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SUWG > SEC Filings for SUWG > Form 10-K on 14-Apr-2014All Recent SEC Filings

Show all filings for SUNWAY GLOBAL INC.

Form 10-K for SUNWAY GLOBAL INC.


14-Apr-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

The following discussion and analysis of the consolidated financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes of the Company, appearing elsewhere in this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements.

The Company primarily functions as a holding company for entities that control the business of Qingdao Sunway and Beijing Sunway, or through contractual relationships, Daqing Sunway, which companies are organized under the laws of the PRC that design, and manufacture and sell logistic transport systems and medicine dispensing systems and equipment that are principally used by hospitals and other medical facilities in the PRC. This discussion and analysis focuses on the business results, comparing results of operations in the fiscal years ended December 31, 2013 and 2012.

Results of Operations

In the fiscal year ended December 31, 2013, our net sales and gross profit decreased compared with the fiscal year ended December 31, 2012. These decreases are due to decrease in SADP sales since the third quarter of 2013. The following table summarizes the results of our operations during the fiscal years ended December 31, 2013 and 2012, respectively, and provides information regarding the dollar and percentage increase or (decrease) during the fiscal years ended December 31, 2013 and 2012.

                                              Fiscal Year Ended December 31,
                                                 2013                  2012              Change         Change rate
Net Revenue                                 $     8,008,897        $  9,754,094       $  (1,745,197 )          (17.89 ) %
Cost of Net Revenue                         $     4,243,469        $  5,358,411       $  (1,114,942 )          (20.81 ) %
Gross Profit                                $     3,765,428        $  4,395,683       $    (630,255 )          (14.34 ) %
Gross Margin                                          47.02 %             45.07 %                 -              1.95 %
Operating Expenses                          $     8,594,292        $  9,362,871       $    (768,579 )           (8.21 ) %
Operating Income                            $    (4,828,864 )      $ (4,967,188 )     $     138,324             (2.78 ) %
Operating Margin                                     (60.29 ) %          (50.92 ) %               -             (9.37 ) %
Changes in Fair Value of Warrants           $             -        $  1,165,692       $   1,165,692                 - %
Impairment on Fixed and Intangible Assets   $   (10,112,946 )      $          -       $ (10,112,946 )               - %
Provision for Bad-Debt                      $    (3,097,917 )      $          -       $ $(3,097,917 )               - %
Net Income                                  $   (19,458,449 )      $ (3,098,445 )       (16,360,004 )          528.01 %
Net Profit Margin                                   (242.96 ) %          (31.77 ) %               -            274.73 %


Net Revenue

Net revenue for the fiscal year ended December 31, 2013, which resulted primarily from sales of PTS, SADP, spare parts and supporting service, were $8,008,897, a decrease of 17.89% as compared with net revenue of $9,754,094 for the fiscal year ended December 31, 2012. In the fiscal year ended December 31, 2013, we sold 847 workstations, representing a decrease in workstation sales of 9.02% as compared with 931 workstations in the fiscal year ended December 31, 2012.The decrease in workstation sales was primarily due to decrease in production volume as a result of the Company's operating cash shortage. We sold 19 units of SADP, a decrease of 42.42% as compared with 33 units of SADP for the fiscal year ended December 31, 2012. The decrease in SADP was due primarily to decrease in new orders resulting from our product's design defects. In addition, we did not sell any SAME in the fiscal year ended December 31, 2013 due primarily to a defect in design for our second generation product, compared with one unit in the fiscal year ended December 31, 2012.

The following table presents a breakdown of revenue by products for the periods indicated:

                             2013                                   2012
                 sales          % of total sales        sales          % of total sales
    PTS       $ 5,803,816                  72.47 %   $ 5,590,698                  57.32 %
   SADP       $ 1,472,494                  18.39 %   $ 2,662,818                  27.30 %
   SAME       $         -                      - %   $   233,055                   2.39 %
   Other      $   732,587                   9.14 %   $ 1,267,523                  12.99 %
Total sales   $ 8,008,897                 100.00 %   $ 9,754,094                 100.00 %

Cost of Net Revenue

Cost of net revenue decreased to $4,243,469 for the fiscal year ended December 31, 2013, representing a decrease of 20.81% from $5,358,411 for the fiscal year of 2012. This decrease is primarily due to decrease in sale.

Gross Profit

Gross profit was $3,765,428 for the fiscal year ended December 31, 2013, a decrease of 14.34% as compared with $4,395,683 for the fiscal year ended December 31, 2012. Our gross profit margin increased 1.95% from 45.07% for the fiscal year ended December 31, 2012 to 47.02% for the fiscal year ended December 31, 2013, mainly due to increase in sales of PTS which has a higher gross profit margin.

