f10q0313_huixinwaste.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-Q
_____________________________
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended March 31, 2013
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ______to______.
HUIXIN WASTE WATER SOLUTIONS, INC.
(Exact name of registrant as specified in Charter)
Cayman Islands
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|
000-52339
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N/A
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(State or other jurisdiction of
incorporation or organization)
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(Commission File Number)
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(I.R.S. Employee Identification No.)
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#99 Jianshe Road 3, Pengjiang District, Jiangmen City
Guangdong Province, 529000
People’s Republic of China
(Address of principal executive office, Zip Code)
_______________
(86) (750) 395-9988
(Registrant’s telephone number, including area code)
_______________
Not Applicable.
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filero (Do not check if a smaller reporting company) |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common equity: As of May 15, 2013, 21,126,695 ordinary shares, par value $0.00018254172 per share are issued and outstanding.
HUIXIN WASTE WATER SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
March 31, 2013
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
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PAGE
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Item 1.
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Financial Statements (Unaudited)
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1
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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21
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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29
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Item 4.
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Controls and Procedures
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29
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PART II - OTHER INFORMATION
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Item 6.
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Exhibits
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30
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SIGNATURES
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31
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CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements discuss matters that are not historical facts. Because they discuss future events or conditions, forward-looking statements may include words such as “anticipate,” “believe,” “estimate,” “intend,” “could,” “should,” “would,” “may,” “seek,” “plan,” “might,” “will,” “expect,” “anticipate,” “predict,” “project,” “forecast,” “potential,” “continue” negatives thereof or similar expressions. Forward-looking statements speak only as of the date they are made, are based on various underlying assumptions and current expectations about the future and are not guarantees. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, level of activity, performance or achievement to be materially different from the results of operations or plans expressed or implied by such forward-looking statements.
We cannot predict all of the risks and uncertainties. Accordingly, such information should not be regarded as representations that the results or conditions described in such statements or that our objectives and plans will be achieved and we do not assume any responsibility for the accuracy or completeness of any of these forward-looking statements. These forward-looking statements are found at various places throughout this Quarterly Report on Form 10-Q and include information concerning possible or assumed future results of our operations, including statements about potential acquisition or merger targets; business strategies; future cash flows; financing plans; plans and objectives of management; any other statements regarding future acquisitions, future cash needs, future operations, business plans and future financial results, and any other statements that are not historical facts.
These forward-looking statements represent our intentions, plans, expectations, assumptions and beliefs about future events and are subject to risks, uncertainties and other factors. Many of those factors are outside of our control and could cause actual results to differ materially from the results expressed or implied by those forward-looking statements. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements might not occur or might occur to a different extent or at a different time than we have described. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the Quarterly Report on Form 10-Q. All subsequent written and oral forward-looking statements concerning other matters addressed in this Quarterly Report on Form 10-Q and attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this Quarterly Report on Form 10-Q.
Except to the extent required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, a change in events, conditions, circumstances or assumptions underlying such statements, or otherwise.
CERTAIN TERMS USED IN THIS QUARTERLY REPORT ON FORM 10-Q
Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of Huixin Waste Water Solutions, Inc. and its consolidated subsidiaries, Wealth Environmental Protection, Wealth Environmental, Jiangmen Huiyuan, and its variable interest entities, Guangdong Huixin (formerly “Jiangmen Wealth”), Guizhou Yufeng, and Shanxi Wealth.
In addition, unless the context otherwise requires and for the purposes of this report only, reference to the following terms have the meaning assigned to each of them hereof:
●
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“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
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●
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“PRC,” “China,” and “Chinese,” refer to the People’s Republic of China;
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“Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China;
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●
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“Jiangmen Huiyuan” refers Jiangmen Huiyuan Environmental Protection Technology Consultancy Co. Ltd ., a wholly foreign owned enterprise organized under the PRC laws;
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“Guangdong Huixin” refers to Guangdong Huixin Environmental Protection Co., Ltd., a PRC limited liability company, (formerly “Jiangmen Wealth Water Purifying Agent Co., Ltd”).
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“Operating Company” or “Operating Companies” refers to Jiangmen Huiyuan, Guangdong Huixin, Guizhou Yufeng and Shanxi Wealth;
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“Guizhou Yufeng” refers to Guizhou Yufeng Melt Co., Ltd., a PRC limited company;
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“Renminbi” and “RMB” refer to the legal currency of China;
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“SEC” refers to the United States Securities and Exchange Commission;
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“Securities Act” refers to the Securities Act of 1933, as amended;
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“Shanxi Wealth” refers to Shanxi Wealth Aluminate Materials Co., Ltd., a PRC limited company;
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“U.S. dollars,” “dollars” and “$” refer to the legal currency of the United States of America;
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“Wealth Environmental Protection” refers to Wealth Environmental Protection Group, Inc., a British Virgin Islands company; and
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“Wealth Environmental Technology” refers to Wealth Environmental Technology Holding, Ltd., a Hong Kong company.
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PART I—FINANCIAL INFORMATION
Item 1.
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Financial Statements.
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HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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Page
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Condensed Consolidated Balance Sheets as of March 31, 2013 (Unaudited) and December 31, 2012
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2
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Condensed Consolidated Statements of Income for the three months ended March 31, 2013 and 2012 (Unaudited)
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3
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Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2013 and 2012 (Unaudited)
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4
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Condensed Consolidated Statement of Shareholders' Equity for the three months ended March 31, 2013 (Unaudited)
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5-6
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Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012 (Unaudited)
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7
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|
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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8 – 20
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HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
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CONDENSED CONSOLIDATED BALANCE SHEETS
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March 31,
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2013
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(UNAUDITED)
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ASSETS
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Current assets:
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|
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|
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Cash and cash equivalents
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$
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22,547,303
|
|
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$
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33,871,287
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Accounts receivable
|
|
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3,115,347
|
|
|
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2,729,778
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Inventories
|
|
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1,180,623
|
|
|
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1,447,570
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|
Other current assets
|
|
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17,291
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|
|
|
31,479
|
|
|
|
|
|
|
|
|
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Total current assets
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|
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26,860,564
|
|
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38,080,114
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|
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|
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|
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Property, plant and equipment and land and mining rights, net
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93,213,840
|
|
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13,618,082
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Deposit for mining right acquisition
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|
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-
|
|
|
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63,480,677
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|
|
|
|
|
|
|
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Total assets
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$
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120,074,404
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$
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115,178,873
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LIABILITIES AND SHAREHOLDERS’ EQUITY
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Current liabilities:
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Short-term debt
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$
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19,149,140
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$
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19,044,203
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Accounts payable
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2,710,776
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2,444,555
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Accrued expenses
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1,122,692
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2,335,342
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Due to shareholders
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15,290
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15,290
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Value added taxes payable
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943,901
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646,743
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Other taxes payable
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181,806
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160,605
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Income tax payable
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1,496,831
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|
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1,332,804
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Total current liabilities
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25,620,436
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25,979,542
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Deferred income taxes
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353,914
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311,425
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|
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|
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Total liabilities
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|
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25,974,350
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|
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26,290,967
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Commitments and contingencies
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Shareholders' equity:
|
|
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|
|
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Preferred stock, $0.000128 par value, 781,250 shares
|
|
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authorized, 177,530 and 184,198 shares
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|
|
|
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issued and outstanding on March 31, 2013
|
|
|
|
|
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and December 31, 2012
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|
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23
|
|
|
|
24
|
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Common stock: $0.00018254172 par value, 39,062,500
|
|
|
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|
|
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shares authorized, 21,126,695 and 21,089,275 shares issued
|
|
|
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and outstanding on March 31, 2013 and December 31, 2012
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3,857
|
|
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3,850
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Additional paid-in capital
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24,853,037
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24,840,803
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Accumulated other comprehensive income
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|
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7,567,845
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|
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7,071,841
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Retained earnings (the restricted portion of retained earnings
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|
|
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is $496,396 on March 31, 2013 and December 31, 2012)
|
|
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61,675,292
|
|
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56,971,388
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|
|
|
|
|
|
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Total shareholders’ equity
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|
|
94,100,054
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|
|
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88,887,906
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|
|
|
|
|
|
|
|
|
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Total liabilities and shareholders’ equity
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|
$
|
120,074,404
|
|
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$
|
115,178,873
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The accompanying notes form an integral part of these condensed consolidated financial statements
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
|
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Three Months Ended March 31,
|
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2013
|
|
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2012
|
|
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|
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|
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Net revenue
|
|
$
|
19,100,863
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|
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$
|
17,757,465
|
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Costs of revenue
|
|
|
10,484,922
|
|
|
|
9,743,823
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,615,941
|
|
|
|
8,013,642
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
663,513
|
|
|
|
655,797
|
|
General and administrative
|
|
|
1,212,930
|
|
|
|
1,162,046
|
|
Research and development
|
|
|
176,121
|
|
|
|
151,727
|
|
Total operating expenses
|
|
|
2,052,564
|
|
|
|
1,969,570
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,563,377
|
|
|
|
6,044,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
25,186
|
|
|
|
567,587
|
|
Interest expense
|
|
|
(286,765
|
)
|
|
|
-
|
|
Total other (expense)/income
|
|
|
(261,579
|
)
|
|
|
567,587
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
6,301,798
|
|
|
|
6,611,659
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,585,654
|
|
|
|
1,700,858
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
4,716,144
|
|
|
|
4,910,801
|
|
Less: cumulative dividends on preferred stock
|
|
|
43,105
|
|
|
|
100,081
|
|
Net income attributable to common shareholders
|
|
$
|
4,673,039
|
|
|
$
|
4,810,720
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - basic
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Net income per common share - diluted
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - basic
|
|
|
21,097,579
|
|
|
|
19,600,305
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - diluted
|
|
|
22,010,265
|
|
|
|
21,824,325
|
|
The accompanying notes form an integral part of these condensed consolidated financial statements
HUIXIN WASTE WATER SOLUTIONS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
(UNAUDITED)
|
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,716,144
|
|
|
$
|
4,910,801
|
|
Other comprehensive income -
|
|
|
|
|
|
|
|
|
foreign currency translation adjustments
|
|
|
496,004
|
|
|
|
439,421
|
|
Comprehensive income
|
|
$
|
5,212,148
|
|
|
$
|
5,350,222
|
|
The accompanying notes form an integral part of these condensed consolidated financial statements
HUIXIN WASTE WATER SOLUTIONS, INC.
