated Statements of Income and Comprehensive Income (Unaudited) for
      the Three and Nine Months Ended September 30, 2010 and
2009
            2Condensed
      Consolidated Statements of Cash Flows (Unaudited) for the Three and Nine
      Months Ended September 30, 2010 and 2009
            3Condensed
      Consolidated Statements of Stockholders’ Equity (Unaudited)
            4Notes
      to the Condensed Consolidated Financial Statements (Unaudited)
            6Item 2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
            20Item 3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            32Item 4.
            Controls
      and Procedures
            32PART II.
            OTHER
      INFORMATION
            33Item 6.
            Exhibits
            33SIGNATURES
            33












SORL
      Auto Parts, Inc. and SubsidiariesConsolidated
      Balance SheetsSeptember
      30, 2010 and December 31, 2009




September
      30, 2010
            
            
            
            December
      31, 2009 *(Unaudited)AssetsCurrent
      AssetsCash
      and Cash Equivalents
            US$
            
            
            2,244,711
            
            US$
            
            
            10,255,259Accounts
      Receivable, Net of Provision
            
            
            
            52,341,726
            
            
            
            
            47,753,974Notes
      Receivable
            
            
            
            17,722,265
            
            
            
            
            13,083,691Inventory
            
            
            
            27,970,237
            
            
            
            
            23,943,279Prepayments
            
            
            
            9,558,419
            
            
            
            
            7,558,140Deferred
      tax assets
            
            
            
            526,631
            
            
            
            
            220,577Other
      current assets
            
            
            
            4,041,842
            
            
            
            
            5,226,713Total
      Current Assets
            
            
            
            114,405,831
            
            
            
            
            108,041,633Fixed
      AssetsProperty,
      Plant and Equipment
            
            
            
            62,154,174
            
            
            
            
            49,713,952Less:
      Accumulated Depreciation
            
            
            
            (21,289,024
            )
            
            
            
            (17,983,124
            )Property,
      Plant and Equipment, Net
            
            
            
            40,865,150
            
            
            
            
            31,730,828Leasehold
      Improvements in Progress
            
            
            
            437,161
            
            
            
            
            477,681Land
      Use Rights, Net
            
            
            
            14,215,350
            
            
            
            
            14,198,392Other
      AssetsDeferred
      compensation cost-stock options
            
            
            
            -
            
            
            
            
            -Intangible
      Assets
            
            
            
            164,561
            
            
            
            
            161,499Less:
      Accumulated Amortization
            
            
            
            (67,123
            )
            
            
            
            (54,380
            )Intangible
      Assets, Net
            
            
            
            97,438
            
            
            
            
            107,119Total
      Other Assets
            
            
            
            97,438
            
            
            
            
            107,119Total
      Assets
            US$
            
            
            170,020,930
            
            US$
            
            
            154,555,653Liabilities
      and Shareholders' EquityCurrent
      LiabilitiesAccounts
      Payable, including $5,322 and $1,985,291 due to related parties at
      September 30, 2010 and December 31, 2009, respectively.
            US$
            
            
            6,325,153
            
            US$
            
            
            9,724,715Deposit
      Received from Customers
            
            
            
            5,110,219
            
            
            
            
            3,670,369Short
      term bank loans
            
            
            
            9,383,510
            
            
            
            
            -Income
      tax payable
            
            
            
            1,258,771
            
            
            
            
            551,900Accrued
      Expenses
            
            
            
            5,717,555
            
            
            
            
            4,206,297Other
      Current Liabilities, including $107,845 and $200,762 from related parties
      at September 30, 2010 and December 31, 2009, respectively.
            
            
            
            2,283,609
            
            
            
            
            585,176Total
      Current Liabilities
            
            
            
            30,078,817
            
            
            
            
            18,738,457Non-Current
      LiabilitiesDeferred
      tax liabilities
            
            
            
            156,895
            
            
            
            
            115,481Total
      Liabilities
            
            
            
            30,235,712
            
            
            
            
            18,853,938Stockholders'
      EquityPreferred
      Stock - No Par Value; 1,000,000 authorized; none issued and outstanding as
      of September 30, 2010 and December 31, 2009
            
            
            
            -
            
            
            
            
            -Common
      Stock - $0.002 Par Value; 50,000,000 authorized, 19,304,921 and 18,304,921
      issued and outstanding as of September 30, 2010 and December 31,
      2009
            
            
            
            38,609
            
            
            
            
            36,609Additional
      Paid In Capital
            
            
            
            42,199,014
            
            
            
            
            55,268,604Reserves
            
            
            
            6,051,748
            
            
            
            
            4,554,601Accumulated
      other comprehensive income
            
            
            
            13,273,727
            
            
            
            
            10,939,703Retained
      Earnings
            
            
            
            64,448,912
            
            
            
            
            51,390,409Total
      SORL Auto Parts, Inc. stockholders' equity
            
            
            
            126,012,010
            
            
            
            
            122,189,926Noncontrolling
      Interest In Subsidiaries
            
            
            
            13,773,208
            
            
            
            
            13,511,789Total
      Equity
            
            
            
            139,785,218
            
            
            
            
            135,701,715Total
      Liabilities and Stockholders' Equity
            US$
            
            
            170,020,930
            
            US$
            
            
            154,555,653




The
      accompanying notes are an integral part of these financial
      statements




*
12/31/09 Consolidated Balance Sheet has been adjusted for the acquisition of a
business line under common control in the current period. Refer to Note AD for
details.





1




SORL
      Auto Parts, Inc. and SubsidiariesConsolidated
      Statements of Income and Comprehensive
Income(Unaudited)Three
      Months and Nine Months Ended September 30,
2010


Three
      Months Ended September 30,
              
              
              
              Nine
      Months Ended
                September
      30,2010
              
              
              2009
              
              
              
              2010
              
              
              2009Sales
              US$
              
              
              50,806,384
              
              
              
              38,719,508
              
              US$
              
              
              144,593,338
              
              
              
              95,110,334Include:
      sales to related parties
              
              
              
              364,669
              
              
              
              181,873
              
              
              
              
              982,266
              
              
              
              383,484Cost
      of Sales
              
              
              
              36,279,785
              
              
              
              27,751,213
              
              
              
              
              102,081,674
              
              
              
              67,251,392Gross
      Profit
              
              
              
              14,526,599
              
              
              
              10,968,295
              
              
              
              
              42,511,664
              
              
              
              27,858,942Expenses:Selling
      and Distribution Expenses
              
              
              
              3,299,914
              
              
              
              2,783,780
              
              
              
              
              9,341,056
              
              
              
              7,187,413General
      and Administrative Expenses
              
              
              
              2,950,120
              
              
              
              2,149,066
              
              
              
              
              9,789,218
              
              
              
              6,740,521Research
      and Development Expenses
              
              
              
              1,773,044
              
              
              
              624,461
              
              
              
              
              5,326,598
              
              
              
              2,545,689Financial
      Expenses
              
              
              
              357,984
              
              
              
              60,492
              
              
              
              
              775,385
              
              
              
              166,093Total
      Expenses
              
              
              
              8,381,062
              
              
              
              5,617,799
              
              
              
              
              25,232,257
              
              
              
              16,639,716Operating
      Income
              
              
              
              6,145,537
              
              
              
              5,350,496
              
              
              
              
              17,279,407
              
              
              
              11,219,226Other
      Income
              
              
              
              366,308
              
              
              
              163,776
              
              
              
              
              649,227
              
              
              
              410,074Non-Operating
      Expenses
              
              
              
              (68,318
              )
              
              
              (61,226
              )
              
              
              
              (133,215
              )
              
              
              (84,506
              )Income
      Before Provision for Income Taxes
              
              
              
              6,443,527
              
              
              
              5,453,046
              
              
              
              
              17,795,419
              
              
              
              11,544,794Provision
      for Income Taxes
              
              
              
              962,210
              
              
              
              802,124
              
              
              
              
              1,780,492
              
              
              
              2,140,055Net
      Income
              US$
              
              
              5,481,317
              
              
              
              4,650,922
              
              US$
              
              
              16,014,927
              
              
              
              9,404,739Other
      Comprehensive Income - Foreign Currency Translation
    Adjustment
              
              
              
              1,816,535
              
              
              
              45,431
              
              
              
              
              2,593,662
              
              
              
              86,688Total
      Comprehensive Income
              
              
              
              7,297,852
              
              
              
              4,696,353
              
              
              
              
              18,608,589
              
              
              
              9,491,427Less:Net
      income attributable to Noncontrolling Interest In
    Subsidiaries
              
              
              
              501,616
              
              
              
              465,092
              
              
              
              
              1,459,277
              
              
              
              941,468Other
      Comprehensive Income Attributable to Non-controlling Interest's
      Share
              
              
              
              181,654
              
              
              
              4,543
              
              
              
              
              259,638
              
              
              
              8,669Total
      Comprehensive Income Attributable to Non-controlling Interest's
      Share
              
              
              
              683,270
              
              
              
              469,635
              
              
              
              
              1,718,915
              
              
              
              950,137Net
      Income Attributable to Stockholders
              
              
              
              4,979,701
              
              
              
              4,185,830
              
              
              
              
              14,555,650
              
              
              
              8,463,271Other
      Comprehensive Income Attributable to Stockholders
              
              
              
              1,634,881
              
              
              
              40,888
              
              
              
              
              2,334,024
              
              
              
              78,019Total
      Comprehensive Income Attributable to Stockholders
              
              
              
              6,614,582
              
              
              
              4,226,718
              
              
              
              
              16,889,674
              
              
              
              8,541,290Weighted
      average common share - Basic
              
              
              
              19,304,921
              
              
              
              18,279,254
              
              
              
              
              19,162,064
              
              
              
              18,279,254Weighted
      average common share - Diluted
              
              
              
              19,304,921
              
              
              
              18,279,254
              
              
              
              
              19,162,064
              
              
              
              18,279,254EPS
      - Basic
              
              
              
              0.26
              
              
              
              0.23
              
              
              
              
              0.76
              
              
              
              0.46EPS
      - Diluted
              
              
              
              0.26
              
              
              
              0.23
              
              
              
              
              0.76
              
              
              
              0.46




The
      accompanying notes are an integral part of these financial
      statements





2




SORL
      Auto Parts, Inc. and SubsidiariesConsolidated
      Statements of Cash FlowsThree
      and Nine Months Ended September
30,2010




Three Months
      Ended
              September
    30,
            
            
            Nine Months
      Ended
              September
    30,2010
            
            
            2009
            
            
            2010
            
            
            2009Cash
      Flows from Operating ActivitiesNet
      Income
            
            
            4,979,701
            
            
            
            4,185,830
            
            
            
            14,555,650
            
            
            
            8,463,271Adjustments
      to reconcile net income (loss) to net cash from operating
      activities:Noncontrolling
      Interest In Subsidiaries
            
