BEFUT
INTERNATIONAL CO., LTD.
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2010 AND 2009
(UNAUDITED)
BEFUT
INTERNATIONAL CO., LTD.
Consolidated
Financial Statements
December
31, 2010 and 2009
(Unaudited)
Table
of Contents
|
|
Page
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
5
|
|
|
|
Consolidated
Statements of Operations and Other Comprehensive Income
|
|
6
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
7
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
8
|
BEFUT
INTERNATIONAL CO., LTD.
Consolidated
Balance Sheets
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
761,460
|
|
|
$
|
1,319,173
|
|
Restricted
cash
|
|
|
3,494,084
|
|
|
|
1,181,095
|
|
Accounts
receivable, net of allowance for doubtful accounts of $85,783 and $83,295
at December 31, 2010, and June 30, 2010, respectively
|
|
|
17,292,392
|
|
|
|
9,292,310
|
|
Inventory
|
|
|
5,234,237
|
|
|
|
2,543,789
|
|
Loans
to unrelated parties
|
|
|
1,888,835
|
|
|
|
1,054,090
|
|
Bank
loan security deposits
|
|
|
1,089,206
|
|
|
|
1,031,100
|
|
Advance
payments
|
|
|
1,929,467
|
|
|
|
693,473
|
|
Due
from related party
|
|
|
-
|
|
|
|
472,838
|
|
Other
current assets
|
|
|
1,227,666
|
|
|
|
521,739
|
|
Total
current assets
|
|
|
32,917,347
|
|
|
|
18,109,607
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
32,394,534
|
|
|
|
31,618,074
|
|
|
|
|
|
|
|
|
|
|
Other
assets:
|
|
|
|
|
|
|
|
|
Intangibles,
net
|
|
|
15,485,194
|
|
|
|
15,669,375
|
|
Advance
payments – Research & Development
|
|
|
2,151,106
|
|
|
|
2,088,714
|
|
Total
other assets
|
|
|
17,636,300
|
|
|
|
17,758,089
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
82,948,181
|
|
|
$
|
67,485,770
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
2,770,621
|
|
|
$
|
3,119,646
|
|
Trade
notes payable
|
|
|
3,034,000
|
|
|
|
-
|
|
Short-term
bank loans
|
|
|
9,086,830
|
|
|
|
6,039,300
|
|
Current
portion of long-term bank loans
|
|
|
758,500
|
|
|
|
294,600
|
|
Loans
from unrelated parties
|
|
|
2,220,740
|
|
|
|
370,000
|
|
Advances
from customers
|
|
|
1,007,947
|
|
|
|
533,806
|
|
Income
taxes payable
|
|
|
3,120,515
|
|
|
|
1,655,747
|
|
Other
current liabilities
|
|
|
1,334,564
|
|
|
|
969,787
|
|
Total
current liabilities
|
|
|
23,333,717
|
|
|
|
12,982,886
|
|
|
|
|
|
|
|
|
|
|
Long-term
bank loan
|
|
|
14,108,100
|
|
|
|
14,435,400
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
37,441,817
|
|
|
|
27,418,286
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.001 par value, 10,000,000 shares authorized, no shares issued or
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.001 par value, 200,000,000 shares authorized, 29,715,640 and
29,715,666 shares issued and outstanding at
December
31, 2010 and June 30, 2010, respectively
|
|
|
29,716
|
|
|
|
29,716
|
|
Additional
paid-in capital
|
|
|
21,838,047
|
|
|
|
21,838,047
|
|
Statutory
reserves
|
|
|
1,181,189
|
|
|
|
1,181,189
|
|
Retained
earnings
|
|
|
17,994,979
|
|
|
|
13,810,157
|
|
Accumulated
other comprehensive income
|
|
|
3,447,965
|
|
|
|
2,166,533
|
|
Total
stockholders’ equity
|
|
|
44,491,896
|
|
|
|
39,025,642
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
1,014,468
|
|
|
|
1,041,842
|
|
|
|
|
|
|
|
|
|
|
Total
equity
|
|
|
45,506,364
|
|
|
|
40,067,484
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and equity
|
|
$
|
82,948,181
|
|
|
$
|
67,485,770
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BEFUT
INTERNATIONAL CO., LTD.
Consolidated
Statements of Operations and Other Comprehensive Income
(Unaudited)
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
14,871,164
|
|
|
$
|
7,126,044
|
|
|
$
|
30,801,975
|
|
|
$
|
12,609,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
10,954,272
|
|
|
|
5,235,323
|
|
|
|
22,625,032
|
|
|
|
9,098,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
3,916,892
|
|
|
|
1,890,721
|
|
|
|
8,176,943
|
|
|
|
3,511,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
149,643
|
|
|
|
14,828
|
|
|
|
188,250
|
|
|
|
36,701
|
|
General
and administrative expenses
|
|
|
1,032,259
|
|
|
|
442,264
|
|
|
|
2,043,879
|
|
|
|
1,030,549
|
|
Total
operating expenses
|
|
|
1,181,902
|
|
|
|
457,092
|
|
|
|
2,232,129
|
|
|
|
1,067,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,734,990
|
|
|
|
1,433,629
|
|
|
|
5,944,814
|
|
|
|
2,444,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government
subsidy
|
|
|
180,155
|
|
|
|
304,704
|
|
|
|
316,642
|
|
|
|
354,658
|
|
Interest
expense, net
|
|
|
(493,390
|
)
|
|
|
(5,195
|
)
|
|
|
(879,788
|
)
|
|
|
(137,504
|
)
|
Other
income (expenses)
|
|
|
107,024
|
|
|
|
(403,138
|
)
|
|
|
138,145
|
|
|
|
(397,441
|
)
|
Total
other income (expenses)
|
|
|
(206,211
|
)
|
|
|
(103,629
|
)
|
|
|
(425,001
|
)
|
|
|
(180,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before provision for income tax
|
|
|
2,528,779
|
|
|
|
1,330,000
|
|
|
|
5,519,813
|
|
|
|
2,264,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income tax
|
|
|
614,895
|
|
|
|
336,819
|
|
|
|
1,422,030
|
|
|
|
585,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
1,913,884
|
|
|
|
993,181
|
|
|
|
4,097,783
|
|
|
|
1,678,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Net loss attributable to noncontrolling interest
|
|
|
(22,681
|
)
|
|
|
(963
|
)
|
|
|
(87,038
|
)
|
|
|
(6,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to BEFUT International Co., Ltd.
