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EX-31.1 - Sutor Technology Group LTDv221418_ex31-1.htm
EX-31.2 - Sutor Technology Group LTDv221418_ex31-2.htm
EX-32.2 - Sutor Technology Group LTDv221418_ex32-2.htm
EX-32.1 - Sutor Technology Group LTDv221418_ex32-1.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: March 31, 2011

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

For the transition period from ____________ to _____________

Commission File Number: 000-51908

SUTOR TECHNOLOGY GROUP LIMITED
(Exact Name of Registrant as Specified in Its Charter)

Nevada
 
87-0578370
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
   

No 8, Huaye Road
Dongbang Industrial Park
Changshu, 215534
People’s Republic of China
(Address of principal executive offices, zip code)

(+86) 512-52680988
(Registrant’s telephone number, including area code)


(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.

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

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

The number of shares outstanding of each of the issuer’s classes of common stock, as of May 9, 2011 is as follows:
 
Class of Securities
 
Shares Outstanding
Common Stock, $0.001 par value
 
40,745,602

 
 

 

 SUTOR TECHNOLOGY GROUP LIMITED
 
Quarterly Report on FORM 10-Q
 Three Months Ended March 31, 2011

TABLE OF CONTENTS

   
PART I
   
   
FINANCIAL INFORMATION
   
         
Item 1.
 
Financial Statements
 
2
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
3
         
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
15
         
Item 4.
 
Controls and Procedures
 
15
         
   
PART II
   
   
OTHER INFORMATION
   
         
Item 1.
 
Legal Proceedings
 
16
         
Item 1A.
 
Risk Factors
 
16
         
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
16
         
Item 3.
 
Defaults Upon Senior Securities
 
16
         
Item 4.
 
(Removed and Reserved)
 
16
         
Item 5.
 
Other Information
 
16
         
Item 6.
  
Exhibits
  
16

 
 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

   
Page
     
Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and June 30, 2010
 
F-1
     
Condensed Consolidated Statements of Operations and Comprehensive Income for the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)
 
F-2
     
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2011 and 2010 (Unaudited)
 
F-3
     
Notes to Condensed Consolidated Financial Statements (Unaudited)
 
F-4-F-17
 
 
2

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(audited)
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 12,162,775     $ 13,336,736  
Restricted cash
    62,875,755       48,315,962  
Trade accounts receivable, net of allowance for doubtful accounts of $504,150 and $498,620, respectively
    16,555,372       10,913,736  
Other receivables and prepayments
    1,997,451       929,507  
Advances to suppliers, related parties
    114,214,160       96,776,181  
Advances to suppliers, net of allowance of $460,011 and $542,490, respectively
    24,793,941       8,304,246  
Inventory, net of allowance for obsolescence of $105,732 and $102,028, respectively
    38,305,284       40,179,358  
Notes receivable
    15,220       73,437  
Deferred income taxes
    285,875       329,414  
                 
Total Current Assets
    271,205,833       219,158,577  
                 
Property, Plant and Equipment, net of accumulated depreciation of $32,589,559 and $25,914,352, respectively
    68,157,865       70,018,522  
Intangible Assets, net of accumulated amortization of $483,266 and $415,178, respectively
    3,051,210       2,995,488  
                 
TOTAL ASSETS
  $ 342,414,908     $ 292,172,587  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 31,196,368     $ 23,954,009  
Advances from customers
    7,485,793       6,769,481  
Other payables and accrued expenses
    4,678,025       4,688,324  
Other payables - related parties
    529,672       352,495  
Short-term notes payable
    93,521,167       82,128,484  
Short-term notes payable - related parties
    608,819       587,492  
                 
Total Current Liabilities
    138,019,844       118,480,285  
Long-Term Notes Payable
    16,826,700       2,859,995  
Total Liabilities
    154,846,544       121,340,280  
                 
Stockholders' Equity
               
Undesignated preferred stock - $0.001 par value; 1,000,000 shares authorized; no shares outstanding
    -       -  
Common stock - $0.001 par value; 500,000,000 shares authorized, 40,745,602 and 40,715,602 shares outstanding at March 31, 2011 and June 30, 2010, respectively
    40,745       40,715  
Additional paid-in capital
    42,554,997       42,465,581  
Statutory reserves
    12,629,151       12,629,151  
Retained earnings
    105,978,786       96,164,928  
Accumulated other comprehensive income
    26,364,685       19,531,932  
Total Stockholders' Equity
    187,568,364       170,832,307  
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 342,414,908     $ 292,172,587  
                 
The accompanying notes are an integral part of the condensed consolidated financial statements

 
F-1

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(Unaudited)

   
For The Three Months Ended
   
For The Nine Months Ended
 
   
March 31
   
March 31
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenue:
                       
Revenue
  $ 62,521,577     $ 53,393,402     $ 157,802,440     $ 165,933,164  
Revenue from related parties
    38,853,040       61,058,979       144,942,388       187,502,281  
      101,374,617       114,452,381       302,744,828       353,435,445  
                                 
Cost of Revenue
                               
Cost of revenue
    57,017,557       48,928,589       143,055,256       153,813,836  
Cost of revenue from related party sales
    35,742,344       56,209,868       133,184,740       177,272,203  
      92,759,901       105,138,457       276,239,996       331,086,039  
                                 
Gross Profit
    8,614,716       9,313,924       26,504,832       22,349,406  
                                 
Operating Expenses:
                               
                                 
Selling expense
    1,345,635       1,815,730       4,708,748       4,464,208  
General and administrative expense
    1,718,186       1,980,356       5,081,444       4,466,783  
                                 
Total Operating Expenses
    3,063,821       3,796,086       9,790,192       8,930,991  
Income from Operations
    5,550,895       5,517,838       16,714,640       13,418,415  
                                 
Other Income (Expense):
                               
Interest income
    188,697       389,750       626,412       973,089  
Other income
    2,595       6,211       123,886       373,175  
Interest expense
    (1,986,541 )     (1,535,430 )     (5,856,643 )     (4,150,479 )
Other expense
    (214,926 )     (19,043 )     (489,989 )     (341,321 )
Gain on sale of assets
    4,447       (3,549 )     4,447-       (3,549 )
Total Other Income (Expense)
    (2,005,728 )     (1,162,061 )     (5,591,887 )     (3,149,085 )
                                 
Income Before Taxes
    3,545,167       4,355,777       11,122,753       10,269,330  
Provision for income taxes
    (76,958 )     (961,085 )     (1,308,895 )     (2,346,813 )
                                 
Net Income
  $ 3,468,209     $ 3,394,692     $ 9,813,858     $ 7,922,517  
   
 
   
 
   
 
   
 
 
Basic Earnings per Share
  $ 0.09     $ 0.09     $ 0.24     $ 0.21  
Diluted Earnings per Share
  $ 0.09     $ 0.09     $ 0.24     $ 0.21  
   
 
   
 
   
 
   
 
 
Basic Weighted Shares Outstanding
    40,727,935       38,608,046       40,719,653       38,169,909  
Diluted Weighted Shares Outstanding
    40,727,935       38,608,046       40,719,653       38,169,909  
                                 
Net Income
  $ 3,468,209     $ 3,394,692     $ 9,813,858     $ 7,922,517  
Foreign currency translation adjustment
    1,231,987       33,378       6,832,753       226,802  
Comprehensive Income
  $ 4,700,196     $ 3,428,070     $ 16,646,611     $ 8,149,319  

