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SUWG > SEC Filings for SUWG > Form 10-K on 15-Apr-2013All Recent SEC Filings

Show all filings for SUNWAY GLOBAL INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-K for SUNWAY GLOBAL INC.


15-Apr-2013

Annual Report


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

Overview

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes of Sunway Global Inc., appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements.

Sunway Global Inc. primarily functions as a holding company for entities that, through contractual relationships, control the business of Daqing Sunway, Liheng and Beijing Sunway, those companies organized under the laws of the PRC that designs, manufactures and sells logistic transport systems and medicine dispensing systems and equipment that are principally used by hospitals and other medical facilities in the PRC. This discussion and analysis focuses on the business results, comparing its results in the fiscal years ended December 31, 2012and 2011.

Results of Operations

In the fiscal year ended December 31, 2012, our net sales and gross profit increased compared with the same period in the fiscal year ended December 31, 2011. These increases are due to our increased marketing effort. The following table summarizes the results of our operations during the fiscal years ended December 31, 2012 and 2011, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the fiscal years ended December 31, 2012 and 2011.

                                             Fiscal Year Ended December 31,
                                                2011                  2012             Change          Change rate
Net Revenue                                $     8,683,877        $  9,754,094      $   1,070,217             12.32 %
Cost of sales                              $     4,699,506        $  5,358,411      $     658,905             14.02 %
Gross Profit                               $     3,984,371        $  4,395,683      $     411,312             10.32 %
Gross Margin                               $         45.88 %             45.07 %                -             (0.81 )%
Operating Income                           $    (4,005,568 )      $ (4,967,188 )    $    (961,620 )           24.01 %
Operating Margin                                    (46.13 )%           (50.92 )%               -             (4.79 )%
Changes in fair value of warrants          $    16,353,823        $  1,165,692      $ (15,188,131 )          (92.87 )%
Impairment on fixed                        $    (2,439,271 )      $          -      $  (2,439,271 )               - %
Compensation for product quality           $    (6,088,870 )      $          -      $ $(6,088,870 )               - %
Net Income                                 $     1,789,159        $ (3,098,445 )       (4,887,604 )         (273.18 ) %
Net profit margin                                    20.60 %            (31.77 )%               -            (52.37 ) %

Net revenue

Net revenue for the fiscal year ended December 31, 2012, which resulted primarily from sales of PTS, SADP, SAME, spare parts and supporting services, were $9,754,094, an increase of 12.32% as compared with the net revenues of $8,683,877 in the same period ended December 31, 2011. In the fiscal year ended December 31, 2012, we sold 931 workstations, representing an increase in workstation sales of 33.08% as compared with 623 workstations in the same period ended December 31, 2011.The increase in workstation sales was primarily due to a result of the growth in the Qingdao factory's output energy in the fourth quarter of 2012. We sold 33 units SADP, a decrease of 13.16% as compared with 38 units SADP for the fiscal year ended December 31, 2011. The decrease in SADP was due primarily to a decline in our marketing effort, and we sold 1 unit of SAME in the fiscal year ended December 31, 2012, an decrease of 50% as compared to 2 units in the fiscal year ended December 31, 2011. The decrease in SAME was due primarily to a defect in design in our first generation products. We just released our improved second generation products in the fourth quarter of 2012.


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The following table presents information about our revenue for the periods indicated:

                             2012                                   2011
                 sales         % of total sales         sales         % of total sales
    PTS       $ 5,590,698                  57.32 %   $ 3,770,295                  43.42 %
   SADP       $ 2,662,818                  27.30 %   $ 3,861,786                  44.47 %
   SAME       $   233,055                   2.39 %   $   290,003                   3.34 %
   Other      $ 1,267,523                  12.99 %   $   761,793                   8.77 %
Total sales   $ 9,754,094                 100.00 %   $ 8,683,877                 100.00 %

Gross Profit

Gross profit was $4,395,683 for the fiscal year ended December 31, 2012, an increase of 10.32% as compared with $3,984,371 for the fiscal year ended December 31, 2011. Our gross profit margin decreased 0.81% from 45.88% as of the fiscal year ended December 31, 2011 to 45.07% as of the same period of 2012, mainly due to the change in the Euros exchange rate.

The table below presents information about our gross profit for the periods indicated:

                                       Fiscal Year Ended December 31,
                                 2012                                  2011
                                    Gross profit                          Gross profit
                       US$              margin               US$              margin

Gross Profit       $ 4,395,683                45.07 %    $ 3,984,371                45.88 %

Income from Operations

Operating loss was $4,967,188 for the fiscal year ended December 31, 2012, as
compared with $4,005,568 loss for the fiscal year ended December 31, 2011. The
decrease was primarily because selling expenses increased sharply, especially
employees' salary increased approximately 139.76% as compare with the fiscal
year of 2011.

