Attached files
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EX-31.1 - Sutor Technology Group LTD | v221418_ex31-1.htm |
EX-31.2 - Sutor Technology Group LTD | v221418_ex31-2.htm |
EX-32.2 - Sutor Technology Group LTD | v221418_ex32-2.htm |
EX-32.1 - Sutor Technology Group LTD | v221418_ex32-1.htm |
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10−Q
(Mark One)
x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended: March 31, 2011
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ____________ to _____________
Commission File Number: 000-51908
SUTOR TECHNOLOGY GROUP LIMITED
(Exact Name of Registrant as Specified in Its Charter)
Nevada
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87-0578370
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(State or other jurisdiction of incorporation
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(I.R.S. Employer Identification No.)
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or organization)
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No 8, Huaye Road
Dongbang Industrial Park
Changshu, 215534
People’s Republic of China
(Address of principal executive offices, zip code)
(+86) 512-52680988
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
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Accelerated filer ¨
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Non-accelerated filer ¨ (Do not check if a smaller reporting company)
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Smaller reporting company x
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of common stock, as of May 9, 2011 is as follows:
Class of Securities
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Shares Outstanding
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Common Stock, $0.001 par value
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40,745,602
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SUTOR TECHNOLOGY GROUP LIMITED
Quarterly Report on FORM 10-Q
Three Months Ended March 31, 2011
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TABLE OF CONTENTS
PART I
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||||
FINANCIAL INFORMATION
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||||
Item 1.
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Financial Statements
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2
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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3
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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15
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Item 4.
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Controls and Procedures
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15
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PART II
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||||
OTHER INFORMATION
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||||
Item 1.
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Legal Proceedings
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16
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Item 1A.
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Risk Factors
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16
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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16
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Item 3.
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Defaults Upon Senior Securities
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16
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Item 4.
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(Removed and Reserved)
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16
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Item 5.
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Other Information
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16
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Item 6.
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Exhibits
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16
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SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Page
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Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and June 30, 2010
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F-1
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Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)
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F-2
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Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)
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F-3
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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F-4-F-17
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2
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
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June 30,
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|||||||
2011
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2010
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|||||||
(unaudited)
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(audited)
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|||||||
ASSETS
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||||||||
Current Assets:
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||||||||
Cash and cash equivalents
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$ | 12,162,775 | $ | 13,336,736 | ||||
Restricted cash
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62,875,755 | 48,315,962 | ||||||
Trade accounts receivable, net of allowance for doubtful accounts of $504,150 and $498,620, respectively
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16,555,372 | 10,913,736 | ||||||
Other receivables and prepayments
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1,997,451 | 929,507 | ||||||
Advances to suppliers, related parties
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114,214,160 | 96,776,181 | ||||||
Advances to suppliers, net of allowance of $460,011 and $542,490, respectively
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24,793,941 | 8,304,246 | ||||||
Inventory, net of allowance for obsolescence of $105,732 and $102,028, respectively
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38,305,284 | 40,179,358 | ||||||
Notes receivable
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15,220 | 73,437 | ||||||
Deferred income taxes
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285,875 | 329,414 | ||||||
Total Current Assets
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271,205,833 | 219,158,577 | ||||||
Property, Plant and Equipment, net of accumulated depreciation of $32,589,559 and $25,914,352, respectively
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68,157,865 | 70,018,522 | ||||||
Intangible Assets, net of accumulated amortization of $483,266 and $415,178, respectively
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3,051,210 | 2,995,488 | ||||||
TOTAL ASSETS
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$ | 342,414,908 | $ | 292,172,587 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
Current Liabilities:
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||||||||
Accounts payable
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$ | 31,196,368 | $ | 23,954,009 | ||||
Advances from customers
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7,485,793 | 6,769,481 | ||||||
Other payables and accrued expenses
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4,678,025 | 4,688,324 | ||||||
Other payables - related parties
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529,672 | 352,495 | ||||||
Short-term notes payable
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93,521,167 | 82,128,484 | ||||||
Short-term notes payable - related parties
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608,819 | 587,492 | ||||||
Total Current Liabilities
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138,019,844 | 118,480,285 | ||||||
Long-Term Notes Payable
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16,826,700 | 2,859,995 | ||||||
Total Liabilities
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154,846,544 | 121,340,280 | ||||||
Stockholders' Equity
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||||||||
Undesignated preferred stock - $0.001 par value; 1,000,000 shares authorized; no shares outstanding
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- | - | ||||||
Common stock - $0.001 par value; 500,000,000 shares authorized, 40,745,602 and 40,715,602 shares outstanding at March 31, 2011 and June 30, 2010, respectively
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40,745 | 40,715 | ||||||
Additional paid-in capital
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42,554,997 | 42,465,581 | ||||||
Statutory reserves
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12,629,151 | 12,629,151 | ||||||
Retained earnings
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105,978,786 | 96,164,928 | ||||||
Accumulated other comprehensive income
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26,364,685 | 19,531,932 | ||||||
Total Stockholders' Equity
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187,568,364 | 170,832,307 | ||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
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$ | 342,414,908 | $ | 292,172,587 | ||||
The accompanying notes are an integral part of the condensed consolidated financial statements
F-1
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)
For The Three Months Ended
|
For The Nine Months Ended
|
|||||||||||||||
March 31
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March 31
|
|||||||||||||||
2011
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2010
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2011
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2010
|
|||||||||||||
Revenue:
|
||||||||||||||||
Revenue
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$ | 62,521,577 | $ | 53,393,402 | $ | 157,802,440 | $ | 165,933,164 | ||||||||
Revenue from related parties
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38,853,040 | 61,058,979 | 144,942,388 | 187,502,281 | ||||||||||||
101,374,617 | 114,452,381 | 302,744,828 | 353,435,445 | |||||||||||||
Cost of Revenue
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||||||||||||||||
Cost of revenue
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57,017,557 | 48,928,589 | 143,055,256 | 153,813,836 | ||||||||||||
Cost of revenue from related party sales
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35,742,344 | 56,209,868 | 133,184,740 | 177,272,203 | ||||||||||||
92,759,901 | 105,138,457 | 276,239,996 | 331,086,039 | |||||||||||||
Gross Profit
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8,614,716 | 9,313,924 | 26,504,832 | 22,349,406 | ||||||||||||
Operating Expenses:
|
||||||||||||||||
Selling expense
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1,345,635 | 1,815,730 | 4,708,748 | 4,464,208 | ||||||||||||
General and administrative expense
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1,718,186 | 1,980,356 | 5,081,444 | 4,466,783 | ||||||||||||
Total Operating Expenses
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3,063,821 | 3,796,086 | 9,790,192 | 8,930,991 | ||||||||||||
Income from Operations
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5,550,895 | 5,517,838 | 16,714,640 | 13,418,415 | ||||||||||||
Other Income (Expense):
|
||||||||||||||||
Interest income
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188,697 | 389,750 | 626,412 | 973,089 | ||||||||||||
Other income
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2,595 | 6,211 | 123,886 | 373,175 | ||||||||||||
Interest expense
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(1,986,541 | ) | (1,535,430 | ) | (5,856,643 | ) | (4,150,479 | ) | ||||||||
Other expense
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(214,926 | ) | (19,043 | ) | (489,989 | ) | (341,321 | ) | ||||||||
Gain on sale of assets
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4,447 | (3,549 | ) | 4,447- | (3,549 | ) | ||||||||||
Total Other Income (Expense)
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(2,005,728 | ) | (1,162,061 | ) | (5,591,887 | ) | (3,149,085 | ) | ||||||||
Income Before Taxes
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3,545,167 | 4,355,777 | 11,122,753 | 10,269,330 | ||||||||||||
Provision for income taxes
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(76,958 | ) | (961,085 | ) | (1,308,895 | ) | (2,346,813 | ) | ||||||||
Net Income
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$ | 3,468,209 | $ | 3,394,692 | $ | 9,813,858 | $ | 7,922,517 | ||||||||
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|
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|||||||||||||
Basic Earnings per Share
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$ | 0.09 | $ | 0.09 | $ | 0.24 | $ | 0.21 | ||||||||
Diluted Earnings per Share
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$ | 0.09 | $ | 0.09 | $ | 0.24 | $ | 0.21 | ||||||||
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|||||||||||||
Basic Weighted Shares Outstanding
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40,727,935 | 38,608,046 | 40,719,653 | 38,169,909 | ||||||||||||
Diluted Weighted Shares Outstanding
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40,727,935 | 38,608,046 | 40,719,653 | 38,169,909 | ||||||||||||
Net Income
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$ | 3,468,209 | $ | 3,394,692 | $ | 9,813,858 | $ | 7,922,517 | ||||||||
Foreign currency translation adjustment
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1,231,987 | 33,378 | 6,832,753 | 226,802 | ||||||||||||
Comprehensive Income
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$ | 4,700,196 | $ | 3,428,070 | $ | 16,646,611 | $ | 8,149,319 |
The accompanying notes are an integral part of the condensed consolidated financial statements
F-2
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For The Nine Months Ended
|
||||||||
March 31
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||||||||
2011
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2010
|
|||||||
Cash Flows from Operating Activities:
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||||||||
Net income
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$ | 9,813,858 | $ | 7,922,517 | ||||
Adjustments to reconcile net income to net cash provided by operating activities
|
||||||||
Depreciation and amortization
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5,715,855 | 5,260,692 | ||||||
Deferred income taxes
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54,587 | 63,740 | ||||||
Foreign currency exchange (gain) loss
|
191 | - | ||||||
Stock based compensation
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89,446 | 10,133 | ||||||
Loss (Gain) on sale of assets
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(4,447 | ) | 3,549 | |||||
Changes in current assets and liabilities:
|
||||||||
Trade accounts receivable, net
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(5,228,146 | ) | (389,975 | ) | ||||
Other receivable and prepayment
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(1,017,248 | ) | 104,586 | |||||
Advances to suppliers - related parties
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(13,346,284 | ) | (37,108,212 | ) | ||||
Advances to suppliers
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(15,922,866 | ) | 1,561,993 | |||||
Inventory
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3,277,984 | 6,830,463 | ||||||
Accounts payable
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6,268,337 | 2,980,168 | ||||||
Advances from customers
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486,821 | 3,836,561 | ||||||
Other payables and accrued expenses
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(163,136 | ) | 1,432,592 | |||||
Other payables - related parties
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161,686 | 298,345 | ||||||
Net Cash (Used In) Operating Activities
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(9,813,362 | ) | (7,192,848 | ) | ||||
Cash Flows from Investing Activities:
|
||||||||
Changes in notes receivable
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59,884 | (1,269,427 | ) | |||||
Purchase of property, plant and equipment, net of value added tax refunds received
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(1,335,063 | ) | (1,196,621 | ) | ||||
Proceeds from sale of assets
|
6,138 | - | ||||||
Net Cash Used In Investing Activities
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(1,269,041 | ) | (2,466,048 | ) | ||||
Cash Flows from Financing Activities:
|
||||||||
Proceeds from issuance of notes payable
|
96,696,227 | 95,709,395 | ||||||
Payments on notes payable
|
(74,409,132 | ) | (95,979,838 | ) | ||||
Proceeds from issuance of notes payable - related parties
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- | 199,932 | ||||||
Payments on notes payable - related parties
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- | (985,269 | ) | |||||
Net change in restricted cash
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(12,595,955 | ) | 16,649,017 | |||||
Distribution to shareholders
|
- | (6,615,825 | ) | |||||
Net proceeds from issuance of common stock and warrants
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- | 6,814,196 | ||||||
Net Cash Provided By Financing Activities
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9,691,140 | 15,791,608 | ||||||
Effect of Exchange Rate Changes on Cash
|
217,302 | 22,772 | ||||||
Net Change in Cash
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(1,173,961 | ) | 6,155,484 | |||||
Cash and Cash Equivalents at Beginning of Period
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13,336,736 | 10,653,438 | ||||||
Cash and Cash Equivalents at End of Period
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$ | 12,162,775 | $ | 16,808,922 | ||||
Supplemental Non-Cash Financing Activities
|
||||||||
Offset of notes payable to related party against receivable from related parties (Note 7)
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$ | 9,959,383 | $ | 9,597,783 | ||||
Supplemental Cash Flow Information
|
||||||||
Cash paid during the period for interest
|
$ | 5,426,740 | $ | 3,744,722 | ||||
Cash paid during the period for income taxes
|
$ | 2,095,060 | $ | 1,465,412 |
The accompanying notes are an integral part of the condensed consolidated financial statements
F-3
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Sutor Technology Group Limited and subsidiaries (the “Company”) include its wholly owned subsidiaries Sutor Steel Technology Co., Ltd. (“Sutor Steel”), Changshu Huaye Steel Strip Co., Ltd. (“Changshu Huaye”), Jiangsu Cold-Rolled Technology Co., Ltd. (“Jiangsu Cold-Rolled”), Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd. (“Ningbo Zhehua”) and Sutor Technology Co., Ltd (“Sutor Technology”).