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CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
For the Three Months Ended March 31, 2013
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
|
184,198
|
|
|
$
|
24
|
|
|
|
21,089,275
|
|
|
$
|
3,850
|
|
|
$
|
24,840,803
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Shares issued in kind for the payment of preferred stock dividends
|
|
|
816
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
12,240
|
|
Preferred stock and related dividends in arrears converted to common stock
|
|
|
(7,484
|
)
|
|
|
(1
|
)
|
|
|
37,420
|
|
|
|
7
|
|
|
|
(6
|
)
|
Other comprehensive income foreign currency translation adjustment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2013
|
|
|
177,530
|
|
|
$ |
23
|
|
|
|
21,126,695
|
|
|
$ |
3,857
|
|
|
|
24,853,037
|
|
The accompanying notes form an integral part of these condensed consolidated financial statements
HUIXIN WASTE WATER SOLUTIONS, INC.
|
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
For the Three Months Ended March 31, 2013
|
|
Accumulated
|
|
|
|
|
|
|
Other
|
|
|
|
Total
|
|
|
Comprehensive
|
|
Retained Earnings
|
|
Shareholders’
|
|
|
Income
|
|
Restricted
|
|
Unrestricted
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2012
|
|
$
|
7,071,841
|
|
|
$
|
496,396
|
|
|
$
|
56,474,992
|
|
|
$
|
88,887,906
|
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
4,716,144
|
|
|
|
4,716,144
|
|
Shares issued in kind for the payment of preferred stock dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,240
|
)
|
|
|
-
|
|
Preferred stock and related dividends in arrears converted to common stocks
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other comprehensive income - foreign currency translation adjustments
|
|
|
496,004
|
|
|
|
-
|
|
|
|
-
|
|
|
|
496,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2013
|
|
$
|
7,567,845
|
|
|
$
|
496,396
|
|
|
$
|
61,178,896
|
|
|
$
|
94,100,054
|
|
The accompanying notes form an integral part of these condensed consolidated financial statements
|
|
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
|
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
4,716,144
|
|
|
$
|
4,910,801
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
588,778
|
|
|
|
330,625
|
|
Deferred income taxes
|
|
|
40,294
|
|
|
|
4,703
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(369,918
|
)
|
|
|
(1,849,116
|
)
|
Interest receivable
|
|
|
-
|
|
|
|
157,443
|
|
Inventories
|
|
|
274,472
|
|
|
|
90,157
|
|
Advances to suppliers
|
|
|
-
|
|
|
|
2,553,005
|
|
Other current assets
|
|
|
14,338
|
|
|
|
-
|
|
Accounts payable
|
|
|
252,764
|
|
|
|
(108,340
|
)
|
Accrued expenses
|
|
|
(1,223,500
|
)
|
|
|
(381,562
|
)
|
Value added taxes payable
|
|
|
299,198
|
|
|
|
434,361
|
|
Other taxes payable
|
|
|
14,200
|
|
|
|
47,641
|
|
Income tax payable
|
|
|
156,425
|
|
|
|
418,514
|
|
Net cash provided by operating activities
|
|
|
4,763,195
|
|
|
|
6,608,232
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of property, equipment and improvement
|
|
|
(3,228
|
)
|
|
|
(22,168
|
)
|
Proceeds collected on note receivable
|
|
|
-
|
|
|
|
25,406,908
|
|
Mining right acquisition
|
|
|
(16,250,008
|
)
|
|
|
-
|
|
Net cash (used in)/provided by investing activities
|
|
|
(16,253,236
|
)
|
|
|
25,384,740
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Decrease in restricted cash
|
|
|
-
|
|
|
|
300,000
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
166,057
|
|
|
|
92,542
|
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(11,323,984
|
)
|
|
|
32,385,514
|
|
Cash and cash equivalents at the beginning of period
|
|
|
33,871,287
|
|
|
|
26,383,537
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of period
|
|
$
|
22,547,303
|
|
|
$
|
58,769,051
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
286,765
|
|
|
$
|
-
|
|
Income tax paid
|
|
$
|
1,429,228
|
|
|
$
|
1,277,641
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Reclassify deposit for mining right acquisition to property, plant and equipment and land and mining rights
|
|
$ |
63,480,677 |
|
|
$ |
- |
|
Preferred stocks issued in kind for payment of dividends
|
|
$
|
12,240
|
|
|
$
|
-
|
|
The accompanying notes form an integral part of these condensed consolidated financial statements
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(1)
|
Organization, Nature of Business and Basis of Presentation
|
Huixin Waste Water Solutions, Inc. (“the Company” or “Huixin”) was incorporated in the Cayman Islands on December 7, 2006. The Company was originally organized as a “blank check” shell company to investigate and acquire a target company or business desiring to be a publicly held corporation. Wealth Environmental Protection Group, Inc. (“WEP”) was incorporated under the laws of the British Virgin Islands on June 3, 2010 to serve as an investment holding company. On December 15, 2010, the Company (i) closed a share exchange transaction pursuant to which it became the 100% parent of WEP, and (ii) assumed the operations of WEP and its subsidiaries.
The share exchange transaction has been treated as a recapitalization of WEP, with Huixin emerging as the surviving legal entity and WEP is considered as the acquirer for accounting purposes. Prior to the recapitalization, Huixin had essentially no assets or liabilities and issued approximately 96% of its outstanding shares to the shareholders of WEP and their designees in the recapitalization. The historical consolidated financial statements of WEP are retroactively presented as the financial statements of Huixin. A summary of the Company subsidiaries is currently as follows:
|
|
Domicile and
|
|
|
|
|
|
|
|
|
Date of
|
|
Paid -In
|
|
Effective
|
|
|
Name and Location
|
|
Incorporation
|
|
Capital
|
|
Ownership
|
|
Activities
|
|
|
|
|
|
|
|
|
|
Wealth Environmental Protection Group, Inc (“WEP”)
|
|
British Virgin Islands
June 3, 2010
|
|
$
|
7,000
|
|
100% Owned
|
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
Wealth Environmental Technology Holding Ltd.(“Wealth Technology”) Hong Kong
|
|
Hong Kong
June 18, 2010
|
|
$
|
1,299
|
|
100% Owned
|
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
Jiangmen Huiyuan Environmental Protection Technology Consultancy Co.
