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 December 31, 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 S 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 S

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 29,715,640 shares of Common Stock, $.001 par value, were outstanding as of February 9, 2012.

 

 

TABLE OF CONTENTS

 

		Page
PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements.	3
	Consolidated Balance Sheets As of December 31, 2011(Unaudited) and June 30, 2011	5
	Consolidated Statements of Operations For the Three and Six Months Ended December 31, 2011 and 2010 (Unaudited)	6
	Consolidated Statements of Comprehensive Income For the Three and Six Months Ended December 31, 2011 and 2010 (Unaudited)	7
	Consolidated Statements of Cash Flows For the Six Months Ended December 31, 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.	21
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	32
Item 4.	Controls and Procedures.	32
PART II	OTHER INFORMATION	33
Item 6.	Exhibits.	33
Signatures		34
Exhibits/Certifications

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements.

  

BEFUT INTERNATIONAL CO., LTD.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

DECEMBER 31, 2011 AND 2010

 

(UNAUDITED)

 

 

BEFUT INTERNATIONAL CO., LTD.

Consolidated Financial Statements

December 31, 2011 and 2010

(Unaudited)

 

Table of Contents

 

	Page
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statements of Cash Flows	5
Notes to Consolidated Financial Statements	6

 

 

BEFUT INTERNATIONAL CO., LTD.

 

Consolidated Balance Sheets

 

		December 31,				June 30,
		2011				2011
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	5,217,291			$	2,724,146
Restricted cash			7,914,149				3,565,859
Accounts receivable, net of allowance for doubtful accounts of $121,188			24,584,186				18,166,580
and $87,480 at December 31, 2011 and June 30, 2011, respectively
Due from factor			-				108,545
Inventory			7,760,095				4,607,431
Trade notes receivable			1,428,063				1,343,309
Loans to unrelated parties			16,021,073				4,495,767
Bank loan security deposits			933,382				917,371
Advance payments for inventory			3,176,074				2,024,943
Prepaid VAT taxes			-				200,006
Other current assets			1,976,022				1,729,758
Total current assets			69,010,335				39,883,715
Property and equipment, net			39,730,916				36,449,318
Other assets:
Advance payments for property and equipment			921,885				771,414
Advance payments – Research & Development			1,067,172				1,048,866
Bank loan security deposits – long term			314,800				309,400
Intangibles, net			14,699,101				15,119,699
Total other assets			17,002,958				17,249,379
Total assets		$	125,744,209			$	93,582,412
Liabilities
Current liabilities:
Accounts payable and accrued expenses		$	6,766,344			$	4,617,422
Short-term bank loans			22,460,980				11,587,030
Current portion of long-term bank loan			2,203,600				1,082,900
Loans from unrelated party			4,244,118				3,364,992
Trade notes payable			11,018,000				3,094,000
Advances from customers			6,168,590				3,273,647
Due to shareholder			579,959				-
Income taxes payable			892,083				322,299
Other taxes payable			658,213				-
Other current liabilities			2,496,585				1,039,231
Total current liabilities			57,488,472				28,381,521
Long-term bank loan			12,434,600				13,768,300
Total liabilities			69,923,072				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,			29,716				29,716
29,715,640 and 29,715,666 shares issued and outstanding at
December 31, 2011 and June 30, 2011, respectively
Additional paid-in capital			21,838,047				21,838,047
Statutory reserves			1,215,273				1,215,273
Retained earnings			26,926,592				23,378,099
Accumulated other comprehensive income			5,316,605				4,390,669
Total stockholders’ equity			55,326,233				50,851,804
Noncontrolling interest			494,904				580,787
Total equity			55,821,137				51,432,591
Total liabilities and equity		$	125,744,209			$	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 December 31,								For the Six Months Ended December 31,
		2011				2010				2011				2010
Sales		$	13,382,645			$	14,871,164			$	30,255,721			$	30,801,975
Cost of sales			10,056,846				10,954,272				22,479,087				22,625,032
Gross profit			3,325,799				3,916,892				7,776,634				8,176,943
Operating expenses
Selling expenses		$	177,529				149,643				333,285				188,250
General and administrative expenses			1,104,355				1,032,259				2,265,695				2,043,879
Total operating expenses			1,281,884				1,181,902				2,598,980				2,232,129
Income from operations			2,043,915				2,734,990				5,177,654				5,944,814
Other income (expenses):
Government subsidy income			100,138				180,155				285,732				316,642
Interest income			9,140				1,462				28,723				9,966
Interest expense			(838,898	)			(494,852	)			(1,612,194	)			(889,754	)
Other income (expenses), net			208,443				107,024				194,039				138,145
Total other expenses			(521,177	)			(206,211	)			(1,103,700	)			(425,001	)
Income before provision for income taxes			1,522,739				2,528,779				4,073,954				5,519,813
Provision for income taxes			241,586				614,895				624,880				1,422,030
Net income			1,281,153				1,913,884				3,449,074				4,097,783
Less: net loss attributable to noncontrolling interest			(57,192	)			(22,681	)			(98,775	)			(87,038	)
Net income attributable to BEFUT International Co., Ltd.		$	1,338,345			$	1,936,565			$	3,547,849			$	4,184,821
Basic earnings per share		$	0.05			$	0.07			$	0.12			$	0.14
Diluted earnings per share		$	0.05			$	0.07			$	0.12			$	0.14
Weighted average number of common shares outstanding:
Basic			29,715,640				29,715,640				29,715,640				29,715,640
Diluted			29,715,640				29,786,677				29,715,640				29,771,813

