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GPRC > SEC Filings for GPRC > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for GUANWEI RECYCLING CORP.

Form 10-Q for GUANWEI RECYCLING CORP.


13-Nov-2012

Quarterly Report


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

Except as otherwise indicated by the context, references in this Quarterly Report to "we", "us", "our" or the "Company" are to the consolidated businesses of Guanwei Recycling Corp. and its wholly-owned direct and indirect subsidiaries, Hongkong Chenxin International Development Limited, a Hong Kong limited company ("Chenxin") and Fuqing Guanwei Plastic Industry Co. Ltd., a China limited company ("Guanwei"), except that references to "our common stock" or "our capital stock" or similar terms refer to the common stock, par value $0.001 per share, of Guanwei Recycling Corp., a Nevada corporation (the "Registrant"). "China" or "PRC" refers to the People's Republic of China. References to "RMB" refer to the Chinese Renminbi, the currency of the primary economic environment in which the Company operates.

Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, the Company's consolidated financial statements and the accompanying notes contained in this Quarterly Report. Information in this Item 2 is intended to assist the reader in obtaining an understanding of the consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company's future performance, as well as how certain accounting principles affect the consolidated financial statements. This includes discussion of (i) Liquidity,
(ii) Capital Resources, (iii) Results of Operations and (iv) Off-Balance Sheet Arrangements, and any other information that would be necessary to an understanding of the Company's financial condition, changes in financial condition and results of operations.

Forward Looking Statements

The discussion below contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act. We have used words such as "believes," "intends," "anticipates," "expects" and similar expressions to identify forward-looking statements. These statements are based on information currently available to us and are subject to a number of risks and uncertainties that may cause our actual results of operations, financial condition, cash flows, performance, business prospects and opportunities and the timing of certain events to differ materially from those expressed in, or implied by, these statements. These risks, uncertainties and other factors include, without limitation, those matters discussed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2011. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K and Item 1A, "Risk Factors" for the year ended December 31, 2011.

Corporate Background

The Company operates its business through its indirect wholly-owned subsidiary, Guanwei, which is located in Fuqing City, Fujian Province, PRC. Guanwei imports and recycles low density polyethylene ("LDPE") plastic scrap material into granular plastic for use in the manufacture of various consumer products, and is one of the largest manufacturers of recycled LDPE in China. Guanwei is one of the few plastic recyclers in China to import most of its raw materials (i.e. plastic waste) from foreign suppliers (primarily Germany) where the cost of processing plastic waste is significantly higher than in China. Guanwei's products are sold to customers in a wide range of industries, including shoe manufacturing, architecture and engineering products, industrial equipment and supplies and chemical and petrochemical manufacturing.

The Company is organized as a single business segment and is committed to sourcing and developing innovative ideas and markets for recycled materials, and concentrates on transforming plastic waste into useful plastic grains. Its mission is to be an environmentally conscious, profitable manufacturer of plastics products of the highest quality. Guanwei procures raw material in the form of unrecycled plastic waste from its suppliers and uses this material to manufacture recycled plastic grains, which are then sold to manufacturers of consumer products in various industries. Guanwei specializes in the production of various recycled plastics products, the most important of which is LDPE. Guanwei has developed four distinct grades of LPDE plastic grains, which are sold to customers to be manufactured into a broad range of end products. Guanwei currently sells to more than 300 customers, including over 150 active customers during 2012, in over 10 industries, ranging from shoe manufacturing, architecture and engineering, industrial equipment and supplies, and chemical and petrochemical manufacturing. Guanwei's LDPE products in particular are widely used in the manufacturing of chemical and functional fibers, and is the main raw material for shoe soles, insulation material, fire-proofing and water-proofing material, and foam.


Guanwei operates its business in compliance with the highest environmental standards in order to meet the stringent requirements of both German and Chinese authorities. In fact, on June 18, 2009, Umweltagentur Erftstadt, a provider of certification services, issued its audit report on the compliance of Guanwei's operations with German regulations regarding pollution and environmental controls. Based upon its audit, Umweltagentur Erftstadt determined that Guanwei should be issued a certificate as to such compliance. Holding such a Compliance Certificate permits a plastics recycler to purchase plastic waste directly from German suppliers.

The Company's corporate offices are located at Rong Qiao Economic Zone, Fuqing City, Fujian Province, People's Republic of China, 350301.