Ningbo Zhehua was organized under the laws of the People’s Republic of China (the “PRC”) on April 5, 2004. On November 10, 2009, pursuant to an Equity Transfer Agreement (the “Agreement”), Changshu Huaye acquired 100% of the equity interests of Ningbo Zhehua from Shanghai Huaye Iron & Steel Co., Ltd., (an entity under common control with the Company) (“Shanghai Huaye”) for approximately $6,615,825 in cash. The acquisition was a transfer of equity interests between entities under common control and was recognized as a recapitalization of Ningbo Zhehua into the Company in a manner similar to the pooling-of-interests method of accounting, with the assets and liabilities of Ningbo Zhehua recognized at their historical carrying amounts.
Nature of Operations - The Company’s operations are located in the PRC. For the three months ended March 31, 2011 and 2010, approximately 87.4% and 90.6%, respectively, of the Company’s revenue was derived from sales within the PRC of steel products. For the nine months ended March 31, 2011 and 2010, approximately 91.0% and 90.3%, respectively, of the Company’s revenue was derived from sales within the PRC of steel products. A significant portion of the Company’s purchases and revenues consist of transactions with Shanghai Huaye and its subsidiaries. Changshu Huaye manufactures hot-dip galvanized steel (“HDG products) and pre-painted galvanized steel (“PPGI products”). Jiangsu Cold-Rolled operates several production lines that refine products such as cold-rolled steel, acid pickled steel and hot-dip galvanized steel. Ningbo Zhehua manufactures heavy steel pipe and purchases and resells cold-rolled and hot-dip galvanized steel. Sutor Technology Co., Ltd. has not started operation since its inception on February 24, 2010.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Interim Unaudited Financial Statements – The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries at March 31, 2011 and for the three and nine months ended March 31, 2011 and 2010 reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the three and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. The Company follows the same accounting policies in the preparation of interim reports.
Principles of Consolidation – The accompanying condensed consolidated financial statements includes the accounts and transactions of Sutor Technology Group Limited and its subsidiaries for all periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.
Functional Currency and Translating Financial Statements - The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The functional currency of the Company is the Chinese Yuan Renminbi (“RMB”); however, the accompanying condensed consolidated financial statements have been expressed in United States Dollars (“USD”). The accompanying consolidated balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The accompanying consolidated statements of operations and cash flows have been translated using the exchange rate on the dates of significant transactions or the weighted-average exchange rates prevailing during the periods of each statement. Transactions in the Company’s equity securities have been recorded at the exchange rate existing at the time of the transaction.
March 31,
2011
|
March 31,
2010
|
June 30,
2010
|
||||||||||
Period end RMB : USD exchange rate
|
|
|
6.5701
|
6.8361
|
|
|
|
6.8086
|
|
|||
Average 3 months RMB : USD exchange rate
|
|
|
6.5894
|
6.8360
|
|
|
|
|
||||
Average 9 months RMB : USD exchange rate
|
|
|
6.6796
|
6.8377
|
|
|
|
|
F-4
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued
Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Revenue Recognition - The Company recognizes revenues from the sale of products in the three segments when they are realized and earned. The Company considers revenue realized or realizable and earned when (1) it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Revenues are not recognized until products have been shipped to the client, risk of loss has transferred to the client and client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied.
The Company sells product to affiliates, who in turn sell the product to various other third party customers. Revenue is considered realized or realizable and earned when the affiliates ship the product to third party customers. A fee of 0.5% of the sale is paid to the affiliate for handling the product. The handling fees were $82,866 and $137,776 for the three months ended March 31, 2011 and 2010 respectively and have been classified as selling expenses in the statement of operations. The handling fees were $366,288 and $384,016 for the nine months ended March 31, 2011 and 2010 respectively and have been classified as selling expenses in the statement of operations.
Recently Adopted Accounting Guidance - In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. The adoption of this standard did not have a material impact to the Company’s financial statements
In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial position or results of operations.
Recent Accounting Guidance Not Yet Adopted – Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.
F-5
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 3 – INVENTORY
Inventory consisted of the following:
March 31,
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Raw materials
|
$ | 18,446,138 | $ | 22,285,980 | ||||
Work in process
|
- | 265,282 | ||||||
Finished goods
|
19,964,878 | 17,730,124 | ||||||
38,411,016 | 40,281,386 | |||||||
Less: allowance for obsolescence
|
(105,732 | ) | (102,028 | ) | ||||
Total Inventory - net
|
$ | 38,305,284 | $ | 40,179,358 |
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT
Property and equipment includes value-added tax paid. Foreign invested enterprises and foreign enterprises doing business in the PRC are generally able to receive a refund of the value-added tax paid on property and equipment purchased and manufactured within the PRC. The Company recognizes refunds of value-added tax as a reduction of property and equipment when the refunds are collected. The refunds are a long-term asset as it can take up to three years to collect them from the PRC government. Investment tax credits are realized upon collection from the government. The Company has approximately $32,115,000 of property and equipment that is used as collateral for loans.
Property, plant and equipment consisted of the following:
March 31,
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Buildings and plant
|
$ | 28,618,698 | $ | 27,513,920 | ||||
Machinery
|
68,690,167 | 66,220,305 | ||||||
Office and other equipment
|
1,095,065 | 994,114 | ||||||
Vehicles
|
290,754 | 337,454 | ||||||
98,694,684 | 95,065,793 | |||||||
Less: accumulated depreciation
|
(32,589,559 | ) | (25,914,352 | ) | ||||
66,105,125 | 69,151,441 | |||||||
Construction in process
|
2,052,740 | 867,081 | ||||||
Net property, plant and equipment
|
$ | 68,157,865 | $ | 70,018,522 |
No interest has been capitalized in construction in process through March 31, 2011 as the amount is insignificant.
F-6
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 4 – PROPERTY, PLANT AND EQUIPMENT - continued
Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, as follows:
|
Life
|
Buildings and Plant
|
20 years
|
Machinery
|
10 years
|
Office and other equipment
|
10 years
|
Vehicles
|
5 years
|
Depreciation expense for the three months ended March 31, 2011 and 2010 was $1,913,961 and $1,836,144, respectively.
Depreciation expense for the nine months ended March 31, 2011 and 2010 was $5,663,707 and $5,209,750, respectively.
NOTE–5 - INTANGIBLE ASSETS
The Company’s intangible assets consist of several land use rights, which are amortized over the 50-year life of those rights. Amortization expense for the three months ended March 31, 2011 and 2010 was $17,611 and $16,985 respectively. Amortization expense for the nine months ended March 31, 2011 and 2010 was $52,148 and $50,942 respectively. Intangible information by segment is presented below:
As of March 31, 2011
|
Changshu Huaye
|
Jiangsu Cold-Rolled
|
Total
|
|||||||||
(unaudited)
|
||||||||||||
Gross Carrying Amount
|
$ | 2,248,961 | $ | 1,285,515 | $ | 3,534,476 | ||||||
Accumulated Amortization
|
(328,163 | ) | (155,103 | ) | (483,266 | ) | ||||||
$ | 1,920,798 | $ | 1,130,412 | $ | 3,051,210 |
As of June 10, 2010
|
Changshu Huaye
|
Jiangsu Cold-Rolled
|
Total
|
|||||||||
(audited)
|
||||||||||||
Gross Carrying Amount
|
$ | 2,170,182 | $ | 1,240,484 | $ | 3,410,666 | ||||||
Accumulated Amortization
|
(284,116 | ) | (131,062 | ) | (415,178 | ) | ||||||
$ | 1,886,066 | $ | 1,109,422 | $ | 2,995,488 |
The following schedule sets forth the estimated amortization expense for the periods presented:
ESTIMATED AMORTIZATION EXPENSE
|
|
|
|
|
Remainder of the year ending June 30, 2011
|
|
$
|
17,672
|
|
For the year ending June 30, 2012
|
|
|
70,690
|
|
For the year ending June 30, 2013
|
|
|
70,690
|
|
For the year ending June 30, 2014
|
|
|
70,690
|
|
For the year ending June 30, 2015
|
|
|
70,690
|
|
F-7
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE–6 - NOTES PAYABLE
The Company’s notes payable consist of short and long-term debt. All non related party short-term notes payable were due to banks. The following schedules sets forth the Company’s notes payable and notes payable – related parties as of the dates presented:
Non-related party short-term and long term notes were comprised of the following:
March 31,
|
June 30,
|
|||||||||
Maturity Date
|
2011
|
2010
|
||||||||
(unaudited)
|
(audited)
|
|||||||||
Note payable at 5.22% interest, guaranteed by related party
|
Renew to 1/19/2012
|
$ | 2,283,070 | $ | 2,203,096 | |||||
Note payable at 6.06% interest, guaranteed by related party
|
Renew to 2/29/2012
|
3,044,094 | 2,937,461 | |||||||
Note payable at 5.31% interest, guaranteed by related party
|
4/29/2011
|
3,044,094 | 2,937,461 | |||||||
Note payable at 5.31% interest, guaranteed by related party
|
5/19/2011
|
3,044,094 | 2,937,461 | |||||||
Note payable at 4.78% interest, guaranteed by related party
|
5/24/2011
|
5,174,959 | 4,993,684 | |||||||
Note payable at 4.78% interest, guaranteed by related party
|
5/26/2011
|
7,610,234 | 7,343,654 | |||||||
Note payable at 5.10% interest, guaranteed by related party
|
5/16/2011
|
3,044,094 | 2,937,461 | |||||||
Note payable at 6.00% interest, unsecured
|
11/20/2011
|
2,859,995 | - | |||||||
Note payable at 4.78% interest, guaranteed by related party
|
various dates from 6/20/2011 to 9/6/2011
|
33,028,415 | - | |||||||
Note payable at 5.31% interest, guaranteed by related party
|
8/20/2011
|
1,522,047 | - | |||||||
Note payable at 5.00% interest, guaranteed by related party
|
11/17/2011
|
6,088,187 | - | |||||||
Note payable at 4.78% interest, guaranteed by related party
|
9/30/2011
|
7,610,234 | - | |||||||
Note payable at 5.00% interest, guaranteed by related party
|
various dates from 10/24/2011 to 11/10/2011
|
10,045,509 | - | |||||||
Note payable at 5.91% interest, guaranteed by related party
|
12/26/2011
|
1,522,047 | - | |||||||
Note payable at 0.85% interest, guaranteed by related party
|
4/22/2011
|
556,000 | - | |||||||
Note payable at 5.81% interest, guaranteed by related party
|
7/5/2011
|
3,044,094 | - | |||||||
Note payable at 4.78% interest, guaranteed by related party
|
matured
|
- | 30,549,599 | |||||||
Note payable at 4.05% interest, guaranteed by land use right
|
matured
|
- | 3,231,208 | |||||||
Note payable at 4.80% interest, secured by property
|
matured
|
- | 9,693,623 | |||||||
Note payable at 4.05% interest, guaranteed by related party
|
matured
|
- | 1,909,350 | |||||||
Note payable at 5.31% interest, guaranteed by related party
|
matured
|
- | 7,343,654 | |||||||
Note payable at 4.78% interest, guaranteed by related party
|
matured
|
- | 1,321,858 | |||||||
Note payable at 4.86% interest, guaranteed by related party
|
matured
|
- | 1,788,914 | |||||||
Total Short-Term Notes Payable
|
$ | 93,521,167 | $ | 82,128,484 | ||||||
Long-term notes payable at 3.98% interest as of March 31, 2011, guaranteed by related party
|
2/21/2013
|
16,826,700 | - | |||||||
Long-term notes payable at 6.00% interest, unsecured
|
matured
|
- | 2,859,995 | |||||||
Total long-term notes payable
|
$ | 16,826,700 | $ | 2,859,995 | ||||||
As of March 31, 2011, restricted cash of $45,159,130 and $17,716,625 are held as collateral for short term and long term notes payable, respectively.
