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

Show all filings for HUIXIN WASTE WATER SOLUTIONS, INC.

Form 10-Q for HUIXIN WASTE WATER SOLUTIONS, INC.


13-Nov-2012

Quarterly Report


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

The following discussion provides information which management believes is relevant to an assessment and understanding of our results of operations and financial condition. The discussion should be read along with our financial statements and notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. The following discussion and analysis contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ significantly from the results, expectations and plans discussed in these forward-looking statements.

Company Overview

We are a leading producer and distributer of water purifying agent and High-performance Aluminate Calcium (HAC) powder, the core component of water purifying agent. We manufactured and distributed approximately 180,000 and 235,000 tons water purifying agent and 178,000 and 227,000 tons of high calcium aluminates powder for the past two years. Our products are distributed in the southern, south-western, mid-eastern, and eastern part of China. We supply water purifying products for industries such as printing and dyeing, paper making, municipal wastewater, phosphorus removal, and oil removal from washing water.

Our products are manufactured and distributed by our Operating Companies. Jiangmen Wealth Water is engaged in the production and sale of water purifying agents. Water purifying agent's core raw material is HAC powder, which is exclusively supplied by Guizhou Yufeng, a wholly owned subsidiary of Jiangmen Wealth Water. Although Guizhou Yufeng sells HAC powder to third party customers, it prioritizes the supply to Jiangmen Wealth Water over third party customers and ensures that its supply meets the demand of Jiangmen Wealth Water before products being sold to other customers. Shanxi Wealth also manufactures HAC powder and distributes all of its products to third party customers. HAC powder's core raw materials are aluminates ore and limestone, respectively obtained from their self-owned mines.

Results of Operations

The following table shows key components of our results of operations during the
three months and nine months ended September 30, 2012 and 2011, in both dollars
and as a percentage of our total revenue.

                                                            Three Months Ended June 30,
                                                                % of                            % of
                                                2012           Revenue           2011          Revenue

Net revenue                                 $ 22,407,329         100.00 %    $ 19,335,053        100.00 %
Cost of revenue                               12,308,208          54.93 %      10,759,594         55.65 %

Gross profit                                  10,099,121          45.07 %       8,575,459         44.35 %

Operating expenses:
Selling and marketing                            797,674           3.56 %         568,573          2.94 %
General and administrative                     1,490,942           6.65 %       1,184,947          6.13 %
Research and development                         151,176           0.67 %         149,191          0.77 %
Total operating expenses                       2,439,792          10.88 %       1,902,711          9.84 %

Income from operations                         7,659,329          34.19 %       6,672,748         34.51 %

Other income/(expense)
Interest income                                   79,596           0.36 %          99,281          0.51 %
Interest expense                                (228,123 )        (1.02 )%              -          0.00 %
Total other income/(expense)                    (148,527 )       (0. 66 )%         99,281          0.51 %

Income before provision for income taxes       7,510,802          33.53 %       6,772,029         35.02 %

Provision for income taxes                     1,901,646           8.49 %       1,696,209          8.77 %

Net income                                  $  5,609,156          25.04 %    $  5,075,820         26.25 %


                                                        Nine Months Ended September 30,
                                                              % of                            % of
                                               2012          Revenue           2011          Revenue

Net revenue                                $ 61,298,540        100.00 %    $ 52,761,618        100.00 %
Cost of revenue                              33,746,528         55.05 %      28,364,739         53.76 %

Gross profit                                 27,552,012         44.95 %      24,396,879         46.24 %

Operating expenses:
Selling and marketing                         2,218,268          3.62 %       1,590,600          3.01 %
General and administrative                    3,826,647          6.24 %       2,347,284          6.34 %
Research and development                        470,722          0.77 %         438,936          0.83 %
Total operating expenses                      6,515,637         10.63 %       5,376,820         10.18 %

Income from operations                       21,036,375         34.32 %      19,020,059         36.06 %

Other income /(expense)
Interest income                                 708,023          1.16 %         163,084          0.31 %
Interest expense                               (284,243 )       (0.46 )%              -          0.00 %
Total other income                              423,780          0.70 %         163,084          0.31 %

Income before provision for income taxes     21,460,155         35.01 %      19,183,143         36.37 %

Provision for income taxes                    5,454,958          8.90 %       4,865,974          9.22 %

Net income                                 $ 16,005,197         26.11 %    $ 14,317,169         27.15 %

Three Months and Nine Months Ended September 30, 2012 and September 30, 2011:

Revenue:

Revenue increased by $3,072,276 or 16%, to $22,407,329 for three months ended September 30, 2012 from $19,335,053 for the three months ended September 30, 2011, and increased by $8,536,922 or 16% to $61,298,540 for the nine months ended September 30, 2012 from $52,761,618 for the nine months ended September 30, 2011. The increase in revenue for the three months and nine months ended September 30, 2012 was primarily due to the appreciation of the average foreign currency exchange rate of RMB against US dollars, the increase of selling prices of purifying agents by approximately 3.5% and increase of selling prices of HAC powder by approximately 15%, the increases of sales contributed by sales generated from new customers and distributers, and overall increase in volume from our existing customers.

Our revenue from sales of water purifying agents for the three months ended September 30, 2012 was $11,510,345 and for the three months ended September 30, 2011 was $10,581,290, representing an increase of $929,055 or approximately 9%. Our revenue from sales of water purifying agents for the nine months ended September 30, 2012 was $32,700,226 and for the nine months ended September 30, 2011 was $28,619,169 representing an increase of $4,081,057 or approximately 14%. The increase in revenue for the three months and nine months ended September 30, 2012 was primarily due to the appreciation of the average foreign currency exchange rate of RMB against US dollars, the increase of selling prices of purifying agents by approximately 3.5% and expansion of our customer base and increased orders from our existing customers.

Our revenue from sales of HAC powder for the three months ended September 30, 2012 was $10,896,984 and for the three months ended September 30, 2011 was $8,753,763, representing an increase of $2,143,221 or approximately 24%. Our revenue from sales of HAC powder was $28,598,314 for the nine months ended September 30, 2012 and was $24,142,449 for the nine months ended September 30, 2011, representing an increase of $4,455,865 or approximately 18%. The increase in revenue for the three months and nine months ended September 30, 2012 was primarily due to the appreciation of the average foreign currency exchange rate of RMB against US dollars, the increase of selling prices of HAC powder by approximately15%, and increased orders from our existing customers.


Cost of Revenue:

Cost of revenue increased by $1,548,614, or 14%, to $12,308,208 for the three months ended September 30, 2012 from $10,759,594 for the three months ended September 30, 2011 and increased by $5,381,789, or 19%, to $33,746,528 for the nine months ended September 30, 2012 from $28,364,739 for the nine months ended September 30, 2011. The increase in the cost of revenue was mainly due to the increase in sales of our products, which was in line with the increase of our revenue, and the increase of raw material prices.

Cost of revenue from sales of water purifying agents for the three months ended September 30, 2012 was $4,582,809, an increase of $353,623 or 8%, from $4,229,186 for the same period in 2011. Cost of revenue from sales of water purifying agents for the nine months ended September 30, 2012 was $13,261,169, an increase of $2,359,391 or 22%, from $10,901,778 for the same period in 2011. As a percentage of net revenue, cost of revenue from sales of water purifying agents was 40% for the three months ended September 30, 2012 and 2011, 41% and 38% for the nine months ended September 30, 2012 and 2011, respectively. The increase of cost of revenue from sales of water purifying agents was primarily attributable to the increase of our revenue from sales of water purifying agents, and the increase of raw material prices, labor and overhead cost.

Cost of revenue from sales of HAC powder for the three months ended September 30, 2012 was $7,725,399, an increase of $1,194,991 or 18%, from $6,530,408 for the same period in 2011. Cost of revenue from sales of HAC powder for the nine months ended September 30, 2012 was $20,485,359, an increase of $3,022,398 or 17%, from $17,462,961 for the same period in 2011. As a percentage of net revenue, cost of revenue from sales of HAC powder approximated 71% and 75% for the three months ended September 30, 2012 and 2011, respectively, and 72% for the nine months ended September 30, 2012 and 2011. The increase of cost of revenue from sales of HAC powder was primarily attributable to the increase of our revenue from sales of HAC powder, and the increase of raw material prices, labor and overhead cost.

Gross profit and Gross Profit Margin:

Our gross profit increased by $1,523,662 or 18% to $10,099,121 for the three months ended September 30, 2012 from $8,575,459 for the three months ended September 30, 2011, and increased by $3,155,133 or 13% to $27,552,012 for the nine months ended September 30, 2012 from $24,396,879 for the nine months ended September 30, 2011. Our gross profit margin (gross profit divided by net revenue) increased to 45.07% for the three months ended September 30, 2012 from 44.35% for the three months ended September 30, 2011. The increase in gross margin for the three months ended September 30, 2012 was primarily due to increase in sales price. Our gross margin decreased to 44.95% for the nine months ended September 30, 2012 from 46.24% for the nine months ended September 30, 2011. The decrease in gross margin for the nine months ended was primarily due to the increases in raw materials, labor and overhead cost, which appreciated at a faster pace than the increase of our sales price.