|
|
|
1,936,565
|
|
|
|
994,144
|
|
|
|
4,184,821
|
|
|
|
1,684,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
597,575
|
|
|
|
263
|
|
|
|
1,281,432
|
|
|
|
48,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,534,140
|
|
|
$
|
994,407
|
|
|
$
|
5,466,253
|
|
|
$
|
1,732,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
Diluted
earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,715,640
|
|
|
|
29,511,277
|
|
|
|
29,715,640
|
|
|
|
29,511,277
|
|
Diluted
|
|
|
29,786,677
|
|
|
|
30,280,532
|
|
|
|
29,771,813
|
|
|
|
30,280,532
|
|
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,
|
|
|
|
2010
|
|
|
2009
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
4,097,783
|
|
|
$
|
1,678,346
|
|
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,583,652
|
|
|
|
718,680
|
|
Changes
in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(7,894,969
|
)
|
|
|
(53,500
|
)
|
Inventory
|
|
|
(2,574,960
|
)
|
|
|
(1,000,998
|
)
|
Advance
payments
|
|
|
(1,066,359
|
)
|
|
|
(197,666
|
)
|
Other
current assets
|
|
|
(935,345
|
)
|
|
|
(1,032,681
|
)
|
Accounts
payable and accrued expenses
|
|
|
(176,022
|
)
|
|
|
1,637,214
|
|
Trade
notes payable
|
|
|
2,983,200
|
|
|
|
(1,173,120
|
)
|
Advances
from customers
|
|
|
450,523
|
|
|
|
(174,496
|
)
|
Income
taxes payable
|
|
|
1,391,612
|
|
|
|
585,724
|
|
Other
current liabilities
|
|
|
711,714
|
|
|
|
104,016
|
|
Total
adjustments
|
|
|
(5,526,954
|
)
|
|
|
(586,827
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(1,429,171
|
)
|
|
|
1,091,519
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Due
from related party
|
|
|
478,809
|
|
|
|
-
|
|
Additions
to property and equipment
|
|
|
(755,610
|
)
|
|
|
(1,594,161
|
)
|
Additions
to construction in progress
|
|
|
(39,808
|
)
|
|
|
(2,442,107
|
)
|
Advance
payment for fixed assets
|
|
|
(104,131
|
)
|
|
|
(8,011,520
|
)
|
Acquisition
of intangible assets
|
|
|
(5,964
|
)
|
|
|
(6,452
|
)
|
Long-term
investment
|
|
|
-
|
|
|
|
2,933
|
|
Loans
to unrelated parties
|
|
|
(789,809
|
)
|
|
|
1,521,543
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,216,513
|
)
|
|
|
(10,529,764
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(2,239,572
|
)
|
|
|
586,000
|
|
Bank
loan security deposits
|
|
|
(26,849
|
)
|
|
|
(163,877
|
)
|
Loans
from unrelated party
|
|
|
1,819,753
|
|
|
|
2,274,251
|
|
Proceeds
(repayment) of short-term bank loans
|
|
|
2,844,524
|
|
|
|
(2,786,160
|
)
|
Proceeds
(repayment) of long-term bank loans
|
|
|
(298,320
|
)
|
|
|
14,664,000
|
|
Proceeds
from minority shareholders
|
|
|
59,183
|
|
|
|
43,992
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
2,158,719
|
|
|
|
14,618,206
|
|
|
|
|
|
|
|
|
|
|
Effect
of foreign currency translation on cash
|
|
|
(70,748
|
)
|
|
|
(4,369
|
)
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
|
|
(557,713
|
)
|
|
|
5,175,592
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents – beginning
|
|
|
1,319,173
|
|
|
|
210,301
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents – ending
|
|
$
|
761,460
|
|
|
$
|
5,385,893
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
BEFUT
INTERNATIONAL CO., LTD.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
1 – Organization and Nature of Business
BEFUT
International Co., Ltd., formerly known as Frezer, Inc. (“Frezer”), a former
public shell company as
defined in Rule 12b-2 of
the
Securities
Exchange Act
of
1934
, as amended,
was
established under the laws
of Nevada on
May 2, 2005
.
The accompanying
consolidated financial statements include the financial statements of
BEFUT International Co., Ltd.
and its
subsidiaries
(
collectively,
the
“Company”)
.
The
Company
’
s
primary business
is to design manufacture and sell industrial wires and
cables.
On March
13, 2009, Frezer entered into and consummated a series of transactions whereby
(a) Frezer acquired 100% of the outstanding shares of
common stock
of BEFUT Corporation, a company incorporated in the State of Nevada on January
14, 2009 (“Befut Nevada”), constituting all of the capital
stock of
Befut Nevada, from Befut International Co. Limited, a British Virgin Islands
company (“Befut BVI”) in exchange for the issuance to Befut BVI
of an
aggregate of 117,768,300 shares of Frezer’s common stock and the cancellation of
an aggregate of 2,176,170 shares of Frezer’s common stock
and (b)
Frezer raised $500,000 in gross proceeds from the sale to four investors of
convertible promissory notes of Frezer in the aggregate principal amount of
$500,000 and
warrants to purchase an aggregate of 720,076 shares of Frezer’s common stock.
The acquisition was accounted for as a reverse acquisition
under the
purchase method for business combinations. On June 18, 2009, the Company
effectuated a name change from its original name “Frezer, Inc.”
to “BEFUT
International Co., Ltd.”.
Hongkong
BEFUT Co., Ltd. (“Befut Hongkong”) was incorporated on September 10, 2008 under
the laws of Hong Kong and is a wholly-owned subsidiary of Befut
Nevada. On
February 13, 2009, Befut Hongkong invested 100% of the registered capital to
form Befut Electric (Dalian) Co., Ltd. (“WFOE”), a Chinese company incorporated
in the city of Dalian, the People’s
Republic of
China (the “PRC” or “China”).
On
February 16, 2009, WFOE entered into a series of agreements, the purpose of
which was to restructure Dalian Befut Wire & Cable Manufacturing
Co., Ltd.
(“Dalian Befut”) in accordance with applicable PRC law so that Dalian Befut
could raise capital and grow its business (the “Restructuring”). Dalian Befut
was
incorporated
on June 13, 2002 under the laws of the PRC. The Restructuring included the
following arrangements: First, WFOE entered into an Original
Equipment
Manufacturer Agreement (the “OEM Agreement”) with Dalian Befut containing
the following material provisions: (i) Dalian Befut may not manufacture
products for
any person or entity other than WFOE without the written consent of WFOE; (ii)
WFOE is to provide all raw materials and advance related costs to
Dalian Befut,
as well as provide design requirements for products to be manufactured; (iii)
WFOE is responsible for marketing and distributing the
products
manufactured by Dalian Befut and will keep all related profits and revenues; and
(iv) WFOE has an exclusive right, exercisable in its sole discretion, to
purchase all or part of
the assets
and/or equity of Dalian Befut at a mutually agreed price to the extent permitted
by applicable PRC law. In
addition, on
February 16, 2009, WFOE entered into two ancillary agreements with Dalian Befut:
(i) an Intellectual Property License Agreement,
pursuant to
which WFOE shall be permitted to use intellectual property rights such as
trademarks, patents and know-how for the marketing and sale of the products
manufactured by Dalian Befut; and (ii) a Non-competition Agreement, pursuant to
which Dalian Befut shall not compete against WFOE.
