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

FORM 10-Q

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2011
OR
 
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-53837

FUSIONTECH, INC.
(Exact name of registrant as specified in its charter)

Nevada
 
26-1250093
(State or other jurisdiction of incorporation
or organization)
 
(IRS Employer Identification No.)

No. 26 Gaoneng Street, High Tech Zone, Dalian,
Liaoning Province, China
 
116025
(Address of principal executive offices)
 
(Zip Code)

(86) 0411-84799486
(Registrant’s telephone number, including area code)

Indicate by checkmark 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 last 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  x    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,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 29,390,000 shares of common stock outstanding as of August 19, 2011.



Table of Contents

  Page
PART I. FINANCIAL INFORMATION
 
     
Item 1.
1
Item 2.
14
Item 3.
20
Item 4.
20
     
PART II. OTHER INFORMATION
 
     
Item 1.
21
Item 1A.
21
Item 2.
21
Item 3.
21
Item 5.
21
Item 6.
21
     
   
Signatures
22
     
   
Exhibit Index
23



 
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FUSIONTECH, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

   
JUNE 30,
   
DECEMBER 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
ASSETS
           
             
CURRENT ASSETS:
           
 Cash and equivalents
  $ 5,546,239     $ 1,365,267  
 Restricted cash
    3,561,876       36,818  
 Accounts receivable, net of allowance for doubtful accounts of
   $844,814 and $209,620  for 2011 and 2010, respectively
    2,919,098       5,063,833  
 Inventory
    1,244,146       1,362,285  
 Other receivables
    49,685       169,436  
 Prepaid financing costs
    144,179       -  
 Due from related parties
    8,267       -  
 Due from shareholder
    15,452       -  
 Advances to suppliers, net
    761,707       488,639  
 Tax receivable
    212,886       -  
 Notes receivable
    421,531       1,571,612  
 Retentions receivable
    1,264,707       746,642  
 Prepaid expenses
    78,806       40,443  
                 
 Total current assets
    16,228,579       10,844,975  
                 
 NONCURRENT ASSETS
               
 Property and equipment, net
    435,501       477,019  
 Retention receivable - noncurrent
    -       283,982  
 Long-term deposits
    1,403,927       1,061,445  
 Construction in progress
    1,496,475       426,708  
 Prepaid offering costs
    23,611       -  
                 
 Total noncurrent assets
    3,359,514       2,249,154  
                 
 TOTAL ASSETS
  $ 19,588,093     $ 13,094,129  
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
 CURRENT LIABILITIES:
               
 Accounts payable
  $ 3,300,475     $ 4,721,136  
 Senior convertible promissory notes payable
    3,600,000       -  
 Short-term loans
    7,030,719       1,517,000  
 Other payables
    974,145       1,870,785  
 Unearned revenue
    327,455       1,223,692  
 Notes payable
    1,482,712       213,912  
 Due to shareholder
    618,085       409,590  
 Due to former stockholder / officer
    80,000       80,000  
                 
 Total current liabilities
    17,413,591       10,036,115  
                 
 COMMITMENTS AND CONTINGENCIES
               
                 
 STOCKHOLDERS' EQUITY
               
  Common stock, $0.001 par value, 100,000,000 shares authorized,
       29,390,000 shares issued and outstanding
    29,390       29,390  
 Additional paid-in capital
    1,554,917       1,554,917  
 Other comprehensive income
    255,384       170,055  
 Statutory reserve
    139,699       203,541  
 Retained earnings
    195,112       1,100,111  
                 
 Total stockholders' equity
    2,174,502       3,058,014  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 19,588,093     $ 13,094,129  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
   
SIX MONTHS ENDED JUNE 30,
   
THREE MONTHS ENDED JUNE 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net revenue
  $ 3,458,427     $ 3,462,979     $ 1,920,018     $ 2,277,111  
Cost of goods sold
    2,810,996       2,548,690       1,549,705       1,831,054  
                                 
Gross profit
    647,431       914,289       370,313       446,057  
                                 
Operating expenses
                               
Selling     168,137       123,864       103,534       56,900  
Research and development
    122,346       119,271       65,741       79,831  
General and administrative
    1,024,431       452,535       254,787       202,777  
                                 
Total operating expenses
    1,314,914       695,670       424,062       339,508  
                                 
(Loss) income from operations
    (667,483 )     218,619       (53,749 )     106,549  
                                 
Non-operating income (expenses)
                               
Other income (expense), net
    54,174       (3,316 )     56,519       (3,316 )
Interest expense, net
    (168,003 )     (42,108 )     (101,989 )     (29,670 )
Amortization of prepaid financing costs
    (187,530 )     -       (164,914 )     -  
                                 
Total non-operating expenses
    (301,359 )     (45,424 )     (210,384 )     (32,986 )
                                 
(Loss) Income before income tax
    (968,842 )     173,195       (264,133 )     73,563  
Income tax
    -       65,770       -       40,343  
                                 
Net (loss)  income
    (968,842 )     107,425       (264,133 )     33,220  
Foreign currency translation gain (loss)
    85,328       5,891       (77,905 )     21,322  
                                 
Comprehensive income (loss)
  $ (883,514 )   $ 113,316     $ (342,038 )   $ 54,542  
                                 
Basic and diluted net income (loss) per share
  $ (0.03 )   $ -     $ (0.01 )   $ -  
                                 
Weighted average number of common shares
      outstanding - basic and diluted
    29,390,000       24,990,000       29,390,000       24,990,000  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
    SIX MONTHS ENDED JUNE 30,  
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ (968,842 )   $ 107,425  
Adjustment to reconcile net income (loss) to net cash
  (used in) operating activities:
               
Depreciation
    250,058       42,509  
Provision for bad debt allowance-Advance to suppliers
    160,098       122,385  
Provision for bad debt allowance-Accounts receivable
    624,588       39,032  
(Increase) decrease in assets:
               
Accounts receivable
    1,590,534       (8,948 )
Other receivables
    121,597       80,400  
Advance to suppliers
    (429,153 )     (84,521 )
Prepaid expenses
    (37,211 )     19,545  
Inventory     141,950       (53,747
Retentions receivable
    (212,632 )     (147,468 )
Tax receivable
    (1,191,009 )     -  
Other noncurrent assets
    -       39,742  
Long-term deposits
    (319,313 )     (270,870 )
Increase (decrease) in current liabilities:
               
Accounts payable
    (1,492,095 )     (390,979 )
Tax payable     -       (22,968
Other payables
    59,736       69,048  
Unearned revenue
    (909,231 )     144,003  
                 
