Attached files
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EX-32.1 - EXHIBIT 32.1 - BEFUT International Co., Ltd. | v235048_ex32-1.htm |
EX-31.1 - EXHIBIT 31.2 - BEFUT International Co., Ltd. | v235048_ex31-1.htm |
EX-31.2 - EXHIBIT 31.2 - BEFUT International Co., Ltd. | v235048_ex31-2.htm |
EX-32.2 - EXHIBIT 32.2 - BEFUT International Co., Ltd. | v235048_ex32-2.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Amendment No. 1)
(Mark One)
¨
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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 December 31, 2010
¨
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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 000-51336
BEFUT INTERNATIONAL CO., LTD.
(Exact name of registrant as specified in its charter)
Nevada
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20-2777600
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(State or other jurisdiction of
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(IRS Employer
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incorporation or organization)
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Identification No.)
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27th Floor, Liangjiu International Tower,
No.5, Heyi Street, Xigang District, Dalian City, China 116011
(Address of principal executive offices) (Zip Code)
86 0411-8367-0755
(Issuer's telephone number, including area code)
N/A
(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. (Check One):
Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
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(Do not check if a smaller reporting company)
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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
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 29,715,640 shares of Common Stock, $.001 par value, were outstanding as of February 10, 2011.
EXPLANATORY NOTE
This Amendment No. 1 to the Quarterly Report on Form 10-Q (the “Amended 10-Q”) of BEFUT International Co., Ltd. (the “Company”) amends the Company’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2010, filed with the Securities and Exchange Commission (the “SEC”) on February 14, 2011 (the “Original 10-Q”). In connection with the preparation of its responses to comments received from the SEC, the Company identified certain reporting errors and omissions in the Original 10-Q and in its previously issued financial statements, some of which the Company considers material. The Amended 10-Q is being filed to amend the Original 10-Q as follows:
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·
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Revise the Consolidated Balance Sheet to reclassify advance payments for fixed assets and research and development as non-current assets;
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·
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Revise the Consolidated Statements of Operations and Other Comprehensive Income into two separate statements: Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income;
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·
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Revise the Statements of Operations to present interest expenses separately from interest income;
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·
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Reclassify certain line items in the Consolidated Statement of Cash Flows resulting in changes from net cash used in operating activities of $1,429,171 to $3,668,743 for the six months ended December 31, 2010 and from $1,091,519 to $1,677,519 for the six months ended December 31, 2009, and changes from net cash provided by financing activities of $2,158,719 to $4,398,291 for the six months ended December 31, 2010;
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·
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Revise “Note 1 – Organization and Nature of Business” to include the description of interest in Dalian Yuansheng;
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·
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Revise Basis of Presentation under “Note 2 – Summary of Significant Accounting Policies” to include consolidation as a critical accounting policy;
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·
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Revise “Note 5 – Loans to Unrelated Parties” to identify unrelated parties;
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·
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Add a footnote for Bank Loan Security Deposits;
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·
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Revise “Note 9 – Advance Payments – Research and Development” to address that these amounts are determined to be recoverable;
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·
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Revise “Note 11 – Trade Notes Payable” to include the maturity date of the promissory notes;
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·
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Revise “Note 12 – Short-Term Bank Loans” to include average annual interest rates;
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·
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Revise “Note 13 – Loans from Unrelated Parties” to include information regarding maturity date and financial or non-financial covenants associated with the loans;
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·
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Add a footnote for Government Subsidy Income;
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·
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Revise “Note 14 – Long-Term Bank Loans” to include average annual interest rate;
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·
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Revise “Note 16 – Stockholders’ Equity and Related Financing Agreements” to include a summary of intangible assets received for ownership;
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·
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Revise “Note 17 – Income Taxes” to address the timing of the Company’s payments for income taxes;
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·
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Add a footnote for Restatement to Reflect Correction of Accounting Errors;
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·
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Add the words “Restated”, as applicable, to column headings of certain financial tables;
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·
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Make several minor, miscellaneous corrections in Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations;” and
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·
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Amend and restate, in its entirety, Item 4. “Controls and Procedures,” due to the errors and omissions in the Company’s financial statements, to state that the Company had material weaknesses in its disclosure controls and procedures and internal control over financial reporting at December 31, 2010.
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Except as set forth above, the Amended 10-Q is identical to the Original 10-Q. The Amended 10-Q does not reflect events occurring after the filing of the Original 10-Q and no attempt has been made in the Amended 10-Q to modify or update other disclosures as presented in the Original 10-Q. Accordingly, this Amended 10-Q should be read in conjunction with the Company’s filings with the SEC subsequent to the filing of the Original Form 10-Q. Additionally, the Company has attached to the Amended 10-Q updated certifications executed as of the date of the Amended 10-Q by the Company’s chief executive officer and chief financial officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002. These updated certifications are attached as Exhibits 31.1, 31.2, 32.1 and 32.2 to the Amended 10-Q.
TABLE OF CONTENTS
Page
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PART I
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FINANCIAL INFORMATION
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Item 1.
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Financial Statements.
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3
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Restated Consolidated Balance Sheets
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As of December 31, 2010 (Unaudited) and June 30, 2010
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5
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Restated Consolidated Statements of Operations
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For the Three Months and Six Months Ended December 31, 2010 and 2009 (Unaudited)
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6
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Restated Consolidated Statements of Comprehensive Income
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For the Three Months and Six Months Ended December 31, 2010 and 2009 (Unaudited)
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7
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Restated Consolidated Statements of Cash Flows
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For the Six Months Ended December 31, 2010 and 2009 (Unaudited)
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8
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Notes to Restated Consolidated Financial Statements December 31, 2010 and 2009 (Unaudited)
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9
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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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26
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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33
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Item 4.
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Controls and Procedures.
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33
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PART II
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OTHER INFORMATION
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34 |
Item 6.
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Exhibits
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34
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Signatures
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35
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Exhibits/Certifications
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36
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2
PART I - FINANCIAL INFORMATION
Item 1.
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Financial Statements
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BEFUT INTERNATIONAL CO., LTD.
RESTATED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2010 AND 2009
3
BEFUT INTERNATIONAL CO., LTD.
Consolidated Financial Statements
December 31, 2010 and 2009
(Unaudited)
Table of Contents
Page
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Consolidated Balance Sheets
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5
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Consolidated Statements of Operations
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6
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Consolidated Statements of Comprehensive Income
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7
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Consolidated Statements of Cash Flows
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8
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Notes to Consolidated Financial Statements
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9
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4
BEFUT INTERNATIONAL CO., LTD.
Consolidated Balance Sheets
December 31,
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June 30,
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|||||||
2010
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2010
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Assets
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(Restated)
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(Restated)
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Current assets:
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Cash and cash equivalents
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$ | 761,460 | $ | 1,319,173 | ||||
Restricted cash
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3,494,084 | 1,181,095 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $85,783
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17,292,392 | 9,292,310 | ||||||
and $83,295 at December 31, 2010, and June 30, 2010, respectively
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Inventory
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5,234,237 | 2,543,789 | ||||||
Loans to unrelated parties
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1,888,835 | 1,054,090 | ||||||
Bank loan security deposits
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1,089,206 | 1,031,100 | ||||||
Advance payments
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1,521,188 | 399,868 | ||||||
Due from related party
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- | 472,838 | ||||||
Other current assets
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1,227,666 | 521,739 | ||||||
Total current assets
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32,509,068 | 17,816,002 | ||||||
Property and equipment, net
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32,394,534 | 31,618,074 | ||||||
Other assets:
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Intangibles, net
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15,485,194 | 15,669,375 | ||||||
Advance payments – non-current
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408,279 | 293,605 | ||||||
Advance payments – Research & Development
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2,151,106 | 2,088,714 | ||||||
Total other assets
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18,044,579 | 18,051,694 | ||||||
Total assets
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$ | 82,948,181 | $ | 67,485,770 | ||||
Liabilities
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Current liabilities:
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Accounts payable and accrued expenses
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$ | 2,770,621 | $ | 3,119,646 | ||||
Trade notes payable
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3,034,000 | - | ||||||
Short-term bank loans
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9,086,830 | 6,039,300 | ||||||
Current portion of long-term bank loans
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758,500 | 294,600 | ||||||
Loans from unrelated parties
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2,220,740 | 370,000 | ||||||
Advances from customers
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1,007,947 | 533,806 | ||||||
Income taxes payable
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3,120,515 | 1,655,747 | ||||||
Other current liabilities
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1,334,564 | 969,787 | ||||||
Total current liabilities
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23,333,717 | 12,982,886 | ||||||
Long-term bank loan
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14,108,100 | 14,435,400 | ||||||
Total liabilities
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37,441,817 | 27,418,286 | ||||||
Equity
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Stockholders’ equity:
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Preferred stock, $0.001 par value, 10,000,000 shares authorized,
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- | - | ||||||
no shares issued or outstanding
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Common stock, $0.001 par value, 200,000,000 shares authorized,
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29,716 | 29,716 | ||||||
29,715,640 and 29,715,666 shares issued and outstanding at
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December 31, 2010 and June 30, 2010, respectively
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Additional paid-in capital
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21,838,047 | 21,838,047 | ||||||
Statutory reserves
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1,181,189 | 1,181,189 | ||||||
Retained earnings
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17,994,979 | 13,810,157 | ||||||
Accumulated other comprehensive income
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3,447,965 | 2,166,533 | ||||||
Total stockholders’ equity
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44,491,896 | 39,025,642 | ||||||
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Noncontrolling interest
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1,014,468 | 1,041,842 | ||||||
Total equity
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45,506,364 | 40,067,484 | ||||||
Total liabilities and equity
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$ | 82,948,181 | $ | 67,485,770 |
The accompanying notes are an integral part of these consolidated financial statements.
5
BEFUT INTERNATIONAL CO., LTD.
Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended
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For the Six Months Ended
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December 31,
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December 31,
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|||||||||||||||
2010
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2009
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2010
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2009
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(Restated)
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(Restated)
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(Restated)
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(Restated)
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Sales
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$ | 14,871,164 | $ | 7,126,044 | $ | 30,801,975 | $ | 12,609,703 | ||||||||
Cost of sales
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10,954,272 | 5,235,323 | 22,625,032 | 9,098,097 | ||||||||||||
Gross profit
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3,916,892 | 1,890,721 | 8,176,943 | 3,511,606 | ||||||||||||
Operating expenses:
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Selling expenses
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149,643 | 14,828 | 188,250 | 36,701 | ||||||||||||
General and administrative expenses
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1,032,259 | 442,264 | 2,043,879 | 1,030,549 | ||||||||||||
Total operating expenses
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1,181,902 | 457,092 | 2,232,129 | 1,067,250 | ||||||||||||
Income from operations
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2,734,990 | 1,433,629 | 5,944,814 | 2,444,356 | ||||||||||||
Other income (expenses):
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Government subsidy
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180,155 | 304,704 | 316,642 | 354,658 | ||||||||||||
Interest income
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1,462 | 3,728 | 9,966 | 3,728 | ||||||||||||
Interest expense
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(494,852 | ) | (8,923 | ) | (889,754 | ) | (141,232 | ) | ||||||||
Other income (expenses)
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107,024 | (403,138 | ) | 138,145 | (397,441 | ) | ||||||||||
Total other income (expenses)
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(206,211 | ) | (103,629 | ) | (425,001 | ) | (180,287 | ) | ||||||||
Income before provision for income tax
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2,528,779 | 1,330,000 | 5,519,813 | 2,264,069 | ||||||||||||
Provision for income tax
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614,895 | 336,819 | 1,422,030 | 585,723 | ||||||||||||
Net income
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1,913,884 | 993,181 | 4,097,783 | 1,678,346 | ||||||||||||
Less: Net loss attributable to noncontrolling
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(22,681 | ) | (963 | ) | (87,038 | ) | (6,121 | ) | ||||||||
interest
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Net income attributable to BEFUT International Co., Ltd.
