UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

 

FORM 10−Q

(Mark One)

 

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

 

For the quarterly period ended: September 30, 2014

 

¨	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: 001-33959

 

SUTOR TECHNOLOGY GROUP LIMITED

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

No 8, Huaye Road

DongbangIndustrial Park

Changshu, 215534
People’s Republic of China

(Address of principal executive offices, Zip Code)

 

(+86) 512-52680988

(Registrant’s telephone number, including area code)

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

 

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

 

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

 

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

 

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

 

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

 

The number of shares outstanding of each of the issuer’s classes of common stock, as of December 11, 2014 is as follows:

 

Class of Securities		Shares Outstanding
Common Stock, $0.001 par value		41,661,429

 

 

 SUTOR TECHNOLOGY GROUP LIMITED

 

Quarterly Report on Form 10-Q

Period Ended September 30, 2014

 

TABLE OF CONTENTS

 

PART I
FINANCIAL INFORMATION
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	14
Item 4.	Controls and Procedures	14
PART II
OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	15
Item 3.	Defaults Upon Senior Securities	15
Item 4.	Mine Safety Disclosures	15
Item 5.	Other Information	15
Item 6.	Exhibits	15

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1.      FINANCIAL STATEMENTS.

 

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

		Page
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2014 and Condensed Consolidated Balance Sheets as of June 30, 2014		F-1 – F-2
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income for the Three Months Ended September 30, 2014 and 2013		F-3
Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended September 30, 2014 and 2013		F-4 – F-5
Notes to Unaudited Condensed Consolidated Financial Statements		F-6 – F-23

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30,				June 30,
		2014				2014
ASSETS
Current Assets:
Cash and cash equivalents		$	4,021,868			$	12,178,225
Restricted cash			14,779,924				60,860,255
Short-term investments			-				3,248,652
Trade accounts receivable, unrelated parties, net of allowance for doubtful accounts of $1,243,554 and $1,368,723, respectively			3,939,382				6,331,702
Trade accounts receivable, related parties			40,790,071				16,149,269
Notes receivables			576,795				194,919
Other receivables and prepayments, unrelated parties, net of allowance for doubtful accounts of $257,946 and $255,628, respectively			2,679,247				1,875,785
Other receivables and prepayments, related parties			405,670				405,558
Advances to suppliers, unrelated parties, net of allowance for doubtful accounts of $661,926 and $527,673, respectively			7,898,158				8,645,751
Advances to suppliers, related parties			287,018,783				286,085,768
Inventories, net			56,202,616				78,277,682
Current deferred tax assets			3,104,989				1,507,840
Total Current Assets			421,417,503				475,761,406
Non-current Assets:
Advances for purchase of long term assets			85,264				85,241
Property, plant and equipment, net			85,008,417				87,121,382
Intangible assets, net			3,548,143				3,568,855
Long-term investments			1,815,236				1,814,734
Total Non-current Assets			90,457,060				92,590,212
TOTAL ASSETS		$	511,874,563			$	568,351,618

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(CONTINUED)

 

		September 30,				June 30,
		2014				2014
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Short-term loans		$	186,818,007			$	139,223,123
Long-term loans, current portion			-				-
Accounts payable, unrelated parties			5,717,104				5,843,599
Notes payable			33,295,758				136,274,446
Other payables and accrued expenses, unrelated parties			9,411,081				4,613,201
Other payables and accrued expenses, related parties			3,113,169				3,110,196
Advances from customers, unrelated parties			7,095,891				7,917,111
Advances from customers, related parties			15,118,527				15,114,353
Warrant liabilities			3				866
Total Current Liabilities			260,569,540				312,096,895
Non-Current Liabilities
Long-term loans, unrelated parties			2,859,995				2,859,995
Long-term loans, related parties			8,182,018				8,182,018
Total Non-current Liabilities			11,042,013				11,042,013
Total Liabilities			271,611,553				323,138,908
Commitments and Contingencies (Note 15)
Stockholders' Equity
Undesignated preferred stock - $0.001 par value; 1,000,000 shares authorized; nil shares outstanding			-				-
Common stock - $0.001 par value; authorized: 500,000,000 shares as of September 30 and June 30, 2014; issued: 42,252,267 shares and 42,252,267 shares as of September 30 and June 30, 2014, respectively			42,252				42,252
Additional paid-in capital			43,720,091				43,652,089
Statutory reserves			22,725,841				22,725,841
Retained earnings			131,989,310				137,081,594
Accumulated other comprehensive income			42,437,025				42,362,443
Less: Treasury stock, at cost, 590,838 as of September 30 and June 30, 2014			(651,509	)			(651,509	)
Total Stockholders' Equity			240,263,010				245,212,710
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	511,874,563			$	568,351,618

 

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

  

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME

 

		For the Three Months Ended
		September 30
		2014				2013
Revenue from unrelated parties		$	16,991,898			$	102,182,122
Revenue from related parties			20,995,932				36,926,203
Total Revenue			37,987,830				139,108,325
Cost of Revenue			(39,832,100	)			(126,905,780	)
Gross (Loss)/Profit			(1,844,270	)			12,202,545
Operating Expenses:
Selling expenses			(269,640	)			(1,994,856	)
General and administrative expenses			(2,249,251	)			(2,904,270	)
Total Operating Expenses			(2,518,891	)			(4,899,126	)
(Loss)/Income from Operations			(4,363,161	)			7,303,419
Other Incomes/(Expenses):
Interest income			446,485				1,050,222
Interest expense			(2,978,347	)			(1,803,295	)
Changes in fair value of warrant liabilities			863				(12,587	)
Income from equity method investments			-				85,172
Other income			273,362				44,274
Other expense			(66,845	)			(18,023	)
Total Other Expenses			(2,324,482	)			(654,237	)
Income (Loss) Before Taxes			(6,687,643	)			6,649,182
Income tax benefit/(expense)			1,595,359				(1,460,935	)
Net Income/(Loss)		$	(5,092,284	)		$	5,188,247
Other Comprehensive Income:
Foreign currency translation adjustment			74,582				1,659,557
Comprehensive Income/(Loss)			(5,017,702	)			6,847,804
Basic Earnings/(Loss) per Share		$	(0.12	)		$	0.13
Diluted Earnings/(Loss) per Share		$	(0.12	)		$	0.13
Basic Weighted Shares Outstanding			41,661,429				41,314,527
Diluted Weighted Shares Outstanding			41,661,429				41,314,527

 

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

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Three Months Ended
		September 30
		2014				2013
Cash Flows from Operating Activities:
Net income (loss)		$	(5,092,284	)		$	5,188,247
Adjustments to reconcile net income to net cash provided by/(used in) operating activities
Depreciation and amortization			2,139,619				2,244,793
Provision for doubtful accounts			10,827				106,557
Stock-based compensation			68,002				64,264
Foreign currency exchange gain			-				(91,689	)
Income from equity method investments			-				(85,172	)
Deferred income taxes			(1,595,359	)			(112,083	)
Changes in fair value of warrant liabilities			(863	)			12,587
Changes in current assets and liabilities:
Restricted cash			46,057,480				(8,735,865	)
Trade accounts receivable, unrelated parties			2,517,420				(2,708,302	)
Trade accounts receivable, related parties			(24,615,145	)			-
Notes receivable			(381,494	)			(41,394,993	)
Other receivables and prepayments, unrelated parties			(804,498	)			(8,236,889	)
Advances to suppliers, unrelated parties			615,344				(2,831,826	)
Advances to suppliers, related parties			(853,727	)			93,269,690
Inventories			22,077,021				(54,550,385	)
Accounts payable, unrelated parties			574,496				3,728,819
Accounts payable, related parties			-				9,268,908
Notes payable			(102,927,694	)			17,255,052
Other payables and accrued expenses, unrelated parties			4,792,724				(361,778	)
Other payables and accrued expenses, related parties			2,641				-
Advances from customers, unrelated parties			(822,613	)			(190,350	)
Net Cash (Used In)/Provided by Operating Activities			(58,238,103	)			11,839,585
Cash Flows from Investing Activities:
Purchase of property, plant and equipment			(685,244	)			(6,557,827	)
Payments for short-term investments			-				(3,243,910	)
Proceeds from sale of short-term investments			3,246,753				-
Net Cash Provided By/(Used In) Investing Activities			2,561,509				(9,801,737	)
Cash Flows from Financing Activities:
Proceeds from loans			79,796,650				32,728,061
Payments of loans			(32,281,138	)			(44,606,562	)
Proceeds from issuance of common stock			-				1,500,000
Changes in restricted cash			-				10,864,531
Net Cash Provided By Financing Activities			47,515,512				486,030
Effect of Exchange Rate Changes on Cash			4,725				25,427

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(CONTINUED)

 

Net Change in Cash and Cash Equivalents			(8,156,357	)			2,549,305
Cash and Cash Equivalents at Beginning of Year			12,178,225				3,601,385
Cash and Cash Equivalents at End of Year		$	4,021,868			$	6,150,690
Supplemental Non-Cash Information:
Offset of notes payable to related parties against receivable from related parties		$	-			$	10,997,923
Accounts payable for purchase of long-term assets			(702,495	)			-
Supplemental Cash Flow Information:
Cash paid during the year for interest expense		$	(2,726,391	)		$	(2,030,947	)
Cash paid during the year for income tax		$	-			$	(1,539,622	)

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

 

  

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS

 

Sutor Technology Group Limited (“Sutor”) was incorporated on May 1, 1997 in the State of Nevada under the name of Bronze Marketing, Inc. and changed the name to Sutor Technology Group Limited effective March 6, 2007. Its principal activity is investment holding. The principal activities of its subsidiaries are described in the table below. Sutor together with its subsidiaries listed below are referred to as the “Company” hereinafter.

 

As of September 30, 2014, Sutor’s subsidiaries included the following entities:

 

Name of subsidiary or affiliate		Date of incorporation/ acquisition		Place of incorporation		Percentage of shareholding		Principal activities
Sutor Steel Technology Co., Ltd. (“Sutor BVI”)		August 15, 2006		British Virgin Islands		100%		Investment holding
Changshu Huaye Steel Strip Co., Ltd. (“Changshu Huaye”)		January 17, 2003		PRC		100%		Manufacture of hot-dip galvanized steel (“HDG”) and pre-painted galvanized steel (“PPGI”)
Jiangsu Cold-Rolled Technology Co., Ltd. (“Jiangsu Cold-Rolled”)		August 28, 2003		PRC		100%		Manufacture of cold-rolled steel, acid pickled steel and hot-dip galvanized steel
Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd. (“Ningbo Zhehua”)		April 5, 2004		PRC		100%		Manufacture of heavy steel pipe
Sutor Technology Co., Ltd. (“Sutor Technology”)		February 24, 2010		PRC		100%		Trading of steel products

 

In October 2012, Ningbo Zhehua established a wholly owned subsidiary, Ningbo Taixiang Investment Co., Ltd (“Ningbo Taixiang”). The principle activity of Ningbo Taixiang is investment. Ningbo Taixiang has not incurred any operations since its establishment. In June 2013, the Company disposed 100% equity interest in Ningbo Taixiang to its related party (Note 10). The disposal of Ningbo Taixiang was accounted for as a transaction between entities under common control. Therefore the transaction was recorded at carryover basis and any difference between the carrying value and the amount received are recorded in stockholder’s equity.

