Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - BEFUT International Co., Ltd.v235047_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - BEFUT International Co., Ltd.v235047_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - BEFUT International Co., Ltd.v235047_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - BEFUT International Co., Ltd.v235047_ex31-1.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q/A
(Amendment No. 1)

(Mark One)

¨
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 0-51336

BEFUT INTERNATIONAL CO., LTD.
(Exact name of registrant as specified in its charter)
 
 
Nevada
 
20-2777600
 
 
(State or other jurisdiction of
 
(IRS Employer
 
 
incorporation or organization)
 
Identification No.)
 

27th Floor, Liangjiu International Tower
No. 5, Heyi Street, Xigang District    116011
Dalian City, China
(Address of principal executive offices) (Zip Code)
 
(011) 86-411-8367-8755 (China)
(Issuer's telephone number, including area code)

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

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

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

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

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

As of May 11, 2011, 29,715,640 shares of the registrant’s Common Stock, $.001 par value, were outstanding.
 
 
 

 

EXPLANATORY NOTE

This Amendment No. 1 to the Quarterly Report on Form 10-Q (the “Amended 10-Q”) of BEFUT International Co., Ltd. (the “Company”) amends the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on May 13, 2011 (the “Original 10-Q”).  In connection with the preparation of its responses to comments received from the SEC, the Company identified certain reporting errors and omissions in the Original 10-Q and in its previously issued financial statements, some of which the Company considers material.  The Amended 10-Q is being filed to amend the Original 10-Q as follows:

 
·
Reclassify certain line items in the Consolidated Statement of Cash Flows resulting in changes from net cash used in operating activities of $3,498,910 to $4,252,955 for the nine months ended March 31, 2011 and from $4,342,710 to $3,756,710 for the nine months ended March 31, 2010, and changes from net cash provided by financing activities of $5,122,800 to $5,876,845 for the nine months ended March 31, 2011 and from $9,422,526 to $8,836,526 for the nine months ended March 31, 2010;
 
 
·
Revise “Note 5 – Loans to Unrelated Parties” to identify the unrelated parties;
 
 
·
Revise “Note 11 – Short-Term Bank Loans” to include average annual interest rate;
 
 
·
Revise “Note 12 – Loans From Unrelated Parties” to include information regarding maturity date and financial or non-financial covenants associated with these loans;
 
 
·
Revise “Note 13 – Long-Term Bank Loans” to include average annual interest rate;
 
 
·
Revise “Note 22 – Disposal of A Subsidiary – Dalian Marine” to more clearly indicate the business purpose surrounding the sale of Dalian Marine;
 
 
·
Add a footnote for Restatement to Reflect Correction of Accounting Errors.
 
 
·
Add the words “Restated”, as applicable, to column headings of certain financial tables for the three months ended March 31, 2011 and 2010
 
 
·
Amend and restate, in its entirety, Item 4. “Controls and Procedures,” due to the errors and omissions in the Company’s financial statements, to state that the Company had material weaknesses in its disclosure controls and procedures and internal control over financial reporting at March 31, 2011.
 
Except as set forth above, the Amended 10-Q is identical to the Original 10-Q.  The Amended 10-Q does not reflect events occurring after the filing of the Original 10-Q and no attempt has been made in the Amended 10-Q to modify or update other disclosures as presented in the Original 10-Q.  Accordingly, this Amended 10-Q should be read in conjunction with the Company’s filings with the SEC subsequent to the filing of the Original Form 10-Q.  Additionally, the Company has attached to the Amended 10-Q updated certifications executed as of the date of the Amended 10-Q by the Company’s chief executive officer and chief financial officer as required by Sections 302 and 906 of the Sarbanes Oxley Act of 2002.  These updated certifications are attached as Exhibits 31.1, 31.2, 32.1 and 32.2 to the Amended 10-Q.

 
 

 

TABLE OF CONTENTS
 
       
Page
 
PART I
 
FINANCIAL INFORMATION
     
           
Item 1.
 
Financial Statements.
   
3
 
             
   
Restated Consolidated Balance Sheets As of March 31, 2011(Unaudited) and June 30, 2010
   
5
 
             
   
Restated Consolidated Statements of Operations For the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)
   
6
 
             
   
Restated Consolidated Statements of Comprehensive Income For the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)
   
8
 
             
   
Restated Consolidated Statements of Cash Flows For the Three and Nine Months Ended March 31, 2011 and 2010 (Unaudited)
   
9
 
             
   
Notes to Restated Consolidated Financial Statements March 31, 2011 and 2010 (Unaudited)
   
10
 
             
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
24
 
             
Item 3.
 
Quantitative and Qualitative Disclosures about Market Risk
   
32
 
             
Item 4.
 
Controls and Procedures.
   
33
 
             
PART II
 
OTHER INFORMATION
    33  
             
Item 6.
 
Exhibits
   
33
 
             
Signatures
   
34
 
         
Exhibits/Certifications
    35  
 
 
2

 

PART I - FINANCIAL INFORMATION

Item 1.
Financial Statements

BEFUT INTERNATIONAL CO., LTD.

RESTATED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2011 AND 2010
 
 
3

 

Table of Contents
 
 
Page
   
Consolidated Balance Sheets
5
   
Consolidated Statements of Operations
6
   
Consolidated Statements of Comprehensive Income
8
   
Consolidated Statements of Cash Flows
9
   
Notes to Consolidated Financial Statements
10
  
 
4

 

Consolidated Balance Sheets
   
March 31,
   
June 30,
 
   
2011
   
2010
 
   
(Unaudited)
       
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 446,658     $ 1,319,173  
Restricted cash
    1,991,245       1,181,095  
Accounts receivable, net of allowance for doubtful accounts of $86,349
    16,279,594       9,292,310  
and $83,295 at March 31, 2011, and June 30, 2010, respectively
               
Inventory
    5,799,198       2,543,789  
Trade notes receivable
    669,290       -  
Loans to unrelated parties
    5,668,683       1,054,090  
Bank loan security deposits
    1,210,911       1,031,100  
Advance payments for inventory
    1,132,694       399,868  
Due from related party
    -       472,838  
Other current assets
    1,037,503       521,739  
Total current assets
    34,235,776       17,816,002  
                 
Property and equipment, net
    32,250,107       31,618,074  
                 
Other assets:
               
Intangibles, net
    15,255,499       15,669,375  
Advance payments for property and equipment
    274,690       293,605  
Advance payments – Research & Development
    2,165,286       2,088,714  
Total other assets
    17,695,475       18,051,694  
                 
Total assets
  $ 84,181,358     $ 67,485,770  
                 
Liabilities
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 2,827,356     $ 3,119,646  
Short-term bank loans
    11,437,230       6,039,300  
Current portion of long-term bank loans
    763,500       294,600  
Loans from unrelated parties
    1,591,600       370,000  
Advances from customers
    2,460,833       533,806  
Income taxes payable
    3,502,071       1,655,747  
Other current liabilities
    1,185,812       969,787  
Total current liabilities
    23,768,402       12,982,886  
                 
Long-term bank loan
    14,201,100       14,435,400  
                 
Total liabilities
    37,969,502       27,418,286  
                 
Equity
               
Stockholders’ equity:
               
Preferred stock, $0.001 par value, 10,000,000 shares authorized,
    -       -  
no shares issued or outstanding
               
Common stock, $0.001 par value, 200,000,000 shares authorized,
               
29,715,640 and 29,715,666 shares issued and outstanding at
               
December 31, 2010 and June 30, 2010, respectively
    29,716       29,716  
Additional paid-in capital
    21,838,047       21,838,047  
Statutory reserves
    1,181,189       1,181,189  
Retained earnings
    18,818,441       13,810,157  
Accumulated other comprehensive income
    3,727,290       2,166,533  
Total stockholders’ equity
    45,594,683       39,025,642  
 
               
Noncontrolling interest
    617,173       1,041,842  
                 
Total equity
    46,211,856       40,067,484  
                 
Total liabilities and equity
  $ 84,181,358     $ 67,485,770  
 
 
5

 
 
BEFUT INTERNATIONAL CO., LTD.

Consolidated Statements of Operations
(Unaudited)
 
   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Sales
  $ 9,443,346     $ 6,708,410     $ 40,245,320     $ 19,318,113  
                                 
Cost of sales
    6,945,831       5,002,973       29,570,863       14,101,070  
                                 
Gross profit
    2,497,515       1,705,437       10,674,457       5,217,043  
                                 
Operating expenses:
                               
Selling expenses
    146,144       11,300       334,393       48,001  
General and administrative expenses
    983,787       731,346       2,999,048       1,761,895  
Total operating expenses
    1,129,931       742,646       3,333,441       1,809,896  
                                 
Income from operations
    1,367,584       962,791       7,341,016       3,407,147  
                                 
Other income (expenses):
                               
Government subsidy income
    84,352       331,138       251,834       685,796  
Interest income
    1,585       2,113       11,532       5,841  
Interest expense
    (434,063 )     (361,680 )     (1,159,430 )     (502,912 )
Other income (expenses)
    (19,152 )     2,930       (45,334 )     (394,511 )
Total other income (expenses)
    (367,278 )     (25,499 )     (941,398 )     (205,786 )
                                 
Income from continuing operations before provision for income tax
    1,000,306       937,292       6,399,618       3,201,361  
                                 
Provision for income tax
    364,396       306,698       1,786,426       892,421  
                                 
Income from continuing operations, net of tax
    635,910       630,594       4,613,192       2,308,940  
                                 
Discontinued operations:
                               
Income from operations of discontinued subsidiary (including gain on disposal of $99,148 in 2011)
    171,644       -       292,146       -  
Provision for income tax
    24,787       -       24,787       -  
Income from discontinued operations, net of tax
    146,857       -       267,359       -  
                                 
Net income
    782,767       630,594       4,880,551       2,308,940  
                                 
Less: net loss attributable to noncontrolling interest
    (24,547 )     (61,016 )     (127,732 )     (67,137 )
                                 
Net income attributable to BEFUT
  $ 807,314     $ 691,610     $ 5,008,283     $ 2,376,077  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
6

 
 
BEFUT INTERNATIONAL CO., LTD.