                                           Fiscal Year Ended December 31,
                                        2012                             2011
                                              Operating                        Operating
                                 US$            margin            US$            margin

Income from operations $ (4,967,188) (50.92) % $ (4,005,568) (46.13) %

Cost of Net Revenue

Cost of net revenue increase to $5,358,411 for the fiscal year ended December 31, 2012, representing an increase of 14.02% as compared with $4,699,506 for the fiscal year of 2011. This increase is primarily due to sale growth.

The following table presents information about our cost of sales for the periods indicated:

Fiscal Year Ended December 31, 2012 2011 Change Cost of net revenue $ 5,358,411 $ 4,699,506 14.02 %


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Operating Expenses

Operating expenses were $9,362,871for the fiscal year ended December 31, 2012, an increase of 17.18% as compared to $7,989,939 for the fiscal year of 2011. This increase was primarily because: (i) selling expenses increased $1,452,006, or 82.27% to $3,216,885 in the fiscal year ended December 31, 2012 from $1,764,879 for the fiscal year of 2011; and (ii) general and administration expenses decreased $79,074, or 1.27% to $6,145,986 for the fiscal year ended December 31, 2012 from $6,225,060 for the fiscal year of 2011.

The following table presents information about our operating expenses for the periods indicated:

                                      Fiscal Year Ended December 31,
                                          2012                 2011          change
Selling expenses                    $      3,216,885       $  1,764,879        82.27 %
General & Administrative Expenses   $      6,145,986       $  6,225,060       (1.27) %
Total operating expenses            $      9,362,871       $  7,989,939        17.18 %

Changes in fair value of warrants

Changes in fair value of warrants were $1,165,692 for the fiscal year ended December 31, 2012. This is recorded as a non-cash charges, which resulted from the change in fair value of warrants issued to investors in conjunction with the Company's issuance of warrants in June of 2007 pursuant to provisions of FASB ASC Topic 815, "Derivative and Hedging" (ASC 815). The accounting treatment of the warrants resulted from a provision providing anti-dilution protection to the warrant holders. As of June 5, 2012, all of the warrants were expiredby the agreement item.

Compensation for product quality and overdue delivery

Compensation for product quality and overdue delivery was 6,088,870 for the fiscal years ended December 31, 2011.Due to the closing of our factory in Daqing in the second quarter of 2011, we were unable to timely deliver products to some of our clients. Also, in an effort to increase output at our Qingdao factory we hired many new employees to meet our customers' needs. However, many of these new employees did not have sufficient experience in manufacturing which affected the quality of some of our products. We agreed to compensate our clients who were affected by the foregoing with a combination of cash payments and reduction in their account balances with us.

Impairment on fixed assets

Impairment on fixed assets was 2,439,271 for the fiscal year ended December 31, 2011. The Impairment was due to disposal building, and equipment of the closing of our factory in Daqing.

Net Loss

Net loss was $3,098,445 for the fiscal year ended December 31, 2012, a decrease of 273.18% from $1,789,159 as net income for the fiscal year of 2011. In the fiscal year ended December 31, 2012, net income were impacted by a non-cash income of $1,165,692 in changes in fair value of warrants unrelated to the Company's operations Excluding this non-cash income, the Company's net loss from operations for the fiscal year ended December 31, 2012 would have been $4,264,138.

Earnings Per Share ("EPS")

Basic and diluted loss per share for the fiscal year ended December 31, 2012 was $0.17 and $0.13 compared to $0.10 and $0.08 as net income per share for the fiscal year of 2011. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 18,499,736 for the fiscal years ended December 31, 2012, and 2011, respectively. The weighted average number of shares outstanding to calculate diluted EPS was 23,314,556 and 23,314,556 for the fiscal years ended December 31, 2012 and 2011, respectively.

Cash and Cash Equivalents

Cash and cash equivalents decreased to $352,457 as of December 31, 2012, as compared with $1,550,911 as of December 31, 2011. This increase was mainly due to our selling expenses expense and employees salary increase, but it does not immediately bring out our sale growth.


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Trade Receivables, net

Trade receivables, net increased to $8,595,793 as of December 31, 2012, compared with $6,883,677as of December 31, 2011. This decrease in trade receivables was primarily attributable to increase in sale and several client overdue payments.

Inventory

Inventory consists of raw materials, works in process and finished goods. As of December 31, 2012, the recorded value of our inventory has increased 20.68% to $3,336,188 from $2,764,560 as of December 31, 2011. This increase is mainly due to an increase of 1020.97% in work in process from $218,788 as of December 31, 2011 to $2,452,547 as of December 31, 2012; an increase of 57.78% in raw material from $452,379 as of December 31, 2011 to $713,769 as of December 31, 2012, a decrease of 91.89% in finished goods from $218,788 as of December 31, 2011 to $169,872 as of December 31, 2012. The increases were primarily attributable to our Qingdao factory's augmented output of the SADP and PTS, so that we have adequate supply to meet our customers' needs.