(“Jiangmen Huiyuan”)
Jiangmen, Guandong Province
|
|
Peoples Republic Of China (“PRC”)
July 22, 2010
|
|
$
|
15,082
|
|
100% Owned - Wholly Foreign Owned Entity (“WFOE”)
|
|
Holding Company
|
|
|
|
|
|
|
|
|
|
|
Guangdong Huixin Environmental Protection Co., Ltd. (formerly “Jiangmen Wealth Water Purifying Agent Co., Ltd”) (“Guangdong Huixin”)
Jiangmen, Guandong Province
|
|
PRC
April 25, 2003
|
|
$
|
4,049,060
|
|
100% Control Through
Contractual Arrangements
|
|
Manufacturing of water
purifying agents
|
|
|
|
|
|
|
|
|
|
|
Guizhou Yufeng Melt Co., Ltd. (“Guizhou Yufeng”)
Guizhou Province
|
|
PRC
March 25, 2005
|
|
$
|
4,233,854
|
|
100% Control Through
Contractual Arrangements
|
|
Manufacturer of HAC Powder using bauxite and limestone from mines controlled under mining rights agreements
|
|
|
|
|
|
|
|
|
|
|
Shanxi Wealth Aluminate
Materials Co., Ltd (“Shanxi Weath”) Shanxi Province
|
|
PRC
April 8, 2004
|
|
$
|
6,786,056
|
|
100% Control Through
Contractual Arrangements
|
|
Manufacturer of HAC Powder using bauxite
and limestone from mines controlled under mining rights agreements
|
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(1)
|
Organization, Nature of Business and Basis of Presentation, continued
|
On September 29, 2010, Jiangmen Huiyuan entered into a series of contractual agreements with Guangdong Huixin (formerly “Jiangmen Wealth Water”), and its shareholders, in which Jiangmen Huiyuan effectively assumed management of the business activities of Guangdong Huixin and has the right to appoint all executives and senior management and the members of the board of directors of Guangdong Huixin. The contractual arrangements are comprised of a series of agreements, including an Exclusive Business Cooperation Agreement, Exclusive Option Agreement, Equity Interest Pledge Agreement and Power of Attorney, through which Jiangmen Huiyuan has the right to provide exclusive complete business support and technical and consulting service to Guangdong Huixin for an annual fee in the amount of Guangdong Huixin’s yearly net profits after tax. Additionally, Guangdong Huixin’s shareholders have pledged their rights, titles and equity interest in Guangdong Huixin as security for Jiangmen Huiyuan to collect consulting and services fees provided to Guangdong Huixin through an Equity Pledge Agreement. In order to further reinforce Jiangmen Huiyuan’s rights to control and operate Guangdong Huixin, the shareholders of Guangdong Huixin have granted Jiangmen Huiyuan the exclusive right and option to acquire all of their equity interests in Guangdong Huixin through an Exclusive Option Agreement.
Based on Jiangmen Huiyuan’s contractual relationship with Guangdong Huixin, the Company has determined that a variable interest entity has been created and therefore Guangdong Huixin is considered a consolidated subsidiary of the Company. Additionally, because all of the companies are currently under common control, the series of agreements and restructurings referred to above have been accounted for as a reorganization of the entities and the financial statements have been prepared as if the reorganization had occurred retroactively. Accordingly these financial statements present the consolidated operating results, assets and liabilities of Guangdong Huixin and its subsidiaries, which are collectively referred to as the “Company”.
The Company produces and sells water purifying agents and high-performance aluminate calcium (HAC) powder, the core ingredient of its water purifying agents in China.
The accompanying condensed consolidated balance sheet as of December 31, 2012, which has been derived from the audited consolidated financial statements and the accompanying unaudited condensed consolidated financial statements, has been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations and the Company believes that the disclosures made are adequate to make the information not misleading.
In the opinion of management, these condensed consolidated financial statements reflect all adjustments which are of a normal recurring nature and which are necessary to present fairly the financial position of Huixin as of March 31, 2013, the results of operations, and cash flows for the three-month periods ended March 31, 2013 and March 31, 2012. These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2012. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results which may be expected for the entire fiscal year.
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(2)
|
Summary of Significant Accounting Policies
|
Principles of Consolidation
These condensed consolidated financial statements present the consolidated accounts of WEP and its subsidiaries, Wealth Technology, Jiangmen Huiyan, and its variable interest entities, Guangdong Huixin, Guizhou Yunfeng and Shanxi Wealth, which are collectively referred to as the “Company”. This presentation is based upon the retroactive treatment of series of agreements and restructurings of companies under common control as described in Note (1).
All inter-company transactions and balances have been eliminated in preparation of the condensed consolidated financial statements.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue and expenses in the condensed consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Company’s condensed consolidated financial statements include collectability of accounts receivable, useful lives and impairment of property and equipment, mineral reserves available for mining production, total expected use of mineral reserves and value and realizability of intangible assets. Actual results could differ from those estimates.
Segments
For the three months ended March 31, 2013 and 2012, the Company’s operations have been broken down into 3 segments based on production facility, in the manner that management reviews operations on a regular basis. All our operations revolve around the production of water purification agents made to similar specifications. All of the Company’s segments have similar assets, customers and distribution methods, and their economic characteristics are similar with regard to their gross margin percentages.
Currency Reporting
The Company’s operations in the PRC use the local currency, Renminbi (“RMB”), as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in U.S. dollars, the reporting currency of the Company, unless stated otherwise. As such, the condensed consolidated balance sheets of the Company have been translated into U.S. dollars at the current rates as of March 31, 2013 and December 31, 2012 and the condensed consolidated statements of income have been translated into U.S. dollars at the weighted average rates during the periods the transactions were recognized.
The resulting translation gain adjustments are recorded as other comprehensive income in the condensed consolidated statements of comprehensive income and as a separate component of equity in the condensed consolidated balance sheets.
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(2)
|
Summary of Significant Accounting Policies, continued
|
Revenue Recognition
The Company’s main source of revenue is generated from sales of water purifying agents and high-performance calcium aluminates powder (“HAC powder”). The Company recognizes revenue when there is persuasive evidence of a sales arrangement, delivery and acceptance by the customer has occurred, the sales price is fixed or determinable, and collection is probable. Under the Company’s typical sales terms for both water purifying agents and HAC powder, the Company recognizes revenue when product is shipped from its production facilities because shipments are made FOB shipping point with the customer bearing all shipping costs and title and risk of loss transferring to the customer upon shipment. Sales terms for water purifying agents and HAC powder do not include customer acceptance provisions, the right of return (unless the product is proven to be defective) or other post-delivery obligations. The Company has not experienced any significant returns associated with defective product.
Major Customers
During the three months ended March 31, 2013 and 2012, no customer accounted for 10% or more of our net revenue.
Major Suppliers
During the three months ended March 31, 2013 and 2012, certain suppliers accounted for more than 10% of the Company’s total net purchases as follows:
|
|
Three Months Ended
|
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
Supplier 1
|
|
|
15
|
%
|
|
|
19
|
%
|
Supplier 2
|
|
|
10
|
%
|
|
|
15
|
%
|
Value-Added Tax (“VAT”)
Value added taxes represent amounts collected on behalf of specific government agencies that require remittance of tax by specified dates. Value added taxes are collected at the time of sales and are detailed on invoices provided to customers. The Company accounts for value added taxes on a net basis. The Company recorded and paid sales related taxes based on a percentage of the value added taxes and reported the revenue net of the sales related taxes.