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES

 

Interim Unaudited Financial Statements – The accompanying unaudited condensed consolidated financial statements of the Company reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations of the Company for the periods presented. Operating results for the three months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending June 30, 2015. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2014. The Company follows the same accounting policies in the preparation of interim reports.

 

Principles of Consolidation – The accompanying consolidated financial statements include the accounts and transactions of Sutor and its subsidiaries for all years presented. All significant intercompany balances and transactions have been eliminated in consolidation.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

 

Functional Currency and Translating Financial Statements - Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transaction. Monetary assets and liabilities denominated in currencies other than the functional currency are translated into the functional currency using the applicable exchange rates at the balance sheet dates. The resulting exchange differences are recorded in the condensed consolidated statement of operations and comprehensive income.

 

The reporting currency of the Company is the United States Dollars (“USD”). Sutor and Sutor BVI maintain their books and records in USD, their functional currency. The PRC subsidiaries maintain their books and records in its local currency, the Renminbi Yuan (“RMB”), which is their functional currencies as being the primary currency of the economic environment in which these entities operate. In general, for consolidation purposes, assets and liabilities of its subsidiaries whose functional currency is not the USD are translated into USD, in accordance with ASC Topic 830-30, “Translation of Financial Statement”, using the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates prevailing during the period. The gains and losses resulting from translation of financial statements of foreign subsidiaries are recorded as a separate component of accumulated other comprehensive income.

 

Translation of amounts from RMB into US$1 has been made at the following exchange rates for the respective years:

 

		September 30, 2014				September 30, 2013				June 30, 2013
Closing RMB : US$ exchange rate at the period end			6.1547				6.1439				6.1564
Average three months RMB : US$ exchange rate			6.1600				6.1654				n/a

 

The RMB is not freely convertible into foreign currency and all foreign exchange transactions must take place through authorized institutions. No representation is made that the RMB amounts could have been, or could be, converted into US$ at the rates used in translation.

 

Accounting Estimates – The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could materially differ from those estimates. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities are provision for doubtful accounts on trade accounts receivable, notes receivable, other receivables and prepayments, advances to suppliers, reserves for inventories, estimated useful lives of property, plant and equipment, valuation allowance for deferred tax assets and valuation of warrant liabilities.

 

Cash and Cash Equivalents - Cash and cash equivalents are stated at cost, which approximates fair value, and consist of cash on hand and bank deposits, which are unrestricted as to withdrawal and use and have original maturities of less than 90 days.

 

Restricted Cash - Restricted cash represents amounts held by banks in escrow as security for either notes payable that have yet to be drawn down or bank loans and therefore are not available for the Company’s use.

 

Short-term investments - Investments with stated maturities of greater than 90 days but less than 365 days are mainly time deposits that are classified as short-term investments. Short-term investments are classified as held-to-maturity and recorded at amortized cost when the Company has both the positive intent and ability to hold investments to maturity. As of June 30, 2014, all the short-term investments of the Company were classified as held-to-maturity.

 

Trade Accounts Receivable - Trade accounts receivable are carried at original invoiced amounts less an allowance for doubtful accounts.

 

Allowance for doubtful accounts – The Company provides a general provision for doubtful accounts for the outstanding trade receivable balances based on historical experience and information available. Additionally, the Company makes specific bad debt provisions based on (i) specific assessment of the collect ability of all significant accounts; and (ii) any specific knowledge the Company has acquired that might indicate that an account is uncollectible. The facts and circumstances of each account may require the Company to use substantial judgment in assessing its collect ability.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

 

Inventories - Inventories are stated at the lower of cost or market. The cost of inventories is determined using first-in-first-out method, and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In case of finished goods and work in progress, cost includes an appropriate share of production overhead based on normal operating capacity. The Company regularly reviews the cost of inventories against their estimated fair market value and records a lower of cost or market write-down for inventories that have cost in excess of estimated market value.

 

Property, Plant and Equipment – Property, plant and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets as follows:

 

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

 

Repair and maintenance costs are charged to expense as incurred, whereas the costs of betterments that extend the useful life of property, plant and equipment are capitalized as additions to the related assets. Retirements, sale and disposals of assets are recorded by removing the cost and accumulated depreciation with any resulting gain or loss reflected in the consolidated statements of operations.

 

Property, plant and equipment that are purchased or constructed which require a period of time before the assets are ready for their intended use are accounted for as construction-in-progress. Construction-in-progress is recorded at acquisition cost, including installation costs. Construction-in-progress is transferred to specific property, plant and equipment accounts and commences depreciation when these assets are ready for their intended use.

 

Interest costs are capitalized if they are incurred during the acquisition, construction or production of a qualifying asset and such costs could have been avoided if expenditures for these assets have not been made. Capitalization of interest costs commences when the activities to prepare the asset are in progress and expenditures and borrowing costs are incurred. Interest costs are capitalized until the assets are ready for their intended use.

 

Foreign invested enterprises and foreign enterprises running business in the PRC are generally able to receive a refund of the value-added tax paid on property, plant and equipment purchased and manufactured within the PRC. The Company recognizes refunds of value-added tax as a reduction of property, plant and equipment when the refunds are collected.

 

Intangible Assets – Intangible assets are land use rights. Acquisition costs of land use rights are capitalized and amortized using the straight-line method over the land lease term of 50 years.

 

Impairment of Long-lived Assets - The Company evaluates its long-lived assets or asset group, including intangible assets with finite lives, for impairment whenever events or changes in circumstances (such as a significant adverse change to market conditions that will impact the future use of the assets) indicate that the carrying amount of an asset or a group of long-lived assets may not be recoverable. When these events occur, the Company evaluates for impairment by comparing the carrying amount of the assets to future undiscounted net cash flows expected to result from the use of the assets and their eventual disposition. If the sum of the expected undiscounted cash flow is less than the carrying amount of the assets, the Company would recognize an impairment loss based on the excess of the carrying amount of the asset group over its fair value. Fair value is generally determined by discounting the cash flows expected to be generated by the assets, when the market prices are not readily available for the long-lived assets. No impairment charge was recognized for the three months ended September 30, 2014 and 2013, respectively.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

 

Equity method investments – Affiliated company (partially owned affiliate) is an entity over which the Company has significant influence, but which it does not control. Investments in affiliated company (“Investee”) are accounted for as equity method investments. Under equity method, the Company’s share of the post-acquisition profits or losses of Investee is recognized in the consolidated statements of operations. Unrealized gains on transactions between the Company and its Investee are eliminated to the extent of the Company’s interest in Investee; unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. When the Company’s share of losses in Investee equals or exceeds its interest in the Investee, the Company does not recognize further losses, unless the Company has incurred obligations or made payments on behalf of the Investee.

 

The Company continually reviews its equity method investments to determine whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of time that the fair value of the investment is below the Company’s carrying value and the financial condition, operating performance and near term prospects of Investee. In addition, the Company considers the reason for the decline in fair value, including general market conditions, industry specific or Investee specific reasons, changes in valuation subsequent to the balance sheet date and the Company’s intent and ability to hold the investments for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other than temporary, the carrying value of the investments is written down to fair value. There was no impairment for equity method investments as of September 30, 2014.

 

Fair Values of Financial Instruments - The Company adopted ASC 820 “Fair value measurements and disclosures”. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The guidance outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related disclosures. Under US GAAP, certain assets and liabilities must be measured at fair value, and the guidance details the disclosures that are required for items measured at fair value.

 

The three levels are defined as follows: Level 1 – Valuations based on quoted prices in active markets for identical assets or liabilities. Level 2 – Valuations based other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – Valuations based on inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

Financial instruments of the Company primarily comprise of cash and cash equivalents, restricted cash, short-term investments, trade accounts receivable, other receivables, loans, accounts payable, other payables and warrant liabilities. As of September 30, 2014 and June 30, 2014, carrying values of cash and cash equivalents, restricted cash, short-term investments, trade accounts receivable, other receivables, short-term loans, current portion of long-term loans, accounts payable and other payables approximated their fair values because of their generally short maturities. The estimated fair value of long-term loan approximated the carrying amount as of September 30, 2014 and June 30, 2014 as they bear floating interest rate and the market rate approximate the floating interest rates at the respective balance sheet dates. Warrants are recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in changes in fair value of warrant liabilities on the Company’s statement of operations in each subsequent period. The warrants were measured at estimated fair value using the Black Scholes valuation model, which was based, in part, upon inputs for which there is little or no observable market data, requiring the Company to develop its own assumptions. Inherent in this model were assumptions related to expected stock-price volatility, expected life, risk free interest rate and dividend yield. We estimated the volatility of our common stock at the date of issuance, and at each subsequent reporting period, based on historical volatility that matches the expected remaining life of the warrants. The risk-free interest rate was based on the U.S. Treasury zero-coupon yield curve on the grant date for a maturity similar to the expected remaining life of the warrants. The expected life of the warrants was assumed to be equivalent to their remaining contractual term. The dividend rate was based on our historical rate, which we anticipated to remain at zero. The assumptions used in calculating the estimated fair value of the warrants represent our best estimates. However these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and different assumptions were used, the warrant liability and the changes in estimated fair value could be materially different.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

 

Liabilities measured at fair value on a recurring basis are summarized below:

 

		Balance as of September 30, 2014
						Fair Value Measurements
		Carrying Value				Level 1				Level 2				Level 3
Warrant liabilities		$	3			$	-			$	-			$	3

 

		Balance as of June 30, 2014
						Fair Value Measurements
		Carrying Value				Level 1				Level 2				Level 3
Warrant liabilities		$	866			$	-			$	-			$	866

 

For a summary of changes in warrant liabilities for the three months ended September 30, 2014, please see Note 12.

 

Statutory Reserves - In accordance with the PRC Regulations on Enterprises with Foreign Investment, an enterprise established in the PRC with foreign investment is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A wholly owned foreign enterprise (“WOFE”) is required to allocate at least 10% of its annual after-tax profit to the General Reserve Fund until the balance of such fund has reached 50% of its respective registered capital. A non-wholly owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its board of directors. Appropriations to the Enterprise Expansion Fund and Staff Welfare and Bonus Fund are at the discretion of the board of directors for all foreign invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends.