Net cash used in operating activities
    (2,610,925 )     (315,412 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Increase in restricted cash
    (3,513,490 )     (255,333 )
Notes receivable
    1,166,780       (509,840 )
Increase in construction in progress
    (1,050,549 )     -  
Purchase of property and equipment
    (12,673 )     (11,258 )
                 
Net cash used in investing activities
    (3,409,932 )     (776,431 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from short-term loans
    6,956,017       1,758,190  
Repayment of short-term loans
    (1,528,795 )     -  
Proceeds from senior convertible promissory notes     3,600,000       -  
Deferred offering cost
    (50,000 )     -  
Deferred loan cost
    (305,320 )     -  
Proceeds from notes payable
    1,251,382       219,774  
Due from shareholder
    (15,288 )     (8,331 )
Due from related party
    45,566       (83,752 )
Due to shareholder
    152,879       (146,516 )
Due to related party
    -       83,194  
Dividends      -       (512,805
                 
Net cash provided by financing activities
    10,106,441       1,309,754  
                 
Effect of exchange rate changes on cash and equivalents
    95,388       5,230  
                 
INCREASE IN CASH AND EQUIVALENTS
    4,180,972       223,141  
                 
CASH AND EQUIVALENTS, BEGINNING BALANCE
    1,365,267       1,089,775  
                 
CASH AND EQUIVALENTS, ENDING BALANCE
  $ 5,546,239     $ 1,312,916  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
               
      Interest paid   $ 109,923     $ 46,241  
      Income taxes paid   $ 136,259     $ 135,312  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION

FusionTech, Inc. (the “Company”) was incorporated under the name ZapNaps, Inc. on October 10, 2007, in the State of Nevada.

On October 28, 2010, in anticipation of the Share Exchange and related transactions described below, the Company changed its name from ZapNaps, Inc. to FusionTech, Inc. through a merger with its wholly owned non-operational subsidiary, FusionTech, Inc., which was established to change the Company’s name as permitted under Nevada Law. The Company also authorized an increase in its authorized shares of common stock from 75,000,000 to 100,000,000, effective November 1, 2010, and an 8-for-1 forward split of its common stock, effective November 12, 2010. The effect of the forward stock split is reflected in the accompanying consolidated financial statements and all share and per share amounts were restated.

We carry out all operations through Dalian Heavy Mining Equipment Manufacturing Co., Ltd. (“Dalian”), a foreign joint venture company organized under the laws of the People’s Republic of China (“PRC”). Dalian was organized as a limited company in the PRC on December 18, 1992. On November 17, 2010, the Dalian Administration of Industry and Commerce, or the Dalian SAIC, issued an approval notice for a Sino-foreign joint venture business license for Dalian, indicating that capital injections by Wonderful Limited and Median Asset Investments Limited, British Virgin Islands companies, were approved registering the ownership of their respective 5% equity interests in Dalian. Dalian manufactures the Company’s clean coking and related products and developed the Company’s Steel Plate Fusion technology.

The Company entered into a Share Exchange Agreement and Plan of Reorganization on November 22, 2010, as amended as of March 11, 2011, or the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, on November 22, 2010, the Company issued 24,990,000 shares of its common stock to the seven owners of Dalian for their agreement to enter into and consummate a series of transactions to transfer ownership of Dalian to the Company as a wholly foreign owned enterprise (“WFOE”). In addition, the owners of Dalian agreed to indemnify the Company in the event that they failed to transfer Dalian as a WFOE of the Company under relevant PRC law. Concurrently with the Share Exchange Agreement, and as a condition thereof, the Company entered into an agreement with David Lu, the Company’s former Chief Executive Officer and Director, pursuant to which he returned 80,000,000 shares of the Company’s common stock for cancellation. Mr. Lu will receive $80,000 from the Company for the cancellation of his common stock. Upon completion of the foregoing transactions, the Company had 29,390,000 shares of common stock issued and outstanding.

For accounting purposes, the Share Exchange Agreement and related transactions described above were treated as a reverse acquisition and recapitalization of the Company because, prior to the transactions, the Company was a non-operating public shell and, subsequent to the transactions, the shareholders of Dalian owned a majority of the outstanding common stock of the Company and exercised significant influence over the operating and financial policies of the consolidated entity. Pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), the merger or acquisition of a private operating company into a non-operating public shell with nominal net assets is considered a capital transaction. As of November 22, 2010, the Company was no longer in the development stage.

Dalian designs and manufactures clean technology industrial machinery used in coking, a critical but highly pollutive step in crude steel production. Dalian's products are sold to large and medium size steel mills and coke plants in China which use or are planning to use the coke dry quenching (“CDQ”) method of coking, a more environmentally friendly and energy conservative method of coking as compared to the traditional coke wet quenching method.

Dalian also designs and manufactures CDQ transport cars used in complete CDQ systems and clean technology coke oven machineries such as coke oven elevators, smoke transfer machines and coal cleaning machines. These clean technology coke oven machineries are used for maintaining coke ovens and reducing the amount of pollution they emit.  Dalian also designs and manufactures core coke oven products such as coke drums, coke drum carriers, wet quenching cars, coal freight cars, coke guide cars and coke pushers. These core coke oven products are necessary components for all coke oven systems.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
All of Dalian’s product lines – coke oven elevators, smoke transfer machines, coal cleaning machines, coke drums, coke drum carriers, wet quenching cars, coal freight cars, coke guide cars and coke pushers – constituted a single reportable segment in accordance with Accounting Standards Codification (“ASC”) Topic 280. Dalian currently operates exclusively in one business, the design and manufacture of customized and motorized equipment used in the coking and steelmaking process. Dalian manufactures all of its products by welding together large steel plates and integrating motors and electronic controls into its products. The components are then shipped to the job sites and subsequently field assembled. Our customers are some of the largest coking and steelmakers in China. Individual customers have purchased our entire suite of products in the past.  Currently, the Company has no customers outside of these two industries.  All of the Company’s products are sold by in-house sales and marketing personnel and are shipped via outsourced third party logistic firms. In addition, the design and manufacturing processes for each product makes use of the same pool of engineering and production workers.
 
Dalian’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 environments in the PRC as well as by the general state of the PRC’s economy.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidated Financial Statements

The accompanying consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States ("US GAAP") and include all of the accounts of the Company and its subsidiary. All significant intercompany accounts and transactions were eliminated in consolidation.

Foreign Currency Translation

The functional currency of the Company's subsidiary, Dalian, is the Chinese Yuan Renminbi (“RMB”); however, the accompanying financial statements were translated and presented in United States Dollars ("$").

All assets and liabilities were translated at the exchange rate on the balance sheet dates; stockholders’ equity was translated at the historical rates and statement of operations items were translated at the weighted average exchange rate for the period. The resulting translation adjustments were reported under other comprehensive income in stockholders’ equity in accordance with ASC Topic 220, “Comprehensive Income.”

