10-Q 1 v201408_10q.htm Unassociated Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

Commission File Number: 000-53825

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 November 3, 2010, the registrant had 20,000,006 shares of its common stock issued and outstanding.


 
TABLE OF CONTENTS
 
       
PAGE
   
PART I – FINANCIAL INFORMATION
 
  3
Item 1.
 
Financial Statements.
 
  3
   
Condensed Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009 (Unaudited)
 
  3
   
Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2010 and 2009 (Unaudited)
 
  4
   
Condensed Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended September 30, 2010 and 2009 (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.
 
  12
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk.
 
  22
Item 4.
 
Controls and Procedures.
 
  23
         
   
PART II – OTHER INFORMATION
 
  24
Item 1.
 
Legal Proceedings.
 
  24
Item 1A.
 
Risk Factors.
 
  24
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds.
 
  24
Item 3.
 
Defaults Upon Senior Securities.
 
  24
Item 4.
 
(Removed and Reserved).
 
  24
Item 5.
 
Other Information.
 
  24
Item 6.
 
Exhibits.
 
  25
       
   
   
SIGNATURES
 
27

2

 
PART I – FINANCIAL INFORMATION
 
Item 1.  Financial Statements.

GUANWEI RECYCLING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in U.S. dollars)

   
September 30,
   
December 31,
 
   
2010
   
2009
 
 
(Unaudited)
       
ASSETS
           
             
Current assets
           
Cash and cash equivalents
  $ 12,706,134     $ 7,302,209  
Accounts receivable
    953,006       4,181  
Amount due from director
    1,290       1,290  
Amount due from an unrelated third party
    746,146       -  
Prepayments and other current assets
    281,481       638,425  
Inventories
    3,791,639       6,809,865  
Total current assets
    18,479,696       14,755,970  
                 
Property, plant and equipment, net
    4,940,025       4,611,784  
Land use right, net
    656,837       655,295  
Other assets
    196,983       -  
Total Assets
  $ 24,273,541     $ 20,023,049  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
                 
Current liabilities
               
Short term borrowings
  $ 1,447,524     $ 1,420,579  
Accounts payable
    3,471,599       8,685,324  
Accrued expenses and other payables
    971,248       429,124  
Amount due to shareholder
    814,220       352,489  
Income tax payable
    1,144,722       460,695  
Total current liabilities
    7,849,313       11,348,211  
                 
Equity
               
Shareholders’ equity:
               
Common stock, $0.001 par value, 500,000,000 shares authorized,
               
20,000,006 shares and 12,000,000 shares issued and outstanding, respectively
    20,000       20,000  
Additional paid-in capital
    1,290,028       1,234,133  
PRC statutory reserves
    805,483       805,483  
Retained earnings
    13,331,818       5,908,232  
Accumulated other comprehensive income
    976,899       706,990  
Total shareholders’ equity
    16,424,228       8,674,838  
                 
Total liabilities and shareholders’ equity
  $ 24,273,541     $ 20,023,049  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

3

 
GUANWEI RECYCLING CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
 (Expressed in U.S. dollars)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net revenue
  $ 14,983,816     $ 7,446,817     $ 33,594,779     $ 37,892,598  
                                 
Cost of revenue
    9,989,728       4,330,429       22,452,934       29,046,957  
Gross profit
    4,994,088       3,116,388       11,141,845       8,845,641  
                                 
Operating expenses
                               
Selling and marketing expenses
    69,972       64,266       178,153       400,142  
General and administrative expenses
    208,889       183,494       928,053       567,621  
      278,861       247,760       1,106,206       967,763  
                                 
Income from operations
    4,715,227       2,868,628       10,035,639       7,877,878  
                                 
Interest income
    3,750       5,356       20,578       7,070  
Interest expenses
    (21,824 )     (21,524 )     (63,610 )     (57,307 )
Income before income taxes
    4,697,153       2,852,460       9,992,607       7,827,641  
                                 
Income taxes
    1,149,156       712,677       2,569,021       1,955,596  
                                 
Net income
  $ 3,547,997     $ 2,139,783     $ 7,423,586     $ 5,872,045  
                                 
Comprehensive Income:
                               
                                 
Net income
  $ 3,547,997     $ 2,139,783     $ 7,423,586     $ 5,872,045  
                                 
Other comprehensive income (loss)
                               
- Foreign currency translation adjustments
    202,863       12,905       269,909       21,307  
                                 
Comprehensive income
  $ 3,750,860     $ 2,152,688     $ 7,693,495     $ 5,893,352  
                                 
Earnings per share attributable to shareholders of Guanwei Recycling Corp.
                               