 

Accumulated Other Comprehensive Income - Accumulated other comprehensive income presented in the accompanying consolidated financial statements consists of foreign currency translation adjustments.

 

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

 

The Company sells some products to related parties, who in turn sell the product to various other unrelated party customers. The price, terms and conditions on the sales to related parties are the same as those to unrelated parties. Revenue is considered realized or realizable and earned when the related parties ship the products to unrelated party customers. A fee of 0.5% of the sales is paid to the related parties for handling the product. Handling fees were nil and $33,745 for the period ended September 30, 2014 and 2013 respectively and have been recorded in selling expenses in the statement of operations.

 

Cost of Revenue - Cost of products sold includes wages, materials, handling charges, and other expenses associated with the manufacture and delivery of product.

 

Shipping and Handling Costs - Shipping and handling costs are billed to customers and recorded as revenue, and the associated costs are included in cost of revenues.

 

  

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES - continued

 

Employee Benefits - The full-time employees of the Company’s PRC subsidiaries are entitled to staff welfare benefits including medical care, housing fund, pension benefits and unemployment insurance, which are governmental mandated defined contribution plans. These entities are required to accrue for these benefits based on certain percentages of the employees’ respective salaries, subject to certain ceilings, in accordance with the relevant PRC regulations, and make cash contributions to the state-sponsored plans out of the amounts accrued.

 

Stock-based Compensation – Share options granted to employees are accounted for under ASC 718, “Compensation – Stock Compensation”, which requires that share-based awards granted to employees be measured based on the grant date fair value and recognized as compensation expense over the requisite service period (which is generally the vesting period) in the consolidated statements of operations. The Company has elected to recognize compensation expense using the straight-line method for all share options granted with service conditions that have a graded vesting schedule.

 

ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. Forfeiture rate is estimated based on historical and future expectation of employee turnover rate and are adjusted to reflect future change in circumstances and facts, if any. Share-based compensation expense is recorded net of estimated forfeitures such that expense was recorded only for those share-based awards that are expected to vest. To the extent the Company revises this estimate in the future, the share-based payments could be materially impacted in the period of revision, as well as in following periods.

 

Transactions in which goods or services are received in exchange for equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable. The measurement date of the fair value of the equity instrument issued is the date on the earlier of: (1) the performance commitment date, or (2) the date the services required under the arrangement have been completed.

 

Income Taxes – The Company accounts for income taxes using the liability method whereby deferred income taxes are recognized for the tax consequences of temporary differences by applying statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of certain assets and liabilities, changes in deferred tax assets and liabilities, if any, include the impact of any tax rate changes enacted during the year. ASC Topic 350, “Accounting for Income Taxes,” requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Additionally, the Company accounts for uncertainty in income taxes using a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes. The Company did not have any uncertain tax positions for the three months ended September 30, 2014 and 2013.

 

If the amount of the Company’s taxable income or income tax liability is a determinant of the amount of a grant, the grant is treated as a reduction of the income tax provision in the year the grant is realized.

 

Earnings Per Share – Earnings per share are calculated in accordance with ASC subtopic 260-10 (“ASC 260-10”), Earnings Per Share: Overall. Basic earnings per share is computed by dividing net income attributable to holders of ordinary shares by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of shares and dilutive equivalent shares outstanding during the period. Dilutive equivalent shares consist of ordinary shares issuable upon the exercise of stock options granted, with an exercise price less than the average fair market value for such period, using the treasury stock method. Dilutive equivalent shares are excluded from the computation of diluted earnings per share if their effects would be anti-dilutive.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES – continued

 

Share Repurchase Program – Pursuant to a Board of Directors’ resolution on August 29, 2011, the Company’s management is authorized to repurchase up to $5 million of the Company’s outstanding common stock over the next year in the open market, in privately negotiated transactions or as otherwise may be determined by the Chief Executive Offer and the Chief Financial Officer (“Authorized Officers”) and will be funded from available working capital. The timing and extent of any purchases depend upon the trading price of the Company’s common stock, general business and market conditions and other investment opportunities. The Company accounted for those shares repurchase as Treasury Stock at cost in accordance to ASC Subtopic 505-30 (“ASC 505-30”), Treasury Stock and is shown separately in the stockholders’ equity as the Company has not yet decided on the ultimate disposition of those repurchased stocks. The treasury stock may be retired or used by the Company to finance or execute acquisitions or other arrangements. As of September 30 and June 30, 2014, the Company had repurchased 590,838 shares of its common stock at a total cost of $651,509.

 

Treasury stock reissuance – Shares of common stock repurchased by the Company that are not retired are recorded at cost as treasury stock and result in a reduction of stockholders' equity in the Company's consolidated balance sheets. From time to time, treasury shares may be reissued as part of the Company's stock-based compensation programs. When shares are reissued, the Company uses the weighted average cost method for determining cost. If the issuance price is higher than the cost, the excess of the issuance price over cost is credited to additional paid-in capital (“APIC”). If the issuance price is lower than the cost, the difference is first charged against any credit balance in APIC from treasury stock and the balance is charged to retained earnings. During the three months ended September 30, 2014 and 2013, the Company did not reissue shares from treasury stock.

 

Recent Accounting Pronouncements – In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”), “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 will eliminate transaction-specific and industry-specific revenue recognition guidance under current US GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative effect adjustment as of the date of adoption. The Company is currently assessing the impact the adoption of ASU 2014-09 and the effect of the standard on our ongoing financial reporting.

 

In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-12 (“ASU 2014-12”), “Compensation—Stock Compensation (Topic 718) - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. For all entities, the amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. Entities may apply the amendments in this Update either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this Update as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost. The Company is currently evaluating the impact of adopting this Update on its financial statements.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – OTHER RECEIVABLES AND PREPAYMENTS

 

Other receivables and prepayments, unrelated parties as of September 30 and June 30, 2014 consisted of the following:

 

		September 30,				June 30,
		2014				2014
Tax recoverable		$	810,128			$	10,266
							-
Other receivables			2,127,065				2,121,147
			2,937,193				2,131,413
Less: allowance for doubtful accounts			(257,946	)			(255,628	)
Other receivables and prepayments, unrelated parties, net		$	2,679,247			$	1,875,785

 

NOTE 4 – INVENTORIES

 

Inventories as of September 30 and June 30, 2014 consisted of the following:

 

		September 30,				June 30,
		2014				2014
Raw materials		$	14,757,044			$	14,006,475
Finished goods			41,579,624				64,405,222
			56,336,668				78,411,697
Less: allowance for obsolescence			(134,052	)			(134,015	)
Inventories, net		$	56,202,616			$	78,277,682

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – PROPERTY, PLANT AND EQUIPMENT

 

Property, plant and equipment as of September 30 and June 30, 2014 consisted of the following:

 

		September 30,				June 30,
		2014				2014
Buildings and plant		$	47,026,036			$	47,013,051
Machinery			72,946,756				72,916,144
Office and other equipment			669,286				1,734,518
Vehicles			1,743,679				669,101
			122,385,757				122,332,814
Less: accumulated depreciation			(64,556,227	)			(62,419,223	)
			57,829,530				59,913,591
Construction in progress			27,178,887				27,207,791
Property, Plant and Equipment, net		$	85,008,417			$	87,121,382

 

As of September 30 and June 30, 2014, certain of the Company’s property, plant and equipment amounted to approximately $39 million was pledged to banks to secure the loan granted to the Company (Note 8).

 

Depreciation expense for the three months ended September 30, 2014 and 2013 was $2,117,940 and $2,225,960, respectively.

 

NOTE 6 – INTANGIBLE ASSETS

 

Intangible assets as of September 30 and June 30, 2014 consisted of the following:

 

		September 30,				June 30,
		2014				2014
Cost		$	4,339,467			$	4,338,269
Less: Accumulated amortization			(791,324	)			(769,414	)
Intangible Assets, net		$	3,548,143			$	3,568,855

 

The Company’s intangible assets represented several land use rights, which are amortized using the straight-line method over the lease term of 50 years. Amortization expense for the three months ended September 30, 2014 and 2013 was $21,679 and $18,833, respectively.

 

As of September 30 and June 30, 2014, certain of the Company’s intangible assets amounted to approximately $2.8 million was pledged to banks to secure the loan granted to the Company (Note 8).

 

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

 

ESTIMATED AMORTIZATION EXPENSE
For the year ending June 30, 2015			65,092
For the year ending June 30, 2016			86,789
For the year ending June 30, 2017			86,789
For the year ending June 30, 2018			86,789
For the year ending June 30, 2019			86,789
For the year ending June 30, 2020 and thereafter			3,135,895
Total		$	3,548,143

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – LONG-TERM INVESTMENTS

 

In August 2012, the Company together with other two unrelated companies jointly established CRM Suzhou. The Company holds 39% equity interest in CRM Suzhou with the consideration of $6.2 million in cash. The Company evaluated its interest in CRM Suzhou under relevant guidance in ASC 810 and ASC 323 pertaining to consolidation and equity method accounting, respectively. The Company determined that it does not have a controlling financial interest in the investee, but rather possesses significant influence. Accordingly, the Company has accounted for this investment under the equity method.

 

In 2014, the Company entered into a share transfer agreement with China Railway Materials Wuhan Company Limited (“CRM Wuhan”), CRM Suzhou’s holding company, and sold 28% of CRM Suzhou’s shares held by Jiangsu Coldrolled to CRM Wuhan for total consideration of $4.5 million in cash. The Company evaluated its interest in CRM Suzhou again after disposal under relevant guidance in ASC 810 and ASC 323 pertaining to consolidation and equity method accounting, respectively. The Company determined that it neither has a controlling financial interest in the investee nor possesses significant influence. Accordingly, the Company has accounted for this investment under the cost method after disposal. Immediately before the disposal, the carrying value of the investment in CRM Suzhou was $6.4 million as a result of the equity accounting; and immediately after the disposal, the carrying value of the investment CRM Suzhou was $1.8 million.

 

NOTE 8 – LOANS

 

Loans are as follows as of the respective balance sheet dates:

 

		September 30,				June 30,
		2014				2014
Short-term loans		$	186,818,007			$	139,223,123
Long-term loans, current portion			-				-
			186,818,007				139,223,123
Long-term loans, non-current portion			11,042,013				11,042,013
Total loans		$	197,860,020			$	150,265,136

 

The short-term loans outstanding as of September 30 and June 30, 2014 bore a weighted average interest rate of 6.88% and 6.82% per annum, respectively. These loans were obtained from financial institutions and have contract terms of three months to one year.

