10-K 1 v305799_10k.htm FORM 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended December 31, 2011

 

¨ 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 85369 6197

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered under Section 12(g) of the Act:

 

Common stock, par value $0.001 per share

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨ Yes         x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.

¨ Yes         x  No

 

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.

x  Yes       ¨  No

 

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 Regulations 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).

x  Yes         ¨  No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    £

 

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 ¨ Accelerated filer  ¨
     
Non-accelerated filer £ (do not check if a smaller reporting company) Smaller reporting company x

 

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

¨  Yes         x  No

 

The aggregate market value of the registrant’s voting common stock held by non-affiliates as of June 30, 2011 based upon the closing price reported for such date on the NASDAQ Capital Market was $10,480,008.

 

As of March 29, 2012, there were 20,000,006 shares of the registrant’s common stock outstanding.

 

 

 

TABLE OF CONTENTS

 

PART I
     
Item 1. Business.   4
Item 1A. Risk Factors.   11
Item 2. Properties.   24
Item 3. Legal Proceedings.   24
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.   25
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   26
Item 8. Financial Statements and Supplementary Data.   34
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.   34
Item 9A. Controls and Procedures.   35
PART III
     
Item 10. Directors, Executive Officers, and Corporate Governance.   37
Item 11. Executive Compensation.   40
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.   42
Item 13. Certain Relationships and Related Transactions, and Director Independence.   43
Item 14. Principal Accounting Fees and Services.   45
PART IV
     
Item 15. Exhibits, Financial Statement Schedules.   46
  Signatures.   48

 

2
 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS AND INFORMATION

 

This Annual Report on Form 10-K, the other reports, statements, and information that we have previously filed or that we may subsequently file with the Securities and Exchange Commission and public announcements that we have previously made or may subsequently make include, may include, incorporate by reference or may incorporate by reference certain statements that may be deemed to be forward-looking statements. The forward-looking statements included or incorporated by reference in this Annual Report and those reports, statements, information and announcements address activities, events or developments that Guanwei Recycling Corp. expects or anticipates will or may occur in the future. Any statements in this document about expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “may,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “will continue,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would” and “outlook,” and similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties, which could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this document. All forward-looking statements concerning economic conditions, rates of growth, rates of income or values as may be included in this document are based on information available to us on the dates noted, and we assume no obligation to update any such forward-looking statements.

 

The risk factors referred to in this Annual Report could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us, and you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made and we do not undertake any obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

Management cautions that these statements are qualified by their terms and/or important factors, many of which are outside of our control, involve a number of risks, uncertainties and other factors that could cause actual results and events to differ materially from the statements made. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. 

 

 

3
 

 

PART I

 

Item 1. Business

 

Except as otherwise indicated by the context, references in this Annual 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”, “our shares of Common Stock” or “our capital stock” or similar terms shall 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.

 

History and Organizational Structure

 

The Registrant was incorporated as MD Holdings Corp. on December 13, 2006 in Nevada, and was engaged in the business of providing traditional mortgage brokerage services through its wholly-owned subsidiary, MD Mortgage Corp., a Maryland Corporation (“MD Mortgage”). It was unsuccessful in developing a profitable business and ceased its operations effective December 31, 2008. On November 5, 2009, the Registrant consummated a share exchange transaction (the “Share Exchange”), pursuant to which the Registrant became the 100% parent of Chenxin and assumed the operations of Chenxin and its subsidiary, Guanwei. Prior to the Share Exchange, Chenxin was 100% owned by Fresh Generation Overseas Limited, a British Virgin Islands corporation (“Fresh Generation”). Pursuant to the Share Exchange, Fresh Generation became the holder of approximately 60% of our Common Stock. Additional information regarding the Share Exchange can be found in the Registrant’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (“SEC”) on November 6, 2009.

 

Guanwei was founded as a limited company in China in April 2005 with registered capital of RMB 5 million (approximately $0.62 million) and then increasing to RMB 10 million (approximately $1.46 million) in January 2006. Since inception, it has been principally engaged in the manufacture and distribution of low density polyethylene (“LDPE”) and other recycled plastics products, using imported raw material in the form of plastic waste. On November 22, 2008, Guanwei was acquired by Chenxin, a holding company incorporated in Hong Kong, and became a wholly-owned foreign investment enterprise (“WOFIE”) under PRC law. Guanwei is the sole operating subsidiary of Chenxin.

 

On December 16, 2009, the Registrant filed Articles of Merger with the Nevada Secretary of State, pursuant to which the Registrant’s newly formed and wholly-owned subsidiary, Guanwei Recycling Corp., a Nevada corporation, merged with and into the Registrant. Upon the effectiveness of the merger, the name of the Registrant was changed from MD Holdings Corp. to Guanwei Recycling Corp. in accordance with Nevada Revised Statutes §92A.180.  The Registrant effected the name change to better reflect the nature of its new business operations following the Share Exchange. The merger, along with the Plan of Merger and Articles of Merger, are disclosed in the Registrant’s Current Report on Form 8-K filed with the SEC on December 22, 2009.  Effective December 28, 2009, the Registrant received a new trading symbol, GURC.OB, and a new CUSIP number for its Common Stock. On March 30, 2010, the Registrant’s Common Stock began trading on the NASDAQ Capital Market under the symbol “GPRC.”

 

The corporate structure of the Registrant is as follows:

 

 

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

 

4
 

 

General Business Overview

 

The following is a description of the business operations of the Registrant, including its wholly-owned and sole operating subsidiary, Guanwei.

 

Based in Fuqing City, in the Fujian Province of China, Guanwei is one of the few plastic recyclers in China to import primarily 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. Guanwei operates its business in compliance with the highest environmental standards in order to meet the stringent requirements of both German and Chinese authorities. 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 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 LDPE plastic grains, which are sold to clients to be manufactured into a broad range of end products. Guanwei currently sells to over 300 customers in more than 10 industries. 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.

 

Market and Industry

 

According to the Plastic Industry Statistics & Research Report (2008), since 2004, with national production capacity exceeding 20 million tons, China has become the second largest plastics products manufacturing country in the world after the United States. China’s plastics industry has benefited greatly from its low production and labor costs, as the manufacturing and recycling of plastics products have been outsourced from higher-cost countries to China and other low-cost countries. The lower production costs have allowed the plastics industry worldwide to experience strong growth in sales over the last several years. In the US and Europe, plastics industries out-perform overall manufacturing industries and are a strong force in international markets. According to the Plastic Industry Statistics & Research Report (2008), the worldwide average annual growth rate of the plastics industry from 1999 to 2005 was 5.02%, while the average GDP growth rate for the same period was 2.43%.  In China, the growth rate of domestic plastic consumption from 2001 to 2005 exceeded 19% annually, while the Chinese GDP growth rate averaged 9.5% for the same period.

 

The Plastic Industry Statistics & Research Report (2008) further states that, in particular, China’s plastics manufacturing industry experienced an annual growth rate of greater than 18% from 1990 to 2001, and in 2008 the growth rate was 11%. According to the website of the Chinese national plastic industry (www.51plas.com), in 2007, 14,592 Chinese plastic manufacturers realized a total profit of RMB 802 billion (approximately $110 billion), and 16,300 manufacturers realized a total profit of RMB 964 billion (approximately $141 billion) in 2008. China consumed more than 50 million tons of plastics in 2008, 24% of which was produced by recycled plastics. 

 

There are seven types of plastic polymers, each with specific properties, which are used worldwide for various packaging applications. Each group of plastic polymers can be identified by its Plastic Identification Code (PIC), which is usually a number or a letter abbreviation. The PIC appears inside a three-chasing arrow recycling symbol. The symbol is used to indicate whether the plastic can be recycled into new products. The PIC identification system was introduced by the Society of the Plastics Industry, Inc., which provides a uniform system for the identification of different polymer types and helps recycling companies to separate different plastics for reprocessing. Manufacturers of plastic products are required to use PIC labels in some countries/regions and can voluntarily mark their products with the PIC where there are no requirements. Consumers can identify the plastic types based on the codes usually found at the base or at the side of the plastic products, including food/chemical packaging and containers.

 

The seven types of plastics polymers used in packaging are listed in the chart below, along with a brief description of the properties and common applications of each. A more detailed description of each polymer type follows the chart.

 

5
 

 

Plastic

Identification Code

 

Type of plastic

polymer

  Properties   Common Packaging Applications
             
  Polyethylene Terephthalate (PET, PETE)   Clarity, strength, toughness, barrier to gas and moisture.   Soft drink, water and salad dressing bottles; peanut butter and jam jars
             
  High Density Polyethylene (HDPE)   Stiffness, strength, toughness, resistance to moisture, permeability to gas.   Milk, juice and water bottles; trash and retail bags.
             
  Polyvinyl Chloride (PVC)   Versatility, clarity, ease of blending, strength, toughness.   Juice bottles; cling films; PVC piping
             
  Low Density Polyethylene (LDPE)   Ease of processing, strength, toughness, flexibility, ease of sealing, barrier to moisture.   Frozen food bags; squeezable bottles, e.g. honey, mustard; cling films; flexible container lids.
             
  Polypropylene (PP)   Strength, toughness, resistance to heat, chemicals, grease and oil, versatile, barrier to moisture.   Reusable microwaveable ware; kitchenware; yogurt containers; margarine tubs; microwaveable disposable take-away containers; disposable cups and plates.
             
  Polystyrene (PS)   Versatility, clarity, easily formed   Egg cartons; packing peanuts; disposable cups, plates, trays and cutlery; disposable take-away containers;

 

6
 

 

  Other (often polycarbonate or ABS)   Dependent on polymers or combination of polymers   Beverage bottles; baby milk bottles; electronic casing.

 

Polyethylene terephthalate (PET)

 

PET is among the most-recycled polymers worldwide. Its barrier properties make it the material of choice for mineral water and carbonated drink bottles, and it can be recycled a number of times. The material is also used to make food trays, and is commonly found as a laminate in films. A high proportion of mixed bottles, typically PET combined with HDPE, are exported from China.

 

High-density polyethylene (HDPE)

 

HDPE is most commonly used for milk containers and bleach and other cleaning product containers, and is also found in films and some thin-gauge carriers and fresh produce bags. As with PET, price is dictated by quality and markets offer a wide range of prices according to the level of purity of the polymer. HDPE is a versatile polymer that can be manipulated to control transparency.

 

Polyvinyl chloride (PVC)

 

PVC is a popular polymer for a range of applications, including food packaging, where it is found in some thermoformed trays. It is also used in the manufacture of plastic wrapping film. PVC can contaminate some PET products, however, which impedes the collection and thus the recycling of PET. Through the introduction of reclamation facilities that focus solely on plastics and recycling plastic products, more color and polymer separation is possible, which would help develop the rates of recycling of all polymers, including PVC.

 

Low-density polyethylene (LDPE)

 

LDPE is used in food trays, but a more common application is in wrapping films and bags because it is very flexible. It is easily cleaned, has strong impact resistance and is unreactive at room temperature in the absence of a strong oxidizing agent. LDPE can withstand moderately high temperatures, does not absorb moisture and is chemical and corrosion resistant. LDPE’s tensile force is lower than that of HDPE and its resilience is higher. The collection of LDPE is particularly challenging given the relatively low-value of its end products, which can make the recycling of LDPE less cost-efficient, so its recycling rates are lower than other polymers.

 

 Polypropylene (PP)

 

PP comprises a large proportion of mixed plastics products that are recycled for collection, other than plastic bottles. PP is widely used in packaging in food containers and trays, screw tops and as a film. It can be easily recovered and recycled into a wide range of applications.  Its recycling rates are typically quite high.

 

 Polystyrene (PS)

 

PS is found in yogurt containers and food trays, and in its expanded form, in protective packaging and hot drinks cups. Research has shown that PS comprises a small part of the waste stream, but as with other rigid packaging plastics, it is likely to form part of future mixed plastics recycling trials, which focus on new ways to recycle and to enhance the collection of recyclable products.

 

Recycling Awareness

 

There is a growing awareness in the global economy of issues surrounding waste management, and recycling processes and recycled products are being developed to address these issues. The advantages of recycling waste material, much of which consists of metal, paper, glass and plastic packaging, are being increasingly recognized by the global community.  The environmental benefits of recycled plastics products are well known, and in addition, our management’s experience indicates that recycled plastics can be 40% cheaper than virgin polymers. Recycling rates in China vary among the different polymer types, but the overall trend for each polymer type is increasing.

 

7
 

 

Currently, most of the recycled plastics products manufactured in China use imported raw material in the form of plastic waste.  We believe that there is great opportunity to further develop the plastics recycling market in China by relying on domestic suppliers of raw material.  According to the Plastics Industry Statistics & Research Report (2008), in 2007, only approximately 14 million tons, or 24% of the total amount of plastic being consumed in China, was recycled.  The total value of the unrecycled plastic waste in China is currently estimated to exceed RMB 28 billion (approximately $4.1 billion) per year. Guanwei has no current plans to use domestic suppliers as the waste classification and sorting techniques used abroad result in higher quality raw material.

 

Guanwei’s Recycling Process

 

Guanwei’s plastics recycling process begins with procuring raw material, which it sources primarily from Europe and China.  All the raw material Guanwei purchases is previously unrecycled (i.e. virgin) plastic waste, making it a strong plastic that is most suitable in the manufacturing of Guanwei’s plastic grains.

 

The raw material is shipped directly from the supplier to Guanwei’s 64,000 square meter raw material storage and manufacturing plant in special containers which are approved by the Chinese government. Once in Guanwei’s facility, the plastic waste is then classified and sorted by hand based on polymer type and color.  Guanwei has over 200 workshop employees who help sort raw material and who are paid per piece in order to increase productivity.  Guanwei focuses on recycling of LDPE products, so the non-LDPE materials are sorted out first, which accounts for approximately 9% of the raw material. This non-LDPE material is packed and sold to manufacturers who specialize in plastic production using the respective materials.

 

After the LDPE material is sorted by color, it is sent to the smashing workshop, where it is smashed and cut into pieces by one of Guanwei’s twelve smashing machines. The material is then washed and cleaned at least two to three times in order to eliminate impurities. This enhances the whiteness of the material, which results in a higher grade end-product. Once washed, the material is packed into square containers and sent to the plastic grain manufacturing area of the workshop, where there are 32 plastic grain machines. The material is fed into the grain machines, which break down the material and form it into small grains of recycled plastic, which are then sold to consumers in various manufacturing industries.

 

The waste water from the washing process is treated in Guanwei’s sewage treatment area, which comprises over 4,800 square meters. The water is discharged into rectangular sediment pools through a fence, which eliminates any large pieces of waste. Most of the inorganic suspended particles and insoluble organic material are separated out in the sedimentation pool.  Each sediment pool has a sewage pumps for condensing the inorganic material into sludge, which is then dried and used as compost.  The waste water is then run through a reaction pool, where the coagulant agents PAC and PAM are added. The water is then processed again in the sediment pool before it is sand filtered and run back to the workshop for re-use.

