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SUWG > SEC Filings for SUWG > Form 10-Q on 20-May-2013All Recent SEC Filings

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

Form 10-Q for SUNWAY GLOBAL INC.


20-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Forward-Looking Statements

The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as "believes," "estimates," "could," "possibly," "probably," anticipates," "projects," "expects," "may," "will," or "should" or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations.

The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.

Overview

Since June 27, 2007, the Company has operated as a holding company for entities that, through contractual relationships, control the business of Daqing Sunway Technology Co., Ltd. ("Daqing Sunway"), a company 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. Currently our Company is the only producer of three products in the PRC. We have served approximately 300 customers in the PRC from our facilities in Qingdao. We generate our revenue from sales in three product categories: pneumatic transport systems ("PTS"), Sunway Automatic Dispensing and Packing ("SADP"), and automatic medicament emitting systems.

This discussion and analysis focuses on the business results of Sunway Group (consisting of Daqing Sunway, the Company's primary operating entity, along with its other indirectly-owned subsidiaries Beijing Sunway New-force Medical Treatment Tech Co., Ltd. and Qingdao Sunway New-force Mechanical Co., Ltd), comparing its results in the three months ended March 31, 2013 to the three months ended March 31, 2012.

This discussion and analysis focuses on the business results of Sunway Group, comparing its results in the three months period ended March 31, 2013 with the three months period ended March 31, 2012.

Results of Operations

In the three months ended March 31, 2013, the growth of the Company's net revenue was slow as compared with the same period of 2012, but in the three months ended March 31, 2013, the gross profit had a sharp decline as compared with the same period of 2012. The decrease was primarily attributable to a decline in the sales prices of spare part and PTS and an increase in production costs.

The following table summarizes the results of our operations during the three months ended March 31, 2012 and 2011, respectively, and provides information regarding the dollar and percentage increase or (decrease) from the three months ended March 31, 2013 and 2012.

                                             Three Months Ended March 31
                                                2013               2012             Change          Change rate
Net Revenue                                $    2,017,554      $  2,010,575      $      6,979               0.35 %
Cost of net revenue                        $    1,206,223      $    949,675      $    256,548              27.01 %
Gross Profit                               $      811,331      $  1,060,900      $   (249,569 )           (23.52 )%
Gross Margin                                        40.21 %           52.77 %               -             (12.56 )%
Operating (loss)/ Income                   $   (1,301,783 )    $ (1,214,565 )    $    (87,218 )             7.18 %
Changes in fair value of warrants          $            -      $    967,868      $   (967,868 )                -  %
Net Income/(loss)                          $   (1,313,463 )    $  (208,498)      $ (1,104,965 )           529.96 %
Net (loss) / profit margin                         (65.10 )%         (10.37 )%                            (54.73 )%


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Net Revenues

Net revenues for the three months ended March 31, 2013, was $2,017,554, an increase of 0.35% as compared with net revenues of $2,010,575 for the three months ended March 31, 2012. In the three months ended March 31, 2013, we sold 198 workstations, a decrease of 5.71% as compared with 210 workstations in the three months ended March 31, 2012. The decrease in PTS' sale is mainly because the number of newly established hospital decreased, which led to shrinking of the market. During the three months ended March 31, 2013, we also sold 6 units of the SADP, an increase of 100.00% as compared with 3 units in the three months ended March 31, 2012. The increase in the SADP was due primarily to a growth in the marketing effort.

The following table breaks down application categories as percentage of total net revenue.

                                                                  Three Months Ended March 31,
                                                          2013                                     2012
                                              Sales         % of total sales           Sales         % of total sales
PTS                                        $ 1,297,992                  64.33 %     $ 1,154,139                  57.40 %
SADP                                       $   470,688                  23.33 %     $   246,147                  12.24 %
Other                                      $   248,874                  12.34 %     $   610,289                  30.35 %
Total net revenue                          $ 2,017,554                 100.00 %     $ 2,010,575                 100.00 %

Cost of Net Revenue

Cost of net revenue increased to $1,206,223 for the three months ended March 31, 2013, representing a 27.01% increase as compared with $949,675 for the same period of 2012. This increase is primarily due an increase in the installing and production costs of PTS.

Gross Profit

Gross profit decrease 12.56% to $811,331 for the three months ended March 31, 2013, as compared to $1,060,900 for the three months ended March 31, 2012, our gross profit margin dropped 12.56% from 52.77% as of the three months ended March 31, 2012 to 40.21% as of the same period of 2013, mainly because our spare part and PTS' sale prices declined and production costs increased.

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

                               Three Months Ended March 31,
                          2013                             2012
                             Gross profit                      Gross profit
                  US$           Margin             US$            Margin

Gross Profit   $ 811,331             40.21 %   $ 1,060,900             52.77 %

Income from Operations

Operating loss was $1,301,783 for the three months ended March 31, 2013, as compared to $1,214,565 for the three months ended March 31, 2012. The increase in loss was primarily due to decreases in our sale prices and the increases of our production costs.


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The table below presents information about our cost of net revenue for the periods indicated:

Three Months Ended March 31, 2013 2012 Change Cost of net revenue $ 1,206,223 $ 949,675 27.01 %

Operating Expenses

Operating expenses were $2,113,370 for the three months ended March 31, 2013, a decrease of 7.12% as compared with $2,275,465 for the same period of 2012. The decrease was primarily due to two reasons: (i) selling expenses increased $222,823, or 41.07% to $765,371 in the three months ended March 31, 2013 from $542,548 for the same period of 2012; and (ii) general and administration expenses decreased $384,918, or 22.21% to $1,347,999 in the three months ended March 31, 2013 from $1,732,917 for the same period of 2012. The increase in selling expenses was mainly due to our salesperson's salary which increased 196.22% in the three months ended March 31, 2013 compare with the same period of 2012.