            
            501,616
            
            
            
            465,092
            
            
            
            1,459,277
            
            
            
            941,468Bad
      Debt Expense
            
            
            ―
            
            
            
            (450,102
            )
            
            
            888,295
            
            
            
            2,823Depreciation
      and Amortization
            
            
            1,283,642
            
            
            
            1,083,920
            
            
            
            3,750,717
            
            
            
            3,204,199Stock-Based
      Compensation Expense
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            9,935Loss
      on disposal of Fixed Assets
            
            
            ―
            
            
            
            1,734
            
            
            
            ―
            
            
            
            11,832Changes
      in Assets and Liabilities:Account
      Receivables
            
            
            (387,028
            )
            
            
            (2,334,276
            )
            
            
            (4,440,601
            )
            
            
            (8,176,548
            )Notes
      Receivables
            
            
            8,947,788
            
            
            
            (3,146,091
            )
            
            
            (4,229,708
            )
            
            
            (3,727,096
            )Other
      Currents Assets
            
            
            6,276,474
            
            
            
            507,782
            
            
            
            2,564,064
            
            
            
            2,309,133Inventory
            
            
            (2,133,243
            )
            
            
            289,451
            
            
            
            (3,485,655
            )
            
            
            5,009,918Prepayments
            
            
            (895,451
            )
            
            
            (4,513,075
            )
            
            
            (1,845,453
            )
            
            
            (5,066,567
            )Deferred
      tax assets
            
            
            (47,649
            )
            
            
            161,398
            
            
            
            (298,504
            )
            
            
            (180,676
            )Deferred
      assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (465,484
            )Accounts
      Payable and Notes Payable
            
            
            (1,050,966
            )
            
            
            1,204,723
            
            
            
            (3,660,704
            )
            
            
            2,066,273Income
      Tax Payable
            
            
            5,513
            
            
            
            1,281,330
            
            
            
            686,379
            
            
            
            2,704,200Deposits
      Received from Customers
            
            
            569,885
            
            
            
            (249,718
            )
            
            
            1,350,813
            
            
            
            (112,459
            )Other
      Current Liabilities and Accrued Expenses
            
            
            1,257,722
            
            
            
            (775,421
            )
            
            
            1,665,721
            
            
            
            (434,702
            )Deferred
      tax liabilities
            
            
            12,988
            
            
            
            21,378
            
            
            
            38,689
            
            
            
            64,108Net
      Cash Flows from Operating Activities
            
            
            19,320,992
            
            
            
            (2,266,045
            )
            
            
            8,998,980
            
            
            
            6,623,628Cash
      Flows from Investing ActivitiesAcquisition
      of Property and Equipment
            
            
            (4,711,042
            )
            
            
            (960,135
            )
            
            
            (11,662,205
            )
            
            
            (1,925,637
            )Acquisition
      of the automotive parts business
            
            
            (24,963,964
            )
            
            
            ―
            
            
            
            (24,963,964
            )
            
            
            ―Sales
      proceeds of disposal of fixed assets
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            36,692Acquisition
      of Land Use Rights
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―Investment
      in Intangible Assets
            
            
            ―
            
            
            
            ―
            
            
            
            ―
            
            
            
            ―Net
      Cash Flows from Investing Activities
            
            
            (29,675,006
            )
            
            
            (960,135
            )
            
            
            (36,626,169
            )
            
            
            (1,888,945
            )Cash
      Flows from Financing ActivitiesProceeds
      from (Repayment of) Bank Loans
            
            
            4,795,871
            
            
            
            ―
            
            
            
            9,279,449
            
            
            
            ―Proceeds
      from Share Issuance
            
            
            ―
            
            
            
            ―
            
            
            
            9,399,978
            
            
            
            ―Capital
      contributed by Minority S/H
            
            
            ―
            
            
            
            ―
            
            
            
            1,038,900
            
            
            
            ―Net
      Cash flows from Financing Activities
            
            
            4,795,871
            
            
            
            ―
            
            
            
            19,718,327
            
            
            
            ―Effects
      on changes in foreign exchange rate
            
            
            (172,861
            )
            
            
            5,992
            
            
            
            (101,686
            )
            
            
            11,972Net
      Change in Cash and Cash Equivalents
            
            
            (5,731,004
            )
            
            
            (3,220,188
            )
            
            
            (8,010,548
            )
            
            
            4,746,655Cash
      and Cash Equivalents- Beginning of the year
            
            
            7,975,715
            
            
            
            15,762,830
            
            
            
            10,255,259
            
            
            
            7,795,987Cash
      and cash Equivalents - End of the period
            
            
            2,244,711
            
            
            
            12,542,642
            
            
            
            2,244,711
            
            
            
            12,542,642Supplemental
      Cash Flow Disclosures:Interest
      Paid
            
            
            298,277
            
            
            
            ―
            
            
            
            298,277
            
            
            
            13,736Tax
      Paid
            
            
            969,302
            
            
            
            845,072
            
            
            
            2,033,008
            
            
            
            1,475,754




The
accompanying notes are an integral part of these financial
statements




3




SORL
      Auto Parts, Inc. and SubsidiariesConsolidated
      Statements of Changes in Shareholders' EquityFor
      the Year Ended on December 31, 2009




Number
            
            
            Common
            
            
            Additional
            
            
            Reserves
            
            
            Retained
            
            
            Accumu.
      Otherof
      Share
            
            
            Stock
            
            
            Paid-in
            
            
            
            
            
            Earnings
            
            
            Comprehensive
            
            
            Shareholders'
            
            
            Minority
            
            
            Total
      EquityCapital
            
            
            
            
            
            (Deficit)
            
            
            Income
            
            
            Equity
            
            
            InterestBeginning
      Balance - January 1, 2009
            
            
            18,279,254
            
            
            
            36,558
            
            
            
            55,268,655
            
            
            
            3,126,086
            
            
            
            38,774,684
            
            
            
            10,848,248
            
            
            
            108,054,231
            
            
            
            11,981,633
            
            
            
            120,035,864Net
      Income
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14,044,240
            
            
            
            -
            
            
            
            14,044,240
            
            
            
            1,519,921
            
            
            
            15,564,161Other
      Comprehensive Income(Loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            91,455
            
            
            
            91,455
            
            
            
            10,183
            
            
            
            101,638Stock
      options exercised, net
            
            
            25,667
            
            
            
            51
            
            
            
            (51
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Capital
      contributed by Minority S/H
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            52
            
            
            
            52Transfer
      to reserve
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,428,515
            
            
            
            (1,428,515
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Ending
      Balance - December 31, 2009
            
            
            18,304,921
            
            
            
            36,609
            
            
            
            55,268,604
            
            
            
            4,554,601
            
            
            
            51,390,409
            
            
            
            10,939,703
            
            
            
            122,189,926
            
            
            
            13,511,789
            
            
            
            135,701,715




The
accompanying notes are an integral part of these financial
statements


4




SORL
      Auto Parts, Inc. and SubsidiariesConsolidated
      Statements of Changes in Stockholders' EquityNine
      Months Ended September 30, 2010




Number
            
            
            Common
            
            
            Additional
            
            
            Reserves
            
            
            Retained
            
            
            Accumu.
      Otherof
      Share
            
            
            Stock
            
            
            Paid-in
            
            
            
            
            
            Earnings
            
            
            Comprehensive
            
            
            Shareholders'
            
            
            Noncontrolling
            
            
            Total
      EquityCapital
            
            
            
            
            
            (Deficit)
            
            
            Income
            
            
            Equity
            
            
            InterestBeginning
      Balance - January 1, 2010
            
            
            18,304,921
            
            
            
            36,609
            
            
            
            55,268,604
            
            
            
            4,554,601
            
            
            
            51,390,409
            
            
            
            10,939,703
            
            
            
            122,189,926
            
            
            
            13,511,789
            
            
            
            135,701,715Net
      Income
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            14,555,650
            
            
            
            -
            
            
            
            14,555,650
            
            
            
            1,459,277
            
            
            
            16,014,927Other
      Comprehensive Income(Loss)
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,334,024
            
            
            
            2,334,024
            
            
            
            259,638
            
            
            
            2,593,662Common
      stock issued in public offering
            
            
            1,000,000
            
            
            
            2,000
            
            
            
            9,397,978
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            9,399,978
            
            
            
            -
            
            
            
            9,399,978Capital
      contributed by Minority S/H
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,038,900
            
            
            
            1,038,900Acquisition
      of the automotive parts business of Ruili Group Co., Ltd.
            
            
            
            (22,467,568
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (22,467,568
            )
            
            
            (2,496,396
            )
            
            
            (24,963,964
            )Transfer
      to reserve
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1,497,147
            
            
            
            (1,497,147
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Ending
      Balance - September 30, 2010
            
            
            19,304,921
            
            
            
            38,609
            
            
            
            42,199,014
            
            
            
            6,051,748
            
            
            
            64,448,912
            
            
            
            13,273,727
            
            
            
            126,012,010
            
            
            
            13,773,208
            
            
            
            139,785,218






The
accompanying notes are an integral part of these financial
statements





5




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE A - DESCRIPTION OF
BUSINESS





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





On
November 11, 2009, the Company entered into a joint venture agreement with MGR,
a Hong Kong-based global auto parts distribution specialist firm and a
Taiwanese investor. The new joint venture was named SORL International Holding,
Ltd. ("SIH"). SORL holds a 60% interest in the joint venture, MGR holds a 30%
interest, and the Taiwanese investor holds a 10% interest. SIH is primarily
devoted to expanding SORL's international sales network in Asia-Pacific and
creating a larger footprint in Europe, the Middle East and Africa with a target
to create a truly global distribution network. Based in Hong Kong, SIH is
expanding and establishing channels of distribution in international markets
with SORL's primary products, including spring brake chambers, clutch servos,
air dryers, relay valves and hand brake valves.





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





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




The
acquisition was accounted for as a transaction between the entities under common
control because the CEO of the Company owns 63% of registered capital of Ruili
Group Co., Ltd., and owns more than 50% of outstanding common stocks of SORL
with his wife and brother. This results in the acquisition being accounted for
using the historical costs of the financial statements of the Ruili Group Co.,
Ltd. The consolidated financial statements have been prepared as if the
acquisition took place at the earliest time presented, that is, as of January 1,
2009. The assets purchase was deemed to be the acquisition of a
business.





NOTE B - BASIS OF
PRESENTATION





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




6




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 June
2009, the FASB issued FASB ASC 860-10-05 (Prior authoritative literature: FASB
Statement No. 166, “Accounting for Transfers of Financial Assets—an amendment of
FASB Statement No. 140”).  FASB ASC 860-10-05 improves the relevance,
representational faithfulness, and comparability of the information that a
reporting entity provides in its financial statements about a transfer of
financial assets; the effects of a transfer on its financial position, financial
performance, and cash flows; and a transferor’s continuing involvement, if any,
in transferred financial assets. FASB ASC 860-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 860-10-05 has not had a material effect on the Company’s consolidated
financial statements.