 

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 December 31,								For the Six Months Ended December 31,
		2011				2010				2011				2010
Net income		$	1,281,153			$	1,913,884			$	3,449,074			$	4,097,783
Other comprehensive income
Foreign currency translation adjustment			253,748				598,078				938,828				1,341,096
Total comprehensive income			1,534,901				2,511,962				4,387,902				5,438,879
Less: comprehensive income attributable to noncontrolling interest			(117,664	)			(22,177	)			(85,883	)			(27,374	)
Comprehensive income attributable to BEFUT		$	1,652,565			$	2,534,139			$	4,473,785			$	5,466,253

 

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

 

 

BEFUT INTERNATIONAL CO., LTD.

 

Consolidated Statements of Cash Flows

(Unaudited)

 

		For the Six Months Ended
		December 31,
		2011				2010
Cash flows from operating activities:
Net Income		$	3,449,074			$	4,097,783
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			1,696,929				1,583,652
Provision for bad debts			32,055				-
Changes in current assets and current liabilities:
Restricted cash			(4,269,171	)			(2,239,572	)
Accounts receivable			(6,116,666	)			(7,894,969	)
Inventory			(3,102,057	)			(2,574,960	)
Trade notes receivable			(61,068	)			-
Advance payments for inventory			(1,116,944	)			(1,066,359	)
Prepaid VAT taxes			201,789				-
Other current assets			(256,571	)			(2,258,178	)
Accounts payable and accrued expenses			1,965,270				(176,022	)
Trade notes payable			7,839,000				2,983,200
Advances from customers			2,826,813				450,523
Income taxes payable			561,937				1,391,612
Other taxes payable			654,086				248,962
Other current liabilities			1,576,171				1,785,585
Total adjustments			2,431,573				(7,766,526	)
Net cash provided by (used in) operating activities			5,880,647				(3,668,743	)
Cash flows from investing activities:
Advance payments for property and equipment			(137,516	)			(104,131	)
Due from related party			-				478,809
Additions to property and equipment			(3,667,024	)			(795,418	)
Loans to unrelated parties			(11,404,838	)			(789,809	)
Acquisition of intangible assets			-				(5,964	)
Net cash used in investing activities			(15,209,378	)			(1,216,513	)
Cash flows from financing activities:
Due from factor			110,004				-
Bank loan security deposits			-				(26,849	)
Loans from unrelated parties			852,539				1,819,753
Proceeds from short-term bank loans			17,674,984				8,975,000
Repayment of short-term bank loans			(7,024,500	)			(6,130,476	)
Due to shareholder			577,674				-
Repayment of long-term bank loan			(470,340	)			(298,320	)
Capital contribution from minority shareholder for Befut Zhong Xing			-				59,183
Capital contribution from minority shareholder for Befut Consultants			3,136				-
Net cash provided by financing activities			11,723,497				4,398,291
Effect of foreign currency translation on cash			98,379				(70,748	)
Net increase (decrease) in cash and cash equivalents			2,493,145				(557,713	)
Cash and cash equivalents – beginning			2,724,146				1,319,173
Cash and cash equivalents – ending		$	5,217,291			$	761,460

 

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., its subsidiaries and the companies controlled by WFOE, as defined below (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 owning 86.6% of the equity interest. Dalian Marine Co. was formed to conduct marketing activities and produce marine cables for Dalian Befut. 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.

 

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 January 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 six months ended December 31, 2011.

 

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.

 

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 it 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 8 of Regulation S-X of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position and the results of operations and cash flows for the interim periods have been included.