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1,936,565 | 994,144 | 4,184,821 | 1,684,467 | ||||||||||||
Basic earnings per share
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$ | 0.07 | $ | 0.03 | $ | 0.14 | $ | 0.06 | ||||||||
Diluted earnings per share
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$ | 0.07 | $ | 0.03 | $ | 0.14 | $ | 0.06 | ||||||||
Weighted average number of common shares
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outstanding:
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Basic
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29,715,640 | 29,511,277 | 29,715,640 | 29,511,277 | ||||||||||||
Diluted
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29,786,677 | 30,280,532 | 29,771,813 | 30,280,532 |
The accompanying notes are an integral part of these consolidated financial statements.
6
Consolidated Statements of Comprehensive Income
For the Three Months Ended
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For the Six Months Ended
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December 31,
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December 31,
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|||||||||||||||
2010
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2009
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2010
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2009
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(Restated)
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(Restated)
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(Restated)
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(Restated)
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Net income
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$ | 1,913,884 | $ | 993,181 | $ | 4,097,783 | $ | 1,678,346 | ||||||||
Other comprehensive income
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Foreign currency translation adjustment
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598,078 | 264 | 1,341,096 | 92,590 | ||||||||||||
Comprehensive income
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2,511,962 | 993,445 | 5,438,879 | 1,770,936 | ||||||||||||
Less: comprehensive income (loss) attributable to noncontrolling interest
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(22,177 | ) | (962 | ) | (27,374 | ) | 38,399 | |||||||||
Comprehensive income attributable to BEFUT International Co., Ltd.
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$ | 2,534,139 | $ | 994,407 | $ | 5,466,253 | $ | 1,732,537 |
The accompanying notes are an integral part of these consolidated financial statements.
7
BEFUT INTERNATIONAL CO., LTD.
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended
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December 31,
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2010
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2009
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(Restated)
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(Restated)
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Cash flows from operating activities:
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Net Income
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$ | 4,097,783 | $ | 1,678,346 | ||||
Adjustments to reconcile net income to net cash provided by
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||||||||
(used in) operating activities:
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Depreciation and amortization
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1,583,652 | 718,680 | ||||||
Changes in current assets and current liabilities:
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Restricted Cash
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(2,239,572 | ) | 586,000 | |||||
Accounts receivable
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(7,894,969 | ) | (53,500 | ) | ||||
Inventory
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(2,574,960 | ) | (1,000,998 | ) | ||||
Advance payments
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(1,066,359 | ) | (197,666 | ) | ||||
Other current assets
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(2,258,178 | ) | (1,032,681 | ) | ||||
Accounts payable and accrued expenses
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(176,022 | ) | 1,637,214 | |||||
Trade notes payable
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2,983,200 | (1,173,120 | ) | |||||
Advances from customers
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450,523 | (174,496 | ) | |||||
Income taxes payable
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1,391,612 | 585,724 | ||||||
Other taxes payable
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248,962 | (163,417 | ) | |||||
Other current liabilities
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1,785,585 | 267,433 | ||||||
Total adjustments
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(7,766,526 | ) | (827 | ) | ||||
Net cash provided by (used in) operating activities
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(3,668,743 | ) | 1,677,519 | |||||
Cash flows from investing activities:
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||||||||
Due from related party
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478,809 | - | ||||||
Additions to property and equipment
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(755,610 | ) | (1,594,161 | ) | ||||
Additions to construction in progress
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(39,808 | ) | (2,442,107 | ) | ||||
Advance payment for fixed assets
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(104,131 | ) | (8,011,520 | ) | ||||
Acquisition of intangible assets
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(5,964 | ) | (6,452 | ) | ||||
Long-term investment
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- | 2,933 | ||||||
Loans to unrelated parties
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(789,809 | ) | 1,521,543 | |||||
Net cash used in investing activities
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(1,216,513 | ) | (10,529,764 | ) | ||||
Cash flows from financing activities:
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Bank loan security deposits
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(26,849 | ) | (163,877 | ) | ||||
Loans from unrelated party
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1,819,753 | 2,274,251 | ||||||
Proceeds of short-term bank loans
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8,975,000 | - | ||||||
Repayment of short-term bank loans
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(6,130,476 | ) | (2,786,160 | ) | ||||
Repayment of long-term bank loans
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(298,320 | ) | 14,664,000 | |||||
Capital contribution from noncontrolling interest for BEFUT Zhong Xing
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59,183 | 43,992 | ||||||
Net cash provided by financing activities
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4,398,291 | 14,032,206 | ||||||
Effect of foreign currency translation on cash
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(70,748 | ) | (4,369 | ) | ||||
Net increase (decrease) in cash and cash equivalents
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(557,713 | ) | 5,175,592 | |||||
Cash and cash equivalents – beginning
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1,319,173 | 210,301 | ||||||
Cash and cash equivalents – ending
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$ | 761,460 | $ | 5,385,893 |
The accompanying notes are an integral part of these consolidated financial statements.
8
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Nature of Business
BEFUT International Co., Ltd., formerly known as Frezer, Inc. (“Frezer”), a former public shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, was established under the laws of Nevada on May 2, 2005. The accompanying consolidated financial statements include the financial statements of BEFUT International Co., Ltd. and its subsidiaries (collectively, the “Company”). The Company’s primary business is to design manufacture and sell industrial wires and cables.
On March 13, 2009, Frezer entered into and consummated a series of transactions whereby (a) Frezer acquired 100% of the outstanding shares of common stock of BEFUT Corporation, a company incorporated in the State of Nevada on January 14, 2009 (“Befut Nevada”), constituting all of the capital stock of Befut Nevada, from Befut International Co. Limited, a British Virgin Islands company (“Befut BVI”) in exchange for the issuance to Befut BVI of an aggregate of 117,768,300 shares of Frezer’s common stock and the cancellation of an aggregate of 2,176,170 shares of Frezer’s common stock and (b) Frezer raised $500,000 in gross proceeds from the sale to four investors of convertible promissory notes of Frezer in the aggregate principal amount of $500,000 and warrants to purchase an aggregate of 720,076 shares of Frezer’s common stock. The acquisition was accounted for as a reverse acquisition under the purchase method for business combinations. On June 18, 2009, the Company effectuated a name change from its original name “Frezer, Inc.” to “BEFUT International Co., Ltd.”.
Hongkong BEFUT Co., Ltd. (“Befut Hongkong”) was incorporated on September 10, 2008 under the laws of Hong Kong and is a wholly-owned subsidiary of Befut Nevada. On February 13, 2009, Befut Hongkong invested 100% of the registered capital to form Befut Electric (Dalian) Co., Ltd. (“WFOE”), a Chinese company incorporated in the city of Dalian, the People’s Republic of China (the “PRC” or “China”).
On February 16, 2009, WFOE entered into a series of agreements, the purpose of which was to restructure Dalian Befut Wire & Cable Manufacturing Co., Ltd. (“Dalian Befut”) in accordance with applicable PRC law so that Dalian Befut could raise capital and grow its business (the “Restructuring”). Dalian Befut was incorporated on June 13, 2002 under the laws of the PRC. The Restructuring included the following arrangements: First, WFOE entered into an Original Equipment Manufacturer Agreement (the “OEM Agreement”) with Dalian Befut containing the following material provisions: (i) Dalian Befut may not manufacture products for any person or entity other than WFOE without the written consent of WFOE; (ii) WFOE is to provide all raw materials and advance related costs to Dalian Befut, as well as provide design requirements for products to be manufactured; (iii) WFOE is responsible for marketing and distributing the products manufactured by Dalian Befut and will keep all related profits and revenues; and (iv) WFOE has an exclusive right, exercisable in its sole discretion, to purchase all or part of the assets and/or equity of Dalian Befut at a mutually agreed price to the extent permitted by applicable PRC law. In addition, on February 16, 2009, WFOE entered into two ancillary agreements with Dalian Befut: (i) an Intellectual Property License Agreement, pursuant to which WFOE shall be permitted to use intellectual property rights such as trademarks, patents and know-how for the marketing and sale of the products manufactured by Dalian Befut; and (ii) a Non-competition Agreement, pursuant to which Dalian Befut shall not compete against WFOE.
On April 14, 2006, Dalian Marine Cable Co., Ltd. (“Dalian Marine Co.”) was incorporated in the PRC by Dalian Befut. Its current shareholders are Dalian Befut (owning 86.6% of the equity interests) and three individual shareholders. Dalian Marine Co. was formed to conduct marketing activities and produce marine cables for Dalian Befut.
On July 1, 2009, Dalian Befut, our captive manufacturer, formed a joint venture under the laws of the PRC, Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong Xing”), with pre-registered capital of RMB1,000,000 (approximately $147,000). Dalian Befut invested RMB700,000 (approximately $103,000) for its 70% equity interest in Befut Zhong Xing. In January, 2010, Dalian Befut increased its investment capital to RMB14.7 million (approximately $2 million) with a transfer of intangible assets to Befut Zhong Xing on 1/1/2010 and raised its equity ownership percentage in Befut Zhong Xing to 73.5%. The noncontrolling interest also increased its equity investment by contributing additional cash of RMB 5,000,000 (approximately $733,350).
9
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 – Organization and Nature of Business (continued)
There were no equity transactions (purchasing or selling the noncontrolling interest) between the Company and the noncontrolling interest shareholders for the six months ended December 31, 2010.
Dalian Yuansheng was established on June 3, 2009 with a registered capital of RMB 1,000,000 (approximately $146,700). Two individual shareholders, Chengnian Yan and Xianjun Cheng, owned 60% and 40% of Dalian Yuansheng, respectively. On July 23, 2010, Dalian Befut contributed RMB 5,000,000 (approximately $735,294) and purchased the original 60% interest from Chengnian Yan at RMB 600,000 (approximately $88,235). As a result, Dalian Befut became 93.3% owner of Dalian Yuansheng. For the periods ended September 30, 2010 and December 31, 2010, the Company consolidated the financial statements of Dalian Yuansheng with intercompany transactions, including investment in Dalian Yuansheng of RMB 5,600,000 (approximately $823,529), eliminated and reported noncontrolling interest per ASC 810-10 as part of the Company’s equity. The purchase of Chengnian Yan’s interest in Dalian Yuansheng at RMB 600,000 (approximately $88,235) was recorded as an equity transaction at cost and no gain or loss was recorded.
Note 2 – Summary of Significant Accounting Policies
Basis Of Presentation
As disclosed in Note 1, WFOE entered into an Original Equipment Manufacturer Agreement, an Intellectual Property License Agreement and a Non-competition Agreement (collectively, the “OEM Agreements”) with Dalian Befut. Under FASB ASC 810-10 (formerly FIN 46R), Dalian Befut is the variable interest entity, or VIE, of WFOE by virtue of the OEM Agreements. As Dalian Befut’s sole purpose and objective is to provide resources and benefits to WFOE, WFOE is the primary beneficiary that can consolidate Dalian Befut. Therefore, Dalian Befut and its controlled subsidiaries, Dalian Marine Co., Dalian Yuansheng and Befut Zhong Xing, are consolidated into the Company’s financial statements.
The Company’s consolidated financial statements include the accounts of its controlled subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.
In preparing the accompanying unaudited consolidated financial statements, the Company evaluated the period from December 31, 2010 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.
Interim Financial Statements
These interim financial statements should be read in conjunction with the audited consolidated financial statements for the years ended June 30, 2010 and 2009, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited consolidated financial statements for the years ended June 30, 2010 and 2009.