In June
2009, the FASB issued FASB ASC 810-10-05 (Prior authoritative literature: FASB
Statement No. 167, “Amendments to FASB Interpretation No. 46(R)”). FASB ASC
810-10-05 improves financial reporting by enterprises involved with variable
interest entities and to address (1) the effects on certain provisions of prior
authoritative literature FASB Interpretation No. 46 (revised December 2003),
“Consolidation of Variable Interest Entities”, as a result of the elimination of
the qualifying special-purpose entity concept in prior authoritative literature
SFAS 166 and (2) constituent concerns about the application of certain key
provisions of prior authoritative literature Interpretation 46(R), including
those in which the accounting and disclosures under the Interpretation do not
always provide timely and useful information about an enterprise’s involvement
in a variable interest entity. FASB ASC 810-10-05 is effective as of the
beginning of each reporting entity’s first annual reporting period that begins
after November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter. As such, the
Company was required to adopt this standard in January 2010. The adoption of
FASB ASC 810-10-05 has not had a material effect on the Company’s consolidated
financial statements.




In June
2009, the FASB issued revised authoritative guidance related to variable
interest entities, which requires entities to perform a qualitative analysis to
determine whether a variable interest gives the entity a controlling financial
interest in a variable interest entity. The guidance also requires an ongoing
reassessment of variable interests and eliminates the quantitative approach
previously required for determining whether an entity is the primary
beneficiary. This guidance, which was reissued by the FASB in December 2009 as
ASU  No. 2009-17, “Improvements to Financial Reporting by Enterprises
Involved with Variable Interest Entities,” amends ASC Topic 810,
“Consolidation”, and became effective as of the beginning of an entity’s first
annual reporting period that begins after November 15, 2009 (January 1, 2010 for
the Company). The adoption of this guidance has not had a significant impact on
the Company’s consolidated financial statements.





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




7




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





NOTE D - RELATED PARTY
TRANSACTIONS





The
Company continued to purchase other automotive products and packaging materials
from the Ruili Group Co., Ltd. The Ruili Group Co., Ltd., is the minority
shareholder of the Joint Venture and is controlled by the Zhang family, who is
also the controlling party of the Company.





The following related party transactions
are reported for the three months and nine months ended September 30, 2010 and
2009:




Three Months Ended September
      30,
              
              
              Nine Months Ended September
      30,2010
              
              
              2009
              
              
              2010
              
              
              2009PURCHASES
    FROM:Ruili Group Co.,
      Ltd.
              
              $
              954,700
              
              
              $
              282,647
              
              
              $
              2,074,652
              
              
              $
              940,539Total
    Purchases
              
              $
              954,700
              
              
              $
              282,647
              
              
              $
              2,074,652
              
              
              $
              940,539SALES TO:Ruili Group Co.,
      Ltd.
              
              $
              364,669
              
              
              $
              181,873
              
              
              $
              982,266
              
              
              $
              383,484Total Sales
              
              $
              364,669
              
              
              $
              181,873
              
              
              $
              982,266
              
              
              $
              383,484


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




8




In
addition, Ruian Auto Parts Co., Ltdpurchased approximately $0.3 million ofother automotive products and $0.7 million packaging materials from Ruili
Group during the three months ended September 30, 2010. The breakdown was
approximately $0.3 million of other automotive productsand $1.8 million of packaging materials
during the nine months ended September 30, 2010.
 
 September
    30,
              
              
              December
31,2010
              
              
              2009OTHER
      PAYABLES TO RELATED PARTIESRuili
      Group Co., Ltd.
              
              
              107,845
              
              
              
              200,762Total
              
              
              107,845
              
              
              
              200,762ACCOUNTS
      PAYABLE TO RELATED PARTIESRuili Group Co.,
      Ltd.
              
              $
              5,322
              
              
              $
              1,985,291Total
              
              $
              5,322
              
              
              $
              1,985,291
 
 NOTE E - ACCOUNTS
RECEIVABLE
  The
changes in the allowance for doubtful accounts at September 30, 2010 and
December 31, 2009 were summarized as follows:
  September
    30,
              
              
              December
31,2010
              
              
              2009Beginning
      balance
              
              $
              57,823
              
              
              $
              24,997Add: Increase to
      allowance
              
              904,079
              
              
              32,826Less:
      Accounts written off
              
              
              —
              
              
              
              —Ending
    balance
              
              $
              961,902
              
              
              $
              57,823September
    30,
              
              
              December
31,2010
              
              
              2009Accounts
      receivable
              
              $
              53,303,628
              
              
              $
              47,811,797Less: allowance for doubtful
      accounts
              
              (961,902
              )
              
              (57,823
              )Account receivable balance,
      net
              
              $
              52,341,726
              
              
              $
              47,753,974
  NOTE F - INVENTORIES
  On
September 30, 2010 and December 31, 2009, inventories consisted of the
following:
  September
    30,
              
              
              December
31,2010
              
              
              2009Raw
Material
              
              $
              6,277,100
              
              
              $
              4,417,094Work in
    process
              
              
              3,767,626
              
              
              
              4,573,934Finished
    Goods
              
              17,925,511
              
              
              14,952,251Total
    Inventory
              
              $
              27,970,237
              
              
              $
              23,943,279


9


NOTE G - PROPERTY, PLANT AND
EQUIPMENT
  Property, plant and equipment consisted
of the following, on September 30, 2010 and December 31,
2009:
 September
    30,
                  
                  
                  December
31,2010
                  
                  
                  2009Machinery
                  
                  $
                  50,405,332
                  
                  
                  $
                  38,505,453Molds
                  
                  
                  1,300,973
                  
                  
                  
                  1,276,757Office
      equipment
                  
                  
                  1,057,104
                  
                  
                  
                  856,184Vehicle
                  
                  
                  1,256,634
                  
                  
                  
                  1,092,835Building
                  
                  8,134,131
                  
                  
                  7,982,723Sub-Total
                  
                  62,154,174
                  
                  
                  49,713,952Less: Accumulated
      depreciation
                  
                  
                  21,289,024
                  )
                  
                  (17,983,124)Fixed Assets,
      net
                  
                  $
                  40,865,150
                  
                  
                  $
                  31,730,828
 Depreciation expense charged to
operations was $3,440,262 and $2,874,780 for the nine months ended September 30,
2010 and 2009, respectively.
 
 NOTE
H- LEASEHOLD IMPROVEMENTS
 September
    30,
                
                
                December
31,2010
                
                
                2009Cost:
                
                $
                472,025
                
                
                $
                478,088Less: Accumulated
      amortization:
                
                (
      34,864
                )
                
                (407
                )Leasehold Improvements In
      Progress, net
                
                $
                437,161
                
                
                $
                477,681
 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, the Joint Venture 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, SIHentered into
a lease agreement with MGR for the lease of an office with a five-year lease
term.


10
 
  In August
2010, a new a lease agreement was signed between the Joint Venture and Ruili
Group Co., Ltd., the Joint Venture leased 32,410 square meters manufacturing
plant for its new purchased passenger vehicles brake systems business. The lease
term is from September 2009 to August 2020.
 NOTE
I- LAND USE RIGHTS
  September
    30,
                
                
                December
31,2010
                
                
                2009Cost:
                
                $
                15,224,724
                
                
                $
                14,941,331Less: Accumulated
      amortization:
                
                (1,009,374)
                
                
                (742,939)Land use rights,
      net
                
                $
                14,215,350
                
                
                $
                14,198,392
  According to the law ofChina, the government owns all the land inChina. Companies and individuals are
authorized to possess and use the land only through land use rights granted by
the Chinese government. The Company purchased the land use rights from Ruili
Group for approximately $13.9 million on September 28, 2007. The Company has not
yet obtained the land use right certificate. However, the Company has
applied to obtain the land use right certificate. Amortization
expenses were $248,901 and $247,466for the nine months ended September 30,
2010 and 2009, respectively.
  NOTE J - INTANGIBLE
ASSETS
  Intangible assets owned by the Company
included patent technology and management software licenses. Gross intangible
assets were $164,561, less accumulated amortization of $67,123 for net
intangible assets of $97,438 as of September 30, 2010. Gross intangible assets
were $161,499, less accumulated amortization of $54,380 for net intangible
assets of $107,119 as of December 31, 2009. Amortization expenses were $11,552
and $11,485 for the
nine months ended September 30, 2010 and 2009 respectively. Future estimated
amortization expense is as follows:
  2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014
                
                
                Thereafter$
                4,598
                
                
                $
                16,150
                
                
                $
                16,150
                
                
                $
                16,150
                
                
                $
                11,766
                
                
                $
                30,753
  NOTE K - PREPAYMENT
  Prepayment
consisted of the following as of September 30, 2010 and December 31,
2009:
  September
    30,
                
                
                December
31,2010
                
                
                2009Raw material
      suppliers
                
                $
                6,879,629
                
                
                $
                3,059,449Equipment
      purchase
                
                
                2,678,790
                
                
                
                4,498,691Total
      prepayment
                
                $
                9,558,419
                
                
                $
                7,558,140
  11
  NOTE
L - DEFERRED TAX ASSETS AND DEFERRED TAX LIABILITIES
 
 Deferred tax assets consisted of the
following as of September 30, 2010
 
 30-Sep-10
                
                
                31-Dec-09Deferred
      tax assets - currentProvision
                
                $
                143,515
                
                
                $
                7,917Subsidiary's
      operating loss carryforwards
                
                
                66,528
                
                
                
                33,008Warranty
                
                
                451,158
                
                
                
                260,295Deferred
      tax assets
                
                
                661,200
                
                
                
                301,220Valuation
      allowance
                
                
                ―
                
                
                
                ―Net
      deferred tax assets - current
                
                $
                661,200
                
                
                $
                301,220Deferred
      tax liabilities - currentRevenue
      (net off cost)
                
                $
                134,569
                
                
                $
                80,643Deferred
      tax liabilities - current
                
                
                134,569
                
                
                
                80,643Net
      deferred tax assets - current
                
                
                526,631
                
                
                
                220,577Deferred
      tax liabilities - non-currentLand
      use right
                
                
                156,895
                
                
                
                115,481Deferred
      tax liabilities - non-current
                
                
                156,895
                
                
                
                115,481
 
 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.
  12
  NOTE M - Bank
Loans
  Bank
loans represented the following as of September 30, 2010 and December 31,
2009:
  September
      30,
                  2010
                
                
                December
      31,
                  2009Secured
                
                $
                9,383,510
                
                
                $
                —Less:
      Current portion
                
                $
                (9,383,510
                )
                
                $
                —Non-current
      portion
                
                $
                —
                
                
                $
                —
  These loans were from Agricultural Bank
ofChina, to finance general working capital as
well as new equipment acquisition. Guaranteeswere provided by Ruili Group Co., Ltd., a related
party. The Company did not provide any sort of guarantee to any other parties.
Interest rates for the loans ranged between 4.86% and 0.83% per annum. The
maturity dates of the loans were March 16, 2011 and October 22, 2010,
respectively.
  NOTE N - ACCRUED
EXPENSES
  Accrued
expenses consisted of the following as of September 30, 2010 and December 31,
2009:
  September
    30,
                
                
                December
31,2010
                
                
                2009Accrued
    payroll
                
                $
                1,858,239
                
                
                $
                1,536,980Other accrued
      expenses
                
                
                3,859,316
                
                
                
                2,669,317Total accrued
      expenses
                
                $
                5,717,555
                
                
                $
                4,206,297
  NOTE O – RESERVE
  The reserve funds are comprised of the
following:
  September
    30,
                
                
                December
31,2010
                
                
                2009Statutory surplus reserve
      fund
                
                $
                6,051,748
                
                
                $
                4,554,601Total
                
                $
                6,051,748
                
                
                $
                4,554,601
 
 Pursuant to the relevant laws and
regulations of Sino-foreign joint venture enterprises, the profits of the
Company's subsidiary, which are based on their PRC statutory financial
statements, are available for distribution in the form of cash dividends after
they have satisfied all the PRC tax liabilities, provided for losses in previous
years, and made appropriations to reserve funds, as determined at the discretion
of the board of directors in accordance with PRC accounting standards and
regulations.
 