The accompanying notes are an integral part of the condensed consolidated financial statements

 
F-2

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
   
For The Nine Months Ended
 
   
March 31
 
   
2011
   
2010
 
Cash Flows from Operating Activities:
           
Net income
  $ 9,813,858     $ 7,922,517  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization
    5,715,855       5,260,692  
Deferred income taxes
    54,587       63,740  
Foreign currency exchange (gain) loss
    191       -  
Stock based compensation
    89,446       10,133  
Loss (Gain) on sale of assets
    (4,447 )     3,549  
Changes in current assets and liabilities:
               
Trade accounts receivable, net
    (5,228,146 )     (389,975 )
Other receivable and prepayment
    (1,017,248 )     104,586  
Advances to suppliers - related parties
    (13,346,284 )     (37,108,212 )
Advances to suppliers
    (15,922,866 )     1,561,993  
Inventory
    3,277,984       6,830,463  
Accounts payable
    6,268,337       2,980,168  
Advances from customers
    486,821       3,836,561  
Other payables and accrued expenses
    (163,136 )     1,432,592  
Other payables - related parties
    161,686       298,345  
                 
Net Cash (Used In) Operating Activities
    (9,813,362 )     (7,192,848 )
                 
Cash Flows from Investing Activities:
               
Changes in notes receivable
    59,884       (1,269,427 )
Purchase of property, plant and equipment, net of value added tax refunds received
    (1,335,063 )     (1,196,621 )
Proceeds from sale of assets
    6,138       -  
Net Cash Used In Investing Activities
    (1,269,041 )     (2,466,048 )
                 
Cash Flows from Financing Activities:
               
Proceeds from issuance of notes payable
    96,696,227       95,709,395  
Payments on notes payable
    (74,409,132 )     (95,979,838 )
Proceeds from issuance of notes payable - related parties
    -       199,932  
Payments on notes payable - related parties
    -       (985,269 )
Net change in restricted cash
    (12,595,955 )     16,649,017  
Distribution to shareholders
    -       (6,615,825 )
Net proceeds from issuance of common stock and warrants
    -       6,814,196  
Net Cash Provided By Financing Activities
    9,691,140       15,791,608  
                 
Effect of Exchange Rate Changes on Cash
    217,302       22,772  
                 
Net Change in Cash
    (1,173,961 )     6,155,484  
Cash and Cash Equivalents at Beginning of Period
    13,336,736       10,653,438  
Cash and Cash Equivalents at End of Period
  $ 12,162,775     $ 16,808,922  
                 
Supplemental Non-Cash Financing Activities
               
Offset of notes payable to related party against receivable from related parties (Note 7)
  $ 9,959,383     $ 9,597,783  
Supplemental Cash Flow Information
               
Cash paid during the period for interest
  $ 5,426,740     $ 3,744,722  
Cash paid during the period for income taxes
  $ 2,095,060     $ 1,465,412  

The accompanying notes are an integral part of the condensed consolidated financial statements

 
F-3

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

Sutor Technology Group Limited and subsidiaries (the “Company”) include its wholly owned subsidiaries Sutor Steel Technology Co., Ltd. (“Sutor Steel”), Changshu Huaye Steel Strip Co., Ltd. (“Changshu Huaye”), Jiangsu Cold-Rolled Technology Co., Ltd. (“Jiangsu Cold-Rolled”), Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd. (“Ningbo Zhehua”) and Sutor Technology Co., Ltd (“Sutor Technology”).

Ningbo Zhehua was organized under the laws of the People’s Republic of China (the “PRC”) on April 5, 2004. On November 10, 2009, pursuant to an Equity Transfer Agreement (the “Agreement”), Changshu Huaye acquired 100% of the equity interests of Ningbo Zhehua from Shanghai Huaye Iron & Steel Co., Ltd., (an entity under common control with the Company) (“Shanghai Huaye”) for approximately $6,615,825 in cash. The acquisition was a transfer of equity interests between entities under common control and was recognized as a recapitalization of Ningbo Zhehua into the Company in a manner similar to the pooling-of-interests method of accounting, with the assets and liabilities of Ningbo Zhehua recognized at their historical carrying amounts.

Nature of Operations - The Company’s operations are located in the PRC. For the three months ended March 31, 2011 and 2010, approximately 87.4% and 90.6%, respectively, of the Company’s revenue was derived from sales within the PRC of steel products. For the nine months ended March 31, 2011 and 2010, approximately 91.0% and 90.3%, respectively, of the Company’s revenue was derived from sales within the PRC of steel products. A significant portion of the Company’s purchases and revenues consist of transactions with Shanghai Huaye and its subsidiaries. Changshu Huaye manufactures hot-dip galvanized steel (“HDG products) and pre-painted galvanized steel (“PPGI products”). Jiangsu Cold-Rolled operates several production lines that refine products such as cold-rolled steel, acid pickled steel and hot-dip galvanized steel. Ningbo Zhehua manufactures heavy steel pipe and purchases and resells cold-rolled and hot-dip galvanized steel. Sutor Technology Co., Ltd. has not started operation since its inception on February 24, 2010.

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

Interim Unaudited Financial Statements – The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiaries at March 31, 2011 and for the three and nine months ended March 31, 2011 and 2010 reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the three and nine months ended March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending June 30, 2011. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2010. The Company follows the same accounting policies in the preparation of interim reports.

Principles of Consolidation – The accompanying condensed consolidated financial statements includes the accounts and transactions of Sutor Technology Group Limited and its subsidiaries for all periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

Functional Currency and Translating Financial Statements - The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The functional currency of the Company is the Chinese Yuan Renminbi (“RMB”); however, the accompanying condensed consolidated financial statements have been expressed in United States Dollars (“USD”). The accompanying consolidated balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The accompanying consolidated statements of operations and cash flows have been translated using the exchange rate on the dates of significant transactions or the weighted-average exchange rates prevailing during the periods of each statement. Transactions in the Company’s equity securities have been recorded at the exchange rate existing at the time of the transaction.

    
March 31, 
2011
   
March 31, 
2010
   
June 30,
2010
 
Period end RMB : USD exchange rate
 
 
6.5701
     
6.8361
 
 
 
6.8086
 
Average 3 months RMB : USD exchange rate
 
 
6.5894
     
6.8360
 
 
 
 
Average 9 months RMB : USD exchange rate
 
 
6.6796
     
6.8377
 
 
 
 
 
 
F-4

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition - The Company recognizes revenues from the sale of products in the three segments when they are realized and earned. The Company considers revenue realized or realizable and earned when (1) it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Revenues are not recognized until products have been shipped to the client, risk of loss has transferred to the client and client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied.

The Company sells product to affiliates, who in turn sell the product to various other third party customers. Revenue is considered realized or realizable and earned when the affiliates ship the product to third party customers. A fee of 0.5% of the sale is paid to the affiliate for handling the product. The handling fees were $82,866 and $137,776 for the three months ended March 31, 2011 and 2010 respectively and have been classified as selling expenses in the statement of operations. The handling fees were $366,288 and $384,016 for the nine months ended March 31, 2011 and 2010 respectively and have been classified as selling expenses in the statement of operations.

