UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 FORM 10-Q/A

 

R	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2011

 

o	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number: 001-34962

 

GUANWEI RECYCLING CORP.

 (Exact name of registrant as specified in its charter)

 

Nevada		98-0669936
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

 

Rong Qiao Economic Zone, Fuqing City

Fujian Province,

People’s Republic of China 350301

(Address of principal executive offices) (Zip Code)

 

86-591 8539 2532

(Registrant’s telephone number, including area code)

 

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 of 1934 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 þ No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 þ 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 filer   o		(Do not check if a smaller reporting company)	Smaller reporting company	R

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes o   No R

 

As of January 27, 2012, the registrant had 20,000,006 shares of its common stock issued and outstanding.

 

 

EXPLANATORY NOTE

 

Guanwei Recycling Corp., a Nevada corporation (the “Company”) is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q which was originally filed with the Securities and Exchange Commission (“SEC”) on May 16, 2011 (“Original Form 10-Q”), to incorporate the Company’s revisions and responses pursuant to certain comment letters from the staff of the SEC dated June 30, 2011, September 8, 2011 and October 4, 2011 (collectively, the “SEC Comment Letters”).  Except for the amended disclosures made in response to the SEC Comment Letters, the information in this Form 10-Q/A has not been updated to reflect events that occurred after May 16, 2011, the filing date of the Original Form 10-Q. Accordingly, this Form 10-Q/A should be read in conjunction with the Company’s filings made with the SEC subsequent to the filing of the Original Form 10-Q.  The following sections have been amended, without limitation:

 

Part I
	·	Item 1.	Financial Statements
	·	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	·	Item 4.	Controls and Procedures
Part II
	·	Item 6.	Exhibits

 

Except as set forth above, all other information in the Company’s Original Form 10-Q remains unchanged.  The Company has re-filed the entire Form 10-Q in order to provide more convenient access to the amended information in context.

 

 

TABLE OF CONTENTS

 

			PAGE
	PART I – FINANCIAL INFORMATION		3
Item 1.	Financial Statements.		3
	Condensed Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010 (Unaudited)		3
	Condensed Consolidated Statements of Income and Comprehensive Income for the Three Months Ended March 31, 2011 and 2010 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2011 and 2010 (Unaudited)		5
	Notes to the Condensed Consolidated Financial Statements (Unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operation.		11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		18
Item 4.	Controls and Procedures.		18
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings.		19
Item 1A.	Risk Factors.		19
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		19
Item 3.	Defaults Upon Senior Securities.		19
Item 4.	(Removed and Reserved).		19
Item 5.	Other Information.		19
Item 6.	Exhibits.		19
	SIGNATURES		21

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

GUANWEI RECYCLING CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollars)

 

		March 31,				December 31,
		2011				2010
		(Unaudited)
ASSETS
Current assets
Cash and cash equivalents		$	13,953,136			$	14,940,236
Restricted cash			1,601,915				2,280,398
Accounts receivable			951				9,106
Inventories			10,001,650				10,721,765
Prepayments to suppliers			2,135,318				-
Prepaid expenses and other current assets			561,631				473,905
Amount due from director			1,290				1,290
Total current assets			28,255,891				28,426,700
Property, plant and equipment, net			4,817,019				4,894,141
Land use right, net			663,915				660,941
Other assets			202,474				201,579
Total Assets		$	33,939,299			$	34,183,361
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Short term borrowings		$	1,588,171			$	3,716,377
Accounts payable			7,663,689				8,812,940
Accrued expenses and other payables			566,472				721,569
Amount due to shareholder			1,085,130				905,615
Income tax payable			956,561				880,048
Total current liabilities			11,860,023				15,036,549
Equity
Shareholders’ equity:
Common stock, $0.001 par value, 500,000,000 shares authorized,
20,000,006 shares issued and outstanding			20,000				20,000
Additional paid-in capital			1,290,028				1,290,028
PRC statutory reserves			805,483				805,483
Retained earnings			18,550,910				15,835,628
Accumulated other comprehensive income			1,412,855				1,195,673
Total shareholders’ equity			22,079,276				19,146,812
Total liabilities and shareholders’ equity		$	33,939,299			$	34,183,361

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

GUANWEI RECYCLING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

 (Expressed in U.S. dollars)

 

		Three Months Ended March 31,
		2011				2010
Net revenue		$	14,142,612			$	9,494,226
Cost of revenue			9,907,512				6,173,352
Gross profit			4,235,100				3,320,874
Operating expenses
Selling and marketing expenses			88,791				48,499
General and administrative expenses			543,770				322,956
			632,561				371,455
Income from operations			3,602,539				2,949,419
Interest income			22,970				8,252
Interest expenses			(17,435	)			(20,160	)
Exchange gain, net			71,296				-
Income before income taxes			3,679,370				2,937,511
Income taxes			964,088				732,907
Net income		$	2,715,282			$	2,204,604
Comprehensive Income:
Net income		$	2,715,282			$	2,204,604
Other comprehensive income
- Foreign currency translation adjustments			217,182				2,833
Comprehensive income		$	2,932,464			$	2,207,437
Earnings per share attributable to shareholders of Guanwei Recycling Corp.
-  basic and diluted		$	0.14			$	0.11
Weighted average number of share of common stock used in computing
basic and diluted earnings per share			20,000,006				20,000,006

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 

 

  

GUANWEI RECYCLING CORP.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. dollars)

 

		Three Months Ended March 31,
		2011				2010
Cash flows from operating activities
Net income		$	2,715,282			$	2,204,604
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation of property, plant and equipment			129,852				98,899
Amortization of land use right			3,690				3,562
Changes in operating assets and liabilities
Accounts receivable			8,206				(396,508	)
Prepayments to suppliers			(2,124,560	)
Prepaid expenses and other assets			(82,099	)			(215,057	)
Inventories			824,368				2,541,306
Accounts payable			(1,232,140	)			(2,015,076	)
Accrued expenses and other payables			(161,085	)			450,071
Income tax payable			67,273				260,238
Net cash provided by operating activities			148,787				2,932,039
Cash flows from investing activities
Restricted cash			698,014				-
Purchase of property, plant and equipment			(3,877	)			(2,984	)
Net cash provided by (used for) investing activities			694,137				(2,984	)
Cash flows from financing activities
Advance from shareholder			179,515				48,200
New bank borrowings			1,589,467				1,420,767
Repayment of bank borrowings			(3,744,359	)			(1,402,767	)
Net cash (used in) provided by financing activities			(1,975,377	)			48,200
Effect of exchange rate change on cash and cash equivalents			145,353				2,447
Net (decrease) increase in cash and cash equivalents			(987,100	)			2,979,702
Cash and cash equivalents at the beginning of period			14,940,236				7,302,209
Cash and cash equivalents at the end of period		$	13,953,136			$	10,281,911
Supplemental disclosure of cash flow information
Interest received		$	(22,970	)		$	(8,252	)
Interest paid			17,435				20,160
Income taxes paid			896,814				472,669

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements 

 

  

Notes to Financial Statements.