Reclassification
Certain amounts as of June 30, 2010 and December 31, 2010 were reclassified for presentation purposes.
10
Notes to Consolidated Financial Statements
(Unaudited)
Note 3– Restricted Cash
Cash balances in the amount of $1,218,584 and $1,181,095 were restricted as of December 31, 2010 and June 30, 2010, respectively, as collateral for the construction loan obtained from the PRC National Development Bank Joint Equity Corporation, which is exhibited in Note 14. The balance of $758,500 as of December 31, 2010 was restricted as collateral for the Bank of East Asia. The balance of $1,517,000 as of December 31, 2010 was restricted for the settlement of trade notes payable in connection with inventory purchases.
Note 4– Inventory
Inventory consisting of material, labor and manufacturing overhead as of December 31, 2010 and June 30, 2010 consists of the following:
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
Raw materials
|
$ | 2,339,670 | $ | 1,093,193 | ||||
Work in process
|
365,680 | 323,275 | ||||||
Finished goods
|
2,528,887 | 1,127,321 | ||||||
Total
|
$ | 5,234,237 | $ | 2,543,789 |
Note 5– Loans to Unrelated Parties
As of December 31, 2010, the Company had outstanding loans to unrelated parties in the aggregate amount of $1,888,835, consisting of $1,350,679 to Dalian Haide Electric Power Equipment Co., Ltd, a research and development partner of the Company (“Dalian Haide”) and $538,156 to Dalian Chenglian Electrical Installation Engineering Co., Ltd, a customer of the Company (“Dalian Chenglian”). These loans are made to primarily fund working capital requirements and are payable on demand. In addition, the loans are unsecured and non-interest bearing.
As of June 30, 2010, the Company had outstanding loans to unrelated parties in the aggregate amount of $1,054,090, consisting of $531,543 to Dalian Haide and $522,546 to Dalian Chenglian.
Note 6 – Bank Loan Security Deposits
The Company obtained financing from various banks through third party guarantors. The Company is responsible to provide security deposits to third party guarantors per the agreements between the Company and the third guarantors. The balance of such bank loan security deposits as of December 31, 2010 and June 30, 2010 consist of the following:
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
Bank loan security deposits – short-term
|
$ | 785,806 | $ | 736,500 | ||||
Bank loan security deposits – long-term
|
303,400 | 294,600 | ||||||
Total
|
$ | 1,089,206 | $ | 1,031,100 |
Note 7– Property and Equipment
Property and equipment as of December 31, 2010 and June 30, 2010 consist of the following:
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
Buildings
|
$ | 20,475,630 | $ | 19,877,285 | ||||
Machinery and equipment
|
13,679,454 | 12,673,324 | ||||||
Office equipment and furniture
|
173,121 | 100,927 | ||||||
Vehicles
|
521,273 | 466,380 | ||||||
Subtotal
|
34,849,478 | 33,117,916 | ||||||
Less: Accumulated depreciation
|
2,495,322 | 1,499,842 | ||||||
32,354,156 | 31,618,074 | |||||||
Add: Construction in progress
|
40,378 | - | ||||||
Total
|
$ | 32,394,534 | $ | 31,618,074 |
11
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Depreciation expense for the three months ended December 31, 2010 and 2009 was $503,245 and $78,604, respectively. Depreciation expense for the six months ended December 31, 2010 and 2009 was $936,460 and $169,816, respectively.
Note 8 – Intangible Assets
Intangible assets as of December 31, 2010 and June 30, 2010 consist of the following
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
Software
|
$ | 29,326 | $ | 22,684 | ||||
Trademark
|
86,469 | 83,961 | ||||||
Land use rights
|
5,669,469 | 5,505,028 | ||||||
Patent
|
11,947,892 | 11,601,348 | ||||||
Subtotal
|
17,733,156 | 17,213,021 | ||||||
Less: Accumulated amortization
|
2,247,962 | 1,543,646 | ||||||
Total
|
$ | 15,485,194 | $ | 15,669,375 |
Amortization expense for the three months ended December 31, 2010 and 2009 was $326,576 and $288,022, respectively. Amortization expense for the six months ended December 31, 2010 and 2009 was $647,192 and $548,864, respectively.
Note 9 – Advance Payments – Research and Development
As a common business practice in China, the Company is required to make advance payments for goods or services that will be used in future research and development activities. The Company made the original advance payments for research and development to a third party in August 2008 for the development of twenty patents. The Company realizes the advance payments when certain progress targets are achieved, including, but not limited to, obtaining the intellectual property certificate issued by the PRC State Intellectual Property Office and passing the two-year declaration period, and related costs have been incurred and reported by the third party to the Company. Such advance payments are amortized as research and development expense in the years in which the patents have passed the two- year declaration period. As of December 31, 2010 and June 30, 2010, the Company determined that these advance payments are recoverable.
Note 10 – Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of December 31, 2010 and June 30, 2010 consist of the following:
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
Accounts payable
|
$ | 2,705,013 | $ | 3,009,646 | ||||
Accrued expenses
|
65,608 | 110,000 | ||||||
Total
|
$ | 2,770,621 | $ | 3,119,646 |
The carrying value of accounts payable and accrued expenses approximate their fair values due to the short-term nature of these obligations.
12
Notes to Consolidated Financial Statements
(Unaudited)
Note 11 – Trade Notes Payable
Trade notes payable consist of uncollateralized non-interest bearing promissory notes issued in connection with the acquisition of certain inventory and equipment. The maturity date of the promissory notes is March 28, 2011. Balances outstanding under such notes as of December 31, 2010 and June 30, 2010 were $3,034,000 and $-0-, respectively.
Note 12 – Short-Term Bank Loans
Short-term bank loans consist of the following:
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
On September 16, 2009, the Company obtained a loan from Harbin Bank, the principal and accrued interest of which was paid in full by September 15, 2010. The interest was calculated using an annual fixed interest rate of 6.372% and paid monthly. The loan was secured by the Company’s property and equipment.
|
$ | - | $ | 2,946,000 | ||||
On October 30, 2009, the Company obtained a loan from Bank of Dalian, the principal and accrued interest of which was paid in full by October 29, 2010. The interest was calculated using an annual fixed interest rate of 6.903% and paid monthly. The loan is guaranteed by Dalian Fangyuan Financial Guarantee Co. ,Ltd., an unaffiliated third party.
|
$ | - | $ | 2,356,800 | ||||
On June 25, 2010, the Company obtained a loan from the Bank of East Asia, the principal of which was paid in full by December 25, 2010. The interest was calculated using an annual fixed interest rate of 6.318%, and paid monthly. The loan was guaranteed by the Company’s accounts receivables.
|
$ | - | $ | 736,500 | ||||
On September 14, 2010, the Company obtained a loan from Harbin Bank with a maturity date of September 13, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China, the PRC’s central bank. The average annual interest rate for the three months ended December 31, 2010 was approximately 7.228%. The loan is secured by the Company’s property and equipment.
|
$ | 3,034,000 | $ | - | ||||
On October 21, 2010, the Company obtained a loan from the Dalian Economic Development Zone Xinhui Town Bank with a maturity date of October 20, 2011. The interest is paid monthly at a variable rate equal to 50% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average annual interest rate for the three months ended December 31, 2010 was approximately 8.34%. The loan is secured by the Company’s inventory.
|
$ | 1,501,830 | $ | - | ||||
On November 11, 2010, the Company obtained a loan from the Bank of Dalian with a maturity date of November 10, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China,. The average annual interest rate for the three months ended December 31, 2010 was approximately 7.228%. The loan is guaranteed by Dalian Zhongdingxin Investment Guarantee Co., Ltd., an unaffiliated third party.
|
$ | 1,517,000 | $ | - | ||||
On November 23, 2010, the Company obtained a loan from the Bank of Dalian with a maturity date of November 22, 2011. The interest is paid monthly at a variable rate equal to 10% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average annual interest rate for the three months ended December 31, 2010 was approximately 6.116%. The loan is guaranteed by Dalian Tiansi Joint Guarantee Co., Ltd., an unaffiliated third party.
|
$ | 1,517,000 | $ | - | ||||
On December 30, 2010, the Company obtained a loan from the Bank of East Asia with a maturity date of June 30, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average annual interest rate for the three months ended December 31, 2010 was approximately 6.63%. The loan is secured by the Company’s accounts receivables.
|
$ | 1,517,000 | $ | - | ||||
Total
|
$ | 9,086,830 | $ | 6,039,300 |
13
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Note 13 – Loans From Unrelated Parties
These loans are based on good-faith, and are non-interest bearing and payable on demand. There are no financial or non-financial covenants associated with these loans. The proceeds from these loans are utilized for working capital. As of December 31, 2010 and June 30, 2010, the Company had outstanding loans from unrelated parties of $2,220,740 and $370,000, respectively.
Note 14 – Long-Term Bank Loans
Long-term bank loans consist of the following:
December 31,
|
June 30,
|
|||||||
2010
|
2010
|
|||||||
On November 2, 2009, Dalian Befut entered into a Loan Agreement with the PRC National Development Bank Joint Equity Corporation (“NDB”) pursuant to which Dalian Befut borrowed RMB100,000,000 (approximately $14,670,000) from NDB (the “Loan”), The term of the Loan is seven years, with a maturity date of November 1, 2016. The interest rate is a variable rate equal to 5% per annum above the floating base interest for loans of the same term promulgated by the People’s Bank of China. The average annual interest rate for the three months ended December 31, 2010 was approximately 6.258%.The Loan was designated to finance the construction of Dalian Befut’s planned specialty cable production lines with a production capacity of 4,000 KM. The Loan was secured by, among other liens, a first priority lien on Dalian Befut’s land use right and its building property ownership and guaranteed by, among other guarantees, Mr. Hongbo Cao and Mr. Tingmin Li, Dalian BEFUT’s two major shareholders.
|
$ | 14,866,600 | $ | 14,730,000 | ||||
Total
|
$ | 14,866,600 | $ | 14,730,000 | ||||
Less: Current portion
|
758,500 | 294,600 | ||||||
Total noncurrent portion
|
$ | 14,108,100 | $ | 14,435,400 |
Note 15 – Government Subsidy Income
Government subsidy income for the six months ended December 31, 2010 and 2009 consists of the following:
For the Six Months Ended December 31
|
||||||||
2010
|
2009
|
|||||||
Newly Identified Municipal Technical Center Subsidy
|
$ | 74,580 | $ | - | ||||
Appropriation of Technology Innovation Subsidy
|
215,089 | - | ||||||
"Famous Trademark" subsidy
|
293,280 | |||||||
Value added tax refund for employing physically-challenged workers
|
26,973 | 61,378 | ||||||
Total
|
$ | 316,642 | $ | 354,658 |
14
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Note 16 –Earnings Per Share
The Company presents earnings per share on a basic and diluted basis. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing income available to common shareholders by the weighted average number of shares outstanding plus the dilutive effect of potential securities. All shares and per share data have been adjusted retroactively to reflect the recapitalization of the Company pursuant to the Share Exchange Agreement with Befut Nevada.