 

Products

 

Guanwei currently manufactures a number of recycled plastics products made from LDPE, and is one of the largest manufacturers of recycled LDPE in China. LDPE is easily processed and is defined by a density range of 0.910-0.940 g/cm 3.  It is moisture resistant and can withstand continuous temperatures of 175°F, and can withstand temperatures of nearly 200° F for short periods of time. LDPE is chemical and corrosion resistant.  It has high resilience and low density, making it an extremely light weight and flexible plastic. It also meets food handling guidelines and is easily cleaned, and therefore it is ideal for food wraps and films.

 

LDPE can be produced in both translucent and opaque varieties, and the principal difference between virgin LDPE and recycled LDPE is that recycled LDPE cannot be completely transparent. Some manufacturers have strict color requirements, so they will not purchase recycled LDPE. However, recycled LDPE is attractive to manufacturers without color requirements, as the selling price of virgin plastic in China can be as high as RMB 12,000 (approximately $1,890) per ton, 61% higher than recycled LDPE.

 

Guanwei produces four types of LDPE plastic grains. The grade is determined by the color of the plastic grain, with higher grade denoting that the grain is whiter. Higher grade plastic grains are more expensive.

 

Grade A This is a white LDPE grain and accounts for approximately 20% of Guanwei’s sales.
     
Grade B This is a white LDPE grain and accounts for approximately 20% of Guanwei’s sales.
     
Grade C This is a white LDPE grain and accounts for approximately 30% of Guanwei’s sales.
     
Grade D This is a black LDPE grain and accounts for approximately 30% of Guanwei’s sales.

 

8
 

 

Currently, the demand for Guanwei’s products exceeds the amount Guanwei is able to produce. Therefore, Guanwei does not currently have any plans to develop new products.  However, Guanwei intends to enhance its manufacturing process and increase its training of more skilled workers, and thereby increase productivity.

 

All of Guanwei’s products are manufactured in its 64,000 square meter storage and manufacturing facility located in Fuqing City. Guanwei has a sewage treatment area for processing the waste water used in the manufacturing process, which exceeds 4,800 square meters.

 

Raw Materials and Major Suppliers

 

Because an important step in the recycling of plastic waste is sorting and classifying the raw material, Guanwei obtains most of its raw material from foreign suppliers (primarily in Europe), where it can obtain raw material which consists solely of unrecycled plastic, and where the sorting and classification techniques are superior to those used in China. Guanwei’s primary suppliers during 2011 and 2010 are primarily located in Europe. Guanwei is one of the few plastics importer-manufacturers in China with a Compliance Certificate from Unweltagentur Erftstadt for meeting certain pollution and environmental standards, which allows Guanwei access to German suppliers. Guanwei has entered into certain long-term supply contracts with its suppliers in Europe to purchase raw materials at prices to be determined monthly.

 

The following table sets out our major suppliers of raw materials for recycled LDPE and non-LDPE materials for the fiscal years ended December 31, 2011 and 2010.

 

   As a Percentage of Our
Purchases of Raw Materials
 
   Fiscal Year Ended
December 31,
 
   2011   2010 
Recycling Dienstleistung Beratung GmbH   22.6%   21.6%
Sunshine Handels & Consulting GmbH   21.7%   19.7%
TM Recycling GmbH   13.3%   18.8%
KVS Plastics GmbH   ** %    11.7%
Keryi Holdings Co. Ltd.   19.5%   ** % 
Fu Rong He Trading (Fuzhou) Company Limited   ** %    14.4%

 

** Less than 10%

 

The raw materials are transported to the port of Jiangyin in China by ocean freighters. As the importer of the raw materials, Guanwei covers the cost of shipping from the supplier to Guanwei’s facility. Each imported container weighs about 20 tons, and per container shipping costs between $500-$600, including insurance. The raw materials are then transported from the port in Jiangyin to Guanwei’s facility by truck at a cost of approximately $116 per container. Each container is subject to an import tax imposed by the Chinese government of 6.5% of the value of the goods and is also subject to a value-added tax of 17%.

 

Importers of plastic waste into the PRC are subject to an import quota regulated by the Ministry of Environmental Protection. Guanwei has been approved for an import quota of 64,000 tons of plastic waste for 2011, and for a period of 10 years, Guanwei has been permitted use the 35,000 tons per year import quota granted to Fuqing Huan Li Plastics Company Limited (“Huan Li”) at no cost pursuant to the agreement dated November 1, 2008. Huan Li has not had any significant operations since 2005, but its import quota remains valid. Chen Min, the Registrant’s Chief Executive Officer, is the Chief Executive Officer, Chairman of the Board of Directors, and legal representative, with the power to represent and act on behalf, of Huan Li.

 

The Company’s import quota will be evaluated by the Chinese government on an annual basis. In July 2011, we received government approval to increase our quota from 24,000 tons to 64,000 tons for 2011. In January 2012, we received government approval to further increase our quota to 80,000 tons for the year of 2012.

 

Product Sales, Distribution and Marketing

 

Guanwei has a sales team of twenty-two people, led by Mr. Gao Juguang, an industry veteran with over 15 years of plastic sales experience.  The Company is focused on diversifying its client base and increasing its sales volume to the infrastructure-building industry.  Mr. Gao and the sales team work toward these goals by developing new client relationships through site visits, personal telephone calls and presentations and presenting product samples to the potential customers. Guanwei also relies on word-of-mouth to strengthen its reputation and secure sales from local customers. Due to its product quality and reputation, Guanwei has experienced a great deal of success securing regular customers after their first usage of the products.

 

9
 

 

Guanwei sells its products directly to end-users of the plastic grains, many of whom contact Guanwei directly for pricing quotes. Guanwei does not advertise or promote its products heavily, as the demand for the products currently exceeds supply.  The Fujian Province, where Guanwei’s manufacturing facilities are located, is one of the largest shoe-manufacturing bases in China. Guanwei sells between 30% to 50% of its product to these shoe manufacturers, many of whom are located within 200 km of Guanwei’s facilities. 

 

Certain of Guanwei’s customers make deposits for the products they purchase and the purchase price includes all shipping and transportation costs. Guanwei typically sells its products on a purchase order basis, but occasionally enters into one-year supply agreements with customers. The purpose of such agreements is to set the prices at which products are to be sold to such customers during the following year. The customer base is spread across different geographic markets and industries, such as shoe manufacturing, construction material manufacturing (such as fire- and water-proofing material and plastic pipes), and outdoor furniture manufacturing. No single customer represents greater than five percent of our sales volume or net revenue. Guanwei does not foresee any difficulties in sales as it is well-insulated against fluctuating demands in any one industry and demand currently exceeds supply.

 

Competition

 

The market for recycling plastics in China is highly fragmented with companies of various sizes. We are one of the largest recycled LDPE producers in China with an annual production capacity of 80,000 tons of recycled LDPE. Our capacity increased in 2011 from 65,000 tons to 80,000 tons due to significant improvements in our factory equipment and facility during the year. We face competition from both virgin LDPE manufacturers and other plastics recyclers in China. Many of our competitors lack the scale or the sophistication to accommodate the environmental standards and sewage treatment issues involved with processing larger volume. The Company’s two primary competitors are Fujian Huaxia Plastics Corp. and Youfeng Plastics.  Both are private companies and each company produces approximately 20,000 tons of recycled plastic products a year.

 

Competition in the recycled plastics market is based primarily on product quality and pricing. The quality of our products is superior to our competitors because we are able to benefit from the direct procurement of high-quality plastic waste from European suppliers. We compete with virgin LDPE manufacturers for pricing as recycled plastic sells for much less than virgin plastic.

 

Guanwei has several competitive advantages over its competitors, including the following:

 

Experienced management team

 

Guanwei’s senior management team has extensive business and industry experience, which has been instrumental in the development of Guanwei’s strong supplier and customer relationships and manufacturing processes. For additional information regarding Guanwei’s management team, please see the description of directors and management later in this Annual Report.

 

Well-established manufacturing capabilities

 

In China, the vast majority of plastic recycling companies are small-scale craftsmen shops lacking the capacity to properly process raw materials, deal with sewage treatment issues and meet required environmental standards.  In comparison, Guanwei has a large, 64,000 square meter storage and manufacturing facility in which it produces various plastics products, and also has a sewage treatment facility that is able to filter and process the waste products resulting from the manufacturing. Guanwei’s production capacity is currently 80,000 tons annually.  In 2011, Guanwei sold 52,666 tons of manufactured recycled LDPE. Additionally, production costs for both of these companies are higher than Guanwei’s because they purchase their raw materials from wholesalers in Hong Kong, whereas Guanwei imports almost all of its raw materials directly from suppliers. Furthermore, Guanwei is the only LDPE importer in China with recycled plastic manufacturing capabilities, and one of the few plastics manufacturers in China with a Compliance Certificate from Umweltagentur Urftstadt for meeting certain pollution and environmental standards, as discussed further below.

 

Steady supply of imported raw material and no middlemen

 

Guanwei is a forerunner among imported plastic waste processors and plastic material manufacturers. It has a steady supply of raw material from suppliers located throughout Europe and elsewhere outside China. The imported raw material is of a high quality, allowing Guanwei to benefit from efficiencies in the manufacturing of its products. Additionally, Guanwei imports the raw material directly, which cuts costs that would otherwise be paid to an importer, and Guanwei is located near a major port, so freight costs are kept low.

 

10
 

 

Broad range of end-users

 

The Company sells its plastics products to over 300 customers in over 10 industries. Its products are used to produce a wide variety of end products, including shoe soles, outdoor furniture, and construction equipment. The Company intends to focus on expanding further into the construction equipment industry because the Chinese government’s stimulus plan has substantially increased infrastructure construction in China.  The Company is well insulated from fluctuating market demands in any one industry due to its diverse client base.

 

Compliance Certificate From Umweltagentur Erftstadt Regarding German Environmental Standards

 

Umweltagentur Erftstadt provides certificates of approval for certain plastics manufacturers which meet strict German environmental standards.  Manufacturers are subject to inspections relating to air, water and noise discharge. German suppliers are only allowed to sell plastics waste to manufacturers who have this certificate. Guanwei is one of only several Chinese importers and manufacturers with this Compliance Certificate.

 

Employees

 

Guanwei currently has approximately 523 full-time employees working in the workshops and 40 employees in sales, marketing and administrative positions. Guanwei has no part-time employees. We have a labor contract with each employee as required by law in the PRC. The labor contract mainly includes working content, contract period, working time, payment and other terms.

 

Costs and Effects of Compliance with Environmental Laws and Other Regulations

 

Currently, Guanwei’s manufacturing processes are in compliance with all Chinese laws and environmental standards.  Guanwei is not aware of any other governmental approvals required for any of its products or manufacturing processes.

 

Research and Development

 

Guanwei does not currently have plans to develop new products because the demand for LDPE plastic grains already exceeds our manufacturing capabilities.  As the performance was deemed unsatisfactory, Guanwei has abandoned the test-use of Ethylene- Propylene-Diene Monomer (EPDM), which is a cleaning solvent which was being tested in 2009 for use as an additive in the smashing and cleaning process to improve the cleanliness of the end product. There are nominal costs associated with our research and development activities.

 

Item 1A. Risk Factors.

 

The financial condition, business, operations, and prospects of the Company involve a high degree of risk. You should carefully consider the risks and uncertainties described below, which constitute the material risks relating to the Company, and the other information in this Annual Report. If any of the following risks are realized, the Company’s business, operating results and financial condition could be harmed and the value of the Company’s stock could suffer. This means that investors and shareholders of the Company could lose all or a part of their investment.

 

RISKS RELATING TO THE PEOPLE’S REPUBLIC OF CHINA

 

The operations of Guanwei, our sole operating subsidiary, are wholly conducted in China. Accordingly, its businesses, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC and by the general state of the PRC economy.

 

Certain Political and Economic Considerations Relating to China Could Adversely Affect Our Company.

 

The PRC is transitioning from a planned economy to a market economy. While the PRC government has pursued economic reforms since its adoption of the open-door policy in 1978, a large portion of the PRC economy is still operating under five-year plans and annual state plans. Through these plans and other economic measures, such as control on foreign exchange, taxation and restrictions on foreign participation in the domestic market of various industries, the PRC government exerts considerable direct and indirect influence on the economy. Many of the economic reforms carried out by the PRC government are unprecedented or experimental, and are expected to be refined and improved.

 

11
 

 

Other political, economic and social factors can also lead to further readjustment of such reforms. This refining and readjustment process may not necessarily have a positive effect on our operations or future business development. Our operating results may be adversely affected by changes in the PRC’s economic and social conditions as well as by changes in the policies of the PRC government, such as changes in laws and regulations (or the official interpretation thereof), measures which may be introduced to control inflation, changes in the interest rate or method of taxation, and the imposition of additional restrictions on currency conversion.

 

PRC regulations relating to the establishment of offshore special purpose companies by PRC residents and the acquisitions of PRC companies by foreign entities may create regulatory uncertainties and subject our PRC resident beneficial owners to personal liability, limit our ability to inject capital into our PRC subsidiaries, limit our ability to increase registered capital or distribute profits to us, or may otherwise adversely affect us.

 

On August 8, 2006, six PRC regulatory agencies namely, the PRC Ministry of Commerce (“MOFCOM”), the State Assets Supervision and Administration Commission (“SASAC”), the State Administration for Taxation, the State Administration for Industry and Commerce, the China Securities Regulatory Commission (“CSRC”), and the State Administration of Foreign Exchange (“SAFE”), jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (the “New M&A Rules”), which became effective on September 8, 2006, as amended on June 22, 2009. The New M&A Rules significantly revised China’s regulatory framework governing onshore-to-offshore restructurings and foreign acquisitions of domestic enterprises. The New M&A Rules signify greater PRC government attention to cross-border merger, acquisition and other investment activities, by confirming MOFCOM as a key regulator for issues related to mergers and acquisitions in China and requiring MOFCOM approval of a broad range of merger, acquisition and investment transactions. Further, the New M&A Rules establish reporting requirements for acquisition of control by foreigners of companies in key industries, and reinforce the ability of the Chinese government to monitor and prohibit foreign control transactions in key industries.

 

Among other things, the New M&A Rules provide that where a domestic company, enterprise or natural person intends to take over its domestic affiliated company in the name of an offshore company which it lawfully established or controls, it shall be subject to the examination and approval of the MOFCOM. Additionally, the New M&A Rules include new provisions that purport to require that an offshore special purpose vehicle, or SPV, formed for listing purposes and controlled directly or indirectly by PRC companies or individuals must obtain the approval of the CSRC prior to the listing and trading of such SPV’s securities on an overseas stock exchange. However, the application of this PRC regulation remains unclear regarding the scope and applicability of the CSRC approval requirement.