 

1         Summary of Significant Accounting Policies

 

Guanwei Recycling Corp. (the “Registrant”) operates through its wholly-owned subsidiary, Hongkong Chenxin International Development Limited (“Chenxin”), a company incorporated in Hong Kong, and Chenxin’s wholly-owned subsidiary, Fuqing Guanwei Plastic Industry Co., Limited, a company incorporated in Fuzhou City, Fujian Province, PRC on April 9, 2005 as a wholly domestic-owned enterprise with an operating period up to April 8, 2055 (“ Guanwei ”, and together with the Registrant and Chenxin, hereafter referred to as the “Company”). The Company is organized as a single business segment and is principally engaged in the manufacturing and distribution of low density polyethylene (“LDPE”) and the sales of scrap materials, including plastic.

 

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly, certain information and footnotes required by accounting principles generally accepted in the United States of America (“US GAAP”) for annual financial statements are not included herein. In management’s opinion, these unaudited condensed consolidated financial statements include all adjustments necessary for a fair presentation of the information when read in conjunction with our 2010 audited consolidated financial statements and the related notes thereto. The financial information as of December 31, 2010 is derived from our 2010 Annual Report on Form 10-K/A. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2010 Annual Report on Form 10-K/A. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.

 

(a)         Basis of Consolidation

 

The condensed consolidated financial statements of the Company include the financial statements of the Registrant and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated on consolidation.

 

(b)         Use of Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results may be different from the estimates.

 

(c)         Foreign Currency Translations and Transactions

 

The Company’s operations in the PRC use the local currency, RMB, as their functional currency, whereas amounts reported in the accompanying condensed consolidated financial statements and disclosures are stated in US dollars, the reporting currency of the Company, unless stated otherwise.

 

As such, the Company uses the “current rate method” to translate its PRC operations from RMB into US dollars (“USD” or “$”), as required under the Accounting Standards Codification (“ASC”) 830 “Foreign Currency Matters” (formerly SFAS No. 52, “Foreign Currency Translation” ). The assets and liabilities of its PRC operations are translated into USD using the rate of exchange prevailing at the balance sheet date. The capital accounts are translated at the historical rate. Adjustments resulting from the translation of the balance sheets of the Company’s PRC subsidiary, Guanwei, from RMB into USD are recorded in shareholders’ equity as part of accumulated comprehensive income. The statement of income and comprehensive income is translated at average rates during the reporting period. Gains or losses resulting from transactions in currencies other than the functional currencies are recognized in net income for the reporting periods. The statement of cash flows is translated at average rates during the reporting period, with the exception of issuance of shares and payment of dividends which are translated at historical rates.

 

 (d)         Revenue Recognition

 

Revenue from sales of manufactured LDPE is recognized when persuasive evidence of an arrangement exists, delivery of the goods has occurred, and customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

 

From time to time, revenue is deferred for upfront payments for sales of recycled LDPE received and is included in accrued expenses and other payables until the significant risks and ownership of the goods have been transferred to the customers and the price is fixed and collectability is reasonably assured.

 

Sales of scrap materials are recognized on the same basis as sales of LDPE.

 

Interest income is recognized on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

 

 

(e)           Income taxes

 

The Company accounts for income and deferred tax under the provision of the Accounting Standards Codification 740 (“ASC 740”) “Income Taxes” (Formerly SFAS No. 109: “Accounting for Income Taxes”). Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. ASC 740 also requires the recognition of the future tax benefits of net operating loss carry forwards. A valuation allowance is established when the deferred tax assets are not expected to be realized within a reasonable period of time.

 

Effective January 1, 2007, the Company adopted ASC 740-10-25 “Income Taxes” (formerly FIN No. 48 “Accounting for Uncertainty in Income Taxes”). In accordance with ASC 740-10-25, the Company recognizes tax benefits that satisfy a greater than 50% probability threshold and provides for the estimated impact of interest and penalties for such unrecognized tax benefits. The Company did not have any such uncertain tax positions in the three months ended March 31, 2011 and 2010, and as of the balance sheet dates.

 

Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, net operating loss carry forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income for the period that includes the enactment date.

 

(f)           Inventories

 

Inventories are stated at the lower of cost, on the first-in, first-out method, or market value. Costs include purchase and related costs incurred in bringing each product to its present location and condition. Market value is calculated based on the estimated normal selling price, less further costs expected to be incurred for disposal. Provision is made for obsolete, slow moving or defective items, where appropriate.

 

(g)         Related parties

 

Entities are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

 

 3         Revenue

 

		Three Months Ended March 31,
		2011				2010
		(Unaudited)				(Unaudited)
Sales of recycled LDPE		$	13,927,369			$	9,319,708
Sales of scrap materials			215,243				174,518
		$	14,142,612			$	9,494,226

 

4           Income Taxes

 

No provision for US or Hong Kong profits tax has been made as the Company has no assessable profit for tax purposes during the periods.

 

The Company provides for PRC Enterprise Income Tax (“PRC - EIT”) at a rate of 25% (2010: 25%), after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusted for income and expense items which are not assessable or deductible for PRC-EIT.

 

		Three Months Ended March 31,
		2011				2010
		(Unaudited)				(Unaudited)
The provision of income taxes consists of current tax expense
PRC – EIT		$	964,088			$	732,907

 

 

The principal reconciling items from income tax computed at the statutory rate and at the effective income tax rate are stated as follows:

 

		Three Months Ended March 31,
		2011				2010
		(Unaudited)				(Unaudited)
Income before income taxes		$	3,679,370			$	2,937,511
Computed tax at PRC statutory rate of 25%			919,843				734,378
Non-deductible items			44,712				38,438
Others			(467	)			(39,909	)
		$	964,088			$	732,907

 

No provision for deferred taxation has been made in the consolidated financial statements as there were no significant temporary differences arising during each of the three months ended March 31, 2011 and 2010 or as of the balance sheet dates.

 

The Company has not provided deferred taxes on undistributed earnings attributable to its subsidiaries as they are to be permanently reinvested.  On February 22, 2008, the Ministry of Finance (“MOF”) and the State Administration of Taxation (“SAT”) jointly issued Cai Shui [2008] Circular 1 (“Circular 1”). According to Article 4 of Circular 1, distributions of accumulated profits earned by wholly-owned foreign enterprises (“WOFE”) prior to January 1, 2008 to foreign investors will be exempt from withholding tax (“WHT”) while distribution of the profit earned by a WOFE after January 1, 2008 to its foreign investors shall be subject to WHT.