– basic and diluted
  $ 0.19     $ 0.18     $ 0.38     $ 0.49  
                                 
Weighted average number of shares of common stock used in computing basic and diluted earnings per share
    20,000,006       12,000,000       20,000,006       12,000,000  

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

4

 
GUANWEI RECYCLING CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in U.S. dollars)

   
Nine Months Ended
September 30,
 
   
2010
   
2009
 
Cash flows from operating activities
           
Net income
  $ 7,423,586     $ 5,872,045  
                 
Adjustments to reconcile net income to net cash provided by
               
operating activities
               
Depreciation of property, plant and equipment
    303,463       295,453  
Amortization of land use right
    10,739       10,662  
Loss on disposal of property, plant and equipment
    5,125       2,693  
Changes in operating assets and liabilities
               
Accounts receivable
    (938,368 )     67,245  
Amount due from director
    -       14,429  
Prepayments and other assets
    168,145       (76,049 )
Inventories
    3,080,787       7,089,399  
Accounts payable
    (5,255,693 )     (6,532,140 )
Accrued expenses and other payables
    556,868       182,987  
Income tax payable
    668,105       709,453  
Net cash provided by operating activities
    6,022,757       7,636,177  
                 
Cash flows from investing activities
               
Purchase of property, plant and equipment
    (549,823 )     (24,524 )
Net cash used for investing activities
    (549,823 )     (24,524 )
                 
Cash flows from financing activities
               
Advance from shareholder
    461,731       -  
New bank borrowings
    1,420,767       1,417,608  
Repayment of bank borrowings
    (1,420,767 )     -  
Dividends paid to ex-shareholders
    -       (6,412,334 )
Amount due from an unrelated third party     (741,180      -  
Net cash flows used in financing activities
    (279,449     (4,994,726 )
                 
Effect of exchange rate changes on cash and cash equivalents
    210,440       3,368  
                 
Net increase in cash and cash equivalents
    5,403,925       2,620,295  
                 
Cash and cash equivalents at the beginning of period
    7,302,209       1,029,710  
Cash and cash equivalents at the end of period
  $ 12,706,134     $ 3,650,005  
Supplemental disclosure of cash flow information
               
Interest received
  $ 20,533     $ 7,069  
Interest paid
    63,353       57,307  
Income taxes paid
    1,900,915       1,246,143  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
5

 
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 2009 audited consolidated financial statements and the related notes thereto. The financial information as of December 31, 2009 is derived from our 2009 Annual Report on Form 10-K. The interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our 2009 Annual Report on Form 10-K. 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.

6

 
(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.

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 tax benefits. The Company did not have any such uncertain tax positions in the three months and nine months ended September 30, 2010 and 2009, 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.

7

 
3         Revenue

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Sales of recycled LDPE
  $ 14,721,557     $ 7,286,446     $ 32,900,273     $ 29,939,888  
Sales of raw materials
    -       -       -       7,483,107  
Sales of scrap materials
    262,259       160,371       694,506       469,603  
    $ 14,983,816     $ 7,446,817     $ 33,594,779     $ 37,892,598  

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% (2009: 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
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
 The provision of income taxes consists of current tax expense PRC – EIT
  $ 1,149,156     $ 712,677     $ 2,569,021     $ 1,955,596  

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
September 30,
   
Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Income before income taxes
  $ 4,697,153     $ 2,852,460     $ 9,992,607     $ 7,827,641  
                                 
Computed tax at PRC statutory rate of 25%
    1,174,288       713,115       2,498,152       1,956,910  
Non-taxable items
    -       (438 )     -       (1,314 )
Non-deductible items
    16,664       -       152,574       -  
Others
    (41,796 )     -       (81,705 )     -  
    $ 1,149,156     $ 712,677     $ 2,569,021     $ 1,955,596  

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 and nine months ended September 30, 2010 and 2009 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.

8

 
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 $1,412,747 and $630,000 as of September 30, 2010 and December 31, 2009, respectively.

5         Inventories
 
   
September  30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
Raw materials
  $ 2,435,431     $ 5,571,535  
Work-in-progress
    59,654       76,155  
Finished goods
    1,296,554       1,162,175  
    $ 3,791,639     $ 6,809,865  
 
6           Amount Due From An Unrelated Third Party

The balance represents an advance to a company controlled by a friend of Mr. Chen, a director of the Company, which is unsecured, interest-free and repayable on January 6, 2011. The balance was fully repaid on October 28, 2010.
 
7          Short Term Borrowings

The short term loan as of September 30, 2010 bears interest at a fixed rate of 5.94% per annum with the maturity date on January 20, 2011, and is secured by the Company’s building and land use right.

The short term loan as of December 31, 2009 bore interest at a fixed rate of 5.94% per annum and was secured by the Company’s building and land use right. The loan was fully repaid on January 14, 2010.

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 reached 50% of its registered capital, there were no appropriations to the statutory surplus reserve fund during the three months and nine months ended September 30, 2010 and 2009.