 

We are committed to complying with and to ensuring that our beneficial owners who are subject to the New M&A Rules will comply with the relevant rules. However, we cannot assure you that all of our current or future beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with these rules. Any failure by any of our current or future beneficial owners to comply with relevant requirements under this regulation could subject us to fines or sanctions imposed by the PRC government. If the MOFCOM, CSRC or another PRC regulatory agency subsequently determines that the approval of this regulatory agency is required for any of our relevant transactions or acquisitions, we may face sanctions by such regulatory agency. If this happens, these regulatory agencies may impose fines and penalties on our operations in the PRC, limit our operating privileges in the PRC, delay or restrict the repatriation of the proceeds from this offering into the PRC, restrict or prohibit payment or remittance of dividends to us or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our shares.

 

In October 2005, SAFE issued a public notice that took effect on November 1, 2005, known as Circular No. 75, concerning the use of offshore holding companies in mergers and acquisitions in China. The public notice Circular No.75 provides that if a PRC resident intends to establish or control an SPV, or an offshore company controlled by PRC residents intends to acquire a PRC company, such acquisition will be subject to registration with the relevant foreign exchange authorities.

 

Circular No. 75 also suggests that registration with the relevant foreign exchange authorities is required for any sale or transfer by PRC residents of shares in an offshore holding company that owns an onshore company. PRC residents must each submit a registration form to the local SAFE branch with respect to their ownership interests in the offshore company, and must also file an amendment to such registration if the offshore company experiences material events, such as changes in the share capital, share transfer, mergers and acquisitions, spin-off transactions or use of assets in China to guarantee offshore obligations.

 

We are committed to complying with and to ensuring that our beneficial owners who are subject to Circular No. 75 will comply with the relevant rules. However, we cannot assure you that all of our current or future beneficial owners who are PRC residents will comply with our request to make or obtain any applicable registrations or comply with these rules. Any failure by those PRC beneficial owners to file any such registration form or amendments could subject us to sanctions imposed by the PRC government or/and limit the ability of a PRC company to remit its profit, dividends and other proceeds to offshore entities.

 

12
 

 

The Chinese Government Exerts Substantial Influence Over The Manner In Which We Must Conduct Our Business Activities Which Could Adversely Affect Our Company.

 

China only recently has permitted provincial and local economic autonomy and private economic activities. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and State ownership. Our ability to operate in China may be harmed by changes in its laws and regulations, including those relating to taxation, import and export tariffs, environmental regulations, land use rights, property and other matters. We believe that our operations in China are in material compliance with all applicable legal and regulatory requirements. However, the central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations.

 

Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in China.

 

The Chinese Legal System Has Inherent Uncertainties That Could Limit The Legal Protections Available To You.

 

Guanwei’s contractual arrangements in China are governed by the laws of the PRC. China’s legal system is based upon written statutes. Prior court decisions may be cited for reference but are not binding on subsequent cases and have limited value as precedents. Since 1979, the Chinese legislative bodies have promulgated laws and regulations dealing with economic matters such as foreign investment, corporate organization and governance, commerce, taxation and trade. However, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their non-binding nature, the interpretation and enforcement of these laws and regulations involve uncertainties, and therefore you may not have legal protections for certain matters in China.

 

Because Our Assets Are Located In China, Any Dividends Of Proceeds From Liquidation Is Subject To The Approval Of The Relevant Chinese Government Agencies.

 

Our assets are located inside China. Under the laws governing foreign invested enterprises in China, dividend distribution and liquidation are allowed but subject to special procedures under the relevant laws and rules. Any dividend payments will be subject to the decision of our Board of Directors and subject to foreign exchange rules governing such repatriation. Any liquidation is subject to both the relevant government agency’s approval and supervision as well as the foreign exchange control. This may generate additional risk for our investors in case of dividend payments and liquidation.

 

Future Inflation In China May Inhibit Our Activity To Conduct Business In China.

 

In recent years, the Chinese economy has experienced periods of rapid expansion and high rates of inflation. During the past twenty years, the rate of inflation in China has been as high as 24.1% in 1994 and as low as -1.4% in 1999 (according to National Bureau of Statistics of China). These factors have led to the adoption by Chinese government, from time to time, of various corrective measures designed to restrict the availability of credit or regulate growth and contain inflation. While inflation has been more moderate since 1995, high inflation may in the future cause the Chinese government to impose controls on credit and/or prices, or to take other action, which could inhibit economic activity in China and thereby harm our business operations.

 

Capital Outflow Policies In China May Hamper Our Ability To Pay Dividends To Shareholders In The United States.

 

The PRC has adopted currency and capital transfer regulations. These regulations require that we comply with complex regulations for the movement of capital. Although Chinese governmental policies were introduced in 1996 to allow the convertibility of RMB into foreign currency for current account items, conversion of RMB into foreign exchange for capital items, such as foreign direct investment, loans or securities, requires the approval of the State Administration of Foreign Exchange. We may be unable to obtain all of the required conversion approvals for our operations, and Chinese regulatory authorities may impose greater restrictions on the convertibility of the RMB in the future. Because all of our current revenues and most of our future revenues will be in RMB, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit our ability to fund our business activities outside China or to pay dividends to our shareholders.

 

13
 

 

Currency Conversion And Exchange Rate Volatility Could Adversely Affect Our Financial Condition.

 

The PRC government imposes control over the conversion of RMB into foreign currencies. Under the current unified floating exchange rate system, the People’s Bank of China (PBOC) publishes an exchange rate, which we refer to as the PBOC exchange rate, based on the previous day’s dealings in the inter-bank foreign exchange market. Financial institutions authorized to deal in foreign currency may enter into foreign exchange transactions at exchange rates within an authorized range above or below the PBOC exchange rate according to market conditions.

 

Pursuant to the Foreign Exchange Control Regulations of the PRC issued by the State Council which came into effect on April 1, 1996, and the Regulations on the Administration of Foreign Exchange Settlement, Sale and Payment of the PRC which came into effect on July 1, 1996, regarding foreign exchange control, conversion of RMB into foreign exchange by Foreign Investment Enterprises (“FIEs”), for use on current account items, including the distribution of dividends and profits to foreign investors, is permissible. FIEs are permitted to convert their after-tax dividends and profits to foreign exchange and remit such foreign exchange to their foreign exchange bank accounts in the PRC. Conversion of RMB into foreign currencies for capital account items, including direct investment, loans, and security investment, is still under certain restrictions. On January 14, 1997, the State Council amended the Foreign Exchange Control Regulations and added, among other things, an important provision, which provides that the PRC government shall not impose restrictions on recurring international payments and transfers under current account items.

 

Enterprises in the PRC (including FIEs) which require foreign exchange for transactions relating to current account items, may, without approval of the State Administration of Foreign Exchange, or SAFE, effect payment from their foreign exchange account or convert and pay at the designated foreign exchange banks by providing valid receipts and proofs.

 

Convertibility of foreign exchange in respect of capital account items, such as direct investment and capital contribution, is still subject to certain restrictions, and prior approval from the SAFE or its relevant branches must be sought.

 

Since 1994, the exchange rate for RMB against the United States dollars has remained relatively stable, most of the time in the region of approximately RMB 8.28 to US$1.00. However, in 2005, the Chinese government announced that would begin pegging the exchange rate of the Chinese RMB against a number of currencies, rather than just the U.S. Dollar. As our operations are primarily in China, any significant revaluation of the RMB may materially and adversely affect our cash flows, revenues and financial condition. For example, to the extent that we need to convert United States dollars into RMB for our operations, appreciation of this currency against the United States dollar could have a material adverse effect on our business, financial condition and results of operations. Conversely, if we decide to convert RMB into United States dollars for other business purposes and the United States dollar appreciates against this currency, the United States dollar equivalent of the RMB we convert would be reduced.

 

You May Experience Difficulties In Effecting Service Of Legal Process, Enforcing Foreign Judgments Or Bringing Original Actions In China Based On United States Or Other Foreign Laws Against Us.

 

We conduct our operations in China and most of our assets are located in China. In addition, some of our directors and executive officers reside within China. As a result, it may not be possible to effect service of process within the United States or elsewhere outside China upon such directors or executive officers, including with respect to matters arising under U.S. federal securities laws or applicable state securities laws. Moreover, our Chinese counsel has advised us that China does not have treaties with the U.S. and many other countries that provide for the reciprocal recognition and enforcement of judgment of courts. As a result, recognition and enforcement in China of judgments of a court of the U.S. or any other jurisdiction in relation to any matter may be difficult or impossible.

 

Our Significant Amount Of Deposits In Certain Banks and Financial Institutions In China May Be At Risk If These Banks Go Bankrupt During Our Deposit Period.

 

At December 31, 2011, we had approximately US$12.4 million on deposit with banks and financial institutions in China, which constitutes approximately all of our total cash. The terms of these deposits are, in general, up to three (3) months. Historically, deposits in Chinese banks and financial institutions are secure due to the state policy on protecting depositors’ interests. However, China promulgated a new Bankruptcy Law in August 2006, which became effective on June 1, 2007, which contains a separate article expressly stating that the State Council may promulgate implementation measures for the bankruptcy of Chinese banks and financial institutions based on the Bankruptcy Law. Under the new Bankruptcy Law, a Chinese bank or financial institution may go bankrupt. In addition, since China’s concession to WTO, foreign banks have been gradually permitted to operate in China and have been severe competitors against Chinese banks and financial institutions in many aspects, especially since the opening of RMB  business to foreign banks in late 2006. Therefore, the risk of bankruptcy of those banks and financial institutions in which we have deposits has increased. In the event of bankruptcy of one of the banks or financial institutions which holds our deposits, we are unlikely to recover our deposits back in full since we are unlikely to be classified as a secured creditor based on PRC laws.

 

14
 

 

Because Our Funds Are Held In Banks Which Do Not Provide Insurance, The Failure Of Any Bank In Which We Deposit Our Funds Could Affect Our Ability To Continue In Business.

 

Banks and other financial institutions in the People’s Republic of China do not provide insurance for funds held on deposit. As a result, in the event of a bank failure, we may not have access to funds on deposit. Depending upon the amount of money we maintain in a bank that fails, our inability to have access to our cash could impair our operations, and, if we are not able to access funds to pay our suppliers, employees and other creditors, we may be unable to continue in business.

 

We Are Subject To The United States Foreign Corrupt Practices Act.

 

We are required to comply with the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. In addition, we are required to maintain records that accurately and fairly represent our transactions and have an adequate system of internal accounting controls. Foreign companies, including some that may compete with us, are not subject to these prohibitions, and therefore may have a competitive advantage over us. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the PRC, particularly in our industry since it deals with contracts from the Chinese Government, and our executive officers and employees have not been subject to the United States Foreign Corrupt Practices Act prior to the completion of the Share Exchange. If our competitors engage in these practices they may receive preferential treatment from personnel of some companies, giving our competitors an advantage in securing business or from government officials who might give them priority in obtaining new licenses, which would put us at a disadvantage. We can make no assurance that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

Recent Change In The PRC Labor Law Restrict Our Ability To Reduce Our Workforce In The PRC In The Event Of An Economic Downturn And May Increase Our Labor Costs.

 

In June 2007, the National People’s Congress of the PRC enacted the Labor Contract Law, which became effective on January 1, 2008. To clarify certain details in connection with the implementation of the Labor Contract Law, the State Council promulgated the Implementing Rules for the Labor Contract Law, or the Implementing Rules, on September 18, 2008 that came into effect immediately. The Labor Contract Law provides various rules regarding employment contracts that will likely have a substantial impact on employment practices in China. The Labor Contract Law imposes severe penalties on employers that fail to timely enter into employment contracts with employees. The employer is required to pay a double salary to the employee if it does not enter into a written contract with the employee within one month of the employment, and a non-fixed-term contract is assumed if a written contract is not executed after one year of the employment. Additionally, the Labor Contract Law sets a limit of two fixed-term contracts regardless of the length of each term, after which the contract must be renewed on a non-fixed-term basis should the parties agree to a further renewal unless otherwise required by the respective employee. This requirement curtails the common practice of continuously renewing short-term employment contracts. The Implementing Rules appear to further tighten this rule by suggesting that an employee has the right to demand a non-fixed-term contract upon the completion of the second fixed term regardless of whether the employer agrees to a contract renewal. A non-fixed-term contract does not have a termination date and it is generally difficult to terminate such a contract because termination must be based on limited statutory grounds. The employer can no longer supplement such statutory grounds through an agreement with the employee. In addition, the Labor Contract Law requires the payment of statutory severance upon the termination of an employment contract in most circumstances, including the expiration of a fixed-term employment contract.

 

Under the Labor Contract Law, employers can only impose a post-termination non-competition provision on employees who have access to their confidential information for a maximum period of two years. If an employer intends to maintain the enforceability of a post-termination non-competition provision, it has to pay the employee compensation on a monthly basis post-termination of the employment. Under the Labor Contract Law, a “mass layoff” is defined as termination of more than 20 employees or more than 10% of the workforce. The Labor Contract Law expands the circumstances under which a mass layoff can be conducted, such as when the company undertakes a restructuring pursuant to the PRC Enterprise Bankruptcy Law, suffers serious difficulties in business operations, changes its line of business, performs significant technological improvements, changes operating methods, or where there has been a material change in the objective economic circumstances relied upon by the parties at the time of the conclusion of the employment contract, thereby making the performance of such employment contract impractical. The employer must follow specific procedures in conducting a mass layoff. There is little guidance on what penalties an employer will suffer if it fails to follow the procedural requirements in conducting the mass layoff. Finally, the Labor Contract Law requires that the employer discuss the company’s internal rules and regulations that directly affect the employees’ material interests (such as employees’ salary, work hours, leave, benefits, and training, etc.) with all employees or employee representative assemblies and consult with the trade union or employee representatives on such matters before making a final decision.

 

15
 

 

All of our employees based exclusively within the PRC are covered by the Labor Contract Law. As there are uncertainties as to how the Labor Contract Law and its Implementing Rules will be enforced by the relevant PRC authorities, we cannot assess their potential impact on our business and results of operations at the moment. The implementation of the Labor Contract Law and its Implementing Rules may increase our operating expenses, in particular our personnel expenses and labor service expenses. If we want to maintain the enforceability of any of our employees’ post-termination non-competition provisions, the compensation and procedures required under the Labor Contract Law may add substantial costs and cause financial burdens to us. Prior to the new law such compensation was often structured as part of the employee’s salary during employment, and was not an additional compensation cost. In the event that we decide to dismiss employees or otherwise change our employment or labor practices, the Labor Contract Law and its Implementing Rules may also limit our ability to effect these changes in a manner that we believe to be cost-effective or desirable, which could adversely affect our business and results of operations. In particular, our ability to adjust the size of our operations when necessary in periods of recession or less severe economic downturns such as the recent financial turmoil may be affected. In addition, during periods of economic decline when mass layoffs become more common, local regulations may tighten the procedures by, among other things, requiring the employer to obtain approval from the relevant local authority before conducting any mass layoff. Such regulations can be expected to exacerbate the adverse effect of the economic environment on our results of operations and financial condition.

 

Under The New Enterprise Income Tax Law, We May Be Classified As A “Resident Enterprise” Of China, Which Will Likely Result In Unfavorable Tax Consequences To Us And Our Non-PRC Stockholders.