 

Since the Company intends to reinvest its earnings to further expand its businesses in mainland China, its foreign invested enterprises do not intend to declare dividends to their immediate foreign holding companies in the foreseeable future. Accordingly, the Company has not recorded any WHT on the cumulative amount of undistributed retained earnings.

 

Should the Company’s subsidiaries distribute all their profits generated after December 31, 2007, the aggregate withholding tax amount will be approximately $1,965,800 and $1,679,000 as of March 31, 2011 and December 31, 2010, respectively.

 

 5         Inventories

 

		March 31,				December 31,
		2011				2010
		(Unaudited)
Raw materials		$	9,090,843			$	8,772,550
Work-in-progress			101,618				142,096
Finished goods			809,189				1,807,119
		$	10,001,650			$	10,721,765

 

6         Accrued Expenses and Other Payables

 

		March 31,				December 31,
		2011				2010
		(Unaudited)
Deposits from customers		$	65,891			$	36,039
Accrued payroll			278,139				336,601
Accrued expenses			222,442				348,929
		$	566,472			$	721,569

 

7           Short Term Borrowings

 

		March 31,				December 31,
		2011				2010
		(Unaudited)
Fuqing Rural Credit Cooperative Union		$	-			$	1,464,659
China Merchants Bank			1,588,171				2,251,718
		$	1,588,171			$	3,716,377

 

 

The short term loan from Fuqing Rural Credit Cooperative Union as of December 31, 2010 bore interest at a fixed rate of 5.94% per annum and a maturity date of January 20, 2011, and was secured by the Company’s building and land use right. The loan was fully repaid on January 18, 2011.

 

As of March 31, 2011 and December 31, 2010, the short term loans from China Merchants Bank have three month terms and bear interest at rates ranging from 1.788% to 2.103%. These short term loans are secured by the Company’s restricted cash, which amounted to $1,601,915 and $2,280,398 as of March 31, 2011 and December 31, 2010, respectively.

 

8           PRC Reserves

 

Statutory Surplus Reserve Fund

 

Pursuant to applicable PRC laws and regulations, Guanwei is required to allocate at least 10% of its net income to the statutory surplus reserve fund until such funds reaches 50% of the subsidiary’s registered capital. The statutory surplus reserve fund can be utilized upon the approval by the relevant authorities, to offset accumulated losses or to increase registered capital, provided that such fund be maintained at a minimum of 25% of the registered capital. As Guanwei’s statutory surplus reserve fund had already reached 50% of its registered capital, there were no appropriations to the statutory surplus reserve fund during the three months ended March 31, 2011 and 2010.

 

Statutory Public Welfare Fund

 

Pursuant to PRC laws and regulations as applicable to PRC domestic-owned enterprises, Guanwei, the Company’s subsidiary in the PRC, is required to allocate a certain amount of its net income to the statutory public welfare fund determined by its board of directors. Guanwei ceased to allocate such funds since it became a foreign-owned enterprise in December 2008. The staff welfare fund can only be used to provide staff welfare facilities and other collective benefits to the employees. This fund is non-distributable other than upon liquidation of Guanwei. During the three months ended March 31, 2011 and 2010, the board of directors of Guanwei determined no appropriations to statutory public welfare fund.

 

9          Distribution of Profits

 

The Company is a holding company incorporated in the United States and its cash flow depends on dividends from Guanwei, its PRC operating subsidiary. In order for the Company to distribute any dividends to its shareholders, the Company will rely on dividends distributed by Guanwei. PRC regulations currently permit payment of dividends only out of accumulated profits, if any, as determined in accordance with PRC accounting standards and regulations. Under current PRC laws and regulations, Guanwei is required, where applicable, to allocate a portion of its net profit to PRC statutory reserves before distributing dividends, including at least 10% of its net profit to PRC statutory reserves until the balance of such fund has reached 50% of its registered capital. These reserves can only be used for specific purposes, including making-up cumulative losses of previous years, conversion to our equity capital, and application to business expansion, and are not distributable as dividends. Further, if Guanwei incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. The Company’s restricted net assets as of March 31, 2011 and December 31, 2010 amounted to approximately $2,045,000.

 

Assuming Guanwei distributes dividends to the Company, dividends will be paid on our common stock only at the discretion of the Board and will be contingent upon our financial condition, results of operations, current and anticipated cash needs, restrictions contained in current or future financing instruments, plans for expansion and such other factors as the Board deems relevant. The Company does not have any present plan to pay any cash dividends on our common stock in the foreseeable future. The Company presently intends to retain all earnings, if any, for use in our business operations and accordingly, the Board does not anticipate declaring any cash dividends for the foreseeable future.

 

10         Pension Plan

 

As stipulated by the rules and regulations in the PRC, Guanwei, the Company’s subsidiary in the PRC, contributes to the national retirement plans for its employees in the PRC. The subsidiary contributes approximately 20% of the base salaries of its employees, and has no further obligations for the actual payment of pension or post-retirement benefits beyond the annual contributions. The state-sponsored retirement plans are responsible for the entire pension obligations payable to retired employees.

 

During the three months ended March 31, 2011 and 2010, the aggregate contributions of the Company to the pension plan were approximately $33,000 and $24,000, respectively.

 

11          Risk, Uncertainties and Concentration

 

(i)          Nature of Operations

 

All of the Company’s operations are conducted in the PRC and are subject to various political, economic, and other risks and uncertainties inherent in this country. Among other risks, the Company’s operations are subject to the risks of restrictions on transfer of funds; export duties, quotas and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

 

 

(ii)           Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash.

 

As of March 31, 2011 and December 31, 2010, the Company had cash deposits of $13.9 million and $14.9 million placed with several banks and a financial institution 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 risks on its cash in accounts with banks and financial institutions.

 

(iii)          Concentration of Suppliers, Customers

 

During the three months ended March 31, 2011 and 2010, there were four and three suppliers, respectively, who each accounted for 10% or more of our total purchases, and who in the aggregate account for 66% and 72% of our total purchases, respectively.

 

The Company did not have customer concentration. No one customer was responsible for more than 10% of the Company’s revenue in the three months ended March 31, 2011 and 2010.

 

(iv)           Foreign Exchange Risk

 

The Company operates in the PRC and purchases raw materials from overseas suppliers, and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to purchases in USD and Euros. Foreign exchange risk arises from committed and unmatched future commercial transactions, such as confirmed import purchase orders, recognized assets and liabilities in the PRC operations.

 

The Company does not enter into any hedging transactions in an effort to reduce exposure to foreign exchange risk.

