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GPRC > SEC Filings for GPRC > Form 10-K on 28-Mar-2013All Recent SEC Filings

Show all filings for GUANWEI RECYCLING CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for GUANWEI RECYCLING CORP.


28-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 Annual Report. Information in this Item 7 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 year to year, 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 following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this Annual Report. This report contains forward-looking statements. Generally, the words "believes," "anticipates," "may," "will," "should," "expect," "intend," "estimate," "continue" and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

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 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 LDPE 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 recurring 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 to issue a certificate to Guanwei 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. Our telephone number is 86-591 85369 6197.

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.


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 improve our production efficiency. We also built additional storage space of 3,000 square meters 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 audited consolidated financial statements. These financial statements are prepared in accordance with generally accepted accounting principles in the United States ("US GAAP"), which require us to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues and expenses, 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 revenue recognition, valuation of inventories, useful lives of property and equipment, and valuation allowance of deferred taxes. 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 Annual 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 audited 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 collectability is reasonably assured.

Sales of non-LDPE waste materials and sales of raw materials are recognized on the same basis as sales of LDPE.

(b) Inventories

Inventories are stated at the lower of cost, on a 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 such 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. During the years ended December 31, 2012 and 2011, the Company recorded no inventory write down. We carry out an inventory review at each reporting period.


(c) 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 December 31, 2012, the Company has undistributed profits of approximately $40,305,000 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 these profits, the aggregate withholding tax will amount to approximately $4,031,000 which assumes the current tax rate 10% of the undistributed earnings prepared under PRC GAAP after 2007.

The Company has no material uncertain tax positions as of December 31, 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 December 31, 2012, there is no interest and 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.

(d) New Accounting Standards

Recently Adopted Accounting Standards

In May 2011, the FASB issued ASU No. 2011-04, Topic 820 - Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in US GAAP and IFRSs ("ASU 2011-04"). The amendments establish common requirements for measuring fair value and related disclosures in accordance with accounting principles generally accepted in the United Sates and international financial reporting standards. This amendment did not require additional fair value measurements. ASU 2011-04 became effective for the first interim and annual periods beginning after December 15, 2011, and should be applied prospectively. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Topic 220 - Comprehensive Income:
Presentation of Comprehensive Income ("ASU 2011-05"). The amendments eliminate the option of presenting the components of other comprehensive income as part of the statement of changes in stockholders' equity, require consecutive presentation of the statement of net income and other comprehensive income and require reclassification adjustments from other comprehensive income to net income to be shown on the financial statements. In December 2011, the FASB issued ASU No. 2011-12, Topic 220 - Comprehensive Income: Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items out of Accumulated Other Comprehensive Income in ASU 2011-05 ("ASU 2011-12") to defer the effective date of the provision requiring entities to present reclassification adjustments out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. However, the remaining requirements of ASU 2011-05 became effective for the first interim and annual periods beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Topic 350 - Intangibles - Goodwill and Other: Testing Goodwill for Impairment ("ASU 2011-08"), which amends current guidance to allow a company to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The amendment also improves previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. ASU 2011-08 became effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of this guidance did not have a material impact on the Company's consolidated financial statements.


New Accounting Pronouncements Not Yet Adopted

In December 2011, the FASB issued ASU No. 2011-11, Topic 210 - Balance Sheet:
Disclosures about Offsetting Assets and Liabilities ("ASU 2011-11"). ASU 2011-11 requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 will be effective for fiscal years beginning on or after January 1, 2013, with retrospective application for all comparable periods presented. The Company does not expect the adoption of this guidance to have a material effect on the Company's consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02 - Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"), which amends the guidance in ASC 350-30 on testing indefinite-lived intangible assets, other than goodwill, for impairment. FASB issued ASU 2012-12 in response to feedback on ASU 2011-08, which amended the goodwill impairment testing requirements by allowing an entity to perform a qualitative impairment assessment before proceeding to the two-step impairment test. Similarly, under ASU 2012-02, an entity testing an indefinite-lived intangible asset for impairment has the option of performing a qualitative assessment before calculating the fair value of the asset. If the entity determines, on the basis of qualitative factors, that the fair value of the indefinite-lived intangible asset is not more likely than not (i.e. a likelihood of more than 50 percent) impaired, the entity would not need to calculate the fair value of the asset. ASU 2012-02 does not revise the requirement to test indefinite-lived intangible assets annually for impairment. In addition, the ASU 2012-02 does not amend the requirement to test these assets for impairment between annual tests if there is a change in events or circumstances; however, it does revise the examples of events and circumstances that an entity should consider in interim periods. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company does not expect the adoption of this guidance to have a material effect on the Company's consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, Topic 220 - Comprehensive Income:
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("ASU 2013-02"). ASU 2013-02 changes the presentation requirements of significant reclassifications out of accumulated other comprehensive income in their entirety and their corresponding effect on net income. For other significant amounts that are not required to be reclassified in their entirety, the standard requires the company to cross-reference to related footnote disclosures. ASU 2013-02 became effective for the company on January 1, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company's consolidated financial statements.

In March 2013, the FASB issued ASU 2013-05 Topic 830 - Foreign Currency Matters ("ASU 2013-05"). ASU 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation-Overall, or Subtopic 830-30, ASU 2013-05 applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. In addition, the amendments in this Update resolve the diversity in practice for the treatment of business combinations achieved in stages (sometimes also referred to as step acquisitions) involving a foreign entity. ASU 2013-02 became effective for the company prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company does not expect the adoption of this guidance to have a material effect on the Company's consolidated financial statements.