 

The EIT Law and its implementing rules became effective on January 1, 2008. Under the EIT Law, an enterprise established outside of China with “de facto management bodies” within China is considered a “resident enterprise,” meaning that it can be treated in a manner similar to a Chinese enterprise for enterprise income tax purposes. The implementing rules of the EIT Law define de facto management as “substantial and overall management and control over the production and operations, personnel, accounting, and properties” of the enterprise.

 

On April 22, 2009, the State Administration of Taxation issued the Notice Concerning Relevant Issues Regarding Cognizance of Chinese Investment Controlled Enterprises Incorporated Offshore as Resident Enterprises pursuant to Criteria of de facto Management Bodies, or the Notice, further interpreting the application of the EIT Law and its implementation non-Chinese enterprise or group controlled offshore entities. Pursuant to the Notice, an enterprise incorporated in an offshore jurisdiction and controlled by a Chinese enterprise or group will be classified as a “non-domestically incorporated resident enterprise” if (i) its senior management in charge of daily operations reside or perform their duties mainly in China; (ii) its financial or personnel decisions are made or approved by bodies or persons in China; (iii) its substantial assets and properties, accounting books, corporate chops, board and shareholder minutes are kept in China; and (iv) at least half of its directors with voting rights or senior management often resident in China. A resident enterprise would be subject to an enterprise income tax rate of 25% on its worldwide income and must pay a withholding tax at a rate of 10% when paying dividends to its non-PRC stockholders. However, it remains unclear as to whether the Notice is applicable to an offshore enterprise incorporated by a Chinese natural person. Nor are detailed measures on imposition of tax from non-domestically incorporated resident enterprises are available. Therefore, it is unclear how tax authorities will determine tax residency based on the facts of each case.

 

We may be deemed to be a resident enterprise by Chinese tax authorities. If the PRC tax authorities determine that we are a “resident enterprise” for PRC enterprise income tax purposes, a number of unfavorable PRC tax consequences could follow. First, we may be subject to the enterprise income tax at a rate of 25% on our worldwide taxable income as well as PRC enterprise income tax reporting obligations. In our case, this would mean that income such as interest on financing proceeds and non-China source income would be subject to PRC enterprise income tax at a rate of 25%. Second, although under the EIT Law and its implementing rules dividends paid to us from our PRC subsidiaries would qualify as “tax-exempt income,” we cannot guarantee that such dividends will not be subject to a 10% withholding tax, as the PRC foreign exchange control authorities, which enforce the withholding tax, have not yet issued guidance with respect to the processing of outbound remittances to entities that are treated as resident enterprises for PRC enterprise income tax purposes. Finally, it is possible that future guidance issued with respect to the new “resident enterprise” classification could result in a situation in which a 10% withholding tax is imposed on dividends we pay to our non-PRC stockholders and with respect to gains derived by our non-PRC stockholders from transferring our shares. We are actively monitoring the possibility of “resident enterprise” treatment for the 2011 tax year and are evaluating appropriate organizational changes to avoid this treatment, to the extent possible.

 

If We Were Treated As A “Resident Enterprise” By PRC Tax Authorities, We Would Be Subject To Taxation In Both The United States And China, And Our PRC Tax May Not Be Creditable Against Our U.S. Tax.

 

We face uncertainty from China’s Circular on Strengthening the Administration of Enterprise Income Tax on Non-Resident Enterprises' Share Transfer that was released in December 2009 with retroactive effect from January 1, 2008.

 

16
 

  

The Chinese State Administration of Taxation, or SAT, released a circular on December 15, 2009 that addresses the transfer of shares by nonresident companies, generally referred to as Circular 698. Circular 698, which is effective retroactively to January 1, 2008, may have a significant impact on many companies that use offshore holding companies to invest in China. Circular 698, which provides parties with a short period of time to comply with its requirements, indirectly taxes foreign companies on gains derived from the indirect sale of a Chinese company. Where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise by selling the shares in an offshore holding company, and the latter is located in a country or jurisdiction where the effective tax burden is less than 12.5% or where the offshore income of his, her, or its residents is not taxable, the foreign investor is required to provide the tax authority in charge of that Chinese resident enterprise with the relevant information within 30 days of the transfers. Moreover, where a foreign investor indirectly transfers equity interests in a Chinese resident enterprise through an abuse of form of organization and there are no reasonable commercial purposes such that the corporate income tax liability is avoided, the PRC tax authority will have the power to re-assess the nature of the equity transfer in accordance with PRC’s “substance-over-form” principle and deny the existence of the offshore holding company that is used for tax planning purposes. There is uncertainty as to the application of Circular 698. For example, while the term "indirectly transfer" is not defined, it is understood that the relevant PRC tax authorities have jurisdiction regarding requests for information over a wide range of foreign entities having no direct contact with China. Moreover, the relevant authority has not yet promulgated any formal provisions or formally declared or stated how to calculate the effective tax in the country or jurisdiction and to what extent and the process of the disclosure to the tax authority in charge of that Chinese resident enterprise. In addition, there are not any formal declarations with regard to how to decide “abuse of form of organization” and “reasonable commercial purpose,” which can be utilized by us to balance if our Company complies with the Circular 698. As a result, we may become at risk of being taxed under Circular 698 and we may be required to expend valuable resources to comply with Circular 698 or to establish that we should not be taxed under Circular 698, which could have a material adverse effect on our financial condition and results of operations.

 

RISKS RELATING TO OUR BUSINESS

 

We Cannot Predict Whether We Will Meet Internal or External Expectations Of Future Performance.

 

We believe that our future success depends on our ability to significantly increase revenue from processing recycled plastic wastes. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies with a limited operating history. These risks include our ability to:

  

develop new and innovative processing methods, including processes which increase production yield;

 

respond effectively to competitive pressures and address the effects of strategic relationships or corporate combinations;

 

maintain our current, and develop new, strategic relationships with customers and suppliers;

 

increase awareness of our products and continue to build customer loyalty; and

 

attract and retain qualified management, consultants and employees.

 

We Cannot Assure You That Our Organic Growth Strategy Will Be Successful.

 

One of our growth strategies is to grow organically through increasing the sale of our products by increasing our output volume and entering new markets in China and internationally. However, many obstacles to increasing our market share and entering such new markets exist, including, but not limited to, costs associated with increasing market share and entering into such markets and attendant marketing efforts. We cannot, therefore, assure you that we will be able to successfully overcome such obstacles and establish our products in any additional markets. Our inability to implement this organic growth strategy successfully may have a negative impact on our ability to grow and on our future financial condition, results of operations or cash flows.

 

Our Business And Growth Could Suffer If We Are Unable To Hire And Retain Key Personnel That Are In High Demand.

 

We depend upon the continued contributions of our senior management and other key personnel, including external experts and advisers. The loss of the services of any of our executive officers or other key personnel could have a material adverse effect on our business, operations, revenues or prospects. We do not maintain key man insurance on the lives of these individuals at present. As we plan to expand, we will have to attract managerial staff. We may not be able to identify and retain qualified personnel due to our lack of understanding of different cultures and lack of local contacts. This may impede any potential expansion. Our future success will also depend on our ability to attract and retain highly skilled and qualified technical, engineering, managerial, finance, marketing, security and customer service personnel in China. Qualified individuals are in high demand, and we may not be able to successfully attract, assimilate or retain the personnel we need to succeed.

 

17
 

 

We May Not Be Able To Manage Our Expanding Operations Effectively, Which Could Harm Our Business.

 

We anticipate expanding our business as we address growth in our customer base and market opportunities. In addition, the geographic dispersion of our operations as a result of overall internal growth requires significant management resources that our locally-based competitors do not need to devote to their operations. In order to manage the expected growth of our operations and personnel, we will be required to improve and implement operational and financial systems, procedures and controls, and expand, train and manage our growing employee base. Further, our management will be required to maintain and expand our strategic relationships necessary to our business. We cannot assure you that our current and planned personnel, systems, procedures and controls will be adequate to support our future operations. If we are not successful in establishing, maintaining and managing our personnel, systems, procedures and controls, our business will be materially and adversely affected.

 

If We Need Additional Capital To Fund Our Growing Operations, We May Not Be Able To Obtain Sufficient Capital And May Be Forced To Limit The Scope Of Our Operations.

 

We may experience increased capital needs and we may not have enough capital to fund our future operations without additional capital investments. Our capital needs will depend on numerous factors, including (i) our profitability; (ii) the success of our competitors; (iii) the amount of our capital expenditures; and (iv) new investments. We cannot assure you that we will be able to obtain capital in the future to meet our needs. If we cannot obtain additional funding, we may be required to:

  

reduce our investments;

 

limit our expansion efforts; and

 

decrease or eliminate capital expenditures.

 

Such reductions could materially adversely affect our business and our ability to compete. Even if we do find a source of additional capital, we may not be able to negotiate terms and conditions for receiving the additional capital that are acceptable to us. Any future capital investments could dilute or otherwise materially and adversely affect the holdings or rights of our existing shareholders. We cannot give you any assurance that any additional financing will be available to us, or if available, will be on terms favorable to us.

 

We Depend On A Limited Number Of Suppliers For A Majority Of Our Supplies.  The Inability To Secure Raw Materials Could Affect Our Production Output And Reduce Our Revenues.

 

For the years ended December 31, 2011 and 2010, 77% and 86% of our raw material was purchased from four and five major suppliers, respectively. Failure to maintain good relationships with our current suppliers or to develop a new supply source of raw materials could negatively affect our ability to obtain the raw materials used in our products in a timely manner. If we are unable to obtain ample supplies of raw material from our existing suppliers or develop alternative supply sources, we may be unable to satisfy our customers’ orders which could materially and adversely affect our revenues and our relationship with our customers.  Furthermore, we are dependent on our suppliers for the timely delivery of materials that we require for our operations. Should our suppliers fail to deliver such materials on time, and if we are unable to source these materials from alternative suppliers on a timely basis, our revenue and profitability could be adversely affected.

 

The Success Of Our Business Is Heavily Dependent Upon Our Ability To Secure Raw Plastic.

 

Our ability to generate revenue depends upon our ability to secure raw plastic. There is a world-wide market for these materials, and the Company faces competition from other low-cost users. To the extent that we are unable to secure enough raw plastic, our business, financial condition and results of operations will be materially adversely affected.

 

The Chinese Government Limits The Amount Of Plastic Waste Which May Be Imported, And As Such, We May Not Be Able To Import Sufficient Raw Materials.

 

The Chinese government limits the amount of plastic waste which may be imported into China.  Although we have not experienced difficulties obtaining and renewing our import license in the past, we cannot guarantee the license will be approved in the future. If we fail to obtain the import license, we may have to use domestically supplied plastics wastes for our manufacturing. Domestic plastic wastes are typically poorly sorted, so utilizing the domestic raw material increase production costs.

 

18
 

 

Our Production Costs And Revenues Are Impacted By Increases In The Cost Of Labor, Shipping And Other Expenses.

 

The manufacturing of recycled plastics is highly labor-intensive as all raw material classification is done by hand.  A sharp increase of in pay or a mandatory welfare/insurance contribution by employers would cause an increase in production costs and would reduce our profit margin. Additionally, as all of the raw material used in our manufacturing is imported, an increase in the freight costs of importing such material would increase our production costs and thus negatively impact our revenues.

 

We Are Dependent On Use Of An Import Quota Granted To Us By Another Company, The Loss Of Which Could Materially Affect Our Ability To Secure High Quality Raw Materials For Our Manufacturing Processes.

 

In the PRC, imports of plastic waste are subject to an import quota regulated by the Ministry of Environmental Protection. We have been approved for an import quota of 80,000 tons of plastic waste in 2012. We have also been permitted to use of the 35,000 tons per year import quota granted to Huan Li. Huan Li has not had any significant operations since 2005, but its import quota remains valid. Chen Min, our Chief Executive Officer, is the Chief Executive Officer, Chairman of the Board of Directors, and legal representative with the power to represent and act on behalf, of Huan Li.

 

Although we have not previously experienced difficulties with regard to Huan Li permitting us to use its import quota, there can be no guarantee that the import quota will be available to us in the future. Huan Li can rescind its grant to us of the import quota at any time. If we are unable to use Huan Li’s import quota, our business, financial condition and results of operations would be materially adversely affected. Without the import quota we may have to purchase domestically supplied plastic waste for our manufacturing processes.  Domestic plastic waste is typically poorly sorted, which increases our production costs and most of the plastic waste available domestically has already been recycled, and it therefore has a lower tensile force which would negatively impact the quality of our products.

 

We May Be Classified As A Passive Foreign Investment Company, Which Could Result In Adverse U.S. Tax Consequences To U.S. Investors.

 

Based upon the nature of our income and assets, we may be classified as a passive foreign investment company, or PFIC, by the United States Internal Revenue Service for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax consequences to you. For example, if we are a PFIC, our U.S. investors will become subject to increased tax liabilities under U.S. tax laws and regulations and will become subject to more burdensome reporting requirements. The determination of whether or not we are a PFIC is made on an annual basis, and those determinations depend on the composition of our income and assets, including goodwill, from time to time. We intend to operate our business so as to minimize the risk of PFIC treatment, however you should be aware that certain factors that could affect our classification as PFIC are out of our control. For example, the calculation of assets for purposes of the PFIC rules depends in large part upon the amount of our goodwill, which in turn is based, in part, on the then market value of our shares, which is subject to change. Similarly, the composition of our income and assets is affected by the extent to which we spend the cash we have raised on acquisitions and capital expenditures. In addition, the relevant authorities in this area are not clear and so we operate with less than clear guidance in our effort to minimize the risk of PFIC treatment. Therefore, we cannot be sure whether we are not and will not be a PFIC for the current or any future taxable year. In the event we are determined to be a PFIC, our stock may become less attractive to U.S. investors, which may negatively impact the price of our common stock.

 

Environmental Compliance And Remediation Could Result In Substantially Increased Capital Requirements And Operating Costs Which Could Adversely Affect Our Business.

 

Guanwei is subject to numerous Chinese provincial and local laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Our consolidated business and operating results could be materially and adversely affected if Guanwei were required to increase expenditures to comply with any new environmental regulations affecting its operations. We could, in the future, incur a material liability resulting from the costs of complying with environmental laws, environmental permits or any claims concerning noncompliance, or liability from contamination.

 

We cannot predict what environmental legislation or regulations will be enacted in the future, how existing or future laws or regulations will be administered or interpreted or what environmental conditions may be found to exist at our facilities or at third-party sites for which we are liable. Enactment of stricter laws or regulations, stricter interpretations of existing laws and regulations or the requirement to undertake the investigation or remediation of currently unknown environmental contamination at our own or third-party sites may require us to make additional expenditures, some of which could be material.

 

19
 

 

If Environmental Regulation Enforcement Is Relaxed, The Demand For Our Products May Decrease.

 

The demand for our services is substantially dependent upon the public’s concern with, and the continuation and proliferation of, the laws and regulations governing the recycling of plastic. A decrease in the level of public concern, the repeal or modification of these laws, or any significant relaxation of regulations relating to the recycling of plastic would significantly reduce the demand for our services and could have a material adverse effect on our operations and financial condition.