Enterprises or individuals, who sell commodities, engage in repair and maintenance or import or export goods in the PRC are subject to a value-added tax in accordance with the PRC laws. The value-added tax standard rate for sales made by the Company is 17% of the gross sales price and the Company records its revenue net of VAT. A credit is available whereby VAT paid on the purchases of semi-finished products or raw materials used in the production of the Company’s finished products can be used to offset the VAT due on the sales of the finished products. When the Company purchases raw materials, the VAT incurred by the Company, and subject to credit, generally varies from 6% to 17% depending on the type of materials or services purchased. There is a significant difference in the VAT that the Company incurs on purchases and the amount the Company bills to customers for sales of HAC powder and water purifying agents due to the fact that the Company converts raw materials from their mined state to finished product and is responsible for the substantial portion of increased value in its products.
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(2)
|
Summary of Significant Accounting Policies, continued
|
Value-Added Tax (“VAT”), continued
Following is an analysis of VAT billed to the Company on purchases, VAT billed by the Company on sales and VAT remitted to PRC during the three months ended March 31, 2013 and 2012, with information related to the liability for uncollected or unremitted VAT at March 31, 2013 and 2012:
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
March 31, 2013
|
|
|
March 31, 2012
|
|
|
|
|
|
|
|
|
VAT billed to customers for sales during the period
|
|
$
|
3,718,906
|
|
|
$
|
3,452,348
|
|
Less: VAT billed to the Company for purchases during the period
|
|
|
1,360,320
|
|
|
|
1,201,546
|
|
|
|
|
|
|
|
|
|
|
Net VAT on transactions took place during the period
|
|
|
2,358,586
|
|
|
|
2,250,802
|
|
Amount remitted to the PRC
|
|
|
(2,061,428
|
)
|
|
|
(1,814,292
|
)
|
VAT payable at beginning of period
|
|
|
646,743
|
|
|
|
497,581
|
|
|
|
|
|
|
|
|
|
|
VAT payable at period end
|
|
$
|
943,901
|
|
|
$
|
934,091
|
|
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Liabilities for taxes collected but not remitted
|
|
$
|
491,244
|
|
|
$
|
250,109
|
|
Liabilities for taxes billed to customers but not collected
|
|
|
|
|
|
|
|
|
from the customers or remitted to PRC
|
|
|
452,657
|
|
|
|
396,634
|
|
|
|
|
|
|
|
|
|
|
VAT payable at period end
|
|
$
|
943,901
|
|
|
$
|
646,743
|
|
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Basic net earnings per share is computed using the weighted-average number of common shares outstanding. The dilutive effect of potential common shares outstanding is included in diluted net earnings per share. The computations of basic net earnings per share and diluted net earnings per share for three months ended March 31, 2013 and 2012 are as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders - Basic
|
|
$
|
4,673,039
|
|
|
$
|
4,810,720
|
|
|
|
|
|
|
|
|
|
|
Add: cumulative dividends attributable to 6% convertible preferred stock
|
|
|
43,105
|
|
|
|
100,081
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
4,716,144
|
|
|
$
|
4,910,801
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - Basic
|
|
|
21,097,579
|
|
|
|
19,600,305
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of preferred stock conversion
|
|
|
912,686
|
|
|
|
2,224,020
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding - Diluted
|
|
|
22,010,265
|
|
|
|
21,824,325
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.21
|
|
|
$
|
0.23
|
|
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
A summary of inventories is as follows:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
Raw Materials
|
|
$
|
866,520
|
|
|
$
|
949,111
|
|
Work in progress
|
|
|
40,352
|
|
|
|
33,228
|
|
Finished goods
|
|
|
273,751
|
|
|
|
465,231
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,180,623
|
|
|
$
|
1,447,570
|
|
Inventories are stated at the lower of cost or market. The weighted average cost method is used to account for the Company inventories.
(5)
|
Property, Plant and Equipment and Land and Mining Rights
|
A summary of property, plant and equipment and land and mining rights is as follows:
|
|
March 31,
2013
|
|
|
December 31,
2012
|
|
|
|
|
|
|
|
|
Leasehold improvement
|
|
$
|
3,366,461
|
|
|
$
|
3,348,013
|
|
Production equipment
|
|
|
6,814,415
|
|
|
|
6,777,072
|
|
Furniture and fixtures
|
|
|
474,459
|
|
|
|
468,644
|
|
Automobiles
|
|
|
576,056
|
|
|
|
572,900
|
|
Land use rights
|
|
|
2,307,478
|
|
|
|
2,294,833
|
|
Mining rights
|
|
|
89,203,077
|
|
|
|
9,045,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,741,946
|
|
|
|
22,507,459
|
|
Less: Accumulated depreciation
|
|
|
9,528,106
|
|
|
|
8,889,377
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
93,213,840
|
|
|
$
|
13,618,082
|
|
On August 28, 2012, the Company entered into a transfer agreement with Xiuwen Longchang Mineral Industry Co., Ltd (“Longchang Mineral”), pursuant to which, Longchang Mineral transferred its aluminum bauxite mine mining right located at Xiuwen County Longchang Town Ganba 25th Group, PRC to the Company for consideration of approximately $80 million (RMB502 million) and the Company transferred its aluminum bauxite mine mining right located at Xiumen, Guizhou, PRC, to Longchang Mineral as in-kind exchange for consideration of approximately $2.87 million (RMB18 million). As of December 31, 2012, the Company paid approximately $63.4 million (RMB400 million) as deposit for the mining right acquisition.
During the three months ended March 31, 2013, the Company transferred its Guizhou aluminum bauxite mine mining right and paid approximately an additional $16.3 million (RMB102 million) to Longchang Mineral to complete the transaction. On February 6, 2013, the Company received a license form Guizhou National Land and Resource, PRC granting the Company a mining right for the aluminum bauxite mine located at Xiuwen County, Longchang Town, Ganba 25th Group.
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(5)
|
Property, Plant and Equipment and Land and Mining Rights, continued
|
Depreciation and amortization expense was $588,778 and $330,625 for the three months ended March 31, 2013 and 2012. A breakdown of depreciation and amortization expenses is summarized as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Depreciation of plant, equipment and improvements
|
|
$
|
196,279
|
|
|
$
|
185,678
|
|
Amortization of land use rights
|
|
|
12,699
|
|
|
|
12,658
|
|
Amortization of mining rights
|
|
|
379,800
|
|
|
|
132,289
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
588,778
|
|
|
$
|
330,625
|
|
At March 31, 2013 and December 31, 2012, the Company holds mining rights to two limestone mines and two bauxite mines from which they are allowed to produce:
●
|
300,000 tons of limestone, from which the calcium needed for production of its products is derived; and
|
●
|
360,000 tons of bauxite, from which the aluminum for production of its products is derived.
|
During the three months ended March 31, 2013 and 2012, the Company had production from its limestone and bauxite mines as follows (in tons):
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Limestone
|
|
|
24,142
|
|
|
|
23,643
|
|
Bauxite
|
|
|
58,383
|
|
|
|
57,304
|
|
The Company's short-term debt consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
2013
|
2012
|
|
|
|
|
|
|
|
Short term note (1)
|
|
$
|
12,766,093
|
|
|
$
|
12,696,135
|
|
Short term note (2)
|
|
|
6,383,047
|
|
|
|
6,348,068
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,149,140
|
|
|
$
|
19,044,203
|
|
On August 23, 2012, the Company entered into a $12.70 million (RMB80,000,000) short-term note agreement with Industrial Bank Co., Limited (“IB”) with a one year maturity, personally guaranteed by Mr. Tan and Ms. Du, which contains no financial maintenance covenants. 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 (6% at March 31, 2013). Interest under the short term note is paid monthly at the end of each month. As of March 31, 2013, all interest was fully paid.
On December 3, 2012, the Company entered into a $6.35 million (RMB40,000,000) short-term note agreement with IB with a one year maturity, is personally guaranteed by Mr. Tan and Ms. Du, which contains no financial maintenance covenants. 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 (6% at March 31, 2013). Interest under the short term note is paid monthly at the end of each month. As of March 31, 2013, all interest was fully paid.
