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

Show all filings for SUNWAY GLOBAL INC.

Form 10-Q for SUNWAY GLOBAL INC.


20-Nov-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, Sunway Global, Inc. (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 and nine months ended September 30, 2013 to the same period of 2012.

Three-month periods ended September 30, 2013 and 2012

Results of Operations

In the three months ended September 30, 2013, the Company's gross margin decreased sharply as compared with the same period of 2012. These decreases were primarily attributable to an increase in the sales and a rise in the product costs.

The following table summarizes the results of our operations during the three months ended 30, 2013 and 2012, respectively, and provides information regarding the dollar and percentage increase (or decrease) from the Three months ended September 30, 2013 and 2012.

                                            The three months ended September 30,
                                                 2013                   2012            Change       Change rate
Net Revenues                               $       2,120,548       $    1,666,269      $ 454,279             27.26 %
Cost of net revenues                       $         837,649       $      528,553      $ 309,096             58.48 %
Gross Profit                               $       1,282,899       $    1,137,716      $ 145,183             12.76 %
Gross Margin                                           60.50 %              68.28 %                         (7.78) %
Operating Income/(loss)                    $       (823,341)       $  (1,222,478)      $ 399,137           (32.65) %
Net (Loss)/Income                          $       (723,445)       $    (868,445)      $ 145,000           (16.70) %
Net profit margin                                    (34.12) %            (52.12)  %                         18.00 %


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Net Revenues

Net revenues for the three months ended September 30, 2013, which resulted entirely from sales, was $2,120,548, an increase of 27.26% as compared with net revenues of $1,666,269 for the three months ended September 30, 2012. In the three months ended September 30, 2013, we sold 273 workstations, an increase of 34.48% as compared with 203 workstations sold in the three months ended September 30, 2012. The increase in PTS'sale was because we hired outside installation company to help us to meet client process' need, which led to revenues of PTS added.

During the three months ended September 30, 2013, we sold 6 units of SADP, a decrease of 40% as compared with 10 units of SADP for the Three months ended September 30, 2012. The decrease in SADP was due primarily because our products upgrade slowly compared with those of our competitor, which led to shrinking of our market.

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

                                     The three months ended September 30,
                                  2013                                 2012
                       Sales       % of total sales         Sales        % of total sales
PTS                 $ 1,765,379                83.25 %    $   821,695                49.31 %
SADP                $   255,627                12.05 %    $   311,817                18.71 %
Others              $    99,542                 4.69 %        532,757                31.98 %
Total net revenue   $ 2,120,548               100.00 %    $ 1,666,269               100.00 %

Gross Profit

Gross profit increased 12.76% to $1,282,899 in the three months ended September 30, 2013, as compared to $1,137,716 for the three months ended September 30, 2012. Our gross profit margin was down 7.78% from 68.28% for the three months ended September 30, 2012 to 60.50% for the same period of 2013, mainly due to a decrease in the PTS' sale prices and an increase in the product costs.

Income from Operations

Operating loss was $823,341 in the three months ended September 30, 2013, as compared with operating loss of $1,222,478 for the three months ended September 30, 2012. The decrease in loss was primarily due to an increase in the sale and a decrease in operation expenses.

Cost of Net Revenue

Cost of net revenue decreased to $837,649 for the three months ended September 30, 2013, representing a 58.48% increase as compared with $528,553 for the same period of 2012. The increase was primarily due to increase in sale.


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Operating Expenses

Operating expenses was $2,106,240 in the three months ended September 30, 2013, a decrease as compared with $2,360,194 in the same period of 2012. The decreased was primarily due to two factors: (i) selling expenses decreased $64,133, or 7.19% to $827,661 in the three months ended September 30, 2013 from $891,794 for the same period of 2012; and (ii) general and administration expenses decreased $189,821, or 12.93% to $1,278,579 for the three months ended September 30, 2013 from $1,468,400 for the same period of 2012. The decrease in operating expenses was mainly because our new contract volume declined.

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

                                                         The three months ended
                                                              September 30,
                                                         2013               2012          Change
Selling expenses                                      $   827,661        $   891,794        (7.19) %
General & Administrative expenses                     $ 1,278,579        $ 1,468,400       (12.93) %
Total operating expenses                              $ 2,106,240        $ 2,360,194       (10.76) %

Net Income

Net loss was $723,445 for the three months ended September 30, 2013, an increase of 16.70% as compared with $868,445 of net loss for the same period of 2012. In the three months ended September 30, 2013, the loss mainly reason is our products upgrade slowly compare with our competitor, led to our order quantity decrease.