In accordance with ASC Topic 230, “Statement of Cash Flows,” cash flows from the Company’s operations are calculated based upon the local currencies using the average translation rates. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheets.

Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Areas that require estimates include the valuation of accounts receivable and inventory, determination of useful lives of property and equipment, estimation of certain liabilities, future tax rates and sales returns.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
Financial Instruments

The Company considers the carrying amounts of financial instruments, including cash and equivalents, notes receivable, accounts receivable and other receivables and accounts payable and other payables, accrued expenses, notes payable and short term debt to approximate their fair values because of their relatively short maturities.

Cash and equivalents include cash on hand and cash in time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Restricted Cash

Restricted cash consists of amounts deposited by certain customers related to product warranties which are to be held by the Company until the warranty period expires in the amount of $0.55 million and $36,000 at June 30, 2011, and December 31, 2010 (audited), respectively; collateral of $0.50 million for bank issuing the notes payable; and a certificate deposit of $2.5 million for the collateral of a bank loan as of June 30, 2011. This collateral will be released upon repayment of the loan (see Note 7). An additional RMB 9 million is restricted as of August 17, 2011 (see Note 14).
 
Accounts Receivable

The Company maintains reserves for potential credit losses on accounts receivable.  Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of the reserve. Based on management’s analysis noted above and historical collection activity, the Company recorded bad debt allowances of $844,814 and $209,620 at June 30, 2011 and December 31, 2010 (audited), respectively.
 
Inventory

Inventory consists of raw materials, work in process and finished goods.  Inventory cost includes materials, labor and overhead and is stated at the lower of cost or market. The Company compares the cost of inventory with the market value and an allowance is provided to write down the inventory to its market value, if lower. Additionally, the Company determines cost of work in process and finished products using the specific identification method based on actual costs accumulated under a job-order cost system.

Advances to Suppliers

The Company makes advances to certain suppliers to purchase their material. The advances are interest free and unsecured. The Company recorded allowances on advances to suppliers of $161,817 and $118,607 at June 30, 2011, and December 31, 2010 (audited), respectively.

Notes Receivable

Notes receivable consists of bank notes received from customers as payment on their accounts receivable balances. The notes are guaranteed by a bank and bear no interest. The notes are generally due within six months from the date of issuance.

Retentions Receivable

The Company had retentions receivable from customers of $1,264,707 and $1,030,624 as of June 30, 2011, and December 31, 2010 (audited), respectively. The retention rates are generally 10% of the related sales price with terms of 12 to 18 months, but are due no later than the termination of the warranty period.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
Property and Equipment

Property and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Expenditures for maintenance and repairs are expensed as incurred; additions, renewals and betterments which extend the lives of the assets are capitalized. The cost and accumulated depreciation of assets retired or otherwise disposed of are relieved from the appropriate accounts and any profit or loss on the sale or disposition of such assets is credited or charged to income.

Impairment of Long-Lived Assets

Long-lived assets, which include property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
 
Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, the Company believes, as of June 30, 2011, and December 31, 2010 (audited), there were no significant impairments of its long-lived assets.
 
Concentration of Credit Risk

Cash includes cash on hand and demand deposits in accounts maintained within China. Balances at financial institutions within China are not covered by insurance.  The Company has not experienced any losses in such accounts.

Financial instruments that potentially subject the Company to credit risk consist primarily of accounts and other receivables. The Company does not require collateral or other security to support these receivables. The Company conducts periodic reviews of its clients’ financial condition and customer payment practices to minimize collection risk on accounts receivable.
 
For the six months ended June 30, 2011, three customers accounted for 50%, 19% and 13% of the Company’s sales. For the three months ended June 30, 2011, two customers accounted for 57% and 33% of the Company’s sales. For the six months ended June 30, 2010, three customers accounted for 47%, 37% and 11% of the Company’s sales. For the three months ended June 30, 2010, two customers accounted for 71% and 20% of the Company’s sales. At June 30, 2011, the total receivable from these customers was approximately $2,058,600.

Three vendors provided 24%, 12% and 11% of the Company’s purchases of raw materials for the six months ended June 30, 2011. One vendor provided 53% of the Company’s purchases of raw materials for the three months ended June 30, 2011. One vendor provided 11% of the Company’s purchase of raw materials for the six months ended June 30, 2010. No vendor provided more than 10% of the Company’s purchase of raw materials for the three months ended June 30, 2010. At June 30, 2011, the total payable due to those vendors was approximately $32,410.

Research and Development Costs

Research and development costs are expensed when incurred and are included in general and administrative expenses. The Company’s research and development costs were $122,346 and $119,271 for the six months ended June 30, 2011 and 2010, respectively. The Company’s research and development costs were $65,741 and $79,831 for the three months ended June 30, 2011 and 2010, respectively.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
Income Taxes

Deferred tax assets and liabilities are recognized on the liability method on the differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.  Valuation allowances are provided when necessary to reduce deferred tax assets to the amount expected to be realized.

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”), codified in FASB ASC Topic 740. When tax returns are filed, it is likely that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in general and administrative expenses in the statements of income. The adoption of FIN 48 did not have a material impact on the Company’s financial statements. At June 30, 2011 and December 31, 2010 (audited), the Company did not take any uncertain positions that would necessitate recording a tax related liability.

Basic and Diluted Earnings (Loss) per Share

Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share includes potentially dilutive securities such as outstanding options and warrants, using various methods such as the treasury stock or modified treasury stock method in the determination of dilutive shares outstanding during each period.

For 2011 and 2010, there were no potentially dilutive securities.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with SEC Staff Accounting Bulletin (“SAB”) 104 (codified in ASC Topic 605).  Sales revenue, including the final 10% of the purchase price, is recognized after delivery is complete, customer accepts the product occurs and collectability is reasonably assured. Customer acceptance occurs after the Company ships the product, assembles the product on customer’s site, and the customer agrees to the acceptance of the product.  Payments received before satisfaction of all relevant criteria for revenue recognition are recorded as unearned revenue.
 
Warranties

The Company offers a warranty to its customers on its products depending on the contract terms negotiated. Warranty terms are typically between 12 to 18 months. The Company records warranty costs as incurred, which are included in the Company's selling expenses. Warranty expenses are associated with parts, labor, and travel expenses associated with repairing products post sale and within the warranty period. The majority of the warranty costs are incurred within a short period of time after the final installation and acceptance of the Company’s products by its customers. The Company’s warranty costs were $70,228 and $37,740 for the six months ended June 30, 2011 and 2010, respectively. The Company’s warranty costs were $46,471 and $12,582 for the three months ended June 30, 2011 and 2010, respectively. 
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
The Company believes the product warranty in our sales contract does not constitute a deliverable in the arrangement and thus there is no need to apply FASB ASC Topic 605-25 separation and allocation model for a multiple deliverable arrangement. FASB ASC Topic 450 specifically addresses the accounting for standard warranties and neither SAB 104 nor FASB ASC Topic 605-25 supersedes FASB ASC Topic 450.  