For the Three Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Net income
|
$ | 1,936,565 | $ | 994,144 | ||||
Weighted average common shares
|
||||||||
(denominator for basic earnings per share)
|
29,715,640 | 29,511,277 | ||||||
Effect of dilutive securities:
|
71,037 | 769,255 | ||||||
Weighted average common shares
|
||||||||
(denominator for diluted earnings per share)
|
29,786,677 | 30,280,532 | ||||||
Basic earnings per share
|
$ | 0.07 | $ | 0.03 | ||||
Diluted earnings per share
|
$ | 0.07 | $ | 0.03 |
For the Six Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Net income
|
$ | 4,184,821 | $ | 1,684,467 | ||||
Weighted average common shares
|
||||||||
(denominator for basic earnings per share)
|
29,715,640 | 29,511,277 | ||||||
Effect of dilutive securities:
|
56,173 | 769,255 | ||||||
Weighted average common shares
|
||||||||
(denominator for diluted earnings per share)
|
29,771,813 | 30,280,532 | ||||||
Basic earnings per share
|
$ | 0.14 | $ | 0.06 | ||||
Diluted earnings per share
|
$ | 0.14 | $ | 0.06 |
15
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Note 17– Stockholders’ Equity And Related Financing Agreements
On March 13, 2009, as part of the reverse merger transaction, the Company acquired, from Befut BVI, 100% of the outstanding shares of common stock of Befut Nevada. In exchange, Befut BVI was issued 117,768,300 shares of the Company’s Common Stock, under a Share Exchange Agreement (“SEA”) pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as amended, for issuances not involving a public offering. As a result of the transaction, Befut Nevada became a wholly-owned subsidiary of the Company.
On March 13, 2009, the Company completed a private financing totaling $500,000, for which convertible promissory notes were issued, with four accredited investors (the “March 2009 Financing”). Consummation of the March 2009 Financing was a condition to the completion of the share exchange transaction with Befut BVI and the Befut BVI Stockholders under the SEA. The securities offered in the March 2009 Financing were sold pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company and the investors named in the Purchase Agreement.
In accordance with the Purchase Agreement, the Company issued securities consisting of: (i) 3,130,869 shares of the Company’s common stock $0.001 par value per share in connection with the private financing; (ii) Five (5) year warrants to purchase 720,076 shares of the Company’s common stock at an initial exercise price of $0.1916 per share.
On June 18, 2009, the Company effectuated a 1 for 4.07 reverse stock split of its outstanding common stock (the “Reverse Split”). The Reverse Split did not alter the number of shares of the common stock the Company is authorized to issue, but rather simply reduced the number of shares of its common stock issued and outstanding. Any fractional shares issued as a result of the Reserve Split was rounded up. In addition, any shareholder owning at least 100 shares but less than 407 shares of the Company’s common stock on June 17, 2009, would own at least 100 shares after giving effect to the Reverse Split.
On March 13, 2009, the Company issued convertible notes in an aggregate principal amount of $500,000 at an annual interest of 15%. On March 12, 2010, the maturity date of the convertible notes, the Company repaid convertible notes in the amount of $370,000 and an interest payment of $55,500. The remaining convertible notes in an aggregate principal amount of $130,000 were converted into 200,000 shares of common stock of the Company at the conversion price of $0.65 per share on May 6, 2010.
During the year ended June 30, 2009, the Company received cash contributions from shareholders in the amount of $5,301,971 and intangible assets with an aggregate fair value of $11,383,050 in exchange for ownership, both of which were accounted for as additional paid-in-capital. During the year ended June 30, 2009, two shareholders of the Company, Tingmin Li and Hongbo Cao, contributed two patents into the Company as increases to their respective capital contributions. The two patents were Intelligent Reactive Power Compensation and Automatic Protection Ni-mh Battery Screen, which were valued as $11,383,050 in total by a professional valuation firm. The contribution was treated as capital transaction per ASC 505-10.
Note 18– Income Taxes
The Company is a Nevada corporation and conducts all of its business through its Chinese subsidiaries. The Company’s business is conducted solely in the PRC. As the Company is a U.S. holding company, it has not recorded any income for the six months ended December 31, 2010 and 2009, there was no provision or benefit for U.S. income tax purpose.
The Company is governed by the Income Tax Law of the PRC concerning private-run enterprises, which are generally subject to a statutory tax rate of 25% and were previously, until January 2008, subject to a statutory tax rate of 33% (30% state income tax plus 3% local income tax) on income reported in the statutory statements after appropriate tax adjustments.
16
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Note 18– Income Taxes (continued)
On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the PRC (the “New CIT Law”), which became effective from January 1, 2008. Under the New CIT Law, the corporate income tax rate applicable to all companies, including both domestic and foreign-invested companies, is 25%, replacing the previous applicable tax rate of 33%. For the six months ended December 31, 2010 and 2009, the income tax provision for the Company was $1,422,030 and $585,723, respectively.
The Company’s provision for income taxes consists of:
For the Three Months Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
Current – PRC
|
$ | 614,895 | $ | 336,819 | ||||
Deferred
|
- | - | ||||||
Total provision for income taxes
|
$ | 614,895 | $ | 336,819 |
For the Six Months Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
Current – PRC
|
$ | 1,422,030 | $ | 585,723 | ||||
Deferred
|
- | - | ||||||
Total provision for income taxes
|
$ | 1,422,030 | $ | 585,723 |
A reconciliation of the provision for income taxes with amounts determined by applying the statutory income tax rate to income before income taxes is as follows:
For the Six Months Ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
Computed tax @ statutory rate of 25%
|
||||||||
($5,519,813*25% and $2,264,069*25% for June 30, 2010
|
||||||||
and 2009, respectively)
|
$ | 1,379,953 | $ | 566,017 | ||||
Entertainment expense add-back
|
5,202 | 6,594 | ||||||
Government subsidy income
|
(11,418 | ) | - | |||||
Deductions permitted for salaries paid to physically-challenged employees
|
(8,774 | ) | (8,202 | ) | ||||
Additional deductions permitted for R&D costs
|
(32,629 | ) | - | |||||
Current year losses from PRC subsidiaries
|
60,663 | - | ||||||
Current year losses from U.S. parent holding company not subject to PRC income taxes
|
29,033 | 21,314 | ||||||
Total provision for income taxes
|
||||||||
Computed tax @ statutory rate of 25%
|
$ | 1,422,030 | $ | 585,723 |
In July 2006, the FASB issued FASB Interpretation No.48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company does not recognize any benefits in the financial statements for the six month ended December 31, 2010 and 2009.
17
BEFUT INTERNATIONAL CO., LTD.
Note 18– Income Taxes (continued)
The Company has not paid income taxes for the three months ended September 30, 2010 and 2009 although it has accrued a liability for income tax payable on its balance sheet. To date, the Company has not been granted an extension to pay its income tax obligations, however, the Company intends to commence negotiations with the local tax authorities regarding the availability of tax exemptions relating to the manufacturing of specialty cables and the payment of any remaining income tax obligations after application of available exemptions. In addition, the Company is applying for the electronic remittance of outstanding tax payments due the local tax bureau, if any. The Company expects a final determination on this matter and payment of any tax amounts due within two years
Note 19 – Employee Welfare Plan
The Company has established an employee welfare plan in accordance with applicable Chinese laws and regulations. Full-time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance and other welfare benefits are provided to employees. PRC labor regulations require the Company to accrue for these benefits based on a certain percentage of the employees’ salaries.
Note 20 – Risk Factors
The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal conditions in the PRC. The Company's business may also be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
Note 21 – Risk of Concentration and Credit Risk
During the six months ended December 31, 2010, five vendors accounted for approximately 76% of the Company’s purchases of raw materials, while during the six months ended December 31, 2009, two major vendors accounted for approximately 56.19% of the Company’s purchases of raw materials. Total purchases from these vendors were $20,227,944 and $6,524,876 for the six months ended December 31, 2010 and 2009, respectively.
Five major customers accounted for 24% and 44.01% of the net revenue for the six months ended December 31, 2010 and 2009, respectively. Total sales to these customers were $6,919,765 and $5,550,159, for the six months ended December 31, 2010 and 2009, respectively.
Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.
Note 22 – Supplemental Cash Flow Disclosures
The following is supplemental information relating to the consolidated statements of cash flows:
Six Months Ended December 31,
|
||||||||
2010
|
2009
|
|||||||
Cash paid for interest
|
$ | 357,993 | $ | 137,504 | ||||
Cash paid for income taxes
|
$ | - | $ | - |
The accompanying notes are an integral part of these consolidated financial statements.
18
BEFUT INTERNATIONAL CO., LTD.
Note 23 – Restatement to Reflect Correction of Accounting Errors
The effect of restatement for 2010 is as follows:
Consolidated Balance Sheets
December 31,
|
December 31,
|
Effect of
|
||||||||||
2010
|
2010
|
Change
|
||||||||||
Assets
|
(Restated)
|
(Originally)
|
||||||||||
Current assets:
|
||||||||||||
Cash and cash equivalents
|
$ | 761,460 | $ | 761,460 | ||||||||
Restricted cash
|
3,494,084 | 3,494,084 | ||||||||||
Accounts receivable, net of allowance for doubtful
|
||||||||||||
accounts of $85,783 at December 31, 2010,
|
17,292,392 | 17,292,392 | ||||||||||
Inventory
|
5,234,237 | 5,234,237 | ||||||||||
Loans to unrelated parties
|
1,888,835 | 1,888,835 | ||||||||||
Bank loan security deposits
|
1,089,206 | 1,089,206 | ||||||||||
Advance payments
|
1,521,188 | 1,929,467 | (408,279 | ) | ||||||||
Due from related party
|
- | - | ||||||||||
Other current assets
|
1,227,666 | 1,227,666 | ||||||||||
Total current assets
|
32,509,068 | 32,917,347 | (408,279 | ) | ||||||||
Property and equipment, net
|
32,394,534 | 32,394,534 | ||||||||||
Other assets:
|
||||||||||||
Intangibles, net
|
15,485,194 | 15,485,194 | ||||||||||
Advance payments – non-current
|
408,279 | - | 408,279 | |||||||||
Advance payments – Research & Development
|
2,151,106 | 2,151,106 | ||||||||||
Total other assets
|
18,044,579 | 17,636,300 | 408,279 | |||||||||
Total assets
|
$ | 82,948,181 | $ | 82,948,181 | ||||||||
Liabilities
|
||||||||||||
Current liabilities:
|
||||||||||||
Accounts payable and accrued expenses
|
$ | 2,770,621 | $ | 2,770,621 | ||||||||
Trade notes payable
|
3,034,000 | 3,034,000 | ||||||||||
Short-term bank loans
|
9,086,830 | 9,086,830 | ||||||||||
Current portion of long-term bank loans
|
758,500 | 758,500 | ||||||||||
Loans from unrelated parties
|
2,220,740 | 2,220,740 | ||||||||||
Advances from customers
|
1,007,947 | 1,007,947 | ||||||||||
Income taxes payable
|
3,120,515 | 3,120,515 | ||||||||||
Other current liabilities
|
1,334,564 | 1,334,564 | ||||||||||
Total current liabilities
|
23,333,717 | 23,333,717 | ||||||||||
Long-term bank loan
|
14,108,100 | 14,108,100 | ||||||||||
Total liabilities
|
37,441,817 | 37,441,817 | ||||||||||
Equity
|
||||||||||||
Stockholders’ equity:
|
||||||||||||
Common stock, $0.001 par value, 200,000,000 shares authorized,
|
||||||||||||
29,715,640 and 29,715,666 shares issued and outstanding at
|
||||||||||||
December 31, 2010 and June 30, 2010, respectively
|
29,716 | 29,716 | ||||||||||
Additional paid-in capital
|
21,838,047 | 21,838,047 | ||||||||||
Statutory reserves
|
1,181,189 | 1,181,189 | ||||||||||
Retained earnings
|
17,994,979 | 17,994,979 | ||||||||||
Accumulated other comprehensive income
|
3,447,965 | 3,447,965 | ||||||||||
Total stockholders’ equity
|
44,491,896 | 44,491,896 | ||||||||||
|
||||||||||||
Noncontrolling interest
|
1,014,468 | 1,014,468 | ||||||||||
Total equity
|
45,506,364 | 45,506,364 | ||||||||||
Total liabilities and equity
|
$ | 82,948,181 | $ | 82,948,181 |
The accompanying notes are an integral part of these consolidated financial statements.