On April
14, 2006, Dalian Marine Cable Co., Ltd. (“Dalian Marine Co.”) was incorporated
in the PRC by Dalian Befut. Its current shareholders are Dalian Befut
(owning 86.6%
of the equity interests) and three individual shareholders. Dalian Marine Co.
was formed to conduct marketing activities and produce marine cables for Dalian
Befut.
On July
1, 2009, Dalian Befut, our captive manufacturer, formed a joint venture under
the laws of the PRC, Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong
Xing”), with pre-registered capital of RMB1,000,000. Dalian Befut invested
RMB700,000 for its 70% equity interest in Befut Zhong Xing. In January, 2010,
Dalian Befut increased its investment capital to RMB14.7 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.
BEFUT
INTERNATIONAL CO., LTD.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
1 – Organization and Nature of Business (continued)
On July
16, 2010, Dalian Befut acquired 60% of the equity interests of Dalian Yuansheng
Technology Co., Ltd. (“Dalian Yuansheng”) for $88,235 (the registered capital
value of such equity interests) from Mr. Chengnian Yan. Dalian Befut also
increased Dalian Yuansheng’s registered capital by RMB 5 million (or $735,294),
thereby increasing Dalian Befut’s equity interests to 93.3%. Dalian Yuansheng is
engaged in the research and development of carbon fiber composite cable and
other specialty cables.
Note
2 – Summary of Significant Accounting Policies
Basis
Of Presentation
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 ha
ve
been prepared in
accordance with generally accepted accounting principles applicable to interim
financial information and the requirements of Form 10-Q and Article 10 of
Regulation S-X of the Securities and Exchange Commission. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. Interim results are not necessarily indicative of results
for a full year. In the opinion of management, all adjustments considered
necessary for a fair presentation of the financial position and the results of
operations and cash flows for the interim periods have been
included.
In
preparing the accompanying unaudited consolidated financial statements, the
Company evaluated the period from
December 31
, 2010
through the date the financial statements were issued for material subsequent
events requiring recognition or disclosure. No such events were identified for
this period.
Interim
Financial Statements
These
interim financial statements should be read in conjunction with the audited
consolidated
financial statements for the years ended June 30, 20
10
and 200
9
, 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, 20
10
and 200
9
.
Reclassification
Certain
amounts as of June 30, 2010 and December 31, 2010 were reclassified for
presentation purposes.
Note
3– Restricted Cash
Cash
balances in the amount of $1,218,584 an
d $1,181,095
w
ere
restricted as of December 31, 2010 and June 30, 2010
, respectively
, as collateral for
the construction loan obtained from the PRC National Development Bank
Joint Equity Corporation, which is exhibited in Note 14. The balance of $758,500
as of December 31, 2010 was restricted as collateral for the Bank of East Asia.
The balance of
$1,
517
,
000
a
s of
December
3
1
, 2010 was restricted for
the settlement of trade notes payable
in connection with
inventory purchases.
Note
4– Inventory
Inventory
consisting of material, labor and manufacturing overhead
as of December
3
1
, 2010 and
June 30, 2010 consists of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,339,670
|
|
|
$
|
1,093,193
|
|
Work
in process
|
|
|
365,680
|
|
|
|
323,275
|
|
Finished
goods
|
|
|
2,528,887
|
|
|
|
1,127,321
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,234,237
|
|
|
$
|
2,543,789
|
|
BEFUT
INTERNATIONAL CO., LTD.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
5– Loans to Unrelated Parties
As of
Decem
ber
3
1
, 2010 and
June 30, 2010, the Company had outstanding loans to unrelated parties of
$1,
888
,
835
and $1,054,090,
respectively. These loans represent advances to unrelated parties at an annual
interest rate of 50% above the applicable bank interest rate. Interest payments
are made semi-annually with no principal payments required until on or before
the due date, as per the terms of the applicable loan agreements.
Note
6– Advance Payments
Advance
payments as of
Dec
ember 3
1
, 2010 and June
30, 2010 consist of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Advance
payments for inventory
|
|
$
|
1,521,188
|
|
|
$
|
399,868
|
|
Advance
payments for land and equipment
|
|
|
408,279
|
|
|
|
293,605
|
|
Total
|
|
$
|
1,929,467
|
|
|
$
|
693,473
|
|
Note
7– Property and Equipment
Property
and equipment as of December 31, 2010 and June 30, 2010 consist of the
following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Buildings
|
|
$
|
20,475,630
|
|
|
$
|
19,877,285
|
|
Machinery
and equipment
|
|
|
13,679,454
|
|
|
|
12,673,324
|
|
Office
equipment and furniture
|
|
|
173,121
|
|
|
|
100,927
|
|
Vehicles
|
|
|
521,273
|
|
|
|
466,380
|
|
Subtotal
|
|
|
34,849,478
|
|
|
|
33,117,916
|
|
Less:
Accumulated depreciation
|
|
|
2,495,322
|
|
|
|
1,499,842
|
|
|
|
|
32,354,156
|
|
|
|
31,618,074
|
|
Add:
Construction in progress
|
|
|
40,378
|
|
|
|
-
|
|
Total
|
|
$
|
32,394,534
|
|
|
$
|
31,618,074
|
|
Depreciation
expense for the three months ended December 31, 2010 and 2009 was $503,245 and
$78,604, respectively. Depreciation expense for the six months ended December
31, 2010 and 2009 was $936,460 and $169,816, respectively.
Note
8 – Intangible Assets
Intangible
assets as of December 31, 2010 and June 30, 2010 consist of the
following
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Software
|
|
$
|
29,326
|
|
|
$
|
22,684
|
|
Trademark
|
|
|
86,469
|
|
|
|
83,961
|
|
Land
use rights
|
|
|
5,669,469
|
|
|
|
5,505,028
|
|
Patent
|
|
|
11,947,892
|
|
|
|
11,601,348
|
|
Subtotal
|
|
|
17,733,156
|
|
|
|
17,213,021
|
|
Less:
Accumulated amortization
|
|
|
2,247,962
|
|
|
|
1,543,646
|
|
Total
|
|
$
|
15,485,194
|
|
|
$
|
15,669,375
|
|
Amortization
expense for the three months ended December 31, 2010 and 2009 was $326,576 and
$288,022, respectively. Amortization expense for the six months ended December
31, 2010 and 2009 was $647,192 and $548,864, respectively.
BEFUT
INTERNATIONAL CO., LTD.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
9 – Advance Payments – Research and Development
As a
common business practice in China, the Company is required to make advance
payments for goods or services that will be used in future research and
development activities. The balance of outstanding advance payments for such
activities as of Dec
ember 3
1
, 2010 and June 30, 2010
was $2,151,106 and $2,088,714, respectively.
Note
10 – Accounts Payable and Accrued Expenses
Accounts
payable and accrued expenses as of December 31, 2010 and June 30, 2010 consist
of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
2,705,013
|
|
|
$
|
3,009,646
|
|
Accrued
expenses
|
|
|
65,608
|
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,770,621
|
|
|
$
|
3,119,646
|
|
The
carrying value of accounts payable and accrued expenses approximate their fair
values due to the short-term nature of these obligations.