 

12            Related Party Transactions and Balance

 

Chenxin International Limited, a shareholder of the Registrant which is controlled by Mr. Wang Rui, a director of the Company, has an arrangement with the Company pursuant to which Chenxin International Limited has paid accrued expenses of $179,515 and $48,200 on behalf of the Registrant during the three months ended March 31, 2011 and 2010, respectively. These amounts were related to legal and professional fees paid by Chenxin International Limited on behalf of the Registrant and were outstanding as amount due to shareholder on the consolidated balance sheets as of March 31, 2011 and December 31, 2010. This arrangement is not reflected in any written agreement and is typical of PRC business practices in the region where the Company is located

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Except as otherwise indicated by the context, references in this Quarterly Report to “we”, “us”, “our” or the “Company” are to the consolidated businesses of Guanwei Recycling Corp. and its wholly-owned direct and indirect subsidiaries, Hongkong Chenxin International Development Limited, a Hong Kong limited company (“Chenxin”) and Fuqing Guanwei Plastic Industry Co. Ltd., a China limited company (“Guanwei”), except that references to “our common stock” or “our capital stock” or similar terms refer to the common stock, par value $0.001 per share, of Guanwei Recycling Corp., a Nevada corporation (the “Registrant”).  “China” or “PRC” refers to the People’s Republic of China.  References to “RMB” refer to the Chinese Renminbi, the currency of the primary economic environment in which the Company operates.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide information that is supplemental to, and should be read together with, the Company’s consolidated financial statements and the accompanying notes contained in this Quarterly Report. Information in this Item 2 is intended to assist the reader in obtaining an understanding of the consolidated financial statements, the changes in certain key items in those financial statements from quarter to quarter, the primary factors that accounted for those changes, and any known trends or uncertainties that the Company is aware of that may have a material effect on the Company’s future performance, as well as how certain accounting principles affect the consolidated financial statements. This includes discussion of (i) Liquidity, (ii) Capital Resources, (iii) Results of Operations, and (iv) Off-Balance Sheet Arrangements, and any other information that would be necessary to an understanding of the company’s financial condition, changes in financial condition and results of operations.

 

Forward Looking Statements

 

The following discussion of our financial condition and results of operations is based upon and should be read in conjunction with our consolidated financial statements and their related notes included in this Quarterly Report and the Annual Report on Form 10-K/A as filed with the SEC for the year ended December 31, 2010. This report contains forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the SEC from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.

 

Business Overview

 

The Company operates its business through its indirect wholly-owned subsidiary, Guanwei, which is located in Fuqing City, Fujian Province, PRC. Guanwei imports and recycles low density polyethylene (“LDPE”) plastic scrap material into granular plastic for use in the manufacture of various consumer products, and is one of the largest manufacturers of recycled LDPE in China. Guanwei is one of the few plastic recyclers in China to import most of its raw materials (i.e. plastic waste) from foreign suppliers (primarily Germany) where the cost of processing plastic waste is significantly higher than in China. Guanwei’s products are sold to customers in a wide range of industries, including shoe manufacturing, architecture and engineering products, industrial equipment and supplies, and chemical and petrochemical manufacturing.

 

The Company is organized as a single business segment and is committed to sourcing and developing innovative ideas and markets for recycled materials, and concentrates on transforming plastic waste into useful plastic grains. Its mission is to be an environmentally conscious, profitable manufacturer of plastics products of the highest quality. Guanwei procures raw material in the form of unrecycled plastic waste from its suppliers and uses this material to manufacture recycled plastic grains, which are then sold to manufacturers of consumer products in various industries. Guanwei specializes in the production of various recycled plastics products, the most important of which is LDPE. In the last four years, Guanwei has developed four distinct grades of LPDE plastic grains, which are sold to clients to be manufactured into a broad range of end products. Guanwei currently sells to more than 300 customers in over 10 industries, ranging from shoe manufacturing, architecture and engineering, industrial equipment and supplies, and chemical and petrochemical manufacturing. Guanwei’s LDPE products in particular are widely used in the manufacturing of chemical and functional fibers, and is the main raw material for shoe soles, insulation material, fire-proofing and water-proofing material, and foam.

 

Guanwei operates its business in compliance with the highest environmental standards in order to meet the stringent requirements of both German and Chinese authorities. In fact, on June 18, 2009, Umweltagentur Erftstadt, a provider of certification services, issued its audit report on the compliance of Guanwei's operations with German regulations regarding pollution and environmental controls. Based upon its audit, Umweltagentur Erftstadt determined that Guanwei should be issued a certificate (a “Compliance Certificate”) as to such compliance. Holding a Compliance Certificate permits a plastics recycler to purchase plastic waste directly from German suppliers.

 

The Company’s corporate offices are located at Rong Qiao Economic Zone, Fuqing City, Fujian Province, People’s Republic of China, 350301.

 

 

Critical Accounting Policies, Estimates and Assumptions

 

Accounting Principles

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements. These financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP” for interim financial information), which requires us to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues and expenditures, to disclose contingent assets and liabilities on the date of the financial statements, and to disclose the reported amounts of revenues and expenses incurred during the financial reporting period. The most significant estimates and assumptions include revenues recognition, valuation of inventories and provisions for income taxes. We continue to evaluate these estimates and assumptions that we believe to be reasonable under the circumstances. We rely on these evaluations as the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from those estimates. Some of our accounting policies require higher degrees of judgment than others in their application. We believe critical accounting policies as disclosed in this Quarterly Report reflect the more significant judgments and estimates used in preparation of our financial statements. We believe there have been no material changes to our critical accounting policies and estimates.

 

The following critical accounting policies rely upon assumptions and estimates and were used in the preparation of our unaudited consolidated financial statements:

 

(a)	Revenue Recognition

 

Revenue from sales of manufactured LDPE is recognized when persuasive evidence of an arrangement exists, delivery of the goods has occurred, and customer acceptance has been obtained, which means the significant risks and ownership have been transferred to the customer, the price is fixed or determinable and collectability is reasonably assured.

 

From time to time, revenue is deferred for upfront payments for sales of recycled LDPE received and is included in accrued expenses and other payables until the significant risks and ownership of the goods have been transferred to the customers and the price is fixed and collectability is reasonably assured.

 

Sales of scrap materials are recognized on the same basis as sales of LDPE.

 

Interest income is recognized on a time proportion basis, taking into account the principal amounts outstanding and the interest rates applicable.

 

(b)	Income taxes

 

In the process of preparing financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. The Registrant and its subsidiaries, with the exception of Guanwei, generated no taxable income. Current income taxes are provided for in accordance with the laws of the relevant taxing authorities.

 

We account for income taxes using an asset and liability approach for financial accounting and reporting for income tax purposes. Under the asset and liability method, deferred income taxes are recognized for temporary differences, net operating loss carry-forwards and credits by applying enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. We conduct this analysis on a quarterly basis. As of March 31, 2011, the Company has undistributed profits of approximately $19,658,000 that are subject to withholding tax when distributed. Since the Company intends to reinvest these undistributed profits to further expand its businesses and does not intend to declare dividends, the Company has not recorded a withholding tax in relation to these undistributed profits. Should the Company’s distribute all these profits, the aggregate withholding tax will amount to approximately $1,965,800 based on the current tax rate of 10% of the undistributed earnings prepared under PRC GAAP after 2007.