Interest expense related to short-term debts was $286,765 and $0 for the three months ended March 31, 2013 and 2012.
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
The Company has not recorded a provision for U.S. federal income tax for the three months ended March 31, 2013 and 2012 because substantially all of the Company’s operations are conducted in the PRC.
On March 16, 2007, the National People’s Congress of China approved the new Corporate Income Tax Law of the PRC (“New CIT Law”), which is effective from January 1, 2008. Under the New CIT Law, the statutory corporate income tax rate applicable to most companies, including the Company is 25%. In accordance with the New CIT Law, enterprises established under the laws of foreign countries or regions and whose “place of effective management” is located within the PRC territory are considered PRC resident enterprises and subject to the PRC income tax at the rate of 25% on worldwide income. The definition of “place of effective management” refers to an establishment that exercises, in substance, overall management and control over the production and business, personnel, accounting, properties, etc. of an enterprise. As of March 31, 2013, no detailed interpretation or guidance has been issued to define “place of effective management”. Furthermore, as of March 31, 2013, the administrative practice associated with interpreting and applying the concept of “place of effective management” is unclear. However, the Company has analyzed the applicability of this law, as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013, and the Company has accrued and paid PRC tax on such basis. The Company will continue to monitor changes in the interpretation or guidance of this law.
The New CIT Law also imposes a 10% withholding income tax for dividends distributed by a foreign invested enterprise to its immediate holding company outside China. Such dividends were exempted from PRC tax under the previous income tax law and regulations.
The tax authority of the PRC Government conducts periodic and ad hoc tax filing reviews on business enterprises operating in the PRC after those enterprises have completed their relevant tax filings, hence the Company’s tax filings may not be finalized. It is therefore uncertain as to whether the PRC tax authority may take different views about the Company’s tax filings which may lead to additional tax liabilities.
The Company conducts substantially all of its business in PRC and it is subject to PRC income taxes at a 25% statutory tax rate in 2013 and 2012. Following is a reconciliation of the Company’s income tax provision of $1,585,654 and $1,700,858 for the three months ended March 31, 2013 and 2012, respectively, respectively, to the expected US statutory rate of 34%:
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Computed tax at the U.S. federal statutory rate of 34%
|
|
$
|
2,142,611
|
|
|
$
|
2,247,964
|
|
|
|
|
|
|
|
|
|
|
Tax rate difference between the US and PRC on foreign earnings
|
|
|
(567,162
|
)
|
|
|
(595,049
|
)
|
Change in valuation allowance
|
|
|
13,879
|
|
|
|
65,131
|
|
Other
|
|
|
(3,674
|
)
|
|
|
(17,188
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,585,654
|
|
|
$
|
1,700,858
|
|
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(7)
|
Income Taxes, continued
|
At March 31, 2013 and December 31, 2012, differences between the basis of assets and liabilities reported in the accompanying financial statements and those recognized for tax reporting purposes in the PRC, and the related deferred taxes were as follows:
|
|
As of
|
|
|
As of
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,443,894
|
|
|
$
|
1,240,356
|
|
Liability for social insurance premiums and provident housing funds
|
|
|
75,000
|
|
|
|
75,000
|
|
Total deferred tax assets
|
|
|
1,518,894
|
|
|
|
1,315,356
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Difference between book and tax amortization on mining rights
|
|
|
(428,914
|
)
|
|
|
(386,425
|
)
|
Total deferred tax liabilities
|
|
|
(428,914
|
)
|
|
|
(386,425
|
)
|
Net deferred tax assets before valuation allowance
|
|
|
1,089,980
|
|
|
|
928,931
|
|
Valuation allowance
|
|
|
(1,443,894
|
)
|
|
|
(1,240,356
|
)
|
Net deferred tax liabilities
|
|
$
|
(353,914
|
)
|
|
$
|
(311,425
|
)
|
The Company accounts for uncertainty in income taxes in accordance with applicable accounting standards, which prescribe a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These accounting standards also provide guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Based on the Company’s evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its condensed consolidated financial statements.
General Reserve Fund
In accordance with the PRC Regulations on Enterprises with Foreign Investment, an enterprise established in the PRC with foreign investment is required to provide for certain statutory reserves, namely (i) General Reserve Fund, (ii) Enterprise Expansion Fund and (iii) Staff Welfare and Bonus Fund, which are appropriated from net profit as reported in the enterprise’s PRC statutory accounts. A Wholly Foreign-Owned Enterprise (“WFOE”) is required to allocate at least 10% of its annual after-tax profit to the General Reserve Fund until the balance of such fund has reached 50% of its respective registered capital. A non- wholly-owned foreign invested enterprise is permitted to provide for the above allocation at the discretion of its board of directors. Appropriations to the Enterprise Expansion Fund and Staff Welfare and Bonus Fund are at the discretion of the board of directors for all foreign invested enterprises. The aforementioned reserves can only be used for specific purposes and are not distributable as cash dividends. As a result, $496,396 has been appropriated to the accumulated statutory reserves (included in the retained earnings) by the Company as of March 31, 2013 and December 31, 2012 and the balance represents a fully funded General Reserve Fund.
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
Following is an analysis of the general fund by subsidiary at March 31, 2013 and December 31, 2012:
|
|
Registered |
|
|
General
|
|
|
|
Capital
|
|
|
Reserve Fund
|
|
|
|
|
|
|
|
|
Jiangmen Huiyuan
|
|
$
|
-
|
|
|
$
|
-
|
|
Guangdong Huixin
|
|
|
61,981
|
|
|
|
38,801
|
|
Guizhou Yufeng
|
|
|
61,981
|
|
|
|
39,211
|
|
Shanxi Wealth
|
|
|
619,806
|
|
|
|
418,384
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
743,768
|
|
|
$
|
496,396
|
|
Preferred Stock
During the three months ended March 31, 2013, the Company paid $12,240 in preferred stock dividends, all of these dividends were paid in-kind at $15 per preferred share based on the pricing of the subscription agreement dated on December 15, 2010 for the total issuance of 816 shares of preferred stock with each of the preferred shares convertible into five common shares.
Common Stock
During the three months ended March 31, 2013, 7,484 preferred shares were converted into 37,420 common shares per subscription agreement.
(9)
|
Related Party Balances and Transactions
|
On August 23, 2012, the Company entered into a $12.70 million (RMB80,000,000) short-term note agreement with Industrial Bank Co., Limited (“IB”) with a one year maturity, personally guaranteed by Mr. Tan and Ms. Du, which contains no financial maintenance covenants. 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 (6% at March 31, 2013). Interest under the short term note is paid monthly at the end of each month. As of March 31, 2013, all interest was fully paid.
On December 3, 2012, the Company entered into a $6.35 million (RMB40,000,000) short-term note agreement with IB with a one year maturity, is personally guaranteed by Mr. Tan and Ms. Du, which contains no financial maintenance covenants. 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 (6% at March 31, 2013). Interest under the short term note is paid monthly at the end of each month. As of March 31, 2013, all interest was fully paid.
During the year ended December 31, 2010, the Company executed a lease agreement for its corporate office space owned by Mr. Tan. The lease is for a term of 5 years from January 1, 2011 to December 31, 2015 with monthly lease payments of $12,696. The Company incurred rent expense approximately of $38,000 related to this office lease during the three months ended March 31, 2013 and 2012.