Recently Adopted Accounting Guidance - In January 2010, FASB issued ASU No. 2010-05, Compensation – Stock Compensation (ASC Topic 718), Escrowed Share Arrangements and the Presumption of Compensation. This update codifies Emerging Issues Task Force D-110. The adoption of this standard did not have a material impact to the Company’s financial statements

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (ASC Topic 820), Improving Disclosures about Fair Value Measurements. This update provides amendments to ASC Topic 820 that will provide more robust disclosures about (1) the different classes of assets and liabilities measured at fair value, (2) the valuation techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4) the transfers between Levels 1, 2, and 3. This standard is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of this standard did not have a material impact to the Company’s financial position or results of operations.

Recent Accounting Guidance Not Yet Adopted – Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our consolidated financial statements upon adoption.

 
F-5

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 3 – INVENTORY

Inventory consisted of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(audited)
 
Raw materials
  $ 18,446,138     $ 22,285,980  
Work in process
    -       265,282  
Finished goods
    19,964,878       17,730,124  
                 
      38,411,016       40,281,386  
Less: allowance for obsolescence
    (105,732 )     (102,028 )
                 
Total Inventory - net
  $ 38,305,284     $ 40,179,358  

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT

Property and equipment includes value-added tax paid. Foreign invested enterprises and foreign enterprises doing business in the PRC are generally able to receive a refund of the value-added tax paid on property and equipment purchased and manufactured within the PRC. The Company recognizes refunds of value-added tax as a reduction of property and equipment when the refunds are collected. The refunds are a long-term asset as it can take up to three years to collect them from the PRC government. Investment tax credits are realized upon collection from the government. The Company has approximately $32,115,000 of property and equipment that is used as collateral for loans.

Property, plant and equipment consisted of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(audited)
 
Buildings and plant
  $ 28,618,698     $ 27,513,920  
Machinery
    68,690,167       66,220,305  
Office and other equipment
    1,095,065       994,114  
Vehicles
    290,754       337,454  
                 
      98,694,684       95,065,793  
Less: accumulated depreciation
    (32,589,559 )     (25,914,352 )
                 
      66,105,125       69,151,441  
Construction in process
    2,052,740       867,081  
                 
Net property, plant and equipment
  $ 68,157,865     $ 70,018,522  

No interest has been capitalized in construction in process through March 31, 2011 as the amount is insignificant.

 
F-6

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 4 – PROPERTY, PLANT AND EQUIPMENT - continued

Depreciation is computed on a straight-line basis over the estimated useful lives of the assets, as follows:

 
Life
Buildings and Plant
20 years
Machinery
10 years
Office and other equipment
10 years
Vehicles
5 years

Depreciation expense for the three months ended March 31, 2011 and 2010 was $1,913,961 and $1,836,144, respectively.
Depreciation expense for the nine months ended March 31, 2011 and 2010 was $5,663,707 and $5,209,750, respectively.

NOTE–5 - INTANGIBLE ASSETS

The Company’s intangible assets consist of several land use rights, which are amortized over the 50-year life of those rights. Amortization expense for the three months ended March 31, 2011 and 2010 was $17,611 and $16,985 respectively. Amortization expense for the nine months ended March 31, 2011 and 2010 was $52,148 and $50,942 respectively. Intangible information by segment is presented below:

As of March 31, 2011
 
Changshu Huaye
   
Jiangsu Cold-Rolled
   
Total
 
               
(unaudited)
 
Gross Carrying Amount
  $ 2,248,961     $ 1,285,515     $ 3,534,476  
Accumulated Amortization
    (328,163 )     (155,103 )     (483,266 )
    $ 1,920,798     $ 1,130,412     $ 3,051,210  

As of June 10, 2010
 
Changshu Huaye
   
Jiangsu Cold-Rolled
   
Total
 
               
(audited)
 
Gross Carrying Amount
  $ 2,170,182     $ 1,240,484     $ 3,410,666  
Accumulated Amortization
    (284,116 )     (131,062 )     (415,178 )
    $ 1,886,066     $ 1,109,422     $ 2,995,488  

The following schedule sets forth the estimated amortization expense for the periods presented:

ESTIMATED AMORTIZATION EXPENSE
 
 
 
Remainder of the year ending June 30, 2011
 
$
17,672
 
For the year ending June 30, 2012
 
 
70,690
 
For the year ending June 30, 2013
 
 
70,690
 
For the year ending June 30, 2014
 
 
70,690
 
For the year ending June 30, 2015
 
 
70,690
 
 
 
F-7

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE–6 - NOTES PAYABLE

The Company’s notes payable consist of short and long-term debt. All non related party short-term notes payable were due to banks. The following schedules sets forth the Company’s notes payable and notes payable – related parties as of the dates presented:

 Non-related party short-term and long term notes were comprised of the following:

        
March 31,
   
June 30,
 
   
Maturity Date
 
2011
   
2010
 
       
(unaudited)
   
(audited)
 
Note payable at 5.22% interest, guaranteed by related party
 
Renew to 1/19/2012
  $ 2,283,070     $ 2,203,096  
Note payable at 6.06% interest, guaranteed by related party
 
Renew to 2/29/2012
    3,044,094       2,937,461  
Note payable at 5.31% interest, guaranteed by related party
 
4/29/2011
    3,044,094       2,937,461  
Note payable at 5.31% interest, guaranteed by related party
 
5/19/2011
    3,044,094       2,937,461  
Note payable at 4.78% interest, guaranteed by related party
 
5/24/2011
    5,174,959       4,993,684  
Note payable at 4.78% interest, guaranteed by related party
 
5/26/2011
    7,610,234       7,343,654  
Note payable at 5.10% interest, guaranteed by related party
 
5/16/2011
    3,044,094       2,937,461  
Note payable at 6.00% interest, unsecured
 
11/20/2011
    2,859,995       -  
Note payable at 4.78% interest, guaranteed by related party
 
various dates from 6/20/2011 to 9/6/2011
    33,028,415       -  
Note payable at 5.31% interest, guaranteed by related party
 
8/20/2011
    1,522,047       -  
Note payable at 5.00% interest, guaranteed by related party
 
11/17/2011
    6,088,187       -  
Note payable at 4.78% interest, guaranteed by related party
 
9/30/2011
    7,610,234       -  
Note payable at 5.00% interest, guaranteed by related party
 
various dates from 10/24/2011 to 11/10/2011
    10,045,509       -  
Note payable at 5.91% interest, guaranteed by related party
 
12/26/2011
    1,522,047       -  
Note payable at 0.85% interest, guaranteed by related party
 
4/22/2011
    556,000       -  
Note payable at 5.81% interest, guaranteed by related party
 
7/5/2011
    3,044,094       -  
Note payable at 4.78% interest, guaranteed by related party
 
matured
    -       30,549,599  
Note payable at 4.05% interest, guaranteed by land use right
 
matured
    -       3,231,208  
Note payable at 4.80% interest, secured by property
 
matured
    -       9,693,623  
Note payable at 4.05% interest, guaranteed by related party
 
matured
    -       1,909,350  
Note payable at 5.31% interest, guaranteed by related party
 
matured
    -       7,343,654  
Note payable at 4.78% interest, guaranteed by related party
 
matured
    -       1,321,858  
Note payable at 4.86% interest, guaranteed by related party
 
matured
    -       1,788,914  
                     
Total Short-Term Notes Payable
      $ 93,521,167     $ 82,128,484  
                     
Long-term notes payable at 3.98% interest as of March 31, 2011, guaranteed by related party
 
2/21/2013
    16,826,700       -  
Long-term notes payable at 6.00% interest, unsecured
 
matured
    -       2,859,995  
Total long-term notes payable
      $ 16,826,700     $ 2,859,995  
                     
As of March 31, 2011, restricted cash of $45,159,130 and $17,716,625 are held as collateral for short term and long term notes payable, respectively.