 

The Company has no material uncertain tax positions as of March 31, 2011 or unrecognized tax benefit which would favorably affect the effective income tax rate in future periods. The Company classifies interest and/or penalties related to income tax matters as an income tax expense. As of March 31, 2011, there were no interest or penalties related to uncertain tax positions. The Company does not anticipate any significant increases or decreases to its liability for unrecognized tax benefits within the next 12 months.

 

(c)	Inventories

 

Inventories are stated at the lower of cost, on the first-in, first-out method, or market value. Costs include purchase and related costs incurred in bringing each product to its present location and condition. Market value is calculated based on the estimated normal selling price, less further costs expected to be incurred for disposal. Provisions are made for obsolete, slow moving or defective items, where appropriate.

 

We estimate the net realizable value for finished goods and work-in-progress based primarily upon the latest invoice prices and current market conditions. If the market value of an inventory drops below its carrying value, we record a write-off to cost of sales for the difference between the carrying cost and the market value. During the three months ended March 31, 2011 and 2010, the Company recorded no inventory write down. We carry out an inventory review at each quarter-end.

 

 

(d)	Impairment of Long-lived Assets

 

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that their carrying amounts may not be recoverable, such as change of business plan, obsolescence, and continuous losses suffered. We assess recoverability of assets by comparing the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. In determining estimates of future cash flows, we have to exercise significant judgment in terms of projection of future cash flows and assumptions. If the estimated undiscounted cash flows are less than the carrying amount then we perform the second step of the analysis and compare the fair value to the carrying amount. Fair value is determined using various approaches, including discounted future cash flows, independent appraisals or other relevant methods. If the carrying amount of the asset exceeds its fair value, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds its fair value. The fair value of the asset then becomes the asset’s new carrying value, which we depreciate or amortize over the remaining estimate useful life of the asset where appropriate. We may incur impairment losses in future periods if factors influencing our estimates change. Historically, we have not had an impairment charge on our long-lived assets.

 

Results of Operations for the Three Months Ended March 31, 2011 Compared To the Three Months Ended March 31, 2010

 

The following table sets forth a summary of certain key components of our results of operations for the periods indicated, in USD.

 

		For The Three Months Ended March 31,
		2011				2010				Change in %
Net revenue		$	14,142,612			$	9,494,226				48.96	%
Cost of revenue		$	9,907,512			$	6,173,352				60.49	%
Gross profit		$	4,235,100			$	3,320,874				27.53	%
Operating expenses		$	632,561			$	371,455				70.29	%
Interest (income) expenses and exchange (gain) loss, net		$	76,831			$	(11,908	)			745.20	%
Net income		$	2,715,282			$	2,204,604				23.16	%

 

Net Revenue

 

The following table sets forth a summary of our net revenue by categories for the periods indicated, in USD.

 

		For The Three Months Ended March 31,
		2011				2010				Change in %
Sales of recycled LDPE		$	13,927,369			$	9,319,708				49.44	%
Sales of non- LDPE materials			215,243				174,518				23.34	%
		$	14,142,612			$	9,494,226				48.96	%

 

Our revenues are primarily derived from sales of recycled LDPE and non-LDPE waste material. We manufacture recycled LDPE from plastic waste. The raw materials (i.e. plastic waste) we use in our operations generally contain approximately 8-10% of non-LDPE plastic waste, such as polyethylene terephthalate, polypropylene, or acrylonitrile butadiene styrene. We sort and classify these non-LDPE materials and sell them unprocessed to other recycled plastic manufacturers who use these products.

 

During the second quarter of 2010, the Company completed the construction projects involving our washing and smashing plant. The washing and smashing plant is a key component in the Company's manufacturing process. After being sorted from the non-LDPE material, all LDPE material is smashed and cut into pieces by one of eight smashing machines before being washed and cleaned several times in order to eliminate impurities. After completion of the construction projects, the washing pools were drained and excavated to increase their depth, some components of the pools' vortex pumps were replaced, and the engine size of the pumps was enlarged to enhance their efficiency. The improved washing pools allow the Company to enhance the cleanliness of the recycled LDPE material, which results in a higher quality end-product with improved elasticity. This is particularly desirable for the many customers who mix recycled LDPE with virgin plastics.

  

In late 2010, the construction on the new raw material storage facilities, which is more than 4,000 square meters, was completed and put into use. Raw materials were relocated to the new storage facilities and the old raw material warehouse was converted for expansion of the Company's classification and sorting operations, which will allow for future increases in production capacity. Currently, the Company’s full production capacity is 65,000 tons per year if we operate three shifts.

 

Revenue generated during the three months ended March 31, 2011 from the sale of manufactured recycled LDPE was $13,927,269, as compared to $9,319,708 for the same period of 2010, which represents an increase of 49.44%. This increase was due to an increase in both sales volume and selling price of manufactured recycled LDPE.  The Company sold 12,233 tons of manufactured recycled LDPE in the three months ended March 31, 2011, representing an increase of 37.92% from the 8,870 tons sold in the corresponding period of 2010. The average selling price of recycled LDPE increased 8.37% from approximately $1,051 per ton in the three months ended March 31, 2010 to approximately $1,139 per ton in the same period in 2011. In view of the strong demand for our products, we believe this trend should positively impact our revenues going forward.

 

 

Revenue generated from the sales of sorted non-LDPE material increased from $174,518 in the three months ended March 31, 2010 to $215,243 in the same period of 2011, representing an increase of 23.34%. This was mainly due to an increase in selling price. Guanwei sold 817 tons of sorted non-LDPE material in the three months ended March 31, 2011, representing a decrease of 10.32% from 911 tons sold in the same period of 2010. The average selling price of sorted non-LDPE material increased 37.53% from approximately $192 per ton in the three months ended March 31, 2010 to approximately $264 per ton in the same period in 2011. As with recycled LDPE, the average selling price of sorted non-LDPE materials has increased steadily from the three months ended March 31, 2010 to the same period of 2011.

 

Our revenue may be affected by the import quotas granted by the PRC’s Ministry of Environmental Protection.  Guanwei has been approved for an import quota of 24,000 tons of plastic waste per year.  Additionally, on November 1, 2008, Guanwei entered into an agreement pursuant to which it is permitted to use, at no cost and for a period of 10 years, the 35,000 tons per year import quota granted to Fuqing Huan Li Plastics Company Limited (“Huan Li”). Chen Min, our Chief Executive Officer and Chairman of the Board, is also the Chief Executive Officer, Chairman of the Board and legal representative of Huan Li. There can be no guarantee that Huan Li’s import quota will be available to us after the expiration of the agreement. If we are unable to use Huan Li’s import quota or obtain the grant of import quota from the Ministry of Environment Protection, our revenue and results of operations would be materially adversely affected. Please refer to the section entitled “Risk Factors” in our Annual Report on Form 10-K/A for further information and other factors that may affect our revenue. 