 As stipulated by the relevant laws and
regulations for enterprises operating in the PRC, the Company's Sino-foreign
joint venture 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, the Joint Venture is required to
allocate a certain percentage of its profits after taxation, as determined in
accordance with PRC accounting standards applicable to the Company, to the
statutory surplus reserve until such reserve reaches 50% of the registered
capital of the Company.
 
 Net income as reported in the US GAAP
financial statements differs from that as reported in the PRC statutory
financial statements. In accordance with the relevant laws and regulations in
the PRC, the profits available for distribution are based on the statutory
financial statements. If the Joint Venture has foreign currency available after
meeting its operational needs, the Joint Venture 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 has
been allocated to the statutory reserve fund.
 
 13
  NOTE P - INCOME
TAXES
  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 statements in accordance with relevant
income tax laws. According to applicable tax laws regarding Sino-Foreign Joint
Venture, the Joint Venture is exempted from income taxes in the PRC for the
fiscal years ended December 31, 2005 and 2004. Thereafter, the Joint Venture is
entitled to a 50% income tax deduction for the following three years ended
December 31, 2006, 2007, and 2008. As a result of the Joint Venture
obtaining its Sino-foreign joint venture status in 2004, in accordance with
applicable PRC tax regulations, the Joint Venture was exempted from PRC income
tax in both fiscal 2004 and 2005. Thereafter, the Joint Venture is entitled to a
tax concession of 50% of the applicable income tax rate of 26.4% for the two
years ended December 31, 2006 and 2007. With the new PRC Enterprise Income Tax
Law, effective on 1st January 2008, the China’s enterprises are generally
subject to a PRC income tax rate of 25% and the Joint Venture is entitled to a
tax concession of 50% of the applicable income tax rate of 25% for the year
ended December 31, 2008.
 
 Additionally,
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 is eligible for additional preferential tax
treatment. For the years 2007 and 2008, the Joint Venture 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, the Joint Venture will
enjoy 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 the Joint
Venture has been awarded the Chinese government's "High-Tech Enterprise"
designation. The High-Tech Enterprise certificate is valid for three years and
provides for a reduced tax rate of 15% for years 2009 through 2011. So, the
Company’s effective income tax rate will be 15% for years 2009 through
2011.
 
 The reconciliation of the effective
income tax rate of the Joint Venture to the statutory income tax rate in the PRC
for the third quarter of 2010 and 2009 is as follows:
  Sep-30-2010
                
                
                Sep-30-2009Statutory tax
      rate
                
                
                25.0
                %
                
                
                25.0
                %Tax holidays and
      concessions
                
                
                -10
                %
                
                
                -10
                %Effective tax
      rate
                
                
                15
                %
                
                
                15
                %
 
 Nine
      months ended September 30, 2010
                
                
                Nine
      months ended September 30, 2009Computed income tax provision at
      the statutory rate
                
                $
                2,692,572
                
                
                $
                1,731,719Tax refund
                
                
                (903,699
                )
                
                
                (694,843
                )Deferred tax
      provision
                
                
                (259,993
                )
                
                
                (116,568
                )Current period permanent
      differences and other reconciling items
                
                
                251,612
                
                
                
                1,219,747Total income
      taxes
                
                $
                1,780,492
                
                
                $
                2,140,055
  14
  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 follows at December 31,2009. No valuation allowance is
deemed necessary. There currently is no tax benefit or burden recorded for theUnited States. The tax authority may examine the tax
returns of the Company three years after the year ended. In the year of 2009,
there were no penalties and interest, which generally are recorded in the
general and administrative expenses or in the tax expenses. The provisions for
income taxes for the nine months ended September 30, 2010 and 2009,
respectively, are summarized as follows:
 
 Sep-30-2010
                
                
                Sep-30-2009Current
                
                $
                2,040,485
                
                
                $
                2,256,623Deferred
                
                
                (259,993
                )
                
                
                (116,568
                )Total
                
                $
                1,780,492
                
                
                $
                2,140,055
 
 The Company adopted the provisions of
FASB ASC 740-10 (Prior authoritative literature: FIN No. 48, Accounting for
Uncertainty in Income Taxes), on January 1, 2007. As the result of the
implementation of the FASB ASC 740-10, Accounting for Uncertainty in Income
Taxes – In Interpretation of FASB ASC 740-10 (Prior authoritative literature:
FASB Statement No. 109), the Company recognized no material adjustments to
unrecognized tax benefits. At the adoption date of January 1, 2007 and as of
September 30, 2010 and 2009, the Company has no unrecognized tax
benefits.
 
 NOTE Q - Non-controlling interest in
subsidiaries
 
 Non-controlling
interest in subsidiaries represents a 10% non-controlling interest, owned by the
Company’s Joint Venture Partner, in the Chinese located Joint Venture, and a 40%
non-controlling interest, owned by the Company’s Joint Venture Partners, in the
Hong Kong located Joint Venture. Net income attributable to non-controlling
interests in subsidiaries amounted to $1,459,277and $941,468 for the nine months ended September 30,
2010 and 2009, respectively.
 
 Sep-30-2010
                
                
                Sep-30-200910%
      non-controlling interest in Ruian
                
                $
                1,647,133
                
                
                $
                941,46840%
      non-controlling interest in SIH
                
                $
                (187,856
                )
                
                
                ―Total
                
                $
                1,459,277
                
                
                
                941,468
  15
  NOTE R - LEASES
 
 In December 2006, the Joint Venture
entered into a lease agreement with Ruili Group Co., Ltd. for the lease of two
apartment buildings. These two apartment buildings are for the Joint Venture’s
management personnel and staff, respectively. The lease term is from January
2007 to December 2011 for one of the apartment buildings and from January 2007
to December 2012 for the other.
 
 In May 2009, the Joint Venture entered
into a lease agreement with Ruili Group Co., Ltd. for the lease of a
manufacturing plant. The lease term is from June 2009 to May
2017.
 
 In August 2009, SIHentered 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 the Joint Venture and Ruili
Group Co., Ltd., the Joint Venture leased 32410 square meters manufacturing
plant for its new purchased passenger vehicles brake systems business. The lease
term is from September 2009 to August 2020.
 
 All abovementioned leases are operating
leases. Future minimum rental payments for the years ending December 31 are as
follows:
 
 2010
                
                
                2011
                
                
                2012
                
                
                2013
                
                
                2014
                
                
                ThereafterLease
      Commitments
                
                $
                305,683
                
                
                $
                1,140,666
                
                
                $
                910,180
                
                
                $
                841,897
                
                
                $
                841,897
                
                
                $
                4,404,811Total
                
                $
                305,683
                
                
                $
                1,140,666
                
                
                $
                910,180
                
                
                $
                841,897
                
                
                $
                841,897
                
                
                $
                4,404,811
  NOTE S - ADVERTISING
COSTS
 
 Advertising costs were $146,873 and
$2,532 for the nine months
ended September 30, 2010 and 2009, respectively.
 
 NOTE T- RESEARCH AND DEVELOPMENT
EXPENSE
 
 Research and development costs are
expensed as incurred and were $5,326,598 and $2,545,689for the nine months ended September 30,
2010 and 2009, respectively.
 
 NOTE U - WARRANTY
CLAIMS
 
 Warranty claims were $2,036,353
and $1,289,067 for the nine months
ended September 30, 2010 and 2009, 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, 2010 was as
follows:
  Beginning
      balance at January 01, 2010
                
                
                1,735,301Aggregate
      reduction for payments made
                
                
                (763,941
                )Aggregate
      increase for new warranties issued during current period
                
                
                2,036,353Aggregate
      changes in the liability related to pre-existing warranties (changes in
      estimate)
                
                
                ―Ending
      balance at September 30, 2010:
                
                
                3,007,713
 
 NOTE V – SEGMENT
INFORMATION
 
 The
Company produces brake systems and
other related components (“commercial vehicles brake systems, etc.”) for different types of commercial
vehicles. On August 31, 2010, the Company through its 90%-owned subsidiary,
Ruili Group Ruian Auto Parts Co., Ltd., executed an Asset Purchase Agreement to
acquire, and purchased, the segment of the passenger vehicle auto parts business
(“passenger vehicles brake systems, etc.”) of Ruili Group Co., Ltd. As a result
of this acquisition, the Company's product offerings were expanded to both
commercial and passenger vehicles' brake systems and other key safety-related
auto parts.
  16
  The
Company has two operating segments: commercial vehicles brake systems, etc. and
passenger vehicles brake systems, etc.
 
 Net sales from our Chinese market ofcommercial vehicles brake systems, etc.were $32.8 million and $26.1 million
for the three months ended September 30, 2010 and 2009, respectively. Net sales
from international market ofcommercial vehicles brake systems, etc.
were $11.8 million and $7.8
million for the three months ended September 30, 2010 and 2009,
respectively.
  Net sales from our Chinese market ofpassenger vehicles brake systems, etc. were $8.0 million and $7.8 million for
the three months ended September 30, 2010 and 2009, respectively. Net sales from
international market ofpassenger vehicles brake systems, etc. were $2.3 million and $0.9 million for
the three months ended September 30, 2010 and 2009, respectively. Because of
both $4.0 million elimination of inter-company sales for the three months ended
September 30, 2010 and 2009, the consolidated sales were $50.8 million and $38.7
million for the three months ended September 30, 2010 and 2009,
respectively.
 
