BEFUT International Co., Ltd. - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - BEFUT International Co., Ltd.	v244051_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - BEFUT International Co., Ltd.	v244051_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - BEFUT International Co., Ltd.	v244051_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - BEFUT International Co., Ltd.	v244051_ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended September 30, 2011

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ____________ to ____________

Commission File Number 0-51336

BEFUT INTERNATIONAL CO., LTD.

(Exact name of registrant as specified in its charter)

	Nevada		20-2777600
	(State or other jurisdiction of		(IRS Employer
	incorporation or organization)		Identification No.)

27th Floor, Liangjiu International Tower

No. 5, Heyi Street, Xigang District 116011

Dalian City, China

(Address of principal executive offices) (Zip Code)

(011) 86-411-8367-8755 (China)

(Issuer's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer ¨	Accelerated filer ¨

Non-accelerated filer ¨	Smaller reporting company x
(Do not check if a smaller reporting company)

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

Yes ¨ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 29,715,640 shares of Common Stock, $.001 par value, were outstanding as of December 20, 2011.

TABLE OF CONTENTS

		Page
PART I	FINANCIAL INFORMATION	3

Item 1.	Financial Statements.	3

	Consolidated Balance Sheets As of September 30, 2011(Unaudited) and June 30, 2011	5

	Consolidated Statements of Operations For the Three Months Ended September 30, 2011 and 2010 (Unaudited)	6

	Consolidated Statements of Comprehensive Income For the Three Months Ended September 30, 2011 and 2010 (Unaudited)	7

	Consolidated Statements of Cash Flows For the Three Months Ended September 30, 2011 and 2010 (Unaudited)	8

	Notes to Consolidated Financial Statements (Unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	29

Item 4.	Controls and Procedures.	29

PART II	OTHER INFORMATION	30

Item 6.	Exhibits	30

Signatures		31

Exhibits/Certifications		32

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

BEFUT INTERNATIONAL CO., LTD.

CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2011 AND 2010

(UNAUDITED)

BEFUT INTERNATIONAL CO., LTD.

Consolidated Financial Statements

September 30, 2011 and 2010

(Unaudited)

Table of Contents

		Page

CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets		5

Consolidated Statements of Operations		6

Consolidated Statements of Comprehensive Income		7

Consolidated Statements of Cash Flows		8

Notes to Consolidated Financial Statements		9

BEFUT INTERNATIONAL CO., LTD.

Consolidated Balance Sheets

	September 30,		June 30,
	2011		2011
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,471,845	$	2,724,146
Restricted cash		4,713,880		3,565,859
Accounts receivable, net of allowance for doubtful accounts of $120,495 and $87,480 at September 30, 2011 and June 30, 2011, respectively		22,396,099		18,166,580
Due from factor		-		108,545
Inventory		6,876,973		4,607,431
Trade notes receivable		1,487,192		1,343,309
Loans to unrelated parties		11,645,835		4,495,767
Bank loan security deposits		1,241,045		917,371
Advance payments for inventory		2,605,290		2,024,943
Prepaid VAT taxes		-		200,006
Other current assets		1,835,577		1,729,758
Total current assets		55,273,736		39,883,715

Property and equipment, net		39,630,014		36,449,318

Other assets:
Advance payments for property and equipment		921,885		771,414
Advance payments – Research & Development		1,061,070		1,048,866
Bank loan security deposits – long term		313,000		309,400
Intangibles, net		14,955,081		15,119,699
Total other assets		17,251,036		17,249,379

Total assets	$	112,154,786	$	93,582,412

Liabilities
Current liabilities:
Accounts payable and accrued expenses	$	5,805,099	$	4,617,422
Short-term bank loans		20,888,055		11,587,030
Current portion of long-term bank loan		1,095,500		1,082,900
Loans from unrelated party		4,057,140		3,364,992
Trade notes payable		4,695,000		3,094,000
Advances from customers		4,890,072		3,273,647
Income taxes payable		687,488		322,299
Other taxes payable		138,335		-
Other current liabilities		1,746,924		1,039,231
Total current liabilities		44,003,613		28,381,521
Long-term bank loan		13,928,500		13,768,300

Total liabilities		57,932,113		42,149,821

Equity
Stockholders’ equity:
Preferred stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or outstanding		-		-
Common stock, $0.001 par value, 200,000,000 shares authorized, 29,715,640 and 29,715,666 shares issued and outstanding at September 30, 2011 and June 30, 2011, respectively		29,716		29,716
Additional paid-in capital		21,838,047		21,838,047
Statutory reserves		1,215,273		1,215,273
Retained earnings		25,588,246		23,378,099
Accumulated other comprehensive income		5,002,385		4,390,669
Total stockholders’ equity		53,673,667		50,851,804

Noncontrolling interest		549,006		580,787

Total equity		54,222,673		51,432,591

Total liabilities and equity	$	112,154,786	$	93,582,412

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

BEFUT INTERNATIONAL CO., LTD.

Consolidated Statements of Operations

(Unaudited)

	For the Three Months Ended September 30,
	2011			2010

Sales	$	16,873,076		$	15,930,811

Cost of sales		12,422,241			11,670,760

Gross profit		4,450,835			4,260,051

Operating expenses
Selling expenses		155,756			38,607
General and administrative expenses		1,161,340			1,011,620
Total operating expenses		1,317,096			1,050,227

Income from operations		3,133,739			3,209,824

Other income (expenses):
Government subsidy income		185,594			136,487
Interest income		19,583			8,504
Interest expense		(773,296	)		(394,902	)
Other income (expenses), net		(14,405	)		31,121
Total other income		(582,524	)		(218,790	)

Income before provision for income taxes		2,551,215			2,991,034

Provision for income taxes		383,294			807,135

Net income		2,167,921			2,183,899

Less: net loss attributable to noncontrolling interest		(41,583	)		(64,358	)

Net income attributable to BEFUT International Co., Ltd.	$	2,209,504		$	2,248,257

Basic earnings per share	$	0.07		$	0.08
Diluted earnings per share	$	0.07		$	0.08

Weighted average number of common shares outstanding:
Basic		29,715,640			29,715,640
Diluted		29,715,640			29,752,094

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

BEFUT INTERNATIONAL CO., LTD.

Consolidated Statements of Comprehensive Income

(Unaudited)

	For the Three Months Ended September 30,
	2011			2010

Net income	$	2,167,921		$	2,183,899

Other comprehensive income
Foreign currency translation adjustment		685,080			743,018

Total comprehensive income		2,853,001			2,926,917

Less: comprehensive income attributable to noncontrolling interest		(31,781	)		(5,197	)

Comprehensive income attributable to BEFUT	$	2,821,220		$	2,932,114

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

BEFUT INTERNATIONAL CO., LTD.