Selling and Marketing Expenses:

Our selling and marketing expenses increased by $229,101 or 40% to $797,674 for the three months ended September 30, 2012 from $568,573 for the three months ended September 30, 2011 and increased by $627,668 or 39% to $2,218,268 for the nine months ended September 30, 2012 from $1,590,600 for the nine months ended September 30, 2011. The increase in our selling and marketing expenses in 2012 was primarily attributable to increase of commission expense related to the establishment of commission policy in Shanxi Wealth beginning January 2012.

General and Administrative Expenses:

Our general and administrative expenses increased by $305,995 or 26% to $1,490,942 for the three months ended September 30, 2012 from $1,184,947 for the three months ended September 30, 2011 and increased by $479,363 or 14% to $3,826,647 for the nine months ended September 30, 2012 from $3,347,284 for the nine months ended September 30, 2011. The increase in our general and administrative expenses was primarily attributable to the increase in our overall expenses including payroll, benefits and other office expenses.

Research and Development Cost:

Our research and development cost increased by $1,985 or 1% to 151,176 for the three months ended September 30, 2012 from $149,191 for the three months ended September 30, 2011 and increased by $31,786 or 7% to $470,722 for the nine months ended September 30, 2012 from $438,936 for the nine months ended September 30, 2011. We continue to incur expenses to improve and develop new products. We expect to continue to increase our research and development efforts to enhance the competitiveness of our products.


Other income (Expense):

Our other income decreased by $247,808, or 250% to expense of $148,527 for the three months ended September 30, 2012 from income of $99,281 for the three months ended September 30, 2011, the decrease was primarily due to increase in interest expenses on short term loan. Other income for the nine months ended September 30, 2012 increased by $260,696, or 160% to $423,780 from $163,084 for the nine months ended September 30, 2011. The increase was primarily due to the increase in cash balance in banks as a result of our continuous increase in profits and interest income earned at a rate of 9% on a secured note receivable in the amount of $25 million which generated approximately $541,000 in interest income for the nine months ended September 30, 2012, which offset by increased in interest expense for short-term loans in the amount of $284,243.

Net Income:

Net income increased by $533,336 or 11% to $5,609,156 for the three months ended September 30, 2012 from $5,075,820 for the three months ended September 30, 2011, and increased by $1,688,028 or 12% to $16,005,197 for the nine months ended September 30, 2012 from $14,317,169 for the nine months ended September 30, 2011. The increase of our net income was primarily due to the increase in sales price and demand of our products during 2012. Our cost of revenue increased 19% during the nine months ended September 30, 2012 due to the increases in raw material cost, labor and overhead cost which caused our gross profit to be lower than that of the same period of 2011.

Liquidity and Capital Resources

We had an unrestricted cash balance of approximately $55 million as of September 30, 2012, as compared to $26 million as of December 31, 2011. In addition, we also had approximately $120,000 in restricted cash as of September 30, 2012, as compared to $670,000 as of December 31, 2011. Our restricted cash is held by Access America Investments, LLC ("AAI") as a security deposit for investor relation firm pursuant to a Holdback Escrow Agreement entered into in connection with the Private Placement in December 2010. A total of $2,167,203 was deposited with Anslow & Jaclin, LLP ("A&J"), the escrow agent to be distributed upon the satisfaction of certain covenants set forth in the Subscription Agreement. Pursuant to the Holdback Escrow Agreement, $1,500,000 shall be released to the Company upon the hiring of a chief financial officer on terms acceptable to AAI (the "Chief Financial Officer Holdback") and $667,203 shall be released to us upon appointment of the required independent directors to our board of directors. In March 2011, pursuant to the Holdback Escrow Agreement, $667,203 was released to us upon appointment of the required independent directors to our board of directors.