The weighted average interest rate for the non-related party short-term and long term notes payable as of March 31, 2011 is 4.99%.

 
F-8

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE–6 - NOTES PAYABLE- continued

Notes due to related parties were comprised of the following:

   
Maturity
Date
 
March 31,
2011
   
June 30,
2010
 
       
(unaudited)
   
(audited)
 
Note payable to principal shareholder, no interest rate, unsecured
 
On demand
  $ 608,819     $ 587,492  
Total short-term notes payable - related parties
 
 
  $ 608,819     $ 587,492  

The note payable to the principal shareholder has a zero interest rate, the Company does not impute interest on this note payable. The Company intends to repay this note when repayment is demanded.

NOTE–7 - RELATED PARTIES

Purchases from Related Parties
The Company sells its products to and buys raw materials from various companies which are owned or controlled by the Principal Shareholders. These other companies are composed of a number of companies with which the Company conducts significant transactions. Revenues related to these transactions are shown separately in the accompanying consolidated statements of income. For the three months ended March 31, 2011 and 2010, purchases from these related parties totaled of $58,957,273 and $94,364,470, respectively. For the nine months ended March 31, 2011 and 2010, purchases from these related parties totaled of $163,121,266 and $210,563,568, respectively.

Advances to Suppliers- Related Parties
The amounts due to related parties are non-interest bearing and were incurred in the normal course of business except for certain notes payable. Receivables from, advances to suppliers, sales to, payables from advanced sales deposits, and payables from purchases from related parties have been netted due to the right of offset. At March 31, 2011 and June 30, 2010, the net amounts due from related parties were $114,214,160 and $96,776,181, respectively. The amounts charged for products to the Company by the related parties are under the same pricing, terms and conditions as those charged to third parties, and are due upon receipt. It is not uncommon for the Company with its related parties to accommodate a repayment extension of 90 to 180 days. Amounts receivable from related parties are also due upon delivery. Advances to suppliers which are related parties, are relieved once the goods are received.

Letters of Credit Held by Related Parties
At March 31, 2011, the Company had letters of credit totaling $55,006,773 in the form of banker’s acceptance notes that are held by related parties in connection with purchases from related parties. The banker’s acceptance notes carry a 0% interest rate, can be presented to the respective banks in 90 to 180 days from the dates they were written, are secured by cash on deposit with the respective banks and are guaranteed by related parties.

Notes Payable to Principal Shareholder
On December 20, 2007, Ms. Chen loaned the Company $7,099,998. The loan was for an initial period of 24 months through December 20, 2009, carried an interest rate of 5%.

On March 11, 2009, Ms. Chen loaned the Company $99,998. The loan was for a period of 36 months, carried an interest rate of 3.60%.

On April 29, 2009, Ms. Chen loaned the Company $149,998. The loan was for a period of 36 months, carried an interest rate of 5.00%.

On July 25, 2009, Ms. Chen loaned the Company $199,930. The loan was for a period of 12 months, and carried an interest rate of 2%.

The notes to Ms. Chen described above plus the accrued interest on the notes of $1,177,364 totaling $8,727,288 (along with $1,232,095 of non-interest bearing notes due to Ms. Chen) was transferred to Shanghai Huaye by Ms. Chen pursuant to an agreement between the parties dated December 10, 2009. Since the Company has a right of offset for amounts due from Shanghai Huaye, the aggregate amount of these notes and accrued interest of $9,959,383 has been recorded as a reduction of advances to related parties in the accompanying balance sheet as of March 31, 2011.

 
F-9

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE–7 - RELATED PARTIES - continued

On various dates from February 25, 2007 to June 30, 2009, Ms. Chen loaned the Company a total of $5.3 million. The Company during that same period paid Ms. Chen $2.5 million and as described above Ms. Chen transferred to Shanghai Huaye $1,232,095 of the notes on December 10, 2009. The Company further paid off $1 million as of March 31, 2010. The notes are due on demand and bear no interest and are included in the accompanying balance sheet under the caption short-term notes payable – related parties in the net amount of $608,819 and $587,492 at March 31, 2011 and June 30, 2010, respectively.

Rental Agreement with Principal Shareholder
On November 8, 2008, the Company entered into an agreement with the Principal Shareholder for the lease of 1,200 square meters of property in the Dongbang Industrial Park, in Changhsu, China. The terms of the agreement state that the Company will lease the property for three years, and pay the principal shareholder approximately $18,260 (RMB 120,000) per month. The Company has accrued expense for this lease of $529,672 and $352,495 that is included on the balance sheet under the caption Other payables – related parties at March 31, 2011 and June 30, 2010, respectively. The Company and the principal shareholders have renewed the lease and extended the date of agreement from November 7, 2011 to November 7, 2014.

On August 6, 2004, the Company entered into a 10 year lease agreement with its related company, Ningbo Huaye Steel Processing, Ltd. to use a factory building in the Ningbo Camel Luo Ji Dian Industrial Park. Lease payments are made quarterly at a monthly rate of approximately $12,180 (RMB 80,000).

NOTE–8 - INCOME TAXES

On March 16, 2007, the National People’s Congress of China passed the new Enterprise Income Tax Law (“EIT Law”), and on December 6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.

The EIT Law gives existing FIEs a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. Changshu Huaye is subject to an EIT of 15% from calendar year 2010 and beyond because it qualifies as high-tech enterprise for the calendar years 2010, 2011 and 2012. Changshu Huaye paid EIT at the 25% tax rate for the period between July and December 2010 and the Company expects to receive a refund on the over-paid portion of the EIT. Jiangsu Cold-Rolled is subject to EIT of 12.5% for the calendar years 2009, 2010 and 2011. Jiangsu Cold-Rolled will be subject to an EIT of 25% for the calendar year 2012 and beyond. Ningbo Zhehua is subject to an EIT of 25% and has no preferential tax treatments. The discontinuation of any such special or preferential tax treatment or other incentives would have an adverse affect on the Company’s business, fiscal condition and current operations in China.

 Taxes payable are a component of other payables and accrued expenses in the accompanying condensed consolidated balance sheets and consisted of:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(audited)
 
Value added tax
  $ (125,308 )   $ (584,996 )
Income tax
    812,703       1,162,792  
Surtax, insurance, other
    120,104       136,401  
Total Taxes
  $ 807,499     $ 714,196  
 
 
F-10

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE–8 - INCOME TAXES - continued

Following is a reconciliation of income taxes at the calculated statutory rate:

   
For The Three Months Ended
   
For The Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Income tax calculated at statutory rates
  $ 882,672     $ 1,088,944     $ 2,777,068     $ 2,567,332  
Under-accrual/(tax credit) in prior years
    (408,133 )     -       (438,719 )     -  
Benefit of favorable rates
    (269,806 )     (210,154 )     (843,957 )     (504,140 )
Operating loss carryforward
    49,228       -       49,244       -  
Tax effect of parent and sewer losses
    (159,050 )     73,315       (216,788 )     274,641  
Permanent difference
    (17,953 )     8,979       (17,953 )     8,979  
Provision for income taxes
  $ 76,958     $ 961,085     $ 1,308,895     $ 2,346,813  

Deferred taxes are comprised of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(unaudited)
   
(audited)
 
Net operating loss carryforward - US
  $ 1,198,377     $ 1,183,622  
Net operating loss carryforward - PRC
    46,368       -  
Stock based compensation
    42,877       -  
Allowance for doubtful trade receivables
    116,952       124,685  
Allowance for doubtful other receivables
    56,959       79,461  
Allowance for doubtful advances to suppliers
    66,013       99,761  
Allowance for inventory obsolescence
    26,433       25,507  
Other
    19,520       -  
Less: Valuation allowance
    (1,287,623 )     (1,183,622 )
Total deferred income tax assets
  $ 285,875     $ 329,414  

As of March 31, 2011, the Company has a net operating loss from continuing operations for United States federal income tax purposes of $3,524,639 which are available to carry back five years or offset future taxable income, if any, through 2030. As of March 31, 2011, the Company determined that the net operating loss may not be utilizable, as such, a full valuation allowance has been provided.