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 Guanwei. Guanwei ceased to allocate such fund 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 and nine months ended September 30, 2010 and 2009, the board of directors of Guanwei determined no appropriations to statutory public welfare fund.

9
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 September 30, 2010 and 2009, the aggregate contributions of the Company to the pension plan were approximately $20,000 and $27,000, respectively.

9

 
During the nine months ended September 30, 2010 and 2009, the aggregate contributions of the Company to the pension plan were approximately $67,000 and $83,000, respectively.

10
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 September 30, 2010 and December 31, 2009, the Company had cash deposits of $12.7 million and $7.3 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 and Restriction of Import Quota

For the three months ended September 30, 2010 and 2009, 87% and 94% of raw materials was purchased from three major suppliers, respectively.  For the nine months ended September 30, 2010 and 2009, 76% and 93% of raw materials was purchased from three major suppliers, 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 and nine months ended September 30, 2010 and 2009.

In the PRC, import of regenerative plastic materials is controlled by import quota. The grant of import quota to the Company is subject to review and approval by the Ministry of Environmental Protection of the PRC annually. For the fiscal year ending December 31, 2010 and the fiscal year ended December 31, 2009 the Company obtained an import quota of 24,000 tons of regenerative plastic materials (note 11).

(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.

(v)  
Dependence of Import Quota from a Related Company

During the three months and nine months ended September 30, 2010 and 2009, import of regenerative plastic materials were heavily dependent on the import quota granted by a related company, Fuqing Huan Li Plastics Company Limited or “Huan Li” (note 11). Although the Company has not experienced difficulties obtaining the import quota from Huan Li in the past, the Company cannot guarantee the grant of import quota will be successfully obtained from Huan Li in the future. If the Company fails to obtain the import quota from Huan Li, the Company may have to use domestically supplied plastic wastes for manufacturing. Domestic plastic wastes are typically poorly sorted, so utilizing the domestic raw materials would increase production costs.

10

 
11
Related Party Transactions and Balance

During the three months and nine months ended September, 2010 and 2009, the Company was permitted to use, for no consideration, the import quota of a related party, Huan Li, for the import of regenerative plastic materials. Huan Li is considered to be a related party since Chen Min, the Chief Executive Officer and Chairman of the Board of Directors of the Registrant, is also the Chief Executive Officer, Chairman of Board of Directors and legal representative of Huan Li.

Chenxin International Limited, a shareholder of the Registrant, paid accrued expenses of $62,950 and $461,731 on behalf of the Registrant during the three months and nine months ended September 30, 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 sheet as of September 30, 2010.

11


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 as filed with the SEC for the year ended December 31, 2009. 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 primarily all 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 January 1, 2009, TÜV Rheinland Cert GmbH (“TUV”), 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, TUV 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.

12

 
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”), 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.

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

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 tax benefits. The Company did not have any such uncertain tax positions in the three months and nine months ended September 30, 2010 and 2009, 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.
 
13

 
(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. Provision is made for obsolete, slow moving or defective items, where appropriate.

Results of Operations for the Three Months Ended September 30, 2010 Compared To the Three Months Ended September 30, 2009

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
September 30,
 
   
2010
   
2009
   
Change in %
 
Net revenue
 
$
14,983,816
   
$
7,446,817
     
101.21
Cost of revenue
 
$
9,989,728
   
$
4,330,429
     
130.69
Gross profit
 
$
4,994,088
   
$
3,116,388
     
60.25
Operating expenses
 
$
278,861
   
$
247,760
     
12.55
Interest expenses, net
 
$
18,074
   
$
16,168
     
11.79
Net income
 
$
3,547,997
   
$
2,139,783
     
65.81

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
September 30,
 
   
2010
   
2009
   
Change in %
 
Sales of recycled LDPE
                       
- Manufactured
 
$
12,730,548
   
$
7,286,446
     
 74.72
%
- Purchased
   
1,991,009
     
-
     
 N/A
 
Sales of non- LDPE materials
   
262,259
     
160,371
     
 63.53
   
$
14,983,816
   
$
7,446,817
     
 101.21

Our revenues are primarily derived from sales of recycled LDPE and non-LDPE waste material. We manufacture recycled LDPE from plastic waste and occasionally also purchase recycled LDPE from other manufacturers for resale when market conditions justify doing so. 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 this non-LDPE material and sell it 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 whiteness of the recycled LDPE material, which results in a higher grade end-product. This is particularly desirable for the many customers who mix recycled LDPE with virgin plastics in their production processes and who typically have strict color requirements.
 
14

 
During this quarter, construction on the new raw material warehouse, which is more than 4,000 square meters, was completed and the warehouse was put into use. Raw materials were relocated to the new warehouse 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.
 