Note
11 – Trade Notes Payable
Trade
notes payable consist of uncollateralized non-interest bearing promissory notes
issued in connection with the acquisition of certain inventory and equipment.
Balances outstanding under such notes as of December 31, 2010 and June 30, 2010
were $3,034,000 and $-0-, respectively.
Note
12 – Short-Term Bank Loans
Short-term
bank loans consist of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
On
September 16, 2009, the Company obtained a loan from Harbin Bank, the
principal and accrued interest of which was paid in full by September 15,
2010. The interest was calculated using an annual fixed interest rate of
6.372% and paid monthly. The loan was secured by the Company’s property
and equipment.
|
|
$
|
-
|
|
|
$
|
2,946,000
|
|
|
|
|
|
|
|
|
|
|
On
October 30, 2009, the Company obtained a loan from Bank of Dalian, the
principal and accrued interest of which was paid in full by October 29,
2010. The interest was calculated using an annual fixed interest rate of
6.903% and paid monthly. The loan was guaranteed by Dalian Fangyuan
Financial Guarantee Co. ,Ltd., an unaffiliated third
party.
|
|
$
|
-
|
|
|
$
|
2,356,800
|
|
|
|
|
|
|
|
|
|
|
On
June 25, 2010, the Company obtained a loan from the Bank of East Asia, the
principal and accrued interest of which was paid in full by December 25,
2010. The interest was calculated using an annual fixed interest rate of
6.318% and paid monthly. The loan was guaranteed by the Company’s accounts
receivables.
|
|
$
|
-
|
|
|
$
|
736,500
|
|
|
|
|
|
|
|
|
|
|
On
September 14, 2010, the Company obtained a loan from Harbin Bank
with
a maturity date of September 13, 2011. The interest is paid monthly at a
variable rate equal to 30% per annum above the floating base interest for
loans of the same term issued by the People’s Bank of China, the PRC’s
central bank. The loan is secured by the Company’s property and
equipment.
|
|
$
|
3,034,000
|
|
|
$
|
-
|
|
BEFUT
INTERNATIONAL CO., LTD.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
12 – Short-Term Bank Loans (continued)
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 loan is secured by the Company’s
inventory.
|
|
$
|
1,501,830
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
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 30% per annum above the floating
base interest for loans of the same term issued by the People’s
Bank of China,. The loan is guaranteed by Dalian Zhongdingxin Investment
Guarantee Co., Ltd., an unaffiliated third party.
|
|
$
|
1,517,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
On
November 23, 2010, the Company obtained a loan from the Bank of Dalian
with a maturity date of November 22, 2011. The interest is paid monthly at
a variable rate equal to 30% per annum above the floating base interest
for loans of the same term issued by the People’s Bank of China. The loan
is guaranteed by Dalian Tiansi Joint Guarantee Co., Ltd., an unaffiliated
third party.
|
|
$
|
1,517,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
On
December 30, 2010, the Company obtained a loan from the Bank of East Asia
with a maturity date of June 30, 2011. The interest is paid monthly at a
variable rate equal to 30% per annum above the floating base interest for
loans of the same term issued by the People’s Bank
of China.. The loan is secured by the Company’s accounts
receivables.
|
|
$
|
1,517,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,086,830
|
|
|
$
|
6,039,300
|
|
Note
13 – Loans From Unrelated Parties
These
loans are based on good-faith, and are unsecured and non-interest bearing. The
proceeds from these loans are utilized for working capital. As of December 31,
2010 and June 30, 2010, the Company had outstanding loans from unrelated parties
of $2,220,740 and $370,000, respectively.
Note
14 – Long-Term Bank Loans
Long
-term
bank loans
consist
of the following:
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
2010
|
|
On
November 2, 2009, Dalian Befut entered into a Loan Agreement with the PRC
National Development Bank Joint Equity Corporation (“NDB”) pursuant to
which Dalian Befut borrowed RMB100,000,000 (approximately $14,670,000)
from NDB (the “Loan”), The term of the Loan is seven years, with a
maturity date of November 1, 2016. The interest rate is a variable rate
equal
to 5% per annum above the floating base interest for loans of the same
term promulgated by the People’s Bank of China. The Loan was
designated to finance the construction of Dalian Befut’s planned specialty
cable production lines with a production capacity of 4,000 KM. The Loan
was secured by, among other liens, a first priority lien on Dalian Befut’s
land use right and its building property ownership and guaranteed by,
among other guarantees, Mr. Hongbo Cao and Mr. Tingmin Li, Dalian BEFUT’s
two major shareholders.
|
|
$
|
14,866,600
|
|
|
$
|
14,730,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
14,866,600
|
|
|
$
|
14,730,000
|
|
|
|
|
|
|
|
|
|
|
Less:
Current portion
|
|
|
758,500
|
|
|
|
294,600
|
|
|
|
|
|
|
|
|
|
|
Total
noncurrent portion
|
|
$
|
14,108,100
|
|
|
$
|
14,435,400
|
|
Note
15 –Earnings Per Share
The
Company presents earnings per share on a basic and diluted basis. Basic earnings
per share are computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding. Diluted earnings per
share are computed by dividing income available to common shareholders by the
weighted average number of shares outstanding plus the dilutive effect of
potential securities. All shares and per share data have been adjusted
retroactively to reflect the recapitalization of the Company pursuant to the
Share Exchange Agreement with Befut Nevada.
|
|
For the Three Months Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
income attributable to BEFUT International Co., Ltd.
|
|
$
|
1,936,565
|
|
|
$
|
994,144
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares (denominator for basic earnings per
share)
|
|
|
29,715,640
|
|
|
|
29,511,277
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
71,037
|
|
|
|
769,255
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares (denominator for diluted earnings per
share)
|
|
|
29,786,677
|
|
|
|
30,280,532
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
Diluted
earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
|
For the Six Months Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Net
income attributable to BEFUT International Co., Ltd.
|
|
$
|
4,184,821
|
|
|
$
|
1,684,467
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares (denominator for basic earnings per
share)
|
|
|
29,715,640
|
|
|
|
29,511,277
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
56,173
|
|
|
|
769,255
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares (denominator for diluted earnings per
share)
|
|
|
29,771,813
|
|
|
|
30,280,532
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
Diluted
earnings per share
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
BEFUT
INTERNATIONAL CO., LTD.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
16– Stockholders’ Equity And Related Financing Agreements
On March
13, 2009, as part of the reverse merger transaction, Frezer 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 Frezer’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 Frezer.
On March
13, 2009, Frezer 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 Frezer and the investors named in the
Purchase Agreement.
In
accordance with the Purchase Agreement, Frezer issued securities consisting of:
(i) 3,130,869 shares of Frezer’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 Frezer common stock at an initial exercise price of
$0.1916 per share.
On June
18, 2009, 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 200,007 shares of
common stock of the Company at the conversion price of $0.65 per share on May 6,
2010.