Results of Operations for the Fiscal Year Ended December 31, 2012 Compared To the Fiscal Year Ended December 31, 2011

The following table sets forth a summary of certain key components of our results of operations for the years indicated, in USD.

                                                        For the Years Ended December 31,        Change in
                                                            2012                  2011              %

Net revenue                                           $      79,043,356       $  63,600,678         24.28 %
Cost of revenue                                              60,440,237          44,111,700         37.02 %
Gross profit                                                 18,603,119          19,488,978         (4.55 )%
Selling and marketing expenses                                  417,597             398,513          4.79 %
General and administrative expenses                           2,297,782           1,994,873         15.18 %
Interest income                                                  55,781              88,249        (36.79 )%
Interest expense                                                      -             (29,083 )     (100.00 )%
Net foreign exchange gain                                        62,806             156,602        (59.89 )%
Loss on disposal of property and equipment                      (33,452 )           (72,174 )      (53.65 )%
Miscellaneous                                                     6,372               7,383        (13.69 )%
Income taxes                                                  4,143,952           4,453,121         (6.94 )%
Net income                                                   11,835,295          12,793,448         (7.49 )%

Revenues

The following table sets forth a summary of our net revenue by categories for
the periods indicated, in USD.

                                                        For the Years Ended December 31,        Change in
                                                            2012                  2011              %

Sales of recycled LDPE                                $      67,331,679       $  61,900,588          8.77 %
Sales of sorted non- LDPE materials                           1,913,859           1,700,090         12.57 %
Sales of raw materials                                        9,797,818                   -             -
                                                      $      79,043,356       $  63,600,678         24.28 %

Our revenues are derived from the sales of recycled LDPE and non-LDPE waste materials. We manufacture recycled LDPE from plastic waste and occasionally sell our raw materials when we have excess raw materials and the market conditions justify doing so. We have approximately 10% to 12% of loss of materials during our production process. 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 who use these products.

Revenue generated during the fiscal year 2012 from the sale of manufactured recycled LDPE was $67,331,679, as compared to $61,900,588 for 2011, which represents an increase of 8.77%. This increase was due to an increase in both sales volume and selling price of manufactured recycled LDPE. The Company sold 55,448 tons of manufactured recycled LDPE in the year ended December 31, 2012, representing an increase of 5.28% from the 52,666 tons sold in 2011. The average selling price of recycled LDPE increased 3.32% from approximately $1,175 per ton in 2011 to approximately $1,214 per ton in 2012.

We sold 16,444 tons of raw materials in the amount of $9,797,818 during the year ended December 31, 2012. In order to get a volume discount from our suppliers, we verbally agreed to purchase certain quantities in order to continue get our raw materials at lower prices. Raw materials in excess of our production needs were sold at a small profit in order to free up our storage space. We did not sell any raw materials during the same period of 2011.


Revenue generated from the sales of sorted non-LDPE material increased from $1,700,090 in 2011 to $1,913,859 in 2012, representing an increase of 12.57%. This was due to an increase in both sales volume and selling price. Guanwei sold 6,135 tons of sorted non-LDPE material in 2012, representing an increase of 5.41% from 5,820 tons sold in the same period of 2011. A higher volume of non-LDPE material was sold during the fiscal year 2012 because our production of LDPE material increased. Since non-LDPE material is a by-product of manufacturing our LDPE products, the increase of our sales of non-LDPE material is in line with the increase of our LDPE product sales. The average selling price of sorted non-LDPE material increased 6.85% to approximately $312 per ton in 2012 from approximately $292 per ton in 2011. As with recycled LDPE, the average selling price of sorted non-LDPE materials has increased steadily since the first quarter of 2009.

Our revenue may be affected by the import quotas granted by the PRC's Ministry of Environmental Protection. On July 11, 2011, Guanwei received official government approval for expansion of its quota for imported plastic waste. Pursuant to the approval, the Guanwei's import quota increased from 24,000 tons to 64,000 tons in 2011. We have been approved for an import quota of 100,000 tons and 80,000 tons of plastic waste in 2013 and 2012, respectively. 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. Min Chen, 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. Huan Li's import quota was reduced to 15,000 for the year of 2013 Accordingly, we are only allowed to use Huan Li's quota up to 15,000 tons of imported plastic waste. 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 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 in 2012.

Other than as disclosed elsewhere in this Annual 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

                            Year Ended December 31,            Year Ended December 31,
                                      2012                              2011
                                              % of Net                         % of Net
                              in $            Revenue             in $         Revenue    Change in %

Cost of manufactured
recycled LDPE and
sorted non-LDPE
materials                $    51,041,177         73.71%     $    44,111,700      69.36%        15.71%
Cost of raw material
sales                          9,399,060         95.93%                   -           -             -
                         $    60,440,237         76.46%     $    44,111,700      69.36%        37.02%


During the years ended December 31, 2012 and 2011, our cost of revenue was $60,440,237 and $44,111,700, representing 73.71% and 69.36% of net revenue, respectively.

During the years ended December 31, 2012 and 2011, our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material was $51,041,177 and $44,111,700, representing 73.71% and 69.36% of net revenue from sales of manufactured recycled LDPE and sorted non-LDPE material. The increase in the percentage of cost to net revenue is primarily due to manufacturing costs . . .

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