 

The long-term loans outstanding as of September 30 and June 30, 2014 bore a weighted average interest rate of 4.63% and 4.63% per annum, respectively. These loans were obtained from financial institutions and one individual. Long-term loans have contract terms of one to three years.

 

Short-term loans as of September 30, 2014 were secured/guaranteed by the following:

 

Secured/guaranteed by
Guaranteed by a related party		$	110,671,091
Jointly guaranteed by (i) a related party, and (ii) the Company's property, plant and equipment			68,347,998
Guaranteed by the Company's property, plant and equipment			7,798,918
Total short-term loans		$	186,818,007

 

Short-term loans as of June 30, 2014 were secured/guaranteed by the following:

 

Secured/guaranteed by
Jointly guaranteed by (i) a related party, and (ii) the Company's property, plant and equipment		$	75,476,159
Guaranteed by a related party			52,701,548
Guaranteed by the Company's property, plant and equipment			11,045,416
Total short-term loans		$	139,223,123

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 – LOANS - continued

 

Long-term loans, non-current portion as of September 30, 2014 were secured/guaranteed by the following:

 

Secured/guaranteed by
Unsecured		$	11,042,013

 

Long-term loans, non-current portion as of June 30, 2014 were secured/guaranteed by the following:

 

Secured/guaranteed by
Unsecured		$	11,042,013

 

The Company must use the loans for the purpose specified in borrowing agreements, pay interest at the interest rate described in borrowing agreements. The Company also has to repay the principal outstanding on the specified date as described in borrowing agreements. Management believes that the Company had complied with such financial covenants as of September 30, 2014, and will continue to comply with them.

 

NOTE 9 – RELATED PARTY TRANSACTIONS

 

The Company’s related parties mainly include Shanghai Huaye and its subsidiaries, which were ultimately controlled by the same party as the Company; CRM Suzhou, which is the Company’s equity investee; Tianjin Xinhao Commerce Co., Ltd, Hangzhou Xiaoshan Ruifan Industrial Co., Ltd, Guangzhou Xingbang Metal Industrial Co., Ltd. and Wuxi Suwu Industrial Co., Ltd. (collectively “Related Trading Companies”), over which the Company’s ultimate controlling party has significant influence.

 

Related Party Activities

 

		For The Three Months Ended
		September 30,
		2014				2013
Sales to Shanghai Huaye and its subsidiaries		$	-			$	36,926,203
Sales to Related Trading Companies			20,995,932				-
Purchases from Shanghai Huaye and its subsidiaries			61,081				96,130,414
Purchases from CRM Suzhou			603,938				23,336,170
Rental fees to Shanghai Huaye and its subsidiaries			87,738				38,927
Interest expenses to Shanghai Huaye			85,723				85,724
Handling fee paid to Shanghai Huaye and its subsidiaries			-				33,745

 

Period-End Related Party Balances

 

		September 30,				June 30,
		2014				2014
Trade accounts receivable		$	40,790,071			$	16,149,269
Advances to suppliers			287,018,783				286,085,768
Other receivables			405,670				405,558
Other payables and accrued expenses			3,113,169				3,110,196
Long-term loans			8,182,018				8,182,018

 

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9 – RELATED PARTY TRANSACTIONS - continued

 

The amounts charged for products to the Company by Shanghai Huaye and its subsidiaries under the same pricing, terms and conditions as those charged to third parties. Different to nonrelated party suppliers, the Company does not have to enter into a long-term contract with related party suppliers in which case is more flexible for the Company.

 

NOTE 10 – INCOME TAXES

 

The Company has total income tax expense of $1,595,359 and income tax benefit of $1,460,935 for the three months ended September 30, 2014 and 2013, respectively. The Company continues to conduct most of its business through its major PRC subsidiaries whose applicable income tax rates are 15% or 25% for the three months ended September 30, 2014.

 

The Company’s effective tax rates were 24% and 22% for the three months ended September 30, 2014 and 2013, respectively.

 

NOTE 11 – WARRANTS

 

On March 10, 2010, The Company issued warrants to purchase up to 685,000 shares of common stock in connection with the Company’s registered direct offering. The warrants are exercisable for a five year period, expiring March 9, 2015, with an exercise price of $3.76 per share, adjustable for stock dividends, stock splits and upon occurrence of a fundamental transaction as defined in the warrant agreement.

 

The fair values of the warrants at the issuance date and the end of each reporting period were calculated using Black-Scholes pricing model and based on the following assumptions:

 

		September 30, 2014				June 30, 2014
		Quarter end date				Year end date
Warrants indexed to common stock			685,000				685,000
Trading market price		$	0.52			$	1.00
Exercise price		$	3.76			$	3.76
Estimated Term (Year)			0.44				0.69
Expected volatility			74.11	%			60.57	%
Risk-free rate			0.03	%			0.11	%
Dividend yield rates			0.00	%			0.00	%
Fair value of warrants		$	3			$	866

 

The Warrants were recorded as liabilities at their estimated fair value at the date of issuance, with subsequent changes in estimated fair value recorded in changes in fair value of warrant liabilities on the Company’s consolidated statement of operations in each subsequent period.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 11 – WARRANTS - continued

 

The following table summarizes the movement of warrant liabilities for the three months ended September 30, 2014 and 2013:

 

		For The Three Months Ended
		September 30,
		2014				2013
Balance at beginning of the period		$	866			$	144,535
Changes in fair value			(863	)			12,587
Balance at end of the period		$	3			$	157,122

 

NOTE 12 – STOCK-BASED COMPENSATION

 

2009 Equity Incentive Plan

 

In April 2009, the Company authorized an equity incentive plan (“2009 Equity Incentive Plan”) that provides for issuance of up to 2,000,000 shares of the Company’s common stock. Under the 2009 Equity Incentive Plan, the management may, at their discretion, grant any employees and directors of the Company, and consultants (i) options to subscribe for common stocks, (ii) stock appreciation rights to receive payment, in cash and/or the Company’ common stocks, equals to the excess of the fair market value of the Company’ common stocks, (iii) Restricted stock awards and restricted stock units, or (iv) other types of compensation based on the performance of the Company’ common stocks. The exercise price of the options may not be less than the fair market value of the share on the grant date and the option term may not exceed ten years.

 

Non-Vested Stock Grants to employees and directors

 

On December 14, 2012, the Company granted an executive 50,000 shares of restricted common stock with a grant date fair value of $1.00 per share as part of his remuneration for his service commencing December 14, 2012 for a one year period. The restricted common stock will vest on the one-year anniversary date of the grant date.

 

On March 7, 2013, the Company granted a director 10,000 shares of restricted common stock with a grant date fair value of $2.43 per share as part of his remuneration for the service commencing March 7, 2013 for a one-year period. The restricted common stock will vest on the one-year anniversary date of the grant date.

 

On January 7, 2014, the Company granted seven employees 135,000 shares of restricted common stock with a grant date fair value of $1.85 per share as part of their remuneration for the service commencing January 7, 2014 for a one-year period. The restricted common stock will vest on the one-year anniversary date of the grant date.

 

On February 10, 2014, the Company granted a director 10,000 shares of restricted common stock with a grant date fair value of $1.93 per share as part of his remuneration for the service commencing February 10, 2014 for a one-year period. The restricted common stock will vest on the one-year anniversary date of the grant date.

 

Stock-based compensation expense for the three months ended September 30, 2014 and 2013 was $68,002 and $18,779, respectively. The remaining $142,241stock-based compensation will be expensed over the remainder of the one year service period. The value of the non-vested stock at September 30, 2014 is $75,400.

 

Non-Vested Stock Grants to non-employees

 

On April 29, 2013 (“Agreement Date”), the Company entered into a consultancy agreement with a Company’s external consultant. In accordance with the agreement, the consultant will provide financing consultancy service to the Company and the Company will grant 200,000 restricted common stocks as consideration, out of which, 100,000 restricted common stock will vest 30 days after the Agreement Date (e.g. May 20, 2013) and the other 100,000 restricted common stock will vest 180 days after the Agreement Date (e.g. October 26, 2013). The service period is one year from April 29, 2013 to April 29, 2014.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – STOCK-BASED COMPENSATION - continued

 

The Company accounted for equity instruments granted to non-employees in accordance with ASC 505-50 “Equity-Based Payments to Non-Employees”. Restricted stocks granted to non-employees are measured at the fair value of the equity instrument as of the earlier of (a) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment) or (b) the date at which the counterparty's performance is complete. Because the restricted stocks will vest 30 and 180 days after the Agreement Date for the first and second half of the grant of 200,000 restricted stocks, respectively, a measurement date has been reached on May 20, 2013 and October 26, 2013 for the first 100,000 and second 100,000 grant of restricted stocks, respectively. Since the service will be performed during the year started from April 29, 2013, the Company recognized a prepayment at the date of grant based on the fair value of the measurement date.

 

Stock-based compensation expense for the three months ended September 30, 2014 and 2013 was nil and $18,779, respectively. As of September 30, 2014, the remaining unrecognized stock-based compensation was nil.

 

Options to employees

 

Stock Options granted to key employees

 

On April 27, 2010, the Board of Directors approved the grant of stock options to purchase 100,000 shares of the Company’s common stock under the “2009 Equity Incentive Plan” to certain key employees as reward for past services and to promote future performance. These options have an exercise price of $2.71 per share, expiring on the fifth anniversary of the grant date, and vest in three equal installments on each of the first, second and third anniversary of the vesting commencement date, which is April 27, 2010. The fair value of the options, determined using the Black-Scholes Option Pricing Model, was calculated using the following assumptions: risk free interest rate of 2%, expected dividend yield of 0%, expected volatility of 90% and an expected life of 5 years.

 

Stock-based compensation expense for the three months ended September 30, 2014 and 2013 on the stock options were nil and $16,043, respectively. As of September 30, 2014, the remaining unrecognized stock-based compensation is nil.

 

The following table summarizes the options activity for the three months ended September 30, 2014 and 2013:

 

		Options				Weighted-average exercise price				Weighted average remaining contractual life (years)				Aggregate Intrinsic Value
Outstanding as of June 30, 2013			105,000			$	2.71				1.86			$	-
Issued			-				-				-				-
Exercised			-				-				-				-
Expired			-				-				-				-
Outstanding as of  September 30, 2014			105,000			$	2.71				0.61			$	-

 

Total intrinsic value of stock options outstanding as of September 30, 2014 and 2013 was nil.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 13 – EARNINGS (LOSS) PER SHARE

 

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

 

		For The Three Months Ended
		September 30,
		2014				2013
Net income (loss) attributable to the common stockholders		$	(5,092,284	)		$	5,188,247
Basic weighted-average common shares outstanding			41,661,429				41,314,527
Dilutive effect of warrants and options							-
Diluted weighted-average common shares outstanding			41,661,429				41,314,527
Earnings (loss) per share:
Basic		$	(0.12	)		$	0.13
Diluted		$	(0.12	)		$	0.13

 

Warrants and options to purchase 685,000, and 105,000 shares of common stock, respectively were outstanding during the three months ended September 30, 2014 and 2013, but were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive because the exercise prices of the warrants and options were larger than the average share price during the year.