Note
17– Income Taxes
The
Company is a Nevada corporation and conducts all of its business through its
Chinese subsidiaries. The Company’s business is conducted solely in the PRC. As
the Company is a U.S. holding company, it has not recorded any income for the
six months ended December 31, 2010 and 2009, there was no provision or benefit
for U.S. income tax purpose.
The
Company is governed by the Income Tax Law of the PRC concerning private-run
enterprises, which are generally subject to a statutory tax rate of 25% and were
previously, until January 2008, subject to a statutory tax rate of 33% (30%
state income tax plus 3% local income tax) on income reported in the statutory
statements after appropriate tax adjustments.
On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the PRC (the “New CIT Law”), which became effective from January 1,
2008. Under the New CIT Law, the corporate income tax rate applicable to all
companies, including both domestic and foreign-invested companies, is 25%,
replacing the previous applicable tax rate of 33%. For the six months ended
December 31, 2010 and 2009, the income tax provision for the Company was
$1,422,030 and $585,723, respectively.
BEFUT
INTERNATIONAL CO., LTD.
Notes
to Consolidated Financial Statements
(Unaudited)
Note
17– Income Taxes (continued)
In July
2006, the FASB issued FASB Interpretation No.48, Accounting for Uncertainty in
Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by
prescribing a minimum probability threshold that a tax position must meet before
a financial statement benefit is recognized. The minimum threshold is defined in
FIN
48
as a tax position that is more likely than not to be sustained upon examination
by the applicable taxing authority, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. The
Company does not recognize any benefits in the financial statements for the
six month
end
ed
December 31
, 2010 and 2009.
Note
1
8
– 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
19 – 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
20 – Risk of Concentration and Credit Risk
During
the six months ended December 31, 2010, five vendors accounted for approximately
76% of the Company’s purchases of raw materials, while during the six months
ended December 31, 2009, two major vendors accounted for approximately 56.19% of
the Company’s purchases of raw materials. Total purchases from these vendors
were $20,227,944 and $6,524,876 for the six months ended December 31, 2010 and
2009, respectively.
Five
major customers accounted for 24% and 44.01% of the net revenue for the six
months ended December 31, 2010 and 2009, respectively. Total sales to these
customers were $6,919,765 and $5,550,159, for the six months ended December 31,
2010 and 2009, respectively.
Financial
instruments which potentially subject the Company to credit risk consist
principally of cash on deposit with financial institutions. Management believes
that the financial institutions that hold the Company’s cash and cash
equivalents are financially sound and minimal credit risk exists with respect to
these investments.
Note
21 – Supplemental Cash Flow Disclosures
The
following is supplemental information relating to the consolidated statements of
cash flows:
|
|
Six Months Ended December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
357,993
|
|
|
$
|
137,504
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The following discussion of our
financial condition and results of operations should be read in conjunction with
our consolidated financial statements and the notes to those financial
statements appearing elsewhere in this report.
Certain statements in this report
constitute “forward-looking statements”. Such forward-looking statements include
statements, which involve risks and uncertainties, regarding, among other
things, (a) our projected sales, profitability, and cash flows, (b) our growth
strategy, (c) our anticipated trends in our industry (d) our future financing
plans, and (e) our anticipated needs for, and use of, working capital.
Forward-looking Statements are generally identifiable by use of the words
“may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” or the
negative of these words or other variations on these words or comparable
terminology. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks and matters described in this report generally. In light
of these risks and uncertainties, there can be no assurance that the
forward-looking statements contained in this filing will in fact occur. You
should not place undue reliance on these forward-looking
statements.
Any forward-looking statements speak
only as of the date on which they are made and, except to the extent required by
federal securities laws, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated
events. Further, the information about our intentions contained in this report
is a statement of our intention as of the date of this report and is based upon,
among other things, the existing regulatory environment, industry conditions,
market conditions and prices, the economy in general and our assumptions as of
such date. We may change our intentions, at any time and without notice, based
upon any changes in such factors, in our assumptions or otherwise.
Unless the context indicates otherwise,
as used in the following discussion, the words “Company”, “we,” “us,” and “our,”
each refer to (i) BEFUT International Co., Ltd. (f/k/a Frezer, Inc.), a
corporation incorporated in the State of Nevada; (ii) BEFUT Corporation, a
corporation incorporated in the State of Nevada and a wholly owned subsidiary of
the Company (“Befut Nevada”); (ii) Hongkong BEFUT Co., Ltd. (“Befut Hongkong”),
a wholly-owned subsidiary of Befut Nevada, incorporated under the laws of Hong
Kong; (iii) Befut Electric (Dalian) Co., Ltd. (“WFOE”), a corporation
incorporated under the laws of the People’s Republic of China (the “PRC”), and a
wholly-owned subsidiary of Befut Hongkong; (vi) Dalian Befut Wire and Cable
Manufacturing Co., Ltd. (“Dalian Befut”), a corporation incorporated under the
laws of the PRC, which is a captive manufacturer of WFOE pursuant to a series of
contractual agreements; (vii) Dalian Marine Cable Co., Ltd. (“Befut Marine”), a
corporation incorporated under the laws of the PRC, and that is 86.6% owned by
Dalian Befut; (viii) Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong
Xing”), a corporation incorporated under the laws of the PRC, and that is 73.5%
owned by Dalian Befut; and (ix) Dalian Yuansheng Technology Co., Ltd. (“Dalian
Yuansheng”), a corporation incorporated under the laws of the PRC, and that is
93.3% owned by Dalian Befut.
Unless the context otherwise requires,
all references to (i) “PRC” and “China” are to the People’s Republic of China;
(ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”,
“Yuan” and “Renminbi” are to the currency of the PRC or China.
Overview
We
manufacture specialty cables in northeastern China for sale to industries,
including, ship building, nuclear power plants, mining and
petrochemical. Our cable products consist of (i) traditional electric
power system cable and (ii) an assortment of specialty cable, including marine
cable, mining specialty cable, petrochemical cable. We have recently
begun to develop carbon fiber composite cable products. We also have developed
the capability to produce other types of special cables such as submarine cable
and certain “new energy” cable, including cable for wind and solar energy. Our
switch application business mainly includes high and low voltage distribution
cabinet switches and crane electronic control switches, which products
compliment our cable product offerings.