Unearned Revenue

Payments received before satisfaction of all relevant criteria for revenue recognition are recorded as unearned revenue. Generally the sales contracts with customers provide that approximately 30% of the purchase price is due upon the placement of an order, 30% when the manufacturing process is substantially complete, and 30% upon customer acceptance of the product. As a common practice in the manufacturing business in China, payment of the final 10% of the purchase price is due no later than the termination date of the Company’s warranty period, which is typically between 12 and 18 months from the acceptance date.

Recent Pronouncements

In June 2011, FASB issued ASU 2011-05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income. Under the amendments in this update, an entity has the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income and a total amount for comprehensive income. In a single continuous statement, the entity is required to present the components of net income and total net income, the components of other comprehensive income and a total for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach, an entity is required to present components of net income and total net income in the statement of net income. The statement of other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive income and a total for other comprehensive income, along with a total for comprehensive income. In addition, the entity is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The amendments in this update should be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the effect that the adoption of this pronouncement will have on its financial statements.

In December 2010, FASB issued ASU No. 2010-28, Intangibles – Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. The amendments in this update affect all entities that have recognized goodwill and have one or more reporting units whose carrying amount for purposes of performing Step 1 of the goodwill impairment test is zero or negative. The amendments in this update modify Step 1 so that for those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The amendments in this update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to retained earnings beginning in the period of an adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
In December 2010, FASB issued ASU No. 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations. The amendments in this update specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted the disclosure requirements for the business combinations in 2011.

In January 2010, FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (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 ASU did not have a material impact on the Company’s consolidated financial statements.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
 
NOTE 3 – INVENTORY

At June 30, 2011 and December 31, 2010 (audited), inventory consisted of the following:
 
   
2011
   
2010
 
             
Raw Materials
 
$
333,412
   
$
149,570
 
Work in Process
   
905,353
     
1,212,715
 
Finished goods
   
5,381
     
-
 
                 
   
$
1,244,146
   
$
1,362,285
 
 
NOTE 4 – PROPERTY AND EQUIPMENT

At June 30, 2011 and December 31, 2010 (audited), property and equipment consisted of the following:
 
   
Useful Life
 
2011
   
2010
 
Equipment
 
5 Years
 
$
102,810
   
$
91,173
 
Vehicles
 
5 Years
   
447,220
     
439,054
 
Office Equipment
 
5 years
   
202,367
     
195,857
 
         
752,397
     
726,084
 
Less: Accumulated Depreciation
       
(316,896
)
   
(249,065
)
                     
       
$
435,501
   
$
477,019
 
 
The Depreciation expense for the six months ended June 30, 2011 and 2010 was $62,528 and $42,509, respectively.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 5 - STATUTORY RESERVE AND DEVELOPMENT FUND

Our PRC subsidiary is required to transfer 10% of its net income, as determined under PRC accounting rules and regulations, to a statutory surplus reserve fund until such reserve balance reaches 50% of its registered capital. The surplus reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing shareholders in proportion to their shareholding or by increasing the par value of the shares currently held by them, provided that the remaining reserve balance after such issue is not less than 25% of the registered capital.

NOTE 6 – INCOME TAXES

The Company is subject to income taxes by entity on taxable income arising in or derived from each tax jurisdiction in which each entity is domiciled.

Dalian generated substantially all of its net income from its PRC operations and is governed by the Income Tax Law of the PRC. Income taxes are generally at a rate of 25% on income reported in the financial statements after appropriate tax adjustments.

FusionTech is domiciled in the U.S. and is subject to U.S. income taxes. As of June 30, 2011, FusionTech had net operating losses of approximately $365,000, which may be available to reduce future years’ taxable income through 2031. Management believes the realization of benefits from these loss carryforwards are uncertain due to limited operations and continued losses. Accordingly, a 100% deferred tax asset valuation allowance has been provided.
  
Foreign pretax (loss) income was ($641,634) and $173,195 for the six months ended June 30, 2011, and 2010, respectively. Pretax earnings of a foreign subsidiary are subject to U.S. taxation when effectively repatriated. The Company provides income taxes on the undistributed earnings of non-U.S. subsidiaries except to the extent such earnings are indefinitely invested outside the United States and net of available foreign tax credits. At June 30, 2011, approximately $540,000 of accumulated undistributed earnings of non-U.S. subsidiaries was indefinitely invested. At the U.S. federal income tax rate, taxes of approximately $48,600 would have to be provided if such earnings were remitted currently.
 
A reconciliation of income tax at the Federal statutory rate to the provision for income tax recorded in the financial statements for the six months ended June 30, 2011 and 2010 is as follows:
 
   
2011
   
2010
 
             
Tax provision at statutory rate
    (34) %     34 %
Foreign tax rate difference
    6 %     (9) %
Valuation allowance
    28 %     - %
Non-deductible expenses
    - %     13 %
      - %     38 %

A reconciliation of income tax at the Federal statutory rate to the provision for income tax recorded in the financial statements for the three months ended June 30, 2011 and 2010 is as follows:
   
2011
   
2010
 
             
Tax provision at statutory rate
    (34) %     34 %
Foreign tax rate difference
    (2) %     (9) %
Valuation allowance
    36 %     - %
Non-deductible expenses
    - %     30 %
      - %     55 %
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 7 – SHORT-TERM LOANS
 
The Company was obligated for the following short-term loans as of June 30, 2011 and December 31, 2010:
   
2011
   
2010
 
         
(Audited)
 
Commercial bank in the PRC for RMB 11,000,000 entered into on January 19, 2011. The loan currently bears interest at 6.97% with maturity on January 19, 2012.  The loan was personally guaranteed by shareholders of the Company.
  $ 1,699,734     $ -  
                 
Commercial bank in the PRC for RMB 14,500,000 entered into on June 21, 2011. The loan currently bears interest at 5.85% and matures on December 21, 2011.  The loan was pledged with the Company’s certificate of deposit of $2.5 million held at the same bank and will be used for general working capital purpose.  Based on the loan agreement, any single payment over RMB 10 million made from the loan proceeds is required to be made directly from the bank to the intended payee.
    2,240.559       -  
                 
