SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Amendment No. 2)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2010
¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _____________
Commission file number: 000-51336
BEFUT International Co., Ltd.
(Exact name of registrant as specified in its charter)
27th Floor, Liangjiu International Tower
5 Heyi Street
Dalian City, 116011
P. R. China
(Address of Principal Executive Offices) (Zip Code)
Registrant’s telephone number: (011)-86-411-83678755
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.001 Per Share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
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 report(s)), 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $585,556.04 as of December 31, 2009, based on the average bid and asked price $0.5075 of the Company’s common stock on such date as reported by the Over-the-Counter Bulletin Board. Shares of voting stock held by each executive officer and director of the registrant and each person who beneficially owns 10% or more of the registrant’s outstanding voting stock has been excluded from the calculation. This determination of affiliated status may not be conclusive for other purposes.
The number of outstanding shares of the registrant’s common stock on September 24, 2010 was 29,715,640.
Documents Incorporated by Reference: None.
This Amendment No. 2 to the Annual Report on Form 10-K (“Amendment No. 2”) of BEFUT International Co., Ltd. (the “Company”) amends the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2010, filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2010 (the “Original 10-K”), as amended by Amendment No. 1 on Form 10-K/A, filed with the SEC on September 19, 2011 (“Amendment No. 1”). We refer to the Original 10-K, as amended by Amendment No. 1, as the “2010 Form 10-K”. This Amendment No. 2 is being filed to amend the 2010 Form 10-K by:
Except as set forth above, this Amendment No. 2 is identical to the 2010 Form 10-K. This Amendment No. 2 does not reflect events occurring after the filing of the Original 10-K and no attempt has been made in this Amendment No. 2 to modify or update other disclosures as presented in the Original 10-K. Accordingly, this Amendment No. 2 should be read in conjunction with the Company’s filings with the SEC subsequent to the filing of the Original 10-K. Additionally, the Company has attached to this Amendment No. 2 updated certifications executed as of the date of this Amendment No. 2 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 this Amendment No. 2.
FORM 10-K/A ANNUAL REPORT
FISCAL YEAR ENDED JUNE 30, 2010
TABLE OF CONTENTS
Certain statements in this Report, and the documents incorporated by reference herein, 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 strategies, (c) anticipated trends in our industries, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend,” or the negative of these words or other variations on these words or comparable terminology. These statements may be found under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as in this Report generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors 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.
The 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 except to the extent as required by applicable law.
Unless otherwise noted, all currency figures in this filing are in U.S. dollars. References to "yuan" or "RMB" are to the Chinese yuan (also known as the renminbi). According to www.safe.gov.cn , the official website of the PRC State Administration of Foreign Exchange, as of June 30, 2010, US $1.00 = RMB 6.7909 yuan.
The "Company", "we," "us," "our," and the "Registrant" refer to (i) BEFUT International Co., Ltd., the public company incorporated in the state of Nevada (“BEFUT”), (ii) BEFUT Corporation, the direct subsidiary of BEFUT, a corporation incorporated in the State of Nevada (“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 organized under the laws of the People’s Republic of China (the “PRC”) that is wholly owned by Befut Hongkong; (vi) Dalian Befut Wire & Cable Manufacturing Co., Ltd. (“Dalian Befut”), a corporation organized under the laws of the PRC which is the captive manufacturing company to WFOE; (vii) Dalian Marine Cable Co., Ltd., a corporation organized under the laws of the PRC which is 86.6% owned by Dalian Befut (“Befut Marine”); (viii) Dalian Befut Zhong Xing Switch Co., Ltd (“Befut Zhong Xing”), a corporation organized under the laws of the PRC which is 73.5% owned by Dalian Befut, and (ix) Dalian Yuansheng Technology Co., Ltd. (“Dalian Yuansheng”), a corporation organized under the laws of the PRC which is 93.3% owned by Dalian Befut.
ITEM 1. BUSINESS
We believe that we are one of the most competitive manufacturers of specialty cable products in northeastern China. Our cable products consist of (i) traditional electric power system cable and (ii) an assortment of specialty cable, including marine cable, mining specialty cable and, petrochemical cable. We also have developed the capability to produce other types of specialty cable such as carbon fiber composite cable, submarine cable and certain “new energy” cable, including cable for wind and solar energy. Our traditional cable products are primarily focused on serving end-user applications in the construction, electrical utility, and transportation (including automotive) markets. Our specialty cable products are used primarily in ship building, nuclear power plants, mining and petrochemical operations. We also have the technical capability for large-scale production of marine cable for use in electronic conveyance, controls and lighting on a variety of ships, a segment of the market with significantly higher profit margin potential that we intend to further pursue. Additionally, we recently began developing and producing switch appliances, including high and low voltage distribution cabinet switches and crane electronic control switches, which products compliment our cable product offerings.
We are headquartered in the city of Dalian, a large trading and financial center in northeastern China located at the tip of China’s Liaodong Peninsula. Our sales and marketing activities are conducted through our 14 branch offices located throughout China. Currently, our products are sold through our sales force to over 500 Chinese customers.
We are in the process of constructing a new manufacturing facility located in Dalian’s Changxing Island Harbor Industrial Zone. In December 2009, we completed Phase I of this project (the “Phase I Changxing Facility”) which consists of 45,477 square meters of floor space with a maximum production capacity of approximately 4,000 km of cable per year. This facility commenced production in April 2010 and currently has a production capacity of 2,400 km of cable per year. We estimate that Phase II of this project (the “Phase II Changxing Facility”) will add 89,684 square meters of additional floor space with a maximum production capacity of approximately 6,667 km of cable per year.
We also have a high-quality customer base, including Shougang Group, China Huaneng Group, China National Petroleum Corporation, China Shipbuilding Industry Corporation, China Ocean Shipping (Group) Company, which enables us to maintain and strengthen our competitive position in the wire and cable industry.
In July 2010 , Dalian Befut increased its equity interests in Befut Zhong Xing from 70% to 73.5% by contributing RMB 14 million ($2.06 million) to the registered capital of Befut Zhong Xing. Befut Zhong Xing develops and manufactures switch appliances, including high-low-voltage distribution cabinet switches and crane electronic control switches.
On July 23, 2010, Dalian Befut acquired 60% of equity interests of Dalian Yuansheng for $88,235 (the registered capital value of such equity interests) from Mr. Chengnian Yan. Dalian Befut also increased the Dalian Yuansheng’s registered capital by RMB 5 million ($735,294), thereby increasing Dalian Befut’s total equity interest to 93.3%. Dalian Yuansheng is engaged in the research and development of carbon fiber composite cable and other specialty cable. One of the principal shareholders of Dalian Yuansheng holds a patent for carbon fiber composite cable which will be transferred to Dalian Yuansheng.
Our products are categorized into three types: traditional cable, specialty cable and switch appliances. The following table provides information about our principal products:
We believe that the specialty cable sector is one of the most profitable sectors in the wire and cable industry with significantly higher gross margins of up to 60%. Specialty cable is typically produced for specific uses in harsh conditions that are unsuitable for other traditional cable.
With the completion of the Phase I Changxing Facility, we plan to enhance the development of marine cable (one of our specialty cable products), including submerged cable used to transfer data and telecommunications and marine cable used in shipbuilding. We are also in the process of developing carbon fiber composite cable, which is a new type of cable composed of carbon fiber and a metallic conductor. Carbon fiber is one of the most advanced cable products in China and has the potential for higher gross margins than other types of specialty cable. Carbon fiber composite cable is lighter than pure metal cable and has better electrical conductivity. We believe it can be useful in upgrading China’s power grid. We also believe the use of carbon fiber composite cable could alleviate the pressure on cables caused by natural disasters, including heavy snowfall. By January 2011, we expect to be one of the few manufacturers in China producing carbon fiber composite cable. With this new technology, we expect that carbon fiber composite cable will be one of our primary areas of our focus for growth in the next few years. Additionally, we are developing cable for “new energy” sources such as wind and solar energy, which we believe will also be cable products with high-margin potential.
We, through Dalian Befut, currently hold 7 patents and have 22 pending patent applications with respect to our cable products, and we are the only company in the PRC cable and wire industry holding a patent for watertight cable. The patent for carbon fiber composite cable is currently owned by one of the principal shareholders of Dalian Yuansheng, Dalian Befut’s recently acquired subsidiary, and will be transferred to Dalian Yuansheng.
The following table shows the sales of our products in our three main categories (traditional cable, specialty cable and switch appliances) as a percentage of total sales for the fiscal years ended June 30, 2010, 2009 and 2008:
The following pictures illustrate the physical structure of our traditional cable and marine cable:
All of our products are manufactured in the PRC by Dalian Befut, our captive manufacturer, pursuant to agreements between WFOE, our wholly-owned subsidiary in the PRC, and Dalian Befut executed on February 16, 2009. These agreements include an Original Equipment Manufacturer Agreement, an Intellectual Property License Agreement and a Non-competition Agreement (collectively, the “OEM Agreements”).
Pursuant to the Original Equipment Manufacturer Agreement, (i) Dalian Befut is required to manufacture products according to WFOE’s specifications and may not manufacture products for any person or entity other than WFOE; (ii) WFOE is responsible for supplying all raw materials to Dalian Befut and the design specifications for products to be manufactured; (iii) WFOE purchases the manufactured products from Dalian Befut at a price not greater than the cost of such manufactured products; and (iv) WFOE has an exclusive right to purchase some or all of the assets and/or equity of Dalian Befut at a mutually agreed price to the extent permitted by PRC law. The Original Manufacturing Agreement has an indefinite term and may only be terminated in the event of certain breaches of the agreement.
Pursuant to the Intellectual Property License Agreement, WFOE is permitted to use certain of Dalian Befut’s intellectual property rights, including trademarks, patents and know-how, for the marketing and sale of the products manufactured by Dalian Befut. Additionally, Dalian Befut agreed not to compete with WFOE pursuant to the Non-competition Agreement.
As a result of the OEM Agreements, Dalian Befut ceased to be an independent operating company and became contractually bound to manufacture products solely for our benefit and sell such products to us at cost. Throughout the remainder of this report, we use the term “captive manufacturer” to describe our relationship with Dalian Befut.
Changxing Island Manufacturing Facilities
We are in the process of constructing a new manufacturing facility located in Dalian’s Changxing Island Harbor Industrial Zone, which is approximately 120 kilometers from Dalian. Construction of the Phase I Changxing Facility began in 2006 and was completed in December 2009. We relocated all of our cable manufacturing operations to the Phase I Changxing Facility and commenced operations and product manufacturing at this facility in April 2010. The Phase I Changxing Facility boasts 45,477 square meters of floor space, consisting of 24,964 square meters of production space, 5,326 square meters of warehouse space, 8,264 square meters of office space, and 6,923 square meters of supporting facilities space. The Phase I Changxing Facility has over 70 sets of advanced wiring equipment, 20 of which are newly purchased sets. The Phase I Changxing Facility currently has a production capacity of 2,400 km of cable per year, which is three times the amount we were able to produce at our old manufacturing facility. The Phase I Changxing Facility is estimated to reach its full production capacity of approximately 4,000 km of cable per year by June 30, 2013.
We have completed the design plan for the Phase II Changxing Facility. Construction of the Phase II Changxing Facility is planned to commence after the Phase I Changxing Facility reaches its maximum production capacity. The Phase II Changxing Facility will be used primarily for the development and production of specialty cable which corresponds to our plan to focus our business on specialty cable over the next five years. After completion of the Phase II Changxing Facility, our total production capacity is expected to reach approximately 10,667 km of cable per year.
Previously, our cable manufacturing was conducted at a manufacturing facility located in the city of Dalian with a production capacity of approximately 800 km of cable per year. We now use our old manufacturing facility located in Dalian for the production of switch appliances.
We, through Dalian Befut, utilize sophisticated manufacturing processes and know-how, which enable us to produce a wide array of traditional and specialty cable. Due to our research and development efforts, we believe we are a leader in the material configuration and manufacturing processes for specialty cable.