Results
of Operations
Three
and six months ended December 31, 2011 compared to the three and six months
ended December 31, 2010
Item
|
|
Three-
months
ended
December
31, 2010
|
|
|
Three-
months
ended
December
31, 2009
|
|
|
%
Change
|
|
|
Six months
ended
December
31, 2010
|
|
|
Six months
ended
December
31, 2009
|
|
|
%
Change
|
|
Sales
|
|
$
|
14,871,164
|
|
|
$
|
7,126,044
|
|
|
|
109
|
%
|
|
$
|
30,801,975
|
|
|
$
|
12,609,703
|
|
|
|
144
|
%
|
Cost
of sales
|
|
$
|
10,954,272
|
|
|
$
|
5,235,323
|
|
|
|
109
|
%
|
|
$
|
22,625,032
|
|
|
$
|
9,098,097
|
|
|
|
149
|
%
|
Gross
profit
|
|
$
|
3,916,892
|
|
|
$
|
1,890,721
|
|
|
|
107
|
%
|
|
$
|
8,176,943
|
|
|
$
|
3,511,606
|
|
|
|
133
|
%
|
Total
operating expenses
|
|
$
|
1,181,902
|
|
|
$
|
457,092
|
|
|
|
159
|
%
|
|
$
|
2,232,129
|
|
|
$
|
1,067,250
|
|
|
|
109
|
%
|
Total
other income/(expenses)
|
|
$
|
(206,211
|
)
|
|
$
|
(103,629
|
)
|
|
|
(99
|
)%
|
|
$
|
(425,001
|
)
|
|
$
|
(180,287
|
)
|
|
|
(136
|
)%
|
Net
income
|
|
$
|
1,913,884
|
|
|
$
|
993,181
|
|
|
|
93
|
%
|
|
$
|
4,097,783
|
|
|
$
|
1,678,346
|
|
|
|
144
|
%
|
Gross
profit margin
|
|
|
26.34
|
%
|
|
|
26.53
|
%
|
|
|
(0.19
|
)%
|
|
|
26.55
|
%
|
|
|
27.85
|
%
|
|
|
(1.30
|
)%
|
Basic
earnings per share
|
|
$
|
0.07
|
|
|
$
|
0.03
|
|
|
|
133
|
%
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
|
|
133
|
%
|
Diluted
earnings per share
|
|
|
0.07
|
|
|
|
0.03
|
|
|
|
133
|
%
|
|
|
0.14
|
|
|
|
0.06
|
|
|
|
133
|
%
|
Weighted
average number of common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
29,715,640
|
|
|
|
29,511,277
|
|
|
|
0.69
|
%
|
|
|
29,715,640
|
|
|
|
29,511,277
|
|
|
|
0.69
|
%
|
Diluted
|
|
|
29,786,677
|
|
|
|
30,280,532
|
|
|
|
-1.63
|
%
|
|
|
29,771,813
|
|
|
|
30,280,532
|
|
|
|
-1.68
|
%
|
THREE
MONTHS ENDED DECEMBER 31, 2010 AS COMPARED TO THREE MONTHS ENDED DECEMBER 31,
2009
Sales
Our sales for the three months ended
December 31, 2010 were $14,871,164, representing an increase of $7,745,120, or
109%, as compared to $7,126,044 in the three months ended December 31, 2009.
This increase was primarily due to two factors: (i) significantly increased
demand for our traditional cables, specialty cables and switch products from new
and existing customers, and (ii) increased production capacity as a result of
the relocation of our production facilities at the end of 2009 to our Phase I
Changxing facility in Dalian’s Changxing Island Harbor Industrial
Zone.
In terms of our product mix, for the
three months ended December 31, 2010, approximately 42.2% of our revenues were
generated from sales of traditional cable, approximately 49.4 % of revenues were
generated from sales of specialty cable and approximately 8.4% of revenues were
generated from our switch application business, as compared to 34.5%, 57.6% and
7.9%, respectively, in the three months ended December 31, 2009.
Cost
of Sales
Cost of sales is primarily comprised of
the cost of raw materials used in the production of our cable products, direct
labor and manufacturing overhead expenses. Our cost of sales for the three
months ended December 31, 2010 was $10,954,272, representing an increase of
$5,718,949, or 109%, as compared to $5,235,323 in the three months ended
December 31, 2009. The increase in our cost of sales was in line with the
increase in our sales.
Gross
Profit
Gross profit for the quarter ended
December 31, 2010 was $3,916,892, representing an increase of $2,026,171, or
107%, three months as compared to the three months ended December 31, 2009.
Gross profit as a percentage of sales was 26.34% for the three months ended
December 31, 2010, which was not materially different from gross profit
percentage at December 31, 2009.
Selling,
General and Administrative Expenses
Our selling, general and administrative
expenses consist primarily of salaries and bonuses for sales personnel,
advertising and promotion expenses, freight charges, related compensation and
professional fees and amortization expenses. Selling expenses were $149,643 in
the three months ended December 31, 2010, as compared to $14,828 in the three
months ended December 31, 2009, representing an increase of $134,815, or
909.19%. General and administrative expenses were $1,032,259 for the three
months ended December 31, 2010, representing an increase of $589,995, or
133.40%, as compared to $442,264 in the three months ended December 31,
2009. The increase of general and administrative expenses was mainly
due to the increase in expenses from salary, depreciation and expenses from
Dalian Yuansheng and WOFE.
Income
from Operations
Our operating income was $2,734,990 for
the three months ended December 31, 2010, representing an increase of
$1,301,361, or 90.77%, as compared to $1,433,629 for the three months ended
December 31, 2009. This increase was a result of a significant
increase in the gross profit of our overall business of wire and cable
manufacturing, partially offset by an increase of selling, general and
administrative expenses.
Government
Subsidy
In the three months ended December 31,
2010, we received subsidies from various PRC governmental bureaus in the
aggregate amount of $180,155, as compared to subsidies of $304,704 received in
the quarter ended December 31, 2009. The subsidies we received in the three
months ended December 31, 2010 consisted of (i) approximately $150,000 from the
Appropriation of Technology Innovation Fund of the Department of Finance of
Dalian City and (ii) approximately $30,000 from the Appropriation of Technology
Innovation Fund of the Department of Finance of Liaoning Province.
Interest
Expense
Interest expense was $493,390 for the
three months ended December 31, 2010, representing an increase of $488,195, or
9,193.40%, as compared to $5,195 for the three months ended December 31,
2009. This increase was due to the increase of our total bank loans,
proceeds of which were used for working capital and our Phase I Changxing
facility.
Income
Taxes
In the three months ended December 31,
2010, our business operations were conducted solely by WFOE, Dalian Befut and
its subsidiaries and, as such, we were governed by the PRC Enterprise Income Tax
Laws (the “EIT Law”). China enterprise income tax is calculated based on taxable
income determined under Chinese generally accepted accounting principles. In
accordance with the EIT Law, a Chinese domestic company is subject to
taxes, including but not limited to: (i) an enterprise income tax rate of 25%
and (ii) a value added tax of 17% on the goods sold.
Provision for income taxes was $614,895
for the three months ended December 31, 2010, an increase of $278,076, or
82.56%, compared to $336,819 for the three months ended December 31,
2009.
Net
Income
Net income for the three months ended
December 31, 2010 was $1,913,884, representing an increase of $920,703, or
92.70%, as compared to net income of $993,181 for the three months ended
December 31, 2009. The increase was mainly attributable to the increase of
$2,026,171 in gross profit and the increase of $510,162 in other income, which
was partially offset by an increase in selling, general and administrative
expenses of $724,810, an increase in interest expense of $488,195 and an
increase in income tax provision of $278,076.