Consolidated Statements of Cash Flows

(Unaudited)

	For the Three Months Ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net Income	$	2,167,921		$	2,183,899
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization		843,627			753,831
Provision for bad debts		31,932			-
Changes in current assets and current liabilities:
Restricted cash		(1,104,268	)		(1,480,073	)
Accounts receivable		(4,048,194	)		(4,751,564	)
Inventory		(2,251,892	)		(1,231,133	)
Trade notes receivable		(127,991	)		-
Advance payments for inventory		(560,057	)		(1,318,366	)
Prepaid VAT taxes		201,789			-
Other current assets		(124,866	)		(429,085	)
Accounts payable and accrued expenses		1,342,479			(229,105	)
Trade notes payable		1,561,800			2,958,000
Advances from customers		1,575,108			177,334
Income taxes payable		360,699			784,816
Other taxes payable		136,458			-
Other current liabilities		517,505			219,191
Total adjustments		(1,645,871	)		(4,546,154	)

Net cash provided by (used in) operating activities		522,050			(2,362,255	)

Cash flows from investing activities:
Advance payments for property and equipment		(141,206	)		-
Due from related party		-			474,764
Additions to property and equipment		(3,265,982	)		(622,725	)
Loans to unrelated parties		(7,083,245	)		10,664

Net cash used in investing activities		(10,490,433	)		(137,297	)

Cash flows from financing activities:
Due from factor		109,583			-
Bank loan security deposits		(312,680	)		(26,622	)
Loans from unrelated parties		676,908			1,626,900
Proceeds from minority shareholders					58,683
Proceeds from short-term bank loans		14,642,963			-
Repayment of short-term bank loans		(5,477,500	)		-
Capital contribution from minority shareholder for Befut Consultants		3,124			-

Net cash provided by financing activities		9,642,398			1,658,961

Effect of foreign currency translation on cash		73,684			(16,136	)

Net decrease in cash and cash equivalents		(252,301	)		(856,727	)

Cash and cash equivalents – beginning		2,724,146			1,319,173

Cash and cash equivalents – ending	$	2,471,845		$	462,446

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

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Organization and Nature of Business

BEFUT International Co., Ltd., formerly known as Frezer, Inc. (“Frezer”), a former public shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, was established under the laws of Nevada on May 2, 2005. The accompanying consolidated financial statements include the financial statements of BEFUT International Co., Ltd. and its subsidiaries (collectively, the “Company”). The Company’s primary business is to design manufacture and sell industrial wires and cables.

On March 13, 2009, Frezer entered into and consummated a series of transactions whereby (a) Frezer acquired 100% of the outstanding shares of common stock of BEFUT Corporation, a company incorporated in the State of Nevada on January 14, 2009 (“Befut Nevada”), constituting all of the capital stock of Befut Nevada, from Befut International Co. Limited, a British Virgin Islands company (“Befut BVI”) in exchange for the issuance to Befut BVI of an aggregate of 117,768,300 shares of Frezer’s common stock and the cancellation of an aggregate of 2,176,170 shares of Frezer’s common stock and (b) Frezer raised $500,000 in gross proceeds from the sale to four investors of convertible promissory notes of Frezer in the aggregate principal amount of $500,000 and warrants to purchase an aggregate of 720,076 shares of Frezer’s common stock. The acquisition was accounted for as a reverse acquisition under the purchase method for business combinations. On June 18, 2009, the Company effectuated a name change from its original name “Frezer, Inc.” to “BEFUT International Co., Ltd.”.

Hongkong BEFUT Co., Ltd. (“Befut Hongkong”) was incorporated on September 10, 2008 under the laws of Hong Kong and is a wholly-owned subsidiary of Befut Nevada. On February 13, 2009, Befut Hongkong invested 100% of the registered capital to form Befut Electric (Dalian) Co., Ltd. (“WFOE”), a Chinese company incorporated in the city of Dalian, the People’s Republic of China (the “PRC” or “China”).

On February 16, 2009, WFOE entered into a series of agreements, the purpose of which was to restructure Dalian Befut Wire & Cable Manufacturing Co., Ltd. (“Dalian Befut”) in accordance with applicable PRC law so that Dalian Befut could raise capital and grow its business (the “Restructuring”). Dalian Befut was incorporated on June 13, 2002 under the laws of the PRC. The Restructuring included the following arrangements: First, WFOE entered into an Original Equipment Manufacturer Agreement (the “OEM Agreement”) with Dalian Befut containing the following material provisions: (i) Dalian Befut may not manufacture products for any person or entity other than WFOE without the written consent of WFOE; (ii) WFOE is to provide all raw materials and advance related costs to Dalian Befut, as well as provide design requirements for products to be manufactured; (iii) WFOE is responsible for marketing and distributing the products manufactured by Dalian Befut and will keep all related profits and revenues; and (iv) WFOE has an exclusive right, exercisable in its sole discretion, to purchase all or part of the assets and/or equity of Dalian Befut at a mutually agreed price to the extent permitted by applicable PRC law. In addition, on February 16, 2009, WFOE entered into two ancillary agreements with Dalian Befut: (i) an Intellectual Property License Agreement, pursuant to which WFOE shall be permitted to use intellectual property rights such as trademarks, patents and know-how for the marketing and sale of the products manufactured by Dalian Befut; and (ii) a Non-competition Agreement, pursuant to which Dalian Befut shall not compete against WFOE.

On April 14, 2006, Dalian Marine Cable Co., Ltd. (“Dalian Marine Co.”) was incorporated in the PRC by Dalian Befut. Its current shareholders are Dalian Befut (owning 86.6% of the equity interest) and three individual shareholders. Dalian Marine Co. was formed to conduct marketing activities and produce marine cables for Dalian Befut.

On July 1, 2009, Dalian Befut, our captive manufacturer, formed a joint venture under the laws of the PRC, Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong Xing”), with pre-registered capital of RMB1,000,000 (approximately $147,000). Dalian Befut invested RMB700,000 (approximately $103,000) for its 70% equity interest in Befut Zhong Xing.

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 1 – Organization and Nature of Business (continued)

In January, 2010, Dalian Befut increased its investment capital to RMB14.7 million (approximately $2 million) with a transfer of intangible assets to Befut Zhong Xing on 1/1/2010 and raised its equity ownership percentage in Befut Zhong Xing to 73.5%. Befut Zhong Xing manufactures switch appliances, including high/low voltage distribution cabinet switches and crane electronic control switches. The noncontrolling interest also increased its equity investment by contributing additional cash of RMB 5,000,000 (approximately $733,350). There were no equity transactions (purchasing or selling the noncontrolling interest) between the Company and the noncontrolling interest shareholders for the three months ended September 30, 2011.