The provision for income taxes is comprised of the following:

   
For The Three Months Ended
   
For The Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Current
  $ (7,012 )   $ 1,090,365     $ 1,254,308     $ 2,367,133  
Deferred
    83,970       (129,280 )     54,587       (20,320 )
Provision for income taxes
  $ 76,958     $ 961,085     $ 1,308,895     $ 2,346,813  

There was no tax holiday for the three and nine months ended March 31, 2011.

 
F-11

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 9 – ISSUANCE OF COMMON STOCK AND WARRANTS

The following table summarizes the warrant activity as of March 31, 2011, and changes during the nine months ended March 31, 2011:

    
Warrants
   
Weighted-average
     exercise price     
 
 
 
 
 
 
 
 
Outstanding at June 30, 2010
 
 
685,000
 
 
$
3.76
 
Issued
 
 
-
 
 
 
-
 
Exercised
 
 
-
 
 
 
-
 
Expired
 
 
-
 
 
 
-
 
Outstanding at March 31, 2011
 
 
685,000
 
 
$
3.76
 

The aggregate intrinsic value as of March 31, 2011 and June 30, 2010 are $0.

NOTE 10 – STOCK-BASED COMPENSATION

Restricted Stock

On February 1, 2010, the Company granted to an executive 20,000 shares of restricted common stock with a grant date fair value of $3.04 per share as part of his remuneration for his service commencing February 1, 2010 for a one year period. The restricted common stock will vest on the first anniversary of the grant date. Stock-based compensation expense for the three and nine months ended March 31, 2011 was $5,163 and $35,813, respectively. The restricted stock is fully vested as of March 31, 2011.

On February 23, 2011, the Company amended an employment agreement with an executive and granted to an executive 30,000 shares of restricted common stock with a grant date fair value of $1.82 per share as part of his remuneration for his service commencing February 23, 2011 for a one year period. The restricted common stock will vest on the first anniversary of the grant date. The amended agreement calls for a stock grant on each anniversary date through the end of the agreement. Stock-based compensation expense for the three and nine months ended March 31, 2011 was $5,535 and $5,535, respectively. The remaining $49,065 stock-based compensation will be expensed over the remainder of the one year service period. The value of the non-vested stock at March 31, 2011 is $54,600.

Options

Stock Options granted to Key Employees

On April 27, 2010, the Board of Directors approved the grant of stock options to purchase 100,000 shares of the Company’s common stock under the “2009 Equity Incentive Plan” to certain key employees as reward for past services and to promote future performance. These options have an exercise price of $2.71 per share, expiring on the fifth anniversary of the grant date, and vest in three equal installments on each of the first, second and third anniversary of the vesting commencement date, which is April 27, 2010. The fair value of the options, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 2%, expected dividend yield of 0%, expected volatility of 91% and an expected life of 5 years.

Stock-based compensation expense for the three and nine months ended March 31, 2011 on the stock option was $15,695 and $47,782, respectively. The remaining $131,835 stock based compensation will be expensed over the remainder of the three years service period.

 
F-12

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 10 – STOCK-BASED COMPENSATION - continued

Stock Options granted to a Director

On February 23, 2011, the Board of Directors approved the grant of stock options to purchase 5,000 shares of the Company’s common stock under the “2009 Equity Incentive Plan” to a director as compensation for his service. These options have an exercise price of $2.71 per share, expiring on the fifth anniversary of the grant date, and vest in the first anniversary of the vesting commencement date, which is February 23, 2011. The fair value of the options, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 2%, expected dividend yield of 0%, expected volatility of 50% and an expected life of 5 years.

Stock-based compensation expense for the three and nine months ended March 31, 2011 on the stock option was $316 and $316, respectively. The $2,798 stock based compensation will be expensed over the remainder of the year service period.

The following table summarizes the options activity as of March 31, 2011, and changes during the nine months ended March 31, 2011:

   
Options
   
Weighted-average
      exercise price     
   
Weighted average remaining
contractual life (years)
   
Aggregate Intrinsic
Value
 
                         
Outstanding at June 30, 2010
    100,000     $ 2.71       4.08     $ -  
Issued
    5,000       2.71       4.90       -  
Exercised
    -       -       -       -  
Expired
    -       -       -       -  
Outstanding at March 31, 2011
    105,000     $ 2.71       4.12     $ -  

NOTE 11 – EARNINGS PER SHARE

Basic earnings per share is computed on the basis of the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed on the basis of the weighted-average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period. The following table sets forth the computation of basic and diluted earnings per share:

   
For The Three Months Ended
   
For The Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
   
(unaudited)
   
(unaudited)
   
(unaudited)
   
(unaudited)
 
Net income attributable to the common stockholders
  $ 3,468,209     $ 3,394,692     $ 9,813,858     $ 7,922,517  
                                 
Basic weighted-average common shares outstanding
    40,727,935       38,608,046       40,719,653       38,169,909  
Dilutive effect of options, warrants, and contingently issuable shares
    -       -       -       -  
Diluted weighted-average common shares outstanding
    40,727,935       38,608,046       40,719,653       38,169,909  
                                 
Earnings per share:
                               
Basic
  $ 0.09     $ 0.09     $ 0.24     $ 0.21  
Diluted
  $ 0.09     $ 0.09     $ 0.24     $ 0.21  

Warrants and options to purchase 685,000, 100,000 and 5,000 shares of common stock, respectively were outstanding during the three and nine months ended March 31, 2011, but were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

 
F-13

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 12 - COMMITMENTS AND CONTINGENCIES

Lease commitments

On November 8, 2008, the Company entered into an agreement with the Principal Shareholder for the lease of 1,200 square meters of property in the Dongbang Industrial Park, in Changhsu, China. The terms of the agreement state that the Company will lease the property for three years, and pay the principal shareholder approximately $18,260 (RMB120,000) per month. The Company and the principal shareholders have renewed the lease and extended the date of agreement from November 7, 2011 to November 7, 2014.

On August 6, 2004, the Company entered into a 10 year lease agreement with Ningbo Huaye Steel Processing, Ltd. to use a factory building in the Ningbo Camel Luo Ji Dian Industrial Park. Lease payments are made quarterly at a monthly rate of approximately $12,180 (RMB80,000).

On October 12, 2010, the Company entered into a 2 year lease agreement with Ningbo Xin Fu Property Co. Ltd. to use an office building in Jiangdong District, Ningbo City. Lease payments are made quarterly at a monthly rate of approximately $9,360 (RMB61,494).

On January 1, 2011, the Company entered into a 2 year lease agreement with Shanghai Hongjia Property Co. Ltd. to use an office building in PuDong District, Shanghai City. Lease payments are made at a monthly rate of approximately $7,090 (RMB46,552).