 

NOTE 14 - COMMITMENTS AND CONTINGENCIES

 

Operating lease commitments - As of September 30, 2014, the Company has future minimum lease payments under non-cancelable operating leases in relation to office premises consisting of the following:

 

		Lease Payment
For the year ending June 30, 2015			263,213
For the year ending June 30, 2016			350,951
For the year ending June 30, 2017			350,951
For the year ending June 30, 2018			350,951
For the year ending June 30, 2019 and thereafter			1,462,297
Total		$	3,129,314

 

Capital commitments – The Company entered into agreements with suppliers to purchase property, plant and equipment. As of September 30 and June 30, 2014, the Company had purchase obligations totaled $2,471,166 and $2,464,606, respectively.

Indemnification Obligations – The Company entered into agreements whereby its directors are indemnified for certain events or occurrences while the director is, or was, serving at the Company's request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a directors' liability insurance policy that reduces its exposure and enables the Company to recover a portion of future amounts paid. As a result of the Company's insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of September 30, 2014.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 15 – SIGNIFICANT CONCENTRATIONS

 

Concentration of credit risk

 

Assets that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, restricted cash, trade accounts receivable and advances to suppliers. The Company performs ongoing credit evaluations with respect to the financial condition of its debtors, but does not require collateral. As of September 30 and June 30, 2014, substantially all of the Company’s cash and cash equivalents and restricted cash were held in major financial institutions located in the PRC, which management considers to be of high credit quality. However, the deposit accounts in PRC were not insured in any manner. Trade accounts receivable are generally unsecured and denominated in RMB, and derived from revenues earned from operations primarily in the PRC. Advances to suppliers are typically unsecured and arise from deposits paid in advance for future purchases of raw materials. In order to determine the value of the Company’s trade accounts receivable and advances to suppliers, the Company records a provision for doubtful accounts to cover probable credit losses. Management reviews and adjusts this allowance periodically based on historical experience and its evaluation of the collectability of outstanding trade accounts receivable and advances to suppliers.

 

Concentration of customers

 

The Company currently sold a substantial portion of its products to related Trading Companies. As a percentage of revenues, 25% and 17% of the Company’s revenue was derived from Guangzhou Xingbang Metal Industrial Co., Ltd. and Tianjin Xinhao Commerce Co., Ltd respectively for the three months ended September 30, 2014 . And the Company previously sold a substantial portion of its products to Shanghai Huaye and its subsidiaries. As a percentage of revenues, nil and 26.5% of the Company’s revenue was derived from Shanghai Huaye and its subsidiaries for the three months ended September 30, 2014 and 2013, respectively. The loss of sales from Shanghai Huaye and its subsidiaries would have a significant negative impact on the Company’s business. Sales to customers were mostly made through non-exclusive, short-term arrangements. Due to the Company’s dependence on Shanghai Huaye and its subsidiaries, any negative events with respect to Shanghai Huaye and its subsidiaries may cause material fluctuations or declines in the Company’s revenue and have a material adverse effect on the Company’s financial condition and results of operations.

 

Concentration of suppliers

 

A significant portion of the Company’s raw materials were sourced from Shanghai Huaye and its subsidiaries who collectively accounted for an aggregate of 0.6% and 55.4% of the Company’s total purchases for the three months ended September 30, 2014 and 2013, respectively. Failure to develop or maintain relationships with these suppliers may cause the Company to be unable to source adequate raw materials needed to manufacture its products. Any disruption in the supply of raw materials to the Company may adversely affect the Company’s business, financial condition and results of operations.

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 16 – SEGMENT INFORMATION

 

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

 

Factors Management Used to Identify the Enterprise’s Reportable Segments - The Company’s reportable segments are business units that offer different products and are managed separately and require reporting to the various regulatory jurisdictions. Changshu Huaye mainly produces HDG products and PPGI products.  Jiangsu Cold-Rolled offers cold-rolled steel strips, acid pickled steel and hot-dip galvanized steel products. Ningbo Zhehua trades steel and manufactures heavy steel pipe products and Sutor Technology engages in trading of steel products.

 

Certain segment information is presented below:

 

As of September 30, 2014 and for the three months then ended		Changshu Huaye				Jiangsu Cold-Rolled				Ningbo Zhehua				Sutor Technology				Inter-Segment and Reconciling Items				Total
Revenue from unrelated parties		$	1,411,053			$	13,090,414			$	2,355,706			$	134,725			$	-			$	16,991,898
Revenue from related parties			6,279,404				14,716,528				-				-				-				20,995,932
Revenue from other operating segments			3,561,836				1,535,810				1,259,587				-				(6,357,233	)			-
Total operating expenses			996,867				805,691				436,778				316,838				(37,283	)			2,518,891
Interest income			42,565				360,788				42,476				645				11				446,485
Interest expense			1,038,699				1,749,686				10,987				-				178,975				2,978,347
Depreciation and amortization expense			592,850				1,298,644				256,749				136,354				(144,978	)			2,139,619
Income tax expense			(362,365	)			(1,061,286	)			(171,708	)			-				-				(1,595,359	)
Net segment profit/(loss)			(1,971,697	)			(2,321,136	)			(491,451	)			(198,850	)			(109,150	)			(5,092,284	)
Capital expenditures			18,664				135,195				472				-				-				154,331
Segment assets		$	255,187,617			$	352,772,837			$	47,322,479			$	34,191,390			$	(177,599,760	)		$	511,874,563

 

As of September 30, 2013 and for the three months then ended		Changshu Huaye				Jiangsu Cold-Rolled				Ningbo Zhehua				Sutor Technology				Inter-Segment and Reconciling Items				Total
Revenue from unrelated parties		$	57,354,274			$	32,386,362			$	7,921,469			$	4,520,017			$	-			$	102,182,122
Revenue from related parties			6,782,759				22,146,005				7,991,881				5,558				-				36,926,203
Revenue from other operating segments			4,566,078				31,845,150				-				-				(36,411,228	)			-
Total operating expenses			2,894,645				799,049				656,976				263,947				284,509				4,899,126
Interest income			509,378				444,351				96,162				165				166				1,050,222
Interest expense			454,457				1,012,243				48,581				-				288,014				1,803,295
Depreciation and amortization expense			594,498				1,265,809				248,251				136,235				-				2,244,793
Income tax expense/(benefit)			636,100				866,140				(41,305	)			-				-				1,460,935
Net segment profit/(loss)			3,504,466				2,872,828				(123,915	)			(119,694	)			(945,438	)			5,188,247
Capital expenditures			1,775,748				3,898,402				-				-				-				5,674,150
Segment assets			256,810,604			$	427,757,176			$	46,236,020			$	33,691,682			$	(256,207,190	)		$	508,288,292

 

 

SUTOR TECHNOLOGY GROUP LIMITED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 17 – GEOGRAPHIC INFORMATION

 

The following schedule summarizes the sources of the Company’s revenue by geographic regions for the three months ended September 30, 2014 and 2013:

 

		For the Three Months Ended September 30,
		2014				2013
Geographic Area
PRC		$	36,942,791			$	121,015,151
Other Countries			1,045,039				18,093,174
Total		$	37,987,830			$	139,108,325

 

 

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

 

Special Note Regarding Forward Looking Statements

 

In addition to historical information, this report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We use words such as “believe,” “expect,” “anticipate,” “project,” “target,” “plan,” “optimistic,” “intend,” “aim,” “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, those concerning market and industry segment growth and demand and acceptance of new and existing products; any projections of sales, earnings, revenue, margins or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; as well as all assumptions, expectations, predictions, intentions or beliefs about future events. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those identified in Item 1A “Risk Factors” included in our Annual Report on Form 10-K for the year ended June 30, 2014, as well as assumptions, which, if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and our other filings with the SEC. These reports attempt to advise interested parties of the risks and factors that may affect our business, financial condition and results of operations and prospects. The forward-looking statements made in this report speak only as of the date hereof and we disclaim any obligation, except as required by law, to provide updates, revisions or amendments to any forward-looking statements to reflect changes in our expectations or future events.

 

Use of Terms

 

Except as otherwise indicated by the context, all references in this report to:

 

·

“Company,” “we,” “us” and “our” are to the combined business of Sutor Technology Group Limited, a Nevada corporation, and its subsidiaries: Sutor BVI, Sutor Technology PRC, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua;

 

·

“Sutor BVI” are to our wholly-owned subsidiary Sutor Steel Technology Co., Ltd., a BVI company;

 

·

“Sutor Technology PRC” are to our wholly-owned subsidiary Sutor Technology Co., Ltd., a PRC company;

 

·

“Changshu Huaye” are to our wholly-owned subsidiary Changshu Huaye Steel Strip Co., Ltd., a PRC company;

 

·

“Jiangsu Cold-Rolled” are to our wholly-owned subsidiary Jiangsu Cold-Rolled Technology Co., Ltd., a PRC company;

 

·

“Ningbo Zhehua” are to our wholly-owned subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd., a PRC company;

 

·

“Shanghai Huaye” are to Shanghai Huaye Iron & Steel Group Co., Ltd., a PRC company of which Lifang Chen, our major shareholder and chief executive officer, and her husband Feng Gao, are 100% owners, and its subsidiaries;

 

·

“SEC” are to the United States Securities and Exchange Commission;

 

·

“Securities Act” are to the Securities Act of 1933, as amended;

 

·

“Exchange Act” are to the Securities Exchange Act of 1934, as amended.

 

·

“China” and “PRC” are to the People’s Republic of China;

 

·

“RMB” are to Renminbi, the legal currency of China; and

 

·

“U.S. dollar,” “$” and “US$” are to the legal currency of the United States.

 

 

Overview of our Business

 

We are one of the leading China-based, non-state-owned manufacturers and service providers of fine finished steel products. We utilize a variety of processes and technological methodologies to convert steel manufactured by third parties into fine finished steel products. Our product offerings are focused on higher margin, value-added finished steel products, specifically hot-dip galvanized steel, or HDG steel, and pre-painted galvanized steel, or PPGI. In addition, we produce acid pickled steel, or AP steel, and cold-rolled steel, which represent the least processed of our finished products. Since November 2009, our product offerings have included welded steel pipe products. We use a large portion of our AP steel and cold-rolled steel to produce our HDG steel and PPGI products. Our vertical integration has allowed us to maintain more stable margins for our HDG steel and PPGI products. In addition, we offer fee-based steel processing services and market and sell our products through electronic commerce platforms.