Dalian Yuansheng Technology Co., Ltd. (“Dalian Yuansheng”) was established on June 3, 2009 with a registered capital of RMB 1,000,000 (approximately $146,700). Two individual shareholders, Chengnian Yan and Xianjun Cheng, owned 60% and 40% of Dalian Yuansheng, respectively. On July 23, 2010, Dalian Befut contributed RMB 5,000,000 (approximately $735,294) and purchased the original 60% interest from Chengnian Yan at RMB 600,000 (approximately $88,235). As a result, Dalian Befut became 93.3% owner of Dalian Yuansheng. For the year ended June 30, 2010, the Company consolidated the financial statements of Dalian Yuansheng with intercompany transactions, including investment in Dalian Yuansheng of RMB 5,600,000 (approximately $823,529), eliminated and reported noncontrolling interest per ASC 810-10 as part of the Company’s equity. The purchase of Chengnian Yan’s interest in Dalian Yuansheng at RMB 600,000 (approximately $88,235) was recorded as an equity transaction at cost and no gain or loss was recorded.

On February 25, 2011, Dalian Befut sold its entire 86.6% equity interest in Dalian Marine Co. to Mr. Fansheng Li, a noncontrolling shareholder of Dalian Marine Co., for RMB 17,320,000 (approximately $2.67 million) in cash. As part of the transaction, the applicable certifications required for producing marine cables were transferred to WFOE. As Dalian Befut will continue to manufacture marine cables for the Company, the Company has determined that Dalian Befut’s sale of its equity interests in Dalian Marine Co. did not have any material impact on the Company’s financial position and operations.

Dalian Befut Sales Co., Ltd. (“Befut Sales”) was established on August 24, 2011 by Dalian Befut and Befut Zhong Xing under the laws of the PRC, with registered capital of RMB1,000,000 (approximately $156,500). Dalian Befut invested RMB700,000 (approximately $109,550) for its 70% interest, and Befut Zhong Xing invested RMB300,000 (approximately $46,950) for its 30% interest. The main business of Befut Sales is selling wires, cables, and switch appliances.

Dalian Befut Wire & Cable Engineering and Research Co., Ltd. (“Befut Engineering and Research”) was established on August 26, 2011 by Dalian Befut under the laws of the PRC, with registered capital of RMB1,000,000 (approximately $156,500). The main business of Befut Engineering and Research is to engage in the research and development of cables and wires. It is to the Company’s advantage to apply for government subsidies if the Company has a separate entity dedicated to research and development.

Dalian Befut Management Consultants Co., Ltd. (“Befut Consultants”) was established on September 21, 2011 by Dalian Befut and an individual under the laws of the PRC, with registered capital of RMB50,000 (approximately $7,825). Dalian Befut invested RMB 30,000 (approximately $4,695) for its 60% interest. Lu Haiyang, a member of the Company’s management, invested RMB 20,000 (approximately $3,130) in exchange for 40% of ownership interest. The main business of Befut Consultants is management consultant, conference service and Etiquette Services.

Note 2 – Summary of Significant Accounting Policies

Basis Of Presentation

As disclosed in Note 1, WFOE entered into an Original Equipment Manufacturer Agreement, an Intellectual Property License Agreement and a Non-competition Agreement (collectively, the “OEM Agreements”) with Dalian Befut. Under FASB ASC 810-10 (formerly FIN 46R), Dalian Befut is the variable interest entity, or VIE, of WOFE by virtue of the OEM Agreements. As Dalian Befut’s sole purpose and objective is to provide resources and benefits to WFOE, WFOE is the primary beneficiary that can consolidate Dalian Befut.

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

Basis Of Presentation (continued)

The Company’s consolidated financial statements include the accounts of its controlled subsidiaries. All intercompany balances and transactions are eliminated in consolidation. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim financial information and the requirements of Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

In preparing the accompanying unaudited consolidated financial statements, the Company evaluated the period from September 30, 2011 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

Interim Financial Statements

These interim financial statements should be read in conjunction with the audited consolidated financial statements for the years ended June 30, 2011 and 2010, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited consolidated financial statements for the years ended June 30, 2011 and 2010.

Note 3– Restricted Cash

Cash balances in the amount of $4,713,880 and $3,565,859 were restricted as of September 30, 2011 and June 30, 2011, respectively. The balance of $1,261,478 as of September 30, 2011 was restricted as collateral for the construction loan obtained from the PRC National Development Bank Joint Equity Corporation. The balance of $782,500 as of September 30, 2011 was restricted as collateral for the short-term bank loan obtained from Bank of East Asia. The balance of $1,565,000 as of September 30, 2011 was restricted as collateral for trade notes payable issued by Bank of Jinzhou. The balance of $782,500 as of September 30, 2011 was restricted as collateral for trade notes payable issued by China Merchants Bank. The balance of $322,402 as of September 30, 2011 was restricted as collateral for letter of guarantee.

Note 4– Inventory

Inventory consisting of material, labor and manufacturing overhead as of September 30, 2011 and June 30, 2011 consists of the following:

	September 30,		June 30,
	2011		2011

Raw materials	$	2,180,821	$	1,963,765
Work in process		411,851		241,832
Finished goods		4,284,301		2,401,834
Total	$	6,876,973	$	4,607,431

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 5 – Loans to Unrelated Parties

As of September 30, 2011, the Company had outstanding loans to unrelated parties in the aggregate amount of $11,645,835, consisting of $6,539,840 to Dalian Haide Electric Power Equipment Co., Ltd, a research and development partner of the Company (“Dalian Haide”), $3,738,785 to Dalian Shipping Supporting Industrial Park Co., Ltd, a customer of the Company, $924,315 to Dalian Hongbang Trading Co., Ltd, a vendor of the Company, $286,395 to Dalian Aolong Shipping Technology& Development Co., Ltd, a vendor of the Company and $156,500 to Taonan No.1 Construction Co., Ltd, a customer of the Company. These loans are made to primarily fund working capital requirements and are payable on demand. In addition, the loans are unsecured and non-interest bearing.

As of June 30, 2011, the Company had outstanding loans to unrelated parties in the aggregate amount of $4,495,767, consisting of $4,031,667 to Dalian Haide Electric Power Equipment Co., Ltd, a research and development partner of the Company (“Dalian Haide”) and $464,100 to Dalian Shipping Supporting Industrial Park Co., Ltd, a customer of the Company. These loans are made to primarily fund working capital requirements and are payable on demand. In addition, the loans are unsecured and non-interest bearing.

Note 6 – Bank Loan Security Deposits

The Company obtained financing from various banks through third party guarantors. The Company is responsible to provide security deposits to third party guarantors per the agreements between the Company and the third guarantors. The balance of such bank loan security deposits as of September 30, 2011 and June 30, 2011 consist of the following:

	September 30,		June 30,
	2011		2011

Bank loan security deposits – short-term	$	1,241,045	$	917,371
Bank loan security deposits – long-term		313,000		309,400
Total	$	1,554,045	$	1,226,771

Note 7 – Advance Payments for Inventory

As a common practice in the business environment of China, the Company is required to make advance payments to certain vendors for inventory. The advances for the purchase of inventory amounted to $2,605,290 and $2,024,943 as of September 30, 2011 and June 30, 2011, respectively.

