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HXWWF > SEC Filings for HXWWF > Form 10-Q on 13-Aug-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.


13-Aug-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 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 to us 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 are sold to other unaffiliated 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 and six months ended June 30, 2013 and 2012, in both US dollars and as a
percentage of our total revenue.

                                             Three Months                      Three Months
                                            Ended June 30,       % of         Ended June 30,       % of
                                                 2013           Revenue            2012           Revenue

Net revenue                                 $   23,540,360        100.00 %    $   21,133,746        100.00 %
Cost of revenue                                 12,814,860         54.44 %        11,694,497         55.34 %

Gross profit                                    10,725,500         45,56 %         9,439,249         44.66 %

Operating expenses:
Selling and marketing                              753,507          3.20 %           764,797          3.62 %
General and administrative                       1,344,339          5.71 %         1,173,659          5.55 %
Research and development                           178,234          0.76 %           167,819          0.79 %
Stock-based compensation expense                 6,650,000         28.25 %                 -             - %
Total operating expenses                         8,926,080         37.92 %         2,106,275          9.96 %

Income from operations                           1,799,420          7.64 %         7,332,974        34. 70 %

Other income/(expense)
Interest income                                     23,418          0.10 %            60,840          0.29 %
Interest expense                                  (296,614 )       (1.26 )%          (56,120 )       (0.27 )%
Total other income/(expense)                      (273,196 )       (1.16 )%            4,720          0.02 %

Income before provision for income taxes         1,526,224          6.48 %         7,337,694         34.72 %

Provision for income taxes                         419,539          1.78 %         1,852,454          8.77 %

Net income                                  $    1,106,685          4.70 %    $    5,485,240         25.95 %


                                             Six Months                         Six Months
                                           Ended June 30,       % of          Ended June 30,       % of
                                                2013           Revenue             2012           Revenue

Net revenue                                $   42,641,223        100.00 %     $   38,891,211        100.00 %
Cost of revenue                                23,299,782         54.64 %         21,438,320         55.12 %

Gross profit                                   19,341,441         45.36 %         17,452,891         44.88 %

Operating expenses:
Selling and marketing                           1,417,020          3.32 %          1,420,594          3.65 %
General and administrative                      2,557,269          6.00 %          2,335,705          6.01 %
Research and development                          354,355          0.83 %            319,546          0.82 %
Stock-based compensation expense                6,650,000         15.59 %                  -             - %
Total operating expenses                       10,978,644         25.74 %          4,075,845         10.48 %

Income from operations                          8,362,797         19.61 %         13,377,046         34.40 %

Other income /(expense)
Interest income                                    48,604          0.11 %            628,427          1.62 %
Interest expense                                 (583,379 )       (1.37 )%           (56,120 )       (0.14 %
Total other income/(expense)                     (534,775 )       (1.26 )%           572,307          1.48 %

Income before provision for income taxes        7,828,022         18.37 %         13,949,353         35.88 %

Provision for income taxes                      2,005,193          4.70 %          3,553,312          9.14 %

Net income                                 $    5,822,829         13.67 %     $   10,396,041         26.74 %

Three Months and Six Months Ended June 30, 2013 and June 30, 2012:

Revenue:

Our Our consolidated revenue increased by $2,406,614 or approximately 11%, to $23,540,360 for the three months ended June 30, 2013 from $21,133,746 for the three months ended June 30, 2012, and increased by $3,750,012 or approximately 10% to $42,641,223 for the six months ended June 30, 2013 from $38,891,211 for the six months ended June 30, 2012. The increase in revenue for the three and six months ended June 30, 2013 was primarily due to the appreciation of the average foreign currency exchange rate of RMB against US dollars by approximately 1%, the increase of selling prices of purifying agents by approximately 2% and increase of selling prices of HAC powder by 4%, the increases of sales contributed by sales generated from new customers, and overall increase in volume from our existing customers and distributors.

