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HXWWF > SEC Filings for HXWWF > Form 10-K on 29-Mar-2013All Recent SEC Filings

Show all filings for HUIXIN WASTE WATER SOLUTIONS, INC. | Request a Trial to NEW EDGAR Online Pro

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


29-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATION.

Company Overview

We are a leading manufacturer of water purifying agents in the PRC, specializing in manufacturing and distributing water purifying agents, dehydrating agents, papermaking auxiliary agents, printing and dyeing auxiliary agents, fine chemical materials, textile materials, steel, stainless steel, construction materials, aluminum alloy materials, electrical appliances and fittings, hardware for AC power, air-conditioning equipment, and plastic products. Our products are distributed in the southern, south-western, mid-eastern, and eastern part of China.

The annual amount of wastewater discharge in mainland China has been on the rise from the years of 2006 to 2012 with a 2.9%-5.6% growth rate per year. (http://jcs.mep.gov.cn/hjzl/zkgb/2011zkgb/201206/t20120606_231040.htm) Due to water deterioration in both quantity and quality, its protection becomes a concern on the top of the agenda for the Chinese government and the Chinese public. The Chinese government has adopted regulations and policies listing waste water disposal and drinking water safety as two issues of priority importance for Chinese mid-term and long-term national development plans. The Chinese government is making every effort to increase the wastewater disposal rate and wholesome water coverage rate, and at the same time raising the discharge standard for organic substances, nitrogen and phosphorus nutrient content, together with the standard for drinking water. Given the above-mentioned governmental endeavors, the demand for water purifying products has increased over the years and is expected to continue to increase in the future, considering Chinese large population and the severity of China's current environmental challenges. As a result, we believe that there will be continuing there has been increasing market demand for our water purifying products.

Production Capacity

As of December 31, 2012, our PRC Operating Companies, Guizhou Yufeng and Shanxi Wealth, respectively reached production capability of 100,000 tons and 200,000 tons. As of December 31, 2012, our water purifying agent producing company, Jiangment Wealth Water, maintains a production capacity between 350,000 and 400,000 tons.

Our management will continue to maintain its current production capacity, and is considering the prospect of expanding the production capacity of HAC powder at Guizhou Yufeng and Shanxi Wealth in the near future. However, we presently do not have a concrete plan with respect to expansion, and therefore we are not able to estimate capital expenditures associated with such expansion with reasonable certainty.

Current Products and Manufacturing Facilities

Our major products include water purifying agents and high calcium aluminate powder. As a leading producer of water purifying agents and high calcium aluminate powder in China, we reached an annual production and distribution of approximately 322,000 tons and 290,000 tons of water purifying agent, for the years ended December 31, 2012 and 2011, respectively, and approximately 288,000 tons and 277,000 tons of HAC powder for years ended December 31, 2012 and 2011, respectively. Our operating scale has given us considerable competitive advantage in the aspects of reducing costs and developing new products to accommodate to the ever-evolving demands of the market.

We supply water purifying products for industries such as printing and dyeing, paper making, municipal wastewater, phosphorus removal, and oil removal from washing water. We employ high calcium aluminate powder to produce water purifying agent, while American and European water purifying agent manufacturers use higher-cost aluminum hydroxide. Aided by our unique and advanced technologies, the quality of our water purifying agent is similar to that produced by our American and European counterparts, and better than the products of most of our Chinese competitors. The cost of using HAC powder as raw material is only half of that of aluminum hydroxide, which gives Jiangsu Huiyuan a significant price advantage.

Traditional water purifying agents are usually produced for general purposes without tailoring to the needs of particular industrial requirements. Our water purifying agents, on the other hand, are specially developed by our research and development team and the institutions which we work with aiming at satisfying particular industrial situations and requirements. As a result, our products usually have better water purifying effects than other more general products and require a lesser amount of post-sale services. The unique character and strength of our product have been widely acknowledged by our customers over our history of business.


Realizing the popularity of customization of our products, and to further buttress our services, we have designed a mechanism to manufacture polyaluminum chloride production lines for large purchasers. These facilities are architected to produce water purifying agent to be used in treating wastewater with specific physical and chemical qualities, and located on the property of the customers for their convenience and cost-saving purposes. The implementation of this system requires substantial research and development investment, which is not available for our PRC competitors, due to their comparatively limited business scale.