Note 8 – Property and Equipment

Property and equipment as of September 30, 2011 and June 30, 2011 consist of the following:

	September 30,		June 30,
	2011		2011

Buildings	$	21,123,507	$	20,880,553
Machinery and equipment		14,000,187		13,737,259
Office equipment and furniture		532,690		505,084
Vehicles		609,785		602,771
Subtotal		36,266,169		35,725,667
Less: Accumulated depreciation		4,048,638		3,504,649
		32,217,531		32,221,018
Add: Construction in progress		7,412,483		4,228,300

Total	$	39,630,014	$	36,449,318

Depreciation expense for the three months ended September 30, 2011 and 2010 was $503,761 and $433,215, respectively.

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 9 – Advance Payments – Research and Development

As a common practice in the business environment of China, the Company is required to make advance payments for goods or services that will be used in future research and development activities. The Company made the original advance payments for research and development to Dalian Haide in August 2008 for the development of twenty patents. The Company realizes the advance payments when certain progress targets are achieved, including, but not limited to, obtaining the intellectual property certificates issued by the PRC State Intellectual Property Office and passing the two-year declaration period, and related costs have been charged by the PRC State Intellectual Property Office to the Company. Such advance payments are amortized as research and development expense in the years in which the patents have passed the two- year declaration period. As of September 30, 2011 and June 30, 2011, the Company determined that these advance payments are recoverable.

Note 10 – Intangible Assets

Intangible assets as of September 30, 2011 and June 30, 2011 consist of the following:

	September 30,		June 30,
	2011		2011

Software	$	30,254	$	29,906
Trademark		89,205		88,179
Land use rights		5,848,859		5,781,587
Patent		12,325,940		12,184,172
Subtotal		18,294,258		18,083,844
Less: Accumulated amortization		3,339,177		2,964,145
Total	$	14,955,081	$	15,119,699

Amortization expense for the three months ended September 30, 2011 and 2010 was $339,866 and $320,616, respectively.

Note 11 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses as of September 30, 2011 and June 30, 2011 consist of the following:

	September 30,		June 30,
	2011		2011

Accounts payable	$	5,711,992	$	4,294,818
Accrued expenses		93,107		322,604
Total	$	5,805,099	$	4,617,422

The carrying value of accounts payable and accrued expenses approximate their fair values due to the short-term nature of these obligations.

Note 12 – Short-Term Bank Loans

Short-term bank loans consist of the following:

	September 30,		June 30,
	2011		2011
On September 14, 2010, the Company obtained a loan from Harbin Bank with a maturity date of September 13, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China, the PRC’s central bank. The average annual interest rate for the year ended June 30, 2011 was approximately 8.203%. The loan was secured by the Company’s property and equipment. The loan was paid off by September 30, 2011.	$	-	$	3,094,000

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 12 – Short-Term Bank Loans (continued)

	September 30,		June 30,
	2011		2011

On October 21, 2010, the Company obtained a loan from Dalian Economic Development Zone Xinhui Town Bank with a maturity date of October 20, 2011. The interest is paid monthly at a variable rate equal to 50% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 9.84%. The loan is secured by the Company’s inventory.	$	1,549,350	$	1,531,530

On November 11, 2010, the Company obtained a loan from the Bank of Dalian with a maturity date of November 10, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 8.528%. The loan is guaranteed by Dalian Zhongdingxin Investment Guarantee Co., Ltd., an unaffiliated third party.	$	1,565,000	$	1,547,000

On November 23, 2010, the Company obtained a loan from the Bank of Dalian with a maturity date of November 22, 2011. The interest is paid monthly at a variable rate equal to 10% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.216%. The loan is guaranteed by Dalian Tiansi Joint Guarantee Co., Ltd., an unaffiliated third party.	$	1,565,000	$	1,547,000

On January 10, 2011, the Company obtained a loan from the Bank of East Asia with a maturity date of July 10, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.93%. The loan was secured by the Company’s accounts receivables and was paid off by September 30, 2011.	$	-	$	2,320,500

On June 23, 2011, the Company obtained a loan from the Bank of East Asia with a maturity date of December 22, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.93%. The loan is secured by the Company’s accounts receivables.	$	1,565,000	$	1,547,000

On July 1, 2011, the Company obtained a loan from the Bank of East Asia with a maturity date of December 31, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.93%. The loan is secured by the Company’s accounts receivables.	$	2,347,500	$	-

On July 15, 2011, the Company obtained a loan from the Bank of China with a maturity date of November 7, 2011. The interest is paid monthly at a annual interest rate equal to 6.1%. The loan is secured by the Company’s accounts receivables.	$	668,255	$	-

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 12 – Short-Term Bank Loans (continued)

	September 30,		June 30,
	2011		2011
On July 19, 2011, the Company obtained a loan from China Merchants Bank with a maturity date of January 18, 2012. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.93%. The loan is secured by the Company’s accounts receivables.	$	2,347,500	$	-

On July 29, 2011, the Company obtained a loan from Industrial and Commercial Bank of China with a maturity date of January 28, 2012. The interest is paid monthly at a variable rate equal to 20% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate f for the three months ended September 30, 2011 was approximately 7.32%. The loan is secured by the Company’s accounts receivables.	$	1,408,500	$	-

On September 16, 2011, the Company obtained a loan from Industrial and Commercial Bank of China with a maturity date of March 15, 2012. The interest is paid monthly at a variable rate equal to 20% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.32%. The loan is secured by the Company’s accounts receivables.	$	1,611,950	$	-

On September 23, 2011, the Company obtained a loan from Harbin Bank with a maturity date of September 22, 2012. The interest is paid monthly at a variable rate equal to 20% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.872%. The loan is secured by the Company’s property and equipment.	$	3,130,000	$	-

On September 27, 2011, the Company obtained a loan from Jilin Bank with a maturity date of September 26, 2012. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 8.528%. The loan is guaranteed by a third party Dalian Fangyuan Financial Guarantee Co., Ltd.	$	3,130,000	$	-

Total	$	20,888,055	$	11,587,030

Note 13 – Loans From Unrelated Parties

These loans are based on good-faith, and are non-interest bearing and payable on demand. There are no financial or non-financial covenants associated with these loans. The proceeds from these loans are utilized for working capital. As of September 30, 2011 and June 30, 2011, the Company had outstanding loans from unrelated parties of $4,057,140 and $3,364,992, respectively.

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 14 – Trade Notes Payable

Trade notes payable consist of non-interest bearing promissory notes issued in connection with the acquisition of certain inventory. Balances outstanding as of September 30, 2011 and June 30, 2011 were $4,695,000 and $3,094,000, respectively.

Note 15 – Advances from Customers

As a common practice in the business environment of China, the Company is required to receive advance payments from customers. The advances from customers amounted to $4,890,072 and $3,273,647 as of September 30, 2011 and June 30, 2011, respectively.