 Net sales from our Chinese market ofcommercial vehicles brake systems, etc. were $96.2 million and $63.1 million for
the nine months ended September 30, 2010 and 2009, respectively. Net sales from
international market ofcommercial vehicles brake systems, etc. were $32.3 million and $20.8 million for
the nine months ended September 30, 2010 and 2009,
respectively.
  Net sales from our Chinese market ofpassenger vehicles brake systems, etc. were $26.6 million and $18.9 million for
the nine months ended September 30, 2010 and 2009, respectively. Net sales from
international market ofpassenger vehicles brake systems, etc. were $4.5 million and $3.4 million for
the nine months ended September 30, 2010 and 2009, respectively. Because of
$15.1 million and $11.2 million elimination of inter-company sales for the nine
months ended September 30, 2010 and 2009, the consolidated sales were $144.6
million and $95.1 million for the nine months ended September 30, 2010 and 2009,
respectively.
 
 Net Income Attributable to Stockholders
ofcommercial vehicles brake systems, etc. were $4.7 million and $3.8 million for
the three months ended September 30, 2010 and 2009, respectively. Net Income
Attributable to Stockholders ofcommercial vehicles brake systems, etc.
were $13.2 million and $7.8
million for the nine months ended September 30, 2010 and 2009,
respectively.
  Net Income Attributable to Stockholders
ofpassenger vehicles brake systems, etc. were $0.3 million and $0.4 million for
the three months ended September 30, 2010 and 2009, respectively. Net Income
Attributable to Stockholders ofpassenger vehicles brake systems, etc.
were $1.3 million and $0.7 million
for the nine months ended September 30, 2010 and 2009,
respectively.
 
 Total assets ofcommercial
vehicles brake systems, etc. andpassenger vehicles brake systems, etc. were $133.4 million and $21.2 million as
of December 31, 2009, respectively.
 
 The
consolidated income before taxes was equal to the total of income before taxes
of commercial vehicles brake systems, etc. and passenger vehicles brake systems,
etc.
 
 All of
the Company’s long-lived assets are located in the PRC and Hong Kong. The
Company and its subsidiaries do not have long-lived assets in the United States
for the reporting periods.
 
 For the
three months ended September 30, 2010, the Company’s three biggest customers
were Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton
Motor Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works which accounted for
approximately 6.7%, 6.1% and 4.1% of total sales revenue, respectively. For the
three months ended September 30, 2009, Dongfeng Axle Co., Ltd., FAW Qingdao
Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty
Vehicle Works accounted for approximately 8.6%, 8.2% and 5.5% of our total sales
revenue, respectively.
 
 For the
Nine Months ended September 30, 2010, the Company’s three biggest customers were
Dongfeng Axle Co., Ltd., FAW Qingdao Automobile Works, and Beiqi Foton Motor
Co., Ltd. Beijing Auman Heavy-Duty Vehicle Works which accounted for
approximately 8.9%, 8.4% and 4.6% of total sales revenue, respectively. For the
three months ended September 30, 2009, Dongfeng Axle Co., Ltd., FAW Qingdao
Automobile Works, and Beiqi Foton Motor Co., Ltd. Beijing Auman Heavy-Duty
Vehicle Works accounted for approximately 9.6%, 6.5% and 3.6% of our total sales
revenue, respectively.
  17
  NOTE W – 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, 2010 and
2009.
 
 NOTE X – 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 $2,471,534and
$1,543,344 for the nine month
ended September 30, 2010 and 2009, respectively.
  NOTE Y – STOCK COMPENSATION
PLAN
 
 The
amortization of deferred stock-based compensation was $0 and
$9,935 for the nine month
ended September 30, 2010 and 2009, respectively.There were no employee
stock options or warrants outstanding as of September 30, 2010.
 
 NOTE Z- COMMITMENTS AND
CONTINGENCIES
  (1)  According to the law ofChina, the government owns all the land inChina. Companies and individuals are
authorized to possess and use the land only through land use rights granted by
the Chinese government. The Company purchased the land use rights from Ruili
Group for approximately $13.9 million on September 28, 2007. The Company has not
yet obtained the land use right certificate. However, the Company has applied to
obtain the land use right certificate.
 
 (2)  Information regarding
lease commitments is provided in Note R.
 
 NOTE AA - OFF-BALANCE SHEET
ARRANGEMENTS
 
 At September 30, 2010, we do not have
any material commitments for capital expenditures or have any transactions,
obligations or relationships that could be considered off-balance sheet
arrangements.
 
 NOTE AB – RECLASSIFICATION OF PRIOR YEAR
FINANCIAL STATEMENTS
 
 For the nine month ended September 30,
2010, the Company has reclassified Research and Development Expenses and
Deferred Tax Assets/Liabilities to facilitate a year over year comparison with
the same period of 2009.
 
 NOTE AC – THE ACQUISITION AND
COMBINATION OF OPERATIONS REPORTING
  All of the allocations and estimates in
the Consolidated Financial Statements are based on assumptions that management
believes are reasonable under the circumstances. However, these allocations and
estimates are not necessarily indicative of the costs and expenses that would
have resulted if the business we acquired from the Seller had been operated as a
part of SORL for periods prior to the
combination/acquisition.
  NOTE AD –BUSINESS
ACQUISITION
  On August
31, 2010, the Company through Ruian, executed an Asset Purchase Agreement to
acquire, and purchased the assets of the hydraulic brake, power steering, and
automotive electrical operations parts business of the
Seller.  Consideration paid amounted to RMB 170 million or
approximately USD$25 million. The acquisition has been accounted for as a common
control transaction at carrying amounts. The excess of consideration over the
carrying value of net assets received has been recorded as a decrease in the
additional paid-in capital of the Company.
  18
  Consolidated
      Balance SheetsDecember
      31, 2009
  Acquired
      auto parts business
                
                
                CombinedDecember
      31, 2009
                
                
                December
      31, 2009
                
                
                December
      31, 2009(Audited)
                
                
                (Unaudited)AssetsCurrent
      AssetsCash
      and Cash Equivalents
                US$
                
                
                10,255,259
                
                
                
                -
                
                
                
                10,255,259Accounts
      Receivable, Net of Provision
                
                
                
                44,546,107
                
                
                
                3,207,867
                
                
                
                47,753,974Notes
      Receivable
                
                
                
                13,083,691
                
                
                
                -
                
                
                
                13,083,691Inventory
                
                
                
                18,760,724
                
                
                
                5,182,555
                
                
                
                23,943,279Prepayments
                
                
                
                7,558,140
                
                
                
                -
                
                
                
                7,558,140Deferred
      tax assets
                
                
                
                220,577
                
                
                
                -
                
                
                
                220,577Other
      current assets
                
                
                
                444,281
                
                
                
                4,782,432
                
                
                
                5,226,713Total
      Current Assets
                
                
                
                94,868,779
                
                
                
                13,172,854
                
                
                
                108,041,633Fixed
      AssetsProperty,
      Plant and Equipment
                
                
                
                35,335,958
                
                
                
                14,377,994
                
                
                
                49,713,952Less:
      Accumulated Depreciation
                
                
                
                (11,608,920
                )
                
                
                (6,374,204
                )
                
                
                (17,983,124
                )Property,
      Plant and Equipment, Net
                
                
                
                23,727,038
                
                
                
                8,003,790
                
                
                
                31,730,828Leasehold
      Improvements in Progress
                
                
                
                477,681
                
                
                
                -
                
                
                
                477,681Land
      Use Rights, Net
                
                
                
                14,198,392
                
                
                
                -
                
                
                
                14,198,392Other
      AssetsDeferred
      compensation cost-stock options
                
                
                
                -
                
                
                
                -
                
                
                
                -Intangible
      Assets
                
                
                
                161,499
                
                
                
                -
                
                
                
                161,499Less:
      Accumulated Amortization
                
                
                
                (54,380
                )
                
                
                -
                
                
                
                (54,380
                )Intangible
      Assets, Net
                
                
                
                107,119
                
                
                
                -
                
                
                
                107,119Total
      Other Assets
                
                
                
                107,119
                
                
                
                -
                
                
                
                107,119Total
      Assets
                US$
                
                
                133,379,009
                
                
                
                21,176,644
                
                
                
                154,555,653Liabilities
      and Shareholders' EquityCurrent
      LiabilitiesAccounts
      Payable
                US$
                
                
                9,724,715
                
                
                
                -
                
                
                
                9,724,715Deposit
      Received from Customers
                
                
                
                3,670,369
                
                
                
                -
                
                
                
                3,670,369Short
      term bank loans
                
                
                
                -
                
                
                
                -Income
      tax payable
                
                
                
                551,900
                
                
                
                -
                
                
                
                551,900Accrued
      Expenses
                
                
                
                4,206,297
                
                
                
                -
                
                
                
                4,206,297Other
      Current Liabilities
                
                
                
                585,176
                
                
                
                -
                
                
                
                585,176Total
      Current Liabilities
                
                
                
                18,738,457
                
                
                
                -
                
                
                
                18,738,457Non-Current
      LiabilitiesDeferred
      tax liabilities
                
                
                
                115,481
                
                
                
                -
                
                
                
                115,481Total
      Liabilities
                
                
                
                18,853,938
                
                
                
                -
                
                
                
                18,853,938Stockholders'
      EquitySORL
      Auto Parts, Inc. stockholders' equity
                
                
                
                103,130,946
                
                
                
                19,058,980
                
                
                
                122,189,926Noncontrolling
      Interest In Subsidiaries
                
                
                
                11,394,125
                
                
                
                2,117,664
                
                
                
                13,511,789Total
      Equity
                US$
                
                
                114,525,071
                
                
                
                21,176,644
                
                
                
                135,701,715
  19




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 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
condensed consolidated financial statements and the related notes thereto and
other financial information contained elsewhere in this Form 10-Q.





To
facilitate the analysis our financial performance, we provide the comparison of
the financial results excluding the business acquired from Ruilin Group with our
previously quarterly filings. Please note that the financial results excluding
the acquired business of Ruilin Group, as discussed below, including the financial result of the
acquired business from September 1, 2010.





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.
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, 2009.





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




20




Results of
Operations




(1) Results of operations for the three
months ended September 30, 2010 as compared to the three months ended September
30, 2009.




SALES




Three Months
      ended
            
            
            Three Months
      ended30-Sept-10
            
            
            30-Sept-09(U.S.  dollars in
      millions)Commercial vehicles brake systems,
      etc.
            
            $
            40.0
            
            
            
            79
            %
            
            $
            29.9
            
            
            
            77
            %Passenger vehicles brake systems,
      etc.
            
            $
            10.8
            
            
            
            21
            %
            
            $
            8.8
            
            
            
            23
            %Total
            
            $
            50.8
            
            
            
            100
            %
            
            $
            38.7
            
            
            
            100
            %





Sales
consist of brake systems and other key safety-related components manufactured by
SORL and sold to domestic original equipment manufacturers (OEM), aftermarket
customers and export market as well as distribution of non-valve auto parts
sourced from related parties.