The following table presents information about our inventory for the periods indicated:

                   December 31,         December 31,
                        2012                2011           Change
Raw material      $        713,769     $      452,379         57.78 %
Work in process   $      2,452,547     $      218,788       1020.97 %
Finished goods    $        169,872     $    2,093,393       (91.89) %
Total inventory   $      3,336,188     $    2,764,560         20.68 %

Accounts payable

Accounts payable was $1,211,450 as of December 31, 2012, an increase of 94.77% from $621,977 as of December 31, 2011. The increase was primarily attributable to the fact that our Qingdao factory started to augment output cause to an increase in purchase volume of raw materials.

Liquidity and Capital Resources

We have historically financed our operations and capital expenditures principally through private placements of debt and equity offerings, and cash provided by operations.

The following table presents information about our cash flow for the periods indicated:

                                                       Fiscal Year Ended December 31,
                                                           2012                2011             Change
Net cash provided by (used in) operating
activities                                           $    (2,295,871)      $ (5,395,973)         3,100,102
Net cash provided by (used in) investing
activities                                           $      (127,233)      $ (3,017,911)         2,890,678
Net cash provided by (used in) financing
activities                                           $        697,538      $   (303,407)         1,000,945
Effect of foreign currency translation on cash and
cash equivalents                                     $        527,112      $     680,437         (153,325)
Cash and cash equivalents at beginning of year       $      1,550,911      $   9,587,765       (8,036,854)
Cash and cash equivalents-end of year                $        352,457      $   1,550,911       (1,198,454)

Operating Activities

For the fiscal year ended December 31, 2012, net cash used in operating activities was $2,295,871. This was primarily attributable to net loss of $3,098,445, adjusted by an add-back of non-cash income mainly consisting of depreciation, amortization and change in fair value of warrants $2,550,536 offset by a $1,747,962 decrease in working capital. Specifically, the working capital increase was primarily due to (i) a $1,654,397 trade receivables increase driven by increase in sale; (ii) a $710,543 inventories increase, principally in work in process and finished goods, due to increase in purchasing volume and product volume; (iii) a $651,166 increase e in advance to suppliers to choose new suppliers for PTS in Qingdao factory; (iv) a $613,530 increase in prepayments, travel advances to directors, tender deposits and advances to employees, consisting primarily of prepayments for raw materials and supplies in advance of shipment, working capital for sales staff and payment of client deposits; partially offset by a $1,881,674 increase in accounts payable, tax payable, loans from unrelated parties, amount due from a director, customer deposits and accrued liabilities.

Investing Activities

For the fiscal year ended December 31, 2012, net cash used in investing activities were $127,233. This was primarily attributable to a $127,233 capital expenditure for purchase of new office equipment.

Financing Activities

For the fiscal year ended December 31, 2012, net cash used in financing activities were $697,538. This was primarily attributable to a short-term bank loan.

As of December 31, 2012, we had cash and cash equivalents of $352,457, down to $1,550,911 as of December 31, 2011.

In future periods, we believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next 6months. 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.


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Obligations under Material Contracts

We do not have any material contractual obligations as of December 31, 2012.

Critical Accounting Policies

Management's discussion and analysis of its financial condition and results of operations is based upon Sunway's consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Sunway's financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Sunway believes that the following reflect the more critical accounting policies that currently affect Sunway's financial condition and results of operations.

Impairment of long-lived assets. We account for impairment of property, plant and equipment and amortizable intangible assets in accordance with FASB ASC 360. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. During the reporting years, there was no impairment loss incurred. Competitive pricing pressure and changes in interest rates, could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets.

Inventories . Inventories consist of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required. Changes in sales volumes due to unexpected economic or competitive conditions are among the factors that could materially affect the adequacy of such write down.

Trade receivables . Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were no bad debts.

Outstanding accounts balances are reviewed individually for collectability. The Company does not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.

Revenue recognition . Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenues from services recognizes when the agreed services have been performed, provided, completed or virtual completed at an agreed period(s) of time, and are measurable. Revenue is recognized when all of the following criteria are met:

- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller's price to the buyer is fixed or determinable, and
- Collection is reasonably assured.

Contract revenues are recognized when the manufacturing and installation of the medical equipment is completed. Generally, the company receives total contract sum from clients in 3 installments. Deposit of 30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. The final sum of the remaining portion is received after the construction is completed within a year.

Expected warranty liabilities. The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements as of December 31, 2012.

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