 

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

 

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

 

Executive Overview of Quarterly Results

 

In the first quarter of fiscal 2015, our revenue decreased 72.7% as compared with same period last year primarily due to the transformation of our business model from a traditional manufacturer and seller of fine finished steel products to one that offers both manufactured products and fee-based processing services. In the case of selling manufactured products, the selling price covers the cost of raw material steel sheets plus a gross profit, and the cost of the steel sheets may range from $500 to $700 per ton. For fee-based process service, the current processing fee may range from $50 to $80 per ton and only covers production costs like energy, labor, depreciation and zinc (e.g. for HDG products) plus a gross profit. Therefore, the new fee-based business model led to significantly reduced revenue.

 

In terms of total sales volume, we sold approximately 138,401 tons of mixed products mostly consisting of fee-based processed HDG products, as compared with 208,422 tons of mixed products consisting of almost all manufactured products. The reduced sales volumes reflected the initial challenges we faced during the transition period to market our new services as well as the recent softness in the Chinese economy when the GDP growth rate in the third quarter of calendar year 2014 was the lowest for the last five years. We believe that the slowing down in the economy affected the steel industry more than other industries.

 

Our net income decreased 198.2% in the first quarter of fiscal 2015 as compared with the same period last year. The reduction in net income was primarily due to our reduced total sales volumes for the reasons discussed above as well as our marketing efforts as we reduced our fees to attract customers to our new fee-based processing services and gain market shares.

 

The following summarizes the major financial information for the first fiscal quarter:

 

·

Revenue: Revenue was $38.0million for the three months ended September 30, 2014, a decrease of $101.1million, or 72.7%, from $139.1 million for the same period last year.

 

·

Gross profit and margin: Gross profit was $(1.8) million for the three months ended September 30, 2014, as compared to $12.2 million for the same period last year. Gross margin was (4.9)% for the three months ended September 30, 2014, as compared to 8.8% for the same period last year.

 

·

Net income: Net income was $(5.1) million for the three months ended September 30, 2014, a decrease of $10.3 million, or 198.2%, from $5.2 million for the same period of last year.

 

·

Fully diluted earnings per share: Fully diluted earnings per share were approximately $(0.12) for the three months ended September 30, 2014, as compared to approximately $0.13 for the same period last year.

 

Reportable Operating Segments

 

We have four reportable operating segments which are categorized based on manufacturing facilities and nature of operations – ChangshuHuaye, Jiangsu Cold-Rolled, Ningbo Zhehua and Sutor Technology PRC. ChangshuHuaye manufactures and sells HDG steel and PPGI products. Jiangsu Cold-Rolled manufactures and sells AP steel, cold-rolled steel and HDG steel. Ningbo Zhehua manufactures and sells steel pipe products. ChangshuHuaye and Jiangsu Cold-Rolled are adjacent to each other and use largely the same management resources. Ningbo Zhehua is located in Ningbo, China. Sutor Technology PRC is intended to cover R&D operations of the Company and so far had limited trading operations. See Note 16, “Segment Information” to the consolidated financial statements included elsewhere in this report.

 

 

Revenue

 

Our revenue is generated from sales of our HDG steel, PPGI, AP steel and cold-rolled steel products. As a result of our acquisition of Ningbo Zhehua, we also generate revenue from sales of steel pipe products, such as longitudinally welded steel pipes and spiral welded steel pipes. Our revenue has historically been affected by sales volume, sales price of our products and our product mix. In addition, we also generate revenue from offering fee-based steel processing services.

 

In the three months ended September 30, 2014 and 2013, ChangshuHuaye generated revenue of $7.7 million and $64.1 million, which represented 20.2% and 46.1% of our total revenue, respectively. Jiangsu Cold-Rolled generated revenue of $27.8million and $54.5 million in the three months ended September 30, 2014 and 2013, which represented 73.2% and 39.2% of our total revenue, respectively. In the three months ended September 30, 2014 and 2013, Ningbo Zhehua generated revenue of $2.4 million and $15.9 million, which represented 6.2% and 11.4% of our total revenue, respectively. In addition, in the three months ended September 30, 2014 and 2013, Sutor Technology PRC generated revenue of $0.1 million and $4.5 million, which represented 0.4% and 3.3% of our total revenue, respectively.

 

Historically a portion of our products were sold through our affiliate Shanghai Huaye, which also supplied to us a significant portion of our raw materials. We did not sell any products to Shanghai Huaye and its affiliates in the first quarter of fiscal 2015, while 26.5% of our revenue was derived from Shanghai Huaye and its affiliates in the three months ended September 30, 2013. As we are transforming from the traditional manufacturing and sales business model to one that provides more fee-based processing services directly to the end users, we anticipate that in the future we will have no or only a small part of our total revenues generated from sales to Shanghai Huaye.

 

Cost of Revenue

 

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

 

In the three months ended September 30, 2014, approximately $0.06 million of raw material procurement was conducted through Shanghai Huaye and its affiliates. Due to the size of Shanghai Huaye and the economy of scale, it has stronger bargaining power than we do and our arrangement with Shanghai Huaye allows us to purchase raw materials at relatively lower prices than we could obtain from suppliers ourselves. In the quarter ended on September 30, 2014, we significantly reduced raw materials purchases from Shanghai Huaye than in the past since under our new fee-based processing model the customers are generally responsible for raw materials.

 

Gross Profit and Gross Margin

 

Gross profit is equal to the difference between revenue and the cost of revenue. Gross margin is equal to gross profit divided by revenue. For the three months ended September 30, 2014, gross margin for domestic and international sales was (5.5)% and 14.4%, respectively, as compared with 8.0% and 14.7%, respectively, in the same period last year. On a segment basis, Changshu Huaye, Jiangsu Cold-Rolled and Ningbo Zhehua’s gross margins were approximately 2.5%, (4.3)% and (11.0)%, respectively. Sutor Technology PRC has a gross margin of approximately 87.1% for the first quarter of fiscal 2015.

 

To gain market penetration, we price our products at levels that we believe are competitive. We continually strive to improve manufacturing efficiencies and reduce our production costs in order to offer superior products and services at competitive prices. General economic conditions, the cost of raw materials, and supply and demand of fine finished steel products within our markets influence sales prices. Our high-end, value-added products, such as the PPGI products, generally tend to have higher profit margins. For the first quarter of fiscal 2015, we did not produce PPGI steel as the production line was shut down for scheduled technical upgrading. Reduced product sales led to negative gross margin for the first quarter of fiscal 2015 primarily due to fixed depreciation and amortization expenses.

 

 

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

 

Operating Expenses

 

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

 

General and Administrative Expenses

 

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

 

Selling Expenses

 

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

 

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

 

Provision for Income Taxes

 

Sutor Technology Group Limited is subject to United States federal income tax at a tax rate of 34%. Sutor BVI was incorporated in the British Virgin Islands and, under the current laws of the British Virgin Islands, is not subject to income taxes.

 

On March 16, 2007, the National People’s Congress of China passed a new Enterprise Income Tax Law, or the EIT Law, and on December 6, 2007, the State Council of China passed its implementing rules, which took effect on January 1, 2008. The EIT Law gives existing foreign invested enterprises a five-year grandfather period during which they can continue to enjoy their existing preferential tax treatments. Changshu Huaye was subject to an EIT of 15% from calendar years 2010 to 2012 because it qualified as a high-tech enterprise for the calendar years 2010, 2011 and 2012. In 2013, Jiangsu provincial government renewed the high-tech enterprise status of Changshu Huaye. As a result, Changshu Huaye is entitled to the preferred tax rate of 15% for the three years 2013 through 2015. Jiangsu Cold-Rolled was subject to an EIT of 12.5% for the calendar years 2010 and 2011 and is subject to an EIT of 25% for the calendar year 2012 and beyond. Ningbo Zhehua and Sutor Technology PRC are subject to an EIT of 25% and have no preferential tax treatments.

 

 

Results of Operations

 

Comparison of Three Months Ended September 30, 2014 and September 30, 2013

 

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

 

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

 

		Three Months Ended September 30, 2014								Three Months Ended September 30, 2013
		Amount				% of Revenue				Amount				% of Revenue
Revenue from unrelated parties		$	16,992				44.7	%		$	102,182				73.5	%
Revenue from related parties			20,996				55.3	%			36,926				26.5	%
Total Revenue			37,988				100.0	%			139,108				100.0	%
Cost of Revenue			(39,832	)			(104.9	)%			(126,906	)			(91.2	)%
Gross (Loss)/Profit			(1,844	)			(4.9	)%			12,202				8.8	%
Operating Expenses
Selling expense			(270	)			(0.7	)%			(1,995	)			(1.4	)%
General and administrative expense			(2,249	)			(5.9	)%			(2,904	)			(2.1	)%
Total Operating Expenses			(2,519	)			(6.6	)%			(4,899	)			(3.5	)%
(Loss)/Income from Operations			(4,363	)			(11.5	)%			7,303				5.3	%
Other Income (Expense)
Interest income			446				1.2	%			1,050				0.8	%
Other income			273				0.7	%			44				-
Interest expense			(2,978	)			(7.8	)%			(1,803	)			(1.3	)%
Other expense			(66	)			(0.2	)%			(18	)			-
Changes in fair value of warrant liabilities			-				-				(12	)			-
Income from equity method investments			-				-				85				-
Total Other Expense			(2,325	)			(6.1	)%			(654	)			(0.5	)%
Income (Loss) Before Taxes			(6,688	)			(17.6	)%			6,649				4.8	%
Income tax (expense)/benefit			1,595				4.2	%			(1,461	)			(1.1	)%
Net Income/ (Loss)		$	(5,093	)			(13.4	)%		$	5,188				3.7	%

 

Revenue. For the three months ended September 30, 2014, revenue was $38.0 million, compared to $139.1 million for the same period last year, a decrease of $101.1 million, or 72.7%. The decrease was mainly attributable to the change in our business model. In the past, our revenue was primarily derived from selling manufactured products and the sales price included the cost of steel sheets plus a gross profit. Under the fee-based processing services, the price of processing services does not include the cost of steel sheets as the customers are responsible for procurement of the raw materials. As a result, revenue from processing one ton of fine finished steel products is only a fraction of the revenue from the traditional business model. We believe the fee-based model is more scalable and allows us to better adapt to the changes in the Chinese economy than our traditional manufacturing and sales model. Finally, as fewer products were available for sales for the first quarter of fiscal 2015 than in the same period last year, sales to related parties were also significantly reduced.