Recent Events

On December 15, 2011, we effectuated a 1:1.42610714 reverse stock split of the Company's issued and outstanding ordinary shares such that the share capital of the Company was consolidated and increased from US $5,100 divided into 39,062,500 Ordinary Shares of US$0.000128 par value each and 781,250 Preference Shares of US$0.000128 par value each, to US $7,230.536 divided into 39,062,500 Ordinary Shares of US$0.00018254172 par value each and 781,250 Preference Shares of US$0.000128 par value each. After the adjustment for such Reverse Split, each Preference Shares will be convertible into 5 ordinary shares and the holder of each Warrant will be entitled to purchase 5 ordinary shares at an exercise price of $4.50 per share. See "Description of Securities - Preference Shares" below for a description of our Preference Shares.

Critical Accounting Policies, Estimates and Assumptions

The SEC defines critical accounting policies as those that are, in management's view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.

The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.

Revenue recognition. We recognize revenue from the sales of products. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectivity is reasonably assured. Sales revenue is presented net of value added tax (VAT), sales rebates and returns. No return allowance is made as product returns are insignificant based on historical experience.

Allowance for doubtful accounts. In estimating the collectability of accounts receivable we analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Differences may result in the amount and timing of expenses for any period if we make different judgments or use different estimates. Our accounts receivable represent a significant portion of our current assets and total assets. Our realization on accounts receivable, expressed in terms of United States dollars may be affected by fluctuations in currency rates since the customer's currency is frequently a currency other than United States dollars.

Inventories. Inventories comprise raw materials and finished goods are stated at the lower of cost or market. Substantially all inventory costs are determined using the weighted average basis. Costs of finished goods include direct labor, direct materials, and production overhead before the goods are ready for sale. Inventory costs do not exceed net realizable value. We did not record any inventory reserve at the end of each of the reporting periods.

Taxation

Cayman Islands

The Government of the Cayman Islands does not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon us or our shareholders. The Cayman Islands are not party to a double tax treaty with any country that is applicable to any payments made to or by us.


We have received an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from April 2006 no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on or in respect of our shares, debentures or other obligations or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by us to our shareholders or a payment of principal or interest or other sums by us due under a debenture or other obligation.

Hong Kong

Our indirect subsidiary, Wealth Environmental Technology, was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as Wealth Environmental Technology has no taxable income.

China

Before the implementation of the New EIT Law, FIEs established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or EIT, rate of 33.0%, which included a 30.0% state income tax and a 3.0% local income tax. On March 16, 2007, the National People's Congress of China passed the New EIT Law, and on November 28, 2007, the State Council of China passed the EIT Law Implementing Rules which took effect on January 1, 2008. The EIT Law and its implementing rules impose a unified EIT of 25.0% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions.

In addition to the changes to the current tax structure, under the New EIT Law, an enterprise established outside of China with "de facto management bodies" within China is considered a resident enterprise and will normally be subject to an EIT of 25% on its global income. The implementing rules define the term "de facto management bodies" as "an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise." If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization's global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see "Risk Factors - Risks Related to Our Business - Under the New Enterprise Income Tax Law, we may be classified as a "resident enterprise" of China. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders."

In addition, the New EIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises' shareholder has a tax treaty with China that provides for a different withholding arrangement. In this regard, we expect that 10% withholding tax will apply to dividends paid to Wealth Environmental Technology by Jiangmen Huiyuan.

Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments and will timely adjust our effective income tax rate when necessary.


Recently Adopted Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"). This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU No. 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. ASU No. 2011-04 is effective for reporting periods beginning after December 15, 2011 with application on a prospective basis. The adoption of ASU No. 2011-04, effective January 1, 2012, did not have a significant impact on the Company's consolidated financial statements or disclosures.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. ASU No. 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The more likely than not threshold is defined as having a likelihood of more than 50 percent. Under ASU No. 2011-08, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. ASU No. 2011-08 is effective for annual periods beginning after December 15, 2011. The adoption of ASU 2011-08, effective January 1, 2012, did not have a significant impact on the Company's consolidated financial statements or disclosures.