The weighted average interest rate for the non-related party short-term and long term notes payable as of March 31, 2011 is 4.99%.
F-8
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE–6 - NOTES PAYABLE- continued
Notes due to related parties were comprised of the following:
Maturity
Date
|
March 31,
2011
|
June 30,
2010
|
||||||||
(unaudited)
|
(audited)
|
|||||||||
Note payable to principal shareholder, no interest rate, unsecured
|
On demand
|
$ | 608,819 | $ | 587,492 | |||||
Total short-term notes payable - related parties
|
|
$ | 608,819 | $ | 587,492 |
The note payable to the principal shareholder has a zero interest rate, the Company does not impute interest on this note payable. The Company intends to repay this note when repayment is demanded.
NOTE–7 - RELATED PARTIES
Purchases from Related Parties
The Company sells its products to and buys raw materials from various companies which are owned or controlled by the Principal Shareholders. These other companies are composed of a number of companies with which the Company conducts significant transactions. Revenues related to these transactions are shown separately in the accompanying consolidated statements of income. For the three months ended March 31, 2011 and 2010, purchases from these related parties totaled of $58,957,273 and $94,364,470, respectively. For the nine months ended March 31, 2011 and 2010, purchases from these related parties totaled of $163,121,266 and $210,563,568, respectively.
Advances to Suppliers- Related Parties
The amounts due to related parties are non-interest bearing and were incurred in the normal course of business except for certain notes payable. Receivables from, advances to suppliers, sales to, payables from advanced sales deposits, and payables from purchases from related parties have been netted due to the right of offset. At March 31, 2011 and June 30, 2010, the net amounts due from related parties were $114,214,160 and $96,776,181, respectively. The amounts charged for products to the Company by the related parties are under the same pricing, terms and conditions as those charged to third parties, and are due upon receipt. It is not uncommon for the Company with its related parties to accommodate a repayment extension of 90 to 180 days. Amounts receivable from related parties are also due upon delivery. Advances to suppliers which are related parties, are relieved once the goods are received.
Letters of Credit Held by Related Parties
At March 31, 2011, the Company had letters of credit totaling $55,006,773 in the form of banker’s acceptance notes that are held by related parties in connection with purchases from related parties. The banker’s acceptance notes carry a 0% interest rate, can be presented to the respective banks in 90 to 180 days from the dates they were written, are secured by cash on deposit with the respective banks and are guaranteed by related parties.
Notes Payable to Principal Shareholder
On December 20, 2007, Ms. Chen loaned the Company $7,099,998. The loan was for an initial period of 24 months through December 20, 2009, carried an interest rate of 5%.
On March 11, 2009, Ms. Chen loaned the Company $99,998. The loan was for a period of 36 months, carried an interest rate of 3.60%.
On April 29, 2009, Ms. Chen loaned the Company $149,998. The loan was for a period of 36 months, carried an interest rate of 5.00%.
On July 25, 2009, Ms. Chen loaned the Company $199,930. The loan was for a period of 12 months, and carried an interest rate of 2%.
The notes to Ms. Chen described above plus the accrued interest on the notes of $1,177,364 totaling $8,727,288 (along with $1,232,095 of non-interest bearing notes due to Ms. Chen) was transferred to Shanghai Huaye by Ms. Chen pursuant to an agreement between the parties dated December 10, 2009. Since the Company has a right of offset for amounts due from Shanghai Huaye, the aggregate amount of these notes and accrued interest of $9,959,383 has been recorded as a reduction of advances to related parties in the accompanying balance sheet as of March 31, 2011.
F-9
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE–7 - RELATED PARTIES - continued
On various dates from February 25, 2007 to June 30, 2009, Ms. Chen loaned the Company a total of $5.3 million. The Company during that same period paid Ms. Chen $2.5 million and as described above Ms. Chen transferred to Shanghai Huaye $1,232,095 of the notes on December 10, 2009. The Company further paid off $1 million as of March 31, 2010. The notes are due on demand and bear no interest and are included in the accompanying balance sheet under the caption short-term notes payable – related parties in the net amount of $608,819 and $587,492 at March 31, 2011 and June 30, 2010, respectively.
Rental Agreement with Principal Shareholder
On November 8, 2008, the Company entered into an agreement with the Principal Shareholder for the lease of 1,200 square meters of property in the Dongbang Industrial Park, in Changhsu, China. The terms of the agreement state that the Company will lease the property for three years, and pay the principal shareholder approximately $18,260 (RMB 120,000) per month. The Company has accrued expense for this lease of $529,672 and $352,495 that is included on the balance sheet under the caption Other payables – related parties at March 31, 2011 and June 30, 2010, respectively. The Company and the principal shareholders have renewed the lease and extended the date of agreement from November 7, 2011 to November 7, 2014.
On August 6, 2004, the Company entered into a 10 year lease agreement with its related company, Ningbo Huaye Steel Processing, Ltd. to use a factory building in the Ningbo Camel Luo Ji Dian Industrial Park. Lease payments are made quarterly at a monthly rate of approximately $12,180 (RMB 80,000).
NOTE–8 - INCOME TAXES
On March 16, 2007, the National People’s Congress of China passed the new Enterprise Income Tax Law (“EIT Law”), and on December 6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.
The EIT Law gives existing FIEs a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. Changshu Huaye is subject to an EIT of 15% from calendar year 2010 and beyond because it qualifies as high-tech enterprise for the calendar years 2010, 2011 and 2012. Changshu Huaye paid EIT at the 25% tax rate for the period between July and December 2010 and the Company expects to receive a refund on the over-paid portion of the EIT. Jiangsu Cold-Rolled is subject to EIT of 12.5% for the calendar years 2009, 2010 and 2011. Jiangsu Cold-Rolled will be subject to an EIT of 25% for the calendar year 2012 and beyond. Ningbo Zhehua is subject to an EIT of 25% and has no preferential tax treatments. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse affect on the Company’s business, fiscal condition and current operations in China.
Taxes payable are a component of other payables and accrued expenses in the accompanying condensed consolidated balance sheets and consisted of:
March 31,
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Value added tax
|
$ | (125,308 | ) | $ | (584,996 | ) | ||
Income tax
|
812,703 | 1,162,792 | ||||||
Surtax, insurance, other
|
120,104 | 136,401 | ||||||
Total Taxes
|
$ | 807,499 | $ | 714,196 |
F-10
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE–8 - INCOME TAXES - continued
Following is a reconciliation of income taxes at the calculated statutory rate:
For The Three Months Ended
|
For The Nine Months Ended
|
|||||||||||||||
March 31,
|
March 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Income tax calculated at statutory rates
|
$ | 882,672 | $ | 1,088,944 | $ | 2,777,068 | $ | 2,567,332 | ||||||||
Under-accrual/(tax credit) in prior years
|
(408,133 | ) | - | (438,719 | ) | - | ||||||||||
Benefit of favorable rates
|
(269,806 | ) | (210,154 | ) | (843,957 | ) | (504,140 | ) | ||||||||
Operating loss carryforward
|
49,228 | - | 49,244 | - | ||||||||||||
Tax effect of parent and sewer losses
|
(159,050 | ) | 73,315 | (216,788 | ) | 274,641 | ||||||||||
Permanent difference
|
(17,953 | ) | 8,979 | (17,953 | ) | 8,979 | ||||||||||
Provision for income taxes
|
$ | 76,958 | $ | 961,085 | $ | 1,308,895 | $ | 2,346,813 |
Deferred taxes are comprised of the following:
March 31,
|
June 30,
|
|||||||
2011
|
2010
|
|||||||
(unaudited)
|
(audited)
|
|||||||
Net operating loss carryforward - US
|
$ | 1,198,377 | $ | 1,183,622 | ||||
Net operating loss carryforward - PRC
|
46,368 | - | ||||||
Stock based compensation
|
42,877 | - | ||||||
Allowance for doubtful trade receivables
|
116,952 | 124,685 | ||||||
Allowance for doubtful other receivables
|
56,959 | 79,461 | ||||||
Allowance for doubtful advances to suppliers
|
66,013 | 99,761 | ||||||
Allowance for inventory obsolescence
|
26,433 | 25,507 | ||||||
Other
|
19,520 | - | ||||||
Less: Valuation allowance
|
(1,287,623 | ) | (1,183,622 | ) | ||||
Total deferred income tax assets
|
$ | 285,875 | $ | 329,414 |
As of March 31, 2011, the Company has a net operating loss from continuing operations for United States federal income tax purposes of $3,524,639 which are available to carry back five years or offset future taxable income, if any, through 2030. As of March 31, 2011, the Company determined that the net operating loss may not be utilizable, as such, a full valuation allowance has been provided.
The provision for income taxes is comprised of the following:
For The Three Months Ended
|
For The Nine Months Ended
|
|||||||||||||||
March 31,
|
March 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Current
|
$ | (7,012 | ) | $ | 1,090,365 | $ | 1,254,308 | $ | 2,367,133 | |||||||
Deferred
|
83,970 | (129,280 | ) | 54,587 | (20,320 | ) | ||||||||||
Provision for income taxes
|
$ | 76,958 | $ | 961,085 | $ | 1,308,895 | $ | 2,346,813 |
There was no tax holiday for the three and nine months ended March 31, 2011.
F-11
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 9 – ISSUANCE OF COMMON STOCK AND WARRANTS
The following table summarizes the warrant activity as of March 31, 2011, and changes during the nine months ended March 31, 2011:
Warrants
|
Weighted-average
exercise price
|
|||||||
|
|
|
|
|
|
|
||
Outstanding at June 30, 2010
|
|
|
685,000
|
|
|
$
|
3.76
|
|
Issued
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2011
|
|
|
685,000
|
|
|
$
|
3.76
|
|
The aggregate intrinsic value as of March 31, 2011 and June 30, 2010 are $0.
NOTE 10 – STOCK-BASED COMPENSATION
Restricted Stock
On February 1, 2010, the Company granted to an executive 20,000 shares of restricted common stock with a grant date fair value of $3.04 per share as part of his remuneration for his service commencing February 1, 2010 for a one year period. The restricted common stock will vest on the first anniversary of the grant date. Stock-based compensation expense for the three and nine months ended March 31, 2011 was $5,163 and $35,813, respectively. The restricted stock is fully vested as of March 31, 2011.