Commercial bank in the PRC for RMB 20,000,000 entered into on June 30, 2011. The loan currently bears interest at a floating rate of 120% of China’s benchmark interest rate and matures on June 29, 2012. Based on the loan agreement, any single payment over RMB 10 million made from the loan proceeds is required to be made directly from the bank to the intended payee. Seventy percent of the Company’s account receivable collections is required to be submitted to the bank to pay down this loan. The loan was guaranteed by Liaoning Guorong Bonding Company and the Company made $401,755 deposit to this bonding company; of which $92,000 was the prepaid charge for loan guarantee service and $310,000 was the security deposit, which will be refunded when the loan guarantee is terminated.
    3,090,423       -  
                 
Commercial bank in the PRC for RMB 10,000,000 entered into on January 12, 2010. The loan currently bears interest at 5.84% with maturity on January 11, 2011. The loan was paid in full when it matured.
    -       1,517,000  
    $ 7,030,719     $ 1,517,000  

NOTE 8 - CONSTRUCTION IN PROGRESS

The Company had construction in progress of $1,496,475 and $426,708 at June 30, 2011 and December 31, 2010 (audited), respectively. The project is for a manufacturing facility located in Yingkou city. The total investment is about $10 million (RMB 65 million), the investment on the Phase I construction is approximately $5 million and will be completed by the end of 2011 in time to commence production.

NOTE 9 - LONG-TERM DEPOSITS

At June 30, 2011 and December 31, 2010 (audited), the Company had deposits of $1,403,927 and $1,061,445, mainly including a prepayment of land use right of $617,622, security deposit and prepayment of loan guarantee service of $401,755 for obtaining a bank loan, bid deposit of $338,194, and guarantee deposit of $46,356.

NOTE 10 - DUE TO SHAREHOLDER

On February 25, 2011, the Company borrowed $618,085 from the Company’s Chairman and Chief Executive Officer, payable with interest at 8% on July 31, 2011. The advance was fully paid when it was due.
 
 
FUSIONTECH, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2011 AND 2010 (UNAUDITED)
 
NOTE 11 - CONVERTIBLE NOTES PAYABLE

On March 8, 18 and 28, 2011, the Company sold Senior Convertible Promissory Notes for $3,600,000 under a private offering memorandum. The notes are due the earlier of: 180 days from the date of the note or 4 days from the filing of a registration statement for an initial public offering with the SEC, with interest at 8%, and convertible at the holder’s option into shares of common stock at an amount equal to the price per share of an initial public offering.

Interest expense on the convertible notes payable for the six months and three months ending June 30, 2011 was $83,400 and $72,000.

NOTE 12 – OTHER PAYABLES

At June 30, 2011, the Company had other payables of $890,691, which mainly included a third party advance to the Company of $726,250 (RMB 4,700,000) in November 2010 for working capital.  This is a non interest loan and it is due on demand. This payable was repaid in July 2011.

NOTE 13 – COMMITMENTS AND CONTINGENCIES

Dalian entered into non-cancelable leases for four buildings in Liaoning Province, China which include the Company’s office headquarters and three separate manufacturing facilities.  As of June 30, 2011, the leases expire on February 1, 2012, August 10, 2012, January 1, 2013 and October 31, 2013.  On February 1, 2011, Dalian renewed a lease for one year through January 31, 2012 with annual rent of $41,000. The Company recorded rent of $124,796 and $75,646 for the six months ended June 30, 2011, and 2010, respectively. The Company recorded rent of $52,592 and $28,003 for the three months ended June 30, 2011, and 2010, respectively.
 
As of June 30, 2011, future minimum lease payments under these leases by years are as follows:

2012
 
$
240,281
 
2013
   
113,315
 
Total
 
$
353,596
 
 
NOTE 14 – SUBSEQUENT EVENT

On August 17, 2011, certain equity investors have requested a return of their investment of approximately RMB 3.75 million. The matter is currently in arbitration and approximately RMB 9 million is restricted as of August 17, 2011. The Company and its PRC counsel believe the investors' claim is not in accordance with the PRC law. 
 
 
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.  In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions.  Factors that might cause or contribute to such a discrepancy include, but are not limited to, those listed under the heading “Risk Factors” and those listed in our other Securities and Exchange Commission filings.  The following discussion should be read in conjunction with our Financial Statements and related Notes thereto included elsewhere in this report. Throughout this Quarterly Report, we will refer to FusionTech, Inc. as “FusionTech,” the “Company,” “we,” “us,” and “our.”

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

Overview

We design and manufacture clean technology industrial machinery used in the coking process, a critical but highly pollutive step in crude steel production. Our products are primarily sold to large and medium size steel mills and coking plants in China who use or are planning to use the CDQ method of coking, a more environmentally friendly and energy conservative method of coking as compared to the traditional coke wet quenching method.

We currently design and manufacture CDQ transport cars used in CDQ systems and clean technology coke oven products such as coke oven elevators, smoke transfer machines and coal cleaning machines. These clean technology coke oven products are used to maintain coke ovens and reduce the amount of pollution they emit.  We also design and manufacture core coke oven products such as coke drums, coke drum carriers, wet quenching cars, coal freight cars, coke guide cars and coke pushers. These core coke oven products are necessary components for all coke oven systems.

In the fourth quarter of 2011, we plan to provide our proprietary steel plate fusion services (“Steel Plate Fusion”) to a large steel plate manufacturer in northern China, Minmetals Yingkou Medium Plate Co., Ltd. (“Minmetals Yingkou”). Minmetals Yingkou is an established steel plate manufacturer in China with over 30 years of experience in manufacturing steel plates. It is a subsidiary of the reputable China Minmetals Corporation, a Fortune Global 500 Company based in China focusing on the development and production of metals and minerals.

On June 2, 2010, we entered into a non-exclusive strategic agreement, as amended on August 9, 2010, to fuse metal slabs produced by Minmetals Yingkou using Steel Plate Fusion. Minmetals Yingkou will manufacture finished steel plates from the fused metal slabs we produce for sale to its customers and has agreed to manufacture 200,000 tonnes of steel plates per year, adjustable based on market demand to 500,000 tonnes per year. We will receive a processing fee based on the size, type and number of tonnes of fused metal slabs we produce. The processing fee is renegotiable based on the market demand for the final steel plates manufactured.

We believe Steel Plate Fusion is the next generation of steel plate manufacturing technology which is superior in quality, cost and efficiency to the current methods used to manufacture clad steel plates and extra-thick carbon steel plates. Steel Plate Fusion uses an electron-beam welding machine in a vacuum chamber and a proprietary process of surface treatment and manipulation of pressure and temperature to fuse together metal slabs that are then hot rolled and compressed to produce clad steel plates and extra-thick carbon steel plates.
 