 

In preparing the accompanying unaudited consolidated financial statements, the Company evaluated the period from December 31, 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 $7,914,149 and $3,565,859 were restricted as of December 31, 2011 and June 30, 2011, respectively. The balance of $1,270,337 as of December 31, 2011 was restricted as collateral for the construction loan obtained from the PRC National Development Bank Joint Equity Corporation. The balance of $787,000 as of December 31, 2011 was restricted as collateral for the short-term bank loan obtained from Bank of East Asia. The balance of $1,574,000 as of December 31, 2011 was restricted as collateral for trade notes payable issued by Bank of Yingkou. The balance of $3,148,000 as of December 31, 2011 was restricted as collateral for trade notes payable issued by China Minsheng Banking Corp.,Ltd.. The balance of $787,000 as of December 31, 2011 was restricted as collateral for trade notes payable issued by China Merchants Bank. The balance of $347,812 as of December 31, 2011 was restricted as collateral for letter of guarantee.

 

Note 4– Inventory

 

Inventory consisting of material, labor and manufacturing overhead as of December 31, 2011 and June 30, 2011 consists of the following:

 

		December 31,				June 30,
		2011				2011
Raw materials		$	1,823,887			$	1,963,765
Work in process			343,455				241,832
Finished goods			5,592,753				2,401,834
Total		$	7,760,095			$	4,607,431

 

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 5 – Loans to Unrelated Parties

 

As of December 31, 2011, the Company had outstanding loans to unrelated parties in the aggregate amount of $16,021,073, consisting of $12,390,105 to Dalian Haide Electric Power Equipment Co., Ltd, a research and development partner of the Company (“Dalian Haide”), $2,556,701 to Dalian Shipping Supporting Industrial Park Co., Ltd, a customer of the Company, $353,130 to Dalian Hongbang Trading Co., Ltd, a customer of the Company, $406,337 to Dalian Marine Cable Co., Ltd., a customer of the Company and $314,800 to Su Yijun, a customer of the Company. These loans are made to primarily fund working capital requirements of the borrowers 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 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 of the borrowers 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 December 31, 2011 and June 30, 2011 consisted of the following:

 

		December 31,				June 30,
		2011				2011
Bank loan security deposits – short-term		$	933,382			$	917,371
Bank loan security deposits – long-term			314,800				309,400
Total		$	1,248,182			$	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 $3,176,074 and $2,024,943 as of December 31, 2011 and June 30, 2011, respectively.

 

Note 8 – Property and Equipment

 

Property and equipment as of December 31, 2011 and June 30, 2011 consisted of the following:

 

		December 31,				June 30,
		2011				2011
Buildings		$	21,244,985			$	20,880,553
Machinery and equipment			14,388,180				13,737,259
Office equipment and furniture			556,409				505,084
Vehicles			613,292				602,771
Subtotal			36,802,866				35,725,667
Less: Accumulated depreciation			4,582,408				3,504,649
			32,220,458				32,221,018
Add: Construction in progress			7,510,458				4,228,300
Total		$	39,730,916			$	36,449,318

 

Depreciation expense for the three months ended December 31, 2011 and 2010 was $511,286 and $503,245, respectively. Depreciation expense for the six months ended December 31, 2011 and 2010 was $1,015,047 and $936,460, 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 December 31, 2011 and June 30, 2011, the Company determined that these advance payments are recoverable.

 

Note 10 – Intangible Assets

 

Intangible assets as of December 31, 2011 and June 30, 2011 consisted of the following:

 

		December 31,				June 30,
		2011				2011
Software		$	30,428			$	29,906
Trademark			89,718				88,179
Land use rights			5,882,494				5,781,587
Patent			12,396,824				12,184,172
Subtotal			18,399,464				18,083,844
Less: Accumulated amortization			3,700,363				2,964,145
Total		$	14,699,101			$	15,119,699

 

Amortization expense for the three months ended December 31, 2011 and 2010 was $342,016 and $326,576, respectively. Amortization expense for the six months ended December 31, 2011 and 2010 was $681,882 and $647,192, respectively.

 

Note 11 – Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses as of December 31, 2011 and June 30, 2011 consisted of the following:

 

		December 31,				June 30,
		2011				2011
Accounts payable		$	6,651,507			$	4,294,818
Accrued expenses			114,837				322,604
Total		$	6,766,344			$	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:

 

		December 31,				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 and 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)

 