Revenue generated during the three months ended September 30, 2010 from the sale of manufactured recycled LDPE was $12,730,548, as compared to $7,286,446 for the same period of 2009, which represents an increase of 74.72%. This increase was due to an increase in both sales volume and selling price of manufactured recycled LDPE.  The Company sold 11,483 tons of manufactured recycled LDPE in the three months ended September 30, 2010, representing an increase of 64.61% from the 6,976 tons sold in the corresponding period of 2009. The average selling price of recycled LDPE increased 6.12% from approximately $1,045 per ton in the three months ended September 30, 2009 to approximately $1,109 per ton in the same period in 2010. The average selling prices of recycled LDPE have been steadily increasing since the first quarter of 2009. Coupled with the strong demand for our products, we believe this trend should positively impact our revenues going forward.
 
During this quarter, we also purchased recycled LDPE from other recycled manufacturers for resale in order to meet the demand from certain of our customers. The product quality of recycled LDPE purchased from other recycled plastic manufacturers was moderate and accordingly the gross profit margin of such purchased recycled LDPE was low. The Company sold 1,863 tons of purchased recycled LDPE, generating net revenue of $1,991,009 during the three months ended September 30, 2010. There were no sales of purchased recycled LDPE during the third quarter of 2009.

Revenue generated from the sales of sorted non-LDPE material increased from $160,371 in the three months ended September 30, 2009 to $262,259 in the same period of 2010, representing an increase of 63.53%. This was due to an increase in both sales volume and selling price. Guanwei sold 1,201 tons of sorted non-LDPE material in the three months ended September 30, 2010, representing an increase of 29.84% from ­925 tons sold in the same period of 2009. A higher volume of non-LDPE material was sold during the three months ended September 30, 2010 because the raw materials acquired during the quarter contained a greater proportion of high-grade LDPE plastics, enabling Guanwei to produce more higher-priced Grade A recycled LDPE, but also contained a higher level of non-LDPE plastics. The average selling price of sorted non-LDPE material increased 26.01% from approximately $173 per ton in the three months ended September 30, 2009 to approximately $218 per ton in the same period in 2010. As with recycled LDPE, the average selling price of sorted non-LDPE materials has increased steadily since the first quarter of 2009.

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, and for a number of years, Guanwei has also been permitted to use, at no cost, 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 in the future. 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 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. It is anticipated that the full approval process will take approximately one year. If successful, by the end of March 2011, the Company expects to add 150,000 tons to its current import quota of 24,000 tons.

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.

15

 
Cost of Revenue

   
For the Three
Months Ended
September 30,
2010
   
% of net
revenue
   
For the Three
Months Ended
September 30,
2009
   
% of net
revenue
   
Change in 
%
 
Costs of manufactured recycled LDPE and sorted non-LDPE material 
 
$
8,084,199
     
62.22
%  
$
4,330,429
     
58.15
%    
86.68
%
Costs of purchased recycled LDPE
   
1,905,529
     
95.71
%    
-
     
N/A
     
N/A
 
   
$
9,989,728
     
66.67
%  
$
4,330,429
     
58.15
%    
130.69
%

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

During the three months ended September 30, 2010 and 2009, our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material was $8,084,199 and $4,330,429, respectively, representing 62.22% and 58.15% 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 16.29% from the third quarter of 2009 to the third quarter of 2010.

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. In fact, in May, 2010 and July, 2010, Guanwei entered into supply arrangements with two German suppliers for the purchase of at least 35,000 tons of plastic waste.
 
Gross Profit

The overall gross profit for the three months ended September 30, 2010 increased 60.25% to $4,994,088 as compared to $3,116,388 for the same period in 2009, representing an increase of $1,877,700, or 25.21% of net revenue. During the three months ended September 30, 2010, our overall gross profit margin decreased to 33.33% from 41.85% in the same period of 2009. The 8.52% period-over-period decrease in overall gross profit margin is primarily attributable to (i) a 4.07% period-to-period decrease in gross profit margin of sales of manufactured LDPE and non-LDPE material, and (ii) the increase in sales of purchased recycled LDPE.

Gross profit from sales of manufactured recycled LDPE and sorted non-LDPE material during the three months ended September 30, 2010 increased $1,792,220 to $4,908,608, or 24.07% of net revenue, from $3,116,388 for the same period of 2009. The increase in gross profit was primarily the result of the increase in selling price and sales volume. During the three months ended September 30, 2010, the sales volume of manufactured recycled LDPE and sorted non-LDPE material increased 64.61% and 29.84% respectively, and their average selling prices increased 6.12% and 26.01%, respectively. The average per-ton cost of production during the three months ended September 30, 2010 increased 16.29% compared to the same period of 2009.

Gross profit from sales of purchased recycled LDPE during the three months ended September 30, 2010 was $85,480 or 4.29% of net revenue. There were no sales of purchased recycled LDPE in the same period of 2009.

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.