In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210):
Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 was issued to provide enhanced disclosures that will enable users of the financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. The amendments under ASU No. 2011-11 require enhanced disclosures by requiring entities to disclose both gross information and net information about both instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending arrangements. ASU No. 2011-11 is effective retrospectively for annual periods beginning on or after January 1, 2013, and interim periods within those periods. The adoption of ASU No. 2011-11 is not expected to have a significant impact on the Company's consolidated financial position or results of operations.

In December 2011, the FASB issued ASU No. 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. ASU No. 2011-12 defers the effective date for provisions of ASU No. 2011-05 requiring entities to present the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income on the face of the financial statements for all periods presented. All other requirements in ASU No. 2011-05 are not affected by ASU No. 2011-12. ASU No. 2011-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 and reinstates the requirement that reclassifications must be either disclosed on the face of the financial statements or in the notes. The adoption of ASU No. 2011-12, effective January 1, 2012, did not have a significant impact on the Company's consolidated financial statements or disclosures.

In July 2012, the FASB issued ASU No. 2012-02, Intangible - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles - Goodwill and Other - General Intangibles Other than Goodwill. The more likely than not threshold is defined as having a likelihood of more than 50 percent. Under ASU No. 2012-02, an entity is not required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines it is more likely than not that its fair value is less than its carrying value. ASU No. 2012-02 is effective for annual periods beginning after September 15, 2012. The adoption of ASU No. 2012-02 is not expected to have a significant impact on the Company's consolidated financial position or results of operations.


RESULTS OF OPERATIONS

The following table shows key components of our results of operations during the fiscal years ended December 31, 2012 and 2011.

                                                                 Years ended December 31,
                                               2012           % of Revenue           2011          % of Revenue
Net revenue                                $ 80,459,992              100.00 %    $ 68,900,075             100.00 %
Cost of revenue                              44,411,319               55.20 %      37,342,469              54.20 %
Gross profit                                 36,048,673               44.80 %      31,557,606              45.80 %
Operating expenses:
Selling and marketing                         2,953,258                3.67 %       2,174,688               3.16 %
General and administrative                    6,300,847                7.83 %       5,169,298               7.50 %
Research and development                        622,684                0.77 %         604,549               0.88 %
Total operating expenses                      9,876,789               12.27 %       7,948,535              11.54 %
Income from operations                       26,171,884               32.53 %      23,609,071              34.26 %

Other income (expenses):
Interest expense                               (495,997 )             (0.62 )%              -                  - %
Interest income                                 753,301                0.94 %         553,107               0.80 %
Miscellaneous                                    14,278                0.02 %             (38 )                - %
Total other income                              271,582                0.34  %        553,069               0.80 %

Income before provision for income taxes     26,443,466               32.87 %      24,162,140              35.06 %
Provision for income taxes                    6,739,279                8.38 %       6,148,633               8.92 %
Net income                                 $ 19,704,187               24.49 %    $ 18,013,507              26.14 %

Revenue:

Revenue increased by $11,559,917 or 17%, to $80,459,992 for the year ended December 31, 2012 from $68,900,075 for the year ended December 31, 2011. The increase in revenue was primarily due to the increased sales contributed by sale unit price increase, 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 year ended December 31, 2012 was $42,882,342 and for the year ended December 31, 2011 was $36,388,733, representing an increase of $6,493,609 or approximately 18%. The increase was due to continuous increase of the sales of our water purifying agents through expansion of our customer base and increased orders from our existing customers.

Our revenue from sales of HAC powder for the year ended December 31, 2012 was $37,577,650 and for the year ended December 31, 2011 was $32,511,342, representing an increase of $5,066,308 or approximately 16%. This increase was primarily due to unit prices increased by 13% during the year ended December 31, 2012 compared to same period in 2011.