 

We face Competition From Other Companies, Which Could Force Us To Lower Our Prices, Thereby Adversely Affecting Our Operating Margins, Financial Condition, Cash Flows And Profitability.

 

The markets in which we operate are highly competitive, and this competition could harm our business, results of operations, cash flow and financial condition. We believe that one significant competitive factor for our products is selling price. Although we do not aspire to be the lowest cost provider but rather the highest value provider to our customers, we could be subject to adverse results caused by our competitors’ pricing decisions. If we do not compete successfully, our business, operating margins, financial condition, cash flows and profitability could be adversely affected.

 

Our Sales Are Dominated By Sales in China Which Could Have An Adverse Effect On Our Business.

 

For each of the two fiscal years ended December 31, 2011 and 2010 almost all of our sales were derived from customers in China. We expect that the domestic market in China will continue to be our major market. Our business is therefore heavily dependent on the demand for plastics in China and the domestic market prices of LDPE. In the event that there is any material adverse change in the level of the demand of raw material for plastic products in China or if there are a significant price fluctuations in China, our performance could be adversely affected.

 

The Staff Of Our Accounting Department Lack Training And Experience In U.S. Accounting Principles, Which May Result In Accounting Errors In The Financial Statements That We File With The Securities And Exchange Commission.

 

Our executive offices are located in Fuqing City, Fujian Province in the PRC. Our entire bookkeeping and accounting staff is located there. Our books and records are maintained in Chinese, using Chinese accounting principles. Chinese accounting principles vary in many important respects from U.S. accounting principles. To file our Company’s financial statements with the Securities and Exchange Commission, our accounting staff must convert the financial statements from Chinese accounting principles to U.S. accounting principles. However, none of the members of our accounting staff has extensive experience or training in the preparation of financial statements under U.S. accounting principles. Neither do we have any employee who has previous experience in accounting for a U.S. public company. This situation creates a risk that the financial statements we file with the SEC will fail to present our financial condition and/or results of operations as required by SEC rules and the principles of accounting generally applied in the United States.

 

We Have Identified Material Weaknesses In Our Internal Control Over Financial Reporting. If We Fail To Develop Or Maintain An Effective System Of Internal Controls, We May Not Be Able To Accurately Report Our Financial Results and Prevent Fraud. As A Result, Current And Potential Stockholders Could Lose Confidence In Our Financial Statements, Which Would Harm The Trading Price Of Our Common Stock.

 

Companies that file reports with the SEC, including us, are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or SOX 404. SOX 404 requires management to establish and maintain a system of internal control over financial reporting and annual reports on Form 10-K filed under the Exchange Act to contain a report from management assessing the effectiveness of a company’s internal control over financial reporting. Separately, under SOX 404, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, public companies that are large accelerated or accelerated filers must include in their annual reports on Form 10-K an attestation report of their regular auditors attesting to and reporting on management’s assessment of internal control over financial reporting. Non-accelerated filers and smaller reporting companies are not required to include an attestation report of their auditors in annual reports.

 

A report of our management is included under Item 9A.“Controls and Procedures” of this report. We are a smaller reporting company and, consequently, are not required to include an attestation report of our auditor in this annual report. However, if and when we become subject to the auditor attestation requirements under SOX 404, we can provide no assurance that we will receive an unqualified report from our independent auditors.

 

During its evaluation of the effectiveness of internal control over financial reporting as of December 31, 2011, management identified material weaknesses relating to our lack of sufficient accounting personnel with an appropriate understanding of U.S. GAAP and SEC reporting requirements.

 

20
 

 

We are undertaking remedial measures, which measures will take time to implement and test, to address these material weaknesses. There can be no assurance that such measures will be sufficient to remedy the material weaknesses identified or that additional material weaknesses or other control or significant deficiencies will not be identified in the future. If we continue to experience material weaknesses in our internal controls or fail to maintain or implement required new or improved controls, such circumstances could cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements, or adversely affect the results of periodic management evaluations and, if required, annual auditor attestation reports. Each of the foregoing results could cause investors to lose confidence in our reported financial information and lead to a decline in our stock price. See Item 9A.“Controls and Procedures” for more information.

 

RISKS RELATING TO OUR COMMON STOCK

 

If We Fail To Meet The Continued Listing Requirements Of The Nasdaq Capital Market, Our Common Stock May Be Deslisted from the Nasdaq Capital Market, Which May Cause The Value Of An Investment In Our Common Stock To Substantially Decrease.

 

On January 25, 2012, we received a written notification from The NASDAQ Stock Market (“NASDAQ”) stating that we no longer comply wth Nasdaq Rule 5550(a)(2) (the “Minimum Bid Price Rule”), because the closing bid price of our Common Stock was below the minimum $1.00 per share for the 30 consecutive trading days prior to January 25, 2012. In accordance with Nasdaq Rule 5810(c)(3)(A), we will be provided 180 calendar days, or until July 23, 2012, to regain compliance with the Minimum Bid Price Rule. We may regain compliance with the Minimum Bid Price Rule if the bid price of our Common Stock closes at $1.00 per share or more for a minimum of 10 consecutive business days at any time prior to July 23, 2012. In the event we do not regain compliance with the Minimum Bid Price Rule by July 23, 2012, we may be eligible for an additional 180-day period in which to demonstrate compliance with the Minimum Bid Price Rule, provided that we meets the continued listing requirements for the market value of our Common Stock and all other initial listing standards for The Nasdaq Capital Market set forth in Nasdaq Rule 5505. If we do not regain compliance with the Minimum Bid Price Rule prior to July 23, 2012 and are not eligible for the additional compliance period, Nasdaq will notify the Company that its Common Stock will be delisted. At that time, the Company may appeal Nasdaq’s determination to delist the Company’s Common Stock. If our common stock is delisted from The NASDAQ Capital Market, we expect prices for our common stock to be quoted on the Pink Sheets LLC or the OTC Bulletin Board. There is no assurance, however, that prices for our common stock would be quoted on one of these other trading systems or that an active trading market for our common stock would thereafter exist, which would materially and adversely impact the market value of our common stock.

 

Our Common Stock Price May Be Volatile And Could Decline In The Future.

 

The stock market in general and the market price for other companies based in the PRC have experienced extreme stock price fluctuations. In some cases, these fluctuations have been unrelated to the operating performance of the affected companies. Many companies in China have experienced dramatic volatility in the market prices of their common stock. We believe that a number of factors, both within and outside of our control, could cause the price of our Common Stock to fluctuate, perhaps substantially. Factors such as the following could have a significant adverse impact on the market price of our Common Stock:

  

announcements of technological innovations by us or our competitors;

 

our ability to obtain additional financing and, if available, the terms and conditions of the financing;

 

our financial position and results of operations;

 

litigation;

 

period-to-period fluctuations in our operating results;

 

changes in estimates of our performance by any securities analysts;

 

new regulatory requirements and changes in the existing regulatory environment;

 

the issuance of new equity securities in a future offering;

 

changes in interest rates;

 

changes in environmental standards;

 

market conditions of securities traded on the NASDAQ;

 

21
 

 

investor perceptions of us and the plastics recycling industry generally; and

 

general economic and other national conditions.

 

The Trading Market In Our Common Stock Is Limited And May Cause Volatility In The Market Price.

 

Our Common Stock is currently quoted on the NASDAQ Capital Market under the symbol “GPRC”. The quotation of our Common Stock on the NASDAQ Capital Market does not assure that a meaningful, consistent and liquid trading market currently exists, and in recent years such market has experienced extreme price and volume fluctuations that have particularly affected the market prices of many smaller companies like us. Thus, the market price for our Common Stock is subject to volatility and holders of Common Stock may be unable to resell their shares at or near their original purchase price or at any price. In the absence of an active trading market:

  

investors may have difficulty buying and selling or obtaining market quotations;

 

market visibility for our Common Stock may be limited; and

 

a lack of visibility for our Common Stock may have a depressive effect on the market for our Common Stock.

 

We May Have Difficulty Raising Necessary Capital To Fund Operations As A Result Of Market Price Volatility For Our Shares Of Common Stock.

 

In recent years, the securities markets in the United States have experienced a high level of price and volume volatility, and the market price of securities of many companies have experienced wide fluctuations that have not necessarily been related to the operations, performances, underlying asset values or prospects of such companies. For these reasons, our shares of Common Stock can also be expected to be subject to volatility resulting from purely market forces over which we will have no control. If our business development plans are successful, we may require additional financing to continue to develop and exploit existing and new technologies and to expand into new markets. The exploitation of our technologies may, therefore, be dependent upon our ability to obtain financing through debt and equity or other means.

 

Shares Eligible For Future Sale May Adversely Affect The Market Price Of Our Common Stock.

 

From time to time, certain of our shareholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act of 1933, as amended (the “Securities Act”), subject to certain limitations.  Future sales of our Common Stock by existing shareholders pursuant to Rule 144, or following the exercise of future option grants, could adversely affect the market price of our Common Stock.  The issuance of additional shares upon exercise of options will dilute the voting power of our current shareholders on corporate matters and, as a result, may cause the market price of our Common Stock to decrease. Further, sales of a large number of shares of Common Stock in the public market could adversely affect the market price of the Common Stock and could materially impair our future ability to generate funds through sales of Common Stock or other equity securities.

 

One Shareholder Exercises Significant Control Over Matters Requiring Shareholder Approval.

 

A single shareholder, Fresh Generation, has voting power equal to approximately 60% of our voting securities as of the date of this Annual Report. As described in greater detail later in this Annual Report, Chen Min, our Chief Executive Officer and Chairman of the Board, is the beneficial owner of the shares of our Common Stock held by that Fresh Generation. Furthermore, Mr. Min Chen holds a portion of such shares in trust for the benefit of certain other of our directors. As a result, Mr. Min Chen and such directors, through such indirect stock ownership, can exercise control over all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may also have the effect of delaying or preventing a change in control of us that may be otherwise viewed as beneficial by other shareholders.

 

We May Incur Significant Costs To Ensure Compliance With U.S. Corporate Governance And Accounting Requirements.

 

We may incur significant costs associated with our public company reporting requirements, costs associated with newly applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the SEC. We expect all of these applicable rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. We also expect that these applicable rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our Board or as executive officers. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

 

22
 

  

If We Fail To Maintain An Effective System Of Internal Control Over Financial Reporting, We May Be Unable To Accurately Report Our Financial Results Or Prevent Fraud, And Investor Confidence And The Market Price Of Our Shares May Be Adversely Affected.

 

As a result of the assessment of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act as of December 31, 2011, we have identified the fact that we lack sufficient accounting personnel with an appropriate understanding of U.S. GAAP and SEC reporting requirements as a material weakness in our internal control over financial reporting.

  

A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. We have taken measures and plan to continue to take measures to remedy these deficiencies. However, the implementation of these measures may not fully address the control deficiencies in our internal control over financial reporting. Our failure to address any control deficiency could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis. Moreover, effective internal control over financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the trading price of our shares, may be materially and adversely affected.

 

If We Become Directly Subject To The Recent Scrutiny, Criticism And Negative Publicity Involving U.S.-Listed Chinese Companies, We May Have To Expend Significant Resources To Investigate And Resolve The Matter Which Could Harm Our Business Operations, Stock Price And Reputation And Could Result In A Loss Of Your Investment In Our Stock, Especially If Such Matter Cannot Be Addressed And Resolved Favorably.

 

Recently, U.S. public companies that have substantially all of their operations in China, particularly companies like us which have completed reverse merger transactions, have been the subject of intense scrutiny, criticism and negative publicity by investors, financial commentators and regulatory agencies, such as the United States Securities and Exchange Commission. Much of the scrutiny, criticism and negative publicity has centered around financial and accounting irregularities and mistakes, a lack of effective internal controls over financial accounting, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result of the scrutiny, criticism and negative publicity, the publicly traded stock of many U.S. listed Chinese companies has sharply decreased in value and, in some cases, has become virtually worthless. Many of these companies are now subject to shareholder lawsuits, SEC enforcement actions and are conducting internal and external investigations into the allegations. It is not clear what effect this sector-wide scrutiny, criticism and negative publicity will have on our company, our business and our stock price. If we become the subject of any unfavorable allegations, whether such allegations are proven to be true or untrue, we will have to expend significant resources to investigate such allegations and/or defend our company. This situation will be costly and time consuming and distract our management from growing our company. If such allegations are not proven to be groundless, our company and business operations will be severely impacted and your investment in our stock could be rendered worthless.

 

We May Be Required To Raise Additional Financing By Issuing New Securities With Terms Or Rights Superior To Those Of Our Shares Of Common Stock, Which Could Adversely Affect The Market Price Of Our Shares Of Common Stock.

 

We may require additional financing to fund future operations, including expansion in current and new markets, development and acquisition, capital costs and the costs of any necessary implementation of technological innovations or alternative technologies. We may not be able to obtain financing on favorable terms, if at all. If we raise additional funds by issuing equity securities, the percentage ownership of our current shareholders will be reduced, and the holders of the new equity securities may have rights superior to those of the holders of shares of Common Stock, which could adversely affect the market price and the voting power of shares of our Common Stock. If we raise additional funds by issuing debt securities, the holders of these debt securities would similarly have some rights senior to those of the holders of shares of Common Stock, and the terms of these debt securities could impose restrictions on operations and create a significant interest expense for us.

 

We May Have Difficulty Establishing Adequate Management And Financial Controls In China And In Complying With U.S. Corporate Governance And Accounting Requirements Which Could Have An Adverse Effect On Our Business

 

The PRC has only recently begun to adopt the management and financial reporting concepts and practices that investors in the United States are familiar with.  We may have difficulty in hiring and retaining employees in China who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company.  If we cannot establish such controls, we may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards, which could have an adverse effect on our business.

 

23
 

 

We Are Subject To The Requirements Of Section 404 Of The Sarbanes-Oxley Act Of 2002, And If We Fail To Comply In A Timely Manner, Our Business Could Be Harmed And Our Stock Price Could Decline.

 

Rules adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual assessment of our internal control over financial reporting. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards and will impose significant additional expenses on us. We may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting. If we cannot assess our internal control over financial reporting as effective, investor confidence and share value may be negatively impacted.

 

The Value Of Our Securities Will Be Affected By The Foreign Exchange Rate Between U.S. Dollars And Renminbi.

 

The value of our Common Stock will be affected by the foreign exchange rate between U.S. dollars and RMB, and between those currencies and other currencies in which our sales may be denominated. For example, to the extent that we need to convert U.S. dollars into RMB for our operational needs and should the RMB appreciate against the U.S. dollar at that time, our financial position, the business of the Company, and the price of our Common Stock may be harmed. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of declaring dividends on our Common Stock or for other business purposes and the U.S. dollar appreciates against the RMB, the U.S. dollar equivalent of our earnings from our China operations would be reduced.

 

We Do Not Foresee Paying Cash Dividends In The Foreseeable Future.