16

 
Operating Expenses

   
For The Three Months Ended
September 30,
 
   
2010
   
2009
   
Change in %
 
Operating expenses
                 
- Sales & Marketing
 
$
69,972
   
$
64,266
     
8.88
%
- G&A
   
208,889
     
183,494
     
13.84
%
Total
 
$
278,861
   
$
247,760
     
12.55
%

For the three months ended September 30, 2010, operating expenses were $278,861, representing an increase of 12.55% from $247,760 for the three months ended September 30, 2009. The increase was primarily due to a 8.88% increase in sales and marketing expenses and a 13.84% increase in general and administrative expenses.

Sales and marketing expenses include transportation and courier costs and sales remunerations. In the three months ended September 30, 2010, sales and marketing expenses increased 8.88% to $69,972, as compared to $64,266 for the same period in 2009. The increase was primarily caused by the increase of wages and packing material costs, which was partially offset by the decrease of transportation costs.

General and administrative expenses primarily consist of management remuneration, depreciation and amortization, employee welfare costs, and legal and professional fees.  During the three months ended September 30, 2010, general and administrative expenses increased 13.84% to $208,889, as compared to $183,494 in the same period of 2009.  This increase was primarily due to 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.

Net Income

During the three months ended September 30, 2010, our net income increased 65.81% to $3,547,997 from $2,139,783 for the same period of 2009. The increase in net income is primarily due to the $1,877,700 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 a $31,101 increase in operating expenses and a $436,479 increase 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.

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 expenses (interest expenses offset by interest income) were recorded at $18,074 in the three months ended September 30 2010, representing an increase of 11.79% from $16,168 in the same period of 2009. The increase is primarily due to the decrease in interest income in the three months ended September 30, 2010.

We support our operations with a combination of self-generated profit and limited amount of loans from banks and financial institutions. For the three months ended September 30, 2010, we had one short-term loan of $1,447,524 from the Rural Credit Cooperatives Union, which will mature on January 20, 2011. The interest rate on this loan is 5.94%.

17

 
Results of Operations for the Nine Months Ended September 30, 2010 Compared To the Nine Months Ended September 30, 2009

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

   
For The Nine Months Ended
September 30,
 
   
2010
   
2009
   
Change in %
 
Net revenue
 
$
33,594,779
   
$
37,892,598
     
(11.34
)% 
Cost of revenue
 
$
22,452,934
   
$
29,046,957
     
(22.70
)% 
Gross profit
 
$
11,141,845
   
$
8,845,641
     
25.96
Operating expenses
 
$
1,106,206
   
$
967,763
     
14.31
Interest (income) and expenses, net
 
$
43,032
   
$
50,237
     
(14.34
)% 
Net income
 
$
7,423,586
   
$
5,872,045
     
26.42

Net Revenue

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

   
For The Nine Months Ended
September 30,
 
   
2010
   
2009
   
Change in %
 
Sales of recycled LDPE
                       
-   manufactured
 
$
30,909,263
   
$
22,426,985
     
37.82
-   purchased
   
1,991,009
     
7,512,903
     
(73.50
)% 
Re-sales of raw materials
   
-
     
7,483,107
     
(100.00
)% 
Sales of non- LDPE materials
   
694,507
     
469,603
     
47.89
   
$
33,594,779
   
$
37,892,598
     
(11.34
)% 

For the nine months ended September 30, 2010, net revenue was $33,594,779, representing a 11.34% decrease from net revenue of $37,892,598 for the nine months ended September 30, 2009. This decrease was primarily caused by the fact that the Company did not sell any raw materials during the nine months ended September 30, 2010 and the sales of purchased recycled LDPE decreased by 73.50% or $5,521,894. In response to the negative economic conditions and in light of the business risk created by the Company’s high inventory levels, in early 2009 the Company resold a large amount of raw materials to other recycled plastic manufacturers, generating net revenue of $7,483,107. Because the Company’s inventory levels had decreased to desirable levels by late 2009, there were no direct sales of raw materials during the first nine months of 2010.
 
Revenue generated during the nine months ended September 30, 2010 from the sale of manufactured recycled LDPE was $30,909,263, as compared to $22,426,985 for the same period of 2009, which represents an increase of 37.82%. This increase was due to an increase in both sales volume and selling price of recycled LDPE. In the 2009 fiscal year, the Company sold a total of 39,076 tons of recycled LDPE, comprised of 31,149 tons of recycled LDPE manufactured by the Company from plastic waste and 7,927 tons of recycled LDPE purchased from other manufacturers for resale during the first quarter of 2009. Accordingly, production volume in 2010 should be compared to the portion of 2009 tonnage attributable to manufactured recycled LDPE only.  The Company sold 28,853 tons of manufactured recycled LDPE in the nine months ended September 30, 2010, an increase of 28.15% from 22,515 tons sold in the corresponding period of 2009. The average selling price of manufactured recycled LDPE increased 7.53% from approximately $996 per ton in the nine months ended September 30, 2009 to approximately $1,071 per ton in the same period in 2010. The average selling prices of recycled LDPE have increased steadily since the first quarter of 2009. This increased selling price is expected to have a positive impact on future revenues.
 