 

The following table sets forth revenue by geography and by business segments for the three months ended September 30, 2014 and 2013.

 

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

 

		Three Months Ended September 30, 2014								Three Months Ended September 30, 2013
		Amount				% of Revenue				Amount				% of Revenue
Geographic Data
China		$	36,943				97.2	%		$	121,015				87.0	%
Other Countries			1,045				2.8	%			18,093				13.0	%
Segment Data
Changshu Huaye		$	7,690				20.2	%		$	64,137				46.1	%
Jiangsu Cold-Rolled			27,807				73.2	%			54,532				39.2	%
Ningbo Zhehua			2,356				6.2	%			15,913				11.4	%
Sutor Technology PRC			135				0.4	%			4,526				3.3	%

 

On a geographic basis, revenue generated from outside of China was $1.0 million, or 2.8% of the total revenue, for the three months ended September 30, 2014, as compared to $18.1 million, or 13.0% of the total revenue, for the same period in 2013. Our PPGI line was shut down during the first quarter of fiscal 2015 for scheduled technical upgrading. PPGI historically was one of our main export products.

 

 

On a segment basis, after eliminating intercompany sales and adjusting reconciliation items, revenue contributed by Changshu Huaye was $7.7 million for the three months ended September 30, 2014, reflecting a decrease of $56.4 million, or 88.0%, from $64.1 million for the same period last year. The decrease mainly resulted from the change in our business model as well as the shutdown of the PPGI line for technical upgrading.

 

After eliminating inter-company sales and adjusting reconciliation items, revenue contributed by Jiangsu Cold-Rolled was $27.8 million for the three months ended September 30, 2014, as compared at $54.5 million for the same period last year. As explained above, the decrease in sales revenue was mainly because of the change in the business model. Further, all cold-rolled products were internally used to produce HDG products in the first quarter of fiscal 2015 while some sales of cold-rolled products were made in the same quarter last year.

 

Revenue contributed by Ningbo Zhehua was $2.4 million for the three months ended September 30, 2014, a decrease of $13.5 million, or 84.9%, from $15.9 million for the same period in 2013. Our steel pipe business was significantly affected by the transition of the Chinese economy from investment driven to consumption driven. In addition, depending on the timing of project closing of its customers, revenues from Ninbo Zhehua often fluctuate from quarter to quarter.

 

Revenues contributed by Sutor Technology PRC were $0.1 million for the three months ended September 30, 2014, a decrease of approximately $4.4 million from $4.5 million for the same period in 2013. As Sutor Technology PRC sells products made by other Sutor subsidiaries, its first quarter 2015 revenues decreased significantly as a result of the reduction of our overall sales.

 

In terms of sales to related party as compared with sales to unrelated parties, our direct sales to unrelated parties in the three months ended September 30, 2014 decreased by $85.2 million, or 83.4%, to $17.0 million, from $102.2 million in the same period in 2013.

 

Cost of revenue. Cost of revenue decreased by $87.1 million, or 68.6%, to $39.8 million in the three months ended September 30, 2014, from $126.9 million in the same period in 2013. The decrease in cost of revenue was mainly due to reduced manufacturing activities.

 

Gross profit and gross margin. Gross profit decreased by $14.0 million to $(1.8) million in the three months ended September 30, 2014, from $12.2 million in the same period in 2013. Gross profit as a percentage of revenue (gross margin) was (4.9)% for the three months ended September 30, 2014, as compared to 8.8% for the same period last year. The main reason for the declined gross margin was our effort to make our new fee-based processing services more competitive by setting up our fees at a comparatively low level. In addition, overall lower production volumes in the first quarter of fiscal 2015 than the same period last year also reduced gross margin due to fixed production expenses.

 

On a segment basis, gross margin for Changshu Huaye decreased to 2.5% in the three months ended September 30, 2014, from 10.8% in the same period last year, mainly because of reduced HDG sales and shutdown of our PPGI production line. Gross margin for Jiangsu Cold-Rolled decreased to (4.3)%in the three months ended September 30, 2014, from 8.9% in the same period last year, mainly due to negative gross margin for fee-based HDG processing services during the first quarter of fiscal 2015 as discussed above. Gross margin for Ningbo Zhehua decreased to (11.0)% in the three months ended September 30, 2014, as compared to 3.0% in the same period in 2013 primarily due to low production volume. Gross margin for Sutor Technology PRC was 87.1% in the three months ended September 30, 2014, as compared to 3.2%in the same period last year. The increase was due to miscellaneous income and the dollar amount was small. Generally speaking, low production volumes led to low gross margin due to fixed production expenses.

 

Total operating expenses. Our total operating expenses decreased by $2.4 million to $2.5 million in the three months ended September 30, 2014, from $4.9 million in the same period in 2013. As a percentage of revenue, our total operating expenses increased to 6.6% in the three months ended September 30, 2014, from 3.5% in the same period in 2013.

 

Selling expenses. Our selling expenses decreased by $1.7 million to $0.3 million in the three months ended September 30, 2014, from $2.0 million in the same period in 2013. As a percentage of revenue, our selling expenses decreased to 0.7% for the three months ended September 30, 2014, from 1.4% for the same period last year. The reduced dollar amount of the selling expenses was primarily due to reduced shipping and handling actives as the total sales were reduced.

 

General and administrative expenses. General and administrative expenses was $2.2 million, or 5.9% of the total revenue, in the three months ended September 30, 2014, as compared with $2.9 million, or 2.1% of the revenue, in the same period in 2013. The decreased dollar amount of general and administrative expenses was primarily due to the reversal of a prior period bad debt allowance.

 

 

Interest expense. Our interest expense increased by $1.2 million to $3.0 million in the three months ended September 30, 2014, from $1.8 million in the same period in 2013. As a percentage of revenue, our interest expense was 7.8% of total revenue in the three months ended September 30, 2014, compared to 1.3% in the same period in 2013. The higher amount of interest expenses was mainly due to more outstanding bank loans in the first quarter of fiscal 2015 than the same period last year.

 

Provision for income taxes. Our income tax benefit was $1.6 million in the three months ended September 30, 2014, from $1.5 million of income tax expense in the same period last year, mainly due to net losses for the first quarter of fiscal 2015.

 

Net income. Net income, without including the foreign currency translation adjustment, decreased by $10.3 million, or 198.2%, to $(5.1) million in the three months ended September 30, 2014, from $5.2 million in the same period in 2013, as a cumulative result of the above factors.

 

Liquidity and Capital Resources

 

Our major sources of liquidity for the periods covered by this quarterly report were mainly borrowings through short-term bank loans. Our operating activities used approximately $58.2 million of cash in the three months ended September 30, 2014. As of September 30, 2014, our total indebtedness to non-related parties under existing short-term loans was approximately $186.8 million. We also had approximately $11.0 million under long-term loans. As of September 30, 2014, we had an unused line of credit with banks of approximately $31.2 million (RMB192 million) which entitled us to draw bank loans for general corporate purposes.

 

Short-term and long-term banks loans are likely to continue to be our key sources of financing for the foreseeable future, although in the future we may raise additional capital by issuing shares of our capital stock in an equity financing. We expect to renew our short term bank loans when they become due.

 

Our liquidity and working capital may be affected by a material decrease in cash flow due to factors such as the continued use of cash in operating activities resulting from a decrease in sales due to a challenging economic climate, increased competition, decreases in the availability, or increases in the cost of raw materials, unexpected equipment failures, or regulatory changes.

 

As stated above, a portion of our operations is funded through short-term bank loans and we expect to renew our short term loans when they become due. We are exposed to a variety of risks associated with short-term borrowings including adverse fluctuations in fixed interest rates for short-term borrowings and unfavorable increases in variable interest rates, potential inability to service our short term indebtedness through cash flow from operations and the overall reduction of credit in the current economic environment.

 

Our liquidity and working capital may also be affected by the substantial amount of our outstanding short-term loans, which represent our primary source of financing in China. Depending on the level of cash used in our operating activities and the level of our indebtedness, (i) it may become more difficult for us to satisfy our existing or future liabilities or obligations, which could in turn result in an event of default on such obligations, (ii) we may have to dedicate a substantial portion of our cash flows from borrowings to our operating activities and to debt service payments, thereby reducing the availability of cash for working capital and capital expenditures, acquisitions, general corporate purposes or other purposes, (iii) our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate purposes or other purposes may become impaired, (iv) our ability to withstand a downturn in our business, the industry in which we operate or the economy generally may be diminished, (v) we may experience limited flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and (vi) we may find ourselves at a competitive disadvantage compared to competitors that have proportionately less debt. If we are unable to meet our debt service obligations, we could be forced to restructure or refinance our indebtedness, seek additional equity capital or sell assets. We may be unable to obtain financing or sell assets on satisfactory terms, or at all, which could cause us to default on our debt service obligations and be subject to foreclosure on such loans. Additionally, we could incur additional indebtedness in the future and, if new debt is added to our current debt levels, the risks above could intensify.

 

As some of our loans become due, we may elect to refinance, rather than repay, the indebtedness. However, there is no assurance that additional financing will become available on terms acceptable to us. We believe that we will have the ability to refinance our indebtedness when and if we elect to do so. While we currently are not in a position to know the terms of such refinancing, we expect to refinance our indebtedness at prevailing market rates and on prevailing market terms.

 

 

As of September 30, 2014, we had cash and cash equivalents (excluding restricted cash) of $4.0 million and restricted cash of $14.8 million. The following table provides detailed information about our net cash flow for the financial statement period presented in this report.

 

Cash Flow

(All amounts in thousands of U.S. dollars)

 

		Three Months Ended September 30,
		2014				2013
Net cash provided by (used in) operating activities		$	(58,238	)		$	11,840
Net cash provided by (used in) investing activities			2,562				(9,802	)
Net cash provided by financing activities			47,515				486
Effect of foreign currency translation on cash and cash equivalents			5				25
Net cash flows			(8,156	)			2,549

 

Operating Activities

 

Net cash used in operating activities was $58.2 million for the three months ended September 30, 2014, as compared to $11.8 million cash provided by operating activities for the same period last year. During the quarter, we significantly reduced our account payables which led to increased cash used in operating activities.

 

Specifically, the increase in net cash used in operating activities was primarily due to reduced notes payable of approximately $102.9 million, increased trade account receivable of $22.1 million, and net loss of $5.1 million; partially offset by reduced restricted cash of $46.1 million, reduced inventory of $22.1 million, increased other payable of $4.8 million, and depreciation and amortization expenses of $2.1 million. The reduced amount of notes payable was due to change in our business practice. For the quarter ended on September 30, 2014, we devoted more production capacity to fee-based steel processing services than to traditional product sales, which led to reduced raw materials purchases and hence the need for bank notes. Our inventory as of September 30, 2014 was approximately $22.1 million, consisting of approximately $14.7 million in raw materials and $41.5 million in finished goods.