Consolidated Statements of Operations (continued)
(Unaudited)

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
Amounts attributable to BEFUT common shareholders:
                       
                         
Income from continuing operations, net of tax
  $ 686,318     $ 691,610     $ 4,766,785     $ 2,376,077  
                                 
Discontinued operations:
                               
Income from operations of discontinued subsidiary (including gain on disposal of $99,148 in 2011)
    145,783       -       266,285       -  
Provision for income tax
    24,787       -       24,787       -  
Income from discontinued operations, net of tax
    120,996       -       241,498       -  
                                 
Net income
  $ 807,314     $ 691,610     $ 5,008,283     $ 2,376,077  
                                 
Earnings per share—Basic:
                               
Income from continuing operations
  $ 0.02     $ 0.03     $ 0.16     $ 0.08  
Discontinued operations
  $ 0.01     $ 0.00     $ 0.01     $ 0.00  
Net income
  $ 0.03     $ 0.03     $ 0.17     $ 0.08  
                                 
Earnings per share—Diluted:
                               
Income from continuing operations
  $ 0.02     $ 0.02     $ 0.16     $ 0.08  
Discontinued operations
  $ 0.01     $ 0.00     $ 0.01     $ 0.00  
Net income
  $ 0.03     $ 0.02     $ 0.17     $ 0.08  
                                 
Weighted average number of common shares
                               
outstanding:
                               
Basic
    29,715,640       29,512,784       29,715,640       29,512,784  
Diluted
    29,778,814       30,155,539       29,774,190       30,240,336  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
7

 
 
BEFUT INTERNATIONAL CO., LTD.

Statements of Consolidated Comprehensive Income
(Unaudited)

   
For the Three Months Ended
   
For the Nine Months Ended
 
   
March 31,
   
March 31,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Net income
  $ 782,767     $ 630,594     $ 4,880,551     $ 2,308,940  
                                 
Other comprehensive income
                               
Foreign currency translation adjustment
    279,458       107       1,561,447       48,178  
                                 
Total comprehensive income
    1,062,225       630,701       6,441,998       2,357,118  
                                 
Less: comprehensive income attributable to noncontrolling interest
    (24,414 )     (61,004 )     (127,042 )     (67,124 )
                                 
Comprehensive income attributable to BEFUT
  $ 1,086,639     $ 691,705     $ 6,569,040     $ 2,424,242  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
8

 

BEFUT INTERNATIONAL CO., LTD.

Consolidated Statements of Cash Flows
(Unaudited)

   
For the Nine Months Ended
 
   
March 31,
 
   
2011
   
2010
 
   
(Restated)
   
(Restated)
 
Cash flows from operating activities:
           
Net Income
  $ 4,880,551     $ 2,308,940  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation and amortization
    2,373,398       1,087,427  
Changes in current assets and current liabilities:
               
Restricted cash
    (754,045 )     586,000  
Accounts receivable
    (6,831,456 )     (4,510,985 )
Inventory
    (3,113,702 )     (743,916 )
Trade notes receivable
    (647,603 )     -  
Advance payments for inventory
    (664,108 )     (7,726,696 )
Advance payment - R&D
    -       155,438  
Other current assets
    (3,327,626 )     (815,103 )
Accounts payable and accrued expenses
    (203,318 )     5,871,576  
Trade notes payable
    -       (1,173,120 )
Advances from customers
    1,875,604       290,209  
Income taxes payable
    1,755,806       892,421  
Other taxes payable
    (183,770 )     (37,983 )
Other current liabilities
    587,314       59,082  
Total adjustments
    (9,133,506 )     (6,065,650 )
                 
Net cash used in operating activities
    (4,252,955 )     (3,756,710 )
                 
Cash flows from investing activities:
               
Loans to unrelated parties
    (4,499,535 )     1,234,288  
Due from related party
    481,987       -  
Advance payments for property and equipment
    29,183       (642,672 )
Additions to property and equipment
    (866,358 )     (2,016,175 )
Additions to construction in progress
    (40,072 )     (2,450,795 )
Acquisition of intangible assets
    (6,004 )     (6,453 )
Gain on disposal of a subsidiary Dalian Marine, net of cash
    2,465,957       -  
Long-term investment
    -       2,933  
                 
Net cash used in investing activities
    (2,434,842 )     (3,878,874 )
                 
Cash flows from financing activities:
               
Bank loan security deposits
    (139,640 )     (681,876 )
Proceeds of short-term bank loans
    11,391,555       5,279,040  
Repayment of short-term bank loans
    (6,275,970 )     (8,065,200 )
Convertible notes payable
    -       (370,000 )
Loans from unrelated parties
    1,201,200       2,708,908  
Proceeds (repayment) of long-term bank loans
    (300,300 )     9,188,462  
Capital contribution from noncontrolling interest for BEFUT Zhong Xing
    -       777,192  
                 
Net cash provided by financing activities
    5,876,845       8,836,526  
                 
Effect of foreign currency translation on cash
    (61,563 )     4,314  
                 
Net increase (decrease) in cash and cash equivalents
    (872,515 )     1,205,256  
                 
Cash and cash equivalents beginning
    1,319,173       210,301  
                 
Cash and cash equivalents ending
  $ 446,658     $ 1,415,557  

The accompanying notes are an integral part of these consolidated financial statements.
 
 
9

 
 
BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 1 – Organization and Nature of Business

BEFUT International Co., Ltd., formerly known as Frezer, Inc. (“Frezer”), a former public shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended, was established under the laws of Nevada on May 2, 2005. The accompanying consolidated financial statements include the financial statements of BEFUT International Co., Ltd. and its subsidiaries (collectively, the “Company”). The Company’s primary business is to design manufacture and sell industrial wires and cables.

On March 13, 2009, Frezer entered into and consummated a series of transactions whereby (a) Frezer acquired 100% of the outstanding shares of common stock of BEFUT Corporation, a company incorporated in the State of Nevada on January 14, 2009 (“Befut Nevada”), constituting all of the capital  stock of Befut Nevada, from Befut International Co. Limited, a British Virgin Islands company (“Befut BVI”) in exchange for the issuance to Befut BVI  of an aggregate of 117,768,300 shares of Frezer’s common stock and the cancellation of an aggregate of 2,176,170 shares of Frezer’s common stock  and (b) Frezer raised $500,000 in gross proceeds from the sale to four investors of convertible promissory notes of Frezer in the aggregate principal amount of  $500,000 and warrants to purchase an aggregate of 720,076 shares of Frezer’s common stock. The acquisition was accounted for as a reverse acquisition   under the purchase method for business combinations. On June 18, 2009, the Company effectuated a name change from its original name “Frezer, Inc.” to “BEFUT International Co., Ltd.”.

Hongkong BEFUT Co., Ltd. (“Befut Hongkong”) was incorporated on September 10, 2008 under the laws of Hong Kong and is a wholly-owned subsidiary of Befut   Nevada.  On February 13, 2009, Befut Hongkong invested 100% of the registered capital to form Befut Electric (Dalian) Co., Ltd. (“WFOE”), a Chinese company incorporated in the city of Dalian, the People’s  Republic of China (the “PRC” or “China”).

On February 16, 2009, WFOE entered into a series of agreements, the purpose of which was to restructure Dalian Befut Wire & Cable Manufacturing   Co., Ltd. (“Dalian Befut”) in accordance with applicable PRC law so that Dalian Befut could raise capital and grow its business (the “Restructuring”). Dalian Befut was incorporated on June 13, 2002 under the laws of the PRC. The Restructuring included the following arrangements: First, WFOE entered into an Original Equipment Manufacturer Agreement with Dalian Befut containing the following material provisions: (i) Dalian Befut may not manufacture products for any person or entity other than WFOE without the written consent of WFOE; (ii) WFOE is to provide all raw materials and advance related costs to  Dalian Befut, as well as provide design requirements for products to be manufactured; (iii) WFOE is responsible for marketing and distributing the   products manufactured by Dalian Befut and will keep all related profits and revenues; and (iv) WFOE has an exclusive right, exercisable in its sole discretion, to purchase all or part of   the assets and/or equity of Dalian Befut at a mutually agreed price to the extent permitted by applicable PRC law. In  addition, on February 16, 2009, WFOE entered into two ancillary agreements with Dalian Befut: (i) an Intellectual Property License Agreement, pursuant to which WFOE shall be permitted to use intellectual property rights such as trademarks, patents and know-how for the marketing and sale of the products manufactured by Dalian Befut; and (ii) a Non-competition Agreement, pursuant to which Dalian Befut shall not compete against WFOE.

On April 14, 2006, Dalian Marine Cable Co., Ltd. (“Dalian Marine Co.”) was incorporated in the PRC by Dalian Befut.  At such time, the shareholders of Dalian Marine Co. were Dalian Befut (owning 86.6% of the equity interests) and three individual shareholders. Dalian Marine Co. was formed to conduct marketing activities and produce marine cables for Dalian Befut.

On July 1, 2009, Dalian Befut, our captive manufacturer, formed a joint venture under the laws of the PRC, Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong Xing”), with pre-registered capital of RMB1,000,000 (approximately $147,000). Dalian Befut invested RMB700,000 (approximately $103,000) for its 70% equity interest in Befut Zhong Xing. In January, 2010, Dalian Befut increased its investment capital to RMB14.7 (approximately $2 million) million with a transfer of intangible assets to Befut Zhong Xing on January 1, 2010 and raised its equity ownership percentage in Befut Zhong Xing to 73.5%. Befut Zhong Xing manufactures switch appliances, including high/low voltage distribution cabinet switches and crane electronic control switches.  The noncontrolling interest also increased its equity investment by contributing additional cash of RMB5,000,000 (approximately $733,350).  There were no equity transactions (purchasing or selling the controlling interest) between the Company and the noncontrolling interest shareholders for the quarter ended March 31, 2011.

 
10

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 1 – Organization and Nature of Business (continued)

Dalian Yuansheng was established on June 3, 2009 with a registered capital of RMB 1,000,000 (approximately $146,700).  Two individual shareholders, Chengnian Yan and Xianjun Cheng, owned 60% and 40% of Dalian Yuansheng, respectively.  On July 23, 2010, Dalian Befut contributed RMB 5,000,000 (approximately $735,294) and purchased the original 60% interest from Chengnian Yan at RMB 600,000 (approximately $88,235).  As a result, Dalian Befut became 93.3% owner of Dalian Yuansheng.  For the periods ended September 30, 2010 and December 31, 2010, the Company consolidated the financial statements of Dalian Yuansheng with intercompany transactions, including investment in Dalian Yuansheng of RMB 5,600,000 (approximately $823,529), eliminated and reported noncontrolling interest per ASC 810-10 as part of the Company’s equity.  The purchase of Chengnian Yan’s interest in Dalian Yuansheng at RMB 600,000 (approximately $88,235) was recorded as an equity transaction at cost and no gain or loss was recorded.

On February 25, 2011, Dalian Befut sold its entire 86.6% equity interest in Dalian Marine Co. to Mr. Fansheng Li, a noncontrolling shareholder of Dalian Marine Co., for RMB 17,320,000 (approximately $2.67 million) in cash. As part of the transaction, the applicable certifications required for producing marine cables were transferred to WFOE. As Dalian Befut will continue to manufacture marine cables for the Company, the Company has determined that Dalian Befut’s sale of its equity interests in Dalian Marine Co. did not have any material impact on the Company’s financial position and operations.
 