Current Business and Recent Developments

Our revenues are derived from the sale of recycled LDPE and non-LDPE waste materials. We manufacture recycled LDPE from plastic waste and occasionally purchase recycled LDPE from other manufacturers for resale when market conditions justify us doing so. The raw materials (i.e. plastic waste) we use in our operations generally contain approximately 9% of non-LDPE plastic waste, such as polyethylene terephthalate, polypropylene, or acrylonitrile butadiene styrene. We sort and classify this non-LDPE material and sell it to other recycled plastic manufacturers that use these products.

During the fiscal year 2010, we completed construction projects involving our washing and smashing plant. The washing and smashing plant is a key component in our manufacturing process. After being sorted from the non-LDPE material, all LDPE material is smashed and cut into pieces by one of eight smashing machines before being washed and cleaned several times in order to eliminate impurities. After completion of the construction projects, the washing pools were drained and excavated to increase their depth, some components of the pools' vortex pumps were replaced, and the engine size of the pumps was enlarged to enhance their efficiency. The improved washing pools allow the Company to enhance the whiteness of the recycled LDPE material, which results in a higher grade end-product. This is particularly desirable for the many customers that mix recycled LDPE with virgin plastics in their production processes and typically have strict color requirements. In late 2010, construction was completed on the new raw material storage field. Our storage facility in use is now more than 4,000 square meters. Raw materials were relocated to the new storage facility and the old raw material warehouse was converted for expansion of the Company's classification and sorting operations, which will allow for future increases in production capacity.

In 2011, we made significant improvements in our factory equipment and facility. Our capacity increased to annual production of 80,000 tons as a result of these improvements.

In 2012, we acquired additional factory equipment to increase our production efficiency and handle increasing demand of our products. In addition, we built additional storage space for our raw materials which will allow us to better manage our production cycle to meet our customers' orders.

Critical Accounting Policies, Estimates and Assumptions

Accounting Principles

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements. These financial statements are prepared in accordance with generally accepted accounting principles in the United States ("US GAAP" for interim financial information), which requires us to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues and expenditures, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include revenues recognition, valuation of inventories, valuation allowance for deferred taxes and impairment of long-lived assets. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Quarterly Report reflect the more significant judgments and estimates used in preparation of our financial statements. We believe there have been no material changes to our critical accounting policies and estimates.


The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our unaudited consolidated financial statements:

(a) Revenue Recognition

Revenue from sales of manufactured LDPE is recognized when persuasive evidence of an arrangement exists, delivery of the goods has occurred, and customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

From time to time, revenue is deferred for upfront payments for sales of recycled LDPE received and is included in accrued expenses and other payables until the significant risks and ownership of the goods have been transferred to the customers and the price is fixed and determinable and collectability is reasonably assured.

Sales of scrap materials are recognized on the same basis as sales of LDPE.

(b) Income Taxes

In the process of preparing financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The Registrant and its subsidiaries, with the exception of Guanwei, generated no taxable income. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carry-forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We conduct this analysis on a quarterly basis. As of September 30, 2012, the Company had undistributed profits of approximately $37,204,000 that are subject to withholding tax when distributed. Since the Company intends to reinvest these undistributed profits to further expand its businesses and does not intend to declare dividends, the Company has not recorded a withholding tax in relation to these undistributed profits. Should the Company's distribute all of these profits, the aggregate withholding tax would amount to approximately $3,720,000 based on the current tax rate of 10% of the undistributed earnings prepared under accounting principles generally accepted in the PRC ("PRC GAAP") after 2007.

The Company had no material uncertain tax positions as of September 30, 2012 or unrecognized tax benefit which would favorably affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters as an income tax expense. As of September 30, 2012, there were no interest or penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

(c) Inventories

Inventories are stated at the lower of cost, on the first-in, first-out method, or market value. Costs include purchase and related costs incurred in bringing each product to its present location and condition. Market value is calculated based on the estimated normal selling price, less further costs expected to be incurred for disposal. Provisions are made for obsolete, slow moving or defective items, where appropriate.

We estimate the net realizable value for finished goods and work-in-progress based primarily upon the latest invoice prices and current market conditions. If the market value of an inventory drops below its carrying value, we record a write-off to cost of sales for the difference between the carrying cost and the market value. We carry out an inventory review at each quarter-end. During the three and nine months ended September 30, 2012, the Company had no inventory write downs.

(d) Impairment of Long-lived Assets

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable, such as change of business plan, obsolescence, and continuous losses suffered. We assess recoverability of assets by comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. In determining estimates of future cash flows, we have to exercise significant judgment in terms of projection of future cash flows and assumptions. If the estimated undiscounted cash flows are less than the carrying amount then we perform the second step of the analysis and compare the fair value to the carrying amount. Fair value is determined using various approaches, including discounted future cash flows, independent appraisals or other relevant methods. If the carrying amount of the asset exceeds its fair value, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value. The fair value of the asset then becomes the asset's new carrying value, which we depreciate or amortize over the remaining estimate useful life of the asset where appropriate. We may incur impairment losses in future periods if factors influencing our estimates change. Historically, we have not had an impairment charge on our long-lived assets.