On February 23, 2011, the Company amended an employment agreement with an executive and granted to an executive 30,000 shares of restricted common stock with a grant date fair value of $1.82 per share as part of his remuneration for his service commencing February 23, 2011 for a one year period. The restricted common stock will vest on the first anniversary of the grant date. The amended agreement calls for a stock grant on each anniversary date through the end of the agreement. Stock-based compensation expense for the three and nine months ended March 31, 2011 was $5,535 and $5,535, respectively. The remaining $49,065 stock-based compensation will be expensed over the remainder of the one year service period. The value of the non-vested stock at March 31, 2011 is $54,600.
Options
Stock Options granted to Key Employees
On April 27, 2010, the Board of Directors approved the grant of stock options to purchase 100,000 shares of the Company’s common stock under the “2009 Equity Incentive Plan” to certain key employees as reward for past services and to promote future performance. These options have an exercise price of $2.71 per share, expiring on the fifth anniversary of the grant date, and vest in three equal installments on each of the first, second and third anniversary of the vesting commencement date, which is April 27, 2010. The fair value of the options, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 2%, expected dividend yield of 0%, expected volatility of 91% and an expected life of 5 years.
Stock-based compensation expense for the three and nine months ended March 31, 2011 on the stock option was $15,695 and $47,782, respectively. The remaining $131,835 stock based compensation will be expensed over the remainder of the three years service period.
F-12
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 10 – STOCK-BASED COMPENSATION - continued
Stock Options granted to a Director
On February 23, 2011, the Board of Directors approved the grant of stock options to purchase 5,000 shares of the Company’s common stock under the “2009 Equity Incentive Plan” to a director as compensation for his service. These options have an exercise price of $2.71 per share, expiring on the fifth anniversary of the grant date, and vest in the first anniversary of the vesting commencement date, which is February 23, 2011. The fair value of the options, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 2%, expected dividend yield of 0%, expected volatility of 50% and an expected life of 5 years.
Stock-based compensation expense for the three and nine months ended March 31, 2011 on the stock option was $316 and $316, respectively. The $2,798 stock based compensation will be expensed over the remainder of the year service period.
The following table summarizes the options activity as of March 31, 2011, and changes during the nine months ended March 31, 2011:
Options
|
Weighted-average
exercise price
|
Weighted average remaining
contractual life (years)
|
Aggregate Intrinsic
Value
|
|||||||||||||
Outstanding at June 30, 2010
|
100,000 | $ | 2.71 | 4.08 | $ | - | ||||||||||
Issued
|
5,000 | 2.71 | 4.90 | - | ||||||||||||
Exercised
|
- | - | - | - | ||||||||||||
Expired
|
- | - | - | - | ||||||||||||
Outstanding at March 31, 2011
|
105,000 | $ | 2.71 | 4.12 | $ | - |
NOTE 11 – EARNINGS PER SHARE
Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share:
For The Three Months Ended
|
For The Nine Months Ended
|
|||||||||||||||
March 31,
|
March 31,
|
|||||||||||||||
2011
|
2010
|
2011
|
2010
|
|||||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
Net income attributable to the common stockholders
|
$ | 3,468,209 | $ | 3,394,692 | $ | 9,813,858 | $ | 7,922,517 | ||||||||
Basic weighted-average common shares outstanding
|
40,727,935 | 38,608,046 | 40,719,653 | 38,169,909 | ||||||||||||
Dilutive effect of options, warrants, and contingently issuable shares
|
- | - | - | - | ||||||||||||
Diluted weighted-average common shares outstanding
|
40,727,935 | 38,608,046 | 40,719,653 | 38,169,909 | ||||||||||||
Earnings per share:
|
||||||||||||||||
Basic
|
$ | 0.09 | $ | 0.09 | $ | 0.24 | $ | 0.21 | ||||||||
Diluted
|
$ | 0.09 | $ | 0.09 | $ | 0.24 | $ | 0.21 |
Warrants and options to purchase 685,000, 100,000 and 5,000 shares of common stock, respectively were outstanding during the three and nine months ended March 31, 2011, but were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.
F-13
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Lease commitments
On November 8, 2008, the Company entered into an agreement with the Principal Shareholder for the lease of 1,200 square meters of property in the Dongbang Industrial Park, in Changhsu, China. The terms of the agreement state that the Company will lease the property for three years, and pay the principal shareholder approximately $18,260 (RMB120,000) per month. The Company and the principal shareholders have renewed the lease and extended the date of agreement from November 7, 2011 to November 7, 2014.
On August 6, 2004, the Company entered into a 10 year lease agreement with Ningbo Huaye Steel Processing, Ltd. to use a factory building in the Ningbo Camel Luo Ji Dian Industrial Park. Lease payments are made quarterly at a monthly rate of approximately $12,180 (RMB80,000).
On October 12, 2010, the Company entered into a 2 year lease agreement with Ningbo Xin Fu Property Co. Ltd. to use an office building in Jiangdong District, Ningbo City. Lease payments are made quarterly at a monthly rate of approximately $9,360 (RMB61,494).
On January 1, 2011, the Company entered into a 2 year lease agreement with Shanghai Hongjia Property Co. Ltd. to use an office building in PuDong District, Shanghai City. Lease payments are made at a monthly rate of approximately $7,090 (RMB46,552).
Rent expense for the three months ended March 31, 2011 and 2010 were $117,044 and $198,942, respectively.
Rent expense for the nine months ended March 31, 2011 and 2010 were $312,133 and $374,417, respectively. Annual future minimum lease payments due under the operating leases are as follows:
For the Year Ending June 30,
|
||||
Remainder of 2011
|
|
$
|
140,658
|
|
2012
|
|
|
562,632
|
|
2013
|
|
|
454,602
|
|
2014
|
|
|
243,527
|
|
2015
|
|
|
91,323
|
|
Total
|
|
$
|
1,492,742
|
|
Commitment for design project
On September 13, 2010, the Company signed an agreement with Suzhou Institute of Architectural Design Co., Ltd. for the design of an office building and the cost of the design is $396,847 (RMB2,623,874). The design project is still in process and the final drawing of the plan has yet to be submitted to the Company’s management for approval. As of March 31, 2011, 20% of the cost, or $79,873 (RMB524,775) has been paid as the prepayment for the design project. The remaining balance is due upon the approval of the construction design and the completion of the construction of the office building.
Economic environment - Since most of the Company’s operations are conducted in the PRC, the Company is subject to special considerations and significant risks. These risks include, among others, the political, economic and legal environments and foreign currency exchange rates. The Company’s results from operations may, among other things, be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to: laws and regulations, anti-inflationary measures, currency conversions and remittances abroad, and rates and methods of taxation.
Foreign currency remittance - The Company’s revenue is either earned in the PRC or remitted to banks within the PRC and is denominated in the PRC’s currency of RMB. The transfer of currencies outside of the PRC must be converted into other currencies. Both the conversion of RMB into foreign currencies and the remittance of those currencies outside the PRC require approval of the PRC government.
F-14
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 13 - SEGMENT INFORMATION
The Company has four reportable segments represented by its four subsidiaries Changshu Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology Co., Ltd. as described in Note 1.
Factors Management Used to Identify the Enterprise’s Reportable Segments - The Company’s reportable segments are business units that offer different products and are managed separately and require reporting to the various regulatory jurisdictions. Changshu Huaye mainly produces HDG products and PPGI products. Jiangsu Cold-Rolled manufactures cold-rolled steel strips and acid pickled steel products. Ningbo Zhehua trades steel and manufactures heavy steel pipe products and Sutor Technology Co., Ltd. has not started operation since its inception on February 24, 2010.
Certain segment information is presented below:
At March 31, 2011 and for
the three months then ended
|
Changshu
Huaye
|
Jiangsu
Cold-Rolled
|
Ningbo
Zhehua
|
Sutor
Technology
|
Inter-Segment and
Reconciling Items
|
Total
|
||||||||||||||||||
Revenue
|
$ | 24,212,158 | $ | 21,426,726 | $ | 6,775,413 | $ | - | $ | 10,107,280 | $ | 62,521,577 | ||||||||||||
Revenue from related parties
|
16,837,316 | 55,289,370 | 32,728 | - | (33,306,374 | ) | 38,853,040 | |||||||||||||||||
Revenue from other operating segments
|
9,261,134 | 24,045,240 | - | - | - | 33,306,374 | ||||||||||||||||||
Total operating expenses
|
1,953,223 | 263,334 | 682,270 | 14,481 | 150,513 | 3,063,821 | ||||||||||||||||||
Interest income
|
136,956 | 25,285 | 26,456 | - | - | 188,697 | ||||||||||||||||||
Interest expense
|
250,122 | 1,515,642 | 89,301 | - | 131,476 | 1,986,541 | ||||||||||||||||||
Depreciation and amortization expense
|
555,047 | 1,151,400 | 225,125 | - | - | 1,931,572 | ||||||||||||||||||
Provision for income taxes
|
(200,101 | ) | 225,011 | 52,048 | - | - | 76,958 | |||||||||||||||||
Net segment profit
|
1,234,034 | 1,576,023 | (40,941 | ) | (14,481 | ) | 713,574 | 3,468,209 | ||||||||||||||||
Capital expenditures, net of VAT refunds
|
23,566 | 477,390 | 1,902 | 515 | - | 503,373 | ||||||||||||||||||
Total assets
|
222,780,712 | 296,264,832 | 28,353,809 | 23,461,222 | (228,445,667 | ) | 342,414,908 |
F-15
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 13 - SEGMENT INFORMATION - CONTINUED
At March 31, 2010 and for
the three months then ended
|
Changshu
Huaye
|
Jiangsu
Cold-Rolled
|
Ningbo
Zhehua
|
Sutor
Technology
|
Inter-Segment and
Reconciling Items
|
Total
|
||||||||||||||||||
Revenue
|
$ | 20,086,500 | $ | 24,129,072 | $ | 9,177,830 | $ | - | $ | - | $ | 53,393,402 | ||||||||||||
Revenue from related parties
|
28,644,364 | 44,608,428 | 6,891,459 | - | (19,085,272 | ) | 61,058,979 | |||||||||||||||||
Revenue from other operating segments
|
120,108 | 18,965,164 | - | - | - | 19,085,272 | ||||||||||||||||||
Total operating expenses
|
2,569,834 | 702,354 | 350,919 | - | 172,979 | 3,796,086 | ||||||||||||||||||
Interest income
|
357,407 | 10,114 | 22,229 | - | - | 389,750 | ||||||||||||||||||
Interest expense
|
253,412 | 1,158,694 | 3,042 | - | 120,282 | 1,535,430 | ||||||||||||||||||
Depreciation and amortization expense
|
541,792 | 1,109,023 | 202,314 | - | - | 1,853,129 | ||||||||||||||||||
Provision for income taxes
|
690,555 | 194,028 | 76,502 | - | - | 961,085 | ||||||||||||||||||
Net segment profit
|
2,081,827 | 1,358,193 | 247,934 | - | (293,262 | ) | 3,394,692 | |||||||||||||||||
Capital expenditures, net of VAT refunds
|
12,322 | (178,844 | ) | 363,411 | - | - | 196,889 | |||||||||||||||||
Total assets
|
223,458,218 | 161,036,300 | 58,586,365 | - | (124,184,559 | ) | 318,896,324 |
At March 31, 2011 and for
the nine months then ended
|
Changshu
Huaye
|
Jiangsu
Cold-Rolled
|
Ningbo
Zhehua
|
Sutor
Technology
|
Inter-Segment and
Reconciling Items
|
Total
|
||||||||||||||||||
Revenue
|
$ | 47,122,546 | $ | 70,604,475 | $ | 21,285,217 | $ | - | $ | 18,790,202 | $ | 157,802,440 | ||||||||||||
Revenue from related parties
|
75,324,296 | 166,403,515 | 199,461 | - | (96,984,884 | ) | 144,942,388 | |||||||||||||||||
Revenue from other operating segments
|
18,602,005 | 78,382,879 | - | - | - | 96,984,884 | ||||||||||||||||||
Total operating expenses