 

The Company is applying to the relevant government agencies for an increase in its import quota for plastic waste. Pre-approval for the application has already been received from the Development Council of the Fuqing Rongqiao Economic Zone Authority and the application has been forwarded for further processing to the General Administration of Quality Supervision, Inspection and Quarantine of the PRC, the General Administration of Customs of the PRC and the Ministry of Environmental Protection of the PRC. The Company is in the final stages of obtaining approval to increase its import quota from 24,000 tons to 150,000 tons.  Upon obtaining this approval, the Company will have an effective aggregate import quota of 185,000 tons (including the 35,000 tons in the name of Huan Li).  The Company expects to obtain the approval for the increased import quota in July 2011.

 

Other than as disclosed elsewhere in this Quarterly Report, we are unaware of any trends or uncertainties which have or which we reasonably expect to have a material impact on net sales or revenues from continued operations.

 

Cost of Revenue

 

		For the Three Months Ended March 31, 2011				% of net revenue				For the Three Months Ended March 31, 2010				% of net revenue				Change in  %
Costs of manufactured recycled LDPE and sorted non-LDPE material		$	9,907,512				70.05	%		$	6,173,352				65.02	%			60.49	%

 

 

Our cost of revenue consists of the costs of plastic waste raw materials for production, labor costs and overhead related to production.

 

During the three months ended March 31, 2011 and 2010, our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material was $9,907,512 and $6,173,352, respectively, representing 70.05% and 65.02% of net revenue from sales of manufactured recycled LDPE and sorted non-LDPE material, respectively. The increase in the percentage of cost to net revenue is primarily due to the fact that the increase in manufacturing cost of recycled LDPE and sorted non–LDPE material is higher than the increase in average selling prices.

 

Because our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material consists primarily of the purchase price of imported plastic waste for production, we have limited influence on such costs. The prices of imported plastic waste are determined solely by suppliers and are dependent upon market conditions. The average manufacturing cost of recycled LDPE and sorted non-LDPE material increased by 20.29% from the first quarter of 2010 to the first quarter of 2011.

 

In order to reduce costs and increase profit margins, Guanwei focuses heavily on developing relationships with new suppliers and increasing the amount of high quality raw material purchased directly from European suppliers of plastic waste, as opposed to purchasing from a wholesaler.  Guanwei will continue to work on developing such relationships, and obtaining more favorable terms and discounts by strengthening our relationship with suppliers and placing more bulk orders.

 

 

Gross Profit

 

Gross profit from sales of manufactured recycled LDPE and sorted non-LDPE material during the three months ended March 31, 2011 increased $914,226 to $4,235,100 from $3,320,874 for the same period of 2010. The increase in gross profit was primarily the result of the increase in selling price and sales volume. During the three months ended March 31, 2011, the sales volume of manufactured recycled LDPE increased 37.92% over the same period of 2010, and the sale volume of sorted non-LDPE material decreased 10.32% over the same period of 2010, and their average selling prices increased 8.37% and 37.53%, respectively, as compared to the same period of 2010.

 

Although the selling prices of both manufactured recycled LDPE and sorted non-LDPE waste increased, the gross profit margin of manufactured recycled LDPE and sorted non-LDPE for the three months ended March 31, 2011 decreased by 5.03% period over period from 34.98% for the three months ended March 31, 2010 to 29.95% for the same period of 2011. This decrease in gross profit margin is primarily attributable to the increase in average per-ton manufacturing cost, which increased by 20.45%, or $127 per ton, from $621 per ton for the three months ended March 31, 2010 to $748 for the same period of 2011. The increases in raw material costs and manufacturing overhead contributed 14.81% and 5.48%, respectively, to the increase in manufacturing costs.

 

The prices of imported plastic waste are determined solely by suppliers and are dependent upon market conditions, and the import-related costs are mainly dependent on the delivery terms agreed with suppliers. In order to reduce costs and to secure availability of raw material supplies, the Company will continue to work on obtaining more favorable terms and a sustainable supply of materials by strengthening our relationship with suppliers and by developing long term supply arrangements.

 

Operating Expenses

 

		For The Three Months Ended March 31,
		2011				2010				Change in %
Operating expenses
- Sales & Marketing		$	88,791			$	48,499				83.08	%
- G&A			543,770				322,956				68.37	%
Total		$	632,561			$	371,455				70.29	%

 

For the three months ended March 31, 2011, operating expenses were $632,561, representing an increase of 70.20% from $371,455 for the three months ended March 31, 2010. The increase was primarily due to a 83.08% increase in sales and marketing expenses and a 68.37% increase in general and administrative expenses.

 

Sales and marketing expenses include transportation costs, advertising expenses and salesmen remunerations. In the three months ended March 31, 2011, sales and marketing expenses increased 83.08% to $88,791, as compared to $48,499 for the same period in 2010. The increase was primarily caused by the increase in wages to new delivery department employees (the number of employees in the transportation department increased from 14 employees for the three months ended March 31, 2010 to 21 employees in the same period of 2011), and the increase in transportation costs due to increased sales growth.

 

General and administrative expenses primarily consist of management remuneration, depreciation and amortization, staff-related costs, and legal and professional fees.  During the three months ended March 31, 2011, general and administrative expenses increased 68.27% to $543,431, as compared to $322,956 in the same period of 2010.  This increase was primarily due to the rising cost of remuneration packages related to recruiting and maintaining executives and skilled employees, the increase staff-related costs, the increase in legal and professional fees incurred in relation to ongoing compliance requirements as a result of our share exchange transaction in November 2009 and our listing on NASDAQ on April 12, 2010.

 

Interest Income and Expense

 

Our interest income is generated by interest earned on deposits with banks and financial institutions and interest expenses are amounts we pay in interest with respect to our borrowings. Net interest income (interest income offset by interest expenses) was recorded at $5,535 in the three months ended March 31 2011, representing an increase of 146.48% from net interest expenses of $11,908 in the same period of 2010. The increase is primarily due to the increase in interest income in the three months ended March 31, 2011 as a result of the higher bank balances during the period.

 

We support our operations with a combination of self-generated profit and limited amount of loans from banks and financial institutions. As of March 31, 2011, we had short term borrowings of $1,588,171 from China Merchants Bank, which were secured by restricted cash at the bank of $1,601,915 and charged at rates ranging from 1.788% to 2.103% annually.

 

Net Income

 

During the three months ended March 31, 2011, our net income increased 23.16% to $2,715,282 from $2,204,604 for the same period of 2010. The increase in net income is primarily due to the $914,226 increase in gross profit which was largely driven by the increase in sales volume and selling prices in the current quarter, but was partially offset by an increase of $261,106 in operating expenses and an increase of $231,181 in income taxes resulting from higher operating income.