Note 2 – Summary of Significant Accounting Policies

Basis Of Presentation

As disclosed in Note 1, WFOE entered into an Original Equipment Manufacturer Agreement, an Intellectual Property License Agreement and a Non-competition Agreement (collectively, the “OEM Agreements”) with Dalian Befut.  Under FASB ASC 810-10 (formerly FIN 46R), Dalian Befut is the variable interest entity, or VIE, of WOFE by virtue of the OEM Agreements.  As Dalian Befut’s sole purpose and objective is to provide resources and benefits to WFOE, WFOE is the primary beneficiary that can consolidate Dalian Befut. Therefore, Dalian Befut and its controlled subsidiaries, Dalian Marine Co., Dalian Yuansheng and Befut Zhong Xing, are consolidated into the Company’s financial statements.

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

In preparing the accompanying unaudited consolidated financial statements, the Company evaluated the period from March 31, 2011 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such events were identified for this period.

Interim Financial Statements

These interim financial statements should be read in conjunction with the audited consolidated financial statements for the years ended June 30, 2010 and 2009, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited consolidated financial statements for the years ended June 30, 2010 and 2009.

 
11

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 2 – Summary of Significant Accounting Policies (continued)

Reclassification

Certain amounts as of June 30, 2010 and March 31, 2011 were reclassified for presentation purposes.
 
Note 3– Restricted Cash

Cash balances in the amount of $1,991,245 and $1,181,095 were restricted as of March 31, 2011 and June 30, 2010, respectively, as collateral for the construction loan obtained from the PRC National Development Bank Joint Equity Corporation, which is described in Note 13. The balance of $763,500 as of March 31, 2011 was restricted as collateral for the Bank of East Asia.
 
Note 4– Inventory

Inventory consisting of material, labor and manufacturing overhead as of March 31, 2011 and June 30, 2010 consists of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
             
Raw materials
  $ 2,419,354     $ 1,093,193  
Work in process
    1,071,458       323,275  
Finished goods
    2,308,386       1,127,321  
                 
Total
  $ 5,799,198     $ 2,543,789  

Note 5– Loans to Unrelated Parties

As of March 31, 2011, the Company had outstanding loans to unrelated parties in the aggregate amount of $5,668,683, consisting of $5,126,980 to Dalian Haide Electric Power Equipment Co., Ltd., a research and development partner of the Company (“Dalian Haide”) and $541,703 to Dalian Chenglian Electrical Installation Engineering Co., Ltd., a customer of the Company (“Dalian Chenglian”). These loans are made to primarily fund working capital requirements and are payable on demand. In addition, the loans are unsecured and non-interest bearing.

As of June 30, 2010, the Company had outstanding loans to unrelated parties in the aggregate amount of $1,054,090, consisting of $531,543 to Dalian Haide and $522,546 to Dalian Chenglian.

Note 6– Bank Loan Security Deposits

The Company obtained financing from various banks through third party guarantors.  The Company is responsible to provide security deposits to third party guarantors per the agreements between the Company and the third guarantors.  The balance of such bank loan security deposits as of March 31, 2011 and June 30, 2010 consist of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
             
Bank loan security deposits – short-term
  $ 905,511     $ 736,500  
Bank loan security deposits – long-term
    305,400       294,600  
Total
  $ 1,210,911     $ 1,031,100  
  
 
12

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)
 
Note 7– Property and Equipment

Property and equipment as of March 31, 2011 and June 30, 2010 consist of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
             
Buildings
  $ 20,610,604     $ 19,877,285  
Machinery and equipment
    13,844,784       12,673,324  
Office equipment and furniture
    200,810       100,927  
Vehicles
    524,710       466,380  
Subtotal
    35,180,908       33,117,916  
Less: Accumulated depreciation
    2,971,444       1,499,842  
      32,209,464       31,618,074  
Add: Construction in progress
    40,643       -  
Total
  $ 32,250,107     $ 31,618,074  

Depreciation expense for the three months ended March 31, 2011 and 2010 was $458,861 and $80,779, respectively. Depreciation expense for the nine months ended March 31, 2011 and 2010 was $1,395,665 and $250,595, respectively.
 
Note 8 – Intangible Assets

Intangible assets as of March 31, 2011 and June 30, 2010 consist of the following

   
March 31,
   
June 30,
 
   
2011
   
2010
 
             
Software
  $ 29,519     $ 22,684  
Trademark
    87,039       83,961  
Land use rights
    5,706,842       5,505,028  
Patent
    12,026,652       11,601,348  
Subtotal
    17,850,052       17,213,021  
Less: Accumulated amortization
    2,594,553       1,543,646  
Total
  $ 15,255,499     $ 15,669,375  

Amortization expense for the three months ended March 31, 2011 and 2010 was $330,541 and $287,968, respectively. Amortization expense for the nine months ended March 31, 2011 and 2010 was $977,733and $836,832, respectively.

Note 9 – Advance Payments – Research and Development

As a common practice in the business environment of China, the Company is required to make advance payments for goods or services that will be used in future research and development activities. The Company made the original advance payments for research and development to a third party in August 2008 for the development of twenty patents.  The Company realizes the advance payments when certain progress targets are achieved, including, but not limited to, obtaining the intellectual property certificate issued by the PRC State Intellectual Property Office and passing the two-year declaration period, and related costs have been incurred and reported by the third party to the Company. Such advance payments are amortized as research and development expense in the years in which the patents have passed the two- year declaration period. As of March 31, 2011 and June 30, 2010, the Company determined that these advance payments are recoverable.
 
 
13

 
 
BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 10 – Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses as of March 31, 2011 and June 30, 2010 consist of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
             
Accounts payable
  $ 2,745,585     $ 3,009,646  
Accrued expenses
    81,771       110,000  
Total
  $ 2,827,356     $ 3,119,646  

The carrying value of accounts payable and accrued expenses approximate their fair values due to the short-term nature of these obligations.

Note 11 – Short-Term Bank Loans

Short-term bank loans consist of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
On September 16, 2009, the Company obtained a loan from Harbin Bank, the principal and accrued interest of which was paid in full by September 15, 2010. The interest was calculated using an annual fixed interest rate of 6.372% and paid monthly. The loan was secured by the Company’s property and equipment.
  $ -     $ 2,946,000  
                 
On October 30, 2009, the Company obtained a loan from Bank of Dalian, the principal and accrued interest of which was paid in full by October 29, 2010. The interest was calculated using an annual fixed interest rate of 6.903% and paid monthly. The loan was guaranteed by Dalian Fangyuan Financial Guarantee Co., Ltd., an unaffiliated third party.
  $ -     $ 2,356,800  
                 
On June 25, 2010, the Company obtained a loan from the Bank of East Asia, the principal and accrued interest of which was paid in full by December 25, 2010. The interest was calculated using an annual fixed interest rate of 6.318% and paid monthly. The loan was guaranteed by the Company’s accounts receivables.
  $ -     $ 736,500  
                 
On September 14, 2010, the Company obtained a loan from Harbin Bank with a maturity date of September 13, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China, the PRC’s central bank. The average annual interest rate for the three months ended March 31, 2011 was approximately 7.73%. The loan is secured by the Company’s property and equipment.
  $ 3,054,000     $ -  
                 
On October 21, 2010, the Company obtained a loan from the Dalian Economic Development Zone Xinhui Town Bank with a maturity date of October 20, 2011. The interest is paid monthly at a variable rate equal to 50% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average annual interest rate for the three months ended March 31, 2011 was approximately 8.92%. The loan is secured by the Company’s inventory.
  $ 1,511,730     $ -  
 
 
14

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 11 – Short-Term Bank Loans (continued)

On November 11, 2010, the Company obtained a loan from the Bank of Dalian with a maturity date of November 10, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average annual interest rate for the three months ended March 31, 2011 was approximately 7.73%. The loan is guaranteed by Dalian Zhongdingxin Investment Guarantee Co., Ltd., an unaffiliated third party.
  $ 1,527,000     $ -  
                 
On November 23, 2010, the Company obtained a loan from the Bank of Dalian with a maturity date of November 22, 2011. The interest is paid monthly at a variable rate equal to 10% per annum above the floating base interest for loans of the same term issued by the People’s Bank of China. The average annual interest rate for the three months ended March 31, 2011 was approximately 6.54%. The loan is guaranteed by Dalian Tiansi Joint Guarantee Co., Ltd., an unaffiliated third party.
  $ 1,527,000     $ -  
                 
On December 30, 2010, the Company obtained a loan from the Bank of East Asia with a maturity date of June 30, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the  People’s Bank of China. The average annual interest rate for the three months ended March 31, 2011 was approximately 7.14%. The loan is secured by the Company’s accounts receivables.
  $ 1,527,000     $ -  
                 
On January 10, 2011, the Company obtained a loan from the Bank of East Asia with a maturity date of July 10, 2011. The interest is paid monthly at a variable rate equal to 30% per annum above the floating base interest for loans of the same term issued by the  People’s Bank of China. The average annual interest rate for the three months ended March 31, 2011 was approximately 7.14%. The loan is secured by the Company’s accounts receivables.
  $ 2,290,500     $ -  
                 
Total
  $ 11,437,230     $ 6,039,300  

Note 12 – Loans From Unrelated Parties

These loans are based on good-faith, and are non-interest bearing and payable on demand. There are no financial or non-financial covenants associated with these loans. The proceeds from these loans are utilized for working capital. As of March 31, 2011 and June 30, 2010, the Company had outstanding loans from unrelated parties of $1,591,600 and $370,000, respectively.
 