On May 20, 2011, the Holdback Escrow Agreement was amended to provide that as soon as practicable following the Offering, the Company shall employ a chief financial officer meeting certain requirements and to permit the "Lead Investor" (as defined in the Subscription Amendment) to authorize the escrow agent appointed pursuant to the Holdback Escrow Agreement to disburse a portion of the Chief Financial Officer Holdback, such portion not to exceed $750,000 in the aggregate, to the Company (a "Good Faith Disbursement"). Pursuant to Holdback Escrow Agreement, as amended on May 20, 2011, $750,000 was released to us as Good Faith Disbursement. On December 1, 2011, the Holdback Escrow Agreement was further amended to provide for a series of disbursements from the Chief Financial Officer Holdback to the Company of $100,000 commencing on December 1, 2011 and continuing on the first day of each successive month thereafter until the remaining balance of the Chief Financial Officer Holdback is disbursed to the Company (the "Monthly Disbursements"). As of September 30, 2012, all funds related to the Holdback Escrow Agreement were released. $120,000 remained unreleased pursuant to a separate Investor Relations Escrow Agreement pending hiring of an investor relations firm by the Company and subject to the consent of AAI as the investor representative.

Our funds are kept in financial institutions located in China, and banks and other financial institutions in the PRC, which do not provide insurance for funds held on deposit. In the event of a bank failure, we may incur loss for our funds on deposit. In addition, we are subject to the regulations of the PRC, which restrict the transfer of cash from China, except under certain specific circumstances. Accordingly, such funds may not be readily available to us to satisfy obligations that have been incurred outside the PRC.

We had working capital of approximately $39.8 million and $54.2 million as of September 30, 2012 and December 31, 2011, respectively. The decrease of working capital was primarily due to the increase in cash flow used in long-term assets as refundable security deposit for assets purchase.

Our accounts receivable has been a small portion of our current assets, representing $3.2 million and $2.4 million, or 5.42% and 3.98% of current assets, as of September 30, 2012 and December 31, 2011, respectively. We began to offer longer credit terms to our good standing customers starting in 2011 per the requests of our customers due to the tightening monetary policies imposed by the Government in 2011. If customers responsible for a significant amount of accounts receivable were to become insolvent or otherwise unable to pay for our products, or to make payments in a timely manner, our liquidity and results of operations could be adversely affected. An economic or industry downturn could materially adversely affect the servicing of these accounts receivable, which could result in longer payment cycles, increased collections costs and defaults in excess of management's expectations. A significant deterioration in our ability to collect on accounts receivable could affect our cash flow and working capital position and could also impact the cost or availability of financing available to us.

We provide our major customers with payment terms ranging from 30 to 90 days. It takes approximately one day to mine our raw materials and deliver the raw materials to our Guizhou and Shanxi facilities. We can manufacture the HAC powder and water purification agent within one day. Therefore the average time from mining the raw materials to completion of our products is approximately 2 days. Depending on the locations of our customers, delivery time ranges between a few hours to three days. We have frequent communications with our customers about their needs for our products. Our customers send us purchase orders 2 to 4 weeks prior to the requested delivery dates. We typically estimate our required raw materials for production at each month end for the following month based on the purchase orders received at month end. Since our production lead time for HAC powder and purifying agent is very short, we keep relatively small amounts of inventories. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Allowance for doubtful accounts is based on our assessment of the aging of accounts receivable, the collectability of specific customer accounts, our history of bad debts, and the general condition of the industry.


Our aging of accounts receivables could result in our inability to collect receivables requiring us to increase our doubtful accounts reserve, which would decrease our net income and working capital. We experienced no bad debt expense during nine months ended September 30, 2012 and the year ended December 31, 2011. As of September 30, 2012, we believed it was appropriate not to recognize bad debt expense primarily due to the subsequent collections made on our receivable balance and our historical ability to collect our accounts receivable. Bad debt expense was $0 for the nine months ended September 30, 2012 and the year ended December 31, 2011.

On August 29, 2011, we entered into a secured note receivable agreement with a non-related party in the amount of $14,087,748 (RMB90,000,000) which was increased to approximately $25,187,727 (RMB160,000,000) in December 2011. The note carried an annual interest rate of 9%. This note originally expired on November 28, 2011 but was extended to March 31, 2012, and was secured by the debtor's land use right, certain tangible assets and all the business operation rights. Interest receivable related to this note amounted to $156,085 as of December 31, 2011. As of March 28, 2012, the note receivable was fully repaid. Through this note, we are able to earn interest income with our cash at a much higher interest rate than what is being offered by our banks which is generally less than 1% annual interest rate. During the nine months ended September 30, 2012, we earned approximately $541,000 in interest income on this note receivable.