|
5,416,127 | 1,133,303 | 2,699,396 | 14,544 | 526,822 | 9,790,192 | ||||||||||||||||||
Interest income
|
370,838 | 206,649 | 48,925 | - | - | 626,412 | ||||||||||||||||||
Interest expense
|
684,233 | 4,639,731 | 132,415 | - | 400,264 | 5,856,643 | ||||||||||||||||||
Depreciation and amortization expense
|
1,642,231 | 3,408,745 | 664,879 | - | - | 5,715,855 | ||||||||||||||||||
Provision for income taxes
|
501,002 | 785,114 | 22,779 | - | - | 1,308,895 | ||||||||||||||||||
Net segment profit
|
3,325,410 | 5,639,419 | 4,332 | (14,544 | ) | 859,241 | 9,813,858 | |||||||||||||||||
Capital expenditures, net of VAT refunds
|
37,234 | 1,190,840 | 28,425 | 78,564 | - | 1,335,063 | ||||||||||||||||||
Total assets
|
222,780,712 | 296,264,832 | 28,353,809 | 23,461,222 | (228,445,667 | ) | 342,414,908 |
F-16
SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)
NOTE 13 - SEGMENT INFORMATION – continued
At March 31, 2010 and for
the nine months then ended
|
Changshu
Huaye
|
Jiangsu
Cold-Rolled
|
Ningbo
Zhehua
|
Sutor
Technology
|
Inter-Segment and
Reconciling Items
|
Total
|
||||||||||||||||||
Revenue
|
$ | 80,074,319 | $ | 66,768,402 | $ | 19,090,443 | $ | - | $ | - | $ | 165,933,164 | ||||||||||||
Revenue from related parties
|
80,375,197 | 142,379,628 | 32,006,905 | - | (67,259,449 | ) | 187,502,281 | |||||||||||||||||
Revenue from other operating segments
|
302,575 | 66,956,874 | - | 67,259,449 | ||||||||||||||||||||
Total operating expenses
|
6,024,848 | 1,144,657 | 1,064,790 | - | 696,696 | 8,930,991 | ||||||||||||||||||
Interest income
|
809,784 | 19,296 | 144,009 | - | - | 973,089 | ||||||||||||||||||
Interest expense
|
822,489 | 2,910,660 | 15,461 | - | 401,869 | 4,150,479 | ||||||||||||||||||
Depreciation and amortization expense
|
1,617,614 | 3,061,855 | 581,223 | - | - | 5,260,692 | ||||||||||||||||||
Provision for income taxes
|
1,640,069 | 493,242 | 213,502 | - | - | 2,346,813 | ||||||||||||||||||
Net segment profit
|
4,945,620 | 3,452,691 | 622,771 | - | (1,098,565 | ) | 7,922,517 | |||||||||||||||||
Capital expenditures, net of VAT refunds
|
27,083 | 740,255 | 429,283 | - | - | 1,196,621 | ||||||||||||||||||
Total assets
|
223,458,218 | 161,036,300 | 58,586,365 | - | (124,184,559 | ) | 318,896,324 |
NOTE 14 - GEOGRAPHIC INFORMATION
The following schedule summarizes the sources of the Company’s revenue by geographic regions for the three and nine months ended March 31, 2011 and 2010:
For the Three Months Ended March 31,
|
For the Nine Months Ended March 31,
|
||||||||||||||
Geographic Area
|
2011
|
2010
|
2011
|
2010
|
|||||||||||
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
||||||||||||
People's Republic of China
|
$ | 88,602,341 | $ | 103,722,673 | $ | 275,374,860 | $ | 319,221,278 | |||||||
Other Countries
|
12,772,276 | 10,729,708 | 27,369,968 | 34,214,167 | |||||||||||
Total
|
$ | 101,374,617 | $ | 114,452,381 | $ | 302,744,828 | $ | 353,435,445 |
NOTE 15 – SUBSEQUENT EVENTS
On April 6, 2011, the Company invested an additional $5,052,990 into Sutor Technology Co. Ltd raising its registered capital to $28,294,360.
The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q. Other than the event disclosed above, no significant events occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Condensed Consolidated Financial Statements.
F-17
ITEM 2.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
Special Note Regarding Forward Looking Statements
This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China and the current global economic crisis on our business and on our customers’ business; the factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this report, and any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended June 30, 2010 and subsequent SEC filings. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.
Use of Terms
Except as otherwise indicated by the context, all references in this Quarterly Report to: (i) “Sutor Group,” the “Company,” “we,” “us” or “our” are to Sutor Technology Group Limited, a Nevada corporation, and its direct and indirect subsidiaries; (ii) “Changshu Huaye” are to our indirect wholly-owned subsidiary Changshu Huaye Steel Strip Co., Ltd., a corporation incorporated in the People’s Republic of China; (iii) “Jiangsu Cold-Rolled” are to our indirect wholly-owned subsidiary Jiangsu Cold-Rolled Technology Co., Ltd., a corporation incorporated in the People’s Republic of China; (iv) “Ningbo Zhehua” are to our indirect wholly-owned subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd., a corporation incorporated in the People’s Republic of China; (v) “Shanghai Huaye” are to Shanghai Huaye Iron & Steel Group Co., Ltd., a corporation incorporated in the People’s Republic of China of which Lifang Chen, our major shareholder and chief executive officer, and her husband Feng Gao are 100% owners, and its subsidiaries; (vi) “Securities Act” are to the Securities Act of 1933, as amended; (vii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (viii) “RMB” are to Renminbi, the legal currency of China; (ix) “U.S. dollar,” “$” and “US$” are to the legal currency of the United States; and (x) “China” and “PRC” are to the People’s Republic of China.
Overview of our Business
We are one of the leading Chinese private manufacturers of fine finished steel products. We utilize a variety of processes and technological methodologies to convert steel manufactured by third parties into fine finished steel products. Our product offerings are focused on higher margin, value-added finished steel products, specifically, hot-dip galvanized steel (“HDG steel”) and prepainted galvanized steel (“PPGI”). In addition, we produce acid pickled steel (“AP steel”) and cold-rolled steel, which represent the least processed of our finished products. As a result of our acquisition of Ningbo Zhehua in November 2009, our product offerings include welded steel pipe products. We use a large portion of our AP steel and cold-rolled steel to produce our HDG steel and PPGI products. Our vertical integration has allowed us to maintain more stable margins for our HDG steel and PPGI products.
We sell most of our products to customers who operate primarily in the solar energy, appliances, automobile, construction, infrastructure, medical equipment and water resource industries. Most of our customers are located in China. Our primary export markets are Europe, Middle East, South America and Hong Kong.
Our manufacturing facilities, located in Changshu, China, have three HDG steel production lines, one PPGI production line, one AP steel production line and one cold-rolled steel line. Our current annual designed production capacity is approximately 700,000 metric tons, or MT, for HDG steel, 200,000 MT for PPGI, 500,000 MT for AP steel and 250,000 MT for cold-rolled steel. Ningbo Zhehua, our subsidiary located in Ningbo, currently has an annual capacity of 400,000 MT for welded steel pipe products.
3
Executive Overview of Quarterly Results
We continued our strategic efforts to exit the lower margin steel trading business and focus on higher margin value added products in this quarter. Our orders and production output in this quarter continued to be more heavily focused on advanced PPGI products that utilize sophisticated processing procedures and require more production time. As a result, our production volume and revenue declined in this quarter as compared to the same period last year. However, the negative effects of these reductions were partially offset by higher average sales prices as demand for our product remained strong during the quarter. Despite the revenue decrease, our gross margin and net income improved to 8.5% and $3.5 million in this quarter from 8.1% and $3.4 million in the same period last year, respectively. We believe in the long run we can strengthen our competitive position by focusing on higher-margin value added products.
The following summarizes certain key financial information for the third fiscal quarter.
|
·
|
Revenue: Revenue was $101.4 million for the three months ended March 31, 2011, a decrease of $13.1 million, or 11.4%, from $114.5 million for the same period last year.
|
|
·
|
Gross Profit and Margin: Gross profit was $8.6 million for the three months ended March 31, 2011 as compared to $9.3 million for the same period last year. Gross margin was 8.5% for the three months ended March 31, 2011 as compared to 8.1% for the same period last year.
|
|
·
|
Net Income: Net income was $3.5 million for the three months ended March 31, 2011, an increase of $0.1 million, or approximately 2.9%, from $3.4 million for the same period of last year.
|
|
·
|
Fully diluted net income per share: Fully diluted net income per share was approximately $0.09 for the three months ended March 31, 2011, as compared to approximately $0.09 for the same period last year.
|
Revenue
Our revenue is generated from sales of our HDG steel, PPGI, AP steel, cold-rolled steel products and welded steel pipe products. Our revenue has historically been affected by sales volume, product pricing and our product mix.
Our operations consist of three business segments: Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua, which are our three principal manufacturing facilities. Changshu Huaye manufactures HDG steel and PPGI products. In the three months ended March 31, 2011 and 2010, after eliminating intercompany sales, Changshu Huaye generated revenue of $41.1 million and $48.7 million, which represented 40.5% and 42.6% of our total revenue, respectively. Jiangsu Cold-Rolled manufactures AP steel, cold-rolled steel and HDG steel. In the three months ended March 31, 2011 and 2010, after eliminating the inter-company sales, Jiangsu Cold-Rolled generated revenue of $53.5 million and $49.7 million, which represented 52.8% and 43.4% of our total revenue, respectively. Ningbo Zhehua manufactures welded steel pipe products. In the three months ended March 31, 2011 and 2010, Ningbo Zhehua generated revenue of $6.8 million and $16.1 million, which represented 6.7% and 14.0% of our total revenue, respectively.
A substantial portion of our products are sold through our affiliate Shanghai Huaye, which also supplies to us a significant portion of our raw materials. Approximately 38.3% of our revenue was derived from Shanghai Huaye and its affiliates in the three months ended March 31, 2011, as compared with approximately 53.3% in the same period last year. We continue to take advantage of Shanghai Huaye’s extensive sales network as we strive to independently enhance our brand value. But we intend to continue to gradually reduce related party transactions in the future.
Cost of Revenue
Cost of revenue includes direct costs to manufacture our products, including the cost of raw materials, labor, overhead, energy cost, handling charges, and other expenses associated with the manufacture and delivery of product. Direct costs of manufacturing are generally highest when we first introduce a new product due to higher start-up costs and higher raw material costs. As production volume increases, we typically improve manufacturing efficiencies and are able to strengthen our purchasing power by buying raw materials in greater quantities.
4
In the three months ended March 31, 2011, approximately $59.0 million of our procurement was conducted through Shanghai Huaye. Due to the size of Shanghai Huaye and the economy of scale, it has stronger bargaining power than we do and our arrangement with Shanghai Huaye allows us to purchase raw materials at relatively lower prices than we could obtain from suppliers ourselves.
Gross Profit and Gross Margin
Gross profit is equal to the difference between our revenue and the cost of revenue. Gross margin is equal to gross profit divided by revenue. In the three months ended March 31, 2011, gross margin for domestic and international sales were approximately 7.4% and 16.4%, respectively. On a segment basis, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua’s gross margins were 11.1%, 4.5% and 12.1% in the three months ended March 31, 2011, respectively.