The following illustration shows the basic steps in the manufacturing process of our cable products:
Raw Materials and Suppliers
Our primary raw materials are copper wire, insulation materials and protective materials. Our main suppliers for copper wire for the fiscal year ended June 30, 2010 were Tianjin Huabei Wire & Cable Manufacturing, Shenyang Tailida Copper Co., Ltd. and Shanyang Metal Co., Ltd. Our main suppliers for insulation and protective materials in the same period were Yingkou Genorio Industrial Co., Ltd., Jiangsu Right Plastic Co., Ltd., Huayi Plastic Co., Ltd. and Tianjin Commercial Import & Export Co., Ltd.
Our principal raw materials are generally available in the market and we have not experienced any raw material shortages in the past. Because of the general availability of these raw materials, we do not believe that we will experience any raw material shortages in the foreseeable future; however, changes in the price of copper, which has a history of volatility, directly affect the prices of our products and may influence the demand for our products. Nonetheless, because we seek to pass the cost of our raw materials (mainly copper wire) on to our customers, we believe our actual margin rate will not be significantly affected even if the price of raw materials increases.
The following is a list of our top suppliers expressed as a percentage of the U.S. dollar amount of total raw materials purchased in the fiscal year ended June 30, 2010:
Distribution, Sales Network and Customers
We sell our products through a team of 24 full-time sales personnel located in Dalian and another 20 full-time sales personnel located at 14 sales branch offices in major cities throughout China, including in Beijing, Shenyang, Tianjin, Jilin, Harbin and Benxi. In addition, we have contracted with five distributors to sell our products. Normally, the contracts we have with the distributors are for one year and are non-exclusive. In the year ended June 30, 2010, most of our sales were generated by our full-time sales personnel, who are responsible for maintaining business relationships with our customers.
As of June 30, 2010, we had a total of approximately 500 customers located throughout China.
In the year ended June 30, 2010, our five largest customers accounted for approximately 45.93% of our total sales, among which Dalian Huasheng Electric Installation Corporation was the largest, accounting for 10.03% of our total revenue. These key customers and their respective percentages of our total sales are listed below:
Top 5 Customers for the Fiscal Year Ended June 30, 2010
In light of our increased production capacity due to the completion of the Phase I Changxing Facility, in April 2010, we adjusted our sales strategy to increase our focus on larger customers that desire higher volumes of our products. As a result, in fiscal 2010 we experienced increased total revenue, much of which was derived from sales to these larger customers. This shift in sales strategy resulted in a change in our top five customers in fiscal 2010 as compared to fiscal 2009.
Our objective is to become the leading manufacturer of specialty cable products in China. We intend to achieve this objective by pursuing a growth strategy that includes:
Increase focus on high-margin specialty products. To meet the growing demand for specialty cable products, we plan to increase the production of high-margin specialty cable from approximately 58% to approximately 67% of our total production volume over the next three to five years. In addition, we plan to produce submarine cable, carbon fiber composite cable and other high-end cable products with high profit margins, increasing our sales and financial performance.
Our sales generated from specialty cable in our fourth fiscal quarter ended June 30, 2010 accounted for 58.6% of our total sales revenue in that quarter. Additionally, current economic policy in China encourages marine construction, mining, petrochemical and new energy industries. Based on these factors, in our fiscal year ending June 30, 2011 we plan to continue devoting more resources to developing, marketing and selling petrochemical and marine cable and investing in our new high-margin product, carbon fiber composite cable.
We currently possess the technology and know-how to produce these new cable products. With regard to submarine cable, however, we likely will be required to make significant additional expenditures to execute this element of our strategy. Such expenditures may include acquisition of land rights close to the coast, construction of a separate production facility on such site and hiring of additional personnel. Such expenditures will require us to obtain additional financing, the success of which cannot be assured.
Expand production capacity . In order to accommodate the increasing demand for our products, we intend to expand our current production capacity of 2,400 km of cable per year to 4,000 km of cable per year by maximizing the production capacity from our recently completed Phase I Changxing Facility. The construction of the Phase II Changxing Facility will further increase our production capacity. An increase in production capacity will allow us to produce and sell a higher quantity of products while lowering our manufacturing costs due to economies of scale. The Phase II Changxing Facility will expand our production capacity for specialty cable.
Expand into new markets. We plan to enter into new markets, such as the submarine cable market and the “new energy” cable market, which includes the production of wind and solar energy cable. We also recently entered the switch appliance market in the fiscal year ended June 30, 2010. Because switch appliances are not our primary business, this product only accounts for 2%-3% of our total revenue. However, we anticipate that the sales of switch appliances will to increase to 5% of our total revenue in the year ending June 30, 2011.
Increase sales and broaden customer base . We plan to continue to provide high quality cable products to our existing customer base and use our existing customer contacts, industry reputation and experienced sales team to increase our sales of traditional and specialty cable products. In the short-term, we will continue our sales and marketing efforts to increase our sales of our traditional cable products, while our long-term strategy is to concentrate on developing and expanding our sales and customer base for our specialty cable products.
Pursue strategic acquisitions. We will continue to actively consider possible investments in or acquisitions of companies that complement our business strategies and expand our product offerings. As a result of the fragmented nature of the cable and wire industry in China, we believe attractive potential acquisition targets may present themselves. We plan to consider strategic acquisitions as a means to accelerate our growth, increase our sales and expand our market share.
Demand for our traditional cable is generally lower from December to March than from April to November primarily due to the Chinese new year and spring festival which occurs from January to March. Sales of our specialty cable products have not experienced seasonal trends. We believe that our expanding focus on specialty cable products will significantly reduce the impact of seasonality on our overall business.
Research and Development
For the fiscal years ended June 30, 2010 and 2009, we spent $880,944 and $89,179 on research and development, respectively. We significantly increased our budget for research and development in fiscal 2010 compared to fiscal 2009, all of which was spent on the research and development of new technologies which are the subject of 22 pending patent applications (including fees associated with the application process). We maintain an internal research and development department staffed with 40 senior technical employees consisting of 31 full-time employees and 9 part-time employees.
Our research and development team is led by Mr. Guoxiang Liu, who was formerly employed by the Shenyang Electric Cable Factory, a state owned enterprise and formerly one of Asia’s largest cable companies. Due to our research and development efforts, we believe we are a leader in the material configuration and manufacturing process of specialty cable. As an ancillary method of our research and development, we also have a research cooperation relationship with Dalian University of Technology to share their technology and research achievements. The general framework for our cooperative partnership with the Dalian University of Technology is set forth in an agreement dated July 10, 2009 (the “Cooperation Agreement”). Pursuant to the Cooperation Agreement, which has a three year term and may be terminated by either party at any time, we agree to collaborate with the Dalian University of Technology on a project basis. We have no financial obligations under the Cooperation Agreement but may fund projects at our discretion.
We plan to continue differentiating ourselves from our competition by focusing our activities on developing the most advanced products in the cable and wire industry.
Trademarks. Dalian Befut is the registered holder of the following trademark, which is registered with the Trademark Office of the State Administration for Industry and Commerce in China.
The registered scope of use of this trademark includes wire products such as wire cable, electric wire, power materials (electric wire and wire cable), and electric resisters for copper wire. The registered term of the trademark expires on September 6, 2011. Under the PRC Trademark Law, registered trademarks are granted for a term of ten years and are renewable for additional terms. Each renewal is limited to a ten-year term and the registrant must continue to use the trademark and apply for a renewal within six months prior to the expiration of the current term.
In 2008, the trademark above was recognized as a “Famous Trademark” in China through a judicial procedure pursuant to Rules on Famous Trademark Recognition and Protection promulgated by the PRC National Industrial and Commercial Bureau. A Famous Trademark in China entitles the owner of the mark to stronger protection as compared to a general trademark. For example, a holder of a Famous Trademark may prohibit others from using the same or similar mark not only on the same or similar products but also on products in other industries if the use of such mark would cause confusion or be misleading to a reasonable consumer. In addition, in a trademark dispute adjudication, a Famous Trademark itself provides evidence of influence on consumers. In Dalian, there are only ten Famous Trademarks, one of which is our mark.
Patents . Dalian Befut has seven registered patents in China. The following table provides information regarding each patent.
In addition to the registered patents, Dalian Befut has pending applications for 22 additional patents as set forth in the table below.
Under the PRC Patent Law, a patent is valid for a term of twenty years in the case of an invention and a term of ten years in the case of utility models and designs. Our pending patents are all utility models and will be entitled to ten years of protection. Any use of a patent without consent or a proper license from the patent owner constitutes an infringement of patent rights. We cannot assure you that any patent applications filed by us will be approved in the future.
With respect to intellectual property rights such as trademarks and patents as described above and know-how for the marketing and sale of the products manufactured by Dalian Befut, WFOE and Dalian Befut have entered into an Intellectual Property License Agreement, pursuant to which, WFOE is permitted to use Dalian Befut’s trademarks, patents (except newly issued patents not existing as of the date of the agreement) and know-how for nominal consideration. If and when any of the above patent applications are granted, we intend to either enter into a similar Intellectual Property License Agreement between WFOE and Dalian Befut or arrange for the transfer such patents from Dalian Befut to WFOE.
Currently, there are approximately 7,000 manufacturers in China producing a variety of types of cable and wire. Among these manufacturers, we estimate that approximately 2,000 manufacturers have the capability to produce specialty cable, approximately 40 of such manufacturers have the capability to produce nuclear cable and approximately 20 have the capability to produce marine cable. Unlike most other competitors, we are capable of producing both nuclear cable and marine cable. In addition, by January 2011, we expect to become one of the few manufacturers in China producing carbon fiber composite cable.
Our competitors include manufacturers that have the ability to conduct comprehensive cable and wire production, such as Far East Cable Co., Limited (“Far East”), Shangshang Cable Co., Ltd., as well as manufacturers that can produce specialty cable, such as Yangzhou Marine Cable Manufacturing Factory (“Yangzhou Marine”). Far East is our largest competitor in the sector of traditional electrical cable and wire and is a leader in terms of market share. We believe our competitive advantage over Far East is in specialty cable production, a segment in which we have more qualification certificates and market share. In terms of specialty cable, Yangzhou Marine is our major competitor. It entered into this market earlier than we did and currently has a strong competitive advantage on qualification certificates and market share. However, Yangzhou Marine's primary market is mostly in the adjacent provinces, such as Jiangsu and Zhejiang, areas in which we have not focused our sales and marketing efforts.
We believe we have the following competitive advantages:
We have obtained qualifications in specialty cable production and we are a nationally-designated enterprise for coal mining and mechanical products. Additionally, we have obtained classification society certifications from the China Classification Society, American Bureau of Shipping, Germanischer Lloyd, Nippon Kaiji Kyokai and Korean Register of Shipping for our marine cable. We have also received a MIL-Spec Quality Management System certification. In the year ended June 30, 2010, we became one of 29 designated suppliers of China National Petroleum Corporation, one of the largest companies in the world with very strict standards of selecting cable and wire suppliers, further evidencing the quality of our cable products.
We are subject to environmental regulations that are generally applicable to manufacturing companies in the PRC. For example, we obtained necessary approvals for our new manufacturing facilities. We are also subject to periodic inspection by environmental regulators and must follow specific procedures in some of our processes. We have not violated environmental regulations or approved practices.
We currently have 208 employees in total, of whom 162 are full-time and 46 are part-time.
We are subject to the recent PRC State Administration of Foreign Exchange (“SAFE”) regulations regarding offshore financing activities by PRC residents. SAFE issued a public notice in October 2005 requiring PRC domestic residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” The PRC domestic residents that were former shareholders of the WFOE fully complied with the SAFE regulations and have duly registered with the SAFE in accordance with the public notice.
Dalian Befut’s production facilities maintain an ISO 9001 Quality Management System.
According to The Rule Regarding the Administration on Compulsory Products Certification promulgated by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC on December 3, 2001 and effective May 1, 2002, products that impact health and safety of human beings, life and health of animals and plants and environmental protection and public safety that are listed in the Index of the PRC Compulsory Production Certification (the “Index”) are subject to the universally applicable national standards, technical rules and implementation procedures. China Compulsory Certification (“CCC”) is a mandatory requirement for the production, distribution and exportation of any of the products that are listed in the Index. Certain of our cable and wire products are subject to such certification and we have maintained effective CCC status on those products accordingly.