Revenue generated from sales of purchased recycled LDPE decreased from $7,512,903 in the nine months ended September 30, 2009 to $1,991,009 in the same period of 2010, which represents a decrease of 73.50%. The Company ceased its resale of purchased recycled LDPE after the first quarter of 2009 because the product quality supplied by other recycled plastic manufacturers was not sufficient to satisfy the Company’s high standards and the gross profit margin of such purchased recycled LDPE was low. During the third quarter of 2010, the Company generated revenue of $1,991,009 of resale of purchased recycled LDPE to meet the demand of certain of its existing customers.

Revenue generated from the sales of sorted non-LDPE material increased from $469,603 in the nine months ended September 30, 2009 to $694,507 in the same period of 2010, representing an increase of 47.89%. This was due to an increase in both sales volume and selling price. Guanwei sold 3,334 tons of sorted non-LDPE material in the nine months ended September 30, 2010, representing an increase of 24.50% from 2,678 tons sold in the same period of 2009. The average selling price of sorted non-LDPE material increased 18.86% from approximately $175 per ton in the nine months ended September 30, 2009 to approximately $208 per ton in the same period in 2010. As with recycled LDPE, the average selling price of sorted non-LDPE materials has steadily increased since the first quarter of 2009 due to strong market demand, which should have a positive impact on revenues.

18

 
Cost of Revenue

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

   
For the Nine
Months Ended
September 30,
2010
   
% of net
revenue
   
For the Nine
Months Ended
September 30,
2009
   
% of net
revenue
   
Change in 
%
 
Costs of manufactured recycled LDPE and sorted non-LDPE material 
 
$
20,547,405
     
65.02
%
 
$
15,546,119
     
67.90
%
   
32.17
%
Costs of imported plastic waste for direct sale
   
-
     
0.00
%
   
6,262,944
     
83.69
%
   
(100.00
)%
Costs of purchased recycled LDPE
   
1,905,529
     
95.71
%
   
7,237,894
     
96.34
%
   
(73.67
)%
   
$
22,452,934
     
66.83
%
 
$
29,046,957
     
76.66
%
   
(22.70
)%

During the nine months ended September 30, 2010 and 2009, our cost of revenue was $22,452,934 and $29,046,957, respectively, representing 66.83% and 76.66% of net revenue, respectively. As previously discussed, during the nine months ended September 30, 2009, we sold raw materials to other recycled plastics manufacturers to lower our inventory levels and purchased recycled LDPE from other recycled plastics manufacturers for resale. Because of our continued efforts to maintain lower inventory levels and based on our review of the low profitability of reselling purchased recycled LDPE, we did not directly sell raw materials and reduced our resale of purchased recycled LDPE during the nine months ended September 30, 2010. Accordingly, although the cost of revenue as a percentage of net revenue for the nine months ended September 30, 2010 decreased significantly from the same period in 2009, this trend is not expected to continue.

During the nine months ended September 30, 2010 and 2009, our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material was $20,547,405 and $15,546,119, respectively, representing 65.02% and 67.90% of net revenue from sales of manufactured recycled LDPE and sorted non-LDPE material, respectively. The decrease in the percentage of cost to net revenue is primarily due to an increase in selling prices during in the nine months ended September 30, 2010. The average selling prices of recycled LDPE and sorted non-LDPE material in the nine months ended September 30, 2010 increased 7.53% and 18.86%, respectively, as compared to average prices during the same period of 2009.

A factor partly offsetting the decrease in cost of revenue versus net revenue between the first nine months of 2010 and the first nine months of 2009 was the average manufacturing cost of recycled LDPE and sorted non–LDPE material increased 3.57% to $639 for the nine months ended September 30, 2010 from $617 in the same period in 2009.

Gross Profit

The overall gross profit for the nine months ended September 30, 2010 increased 25.96% to $11,141,845 as compared to $8,845,641 for the same period in 2009. During the nine months ended September 30, 2010, our overall gross profit margin increased to 33.17% from 23.34% in the same period of 2009. The 9.83% period-over-period increase in overall gross margin was primarily attributable to the rebound in selling price of recycled LDPE. This increase was partially offset by an approximate 3.22% period-over-period decrease in overall gross margin resulting from our cessation of sales of raw materials in 2010.