Net sales were $50,806,384 and
$38,719,508 for the
three months ended September 30, 2010 and 2009, respectively, an increase of
$12.1 million or 31.2%.





Net sales excluding acquired business of
Ruili Group were $47,851,974 and $33,989,937 for the three months ended September 30,
2010 and 2009, respectively, an increase of $13.9 million or
40.8%.





A breakdown of net sales revenue for
these markets for the third quarter of the 2010 and 2009 fiscal years,
respectively, is set forth below:





Three
Months
            
            
            Percent
            
            
            Three
Months
            
            
            Percentended
            
            
            of
            
            
            ended
            
            
            of
            
            
            Percentage30-Sep-10
            
            
            Total Sales
            
            
            30-Sep-09
            
            
            Total Sales
            
            
            Change(U.S. dollars in
      million)China OEM
      market
            
            $
            27.0
            
            
            
            53
            %
            
            $
            20.6
            
            
            
            53
            %
            
            
            31.1
            %China
      Aftermarket
            
            $
            9.8
            
            
            
            19
            %
            
            $
            9.4
            
            
            
            24
            %
            
            
            4.3
            %International
      market
            
            $
            14.0
            
            
            
            28
            %
            
            $
            8.7
            
            
            22%
            
            
            
            60.9
            %Total
            
            $
            50.8
            
            
            
            100
            %
            
            $
            38.7
            
            
            
            99
            %





During the
third quarter of 2010, we benefited from the robust growth of China’s economic
and automobile industry. Further, we promoted our integrated system and
modular supplies of air brake systems to our OEM customers and we
increasingly focused on the light duty, bus and agricultural vehicle market in
2010. As a result of these positive factors, our sales to the Chinese OEM
market increased by $6.4 million or 31.1%, to $27.0 million for the third
quarter of 2010, compared to $20.6 million for the same period of
2009.





We
achieved total revenue of $9.8 million in Chinese aftermarket sales for the
three months ended September 30, 2010, a slight increase compared to $9.4
million for the same period of 2009. 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, 2010. We
will continue with our strategies to further optimize our sales network, to help
further penetrate into new markets. Also, we will continue to focus on investing
in new product development for both the OEM market and the aftermarket, as a
means to increase our sales.




21




The third
quarter is the second consecutive quarter of growth in the manufacture of
commercial vehicles in all the regions of the world. With the recovery of global
economy and customers' confidence in the growth of economy in 2010, our export
sales increased by $5.3 million or 60.9%, to $14.0 million for the third quarter
of 2010, as compared to $8.7 million for the same period of
2009.





Our sales
to the Chinese OEM marketexcluding acquired business of Ruili Group were $25.0 million and $17.4
million for the three months
ended September 30, 2010 and 2009, respectively, an increase of
43.7%.




Our
Chinese aftermarket salesexcluding acquired business of Ruili Group were $9.4 million and
$8.7 million for the
three months ended September 30, 2010 and 2009, respectively, an increase of
8.0%.




Our
export salesexcluding acquired
business of Ruili Group were $13.4 million and $7.8 million for the three months ended
September 30, 2010 and 2009, respectively, an increase of
71.8%.




COST OF SALES AND GROSS
PROFIT




Cost of sales for the three months ended
September 30, 2010 were $36,279,785 an increase of $8,528,572 or 30.7% from
$27,751,213 for the same period last year. Our gross profit increased by 32.4%
from $10,968,295 for the third quarter of 2009 to $14,526,599 for the third
quarter of 2010.




Gross margin increased to 28.6% from
28.3% for the three months ended September 30, 2010 compared with 2009. We
focused on increasing management efficiency, improving the technologies of our
products, and improving our product portfolio. We believe that our continued
expansion to the higher-profit new valve products will also help us to maintain
or increase our gross profit margins.




Cost of salesexcluding acquired business of Ruili
Groupfor the three months
ended September 30, 2010 were $34,477,077, an increase of $9,360,468 or 37.3%
from $25,116,609 for the same period last year. Our gross profit increased by
50.7% from $8,873,328 for the third quarter of 2009 to $13,374,897 for the third
quarter of 2010.





Gross margin excluding acquired business
of Ruili Group increased to 28.0% from 26.1% for the three months ended
September 30, 2010 compared with 2009.





SELLING AND DISTRIBUTION
EXPENSES





Selling and distribution expenses were
$3,299,914 for the three months ended September 30, 2010, as compared to
$2,783,780for the same
period of 2009, an increase of $516,134 or 18.5%.





The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 6.5% for the three months
ended September 30, 2010, as compared to 7.2% for the same period in
2009.





Selling and distribution expenses
excluding acquired business of Ruili Group were $2,689,478 for the three months
ended September 30, 2010, as compared to $2,131,054for the same period of 2009, an
increase of $558,424 or 26.2%.





As a
percentage of sales revenue, selling expenses excluding acquired business of Ruili
Group decreased to 5.6% for the three months ended September 30, 2010, as
compared to 6.3% for the same period in 2009.





GENERAL AND ADMINISTRATIVE
EXPENSES





General and administrative expenses were
$2,950,120 for the three months ended September 30, 2010, as compared to
$2,149,066for the same
period of 2009, an increase of $801,054 or 37.3%.The increase was mainly
due to increasedwelfare
costs for businessexpansion in
the third quarter of 2010. During the three months ended September 30,
2009, we reversed a bad debt provision resulting from collecting a significant
portion of accounts receivable, which had been reflected as a reduction to
general and administrative expenses. As a percentage of sales revenue,
general and administrative expenses increased to 5.8% for the three months
ended September 30, 2010, as compared to 5.6% for the same period in
2009.




22





General and administrative expenses
excluding acquired business of Ruili Group were $2,535,193 for the three months
ended September 30, 2010, as compared to $1,393,971for the same period of 2009, an
increase of $1,141,222 or 81.9%. As a percentage of sales revenue, general
and administrative expenses increased to 5.3% for the three months ended
September 30, 2010, as compared to 4.1% for the same period in
2009.




RESEARCH AND DEVELOPMENT
EXPENSE




Research
and development expenses include payroll, employee benefits, and other
headcount-related expenses associated with product development. Research and
development expenses also include third-party development costs. For the three months ended September 30, 2010,
research and development expense was$1,773,044, as compared to $624,461
for the same period of 2009, an increase of $1,148,583. The Company will
continue to invest in new product development, particularly in upgrading
traditional valve products and in developing electronically controlled
products.




For the
three months ended September 30,
2010, research and development expense excluding acquired business of Ruili
Group was $1,635,421, as compared to $410,397 for the same period of
2009.




DEPRECIATION AND
AMORTIZATION




Depreciation
and amortization expense increased to $1,283,642 for the three months ended
September 30, 2010, compared with that of $1,083,920 for the same period of
2009, an increase of $199,722.The
increase in depreciation and amortization expense was primarily due to the
purchase of production equipment.




FINANCIAL EXPENSE




Financial
expense mainly consists of interest expense and exchange loss. The
financial expense for the three
months ended September 30, 2010 increased by $297,492 to
$357,984 from $60,492for the same period of
2009, which was mainly attributed to fluctuations in the exchange rate
between U.S. dollars and RMB. Management is studying alternative methods for
managing its risks associated with currency translation, such as the
diversification of currencies used in export sales.





The
financial expense excluding
acquired business of Ruili Group for the three months ended September 30,
2010 increased by $311,087 to $348,303 from $37,216for the same period of
2009.




OTHER INCOME




Other
income was $366,308 for the three months ended September 30, 2010, as compared
to $163,776 for the three months ended September 30, 2009, an increase of
$202,532. The increase was mainly due to more subsidies received from local
governments for the three months ended September 30, 2009. These subsidies were
provided to the Company as economic incentives to secure business commitments
and no repayment by the Company is required.





Other
income excluding acquired business
of Ruili Group was $192,459 for the three months ended September 30,
2010, as compared to $121,567 for the three months ended September 30,
2009.




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. According to
applicable tax laws regarding Sino-Foreign Joint Ventures, the Joint
Venture was exempt from income taxes in the PRC for each of the fiscal years
ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled
to a 50% income tax deduction for each of the three years ended December
31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both
fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st
January 2008, China’s enterprises are generally subject to a PRC income tax rate
of 25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.




23




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. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006
pre-tax income. The above taxation exemption was superseded, because the Joint
Venture 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 effective income tax rate will be 15% for years 2009 through
2011.





During
the three months ended September 30, 2010 and 2009, the Joint Venture received
an income tax benefit of $0 and $694,843 in accordance with PRC
preferential income tax policy regarding the purchase of domestically
manufactured equipment, which is subject to assessment and approval from the
local state tax bureau. Income tax expense of $962,210 and
$802,124 was recorded for the quarters ended September 30, 2010 and
2009, respectively.





Income
tax expense excluding acquired
business of Ruili Group of $940,154 and
$728,322 was recorded for the quarters ended September 30, 2010 and
2009, respectively.




STOCK-BASED
COMPENSATION




On March
1, 2006, the Board of Directors approved a total of 60,000 options to be issued
to the four independent members of the Board of Directors. The contractual term
of the options was three years. Total deferred stock-based compensation
expenses related to stock options amounted to $178,904. This amount
was amortized over the three year vesting period in a manner consistent
with FASB ASC 505-50. The amortization of deferred stock-based compensation for
these equity arrangements were $0 and $0 for the three months ended
September 30, 2010 and 2009, respectively. As of December 31, 2009, the 60,000
options had expired unexercised.





On June
20, 2007, the Company granted to its previous senior manager of investor
relations, David Ming He, options to purchase 4,128 shares of its common stock
with an exercise price of $7.25 per share. In accordance with the agreement, the
option became vested and exercisable immediately on the date thereof. Total
deferred stock-based compensation expenses related to the 4,128 stock options
granted amounted to $23,201. This amount was charged to General and
administrative expenses during the fiscal year ended December 31, 2007. On
November 13, 2009, David Ming He exercised the options on a cashless basis and
received 460 shares of common stock, based on a formula provided for in the
initial grant.





On
January 5, 2006, the Company issued 100,000 warrants for financial services to
be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
exercise price of $6.25 per share. In accordance with the common stock purchase
warrant agreement, the warrants became vested and exercisable immediately on the
date thereof. As set forth in the agreement, the Company had retained Maxim
Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors
and investment bankers for a period of twelve months from the date of January 5,
2006. The agreement has now expired. Total expense associated with the 100,000
warrants amounted to $299,052, which, consistent with FASB ASC 505-50, was
recognized during the fiscal year ended December 31, 2006.