In 2006, we obtained a license from the Dalian customs bureau for importing and exporting cable, wire and power equipment. We renewed this license in July 2009 and the extended expiration date is July 20, 2012.
Corporate History and Structure
We are a holding company and conduct substantially all of our production, marketing, finance, research and development, and administrative activities through our indirect subsidiaries and captive manufacturing entity located in the PRC. We were incorporated in the State of Nevada under the name “Frezer, Inc.” on May 2, 2005. On June 18, 2009, we changed our name to “BEFUT International Co., Ltd.” and effectuated a 1-for-4.07 reverse stock split of our outstanding shares of common stock. As a result, our ticker symbol was changed to BFTI.OB. BEFUT International Co. Limited, a British Virgin Islands company (“Befut BVI”), is our majority shareholder and owns approximately 94% of the issued and outstanding common stock of the Company.
On March 13, 2009, we entered into a Share Exchange Agreement with Befut Nevada and Befut BVI pursuant to which Befut BVI transferred to us all of the outstanding shares of common stock of Befut Nevada in exchange for (i) the issuance to Befut BVI of an aggregate of 117,768,300 or 98.3% of our then outstanding shares of common stock, and (ii) the cancellation of an aggregate of 2,176,170 shares of our common stock then owned by Befut Nevada (the “Share Exchange”). Befut Nevada had acquired such shares from three individuals for an aggregate purchase price of $370,000 pursuant to the terms of a Stock Purchase Agreement dated as of March 2, 2009.
Simultaneously with the Share Exchange, the Company consummated a private placement of 15% convertible promissory notes and warrants to purchase common stock for gross proceeds of $500,000. As of the date of this report, such convertible notes are no longer outstanding.
As a result of the Share Exchange, Befut Nevada became our wholly-owned subsidiary. Befut Hongkong is a wholly-owned subsidiary of Befut Nevada, and WFOE is a wholly owned subsidiary of Befut Hongkong. Befut BVI remains our largest shareholder, owning 94.0% of our outstanding shares.
We conduct our operations through WFOE and Dalian Befut, a captive manufacturing entity of WFOE. Dalian Befut was incorporated on June 13, 2002 under the laws of the PRC, and is currently owned by eight individuals residents of the PRC. Mr. Hongbo Cao, our chairman, president and chief executive officer, and Mr. Tingmin Li are the largest shareholders of Dalian Befut, owning an aggregate of 94.6% of its equity interests. For a discussion of our contractual manufacturing relationship with Dalian Befut, see the section entitled “Business – Manufacturing Process – OEM Agreements.”
Befut Marine is a subsidiary of Dalian Befut incorporated on April 14, 2006. Befut Marine’s current shareholders are Dalian Befut, Ms. Lin Li , Mr. Hongbo Cao and Mr. Fansheng Li, each of whom own 86.6%, 5.0%, 5.0% and 3.4% of its equity interests, respectively. Befut Marine conducts all of our production and sales of marine cable.
Befut Zhong Xing is a subsidiary of Dalian Befut incorporated on July 1, 2009. Befut Zhong Xing’s current shareholders are Dalian Befut and Mr. Chengnian Yan, each of whom own 73.5% and 26.5% of its equity interests, respectively. Befut Zhong Xing manufactures switch appliances, including high-low-voltage distribution cabinet switches and crane electronic control switches.
Dalian Yuansheng is a recently acquired subsidiary of Dalian Befut incorporated on June 3, 2009. Dalian Yuansheng’s current shareholders are Dalian Befut and Mr. Xianjun Cheng, each of whom own 93.3% and 6.7% of its equity interests, respectively. Dalian Yuansheng is engaged in the research and development of carbon fiber composite and other specialty cable.
Our corporate organizational chart is set forth below.
* WFOE does not have equity ownership in Dalian Befut. Dalian Befut is a captive manufacturer of WFOE pursuant to the OEM Agreements described in Item 1 – Business.
ITEM 1A. RISK FACTORS
An investment in our common stock involves a high degree of risk. You should carefully consider the following information about these risks, together with the other information contained in this Report before investing in our common stock. If any of the events anticipated by the risks described below occur, our results of operations and financial condition could be adversely affected which could result in a decline in the market price of our common stock, causing you to lose all or part of your investment.
Risks Related to our Business
Adverse capital and credit market conditions may significantly affect our ability to meet liquidity needs, access to capital and cost of capital.
The capital and credit markets may experience extreme volatility and disruption from time to time, including, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. Adverse market conditions may limit our ability to replace, in a timely manner, maturing liabilities and access the capital necessary to operate and grow our business. As such, we may be forced to delay raising capital or bear an unattractive cost of capital which could decrease our profitability and significantly reduce our financial flexibility. Demand for our products is vulnerable to economic downturns. The worsening of economic conditions could result in a decrease in or cancellation of orders for our products. We are unable to predict the duration and severity of any disruption in financial markets and global adverse economic conditions and the effect such events might have on our business. Our results of operations, financial condition, cash flows and capital position could be materially adversely affected by disruptions in the financial markets. Further, any decreased collectability of accounts receivable or early termination of sales contracts due to the current deterioration in economic conditions could negatively impact our results of operations.
Quarterly operating results may fluctuate due to factors beyond our control, including customer demand and raw materials pricing.
Our quarterly results of operations may fluctuate as a result of a number of factors, including fluctuation in the demand for our products and changes in the price of copper, which directly affect the prices of our products and may influence demand. Quarter-to-quarter comparisons of results of operations have been and will be impacted by the volume of such orders and shipments. In addition, our operating results each quarter could be adversely affected by the following factors, among others, such as variations in the mix of product sales, price changes in response to competitive factors, increases in raw material costs and increases in utility costs (particularly electricity). Demand for our traditional cable products are subject to seasonality factors which can affect our quarter to quarter results as well.
Fluctuating copper prices impact our business and operating results.
Copper is the principal raw material used in the manufacture of our products. The copper industry is highly volatile and cyclical in nature. Copper prices, which have increased over the past several years followed by more recent sharp declines, have varied significantly and may vary significantly in the future. This affects our business both positively and negatively, as higher copper prices generate higher sales for us since we pass the incremental costs onto our customers, while lower copper prices will reduce the sales price of our products. The price of copper is influenced by factors including general economic conditions, industry capacity utilization, import duties and other trade restrictions. We cannot predict copper prices in the future or the effect of fluctuations in the costs of copper on our future operating results. In accordance with customary practice in our industry, we seek to mitigate the impact of changing raw material prices by passing price increases and decreases onto our customers by adjusting our prices to reflect changes in raw material prices. We may not be able to adjust our product prices rapidly enough in the short-term to recover the costs of increases in raw materials. Our future profitability may be adversely affected to the extent we are unable to pass on higher raw material costs to our customers.
We face substantial competition in our business and our failure to compete effectively may adversely affect our ability to generate revenue.
The wire and cable industry in China is competitive and highly fragmented with more than 7,000 companies. The principal elements of competition in the market are, in our opinion, pricing, payment terms, product availability and quality. While we believe that we have attained a competitive position with respect to all of these factors, our major competitors such as Far East Cable Co., Limited and Yangzhou Marine Cable Factory may have substantially greater resources than us and may be better able to successfully endure downturns in our industry or primary market segments. In periods of reduced demand for our products, we reduce our selling prices to maintain or increase market share or maintain selling prices, which may result in loss of market share. Under either situation, we would experience a reduction in our sales and overall profitability. In addition, we cannot assure you that additional competitors will not enter our markets, or that we will be able to compete successfully against existing or new competition.
We may not be able to effectively control and manage our growth.
If our business and primary markets, including shipbuilding, nuclear power and mining, continue to grow and develop as we expect, it will be necessary for us to finance and manage expansion in an orderly fashion. We may face challenges in managing the production and sale of expanding product offerings and in integrating acquired businesses with our own. Such events will increase demands on our existing management and facilities. Failure to manage this growth and expansion could interrupt or adversely affect our operations, cause production backlogs, longer product development time frames and administrative inefficiencies.
In the past several years we have derived a significant portion of our revenues from a small group of customers. If we were to become dependent again upon a few customers, such dependency could negatively impact our business, operating results and financial condition.
Previously, our customer base has been highly concentrated. For the year ended June 30, 2010 and 2009, our five largest customers accounted for 46% and 45% of our total sales, respectively, and the largest customer accounted for approximately 10.0% and 19.5% of our total sales in such periods, respectively. As our customer base may change from year-to-year, during such years that the customer base is highly concentrated, the loss of, or reduction of our sales to, any of such major customers could have a material adverse effect on our business, operating results and financial condition. Moreover, our success will depend in part upon our ability to obtain orders from new customers, as well as the financial condition and success of our customers and general economic conditions.
Shortages or disruptions in the availability of raw materials, especially copper, could have a material adverse effect on our business.
Copper, protective materials and insulation materials are our principal raw materials used in the manufacture of our cable products. Copper, our principal raw material, accounted for approximately 76.2% of our raw material purchases during the fiscal year ended June 30, 2010. We expect that copper will continue to account for a significant portion of our raw material purchases in the future. The price of raw materials fluctuate because of general economic conditions, global supply and demand and other factors causing monthly variations in the costs of our raw materials purchases. These macro-economic factors, together with labor and other business interruptions experienced by certain raw material suppliers, have contributed to periodic shortages in the supply of raw materials to other industry participants. Likewise, we could suffer shortages in the future, although we have do not expect shortages of any material nature in the foreseeable future. If we are unable to procure adequate supplies of raw material to meet our future production needs and customer demand, shortages could result in a material loss of customers and revenues and adversely impact our results of operations. In addition, supply shortages or disruptions or the loss of key suppliers may cause us to procure our raw materials from less cost effective sources and may have a material adverse affect on our business, revenues and results of operations.
We depend on a few suppliers for a significant portion of our principal raw materials and we do not have any long-term supply contracts with our raw materials suppliers. Interruptions of production at our key suppliers may affect our results of operations and financial performance.
We rely on a limited number of suppliers for most of the raw materials we use. During the fiscal year ended June 30, 2010, our purchases from our five largest suppliers of raw materials represented approximately 77% of our total raw material purchases. Purchases from our five largest suppliers of raw materials were approximately 62% and 69% in 2009 and 2008, respectively. Interruptions or shortages of supplies from our key suppliers of raw materials could disrupt production or impact our ability to increase production and sales. We do not have long-term or volume purchase agreements with our suppliers. Although there is a large pool of suppliers available to provide our raw materials, including copper, our principal raw material, we may have limited options in the short-term for alternative supply if our existing suppliers fail for any reason, including their business failure or financial difficulties, to continue the supply of materials or components. Moreover, identifying and accessing alternative sources may increase our costs. Interruptions at our key suppliers could negatively impact our results of operations, financial performance and the price of our common stock.
Due to increased volatility of raw material prices, the timing lag between the raw material purchase and product pricing can negatively impact our profitability.
Volatility in the prices of raw materials, among other factors, may adversely impact our ability to accurately forecast demand and may have a material adverse impact on our results of operations. For example, our manufacturing activities are determined, and raw materials purchases are scheduled, upon forecasted demand while sales prices are determined at the time of order placement, subject to adjustment at fulfillment. The lag between the point when raw materials are acquired in advance and the point when products are actually priced may impact us both positively and negatively, resulting in increased or decreased profitability. In addition, we routinely maintain a certain level of finished goods inventories to meet near term expected demand. Pricing for the sale of these inventories is generally based on current raw material prices. Rapid declines in the price of raw materials may result in our inventories being carried at costs in excess of net realizable value and may have an adverse effect on our results of operations and the price of our common stock.
If we fail to accurately project market demand for our products, our business expansion plans could be jeopardized and our business, financial condition and results of operations will be adversely affected.
