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EX-31.2 - EX-31.2 - BEFUT International Co., Ltd.v211050_ex31-2.htm
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EX-32.2 - EX-32.2 - BEFUT International Co., Ltd.v211050_ex32-2.htm
EX-31.1 - EX-31.1 - BEFUT International Co., Ltd.v211050_ex31-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 2010
 
¨
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 000-51336

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, Dalian City, China     116011
 (Address of principal executive offices)      (Zip Code)

86 0411-8367-0755
 (Issuer's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨  No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 29,715,640 shares of Common Stock, $.001 par value, were outstanding as of February 10, 2011.

 
 

 

TABLE OF CONTENTS

   
Page
PART I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements.
3
     
 
Consolidated Balance Sheets
 
 
As of December 31, 2010 (Unaudited) and June 30, 2010
5
     
 
Consolidated Statements of Operations and Other Comprehensive Income
 
 
For the Three Months and Six Months Ended December 31, 2010 and 2009 (Unaudited)
6
     
 
Consolidated Statements of Cash Flows
 
 
For the Six Months Ended December 31, 2010 and 2009 (Unaudited)
7
     
 
Notes to Consolidated Financial Statements December 31, 2010 and 2009 (Unaudited)
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
27
     
Item 4.
Controls and Procedures.
27
     
PART II
OTHER INFORMATION
 
     
Item 6.
Exhibits
27
     
Signatures
28
   
Exhibits/Certifications
29

 
2

 

PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements
 
BEFUT INTERNATIONAL CO., LTD.

CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2010 AND 2009

(UNAUDITED)

 
3

 

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
 
 
4

 
 
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.

 
5

 
 
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.
 
 
6

 
 
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.
 
 
7

 

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 Companys 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.
 
 
8

 

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

In preparing the accompanying unaudited consolidated financial statements, the Company evaluated the period from December 31, 2010 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

Interim Financial Statements
 
These interim financial statements should be read in conjunction with the audited consolidated financial statements for the years ended June 30, 2010 and 2009, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited consolidated financial statements for the years ended June 30, 2010 and 2009.
 
Reclassification
 
Certain amounts as of June 30, 2010 and December 31, 2010 were reclassified for presentation purposes.
 
Note 3– Restricted Cash
 
Cash balances in the amount of $1,218,584 and $1,181,095 were restricted as of December 31, 2010 and June 30, 2010, respectively, as collateral for the construction loan obtained from the PRC National Development Bank Joint Equity Corporation, which is exhibited in Note 14. The balance of $758,500 as of December 31, 2010 was restricted as collateral for the Bank of East Asia. The balance of $1,517,000 as of December 31, 2010 was restricted for the settlement of trade notes payable in connection with inventory purchases.

Note 4– Inventory

Inventory consisting of material, labor and manufacturing overhead as of December 31, 2010 and June 30, 2010 consists of the following:

   
December 31,
   
June 30,
 
   
2010
   
2010
 
             
Raw materials
  $ 2,339,670     $ 1,093,193  
Work in process
    365,680       323,275  
Finished goods
    2,528,887       1,127,321  
                 
Total
  $ 5,234,237     $ 2,543,789  
 
 
9

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)
 
Note 5– Loans to Unrelated Parties

As of December 31, 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 December 31, 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.

 
10

 

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 December 31, 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     $ -  
 
 
11

 

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.
 
 
12

 

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  

 
13

 

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.

 
14

 

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 ended December 31, 2010 and 2009.

Note 18 – 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
  $ -     $ -  
 
 
15

 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report.

Certain statements in this report constitute “forward-looking statements”. Such forward-looking statements include statements, which involve risks and uncertainties, regarding, among other things, (a) our projected sales, profitability, and cash flows, (b) our growth strategy, (c) our anticipated trends in our industry (d) our future financing plans, and (e) our anticipated needs for, and use of, working capital. Forward-looking Statements are generally identifiable by use of the words “may,” “will,” “should,” “anticipate,” “estimate,” “plan,” “potential,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” or the negative of these words or other variations on these words or comparable terminology. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks and matters described in this report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this filing will in fact occur. You should not place undue reliance on these forward-looking statements.

Any forward-looking statements speak only as of the date on which they are made and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. Further, the information about our intentions contained in this report is a statement of our intention as of the date of this report and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions as of such date. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise.

Unless the context indicates otherwise, as used in the following discussion, the words “Company”, “we,” “us,” and “our,” each refer to (i) BEFUT International Co., Ltd. (f/k/a Frezer, Inc.), a corporation incorporated in the State of Nevada; (ii) BEFUT Corporation, a corporation incorporated in the State of Nevada and a wholly owned subsidiary of the Company (“Befut Nevada”); (ii) Hongkong BEFUT Co., Ltd. (“Befut Hongkong”), a wholly-owned subsidiary of Befut Nevada, incorporated under the laws of Hong Kong; (iii) Befut Electric (Dalian) Co., Ltd. (“WFOE”), a corporation incorporated under the laws of the People’s Republic of China (the “PRC”), and a wholly-owned subsidiary of Befut Hongkong; (vi) Dalian Befut Wire and Cable Manufacturing Co., Ltd. (“Dalian Befut”), a corporation incorporated under the laws of the PRC, which is a captive manufacturer of WFOE pursuant to a series of contractual agreements; (vii) Dalian Marine Cable Co., Ltd. (“Befut Marine”), a corporation incorporated under the laws of the PRC, and that is 86.6% owned by Dalian Befut; (viii) Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong Xing”), a corporation incorporated under the laws of the PRC, and that is 73.5% owned by Dalian Befut; and (ix) Dalian Yuansheng Technology Co., Ltd. (“Dalian Yuansheng”), a corporation incorporated under the laws of the PRC, and that is 93.3% owned by Dalian Befut.

 
16

 

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 %

 
17

 

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.

 
18

 

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.
 
 
19

 
 
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.

 
20

 

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.

 
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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.

 
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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.

 
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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:

 
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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.

 
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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.

 
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Item 3.
Quantitative and Qualitative Disclosures About Market Risk

As a smaller reporting company, we are not required to provide this information.

Item 4.
Controls and Procedures
 
(a)            Evaluation of disclosure controls and procedures. At the conclusion of the period ended December 31, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

(b)            Changes in internal controls. During the period covered by this report, there was no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) 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.

 
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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, 2011
By:
/s/ Hongbo Cao
 
Name: Hongbo Cao
 
Title: President and Chief Executive Officer
 
(principal executive officer)
   
Date: February 14, 2011
By:
/s/ Mei Yu
 
Name: Mei Yu
 
Title: Chief Financial Officer
 
(principal financial officer and principal accounting officer)

 
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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.

 
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