		December 31,				June 30,
		2011				2011
On October 21, 2010, the Company obtained a loan from the Dalian Economic Development Zone Xinhui Town Bank with a maturity date of October 20, 2011. The interest is paid monthly at a variable rate equal to 50% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average annual interest rate for the year ended June 30, 2011 was approximately 9.465%. The loan was secured by the Company’s inventory and was paid off by December 31, 2011		$	-			$	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 annual interest rate for the year ended June 30, 2011 was approximately 8.203%. The loan was guaranteed by Dalian Zhongdingxin Investment Guarantee Co., Ltd., an unaffiliated third party and was paid off by December 31, 2011.		$	-			$	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 annual interest rate for the year ended June 30, 2011 was approximately 6.941%. The loan was guaranteed by Dalian Tiansi Joint Guarantee Co., Ltd., an unaffiliated third party and was paid off by December 31, 2011.		$	-			$	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 annual interest rate for the year ended June 30, 2011 was approximately 7.605%. 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 annual interest rate for the year ended June 30, 2011 was approximately 7.605%. The loan was secured by the Company’s accounts receivables and was paid off by December 31, 2011.		$	-			$	1,547,000
On December 26, 2011, the Company obtained a loan from the Bank of East Asia with a maturity date of June 25, 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 six months ended December 31, 2011 was approximately 7.93%. The loan is secured by the Company’s accounts receivables.		$	1,574,000			$	-

 

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 12 – Short-Term Bank Loans (continued)

 

		December 31,				June 30,
		2011				2011
On December 30, 2011, the Company obtained a loan from the Bank of East Asia with a maturity date of June 29, 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 six months ended December 31, 2011 was approximately 7.93%. The loan is secured by the Company’s accounts receivables.		$	2,361,000			$	-
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 six months ended December 31, 2011 was approximately 7.93%. The loan is secured by the Company’s accounts receivables.		$	2,361,000			$	-
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 for the six months ended December 31, 2011 was approximately 7.32%. The loan is secured by the Company’s accounts receivables.		$	1,416,600			$	-
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 six months ended December 31, 2011 was approximately 7.32%. The loan is secured by the Company’s accounts receivables.		$	1,621,220			$	-
On November 1, 2011, the Company obtained a loan from Industrial and Commercial Bank of China with a maturity date of April 30, 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 six months ended December 31, 2011 was approximately 7.32%. The loan is secured by the Company’s accounts receivables.		$	1,322,160			$	-
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 six months ended December 31, 2011 was approximately 7.872%. The loan is secured by the Company’s property and equipment.		$	3,148,000			$	-

 

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 12 – Short-Term Bank Loans (continued)

 

		December 31,				June 30,
		2011				2011
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 six months ended December 31, 2011 was approximately 8.528%. The loan is guaranteed by a third party Dalian Fangyuan Financial Guarantee Co., Ltd.		$	3,148,000			$	-
On December 7, 2011, the Company obtained a loan from Bank of Dalian with a maturity date of December 6, 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 six months ended December 31, 2011 was approximately 8.528%.		$	4,722,000			$	-
On December 1, 2011, the Company obtained a loan from Dalian Economic Development Zone Xinhui Town Bank with a maturity date of November 30, 2012. 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 six months ended December 31, 2011 was approximately 9.465%. The loan is secured by the Company’s inventory.		$	787,000			$	-
Total		$	22,460,980			$	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 December 31, 2011 and June 30, 2011, the Company had outstanding loans from unrelated parties of $4,244,118 and $3,364,992, respectively.

 

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 December 31, 2011 and June 30, 2011 were $11,018,000 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 $6,168,590 and $3,273,647 as of December 31, 2011 and June 30, 2011, respectively.

 

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 16 – Long-Term Bank Loans

 

Long-term bank loans consist of the following:

 

		December 31,				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 six months ended December 31, 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.		$	14,638,200			$	14,851,200
Total		$	14,638,200			$	14,851,200
Less: Current portion			2,203,600				1,082,900
Total noncurrent portion		$	12,434,600			$	13,768,300

 

Note 17 – Government Subsidy Income

 

Government subsidy income for the six months ended December 31, 2011 and 2010 consisted of the following:

 

		For the Six Months Ended December 31,
		2011				2010
Appropriation of Technology Innovation Subsidy		$	211,653			$	215,089
Newly Identified Municipal Technical Center Subsidy			-				74,580
Value added tax refund for employing physically-challenged workers			74,079				26,973
Total		$	285,732			$	316,642

 

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.

 

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

 

Note 18 –Earnings Per Share (continued)

 

		For the Three Months Ended December 31,
		2011				2010
Net income attributable to BEFUT International Co., Ltd.		$	1,338,345			$	1,936,565
Weighted average common shares (denominator for basic earnings per share)			29,715,640				29,715,640
Effect of dilutive securities:
Warrants			-				71,037
Weighted average common shares (denominator for diluted earnings per share)			29,715,640				29,786,677
Basic earnings per share		$	0.05			$	0.07
Diluted earnings per share		$	0.05			$	0.07

 

		For the Six Months Ended December 31,
		2011				2010
Net income attributable to BEFUT International Co., Ltd.		$	3,547,849			$	4,184,821
Weighted average common shares (denominator for basic earnings per share)			29,715,640				29,715,640
Effect of dilutive securities:
Warrants			-				56,173
Weighted average common shares (denominator for diluted earnings per share)			29,715,640				29,771,813
Basic earnings per share		$	0.12			$	0.14
Diluted earnings per share		$	0.12			$	0.14

 

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.