To increase our production capacity, especially for specialty cable products, we are constructing a new manufacturing facility in the industrial zone of Changxing Island (the “Project”), located approximately 120 kilometers from Dalian. We recently completed Phase I of the Project comprising approximately 25,000 square meters of production facilities, which increased our annual production capacity from 800 km to 2,400 km. We plan to increase our production capacity of specialty cable products in Phase II of the Project, the construction of which will commence upon the full capacity utilization of Phase I expected by 2013. Our decision to increase our manufacturing capacity was based primarily on our goal to focus on specialty cables as our main business in the next five years. If actual customer orders are less than our projected market demand of specialty cables, we may suffer overcapacity problems and may have to leave capacity idle, which can reduce our overall profitability and hurt our financial condition and results of operations.
The cost of complying with new environmental laws in China may have a material adverse effect on our operations and financial condition.
As a manufacturer, we are subject to various Chinese environmental laws and regulations on air emission, waste water discharge, solid wastes and noise. Although we believe that our operations are in substantial compliance with current environmental laws and regulations, we may not be able to comply with these regulations at all times as the Chinese environmental legal regime is evolving and becoming more stringent. If the Chinese government imposes more stringent regulations in the future, we will have to incur additional and potentially substantial costs and expenses in order to comply with new regulations, which may negatively affect our results of operations. If we fail to comply with any of the present or future environmental regulations in any material aspects, we may suffer from negative publicity and may be required to pay substantial fines or suspend or even cease operations until compliance is achieved.
We do not maintain a reserve fund for warranty or defective products claims. Our costs could substantially increase if we experience a significant number of warranty claims.
We provide customers with warranties against technical defects in our products. The warranties require us to replace or repair defective components or refund the purchase price to the customer. We have not established any reserve funds for potential warranty claims since we have strict quality control procedures and, historically, have experienced few warranty claims for our products. If we experience an increase in warranty claims or if our repair and replacement costs associated with warranty claims increase significantly, it would have a material adverse effect on our financial condition and results of operations.
If we fail to adequately protect or enforce our intellectual property rights, we may be exposed to intellectual property infringement and the value of our intellectual property rights could diminish.
Our success, competitive position and future revenues will depend in part on our ability to obtain and maintain patent protection for our products, methods, processes and other technologies, to preserve our trade secrets, to prevent third parties from infringing on our proprietary rights and to operate without infringing the proprietary rights of third parties. Dalian Befut, our captive manufacturer, holds seven registered patents in the PRC and has 22 patents applications that are pending approval, which may take up to two years. However, we cannot assure you such patents will be issued, or that existing or future issued patents will be sufficient to provide us with meaningful protection or commercial advantage.
If we need to initiate litigation or administrative proceedings, such actions may be costly and may divert management attention as well as expend other resources which could otherwise have been devoted to our business. An adverse determination in any such litigation will impair our intellectual property rights and may harm our business, prospects and reputation. In addition, historically, implementation of PRC intellectual property-related laws has been lacking, primarily because of ambiguities in the PRC laws and difficulties in enforcement. Accordingly, intellectual property rights and confidentiality protections in China may not be as effective as in the United States or other countries, which increases the risk that we may not be able to adequately protect our intellectual property. Moreover, litigation may be necessary in the future to enforce our intellectual property rights. Future litigation could result in substantial costs and diversion of our management’s attention and resources, and could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations. Given the relative unpredictability of China’s legal system and potential difficulties enforcing a court judgment in China, there is no guarantee that we would be able to halt any unauthorized use of our intellectual property through litigation.
The occurrence of any acts of God, war, terrorist attacks and other emergencies which are beyond our control may have a material adverse effect on our business operations and financial condition .
Acts of God, war, terrorist attacks and other emergencies which are beyond our control may have a material adverse effect on the economy and infrastructure in the PRC and on the livelihood of the Chinese population. While we have property damage insurance, we do not carry business disruption insurance, which is not readily available in China. Any disruption of the operations in our factories would have a significant negative impact on our ability to manufacture and deliver products, which would cause a potential diminution in sales, the cancellation of orders, damage to our reputation and potential lawsuits.
We cannot give assurance that any acts of God such as floods, earthquakes, drought or any war, terrorist attack or other hostilities in any part of the PRC or even the world, potential or threatened, will not, directly or indirectly, have a material adverse effect on our business, financial condition and operating results.
If we are unable to design, manufacture, and market our products in a timely and efficient manner, we may not remain as competitive .
Most of our products are characterized by short product development cycles and target the unique requirements of our customers. Accordingly, we devote a substantial amount of resources to product development. To compete successfully, we must develop and offer new and/or improved products that are suitable to evolving customer needs. We may experience performance difficulties, which may result in delays, setbacks and cost overruns. Our inability to develop and offer new and/or improved products or to achieve customer acceptance of these products could limit our ability to compete in the market or to grow revenues at desired rates of growth.
If we cannot renew or extend our mandatory certifications, we will be unable to manufacture or sell some or all of our products, which would adversely affect our business, financial condition and results of operations.
According to The Rule Regarding the Administration on Compulsory Products Certification promulgated by the General Administration of Quality Supervision, Inspection and Quarantine of the PRC on December 3, 2001 and effective from May 1, 2002, products that impact health and safety of human beings, life and health of animals and plants and environmental protection and public safety that are listed in the Index of the PRC Compulsory Production Certification (the “Index”) are subject to applicable national standards, technical rules and implementation procedures. China Compulsory Certification (“CCC”) is a mandatory requirement for the production, distribution and exportation of any of the products that are listed in the Index. Certain of our cable and wire products are subject to such certification and we have maintained effective CCC status on those products accordingly.
We cannot assure you that such certificates can be obtained without delay, or can be obtained at all. If we cannot obtain the necessary renewal of our CCC status or new certificates for any of our new products that may be listed on the Index, we may be required to suspend or even cease operations, which would have a material adverse effect on our business and financial condition.
Our success depends on our management team and other key personnel, the loss of any of whom could disrupt our business operations.
We depend, to a large extent, on the abilities and participation of our current management team, but have a particular reliance upon Mr. Hongbo Cao, our CEO, President and Chairman of the Board of Directors, and Mr. Haiyang Lu, Secretary of the Company. The loss of the services of Mr. Cao or Mr. Lu, for any reason, may have a material adverse effect on our business and prospects. We cannot assure you that the services of Messrs. Cao and Lu will continue to be available to us, or that we will be able to find a suitable replacement for him. We do not carry key man life insurance for our key personnel.
The wire and cable industry is specialized and requires the employment of personnel with significant technical and operational experience in the industry. Accordingly, we must attract and retain qualified personnel in order to remain competitive. Our ability to effectively implement our business strategy will depend upon, among other factors, the successful recruitment and retention of additional management and other key personnel that have the necessary scientific, technical and operational skills and experience in the cable and wire industry. These individuals are difficult to find in the PRC and we may not be able to retain such skilled employees. If we are unable to hire individuals with the requisite experience we may not be able to produce enough products to optimize profits, research and development initiatives may be delayed and we may encounter disruptions in production and research which will negatively impact our financial condition, results of operations and share price.
If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results. As a result, current and potential investors could lose confidence in our financial reporting, which could harm our business and have an adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to annually furnish a report by our management on our internal control over financial reporting. Such report must contain, among other matters, an assessment by our principal executive officer and our principal financial officer on the effectiveness of our internal control over financial reporting, including a statement as to whether or not our internal control over financial reporting is effective as of the end of our fiscal year. This assessment must include disclosure of any material weakness in our internal control over financial reporting identified by management. Performing the system and process documentation and evaluation needed to comply with Section 404 is both costly and challenging. During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act of 2002 for compliance with the requirements of Section 404. In addition, if we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002.
Our inability to successfully integrate other businesses we acquire could have adverse consequences on our business.
An important element of our growth strategy is to invest in or acquire businesses that will expand our product offerings, customer and geographic markets. However, we may be unable to identify suitable investment or acquisition candidates or may be unable to make these investments or acquisitions on commercially reasonable terms, if at all. Future acquisitions may result in greater administrative burdens and operating costs. We cannot assure you that we will be able to manage or integrate acquired companies or businesses successfully. The process of integrating acquired businesses may be disruptive to our business and may cause an interruption of or a loss of momentum in our business as a result of the following factors, among others:
These disruptions and difficulties, if they occur, may cause us to fail to realize the cost savings, revenue enhancements and other benefits that we may expect from such acquisitions and may cause material adverse short- and long-term effects on our operating results and financial condition.
Risks Related to Doing Business in the PRC
Substantially all of our assets and operations are located in the PRC, and substantially all of our revenue is derived from sales of products in the PRC. Accordingly, our results of operations and financial position are subject to a significant degree to economic, political and legal risks in the PRC, including the following risks:
Changes in the policies of the PRC government could have a significant impact upon the business we may be able to conduct in the PRC and the profitability of such business.
The PRC’s economy is in a transition from a planned economy to a market-oriented economy subject to five-year and annual plans adopted by the government that set national economic development goals. Policies of the PRC government can have significant effects on economic conditions in China. The PRC government has confirmed that economic development will follow the model of a market economy, such as the United States. Under this direction, we believe that the PRC will continue to strengthen its economic and trading relationships with foreign countries and business development in the PRC will follow market forces. While we believe that this trend will continue, we cannot assure you that this will be the case. Our interests may be adversely affected by changes in policies by the PRC government, including:
Although the PRC government has been pursuing economic reform policies for more than two decades, we cannot assure you that the government will continue to pursue such policies or that such policies may not be significantly altered, especially in the event of a change in leadership, social or political disruption, or other circumstances affecting the PRC's political, economic and social life.
The PRC laws and regulations governing our current business operations are sometimes vague and uncertain. Any changes in such PRC laws and regulations may have a material and adverse effect on our business.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including, but not limited to, the laws and regulations governing our business, and the enforcement and performance of our arrangements with customers in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. We and any future subsidiaries are considered foreign persons or foreign funded enterprises under PRC laws, and as a result, we are required to comply with PRC laws and regulations. These laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our businesses.
We derive substantially all of our revenues from sales of our products in the PRC and any downturn in the Chinese economy could have a material adverse effect on our business and financial condition.
All of our business operations are conducted in the PRC and substantially all of our revenues are generated from sales in the PRC. We anticipate that revenues from sales of our products in the PRC will continue to represent a substantial proportion of our total revenues in the near future. Any significant decline in the condition of the PRC economy could, among other things, adversely affect consumer buying power and discourage consumption of our products, which in turn would have a material adverse effect on our revenues and profitability.
While the PRC economy has experienced rapid growth, it has been uneven among various sectors of the economy and in different geographical areas of the country. Rapid economic growth can lead to growth in the money supply and rising inflation. If prices for our products do not rise at a rate that is sufficient to fully absorb inflation-driven increases in our costs of supplies, our profitability can be adversely affected.
According to the International Monetary Fund, or IMF, the annual inflation rate in China in the last ten years ranged from a low of -1.4% in 1999 to a high of 5.9% in 2008. The IMF reported that the inflation rate in 2009 was -0.7%. These fluctuations and economic factors have led to the adoption by the Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. In order to control inflation in the past, the PRC government has imposed controls on bank credits, limits on loans for fixed assets and restrictions on state bank lending. The implementation of these and other similar policies can impede economic growth and thereby harm the market for our products.
Our subsidiaries are subject to restrictions on paying dividends and making other payments to us; as a result, we might therefore, be unable to pay dividends to you.
We are a holding company incorporated in the State of Nevada and do not have any assets or conduct any business operations other than our investments in our subsidiaries, Befut Nevada, Befut Hongkong and Befut Electric (Dalian) Co., Ltd. (“WFOE”). As a result of our holding company structure, we rely on WFOE, our subsidiary in the PRC, for payments of dividends, if any. PRC regulations currently permit payment of dividends only out of accumulated profits, as determined in accordance with PRC accounting standards and regulations. Our subsidiaries are also required to set aside a portion of its after-tax profits according to PRC accounting standards and regulations to fund certain reserve funds. We may experience difficulties such as lengthy processing time from the foreign exchange administrative bureau’s side and formality requirement on paperwork in completing the administrative procedures necessary to obtain and remit foreign currency. Furthermore, if any of our subsidiaries incurs debt on its own in the future, the instruments governing the debt may restrict its ability to pay dividends or make other payments. If we are unable to receive any profits from the operations of our subsidiaries in the PRC, we may be unable to pay dividends on our common stock.
