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HXWWF > SEC Filings for HXWWF > Form 10-Q on 15-May-2013All Recent SEC Filings

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

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


15-May-2013

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 condensed consolidated 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 agents and High-performance Aluminate Calcium (HAC) powder, the core component of water purifying agents. We manufactured and distributed approximately 322,000 and 290,000 tons water purifying agent and 288,000 and 277,000 tons of high calcium aluminates powder for the years ended December 31, 2012 and 2011. 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. Guangdong Huixin is engaged in the production and sale of water purifying agents. Water purifying agents' core raw material is HAC powder, which is exclusively supplied by Guizhou Yufeng, a wholly owned subsidiary of Guangdong Huixin. Although Guizhou Yufeng sells HAC powder to third party customers, it prioritizes the supply to Guangdong Huixin over third party customers and ensures that its supply meets the demand of Guangdong Huixin 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 aluminate ore and limestone, both of which can be supplied by the mines operated by the Company with its land use and mining rights agreements.

Results of Operations

The following table shows key components of our results of operations during the
three months ended March 31, 2013 and 2012, in both U.S. dollars and as a
percentage of our total revenue.

                                                               Three Months Ended March 31,
                                               2013          % of Revenue          2012          % of Revenue

Net revenue                                $ 19,100,863             100.00 %   $ 17,757,465             100.00 %
Cost of revenue                              10,484,922              54.89 %      9,743,823              54.87 %

Gross profit                                  8,615,941              45.11 %      8,013,642              45.13 %

Operating expenses:
Selling and marketing                           663,513               3.47 %        655,797               3.69 %
General and administrative                    1,212,930               6.35 %      1,162,046               6.54 %
Research and development                        176,121               0.92 %        151,727               0.86 %
Total operating expenses                      2,052,564              10.75 %      1,969,570              11.09 %

Income from operations                        6,563,377              34.36 %      6,044,072              34.04 %

Other (expense)/income:
Interest income                                  25,186               0.13 %        567,587               3.19 %
Interest expense                               (286,765 )           (1.50) %              -                  -
Total other (expense)/income                   (261,579 )           (1.37) %        567,587               3.19 %

Income before provision for income taxes      6,301,798              32.99 %      6,611,659              37.23 %

Provision for income taxes                    1,585,654               8.30 %      1,700,858               9.58 %

Net income                                 $  4,716,144              24.69 %   $  4,910,801              27.65 %


Three Months Ended March 31, 2013 and March 31, 2012:

Revenue:

Our consolidated revenue increased by $1,343,398 or 7.57%, to $19,100,863 for three months ended March 31, 2013 from $17,757,465 for the three months ended March 31, 2012. The increase in revenue for the three months ended March 31, 2013 was primarily due to increase of sales quantities and selling prices of purifying agents and HAC powder during the three months ended March 31, 2013 as compared to those during the same period of 2012.

Our revenue from sales of water purifying agents for the three months ended March 31, 2013 was $9,800,080 and for the three months ended March 31, 2012 was $8,971,234, representing an increase of $828,846 or approximately 9.24%. The increase was primarily due to increase of selling prices by approximately 2.04% and increases in sales quantities by approximately 5.39% during the three months ended March 31, 2013 as compared to those in the same period of 2012. 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 three months ended March 31, 2013 was $9,300,783 and for the three months ended March 31, 2012 was $8,786,231, representing an increase of $514,552 or approximately 5.86%. The increase was primarily due to increase of selling prices by approximately 4.0% and increases in sales quantities by approximately 2.67% during the three months ended March 31, 2013 as compared to those in the same period of 2012. The increase was due to continuous increase of the sales of our HAC powder through expansion of our customer base and increased orders from our existing customers.

Costs of Revenue:

Costs of consolidated revenue increased by $741,099 or 7.61%, to $10,484,922 for the three months ended March 31, 2013 from $9,743,823 for the three months ended March 31, 2012. The increase in the costs of revenue was mainly due to the increase of raw material (for HAC powder) costs, labor and overhead cost in line with the our sales increases; the cost of revenue ratio to revenue was approximately the same during the three months ended March 31, 2013 as compared to that of the same period in 2012.

Costs of revenue from sales of water purifying agents for the three months ended March 31, 2013 were $3,587,915, a decrease of $12,479 or 0.35%, from $3,600,394 for the same period in 2012. As a percentage of net revenue, cost of revenue from sales of water purifying agents was 37% and 40% for the three months ended March 31, 2013 and 2012. The decrease of costs of revenue from sales of water purifying agents was primarily attributable to the decrease of raw material (for water purifying agents) prices.