19
BEFUT INTERNATIONAL CO., LTD.
Note 23 – Restatement to Reflect Correction of Accounting Errors (Continued)
Consolidated Statements of Operations
(Unaudited)
For the Three
Months Ended
December 31,
2010
|
For the Three
Months Ended
December 31,
2010
|
Effect of
Change
|
||||||||||
(Restated)
|
(Originally)
|
|||||||||||
Sales
|
$ | 14,871,164 | $ | 14,871,164 | ||||||||
Cost of sales
|
10,954,272 | 10,954,272 | ||||||||||
Gross profit
|
3,916,892 | 3,916,892 | ||||||||||
Operating expenses:
|
||||||||||||
Selling expenses
|
149,643 | 149,643 | ||||||||||
General and administrative expenses
|
1,032,259 | 1,032,259 | ||||||||||
Total operating expenses
|
1,181,902 | 1,181,902 | ||||||||||
Income from operations
|
2,734,990 | 2,734,990 | ||||||||||
Other income (expenses):
|
||||||||||||
Government subsidy
|
180,155 | 180,155 | ||||||||||
Interest Income
|
1,462 | - | 1,462 | |||||||||
Interest expense
|
(494,852 | ) | (493,390 | ) | (1,462 | ) | ||||||
Other income (expenses)
|
107,024 | 107,024 | ||||||||||
Total other income (expenses)
|
(206,211 | ) | (206,211 | ) | ||||||||
Income before provision for income tax
|
2,528,779 | 2,528,779 | ||||||||||
Provision for income tax
|
614,895 | 614,895 | ||||||||||
Net income
|
1,913,884 | 1,913,884 | ||||||||||
Less: Net loss attributable to noncontrolling interest
|
(22,681 | ) | (22,681 | ) | ||||||||
Net income attributable to BEFUT International Co., Ltd.
|
1,936,565 | 1,936,565 | ||||||||||
Basic earnings per share
|
$ | 0.07 | $ | 0.07 | ||||||||
Diluted earnings per share
|
$ | 0.07 | $ | 0.07 | ||||||||
Weighted average number of common shares
|
||||||||||||
outstanding:
|
||||||||||||
Basic
|
29,715,640 | 29,715,640 | ||||||||||
Diluted
|
29,786,677 | 29,786,677 |
The accompanying notes are an integral part of these consolidated financial statements.
20
BEFUT INTERNATIONAL CO., LTD.
Note 23 – Restatement to Reflect Correction of Accounting Errors (Continued)
Consolidated Statements of Operations
(Unaudited)
For the Three
Months Ended
December 31,
2009
|
For the Three
Months Ended
December 31,
2009
|
Effect of
Change
|
||||||||||
(Restated)
|
(Originally)
|
|||||||||||
Sales
|
$ | 7,126,044 | $ | 7,126,044 | ||||||||
Cost of sales
|
5,235,323 | 5,235,323 | ||||||||||
Gross profit
|
1,890,721 | 1,890,721 | ||||||||||
Operating expenses:
|
||||||||||||
Selling expenses
|
14,828 | 14,828 | ||||||||||
General and administrative expenses
|
442,264 | 442,264 | ||||||||||
Total operating expenses
|
457,092 | 457,092 | ||||||||||
Income from operations
|
1,433,629 | 1,433,629 | ||||||||||
Other income (expenses):
|
||||||||||||
Government subsidy
|
304,704 | 304,704 | ||||||||||
Interest Income
|
3,728 | - | 3,728 | |||||||||
Interest expense
|
(8,923 | ) | (5,195 | ) | (3,728 | ) | ||||||
Other income (expenses)
|
(403,138 | ) | (403,138 | ) | ||||||||
Total other income (expenses)
|
(103,629 | ) | (103,629 | ) | ||||||||
Income before provision for income tax
|
1,330,000 | 1,330,000 | ||||||||||
Provision for income tax
|
336,819 | 336,819 | ||||||||||
Net income
|
993,181 | 993,181 | ||||||||||
Less: Net loss attributable to noncontrolling interest
|
(963 | ) | (963 | ) | ||||||||
Net income attributable to BEFUT International Co., Ltd.
|
994,144 | 994,144 | ||||||||||
Basic earnings per share
|
$ | 0.03 | $ | 0.03 | ||||||||
Diluted earnings per share
|
$ | 0.03 | $ | 0.03 | ||||||||
Weighted average number of common shares
|
||||||||||||
outstanding:
|
||||||||||||
Basic
|
29,511,277 | 29,511,277 | ||||||||||
Diluted
|
30,280,532 | 30,280,532 |
The accompanying notes are an integral part of these consolidated financial statements.
21
BEFUT INTERNATIONAL CO., LTD.
Note 23 – Restatement to Reflect Correction of Accounting Errors (Continued)
Consolidated Statements of Operations
(Unaudited)
For the Six
Months Ended
December 31,
2010
|
For the Six
Months Ended
December 31,
2010
|
Effect of
Change
|
||||||||||
(Restated)
|
(Originally)
|
|||||||||||
Sales
|
$ | 30,801,975 | $ | 30,801,975 | ||||||||
Cost of sales
|
22,625,032 | 22,625,032 | ||||||||||
Gross profit
|
8,176,943 | 8,176,943 | ||||||||||
Operating expenses:
|
||||||||||||
Selling expenses
|
188,250 | 188,250 | ||||||||||
General and administrative expenses
|
2,043,879 | 2,043,879 | ||||||||||
Total operating expenses
|
2,232,129 | 2,232,129 | ||||||||||
Income from operations
|
5,944,814 | 5,944,814 | ||||||||||
Other income (expenses):
|
||||||||||||
Government subsidy
|
316,642 | 316,642 | ||||||||||
Interest Income
|
9,966 | - | 9,966 | |||||||||
Interest expense
|
(889,754 | ) | (879,788 | ) | (9,966 | ) | ||||||
Other income (expenses)
|
138,145 | 138,145 | ||||||||||
Total other income (expenses)
|
(425,001 | ) | (425,001 | ) | ||||||||
Income before provision for income tax
|
5,519,813 | 5,519,813 | ||||||||||
Provision for income tax
|
1,422,030 | 1,422,030 | ||||||||||
Net income
|
4,097,783 | 4,097,783 | ||||||||||
Less: Net loss attributable to noncontrolling interest
|
(87,038 | ) | (87,038 | ) | ||||||||
Net income attributable to BEFUT International Co., Ltd.
|
4,184,821 | 4,184,821 | ||||||||||
Basic earnings per share
|
$ | 0.14 | $ | 0.14 | ||||||||
Diluted earnings per share
|
$ | 0.14 | $ | 0.14 | ||||||||
Weighted average number of common shares
|
||||||||||||
outstanding:
|
||||||||||||
Basic
|
29,715,640 | 29,715,640 | ||||||||||
Diluted
|
29,771,813 | 29,771,813 |
The accompanying notes are an integral part of these consolidated financial statements.
22
BEFUT INTERNATIONAL CO., LTD.
Note 23 – Restatement to Reflect Correction of Accounting Errors (Continued)
Consolidated Statements of Operations
(Unaudited)
For the Six
Months Ended
December 31,
2009
|
For the Six
Months Ended
December 31,
2009
|
Effect of
Change
|
||||||||||
(Restated)
|
(Originally)
|
|
||||||||||
Sales
|
$ | 12,609,703 | $ | 12,609,703 | ||||||||
Cost of sales
|
9,098,097 | 9,098,097 | ||||||||||
Gross profit
|
3,511,606 | 3,511,606 | ||||||||||
Operating expenses:
|
||||||||||||
Selling expenses
|
36,701 | 36,701 | ||||||||||
General and administrative expenses
|
1,030,549 | 1,030,549 | ||||||||||
Total operating expenses
|
1,067,250 | 1,067,250 | ||||||||||
Income from operations
|
2,444,356 | 2,444,356 | ||||||||||
Other income (expenses):
|
||||||||||||
Government subsidy
|
354,658 | 354,658 | ||||||||||
Interest income
|
3,728 | - | 3,728 | |||||||||
Interest expense
|
(141,332 | ) | (137,504 | ) | (3,728 | ) | ||||||
Other income (expenses)
|
(397,441 | ) | (397,441 | ) | ||||||||
Total other income (expenses)
|
(180,287 | ) | (180,287 | ) | ||||||||
Income before provision for income tax
|
2,264,069 | 2,264,069 | ||||||||||
Provision for income tax
|
585,723 | 585,723 | ||||||||||
Net income
|
1,678,346 | 1,678,346 | ||||||||||
Less: Net loss attributable to noncontrolling interest
|
(6,121 | ) | (6,121 | ) | ||||||||
Net income attributable to BEFUT International Co., Ltd.
|
1,684,467 | 1,684,467 | ||||||||||
Basic earnings per share
|
$ | 0.06 | $ | 0.06 | ||||||||
Diluted earnings per share
|
$ | 0.06 | $ | 0.06 | ||||||||
Weighted average number of common shares
|
||||||||||||
outstanding:
|
||||||||||||
Basic
|
29,511,277 | 29,511,277 | ||||||||||
Diluted
|
30,280,532 | 30,280,532 |
The accompanying notes are an integral part of these consolidated financial statements.
23
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Note 23 – Restatement to Reflect Correction of Accounting Errors (Continued)
Consolidated Statements of Cash Flows
(Unaudited)
For the Six
Months Ended
December 31,
2010
|
For the Six
Months Ended
December 31,
2010
|
Effect of
Change
|
||||||||||
(Restated)
|
(Originally)
|
|||||||||||
Cash flows from operating activities:
|
||||||||||||
Net Income
|
$ | 4,097,783 | $ | 4,097,783 | ||||||||
Adjustments to reconcile net income to net cash provided by
|
||||||||||||
(used in) operating activities:
|
||||||||||||
Depreciation and amortization
|
1,583,652 | 1,583,652 | ||||||||||
Changes in current assets and current liabilities:
|
||||||||||||
Restricted Cash
|
(2,239,572 | ) | - | (2,239,572 | ) | |||||||
Accounts receivable
|
(7,894,969 | ) | (7,894,969 | ) | ||||||||
Inventory
|
(2,574,960 | ) | (2,574,960 | ) | ||||||||
Advance payments
|
(1,066,359 | ) | (1,066,359 | ) | ||||||||
Other current assets
|
(935,345 | ) | (935,345 | ) | ||||||||
Accounts payable and accrued expenses
|
(176,022 | ) | (176,022 | ) | ||||||||
Trade notes payable
|
2,983,200 | 2,983,200 | ||||||||||
Advances from customers
|
450,523 | 450,523 | ||||||||||
Income taxes payable
|
1,391,612 | 1,391,612 | ||||||||||
Other current liabilities
|
711,714 | 711,714 | ||||||||||
Total adjustments
|
(7,766,526 | ) | (5,526,954 | ) | (2,239,572 | ) | ||||||
Net cash provided by (used in) operating activities
|
(3,668,743 | ) | (1,429,171 | ) | (2,239,572 | ) | ||||||
Cash flows from investing activities:
|
||||||||||||
Due from related party
|
478,809 | 478,809 | ||||||||||
Additions to property and equipment
|
(755,610 | ) | (755,610 | ) | ||||||||
Additions to construction in progress
|
(39,808 | ) | (39,808 | ) | ||||||||
Advance payment for fixed assets
|
(104,131 | ) | (104,131 | ) | ||||||||
Acquisition of intangible assets
|
(5,964 | ) | (5,964 | ) | ||||||||
Long-term investment
|
- | - | ||||||||||
Loans to unrelated parties
|
(789,809 | ) | (789,809 | ) | ||||||||
Net cash used in investing activities
|
(1,216,513 | ) | (1,216,513 | ) | ||||||||
Cash flows from financing activities:
|
||||||||||||
Restricted cash
|
- | (2,239,572 | ) | 2,239,572 | ||||||||
Bank loan security deposits
|
(26,849 | ) | (26,849 | ) | ||||||||
Loans from unrelated party
|
1,819,753 | 1,819,753 | ||||||||||
Proceeds of short-term bank loans
|
2,844,524 | 2,844,524 | ||||||||||
Repayments of long-term bank loans
|
(298,320 | ) | (298,320 | ) | ||||||||
Capital contribution from noncontrolling interest for BEFUT Zhong Xing
|
59,183 | 59,183 | ||||||||||
Net cash provided by financing activities
|
4,398,291 | 2,158,719 | 2,239,572 | |||||||||
Effect of foreign currency translation on cash
|
(70,748 | ) | (70,748 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents
|
(557,713 | ) | (557,713 | ) | ||||||||
Cash and cash equivalents – beginning
|
1,319,173 | 1,319,173 | ||||||||||
Cash and cash equivalents – ending
|
$ | 761,460 | $ | 761,460 |
24
BEFUT INTERNATIONAL CO., LTD.