 

In order to continue to improve gross margin and net profit margin, we intend to focus on enhancing our manufacturing techniques and improving our labor efficiency. Additionally, we will continue to strengthen our relationships with our major suppliers to obtain more favorable terms, and we will enhance management control over the general and administrative expenses.

 

 

Inflation

 

Inflationary factors, such as increases in the cost of our product and overhead costs, may adversely affect our operating results. Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenues if the selling prices of our products do not increase with these increased costs. 

 

Liquidity and Capital Resources

 

We generally finance our operations through operating profit and occasionally through short-term borrowings from banks and financial institutions. We arranged short-term loans of $1,588,171 during the three months ended March 31, 2011 to satisfy our financing needs.  The interest rates on these loans are ranging from 1.788% to 2.103% annually and it will mature in three months of drawing. As of the date of this Quarterly Report, we have not experienced any difficulties due to a shortage of capital, we have not experienced any difficulty in raising funds through loans from banks and financial institutions, and we have not experienced any liquidity problems in settling our payables in the normal course of business and repaying our loans when they come due.  We are unaware of any trends, demands, commitments events or uncertainties that will result or be likely to result in material changes in our liquidity.

 

We believe that the level of financial resources is a significant factor for our future development and accordingly, we may determine from time to time to raise capital through private debt or equity financing to strengthen the Company’s financial position, to expand our facilities and to provide us with additional flexibility to take advantage of business opportunities.  No assurances can be given that we will be successful in raising such additional capital on terms acceptable to us.

 

 The following table sets forth the summary of our cash flows, in USD, for the three months ended March 31, 2011 and 2010:

 

		Three Months ended March 31,
		2011				2010
Net cash provided by operating activities		$	148,787			$	2,932,039
Net cash provided by (used for) investing activities		$	694,137			$	(2,984	)
Net cash provided by (used for) financing activities		$	(1,975,377	)		$	48,200
Effect of exchange rate changes on cash		$	145,353			$	2,447
Net increase (decrease) in cash and cash equivalents		$	(987,100	)		$	2,979,702
Cash and cash equivalents at beginning of period		$	14,940,236			$	7,302,209
Cash and cash equivalents at end of period		$	13,953,136			$	10,281,911

 

Operating activities

 

During the three months ended March 31, 2011, we generated net cash from operating activities of $148,787, representing a decrease of 94.93% from $2,932,039 for the same period in 2010. This is mainly due to the increase in cash used in operating assets and liabilities during the three months ended March 31, 2010, which increased by $3,325,011 or 632.02% to $2,700,037, as compared to $624,974 net cash provided in the same period of 2010.  This increase is primarily attributable to:

 

-	an increase in cash used in prepayments to suppliers for plastic waste supplies for the coming months, which amounted to $2,124,560 cash used in the three months ended March 31, 2011 as compared to no prepayments to suppliers in the same period in 2010;

 

-	a decrease in cash provided by inventories, which amounted to $824,368 cash provided in the three months ended March 31, 2011 as compared to $2,541,306 cash provided by the decrease in inventories in the same period in 2010; and

 

-	an increase in cash used in accrued expenses and other payables, which amounted to $161,085 in the three months ended March 2011 as compared to $450,071 cash inflow in the same period in 2010;

 

and, which is partly offset by a decrease in cash used in accounts payable, which amounted to $1,232,140 cash used in the three months ended March 31, 2011 compared to $2,015,076 used in the same period in 2010.

 

Investing Activities

 

During the three months ended March 31, 2011, net cash provided by investing activities was $694,137, a $697,121 increase as compared to $2,984 net cash used in investing activities in the same period of 2010. The increase is primarily attributable to the cash refund as a result of the decrease of restricted cash in the three months ended March 31, 2011.

 

 

Financing Activities

 

Cash used in financing activities for the three months ended March 31, 2011 was $1,975,377, as compared to $48,200 net cash provided by financing activities in the same period of 2010. The change is primarily due to $2,154,892 net cash used in repaying bank loans in the three months ended March 31, 2011.

 

Working Capital

 

Our working capital as of March 31, 2011 and December 31, 2010 was $16,395,868 and $13,390,151 respectively, representing an increase of $3,005,717 or 22.45%. The improved working capital is primarily due to a decrease of $2,128,206 in short term borrowings and a decrease of $1,149,251 in accounts payable for the three months ended March 31, 2011 as compared to that as of December 31, 2010. We aim to continue to improve the level of working capital through enhanced levels of productivity and increased revenue and efficiently controlling costs.

 

Dividends

 

We are a holding company with no material operations of our own. We conduct our operations primarily through Guwanwei, our PRC operating subsidiary in China. As a result, our ability to pay dividends and to finance any debt we may incur depends upon dividends paid by Guanwei. If Guanwei or any newly formed subsidiaries incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, Guanwei is permitted to pay dividends to us only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC laws and regulations, Guanwei is required to allocate at least 10% of its after-tax profits each year, if any, to PRC statutory reserves before distributing dividends until the balance of such fund has reached 50% of its registered capital. Guanwei with foreign investment is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund at the discretion of the board. Although the PRC statutory reserves can be used, among other ways, to increase the registered capital and eliminate future losses in excess of retained earnings of Guanwei, the reserve funds are not distributable as cash dividends except in the event of liquidation of Guanwei.

 

Foreign Cash

 

As of March 31, 2011 and December 31, 2010, the Company had cash deposits of $14.0 million and $14.9 million placed with several banks and a financial institution in the People’s Republic of China, where there is currently no rule or regulation in place for obligatory insurance of accounts with banks and financial institutions.

 

If the foreign cash and cash equivalents are expatriated to finance any needs of our operations in the U.S., we may need to accrue and pay U.S. taxes. Currently, we have not provided for U.S. income and foreign withholding taxes on undistributed earnings of our PRC operating subsidiary since we intend to reinvest our earnings to further expand our businesses in mainland China and do not intend to declare dividends to our U.S. holding company in the foreseeable future.

 

Foreign Exchange

 

A majority of our net revenue and expenditures are denominated in the Renminbi. However, the price of raw materials that we buy from foreign suppliers is primarily denominated in the U.S. dollar and European Union euro. As a result, fluctuations in the exchange rate between the European Union euro or the U.S. dollar and the Renminbi will affect the cost of such raw materials to us and will affect our results of operations and financial condition.

 

Approximately 2.69 % of our purchases for the quarter ended March 31, 2011 were denominated in the European Union euro, and the rest of our purchases were denominated in the Renminbi and in the U.S. dollar. Accordingly we believe that any movement in the exchange rate between the European Union euro and the Renminbi will have insignificant impact on our operating income.