Rent expense for the three months ended March 31, 2011 and 2010 were $117,044 and $198,942, respectively.
Rent expense for the nine months ended March 31, 2011 and 2010 were $312,133 and $374,417, respectively. Annual future minimum lease payments due under the operating leases are as follows:

For the Year Ending June 30,
     
Remainder of 2011
 
$
140,658
 
2012
 
 
562,632
 
2013
 
 
454,602
 
2014
 
 
243,527
 
2015
 
 
91,323
 
Total
 
$
1,492,742
 

Commitment for design project

On September 13, 2010, the Company signed an agreement with Suzhou Institute of Architectural Design Co., Ltd. for the design of an office building and the cost of the design is $396,847 (RMB2,623,874). The design project is still in process and the final drawing of the plan has yet to be submitted to the Company’s management for approval. As of March 31, 2011, 20% of the cost, or $79,873 (RMB524,775) has been paid as the prepayment for the design project. The remaining balance is due upon the approval of the construction design and the completion of the construction of the office building.

Economic environment - Since most of the Company’s operations are conducted in the PRC, the Company is subject to special considerations and significant risks. These risks include, among others, the political, economic and legal environments and foreign currency exchange rates. The Company’s results from operations may, among other things, be adversely affected by changes in the political and social conditions in the PRC, and by changes in governmental policies with respect to: laws and regulations, anti-inflationary measures, currency conversions and remittances abroad, and rates and methods of taxation.

Foreign currency remittance - The Company’s revenue is either earned in the PRC or remitted to banks within the PRC and is denominated in the PRC’s currency of RMB. The transfer of currencies outside of the PRC must be converted into other currencies. Both the conversion of RMB into foreign currencies and the remittance of those currencies outside the PRC require approval of the PRC government.

 
F-14

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 13 - SEGMENT INFORMATION

The Company has four reportable segments represented by its four subsidiaries Changshu Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology Co., Ltd. as described in Note 1.

Factors Management Used to Identify the Enterprise’s Reportable Segments - The Company’s reportable segments are business units that offer different products and are managed separately and require reporting to the various regulatory jurisdictions. Changshu Huaye mainly produces HDG products and PPGI products. Jiangsu Cold-Rolled manufactures cold-rolled steel strips and acid pickled steel products. Ningbo Zhehua trades steel and manufactures heavy steel pipe products and Sutor Technology Co., Ltd. has not started operation since its inception on February 24, 2010.

Certain segment information is presented below:

At March 31, 2011 and for
the three months then ended 
 
Changshu
Huaye
   
Jiangsu
Cold-Rolled
   
Ningbo
Zhehua
   
Sutor
Technology
   
Inter-Segment and
 Reconciling Items 
   
Total
 
                         
Revenue
  $ 24,212,158     $ 21,426,726     $ 6,775,413     $ -     $ 10,107,280     $ 62,521,577  
Revenue from related parties
    16,837,316       55,289,370       32,728       -       (33,306,374 )     38,853,040  
Revenue from other operating segments
    9,261,134       24,045,240       -       -       -       33,306,374  
Total operating expenses
    1,953,223       263,334       682,270       14,481       150,513       3,063,821  
Interest income
    136,956       25,285       26,456       -       -       188,697  
Interest expense
    250,122       1,515,642       89,301       -       131,476       1,986,541  
Depreciation and amortization expense
    555,047       1,151,400       225,125       -       -       1,931,572  
Provision for income taxes
    (200,101 )     225,011       52,048       -       -       76,958  
Net segment profit
    1,234,034       1,576,023       (40,941 )     (14,481 )     713,574       3,468,209  
Capital expenditures, net of VAT refunds
    23,566       477,390       1,902       515       -       503,373  
Total assets
    222,780,712       296,264,832       28,353,809       23,461,222       (228,445,667 )     342,414,908  
 
 
F-15

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 13 - SEGMENT INFORMATION - CONTINUED

At March 31, 2010 and for
the three months then ended 
 
Changshu
Huaye
   
Jiangsu
Cold-Rolled
   
Ningbo
Zhehua
   
Sutor
Technology
   
Inter-Segment and
 Reconciling Items 
   
Total
 
                         
Revenue
  $ 20,086,500     $ 24,129,072     $ 9,177,830     $ -     $ -     $ 53,393,402  
Revenue from related parties
    28,644,364       44,608,428       6,891,459       -       (19,085,272 )     61,058,979  
Revenue from other operating segments
    120,108       18,965,164       -       -       -       19,085,272  
Total operating expenses
    2,569,834       702,354       350,919       -       172,979       3,796,086  
Interest income
    357,407       10,114       22,229       -       -       389,750  
Interest expense
    253,412       1,158,694       3,042       -       120,282       1,535,430  
Depreciation and amortization expense
    541,792       1,109,023       202,314       -       -       1,853,129  
Provision for income taxes
    690,555       194,028       76,502       -       -       961,085  
Net segment profit
    2,081,827       1,358,193       247,934       -       (293,262 )     3,394,692  
Capital expenditures, net of VAT refunds
    12,322       (178,844 )     363,411       -       -       196,889  
Total assets
    223,458,218       161,036,300       58,586,365       -       (124,184,559 )     318,896,324  
 
At March 31, 2011 and for
the nine months then ended 
 
Changshu
Huaye
   
Jiangsu
Cold-Rolled
   
Ningbo
Zhehua
   
Sutor
Technology
   
Inter-Segment and
 Reconciling Items 
   
Total
 
                         
Revenue
  $ 47,122,546     $ 70,604,475     $ 21,285,217     $ -     $ 18,790,202     $ 157,802,440  
Revenue from related parties
    75,324,296       166,403,515       199,461       -       (96,984,884 )     144,942,388  
Revenue from other operating segments
    18,602,005       78,382,879       -       -       -       96,984,884  
Total operating expenses
    5,416,127       1,133,303       2,699,396       14,544       526,822       9,790,192  
Interest income
    370,838       206,649       48,925       -       -       626,412  
Interest expense
    684,233       4,639,731       132,415       -       400,264       5,856,643  
Depreciation and amortization expense
    1,642,231       3,408,745       664,879       -       -       5,715,855  
Provision for income taxes
    501,002       785,114       22,779       -       -       1,308,895  
Net segment profit
    3,325,410       5,639,419       4,332       (14,544 )     859,241       9,813,858  
Capital expenditures, net of VAT refunds
    37,234       1,190,840       28,425       78,564       -       1,335,063  
Total assets
    222,780,712       296,264,832       28,353,809       23,461,222       (228,445,667 )     342,414,908  
 
 
F-16

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2011
(Unaudited)

NOTE 13 - SEGMENT INFORMATION – continued

At March 31, 2010 and for
the nine months then ended 
 
Changshu
Huaye
   
Jiangsu
Cold-Rolled
   
Ningbo
Zhehua
   
Sutor
Technology
   
Inter-Segment and
 Reconciling Items 
   
Total
 
                         
Revenue
  $ 80,074,319     $ 66,768,402     $ 19,090,443     $ -     $ -     $ 165,933,164  
Revenue from related parties
    80,375,197       142,379,628       32,006,905       -       (67,259,449 )     187,502,281  
Revenue from other operating segments
    302,575       66,956,874               -               67,259,449  
Total operating expenses
    6,024,848       1,144,657       1,064,790       -       696,696       8,930,991  
Interest income
    809,784       19,296       144,009       -       -       973,089  
Interest expense
    822,489       2,910,660       15,461       -       401,869       4,150,479  
Depreciation and amortization expense
    1,617,614       3,061,855       581,223       -       -       5,260,692  
Provision for income taxes
    1,640,069       493,242       213,502       -       -       2,346,813  
Net segment profit
    4,945,620       3,452,691       622,771       -       (1,098,565 )     7,922,517  
Capital expenditures, net of VAT refunds
    27,083       740,255       429,283       -       -       1,196,621  
Total assets
    223,458,218       161,036,300       58,586,365       -       (124,184,559 )     318,896,324  