Note 16 – Long-Term Bank Loans

Long-term bank loans consist of the following:

	September 30,		June 30,
	2011		2011
On November 2, 2009, Dalian Befut entered into a Loan Agreement with the PRC National Development Bank Joint Equity Corporation (“NDB”) pursuant to which Dalian Befut borrowed RMB100,000,000 (approximately $15,470,000) from NDB (the “Loan”), The term of the Loan is seven years, with a maturity date of November 1, 2016. The interest rate is a variable rate equal to 5% per annum above the floating base interest for loans of the same term promulgated by the People’s Bank of China. The average interest rate for the three months ended September 30, 2011 was approximately 7.245%. The Loan was designated to finance the construction of Dalian Befut’s planned specialty cable production lines with a production capacity of 4,000 km. The Loan was secured by, among other liens, a first priority lien on Dalian Befut’s land use right and its building property ownership and guaranteed by, among other guarantees, Mr. Hongbo Cao and Mr. Tingmin Li, Dalian Befut’s two major shareholders.	$	15,024,000	$	14,851,200

Total	$	15,024,000	$	14,851,200

Less: Current portion		1,095,500		1,082,900

Total noncurrent portion	$	13,928,500	$	13,768,300

Note 17 – Government Subsidy Income

Government subsidy income for the three months ended September 30, 2011 and 2010 consists of the following:

	For the Three Months Ended September 30,
	2011		2010

Appropriation of Technology Innovation Subsidy	$	52,841	$	35,792
Newly Identified Municipal Technical Center Subsidy		-		73,950
Value added tax refund for employing physically-challenged workers		132,753		26,745
Total	$	185,594	$	136,487

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 18 –Earnings Per Share

The Company presents earnings per share on a basic and diluted basis. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing income available to common shareholders by the weighted average number of shares outstanding plus the dilutive effect of potential securities. All shares and per share data have been adjusted retroactively to reflect the recapitalization of the Company pursuant to the Share Exchange Agreement with Befut Nevada.

	For the Three Months Ended September 30,
	2011		2010

Net income attributable to BEFUT International Co., Ltd.	$	2,209,504	$	2,248,257

Weighted average common shares (denominator for basic earnings per share)		29,715,640		29,715,640

Effect of dilutive securities:
Warrants		-		36,454

Weighted average common shares (denominator for diluted earnings per share)		29,715,640		29,752,094

Basic earnings per share	$	0.07	$	0.08
Diluted earnings per share	$	0.07	$	0.08

Note 19– Stockholders’ Equity And Related Financing Agreements

On March 13, 2009, as part of the reverse merger transaction, the Company acquired, from Befut BVI, 100% of the outstanding shares of common stock of Befut Nevada. In exchange, Befut BVI was issued 117,768,300 shares of the Company’s common stock, under a Share Exchange Agreement (“SEA”) pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as amended, for issuances not involving a public offering. As a result of the transaction, Befut Nevada became a wholly-owned subsidiary of the Company.

On March 13, 2009, the Company completed a private financing totaling $500,000, for which convertible promissory notes were issued, with four accredited investors (the “March 2009 Financing”). Consummation of the March 2009 Financing was a condition to the completion of the share exchange transaction with Befut BVI and the Befut BVI Stockholders under the SEA. The securities offered in the March 2009 Financing were sold pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company and the investors named in the Purchase Agreement.

In accordance with the Purchase Agreement, the Company issued securities consisting of: (i) 3,130,869 shares of the Company’s common stock $0.001 par value per share in connection with the private financing; and (ii) Five (5) year warrants to purchase 720,076 shares of the Company’s common stock at an initial exercise price of $0.1916 per share.

On June 18, 2009, the Company effectuated a 1 for 4.07 reverse stock split of its outstanding common stock (the “Reverse Split”). The Reverse Split did not alter the number of shares of the common stock the Company is authorized to issue, but rather simply reduced the number of shares of its common stock issued and outstanding. Any fractional shares issued as a result of the Reserve Split were rounded up. In addition, any shareholder owning at least 100 shares but less than 407 shares of the Company’s common stock on June 17, 2009, would own at least 100 shares after giving effect to the Reverse Split.

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 19– Stockholders’ Equity And Related Financing Agreements (continued)

On March 13, 2009, the Company issued convertible notes in an aggregate principal amount of $500,000, at an annual interest of 15%. On March 12, 2010, the maturity date of the convertible notes, the Company repaid convertible notes in the amount of $370,000 and an interest payment of $55,500. The remaining convertible notes in the aggregate principal amount of $130,000 were converted into 200,000 shares of common stock of the Company at the conversion price of $0.65 per share on May 6, 2010.

During the year ended June 30, 2009, the Company received cash contributions from shareholders in the amount of $5,301,971 and intangible assets with an aggregate fair value of $11,383,050 in exchange for ownership, both of which were accounted for as additional paid-in-capital. During the year ended June 30, 2009, two shareholders of the Company, Tingmin Li and Hongbo Cao, contributed two patents into the Company as increases to their respective capital contributions. The two patents were Intelligent Reactive Power Compensation and Automatic Protection Ni-mh Battery Screen, which were valued as $11,383,050 in total by a professional valuation firm. The contribution was treated as capital transaction per ASC 505-10.

Note 20– Income Taxes

The Company is a Nevada corporation and conducts all of its business through its Chinese subsidiaries. The Company’s business is conducted solely in the PRC. As the Company is a U.S. holding company, it has not recorded any income for the years ended September 30, 2011 and 2010, there was no provision or benefit for U.S. income tax purpose.

The Company is governed by the Income Tax Law of the PRC concerning private-run enterprises, which are generally subject to a statutory tax rate of 25% and were previously, until January 2008, subject to a statutory tax rate of 33% (30% state income tax plus 3% local income tax) on income reported in the statutory statements after appropriate tax adjustments.

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the PRC (the “New CIT Law”), which became effective from January 1, 2008. Under the New CIT Law, the corporate income tax rate applicable to all companies, including both domestic and foreign-invested companies, is 25%, replacing the previous applicable tax rate of 33%. For the three months ended September 30, 2011 and 2010, the income tax provision for the Company was $383,294 and $807,135, respectively.

In July 2006, the FASB issued FASB Interpretation No.48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN 48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company does not recognize any benefits in the financial statements for the three months ended September 30, 2011 and 2010.

Note 21 – Employee Welfare Plan

The Company has established an employee welfare plan in accordance with applicable Chinese laws and regulations. Full-time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance and other welfare benefits are provided to employees. PRC labor regulations require the Company to accrue for these benefits based on a certain percentage of the employees’ salaries.