 
15

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 13 – Long-Term Bank Loans

Long-term bank loans consist of the following:

   
March 31,
   
June 30,
 
   
2011
   
2010
 
On November 2, 2009, Dalian Befut entered into a Loan Agreement with the PRC National Development Bank Joint Equity Corporation (“NDB”) pursuant to which Dalian Befut borrowed RMB100,000,000 (approximately $14,670,000) from NDB (the “Loan”), The term of the Loan is seven years, with a maturity date of November 1, 2016. The interest rate is a variable rate equal to 5% per annum above the floating base interest for loans of the same term promulgated by the People’s Bank of China. The average annual interest rate for the three months ended March 31, 2011 was approximately 6.84%. The Loan was designated to finance the construction of Dalian Befut’s planned specialty cable production lines with a production capacity of 4,000 KM. The Loan was secured by, among other liens, a first priority lien on Dalian Befut’s land use right and its building property ownership and guaranteed by, among other guarantees, Mr. Hongbo Cao and Mr. Tingmin Li, Dalian BEFUT’s two major shareholders.
  $ 14,964,600     $ 14,730,000  
                 
Total
  $ 14,964,600     $ 14,730,000  
                 
Less: Current portion
    763,500       294,600  
                 
Total noncurrent portion
  $ 14,201,100     $ 14,435,400  

Note 14 – Government Subsidy Income

Government subsidy income for the nine months ended March 31, 2011 and 2010 consists of the following:

   
March 31, 2011
   
March 31, 2010
 
Appropriation of Technology Innovation Subsidy
  $ 291,591     $ -  
Newly Identified Municipal Technical Center Subsidy
    75,075       -  
Invention Patent Subsidy
    901       -  
“Famous Trademark” subsidy
    -       293,280  
Marine cable business subsidy
    -       219,960  
Value added tax refund for employing physically-challenged workers
    109,492       172,556  
Amount included in discontinued operations
    (225,225 )     -  
Total
  $ 251,834     $ 685,796  

Note 15 –Earnings Per Share

The Company presents earnings per share on a basic and diluted basis. Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share are computed by dividing income available to common shareholders by the weighted average number of shares outstanding plus the dilutive effect of potential securities. All shares and per share data have been adjusted retroactively to reflect the recapitalization of the Company pursuant to the Share Exchange Agreement with Befut Nevada.
  
 
16

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 15 –Earnings Per Share (continued)
 
    For the Three Months Ended March 31,  
    2011     2010  
                 
Income from continuing operations, net of tax
  683,318     $ 691,610  
                 
Income from discontinued operations, net of tax
    120,996       -  
                 
Net Income
  $ 807,314     $ 691,610  
                 
Effect of Dilutive Securities – Convertible notes
    -       6,389  
                 
Income available to common stockholders
    807,314       697,999  
                 
Weighted average common shares
               
(denominator for basic earnings per share)
    29,715,640       29,512,784  
                 
Effect of dilutive securities:
    63,174       642,755  
                 
Weighted average common shares
               
(denominator for diluted earnings per share)
    29,778,814       30,155,539  
                 
Earnings per share—Basic:
               
Income from continuing operations
  $ 0.02     $ 0.03  
Discontinued operations
  $ 0.01     $ 0.00  
Net income
  $ 0.03     $ 0.03  
                 
Earnings per share—Diluted:
               
Income from continuing operations
  $ 0.02     $ 0.02  
Discontinued operations
  $ 0.01     $ 0.00  
Net income
  $ 0.03     $ 0.02  

   
For the Nine Months Ended March 31,
 
   
2011
   
2010
 
             
Income from continuing operations, net of tax
  $ 4,766,785     $ 2,376,077  
                 
Income from discontinued operations, net of tax
    241,498       -  
                 
Net Income
  $ 5,008,283     $ 2,376,077  
                 
Effect of Dilutive Securities – Convertible notes
    -       19,167  
                 
Income available to common stockholders
    5,008,283       2,395,244  
                 
Weighted average common shares
               
(denominator for basic earnings per share)
    29,715,640       29,512,784  
                 
Effect of dilutive securities:
    58,550       727,522  
                 
Weighted average common shares
               
(denominator for diluted earnings per share)
    29,774,190       30,240,336  
                 
Earnings per share—Basic:
               
Income from continuing operations
  $ 0.16     $ 0.08  
Discontinued operations
  $ 0.01     $ 0.00  
Net income
  $ 0.17     $ 0.08  
                 
Earnings per share—Diluted:
               
Income from continuing operations
  $ 0.16     $ 0.08  
Discontinued operations
  $ 0.01     $ 0.00  
Net income
  $ 0.17     $ 0.08  
  
 
17

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 16– Stockholders’ Equity And Related Financing Agreements

On March 13, 2009, as part of the reverse merger transaction, the Company acquired, from Befut BVI, 100% of the outstanding shares of common stock of Befut Nevada. In exchange, Befut BVI was issued 117,768,300 shares of the Company’s common stock, under a Share Exchange Agreement (“SEA”) pursuant to an exemption under Section 4(2) of the Securities Act of 1933, as amended, for issuances not involving a public offering. As a result of the transaction, Befut Nevada became a wholly-owned subsidiary of the Company.

On March 13, 2009, the Company completed a private financing totaling $500,000, for which convertible promissory notes were issued, with four accredited investors (the “March 2009 Financing”). Consummation of the March 2009 Financing was a condition to the completion of the share exchange transaction with Befut BVI and the Befut BVI Stockholders under the SEA. The securities offered in the March 2009 Financing were sold pursuant to a Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company and the investors named in the Purchase Agreement.

In accordance with the Purchase Agreement, the Company issued securities consisting of: (i) 3,130,869 shares of the Company’s common stock $0.001 par value per share in connection with the private financing; and (ii) Five (5) year warrants to purchase 720,076 shares of the Company’s common stock at an initial exercise price of $0.1916 per share.

On June 18, 2009, the Company effectuated a 1 for 4.07 reverse stock split of its outstanding common stock (the “Reverse Split”). The Reverse Split did not alter the number of shares of the common stock the Company is authorized to issue, but rather simply reduced the number of shares of its common stock issued
and outstanding. Any fractional shares issued as a result of the Reserve Split were rounded up. In addition, any shareholder owning at least 100 shares but less than 407 shares of the Company’s common stock on June 17, 2009, would own at least 100 shares after giving effect to the Reverse Split.

On March 13, 2009, the Company issued convertible notes in an aggregate principal amount of $500,000, at an annual interest of 15%. On March 12, 2010, the maturity date of the convertible notes, the Company repaid convertible notes in the amount of $370,000 and an interest payment of $55,500. The remaining convertible notes in the aggregate principal amount of $130,000 were converted into 200,000 shares of common stock of the Company at the conversion price of $0.65 per share on May 6, 2010.

During the year ended June 30, 2009, the Company received cash contributions from shareholders in the amount of $5,301,971 and intangible assets with an aggregate fair value of $11,383,050 in exchange for ownership, both of which were accounted for as additional paid-in-capital.  During the year ended June 30, 2009, two shareholders of the Company, Tingmin Li and Hongbo Cao, contributed two patents into the Company as increases to their respective capital contributions. The two patents were Intelligent Reactive Power Compensation and Automatic Protection Ni-mh Battery Screen, which were valued as $11,383,050 in total by a professional valuation firm.  The contribution was treated as capital transaction per ASC 505-10.

Note 17– Income Taxes

The Company is a Nevada corporation and conducts all of its business through its Chinese subsidiaries. The Company’s business is conducted solely in the PRC. As the Company is a U.S. holding company, it has not recorded any income for the six months ended March 31, 2011 and 2010, there was no provision or benefit for U.S. income tax purpose.
 
 
18

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 17– Income Taxes (continued)

The Company is governed by the Income Tax Law of the PRC concerning private-run enterprises, which are generally subject to a statutory tax rate of 25% and were previously, until January 2008, subject to a statutory tax rate of 33% (30% state income tax plus 3% local income tax) on income reported in the statutory statements after appropriate tax adjustments.

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the PRC (the “New CIT Law”), which became effective from January 1, 2008. Under the New CIT Law, the corporate income tax rate applicable to all companies, including both domestic and foreign-invested companies, is 25%, replacing the previous applicable tax rate of 33%. For the nine months ended March 31, 2011 and 2010, the income tax provision for the Company was $1,786,426 and $892,421, respectively.

The Company’s provision for income taxes consists of:

   
For the Three Months 
Years Ended March 31,
 
   
2011
   
2010
 
             
Current- PRC
  $ 364,396     $ 306,698  
Deferred
    -       -  
Total provision for income taxes
  $ 364,396     $ 306,698  

   
For the Nine Months 
Years Ended March 31,
 
   
2011
   
2010
 
             
Current – PRC
  $ 1,786,426     $ 892,421  
Deferred
    -       -  
Total provision for income taxes
  $ 1,786,426     $ 892,421  
 
A reconciliation of the provision for income taxes with amounts determined by applying the statutory income tax rate to income before income taxes is as follows:

   
For the Nine Months Ended March 31,
 
   
2011
   
2010
 
             
Computed tax @ statutory rate of 25% ($6,399,618*25% and $3,201,361*25% for March 31, 2011 and 2010, respectively)
  $ 1,599,905     $ 800,340  
                 
Entertainment expense add-back
    8,682       5,221  
Government subsidy income
    (27,376 )     -  
Deductions permitted for salaries paid to physically-challenged employees
    (13,249 )     (12,709 )
Additional deductions permitted for R&D costs
    (49,268 )     -  
Current year losses from PRC subsidiaries
    228,159       83,102  
Current year losses
    39,573       16,467  
                 
Total provision for income taxes
  $ 1,786,426     $ 892,421  
 
 
19

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

In July 2006, the FASB issued FASB Interpretation No.48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum probability threshold that a tax position must meet before a financial statement benefit is recognized. The minimum threshold is defined in FIN   48 as a tax position that is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The Company does not recognize any benefits in the financial statements for the nine month ended March 31, 2011 and 2010.

The Company has not paid income taxes for the three months ended March 31, 2011 although it has accrued a liability for income tax payable on its balance sheet.  To date, the Company has not been granted an extension to pay its income tax obligations, however, the Company is negotiating with the local tax authorities regarding the availability of tax exemptions relating to the manufacturing of specialty cables and the payment of any remaining income tax obligations after application of available exemptions.  In addition, the Company is applying for the electronic remittance of outstanding tax payments due the local tax bureau, if any. The Company expects a final determination on this matter and payment of any tax amounts due within two years.

Note 18 – Employee Welfare Plan

The Company has established an employee welfare plan in accordance with applicable Chinese laws and regulations. Full-time employees of the Company in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance and other welfare benefits are provided to employees. PRC labor regulations require the Company to accrue for these benefits based on a certain percentage of the employees’ salaries.

Note 19 – Risk Factors

The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the political, economic and legal conditions in the PRC. The Company's business may also be influenced by changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

Note 20 – Risk of Concentration and Credit Risk

During the nine months ended March 31, 2011, five vendors accounted for approximately 72% of the Company’s purchases of raw materials, while during the nine months ended March 31, 2010, ten major vendors accounted for approximately 89% of the Company’s purchases of raw materials. Total purchases from these vendors were $25.67 million and $14.17 million for the nine months ended March 31, 2011 and 2010, respectively.

Ten major customers accounted for approximately 37% and 65% of the net revenue for the nine months ended March 31, 2011 and 2010, respectively. Total sales to these customers were $14.26 million and $12.56 million, for the nine months ended March 31, 2011 and 2010, respectively.

Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.
 