NOTE 14 - GEOGRAPHIC INFORMATION

The following schedule summarizes the sources of the Company’s revenue by geographic regions for the three and nine months ended March 31, 2011 and 2010:

    
For the Three Months Ended March 31,
 
For the Nine Months Ended March 31,
 
Geographic Area
 
2011
   
2010
 
2011
   
2010
 
   
(unaudited)
   
(unaudited)
 
(unaudited)
   
(unaudited)
 
People's Republic of China
  $ 88,602,341     $ 103,722,673   $ 275,374,860     $ 319,221,278  
Other Countries
    12,772,276       10,729,708     27,369,968       34,214,167  
Total
  $ 101,374,617     $ 114,452,381   $ 302,744,828     $ 353,435,445  

NOTE 15 – SUBSEQUENT EVENTS

On April 6, 2011, the Company invested an additional $5,052,990 into Sutor Technology Co. Ltd raising its registered capital to $28,294,360.

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q. Other than the event disclosed above, no significant events occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on our Condensed Consolidated Financial Statements.

 
F-17

 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Special Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, including the following “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements include, among others, those concerning our expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and that a number of risks and uncertainties could cause actual results of the Company to differ materially from those anticipated, expressed or implied in the forward-looking statements. The words “believe,” “expect,” “anticipate,” “project,” “targets,” “optimistic,” “intend,” “aim,” “will” or similar expressions are intended to identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Risks and uncertainties that could cause actual results to differ materially from those anticipated include risks related to new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; uncertainties related to conducting business in China and the current global economic crisis on our business and on our customers’ business; the factors discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in this report, and any of the factors and risks mentioned in the “Risk Factors” sections of our Annual Report on Form 10-K for the year ended June 30, 2010 and subsequent SEC filings. The Company assumes no obligation and does not intend to update any forward-looking statements, except as required by law.

Use of Terms

Except as otherwise indicated by the context, all references in this Quarterly Report to: (i) “Sutor Group,” the “Company,” “we,” “us” or “our” are to Sutor Technology Group Limited, a Nevada corporation, and its direct and indirect subsidiaries; (ii) “Changshu Huaye” are to our indirect wholly-owned subsidiary Changshu Huaye Steel Strip Co., Ltd., a corporation incorporated in the People’s Republic of China; (iii) “Jiangsu Cold-Rolled” are to our indirect wholly-owned subsidiary Jiangsu Cold-Rolled Technology Co., Ltd., a corporation incorporated in the People’s Republic of China; (iv) “Ningbo Zhehua” are to our indirect wholly-owned subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd., a corporation incorporated in the People’s Republic of China; (v) “Shanghai Huaye” are to Shanghai Huaye Iron & Steel Group Co., Ltd., a corporation incorporated in the People’s Republic of China of which Lifang Chen, our major shareholder and chief executive officer, and her husband Feng Gao are 100% owners, and its subsidiaries; (vi) “Securities Act” are to the Securities Act of 1933, as amended; (vii) “Exchange Act” are to the Securities Exchange Act of 1934, as amended; (viii) “RMB” are to Renminbi, the legal currency of China; (ix) “U.S. dollar,” “$” and “US$” are to the legal currency of the United States; and (x) “China” and “PRC” are to the People’s Republic of China.

Overview of our Business

We are one of the leading Chinese private manufacturers of fine finished steel products. We utilize a variety of processes and technological methodologies to convert steel manufactured by third parties into fine finished steel products. Our product offerings are focused on higher margin, value-added finished steel products, specifically, hot-dip galvanized steel (“HDG steel”) and prepainted galvanized steel (“PPGI”). In addition, we produce acid pickled steel (“AP steel”) and cold-rolled steel, which represent the least processed of our finished products.  As a result of our acquisition of Ningbo Zhehua in November 2009, our product offerings include welded steel pipe products. We use a large portion of our AP steel and cold-rolled steel to produce our HDG steel and PPGI products. Our vertical integration has allowed us to maintain more stable margins for our HDG steel and PPGI products.

We sell most of our products to customers who operate primarily in the solar energy, appliances, automobile, construction, infrastructure, medical equipment and water resource industries. Most of our customers are located in China. Our primary export markets are Europe, Middle East, South America and Hong Kong.

Our manufacturing facilities, located in Changshu, China, have three HDG steel production lines, one PPGI production line, one AP steel production line and one cold-rolled steel line. Our current annual designed production capacity is approximately 700,000 metric tons, or MT, for HDG steel, 200,000 MT for PPGI, 500,000 MT for AP steel and 250,000 MT for cold-rolled steel. Ningbo Zhehua, our subsidiary located in Ningbo, currently has an annual capacity of 400,000 MT for welded steel pipe products.

 
3

 

Executive Overview of Quarterly Results

We continued our strategic efforts to exit the lower margin steel trading business and focus on higher margin value added products in this quarter. Our orders and production output in this quarter continued to be more heavily focused on advanced PPGI products that utilize sophisticated processing procedures and require more production time. As a result, our production volume and revenue declined in this quarter as compared to the same period last year. However, the negative effects of these reductions were partially offset by higher average sales prices as demand for our product remained strong during the quarter. Despite the revenue decrease, our gross margin and net income improved to 8.5% and $3.5 million in this quarter from 8.1% and $3.4 million in the same period last year, respectively. We believe in the long run we can strengthen our competitive position by focusing on higher-margin value added products.

The following summarizes certain key financial information for the third fiscal quarter.

 
·
Revenue: Revenue was $101.4 million for the three months ended March 31, 2011, a decrease of $13.1 million, or 11.4%, from $114.5 million for the same period last year.

 
·
Gross Profit and Margin: Gross profit was $8.6 million for the three months ended March 31, 2011 as compared to $9.3 million for the same period last year. Gross margin was 8.5% for the three months ended March 31, 2011 as compared to 8.1% for the same period last year.

 
·
Net Income: Net income was $3.5 million for the three months ended March 31, 2011, an increase of $0.1 million, or approximately 2.9%, from $3.4 million for the same period of last year.

 
·
Fully diluted net income per share: Fully diluted net income per share was approximately $0.09 for the three months ended March 31, 2011, as compared to approximately $0.09 for the same period last year.
 
Revenue

Our revenue is generated from sales of our HDG steel, PPGI, AP steel, cold-rolled steel products and welded steel pipe products. Our revenue has historically been affected by sales volume, product pricing and our product mix.

Our operations consist of three business segments: Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua, which are our three principal manufacturing facilities. Changshu Huaye manufactures HDG steel and PPGI products.  In the three months ended March 31, 2011 and 2010, after eliminating intercompany sales, Changshu Huaye generated revenue of $41.1 million and $48.7 million, which represented 40.5% and 42.6% of our total revenue, respectively.  Jiangsu Cold-Rolled manufactures AP steel, cold-rolled steel and HDG steel. In the three months ended March 31, 2011 and 2010, after eliminating the inter-company sales, Jiangsu Cold-Rolled generated revenue of $53.5 million and $49.7 million, which represented 52.8% and 43.4% of our total revenue, respectively. Ningbo Zhehua manufactures welded steel pipe products. In the three months ended March 31, 2011 and 2010, Ningbo Zhehua generated revenue of $6.8 million and $16.1 million, which represented 6.7% and 14.0% of our total revenue, respectively.