Earnings per Share

Basic and diluted loss per share for the three months ended September 30, 2013 were $0.04 and $0.03 compared with loss per share $0.05 and $0.04 for the same period of 2012. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 18,499,736 for the three months ended September 30, 2013 and 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 September 30, 2013 and 2012.

Nine-month periods ended September 30, 2013 and September 30, 2012

Results of Operations

In the nine months ended September 30, 2013, the Company's gross profit decreased sharply as compared with the same period of 2012. The decreases were primarily attributable to a decline in our spare part and PTS' sale prices, and an increase in the product costs.

The following table summarizes the results of our operations during the nine months ended September 30, 2013 and 2012 respectively, and provides information regarding the dollar and percentage increase or (decrease) from the nine months ended September 30, 2013 and 2012.

                                               The nine months ended September 30,
                                                  2013                     2012               Change          Change rate
Net Revenues                               $        5,818,329       $        5,898,300     $    (79,971)            (1.36) %
Cost of net revenues                       $        2,996,642       $        2,596,144     $     400,498             15.43 %
Gross Profit                               $        2,821,687       $        3,302,156     $   (480,469)           (14.55) %
Gross Margin                                            48.50 %                  55.98 %                              7.48 %
Operating (loss)/ Income                   $      (3,571,523)       $      (3,694,308)     $     122,785              3.32 %
Changes in fair value of warrants          $                -       $        1,165,692     $ (1,165,692)                 - %
Net Income/(loss)                          $      (3,498,480)       $      (2,000,247)     $ (1,498,233)             74.90 %
Net (loss) / profit margin                            (60.13) %                (33.91) %                             26.22 %


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Net Revenues

Net revenues in the nine months ended September 30, 2013, was $5,818,329, a decrease of 1.36% as compared with net revenues of $5,898,300 in the nine months ended September 30, 2012. In the nine months ended September 30, 2013, we sold 659 workstations, compared with 658 workstations in the nine months ended September 30, 2012. During the same period of 2013, we also sold 17 units of SADP, a decrease of 15.38% as compared with 17 units in the nine months ended September 30, 2012.

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

                                       The nine months ended September 30,
                                   2013                                   2012
                       Sales         % of total sales         Sales         % of total sales
PTS                 $ 4,232,901                  72.75 %   $ 3,270,863                  55.45 %
SADP                $ 1,115,760                  19.18 %   $ 1,373,431                  23.29 %
Other               $   469,668                   8.07 %   $ 1,254,006                  21.26 %
Total net revenue   $ 5,818,329                 100.00 %   $ 5,898,300                 100.00 %

Gross Profit

Gross profit decreased 14.55% to $2,821,687 for the nine months ended September 30, 2013, as compared to $3,302,156 for the nine months ended September 30, 2012, our gross profit margin dropped 7.48% from 55.98% as of the nine months ended September 30, 2012 to 48.50% as of the same period of 2013, mainly due to a decrease in our spare part and SADP, and a raise in product costs.

Income from Operations

Operating loss was $3,571,523 for the nine months ended September 30, 2013, as compared to $3,694,308 for the nine months ended September 30, 2012. The increase in loss was primarily due to a decrease in operation expenses.

Cost of Net Revenue

Cost of net revenue increased to $2,996,642 for the nine months ended September 30, 2013, representing a 15.43% increase as compared with $2,596,144 for the same period of 2012. The increase is primarily due to an increase in product costs.


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Operating Expenses

Operating expenses were $6,393,210 for the nine months ended September 30, 2013, a decrease of 8.62% as compared with $6,996,464 for the same period of 2012. The decrease was primarily due to two factors: (i) selling expenses increased $253,651, or 11.27% to $2,505,230 in the nine months ended September 30, 2013 from $2,251,579 for the same period of 2012; and (ii) general and administration expenses decreased $856,905, or 18.06% to $3,887,980 in the nine months ended September 30, 2013 from $4,744,885 for the same period of 2012. The increase in selling expenses was mainly because our salesperson's salary increased 60.88% in the nine months ended September 30, 2013 compare with the same period of 2012.