Cash flows generated by Dalian Befut, our captive OEM manufacturer, generally stay at the Dalian Befut operating level as working capital. However, transfer of cash from Dalian Befut, as well as from our PRC subsidiaries, may be made up to BEFUT International Co., Ltd. (the “Company”) when necessary to meet the Company’s cash requirements, including, for example, for the satisfaction of any debt obligations or payment of cash dividends. There are generally no PRC laws or regulations that prohibit the transfer of cash balances from the Company’s subsidiaries or Dalian Befut to the Company, as long as such transfers are made in compliance with applicable PRC laws regarding, among other things, currency controls, tax and payment of dividends.
Capital outflow policies in the People’s Republic of China may hamper our ability to remit income to the United States and all our net assets are restricted assets subject to PRC’s capital outflow policies.
The PRC government imposes controls on the convertibility of Renminbi (RMB) into foreign currencies and, in certain cases, the remittance of currency outside of the PRC. We receive substantially all of our revenues in RMB. Under the existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from trade-related transactions, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange by complying with certain procedural requirements. However, approval from appropriate government authorities is required in those cases in which RMB to be converted into foreign currency and remitted out of the PRC to pay capital expenses, such as the repayment of bank loans denominated in foreign currencies. The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay dividends in foreign currencies to our shareholders.
Since all our consolidated subsidiaries, business operations, revenues and assets are located in China, approximately 100% of the total net assets of all our consolidated and non-consolidated subsidiaries are subject to Chinese government’s limitations on the transferability of RMB to foreign currencies and remittance of RMB out of China.
Although we do not import goods into or export goods out of the People’s Republic of China, fluctuation of the RMB may indirectly affect our financial condition by affecting the volume of cross-border money flow.
The value of the RMB fluctuates and is subject to changes in political and economic conditions in the People’s Republic of China. Since July 2005, the conversion of RMB into foreign currencies, including U.S. dollars, has been based on rates set by the People’s Bank of China which are set based upon the interbank foreign exchange market rates and current exchange rates of a basket of currencies on the world financial markets. As of June 30, 2010, the exchange rate between the RMB and the U.S. dollar was 6.7909 RMB to every one U.S. dollar.”
Governmental control of currency conversion may affect the value of your investment.
The PRC government imposes controls on the convertibility of Renminbi, or RMB, into foreign currencies and, in certain cases, the remittance of currency out of the PRC. We receive substantially all of our revenues in RMB, which is currently not a freely convertible currency. Shortages in the availability of foreign currency may restrict our ability to remit sufficient foreign currency to pay dividends, or otherwise satisfy foreign currency dominated obligations. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and expenditures from the transaction, can be made in foreign currencies without prior approval from the PRC State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from appropriate governmental authorities is required where RMB is to be converted into foreign currency and remitted out of PRC to pay capital expenses such as the repayment of bank loans denominated in foreign currencies.
The PRC government also may at its discretion restrict access in the future to foreign currencies for current account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currency to satisfy our currency demands, we may not be able to pay certain of our expenses as they come due.
The fluctuation of RMB may materially and adversely affect your investment.
The value of the RMB against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in the PRC's political and economic conditions. As we rely entirely on revenues earned in the PRC, any significant revaluation of RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into RMB for our operations, appreciation of the RMB against the U.S. dollar could lead the RMB equivalent of the U.S. dollars be reduced and therefore could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making dividend payments on our common stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of the RMB we convert would be reduced. In addition, the depreciation of significant U.S. dollar denominated assets could result in a charge to our income statement and a reduction in the value of these assets.
Recent PRC regulations relating to the establishment of offshore special purpose companies by PRC domestic residents may subject our PRC resident beneficial owners to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
SAFE issued a public notice in October 2005 requiring PRC domestic residents to register with the local SAFE branch before establishing or controlling any company outside of China for the purpose of capital financing with assets or equities of PRC companies, referred to in the notice as an “offshore special purpose company.” PRC domestic residents who are stockholders of offshore special purpose companies and have completed round trip investments but did not make foreign exchange registrations for overseas investments before November 1, 2005 were retroactively required to register with the local SAFE branch before March 31, 2006. PRC resident stockholders are also required to amend their registrations with the local SAFE in certain circumstances. Internal implementing guidelines issued by SAFE, which became public in June 2007 (known as Notice 106), expanded the reach of Circular 75. After consultation with China counsel, we do not believe that any of our PRC domestic resident stockholders are subject to the SAFE registration requirement, however, we cannot provide any assurances that all of our stockholders who are PRC residents will not be required to make or obtain any applicable registrations or approvals required by these SAFE regulations in the future. The failure or inability of our PRC resident stockholders to comply with the registration procedures set forth therein may subject us to fines and legal sanctions, restrict our cross-border investment activities, or limit our PRC subsidiaries’ ability to distribute dividends or obtain foreign-exchange-dominated loans to our company.
As it is uncertain how the SAFE regulations will be interpreted or implemented, we cannot predict how these regulations will affect our business operations or future strategy. For example, we may be subject to more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and foreign-currency-denominated borrowings, which may adversely affect our results of operations and financial condition. In addition, if we decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to obtain the necessary approvals or complete the necessary filings and registrations required by the SAFE regulations. This may restrict our ability to implement our acquisition strategy and could adversely affect our business and prospects.
The PRC’s labor law restricts our ability to reduce our workforce in the PRC in the event of an economic downturn and may increase our production costs.
In June 2007, the National People’s Congress of the PRC enacted new labor law legislation called the Labor Contract Law, which became effective on January 1, 2008. The legislation formalized workers’ rights concerning overtime hours, pensions, layoffs, employment contracts and the role of trade unions. Considered one of the strictest labor laws in the world, among other things, this new law provides for specific standards and procedures for the termination of an employment contract and places the burden of proof on the employer. In addition, the law requires the payment of a statutory severance pay upon the termination of an employment contract in most cases, including the case of the expiration of a fixed-term employment contract. Further, the law requires an employer to conclude an “employment contract without a fixed-term” with any employee who either has worked for the same employer for 10 consecutive years or more or has had two consecutive fixed-term contracts with the same employer. An “employment contract without a fixed term” can no longer be terminated on the ground of the expiration of the contract, although it can still be terminated pursuant to the standards and procedures set forth under the new law. Because of the lack of implementing rules for the new law and the precedents for the enforcement of such a law, the standards and procedures set forth under the law in relation to the termination of an employment contract have raised concerns among foreign investment enterprises in the PRC that such “employment contract without a fixed term” might in fact become a “lifetime, permanent employment contract.” Finally, under this law, downsizing of either more than 20 people or more than 10% of the workforce may occur only under specified circumstances, such as a restructuring undertaken pursuant to the PRC’s Enterprise Bankruptcy Law, or where a company suffers serious difficulties in production and/or business operations, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract not possible. To date, there has been very little guidance and precedents as to how such specified circumstances for downsizing will be interpreted and enforced by the relevant PRC authorities. All of our employees working for us exclusively within the PRC are covered by the new law and thus, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns may be curtailed. Accordingly, if we face future periods of decline in business activity generally or adverse economic periods specific to our business, this new law can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.
Recent PRC regulations relating to acquisitions of PRC companies by foreign entities may create regulatory uncertainties that could restrict or limit our ability to operate. Our failure to obtain the prior approval of the China Securities Regulatory Commission, or CSRC, may cause a material and adverse effect on our business, results of operations and financial conditions.
On August 8, 2006, six PRC regulatory agencies, the PRC Ministry of Commerce, or MOFCOM, the State Assets Supervision and Administration Commission, or SASAC, the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission, or CSRC, and the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or New M&A Rule, which became effective on September 8, 2006. The New M&A Rule purports, among other things, to require offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
On September 21, 2006, pursuant to the New M&A Rule and other PRC laws and regulations, the CSRC, in its official website, promulgated relevant guidance with respect to the issues of listing and trading of domestic enterprises’ securities on overseas stock exchanges, or the Administrative Permits, including a list of application materials with respect to the listing on overseas stock exchanges by SPVs.
There are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations, including the New M&A Rule. The interpretation and application of the New M&A Rule remain unclear, and we cannot assure you that the restructuring transactions pursuant to which Dalian Befut became the captive manufacturer of WFOE does not require approval from the CSRC, and if it does, what will be the penalties, if any, imposed as a result of our failure to obtain such approval. These uncertainties could inhibit our new business activities because the CSRC has declined to officially clarify the applicability of this New M&A Rule to us and the share exchange transaction consummated on March 13, 2009. If CSRC approval was required for us to consummate the share exchange, our failure to obtain or delay in obtaining the CSRC approval would subject us to sanctions imposed by the CSRC and other PRC regulatory agencies. These sanctions could include fines and penalties on our operations in China, restriction or limitation on our ability to pay dividend outside of China, and other forms of sanctions that may cause a material and adverse effect on our business, results of operations and financial conditions. However, the New M&A Rule does not stipulate the specific penalty terms, so we are not able to predict what penalties we may face, and how such penalties will affect our business operations or future strategy.
The New M&A Rule also established additional procedures and requirements that are expected to make merger and acquisition activities by foreign investors more time-consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise that owns well-known trademarks or China’s traditional brands. We may grow our business in part by acquiring other cable and wire manufacturers. Complying with the requirements of the New M&A Rule in completing this type of transaction could be time-consuming, and any required approval processes, including Ministry of Commerce approval, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Because our principal assets are located outside of the United States and because all of our directors and officers reside outside of the United States, it may be difficult for you to use the United States Federal securities laws to enforce your rights against us and our officers and most of our directors or to enforce judgments of United States courts against us or our officers and most of our directors in the PRC.
All of our present officers and directors reside outside of the United States. In addition, our operating subsidiaries are located in the PRC and substantially all of their assets are located outside of the United States. It may therefore be difficult for investors in the United States to enforce their legal rights based on the civil liability provisions of the United States Federal securities laws against us and our officers and most of our directors in the courts of either the United States or the PRC and, even if civil judgments are obtained in courts of the United States, to enforce such judgments in PRC courts. Further, it is unclear if extradition treaties now in effect between the United States and the PRC would permit effective enforcement against us or our officers and most of our directors of criminal penalties, under the United States Federal securities laws or otherwise.
Failure to comply with the U.S. Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.
We are required to comply with the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices may occur in the PRC. If our competitors engage in these practices they may receive preferential treatment, giving our competitors an advantage in securing business, which would put us at a disadvantage. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
We control Dalian Befut, our captive PRC manufacturer, through certain OEM Agreements which may not be as effective in providing control over Dalian Befut as direct ownership or VIE arrangement, and if Dalian Befut or its shareholders breach the OEM Agreements, we would have to rely on legal remedies under PRC law, which may not be available or effective, to enforce or protect our rights.
We conduct substantially all of our operations, and generate substantially all of our revenues, through an Original Equipment Manufacturer Agreement, an Intellectual Property Rights License Agreement and a Non-competition Agreement (collectively, the “OEM Agreements”) with Dalian Befut that provide us, through our ownership of Befut Hongkong and its direct ownership of WFOE, with control over Dalian Befut and its subsidiaries, Befut Marine, Befut Zhong Xing and Dalian Yuansheng. We have no direct ownership interest in Dalian Befut nor do we have voting control of shares of Dalian Befut. As a result, Dalian Befut’s shareholders, unlike those of a variety interest entity, or VIE, can dispose of their shares at their sole discretion. We depend on Dalian Befut to hold and maintain contracts with our customers. Dalian Befut also owns or leases, as the case may be, substantially all of the intellectual property, facilities and other assets relating to the operation of our business, and employs the personnel for substantially all of our business. Although we have been advised by Junhe Law Offices, PRC legal counsel we engaged during our corporate restructuring in connection with going public in the United States, that the rights, duties and obligations under each of the OEM Agreements with Dalian Befut are valid, binding and enforceable under PRC laws and regulations in effect, these OEM Agreements may not be as effective in providing us with control over Dalian Befut as direct ownership of Dalian Befut would be or if Dalian Befut was the VIE of WFOE. In addition, Dalian Befut may breach the OEM Agreements by, for example, deciding not to make contractual payments to WFOE, and consequently to 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.