24




On
November 9, 2009, Maxim Group LLC transferred 35,000 warrants to OTA LLC and
35,000 warrants to Maxim Partners, LLC respectively. OTA LLC exercised the
warrants on a cashless basis on November 12, 2009 and received 6,609 shares of
common stock, based on a formula provided for in the initial grant. Maxim
Partners, LLC and Chardan Capital Markets, LLC transferred an additional 35,000
warrants and 30,000 warrants to OTA LLC on December 15, 2009 and December 11,
2009, respectively. OTA LLC exercised the warrants on a cashless basis on
December 18, 2009 and received 18,598 shares of common stock, based on a formula
provided for in the initial grant.





There
were no options or warrants outstanding as of September 30, 2010.





Although
the Company anticipates 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 flow.





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. Non-controlling interest in subsidiaries amounted to $501,616 and
$465,092 for the third quarter ended September 30, 2010 and 2009,
respectively.





Non-controlling
interest in subsidiaries excluding
acquired business of Ruili Group amounted to $489,118 and
$423,271 for the third quarter ended September 30, 2010 and 2009,
respectively.





NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS




The net
income attributable to stockholders for the quarter ended September 30,
2010 increased by $793,871, to $4,979,701 from $4,185,830 for the quarter
ended September 30, 2009 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the quarter ended September 30, 2010 and
2009, were $0.26 and $0.23 per share, respectively.





The net
income attributable to stockholders excluding acquired business of Ruili
Group for the quarter ended September 30, 2010 increased by
$1,057,781, to $4,867,219 from $3,809,438 for the quarter ended September 30,
2009 due to the factors discussed above. Earnings per share (“EPS”), both basic
and diluted, for the quarter ended September 30, 2010 and 2009, were $0.25 and
$0.21 per share, respectively.





FINANCIAL CONDITION





Liquidity and Capital
Resources





OPERATING -Net cash generated
from operating activities was $19,320,992 for three months ended September 30,
2010 compared with negative $2,266,045 in the same period in 2009,
an increase of $21,587,037, primarily due to the decreased cash outflow
resulted by changes in notes receivable and prepayments.The decreases in notes
receivable mainly due tothe notes
matured in the third quarter of 2010.





At
September 30, 2010, the Company had cash and cash equivalents of $2,244,711, as
compared to cash and cash equivalents of $10,255,259 at December 31, 2009. The
Company had working capital of $84,327,014 at September 30, 2010, as compared to
working capital of $89,303,176 at December 31, 2009, reflecting current ratios
of 3.8:1 and 5.77:1, respectively.





INVESTING
- The Company expended more cash for investing activities in the third quarter
of 2010 than in the third quarter of 2009. During the three months ended
September 30, 2009, the Company
expended net cash of $960,135in investing activities.For the
three months ended September 30, 2010, the Company utilized $29,675,006 in
investing activities for
acquisition ofthe segments of the automotive parts business of the
Seller, discussed above, and new
equipment to support the growth of our business.




25





FINANCING
- Duringthe third quarter ended September 30,
2010, after repaying loans the Company received aggregate bank loans in the
amount of $4,795,871 underits credit facilities.The Company had no borrowings under its
credit facilities during the quarter ended September 30, 2009.





Management
of the Company has taken a number of steps to restructure its customer base and
phase out accounts which had failed to make prompt payments. The Company also
placed more emphasis on collection of accounts receivable from our customers.
During the second quarter of 2010, the Company continued developing higher
profit margin new products, and adopting steps for further cost saving such as
improving material utilization rate. Meanwhile, the Company maintains good
relationships with local banks. We believe that our current cash and cash
equivalents and anticipated cash flow generated from operations and our bank
lines of credit will be sufficient to finance our working capital requirements
for the foreseeable future.





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





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





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




( 2) Results of operations for the nine
months ended September 30, 2010 as compared to the nine months ended September
30, 2009.





SALES


Nine months
      ended
            
            
            Nine months
      ended30-Sep-10
            
            
            30-Sep-09(U.S.  dollars in
      millions)Commercial vehicles brake systems,
      etc.
            
            $
            112.4
            
            
            
            78
            %
            
            $
            71.9
            
            
            
            76
            %Passenger vehicles brake systems,
      etc.
            
            $
            32.2
            
            
            
            22
            %
            
            $
            23.1
            
            
            
            24
            %Total
            
            $
            144.6
            
            
            
            100
            %
            
            $
            95.0
            
            
            
            100
            %





Sales
consist of brake systems and other key safety-related components manufactured by
SORL and sold to domestic original equipment manufacturers (OEM), aftermarket
customers and export market as well as distribution of non-valve auto parts
sourced from related parties.





Net sales were $144,593,338 and
$95,110,334 for the nine
months ended September 30, 2010 and 2009, respectively, an increase of $49.5
million or 52.0%.




26




Net sales excluding acquired business of
Ruili Group were $131,854,257 and $83,973,887 for the nine months ended September 30,
2010 and 2009, respectively, an increase of $47.9 million or
57.0%.




A breakdown of net sales revenue for
these markets for the nine months ended September 30, 2010 and 2009 fiscal
years, respectively, is set forth below:




Nine months
            
            
            Percent
            
            
            Nine months
            
            
            Percent
            
            
            Percentageended
            
            
            of
            
            
            ended
            
            
            of
            
            
            Change30-Sep-10
            
            
            Total Sales
            
            
            30-Sep-09
            
            
            Total Sales(U.S. dollars in
      million)China OEM
      market
            
            $
            84.6
            
            
            
            59
            %
            
            $
            46.7
            
            
            
            49
            %
            
            
            81.2
            %China
      Aftermarket
            
            $
            23.2
            
            
            
            16
            %
            
            $
            24.1
            
            
            
            25
            %
            
            
            -3.7
            %International
    market
            
            $
            36.8
            
            
            
            25
            %
            
            $
            24.2
            
            
            
            25
            %
            
            
            52.1
            %Total
            
            $
            144.6
            
            
            
            100
            %
            
            $
            95.0
            
            
            
            99
            %
            
            %





During the
nine months of 2010, we benefited from the robust growth of China’s economy and
automobile industry. Further, we promoted our integrated system and modular
supplies of air brake systems to our OEM customers and we increasingly
focused on the light duty, bus and agricultural vehicle market in 2010. As a
result of these positive factors, our sales to the Chinese OEM
market increased by $37.9 million to $84.6 million for the nine months
of 2010, compared to $46.7
million for the same period of 2009.




We
achieved total revenue of $23.2 million in Chinese aftermarket sales for the
nine months ended September 30, 2010, a slight decrease compared to $24.1
million for the same period of 2009. 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 of 2010. We will continue with
our strategies to further optimize our sales network, to help further penetrate
into new markets. Also, we will continue to focus on investing in new product
development for both the OEM market and the aftermarket, as a means to increase
our sales.




In prior
periods, the global financial crisis negatively affected our international
customers and caused many world currencies to depreciate against the US
dollar, while the lack of confidence in the growth of the world
macro-economy caused our customers to decrease their inventories in order
to lower their risk in the nine months of 2009. With the recovery of global
economy and customers' confidence in the growth of economy in 2010, our export
sales increased by $12.6 million or 52.1%, to $36.8 million for the nine months
ended September 30, 2010, as compared to $24.2 million for the same period
of 2009.





Our sales
to the Chinese OEM marketexcluding acquired business of Ruili Group were $75.4 million and $40.7
million for the nine months
ended September 30, 2010 and 2009, respectively, an increase of
85.3%.




Our
Chinese aftermarket salesexcluding acquired business of Ruili Group were $22.5 million and
$22.4 million for the
nine months ended September 30, 2010 and 2009, respectively, an increase of
0.4%.




Our
export salesexcluding acquired
business of Ruili Group were $33.9 million and $20.8 million for the nine months ended
September 30, 2010 and 2009, respectively, an increase of
63.0%.




27




COST OF SALES AND GROSS
PROFIT




For thenine months ended
September 30, 2010, cost
of sales was $102,081,674, an increase of $34,830,282, or 51.8% from $67,251,392
for the same period last year.Our gross profit
increased by 52.6% from $27,858,942for the nine months
ended September 30, 2009 to $42,511,664 for the nine months ended September 30,
2010.




Gross margin increased by 0.1% for the
nine months ended September 30, 2010, to 29.4% from 29.3% for the same period of
2009.We focused on
increasing management efficiency, improving the technologies of our products,
and improving our product portfolio. We believe that our continued expansion to
the higher-profit new valve products will also help us to maintain or increase
our gross profit margins.




For thenine months ended
September 30, 2010, cost
of salesexcluding acquired
business of Ruili Groupwas $95,352,037, an increase of $34,185,804, or 55.9% from $61,166,233 for the
same period last year.Our gross profit
increased by 60.0% from $22,807,654for the nine months
ended September 30, 2009 to $36,502,220 for the nine months ended September 30,
2010.




Gross margin excluding acquired business
of Ruili Group increased by 0.5% for the nine months ended September 30, 2010,
to 27.7% from 27.2% for the same period of 2009.




SELLING AND DISTRIBUTION
EXPENSES





Selling and distribution expenses were
$9,341,056 for the nine months ended September 30, 2010, as compared to
$7,187,413 for the
same period of 2009, an increase of $2,153,643 or 30.0%.





The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 6.5% for the nine months ended
September 30, 2010, as compared to 7.6% for the same period in
2009.





Selling and distribution expenses
excluding acquired business of Ruili Group were $7,516,882 for the nine months
ended September 30, 2010, as compared to $5,509,506 for the same period of 2009, an increase
of $2,007,376 or 36.4%.





The
increase was mainly due to the increased transportation expense and accrued
warranty expenses as a result of increased sales. As a percentage of
sales revenue, selling expenses decreased to 5.7% for the nine months ended
September 30, 2010, as compared to 6.6% for the same period in
2009.








GENERAL AND ADMINISTRATIVE
EXPENSES





General
and administrative expenses were $9,789,218 for the nine months ended September
30, 2010, as compared to $6,740,521 for the same period of 2009, an increase of
$3,048,697 or 45.2%.





The
increase was mainly due to increased expenses for business expansion, consistent
with the increase in revenues. As a percentage of sales revenue,
general and administrative expenses decreased to 6.8% for the nine months
ended September 30, 2010, as compared to 7.1% for the same period in
2009.





General
and administrative expenses excluding acquired business of Ruili
Group were $7,625,969 for the nine months ended September 30, 2010, as
compared to $4,902,026 for the same period of 2009, an increase of $2,723,943 or
55.6%.





As a
percentage of sales revenue, general and administrative expenses were
5.8% for the nine months ended September 30, 2010 and 2009.





28




RESEARCH AND DEVELOPMENT
EXPENSE




Research
and development expenses include payroll, employee benefits, and other
headcount-related expenses associated with product development. Research and
development expenses also include third-party development costs. For the nine
months ended September 30, 2010, research and development expense was
$5,326,598, as compared to $2,545,689 for the same period of 2009, an increase
of $2,780,909. The Company will continue to invest in new product development,
particularly in upgrading traditional valve products and in developing
electronically controlled products.