To gain market penetration, we price our products at levels that we believe are competitive. We continually strive to improve manufacturing efficiencies and reduce our production costs in order to offer superior products and services at competitive prices. General economic conditions, the cost of raw materials, and supply and demand of fine finished steel products within our markets influence sales prices. Our high-end, value-added products, such as the PPGI products, generally tend to have higher profit margins. As part of our effort to maintain stable profitability and mitigate our exposure to fluctuations in the price of our primary raw material steel, we generally adopt the cost-plus pricing mechanism for our products.
We operate using a vertical integration strategy where we use our own AP steel and cold-rolled steel products as raw materials for HDG steel and PPGI products. We believe our vertically integrated operations will allow us to provide customers with one-stop services, build customer loyalty and maintain stable operating margins.
Operating Expenses
Our operating expenses primarily consist of general and administrative expenses and selling expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation and benefits for our general management, finance and administrative staff, professional and advisory fees, bad debts reserves, and other expenses incurred in connection with general corporate purposes. We expect most components of our general and administrative expenses will increase due to inflation and as our business grows and as we incur increased costs as a public company.
Selling Expenses
Selling expenses consist primarily of compensation and benefits for our sales and marketing staff, sales commissions, the cost of advertising, promotional and travel activities, transportation expenses, after-sales support services and other sales related costs.
Our selling expenses are generally affected by the amount of international sales and our sales to unrelated parties. The transportation costs for our international sales are generally higher than domestic sales. In addition, when we sell products to Shanghai Huaye and its affiliates, Shanghai Huaye generally arranges and bears the cost of transportation. In contrast, when we sell products to customers other than Shanghai Huaye, we generally bear the transportation costs, but we are able to charge a higher price.
Provision for Income Taxes
Sutor Technology Group Limited is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as Sutor Technology Group Limited had no taxable income for the three months ended March 31, 2011.
Our direct wholly owned subsidiary Sutor Steel Technology Co., Ltd. was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income taxes.
5
On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law (the “EIT Law”), and on December 6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified enterprise income tax (“EIT”) of 25.0% on all domestic-invested enterprises and Foreign Invested Entities (“FIEs”) established in the PRC, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.
Despite these changes, the EIT Law gives the FIEs established before March 16, 2007 (“Old FIEs”) a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT law shall gradually increase their EIT rate by 2% per year until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for the “two-year exemption and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT law, are allowed to remain to enjoy their preference until these holidays expire.
Our subsidiary Ningbo Zhehua is subject to an EIT rate of 25% for calendar years 2010 and 2011. Our subsidiary Jiangsu Cold-Rolled is subject to an EIT rate of 12.5% for 2010 and 2011. Our subsidiary Changshu Huaye is currently subject to a reduced EIT rate of 15% after it was recognized as a High-Tech Enterprise by the Jiangsu provincial government in 2010. The preferential EIT rate is subject to renew in 2013.
Reportable Operating Segments
We have three reportable operating segments which are categorized based on manufacturing facility – Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua. Changshu Huaye manufactures and sells HDG steel and PPGI products. Jiangsu Cold-Rolled manufactures and sells AP steel, cold-rolled steel and HDG steel products. Ningbo Zhehua manufactures and sells steel pipe products. Changshu Huaye and Jiangsu Cold-Rolled are adjacent to each other and use largely the same management resources. See Note 13, “Segment Information” to the condensed consolidated financial statements included elsewhere in this report.
Results of Operations
Comparison of Three Months Ended March 31, 2011 and March 31, 2010
The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.
(All amounts, other than percentages, in thousands of U.S. dollars)
Three Months Ended
March 31, 2011
|
Three Months Ended
March 31, 2010
|
|||||||||||||||
Amount
|
As a
Percentage
of Revenue
|
Amount
|
As a
Percentage
of Revenue
|
|||||||||||||
Revenue
|
||||||||||||||||
Revenue from unrelated parties
|
$ | 62,522 | 61.7 | % | $ | 53,393 | 46.7 | % | ||||||||
Revenue from related parties
|
38,853 | 38.3 | % | 61,059 | 53.3 | % | ||||||||||
Total
|
101,375 | 100 | % | 114,452 | 100 | % | ||||||||||
Cost of Revenue
|
||||||||||||||||
Cost of revenue
|
57,018 | 56.2 | % | 48,929 | 42.8 | % | ||||||||||
Cost of revenue from related parties
|
35,742 | 35.3 | % | 56,210 | 49.1 | % | ||||||||||
Total
|
92,760 | 91.5 | % | 105,138 | 91.9 | % | ||||||||||
Gross Profit
|
8,615 | 8.5 | % | 9,314 | 8.1 | % | ||||||||||
Operating Expenses
|
||||||||||||||||
Selling expense
|
1,346 | 1.3 | % | 1,816 | 1.6 | % | ||||||||||
General and administrative expense
|
1,718 | 1.7 | % | 1,980 | 1.7 | % | ||||||||||
Total Operating Expenses
|
3,064 | 3.0 | % | 3,796 | 3.3 | % | ||||||||||
Income from Operations
|
5,551 | 5.5 | % | 5,518 | 4.8 | % | ||||||||||
Other Income (Expense)
|
||||||||||||||||
Interest income
|
189 | 0.2 | % | 390 | 0.3 | % | ||||||||||
Other income
|
7 | 0 | % | 6 | 0 | % | ||||||||||
Interest expense
|
(1,987 | ) | (2.0 | )% | (1,535 | ) | (1.3 | )% | ||||||||
Other expense
|
(215 | ) | (0.2 | )% | (19 | ) | 0 | % | ||||||||
Loss on sale of assets
|
- | - | (4 | ) | 0 | % | ||||||||||
Total Other Expense
|
(2,006 | ) | (2.0 | )% | (1,162 | ) | (1.0 | )% | ||||||||
Income Before Taxes and Minority Interest
|
3,545 | 3.5 | % | 4,356 | 3.8 | % | ||||||||||
Provision for income taxes
|
(77 | ) | (0.1 | )% | (961 | ) | (0.8 | )% | ||||||||
Net Income
|
$ | 3,468 | 3.4 | % | $ | 3,395 | 3.0 | % |
6
The following table sets forth revenue by geography and the percentage of our total revenue and total revenue by business segments for the three months ended March 31, 2011 and 2010.
(All amounts, other than percentages, in thousands of U.S. dollars)
Three Months Ended
March 31, 2011
|
Three Months Ended
March 31, 2010
|
|||||||||||||||
Amount
|
As a
Percentage
of Revenue
|
Amount
|
As a
Percentage
of Revenue
|
|||||||||||||
Geographic Data
|
||||||||||||||||
China
|
$ | 88,602 | 87.4 | % | $ | 103,722 | 90.6 | % | ||||||||
Other Countries
|
12,772 | 12.6 | % | 10,730 | 9.4 | % | ||||||||||
Total Revenue
|
$ | 101,374 | 100.0 | % | $ | 114,452 | 100.0 | % | ||||||||
Segment Data
|
||||||||||||||||
Changshu Huaye
|
$ | 41,049 | 40.5 | % | $ | 48,731 | 42.6 | % | ||||||||
Jiangsu Cold-Rolled
|
53,517 | 52.8 | % | 49,653 | 43.4 | % | ||||||||||
Ningbo Zhehua
|
6,808 | 6.7 | % | 16,069 | 14.0 | % | ||||||||||
Total Revenue
|
$ | 101,374 | 100.0 | % | $ | 114,452 | 100.0 | % |
Revenue
Revenue was $101.4 million in the third fiscal quarter of 2011 as compared to $114.5 million for the same period last year, representing a decrease of $13.1 million, or approximately 11.4%. The decrease was primarily attributable to a significant reduction in our subsidiary Ningbo Zhehua’s steel trading business. During the quarter, revenue from Ningbo Zhehua decreased by approximately $9.3 million from approximately $16.1 million for the three months ended March 31, 2010 to $6.8 million for the three months ended March 31, 2011. This accounted for the majority of our decreased revenues. In addition, we experienced lower production volume and generated less revenue from our PPGI products. As the steel industry in Chins becomes more competitive and lower end products become more of a commodity, we are working hard to shift some of our high end capacity to more specialized, higher margin products. Our goal is to separate ourselves from the industry at the highest levels and to work as efficiently as possible. As a result of this transition over the past quarter, we experienced a decrease from our overall PPGI products. Lower production volume, however, was partially offset by higher average sales prices. Our goal is to gradually transition to producing more higher-end and higher-margin products.
On a geographic basis, revenue generated from outside of mainland China was $12.8 million, accounting for 12.6% of our revenue in the three months ended March 31, 2011 as compared to $10.7 million, which was 9.4% of the total revenue for the same period last year. The increase was mainly attributable to our continuous efforts to market our products and improve our brand presence in overseas markets, as well as the timing of shipment.
7
On a segment basis, after eliminating intercompany sales, revenue generated by Changshu Huaye was approximately $41.0 million for the three months ended March 31, 2011, a decrease of approximately $7.6 million, from $41.1 million for the same period last year. The decrease was mainly attributable to our focus on manufacturing and selling more advanced PPGI products as discussed above. In addition, we also shifted more of our HDG steel production from Changshu Huaye to Jiangsu Cold-Rolled to take advantage of the newer 400,000 MT HDG steel production lines at Jiangsu Cold-Rolled which generally have lower production costs than that at Changshu Huaye. As a result, the overall production volume and revenue generated by Changshu Huaye decreased in this quarter.
After eliminating the intercompany sales, revenue generated by Jiangsu Cold-Rolled was $53.5 million for the three months ended March 31, 2011, an increase of $3.8 million from $49.7 million for the same period last year, mainly as a result of the increased output of the 400,000 MT HDG steel production lines.
Revenues from Ningbo Zhehua were $6.8 million for the three months ended March 31, 2011, a decrease of $9.3 million from $16.1 million for the same period last year. After our acquisition of Ningbo Zhehua, we made a strategic decision to reduce its lower-margin steel trading businesses and focus on higher-margin business lines.
In terms of sales to related parties as compared with sales to unrelated parties, our direct sales to unrelated parties in the three months ended March 31, 2011 increased to $62.5 million from $53.4 million for the same period last year.
Cost of Revenue
Cost of revenue decreased $12.4 million, or 11.8% to $92.8 million for the three months ended March 31, 2011 from $105.1 million for the same period last year. As a percentage of revenue, cost of revenue decreased to 91.5% for the three months ended March 31, 2011 from 91.9% for the same period last year. The decreased amount of cost of revenue was mainly due to the decreased sales volumes. During this quarter, the average price for our raw materials was up slightly.
Gross Profit
Gross profit decreased approximately $0.7 million to $8.6 million for the three months ended March 31, 2011 from $9.3 million for the same period last year. Gross profit as a percentage of revenue (gross margin) was 8.5% for the three months ended March 31, 2011, as compared to 8.1% for the same period last year. The slight increase in gross margin mainly resulted from significantly reduced steel trading business operations and changes in product mix.
Gross margin for Changshu Huaye decreased to 11.1% for the three months ended March 31, 2011 as compared to 14.9% for the same period last year. Gross margin for Jiangsu Cold-Rolled decreased slightly to 4.5% for the three months ended March 31, 2011 as compared to 4.6% for the same period last year. Gross margin for Ningbo Zhehua was approximately 12.1% for the three months ended March 31, 2011 as compared with approximately 3.9% in the same period last year, mainly as a result of our strategic decision to reduce its lower-margin steel trading business.
Total Operating Expenses
Our total operating expenses decreased approximately $0.7 million to $3.1 million for the three months ended March 31, 2011, from $3.8 million for the same period last year. As a percentage of revenue, our total operating expenses decreased to 3.0% for the three months ended March 31, 2011 from 3.3% for the same period last year.