Risks Related to an Investment in our Stock.
Shares of our common stock lack a significant trading market .
Our common stock is quoted on the Over The Counter Bulletin Board, or OTCBB, under the symbol “BFTI”. This market tends to be highly illiquid. There can be no assurance that an active trading market in our common stock will develop, or if such a market develops, that it will be sustained. In addition, there is a greater chance for market volatility for securities that trade on the OTCBB as opposed to securities that trade on a national exchange. This volatility may be caused by a variety of factors, including the lack of readily available quotations, the absence of consistent administrative supervision of “bid” and “ask” quotations, and generally lower trading volume. The price at which investors purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. Investors may be unable to sell their shares of common stock at or above their purchase price, which may result in substantial losses.
The limited public trading market may cause volatility in our stock price.
The quotation of our common stock on the OTCBB does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. As a result, our common stock is subject to significant volatility. Sales of substantial amounts of our common stock, or the perception that such sales might occur, could adversely affect prevailing market prices of our common stock.
We have not paid any cash dividends and no cash dividends will be paid in the foreseeable future.
We do not anticipate paying cash dividends on our common stock in the foreseeable future and we may not have sufficient funds legally available to pay dividends. Even if the funds are legally available for distribution, we may nevertheless decide not to pay, or may be unable to pay, any dividends. We intend to retain all earnings for our company’s operations.
The market price for our common stock may be volatile and subject to wide fluctuations, which may adversely affect the price at which you can sell our shares.
The market price for our common stock may be volatile and subject to wide fluctuations in response to factors including the following:
In addition, the securities market has from time to time experienced significant price and volume fluctuations that are not related to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our stock, regardless of our actual operating performance .
Our common stock may be considered a “penny stock,” and thereby be subject to additional sale and trading regulations that may make it more difficult to sell.
Our common stock may be deemed to be “penny stock” as that term is defined under the Securities Exchange Act of 1934, as amended. Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system). Penny stock rules impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors.” The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC, which provides information about penny stocks and the nature and level of risks in the penny stock market. Moreover, broker/dealers are required to determine whether an investment in a penny stock is a suitable investment for a prospective investor. A broker/dealer must receive a written agreement to the transaction from the investor setting forth the identity and quantity of the penny stock to be purchased. These requirements may reduce the potential market for our common stock by reducing the number of potential investors. This may make it more difficult for investors in our common stock to sell shares to third parties or to otherwise dispose of them. This could cause our stock price to decline.
Our officers, directors and affiliates control us through their positions and stock ownership and their interests may differ from other stockholders.
Our Chairman, President and CEO, Mr. Hongbo Cao, has the voting rights on 27,929,242, or 94.0%, of our issued and outstanding common stock. As a result, he is able to influence the outcome of stockholder votes on various matters, including the election of directors and extraordinary corporate transactions, including business combinations. The interests of Mr. Cao may differ from other stockholders.
We may require additional financing in the future and our operations could be curtailed if we are unable to obtain required additional financing when needed.
We may need to obtain additional debt or equity financing to fund future capital expenditures. Additional equity may result in dilution to the holders of our outstanding shares of capital stock. Additional debt financing may include conditions that would restrict our freedom to operate our business, such as conditions that:
We cannot guarantee that we will be able to obtain any additional financing on terms that are acceptable to us, or at all.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
This item is not applicable to us as we are a smaller reporting company.
ITEM 2. PROPERTIES.
Under PRC law, all land in the PRC is owned by either the state or by rural collectives, which grant a “land use right” to an individual or entity after a purchase price for such land use right is paid to the government. The land use right grants the holder the right to use the land for a specified long-term period of time and other rights that are incidental to the ownership of the land. Land and buildings are regarded as two separate properties in China. Land users may use the land and own the buildings and improvements on it, but the sovereignty of the land is retained by the State or rural collectives.
We lease a parcel of land of approximately 14,040 square meters in Dalian from Dalian Wanbao Industrial Co. Ltd., which is the location of our manufacturing base of switch appliance products. The lease is for a term from October 1, 2001 through October 1, 2051 at an aggregate rent of RMB250,000 (approximately $367,647). We own three factory buildings with 661.5 square meters, 1,531.05 square meters and 4,014.72 square meters of floor space, respectively, which are built upon this leased property.
We lease an area of 685.62 square meters of executive office space in the Xigang District in Dalian from Liaoning Ning’an Real Estate Co., Ltd. The lease is for a three-year term beginning of February 1, 2010 at an aggregate rent of RMB315,000 (approximately $46,323). Prior to such lease, we leased an area of 480 square meters in Xigang District from an individual, Yurong Yao, at an annual rent of RMB 336,000 (approximately $49,412) from April 1, 2006 to April 1, 2009. After the lease expired, we paid rent based on the same terms on monthly basis until our new lease mentioned above commenced.
We have obtained the land use right certificate and building ownership certificates for our completed Phase I Changxing Facility, which includes factory facilities located in Xingang County, Lingang Industrial District of Changxing Island. In addition, we also obtained the land use right certificate for the land reserved for our Phase II Changxing Facility.
The land and properties that we use are owned or leased by Dalian Befut.
Set forth in the following table is the detailed information of the properties that we currently use:
Dalian Befut entered into a long term loan agreement with China Development Bank Corporation in November 2009. In order to secure the loan, Dalian Befut mortgaged certain of its land use rights and owned buildings as set forth in the table below:
ITEM 3. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. However, we are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDERMATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock was approved for quotation on the OTC Bulletin Board on September 28, 2006 and initially traded under the symbol FRZR.OB. In connection with a 1-for-20 reverse stock split consummated on February 26, 2008, our symbol on the OTC Bulletin Board was changed to FREZ.OB.
On June 18, 2009, in connection with our name change and a 1-for-4.07 reverse stock split effective the same day, our symbol was changed to BFTI.OB.
The table below sets forth the reported high and low bid prices for the past two fiscal years. The bid prices shown reflect quotations between dealers, without adjustment for markups, markdowns or commissions, and may not represent actual transactions in our securities. Shares of our common stock are very thinly traded, and the price if traded may be highly volatile and may not reflect the value of the Company.
Common and Preferred Stock
We are authorized by our Articles of Incorporation, as amended, to issue an aggregate of 210,000,000 shares of capital stock, of which 200,000,000 are shares of common stock, par value $0.001 per share (the "Common Stock") and 10,000,000 are shares of preferred stock, par value $0.001 per share (the “Preferred Stock”).
All outstanding shares of Common Stock are of the same class and have equal rights and attributes. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of our stockholders. All stockholders are entitled to share equally in dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available. In the event of liquidation, the holders of Common Stock are entitled to share ratably in all assets remaining after payment of all liabilities. The stockholders do not have cumulative or preemptive rights.
Our Articles of Incorporation, as amended, authorize the issuance of up to 10,000,000 shares of Preferred Stock with designations, rights and preferences determined from time to time by its Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the Common Stock. In the event of issuance, the Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. Although we have no present intention to issue any shares of our authorized Preferred Stock, there can be no assurance that the Company will not do so in the future.
The description of certain matters relating to the securities of the Company is a summary and is qualified in its entirety by the provisions of the Company's Articles of Incorporation and By-Laws, copies of which have been filed or incorporated by reference as exhibits to this report.
As of September 21, 2010, there were approximately 567 shareholders of record of our common stock and an indeterminate number of beneficial holders who held our Common Stock in street name.
Transfer Agent and Registrar
Our independent stock transfer agent is Corporate Stock Transfer, Inc., located in Denver, Colorado. Their mailing address is 3200 Cherry Creek Dr. South, Suite 430, Denver, CO 80209. Their phone number is 303-282-4800 and fax number is 303-282-5800.
Our board of directors has not declared a dividend on our common stock during the last two fiscal years or the subsequent interim period. It is the present intention of our board to utilize all available funds for the development of the Company's business.
The payment of dividends, if any, is at the discretion of the Board of Directors and is contingent on the Company's revenues and earnings, capital requirements, financial conditions and the ability of our subsidiary, WFOE, to obtain approval to send monies out of the PRC. The PRC's national currency, the Yuan or Renminbi, is not a freely convertible currency.
Penny Stock Regulations
Our securities are subject to the SEC's “penny stock” rules. The penny stock rules may affect the ability of owners of our shares to sell them. There may be a limited market for penny stocks due to the regulatory burdens on broker-dealers. The market among dealers may not be active. The mark-ups or commissions charged by the broker-dealers might be greater than any profit an investor may make. Because of large spreads market makers quote, investors may be unable to sell the stock immediately back to the dealer at the same price the dealer sold the stock to the investor.
Our securities are also subject to the SEC’s rule that imposes special sales practice requirements upon broker-dealers that sell such securities to other than established customers or accredited investors. For purposes of the rule, the phrase “accredited investor” means, in general terms, institutions with assets exceeding $5,000,000 or individuals having net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Consequently, the rule may affect the ability of purchasers of our securities to buy or sell in any market.
Recent Sales of Unregistered Securities
In connection with the 1-for-4.07 reverse stock split (the “Reverse Split”) of our common stock effective June 18, 2009, in order to preserve our number of outstanding round-lot shareholders our board of directors authorized the issuance of shares of common stock (in an amount equal to the difference between the number of shares a shareholder was to receive after the Reverse Split and 100) to each shareholder owning at least 100 shares but less than 407 shares of our common stock on June 17, 2009. Accordingly, we issued an aggregate of 28,893 shares of common stock to various shareholders in the fiscal year ended June 30, 2010. These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act.
On June 7, 2010, we issued 200,007 shares of common stock upon the conversion of an outstanding convertible promissory note. This issuance was exempt from registration pursuant to Section 3(9) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA.
This item is not applicable to us as we are a smaller reporting company.
ITEM 7. 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 strategies, (c) anticipated trends in our industries, (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. They 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.
The 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.
We believe that we are one of the most competitive manufacturers of specialty cables in northeastern China. For the fiscal year ended June 30, 2010, approximately 40% of our revenues were generated from traditional cable and almost 60% of our revenues were generated from specialty cable. We plan to concentrate our business on specialty cable products over the next five years to take advantage their higher profit margins as compared to traditional cable products. Our specialty cable products include, without limitation, marine cable, mine cable and petro-chemical cable. We also have the technical capability for the large-scale production of submarine cable and high-margin new energy cable, such as wind energy cable and solar energy cable. In addition, Dalian Yuansheng, a newly acquired subsidiary of Dalian Befut, is engaged in researching, developing and manufacturing conductive carbon-fiber to provide Dalian Befut with the raw materials it needs to produce carbon fiber composite cable products. Befut Zhong Xing, a subsidiary of Dalian Befut, is engaged in the production of electric switches and switch boxes, the supporting equipment of cable users.
We believe we are currently at the beginning of a rapid growth stage. Established in 1996 to produce small-scale traditional cable, Dalian Befut built a factory in Dalian in 2001 to enter the more profitable sector of specialty cables. From 2003 to 2008, our sales grew at an average rate of at least 50% per year. When we reached our full production capacity in 2008, we achieved annual sales of approximately $22 million. To expand our manufacturing capacity and production of specialty cables, in 2006 we commenced construction of our new production facility located approximately 120 km from Dalian on Changxing Island (the “Changxing Island Project”). To maintain our competitiveness, we continue to focus on researching and developing new products, and attracting new large-volume customers. At the beginning of 2010, we completed Phase I of the Changxing Island Project (“Phase I Changxing Facility”), which increased our total annual production capacity from 800 km of cable to 2,400 km of cable as of June 30, 2010. We estimate that the Phase I Changxing Facility may reach its maximum annual capacity of 4,000 km by June 30, 2013, at which time we expect to commence construction of Phase II of the Changxing Island Project to add 45,000 square feet of facilities to further expand our production capacity of specialty cable (“Phase II Changxing Facility”). At June 30, 2010, we believe we have the customer base and the technological, manufacturing and research and development capabilities to take advantage of the growing cable and wire market to produce high levels of sales and profits over the next few years.