Costs of revenue from sales of HAC powder for the three months ended March 31, 2013 were $6,897,007, an increase of $753,378 or 12.27%, from $6,143,429 for the same period in 2012. As a percentage of net revenue, costs of revenue from sales of HAC powder approximated 74% and 70% for the three months ended March 31, 2013 and 2012. The increase of costs of revenue from sales of HAC powder was primarily attributable to the increase of raw material (for HAC powder) prices and overall labor and overhead cost increase.


Gross profit and Gross Profit Margin:

Our gross profit increased by $602,299 or 7.52% to $8,615,941 for the three months ended March 31, 2013 from $8,013,642 for the three months ended March 31, 2012. Our gross profit margin (gross profit divided by net revenue) decreased to 45.11% for the three months ended March 31, 2013 from 45.13% for the three months ended March 31, 2012. The decrease in gross margin was primarily due to the increases of raw materials for HAC powder, labor and overhead cost at a faster pace than the increases of our sales prices.

Selling and Marketing Expenses:

Our selling and marketing expenses increased by $7,716 or 1.18% to $663,513 for the three months ended March 31, 2013 from $655,797 for the three months ended March 31, 2012. The increase in our selling and marketing expenses in the three months ended March 31, 2013 was primarily due to increases of payroll expenses resulting from increase of our head count and pay increase as compared to those in the same period of 2012.

General and Administrative Expenses:

Our general and administrative expenses increased by $50,884 or 4.38% to $1,212,930 for the three months ended March 31, 2013 from $1,162,046 for the three months ended March 31, 2012. The increase in our general and administrative expenses was primarily attributable to the increase of general increases in our overall expenses including payroll expenses resulting from increase of our head count and pay increase, benefits and other office expenses.

Research and Development Cost:

Our research and development cost increased by $24,394 or 16.08% to $176,121 for the three months ended March 31, 2013 from $151,727 for the three months ended March 31, 2012. We continue to incur expenses to improve and develop new products. We expect to continue increasing our research and development efforts to enhance the competitiveness of our products.

Other income (expenses):

Interest income:

Our interest income decreased by $542,401 or 96% to $25,186 for the three months ended March 31, 2013 from $567,587 for the three months ended March 31, 2012. The decrease was primarily due to the lack of interest income earned from secured note receivable for the three months ended March 31, 2013 as compared to same period of 2012.

Interest expense increased by $286,765, or 100% for the three months ended March 31, 2013 from $0 for the three months ended March 31, 2012. The increase was due to interest expense for short-term loans obtained during the second half of 2012 for use in our business operations and mining right acquisition.

Net Income:

Net income for the three months ended March 31, 2013 decreased by $194,657 or 3.96% to $4,716,144 for the three months ended March 31, 2013 from $4,910,801 for the three months ended March 31, 2012. Our revenue and costs of revenue increased by approximately the same percentage, 7.6%, and gross profit increased by $602,299 during the three months ended March 31, 2013, as compared to that in the same period of 2012. The decrease of our net income was primarily due to decrease in interest income from note receivable of approximately $541,000 and increase in interest expense of $286,765 for the short-term loans.


Liquidity and Capital Resources

We had an unrestricted cash balance of approximately $22.5 million as of March 31, 2013, as compared to $33.9 million as of December 31, 2012.

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. In addition, as of March 31, 2013, the Company had cash deposits of approximately $22.3 million, placed with several banks in the PRC, where there is currently no rule or regulation in place for obligatory insurance of accounts with banks and financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in accounts with banks and financial institutions.

We had working capital of approximately $1.2 million and $12.1 million as of March 31, 2013 and December 31, 2012. The decrease of working capital was primarily due to our use of cash for the final payment of the mining rights acquisition.

Our accounts receivable has been a relatively insignificant portion of our current assets, representing $3.1 million and $2.7 million, or 11.5% and 7.0% of total current assets, as of March 31, 2013 and December 31, 2012. 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 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.

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.


Our aging of accounts receivable could result in our inability to collect receivables requiring us to increase our allowance for doubtful accounts, which would decrease our net income and working capital. We experienced no bad debt expense during the three months ended March 31, 2013 and the year ended December 31, 2012. As of March 31, 2013, we believed it was appropriate not to record any bad debt expense primarily due to our historical ability to collect our accounts receivable. Bad debt expense was $0 for the three months ended March 31, 2013 and the year ended December 31, 2012.

Inventories amounted to approximately $1.2 million as of March 31, 2013, as compared to approximately $1.4 million as of December 31, 2012. 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 may, however, decide to increase our inventory levels in the future, including both of raw materials and finished goods, in order to meet the market demands.

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 were approximately $325,000 and $262,000 for the three months ended March 31, 2013 and 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 insufficient contribution of 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 expenditures 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 operations. 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 regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand, cash provided by operations and loan borrowed from bank.

We do not have a present plan with respect to steps to expand our production or a reasonable estimate of the capital expenditures associated with the expansion.

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