Operating Expenses

Operating expenses were $8,594,292 for the fiscal year ended December 31, 2013, a decrease of 8.21% as compared to $9,362,871 for the fiscal year of 2012. This decrease was primarily because of the decrease of $941,157 in general and administration expenses partially offset by the increase of $172,578 in selling expenses. Selling expenses increased because of the market environment was bad that forced the Company to increase spending to maintain the market share while general and administration expenses decreased due to cutting expenses on the operation budget.

The following table presents a breakdown of our operating expenses for the periods indicated:

                                    Fiscal Year Ended December 31,
                                    2013                   2012             change
Selling expenses                    $      3,389,463       $  3,216,885     $    5.36 %
General & Administrative Expenses   $      5,204,829       $  6,145,986     $ (15.31) %
Total operating expenses            $      8,594,292       $  9,362,871     $  (8.21) %

Income from Operations

Operating loss was $4,828,864 for the fiscal year ended December 31, 2013, as compared with $4,967,188 for the fiscal year ended December 31, 2012. The decrease was primarily due to the decrease in general and administrative expenses.

Changes in Fair Value of Warrants

Changes in fair value of warrants were $1,165,692 for the fiscal year ended December 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. As of June 5, 2012, all of the warrants expired.


Impairment on Fixed Assets and Intangible Assets

Impairment on fixed assets and intangible assets were $10,112,946 for the fiscal year ended December 31, 2013. The impairment was attributable to below-expectation performances of two products - Sunway Automatic Medicament Emitting and Sunway Automatic Dispensing and Packing. The Company considered historical rates and current market conditions when determining the discount and growth rates to use in its analyses. If these estimates or their related assumptions change in the future, it may be required to record further impairment charges. As the Company decided to drop the unprofitable product lines, it led to immediate impairment on relevant fixed assets dedicated for those disappointed product lines.

Net Loss

Net loss was $19,458,449 for the fiscal year ended December 31, 2013, a decrease of 528.01% from $3,098,445 for the fiscal year of 2012. In the fiscal year ended December 31, 2013, net loss were impacted by a non-cash loss of $13,210,863 in impairment loss on intangible assets and fixed assets and provision for bad-debt unrelated to the Company's operations. Excluding this non-cash loss, the Company's net loss from operations for the fiscal year ended December 31, 2013 would have been $6,247,586.

Earnings Per Share

Basic and diluted loss per share for the fiscal year ended December 31, 2013 was $1.05 and $0.83 compared to $0.17 and $0.13 for the fiscal year of 2012. The weighted average number of shares outstanding to calculate basic loss per share was 18,499,736 and 18,499,736 for the fiscal years ended December 31, 2013, and 2012, respectively. The weighted average number of shares outstanding to calculate diluted loss per share was 23,314,556 and 23,314,556 for the fiscal years ended December 31, 2013 and 2012, respectively.

Liquidity and Capital Resources

We have historically financed our operations and capital expenditures principally through private placements of debt and equity, and cash provided by operations.

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

                                                       Fiscal Year Ended December 31,
                                                                2013                2012     Change rate

Net cash provided by (used in) operating
activities                                           $     (183,612)       $ (2,295,871)         (92.00)%
Net cash provided by (used in) investing
activities                                           $      (91,474)       $   (127,233)         (28.11)%
Net cash provided by (used in) financing
activities                                           $     (129,216)       $     697,538        (118.52)%
Effect of foreign currency translation on cash and
cash equivalents                                     $       493,851       $     527,112          (6.31)%
Cash and cash equivalents at beginning of year       $       352,457       $   1,550,911         (77.27)%
Cash and cash equivalents-end of year                $       442,006       $     352,457           25.41%

Operating Activities

For the fiscal year ended December 31, 2013, net cash used in operating activities was $183,612. This was primarily attributable to net loss of $19,458,449, adjusted by an add-back of non-cash income mainly consisting of depreciation, amortization, impairment of fixed assets and intangible assets and provision for doubtful debts $16,367,807 offset by a $2,907,030 increase in working capital. Specifically, the working capital increase was primarily due to
(i) a $1,726,067 trade receivables increase driven by SADP's design defeat that led to delayed receivable periods; (ii) a $248,457 inventories increase, principally in finished goods, due to decease in new orders; (iii) a $545,003 decrease in advance to suppliers to secure new suppliers; (iv) a $593,864 increase in prepayments, travel advances to directors, tender deposits and advances to employees, consisting primarily of prepayments for raw materials and supplies in advance of shipment, working capital for sales staff and payment of client deposits; partially offset by a $3,742,687 increase in accounts payable, tax payable, loans from unrelated parties, amount due from a director, customer deposits and accrued liabilities.


Investing Activities

For the fiscal year ended December 31, 2013, net cash used in investing activities was $91,474, attributable to purchase of new equipment.