Selling Expenses. Selling expenses decreased approximately $0.5 million to $1.3 million for the three months ended March 31, 2011, from $1.8 million for the same period last year. As a percentage of revenue, our selling expenses decreased to 1.3% for the three months ended March 31, 2011 from 1.6% for the same period last year. The dollar and percentage decrease were mainly due to the reduced shipping costs associated with our international sales as a result of using more FOB (Free on Board) sales than the CIF (Cost, Insurance and Freight) sales in this quarter.
General and Administrative Expenses. General and administrative expenses decreased approximately $0.3 million to $1.7 million for the three months ended March 31, 2011 from $2.0 million for the same period last year. As a percentage of revenue, general and administrative expenses remained stable at 1.7% for the three months ended March 31, 2011 and 2010. The amount decrease of general and administrative expenses was mainly due to an approximately $0.4 million decrease in bad debt allowance in the third fiscal quarter of 2011 than in the same period last year.
8
Interest Expense
Interest expense increased approximately $0.5 million to $2.0 million for the three months ended March 31, 2011, from $1.5 million for the same period last year. As a percentage of revenue, our interest expense increased to 2.0% for the three months ended March 31, 2011, from 1.3% for the same period last year. Interest expenses included interest expenses for bank loans and amounts discounted in connection with bank acceptance notes which accounted approximately $0.3 million and $0.2 million of the increase in interest expenses in this quarter, respectively. When the Bank of China raised interest rates in October 2010, the official interest rate for one-year term bank loans was approximately 0.75% higher in the third fiscal quarter of 2011 than in the same period last year.
Provision for Income Taxes
We incurred income tax expense of approximately $0.1 million and $1.0 million during the three months ended March 31, 2011 and 2010, respectively. The decrease was mainly because Changshu Huaye was recognized as a High-Tech Enterprise by the Jiangsu provincial government last October and therefore enjoys a lower EIT rate of 15% in 2011. We also had an approximately $0.4 million adjustment of income tax provision in this quarter.
Net Income
Net income, without including the foreign currency translation adjustment, increased approximately $0.1 million, or 2.9%, to $3.5 million for the three months ended March 31, 2011 from $3.4 million for the same period last year as a cumulative result of the above factors.
Comparison of Nine Months Ended March 31, 2011 and March 31, 2010
The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.
(All amounts, other than percentages, in thousands of U.S. dollars)
Nine Months Ended
March 31, 2011
|
Nine Months Ended
March 31, 2010
|
|||||||||||||||
Amount
|
As a
Percentage
of Revenue
|
Amount
|
As a
Percentage
of Revenue |
|||||||||||||
Revenue
|
||||||||||||||||
Revenue
|
$ | 157,803 | 52.1 | % | $ | 165,933 | 46.9 | % | ||||||||
Revenue from related parties
|
144,942 | 47.9 | % | 187,502 | 53.1 | % | ||||||||||
Total
|
302,745 | 100 | % | 353,435 | 100.0 | % | ||||||||||
Cost of Revenue
|
||||||||||||||||
Cost of revenue
|
143,055 | 47.3 | % | 153,814 | 43.5 | % | ||||||||||
Cost of revenue from related parties
|
133,185 | 44.0 | % | 177,272 | 50.2 | % | ||||||||||
Total
|
276,240 | 91.2 | % | 331,086 | 93.7 | % | ||||||||||
Gross Profit
|
26,505 | 8.8 | % | 22,349 | 6.3 | % | ||||||||||
Operating Expenses
|
||||||||||||||||
Selling expense
|
4,709 | 1.6 | % | 4,464 | 1.3 | % | ||||||||||
General and administrative expense
|
5,081 | 1.7 | % | 4,467 | 1.3 | % | ||||||||||
Total Operating Expenses
|
9,790 | 3.2 | % | 8,931 | 2.5 | % | ||||||||||
Income from Operations
|
16,715 | 5.5 | % | 13,418 | 3.8 | % | ||||||||||
Other Income (Expense)
|
||||||||||||||||
Interest income
|
626 | 0.2 | % | 973 | 0.3 | % | ||||||||||
Other income
|
128 | 0 | % | 373 | 0.1 | % | ||||||||||
Interest expense
|
(5,857 | ) | (1.9 | )% | (4,150 | ) | (1.2 | )% | ||||||||
Other expense
|
(490 | ) | (0.2 | )% | (341 | ) | (0.1 | )% | ||||||||
Loss on sale of assets
|
- | - | (4 | ) | 0.0 | % | ||||||||||
Total Other Expense
|
(5,592 | ) | (1.8 | )% | (3,149 | ) | (0.9 | )% | ||||||||
Income Before Taxes and Minority Interest
|
11,123 | 3.7 | % | 10,269 | 2.9 | % | ||||||||||
Provision for income taxes
|
(1,309 | ) | (0.4 | )% | (2,347 | ) | (0.7 | )% | ||||||||
Net Income
|
$ | 9,814 | 3.2 | % | $ | 7,923 | 2.2 | % |
9
The following table sets forth revenue by geography and the percentage of our total revenue and total revenue by business segments for the nine months ended March 31, 2011 and 2010.
(All amounts, other than percentages, in thousands of U.S. dollars)
Nine Months Ended
March 31, 2011
|
Nine Months Ended
March 31, 2010
|
|||||||||||||||
Amount
|
As a
Percentage
of Revenue
|
Amount
|
As a
Percentage
of Revenue
|
|||||||||||||
Geographic Data:
|
||||||||||||||||
China
|
$ | 275,375 | 91.0 | % | $ | 319,221 | 90.3 | % | ||||||||
Other Countries
|
27,370 | 9.0 | % | 34,214 | 9.7 | % | ||||||||||
Total Revenue
|
$ | 302,745 | 100.0 | % | $ | 353,435 | 100.0 | % | ||||||||
Segment Data:
|
||||||||||||||||
Changshu Huaye
|
$ | 122,447 | 40.5 | % | $ | 160,450 | 45.4 | % | ||||||||
Jiangsu Cold-Rolled
|
158,813 | 52.5 | % | 141,889 | 40.1 | % | ||||||||||
Ningbo Zhehua
|
21,485 | 7.0 | % | 51,097 | 14.5 | % | ||||||||||
Total Revenue
|
$ | 302,745 | 100.0 | % | $ | 353,435 | 100.0 | % |
Revenue
Revenue decreased $50.7 million, or 14.3%, to $302.7 million for the nine months ended March 31, 2011, from $353.4 million for the same period last year. The revenue decrease was primarily attributable to lower total production volume of our PPGI products and our strategic efforts to reduce Ningbo Zhehua’s lower-margin steel trading businesses. For the nine months ended March 31, 2011, we produced more advanced PPGI products that require sophisticated processing procedures and hence more production time than we did in the same period a year ago. In order to improve gross margin and better allocate our resources, we also reduced Ningbo Zhehua’s lower margin steel trading volumes which contributed to the lower total revenue in the nine months ended March 31, 2011. Our business strategy is to sell more higher-end and higher-margin products which we believe will improve our competitive position in the long run.
On a geographic basis, revenue generated from outside of mainland China was $27.4 million, accounting for 9.0% of our revenue in the nine months ended March 31, 2011 as compared to $34.2 million, which was 9.7% of our revenue for the same period last year. The decrease was mainly attributable to less demand from international customers in the second fiscal quarter of 2011
On a segment basis, after eliminating intercompany sales, revenue generated by Changshu Huaye was $122.5 million for the nine months ended March 31, 2011, a decrease of $38.0 million, or 23.7%, from $160.5 million for the same period last year. Due to increasing market demand, we produced more advanced PPGI products in the nine months ended March 31, 2011 which resulted in decrease of sales volume and revenue, but an increase in our gross margin. In addition, more HDG steel products were produced at Jiangsu Cold-Rolled to take advantage of its newer production lines which generally have lower production costs. As a result, the overall production volume at Changshu Huaye was reduced during the nine months ended March 31, 2011.
After eliminating the inter-company sales, revenues generated by Jiangsu Cold-Rolled were $158.8 million for the nine months ended March 31, 2011, an increase of $16.9 million from $141.9 million for the same period last year, mainly as a result of higher sales volume and the increased output of our 400,000 MT HDG production lines.
10
Revenues from Ningbo Zhehua were $21.5 million for the nine months ended March 31, 2011, a decrease of $29.6 million from $51.1 million for the same period last year, primarily resulting from our strategic decision to reduce its lower-margin steel trading businesses and focus on higher-margin production businesses.
In terms of sales to related parties as compared with sales to unrelated parties, our direct sales to unrelated parties in the nine months ended March 31, 2011 decreased $8.1 million, or 4.9%, to $157.8 million from $165.9 million for the same period last year.
Cost of Revenue
Cost of revenue decreased $54.8 million, or 16.6% to $276.2 million for the nine months ended March 31, 2011 from $331.1 million for the same period last year. As a percentage of revenue, the cost of revenue decreased to 91.2% for the nine months ended March 31, 2011 from 93.7% for the same period last year. Decreased cost of revenue was mainly due to the decreased sales volume.
Gross Profit
Gross profit increased $4.2 million to $26.5 million for the nine months ended March 31, 2011 from $22.3 million for the same period last year. Gross profit as a percentage of revenue (gross margin) was 8.8% for the nine months ended March 31, 2011, as compared to 6.3% for the same period last year. The increased gross margin mainly resulted from reduced low margin steel trading business operations and changes in product mix as discussed above.
Gross margin for Changshu Huaye increased to 10.9% for the nine months ended March 31, 2011 as compared to 9.7% for the same period last year, mainly because it produced and sold more higher-margin advanced PPGI products in the nine months ended March 31, 2011. Gross margin for Jiangsu Cold-Rolled increased to 5.3% for the nine months ended March 31, 2011 as compared to 3.6% for the same period last year, mainly due to the higher capacity utilization of the new HDG production lines and increase of average sales prices. Gross margin for Ningbo Zhehua was approximately 14.1% for the nine months ended March 31, 2011 as compared with approximately 3.4% in the same period last year, mainly because we reduced our lower-margin steel trading business.
Total Operating Expenses
Our total operating expenses increased approximately $0.9 million to $9.8 million for the nine months ended March 31, 2011, from $8.9 million for the same period last year. As a percentage of revenue, our total operating expenses increased to 3.2% for the nine months ended March 31, 2011 from 2.5% for the same period last year.
Selling Expenses. Selling expenses increased approximately $0.2 million to $4.7 million for the nine months ended March 31, 2011, from $4.5 million for the same period last year. As a percentage of revenue, our selling expenses increased to 1.6% for the nine months ended March 31, 2011 from 1.3% for the same period last year. The dollar and percentage increase were mainly due to the increased shipping costs for our international sales.
General and Administrative Expenses. General and administrative expenses increased approximately $0.6 million to $5.1 million for the nine months ended March 31, 2011 from $4.5 million for the same period last year. As a percentage of revenue, general and administrative expenses increased to 1.7% for the nine months ended March 31, 2011 from 1.3% for the same period last year. Such dollar and percentage increase was partially due to opening of two new offices by Changshu Huaye and Ningbo Zhehua, overall cost inflation in China and reversing of bad debt allowances in the same period last year. We recently opened two new offices in metropolitan Ningbo and Shanghai in an effort to attract talents, improve brand recognition and better service customers.
Interest Expense
Interest expense increased $1.7 million to $5.9 million for the nine months ended March 31, 2011, from $4.2 million for the same period last year. As a percentage of revenue, our interest expenses increased to 1.9% for the nine months ended March 31, 2011, from 1.2% for the same period last year. Interest expenses consist of both interest expenses on bank loans and amount discounted in connection with bank acceptance notes. The increased amount was mainly due to the higher cost of discount on the bank acceptance notes received during the current period than the same period last year. The interest expenses associated with our bank loans were also higher as the Bank of China began to raise interest rates in October 2010.