 

Although Chenxin has previously paid cash dividends to its shareholders, the Registrant has not paid cash dividends and there are no plans to pay cash dividends on our stock in the foreseeable future.

 

Item 2.  Properties.

 

All land in China is owned by the State. Individuals and companies are permitted to acquire rights to use land or land use rights for specific purposes at no cost. In the case of land used for industrial purposes, the land use rights are granted for a period of fifty (50) years. This period may be renewed at the expiration of the initial and any subsequent terms. Granted land use rights are transferable and may be used as security for borrowings and other obligations.

 

Guanwei has land use rights to approximately 42,500 square meters of land located at Taicheng Farm in Fuqing City, Fujian Province, PRC.  This land use right expires July 26, 2056.  Guanwei houses a 64,000 square meter storage and manufacturing facility, in which it conducts all its manufacturing processes, on this land.  The facility has a sewage treatment facility that is able to filter and process the waste products resulting from the manufacturing. The current production capacity of the manufacturing facilities is 80,000 tons per year. 

 

Item 3. Legal Proceedings.

 

As of the date of this filing, neither the Registrant nor any of its subsidiaries are a party to any legal proceeding that could reasonably be expected to have a material impact on its operations or finances.

 

24
 

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

As of March 29, 2012, our common stock is quoted on the NASDAQ Capital Market in the United States of America under the symbol “GPRC”. Our common stock was quoted on the OTC Bulletin Board (“OTCBB”) from December 28, 2009 to April 15, 2010 under the symbol “GURC.OB,” and was traded on the OTCBB from August 14, 2008 to December 28, 2009 under the symbol “MDHO.OB.”  As of the date of this Annual Report, 20,000,006 shares of our Common Stock are issued and outstanding.  The quotation of our Common Stock on the NASDAQ Capital Market does not assure that a meaningful, consistent and liquid trading market currently exists. We cannot predict whether a more active market for our Common Stock will develop in the future. In the absence of an active trading market:

 

Investors may have difficulty buying and selling or obtaining market quotations;

 

Market visibility for our common stock may be limited; and

 

A lack of visibility of our common stock may have a depressive effect on the market price for our common stock.

 

When the trading price of our Common Stock is below US$5.00 per share, the Common Stock is considered to be a “penny stock” that is subject to rules promulgated by the SEC (Rule 15-1 through 15g-9) under the Exchange Act. These rules impose significant requirements on brokers under these circumstances, including: (a) delivering to customers the SEC’s standardized risk disclosure document; (b) providing customers with current bid and ask prices; (c) disclosing to customers the brokers-dealer’s and sales representatives compensation; and (d) providing to customers monthly account statements.

 

The following table sets forth on a per share basis for the periods shown, the high and low closing bid prices of our Common Stock. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

Closing Bid Prices  High   Low 
         
Calendar Year Ended December 31, 2011          
           
4th Quarter:  $1.49   $0.70 
           
3rd Quarter:  $2.10   $1.17 
           
2nd Quarter:  $2.60   $1.17 
           
1st Quarter:  $4.20   $2.30 
           
Calendar Year Ended December 31, 2010          
           
4th Quarter:  $4.69   $2.86 
           
3rd Quarter:  $4.70   $2.50 
           
2nd Quarter:  $5.70   $3.35 
           
1st Quarter:  $5.05   $3.06 

 

The reported high and low bid prices for our Common Stock are shown above for the periods indicated. The prices reflect inter-dealer prices, without retail mark-up, markdown or commissions, and may not always represent actual transactions.

 

25
 

 

Dividends

 

We presently intend to retain all earnings, if any, for use in our business operations and accordingly, the Board of Directors (the “Board”) does not anticipate declaring any cash dividends for the foreseeable future. Any future determination to pay dividends will be 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. We have not paid any cash dividends on our Common Stock.

 

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, our PRC operating company is required, where applicable, to allocate a portion of its net profits to PRC statutory reserves before distributing dividends, including at least 10% of its net profits 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 our PRC operating company incurs debt in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. For risks associated with the restrictions that limit our ability to pay dividends on common stock, see “Risk factors—Because Our Assets Are Located in China, Any Dividends Of Proceeds From Liquidations Is Subject To The Approval Of The Relevant Chinese Government Agencies”.

 

Holders of Common Equity

 

As of the date of this Annual Report, the Registrant has issued 20,000,006 shares of our Common Stock to 9 holders of record. The Registrant believes that it has more shareholders since many of its shares are held in “street” name. See also the “Security Ownership of Certain Beneficial Owners and Management” below for a table setting forth (a) each person known by us to be the beneficial owner of five percent (5%) or more of our Common Stock and (b) all directors and officers individually and all directors and officers as a group as of the date of this Report, after giving effect to the Exchange.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

During the period covered by this Annual Report, no equity securities were issued or sold pursuant to the Registrant’s 2010 Omnibus Long-Term Incentive Plan and there are no other compensation plan (including individual compensation arrangements) under which the Registrant’s equity securities may be authorized for issuance.

 

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

 

There were no purchases of equity securities by the Registrant or any of the Registrant’s affiliates during the fourth quarter of the fiscal year ended December 31, 2011.

 

Recent Sales of Unregistered Securities.

 

There were no recent sales of unregistered securities.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

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 Annual Report. Information in this Item 7 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 year to year, 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.

 

26
 

 

 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 Annual Report. 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 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.

 

Critical Accounting Policies, Estimates and Assumptions

 

Accounting Principles

 

Our discussion and analysis of our financial condition and results of operations are based upon our audited consolidated financial statements. These financial statements are prepared in accordance with generally accepted accounting principles in the United States (“US GAAP”), which require 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 Annual 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 audited 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 non-LDPE waste materials are recognized on the same basis as sales of LDPE.

 

(b)           Inventories

 

Inventories are stated at the lower of cost, on a 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 such 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 years ended December 31, 2011 and 2010, the Company recorded no inventory write down. We carry out an inventory review at each quarter-end.

 

27
 

 

(c)           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 December 31, 2011, the Company has undistributed profits of approximately $2,795,000 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 $2,795,000 which the tax rate is currently at 10% of the undistributed earnings prepared under PRC GAAP after 2007.

 

The Company has no material uncertain tax positions as of December 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 December 31, 2011, there is no interest and 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.

 

(d)           Recently Adopted Accounting Standards

 

In May 2011, the FASB issued a new accounting standard update (“ASU”) No. 2011-4, Fair Value Measurements (Topic 820), which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The adoption of this standard will not have a material impact on our consolidated financial statements and disclosures.

 

In June 2011, the FASB issued ASU No. 2011-5, Comprehensive Income (Topic 220), an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted both standards in the fourth quarter of 2011. Such adoption did not have a material impact on the Company’s consolidated financial statements.

 

28
 

 

Results of Operations for the Fiscal Year Ended December 31, 2011 Compared To the Fiscal Year Ended December 31, 2010

 

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

 

   For The Fiscal Year Ended December 31, 
   2011   2010   Change in % 
Net Revenue  $63,600,678   $47,534,645    33.80%
Cost of Revenue  $44,111,700   $32,179,321    37.08%
Gross Profit  $19,488,978   $15,355,324    26.92%
Selling and marketing expenses  $398,513   $346,409    15.04%
General and administrative expenses  $1,903,062   $1,568,653    21.32%
Interest income  $88,249   $28,704    207.44%
Interest expenses  $(29,083)  $(85,474)   (65.97)%
Income taxes  $4,453,121   $3,456,096    28.85%
Net income  $12,793,448   $9,927,396    28.87%

  

Revenues

 

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

 

   For The Fiscal Year Ended December 31, 
   2011   2010   Change in % 
Sales of recycled LDPE            
- Manufactured  $61,900,588   $44,475,726    39.18%
- Purchased   -    1,991,009    (100.00)%
Sales of non- LDPE   1,700,090    1,067,910    59.20%
   $63,600,678   $47,534,645    33.80%

  

Our revenues are derived from the sales of recycled LDPE and non-LDPE waste materials. We manufacture recycled LDPE from plastic waste and occasionally 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 operation generally contain approximately 9% 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 fiscal year 2010, the Company completed 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.

 

In late 2010, construction was completed on the new raw material storage field. Our storage facility in use is now more than 4,000 square meters. Raw materials were relocated to the new storage facility 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 fiscal year 2011 from the sale of manufactured recycled LDPE was $61,900,588, as compared to $44,475,726 for 2010, which represents an increase of 39.18%. This increase was due to an increase in both sales volume and selling price of manufactured recycled LDPE.  The Company sold 52,666 tons of manufactured recycled LDPE in the year ended December 31, 2011, representing an increase of 27% from the 41,478 tons sold in 2010. The average selling price of recycled LDPE increased 9.6% from approximately $1,072 per ton in 2010 to approximately $1,175 per ton in 2011.

 

During the fiscal year 2010, we 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. Revenue generated during the year ended December 31, 2010 from the sales of purchased recycled LDPE was $1,991,009. During the fiscal year 2011, we did not enter into this type of transactions and generated no such revenue.

 

29
 

 

Revenue generated from the sales of sorted non-LDPE material increased from $1,067,910 in 2010 to $1,700,090 in 2011, representing an increase of 59.20%. This was due to an increase in both sales volume and selling price. Guanwei sold 5,820 tons of sorted non-LDPE material in 2011, representing an increase of 21.45% from 4,792 tons sold in the same period of 2010. A higher volume of non-LDPE material was sold during the fiscal year 2011 because our production of LDPE material increased. Since non-LDPE material is a by-product of manufacturing our LDPE products, the increase of our sales of non-LDPE material is in line with the increase of our LDPE product sales. The average selling price of sorted non-LDPE material increased 30.94% to approximately $292 per ton in 2011 from approximately $223 per ton 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.  On July 11, 2011, Guanwei received official government approval for expansion of its quota for imported plastic waste. Pursuant to the approval, the Guanwei’s import quota increased from 24,000 tons to 64,000 tons in 2011. Guanwei entered into an agreement, dated November 1, 2008, pursuant to which Guanwei has 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”) for a term of 10 years. 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 an 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.  Together with the import quota of 35,000 tons contracted from Huan Li, the Company had a total import quota of 99,000 tons in 2011.

 

Other than as disclosed elsewhere in this Annual 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 Fiscal
Year Ended
December 31,
2011
   % of net
revenue
   For the Fiscal
Year Ended
December 31,
2010
   % of net
revenue
   Change in
%
 
                     
Costs of manufactured recycled LDPE and sorted non-LDPE material  $44,111,700    69.36%  $30,273,792    66.47%   45.71%
Costs of purchased recycled LDPE   -    -    1,905,529    95.71%   (100)%
   $44,111,700    69.36%  $32,179,321    67.70%   37.09%

 

During the years ended December 31, 2011 and 2010, our cost of revenue was $44,111,700 and $32,179,321, representing 69.36% and 67.70% of net revenue.

 

During the years ended December 31, 2011 and 2010, our cost of revenue from sales of manufactured recycled LDPE and sorted non-LDPE material was $44,111,700 and $30,273,792, representing 69.36% and 66.47% of net revenue from sales of manufactured recycled LDPE and sorted non-LDPE material. The increase in the percentage of cost to net revenue is primarily due to raw material costs increasing at a faster pace than the increase in our selling price. Raw material prices increased 22%, from $566 per ton in 2010 to $690 per ton in 2011, while the average selling prices of manufactured recycled LDPE and sorted non-LDPE material increased 9.6% and 30.94%, respectively, from $1,072 per ton and $223 per ton in 2010 to $1,175 per ton and $292 per ton in 2011 

 

In order to cut 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, 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.

 

30
 

 

Gross Profit

 

The overall gross profit for 2011 increased 26.92% to $19,488,978, compared to $15,355,324 for 2010. During the fiscal year 2011, our overall gross profit margin decreased to 30.64% from 32.30% in 2010. The 5.14% decrease in overall gross profit margin was primarily attributable to our raw material cost increasing at a faster rate than the increase in our selling price of recycled LDPE. The gross profit margins of purchased recycled LDPE in 2010 were 4.29%. We did not enter into any sales of purchased recycled LDPE in 2011.

 

Gross profit from sales of manufactured recycled LDPE and sorted non-LDPE material during 2011 increased by $4,133,654 to $19,488,978, or 30.64% of net revenue, from $15,269,844 for 2010. The increase in gross profit was primarily the result of the increase in selling price and sales volume. During 2011, the sales volume of manufactured recycled LDPE and sorted non-LDPE material increased 26.97% and 21.45%, respectively, and their average selling prices increased 9.6% and 30.94%, respectively. The average per-ton manufacturing cost of recycled LDPE and sorted non-LDPE material during 2011 continued to climb at a faster pace than the increase of our selling prices.

 

Gross profit from sales of purchased recycled LDPE during 2010 was $85,480 or 4.29% of net revenue from sales of purchased recycled LDPE. The Company had previously sold purchased recycled LDPE in 2009, but upon considering the low quality of purchased recycled LDPE and the low profit margin contributed by such resale, the Company 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 to meet the demand of certain of its existing customers. We did not enter into such revenue in 2011.

 

As previously discussed, the Company’s improved washing and smashing plant and new raw material storage facility were put into use in the period. The Company’s sales volume of manufactured recycled LDPE material increased to 52,666 tons in 2011 from 41,478 tons in 2010. 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

 

Sales and marketing expenses primarily consist of transportation and courier costs, payroll and related benefits. In 2011, sales and marketing expenses increased 15.04% to $398,513, compared to $346,409 for 2010. The increase was primarily caused by an increase of payroll and related benefit costs as a result of an increase in head count and a continuing increase in payroll cost per employee. Our payroll cost increased to $216,028 in 2011 from $172,951 in 2010. In addition, our delivery cost also increased substantially due to a continued increase in our sales and gasoline prices. Our customers may choose to either pick up their products with their own vehicles or to have the Company arrange delivery, in which case the transportation costs are categorized as selling and marketing expenses. Total transportation costs for 2011 and 2010 were $145,072 and $110,527, respectively. 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 2011, general and administrative expenses increased 21.32% to $1,903,062, compared to $1,568,653 in 2010.  This increase was primarily due to the following:

 

-the increase in payroll expenses for management, which increased 0.4% to $552,666 for 2011 from $550,470 for 2010 due to the rising costs of remuneration packages related to recruiting and maintaining skilled executives;

 

-the increase in pension contributions to $141,000 for 2011 from $92,000 for 2010, an increase of $49,000 or 53.2%, due to increased mandatory coverage imposed by the government;

 

-the increase in depreciation and amortization expenses to $343,062 for 2011 from $240,710 for 2010, an increase of $102,352 or 42.52%, due to an increase of amortization expense related a significant improvement to our facility during 2011; and

 

-a foreign exchange loss of $157,000 in 2011, which increased $49,000 or 45.37% as compared to a foreign exchange loss of $108,000 in 2010.

 

Other Income (Expenses)

 

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. The increase in interest income of $59,545, to $88,249 for 2011 from $28,704 for 2010, is due to more cash available to be deposited at the banks as a result of our higher profits in 2011.