Note 22 – Risk Factors

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal conditions in the PRC. The Company's business may also be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

Note 23 – Risk of Concentration and Credit Risk

For the three months ended September 30, 2011, five vendors accounted for approximately 56% of the Company’s purchases of raw materials, while for the three months ended September 30 2010, five vendors accounted for approximately 84% of the Company’s purchases of raw materials. Total purchases from these vendors were $9.85 million and $15.77 million for the three months ended September 30, 2011 and 2010, respectively.

For the three months ended September 30, 2011, five major customers accounted for $4.83 million in sales, or approximately 31% of the Company’s total sales. For the three months ended September 30, 2010, five customers accounted for $5.87 million in sales, or approximately 37% of the Company’s total sales.

Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.

Note 24 – Supplemental Cash Flow Disclosures

The following is supplemental information relating to the consolidated statements of cash flows:

	For the Three Months Ended September 30,
	2011		2010

Cash paid for interest	$	741,798	$	337,068
Cash paid for income taxes	$	15,525	$	-

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report.

Certain statements in this report constitute “forward-looking statements”. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth 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 (“Befut Public Co.”); (ii) BEFUT Corporation, a corporation incorporated in the State of Nevada and a wholly owned subsidiary of Befut Public Co. (“Befut Nevada”); (iii) Hongkong BEFUT Co., Ltd. (“Befut Hongkong”), a wholly-owned subsidiary of Befut Nevada, incorporated under the laws of Hong Kong; (iv) 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; (v) 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; (vi) Dalian Marine Cable Co., Ltd. (“Befut Marine”), a corporation incorporated under the laws of the PRC, which was 86.6% owned by Dalian Befut as of February 25, 2011; (vii) 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; (viii) 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; (ix) Dalian Befut Sales Co., Ltd., a corporation incorporated under the laws of the PRC, and that is 70% owned by Dalian Befut and 30% owned by Befut Zhong Xing; (x) Dalian Befut Wire & Cable Engineering and Research Co., Ltd., a corporation incorporated under the laws of the PRC, and that is wholly owned by Dalian Befut; and (xi) Dalian Befut Management Consultants Co., Ltd., a corporation incorporated under the laws of the PRC, and that is 60% owned by Dalian Befut .

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.

Overview

We believe that we are one of the most competitive manufacturers of specialty cables in northeastern China. For the three months ended September 30, 2011, approximately 36% of our revenues were generated from traditional cable, about 57% of revenues were generated from specialty cable and about 7% of revenues were generated from our switch application business. 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. Our switch application business consists mainly of high and low voltage distribution cabinet switches and crane electronic control switches, which products complement our cable product offerings.

OEM Agreements

We conduct substantially all of our operations through, and generate substantially all of our revenues from Dalian Befut, pursuant to an Original Equipment Manufacturer Agreement, dated February 16, 2009 (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 provides 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 “Non compete Agreement”, together with the IP Agreement and Manufacturing 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, 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.

Recent Developments

On August 24, 2011 Dalian Befut and Befut Zhong Xing formed Dalian Befut Sales Co., Ltd. (“Befut Sales”) under the laws of the PRC, with registered capital of RMB1,000,000 (approximately $156,500). Dalian Befut invested RMB700,000 (approximately $109,550) for its 70% interest, and Befut Zhong Xing invested RMB300,000 (approximately $46,950) for its 30% interest. The main business of Befut Sales is selling wires, cables, and switch appliances.

On August 26, 2011 Dalian Befut formed Dalian Befut Wire & Cable Engineering and Research Co., Ltd. (“Befut Engineering and Research”) under the laws of the PRC, with registered capital of RMB1,000,000 (approximately $156,500). The main business of Befut Engineering and Research is to engage in the research and development of cables and wires. It is to our advantage to apply for government subsidies if we have a separate entity dedicated to research and development.

On September 21, 2011 Dalian Befut and a member of our management formed Dalian Befut Management Consultants Co., Ltd. (“Befut Consultants”) under the laws of the PRC, with registered capital of RMB50,000 (approximately $7,825). Dalian Befut invested RMB 30,000 (approximately $4,695) for its 60% interest. Mr. Haiyang Lu, a member of our management, invested RMB 20,000 (approximately $3,130) in exchange for 40% of the ownership interest. The main business of Befut Consultants is management consultant, conference service and etiquette services.

Results of Operations

Three months ended September 30, 2011 compared to three months ended September 30, 2010

The following table summarizes the results of our operations during the three-month periods ended September 30, 2011 and September 30, 2010, respectively and provides information regarding the dollar and percentage increase or (decrease) from the three-month period ended September 30, 2011 compared to the three-month period ended September 30, 2010.

	Three Months ended						%
Item	30-Sep-11			30-Sep-10			Change
Sales	$	16,873,076		$	15,930,811			6	%
Cost of sales	$	12,422,241		$	11,670,760			6	%
Gross profit	$	4,450,835		$	4,260,051			4	%
Total operating expenses	$	1,317,096		$	1,050,227			25	%
Total other income/(expenses)	$	(582,524	)	$	(218,790	)		166	%
Net income	$	2,209,504		$	2,248,257			-1.7	%
Gross profit margin		26.38	%		26.74	%		-1.36	%
Basic earnings per share		0.07			0.08			-13	%
Diluted earnings per share		0.07			0.08			-13	%
Weighted average number of common shares outstanding:
Basic		29,715,640			29,715,640			0	%
Diluted		29,715,640			29,752,094			0	%

Sales

Our sales for the three months ended September 30, 2011 were $16,873,076, representing an increase of $942,265, or 6%, as compared to the three months ended September 30, 2010. Approximately $2.3 million was attributable to sales of our specialty cable products and $1 million was attributable to sales of our switch appliance business. Our increase in total sales was partially offset by decreased sales of our traditional cable products, which were approximately $2.4 million for the period.

The increase in sales was primarily due to two factors: (i) 12% increase in our total sales volume driven by the increased demand for petrochemical cable, and (ii) higher sales prices of our cable products and switch appliances, which were primarily the result of an approximately 10% increase in the average price of copper, our primary raw material, which we passed on to our customers. Copper constitutes approximately 70%-80% of the raw material components in our cable products.

The percentage of total sales that was attributable to sales of specialty cable, traditional cable and switch appliances for the three months ended September 30, 2011 was approximately 57%, 36% and 7%, representing an increase of approximately 11%, a decrease of approximately 17% and an increase of approximately 6%, respectively, as compared to the three months ended September 30, 2010. Fluctuations in product percentages are mainly due to the changes in the product requirements of our customers.

The rate of increase in our sales slowed down as compared with the previous period, primarily due to two factors: (i) part of our working capital was invested in the construction of the Phase II Changxing Facility, and (ii) the price of copper, our main raw material, decreased substantially in September, when certain customers delayed their orders.

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. Our cost of sales for the three months ended September 30, 2011 was $12,422,241, an increase of $751,481, or 6%, as compared to the three months ended September 30, 2010.