 
20

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 21 – Supplemental Cash Flow Disclosures

The following is supplemental information relating to the consolidated statements of cash flows:

   
Nine Months Ended March 31,
 
   
2011
   
2010
 
             
Cash paid for interest
  $ 1,137,798     $ 497,071  
Cash paid for income taxes
  $ -     $ -  

Note 22 – Disposal of A Subsidiary – Dalian Marine

On February 21, 2011, the stockholders of Dalian Befut determined to sell Dalian Befut’s 86.6% equity interests in Dalian Marine Co. (“Dalian Marine”), an entity qualified to manufacture marine cables, as the result of recurring operating losses at Dalian Marine.  Dalian Marine has not conducted operating activities since its inception in April 2006, and, as a result, had incurred annual losses arising from its general and administrative expenses until it received governmental subsidies in 2010 totaling RMB 1.5 million.
 
On February 25, 2011, Dalian Befut completed the sale of its 86.6% equity interest to Mr. Fansheng Li, a noncontrolling shareholder of Dalian Marine prior to the sale and a non-affiliate of Dalian Befut and the Company, for $2,644,764 (RMB 17,320,000) in cash.  In connection with the sale, Dalian Marine transferred to WFOE the applicable certifications required to produce marine cables in order for WFOE to be eligible to manufacture marine cables. Notwithstanding the transfer of certifications, the purchaser, as the new majority shareholder of Dalian Marine, is able to obtain, pursuant to current industry policy in the PRC, new certificates for the manufacture of marine cables and/or wires from the relevant government(s) within a shorter time frame as compared to forming a new entity for the same purpose. The assets of Dalian Marine Co. as of the date of disposal consisted primarily of a $3 million receivable from Dalian Befut for the payment made by Dalian Marine on behalf of Dalian Befut for the purchase of the manufacturing facilities used by Dalian Befut; cash of approximately RMB17.8 million (approximately $2.7 million)  representing the registered capital of Dalian Marine; and  income in the  aggregate amount of RMB 1.5 million (approximately $231,900) for the three and nine months ended March 31, 2011, which was mainly comprised of the governmental subsidies received from two local governmental bureaus for research and development activities with respect to new cable and wire products.
 
The Company does not expect Dalian Befut’s sale of its entire equity interest in Dalian Marine to have any material impact on the Company’s financial position and operating results as Dalian Marine did not conduct any manufacturing activities. Further, Dalian Befut will continue to be WFOE’s OEM manufacturer and WFOE will be authorized to manufacture marine cable for the Company. The Company recognized a gain of $99,148 on the disposal of Dalian Marine. Such income was treated as an unusual item since it is deemed to be unusual in nature or would be infrequent in occurrence.
 
 
21

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)
 
Note 23 – Restatement to Reflect Correction of Accounting Errors

The effect of restatement is as follows:

Consolidated Statements of Cash Flows (Unaudited)
 
   
For the Nine
Months Ended
March 31,
2011
   
For the Nine
Months Ended
March 31,
2011
   
Effect of
Change
 
   
(Restated)
   
(Originally)
       
Cash flows from operating activities:
                 
Net Income
  $ 4,880,551     $ 4,880,551        
Adjustments to reconcile net income to net cash
                     
used in operating activities:
                     
Depreciation and amortization
    2,373,398       2,373,398        
Changes in current assets and current liabilities:
                     
Restricted cash
    (754,045 )     -       (754,045 )
Accounts receivable
    (6,831,456 )     (6,831,456 )        
Inventory
    (3,113,702 )     (3,113,702 )        
Trade notes receivable
    (647,603 )     (647,603 )        
Advance payments for inventory
    (664,108 )     (664,108 )        
Advance payment - R&D
    -       -          
Other current assets
    (3,327,626 )     (3,327,626 )        
Accounts payable and accrued expenses
    (203,318 )     (203,318 )        
Trade notes payable
    -       -          
Advances from customers
    1,875,604       1,875,604          
Income taxes payable
    1,755,806       1,755,806          
Other taxes payable
    (183,770 )     (183,770 )        
Other current liabilities
    587,314       587,314          
Total adjustments
    (9,133,506 )     (8,379,461 )     (754,045 )
                         
Net cash used in operating activities
    (4,252,955 )     (3,498,910 )     (754,045 )
                         
Cash flows from investing activities:
                       
Loans to unrelated parties
    (4,499,535 )     (4,499,535 )        
Due from related party
    481,987       481,987          
Advance payments for property and equipment
    29,183       29,183          
Additions to property and equipment
    (866,358 )     (866,358 )        
Additions to construction in progress
    (40,072 )     (40,072 )        
Acquisition of intangible assets
    (6,004 )     (6,004 )        
Gain on disposal of a subsidiary Dalian Marine, net of cash
    2,465,957       2,465,957          
Long-term investment
    -       -          
                         
Net cash used in investing activities
    (2,434,842 )     (2,434,842 )        
                         
Cash flows from financing activities:
                       
Restricted cash
    -       (754,045 )     754,045  
Bank loan security deposits
    (139,640 )     (139,640 )        
Proceeds of short-term bank loans
    11,391,555       5,115,585       6,275,970  
Repayment of short-term bank loans
    (6,275,970 )     -       (6,275,970 )
Convertible notes payable
    -       -          
Loans from unrelated parties
    1,201,200       1,201,200          
Proceeds (repayment) of long-term bank loans
    (300,300 )     (300,300 )        
Capital contribution from noncontrolling interest for BEFUT Zhong Xing
    -       -          
                         
Net cash provided by financing activities
    5,876,845       5,122,800       754,045  
                         
Effect of foreign currency translation on cash
    (61,563 )     (61,563 )        
                         
Net increase (decrease) in cash and cash equivalents
    (872,515 )     (872,515 )        
                         
Cash and cash equivalents beginning
    1,319,173       1,319,173          
                         
Cash and cash equivalents ending
  $ 446,658     $ 446,658          
 
 
22

 

BEFUT INTERNATIONAL CO., LTD.

Notes to Consolidated Financial Statements
 (Unaudited)

Note 23 – Restatement to Reflect Correction of Accounting Errors (Continued)
  
   
For the Nine
Months Ended
March 31,
2010
   
For the Nine
Months Ended
March 31,
2010
   
Effect of
Change
 
   
(Restated)
   
(Originally)
       
Cash flows from operating activities:
                 
Net Income
  $ 2,308,940     $ 2,308,940        
Adjustments to reconcile net income to net cash
                     
used in operating activities:
                     
Depreciation and amortization
    1,087,427       1,087,427        
Changes in current assets and current liabilities:
                     
Restricted cash
    586,000       -       586,000  
Accounts receivable
    (4,510,985 )     (4,510,985 )        
Inventory
    (743,916 )     (743,916 )        
Trade notes receivable
    -       -          
Advance payments for inventory
    (7,726,696 )     (7,726,696 )        
Advance payment - R&D
    155,438       155,438          
Other current assets
    (815,103 )     (815,103 )        
Accounts payable and accrued expenses
    5,871,576       5,871,576          
Trade notes payable
    (1,173,120 )     (1,173,120 )        
Advances from customers
    290,209       290,209          
Income taxes payable
    892,421       892,421          
Other taxes payable
    (37,983 )     (37,983 )        
Other current liabilities
    59,082       59,082          
Total adjustments
    (6,065,650 )     (6,651,650 )     586,000  
                         
Net cash used in operating activities
    (3,756,710 )     (4,342,710 )     586,000  
                         
Cash flows from investing activities:
                       
Loans to unrelated parties
    1,234,288       1,234,288          
Due from related party
    -       -          
Advance payments for property and equipment
    (642,672 )     (642,672 )        
Additions to property and equipment
    (2,016,175 )     (2,016,175 )        
Additions to construction in progress
    (2,450,795 )     (2,450,795 )        
Acquisition of intangible assets
    (6,453 )     (6,453 )        
Gain on disposal of a subsidiary Dalian Marine, net of cash
    -       -          
Long-term investment
    2,933       2,933          
                         
Net cash used in investing activities
    (3,878,874 )     (3,878,874 )        
                         
Cash flows from financing activities:
                       
Restricted cash
    -       586,000       (586,000 )
Bank loan security deposits
    (681,876 )     (681,876 )        
Proceeds of short-term bank loans
    5,279,040       -       5,279,040  
Repayment of short-term bank loans
    (8,065,200 )     (2,786,160 )     (5,279,040 )
Convertible notes payable
    (370,000 )     (370,000 )        
Loans from unrelated parties
    2,708,908       2,708,908          
Proceeds (repayment) of long-term bank loans
    9,188,462       9,188,462          
Capital contribution from noncontrolling interest for BEFUT Zhong Xing
    777,192       777,192          
                         
Net cash provided by financing activities
    8,836,526       9,422,526       (586,000 )
                         
Effect of foreign currency translation on cash
    4,314       4,314          
                         
Net increase (decrease) in cash and cash equivalents
    1,205,256       1,205,256          
                         
Cash and cash equivalents beginning
    210,301       210,301          
                         
Cash and cash equivalents ending
  $ 1,415,557     $ 1,415,557          
 
 
23

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

The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes to those financial statements appearing elsewhere in this report.

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

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

Unless the context indicates otherwise, as used in the following discussion, the words “Company”, “we,” “us,” and “our,” each refer to (i) BEFUT International Co., Ltd. (f/k/a Frezer, Inc.), a corporation incorporated in the State of Nevada; (ii) BEFUT Corporation, a corporation incorporated in the State of Nevada and a wholly owned subsidiary of the Company (“Befut Nevada”); (ii) Hongkong BEFUT Co., Ltd. (“Befut Hongkong”), a wholly-owned subsidiary of Befut Nevada, incorporated under the laws of Hong Kong; (iii) Befut Electric (Dalian) Co., Ltd. (“WFOE”), a corporation incorporated under the laws of the People’s Republic of China (the “PRC”), and a wholly-owned subsidiary of Befut Hongkong; (vi) Dalian Befut Wire and Cable Manufacturing Co., Ltd. (“Dalian Befut”), a corporation incorporated under the laws of the PRC, which is a captive manufacturer of WFOE pursuant to a series of contractual agreements; (vii) Dalian Marine Cable Co., Ltd. (“Befut Marine”), a corporation incorporated under the laws of the PRC, which was 86.6% owned by Dalian Befut as of February 25, 2011; (viii) Dalian Befut Zhong Xing Switch Co., Ltd. (“Befut Zhong Xing”), a corporation incorporated under the laws of the PRC, and that is 73.5% owned by Dalian Befut; and (ix) Dalian Yuansheng Technology Co., Ltd. (“Dalian Yuansheng”), a corporation incorporated under the laws of the PRC, and that is 93.3% owned by Dalian Befut.