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

                                      Three Months Ended March 31,
                                         2013                2012         Change
Selling expenses                    $       765,371       $   542,548         41.07 %
General & Administrative expenses   $     1,347,999       $ 1,732,917       (22.21) %
Total operating expenses            $     2,113,370       $ 2,275,465        (7.12) %

Changes in fair value of warrants

Changes in fair value of warrants were $967,868 for the three months ended March 31, 2012. This is recorded as a non-cash charge, 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.

Net Income/Loss

Net loss was $1,313,463 for the three months ended March 31, 2013. In the three months ended March 31, 2012, our net loss was impacted by a non-cash charge of $967,868 of the changes in fair value of warrants unrelated to the Company's operations. Excluding the changes in fair value of warrants in non-cash charge, the Company's net loss from operations would have been $1,176,366 for the three months ended March 31, 2012, an increase in loss compared with the same period of 2013. The increase in loss was mainly due to our product prices decline and product costs rise.

Earnings Per Share

Basic and diluted loss per share for the three months ended March 31, 2013 were $0.07 and $0.06 compared with the loss per share for the same period of 2012 was $0.01 and $0.01. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 18,499,736 for the three months ended March 31, 2013 and March 31, 2012, respectively. The weighted average number of shares outstanding to calculate diluted EPS was 23,314,556 and 23,314,556 for the three months ended March 31, 2013 and 2012 respectively.

Trade Receivables, net

Trade receivables, net increased to $8,793,586 as of March 31, 2013, compared with $8,595,793 as of December 31, 2012. This increase in trade receivables was primarily attributable to increase in sale.


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Inventory

Inventory consists of raw materials, finished goods and work in progress. As of March 31, 2013, the recorded value of our inventory has increased 34.60% to $4,490,489 from $3,336,188 as of December 31, 2012. The increase was mainly due to an increase of 458.11% in finished goods from $169,872 as of December 31, 2012 to $ 948,080 as of March 31, 2013; a decrease of 4.64% in the raw material inventory from $713,769 as of December 31, 2012 to $680,654 as of March 31, 2013, an increase of 16.69% in work in progress inventory from $2,452,547 as of December 31, 2012 to $2,861,755 as of March 31, 2013. The increase was primarily attributable to an increase in orders received by our Qingdao factory. We increased output of the SADP and PTS, to make sure we had adequate supply to meet contract requests.

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

Item                March 31, 2013       December 31, 2012       Change
Finished goods     $        948,080     $           169,872       458.11 %
Work in progress   $      2,861,755     $         2,452,547        16.69 %
Raw material       $        680,654     $           713,769        (4.64 )%
Total              $      4,490,489     $         3,336,188        34.60 %

Accounts Payable

Accounts payable amounted to $2,168,178 as of March 31, 2013, an increase as compared with $1,211,450 as of December 31, 2012. The increase was primarily attributable to produce plan growth, which resulted in an increase in raw material purchases.

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

                                                       Three months ended March 31,
                                                          2013                2012          Change
Net cash provided by (used in) operating
activities                                           $     (193,908 )     $ (1,054,636 )   $  (81.61 )%
Net cash provided by (used in) investing
activities                                           $       (7,086 )     $    (19,419 )   $  (63.51 )%
Net cash provided by (used in) financing
activities                                           $            -       $          -     $       -
Effect of foreign currency translation on cash and
cash equivalents                                     $      (10,195 )     $     70,441     $ (114.47 )%
Beginning cash and cash equivalent                   $      352,457       $  1,550,911     $  (77.28 )%
Ending cash and cash equivalent                      $      141,268       $    547,297     $  (74.19 )%

Operating Activities

For the three months ended March 31, 2013, net cash used in operating activities was $193,908. This was primarily attributable to our net loss of $1,313,463, adjusted by an add-back of non-cash charges mainly consisting of depreciation and amortization of $280,686 and $511,721 respectively, offset by a $327148 increase in working capital. Specifically, the increase in working capital was primarily due to: (i) a $160,615 trade receivables increase driven by sales;
(ii) a $844,643 increase in inventories, principally of finished goods and work in progress inventory; (iii) a $17,116 decrease in advances to suppliers to buy raw materials; (iv) a $316,709 increase in prepayments, travel advances to shareholders, tender deposits and advances to employees, consisting primarily of prepayments for raw materials and other supplies in advance of shipment, working capital for sales staff and payment of client deposits; partially offset by a $1,631,999 increase in accounts payable, tax payable, customer deposits, accrued liabilities and other payables.


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Investing Activities

For the three months ended March 31, 2013, net cash used in investing activities was $7,086. This was primarily attributable to a $7,086 capital expenditure for purchase of new plant and equipment.

Cash and Cash Equivalents

Our cash and cash equivalents as at the beginning of March 31, 2013, were $352,457 and decreased to $141,268 by the end of the period.

In the future, we will need extra operating cash from commercial bank, combined with availability under our revolving credit facility, will be sufficient to meet our presently anticipated future cash needs for at least the next 9 months.

Trends

We are not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our short-term or long-term liquidity.

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