A substantial portion of our products are sold through our affiliate Shanghai Huaye, which also supplies to us a significant portion of our raw materials. Approximately 38.3% of our revenue was derived from Shanghai Huaye and its affiliates in the three months ended March 31, 2011, as compared with approximately 53.3% in the same period last year. We continue to take advantage of Shanghai Huaye’s extensive sales network as we strive to independently enhance our brand value. But we intend to continue to gradually reduce related party transactions in the future.

Cost of Revenue

Cost of revenue includes direct costs to manufacture our products, including the cost of raw materials, labor, overhead, energy cost, handling charges, and other expenses associated with the manufacture and delivery of product. Direct costs of manufacturing are generally highest when we first introduce a new product due to higher start-up costs and higher raw material costs. As production volume increases, we typically improve manufacturing efficiencies and are able to strengthen our purchasing power by buying raw materials in greater quantities.

 
4

 

In the three months ended March 31, 2011, approximately $59.0 million of our procurement was conducted through Shanghai Huaye.  Due to the size of Shanghai Huaye and the economy of scale, it has stronger bargaining power than we do and our arrangement with Shanghai Huaye allows us to purchase raw materials at relatively lower prices than we could obtain from suppliers ourselves.

Gross Profit and Gross Margin

Gross profit is equal to the difference between our revenue and the cost of revenue.  Gross margin is equal to gross profit divided by revenue.  In the three months ended March 31, 2011, gross margin for domestic and international sales were approximately 7.4% and 16.4%, respectively. On a segment basis, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua’s gross margins were 11.1%, 4.5% and 12.1% in the three months ended March 31, 2011, respectively.

To gain market penetration, we price our products at levels that we believe are competitive. We continually strive to improve manufacturing efficiencies and reduce our production costs in order to offer superior products and services at competitive prices. General economic conditions, the cost of raw materials, and supply and demand of fine finished steel products within our markets influence sales prices. Our high-end, value-added products, such as the PPGI products, generally tend to have higher profit margins. As part of our effort to maintain stable profitability and mitigate our exposure to fluctuations in the price of our primary raw material steel, we generally adopt the cost-plus pricing mechanism for our products.

We operate using a vertical integration strategy where we use our own AP steel and cold-rolled steel products as raw materials for HDG steel and PPGI products. We believe our vertically integrated operations will allow us to provide customers with one-stop services, build customer loyalty and maintain stable operating margins.

Operating Expenses

Our operating expenses primarily consist of general and administrative expenses and selling expenses.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and benefits for our general management, finance and administrative staff, professional and advisory fees, bad debts reserves, and other expenses incurred in connection with general corporate purposes. We expect most components of our general and administrative expenses will increase due to inflation and as our business grows and as we incur increased costs as a public company.

Selling Expenses

Selling expenses consist primarily of compensation and benefits for our sales and marketing staff, sales commissions, the cost of advertising, promotional and travel activities, transportation expenses, after-sales support services and other sales related costs.

Our selling expenses are generally affected by the amount of international sales and our sales to unrelated parties. The transportation costs for our international sales are generally higher than domestic sales.  In addition, when we sell products to Shanghai Huaye and its affiliates, Shanghai Huaye generally arranges and bears the cost of transportation. In contrast, when we sell products to customers other than Shanghai Huaye, we generally bear the transportation costs, but we are able to charge a higher price.

Provision for Income Taxes

Sutor Technology Group Limited is subject to United States federal income tax at a tax rate of 34%. No provision for income taxes in the United States has been made as Sutor Technology Group Limited had no taxable income for the three months ended March 31, 2011.

Our direct wholly owned subsidiary Sutor Steel Technology Co., Ltd. was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income taxes.

 
5

 

On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law (the “EIT Law”), and on December 6, 2007, the State Council of China passed the Implementing Rules for the EIT Law (“Implementing Rules”) which took effect on January 1, 2008. The EIT Law and Implementing Rules impose a unified enterprise income tax (“EIT”) of 25.0% on all domestic-invested enterprises and Foreign Invested Entities (“FIEs”) established in the PRC, unless they qualify under certain limited exceptions. Therefore, nearly all FIEs are subject to the new tax rate alongside other domestic businesses rather than benefiting from the old FIE tax laws, and its associated preferential tax treatments, beginning January 1, 2008.

Despite these changes, the EIT Law gives the FIEs established before March 16, 2007 (“Old FIEs”) a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. During this five-year grandfather period, the Old FIEs which enjoyed tax rates lower than 25% under the original EIT law shall gradually increase their EIT rate by 2% per year until the tax rate reaches 25%. In addition, the Old FIEs that are eligible for the “two-year exemption and three-year half reduction” or “five-year exemption and five-year half-reduction” under the original EIT law, are allowed to remain to enjoy their preference until these holidays expire.

Our subsidiary Ningbo Zhehua is subject to an EIT rate of 25% for calendar years 2010 and 2011. Our subsidiary Jiangsu Cold-Rolled is subject to an EIT rate of 12.5% for 2010 and 2011.  Our subsidiary Changshu Huaye is currently subject to a reduced EIT rate of 15% after it was recognized as a High-Tech Enterprise by the Jiangsu provincial government in 2010. The preferential EIT rate is subject to renew in 2013.

Reportable Operating Segments

We have three reportable operating segments which are categorized based on manufacturing facility – Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua. Changshu Huaye manufactures and sells HDG steel and PPGI products. Jiangsu Cold-Rolled manufactures and sells AP steel, cold-rolled steel and HDG steel products. Ningbo Zhehua manufactures and sells steel pipe products. Changshu Huaye and Jiangsu Cold-Rolled are adjacent to each other and use largely the same management resources. See Note 13, “Segment Information” to the condensed consolidated financial statements included elsewhere in this report.

Results of Operations

Comparison of Three Months Ended March 31, 2011 and March 31, 2010

The following table sets forth key components of our results of operations for the periods indicated, both in dollars and as a percentage of our revenue.

(All amounts, other than percentages, in thousands of U.S. dollars)

   
Three Months Ended
March 31, 2011
   
Three Months Ended
March 31, 2010
 
   
Amount
   
As a
Percentage
of Revenue
   
Amount
   
As a
Percentage
of Revenue
 
Revenue
                       
Revenue from unrelated parties
  $ 62,522       61.7 %   $ 53,393       46.7 %
Revenue from related parties
    38,853       38.3 %     61,059       53.3 %
Total
    101,375       100 %     114,452       100 %
                                 
Cost of Revenue
                               
Cost of revenue
    57,018       56.2 %     48,929       42.8 %
Cost of revenue from related parties
    35,742       35.3 %     56,210       49.1 %
Total
    92,760       91.5 %     105,138       91.9 %
                                 
Gross Profit
    8,615       8.5 %     9,314       8.1 %
                                 
Operating Expenses
                               
Selling expense
    1,346       1.3 %     1,816       1.6 %
General and administrative expense
    1,718       1.7 %     1,980       1.7 %
Total Operating Expenses
    3,064       3.0 %     3,796       3.3 %
                                 
Income from Operations
    5,551       5.5 %     5,518       4.8 %