Financing Activities

For the fiscal year ended December 31, 2013, net cash used in financing activities were $129,216, primarily attributable to a short-term bank loan repayment.

Cash and Cash Equivalents

Our cash and cash equivalents as at January 1, 2013, were $352,457 and increased to $442,006 by the end of the year, the increase was mainly due to decrease in our general and administrative expenses. The reduction of accounts receivable did not save cash as it was derived from the increase in provision of doubtful debts. However, the increase of accounts payable, accrued expenses and customer deposit improve the short term cash flow because of delay on payment of obligations.

In future periods, we believe that our existing cash, cash equivalents and cash flows from operations, combined with availability under our revolving credit facility, will be insufficient to meet our presently anticipated future cash needs for at least the next year. 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.

Trade Receivables, net

Trade receivables, net decreased to $7,490,619 as of December 31, 2013, compared with $8,595,793 as of December 31, 2012. This decrease in trade receivables was primarily attributable to increase in provision for doubtful debts. The provision for doubtful debts was $3,097,917 for the fiscal year ended December 31, 2013 which reduced the accounts receivable from $10,588,536 to $7,490,619. The Company believed that additional provision was required to reflect the risk on collectability of certain long outstanding debts.

Inventory

Inventory consists of raw materials, works in process and finished goods. As of December 31, 2013, the recorded value of our inventory increased 3.64% to $3,457,459 from $3,336,188 as of December 31, 2012. This increase is mainly due to an increase of 423.25% in finished goods from $169,872 as of December 31, 2012 to $888,861 as of December 31, 2013 offset by a decrease of 16.73% in work in process from $2,452,547 as of December 31, 2012 to $2,042,258 as of December 31, 2013 and a decrease of 26.26% in raw material from $713,769 as of December 31, 2012 to $526,340 as of December 31, 2013. The increase in finished goods was primarily attributable to decrease in new orders caused by the design flaw in SADP.

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

                   December 31,         December 31,
                        2013                2012             Change
Raw material      $        526,340     $      713,769       (26.26) %
Work in process   $      2,042,258     $    2,452,547       (16.73) %
Finished goods    $        888,861     $      169,872        423.25 %
Total inventory   $      3,457,459     $    3,336,188          3.64 %

Accounts payable

Accounts payable were $1,718,125 as of December 31, 2013, an increase of 41.82% from $1,211,450 as of December 31, 2012. The increase was primarily attributable to our shortage in cash.

Obligations under Material Contracts

We did not have any material contractual obligations as of December 31, 2013.


Critical Accounting Policies

Management's discussion and analysis of its financial condition and results of operations is based upon Sunway's consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. Sunway's financial statements reflect the selection and application of accounting policies which require management to make significant estimates and judgments. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. Sunway believes that the following reflect the more critical accounting policies that currently affect Sunway's financial condition and results of operations.

Impairment of long-lived assets. We account for impairment of property, plant and equipment and amortizable intangible assets in accordance with FASB ASC 360. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair market values are reduced for the cost to dispose. During the reporting years, there was impairment loss incurred. Competitive pricing pressure and changes in interest rates, could materially and adversely affect our estimates of future net cash flows to be generated by our long-lived assets.

Inventories .Inventories consists of finished goods and raw materials, and stated at the lower of cost or market value. Substantially all inventory costs are determined using the weighted average basis. Finished goods are comprised of direct materials, direct labor and an appropriate proportion of overhead. The management regularly evaluates the composition of its inventory to identify slow-moving and obsolete inventories to determine if additional write-downs are required.

Trade receivables. Trade receivables are recognized and carried at the original invoice amount less allowance for any uncollectible amounts. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. Bad debts are written off as incurred. During the reporting years, there were bad debts.

Outstanding accounts balances are reviewed individually for collectability. The Company does not charge any interest income on trade receivables. Accounts balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. To date, the Company has not charged off any balances as it has yet to exhaust all means of collection.

Revenue recognition. Revenue represents the invoiced value of goods sold recognized upon the delivery of goods to customers. Revenues from services recognizes when the agreed services have been performed, provided, completed or virtual completed at an agreed period(s) of time, and are measurable. Revenue is recognized when all of the following criteria are met:

- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services have been rendered;
- The seller's price to the buyer is fixed or determinable, and
- Collection is reasonably assured.

Contract revenues are recognized when the manufacturing and installation of the medical equipment is completed. Generally, the company receives total contract sum from clients in 3 installments. Deposit of 30% is received from client when the contract is signed. Second payment of 30% is received when the project commenced. The final sum of the remaining portion is received after the construction is completed within a year.

Expected warranty liabilities. The Company warrants its products against defects in design, materials, and workmanship generally for one year. A provision for estimated future costs relating to warranty expense are recorded when products are shipped, and the provision is based upon our own historical claim experience.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2013.

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