 

31
 

 

Interest expenses decreased as a result of borrowings paid off in the first quarter of 2011. Therefore, we did not incur any interest expenses in the second half of 2011.

 

We support our operations through a combination of self-generated profit and limited amount of loans from banks and financial institutions. As of December 31, 2010, we had short term borrowings of $3,716,377, including a loan payable to Fuqing Rural Credit Cooperative Union in the amount of $1,464,659 and a loan payable to China Merchants Bank in the amount of $2,251,718. Both loans were repaid in full in 2011. As of December 31, 2011, we did not have any outstanding borrowings as we have sufficient working capital to meet our short term cash needs.

 

Net Income

 

During the year ended December 31, 2011, our net income increased 28.87% to $12,793,448, as compared to $9,927,396 for 2010. The improvement is primarily due to overall increased sales of recycled LDPE. The net income increased at a lower percentage than the increase of our revenue, primarily due to the increase of cost of raw material at a higher rate than that of our net revenue, which was partially offset by operating expenses increase at a lower rate than that of revenue.

 

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.

 

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.

 

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 86% and 2% of our purchases for the fiscal year ended December 31, 2011 were denominated in the U.S. dollar and the European Union euro, and the rest of our purchases were denominated in the Renminbi. 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 December 31, 2011 and 2010 were approximately 6.3523 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 $1,067,008 and $489,000 for the fiscal year ended December 31, 2011 and 2010.  If the exchange rate were to increase by 10% to US$1.00 = RMB6.9875 at December 31, 2011, our foreign currency translation gain would potentially decrease by approximately $3,130,000 for the year ended December 31, 2011. If the exchange rate were to decrease by 10% to US$1.00 = RMB5.71 at December 31, 2011, our foreign currency translation gain would potentially increase by approximately $3,874,000 for the year ended December 31, 2011.

 

Liquidity and Capital Resources

 

We generally finance our operations through operating profit and through short-term borrowings from banks and financial institutions.

 

32
 

 

As of December 31, 2010, we had two outstanding loans payable. The short term loan from Fuqing Rural Credit Cooperative Union bore interest at a fixed rate of 5.94% per annum with the maturity date of January 18, 2011, and was secured by the Company’s building and land use right. The loan was fully repaid on January 18, 2011. A short term loan arrangement with China Merchants Bank allowed the Company to draw on the same loan several times during 2010. Each of the draws were due in 3 months from the date of drawing and bore interest at rates ranging from 1.788% to 2.103%. These short term loans were secured by the Company’s restricted cash, which amounted to $2,280,398 as of December 31, 2010. The loan was fully repaid in 2011 and the restricted cash was released. As of December 31, 2011, we did not have any outstanding borrowings as we have sufficient working capital to meet our short term cash needs.

 

As of the date of this Annual 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 fiscal years ended December 31, 2011 and 2010:

 

   Year ended December 31, 
   2011   2010 
Net cash provided by operating activities  $1,661,295   $7,244,599 
Net cash used for investing activities  (3,844,094)  (578,519)
Net cash (used for) provided by financing activities  (910,871)  592,428 
Effect of exchange rate changes on cash  586,237   379,519 
Net (decrease) increase in cash and cash equivalents  (2,507,433)  7,638,027 
Cash and cash equivalents at beginning of year  14,940,236   7,302,209 
Cash and cash equivalents at end of year  $12,432,803   $14,940,236 

 

Operating activities

 

During the year ended December 31, 2011, we generated net cash from operating activities of $1,661,295 as compared to $7,244,599 for 2010. The decrease is primarily due to the increase of accounts receivable of $4,395,346 and the increase of inventories of $8,370,973. The decrease in net cash from operating activities is partially offset by the increase of net income to $12,793,448 for 2011 from $9,927,396 for 2010 and the increase of accounts payable of $2,340,991.

 

Investing Activities

 

During the fiscal year ended December 31, 2011, net cash used for investing activities was $3,844,094, representing an increase of $3,265,575 as compared to $578,519 of net cash used for investing activities in 2010. The increase of net cash used in investing activities in 2011 is primarily attributable to increased capital expenditures related to the building improvements and other factory equipment purchases in the amount of $3,847,657 in 2011. During the fiscal year ended December 31, 2010, we incurred capital expenditure of $584,467 related to factory equipment.

 

Financing Activities

 

Net cash used for financing activities for the fiscal year ended December 31, 2011 was $910,871, representing a decrease of $1,503,299, compared to $592,428 net cash provided by financing activities in 2010. The decrease is primarily due to repayments of the short term borrowings of $3,813,283 in 2011, which is partially offset by the release of restricted cash in the amount of $2,339,860 as a result of the repayment of our short term borrowings and advances from a shareholder of $562,552 to pay certain professional fees. We received short term borrowings proceeds of $3,659,235 and advances from a shareholder of $620,940 to pay certain professional fees in 2010, which is offset by bank borrowing repayments of $1,420,767 and an increase in restricted cash of $2,266,980 as a condition of bank borrowings in 2010.

 

33
 

 

Working Capital

 

Our working capital as of December 31, 2011 was $23,802,762, compared to working capital of $13,390,151 as of December 31, 2010, representing an increase of 77.76%. The improved working capital is mainly due to the net operating cash flows generated from the increases of our net income.

 

We aim to continue to improve the level of working capital through the enhanced level 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 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 our PRC operating subsidiary. If our PRC subsidiary 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, our PRC operating subsidiary 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, our PRC operating subsidiary 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. Our PRC operating subsidiary 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 the PRC operating subsidiary, the reserve funds are not distributable as cash dividends except in the event of liquidation of the PRC operating subsidiary.

 

Foreign Cash

 

As of December 31, 2011 and 2010, the Company had cash deposits of $12.4 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.

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 8. Financial Statements and Supplementary Data.

 

Reference is made to pages F-1 through F-16 comprising a portion of this Annual Report on Form 10-K.

 

Item 9.  Changes in and Disagreements With Accountants on Accounting and Financial Disclosures.

 

On February 6, 2012, the Audit Committee of the Board of the Registrant accepted the resignation of BDO Limited (“BDO”), the Registrant’s independent auditors. BDO had served as the Company’s independent public accounting firm since December 16, 2009. On February 7, 2012, upon recommendation by the Audit Committee and upon approval by the Board, the Registrant engaged Friedman LLP (“Friedman”) to serve as the Registrant’s independent registered public accounting firm.

 

During the Registrant’s two most recent fiscal years and the subsequent interim period through the date BDO resigned, BDO did not advise the Registrant as to any reportable events as set forth in Item 304(a)(1)(v)(A) through (D) of Regulation S-K and there were no disagreements between the Registrant and BDO of the type described in Item 304(a)(1)(iv) of Regulation S-K.

 

34
 

 

For more information regarding the change in accountants, please see the Registrant’s Current Report on Form 8-K filed with the SEC on February 8, 2012.

 

Item 9A. Controls and Procedures.

 

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 to evaluate the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual 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.  The Certifying Officers have concluded that the Company had a material weakness in its internal control over financial reporting as of December 31, 2011 because the Company’s accounting department personnel have limited knowledge and experience in U.S. GAAP and SEC reporting requirements as of the Evaluation Date.

 

Based on the evaluation of these disclosure controls and procedures, the Certifying Officers have concluded that these disclosure controls and procedures were not effective as of the Evaluation Date.

 

Management’s annual report on internal control over financial reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and SEC reporting requirements.

 

The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the polices or procedures may deteriorate.

 

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected on a timely basis by employees in the normal course of their work. As of December 31, 2011, the Certifying Officers have identified a material weakness that the Company’s accounting department personnel have limited knowledge and experience in U.S. GAAP.

 

Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2011 due to the identified material weakness of the Company above.

 

This Annual Report on Form 10-K does not include an attestation report of the Registrant's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the Registrant's registered public accounting firm pursuant to Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act that permit the Registrant to provide only management's report in this Annual Report.

 

35
 

 

Management’s Remediation Initiatives

 

In response to the above identified material weakness and to continue strengthening the Company’s internal control over financial reporting, we are considering the following remediation initiatives:

  

˙hire additional personnel with sufficient knowledge and experience in U.S. GAAP; and

 

˙provide ongoing training course in U.S. GAAP to existing personnel, including the Chief Financial Officer and the Financial Controller of the Company.

 

In February 2012, the Company retained an experienced consultant to assist the Chief Financial Officer and the Company’s management team in U.S. GAAP financial reporting and internal control under SOX404(a) compliance.

 

Changes in Internal Control Over Financial Reporting

 

During our fiscal year 2011, 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. 

 

36
 

 

PART III.

 

Item 10.  Directors, Executive Officers and Corporate Governance.

 

The following table sets forth the name, age, positions and offices or employments for the past five years as of the date of this filing, of the Registrant’s executive officers and directors.

 

Name   Age   Position(s)   Experience
Min Chen   43   Chairman of the Board of Directors, Chief Executive Officer, President   Min Chen has served as the Company’s Chairman, Chief Executive Officer and President since November 2009. He is the founder of the Company’s wholly-owned subsidiary, Fuqing Guanwei Plastic Industry Co. Ltd., and has served as its Chief Executive Officer and Chairman of its Board of Directors since inception in 2005; from 1999 to 2005, Mr. Chen served as Chief Executive Officer and Chairman of the Board of Directors of Fuqing Huanli Plastic Corp. He holds a Bachelors degree in economics from Xiamen University. Mr. Chen studied at both Japan Arsker College and Japan University and obtained degrees in economics, and obtained a Masters degree in innovative administration from Tsing Hua University in 2009. While in Japan, Mr. Chen completed a study of the advanced Japanese recycling business and upon returning to China in 1999, he established Gaoming Plastics Inc., a plastic recycling business. Mr. Chen has been working to expand the scale and level of recycling in China in a cost-efficient way.  Mr. Chen’s substantial knowledge of and experience with the Company, its operating subsidiary, and the recycled plastics industry, along with his leadership experience gained from his positions both within the Company and his other business experience, make him qualified to serve on the Board.  In addition, the Board felt that Mr. Chen’s specific educational experiences allow him to provide valuable insight into the management and direction of the Company.
             
Qijie Chen    45   Director   Qijie Chen has served on the Company’s Board since November 2009 and has served as Vice General Manager of the Company’s wholly-owned subsidiary, Fuqing Guanwei Plastic Industry Co. Ltd., since 2005; from 2002 to 2005, he served as Vice General Manager of Fuqing Huanli Plastic Corp., and prior to that, he worked as a sales representative and then sales manager at Fuqing Gaoming Plastics. Mr. Chen earned a diploma in chemistry from Fuzhou University.  Mr. Chen’s extensive knowledge of the Company’s operating subsidiary and of the recycled plastics industry, as well as his sales and marketing experience and his educational background, led the Board to conclude that he is qualified to serve as a director of the Company because he can provide insight and knowledge to the Company’s strategic planning and operations.

 

37
 

 

Juguang Gao   49   Director   Juguang Gao has served on the Company’s Board since November 2009 and has served as Sales Director of the Company’s wholly-owned subsidiary, Fuqing Guanwei Plastic Industry Co. Ltd., since 2005.  During that time, he has successfully developed over 200 client relationships for company in over 10 provinces. Prior to joining Guanwei, he served as Sales Manager of Fujian Zhenyun Plastics Corp., Fujian Yatong Plastics Corp. and Rongyin Plastics Corp. from 1997 to 2005. He earned a diploma in chemistry from Fuzhou University in 1982.  The Board concluded that Mr. Gao is qualified to serve as a director of the Company because his general sales and marketing experience, and his extensive knowledge and experience with the Company’s operating subsidiary and with the plastics industry overall, provide valuable insight and knowledge to the Board.
             
Changzhu Wang   39   Independent Director, Chairman of the Nominating and Corporate Governance Committee, Member of the Compensation Committee   Changzhu Wang has served on the Company’s Board since 2009. He founded and has served as President and CEO of Shandong Rongchen Real Property Development Corp. since 2004. He earned a Bachelors degree in business administration from Yokohama National University in 1995.  The Board concluded that Mr. Wang is a valuable member of the Board due to his educational background and business experience, and his experience with the Company, which provide unique insight and knowledge.
             
Rui Wang   42   Independent Director, Chairman of the Compensation Committee, Member of the Audit Committee, Member of the Nominating and Corporate Governance Committee   Rui Wang has served on the Company’s Board since 2009.  In 2002, Mr. Rui founded and has served as President and CEO of Tianjin Yuanchuang Shuntian Architech Design & Consulting Inc. He earned a Bachelors degree in English Literature from Tianjin Foreign Studies University in 1991 and a Bachelors degree in Business & Commerce from University of Tokyo in 1997.  Mr. Wang’s leadership, educational and business experience, along with his experience with the Company, led the Board to conclude that he is qualified to serve as a director of the Company.
             
Howard Barth   60   Independent Director, Chairman of the Audit Committee   Howard Barth has served on the Company’s Board since 2009. From 2005 until May 2008, he served as President, CEO and as a director of Yukon Gold Corp.  Mr. Barth was also a director of Nuinsco Resources Limited (a TSX listed exploration company) until June 2008.  He is currently a director and chairman of the Audit Committees of New Oriental Energy & Chemical Corp. (a NASDAQ-listed company), China Auto Logistics Inc. (a NASDAQ-listed company) and Orsus Xelent Technologies, Inc. (an AMEX-listed company). He was also a director for Uranium Hunter Corporation (an OTC BB company). Mr. Barth has operated his own public accounting firm in Toronto, Canada since 1985, and has over 27 years of experience as a certified accountant. He is a member of the Canadian Institute of Chartered Accountants and the Ontario Institute of Chartered Accountants. He earned a Bachelors and Masters degree in accounting from York University.   Mr. Barth’s extensive financial experience and his experience with both Canadian- and US-listed companies led the Board to conclude that Mr. Barth is a valuable member of the Board.

 

38
 

 

Jingshou Qin   41   Independent Director, Member of the Audit Committee, Member of the Compensation Committee, Member of the Nominating and Corporate Governance Committee   Jingshou Qin has served on the Company’s Board since 2009. In 2000, he founded and has served as General Manager of Fuqing Yonghe Plastic & Rubbery Corp. inception. Prior to that he spent 8 years working for various plastic companies in sales and marketing. He earned a Bachelors degree in Mathematics from Fujian Normal University in 1993.  The Board concluded that Mr. Qin’s substantial experience in the plastics industry, along with his sales, marketing and leadership experiences in the industry and with the Company, provide valuable industry insight and qualify him to serve on the Board.

  

Feng Yang   43   Chief Financial Officer, Secretary, Treasurer   Feng Yang served as Chief Financial Officer, Secretary and Treasurer of the Company since November 2009.  He has served as Chief Financial Officer of Guanwei since 2009; from 2007 to 2009, he served as Chief Financial Officer of Xi’An Li Ao Technology Inc. From 2003 to 2006, he worked as the financial controller for China Diary Group Limited (CHDA, Singapore Securities Exchange listing) and served as the Chief Financial Officer for Xi'An Silver Bridge Bio-tech Corp. (a Singapore listed corporation) from 2001 to 2003. Mr. Yang is a certified public accountant in China and has over 19 years of accounting experience.  He earned a Bachelors degree in Accounting from China Northwest University.