 

 

Investing Activities

 

Our main uses of cash for investing activities are payments related to the acquisition of property, plant and equipment and restricted cash pledged as deposits for bankers’ acceptance bills.

 

Net cash provided by investing activities was $2.6 million for the three months ended September 30, 2014, as compared to $9.8 million used in investing activities for the same period last year. The increase in net cash provided by investing activities was primarily due to the proceeds from sale of short-term investments of approximately $3.2 million, partially offset by purchase of plant and equipment of $0.7 million.

 

Financing Activities

 

Net cash provided by financing activities was $47.5 million for the three months ended September 30, 2014, as compared to $0.5 million provided by financial activities for the same period in 2013.The increased cash flow from financing activities was mainly due to proceeds from bank loans of $79.8 million, partially offset by repayment of bank loans of $32.3 million.

 

 

As of September 30, 2014, the amount, maturity date and term of each of our loans were as follows:

 

(All amounts in millions of U.S. dollars)

 

Lender		Amount*				Starting Date		Maturity Date		Guarantor**
Construction Bank of China, Changshu Branch		$	6.5			2013-10-16		2014-10-15		None
Communications Bank of China, Changshu Branch			3.2			2013-11-04		2014-11-01		Shanghai Huaye
Construction Bank of China, Changshu Branch			4.4			2014-04-30		2014-10-29		Shanghai Huaye
The Agricultural Bank of China, Changshu Branch			2.4			2014-05-16		2015-05-05		Shanghai Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua
The Agricultural Bank of China, Changshu Branch			3.6			2014-05-17		2015-05-15		Shanghai Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua
The Agricultural Bank of China, Changshu Branch			2.4			2014-05-19		2015-05-18		Shanghai Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua
Construction Bank of China, Changshu Branch			2.0			2014-05-23		2014-11-22		Shanghai Huaye
The Agricultural Bank of China, Changshu Branch			2.6			2014-06-11		2015-06-10		Shanghai Huaye, Jiangsu Cold-Rolled
Industrial and Commercial Bank of China, Changshu Branch			1.3			2014-06-13		2015-06-09		Shanghai Huaye,  Ningbo Zhehua
Industrial and Commercial Bank of China, Changshu Branch			3.2			2014-06-20		2015-06-19		Shanghai Huaye, Ningbo Zhehua
The Agricultural Bank of China, Changshu Branch			4.1			2014-06-20		2015-06-19		Shanghai Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua
The Agricultural Bank of China, Changshu Branch			4.1			2014-06-24		2015-06-23		Shanghai Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua
The Agricultural Bank of China, Changshu Branch			4.1			2014-06-25		2015-06-23		Shanghai Huaye, Jiangsu Cold-Rolled, Ningbo Zhehua
Industrial and Commercial Bank of China, Changshu Branch			3.2			2014-06-17		2015-06-13		Shanghai Huaye,  Ningbo Zhehua
Industrial and Commercial Bank of China, Changshu Branch			1.5			2014-06-25		2015-06-22		Shanghai Huaye,  Ningbo Zhehua
Industrial and Commercial Bank of China, Changshu Branch			1.3			2014-06-25		2015-06-23		Sutor Technology PRC, Ningbo Zhehua
Construction Bank of China, Changshu Branch			4.9			2014-07-28		2015-07-27		Shanghai Huaye,  Ningbo Zhehua
Industrial and Commercial Bank of China, Changshu Branch			3.7			2014-08-19		2015-08-18		Shanghai Huaye,  Ningbo Zhehua
Construction Bank of China, Changshu Branch			5.4			2014-08-08		2015-08-07		Shanghai Huaye,  Ningbo Zhehua
Construction Bank of China, Changshu Branch			2.7			2014-08-14		2015-08-13		Shanghai Huaye,  Ningbo Zhehua
Industrial and Commercial Bank of China, Changshu Branch			0.4			2014-08-27		2015-08-26		Shanghai Huaye,  Ningbo Zhehua
Industrial and Commercial Bank of China, Changshu Branch			1.6			2013-12-19		2014-12-18		Shanghai Huaye, ChangshuHuaye

 

 

The Agricultural Bank of China, Changshu Branch			4.9			2014-03-26		2015-03-23		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			4.2			2014-04-14		2015-04-13		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, ChangshuBranch			8.8			2014-04-17		2015-04-15		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.2			2014-04-30		2015-04-17		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			2.8			2014-05-21		2015-05-20		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			3.1			2014-05-26		2015-05-25		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			2.6			2014-04-11		2015-04-10		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			0.6			2014-04-15		2015-04-14		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			1.3			2014-06-12		2015-06-10		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.9			2014-06-20		2015-06-19		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.2			2014-06-20		2015-06-19		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			0.3			2014-06-23		2015-06-22		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			2.4			2014-06-24		2015-06-22		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.2			2014-06-23		2015-06-22		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			4.1			2014-06-23		2015-06-22		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			1.1			2014-06-18		2015-06-15		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			3.6			2014-06-19		2015-06-18		Shanghai Huaye, ChangshuHuaye
Construction Bank of China, Changshu Branch			1.8			2014-06-27		2015-06-26		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			1.5			2014-07-16		2015-07-10		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			1.0			2014-07-16		2015-07-15		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			4.0			2014-07-18		2015-07-17		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			3.4			2014-07-25		2015-07-21		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			4.0			2014-07-18		2015-07-18		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.3			2014-08-15		2015-08-14		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.3			2014-08-15		2015-08-14		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.3			2014-08-15		2015-08-14		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.3			2014-08-15		2015-08-14		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.3			2014-08-16		2015-08-15		Shanghai Huaye, ChangshuHuaye

 

 

The Agricultural Bank of China, Changshu Branch			3.3			2014-08-16		2015-08-15		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.3			2014-08-16		2015-08-15		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			3.2			2014-08-08		2015-08-06		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			3.8			2014-08-14		2015-08-11		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			1.0			2014-09-17		2015-09-11		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			4.0			2014-09-19		2015-03-17		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			4.0			2014-09-19		2015-03-18		Shanghai Huaye, ChangshuHuaye
Industrial and Commercial Bank of China, Changshu Branch			1.8			2014-09-10		2015-09-09		Shanghai Huaye, ChangshuHuaye
Construction Bank of China, Changshu Branch			1.1			2014-09-22		2015-09-21		Shanghai Huaye, ChangshuHuaye
The Agricultural Bank of China, Changshu Branch			3.3			2014-01-27		2014-07-25		Shanghai Huaye, ChangshuHuaye
Ping An Bank, Ningbo Branch			2.3			2014-08-25		2015-08-25		Shanghai Huaye, ChangshuHuaye
Ping An Bank, Ningbo Branch			1.6			2014-09-30		2015-09-30		Shanghai Huaye, ChangshuHuaye
Lin, Guihua			2.9			2008-11-20		2016-12-31		None
Chen,Lifang			8.2			2013-12-31		2016-12-31		None
Total			197.9

 

* Calculated on the basis that $1 = RMB 6.15

 

** We do not pay any consideration to Shanghai Huaye or its affiliated companies, which are controlled by our CEO and her spouse, for the guarantees of our loans.

 

The loan agreements with banks generally contain debt covenants that require us to maintain certain financial and operating condition, among other things. We believe that we were in compliance with these debt covenants as of September 30, 2014.

 

In the coming twelve months, we will have approximately $186.8 million in bank loans that will mature. We plan to replace these loans with new bank loans in approximately the same aggregate amounts.

 

We believe that our currently available working capital, credit facilities referred to above and the expected additional credit facility should be adequate to sustain our operations at the current level for at least the next twelve months. However, depending on our future needs and changes and trends in the capital markets affecting our shares and the Company, we may determine to seek additional equity or debt financing in the private or public markets.

 

Critical Accounting Policies

 

Critical accounting policies are those we believe are most important to portraying our financial conditions and results of operations and also require the greatest amount of subjective or complex judgments by management. Judgments and uncertainties regarding the application of these policies may result in materially different amounts being reported under various conditions or using different assumptions. There have been no material changes to the critical accounting policies previously disclosed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2014.

 

Recent Accounting Pronouncements

 

See Note 2, Significant Accounting Policies, to our unaudited condensed consolidated financial statements included elsewhere in this report.

 

Seasonality

 

Our operating results and operating cash flows historically have not been subject to significant seasonal variations. This pattern may change, however, as a result of new market opportunities or new product introductions.

 

Off Balance Sheet Arrangements

 

We do not have any off-balance arrangements.

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

Not applicable.

 

ITEM 4.

CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our chief executive officer and chief financial officer, Ms. Lifang Chen and Mr. Naijiang Zhou, respectively, evaluated the effectiveness of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports, such as this report, that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives andmanagement necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, Ms. Chen and Mr. Zhou concluded that as of September 30, 2014, our disclosure controls and procedures were effective at the reasonable assurance level.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the first quarter of fiscal year 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II

 

OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS.

 

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.

 

ITEM 1A.

RISK FACTORS.

 

Not applicable.

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

We have not sold any equity securities during the first quarter of fiscal year 2015 that were not previously disclosed in a quarterly report on Form 10-Q or a current report on Form 8-K that was filed during the quarter.

 

During the three month period ended September 30, 2014, we did not repurchase any shares of our common stock.

 

No repurchase plans expired or were terminated during the first quarter of fiscal year 2015, nor do any plans exist under which we do not intend to make further purchases.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4.

MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5.

OTHER INFORMATION.

 

We have no information to disclose that was required to be in a report on Form 8-K during the first quarter of fiscal year 2015, but was not reported. There have been no material changes to the procedures by which security holders may recommend nominees to our board of directors.

 

ITEM 6.

EXHIBITS.

 

The list of exhibits in the Exhibit Index to this report is incorporated herein by reference.

 

 

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.

 

Date: December 15, 2014	SUTOR TECHNOLOGY GROUP LIMITED
	By:	/s/ Lifang Chen
		Lifang Chen, Chief Executive Officer
		(Principal Executive Officer)

 

	By:	/s/ Naijiang Zhou
		Naijiang Zhou, Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

 

 

EXHIBIT INDEX

 

Exhibit No.		Description
31.1		Certifications of Principal Executive Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certifications of Principal Financial Officer filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Principal Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certifications of Principal Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		Interactive data files pursuant to Rule 405 of Regulation S-T (furnished herewith).