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
The Company follows FASB ASC 280, which requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and evaluating their performance. The Company has three operating segments identified by manufacturing facility and each segment is operated in a separate subsidiary. The Company primarily evaluates performance based on income before income taxes and excluding non-recurring items. The operations and product produced by the Company’s various segments are as follows:
●
|
Guangdong Huixin produces water purification agents for specific industrial uses such as the treatment of waste water from paper mills, decolorization agent to treat waste water that contains active dyes, acid dyes and direct dyes produced in the textile and printing industry, and other industry specific water purification applications. The Company uses HAC powder produced by the Guizhou Yefeng segment in the production of its water purification agents.
|
●
|
Guizhou Yefeng produces HAC powder from calcium and aluminum derived from its limestone and bauxite mines. The HAC powder is used by Guangdong Huixin in the production of its water purification agents and is also sold to outside customers for waste water treatment.
|
●
|
Shanxi Wealth produces HAC powder from calcium and aluminum derived from its limestone and bauxite mines. The HAC powder is sold to outside customers for waste water treatment.
|
●
|
Other represents the cost of corporate activities and eliminations
|
The segment data presented below was prepared on the same basis as the Company’s condensed consolidated financial statements:
For the three months ended March 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong
Huixin
|
|
|
Guizhou
Yefeng
|
|
|
Shanxi
Wealth
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
9,800,080
|
|
|
$
|
4,072,373
|
|
|
$
|
7,546,532
|
|
|
$
|
-
|
|
|
$
|
(2,318,122
|
)
|
|
$
|
19,100,863
|
|
Cost of revenue
|
|
|
5,906,037
|
|
|
|
2,423,184
|
|
|
|
4,473,823
|
|
|
|
-
|
|
|
|
(2,318,122
|
)
|
|
|
10,484,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,894,043
|
|
|
|
1,649,189
|
|
|
|
3,072,709
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,615,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
242,874
|
|
|
|
76,460
|
|
|
|
344,179
|
|
|
|
-
|
|
|
|
-
|
|
|
|
663,513
|
|
General and administrative
|
|
|
550,706
|
|
|
|
158,564
|
|
|
|
325,113
|
|
|
|
178,547
|
|
|
|
-
|
|
|
|
1,212,930
|
|
Research and development
|
|
|
167,279
|
|
|
|
8,842
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
176,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
2,933,184
|
|
|
$
|
1,405,323
|
|
|
$
|
2,403,417
|
|
|
$
|
(178,547
|
)
|
|
$
|
-
|
|
|
$
|
6,563,377
|
|
HUIXIN WASTE WATER SOLUTIONS, INC. AND SUBSIDIARIES
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
(UNAUDITED)
|
(10)
|
Segment Information, continued
|
For the three months ended March 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong
|
|
|
Guizhou
|
|
|
Shanxi |
|
|
|
|
|
|
|
|
|
|
|
|
Huixin
|
|
|
Yefeng
|
|
|
Wealth
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
8,971,234
|
|
|
$
|
3,588,278
|
|
|
$
|
7,258,311
|
|
|
$
|
-
|
|
|
$
|
(2,060,358
|
)
|
|
$
|
17,757,465
|
|
Cost of revenue
|
|
|
5,660,752
|
|
|
|
1,942,449
|
|
|
|
4,200,980
|
|
|
|
-
|
|
|
|
(2,060,358
|
)
|
|
|
9,743,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,310,482
|
|
|
|
1,645,829
|
|
|
|
3,057,331
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,013,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
251,885
|
|
|
|
71,510
|
|
|
|
332,402
|
|
|
|
-
|
|
|
|
-
|
|
|
|
655,797
|
|
General and administrative
|
|
|
427,835
|
|
|
|
141,287
|
|
|
|
294,171
|
|
|
|
298,753
|
|
|
|
-
|
|
|
|
1,162,046
|
|
Research and development
|
|
|
142,914
|
|
|
|
8,813
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
151,727
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
2,487,848
|
|
|
$
|
1,424,219
|
|
|
$
|
2,430,758
|
|
|
$
|
(298,753
|
)
|
|
$
|
-
|
|
|
$
|
6,044,072
|
|
As of March 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guangdong
Huixin
|
|
|
Guizhou
Yefeng
|
|
|
Shanxi
Wealth
|
|
|
Corporate
|
|
|
Eliminations
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
54,221,944
|
|
|
$
|
4,890,580
|
|
|
$
|
29,096,889
|
|
|
$
|
5,579,005
|
|
|
$
|
(66,927,854
|
)
|
|
$
|
26,860,564
|
|
Property, plant and equipment,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
land use and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
mining rights
|
|
|
2,648,565
|
|
|
|
84,382,690
|
|
|
|
6,182,585
|
|
|
|
-
|
|
|
|
-
|
|
|
|
93,213,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
56,870,509
|
|
|
$
|
89,273,270
|
|
|
$
|
35,279,474
|
|
|
$
|
5,579,005
|
|
|
$
|
(66,927,854
|
)
|
|
$
|
120,074,404
|
|
|
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 condensed consolidated 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 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 being sold to other 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 months ended March 31, 2013 and 2012, in both U.S. dollars and as a percentage of our total revenue.
|
|
Three Months Ended March 31,
|
|
|
2013
|
|
|
% of Revenue
|
|
|
2012
|
|
|
% of Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
19,100,863
|
|
|
|
100.00
|
%
|
|
$
|
17,757,465
|
|
|
|
100.00
|
%
|
Cost of revenue
|
|
|
10,484,922
|
|
|
|
54.89
|
%
|
|
|
9,743,823
|
|
|
|
54.87
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
8,615,941
|
|
|
|
45.11
|
%
|
|
|
8,013,642
|
|
|
|
45.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
663,513
|
|
|
|
3.47
|
%
|
|
|
655,797
|
|
|
|
3.69
|
%
|
General and administrative
|
|
|
1,212,930
|
|
|
|
6.35
|
%
|
|
|
1,162,046
|
|
|
|
6.54
|
%
|
Research and development
|
|
|
176,121
|
|
|
|
0.92
|
%
|
|
|
151,727
|
|
|
|
0.86
|
%
|
Total operating expenses
|
|
|
2,052,564
|
|
|
|
10.75
|
%
|
|
|
1,969,570
|
|
|
|
11.09
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
6,563,377
|
|
|
|
34.36
|
%
|
|
|
6,044,072
|
|
|
|
34.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
25,186
|
|
|
|
0.13
|
%
|
|
|
567,587
|
|
|
|
3.19
|
%
|
Interest expense
|
|
|
(286,765
|
)
|
|
|
(1.50)
|
%
|
|
|
-
|
|
|
|
-
|
|
Total other (expense)/income
|
|
|
(261,579
|
)
|
|
|
(1.37)
|
%
|
|
|
567,587
|
|
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
6,301,798
|
|
|
|
32.99
|
%
|
|
|
6,611,659
|
|
|
|
37.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
1,585,654
|
|
|
|
8.30
|
%
|
|
|
1,700,858
|
|
|
|
9.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,716,144
|
|
|
|
24.69
|
%
|
|
$
|
4,910,801
|
|
|
|
27.65
|
%
|
Three Months Ended March 31, 2013 and March 31, 2012:
Revenue:
Our consolidated revenue increased by $1,343,398 or 7.57%, to $19,100,863 for three months ended March 31, 2013 from $17,757,465 for the three months ended March 31, 2012. The increase in revenue for the three months ended March 31, 2013 was primarily due to increase of sales quantities and selling prices of purifying agents and HAC powder during the three months ended March 31, 2013 as compared to those during the same period of 2012.
Our revenue from sales of water purifying agents for the three months ended March 31, 2013 was $9,800,080 and for the three months ended March 31, 2012 was $8,971,234, representing an increase of $828,846 or approximately 9.24%. The increase was primarily due to increase of selling prices by approximately 2.04% and increases in sales quantities by approximately 5.39% during the three months ended March 31, 2013 as compared to those in the same period of 2012. The increase was due to continuous increase of the sales of our water purifying agents through expansion of our customer base and increased orders from our existing customers.
Our revenue from sales of HAC powder for the three months ended March 31, 2013 was $9,300,783 and for the three months ended March 31, 2012 was $8,786,231, representing an increase of $514,552 or approximately 5.86%. The increase was primarily due to increase of selling prices by approximately 4.0% and increases in sales quantities by approximately 2.67% during the three months ended March 31, 2013 as compared to those in the same period of 2012. The increase was due to continuous increase of the sales of our HAC powder through expansion of our customer base and increased orders from our existing customers.