 

The exchange rate between the Renminbi and the U.S. dollar is subject to the PRC government’s foreign currency conversion policies, which may change at any time. The exchange rates at March 31, 2011 and 2010 were approximately 6.5564 and 6.6227 Renminbi to 1 U.S. dollar, respectively. Any devaluation of the Renminbi against the U.S. dollar would consequently have an adverse effect on our financial performance and asset values when measured in terms of U.S. dollars. We recognized a foreign currency translation gain of approximately $217,000 and $3,000 for the quarter ended March 31, 2011 and 2010. If the exchange rate were to increase by 10% to US$1.00 = RMB 7.2120 at March 31, 2011, we would record a foreign currency translation loss of approximately $1,749,000 instead of a foreign currency translation gain for the quarter ended March 31, 2011. If the exchange rate were to decrease by 10% to US$1.00 = RMB5.9008 at March 31, 2011, our foreign currency translation gain would potentially increase by approximately $2,062,000 for the quarter ended March 31, 2011.

 

Trend Information

 

Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events that are reasonably likely to have a material adverse effect on our revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.

 

  

Off-Balance Sheet Arrangements.

 

We do not have any outstanding derivative financial instruments, off-balance sheet guarantees or interest rate swap transactions of foreign currency forward contracts.  Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.  We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not required for smaller reporting companies.

 

Item 4.Controls and Procedures.  

 

Material weakness previously disclosed

 

As discussed in Item 9A of our Annual Report on Form 10-K/A for the year ended December 31, 2010, we identified one material weakness in the design and operation of our internal controls. The material weakness is related to the fact that the Company’s accounting department personnel have limited knowledge and experience in U.S. GAAP. The Company is considering hiring additional personnel with sufficient knowledge and experience in U.S. GAAP, and engaging a professional consultancy firm to provide ongoing training course in U.S. GAAP to accounting personnel. As the newly implemented remediation initiatives have not been implemented yet, we will continue to monitor and assess our remediation initiatives to ensure that the aforementioned material weakness is remediated.

 

Disclosure controls and procedures

 

Our Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company, and for evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”). Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer and, as appropriate, to allow for timely decisions regarding required disclosure.

 

Based on the evaluation of these disclosure controls and procedures and due to the unremediated material weakness described above, the Certifying Officers have concluded that these disclosure controls and procedures were not effective at the Evaluation Date.

 

Changes in Internal Control Over Financial Reporting.

 

 During the three months ended March 31, 2011, there were no changes in our internal control over financial reporting that occurred during the period that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

As of the date of this filing, there exist no legal proceedings to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject, that could reasonably be expected to have a material impact on the Registrant’s operations or finances.

  

Item 1A. Risk Factors.

 

Not required for smaller reporting companies.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. (Removed and Reserved).

 

Item 5. Other Information.

 

None

 

Item  6. Exhibits

 

(a)	Financial Statements

 

Our financial statements as set forth in the Index to Financial Statements included as Item 1 hereto are hereby incorporated by reference.

 

(b)

Exhibits

 

EXHIBIT NO.		DESCRIPTION
2.1		Share Exchange Agreement, by and between the Registrant, Chenxin and Fresh Generation, dated November 5, 2009  (1)
2.2		Plan of Merger, adopted by the Registrant’s Board on December 4, 2009 (3)
3.1		Articles of Incorporation of the Registrant, dated December 13, 2006.  (2)
3.2		Bylaws of the Registrant  (2)
3.3		Certificate of Amendment to Articles of Incorporation of the Registrant, dated January 28, 2008 (2)
3.4		Articles of Merger, filed with the Secretary of State of the State of Nevada on December 16, 2009 (3)
3.5		Certificate of Incorporation of Chenxin  (1)
3.6		Memorandum and Articles of Association of Chenxin  (1)
3.7		Articles of Association of Guanwei  (1)
3.8		Enterprise Business License of Guanwei, dated December 27, 2007  (1)
3.9		Enterprise Business License of Guanwei, dated December 23, 2008  (1)
9.1		Declaration of Trust, between Yu Banks Po Fun and Chen Min, dated November 28, 2009 (7)
10.1		Share Exchange Agreement and Stock Purchase between the Registrant and MD Mortgage Corp., dated January 15, 2007  (2)

 

 

10.2		Asset Transfer Agreement, between Fuqing State-Owned Assets Management & Investment Corp. and Guanwei, dated January 11, 2006  (1)
10.3		Land Use Certificate, issued by the Ministry of State-Owned Land Resources of the People’s Republic of China to Guanwei, dated November 8, 2006  (1)

 

10.4		Audit Report and Certificate, issued by Umweltagentur Efftstadt to Guanwei  (7)
10.5		Form of Employment Contract  (1)
10.6		Stock Purchase Agreement, between the Registrant and Marshall Davis, dated November 5, 2009  (1)
10.7		Indemnity Agreement by and between Chenxin, Fresh Generation, and Marshall Davis, dated November 5, 2009  (1)
10.8		Maximum Amount Loan with Pledge Contract, dated January 17, 2008 between Guanwei and Fuqing Rural Credit Cooperative Union (1)
10.9		Sales Confirmation, dated May 3, 2010, between TM Recycling GmbH and Guanwei (4)
10.10		Sales Contract, dated as of July 7, 2010, between Guanwei and Sunshine Handels & Consulting GmbH. (5)
10.11		Guanwei Recycling Corp. 2010 Omnibus Long-Term Incentive Plan (6)
10.12		Agreement with Fuqing Huanli Plastics Co., Ltd., dated November 1, 2008 (7)
10.13		Oral Agreement with Chenxin International Limited., dated 2009 (8)
31.1		Rule 13a-14(a)/15d-14(a) Certification (CEO)  *
31.2		Rule 13a-14(a)/15d-14(a) Certification (CFO)  *
32.1		Section 1350 Certification (CEO) *
32.2		Section 1350 Certification (CFO) *

 

(1)	Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on November 6, 2009.
(2)	Incorporated by reference to the Registrant’s Registration Statement on Form SB-2 (File No. 333-149013), filed on February 1, 2008.

 

(3)	Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on December 22, 2009.
(4)	Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, filed on May 17, 2010.

 

(5)	Incorporated by reference to the Registrant’s Current Report on Form 8-K, filed on July 12, 2010.
(6)	Incorporated by reference to the Registrant’s Definitive Schedule 14A, filed on October 15, 2010.
(7)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on March 31, 2011.
(8)	Incorporated by reference to the Registrant’s Amended Annual Report on Form 10-K/A, filed on December 22, 2011.
*	Filed herewith.

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	GUANWEI RECYCLING CORP.
Date: January 30, 2012	By:	/s/ Chen Min
		Chen Min
		Chief Executive Officer, Chairman of the Board, President
		(Principal Executive Officer)
Date: January 30, 2012	By:	/s/ Yang Feng
		Yang Feng
		Chief Financial Officer, Secretary, Treasurer
		(Principal Financial and Accounting Officer)