19

 
Gross profit from sales of manufactured recycled LDPE and sorted non-LDPE material during the nine months ended September 30, 2010 increased by $3,705,896 to $11,056,365, or 9.78% of net revenue, from $7,350,469 for the same period of 2009. The increase in gross profit was primarily the result of the increase in selling price and sales volume. During the nine months ended September 30, 2010, the sales volume of manufactured recycled LDPE and sorted non-LDPE material increased 28.15% and 24.50% respectively, and their average selling prices increased 7.53% and 18.86%, respectively. The average per-ton manufacturing cost of recycled LDPE and sorted non-LDPE material during the nine months ended September 30, 2010 increased 3.57% compared to the same period of 2009.

Gross profit from direct sales of raw material during the nine months ended September 30, 2009 was $1,220,163 or 16.31% of net revenue from sales of raw material. The Company considered the prevailing overall negative economic conditions and the high inventory risk it had in early 2009 and directly sold raw materials to other recycled plastics manufacturers in the nine months ended September 30, 2009. Through the Company’s continued efforts on inventory risk management, inventory levels had been substantially reduced by the first nine months of 2010. There were no direct sales of raw materials in 2010.

Gross profit from sales of purchased recycled LDPE during the nine months ended September 30, 2010 was $85,480 or 4.29% of net revenue from sales of purchased recycled LDPE.  The Company considered the low quality of purchased recycled LDPE and the low profit margin contributed by such resales and decided to discontinue reselling purchased recycled LDPE in 2009. However, during the third quarter of 2010, the Company generated revenue of $1,991,009 from sale of purchased recycled LDPE only for meeting the demand of certain of its existing customers.

As previously discussed, the Company completed the construction projects involving our washing and smashing plant and new raw material warehouse in the period. The Company’s sales volume of manufactured recycled LDPE and sorted non-LDPE material increased to 12,684 ton for the three months ended September 30, 2010 from 7,901 tons for the same period in 2009; and increased to 32,187 tons for the nine months ended September 30, 2010 from 25,193 tons for the same period in 2009. Furthermore, in order to reduce costs and secure availability of material supply, the Company will continue to work on obtaining more favorable terms and a sustainable supply of raw materials by strengthening our relationship with suppliers and developing long term supply arrangements.

Operating Expenses

  
 
For The Nine Months Ended
September 30,
 
  
 
2010
   
2009
   
Change in
%
 
Operating expenses
                 
- Sales & Marketing
 
$
178,153
   
$
400,142
     
(55.48
)%
- G&A
 
$
928,053
   
$
567,621
     
63.50
%
Total
 
$
1,106,206
   
$
967,763
     
14.31
%

For the nine months ended September 30, 2010, operating expenses were $1,106,206, representing an increase of 14.31% from $967,763 for the nine months ended September 30, 2009. The increase was primarily due to a combined effect of a 55.48% decrease in sales and marketing expenses and a 63.50% increase in general and administrative expenses.

Sales and marketing expenses include transportation and courier costs and sales remunerations. In the nine months ended September 30, 2010, sales and marketing expenses decreased 55.48% to $178,153, as compared to $400,142 for the same period in 2009. The decrease was primarily caused by a significant decrease in transportation costs from the first nine months of 2010. Our customers may choose whether to pick up their products with their own vehicles, in which case the Company deducts transportation costs from the total sales price, or whether to have the Company arrange delivery, in which case the transportation costs are categorized as operating expenses. Total transportation costs for the nine months ended September 30, 2010 and 2009 were approximately $7,538 and $270,264, respectively, due to more customers choosing to transport products themselves in the first nine months of 2010 in order to obtain a lower sales price. The Company believes this trend will continue in the foreseeable future.

General and administrative expenses primarily consist of management remuneration, depreciation and amortization, employee welfare costs, and legal and professional fees.  During the nine months ended September 30, 2010, general and administrative expenses increased 63.50% to $928,053, as compared to $567,621 in the same period of 2009.  This increase was primarily due to the increase in legal and professional fees incurred in relation to compliance services after our share exchange transaction in November 2009 and our listing on NASDAQ on April 12, 2010.

20

 
Net Income

During the nine months ended September 30, 2010, our net income increased 26.42% to $7,423,586, as compared to $5,872,045 for the same period of 2009. The improvement is primarily due to overall increased sales of recycled LDPE, which was partially offset by the Company choosing to discontinue sales of raw materials and reduced resale of purchased recycled LDPE and by the increase in cost of materials in the period of 2010.

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 general and administrative expenses.

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 expenses (interest expenses offset by interest income) were recorded at $43,032 in the nine months ended September 30 2010, representing a decrease of 14.34% from $50,237 in the same period of 2009. The decrease is primarily due to the increase in interest income as a result of the higher average cash level in the nine months ended September 30, 2010.

We support our operations with a combination of self-generated profit and limited amount of loans from banks and financial institutions. For the nine months ended September 30, 2010, we had one short-term loan of $1,447,524 from the Rural Credit Cooperatives Union, which will mature on January 20, 2011. The interest rate on this loan is 5.94%.