 
·
Clad steel plates are manufactured by fusing carbon steel slabs and stainless steel slabs. Clad steel plates are more economical to use than pure stainless steel plates because cheaper carbon steel is used as a base upon which a layer of stainless steel is applied. Clad steel plates provide similar functionalities as stainless steel plates and are used in similar industrial applications. Clad steel plates are in high demand for heavy industrial applications such as the construction of ships, piping, nuclear reactors, pressure vessels, heat exchangers, power generation equipment and coking equipment, all of which require the anti-corrosive properties of clad steel plates.

 
·
Extra-thick carbon steel plates are carbon steel plates that are more than 80 millimeters thick and are manufactured by fusing two carbon steel slabs.  Extra-thick carbon steel plates are in high demand for heavy industrial applications such as the construction of large ships, bridges, buildings, metallurgical equipment, mining equipment and power generation equipment, all of which require the strength of extra-thick carbon steel plates meeting strict standards and specifications.
 
 
We are currently constructing a Steel Plate Fusion processing facility adjacent to Minmetals Yingkou steel plate production facilities and expect Steel Plate Fusion to commence in December of 2011.  The total expenditure to construct this facility is projected to be $10 million.  The total expenditure required to complete Phase I of the construction will be approximately $5 million. We expect Phase I of the construction to be completed by the end of 2011 and will allow us to commence our Steel Plate Fusion services. As of June 30, 2011, we have spent a total of $1.5 million on construction of the facility. We expect to receive the land use rights for the 100 acres of land on which the facility is located in October of 2011.

We believe expanding our business to include Steel Plate Fusion services will positively impact our revenue and net income while creating a need for additional cash to finance our capital expenditures and working capital.  Our plans for expansion will progress according to our ability to obtain the necessary financing.  Once commence Steel Plate Fusion, we anticipate increases in working capital will be generated internally as we increase revenue from this new service.

Our History
 
We carry out all our operations through Dalian, a foreign joint venture company organized under the laws of the PRC. Dalian was originally organized as a limited company in the PRC on December 18, 1992. On November 17, 2010, the Dalian Administration of Industry and Commerce, or the Dalian SAIC, issued an approval notice for a Sino-foreign joint venture business license for Dalian, indicating that capital injections by Wonderful Limited and Median Asset Investments Limited, British Virgin Islands companies, was approved and registering the ownership of their respective 5% equity interests in Dalian. Dalian manufactures all of our clean coking and related products and developed our Steel Plate Fusion technology.

We were incorporated in the State of Nevada on October 10, 2007, under the name ZapNaps, Inc. as a development stage company with no revenues and no operation by Ms. Peggy Lalor, our former President and Director.  On December 3, 2007, we issued 10,000,000 shares of our common stock to Ms. Lalor at $.001 per share for $10,000, representing Ms. Lalor’s initial investment in the Company.

On May 7, 2010, Ms. Lalor sold 10,000,000 shares of the our common stock to Mr. David Lu for $40,000 in a private transaction exempt from registration under the Securities Act of 1933, as amended. Concurrently, Ms. Lalor resigned from her positions with the Company and Mr. Lu was appointed as President, Chief Executive Officer, Chief Financial Officer, Treasurer, Secretary and Director of the Company.

On October 28, 2010, in anticipation of the Share Exchange and related transactions described below, we changed our name from ZapNaps, Inc. to FusionTech, Inc. through a merger with our wholly owned non-operational subsidiary, FusionTech, Inc., which was established to change the Company’s name as permitted under Nevada Law. We also authorized an increase in our authorized shares of common stock from 75,000,000 to 100,000,000, effective November 1, 2010, and an 8-for-1 forward split of our common stock, effective November 12, 2010. Prior to the forward split we had 10,550,000 shares of our common stock outstanding. After giving effect to the forward split and immediately preceding the Share Exchange, we had 84,400,000 shares of our common stock outstanding. We authorized the increase in authorized shares and forward stock split to provide a sufficient number of shares to accommodate the trading of our common stock in the OTC marketplace.

On November 22, 2010, we entered into a Share Exchange Agreement and Plan of Reorganization, as amended as of March 11, 2011, or the Share Exchange Agreement. Pursuant to the Share Exchange Agreement, on November 22, 2010, we issued 24,990,000 shares of our common stock to the seven owners of Dalian in exchange for their agreement to enter into and consummate a series of transactions to transfer ownership of Dalian to the Company as a wholly foreign owned enterprise. In addition, the owners of Dalian agreed to indemnify us in the event that they failed to transfer Dalian as a wholly foreign owned enterprise of the Company under relevant PRC law. Concurrently with the Share Exchange Agreement, and as a condition thereof, we entered into an agreement with David Lu, our former Chief Executive Officer and Director, pursuant to which he returned 80,000,000 shares of our common stock to us for cancellation. Mr. Lu will receive compensation of $80,000 from us for the cancellation of his common stock. Upon completion of the foregoing transactions, we had 29,390,000 shares of our common stock issued and outstanding.

For accounting purposes, the Share Exchange transaction was treated as a reverse acquisition and recapitalization of Dalian, because prior to the transaction the Company was a non-operating public shell, and subsequent to the transaction Dalian’s owners owned a majority of the outstanding common stock of the Company and exercise significant influence over the operating and financial policies of the consolidated entity. We have no other operations or businesses other than those acquired in the Dalian acquisition. As of November 22, 2010 the Company was no longer in the development stage.
 
 
RESULTS OF OPERATIONS

Six Months Ended June 30, 2011 compared to the Six months Ended June 30, 2010
 
               
Increase
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
 
                         
Net revenue
  $ 3,458,427     $ 3,462,979     $ (4,552 )     - %
Cost of goods sold
    2,810,996       2,548,690       262,306       10 %
Gross Profit
    647,431       914,289       (266,858 )     (29) %
Operating expenses
                               
   Selling
    168,137       123,864       44,273       36 %
   Research and development
    122,346       119,271       3,076       3 %
   General and administrative
    1,024,431       452,535       571,895       126 %
Total operating expenses
    1,314,914       695,670       619,244       89 %
(Loss) income from operations
    (667,483 )     218,619       (886,102 )     (405) %
Non-operating income (expenses)
                               
   Other income (expense), net
    54,174       (3,316 )     57,490       (1734) %
   Interest (expense) income, net
    (168,003 )     (42,108 )     (125,895 )     299 %
   Amortization of prepaid financing costs
    (187,530 )     -       (187,530 )        
   Total non-operating (expenses) income
    (301,359 )     (45,424 )     (255,935 )     563 %
(Loss) income before provision for tax
    (968,842 )     173,195       (1,142,037 )     (659) %
Provision for tax
    -       65,770       (65,770 )     (100) %
Net (loss) income
  $ (968,842 )   $ 107,425     $ (1,076,267 )     (1,002) %
 
NET REVENUE

Net revenue for the six months ended June 30, 2011 and 2010 was $3.46 million.