Results of Operations for the Three Months Ended September 30, 2012 Compared To the Three Months Ended September 30, 2011

The following table sets forth a summary of certain key components of our results of operations for the periods indicated:

                                                        For the Three Months Ended
                                                               September 30,               Change in
                                                         2012                2011              %

Net revenue                                          $  17,905,974       $  16,679,012           7.36 %
Cost of revenue                                         12,374,450          11,722,192           5.56 %
Gross profit                                             5,531,524           4,956,820          11.59 %
Selling and marketing expenses                             125,536              95,288          31.74 %
General and administrative expenses                        524,112             431,316          21.51 %
Interest income                                             14,395              22,889         (37.11 )%
Interest expense                                                 -              (3,453 )      (100.00 )%
Exchange (loss) gain                                       (92,074 )            67,485        (236.44 )%
Miscellaneous                                                2,409                   -              - %
Income taxes                                             1,183,774           1,141,379           3.71 %
Net income                                               3,622,832           3,375,758           7.32 %

Net Revenue

The following table sets forth a summary of our net revenue by categories for
the periods indicated:

                                             For the Three Months Ended
                                                   September 30,                Change in
                                               2012              2011               %

      Sales of recycled LDPE                 $ 17,430,616     $ 16,348,291            6.62 %
      Sales of sorted non- LDPE materials         475,358          330,721           43.73 %
                                             $ 17,905,974     $ 16,679,012            7.36 %

Revenue generated during the three months ended September 30, 2012 from the sale of manufactured recycled LDPE was $17,430,616 as compared to $16,348,291 for the same period of 2011, which represents an increase of $1,082,325 or 6.62%. The increase was due to the combined effects of a slight increase of our selling price and an increase in our sales volume of manufactured recycled LDPE. The average selling price of recycled LDPE increased 0.75% to approximately $1,208 per ton from approximately $1,199 per ton in the same period in 2011. The Company sold 14,427 tons of manufactured recycled LDPE in the three months ended September 30, 2012, representing an increase of 5.77% from the 13,640 tons sold in the corresponding period of 2011. This represents a sequential increase of 889 tons sold from the three months ended June 30, 2012. We had a relatively weak first quarter of 2012. The Chinese Spring Festival this year fell in the third week of January 2012, which was 2 to 3 weeks earlier than usual. Consequently many of our customers ordered our products in the fourth quarter of 2011 ahead of the long holidays which resulted in a relatively weak first quarter of 2012. We believe the average selling price of our recycled LDPE and demand for our recycled LDPE will continue to increase at a moderate rate in the remainder of 2012.


Revenue generated from the sales of sorted non-LDPE material increased $144,637, or 43.73%, to $475,358 in the three months ended September 30, 2012 from $330,721 in the same period of 2011. This increase was mainly due to an increase in the average selling price during the period. Guanwei sold 1,536 tons of sorted non-LDPE material in the three months ended September 30, 2012, representing a decrease of 3.78% from 1,480 tons sold in the same period of 2011. The average selling price of sorted non-LDPE material increased 38.39% to approximately $310 in the three months ended September 30, 2012 from approximately $224 per ton in the same period in 2011.

Our revenue may be affected by import quotas imposed by the PRC's Ministry of Environmental Protection. On July 11, 2011, Guanwei received official government approval for the expansion of its quota for imported plastic waste. Pursuant to the approval, Guanwei's import quota increased from 24,000 tons to 64,000 tons in 2011. In January 2012, we received government approval to further increase our quota to 80,000 tons for the year of 2012. Guanwei entered into an agreement, dated November 1, 2008, pursuant to which Guanwei has been permitted to use, at no cost, the 35,000 tons per year import quota granted to Fuqing Huan Li Plastics Company Limited ("Huan Li") for a term of 10 years. Mr. Chen Min, our Chief Executive Officer and Chairman of the Board, is also the Chief Executive Officer, Chairman of the Board and legal representative of Huan Li. There can be no guarantee that Huan Li's import quota will be available to us after the expiration of the agreement. If we are unable to use Huan Li's import quota or obtain the grant of an import quota from the Ministry of Environment Protection, our revenue and results of operations would be materially adversely affected. Please refer to the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 for further information and other factors that may affect our revenue. Together with the import quota of 35,000 tons contracted from Huan Li, the Company had a total import quota of 115,000 tons for the year of 2012.