Inventories amounted to approximately $1.2 million as of September 30, 2012, as compared to $0.96 million as of December 31, 2011. Since our mines can provide stable and sufficient supplies of raw materials for our productions and our stable relationship with other suppliers, we have not experienced any shortage in raw materials as our sales continue to grow. We do not need to maintain large amounts of raw materials. We might expect to experience increase in our inventory levels in future, including both of raw material and finished goods to meet the market demands.

On August 28, 2012, we entered into a purchase agreement with a non-related party for an Aluminum Bauxite mining right located in Guizhou Province, PRC in the total amount of approximately $83 million (RMB520,000,000). In accordance with PRC regulations on natural resources, the transaction is subject to the Ministry of Land and Resources of the PRC for final approval. Pursuant to the purchase agreement, we paid $31,650,477 (RMB200,000,000) security deposit for the transaction, and is secured by the seller's Mining Right Certificate. The security deposit is fully refundable with applicable interest if the transaction is rejected by the Ministry of Land and Resources of the PRC. Through this purchase, we would be better able to secure our raw materials for our HAC powder productions and maintain our cost in a competitive level.

In February 2012, we entered into a revolving credit agreement with Industrial and Commercial Bank of China Limited ("ICBC"), in the amount of approximately $4,755,209 (RMB30,000,000) with one year maturity, The interest rate under the revolving credit agreement is based on the base rate, the interest rate set by the People's Bank of China, plus 30% of the base rate. As of September 30, 2012, the available borrowing base under revolving line-of-credit was $4.76 million, with $0 drawn as of that date, leaving $4.76 million available for general operations use under this revolving credit agreement. Loan amount drawn in pervious periods was paid in full as of September 30, 2012.

On June 18, 2012, we entered into a short-term note agreement with Industrial Bank Co., Limited ("IB") with one year maturity, in the amount of approximately $19,020,839 (RMB120,000,000). The interest rate under the note is based on the base rate, the interest rate set by the People's Bank of China, plus 10% of the base rate. During the three months ended September 30, 2012, the principle and interest of the note was fully paid.

On August 29, 2012, we entered into a new short-term note agreement with Industrial Bank Co., Limited ("IB") with lower in interest rate, in the amount of approximately $12,660,191 (RMB80,000,000). The interest rate under the short-term note agreement is based on the base rate, the interest rate set by the People's Bank of China. Both revolving credit agreement and short-term note agreement are personally guaranteed by Mr. Tan and Ms. Du and contain no maintenance covenants. Through these financing arrangements, we are able to seek new opportunities for investments or acquisitions with lower in interest expense. Interest under the short term note is paid monthly at the ended of each month. As of September 30, 2012, all interest was fully paid.

We are required to contribute for our employees to the Chinese government's social insurance funds, including pension insurance, medical insurance, unemployment insurance, job injuries insurance, maternity insurance, and housing provident funds in accordance with relevant regulations. Total contributions to the funds are approximately $937,966 for the nine months ended September 30, 2012. We expect that the amount of our contribution to the government's social insurance funds and housing provident funds will increase in the future as we expand our workforce and operations. In the years prior to December 31, 2010, we have approximately $300,000 of unpaid social insurance premiums and housing provident funds and potential penalties which are included in the accrued expenses.

The ability of the Company to pay dividends may be restricted due to the foreign exchange control policies and availability of cash balance of the Chinese operating subsidiaries. A majority of our revenue being earned and currency received are denominated in RMB, which is subject to the exchange control regulation in China, and, as a result, we may unable to distribute any dividends outside of China due to PRC exchange control regulations that restrict our ability to convert RMB into US Dollars. Accordingly, the Company's funds may not be readily available to us to satisfy obligations which have been incurred outside the PRC, which could adversely affect our business and prospects or our ability to meet our cash obligations.

Future Capital Expenditures

In future years, as we accelerate expansion, we expect continued capital expenditure for adding manufacturing equipment, expanding workshops and harbors, and modernizing existing equipment. We believe that such expansion will have a material impact on liquidity, capital resources and/or results of operation. However, we believe our existing cash, cash equivalents and cash flows from operations and proceeds from the completed financing in December 2010 will be sufficient to meet our presently anticipated future cash needs to bring all of our facilities into full production. We may, however, require additional cash resources due to changed business conditions or other future developments, including any investments or acquisitions we may decide to pursue.


It is management's intention to expand our operations as quickly as reasonably practicable to capitalize on the demand opportunity for our products. We . . .

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