 

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

 

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

 

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.

 

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 December 31, 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 six months ended December 31, 2011 and 2010, the income tax provision for the Company was $624,880 and $1,422,030, 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 six months ended December 31, 2011 and 2010.

 

On May 20, 2011, one of the Company’s operating entities in China was approved for preferred tax treatment due to its being recognized as High-Tech enterprise. In accordance with the Income Tax Law of the People’s Republic of China, a High-Tech enterprise is eligible for a 2 year tax exemption and a 50% tax reduction for 3 years thereafter. The tax exemption for that entity was retroactively effective from January 1, 2009 through December 31, 2010. The 50% tax reduction became effective on January 1, 2011 and is valid through December 31, 2013.

 

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements

(Unaudited)

 

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.

 

Note 23 – Risk of Concentration and Credit Risk

 

For the six months ended December 31, 2011, five vendors accounted for approximately 55% of the Company’s purchases of raw materials, while for the six months ended December 31 2010, five vendors accounted for approximately 76% of the Company’s purchases of raw materials. Total purchases from these vendors were $15.28 million and $20.23 million for the six months ended December 31, 2011 and 2010, respectively.

 

For the six months ended December 31, 2011, five major customers accounted for $8.5 million in sales, or approximately 28% of the Company’s total sales. For the six months ended December 31, 2010, five customers accounted for $6.92 million in sales, or approximately 24% 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 Six Months Ended December 31,
		2011				2010
Cash paid for interest		$	1,430,085			$	357,993
Cash paid for income taxes		$	55,774			$	-

 

 

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 six months ended December 31, 2011, approximately 35% of our revenues were generated from traditional cable, about 58% 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.

Results of Operations

 

Three and six months ended December 31, 2011 compared to three and six months ended December 31, 2010

 

The following table summarizes the results of our operations during the three-month and six-month periods ended December 31, 2011 and December 31, 2010, respectively and provides information regarding the dollar and percentage increase or decrease from the three-month and six-month period ended December 31, 2011 compared to the three-month and six-month period ended December 31, 2010.

 

 

 

Item		Three-months ended December 31, 2011				Three-months ended December 31, 2010				% Change				Six months ended December 31, 2011				Six months ended December 31, 2010				% Change
Sales		$	13,382,645			$	14,871,164				-10	%		$	30,255,721			$	30,801,975				-2	%
Cost of sales		$	10,056,846			$	10,954,272				-8	%		$	22,479,087			$	22,625,032				-1	%
Gross profit		$	3,325,799			$	3,916,892				-15	%		$	7,776,634			$	8,176,943				-5	%
Total operating expenses		$	1,281,884			$	1,181,902				8	%		$	2,598,980			$	2,232,129				16	%
Total other income/(expenses)		$	(521,176	)		$	(206,211	)			153	%		$	(1,103,700	)		$	(425,001	)			160	%
Net income		$	1,338,345			$	1,936,565				-31	%		$	3,547,849			$	4,184,821				-15	%
Gross profit margin			24.85	%			26.34	%			-1	%			25.70	%			26.55	%			-1	%
Basic earnings per share		$	0.05			$	0.07				-29	%		$	0.12			$	0.14				-14	%
Diluted earnings per share			0.05				0.07				-29	%			0.12				0.14				-14	%
Basic weighted average shares outstanding			29,715,640				29,715,640				0	%			29,715,640				29,715,640				0	%
Diluted weighted average shares outstanding			29,715,640				29,786,677				0	%			29,715,640				29,771,813				0	%

  

Three months ended December 31, 2011 as compared to three months ended December 31, 2010

 

Sales

 

Our sales for the three months ended December 31, 2011 were $13,382,645, representing a decrease of $1,488,519, or 10%, as compared to the three months ended December 31, 2010. Approximately $0.8 million of the decrease was attributable to the decrease in sales of our traditional cable products and $0.8 million was attributable to the decrease in sales of our switch appliance business. Our decrease in total sales was partially offset by increased sales of our specialty cable products, which were approximately $7.8 million, representing an increase of approximately $0.1 million, as compared to the three months ended December 31, 2010.