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

                                                     The nine months ended September
                                                                   30,
                                                         2013               2012         Change
Selling expenses                                     $  2,505,230       $  2,251,579         11.27 %
General & Administrative expenses                    $  3,887,980       $  4,744,885       (18.06) %
Total operating expenses                             $  6,393,210       $  6,996,464        (8.62) %

Changes in fair value of warrants

Changes in fair value of warrants were $1,165,692 for the nine months ended September 30, 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

In the nine months ended September 30, 2013, net loss was $3,498,480 a decrease of 74.90% as compared with $2,000,247 as net loss for the same period of 2012. In the nine months ended September 30, 2013, the loss mainly because is our products upgrade slowly compared with those of our competitor, which led to our new contract decline.

Earnings Per Share

Basic and diluted loss per share for the nine months ended September 30, 2013 was $0.19 and $0.15 compared with the loss per share for the same period of 2012 was $0.11 and $0.09. The weighted average number of shares outstanding to calculate basic EPS was 18,499,736 and 18,499,736 for the nine months ended September 30, 2013 and 2012 respectively. The weighted average number of shares outstanding to calculate diluted EPS was 23,314,556 and 23,314,556 for the nine months ended September 30, 2013 and 2012 respectively.

Trade Receivables, net

Trade receivables, net increased to $9,564,946 as of September 30, 2013, compared with $8,595,793 as of December 31, 2012. This increase in trade receivables was primarily attributable to some new contract's accounting receivable policy change that the final sum of the remaining portion is received after the construction is completed until one year to more than one year.

Inventory

Inventory consists of raw materials, finished goods and work in progress. As of September 30, 2013, the recorded value of our inventory has increase to $4,522,948 from $3,336,188 as of December 31, 2012. The increase was mainly due to a decrease of 5.74% in finished goods from $713,769 as of December 31, 2012 to $ 672,826 as of September 30, 2013; an increase of 277.13% in the raw material inventory from $169,872 as of December 31, 2012 to $640,631 as of September 30, 2013, an increase of 30.86% in work in progress inventory from $2,452,547 as of December 31, 2012 to $3,209,491 as of September 30, 2013. The increase was primarily attributable to new contracts decline.

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

Item                September 30, 2013       December 31, 2012       Change
Finished goods     $            672,826     $           713,769       (5.74) %
Work in progress   $          3,209,491     $         2,452,547        30.86 %
Raw material       $            640,631     $           169,872       277.13 %
Total              $          4,522,948     $         3,336,188        35.57 %


Table of Contents

Accounts Payable

Accounts payable amounted to $2,312,257 as of September 30, 2013, an increase as compared with $1,211,450 as of December 31, 2012. The increase was primarily attributable to our cash liquidity shortage.

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:

                                                      The nine months ended September 30,
                                                           2013                  2012            Change
Net cash provided by (used in) operating                                       (1,916,482)        (98.46)
activities                                           $       (29,508)        $                 $          %
Net cash provided by (used in) investing                                         (111,775)        (43.07)
activities                                           $       (63,637)        $                 $          %
Net cash provided by (used in) financing                                           664,767       (114.52)
activities                                           $       (96,505)        $                 $           %
Effect of foreign currency translation on cash and                                 214,513        (87.89)
cash equivalents                                     $         25,977        $                 $          %
Beginning cash and cash equivalent                   $        352,457        $   1,550,911     $  (77.27) %
Ending cash and cash equivalent                      $        188,784        $     401,934     $  (53.03) %

Operating Activities

For the nine months ended September 30, 2013, net cash provided by used in operating activities was $29,508. This was primarily attributable to our net loss of $3,498,480, adjusted by an add-back of non-cash charges mainly consisting of depreciation, amortization and impairment of fixed assets of $912,633, $1,510,766 and 9,650 respectively, offset by a $1,035,923 increase in working capital. Specifically, increase in working capital was primarily due to:
(i) a $740,373 trade receivables increase driven by accounting policy change;
(ii) a $910,293 increase in inventories, principally of finished goods; (iii) a $91,717 increase in advances to suppliers to buy raw materials; (iv) a $745,374 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 $3,523,680 decrease in accounts payable, tax payable, customer deposits, accrued liabilities and other payables.

Investing Activities

For the nine months ended September 30, 2013, net cash used in investing activities was $63,637. This was primarily attributable to a $63,637 of capital expenditure for purchase of new plant and equipment.

Financing Activities

For the nine months ended September 30, 2013, net cash used in financing activities was $96,505. This was primarily attributable to a $96,505 of bank loan repayments.


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Cash and Cash Equivalents

Our cash and cash equivalents as at the beginning of January 1, 2013, were $352,457 and decreased to $188,784 by the end of the period, main reason is our products upgrade slowly compare with our competitor, led to our revenues decline.

In the future, we 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 3 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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