Gross Profit

Gross profit for the three months ended September 30, 2011 was $4,450,835, representing an increase of $190,784, or 4%, as compared to the three months ended September 30, 2010. Gross profit margin was 26.38% for the three months ended September 30, 2011, representing a decrease of 1.35%, as compared to the three months ended September 30, 2010. The decrease in gross profit margin was primarily due to the significant decrease in margin of our marine cable and traditional cable by 2% and 3%, respectively, as compared to the same period in 2010. The gross profit margin of each category of our products for the three months ended September 30, 2011 was approximately 35% for specialty cable, 17% for traditional cable and 8% for switch appliances, as compared to gross profit margins of approximately 35% for specialty cable, 20% for traditional cable and 11% for switch appliances for three months ended September 30, 2010.

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 $155,756 in the three months ended September 30, 2011, as compared to $38,607 in the three months ended September 30, 2010, representing an increase of $117,149, or 303%. The increase in selling expenses was mainly due to the increase in transportation expenses General and administrative expenses were $1,161,340 for the three months ended September 30, 2011, an increase of $149,720, or 15%, as compared to the three months ended September 30, 2010. The increase of approximately $277,528 of general and administrative expenses from WFOE was mainly due to the manufacturing overhead recorded as general and administrative expense instead of cost of sales since WFOE generated nominal sales for the period ended September 30, 2011. The increase in selling, general and administrative expenses was partially offset by the a decrease of approximately $141,782 of general and administrative expenses from Yuansheng.

Income from Operations

Our operating income was $3,133,739 for the three months ended September 30, 2011, a decrease of $76,085, or 2%, as compared to $3,209,824 for the three months ended September 30, 2010. The slight decrease was due to the increase of selling, general and administrative expenses, which was partially offset by the increase in gross profit.

Government Subsidy

For the three months ended September 30, 2011, we received subsidies from various PRC governmental bureaus in the aggregate amount of $185,594, representing an increase of $49,107, or 36%, as compared to subsidies of $136,487 received in the three months ended September 30, 2010. The subsidies received by the Company in the quarter ended September 30, 2011 consisted of (i) a refund of $52,841 for value added taxes paid by the Company in February 2011, and (ii) $132,753 received from the Appropriation of Technology Innovation Fund of the Department of Finance of Liaoning Province.

Interest Expenses

Interest expense was $773,296 for the three months ended September 30, 2011, an increase of $378,394, or 96%, as compared to $394,902 for the three months ended September 30, 2010. The increase of the interest expense was mainly due to the significant increase of short-term bank loans that we have obtained for the three months ended September 30, 2011, as compared to the three months ended September 30, 2010.

Income Taxes

For the three months ended September 30, 2011, our business operations were conducted solely by WFOE, Dalian Befut and its subsidiaries, and as such, we were governed by the PRC Enterprise Income Tax Laws (the “EIT Law”). China enterprise income tax is calculated based on taxable income determined under Chinese generally accepted accounting principles. In accordance with the EIT Law, a Chinese domestic company is subject to taxes, including but not limited to: (i) an enterprise income tax rate of 25% and (ii) a value added tax of 17% on the goods sold.

Provision for income taxes was $383,294 for the three months ended September 30, 2011, a decrease of $423,841, or 53%, compared to $807,135 for the three months ended September 30, 2010.

Net Income

Net income for the three months ended September 30, 2011 was $2,209,504, a decrease of $38,753, or 1.7 %, as compared to net income of $2,248,257 for the three months ended September 30, 2010. The decrease was mainly attributable to the decrease of $76,085 in income from operations and the increase of $378,394 in interest expense, which was partially offset by an increase in government subsidy of $49,107 and a decrease in income taxes of $423,841.

Liquidity and Capital Resources

Selected Measures of Liquidity and Capital Resources

The following table sets forth certain relevant measures regarding our liquidity and capital resources:

(dollars in thousands, except ratios)	September 30, 2011		June 30, 2011

Cash and cash equivalents and restricted cash	$	7,186	$	6,290

Working capital	$	11,270	$	11,502

Ratio of current assets to current liabilities	1.3:1		1.4 :1

We have historically financed our operations and capital expenditures through cash flows from operations and bank loans.

Our approximately $0.2 million decrease in working capital from June 30, 2010 to September 30, 2011 was primarily due to the increase of $15.62 million of current liabilities, which was partially offset by the increase of $15.39 million of current assets. The increase of current liabilities mainly includes increases of $9.3 million of short term bank loans, $0.7 million of loans from unrelated parties, $1.6 million in advances from customers, $1.6 million of trade notes payable and $1.2 million of accounts payable. The increase of current assets mainly includes the increases of $0.9 million of cash and cash equivalents and restricted cash, $4.2 million of account receivables, $7.2 million of loans to unrelated parties, and $2.3 million of inventory.

We intend to use our available funds as working capital and to expand and develop our current business operations. We believe that our available funds will provide us with sufficient capital for at least the next twelve months; however, to the extent we expand our operations or make acquisitions, we may require additional funding, which may include debt and/or equity financing. There can be no assurance that any additional financing will be available on terms acceptable to us, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

Cash Flows

We had a net decrease of $252,301 in cash and cash equivalents from June 30, 2011 to September 30, 2011. The following table summarizes such changes:

	For the three months ended
	September 30, 2011			September 30, 2010
Net cash used in operating activities	$	522,050		$	(2,362,255	)
Net cash used in investing activities	$	(10,490,433	)	$	(137,297	)
Net cash used in financing activities	$	9,642,398		$	1,658,961
Net decrease in cash, cash equivalents	$	(252,301	)	$	(856,727	)

Operating Activities

We used net cash of $522,050 for our operating activities in the three months ended September 30, 2011, representing an increase of $2,884,305, or 122%, as compared to net cash of $2,362,255 used in the three months ended September 30, 2010. Although the net income for the three months ended September 30, 2011 was $2,167,921, representing a minimal decrease of $15,978, as compared to net income of $2,183,899 for the three months ended September 30, 2010, we still used net cash of $522,050 for our operating activities. The positive operating cash flow was primarily due to the increase of accounts payable, advances from customers and other payables. However, the decrease of accounts receivables, inventory and trade notes payable were partially offset the increase of operating activities.

Investing Activities

The net cash used in our investment activities in the three months ended September 30, 2011 was $10,490,433, representing an increase of $10,353,136, as compared to $137,297 of net cash used in investment activities in the three months ended September 30, 2010. The increase was mainly due to, among other things, cash used in connection with the construction of the Phase II Changxing Facility and loans to unrelated parties.

Financing Activities

The net cash provided by our financing activities in the three months ended September 30, 2011 was $9,642,398, representing an increase of $7,983,437, as compared to $1,658,961 of net cash used in the three months ended September 30, 2010. The increase was mainly due to approximately $9.17 million in short term bank loans, which was partially offset by a decrease of $1 million in loans from unrelated parties.