 

The decrease in sales was primarily due to the weaker sales of our traditional cable products and switch appliances. During the three months ended December 31, 2011, the price of copper decreased substantially. Copper, our main raw material, constitutes approximately 70%-80% of the raw material components in our cable products. As the purchase price of our products is based on the raw materials including copper at the time of the order placement while copper price had been experiencing fluctuation, so certain customers adopted a wait-and-see attitude and delayed their orders during this period.

 

The percentage of total sales that was attributable to sales of specialty cable, traditional cable and switch appliances for the three months ended December 31, 2011 was approximately 59%, 37% and 4%, representing an increase of approximately 9%, a decrease of approximately 4% and a decrease of approximately 5%, respectively, as compared to the percentage of total sales each of the respective category represents during three months ended December 31, 2010. Fluctuations in product percentages are mainly due to the changes in the product demand from our 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. Our cost of sales for the three months ended December 31, 2011 was $10,056,846, a decrease of $897,426, or 8%, as compared to the three months ended December 31, 2010. This decrease was mainly due to the decrease in sales.

 

Gross Profit

 

Gross profit for the three months ended December 31, 2011 was $3,325,799, representing a decrease of $591,093, or 15%, as compared to the three months ended December 31, 2010. Gross profit margin was 24.9% for the three months ended December 31, 2011, representing a decrease of 1.5%, as compared to the three months ended December 31, 2010. The decrease in gross profit margin was primarily attributable to the decreases in margins of our specialty (in particular, petrochemical) cable and traditional cable products, which were by 4% and 3%, respectively, as compared to the same period in 2010. We lowered our selling prices of those cable products in an effort to develop new customers for more market shares. The gross profit margin of each category of our products for the three months ended December 31, 2011 was approximately 33% for specialty cable, 15% for traditional cable and 10% for switch appliances, as compared to gross profit margins of approximately 37% for specialty cable, 18% for traditional cable and 6% for switch appliances for three months ended December 31, 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 $177,529 in the three months ended December 31, 2011, as compared to $149,643 in the three months ended December 31, 2010, representing an increase of $27,886, or 19%. The increase in selling expenses was mainly due to the increase in transportation expenses. This was because the payment obligation of the transportation expenses for most of our products shifted from our clients to us during the quarter ended December 31, 2011. General and administrative expenses were $1,104,355 for the three months ended December 31, 2011, an increase of $72,096, or 7%, as compared to the three months ended December 31, 2010.

 

Income from Operations

 

Our operating income was $2,043,915 for the three months ended December 31, 2011, a decrease of $691,075, or 25%, as compared to $2,734,990 for the three months ended December 31, 2010. The decrease was due to the decrease of gross profit and the increase of selling, general and administrative expenses as set forth above.

 

Government Subsidy

 

For the three months ended December 31, 2011, we received subsidies from various PRC governmental bureaus in the aggregate amount of $100,138 while we received subsidies of $180,155 in the three months ended December 31, 2010. The subsidies received by the Company in the quarter ended December 31, 2011 consisted of a refund of $21,238 for value added taxes paid by the Company in 2011 and $78,900 received from the Appropriation of Technology Innovation Fund of the Department of Finance of Liaoning Province.

 

Interest Expense

 

Interest expense was $838,898 for the three months ended December 31, 2011, an increase of $344,046, or 70%, as compared to $494,852 for the three months ended December 31, 2010. The increase of the interest expense was mainly due to the significant increase in short-term bank loans that we have obtained for the three months ended December 31, 2011, as compared to the three months ended December 31, 2010.

 

 

Income Taxes

 

For the three months ended December 31, 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 $241,586 for the three months ended December 31, 2011, a decrease of $373,309, or 61%, compared to $614,895 for the three months ended December 31 , 2010. The decrease is a result of the Company being granted, on May 20, 2011, an income tax holiday at a rate of 12.5%, as opposed to the regular income tax of 25% for a typical PRC enterprise, which became retroactively effective on January 1, 2011 and is valid until December 31,2013.

 

Net Income

 

Net income for the three months ended December 31, 2011 was $1,338,345, a decrease of $598,220, or 31 %, as compared to net income of $1,936,565 for the three months ended December 31, 2010. The decrease was mainly attributable to the decrease of $691,075 in income from operations and the increase of $344,046 in interest expense, which was partially offset by a decrease in income taxes of $373,309.

 

Six months ended December 31, 2011 as compared to six months ended December 31, 2010

 

Sales

 

Our sales for the six months ended December 31, 2011 were $30,255,721, representing a decrease of $546,254, or 2%, as compared to the six months ended December 31, 2010. Approximately $3.6 million decrease was attributable to the decrease in sales of our traditional cable products. Our decrease in total sales was partially offset by increased sales of our specialty cable products and our switch appliance business, which were approximately $2.8 million and $0.3 million for the period.