Unless the context otherwise requires, all references to (i) “PRC” and “China” are to the People’s Republic of China; (ii) “U.S. dollar,” “$” and “US$” are to United States dollars; and (iii) “RMB”, “Yuan” and Renminbi are to the currency of the PRC or China.

Overview

We believe that we are one of the most competitive manufacturers of specialty cables in northeastern China.  For the quarter ended March 31, 2011, approximately 40% of our revenues were generated from traditional cable, about 57% of revenues were generated from specialty cable and about 3% of revenues were generated from our switch application business. Our cable products consist of (i) traditional electric power system cable and (ii) an assortment of specialty cable, including marine cable, mining specialty cable, and petrochemical cable.  Our switch application business consists mainly of high and low voltage distribution cabinet switches and crane electronic control switches, which products complement our cable product offerings.

 
24

 
 
OEM Agreements
 
We conduct substantially all of our operations through, and generate substantially all of our revenues from Dalian Befut, pursuant to an Original Equipment Manufacturer Agreement, dated February 16, 2009 (the "Manufacturing Agreement") with Dalian Befut, pursuant to which (i) Dalian Befut is the exclusive manufacturer of cable and wire products for WFOE, and may not manufacture products for any other third party without the written consent of WFOE; (ii) WFOE provides all the raw materials and advance related costs to Dalian Befut, as well as provides the design requirements of the products to be manufactured; and (iii) in no event may Dalian Befut use the arrangements under the Manufacturing Agreement for commercial or noncommercial marketing or promotional activities in any form. In addition, on February 16, 2009, WFOE and Dalian Befut entered into (i) an Intellectual Property Rights License Agreement, pursuant to which WFOE shall be permitted to use the intellectual property rights such as trademark, patents and knowhow for the marketing and sale of the products (the “IP Agreement”); and (ii) a Non-competition Agreement, pursuant to which Dalian Befut shall not compete against WFOE (the “Non compete Agreement”, together with the IP Agreement and Manufacturing Agreement, collectively, the “OEM Agreements”). We have no direct ownership interest in Dalian Befut nor do we have voting control of any shares of Dalian Befut.  As a result, these OEM Agreements may not be as effective in providing us with control over Dalian Befut as direct ownership of Dalian Befut would be.  For example, Dalian Befut may breach the OEM Agreements by deciding not to manufacture products for WFOE, and consequently the Company.  In the event of any such breach, we would have to rely on legal remedies under PRC law, which may not always be available or effective to enforce our rights, particularly in light of uncertainties in the PRC legal system.  To mitigate such a risk, WFOE has the exclusive right under the OEM Agreements, exercisable in its sole discretion, to purchase all or part of the assets and/or equity of Dalian Befut.
 
All cash flows generated under the OEM Agreements are maintained in the custody of Dalian Befut instead of in the custody of the Company.  There are no prohibitions under applicable PRC law on the transfer of cash from Dalian Befut to WFOE.  Accordingly, except for the relevant PRC laws, regulations and government policies on capital outflow, as disclosed under Item 1A - Risk Factors of our Annual Report on Form 10-K, as amended, no risks exist as to the movement of cash balances from the Company’s PRC operating subsidiaries or Dalian Befut up to the Company.  Transfer of cash may be made from Dalian Befut to WFOE and up to the Company, when necessary to meet the Company’s cash requirements, including, for example, to satisfy any debt obligations or make cash dividends. Such transfers must be made in compliance with applicable PRC laws regarding, among other things, currency controls, tax and payment of dividends.
 
Recent Development

On February 25, 2011, Dalian Befut sold its entire 86.6% equity interest in Befut Marine, a company engaged in the marketing and production of marine cables, to Mr. Fansheng Li, a noncontrolling shareholder of Befut Marine, for RMB 17,320,000 (approximately $2.67 million) in cash.  As part of the transaction, the applicable certifications required for producing marine cables that were held by Befut Marine were transferred to WFOE.  Dalian Befut, as the captive manufacturer for WFOE, will manufacture marine cable for the Company in accordance with the Manufacturing Agreement.  As a result, the Company has determined that Dalian Befut’s sale of its entire equity interest in Befut Marine does not have any material adverse effect on the Company’s operation, business and financial position.

Results of Operations

Quarter and Nine Months Ended March 31, 2011 Compared to the Quarter and Nine Months Ended March 31, 2010

Item
 
Quarter
ended
March 31,
2011
   
Quarter
ended
March 31,
2010
   
%
Change
   
Nine months
ended March
31, 2011
   
Nine months
ended March
31, 2010
   
%
Change
 
Sales
 
$
9,443,346
   
$
6,708,410
     
41
%
 
$
40,245,320
   
$
19,318,113
     
108
%
Cost of sales
 
$
6,945,831
   
$
5,002,973
     
39
%
 
$
29,570,863
   
$
14,101,070
     
110
%
Gross profit
 
$
2,497,515
   
$
1,705,437
     
46
%
 
$
10,674,457
   
$
5,217,043
     
105
%
Total operating expenses
 
$
1,129,931
   
$
742,646
     
52
%
 
$
3,333,441
   
$
1,809,896
     
84
%
Total other income/(expenses)
 
$
(367,278
)
 
$
(25,499
)
   
1,340
%
 
$
(941,398
)
 
$
(205,786
)
   
357
%
Net income
 
$
782,767
   
$
630,594
     
24
%
 
$
4,880,551
   
$
2,308,940
     
111
%
Gross profit margin
   
26.45
%
   
25.42
%
   
1.03
%
   
26.52
%
   
27.01
%
   
(0.49
)%
Basic earnings per share
   
0.03
     
0.03
     
0
%
   
0.17
     
0.08
     
113
%
Diluted earnings per share
   
0.03
     
0.02
     
50
%
   
0.17
     
0.08
     
113
%
Weighted average number of common shares outstanding:
                                               
Basic
   
29,715,640
     
29,512,784
     
0.69
%
   
29,715,640
     
29,512,784
     
0.69
%
Diluted
   
29,778,814
     
30,155,539
     
(1.25
)%
   
29,774,190
     
30,240,336
     
(1.54
)%
 
 
25

 
 
Three Months Ended March 31, 2011 Compared with Three Months Ended March 31, 2010

Sales

Our sales for the quarter ended March 31, 2011 were $9,443,346, an increase of $2,734,936, or 41%, as compared to the quarter ended March 31, 2010. Approximately 32% of the total increased sales was attributable to increased sales of our traditional cable products, 63% was attributable to increased sales of our specialty cable products and 5% was attributable to increased sales of our switch appliances.

The increase in sales was primarily due to two factors: (i) an approximately 20% increase in our total sales volume driven by the increased demand for petrochemical and mining cable, and (ii) higher sales prices of our cable products and switch appliances which were primarily the result of  an approximately 21% increase in the average price of copper, our primary raw material, in the quarter ended March 31, 2011, which increase we passed on to our customers.  Copper constitutes approximately 70%-80% of the raw material components in our cable products.

The percentage of total sales that was attributable to sales of specialty cable, traditional cable and switch appliances  for the quarter ended March 31, 2011 was approximately 57%, 40% and 3%, representing an increase of 3%, a decrease of 3% and approximately no change, respectively,  as compared to the quarter ended March 31, 2010.   Fluctuations in product percentages are mainly due to the changes in the product requirements of our customers.
 
Cost of Sales

Cost of sales includes the expenses incurred to produce inventory for sale, including raw materials, direct labor, depreciation of manufacturing facilities and machinery, overheads, amortization of land use right  as well as changes in reserves for shrinkage and inventory obsolescence. Our cost of sales for the quarter ended March 31, 2011 was $6,945,831, representing an increase of $1,942,858, or 39%, as compared to the quarter ended March 31, 2010.

Gross Profit

Gross profit for the quarter ended March 31, 2011 was $2,497,515, representing an increase of $792,078, or 46%, as compared to the quarter ended March 31, 2010. Gross profit margin was 26.45% for the quarter ended March 31, 2011, representing an increase of 1.03%, as compared to the quarter ended March 31, 2010.  The increase of gross profit margin was primarily because our sales for the quarter ended March 31, 2011 included a higher percentage of specialty cable products, which have a significantly higher average gross margin than that of our other products, as compared to the same period in 2010. The gross profit margin of each category of our products for the quarter ended March 31, 2011 was approximately 36% for specialty cable, 15% for traditional cable and 15% for switch appliances, as compared to gross profit margins of approximately 32% for specialty cable, 18% for traditional cable and 26% for switch applicances for the quarter ended March 31, 2010.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of salaries and bonuses for sales personnel, advertising and promotion expenses, freight charges, related compensation and professional fees, and amortization expenses. Selling expenses were $146,114 in the quarter ended March 31, 2011, as compared to $11,300 in the quarter ended March 31, 2010, representing an increase of $134,814, or 1,193%. The increase in selling expenses was mainly due to the increase in transportation expenses, entertainment expenses and travel expenses. General and administrative expenses were $983,787 for the quarter ended March 31, 2010, representing an increase of $252,441, or 35%, as compared to the quarter ended March 31, 2010.  The increase of approximately $180,000 of general and administrative expenses from WFOE was mainly due to the manufacturing overhead recorded as general and administrative expense instead of cost of sales since WFOE did not generate any sales in January and February of 2011.
 
Income from Operations

Our operating income was $1,367,584 for the quarter ended March 31, 2011, representing an increase of $404,793, or 42%, as compared to $962,791 for the quarter ended March 31, 2010.  This increase was a direct result of a significant increase in the gross profit of specialty cables,  our leading product.
 
 
26

 
 
Government Subsidy

In the quarter ended March 31, 2011, we received subsidies from various PRC governmental bureaus in the aggregate amount of $84,352, representing a decrease of $246,786, or 75%, as compared to subsidies of $331,138 received in the quarter ended March 31, 2010. The subsidies received by the Company in the quarter ended March 31, 2011 were mainly Value Added Tax refunds.

Interest Expenses

Interest expense was $434,063 for the quarter ended March 31, 2011, representing an increase of $72,383, or 20%, as compared to $361,680 for the quarter ended March 31, 2010. The increase was mainly because our short term bank loans for the quarter ended March 31, 2011 increased by approximately $6.1 million, as compared to approximately $5.3 million in the same period of 2010.
 
Income Taxes

In the quarter ended March 31, 2011, our business operations were conducted solely by WFOE, Dalian Befut and its subsidiaries, and, as such, we were governed by the PRC Enterprise Income Tax Laws (the “EIT Law”). China enterprise income tax is calculated based on taxable income determined under Chinese generally accepted accounting principles. In accordance with the EIT Law, a Chinese domestic company is subject to taxes, including but not limited to: (i) an enterprise income tax rate of 25% and (ii) a value added tax of 17% on the goods sold.