Our revenue from sales of water purifying agents for the three months ended June 30, 2013 was $13,767,433 and for the three months ended June 30, 2012 was $12,218,647, representing an increase of $1,548,786 or approximately 13%. Our revenue from sales of water purifying agents for the six months ended June 30, 2013 was $23,567,513 and for the six months ended June 30, 2012 was $21,189,881, representing an increase of $2,377,632 or approximately 11%. The increase in revenue for the three and six months ended June 30, 2013 was primarily due to the appreciation of the average foreign currency exchange rate of RMB against US dollars, the increase of selling prices of purifying agents by approximately 2% and through expansion of our customer base and increased orders from our existing customers and distributors.

Our revenue from sales of HAC powder for the three months ended June 30, 2013 was $9,772,927 and for the three months ended June 30, 2012 was $8,915,099, representing an increase of $857,828 or approximately 10%. Our revenue from sales of HAC powder was $19,073,710 for the six months ended June 30, 2013 and was $17,701,330 for the six months ended June 30, 2012, representing an increase of $1,372,380 or approximately 8%. The increase in revenue for the three and six months ended June 30, 2013 was primarily due to the appreciation of the average foreign currency exchange rate of RMB against US dollars, the increase of selling prices of HAC powder by approximately 4%, and through expansion of our customer base and increased orders from our existing customers and distributors.


Cost of Revenue:

Our consolidated cost of revenue increased by $1,120,363, or approximately 10%, to $12,814,860 for the three months ended June 30, 2013 from $11,694,497 for the three months ended June 30, 2012; and increased by $1,861,462, or approximately 9%, to $23,299,782 for the six months ended June 30, 2013 from $21,438,320 for the six months ended June 30, 2012. The increase in the cost of revenue was primarily driven by higher amortization expense from the new mining right acquired during the first quarter of 2013, labor and overhead cost in line with our sales increases; which were offset by decreased cost of coal, additives and chemicals used in production. The cost of revenue as a percentage of revenue decreased approximately 1% to 54% for the three months ended June 30, 2013 from 55% for the three months ended June 30, 2012; and the same at 55% during the six months ended June30, 2013 as compared to that of the same periods in 2012.

Cost of revenue from sales of water purifying agents for the three months ended June 30, 2013 was $8,271,179, an increase of $447,990 or approximately 6%, from $7,823,189 for the same period in 2012. Cost of revenue from sales of water purifying agents for the six months ended June 30, 2013 was $14,177,217, an increase of $693,276 or approximately 6%, from $13,483,941 for the same period in 2012. As a percentage of net revenue, cost of revenue from sales of water purifying agents was 60% and 64% for the three months ended June 30, 2013 and 2012, and 60% and 64% for the six months ended June 30, 2013 and 2012, 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, the increase of labor and overhead cost, which was offset by decreases in cost of additives and chemicals used in our productions.

Cost of revenue from sales of HAC powder for the three months ended June 30, 2013 was $4,543,681, an increase of $672,373 or approximately 17%, from $3,871,308 for the same period in 2012. Cost of revenue from sales of HAC powder for the six months ended June 30, 2013 was $9,122,565, an increase of $1,168,186 or approximately 15%, from $7,954,379 for the same period in 2012. As a percentage of net revenue, cost of revenue from sales of HAC powder approximated 46% and 43% for the three months ended June 30, 2013 and 2012, and 48% and 45% for the six months ended June 30, 2013 and 2012, 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, the increase in amortization expense form the new mining right acquired during the first quarter of 2013, and the increase of raw material prices, labor and overhead cost.

Gross profit and Gross Profit Margin:

Our gross profit increased by $1,286,251 or approximately 14% to $10,725,500 for the three months ended June 30, 2013 from $9,439,249 for the three months ended June 30, 2012, and increased by $1,888,550 or 11% to $19,341,441 for the six months ended June 30, 2013 from $17,452,891 for the six months ended June 30, 2012. Our gross profit margin (gross profit divided by net revenue) increased approximately 1% to 46% for the three months ended June 30, 2013 from 45% for the three months ended June 30, 2012 and approximately the same at 45% for the six months ended June 30, 2013 as compared to that of the same period in 2012. The increase in gross margin was primarily due to the increases in sales volume and sales price and decreases in cost of raw materials and coal used in our production

Selling and Marketing Expenses:

Our selling and marketing expenses decreased by $11,290 or approximately 1% to $753,507 for the three months ended June 30, 2013 from $764,797 for the three months ended June 30, 2012, and decreased by $3,574 or approximately 0.25% to $1,417,020 for the six months ended June 30, 2013 from $1,420,594 for the six months ended June 30, 2012. The decrease in our selling and marketing expenses in 2012 was primarily attributable to the decrease of commission percentage paid to sales agents that offset the 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 $170,680 or approximately 15% to $1,344,339 for the three months ended June 30, 2013 from $1,173,659 for the three months ended June 30, 2012, and increased by $221,564 or 9% to $2,557,269 for the six months ended June 30, 2013 from $2,335,705 for the six months ended June 30, 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 $10,415 or approximately 6% to $178,234 for the three months ended June 30, 2013 from $167,819 for the three months ended June 30, 2012, and increased by $34,809 or approximately 11% to $354,355 for the six months ended June 30, 2013 from $319,546 for the six months ended June 30, 2012. We continue to incur expenses to improve and develop new products. We expect to continue to increase our research and development efforts to enhance the competitiveness of our products.


Stock-based compensation expense:

On June 25, 2013, we issued 1,330,000 shares of common stock to independent consultants and legal representatives in exchange for services rendered to us. These shares were valued at $6,650,000 based on the market price of the common stock issued on the date of the grant.

Other income (Expense):

Our other income decreased by $37,422, or approximately 62% to $23,418 for the three months ended June 30, 2013 from $60,840 for the three months ended June 30, 2012, and decrease by $579,823, or approximately 92% to $48,604 for the six months ended June 30, 2013 from $628,427 for the six months ended June 30, 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 $240,494, or approximately 429% to $296,614 for the three months ended June 30, 2013 from $56,120 for the three months ended June 30, 2012, and increase by $527,259, or approximately 940% to $583,379 for the six months ended June 30, 2013 from $56,120 for the six months ended June 30, 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 decreased by $4,378,555 or approximately 80% to $1,106,685 for the three months ended June 30, 2013 from $5,485,240 for the three months ended June 30, 2012, and decreased by $4,573,212 or approximately 44% to $5,822,829 for the six months ended June 30, 2013 from $10,396,041 for the six months ended June 30, 2012. The decrease of our net income was primarily due to increase in stock-based compensation expense of $6,650,000 related to stocks issued to independent consultants and legal representatives during the six months ended June 30, 2013 and increase in interest expense of $527,259 for the short-term loans and decrease in interest income from note receivable of approximately $541,000, as compared to that in the same period of 2012.

Liquidity and Capital Resources

We had an unrestricted cash balance of approximately $29.5 million as of June 30, 2013, as compared to $33.9 million as of December 31, 2012.

Our funds are kept in financial institutions, banks and other financial institutions in China, 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.

We had working capital of approximately $10 million and $12 million as of June 30, 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 represents $4.5 million and $2.7 million, or approximately 13% and 7% of current assets, as of June 30, 2013 and December 31, 2012. We began to offer longer credit terms to our good standing customers starting 2011 per the requests of our customers due to the tightening monetary policies imposed by the PRC 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 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 receivables could result in our inability to collect receivables requiring us to increase our doubtful accounts reserve, which would decrease our net income and working capital. We experienced no bad debt expense during the three and six months ended June 30, 2013 nor for the year ended December 31, 2012. As of June 30, 2013, we believed it was appropriate not to recognize bad debt expense primarily due to the subsequent collections made on our receivable balance and our historical ability to collect our accounts receivable. Bad debt expense was $0 for the three and six months ended June 30, 2013 and the year ended December 31, 2012.

Inventories amounted to approximately $1 million as of June 30, 2013, as compared to $1.5 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 might expect to experience increase in our inventory levels in future, including both of raw material and finished goods 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 are approximately $644,569 for the six months ended June 30, 2013. 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 unpaid 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 be 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 expenditure 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 operation. However, we believe our existing cash, cash equivalents and cash flows from operations and proceeds from the completed financing in December 2010 and proceeds from short term debts entered into in 2012 with Industrial Bank Co., Limited 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 available borrowings under bank lines of credit. We believe that we can continue meeting our cash funding requirements for our business in this manner over the next twelve months.

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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