Notes to Consolidated Financial Statements
(Unaudited)
Note 23 – Restatement to Reflect Correction of Accounting Errors (Continued)
For the Six
Months Ended
December 31,
2009
|
For the Six
Months Ended
December 31,
2009
|
Effect of
Change
|
||||||||||
(Restated)
|
(Orginally)
|
|||||||||||
Cash flows from operating activities:
|
||||||||||||
Net Income
|
$ | 1,678,346 | $ | 1,678,346 | ||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
||||||||||||
Depreciation and amortization
|
718,680 | 718,680 | ||||||||||
Changes in current assets and current liabilities:
|
||||||||||||
Restricted Cash
|
586,000 | - | 586,000 | |||||||||
Accounts receivable
|
(53,500 | ) | (53,500 | ) | ||||||||
Inventory
|
(1,000,998 | ) | (1,000,998 | ) | ||||||||
Advance payments
|
(197,666 | ) | (197,666 | ) | ||||||||
Other current assets
|
(1,032,681 | ) | (1,032,681 | ) | ||||||||
Accounts payable and accrued expenses
|
1,637,214 | 1,637,214 | ||||||||||
Trade notes payable
|
(1,173,120 | ) | (1,173,120 | ) | ||||||||
Advances from customers
|
(174,496 | ) | (174,496 | ) | ||||||||
Income taxes payable
|
585,724 | 585,724 | ||||||||||
Other current liabilities
|
104,016 | 104,016 | ||||||||||
Total adjustments
|
(827 | ) | (586,827 | ) | 586,000 | |||||||
Net cash provided by (used in) operating activities
|
1,677,519 | 1,091,519 | 586,000 | |||||||||
Cash flows from investing activities:
|
||||||||||||
Due from related party
|
- | - | ||||||||||
Additions to property and equipment
|
(1,594,161 | ) | (1,594,161 | ) | ||||||||
Additions to construction in progress
|
(2,442,107 | ) | (2,442,107 | ) | ||||||||
Advance payment for fixed assets
|
(8,011,520 | ) | (8,011,520 | ) | ||||||||
Acquisition of intangible assets
|
(6,452 | ) | (6,452 | ) | ||||||||
Long-term investment
|
2,933 | 2,933 | ||||||||||
Loans to unrelated parties
|
1,521,543 | 1,521,543 | ||||||||||
Net cash used in investing activities
|
(10,529,764 | ) | (10,529,764 | ) | ||||||||
Cash flows from financing activities:
|
||||||||||||
Restricted cash
|
- | 586,000 | (586,000 | ) | ||||||||
Bank loan security deposits
|
(163,877 | ) | (163,877 | ) | ||||||||
Loans from unrelated party
|
2,274,251 | 2,274,251 | ||||||||||
Proceeds (repayment) of short-term bank loans
|
(2,786,160 | ) | (2,786,160 | ) | ||||||||
Proceeds (repayment) of long-term bank loans
|
14,664,000 | 14,664,000 | ||||||||||
Capital contribution from noncontrolling interest for BEFUT Zhong Xing
|
43,992 | 43,992 | ||||||||||
Net cash provided by financing activities
|
14,032,206 | 14,618,206 | (586,000 | ) | ||||||||
Effect of foreign currency translation on cash
|
(4,369 | ) | (4,369 | ) | ||||||||
Net increase (decrease) in cash and cash equivalents
|
5,175,592 | 5,175,592 | ||||||||||
Cash and cash equivalents – beginning
|
210,301 | 210,301 | ||||||||||
Cash and cash equivalents – ending
|
$ | 5,385,893 | $ | 5,385,893 |
Consolidated Statements of Cash Flows
Unaudited)
25
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report.
Certain statements in this report constitute “forward-looking statements”. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) our anticipated trends in our industry (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. Forward-looking Statements are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” or the negative of these words or other variations on these words or comparable terminology. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.
Any forward-looking statements speak only as of the date on which they are made and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.
Unless the context indicates otherwise, as used in the following discussion, the words “Company”, “we,” “us,” and “our,” each refer to (i) BEFUT International Co., Ltd. (f/k/a Frezer, Inc.), a corporation incorporated in the State of Nevada; (ii) BEFUT Corporation, a corporation incorporated in the State of Nevada and a wholly owned subsidiary of the Company (“Befut Nevada”); (ii) Hongkong BEFUT Co., Ltd. (“Befut Hongkong”), a wholly-owned subsidiary of Befut Nevada, incorporated under the laws of Hong Kong; (iii) Befut Electric (Dalian) Co., Ltd. (“WFOE”), a corporation incorporated under the laws of the People’s Republic of China (the “PRC”), and a wholly-owned subsidiary of Befut Hongkong; (vi) Dalian Befut Wire and Cable Manufacturing Co., Ltd. (“Dalian Befut”), a corporation incorporated under the laws of the PRC, which is a captive manufacturer of WFOE pursuant to a series of contractual agreements; (vii) Dalian Marine Cable Co., Ltd. (“Befut Marine”), a corporation incorporated under the laws of the PRC, and that is 86.6% owned by Dalian Befut; (viii) Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong Xing”), a corporation incorporated under the laws of the PRC, and that is 73.5% owned by Dalian Befut; and (ix) Dalian Yuansheng Technology Co., Ltd. (“Dalian Yuansheng”), a corporation incorporated under the laws of the PRC, and that is 93.3% owned by Dalian Befut.
Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and “Renminbi” are to the currency of the PRC or China.
Overview
We manufacture specialty cables in northeastern China for sale to industries, including, ship building, nuclear power plants, mining and petrochemical. Our cable products consist of (i) traditional electric power system cable and (ii) an assortment of specialty cable, including marine cable, mining specialty cable, petrochemical cable. We have recently begun to develop carbon fiber composite cable products. We also have developed the capability to produce other types of special cables such as submarine cable and certain “new energy” cable, including cable for wind and solar energy. Our switch application business mainly includes high and low voltage distribution cabinet switches and crane electronic control switches, which products compliment our cable product offerings.
OEM Agreements
We conduct substantially all of our operations through, and generate substantially all of our revenues from Dalian Befut, pursuant to an Original Equipment Manufacturer Agreement, an Intellectual Property Rights License Agreement and a Non-competition Agreement (collectively, the “OEM Agreements”). We have no direct ownership interest in Dalian Befut nor do we have voting control of any shares of Dalian Befut. As a result, these OEM Agreements may not be as effective in providing us with control over Dalian Befut as direct ownership of Dalian Befut would be. For example, Dalian Befut may breach the OEM Agreements by deciding not to manufacture products for WFOE, and consequently the Company. In the event of any such breach, we would have to rely on legal remedies under PRC law, which may not always be available or effective to enforce our rights, particularly in light of uncertainties in the PRC legal system. To mitigate such a risk, WFOE has the exclusive right under the OEM Agreements, exercisable in its sole discretion, to purchase all or part of the assets and/or equity of Dalian Befut.
26
All cash flows generated under the OEM Agreements are maintained in the custody of Dalian Befut instead of in the custody of the Company. There are no prohibitions under applicable PRC law on the transfer of cash from Dalian Befut to WFOE . Accordingly, except for the relevant PRC laws, regulations and government policies on capital outflow, as disclosed under Item 1A - Risk Factors of our Annual Report on Form 10-K, as amended, no risks exist as to the movement of cash balances from the Company’s PRC operating subsidiaries or Dalian Befut up to the Company. Transfer of cash may be made from Dalian Befut to WFOE and up to the Company, when necessary to meet the Company’s cash requirements, including, for example, to satisfy any debt obligations or make cash dividends. Such transfers must be made in compliance with applicable PRC laws regarding, among other things, currency controls, tax and payment of dividends.
Results of Operations
Three and Six Months Ended December 31, 2011 Compared to the Three and Six Months Ended December 31, 2010
Item
|
Three-
months
ended
December
31, 2010
|
Three-
months
ended
December
31, 2009
|
%
Change
|
Six months
ended
December
31, 2010
|
Six months
ended
December
31, 2009
|
%
Change
|
||||||||||||||||||
Sales
|
$
|
14,871,164
|
$
|
7,126,044
|
109
|
%
|
$
|
30,801,975
|
$
|
12,609,703
|
144
|
%
|
||||||||||||
Cost of sales
|
$
|
10,954,272
|
$
|
5,235,323
|
109
|
%
|
$
|
22,625,032
|
$
|
9,098,097
|
149
|
%
|
||||||||||||
Gross profit
|
$
|
3,916,892
|
$
|
1,890,721
|
107
|
%
|
$
|
8,176,943
|
$
|
3,511,606
|
133
|
%
|
||||||||||||
Total operating expenses
|
$
|
1,181,902
|
$
|
457,092
|
159
|
%
|
$
|
2,232,129
|
$
|
1,067,250
|
109
|
%
|
||||||||||||
Total other income/(expenses)
|
$
|
(206,211
|
)
|
$
|
(103,629
|
)
|
(99
|
)%
|
$
|
(425,001
|
)
|
$
|
(180,287
|
)
|
(136
|
)%
|
||||||||
Net income
|
$
|
1,913,884
|
$
|
993,181
|
93
|
%
|
$
|
4,097,783
|
$
|
1,678,346
|
144
|
%
|
||||||||||||
Gross profit margin
|
26.34
|
%
|
26.53
|
%
|
(0.19
|
)%
|
26.55
|
%
|
27.85
|
%
|
(1.30
|
)%
|
||||||||||||
Basic earnings per share
|
$
|
0.07
|
$
|
0.03
|
133
|
%
|
$
|
0.14
|
$
|
0.06
|
133
|
%
|
||||||||||||
Diluted earnings per share
|
0.07
|
0.03
|
133
|
%
|
0.14
|
0.06
|
133
|
%
|
||||||||||||||||
Weighted average number of common shares outstanding:
|
||||||||||||||||||||||||
Basic
|
29,715,640
|
29,511,277
|
0.69
|
%
|
29,715,640
|
29,511,277
|
0.69
|
%
|
||||||||||||||||
Diluted
|
29,786,677
|
30,280,532
|
-1.63
|
%
|
29,771,813
|
30,280,532
|
-1.68
|
%
|
Three Months Ended December 31, 2010 as Compared to Three Months Ended December 31, 2009
Sales
Our sales for the three months ended December 31, 2010 were $14,871,164, representing an increase of $7,745,120, or 109%, as compared to $7,126,044 in the three months ended December 31, 2009. This increase was primarily due to two factors: (i) significantly increased demand for our traditional cables, specialty cables and switch products from new and existing customers, and (ii) increased production capacity as a result of the relocation of our production facilities at the end of 2009 to our Phase I Changxing facility in Dalian’s Changxing Island Harbor Industrial Zone.