 

The decrease in sales was primarily due to the weaker sales of our traditional cable products as a result of the copper price fluctuation as explained above for our sales under the three months comparison..

 

The percentage of total sales that was attributable to sales of specialty cable, traditional cable and switch appliances for the six months ended December 31, 2011 was approximately 58%, 36% and 6%, representing an increase of approximately 10%, a decrease of approximately 11% and an increase of approximately 1%, respectively, as compared to percentage of total sales each of the respective category represents during the six months ended December 31, 2010. Fluctuations in our products’ sale percentages are mainly due to the changes in the product demand from our 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. Our cost of sales for the six months ended December 31, 2011 was $22,479,087, a decrease of $145,945, or 1%, as compared to the six months ended December 31, 2010.

 

Gross Profit

 

Gross profit for the six months ended December 31, 2011 was $7,776,634, representing a decrease of $400,309, or 5%, as compared to the six months ended December 31, 2010. Gross profit margin was 25.7% for the six months ended December 31, 2011, representing a decrease of 0.9%, as compared to the six months ended December 31, 2010. The decrease in gross profit margin was primarily due to the slight decreases in margins of our specialty cable and traditional cable products, which were by 2% and 4% respectively, as compared to the same period in 2010. The gross profit margins of each category of our products for the six months ended December 31, 2011 was approximately 34% for specialty cable, 15% for traditional cable and 9% for switch appliances, as compared to gross profit margins of approximately 36% for specialty cable, 19% for traditional cable and 7% for switch appliances for six months ended December 31, 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 $333,285 in the six months ended December 31, 2011, as compared to $188,250 in the six months ended December 31, 2010, representing an increase of $145,035, or 77%. The increase in selling expenses was mainly due to the increase in transportation expenses as explained under the same heading of our three months comparison above. General and administrative expenses were $2,265,695 for the six months ended December 31, 2011, an increase of $221,816, or 11%, as compared to the six months ended December 31, 2010. The increase of general and administrative expenses was mainly due to the increased expense from WFOE. 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.

 

Income from Operations

 

Our operating income was $5,177,654 for the six months ended December 31, 2011, a decrease of $767,160, or 13%, as compared to $5,944,814 for the six months ended December 31, 2010. The decrease was due to the decrease of gross profit and the increase of selling, general and administrative expenses.

 

Government Subsidy

 

For the six months ended December 31, 2011, we received subsidies from various PRC governmental bureaus in the aggregate amount of $285,732 while we received subsidies of $316,642 in the six months ended December 31, 2010. The subsidies received by the Company in the six months ended December 31, 2011 consisted of a refund of $74,079 for value added taxes paid by the Company in 2011 and $211,653 received from the Appropriation of Technology Innovation Fund of the Department of Finance of Liaoning Province.

 

Interest Expense

 

Interest expense was $1,612,194 for the six months ended December 31, 2011, an increase of $722,440, or 81%, as compared to $889,754 for the six months ended December 31, 2010. The increase of the interest expense was mainly due to the significant increase in short-term bank loans that we have obtained for the six months ended December 31, 2011, as compared to the six months ended December 31, 2010.

 

Income Taxes

 

For the six months ended December 31, 2011, our business operations were conducted solely by WFOE, Dalian Befut and its subsidiaries, and as such, we were governed by 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 $624,880 for the six months ended December 31, 2011, a decrease of $797,150, or 56%, compared to $1,422,030 for the six months ended December 31, 2010. The decrease is a result of the Company being granted, on May 20, 2011, an income tax holiday at a rate of 12.5%, as opposed to the regular income tax of 25% for a typical PRC enterprise, which became retroactively effective on January 1, 2011 and is valid until December 31, 2013.

 

Net Income

 

Net income for the six months ended December 31, 2011 was $3,547,849, a decrease of $636,972, or 15%, as compared to net income of $4,184,821 for the six months ended December 31, 2010. The decrease was mainly attributable to the decrease of $767,160 in income from operations and the increase of $722,440 in interest expense, which was partially offset by a decrease in income taxes of $797,150.