SIX
MONTHS ENDED DECEMBER 31, 2010 AS COMPARED TO SIX MONTHS ENDED DECEMBER 31,
2009
Sales
Our sales for the six months ended
December 31, 2010 were $30,801,975, representing an increase of $18,192,272, or
144.27%, as compared to $12,609,703 in the six months ended December 31, 2009.
The increase was primarily due to three factors: (i) significantly increased
demand for our traditional cables, specialty cables and switch products from new
and existing customers, (ii) our increased production capacity as a result of
the relocation of our production facilities to our Phase I Changxing facility in
Dalian’s Changxing Island Harbor Industrial Zone at the end of 2009, and
(iii) increased prices of many of our cable products due to an increase in the
average price of copper, our primary raw material, in the six months ended
December 31, 2010, most of which we passed on to our customers.
In terms of our product mix, for the
six months ended December 31, 2010, approximately 48.0% of our revenues were
generated from sales of traditional cable, approximately 47.4% of revenues were
generated from sales of specialty cable and approximately 4.6% of revenues
were generated from our switch application business, as compared to 37.5%,
58.0% and 4.5%, respectively, in the six months ended December 31,
2009.
Cost
of Sales
Cost of sales is primarily comprised of
the cost of raw materials used in the production of our cable products, direct
labor and manufacturing overhead expenses. Our cost of sales for the six months
ended December 31, 2010 was $22,625,032, representing an increase of
$13,526,935, or 148.68%, as compared to $3,511,606 in the six months ended
December 31, 2009. Our cost of sales increased at a higher rate than our
sales because we produced a lower percentage of specialty cable, which typically
has higher gross margins, than in the prior period.
Gross
Profit
Gross profit for the six months ended
December 31, 2010 was $8,176,943, representing an increase of $4,665,337, or
132.85%, as compared to $3,511,606 in the six months ended December 31, 2009.
Gross profit as a percentage of sales was 26.55% for the six months ended
December 31, 2010, representing a decrease of 1.30%, as compared to 7.85% in the
six months ended December 31, 2009. The decrease of gross profit rate
was primarily due to that we produced a lower percentage of specialty cable
products, as compared to the six months ended December
31, 2009.
Selling,
General and Administrative Expenses
Our selling, general and administrative
expenses consist primarily of salaries and bonuses for sales personnel,
advertising and promotion expenses, freight charges, related compensation and
professional fees, and amortization expenses. Selling expenses were $188,250 in
the six months ended December 31, 2010, as compared to $36,701 in the six months
ended December 31, 2009, representing an increase of $151,549, or 412.93%.
General and administrative expenses were $2,043,879 for the six months ended
December 31, 2010, representing an increase of $1,013,330, or 98.33%, as
compared to $1,030,549 in the six months ended December 31, 2009. The increase
of general and administrative expenses was mainly due to the increase in
expenses, including for salary, depreciation and entertainment,
from Dalian Yuansheng, Befut Zhong Xing and WFOE.
Income
from Operations
Our operating income was $5,944,814 for
the six months ended December 31, 2010, an increase of $3,500,458, or 143.21%,
as compared to $2,444,356 for the six months ended December 31,
2009. This increase was a result of a significant increase in the
gross profit of our overall business of wire and cable manufacturing, partially
offset by an increase of selling, general and administrative
expenses.
Government
Subsidy
In the six months ended December 31,
2010, we received subsidies from various PRC governmental bureaus in the
aggregate amount of $316,642, as compared to subsidies of $354,658 received in
the six months ended December 31, 2009. The subsidies received by the Company in
the six months ended December 31, 2010 consisted of: (i) approximately $74,000
received from the Finance Bureau of Dalian and the Economic and Information
Commission of Dalian recognizing the Company as a Newly Identified Municipal
Technical Center, (ii) approximately $30,000 received from the Appropriation of
Technology Innovation Fund of the Department of Finance of Liaoning Province,
and (iii) approximately $178,000 received from the Appropriation of Technology
Innovation Fund of the Department of Finance of Dalian City and (iv) a refund of
$27,000 for value added taxes we paid at the end of 2009.
Interest
Expenses
Interest expense was $879,788 for the
six months ended December 31, 2010, an increase of $742,284, or 539.83%, as
compared to $137,504 for the six months ended December 31, 2009. This increase
is due to the increase in borrowings under our bank loans.
Income
Taxes
In the six months ended December 31,
2010, our business operations were conducted solely by WFOE, Dalian Befut and
its subsidiaries and, as such, we were governed by the PRC Enterprise Income Tax
Laws (the “EIT Law”). China enterprise income tax is calculated based on taxable
income determined under Chinese generally accepted accounting principles. In
accordance with the EIT Law, a Chinese domestic company is subject to taxes,
including but not limited to: (i) an enterprise income tax rate of 25% and (ii)
a value added tax of 17% on the goods sold.
Provision for income taxes was
$1,422,030 for the six months ended December 31, 2010, an increase of $836,307,
or 142.78%, compared to $585,723 for the six months ended December 31,
2009.
Net
Income
Net income for the six months ended
December 31, 2010 was $4,097,783 an increase of $2,419,437, or 144.16%, as
compared to net income of $1,678,346 for the six months ended December 31, 2009.
The increase was mainly attributable to the increase of $4,665,337 in gross
profit and the increase of $535,586 in other income, which was partially offset
by an increase in selling, general and administrative expenses of $1,164,879, an
increase in interest expense of $724,284 and an increase in income tax provision
of $836,307.
Liquidity
and Capital Resources
Selected
Measures of Liquidity and Capital Resources
The following table sets forth certain
relevant measures regarding our liquidity and capital resources:
(dollars in thousands, except ratios)
|
|
December 31,
2010
|
|
|
June 30,
2010
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted cash
|
|
$
|
4,256
|
|
|
$
|
2,500
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
9,584
|
|
|
$
|
7,215
|
|
|
|
|
|
|
|
|
|
|
Ratio
of current assets to current liabilities
|
|
1.4:1
|
|
|
1.5 :1
|
|
Our approximately $2.4
million increase in working capital from June 30, 2010 to December 31, 2010 was
primarily due to the increase of $12.8 million of current assets and the
increase of $10.4 million of current liabilities. The increase of
current assets mainly includes the increase of $1.8 million of cash, cash
equivalents and restricted cash, the increase of $8.0 million of account
receivables and the increase of $2.7 million of inventory. The increase of
current liabilities mainly includes the increase of $3 million of trade notes
payable, the increase of $3 million of short term bank loans, the increase of
$1.8 million of loans from unrelated parties, and the increase of $1.5 million
of income tax payable.