In terms of our product mix, for the three months ended December 31, 2010, approximately 42.2% of our revenues were generated from sales of traditional cable, approximately 49.4 % of revenues were generated from sales of specialty cable and approximately 8.4% of revenues were generated from our switch application business, as compared to 34.5%, 57.6% and 7.9%, respectively, in the three months ended December 31, 2009.
Cost of Sales
Cost of sales is primarily comprised of the cost of raw materials used in the production of our cable products, direct labor and manufacturing overhead expenses. Our cost of sales for the three months ended December 31, 2010 was $10,954,272, representing an increase of $5,718,949, or 109%, as compared to $5,235,323 in the three months ended December 31, 2009. The increase in our cost of sales was in line with the increase in our sales.
Gross Profit
Gross profit for the quarter ended December 31, 2010 was $3,916,892, representing an increase of $2,026,171, or 107%, as compared to the three months ended December 31, 2009. Gross profit as a percentage of sales was 26.34% for the three months ended December 31, 2010, which was not materially different from gross profit percentage at December 31, 2009.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of salaries and bonuses for sales personnel, advertising and promotion expenses, freight charges, related compensation and professional fees and amortization expenses. Selling expenses were $149,643 in the three months ended December 31, 2010, as compared to $14,828 in the three months ended December 31, 2009, representing an increase of $134,815, or 909.19%. General and administrative expenses were $1,032,259 for the three months ended December 31, 2010, representing an increase of $589,995, or 133.40%, as compared to $442,264 in the three months ended December 31, 2009. The increase of general and administrative expenses was mainly due to the increase in expenses from salary, depreciation and expenses from Dalian Yuansheng and WFOE.
27
Income from Operations
Our operating income was $2,734,990 for the three months ended December 31, 2010, representing an increase of $1,301,361, or 90.77%, as compared to $1,433,629 for the three months ended December 31, 2009. This increase was a result of a significant increase in the gross profit of our overall business of wire and cable manufacturing, partially offset by an increase of selling, general and administrative expenses.
Government Subsidy
In the three months ended December 31, 2010, we received subsidies from various PRC governmental bureaus in the aggregate amount of $180,155, as compared to subsidies of $304,704 received in the quarter ended December 31, 2009. The subsidies we received in the three months ended December 31, 2010 consisted of (i) approximately $150,000 from the Appropriation of Technology Innovation Fund of the Department of Finance of Dalian City and (ii) approximately $30,000 from the Appropriation of Technology Innovation Fund of the Department of Finance of Liaoning Province.
Interest Expense
Interest expense was $494,852 for the three months ended December 31, 2010, representing an increase of $485,929, or 5,445.80 %, as compared to $8,923 for the three months ended December 31, 2009. This increase was due to the increase of our total bank loans, proceeds of which were used for working capital and our Phase I Changxing facility.
Income Taxes
In the three months ended December 31, 2010, our business operations were conducted solely by WFOE, Dalian Befut and its subsidiaries and, as such, we were governed by the PRC Enterprise Income Tax Laws (the “EIT Law”). China enterprise income tax is calculated based on taxable income determined under Chinese generally accepted accounting principles. In accordance with the EIT Law, a Chinese domestic company is subject to taxes, including but not limited to: (i) an enterprise income tax rate of 25% and (ii) a value added tax of 17% on the goods sold.
Provision for income taxes was $614,895 for the three months ended December 31, 2010, an increase of $278,076, or 82.56%, compared to $336,819 for the three months ended December 31, 2009.
Net Income
Net income for the three months ended December 31, 2010 was $1,913,884, representing an increase of $920,703, or 92.70%, as compared to net income of $993,181 for the three months ended December 31, 2009. The increase was mainly attributable to the increase of $2,026,171 in gross profit and the increase of $510,162 in other income, which was partially offset by an increase in selling, general and administrative expenses of $724,810, an increase in interest expense of $488,195 and an increase in income tax provision of $278,076.
Six Months Ended December 31, 2010 as Compared to Six Months Ended December 31, 2009
Sales
Our sales for the six months ended December 31, 2010 were $30,801,975, representing an increase of $18,192,272, or 144.27%, as compared to $12,609,703 in the six months ended December 31, 2009. The increase was primarily due to three factors: (i) significantly increased demand for our traditional cables, specialty cables and switch products from new and existing customers, (ii) our increased production capacity as a result of the relocation of our production facilities to our Phase I Changxing facility in Dalian’s Changxing Island Harbor Industrial Zone at the end of 2009, and (iii) increased prices of many of our cable products due to an increase in the average price of copper, our primary raw material, in the six months ended December 31, 2010, most of which we passed on to our customers.
In terms of our product mix, for the six months ended December 31, 2010, approximately 48.0% of our revenues were generated from sales of traditional cable, approximately 47.4% of revenues were generated from sales of specialty cable and approximately 4.6% of revenues were generated from our switch application business, as compared to 37.5%, 58.0% and 4.5%, respectively, in the six months ended December 31, 2009.
28
Cost of Sales
Cost of sales is primarily comprised of the cost of raw materials used in the production of our cable products, direct labor and manufacturing overhead expenses. Our cost of sales for the six months ended December 31, 2010 was $22,625,032, representing an increase of $13,526,935, or 148.68%, as compared to $9,098,097 in the six months ended December 31, 2009. Our cost of sales increased at a higher rate than our sales because we produced a lower percentage of specialty cable, which typically has higher gross margins, than in the prior period.
Gross Profit
Gross profit for the six months ended December 31, 2010 was $8,176,943, representing an increase of $4,665,337, or 132.85%, as compared to $3,511,606 in the six months ended December 31, 2009. Gross profit as a percentage of sales was 26.55% for the six months ended December 31, 2010, representing a decrease of 1.30%, as compared to 7.85% in the six months ended December 31, 2009. The decrease of gross profit rate was primarily due to that we produced a lower percentage of specialty cable products, as compared to the six months ended December 31, 2009.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of salaries and bonuses for sales personnel, advertising and promotion expenses, freight charges, related compensation and professional fees, and amortization expenses. Selling expenses were $188,250 in the six months ended December 31, 2010, as compared to $36,701 in the six months ended December 31, 2009, representing an increase of $151,549, or 412.93%. General and administrative expenses were $2,043,879 for the six months ended December 31, 2010, representing an increase of $1,013,330, or 98.33%, as compared to $1,030,549 in the six months ended December 31, 2009. The increase of general and administrative expenses was mainly due to the increase in expenses, including for salary, depreciation and entertainment, from Dalian Yuansheng, Befut Zhong Xing and WFOE.
Income from Operations
Our operating income was $5,944,814 for the six months ended December 31, 2010, an increase of $3,500,458, or 143.21%, as compared to $2,444,356 for the six months ended December 31, 2009. This increase was a result of a significant increase in the gross profit of our overall business of wire and cable manufacturing, partially offset by an increase of selling, general and administrative expenses.
Government Subsidy
In the six months ended December 31, 2010, we received subsidies from various PRC governmental bureaus in the aggregate amount of $316,642, as compared to subsidies of $354,658 received in the six months ended December 31, 2009. The subsidies received by the Company in the six months ended December 31, 2010 consisted of: (i) approximately $74,000 received from the Finance Bureau of Dalian and the Economic and Information Commission of Dalian recognizing the Company as a Newly Identified Municipal Technical Center, (ii) approximately $30,000 received from the Appropriation of Technology Innovation Fund of the Department of Finance of Liaoning Province, and (iii) approximately $178,000 received from the Appropriation of Technology Innovation Fund of the Department of Finance of Dalian City and (iv) a refund of $27,000 for value added taxes we paid at the end of 2009.
Interest Expenses
Interest expense was $889,754 for the six months ended December 31, 2010, an increase of $748,422, or 529.9 %, as compared to $141,232 for the six months ended December 31, 2009. This increase is due to the increase in borrowings under our bank loans.
Income Taxes
In the six months ended December 31, 2010, our business operations were conducted solely by WFOE, Dalian Befut and its subsidiaries and, as such, we were governed by the PRC Enterprise Income Tax Laws (the “EIT Law”). China enterprise income tax is calculated based on taxable income determined under Chinese generally accepted accounting principles. In accordance with the EIT Law, a Chinese domestic company is subject to taxes, including but not limited to: (i) an enterprise income tax rate of 25% and (ii) a value added tax of 17% on the goods sold.
Provision for income taxes was $1,422,030 for the six months ended December 31, 2010, an increase of $836,307, or 142.78%, compared to $585,723 for the six months ended December 31, 2009.
Net Income
Net income for the six months ended December 31, 2010 was $4,097,783 an increase of $2,419,437, or 144.16%, as compared to net income of $1,678,346 for the six months ended December 31, 2009. The increase was mainly attributable to the increase of $4,665,337 in gross profit and the increase of $535,586 in other income, which was partially offset by an increase in selling, general and administrative expenses of $1,164,879, an increase in interest expense of $724,284 and an increase in income tax provision of $836,307.
29
Liquidity and Capital Resources
Selected Measures of Liquidity and Capital Resources
The following table sets forth certain relevant measures regarding our liquidity and capital resources:
(dollars in thousands, except ratios)
|
December 31,
2010
|
June 30,
2010
|
||||||
Cash and cash equivalents and restricted cash
|
$
|
4,256
|
$
|
2,500
|
||||
Working capital
|
$
|
9,175
|
$
|
4,833
|
||||
Ratio of current assets to current liabilities
|
1.4:1
|
1.4 :1
|
Our approximately $4.4 million increase in working capital from June 30, 2010 to December 31, 2010 was primarily due to the increase of $14.7 million of current assets and the increase of $10.4 million of current liabilities. The increase of current assets mainly includes the increase of $1.8 million of cash, cash equivalents and restricted cash, the increase of $8.0 million of account receivables and the increase of $2.7 million of inventory. The increase of current liabilities mainly includes the increase of $3 million of trade notes payable, the increase of $3 million of short term bank loans, the increase of $1.8 million of loans from unrelated parties, and the increase of $1.5 million of income tax payable.
Cash Flows
We had a net decrease of $557,713 in cash and cash equivalents from June 30, 2010 to December 31, 2010, as compared to a net increase of $5,175,592 from June 30, 2009 to December 31, 2009, respectively. The following table summarizes such changes:
|
For the six months ended
|
|||||||
(dollars in thousands)
|
December 31, 2010
|
December 31, 2009
|
||||||
Net cash provided by (used in) operating activities
|
$
|
(3,669
|
)
|
$
|
1,678
|
|||
Net cash used in investing activities
|
$
|
(1,217
|
)
|
$
|
(10,530
|
)
|
||
Net cash provided by financing activities
|
$
|
4,398
|
$
|
14,032
|
||||
Net increase (decrease) in cash, cash equivalents
|
$
|
(558
|
)
|
$
|
5,176
|
Our management believes that we have sufficient cash, along with projected cash to be generated from operations, and access to short-term bank loans to support our current operations for the next twelve months. We believe our cash position is strong and sufficient to meet our anticipated working capital needs. However, if events or circumstances occur and we do not meet our budgeted operating plan, we may be required to seek additional capital and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing, which may include debt and/or equity financing. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.
Operating Activities
During the six months ended December 31, 2010, net cash used in operating activities was $3,668,743, a decrease of $5,346,262, or 318.7%, as compared to net cash of $1,677,519 provided by operating activities during the six months ended December 31, 2009. The decrease in net cash of approximately $2.5 million was mainly due to the increase of net income of $2.4 million, the increase of account receivables of $7.8 million, the increase in inventory of $1.6 million and the increase of trade notes payable of $4.2 million.