For the
nine months ended September 30, 2010, research and development expense excluding
acquired business of Ruili Group was $4,695,003, as compared to $1,968,155 for
the same period of 2009, an increase of $2,726,848.




DEPRECIATION AND
AMORTIZATION




Depreciation and
amortization expense increased to $3,750,717for the nine months
ended September 30, 2010, compared with that of $3,204,199for the same period of
2009, an increase of $546,518. The increase in depreciation and amortization
expense was primarily due to the purchase of production
equipment.




FINANCIAL EXPENSE




Financial expense mainly consists of
interest expense and exchange loss. The financial expense for the nine
months ended September 30, 2010 increased by $609,292 to $775,385 from
$166,093 for the same
period of 2009, which was mainly attributed to fluctuations in the exchange
rate between U.S. dollars and RMB. Management is studying alternative methods
for managing its risks associated with currency translation, such as the
diversification of currencies used in export sales.




The financial expenseexcluding acquired business of Ruili
Groupfor the nine months
ended September 30, 2010 increased by $618,815to $694,122 from
$75,307 for the same
period of 2009




OTHER INCOME




Other income was $649,227 for the nine
months ended September 30, 2010, as compared to $410,074 for the nine months ended September 30,
2009, an increase of $239,153. The increase was mainly due to an increase in
sales of raw material scraps for the nine months ended September 30,
2010.





Other incomeexcluding acquired business of Ruili
Groupwas $445,524 for the
nine months ended September 30, 2010, as compared to $337,028 for the nine months ended September 30,
2009, an increase of $108,496.




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. According to
applicable tax laws regarding Sino-Foreign Joint Ventures, the Joint
Venture was exempt from income taxes in the PRC for each of the fiscal years
ended December 31, 2005 and 2004. Thereafter, the Joint Venture was entitled
to a 50% income tax deduction for each of the three years ended December
31, 2008. Thus, the Joint Venture was exempted from PRC income tax in both
fiscal 2004 and 2005, and entitled to a tax concession of 50% of the
applicable income tax rate of 26.4% for the two years ended December 31, 2006
and 2007. With the new PRC Enterprise Income Tax Law, effective on 1st
January 2008, China’s enterprises are generally subject to a PRC income tax rate
of 25% and the Joint Venture was entitled to a tax concession of 50% of the
applicable income tax rate of 25% for the year ended December 31,
2008.




29




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. In
2009, 2010 and 2011, the Joint Venture will enjoy a 50% exemption from the
applicable income tax rate of 25% on any pre-tax income above its 2006
pre-tax income. The above taxation exemption was superseded, because the Joint
Venture 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 effective income tax rate will be 15% for years 2009 through
2011.





During
the nine months ended September 30, 2010 and 2009, the Joint Venture received an
income tax benefit of $930,699 and $694,843 in accordance with PRC
preferential income tax policy regarding the purchase of domestically
manufactured equipment, which is subject to assessment and approval from the
local state tax bureau. Income tax expense of $1,780,492 and
$2,140,055 was recorded for the nine months ended September 30, 2010
and 2009, respectively.





Income
tax expense excluding acquired
business of Ruili Group of $1,555,696 and
$2,000,413 was recorded for the nine months ended September 30, 2010
and 2009, respectively.




STOCK-BASED
COMPENSATION




On March
1, 2006, the Board of Directors approved a total of 60,000 options to be issued
to the four independent members of the Board of Directors. The contractual term
of the options was three years. Total deferred stock-based compensation
expenses related to stock options amounted to $178,904. This amount
was amortized over the three year vesting period in a manner consistent
with FASB ASC 505-50. The amortization of deferred stock-based compensation for
these equity arrangements were $0 and $9,935 for the nine months ended
September 30, 2010 and 2009, respectively. As of December 31, 2009, the 60,000
options had expired unexercised.





On June
20, 2007, the Company granted to its previous senior manager of investor
relations, David Ming He, options to purchase 4,128 shares of its common stock
with an exercise price of $7.25 per share. In accordance with the agreement, the
option became vested and exercisable immediately on the date thereof. Total
deferred stock-based compensation expenses related to the 4,128 stock options
granted amounted to $23,201. This amount was charged to General and
administrative expenses during the fiscal year ended December 31, 2007. On
November 13, 2009, David Ming He exercised the options on a cashless basis and
received 460 shares of common stock, based on a formula provided for in the
initial grant.





On
January 5, 2006, the Company issued 100,000 warrants for financial services to
be provided by Maxim Group LLC and Chardan Capital Markets, LLC, with an
exercise price of $6.25 per share. In accordance with the common stock purchase
warrant agreement, the warrants became vested and exercisable immediately on the
date thereof. As set forth in the agreement, the Company had retained Maxim
Group LLC and Chardan Capital Markets, LLC as its exclusive financial advisors
and investment bankers for a period of twelve months from the date of January 5,
2006. The agreement has now expired. Total expense associated with the 100,000
warrants amounted to $299,052, which, consistent with FASB ASC 505-50, was
recognized during the fiscal year ended December 31, 2006.




On
November 9, 2009, Maxim Group LLC transferred 35,000 warrants to OTA LLC and
35,000 warrants to Maxim Partners, LLC respectively. OTA LLC exercised the
warrants on a cashless basis on November 12, 2009 and received 6,609 shares of
common stock, based on a formula provided for in the initial grant. Maxim
Partners, LLC and Chardan Capital Markets, LLC transferred an additional 35,000
warrants and 30,000 warrants to OTA LLC on December 15, 2009 and December 11,
2009, respectively. OTA LLC exercised the warrants on a cashless basis on
December 18, 2009 and received 18,598 shares of common stock, based on a formula
provided for in the initial grant.




30




There
were no options or warrants outstanding as of September 30, 2010.





Although
the Company anticipates 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 flow.





NET
INCOME ATTRIBUTABLE TO NON-CONTROLLING INTEREST IN SUBSIDIARIES




Non-controlling
interest in subsidiaries represents a 10% non-controlling interest in the
Chinese located Joint Venture and 40% non-controlling interest in the Hong Kong
located Joint Venture, in each case held by our Joint Venture Partners. Net
income attributable to non-controlling interest in subsidiaries amounted to
$1,459,277 and $941,468 for the nine months ended September 30, 2010 and 2009,
respectively.





Net
income attributable to non-controlling interest in subsidiaries excluding acquired business of Ruili
Group amounted to $1,331,893 and $862,337 for the nine months ended
September 30, 2010 and 2009, respectively.





NET
INCOME ATTRIBUTABLE TO STOCKHOLDERS




The net
income attributable to stockholders for the nine months ended September 30,
2010 increased by $6,092,379, to $14,555,650 from $8,463,271 for
the nine months ended September 30, 2009 due to the factors discussed above.
Earnings per share (“EPS”), both basic and diluted, for the nine months ended
September 30, 2010 and 2009, were $0.76 and $0.46 per share,
respectively.





The net
income attributable to stockholders excluding acquired business of Ruili
Group for the nine months ended September 30, 2010 increased by
$5,658,100, to $13,409,196 from $7,751,096 for the nine months ended
September 30, 2009 due to the factors discussed above. Earnings per share
(“EPS”), both basic and diluted, for the nine months ended September 30, 2010
and 2009, were $0.7 and $0.42 per share, respectively.





FINANCIAL CONDITION





Liquidity and Capital
Resources




OPERATING -Net cash generated
from operating activities was $8,998,980for nine months ended September
30, 2010 compared with $6,623,628 of net cash provided in operating
activities in the same period in 2009, an increase of $2,375,352,primarily due to the increased cash flow resulted by changes in accounts receivable and
prepayments.





At
September 30, 2010, the Company had cash and cash equivalents of $2,244,711, as
compared to cash and cash equivalents of $10,255,259 at December 31, 2009. The
Company had working capital of $84,327,014 at September 30, 2010, as compared to
working capital of $89,303,176 at December 31, 2009, reflecting current ratios
of 3.80:1 and 5.77:1, respectively.





INVESTING
- During the nine months ended September 30, 2010, the Company expended net cash of
$36,626,169 in investing activities, mainly for acquisition ofthe
segments of the automotive parts business of Ruili Group Co., Ltd. andnew equipment to support the growth of
the business. For the nine months ended September 30, 2009, the Company utilized
$1,888,945 in
investing activities.





FINANCING
-Duringthe nine months ended September
30, 2010, after repaying loans the Company received aggregate bank loans in the amount
of $9,279,449 underits
credit facilities.During the three months ended March 31, 2010, net cash
provided by financing activities was primarily attributable to the net proceeds
of our public offering of approximately $9,399,978. Additionally, another
capital increase of $1,038,900 was contributed by Ruili Group to the Joint
Venture. Net cash provided byfinancing activities was $19,718,327 for nine months ended
September 30, 2010 compared with $0 in the same period in 2009.The
Company had no borrowings under its credit facilities during the nine
months ended September 30, 2009.




31




Management
of the Company has taken a number of steps to restructure its customer base and
phase out accounts which had failed to make prompt payments. The Company also
placed more emphasis on collection of accounts receivable from our customers.
During the second quarter of 2010, the Company continued developing higher
profit margin new products, and adopting steps for further cost saving such as
improving material utilization rate. Meanwhile, the Company maintains good
relationships with local banks. We believe that our current cash and cash
equivalents and anticipated cash flow generated from operations and our bank
lines of credit will be sufficient to finance our working capital requirements
for the foreseeable future.





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





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





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





OFF-BALANCE
SHEET AGREEMENTS





At
September 30, 2010, we do not have any material commitments for capital
expenditures or have any transactions, obligations or relationships that could
be considered off-balance sheet arrangements.





ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





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





ITEM
4. CONTROLS AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures:




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




32




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, 2010 that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over
financial reporting.





PART
II OTHER INFORMATION





ITEM 6. EXHIBITS


(a)
            Exhibits:




31.1
            Certification of Principal
      Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated
      under the Securities and Exchange Act of 1934, as
      amended.31.2
            Certification of Principal
      Accounting Officer pursuant to Rule 13a-14 and Rule 15d-14(a) promulgated
      under the Securities and Exchange Act of 1934, as
      amended.32.1
            Certification pursuant to Section
      906 of the Sarbanes-Oxley Act of
2002.
















SIGNATURES


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




Dated : November 15,
      2010
              SORL AUTO
      PARTS, INC.By:
              /s/
      Xiao Ping ZhangName: Xiao Ping
      ZhangTitle: Chief Executive
      Officer


By:
              /s/
      Zong Yun ZhouName: Zong Yun
      ZhouTitle: Chief Financial
      Officer
                (Principal Financial
      Officer)




33