Provision for income taxes was $364,396 for the quarter ended March 31, 2011, representing an increase of $57,698, or 19%, compared to $306,698 for the quarter ended March 31, 2010.

Net Income

Net income for the quarter ended March 31, 2011 was $782,767, representing an increase of $152,173, or 24%, as compared to net income of $630,594 for the quarter ended March 31, 2010. The increase was mainly attributable to the increase of $404,793 in income from operations and the increase of $146,857 in income from discontinued operations, which was partially offset by a decrease in subsidy income of $246,789 and an increase in income tax provision of $57,698.

Nine Months Ended March 31, 2011 Compared with Nine Months Ended March 31, 2010

Sales

Our sales for the nine months ended March 31, 2011 were $40,245,320, representing an increase of $20,927,207, or 108%, as compared to the nine months ended March 31, 2010. Approximately 53% of the total increased sales was attributable to increased sales of our traditional cable products, 43% was attributable to increased sales of our specialty cable products and 4% was attributable to increased sales of our switch appliance business.

The increase in sales was primarily due to two factors: (i) an approximately 96% increase in our total sales volume driven by the increased demand for petrochemical and mining cable, and (ii) higher sales prices of our cable products and switch appliances, which were primarily the result of an approximately 12% increase in the average price of copper, our primary raw material, in nine months ended March 31, 2011, which we passed on to our customers.  Copper constitutes approximately 70%-80% of the raw material components in our cable products.

 The percentage of total sales that was attributable to sales of specialty cable, traditional cable and switch appliances for the nine months ended March 31, 2011 was approximately 50%, 46% and 4%, representing a decrease of about 7%, an increase about 7% and approximately no change, respectively, as compared to the nine months ended March 31, 2010.  Fluctuations in product percentages are mainly due to the changes in the product requirements of our customers.

Cost of Sales

Cost of sales includes the expenses incurred to produce inventory for sale, including raw materials, direct labor, depreciation of manufacturing facilities and machinery, overheads, amortization of land use right  as well as changes in reserves for shrinkage and inventory obsolescence. Our cost of sales for the nine months ended March 31, 2011 was $29,570,863, an increase of $15,469,793, or 110%, as compared to the nine months ended March 31, 2010.
 
 
27

 
 
Gross Profit

Gross profit for the nine months ended March 31, 2011 was $10,674,457, representing an increase of $5,457,414, or 105%, as compared to the nine months ended March 31, 2010. Gross profit margin was 26.52% for the nine months ended March 31, 2011, representing a decrease of 0.48%, as compared to the nine months ended March 31, 2010.  The slight decrease of gross profit margin was primarily  because our sales for the quarter ended March 31, 2011 included  approximately 7% less specialty cable products, which have a significantly higher average gross margin than that of our other products, as compared to the same period in 2010. The gross profit margin of each category of our products for the nine months ended March 31, 2011 was approximately 36% for specialty cable, 18% for traditional cable and 8% for switch appliances [as compared to gross profit margins of approximately 35% for specialty cable, 17% for traditional cable and 11%] for switch applicances for the nine months ended March 31, 2010.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of salaries and bonuses for sales personnel, advertising and promotion expenses, freight charges, related compensation and professional fees, and amortization expenses. Selling expenses were $334,393 in the nine months ended March 31, 2011, as compared to $48,001 in the nine months ended March 31, 2010, representing an increase of $286,392, or 597%. The increase in selling expenses was mainly due to the increase in transportation expenses, entertainment expenses and travel expenses, which in line with the increase in our sales. General and administrative expenses were $2,999,048 for the nine months ended March 31, 2011, an increase of $1,237,153, or 70%, as compared to the nine months ended March 31, 2010. The increase of general and administrative expenses was mainly due to the increase in expenses from Dalian Yuansheng, Befut Zhong Xing and WFOE for approximately $420,000, $170,000 and $360,000, respectively, compared to the same period in 2010. Dalian Yuansheng, in which the Company acquired its equity interests in July 2010, had general and administrative expenses comprised mainly of salary, social insurance, new product inspections and transportation expenses. The increased expenses from Befut Zhong Xing was mainly due to the increase in transportation expenses and entertainment expenses. The increased expenses from WFOE was mainly due to the manufacturing overhead recorded as general and administrative expense instead of cost of sales since WFOE did not generate any sales in January and February of 2011 and also the increases in salary and social insurance.

Income from Operations

Our operating income was $7,341,016 for the nine months ended March 31, 2011, an increase of $3,933,869, or 115%, as compared to $3,407,147 for the nine months ended March 31, 2010.  This increase was a direct result of a significant increase in the gross profit of specialty cables, our leading product.

Government Subsidy

In the nine months ended March 31, 2011, we received subsidies from various PRC governmental bureaus in the aggregate amount of $251,834, representing a decrease of $433,962, or 63%, as compared to subsidies of $685,796 received in the nine months ended March 31, 2010.  A portion of the subsidies in the amount of $109,492 received by the Company in the nine months ended March 31, 2011 was from a Value Added Tax refund.

Interest Expenses

Interest expense was $1,159,430 for the nine months ended March 31, 2011, an increase of $656,518, or 130%, as compared to $502,912 for the nine months ended March 31, 2010.  The increase of the interest expense was mainly due to a 7 year long-term bank loan in the amount of $14.6 million obtained from the PRC National Development Bank Joint Equity Corporation the end of  2009 and  the significant increase of average short-term bank loans for the nine months ended March 31, 2011 as compared to the nine months ended March 31, 2010. Meanwhile, the interest expense was recorded for the nine months ended March 31, 2011, but capitalized for the same period in 2010.
 
Income Taxes

In the nine months ended March 31, 2011, our business operations were conducted solely by WFOE, Dalian Befut and its subsidiaries, and, as such, we were governed by the PRC Enterprise Income Tax Laws (the “EIT Law”). China enterprise income tax is calculated based on taxable income determined under Chinese generally accepted accounting principles. In accordance with the EIT Law, a Chinese domestic company is subject to taxes, including but not limited to: (i) an enterprise income tax rate of 25% and (ii) a value added tax of 17% on the goods sold.

Provision for income taxes was $1,786,426 for the nine months ended March 31, 2011, an increase of $894,005, or 100%, as compared to $892,421 for the nine months ended March 31, 2010.

 
28

 
 
Net Income

Net income for the nine months ended March 31, 2011 was $4,880,551, an increase of $2,571,611, or 111%, as compared to net income of $2,308,940 for the nine months ended March 31, 2010. The increase was mainly attributable to the increase of $3,933,869 in income from operations and the increase of $267,359 in income from discontinued operations, which was partially offset by an increase in interest expense of $823,731 and an increase in income tax provision of $894,005.

Liquidity and Capital Resources

Selected Measures of Liquidity and Capital Resources

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

(dollars in thousands, except ratios)
 
March 31,
2011
   
June 30,
2010
 
             
Cash and cash equivalents and restricted cash
 
$
2,438
   
$
2,500
 
                 
Working capital
 
$
10,467
   
$
4,833
 
                 
Ratio of current assets to current liabilities
 
1.4:1
   
1.4:1
 

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

Our approximately $5.63 million increase in working capital from June 30, 2010 to March 31, 2011 was primarily due to the increase of $16.42 million of current assets, which was partially offset by the increase of $10.8 million of current liabilities. The increase of current assets mainly includes the increase of $7.0 million of account receivables, and the increase of $3.25 million of inventory. The increase of current liabilities mainly includes the increase of $5.4 million of short term bank loans and the increase of $1.9 million of income tax payable.

We intend to use our available funds as working capital and to expand and develop our current business operations.  We believe that our available funds will provide us with sufficient capital for at least the next twelve months; however, to the extent we expand our operations or make acquisitions, we may require additional funding,  which may include debt and/or equity financing.  There can be no assurance that any additional financing will be available on terms acceptable to us, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

Cash Flows

We had a net decrease of $872,515 in cash and cash equivalents from June 30, 2010 to March 31, 2011, as compared to a net increase of $1,205,256 from June 30, 2009 to March 31, 2010, respectively. The following table summarizes such changes:

   
For the nine months ended
 
   
March 31, 2011
   
March 31, 2010
 
Net cash used in operating activities
 
$
(4,252,955
)
 
$
(3,756,710
)
Net cash used in investing activities
 
$
(2,434,842
)
 
$
(3,878,874
)
Net cash used in financing activities
 
$
5,876,845
   
$
8,836,526
 
Net increase (decrease) in cash, cash equivalents
 
$
(872,515
)
 
$
1,205,256
 

Operating Activities

           We used net cash of $4,252,955 for our operating activities in the nine months ended March 31, 2011, representing a decrease of $496,245, or 13.2 %, as compared net cash of $3,756,710 used in the nine months ended March 31, 2010. Although the net income for the nine months ended March 31, 2011 was $4,880,551, representing a significant increase of $2,571,611, or 111%, as compared to net income of $2,308,940 for the nine months ended March 31, 2010, we still used net cash of $4,252,955 for our operating activities. The negative operating cash flow was primarily due to the increase of accounts receivable and inventory that we incurred as a result of significantly higher sales, as described earlier. The increase of approximately $2.4 million of inventory was mainly due to the increase of raw materials and finished goods in our expanded manufacturing operations.

 
29

 
 
Investing Activities

           The net cash used in our investment activities in the nine months ended March 31, 2011 was $2,434,842, representing a decrease of $1,444,032, or 37%, as compared to $3,878,874 of net cash used in investment activities in the nine months ended March 31, 2010. The decrease was mainly due to, among other things, less cash used to pay construction and equipment expenses, and cash in the amount of approximately $2.67 million received from the sale of Dalian Befut’s entire equity interest in Befut Marine, which was partially offset by cash outflows, such as loans for approximately $4.5 million made to unrelated parties, Dalian Haide Electric Power Equipment Co., Ltd., one of our research and development partners, and Dalian Chenglian Electrical Installation Engineering Co., Ltd., one of our customers, to fund their working capital requirements.  As of March 31, 2011, we had $5,668,683 in outstanding in loans to unrelated parties, as described in Note 5 to our consolidated financial statements.

Financing Activities

           The net cash provided by our financing activities in the nine months ended March 31, 2011 was $5,876,845, representing a decrease of 2,959,681, or 33%, as compared to $8,836,526 of net cash used in the nine months ended March 31, 2010. The decrease was mainly due to approximately $1.6 million less in long and short term bank loans and approximately $1.5 million less in borrowings from unrelated parties in the nine months ended March 31, 2011, as compared in the nine months ended March 31, 2010. Approximately $5.1 million in cash provided by financing activities was primarily from additional short term bank loans obtained during the period.