Costs of Revenue:
Costs of consolidated revenue increased by $741,099 or 7.61%, to $10,484,922 for the three months ended March 31, 2013 from $9,743,823 for the three months ended March 31, 2012. The increase in the costs of revenue was mainly due to the increase of raw material (for HAC powder) costs, labor and overhead cost in line with the our sales increases; the cost of revenue ratio to revenue was approximately the same during the three months ended March 31, 2013 as compared to that of the same period in 2012.
Costs of revenue from sales of water purifying agents for the three months ended March 31, 2013 were $3,587,915, a decrease of $12,479 or 0.35%, from $3,600,394 for the same period in 2012. As a percentage of net revenue, cost of revenue from sales of water purifying agents was 37% and 40% for the three months ended March 31, 2013 and 2012. The decrease of costs of revenue from sales of water purifying agents was primarily attributable to the decrease of raw material (for water purifying agents) prices.
Costs of revenue from sales of HAC powder for the three months ended March 31, 2013 were $6,897,007, an increase of $753,378 or 12.27%, from $6,143,429 for the same period in 2012. As a percentage of net revenue, costs of revenue from sales of HAC powder approximated 74% and 70% for the three months ended March 31, 2013 and 2012. The increase of costs of revenue from sales of HAC powder was primarily attributable to the increase of raw material (for HAC powder) prices and overall labor and overhead cost increase.
Gross profit and Gross Profit Margin:
Our gross profit increased by $602,299 or 7.52% to $8,615,941 for the three months ended March 31, 2013 from $8,013,642 for the three months ended March 31, 2012. Our gross profit margin (gross profit divided by net revenue) decreased to 45.11% for the three months ended March 31, 2013 from 45.13% for the three months ended March 31, 2012. The decrease in gross margin was primarily due to the increases of raw materials for HAC powder, labor and overhead cost at a faster pace than the increases of our sales prices.
Selling and Marketing Expenses:
Our selling and marketing expenses increased by $7,716 or 1.18% to $663,513 for the three months ended March 31, 2013 from $655,797 for the three months ended March 31, 2012. The increase in our selling and marketing expenses in the three months ended March 31, 2013 was primarily due to 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 $50,884 or 4.38% to $1,212,930 for the three months ended March 31, 2013 from $1,162,046 for the three months ended March 31, 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 $24,394 or 16.08% to $176,121 for the three months ended March 31, 2013 from $151,727 for the three months ended March 31, 2012. We continue to incur expenses to improve and develop new products. We expect to continue increasing our research and development efforts to enhance the competitiveness of our products.
Other income (expenses):
Interest income:
Our interest income decreased by $542,401 or 96% to $25,186 for the three months ended March 31, 2013 from $567,587 for the three months ended March 31, 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 $286,765, or 100% for the three months ended March 31, 2013 from $0 for the three months ended March 31, 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 for the three months ended March 31, 2013 decreased by $194,657 or 3.96% to $4,716,144 for the three months ended March 31, 2013 from $4,910,801 for the three months ended March 31, 2012. Our revenue and costs of revenue increased by approximately the same percentage, 7.6%, and gross profit increased by $602,299 during the three months ended March 31, 2013, as compared to that in the same period of 2012. The decrease of our net income was primarily due to decrease in interest income from note receivable of approximately $541,000 and increase in interest expense of $286,765 for the short-term loans.
Liquidity and Capital Resources
We had an unrestricted cash balance of approximately $22.5 million as of March 31, 2013, as compared to $33.9 million as of December 31, 2012.
Our funds are kept in financial institutions located in China, and banks and other financial institutions in the PRC, 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. In addition, as of March 31, 2013, the Company had cash deposits of approximately $22.3 million, placed with several banks in the PRC, where there is currently no rule or regulation in place for obligatory insurance of accounts with banks and financial institutions. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risks on its cash in accounts with banks and financial institutions.
We had working capital of approximately $1.2 million and $12.1 million as of March 31, 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 has been a relatively insignificant portion of our current assets, representing $3.1 million and $2.7 million, or 11.5% and 7.0% of total current assets, as of March 31, 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 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 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.
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 receivable could result in our inability to collect receivables requiring us to increase our allowance for doubtful accounts, which would decrease our net income and working capital. We experienced no bad debt expense during the three months ended March 31, 2013 and the year ended December 31, 2012. As of March 31, 2013, we believed it was appropriate not to record any bad debt expense primarily due to our historical ability to collect our accounts receivable. Bad debt expense was $0 for the three months ended March 31, 2013 and the year ended December 31, 2012.
Inventories amounted to approximately $1.2 million as of March 31, 2013, as compared to approximately $1.4 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 may, however, decide to increase our inventory levels in the future, including both of raw materials and finished goods, in order 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 were approximately $325,000 and $262,000 for the three months ended March 31, 2013 and 2012. 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 insufficient contribution of 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 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 expenditures 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 operations. However, we believe our existing cash, cash equivalents and cash flows from operations and proceeds from the completed financing in December 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 loan borrowed from bank.
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.
Cash Flow
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Net cash provided by operating activities
|
|
$
|
4,763,195
|
|
|
$
|
6,608,232
|
|
Net cash (used for) provided by investing activities
|
|
|
(16,253,236
|
)
|
|
|
25,384,740
|
|
Net cash provided by financing activities
|
|
|
-
|
|
|
|
300,000
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
166,057
|
|
|
|
92,542
|
|
Cash and cash equivalents at the beginning of period
|
|
|
33,871,287
|
|
|
|
26,383,537
|
|
Cash and cash equivalents at the end of period
|
|
$
|
22,547,303
|
|
|
$
|
58,769,051
|
|
Net cash provided by operating activities was approximately $4.8 million for the three months ended March 31, 2013, compared to $6.6 million for the three months ended March 31, 2012. The decrease of net cash provided by operating activities was primarily due to increase of account receivable in the amount of $369,918 and decrease of accrued liabilities in the amount approximately of $1.2 million which was partially offset by the decrease of inventories of $274,472 during the three months ended March 31, 2013. During the three months ended March 31, 2012, net cash provided by operating activities was attributable to decrease of advance payment to suppliers in the amount of $2.5 million which was partially offset by increase in accounts receivable of $1.8 million.
Investing activity during the three months ended March 31, 2013 included cash used for the mining right acquisition in the amount of $16 million. In addition, we purchased equipment of $3,228 and $22,168 during the three months ended March 31, 2013 and 2012.
We had no financing activities during the three months ended March 31, 2013. Financing activities for the quarter ended March 31, 2012 was related to releases of restricted cash pursuant to the Holdback Escrow Agreements and related Amendments to the original agreements in the amounts of $300,000.
Based upon our present plans, we believe that cash on hand and cash flow from operations will be sufficient to fund our capital needs in the next twelve months. We expect that our primary sources of funding in the next twelve months will be from cash flows from operations. However, our ability to maintain sufficient liquidity depends partially on our ability to achieve anticipated levels of revenue, while continuing to control our cost of revenue and other operating expenses. If we do not have sufficient cash, we would have to obtain additional debt financing or equity financing through other external sources, which may not be available on acceptable terms, or at all. Failure to maintain financing arrangements on acceptable terms would have a material adverse effect on our business, results of operations and financial condition.
Reconciliation of the Effect of Exchange Rates on Cash and Cash Equivalents
Our cash accounts are denominated in RMB and the absolute amount of RMB that we hold is unaffected by the change in the exchange rate of the RMB, our functional currency, as compared to the US Dollar, our reporting currency. The effect of exchange rate changes on cash represents changes in the value of our cash accounts because the USD to RMB exchange rate has changed during the reporting periods. When the USD declines in value against the RMB, the translation of our financial statements at year end exchange rates yields an increase in the reported amount of cash in USD. A summary of the effect of exchange rates on cash and cash equivalents follows:
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Effect on beginning cash at period end exchange rate
|
|
$
|
184,783
|
|
|
$
|
167,213
|
|
Effect from operating activities during the period
|
|
|
8,039
|
|
|
|
(15,554
|
)
|
Effect from investing activities during the period
|
|
|
(26,765
|
)
|
|
|
(59,117
|
)
|
Effect of exchange rate changes on cash
|
|
$
|
166,057
|
|
|
$
|
92,542
|
|
Critical Accounting Policies, Estimates and Assumptions
The SEC defines critical accounting policies as those that are, in management’s view, most important to the portrayal of our financial condition and results of operations and those that require significant judgments and estimates.
The discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities. On an on-going basis, we evaluate our estimates including the allowance for doubtful accounts, the salability and recoverability of inventory, income taxes and contingencies. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We cannot predict what future laws and regulations might be passed that could have a material effect on our results of operations. We assess the impact of significant changes in laws and regulations on a regular basis and update the assumptions and estimates used to prepare our financial statements when we deem it necessary.
Revenue recognition. We recognize revenue from the sales of products. Sales are recognized when the following four revenue criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price is fixed or determinable, and collectivity is reasonably assured. Revenue is presented net of value added tax (“VAT”), sales rebates and returns. No return allowance is made as product returns are insignificant based on historical experience.
Allowance for doubtful accounts. In estimating the collectability of accounts receivable we analyze historical write-offs, changes in our internal credit policies and customer concentrations when evaluating the adequacy of our allowance for doubtful accounts. Differences may result in the amount and timing of expenses for any period if we make different judgments or use different estimates. Our accounts receivable represent a significant portion of our current assets and total assets. Our realization on accounts receivable, expressed in terms of United States dollars may be affected by fluctuations in currency rates since the customer’s currency is frequently a currency other than United States dollars.
Inventories. Inventories are comprised of raw materials and finished goods which are stated at the lower of cost or market. Substantially all inventory costs are determined using the weighted average basis. Costs of finished goods include materials, direct labor, and manufacturing overhead before the goods are ready for sale. Inventory costs do not exceed net realizable value.
Taxation
Cayman Islands
The Government of the Cayman Islands does not, under existing legislation, impose any income, corporate or capital gains tax, estate duty, inheritance tax, gift tax or withholding tax upon us or our shareholders. The Cayman Islands are not party to a double tax treaty with any country that is applicable to any payments made to or by us.
We have received an undertaking from the Governor-in-Cabinet of the Cayman Islands that, in accordance with section 6 of the Tax Concessions Law (1999 Revision) of the Cayman Islands, for a period of 20 years from April 2006 no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to us or our operations and, in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax shall be payable (i) on or in respect of our shares, debentures or other obligations or (ii) by way of the withholding in whole or in part of a payment of dividend or other distribution of income or capital by us to our shareholders or a payment of principal or interest or other sums by us due under a debenture or other obligation.
Hong Kong
Our indirect subsidiary, Wealth Environmental Technology, was incorporated in Hong Kong and under the current laws of Hong Kong, is subject to Profits Tax of 16.5%. No provision for Hong Kong Profits Tax has been made as Wealth Environmental Technology has no taxable income.
China
Before the implementation of the New CIT Law, Foreign Invested Enterprise (“FIE") established in the PRC, unless granted preferential tax treatments by the PRC government, were generally subject to an earned income tax, or CIT, rate of 33%, which included a 30% state income tax and a 3% local income tax. On March 16, 2007, the National People’s Congress of China passed the New CIT Law, and on November 28, 2007, the State Council of China passed the CIT Law Implementing Rules which took effect on January 1, 2008. The CIT Law and its implementing rules impose a unified CIT of 25% on all domestic-invested enterprises and FIEs, unless they qualify under certain limited exceptions.
In addition to the changes to the current tax structure, under the New CIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a resident enterprise and will normally be subject to a CIT of 25% on its global income. The implementing rules define the term “de facto management bodies” as “an establishment that exercises, in substance, overall management and control over the production, business, personnel, accounting, etc., of a Chinese enterprise.” If the PRC tax authorities subsequently determine that we should be classified as a resident enterprise, then our organization’s global income will be subject to PRC income tax of 25%. For detailed discussion of PRC tax issues related to resident enterprise status, see “Risk Factors – Risks Related to Our Business – Under the New CIT Law, we may be classified as a “resident enterprise” of China contained in our Current Report on Form 8-K dated December 15, 2010, as amended. Such classification will likely result in unfavorable tax consequences to us and our non-PRC shareholders.
In addition, the New CIT Law and its implementing rules generally provide that a 10% withholding tax applies to China-sourced income derived by non-resident enterprises for PRC enterprise income tax purposes unless the jurisdiction of incorporation of such enterprises’ shareholder has a tax treaty with China that provides for a different withholding arrangement. In this regard, we expect that 10% withholding tax will apply to dividends paid to Wealth Environmental Technology by Jiangmen Huiyuan.
Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income and non-tax deductible expenses incurred. Our management carefully monitors these legal developments and will timely adjust our effective income tax rate when necessary.
Off Balance Sheet Transactions
We do not have any off-balance sheet transactions.
Item 3.
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Quantitative and Qualitative Disclosures About Market Risk.
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Smaller reporting companies are not required to provide the information required by this item.
Item 4.
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Controls and Procedures.
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Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer as appropriate, to allow timely decisions regarding required disclosures. Our President and Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures as of March 31, 2013, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the President and Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were not effective to ensure that information required to be included in our periodic SEC filings is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms due to the material weakness related to a lack of accounting personnel with sufficient experience in maintaining books and records and preparing financial statements in accordance with U.S. GAAP, which existed as of December 31, 2012 and December 31, 2011, which have not been fully remediated as of March 31, 2013.
Remediation Activities
We implemented or are in the process of implementing the following measures to remediate the material weakness identified above:
(1) We hired a consultant with extensive experience in U.S. GAAP and SEC reporting in May 2011 to improve our knowledge of U.S. GAAP and SEC reporting;
(2) We hired a qualified chief financial officer in June 2011 to improve our internal control over financial reporting; and
(3) We plan to provide training to our accounting personnel to improve their knowledge of U.S. GAAP.
However there is no guarantee that such remediation activities can effectively cure our material weakness as identified above.
Changes in Internal Control over Financial Reporting
No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
During the quarter ended March 31, 2013, the Company's management implemented or continued to implement the steps set forth above under “Remediation Activities” to improve the quality of its internal control over financial reporting.
PART II—OTHER INFORMATION
(a) Exhibits
Exhibit
Number
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Description
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31.1*
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Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2*
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Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1+
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Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2+
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Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS**
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XBRL Instance Document
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101.SCH**
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XBRL Taxonomy Extension Schema Document
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101.CAL**
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XBRL Taxonomy Extension Calculation Linkbase Document.
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101.LAB**
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XBRL Taxonomy Extension Label Linkbase Document.
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101.PRE**
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XBRL Taxonomy Extension Presentation Linkbase Document.
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101.DEF**
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XBRL Taxonomy Extension Definition Linkbase Document.
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*Filed with this report.
+In accordance with the SEC Release 33-8238, deemed being furnished and not filed.
**Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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HUIXIN WASTE WATER SOLUTIONS, INC.
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Dated: May 15, 2013
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By:
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/s/ Mingzhuo Tan
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Mingzhuo Tan
President and Chief Executive Officer
(Duly authorized officer and principal executive officer)
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Dated: May 15, 2013
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By:
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/s/ Tin Nang (Chris) Lui
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Tin Nang (Chris) Lui
Chief Financial Officer
(Duly authorized officer, principal financial officer and chief accounting officer )
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Exhibit Index
Exhibit Number
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Description
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|
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31.1*
|
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Certifications of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.2*
|
|
Certifications of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1+
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Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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32.2+
|
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Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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101.INS**
|
|
XBRL Instance Document
|
101.SCH**
|
|
XBRL Taxonomy Extension Schema Document
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101.CAL**
|
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XBRL Taxonomy Extension Calculation Linkbase Document.
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101.LAB**
|
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XBRL Taxonomy Extension Label Linkbase Document.
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101.PRE**
|
|
XBRL Taxonomy Extension Presentation Linkbase Document.
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101.DEF**
|
|
XBRL Taxonomy Extension Definition Linkbase Document.
|
*Filed with this report.
+In accordance with the SEC Release 33-8238, deemed being furnished and not filed.
**Furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise not subject to liability under these sections.
32