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HXWWF > SEC Filings for HXWWF > Form 10-Q on 14-Nov-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.


14-Nov-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 249,000 and 246,000 tons water purifying agent for the nine months ended September 30, 2013 and 2012, approximately 215,000 and 219,000 tons of high calcium aluminates powder for the nine months ended September 30, 2013 and 2012. 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 nine months ended September 30, 2013 and 2012, in both dollars and as
a percentage of our total revenue.

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

Net revenue                                 $ 21,361,331        100.00 %    $ 22,407,329         100.00 %
Cost of revenue                               11,575,232         54.19 %      12,308,208          54.93 %

Gross profit                                   9,786,099         45.81 %      10,099,121          45.07 %

Operating expenses:
Selling and marketing                            744,583          3.49 %         797,674           3.56 %
General and administrative                     1,382,882          6.47 %       1,490,942           6.65 %
Research and development                         179,432          0.84 %         151,176           0.67 %
Total operating expenses                       2,306,897         10.80 %       2,439,792          10.88 %

Income from operations                         7,479,202         35.01 %       7,659,329          34.19 %

Other income/(expense)
Interest income                                   29,879          0.14 %          79,596           0.36 %
Interest expense                                (298,621 )       (1.40 )%       (228,123 )        (1.02 )%
Total other income/(expense)                    (268,742 )       (1.26 )%       (148,527 )       (0. 66 )%

Income before provision for income taxes       7,210,460         33.75 %       7,510,802          33.53 %

Provision for income taxes                     1,811,743          8.48 %       1,901,646           8.49 %

Net income                                  $  5,398,717         25.27 %    $  5,609,156          25.04 %


                                                         Nine Months Ended September 30,
                                                 2013           % of              2012        % of
                                                               Revenue                       Revenue

Net revenue                                  $ 64,002,554        100.00 %     $ 61,298,540    100.00 %
Cost of revenue                                34,875,014         54.49 %       33,746,528     55.05 %

Gross profit                                   29,127,540         45.51 %       27,552,012     44.95 %

Operating expenses:
Selling and marketing                           2,161,603          3.38 %        2,218,268      3.62 %
General and administrative                     10,590,151         16.55 %        3,826,647      6.24 %
Research and development                          533,787          0.83 %          470,722      0.77 %
Total operating expenses                       13,285,541         20.76 %        6,515,637     10.63 %

Income from operations                         15,841,999         24.75 %       21,036,375     34.32 %

Other income /(expense)
Interest income                                    78,483          0.12 %          708,023      1.16 %
Interest expense                                 (882,000 )       (1.38 )%        (284,243 )   (0.46 )%
Total other income                               (803,517 )       (1.26 )%         423,780      0.70 %

Income before provision for income taxes       15,038,482         23.49 %       21,460,155     35.01 %

Provision for income taxes                      3,816,936          5.96 %        5,454,958      8.90 %

Net income                                   $ 11,221,546         17.53 %     $ 16,005,197     26.11 %

Three and Nine Months Ended September 30, 2013 and September 30, 2012:

Revenue:

Our consolidated revenue decreased by $1,045,998 or 5%, to $21,361,331 for three months ended September 30, 2013 from $22,407,329 for the three months ended September 30, 2012. The decrease in revenue for the three months ended September 30, 2013 was primarily due to decreased sales volume which resulted lower demand from existing customers and fewer new customers in both water purifying agents and HAC powder product lines, which was partially offset by the increase in sales price and appreciation of the average foreign currency exchange rate of RMB against US dollars, as compared to the same period in 2012. For the nine months ended September 30, 2013, our revenue increased by $2,704,014 or 4% to $64,002,554 from $61,298,540 for the nine months ended September 30, 2012. The increase in revenue for the nine months ended September 30, 2013 was primarily due to overall increase in sales volume from our existing customers in the first half of the year 2013, which was partially offset by the lower demand in the three months ended September 30, 2013 and the appreciation of the average foreign currency exchange rate of RMB against US dollars, as compared to the same period in 2012.