Cash
Flows
We had a net decrease of $557,713 in
cash and cash equivalents from June 30, 2010 to December 31, 2010, as compared
to a net increase of $5,175,592 from June 30, 2009 to December 31, 2009,
respectively. The following table summarizes such changes:
|
|
For the six months ended
|
|
(dollars in thousands)
|
|
December 31, 2010
|
|
|
December 31, 2009
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
(1,429
|
)
|
|
$
|
1,092
|
|
Net
cash used in investing activities
|
|
$
|
(1,217
|
)
|
|
$
|
(10,530
|
)
|
Net
cash provided by financing activities
|
|
$
|
2,159
|
|
|
$
|
14,618
|
|
Net
increase (decrease) in cash, cash equivalents
|
|
$
|
(558
|
)
|
|
$
|
5,176
|
|
Our management believes that we have
sufficient cash, along with projected cash to be generated from operations, and
access to short-term bank loans to support our current operations for the next
twelve months. We believe our cash position is strong and sufficient to meet our
anticipated working capital needs. However, if events or
circumstances occur and we do not meet our budgeted operating plan, we may be
required to seek additional capital and/or reduce certain discretionary
spending, which could have a material adverse effect on our ability to
achieve our business objectives. Notwithstanding the foregoing, we
may seek additional financing, which may include debt and/or equity financing.
There can be no assurance that any additional financing will be available on
acceptable terms, if at all. Any equity financing may result in
dilution to existing stockholders and any debt financing may include restrictive
covenants.
Operating
Activities
During the six months ended December
31, 2010, net cash used in operating activities was $1,429,171, a
decrease of $2,520,690, or 230.93%, as compared to net cash of $1,091,519
provided by operating activities during the six months ended December 31, 2009.
The decrease in net cash of approximately $2.5 million was mainly due to the
increase of net income of $2.4 million, the increase of account receivables of
$7.8 million, the increase in inventory of $1.6 million and the increase of
trade notes payable of $4.2 million.
Investing
Activities
During the six months ended December
31, 2010, we used net cash in investing activities of $1,216,513, a decrease of
$9,313,251, or 88.45%, as compared to net cash of $10,529,764 used in investing
activities for the six months ended December 31, 2009. We had significantly less
investment activities following the completion of our Phase I Changxing Island
facility in December, 2009.
Financing
Activities
During the six months ended December
31, 2010, net cash provided by financing activities was $2,158,719, representing
a decrease of $12,459,487, or 85.23%, as compared to net cash of $14,618,206
provided by financing activities during the six months ended December 31, 2009.
We significantly reduced our financing activities with the completion of our
Phase I Changxing Island facility.
Financial
Obligations
As of December 31, 2010, our
outstanding loans were as follows:
Creditors
|
|
Loan
Amount
|
|
|
Interest
Rate
|
|
Term
|
|
Maturity
Date
|
|
|
|
|
|
|
|
|
|
|
Harbin
Bank
|
|
$
|
3,034,000
|
|
|
|
7.55
|
%
*
|
1
year
|
|
09/13/11
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of Dalian
|
|
$
|
3,034,000
|
|
|
|
7.55
|
%
*
|
1
year
|
|
11/22/11
|
|
|
|
|
|
|
|
|
|
|
|
|
Dalian
Economic Zone Xinhui Town Bank
|
|
$
|
1,501,830
|
|
|
|
8.72
|
%
+
|
1
year
|
|
10/20/11
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
of East Asia
|
|
$
|
1,517,000
|
|
|
|
7.55
|
%
*
|
6
months
|
|
06/30/11
|
|
|
|
|
|
|
|
|
|
|
|
|
PRC
Development Bank Joint Equity Corporation
|
|
$
|
14,866,600
|
|
|
|
6.72
|
%
#
|
7
years
|
|
11/01/16
|
* Variable
interest rate equal to 30% per annum above the floating base rate issued by the
People’s Bank of China.
+ Variable
interest rate equal to 50% per annum above the floating base rate issued by the
People’s Bank of China.
# Variable
interest rate equal to 5% per annum above the floating base rate issued by the
People’s Bank of China.
Accounts
Receivable
The balance of our accounts receivable
was $17,292,392, net of allowance for doubtful accounts of $85,783, as of
December 31, 2010, as compared to $9,292,310, net of allowance for doubtful
accounts of $83,295, as of June 30, 2010. The average age of receivables for the
last twelve months ended December 31, 2010 was 94 days, compared to 103 days for
the fiscal year ended June 30, 2010.
Inventories
Inventories consisted of the following
as of December 31, 2010 and June 30, 2010, respectively:
|
|
December 31,
2010
|
|
|
June 30,
2010
|
|
Category
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
2,339,670
|
|
|
$
|
1,093,193
|
|
Work-in-process
|
|
|
365,680
|
|
|
|
323,275
|
|
Finished
goods
|
|
|
2,528,887
|
|
|
|
1,127,321
|
|
Total
inventories
|
|
$
|
5,234,237
|
|
|
$
|
2,543,789
|
|
We had total inventory of $5,234,237 as
of December 31, 2010, an increase of $2,690,448, or 105.77%, as compared to
inventory of $2,543,789 as of June 30, 2010. The average number of days of
inventory for the last twelve months ended December 31, 2010 was 66 days,
compared to 40 days for the fiscal year ended June 30, 2010. This increase was
primarily due to the significant increases in our production in last two
quarters.
Off-Balance
Sheet Arrangements
At December 30, 2010, we did not have
any off-balance sheet arrangements.
Critical
Accounting Policies and Use of Estimates
Management's discussion and analysis of
its financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
United States generally accepted accounting principles (“U.S. GAAP”). Our
financial statements reflect the selection and application of accounting
policies which require management to make significant estimates and judgments.
See Note 2 to our consolidated financial statements, “Summary of Significant
Accounting Policies.” We believe that the following paragraphs reflect the more
critical accounting policies that currently affect our financial condition and
results of operations:
Use
of Estimates and Assumption
The preparation of consolidated
financial statements in accordance with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include allowance
for doubtful accounts and income taxes. Actual results could differ from those
estimates.
Revenue
Recognition
We derives our revenues primarily from
the design, manufacture and sale of industrial wires and cables in the PRC. In
accordance with the provisions of ASC Topic 605, revenue is recognized when
products are shipped, title and risk of loss is passed to the customers and
collection is reasonably assured. Payments received before the above
criteria are satisfied are recorded as advance from customers.
Cash
and Cash Equivalents
In accordance with FASB ASC Topic 230,
"Statement of Cash Flows", we consider all highly liquid instruments with
original maturities of three months or less to be cash equivalents.
Accounts
Receivable
Accounts receivable are recorded net of
allowance for doubtful accounts. We provide an allowance for doubtful accounts
equal to the estimated uncollectible amounts. Periodically, management
assesses customer credit history and relationships as well as performs an
analysis on the aging of accounts receivable. Based on the results of
such analysis, management determines whether certain balances are deemed
uncollectible at the end of a certain fixed period. Using its past
collection experience, we reserve 0.3% of accounts receivable balances that have
been outstanding for less than one year, 3% of accounts receivable balances that
have been outstanding for more than one year but less than two years, and 10% of
accounts receivable balances that have been outstanding for more than two
years.