 

 

Liquidity and Capital Resources

 

Selected Measures of Liquidity and Capital Resources

 

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

 

(dollars in thousands, except ratios)		December 31, 2011				June 30, 2011
Cash and cash equivalents and restricted cash		$	13,131			$	6,290
Working capital		$	11,521			$	11,502
Ratio of current assets to current liabilities			1.2:1				1.4 :1

 

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

 

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 increase of $3,050,858 in cash and cash equivalents from June 30, 2011 to December 31, 2011. The following table summarizes such changes:

 

		For the six months ended
		December 31, 2011				December 31, 2010
Net cash provided (used in) operating activities		$	5,880,647			$	(3,668,743	)
Net cash used in investing activities		$	(15,209,378	)		$	(1,216,513	)
Net cash provided by financing activities		$	11,723,497			$	4,398,291
Net increase (decrease) in cash, cash equivalents		$	2,493,145			$	(557,713	)

 

Operating Activities

 

We received net cash of $5,880,647 from our operating activities for the six months ended December 31, 2011, as compared to net cash of $3,668,743 used in the six months ended December 31, 2010. Although the net income for the six months ended December 31, 2011 was $3,449,074, representing a decrease of $648,709, as compared to net income of $4,097,783 for the six months ended December 31, 2010, we still received net cash of $5,880,647 from our operating activities. The positive operating cash flow was primarily due to the increase of accounts receivable, accounts payable, other current assets, trade notes payable and advances from customers. However, the decrease of restricted cash and income taxes payable were partially offset the increase of cash provided by operating activities.

 

 

Investing Activities

 

The net cash used in our investment activities in the six months ended December 31, 2011 was $15,209,378, representing an increase of $13,992,865, as compared to $1,216,513 in the six months ended December 31, 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 six months ended December 31, 2011 was $11,723,497, representing an increase of $7,325,206 as compared to $4,398,291 in the six months ended December 31, 2010. The increase was mainly due to approximately $8.7 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 December 31, 2011, our outstanding loans were as follows:

 

Creditors

Loan Amount

Interest Rate

Term

Maturity Date

China Merchants Bank

$

2,361,000

7.93

%*

6 months

01/18/12

Industrial and Commercial

$

1,416,600

7.32

%&

6 months

01/28/12

Bank of China

Industrial and Commercial

$

1,621,220

7.32

%&

6 months

03/15/12

Bank of China

Industrial and Commercial

$

1,322,160

7.32

%&

6 months

04/30/12

Bank of China

Bank of East Asia

$

1,574,000

7.93

%*

6 months

06/25/11

Bank of East Asia

$

2,361,000

7.93

%*

6 months

06/29/11

Harbin Bank

$

3,148,000

7.872

%&

1 year

09/22/12

Jilin Bank

$

3,148,000

8.528

%*

1 year

09/26/12

Bank of Dalian

$

4,722,000

8.528

%*

1 year

12/06/12

Xinhui Town Bank

$

787,000

9.465

%+

1 year

11/30/12

PRC National Development

$

14,638,200

7.245

%#

7 years

11/01/16

Bank Joint Equity

Corporation

 

* 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 $24,584,186, net of allowance for doubtful accounts of $121,188, as of December 31, 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 six months ended December 31, 2011 were 127 days, as compared to 78 days for the six months ended December 31, 2010.

 

Inventories

 

Inventories consisted of the following as of December 31, 2011 and June 30, 2010, respectively:

 

(dollars)		December 31, 2011				June 30, 2011
Category
Raw materials		$	1,823,887			$	1,963,765
Work-in-process			343,455				241,832
Finished goods			5,592,753				2,401,834
Total inventories		$	7,760,095			$	4,607,431

 

We had total inventory of $7,760,095 as of December 31, 2011, representing an increase of $3,152,664, or 68%, as compared to inventory of $4,607,431 as of June 30, 2011. Days’ purchase in inventory for the six months ended December 31, 2011 were 50 days, compared to 31 days for the six months ended December 31, 2010.

 

Off-Balance Sheet Arrangements

 

At December 31, 2011, we did not have any off-balance sheet arrangements.

 

Foreign Currency Exchange

 

For the six months ended December 31, 2011, the U.S. Dollar and RMB exchange rate fluctuated from RMB 6.4716 to 1 U.S. Dollar to RMB6.3009 to 1 U.S. Dollar, an increase of approximately 2.6% 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.

 

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 December 31, 2011, the amount of our receivables ages less than one year and 1-2 years was $24,589,587 and $115,787, respectively.

 

As of December 31, 2011 and June 30, 2011, the Company had accounts receivable of $24,584,186 and $18,166,580, net of allowance for doubtful accounts of $121,188 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:

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

 

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

 

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

 

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

 

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. described 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 December 31, 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 December 31, 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 December 31, 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: February 14, 2012	By:	/s/ Hongbo Cao
		Name: Hongbo Cao
		Title: President and Chief Executive Officer
		(principal executive officer)
Date: February 14, 2012	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.
101.INS – XBRL Instance Document
101.SCH – XBRL Taxonomy Extension Schema Document
101.CAL – XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF – XBRL Taxonomy Extension Definition Linkbase Document
101.LAB – XBRL Taxonomy Extension Label Linkbase Document
101.PRE – XBRL Taxonomy Extension Presentation Linkbase Document