Other than as disclosed elsewhere in this Quarterly Report, we are unaware of any trends or uncertainties which have or which we reasonably expect to have a material impact on net sales or revenues from continued operations.

Cost of Revenue

                                        Three Months                     Three Months
                                            Ended                            Ended
                                     September 30, 2012               September 30, 2011
                                                   % of Net                         % of Net
                                     in $          Revenue            in $          Revenue        Change in %

Cost of manufactured recycled
LDPE and sorted non-LDPE

materials $ 12,374,450 69.11 % $ 11,722,192 70.28 % 5.56 %

$ 12,374,450 69.11 % $ 11,722,192 70.28 % 5.56 %

Our cost of revenue consists of the costs of plastic waste raw materials for production, labor costs and overhead related to production.

During the three months ended September 30, 2012 and 2011, our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material was $12,374,450 and $11,722,192, respectively, representing 69.11% and 70.28%, respectively, of net revenue from sales of manufactured recycled LDPE and sorted non-LDPE materials. Our manufacturing costs, especially the raw material cost, was in an upward trend beginning in the third quarter of 2011 through the second quarter of 2012. The decrease in the percentage of cost to net revenue during the period was primarily due to the combined effects of the increase in our average selling price by 0.75% and the slight decrease in our average manufacturing costs during the three months ended September 30, 2012 as compared to the same period of 2011.

Because our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material consists primarily of the purchase price of imported plastic waste for production, we have limited influence on such costs. The prices of imported plastic waste are determined solely by suppliers and are dependent upon market conditions. The per-ton raw material cost of recycled LDPE and sorted non-LDPE material decreased 0.99% to $697 per ton during the three months ended September 30, 2012 from $704 per ton during the same period of 2011, and increased 1.01% from $690 per ton during the three months ended June 30, 2012. We believe that the average raw material cost will remain stable or trend slightly higher for the remainder of 2012 based on our current communication with our major suppliers.


In order to cut costs and increase profit margins, Guanwei focuses heavily on developing relationships with new suppliers and increasing the amount of high quality raw material purchased directly from European suppliers, as opposed to purchasing from a wholesaler. Guanwei intends to continue to work on developing such relationships and to obtain more favorable terms and discounts by strengthening our relationships with suppliers and placing more bulk orders.

Gross Profit

Gross profit during the three months ended September 30, 2012 and 2011 was $5,531,524 and $4,956,820, respectively.

Gross profit from sales of manufactured recycled LDPE and sorted non-LDPE material during the three months ended September 30, 2012 increased by $574,704, or 11.59%, to $5,531,524 from $4,956,820 for the same period of 2011. The increase in gross profit from sales of manufactured recycled LDPE and sorted non-LDPE material was primarily the result of increased average selling prices which grew faster than the increases of cost of material, labor and overhead cost which started to stabilize at the end of the second quarter of 2012.

The prices of imported plastic waste are determined solely by suppliers and are dependent upon market conditions, and the import-related costs are mainly dependent on the delivery terms agreed with suppliers. In order to reduce costs and to secure availability of raw material, the Company intends to continue to work on obtaining more favorable terms and a sustainable supply of materials by strengthening our relationships with suppliers and by developing long term supply arrangements. We believe the average raw material cost will remain stable or trend slightly higher for the remainder of 2012 based on our current communication with our major suppliers.

Selling and Marketing Expenses

Sales and marketing expenses primarily consist of transportation and courier costs, payroll and related benefits. During the three months ended September 30, 2012, sales and marketing expenses increased $30,248, or 31.74% to $125,536 from $95,288 during the three months ended September 30, 2011. Our transportation costs dropped in the three months ended September 30, 2011 during a period when there was a significant decline in gas prices. We believe our transportation cost continue to fluctuate based on the fluctuation in gasoline prices.

General and Administrative Expenses

General and administrative expenses primarily consist of management and administrative wages, depreciation and amortization, employee welfare costs, and legal and professional fees. During the three months ended September 30, 2012, general and administrative expenses increased $92,796 or 21.51% to $524,112 from $431,316 during the three months ended September 30, 2011. The increase was primarily due to moderate increases in professional fees and higher depreciation expense as a result of a significant number of transactions for the acquisition of machinery and equipment during the third quarter of 2012 and 2011.

Other Income (Expenses)

Our interest income is generated by interest earned on deposits with banks and other financial institution.

We did not incur any interest expenses during the three months ended September . . .

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