Financial Obligations

           As of March 31, 2011, our outstanding loans were as follows:

Creditors
 
Loan Amount
 
Interest Rate
   
Term
 
Maturity Date
                   
Harbin Bank
 
$
3,054,000
 
7.55
%*
 
1 year
 
09/13/11
                     
Bank of Dalian
 
$
1,527,000
 
7.55
%*
 
1 year
 
11/10/11
                     
Bank of Dalian
 
$
1,527,000
 
6.39
%^
 
1 year
 
11/22/11
                     
Xinhui Town Bank
 
$
1,511,730
 
8.72
%+
 
1 year
 
10/20/11
                     
Bank of East Asia
 
$
1,527,000
 
6.96
%*
 
6 months
 
06/30/11
                     
 Bank of East Asia
 
$
2,290,500
 
6.96
%*
 
6 months
 
07/10/11
                     
China Development Bank
 
$
14,964,600
 
6.72
%#
 
7 years
 
11/01/16

*  Variable interest rate equal to 30% per annum above the floating base rate issued by the People’s Bank of China.

^  Variable interest rate equal to 10% per annum above the floating base rate issued by the People’s Bank of China.

+  Variable interest rate equal to 50% per annum above the floating base rate issued by the People’s Bank of China.

#  Variable interest rate equal to 5% per annum above the floating base rate issued by the People’s Bank of China.

Accounts Receivable

           The balance of our accounts receivable was $16,279,594, net of allowance for doubtful accounts of $86,349, as of March 31, 2011, as compared to $9,292,310, net of allowance for doubtful accounts of $83,295, as of June 30, 2010. The days’ sales in receivables for the last twelve months ended March 31, 2011 were 101 days, compared to 103 days for the fiscal year ended June 30, 2010.  The Company’s sales strategy has shifted to large customers since the Company moved its manufacturing operations to its Changxing Island facility. As a result, the credit terms are longer for large customers, such as China National Petroleum Corporation. As at March 31, 2011, the balance for accounts receivable with the aging of more than one year was approximately $193,857. The Company believes the allowance for doubtful accounts was adequate.
 
 
30

 
 
Inventories

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

(dollars)
 
March 31,
2011
   
June30,
2010
 
Category
           
Raw materials
 
$
2,419,354
   
$
1,093,193
 
Work-in-process
   
1,071,458
     
323,275
 
Finished goods
   
2,308,386
     
1,127,321
 
Total inventories
 
$
5,799,198
   
$
2,543,789
 

We had total inventory of $5,799,198 as of March 31, 2011, representing an increase of $3,255,409, or 128%, as compared to inventory of $2,543,789 as of June 30, 2010. Days’ sales in inventory for the last twelve months ended March 31, 2011 were 37 days, compared to 40 days for the fiscal year ended June 30, 2010.

Off-Balance Sheet Arrangements

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

Foreign Currency Exchange

During the 3 month period ended March 31, 2011, the U.S. Dollar and RMB exchange rate fluctuated from RMB 6.6227 to 1 U.S. Dollar to RMB 6.5564 to 1 U.S. Dollar, an increase of approximately 1% in the value of the RMB.  As a result of the minimum appreciation of the RMB during this period, the Company believes that currency fluctuations have not had a material impact on the Company’s cash flows, revenues and financial condition.

Critical Accounting Policies and Use of Estimates

Management's discussion and analysis of its financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“US GAAP”). Our financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. See Note 2 to our consolidated financial statements, “Summary of Significant Accounting Policies.” We believe that the following paragraphs reflect the more critical accounting policies that currently affect our financial condition and results of operations.

Use of Estimates and Assumption

The preparation of consolidated financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include allowance for doubtful accounts and income taxes. Actual results could differ from those estimates.

Revenue Recognition

The Company derives its revenues primarily from the design, manufacture and sale of industrial wires and cables in the PRC. In accordance with the provisions of ASC Topic 605, revenue is recognized when products are shipped, title and risk of loss is passed to the customers and collection is reasonably assured. Payments received before the above criteria are satisfied are recorded as advance from customers.

Cost of Sales

Cost of sales includes the expenses incurred to produce inventory for sale, including raw materials, direct labor, depreciation of manufacturing facilities and machinery, overheads, amortization of land use right  as well as changes in reserves for shrinkage and inventory obsolescence.
 
 
31

 
 
Cash and Cash Equivalents

In accordance with FASB ASC Topic 230, "Statement of Cash Flows", the Company considers all highly liquid instruments with original maturities of three months or less to be cash equivalents.

Accounts Receivable

Accounts receivable are recorded net of allowance for doubtful accounts. The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts.  Periodically, management assesses customer credit history and relationships as well as performs accounts receivable aging analysis. Based on the results, management determines whether certain balances are deemed uncollectible at the end of period. Using its past collection experience, the Company reserves 0.3% of accounts receivable balances that have been outstanding for less than one year, 3% of accounts receivable balances that have been outstanding for more than one year but less than two years, and 10% of accounts receivable balances that have been outstanding for more than two years. The Company generally provides customers with credit terms of three to four months.  However, we provide our “large” customers, those with average annual specialty cable orders of over $7 million, with credit terms of five to six months.  We generally do not conduct further business with customers that have significant unpaid accounts receivable balances beyond 12 months, unless we receive advance payments from such customers.  As of March 31, 2011, the amount of our receivables ages less than one year, 1-2 years and more than two years was $16,172,085, $190,236 and $3,621, respectively.

Consolidation
 
Pursuant to ASC 810-10-15-14, an entity is deemed to be a variable interest entity, or VIE, and thus to be consolidated by its primary beneficiary, if, by intention, any one of the following conditions is present:
 
 
A.
The total equity investment at risk in the legal entity to be consolidated is insufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, including equity holders; or
 
 
B.
As a group, holders of the equity investment at risk lack any one of the following characteristics of a controlling financial interest:
 
 
 
1. The power, through voting rights or similar rights to direct the activities of an entity that most significantly impact that entity’s economic performance.
 
 
 
2. The obligation to absorb the expected losses of the legal entity. Such an obligation does not exist if the shareholders/investors are directly or indirectly protected from losses or are guaranteed a return on their investment by the legal entity itself or by other parties involved with the legal entity.
 
 
 
3. The right to receive expected residual returns of the legal entity. Such right is not considered to be present if the residual returns are capped by the legal entity's governing documents or by other arrangements with other variable interest holders or the legal entity itself.

Under the OEM Agreements, Dalian Befut can only manufacture products for WFOE and cannot compete with WFOE in the same or similar lines of business. Dalian Befut is a captive manufacturer with the sole business purpose of providing manufacturing services to WFOE and is solely dependent on the business provided by WFOE, its primary beneficiary. As WFOE controls all of the potential and future risks and benefits of Dalian Befut, WFOE has the power to significantly impact the economic performance of Dalian Befut. Furthermore, while Messrs. Hongbo Cao and Tingmin Li are the two controlling shareholders of Dalian Befut, collectively owning an aggregate of 98.6% of the equity interests in Dalian Befut, the Company believes that, due to the OEM Agreements, WFOE, instead of Messrs. Cao and Li, has the power to direct the activities of Dalian Befut to significantly impact the economic performance of Dalian Befut. Based on the aforementioned assessment, Dalian Befut is a VIE of the Company under ASC 810-10-15-14-B.1. above, and as such, is consolidated into the Company. Although the Company is only required to meet one criteria under ASC 810-10-15-14 in order to consolidate Dalian Befut, the Company believes that facts and circumstances exist that would allow it to meet certain other qualifying criteria set forth in ASC 810-10-15-14.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide information required by this item.

 
32

 
Item 4.
Controls and Procedures
 
Disclosure Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer reviewed and evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended.  Based on their evaluation, in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 as originally filed with the SEC on May 13, 2011, our Chief Executive Officer and Chief Financial Officer each concluded that, as of March 31, 2011, our disclosure controls and procedures were effective.

However, in connection with the preparation of our responses to comments received from the SEC, we identified certain reporting errors and omissions in our previously issued financial statements.  We subsequently determined that a restatement was required for our consolidated financial statements for the quarter ended March 31, 2011.  As a result of the foregoing, management determined that a material weakness existed with respect to our financial reporting.  This weakness was a result of our insufficient disclosure of certain required information by inexperienced staff, which required the restatement of our consolidated financial statements as of and for the quarter ended March 31, 2011.

As a result of the material weakness identified with respect to our financial reporting, our Chief Executive Officer and Chief Financial Officer have reevaluated our disclosure controls and procedures and have concluded that our disclosure controls and procedures were not effective as of March 31, 2011. As of the date of this amended report on Form 10-Q/A, we are undertaking steps to correct the aforementioned material weakness by:

 
Establishing policies and procedures of transaction level and type to improve our internal control environment;
 
 
Implementing a financial closing process check list including major book closure steps to perform consolidation and reviews; and
 
 
Recruiting qualified accounting professionals with sufficient US GAAP knowledge to enhance the quality of our financial reporting preparation.
 
Changes in Internal Control Over Financial Reporting
 
In our Annual Report on Form 10-K for the fiscal year ended June 30, 2010, our Chief Executive Officer and Chief Financial Officer concluded that under the framework set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, our internal control over financial reporting was effective. However, due to the restatement of our financial statements for the year ended June 30, 2010, for the quarter ended September 30, 2010, for the quarter ended December 31, 2010 and for the quarter ended March 31, 2011 as described above, our Chief Executive Officer and Chief Financial Officer reassessed that conclusion and determined that there existed a material weakness in our internal controls over financial reporting as of March 31, 2011. Management has determined that the design and operation of internal control over financial reporting that we had in place at December 31, 2010 was not effective to allow our management, employees and consultants, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely and reasonable basis. That material weakness was due to our short staffing of accounting professionals with sufficient knowledge of US GAAP and relevant disclosure requirements.

Because we did not become aware of this material weakness until after the quarter ended March 31, 2011, there was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.  As of the date of this amended report on Form 10-Q/A, we are undertaking the aforementioned steps to remediate the weakness in our internal controls over financial reporting.
 
PART II           OTHER INFORMATION

Item 6.
Exhibits

The exhibits required by this item are set forth in the Exhibit Index attached hereto.
 
 
33

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
BEFUT INTERNATIONAL CO., LTD.
     
Date: September 16, 2011
By:
/s/ Hongbo Cao
   
  Name: Hongbo Cao
   
  Title: President and Chief Executive Officer
   
  (principal executive officer)
     
Date: September 16, 2011
By:
/s/ Mei Yu
   
  Name: Mei Yu
   
  Title: Chief Financial Officer
   
  (principal financial officer and principal
   
  accounting officer)
 
 
34

 

EXHIBIT INDEX

No.
 
Description
     
31.1 – Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
31.2 – Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
32.1 – Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
32.2 – Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
35