Our revenue from sales of water purifying agents for the three months ended September 30, 2013 was $11,159,189 and for the three months ended September 30, 2012 was $11,510,345, representing a decrease of $351,156 or approximately 3%. The decrease in revenue for the three months ended September 30, 2013 was primarily due to a decrease in sales volume approximately 7% due to lower demand from existing customers and fewer new customers, which was partially offset by the increase in sales price approximately of 2% and appreciation of the average foreign currency exchange rate of RMB against US dollar, as compared to the same period in 2012. Our revenue from sales of water purifying agents for the nine months ended September 30, 2013 was $34,726,702 and for the nine months ended September 30, 2012 was $32,700,226 representing an increase of $2,026,476 or approximately 6%. The increase in revenue for the nine months ended September 30, 2013 was primarily due to increased sales volume of approximately 3% from expansion of our customer base and increased orders from our existing customers; and sales price increased by approximately 2% and the appreciation of the average foreign currency exchange rate of RMB against US dollars, as compared to the same period in 2012.

Our revenue from sales of HAC powder for the three months ended September 30, 2013 was $10,202,142 and for the three months ended September 30, 2012 was $10,896,984, representing a decrease of $694,842 or approximately 6%. The decrease in revenue for the three months ended September 30, 2013 was primarily due to a decrease of sales volume of approximately 12% due to lower demand from existing customers and fewer of new customers, which was offset by the increase in sales price of approximately 4% and appreciation of the average foreign currency exchange rate of RMB against US dollars, as compared to the same period in 2012. Our revenue from sales of HAC powder was $29,275,852 for the nine months ended September 30, 2013 and was $28,598,314 for the nine months ended September 30, 2012, representing an increase of $677,538 or approximately 2%. The increase in revenue for the nine months ended September 30, 2013 was primarily due to sales price increase of approximately 4% and the appreciation of the average foreign currency exchange rate of RMB against US dollars, which was partially offset by a sales volume decrease of approximately 2% due to lower demand from our customers, as compared to the same period in 2012.


Cost of Revenue:

Our consolidated cost of revenue decreased by $732,976, or 6%, to $11,575,232 for the three months ended September 30, 2013 from $12,308,208 for the three months ended September 30, 2012. The decrease in the cost of revenue was primarily due to labor and overhead cost in line with our sales decreases; which was partially offset by higher amortization expense from the new mining right acquired during the first quarter of 2013 and decrease in cost of coal, additives and chemicals used in productions. The cost of revenue as a percentage of revenue was approximately the same at 55% during the three and nine months ended September 30, 2013 as compared to that of the same periods in 2012. For the nine months ended September 30, 2013, our consolidated cost of revenue increased by $1,128,486, or 3%, to $34,875,014 from $33,746,528 for the nine months ended September 30, 2013. 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 was approximately the same at 54% and 55 % during the three and nine months ended September 30, 2013 and 2012.

Cost of revenue from sales of water purifying agents for the three months ended September 30, 2013 was $6,797,757, a decrease of $509,410 or 7%, from $7,307,167 for the same period in 2012. As a percentage of net revenue, cost of revenue from sales of water purifying agents was 61% and 63% for the three months ended September 30, 2013 and 2012. The decrease of cost of revenue from sales of water purifying agents was primarily attributable to the decrease 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 water purifying agents for the nine months ended September 30, 2013 was $13,900,040, an increase of $944,620 or 7%, from $12,955,420 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 nine months ended September 30, 2013 and 2012. 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 September 30, 2013 was $4,777,475, a decrease of $223,566 or 4%, from $5,001,041 for the same period in 2012. As a percentage of net revenue, cost of revenue from sales of HAC powder approximated 47% and 46% for the three months ended September 30, 2013 and 2012. The decrease of cost of revenue from sales of HAC powder was primarily attributable to the decrease 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. Cost of revenue from sales of HAC powder for the nine months ended September 30, 2013 was $13,900,040, an increase of $944,620 or 7%, from $12,955,420 for the same period in 2011. As a percentage of net revenue, cost of revenue from sales of HAC powder approximated 47% and 45% for the nine months ended September 30, 2013 and 2012. 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 decreased by $313,022 or 3% to $9,786,099 for the three months ended September 30, 2013 from $10,099,121 for the three months ended September 30, 2012; the decrease was primarily due to overall decrease in demand of water purifying agents and HAC powder. For the nine months ended September 30, 2013, our gross profit increased by $1,575,528 or 6% to $29,127,540 from $27,552,012 for the nine months ended September 30, 2012; the increase was primarily due to overall increase in sales volume from our existing customers in the first half of the year 2013. Our gross profit margin (gross profit divided by net revenue) increased to 45.81% for the three months ended September 30, 2013 from 45.07% for the three months ended September 30, 2012, increased to 45.51% for the nine months ended September 30, 2013 from 44.95% for the nine months ended September 30, 2012. The increase in gross margin was primarily due to the increases in 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 $53,091 or 7% to $744,583 for the three months ended September 30, 2013 from $797,674 for the three months ended September 30, 2012 and decreased by $56,665 or 3% to $2,161,603 for the nine months ended September 30, 2013 from $2,218,268 for the nine months ended September 30, 2012. The decrease in our selling and marketing expenses in 2013 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 decreased by $108,060 or 7% to $1,382,882 for the three months ended September 30, 2013 from $1,490,942 for the three months ended September 30, 2012; the decrease was primarily due to decrease in moving expense with no moving activities in 2013, as compared to same period in 2012. For the nine months ended September 30, 2013, our general and administrative expenses increased by $6,763,504 or 177% to $10,590,151 from $3,826,647 for the nine months ended September 30, 2012. The increase in our general and administrative expenses was primarily attributable to $6,650,000 of stock-based compensation expenses recorded for common stock issued to independent consultants and legal representatives in consideration for their services rendered to the Company, and in our overall expenses including payroll, benefits and other office expenses.