COST OF GOODS SOLD

Cost of goods sold for the six months ended June 30, 2011, increased to $2.81 million from $2.55 million for the six months ended June 30, 2010. Cost of goods sold includes material costs which are primarily steel, labor costs and related overhead. The increased cost of goods sold was due to increased raw material and overhead expenses during the six months ended June 30, 2011, which were a direct result of overall high inflation in China. Cost of goods sold as a percentage of net sales for the six months ended June 30, 201, was 81% compared to 74% for the same period of 2010.

GROSS PROFIT

Gross profit for the six months ended June 30, 2011, decreased to $0.65 million from $0.91 million for the six months ended June 30, 2010. Gross profit margin decreased to 19% for the six months ended June 30, 2011, from 26% for the same period of 2010 due to increased steel prices.
 
 
TOTAL OPERATING EXPENSES

Operating expenses for the six months ended June 30, 2011, increased to $1.31 million from $0.70 million for the six months ended June 30, 2010. Operating expenses consist of selling, general and administrative expenses. The increase in operating expenses resulted from the increased bad debt allowances for account receivables, advance to suppliers of $665,000 and the general expansion of our business, including the expansion of our sales team, increased salaries, employee welfare and depreciation expenses. Legal, audit and consulting expenses also increased in 2011 as a result of our becoming a U.S. publicly listed company in 2010. Operating expenses as a percentage of net sales for the six months ended June 30, 2011, was 38% compared to 20% for the same period of 2010. This increase was the result of the reasons explained above.

NON-OPERATING INCOME (EXPENSES)

Non-operating expenses for the six months ended June 30, 2011, increased to $0.30 million from $0.04 million for the six months ended June 30, 2010, an increase of $0.26 million or 563%. The increase in non-operating expenses resulted primarily from increased interest expense of $0.13 million, and amortization of prepaid financing costs of $0.19 million due to the issuance of $3.6 million senior convertible promissory notes.

NET (LOSS) INCOME

Net loss for the six months ended June 30, 2011, was $0.97 million compared to net income of $0.17 million of 2010 period. Net loss as a percentage of net sales for the six months ended June 30, 2011, was 28% compared to net income of 3% for the same period of 2010. The decrease in net income was attributable to our increased cost of goods sold and operating expenses compared to the same period of 2010 as well as increased interest expense and amortization of prepaid financing costs from the senior convertible notes which bear interest at 8%.

Three Months Ended June 30, 2011 compared to the Three months Ended June 30, 2010
 
               
Increase
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
 
Net revenue
  $ 1,920,018     $ 2,277,111     $ (357,093 )     (16) %
Cost of goods sold
    1,549,705       1,831,054       (281,349 )     (15) %
Gross Profit
    370,313       446,057       (75,744 )     (17) %
Operating expenses
                               
   Selling
    103,534       56,900       46,634       82 %
   Research and development
    65,741       79,831       (14,089 )     (18) %
   General and administrative
    254,787       202,777       52,009       26 %
Total operating expenses
    424,062       339,508       84,554       25 %
(Loss) income from operations
    (53,749 )     106,549       (160,298 )     (150) %
Non-operating income (expenses)
                               
   Other income (expense), net
    56,519       (3,316 )     59,835       (1804) %
   Interest (expense) income, net
    (101,989 )     (29,670 )     (72,319 )     244 %
   Amortization of prepaid financing costs
    (164,914 )     -       (164,914 )     - %
   Total non-operating (expenses) income
    (210,384 )     (32,986 )     (177,398 )     538 %
(Loss) income before income tax
    (264,133 )     73,563       (337,696 )     (459) %
Income tax
    -       40,343       (40,343 )     (100) %
Net (loss) income
  $ (264,133 )   $ 33,220     $ (297,353 )     (895) %
 
 
NET REVENUE

Net revenue for the three months ended June 30, 2011, was $1.92 million a decrease of $0.36 million or 16% from $2.28 million of the same period of 2010.

COST OF GOODS SOLD

Cost of goods sold for the three months ended June 30, 2011, decreased $0.28 million or 15% to $1.55 million from $1.83 million for the three months ended June 30, 2010. Cost of goods sold includes material costs which are primarily steel, labor costs and related overhead. The decrease in cost of goods sold was due to decreased sales during the three months ended June 30, 2011. Cost of goods sold as a percentage of net sales for the three months ended June 30, 2011, was 81% compared to 80% for the same period of 2010, a slight increase which resulted from overall price increases in China.

GROSS PROFIT

Gross profit for the three months ended June 30, 2011, decreased to $0.37 million from $0.45 million for the three months ended June 30, 2010, due to decreased sales. Gross profit margin decreased to 19% for the three months ended June 30, 2011, from 20% for the same period of 2010.

TOTAL OPERATING EXPENSES

Operating expenses for the three months ended June 30, 2011, increased to $0.42 million from $0.34 million for the three months ended June 30, 2010. Operating expenses consist of selling, general and administrative expenses. The increase in operating expenses resulted from the general expansion of our business, including the expansion of our sales team, increased salries, employee welfare and depreciation expenses. Legal, audit and consulting expenses increased in 2011 as a result of our becoming a U.S. publicly listed company in 2010. Operating expenses as a percentage of net sales for the three months ended June 30, 2011, was 22% compared to 15% for the same period of 2010.

NON-OPERATING INCOME (EXPENSES)

Non-operating expenses for the three months ended June 30, 2011, increased to $0.21 million from $0.03 million for the three months ended June 30, 2010, an increase of $0.17 million or 538%. The increase in non-operating expense mainly resulted from increased interest expense of $0.07 million, and amortization of prepaid financing costs of $0.16 million due to the issuance of $3.6 million senior convertible promissory notes.

NET (LOSS) INCOME

Net loss for the three months ended June 30, 2011, was $0.26 million compared to net income of $33,220 for the 2010 period. Net loss as a percentage of net sales for the three months ended June 30, 2011, was 14% compared to net income of 1% for the same period of 2010. The decrease in net income was attributable to our decreased sales and increased operating expenses and non-operating expenses compared to the same period of 2010 as well as increased interest expense and amortization of prepaid financing costs from the senior convertible promissory notes which bear interest at 8%.
 
LIQUIDITY AND CAPITAL RESOURCES

Six Months Ended June 30, 2011 compared to the Six Months Ended June 30, 2010

Operations and liquidity needs are funded primarily through cash flows from operations, short-term borrowings, shareholder contributions and financing through capital markets. The cash was used primarily in operations and plant construction.
 