Cost of Revenue:

Cost of revenue increased by $7,068,850, or 19%, to $44,411,319 for the year ended December 31, 2012 from $37,342,469 for the year ended December 31, 2011. The increase in the cost of revenue was mainly due to the increase in sales of our products and was in line with the increase of our revenue. However since the increases of raw materials and overhead cost have increased at a faster pace than the increases of our sales prices, the cost of revenue ratio to revenue increased in the current year as compared to the prior year.

Cost of revenue from sales of water purifying agents for the year ended December 31, 2012 was $17,438,109, an increase of $3,986,999 or 30%, from $13,451,110 for the year ended December 31, 2011. As a percentage of net revenue, cost of revenue from sales of water purifying agents was 41% and 37% for the years ended December 31, 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 caused by both increases in sales prices and volume.

Cost of revenue from sales of HAC powder for the year ended December 31, 2012 was $26,973,210, an increase of $3,081,851 or 13%, from $23,891,359 for the year ended December 31, 2011. As a percentage of net revenue, cost of revenue from sales of HAC powder approximated 72% and 73% for the years ended December 31, 2012 and 2011, respectively. 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.


Gross profit:

Our gross profit increased by $4,491,067or 14% to $36,048,673 for the year ended December 31, 2012 from $31,557,606 for the year ended December 31, 2011. Our gross profit margin (gross profit divided by net revenue) decreased to 44.80% for 2012 from 45.8% for 2011. The decrease in gross profit margin was primarily due to the increases in the price of raw materials and overhead costs, which increased at a faster pace than our sales prices.

Selling and Marketing Expenses:

Our selling and marketing expenses increased by $778,570 or 36% to $2,953,258 for the year ended December 31, 2012 from $2,174,688 for the year ended December 31, 2011. The increase in our selling and marketing expenses in 2012 was primarily attributable to increase in head counts in the sales and marketing department and increase of sales commission expenses, as a result of increase of sales, which was in line with the increase of our revenue.

General and Administrative Expenses:

Our general and administrative expenses increased by $1,131,549 or 22% to $6,300,847 for the year ended December 31, 2012 from $5,169,298 for the year ended December 31, 2011. The increase in our general and administrative expenses was primarily attributable to the increase of professional expense resulting from being a public reporting company in United States, increase of payroll expenses due to increase of our head count and pay increase, increase of rent expenses and increase in sponsorship for Champion of the Earth Award we entered into with the United Nations Environment Program ("UNEP") during the year of 2012.

Research and Development Cost:

Our research and development cost increased by $18,135 or 3% to $622,684 for the year ended December 31, 2012 from $604,549 for the year ended December 31, 2011 to develop new products in order to continue to launch new products in the future. We expect to continue to increase our research and development efforts to enhance the competitiveness of our products.

Other income (expenses):

Interest expense:

Interest expense increased by $495,997, or 100% for the year ended December 31, 2012 from $0 for the year ended December 31, 2011. The increase was primarily due to interest expense of $495,997 for short-term loans obtained during the year 2012 for use in our business operations and mining right acquisition.

Interest income:

Interest income increased by $200,194, or 36% to $753,301 for the year ended December 31, 2012 from $553,107 for the year ended December 31, 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 from a secured short-term note receivable with a non-related party. The note receivable carries an annual interest rate of 9% which generated an interest income of approximately $540,000 for the year ended December 31, 2012.

Net Income:

Net income increased by $1,690,680 or 9% to $19,704,187 for the year ended December 31, 2012 from $18,013,507 for the year ended December 31, 2011. The increase of our net income was primarily due to price increase and strong demand of our products as a result of our marketing efforts while we can continue keep our cost of revenue and other operating costs at a reasonable level.

LIQUIDITY AND CAPITAL RESOURCES

We had a restricted cash balance of approximately $0 as of December 31, 2012, as compared to $670,000 as of December 31, 2011. Our restricted cash held by our Escrow Agent pursuant to Investor Relations Escrow Agreement entered in December 2010, amended in November 2012, was released in December 2012 according to the terms of the escrow agreement. As of December 31, 2012, both the Holdback Escrow Agreement and Investor Relations Escrow Agreement had been expired and all funds were released.

Our funds are kept in financial institutions located in China, and banks and other financial institutions in the PRC do not provide insurance for funds held on deposit, and in the event of a bank failure, we may not have access to 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.


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