Research and Development Cost:

Our research and development cost increased by $28,256 or 19% to $179,432 for the three months ended September 30, 2013 from $151,176 for the three months ended September 30, 2012 and increased by $63,065 or 13% to $533,787 for the nine months ended September 30, 2013 from $470,722 for the nine months ended September 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.


Other income (Expense):

Our other expense increased by $120,215, or 81% to $268,742 for the three months ended September 30, 2013 from $148,527 for the three months ended September 30, 2012; the increase was primarily due to increase in interest expenses of $70,498 on short term loans, and decreased interest income generated from cash in the bank of $49,717. Other expense for the nine months ended September 30, 2013 increased by $1,227,297, or 290% to $803,517 from income of $423,780 for the nine months ended September 30, 2012, the increase was primarily due to increase in interest expense of $597,757 on short term loans, and decrease in interest income of $629,540, which was primarily due to a expired secured note receivable in the amount of $25 million which generated approximately $541,000 in interest income for the nine months ended September 30, 2012.

Net Income:

Net income decreased by $210,439 or 4% to $5,398,717 for the three months ended September 30, 2013 from $5,609,156 for the three months ended September 30, 2012; the decrease was primarily due to decrease in sales which was partially offset by the decrease in selling and marketing and general administrative expenses, as compared to the same period in 2012. For the nine months ended September 30, 2013, our net income decreased by $4,783,651 or 30% to $11,221,546 from $16,005,197 for the nine months ended September 30, 2012. The decrease of our net income was primarily due to increase in general and administrative expense of $6,650,000 related to stock-based compensation recorded for stocks issued to independent consultants and legal representatives during the nine months ended September 30, 2013 and increase in interest expense of $597,757 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 cash balance of approximately $36 million as of September 30, 2013, as compared to $34 million as of December 31, 2012.

Our funds are kept in financial institutions located in China, and 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 $16.3 million and $12.1 million as of September 30, 2013 and December 31, 2012. The increase in working capital was primarily due to increase in cash flow from operation activities which was offset by cash flow used in mining rights acquisition.

Our accounts receivable has been a small portion of our current assets, representing $3.1 million and $2.7 million, or 7.7% and 7.2% of current assets, as of September 30, 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 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. 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.


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 nine months ended September 30, 2013 and the year ended December 31, 2012. As of September 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 nine months ended September 30, 2013 and the year ended December 31, 2012.

Inventories amounted to approximately $1.2 million as of September 30, 2013, as compared to $1.4 million as of December 31, 2012. Since our mines can provide stable and sufficient supplies of raw materials for our production 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.

On August 28, 2013, we extended the short-term note with Industrial Bank Co., Limited ("IB") in the amount of approximately $13,036,896 (RMB80,000,000) for 12 months with the new maturity date on August 27, 2014. The interest rate under the short-term note agreement is based on the base rate, the interest rate set by the People's Bank of China. This short-term note agreement is personally guaranteed by Mr. Tan and Ms. Du and contains no maintenance covenants.

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 $971,098 for the nine months ended September 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 15, 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 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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