Results of Operations
Fiscal year ended June 30, 2010 compared to the fiscal year ended June 30, 2009
Our sales for the fiscal year ended June 30, 2010 were $31,258,662, an increase of $11,949,723, or 61.9%, as compared to the fiscal year ended June 30, 2009. Approximately $734,777, or 6.2% of the 61.9% increase, is attributed to increased sales from our switch appliance business. The remaining 55.7% increase in our sales was primarily due to three factors: (i) significantly increased demand for our traditional cables and specialty cables from new and existing customers as compared to the demand in fiscal 2009, (ii) an approximately 18.6% increase in our sales due to the increase in our annual production capacity after we relocated our production facilities to the Phase I Changxing Facility at the end of 2009, and (iii) an approximately 37.1% increase on the prices of many of our cable products as the result of the increase in the average price of copper, our primary raw material, in the fiscal year ended June 30, 2010, which we passed on to our customers..
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 fiscal year ended June 30, 2010 was $22,956,708, an increase of $8,855,163, or 62.8%, as compared to the fiscal year ended June 30, 2009. The percentage increase in our cost of sales was in line with the percentage increase in our sales.
Copper wire is our primary raw material. The volatility of the price of copper in the PRC directly impacts the price of our products. However, it does not significantly impact our profit margin because we are able to pass on the cost of raw materials to our customers. As most of our products are high-end specialty cable and a substantial portion of our sales are to large scale state-owned enterprises in China, we are in a position to negotiate the price of our products based on the prevailing market prices of raw materials. As a result, risk of volatility in our profit margin is greatly reduced.
Gross profit for the fiscal year ended June 30, 2010 was $8,301,954, an increase of $3,094,560, or 59.4%, as compared to the fiscal year ended June 30, 2009. Gross profit as a percentage of sales was 26.6% for the fiscal year ended June 30, 2010, a decrease of 0.3% as compared to the fiscal year ended June 30, 2009. Although we are able to pass certain increases in the cost of our raw materials such as copper, onto our customers, we experienced a minor increase in our cost of sales due to higher manufacturing costs which resulted in a slight decrease in our gross profit margin.
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 $80,090 in the fiscal year ended June 30, 2010, as compared to $121,393 in the fiscal year ended June 30, 2009, a decrease of $41,303, or 34.0%. General and administrative expenses were $3,881,655 for the fiscal year ended June 30, 2010, an increase of $2,623,676, or 208.6%, as compared to the fiscal year ended June 30, 2009. Such increase was primarily due to the increase of amortization expenses of $943,463 related to intangible assets we acquired in the third and fourth quarters of fiscal 2009 and the increase in research and development expenses totaling $791,765, which were primarily for technologies that are the subject of Dalian Befut’s pending patents, and the costs associated with such patent applications.
Income from Operations
Our operating income was $4,340,209 for the fiscal year ended June 30, 2010, an increase of $1,003,468, or 30%, as compared to $3,336,741 for the fiscal year ended June 30, 2009. This increase was a result of a significant increase in the gross profit of our business of wire and cable manufacturing, partially offset by an increase of general and administrative expenses.
In the fiscal year ended June 30, 2010, we received subsidies from various PRC governmental bureaus in the aggregate amount of $705,062 as compared to subsidies of $159,979 received in the fiscal year ended June 30, 2009.
The subsidies were comprised of a subsidy in the aggregate amount of approximately $293,340 for the selection of our “Sanyuan” trademark as a “Famous Trademark” of China, two subsidies in the aggregate amount of $293,340 for our engagement in marine cable business and a refund of value added taxes in the aggregate amount of approximately $118,392 as a subsidy for employing physically-challenged workers. The subsidies are determined on a yearly basis and no assurances can be given that we will continue to receive such subsidies.
Interest expense was $397,700 for the fiscal year ended June 30, 2010, a decrease of $37,945 or 8.7%, as compared to $435,645 for the fiscal year ended June 30, 2009. Interest expense was reduced after we obtained a long-term bank loan with favorable terms from China Development Bank Corporation at the end of 2009.
In fiscal 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% for most of the goods sold.
Provision for income taxes was $907,083 for the fiscal year ended June 30, 2010, an increase of $19,387, or 2.2%, compared to $887,696 for the fiscal year ended June 30, 2009. The lower increase (2.2%) in our income taxes as compared to the increase in our income from operations (13.4%) was primarily attributable to certain deductions from the income for taxation on basis such as our products are under “Famous Brand” in China and intangible assets allocation of our research and development fees before tax.
Net income for the fiscal year ended June 30, 2010 was $4,396,644,, an increase of $2,149,526 or 95.7%, as compared to net income of $2,247,118 for the fiscal year ended June 30, 2009. The increase was mainly attributable to the increase of $3,094,560 in gross profit, $545,623 in government subsidies and $486,296 in other income, which was partially offset by an increase in general and administrative expenses of $2,623,676.
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.
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, 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.
Our management team believes that we will experience annual sales growth of over 70% in our fiscal year ending June 30, 2011. Our growth projections are based on several factors, including the following:
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:
Our approximately $1.6 million decrease in working capital from June 30, 2009 to June 30, 2010 was primarily due to the decrease of approximately $1.1 million of current assets and the increase of $0.5 million of current liabilities. The decrease of current assets mainly includes the decrease of $5.9 million of loans we made to unrelated parties, partially offset by the increase of $1.7 million in cash and $1.2 million in inventory. The increase of current liabilities mainly includes the increase of $2.5 million of accounts payable and accrued expenses, partially offset by our repayment of $2 million in short-term loans. Approximately 85% of our loans to unrelated parties were reduced, with the current outstanding amount of $1,054,090 as of June 30, 2010.
We had a net increase of $1,108,872 in cash, cash equivalents and restricted cash from June 30, 2009 to June 30, 2010, as compared to a net increase of $142,748 from June 30, 2008 to June 30, 2009, respectively. The following table summarizes such changes:
We generated net cash of $7,568,370 through our operating activities in our fiscal year ended June 30, 2010, an increase of $8,566,104 or 858.6%, as compared to $997,734 in our fiscal year ended June 30, 2009. We have historically financed our operations and capital expenditures principally through cash provided by operations and bank loans. The net cash obtained from our financing activities in the fiscal year ended June 30, 2010 was approximately $6.5 million less than the amount used in investment activities for the same period. We invested part of the cash generated by our operating activities to complete the Phase I Changxing Facility. 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.
During the fiscal year ended June 30, 2010, net cash derived from operating activities was $7,568,370 ,an increase of $8,566,104 as compared to $997,734 of net cash derived from operating activities during the fiscal year ended June 30, 2009. The increase in net cash of approximately $8.6 million was mainly due to the increase of net income of $2.2 million, the increase of amortization of $1.1 million, the decrease of accounts receivable of $2 million and the decrease of advance payments for R&D of $3 million.
During the fiscal year ended June 30, 2010, we used net cash in investing activities of $13,853,463, a increase of $3,141,106 as compared to $10,712,357 in net cash we used in investing activities for the fiscal year ended June 30, 2009.
During the fiscal year ended June 30, 2010, net cash provided by financing activities was $7,372,367, a decrease of $4,121,861, as compared to net cash of $11,494,228 provided by financing activities in the fiscal year ended June 30, 2009. This decrease was principally due to the decrease of approximately $5 million of additional paid-in capital, as compared to the fiscal year ended June 30, 2009. We increased our net long-term bank loans by $9 million to finance the equipment for and construction of our Phase I Changxing Facility, and repaid approximately $2 million of our short-term bank loans. We also repaid the outstanding principal amount, including all interest accrued thereon, on our convertible notes in the aggregate principal balance of $370,000 due March 2010. The remaining convertible notes in the aggregate principal amount of $130,000 were converted into 200,007 shares of our common stock at the conversion price of $0.65 per share on May 6, 2010.
As of June 30, 2010, our outstanding loans were as follows:
The balance of our accounts receivable was $9,292,310, net of allowance for doubtful accounts of $83,295, as of June 30, 2010, as compared to $8,560,592, net of allowance for doubtful accounts of $20,222, as of June 30, 2009. The days’ sales in receivables for the fiscal year ended June 30, 2010 were 107 days, compared to 160 days for the fiscal year ended June 30, 2009.
Inventories consisted of the following as of June 30, 2010 and 2009, respectively:
We had total inventory of $2,543,789 as of June 30, 2010, an increase of $1,190,257, or 87.9%, as compared to inventory of $1,353,532 as of June 30, 2009. Days’ sales in inventory for the fiscal year ended June 30, 2010 for the fiscal year were 40 days, compared to 35 days for the fiscal year ended June 30, 2009. This increase was primarily due to the significant increases in our production in fiscal 2010.
Loan to Unrelated Parties
We had a net decrease of $5,901,533, or 84.8%, in loans to unrelated parties as of June 30, 2010 as compared to June 30, 2009. As of June 30, 2010, the aggregate outstanding balance of such loans was $1,054,090.
During the 12 month period ended June 30, 2010, the U.S. Dollar and RMB exchange rate fluctuated from 6.8325 RMB to 1 U.S. Dollar to 6.7909 RMB to 1 U.S. Dollar, an increase of 0.6% in the value of the RMB. As a result of the minimum appreciation of the RMB during this period, the Company believes that currency fluctuations have not had a material impact on the Company’s cash flows, revenues and financial condition.
Off-Balance Sheet Arrangements
At June 30, 2010, we did not have any off-balance sheet arrangements.
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 (“US 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 US 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.
The Company derives its 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", the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.
Accounts receivable are recorded net of allowance for doubtful accounts. The Company provides 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 period. Using its past collection experience, the Company reserves 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. As of December 31, 2010, the amount of our receivables aged less than one year, 1-2 years and more than two years was $7,540,663, $1,684,242 and $150,700 respectively.
As of June 30, 2010 and 2009, the Company had accounts receivable of $9,292,310 and $8,560,592, net of allowance for doubtful accounts of $83,295 and $20,222, respectively.
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:
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 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Balance sheets, as of June 30, 2010 and 2009, and statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended June 30, 2010 and 2009, together with the related notes and the reports of independent registered public accounting firms, are set forth on the “F” pages of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer reviewed and evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2010, which included inquiries made to certain of our other employees. Based on their evaluation, in our Annual Report on Form 10-K for the year ended June 30, 2010 as originally filed with the SEC on September 29, 2010 (the “Original 10-K”), our Chief Executive Officer and Chief Financial Officer each concluded that, as of June 30, 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 years ended June 30, 2010 and 2009. 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 certain inexperienced staff, which required the restatement of our consolidated financial statements as of and for the years ended June 30, 2010 and 2009.
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 June 30, 2010. As of the date of this amended report on Form 10-K/A, we are undertaking steps to correct the aforementioned material weakness by:
Management Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statement for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected in a timely manner. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only reasonable assurance with respect to financial statement preparation. In addition, the design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Therefore, any current evaluation of controls can not and should not be projected to future periods.
Management assessed our internal control over financial reporting as of June 30, 2010, the end of our fiscal year of 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control Integrated Framework.” The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
Based on this COSO framework, we originally concluded, as set forth in the Original 10-K, that our internal control over financial reporting was effective as of June 30, 2010. However, due to the restatement of our consolidated financial statements for the years ended June 30, 2010 and 2009 as described above, again under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we reassessed that conclusion and determined that there existed a material weakness in our internal controls over financial reporting as of June 30, 2010. Management has determined that the design and operation of internal control over financial reporting that we had in place during fiscal 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.
Based on management's assessment using the COSO criteria, management has concluded that our internal control over financial reporting was not effective as of June 30, 2010 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. GAAP.
Changes in Internal Control
Because we were not aware of this material weakness until after the quarter ended March 31, 2011, there were no changes in our internal control over financial reporting that occurred during our fourth fiscal quarter ending June 30, 2010 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
As of the date of this amended report on Form 10-K/A, we are undertaking the aforementioned steps to remediate the weakness in our internal controls over financial reporting
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
On September 23, 2010, Mr. Yining Xia resigned from his position as a director of the Company.