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 one short-term loan of $1,447,524 during the nine months ended September 30, 2010 to satisfy our financing needs.  The interest rate on this loan is 5.94% annually and it will mature on January 20, 2011. 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 nine months ended September 30, 2010 and 2009:

   
Nine Months ended
September 30,
 
   
2010
   
2009
 
Net cash provided by operating activities
 
$
6,022,757
   
$
7,636,177
 
Net cash used for investing activities
 
$
 (549,823)
   
$
 (24,524)
 
Net cash provided by (used for) financing activities
 
$
279,449
   
$
(4,994,726)
 
Effect of exchange rate changes on cash
 
$
210,440
   
$
3,368
 
Net increase in cash and cash equivalents
 
$
5,403,925
   
$
2,620,295
 
Cash and cash equivalents at beginning of period
 
$
7,302,209
   
$
1,029,710
 
Cash and cash equivalents at end of period
 
$
12,706,134
   
$
3,650,005
 

21

 
Operating activities

During the nine months ended September 30, 2010, we generated net cash from operating activities of $6,022,757, representing a decrease of 21.13% from $7,636,177 for the same period in 2009. This decrease is primarily due to the fact that we did not make any direct sales of raw materials and reduced sales of purchased recycled LDPE in the first nine months of 2010, which was partially offset by the improvement in our operating results in the period.

The cash provided by change in net working capital during the nine months ended September 30, 2010 decreased 269.13% to $2,461,336 net cash used, as compared to $1,455,324 net cash generated for the same period of 2009, primarily due to the drop in cash provided by a decrease in inventories from $7,089,399 in the first nine months of 2009 to $3,080,787 in the first nine months of 2010. As discussed above, Guanwei sold raw materials directly from inventory in early 2009 to reduce its high inventory levels. Additionally, the decrease was partially offset by higher amounts of cash used to reduce accounts payable in early 2009. During the nine months ended September 30, 2009, Guanwei used $6,532,140 to reduce accounts payable, compared to $5,255,693 used in the same period of 2010.

 Investing Activities

During the nine months ended September 30, 2010, net cash used in investing activities was $549,823, a $525,299 increase as compared to $24,524 in the same period of 2009. The increase is primarily attributable to the higher capital expenditure in the first nine months ended September 30, 2010.

Financing Activities

Cash used for financing activities for the nine months ended September 30, 2010 was $279,449, as compared to $4,994,726 net cash used in financing activities in the same period of 2009. The increase is primarily due to the fact that no dividends were paid in the nine months ended September 30, 2010, which was partially offset by the advance from shareholder in the period.

Working Capital

Our working capital as of September 30, 2010 and December 31, 2009 was $10,630,383 and $3,407,759, respectively, representing an increase of $7,222,624 or 211.95%. The improved working capital is due to the $5,403,925 increase in cash and cash equivalents, a decrease of $3,018,226 in inventories, and a decrease of $5,213,725 in accounts payable for the nine months ended September 30, 2010 as compared to that as of December 31, 2009. We aim to continue to improve the level of working capital through enhanced levels of productivity and increased revenue and efficiently controlling costs.

Following our continued efforts on inventory risk management, we managed to reduce our inventory levels as of September 30, 2010 to $3,791,639 as compared to $6,809,865 as of December 31, 2009. As a result, our accounts payable as of September 30, 2010 had decreased to $3,471,599 as compared to $8,685,324 as of December 31, 2009.

Accounts receivable as of September 30, 2010 increased to $953,006, as compared to $4,181 as of December 31, 2009. It is the Company’s practice to receive payments before making delivery. This increase is mainly due to the shortfall of payments of a few customers.

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.
 
22


Item 4.  Controls and Procedures.   

Disclosure controls and procedures

The Registrant’s Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for the Company. Based upon such officers’ evaluation of these controls and procedures as of the end of the period covered by this quarterly report, and subject to the limitations noted hereinafter, the Certifying Officers have concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed by the Registrant in this quarterly report is accumulated and communicated to management, including to the principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting.
 
During the three months ended September 30, 2010, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

23

 
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.

There have been no material changes to the procedures by which security holders may recommend nominees to the Company’s board of directors.
 
24

 
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)

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 TÜV Rheinland Cert. GmbH to Guanwei  (1)
     
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)
 
25

 
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)
     
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.
   
*
Filed herewith.
 
26

 
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: November 15, 2010
By: 
/s/ Chen Min
 
   
Chen Min
 
   
Chief Executive Officer, Chairman of the Board, President
 
   
(Principal Executive Officer)
 
 
Date: November 15, 2010
By: 
/s/ Yang Feng
 
   
Yang Feng
 
   
Chief Financial Officer, Secretary, Treasurer
 
   
(Principal Financial and Accounting Officer)
 
 
27