Investing Activities
During the six months ended December 31, 2010, we used net cash in investing activities of $1,216,513, a decrease of $9,313,251, or 88.45%, as compared to net cash of $10,529,764 used in investing activities for the six months ended December 31, 2009. We had significantly less investment activities following the completion of our Phase I Changxing Island facility in December, 2009.
30
Financing Activities
During the six months ended December 31, 2010, net cash provided by financing activities was $4,398,291, representing a decrease of $9,633,915, or 68.66%, as compared to net cash of $14,032,206 provided by financing activities during the six months ended December 31, 2009. We significantly reduced our financing activities with the completion of our Phase I Changxing Island facility.
Financial Obligations
As of December 31, 2010, our outstanding loans were as follows:
Creditors
|
Loan Amount
|
Interest Rate
|
Term
|
Maturity Date
|
|||||
Harbin Bank
|
$
|
3,034,000
|
7.55
|
% *
|
1 year
|
09/13/11
|
|||
Bank of Dalian
|
$
|
3,034,000
|
7.55
|
% *
|
1 year
|
11/22/11
|
|||
Dalian Economic Zone Xinhui Town Bank
|
$
|
1,501,830
|
8.72
|
% +
|
1 year
|
10/20/11
|
|||
Bank of East Asia
|
$
|
1,517,000
|
7.55
|
% *
|
6 months
|
06/30/11
|
|||
PRC Development Bank Joint Equity Corporation
|
$
|
14,866,600
|
6.72
|
% #
|
7 years
|
11/01/16
|
* Variable interest rate equal to 30% per annum above the floating base rate issued by the People’s Bank of China.
+ Variable interest rate equal to 50% per annum above the floating base rate issued by the People’s Bank of China.
# Variable interest rate equal to 5% per annum above the floating base rate issued by the People’s Bank of China.
Accounts Receivable
The balance of our accounts receivable was $17,292,392, net of allowance for doubtful accounts of $85,783, as of December 31, 2010, as compared to $9,292,310, net of allowance for doubtful accounts of $83,295, as of June 30, 2010. The average age of receivables for the last twelve months ended December 31, 2010 was 94 days, compared to 103 days for the fiscal year ended June 30, 2010. The Company’s sales strategy has shifted to large customers since the Company moved its manufacturing operations to its Changxing Island facility. As a result, the credit terms are longer for large customers, such as China National Petroleum Corporation. As at December 31, 2010, the balance for accounts receivable with the aging of more than one year was approximately $80,480. The Company believes the allowance for doubtful accounts was adequate.
Inventories
Inventories consisted of the following as of December 31, 2010 and June 30, 2010, respectively:
|
December 31,
2010
|
June 30, 2010
|
||||||
Category
|
||||||||
Raw materials
|
$
|
2,339,670
|
$
|
1,093,193
|
||||
Work-in-process
|
365,680
|
323,275
|
||||||
Finished goods
|
2,528,887
|
1,127,321
|
||||||
Total inventories
|
$
|
5,234,237
|
$
|
2,543,789
|
We had total inventory of $5,234,237 as of December 31, 2010, an increase of $2,690,448, or 105.77%, as compared to inventory of $2,543,789 as of June 30, 2010. The average number of days of inventory for the last twelve months ended December 31, 2010 was 66 days, compared to 40 days for the fiscal year ended June 30, 2010. This increase was primarily due to the significant increases in our production in last two quarters.
Off-Balance Sheet Arrangements
At December 30, 2010, we did not have any off-balance sheet arrangements.
31
Critical Accounting Policies and Use of Estimates
Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations:
Use of Estimates and Assumption
The preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowance for doubtful accounts and income taxes. Actual results could differ from those estimates.
Revenue Recognition
We derives our revenues primarily from the design, manufacture and sale of industrial wires and cables in the PRC. In accordance with the provisions of ASC Topic 605, revenue is recognized when products are shipped, title and risk of loss is passed to the customers and collection is reasonably assured. Payments received before the above criteria are satisfied are recorded as advance from customers.
Cost of Sales
Cost of sales includes the expenses incurred to produce inventory for sale, including raw materials, direct labor, depreciation of manufacturing facilities and machinery, overheads, amortization of land use right as well as changes in reserves for shrinkage and inventory obsolescence.
Cash and Cash Equivalents
In accordance with FASB ASC Topic 230, "Statement of Cash Flows", we consider all highly liquid instruments with original maturities of three months or less to be cash equivalents.
Accounts Receivable
Accounts receivable are recorded net of allowance for doubtful accounts. We provide an allowance for doubtful accounts equal to the estimated uncollectible amounts. Periodically, management assesses customer credit history and relationships as well as performs accounts receivable aging analysis. Based on the results, management determines whether certain balances are deemed uncollectible at the end of a certain fixed period. Using its past collection experience, we reserve 0.3% of accounts receivable balances that have been outstanding for less than one year, 3% of accounts receivable balances that have been outstanding for more than one year but less than two years, and 10% of accounts receivable balances that have been outstanding for more than two years. The Company generally provides customers with credit terms of three to four months. However, we provide our “large” customers, those with average annual specialty cable orders of over $7 million, with credit terms of five to six months. We generally do not conduct further business with customers that have significant unpaid accounts receivable balances beyond 12 months, unless we receive advance payments from such customers.
Consolidation
Pursuant to ASC 810-10-15-14, an entity is deemed to be a variable interest entity, or VIE, and thus to be consolidated by its primary beneficiary, if, by intention, any one of the following conditions is present:
|
A.
|
The total equity investment at risk in the legal entity to be consolidated is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, including equity holders; or
|
|
B.
|
As a group, holders of the equity investment at risk lack any one of the following characteristics of a controlling financial interest:
|
|
1.
|
The power, through voting rights or similar rights to direct the activities of an entity that most significantly impact that entity’s economic performance.
|
|
2.
|
The obligation to absorb the expected losses of the legal entity. Such an obligation does not exist if the shareholders/investors are directly or indirectly protected from losses or are guaranteed a return on their investment by the legal entity itself or by other parties involved with the legal entity.
|
32
|
3.
|
The right to receive expected residual returns of the legal entity. Such right is not considered to be present if the residual returns are capped by the legal entity's governing documents or by other arrangements with other variable interest holders or the legal entity itself.
|
On February 16, 2009, WFOE entered into an Original Manufacturer Agreement (the "Manufacturing Agreement") with Dalian Befut, pursuant to which (i) Dalian Befut is the exclusive manufacturer of cable and wire products for WFOE, and may not manufacture products for any other third party without the written consent of WFOE; (ii) WFOE provides all the raw materials and advance related costs to Dalian Befut, as well as provide the design requirements of the products to be manufactured; and (iii) in no event may Dalian Befut use the arrangements under the Manufacturing Agreement for commercial or noncommercial marketing or promotional activities in any form. In addition, on February 16, 2009, WFOE and Dalian Befut entered into (i) an Intellectual Property Rights License Agreement, pursuant to which WFOE shall be permitted to use the intellectual property rights such as trademark, patents and knowhow for the marketing and sale of the products (the “IP Agreement”); and (ii) a Non-competition Agreement, pursuant to which Dalian Befut shall not compete against WFOE (the “Noncompete Agreement”, together with the IP Agreement and Manufacturing Agreement, collectively, the “OEM Agreements”). Under the OEM Agreements, Dalian Befut can only manufacture products for WFOE and cannot compete with WFOE in the same or similar lines of business. Dalian Befut is a captive manufacturer with the sole business purpose of providing manufacturing services to WFOE and is solely dependent on the business provided by WFOE, its primary beneficiary. As WFOE controls all of the potential and future risks and benefits of Dalian Befut, WFOE has the power to significantly impact the economic performance of Dalian Befut. Furthermore, while Messrs. Hongbo Cao and Tingmin Li are the two controlling shareholders of Dalian Befut, collectively owning an aggregate of 90% of the equity interests in Dalian Befut, the Company believes that, due to the OEM Agreements, WFOE, instead of Messrs. Cao and Li, has the power to direct the activities of Dalian Befut to significantly impact the economic performance of Dalian Befut. Based on the aforementioned assessment, Dalian Befut is a VIE of the Company under ASC 810-10-15-14-B.1. above, and as such, is consolidated into the Company. Although the Company is only required to meet one criteria under ASC 810-10-15-14 in order to consolidate Dalian Befut, the Company believes that facts and circumstances exist that would allow it to meet certain other qualifying criteria set forth in ASC 810-10-15-14.
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
As a smaller reporting company, we are not required to provide this information.
Item 4.
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Controls and Procedures
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Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer reviewed and evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended. Based on their evaluation, in our Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 as originally filed with the SEC on February 14, 2011, our Chief Executive Officer and Chief Financial Officer each concluded that, as of December 31, 2010, our disclosure controls and procedures were effective.
However, in connection with the preparation of our responses to comments received from the SEC, we identified certain reporting errors and omissions in our previously issued financial statements. We subsequently determined that a restatement was required for our consolidated financial statements for the quarter ended December 31, 2010. As a result of the foregoing, management determined that a material weakness existed with respect to our financial reporting. This weakness was a result of our insufficient disclosure of certain required information by inexperienced staff, which required the restatement of our consolidated financial statements as of and for the quarter ended December 31, 2010.
As a result of the material weakness identified with respect to our financial reporting, our Chief Executive Officer and Chief Financial Officer have reevaluated our disclosure controls and procedures and have concluded that our disclosure controls and procedures were not effective as of December 31, 2010. As of the date of this amended report on Form 10-Q/A, we are undertaking steps to correct the aforementioned material weakness by:
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•
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Establishing policies and procedures of transaction level and type to improve our internal control environment;
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•
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Implementing a financial closing process check list including major book closure steps to perform consolidation and reviews; and
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|
•
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Recruiting qualified accounting professionals with sufficient US GAAP knowledge to enhance the quality of our financial reporting preparation.
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33
Changes in Internal Control Over Financial Reporting
In our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, our Chief Executive Officer and Chief Financial Officer concluded that under the framework set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our internal control over financial reporting was effective. However, due to the restatement of our financial statements for the year ended June 30, 2010, for the quarter ended September 30, 2010 and for the quarter ended December 31, 2010, as described above, our Chief Executive Officer and Chief Financial Officer reassessed that conclusion and determined that there existed a material weakness in our internal controls over financial reporting as of December 31, 2010. Management has determined that the design and operation of internal control over financial reporting that we had in place at December 31, 2010 was not effective to allow our management, employees and consultants, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely and reasonable basis. That material weakness was due to our short staffing of accounting professionals with sufficient knowledge of US GAAP and relevant disclosure requirements.
Because we were not aware of this material weakness until after the quarter ended March 31, 2011, there was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. As of the date of this amended report on Form 10-Q/A, we are undertaking the aforementioned steps to remediate the weakness in our internal controls over financial reporting,
PART II OTHER INFORMATION
Item 6.
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Exhibits
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The exhibits required by this item are set forth in the Exhibit Index attached hereto.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BEFUT INTERNATIONAL CO., LTD.
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||
Date: September 16, 2011
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By:
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/s/ Hongbo Cao
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Name: Hongbo Cao
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||
Title: President and Chief Executive Officer
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||
(principal executive officer)
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||
Date: September 16, 2011
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By:
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/s/ Mei Yu
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Name: Mei Yu
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||
Title: Chief Financial Officer
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||
(principal financial officer and principal accounting officer)
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35
EXHIBIT INDEX
No.
|
Description
|
|
31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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|
31.2
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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|
32.1
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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|
32.2
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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36