Mr. Xia’s resignation as a director of the Company was not a result of any disagreement with the Company on matters relating to its operations, policies or practices. Mr. Xia has not furnished the Company with any written correspondence concerning the circumstances surrounding his resignation. As required by SEC rules, Mr. Xia was previously provided with a copy of this Item 9B disclosure and given the opportunity to furnish the Company with a letter stating whether he does not agree with the Company’s statements in this Item 9B. Mr. Xia did not furnish the Company with any such letter.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Listed below are the names and ages of all our directors and executive officers for the fiscal year ended June 30, 2010 along with their positions, offices and term:
All of our directors hold offices until our next annual meeting of the shareholders, and a successor has been duly elected and qualified or until his or her earlier resignation, removal from office, death or incapacity. Officers serve at the discretion of the board of directors.
The following sets forth biographical information regarding the above directors and executive officers.
Mr. Hongbo Cao, Chairman of the Board, Chief Executive Officer and President. Mr. Cao has served as Chairman of Dalian Befut, our captive manufacturer, since December 2006. Prior to that, he also served as the CEO of Dalian Befut since June 2002, and therefore has significant experience in the cable and wire industry in China. He was formerly the CEO of Dalian Xincheng Power Equipment Co., Ltd. from 1985 to 2002. Mr. Cao is also a director of Befut Nevada, our direct intermediary subsidiary. Mr. Cao is a licensed senior economist in China. He received a Master’s Degree in Political Economics from Liaoning Normal University in China in 2000 and a Bachelor’s Degree in Law from Dongbei University of Finance and Economics in China in 1998. We believe Mr. Cao’s industry, commercial, financial, management and legal experience qualifies him to serve as our Chairman.
Ms. Mei Yu, Director, Chief Financial Officer and Treasurer. Ms. Yu has served as Director of Finance of Dalian Befut, our captive manufacturer, since 1997. Ms.Yu is a graduate of Dongbei University of Finance and Economics in Financial Management in 1991. She has over 17 years of experience in accounting and finance in China and has been familiar with Dalian Befut’s financial condition. We believe that Ms. Yu’s knowledge of Dalian Befut’s history and her experience in accounting and finance in China qualify her to serve a director of our company.
Mr. Haiyang Lu, Secretary. Mr. Lu has been the head of the Strategic Development Department of Dalian Befut and a CEO Assistant of Dalian Befut from 2006. Prior to that, he was Manager of Planning for Dalian Yuandian Advertisement Co., Ltd. in 2003 and Manager of Business Planning for Dalian Tianwei Medicine Co., Ltd. from 2004 to 2006. Mr. Lu received a Bachelor’s Degree in Marketing and Sales from Bohai University in China.
Mr. Yining Xia, Former Director. Mr. Xia resigned as a member of our board of directors on September 23, 2010. Mr. Xia previously served as Director (from 2001 to 2007) and Associate Director (from 2000 to 2001) of TIAA-CREF, one of the largest financial services companies in the United States. Prior to that, he was served as Assistant Vice President of Citi Group from 1999 to 2000. Mr. Xia is currently President of Allport America, Inc., a consulting firm he founded. Mr. Xia is also a director of Befut Nevada, the Company’s direct intermediary subsidiary. Mr. Xia obtained a PhD in Mathematics from the Ohio State University in 1990 and a Master’s Degree in Mathematics from Jilin University in China in 1986. Mr. Xia’s capital market and financial experience qualified him to serve as a director of company and to provide us necessary guidance as a U.S. public company.
There are no family relationships among our directors or executive officers.
Director or Officer Involvement in Certain Legal Proceedings
To our knowledge, our directors and executive officers were not involved in any legal proceedings as described in Item 401(f) of Regulation S-K in the past ten years.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company’s directors, executive officers and persons who own more than 10% of the Company’s Common Stock to file reports of ownership and changes in ownership on Forms 3, 4 and 5 with the SEC. Directors, executive officers and greater than 10% stockholders are required by SEC rules to furnish the Company with copies of Section 16(a) forms they file. Based upon a review of the filings made on their behalf during the fiscal year ended June 30, 2010, as well as an examination of the SEC’s EDGAR system Form 3, 4, and 5 filings and the Company’s records, the following table sets forth exceptions to timely filings:
Code of Ethics
We have not yet adopted a Code of Ethics for our executive officers. We intend to adopt a Code of Ethics applying to such persons during the fiscal year ending June 30, 2011.
We have not yet appointed an audit committee. Our board of directors currently acts as our audit committee. At the present time, we believe that the members of our board of directors are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. However, we do not currently have an audit committee financial expert as defined in Item 407 of Regulation S-K serving on our board of directors. The Company is actively seeking to hire an experienced finance or accounting professional to serve as an audit committee financial expert, which the Company believes will strengthen the board’s knowledge of U.S. GAAP and internal controls, among other financial and accounting matters. The Company has not been able to attract a suitable individual.
ITEM 11. EXECUTIVE COMPENSATION
We strive to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities when compared to peer companies of comparable size in similar locations.
It is not uncommon for PRC private companies in northeastern China to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual and the current and potential contributions of the individual. The base salary is compared to the list of similar positions within comparable peer companies and consideration is given to the executive’s relative experience in his or her position. Base salaries are reviewed periodically and at the time of promotion or other changes in responsibilities.
We plan to implement a more comprehensive compensation program, which takes into account other elements of compensation, including, without limitation, short and long term compensation, cash and non-cash, and other equity-based compensation such as stock options. We expect that this compensation program will be comparable to the programs of our peer companies and aimed to retain and attract talented individuals.
Summary of Executive Compensation
The following is a summary of the compensation paid for the fiscal years indicated to each person serving as our named executive officers during the fiscal years ended June 30, 2010 and 2009, respectively.
Narrative Disclosure to Summary Compensation Table
As of June 30, 2010, we had not entered into any employment agreements with our named executive officers.
Outstanding Equity Awards At Fiscal Year-End
As of June 30, 2010, there were no outstanding equity awards to any of our named executive officers or directors.
Compensation of Directors
As of the date of this report, we have no formal or informal arrangements or agreements to compensate our directors for services they provide as directors.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTAND RELATED STOCKHOLDERS MATTERS
The following table sets forth as of September 24, 2010, the number of shares of our common stock beneficially owned by (i) each person who is known by us to be the beneficial owner of more than five percent of our outstanding common stock, (ii) each director, (iii) each executive officer and (iv) all directors and executive officers as a group. Unless otherwise indicated, the stockholders listed in the table have sole voting and investment power with respect to the shares indicated.
Securities Authorized for Issuance Under Equity Compensation Plans
Changes in Control
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
On February 16, 2009, WFOE entered into a series of agreements with Dalian Befut, including an Original Equipment Manufacturer Agreement, an Intellectual Property License Agreement and a Non-competition Agreement (collectively, the “OEM Agreements”), pursuant to which Dalian Befut became a captive manufacturer of WFOE. For a description of the OEM Agreements, see “Business – Manufacturing – OEM Agreements.” Mr. Hongbo Cao, our current Chairman, President and Chief Executive Officer, and Mr. Tingmin Li, one our principal stockholders, own an aggregate of 94.6% of the equity interests of Dalian Befut.
In the share exchange consummated on March 13, 2009, Befut BVI, as the sole shareholder of Befut Nevada, exchanged all of the shares it owned in Befut BVI for the issuance of 120,899,170 shares of the Company, of which 3,130,871 shares were cancelled in connection with the $500,000 private financing that occurred simultaneously with the reverse merger transaction. As a result, Befut BVI was issued a net amount of shares of common stock of the Company totaling 117,768,300. Mr. Hongbo Cao, our current Chairman, President and Chief Executive Officer, Mr. Tingmin Li, one our principal stockholders, Mr. Yining Xia, our former director, are also shareholders of Befut BVI. Mr. Cao, the sole director of Befut BVI, is deemed to have the sole voting and investment control over the shares of our Common Stock owned by Befut BVI.
Mr. Yining Xia, our former director, purchased convertible notes and warrants in the private placement for $170,000 on March 13, 2009. The terms of the purchase offered to Mr. Xia was the same as those to the other three investors in the private placement.
Other than the above transactions or as otherwise set forth in this report or in any reports filed by the Company with the SEC, there have been no related party transactions, or any other transactions or relationships required to be disclosed pursuant to Item 404 of Regulation S-K. The Company is currently not a subsidiary of any company.
Our Board conducts an appropriate review of and oversees all related party transactions on a continuing basis and reviews potential conflict of interest situations where appropriate. The Board has not adopted formal standards to apply when it reviews, approves or ratifies any related party transaction. However, the Board believes that the related party transactions are fair and reasonable to the Company and on terms comparable to those reasonably expected to be agreed to with independent third parties for the same goods and/or services at the time they are authorized by the Board.
Independence of the Board of Directors
Our board of directors has adopted NASDAQ’s standards for determining the independence of its members and believes that it interprets these requirements conservatively. In applying these standards, the board of directors considers commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships, among others, in assessing the independence of directors, and must disclose any basis for determining that a relationship is not material. The board of directors has determined that none of its members are independent directors within the meaning of such NASDAQ independence standards in terms of independence from management. In making these independence determinations, the board of directors did not exclude from consideration as immaterial any relationship potentially compromising the independence of any of the directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
We paid or accrued the following fees in each of the prior two fiscal years to our principal accountants:
PATRIZIO & ZHAO, LLC
In the event that we should require substantial non-audit services, the Board of Directors would approve such services and the fees therefore.
Board Of Directors Pre-Approval
In accordance with paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X under the Securities Exchange Act of 1934, as amended, on May 5, 2009, our board of directors pre-approved our engagement of Patrizio & Zhao, LLC to act as our independent auditors for our fiscal year ended June 30, 2010. Patrizio & Zhao, LLC performed all work described above with its full-time, permanent employees.
Pre-Approval Policies and Procedures
Our board of directors has the sole authority to appoint or replace our independent auditor. Our board is directly responsible for the compensation and oversight of the work of our independent auditor (including resolution of disagreements between management and the independent auditor regarding financial reporting) for the purpose of preparing or issuing an audit report or related work. Our independent auditor is engaged by, and reports directly to, our board of directors.
Our board of directors pre-approves all auditing services and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent auditor, subject to the de minimis exceptions for non-audit services described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934, all of which are approved by our board prior to the completion of the audit. In the event pre-approval for such auditing services and permitted non-audit services cannot be obtained as a result of inherent time constraints in the matter for which such services are required, our Chairman of the Board may pre-approve such services, and will report for ratification such pre-approval to our board of directors at its next scheduled meeting. Our board has complied with the procedures set forth above and all services reported above were approved in accordance with such procedures.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this report:
The following financial statements of BEFUT International Co., Ltd. and Reports of Independent Registered Public Accounting Firms are presented in the “F” pages of this report:
See the Exhibit Index following the signature page of this report, which Index is incorporated herein by reference.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment No. 2 to Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Exhibit Index to Annual Report on Form 10-K
For the Fiscal Year Ended June 30, 2010
BEFUT INTERNATIONAL CO., LTD.
RESTATED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010 AND 2009
BEFUT INTERNATIONAL CO., LTD.
Consolidated Financial Statements
June 30, 2010 and 2009
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
BEFUT International Co., Ltd.
We have audited the accompanying consolidated balance sheets of BEFUT International Co., Ltd. (the “Company”) as of June 30, 2010 and 2009, and the related consolidated statements of operations and comprehensive income, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BEFUT International Co., Ltd. as of June 30, 2010 and 2009, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
As described in Note 25 to the consolidated financial statements, the June 30, 2010 and 2009 financial statements have been restated to correct certain misstatements.
/s/ Patrizio & Zhao, LLC
Parsippany, New Jersey
September 21, 2010
(Except for Note 1, 2, 5, 6, 8, 10, 14, 15, 16, 17, 23, 24 and 25
as to which the date is September 23, 2011)
BEFUT INTERNATIONAL CO., LTD.
Consolidated Balance Sheets