Financial Obligations

As of September 30, 2011, our outstanding loans were as follows:

Creditors	Loan Amount		Interest Rate			Term	Maturity Date

Xinhui Town Bank	$	1,549,350		9.84	%+	1 year	10/20/11

Bank of Dalian	$	1,565,000		8.528	%*	1 year	11/10/11

Bank of Dalian	$	1,565,000	7.216		%^	1 year	11/22/11

Bank of East Asia	$	1,565,000		7.93	% *	6 months	12/22/11

Bank of East Asia	$	2,347,500		7.93	%*	6 months	12/31/11

Bank of China	$	668,255		6.1	%	115 days	11/07/11

China Merchants Bank	$	2,347,500		7.93	%*	6 months	01/18/12

Industrial and Commercial Bank of China	$	1,408,500	7.32		%&	6 months	01/28/12

Industrial and Commercial Bank of China	$	1,611,950	7.32		%&	6 months	03/15/12

Harbin Bank	$	3,130,000	7.872		%&	1 year	09/22/12

Jilin Bank	$	3,130,000		8.528	%*	1 year	09/26/12

PRC National Development Bank Joint Equity Corporation	$	15,024,000		7.245	%#	7 years	11/01/16

* Variable interest rate equal to 30% per annum above the floating base rate issued by the People’s Bank of China.

^ Variable interest rate equal to 10% per annum above the floating base rate issued by the People’s Bank of China.

+ Variable interest rate equal to 50% per annum above the floating base rate issued by the People’s Bank of China.

# Variable interest rate equal to 5% per annum above the floating base rate issued by the People’s Bank of China.

& Variable interest rate equal to 20% per annum above the floating base rate issued by the People’s Bank of China.

Accounts Receivable

The balance of our accounts receivable was $22,396,099, net of allowance for doubtful accounts of $120,495, as of September 30, 2011, as compared to $18,166,580, net of allowance for doubtful accounts of $87,480, as of June 30, 2010. The days’ sales in receivables for the three months ended September 30, 2011 were 108 days, as compared to 66 days for the three months ended September 30, 2010.

Inventories

Inventories consisted of the following as of September 30, 2011 and June 30, 2010, respectively:

(dollars)	September 30, 2011		June 30, 2011
Category
Raw materials	$	2,180,821	$	1,963,765
Work-in-process		411,851		241,832
Finished goods		4,284,301		2,401,834
Total inventories	$	6,876,973	$	4,607,431

We had total inventory of $6,876,973 as of September 30, 2011, representing an increase of $2,269,542, or 49%, as compared to inventory of $4,607,431 as of June 30, 2010. Days’ purchase in inventory for the three months ended September 30, 2011 were 42 days, compared to 25 days for the three months ended September 30, 2010.

Off-Balance Sheet Arrangements

At September 30, 2011, we did not have any off-balance sheet arrangements.

Foreign Currency Exchange

For the three months ended September 30, 2011, the U.S. Dollar and RMB exchange rate fluctuated from RMB 6.4716 to 1 U.S. Dollar to RMB6.3549 to 1 U.S. Dollar, an increase of approximately 2% 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.

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.

Revenue Recognition

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.

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

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 September 30, 2011, the amount of our receivables ages less than one year, 1-2 years and more than two years was $21,804,718, $675,132 and $36,744, respectively.

As of September 30, 2011 and June 30, 2010, the Company had accounts receivable of $22,396,099 and $18,166,580, net of allowance for doubtful accounts of $120,495 and $87,480, respectively.

Consolidation

Pursuant to ASC 810-10-15-14, an entity is deemed to be a variable interest entity, or VIE, and thus to be consolidated by its primary beneficiary, if, by intention, any one of the following conditions is present:

The total equity investment at risk in the legal entity to be consolidated is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, including equity holders; or

As a group, holders of the equity investment at risk lack any one of the following characteristics of a controlling financial interest:

1. The power, through voting rights or similar rights to direct the activities of an entity that most significantly impact that entity’s economic performance.

2. The obligation to absorb the expected losses of the legal entity. Such an obligation does not exist if the shareholders/investors are directly or indirectly protected from losses or are guaranteed a return on their investment by the legal entity itself or by other parties involved with the legal entity.

3. The right to receive expected residual returns of the legal entity. Such right is not considered to be present if the residual returns are capped by the legal entity's governing documents or by other arrangements with other variable interest holders or the legal entity itself.

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 98.6% of the equity interests in Dalian Befut, the Company believes that, due to the OEM Agreements, WFOE, instead of Messrs. Cao and Li, has the power to direct the activities of Dalian Befut to significantly impact the economic performance of Dalian Befut. Based on the aforementioned assessment, Dalian Befut is a VIE of the Company under ASC 810-10-15-14-B.1. above, and as such, is consolidated into the Company. Although the Company is only required to meet one criteria under ASC 810-10-15-14 in order to consolidate Dalian Befut, the Company believes that facts and circumstances exist that would allow it to meet certain other qualifying criteria set forth in ASC 810-10-15-14.

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

Item 4.

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 September 30, 2011 (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.

Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.

In connection with the preparation of our responses to comments received from the SEC in 2011, 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, and for the quarters ended September 30, 2010, December 31, 2010 and March 31, 2011 respectively. As a result of the foregoing, management determined that a material weakness existed with respect to our financial reporting. This weakness was a result of our insufficient disclosure of certain required information by inexperienced staff, which required the restatement of our consolidated financial statements as of and for the years ended June 30, 2010 and 2009, and for the quarters ended September 30, 2010, December 31, 2010 and March 31, 2011 respectively.

As a result of the material weakness identified with respect to our financial reporting and our ongoing efforts to remediate such weakness, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2011. As of the date of this report, we are undertaking the following steps to correct the aforementioned material weakness by:

Establishing policies and procedures of transaction level and type to improve our internal control environment;

Implementing a financial closing process check list including major book closing steps to perform consolidation and reviews; and

Recruiting qualified accounting professionals with sufficient US GAAP knowledge to enhance the quality of our financial reporting preparation.

Changes in Internal Control Over Financial Reporting

Since becoming aware of the material weakness described above after the quarter ended March 31, 2011, we have undertaken the aforementioned steps to remediate the weakness in our internal controls over financial reporting. Except for such efforts, there was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 6.

Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto.

SIGNATURES

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

	BEFUT INTERNATIONAL CO., LTD.

Date: December 27, 2011	By:	/s/ Hongbo Cao
		Name: Hongbo Cao
		Title: President and Chief Executive Officer
		(principal executive officer)

Date: December 27, 2011	By:	/s/ Mei Yu
		Name: Mei Yu
		Title: Chief Financial Officer
		(principal financial officer and principal
		accounting officer)

EXHIBIT INDEX

No.		Description

31.1 –		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 –		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 –		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 –		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

BEFUT International Co., Ltd. - FORM 10-Q - December 27, 2011

Attached files

BEFUT International Co., Ltd. Reports