11
Provision for Income Taxes
We incurred income tax expense of $1.3 million and $2.3 million during the nine months ended March 31, 2011 and 2010, respectively. The decrease was primarily attributable to the lower average effective income tax rate. We generated a bigger portion and amount of revenue from Jiangsu Cold-Rolled and a smaller portion of revenue from Changshu Huaye in the nine months ended March 31, 2011 as compared to the same period last year. Jiangsu Cold-Rolled had a lower income tax rate than Changshu Huaye. We also benefit from the lower income tax rate enjoyed by Changshu Huaye in 2011. Changshu Huaye was recognized as a High-Tech Enterprise by the Jiangsu provincial government last October and therefore enjoys a three-year preferential income tax rate of 15% which started in 2010 and is subject to renewal in 2013.
Net Income
Net income, without including the foreign currency translation adjustment, increased $1.9 million, or 23.9%, to $9.8 million for the nine months ended March 31, 2011 from $7.9 million for the same period last year as a cumulative result of the above factors.
Liquidity and Capital Resources
Our major sources of liquidity for the periods covered by this quarterly report were borrowings through short-term bank and private loans. Our operating activities used approximately $9.8 million of cash in the nine months ended March 31, 2011. As of March 31, 2011, our total indebtedness to non-related parties under existing short-term loans was approximately $93.5 million, our short-term notes payable to related parties totaled approximately $0.6 million, and we had long-term notes payable of approximately $16.8 million.
Short-term bank and private loans are likely to continue to be our key sources of financing for the foreseeable future, although in the future we may raise additional capital by issuing shares of our capital stock in an equity financing. We expect to renew our short term loans when they become due.
Our liquidity and working capital may be affected by a material decrease in cash flow due to factors such as the continued use of cash in operating activities resulting from a decrease in sales due to the current global economic crisis, increased competition, decreases in the availability, or increases in the cost of raw materials, unexpected equipment failures, or regulatory changes.
A portion of our operations is funded through short-term bank loans. As these loans become due, we may repay them in full at maturity or elect to refinance them. We are exposed to a variety of risks associated with short-term borrowings including adverse fluctuations in fixed interest rates for short-term borrowings and unfavorable increases in variable interest rates, potential inability to service our short term indebtedness through cash flow from operations and the overall reduction of credit in the current economic environment.
Our liquidity and working capital may also be affected by the substantial amount of our outstanding short-term loans, which represent our primary source of financing in China. Depending on the level of cash used in our operating activities and the level of our indebtedness, (i) it may become more difficult for us to satisfy our existing or future liabilities or obligations, which could in turn result in an event of default on such obligations, (ii) we may have to dedicate a substantial portion of our cash flows from borrowings to our operating activities and to debt service payments, thereby reducing the availability of cash for working capital and capital expenditures, acquisitions, general corporate purposes or other purposes, (iii) our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may become impaired, (iv) our ability to withstand a downturn in our business, the industry in which we operate or the economy generally may be diminished, (v) we may experience limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and (vi) we may find ourselves at a competitive disadvantage compared to competitors that have proportionately less debt. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all, which could cause us to default on our debt service obligations and be subject to foreclosure on such loans. Additionally, we could incur additional indebtedness in the future and, if new debt is added to our current debt levels, the risks above could intensify.
As some of our loans become due, we may elect to refinance, rather than repay, the indebtedness. However, there is no assurance that additional financing will become available on terms acceptable to us. We believe that we will have the ability to refinance our indebtedness when and if we elect to do so. While we currently are not in a position to know the terms of such refinancing, we expect to refinance our indebtedness at prevailing market rates and on prevailing market terms.
12
As of March 31, 2011, we had cash and cash equivalents (excluding restricted cash) of $12.2 million and restricted cash of $62.9 million. The following table provides detailed information about our net cash flow for all financial statement periods presented in this report.
Cash Flow
(All amounts in thousands of U.S. dollars)
Nine Months Ended March 31,
|
||||||||
2011
|
2010
|
|||||||
Net cash (used in) operating activities
|
$ | (9,813 | ) | $ | (7,193 | ) | ||
Net cash (used in) investing activities
|
(1,269 | ) | (2,466 | ) | ||||
Net cash provided by financing activities
|
9,691 | 15,792 | ||||||
Effect of foreign currency translation on cash and cash equivalents
|
217 | 23 | ||||||
Net cash flows
|
1,174 | 6,155 |
Operating Activities
Net cash used in operating activities was $9.8 million for the nine months ended March 31, 2011, an increase of $2.6 million from $7.2 million for the same period last fiscal year. The increase in net cash used in operating activities was primarily due to reduced advances from customers and higher inventory, partially offset by lower advances to suppliers for the nine months ended March 31, 2011 as compared with the same period last year.
Investing Activities
Our main uses of cash for investing activities are payments relating to the acquisition of property, plant and equipment and restricted cash pledged as deposits for bankers’ acceptance bills.
Net cash used in investing activities during the nine months ended March 31, 2011 was $1.3 million as compared to $2.5 million for the same period in 2010. Capital expenditures for the current period related mostly to the construction of a new cold-rolling facility with an expected annual design facility of 500,000 metric tons. We expect the new facility to start operation in the first half of calendar year 2012.
Financing Activities
Net cash provided by financing activities for the nine months ended March 31, 2011 totaled $9.7 million, as compared to $15.8 million for the same period last year. The decrease in net cash provided by financing activities was mainly due to an increase in restricted cash balance, partially offset by a decrease in cash outflow from payment on notes payable in the current period.
13
The table below sets forth the amount, starting date, maturity date and guarantor of each of our bank loans as of March 31, 2011:
(All amounts in million of U.S. dollars)
Lender
|
Amount*
|
Starting
Date
|
Maturity
Date
|
Guarantor**
|
|||||||||
Industrial and Commercial Bank of China, Changshu Branch
|
$ | 3.04 | 2010-05-20 | 2011-05-19 |
None
|
||||||||
The Agricultural Bank of China, Changshu Branch
|
7.61 | 2010-05-27 | 2011-05-26 |
Shanghai Huaye, Jiangsu Cold-Rolled
|
|||||||||
Communications Bank of China, Changshu Branch
|
3.04 | 2010-11-17 | 2011-05-16 |
Shanghai Huaye
|
|||||||||
Construction Bank of China, Changshu Branch
|
3.04 | 2010-11-18 | 2011-11-17 |
Shanghai Huaye
|
|||||||||
Construction Bank of China, Changshu Branch
|
3.04 | 2010-11-22 | 2011-11-17 |
Shanghai Huaye
|
|||||||||
Industrial and Commercial Bank of China, Changshu Branch
|
3.04 | 2010-04-30 | 2011-04-29 |
Changshu Huaye
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
5.17 | 2010-05-26 | 2011-05-24 |
None
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
9.89 | 2010-07-09 | 2011-06-20 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
3.81 | 2010-07-09 | 2011-07-08 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
7.15 | 2010-07-30 | 2011-07-28 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
6.09 | 2010-08-25 | 2011-08-22 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
6.09 | 2010-09-08 | 2011-09-06 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
7.61 | 2010-10-15 | 2011-09-30 |
None
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
2.44 | 2010-10-26 | 2011-10-24 |
None
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
7.61 | 2010-11-12 | 2011-11-10 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
Industrial and Commercial Bank of China, Changshu Branch
|
1.52 | 2010-12-27 | 2011-12-26 |
Changshu Huaye
|
|||||||||
The Agricultural Bank of China, Changshu Branch
|
0.56 | 2010-12-22 | 2011-04-22 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
Industrial and Commercial Bank of China, Changshu Branch
|
2.28 | 2011-01-21 | 2012-01-19 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
Industrial and Commercial Bank of China, Changshu Branch
|
3.04 | 2011-03-02 | 2012-02-29 |
Changshu Huaye, Shanghai Huaye
|
|||||||||
Shenzhen Development Bank, Ningbo Branch
|
1.52 | 2010-08-20 | 2011-08-20 |
Changshu Huaye
|
|||||||||
The Agricultural Bank of China, Ningbo Branch
|
3.04 | 2011-01-11 | 2011-07-05 |
Changshu Huaye
|
|||||||||
Macao International Bank Co., LTD
|
6.99 | 2011-02-23 | 2013-02-21 |
Sutor Steel Technology Co., Ltd.
|
|||||||||
Macao International Bank Co., LTD
|
5.06 | 2011-03-11 | 2013-02-21 |
Sutor Steel Technology Co., Ltd.
|
|||||||||
Macao International Bank Co., LTD
|
4.78 | 2011-03-23 | 2013-02-21 |
Sutor Steel Technology Co., Ltd.
|
|||||||||
Chen, Lifang
|
0.61 | N/A | N/A |
None
|
|||||||||
Lin, GuiHua
|
2.86 | 2008-11-20 | 2011-11-20 |
None
|
|||||||||
Total
|
$ | 110.96 |
* Calculated on the basis that $1 = RMB 6.57.
** We do not pay any consideration to Shanghai Huaye or its affiliated companies, which are controlled by our CEO and her spouse, for the guarantees of our loans.
The loan agreements with banks contain debt covenants that require us to maintain certain inventory levels, among other things. We were in material compliance with these debt covenants as of March 31, 2011.
In the coming 12 months, we have approximately $94.1 million in bank loans that will mature. We plan to replace these loans with new bank loans in approximately the same aggregate amounts.
We believe that our currently available working capital, credit facilities referred to above and the expected additional credit facility should be adequate to sustain our operations at the current level for at least the next twelve months. However, depending on our future needs and changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional equity or debt financing in the private or public markets.
Critical Accounting Policies
Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2010.
Recent Accounting Pronouncements
See Note 2 (Significant Accounting Policies) to our unaudited condensed consolidated financial statements included elsewhere in this report.
14
Seasonality
Our operating results and operating cash flows historically have not been subject to seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.
Off Balance Sheet Arrangements
We do not have any off-balance arrangements.
ITEM 3.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
Not Applicable.
ITEM 4.
|
CONTROLS AND PROCEDURES.
|
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer, Ms. Lifang Chen, and Chief Financial Officer, Mr. Yongfei Jiang, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011. Based on our assessment, Ms. Chen and Mr. Jiang determined that, as of March 31, 2011, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2011, there were no changes in our internal control over financial reporting identified in connection with the evaluation performed during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
15
PART II
OTHER INFORMATION
ITEM 1.
|
LEGAL PROCEEDINGS.
|
From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
ITEM 1A.
|
RISK FACTORS.
|
Not Applicable.
ITEM 2.
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|
None.
ITEM 3.
|
DEFAULTS UPON SENIOR SECURITIES.
|
None.
ITEM 4.
|
(REMOVED AND RESERVED).
|
ITEM 5.
|
OTHER INFORMATION.
|
We have no information to disclose that was required to be in a report on Form 8-K during the period covered by this report, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.
ITEM 6.
|
EXHIBITS.
|
The following exhibits are filed as part of this report or incorporated by reference:
Exhibit No.
|
Description
|
|
31.1
|
Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
16
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 10, 2011
|
SUTOR TECHNOLOGY GROUP LIMITED
|
|
By:
|
/s/ Lifang Chen
|
|
Lifang Chen, Chief Executive Officer
|
||
(Principal Executive Officer)
|
By:
|
/s/ Yongfei Jiang
|
|
Yongfei Jiang, Chief Financial Officer
|
||
(Principal Financial Officer and Principal
Accounting Officer)
|
17
EXHIBIT INDEX
Exhibit No.
|
Description
|
|
31.1
|
Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
18