 
As of June 30, 2011, we had cash and equivalents of $5,546,239, other current assets of $10,682,340 and current liabilities of $17,413,591. Working capital was $(1,185,012) at June 30, 2011. The ratio of current assets to current liabilities was 0.93-to-1 as of June 30, 2011.

The following is a summary of cash provided by or used in each of the indicated types of activities during the six months ended June 30, 2011 and 2010:
 
   
2011
   
2010
 
Cash provided by (used in):
           
Operating activities
  $ (2,610,925 )   $ (315,412 )
Investing activities
    (3,409,932 )     (776,431 )
Financing activities
    10,106,441       1,309,754  
 
Net cash used in operating activities was $2.61 million in the six months ended June 30, 2011, compared to $0.32 million in the same period of 2010. The increase in net cash used in operating activities during the six months ended June 30, 2011, was due mainly to increased net loss, tax receivable outstanding, payment for long-term deposits, advances to suppliers and decreased account payable outstanding and unearned revenue, despite decreased account receivables outstanding.

Net cash used in investing activities was $3,409,932 during the six months ended June 30, 2011, compared to net cash used in investing activities of $776,431 during the same period of 2010. The cash used in investing activities in the six months ended June 30, 2011, was for construction in progress of $1.05 million, increase of restricted cash of $3.51 million, mainly consisting of a certificate of deposit of $2.5 million as collateral for a bank loan, and $1.01 million for product warranties and collateral for bank issuing the notes payable, offset by decreased note receivable outstanding of $1.16 million. In the 2010 period, the restricted cash increased $0.26 million and note receivables increased $0.51 million.  The Company is currently building a facility located in Yingkou city, for its Steel Plate Fusion operations, which will require a total investment of approximately $10 million (RMB 65 million). Phase I construction will require approximately $5 million, and will be completed by the end of 2011 in time to commence Steel Plate Fusion production. The Company had paid $1.6 million and is committed to pay an additional $3.4 million to complete the Phase I construction.

Net cash provided by financing activities was $10.11 million for the six months ended June 30, 2011, compared to net cash provided by financing activities of $1.31 million in the same period of 2010. The increase in cash inflow for 2011 consisted of $7.03 million of proceeds from short-term loans, $1.52 million repayment on previous loan, $3.6 million of proceeds from senior notes, and $1.25 million from note payable. In the 2010 period, we borrowed $1.76 million from a bank and $0.22 million from note payable, paid $0.51 million of dividends and repaid $0.15 million due from related party.

Off-Balance Sheet Arrangements
 
We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts indexed to our shares and classified as stockholders’ equity or not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.
 
Contractual Obligations

Our significant contractual obligations as of June 30, 2011 are as follows:
 
   
Payments Due by Period
       
   
Less than
   
One to
   
Three to
       
   
One Year
   
Three Years
   
Five Years
   
Total
 
Short-term notes
  $ 1,482,712     $ -     $ -     $ 1,482,712  
                                 
Short-term loans
    7,030,719       -       -       7,030,719  
Senior convertible
                               
Promissory notes
    3,600,000       -       -       3,600,000  
                                 
Factory and office leases
    240,281       113,315       -       353,596  
                                 
Total
  $ 12,353,712     $ 113,315     $ -     $ 12,467,027  
 
 
On January 19, 2011, Dalian entered into a credit facility with Shanghai Pudong Development Bank through which Dalian can borrow up to $3.34 million for working capital needs from time to time until February 1, 2012. Any loan received through the credit facility will bear interest, adjustable quarterly, at a floating rate of 120% of China’s benchmark interest rate, which was 5.8% as of January 28, 2011. At June 30, 2011, Dalian drew down $1.7 million under the credit facility and the interest rate is 6.97% currently. Lixin Wang, Chairman and Chief Executive Officer, and named beneficial owner of the Company’s common stock, and his wife, Peili Wang, also a named beneficial owner of the Company’s common stock, personally guaranteed the draw down.
 
The Company borrowed from a commercial bank in the PRC RMB 14,500,000 ($2.24 million on June 21, 2011. The loan currently bears interest at 5.85% and matures on December 21, 2011.  The loan was pledged with the Company’s certificate of deposit of $2.5 million held at the same bank; and will be used for general working capital purposes.  Based on the loan agreement, any single payment over RMB 10 million made from the loan proceeds is required to be made directly from the bank to the intended payee.
 
The Company borrowed from a commercial bank in the PRC RMB 20,000,000 on June 30, 2011, for working capital needs. The loan currently bears interest at a floating rate of 120% of China’s benchmark interest rate, and matures on June 29, 2012. Based on the agreement, any single payment over RMB 10 million made from the loan proceeds is required to be made directly from the bank to the intended payee.  Seventy percent of the Company’s account receivable collections is required to be submitted to the bank to pay down this loan. The loan was guaranteed by Liaoning Guorong Bonding Company and the Company made $401,755 deposit to this bonding company, of which, $92,000 was the prepaid charge for the loan guarantee service and $310,000 was the security deposit which will be refund when the loan guarantee is terminated.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”), our principal executive officer, and Chief Financial Officer (“CFO”), our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based on that evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of the date of that evaluation to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings
 
On August 17, 2011, we received a notice from the Beijing Arbitration Commission (BAC), that initial foreign investors in the Company filed an arbitration claim against us, seeking the repayment of approximately RMB 3.7 million that was injected into Dalian on November 17, 2010, in exchange for the return of their shares. The arbitration hearing is scheduled for October 5, 2011. The Company believes this claim is without merit, and has retained PRC counsel and intends to defend itself fully.
 
We may occasionally become involved in various lawsuits and legal proceedings arising in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in these or other matters that may arise from time to time could have an adverse effect on our business, financial condition or operating results. We are currently not aware of any such legal proceedings or claims, other than those set forth above, that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

Item 1A.  Risk Factors

Not required.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.  Defaults Upon Senior Securities

None.

Item 5.  Other Information

None.

Item 6.  Exhibits

See the Exhibit Index following the signature page to this Quarterly Report on Form 10-Q for a list of exhibits filed or furnished with this report, which Exhibit Index is incorporated herein by reference.


 

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.

   
FUSIONTECH, INC.
 
   
(Registrant)
 
       
Date: August 22, 2011
By:
/s/ Lixin Wang
 
   
Lixin Wang
Chief Executive Officer
(Principal Executive Officer)
 




Exhibit No.
 
Document Description
31.1 †
 
31.2 †
 
32.1 ‡
 
32.2 ‡
 
101**   The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income and Comprehensive Income, (iii) Consolidated Statements of Cash Flows, and (iv) Notes to Consolidated Financial Statements
       
† Filed herewith
‡ Furnished herewith
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.