 

Term of Office

 

The Registrant’s directors are appointed for a one-year term to hold office until the next annual general meeting of shareholders or until removed from office in accordance with the Registrant’s Bylaws. The Registrant’s officers are appointed by the Board and hold office until removed by the Board.   The Nominating and Corporate Governance Committee will consider nominees recommended by our shareholders.

 

Arrangements and Understandings

 

There are no arrangements and understandings between any officer or director of the Registrant and any other person pursuant to which the officer was selected to serve as an officer or to which the director was elected.

 

Audit Committee

 

The Registrant has a standing Audit Committee, which is currently comprised of the following directors of the Registrant: Howard S. Barth (Chair), Rui Wang and Jinshou Qin, each of whom is an independent director, as independence is currently defined in applicable SEC and NASDAQ rules.  The Audit Committee was established by the Board on December 4, 2009.  The Board has determined that Mr. Barth qualifies as an “audit committee financial expert,” as defined in applicable SEC rules. The Board made a qualitative assessment of Mr. Barth’s level of knowledge and experience based on a number of factors, including his formal education and experience.

 

The Audit Committee is responsible for overseeing the Company’s corporate accounting, financial reporting practices, audits of financial statements and the quality and integrity of the Company’s financial statements and reports. In addition, the Audit Committee oversees the qualifications, independence and performance of the Company’s independent auditors. In furtherance of these responsibilities, the Audit Committee’s duties include the following: evaluating the performance of and assessing the qualifications of the independent auditors; determining and approving the engagement of the independent auditors to perform audit, review and attest services and performing any proposed permissible non-audit services; evaluating employment by the Company of individuals formerly employed by the independent auditors and engaged on the Company’s account and any conflicts or disagreements between the independent auditors and management regarding financial reporting, accounting practices or policies; discussing with management and the independent auditors the results of the annual audit; reviewing the financial statements proposed to be included in the Registrant’s Annual Report on Form 10-K; discussing with management and the independent auditors the results of the auditors’ review of the Company’s quarterly financial statements; conferring with management and the independent auditors regarding the scope, adequacy and effectiveness of internal auditing and financial reporting controls and procedures; and establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting control and auditing matters and the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee operates under the written Audit Committee Charter adopted by the Board in 2009, a copy of which may be obtained by writing the Chief Executive Officer of the Registrant at Guanwei Recycling Corp., c/o Fuqing Guanwei Plastic Industry Co. Ltd., Rong Qiao Economic Zone, Fuqing City, Fujian Province, People’s Republic of China 350301, attention: Min Chen, CEO.  A copy of the Audit Committee Charter is also available as an exhibit to the Current Report on Form 8-K filed by the Registrant on December 22, 2009.

 

39
 

 

Family Relationships

 

There are no family relationships by and between or among the members of the Board or other executives. None of the Registrant’s directors and officers are directors or executive officers of any company that files reports with the SEC except as set forth in the Biographies section above.

 

Legal Proceedings Involving Officers and Directors

 

None.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires that the Registrant’s directors and executive officers and persons who beneficially own more than ten percent (10%) of a registered class of its equity securities, file with the SEC reports of ownership and changes in ownership of its common stock and other equity securities. Executive officers, directors, and greater than ten percent (10%) beneficial owners are required by SEC regulation to furnish the Registrant with copies of all Section 16(a) reports that they file. Based solely upon a review of the copies of such reports furnished to us or written representations that no other reports were required, the Registrant believes that, during that past fiscal year, all filing requirements applicable to its executive officers, directors, and greater than ten percent (10%) beneficial owners were met.

 

Code of Ethics

 

The Registrant has adopted a Code of Business Conduct and Ethics that applies to the Chief Executive Officer, Chief Financial Officer, and other persons performing similar functions within the Company. We shall, without charge, provide to any person, upon request, a copy of the Code of Ethics for the Senior Financial Officers. All such requests should be mailed to: Guanwei Recycling Corp., c/o Fuqing Guanwei Plastic Industry Co. Ltd., Rong Qiao Economic Zone, Fuqing City, Fujian Province, People’s Republic of China 350301, attention: Mr. Min Chen, CEO.

 

As required by SEC rules, the Registrant will report within five business days the nature of any change or waiver of the Code of Ethics for Senior Financial Officers.

 

Item 11.  Executive Compensation.

 

Summary Compensation Table

 

The following table sets forth compensation information concerning all cash and non-cash compensation awarded to, earned or paid to certain of our executive officers and other key employees of the Company who were serving as of the date of this Annual Report for services in all capacities during the last two (2) completed fiscal years ended December 31, 2011 and 2010. The following information includes the U.S. dollar value, based on the exchange rate of the RMB to USD on December 31, 2011, of bonus awards, the number of stock options granted and certain other compensation, if any, whether paid or deferred.

 

Name and
Principal
Position
  Year   Salary ($)   Total ($) 
             
Min Chen,   2011    111,559    111,559 
CEO and Chairman (1)   2010    101,951    101,951 
                
Feng Yang,   2011    74,372    74,372 
CFO (2)   2010    62,358    62,358 
                
Qijie Chen   2011    74,372    74,372 
Vice General Manager (3)   2010    62,358    62,358 
                
Jianli You,    2011    74,372    74,372 
Workshop Manager (4)   2010    62,358    62,358 
                
Juguang Gao,    2011    74,372    74,372 
Operation Manager (5)   2010    62,358    62,358 

 

40
 

 

** The columns for “Bonus,” “Stock Awards,” “Option Awards,” “Non-Equity Incentive Plan Compensation,” “Non-qualified Deferred Compensation Earnings,” and “All Other Compensation” have been omitted because there were no such awards.

 

(1) Min Chen’s base salary for the fiscal years ended December 31, 2011 and 2010 was RMB720,000, and RMB686,670, respectively, or $111,559 and $101,951, respectively.

 

(2) Feng Yang’s base salary for the fiscal years ended December 31, 2011 and 2010 was RMB480,000, and RMB420,000, respectively, or $74,372 and $62,358, respectively.

 

(3) Qijie Chen’s base salary for the fiscal years ended December 31, 2011 and 2010 was RMB480,000, and RMB420,000, respectively, or $74,372 and $62,358, respectively.

 

(4) Jianli You’s base salary for the fiscal years ended December 31, 2011 and 2010 was RMB480,000, and RMB420,000, respectively, or $74,372 and $62,358, respectively.

 

(5) Juguang Gao’s base salary for the fiscal years ended December 31, 2011 and 2010 was RMB480,000, and RMB420,000, respectively, or $74,372 and $62,358, respectively.  

 

Each of the executive officers of the Company has entered into standard employment contracts with the Company, a form of which is incorporated as an exhibit to the Annual Report on Form 10-K as Exhibit 10.5. The contracts have 3-year terms and are otherwise consistent with the standard form prescribed by the Fujian Labor and Social Security Administration. We have no stock option, retirement, pension or profit-sharing programs for the benefit of directors, officers or other employees, but the Registrant’s Board of Directors may recommend adoption of one or more such programs in the future.  

 

None of the directors or officers have any stock options.  

 

Executive Compensation

 

Our compensation program is designed to provide its executive officers with competitive remuneration and to reward their efforts and contributions to the Company. Elements of compensation for our executive officers include base salary and cash bonuses.

 

Before we set the base salary for our executive officers, we research the market compensation in the Fujian Province for executives in similar positions with similar qualifications and relevant experience, and add a premium as an incentive to attract high-level employees. Company performance does not play a significant role in the determination of base salary.

 

Cash bonuses may also be awarded to our executives on a discretionary basis at any time. Cash bonuses are also awarded to executive officers upon the achievement of specified performance targets, including annual revenue targets for the Company.

 

Director Compensation

 

The Registrant paid $24,000 to our audit committee chair/director for each of the years ended December 31, 2011 and 2010. No other directors received any compensation in either of the fiscal years ended December 31, 2011 and 2010. We may establish certain compensation plans (e.g. options, cash for attending meetings, etc.) with respect to directors in the future.

 

Employment Agreements

 

We have a labor contract with each employee as required by law in the PRC. The labor contract mainly includes working content, contract period, working time, payment and other terms.

 

Benefit Plans

 

The Registrant has no stock option, retirement, pension or other profit-sharing programs for the benefit of our directors, officers or employees; however, our Board may recommend the adoption of one or more such programs in the future.

 

41
 

 

In accordance with Chinese law, we offer a welfare program pursuant to which it pays pension, accident, medical, birth, job and house allowance payments for all contract employees.

 

Item 12.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

The shareholders of the Company adopted the Guanwei Recycling Corp. 2010 Omnibus Long-Term Incentive Plan (the “Plan”) at the annual shareholder meeting, which took place on November 19, 2010.  A copy of the Plan is incorporated as an exhibit to the Annual Report on Form 10-K as Exhibit 10.9.  As of the date of this report, no awards have been made under the Plan.  The following table sets forth information regarding securities authorized for issuance under equity compensation plans.

 

Plan Category  Number of Securities to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
(a)
   Weighted-Average Exercise
Price of Outstanding Options,
Warrants and Rights
(b)
  Number of Securities
Remaining Available 
For
Future Issuance Under
Equity Compensation 
Plans
(Excluding Securities
Reflected in Column A)
(c)
 
Equity Compensation Plans Approved by Security Holders   0   n/a   2,400,000 
Equity Compensation Plans Not Approved by Security Holders   0   n/a   n/a 

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth each person known by us to be the beneficial owner of five percent (5%) or more of the Registrant’s Common Stock as of March 29, 2012. Each person named below has sole voting and investment power with respect to the shares shown unless otherwise indicated.

 

Name and Address of Beneficial Owner  

Amount of

Direct

Ownership

   

Amount of

Indirect

Ownership

   

Total Beneficial

Ownership

   

Percentage

of Class (1)

 

Fresh Generation Overseas Limited (2)

Rong Qiao Economic Zone

Fuqing City

Fujian Province, 350301

People’s Republic of China

    12,000,000             12,000,000       60 %
                                 

Security Ownership of Management

 

The following table sets forth the ownership interest in the Registrant’s Common Stock, as of March 29, 2012, of all directors individually and all directors and officers as a group. Each person named below has sole voting and investment power with respect to the shares shown unless otherwise indicated.

 

 

Name and Address of Beneficial Owner (3)  Amount of
Direct
Ownership
   Amount of 
Indirect 
Ownership
   Total 
Beneficial 
Ownership
   Percentage 
of Class (1)
 
Min Chen, Chairman and CEO       3,264,000(2)   3,264,000    16.3%
Qijie Chen, Director       2,184,000(2)   2,184,000    10.9%
Jianli You, Workshop Manager       4,368,000(2)   4,368,000    21.8%
Juguang Gao, Director       2,184,000(2)   2,184,000    10.9%
Changzhu Wang, Director                
Rui Wang, Director                
Howard Barth, Director                
Jingshou Qin, Director                
Feng Yang, Chief Financial Officer                
ALL DIRECTORS AND OFFICERS AS A GROUP:        12,000,000    12,000,000    60%

 

42
 

 

(1) Applicable percentage of ownership is based on 20,000,006 shares of Common Stock outstanding as of the date of this Annual Report, together with securities exercisable or convertible into shares of Common Stock within sixty (60) days of the date of this Report for each shareholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of Common Stock are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. Note that affiliates are subject to Rule 144 and insider trading regulations. The percentage computation is for form purposes only.

 

(2) Min Chen, Qijie Chen, Jianli You and Gao Juguang previously owned all of the issued and outstanding shares of Fresh Generation Overseas Limited, the Registrant’s principal shareholder, in the following proportions: Min Chen (27.2%), Jianli You (36.4%), Qijie Chen (18.2%), Juguang Gao (18.2%). In November 2008, Qijie Chen, Jianli You and Juguang Gao transferred their interests in Fresh Generation Overseas Limited to Chen Min, as trustee, to hold such interests in trust for their benefit. Qijie Chen, Jianli You and Juguang Gao retain the power to direct Min Chen regarding how to vote or dispose of the shares held in trust.

 

  Also in November 2008, Min Chen entered into a trust agreement with Bank Yu Po Fung, as trustee, to hold the shares of Fresh Generation Overseas Limited in trust for Min Chen. Min Chen retains investment and voting control over such shares, and accordingly he is the indirect beneficial owner of the shares of our Common Stock held by Fresh Generation Overseas Limited. However, by virtue of the first trust arrangement, Qijie Chen, Jianli You and Juguang Gao are also deemed to beneficially own the shares of the Registrant’s Common Stock held by Fresh Generation Overseas Limited in proportion to their respective interests in the trust assets.

 

 (3) Each beneficial owner has the same address as the Registrant.

 

Changes in Control

 

We know of no contractual arrangements which may at a subsequent date result in a change of control in the Registrant.

 

Item 13.  Certain Relationships and Related Transactions, and Director Independence.

 

Transactions with Related Persons, Promoters and Certain Control Persons

 

Approval of Related Person Transactions

 

Our Code of Business Conduct and Ethics requires all of our personnel to be scrupulous in avoiding a conflict of interest with regard to our interests.  The code prohibits us from entering into a business relationship with an immediate family member, or with a company that the employee or immediate family member has a substantial financial interest unless such relationship is disclosed to, reviewed by and approved in advance by our Board.

 

Each of our directors and executive officers is required to complete an annual disclosure questionnaire and report all transactions with us in which they and their immediate family members had or will have direct or indirect material interest with respect to us.  The Audit Committee reviews these questionnaires and, if the Audit Committee determines it necessary, it discusses any reported transactions with the entire Board.  The Audit Committee does not, however, have a formal written policy for approval or ratification of such transactions, and all such transactions are evaluated on a case-by-case basis.  If the Audit Committee believes a transaction is significant to the Company and raises particular conflict of interest issues, it will discuss it with our legal counsel, and if necessary, will engage its own legal and financial counsel to evaluate and approve the transaction.

 

Exchange Agreement (Change of Control)

 

On November 5, 2009, the Registrant acquired all of the issued and outstanding capital stock of Chenxin from Fresh Generation in exchange for the issuance to Fresh Generation of 12 million newly-issued shares of Common Stock pursuant to the terms of the Exchange Agreement. As a result of the Share Exchange, Fresh Generation beneficially owns sixty percent (60%) of the voting capital stock of the Registrant. All the shares of Fresh Generation are held in trust for Min Chen, the President, CEO and Chairman of the Board of Guanwei, and Jianli You, Qijie Chen, and Juguang Gao. Upon the execution of the Exchange Agreement, Marshall Davis resigned from each of his officer positions with the Registrant and Min Chen was appointed to serve as Chairman, Chief Executive Officer and President of the Registrant. Additionally, Feng Yang was appointed to serve as Chief Financial Officer, Secretary and Treasurer of the Registrant.

 

43
 

 

On November 6, 2009, the Registrant also filed with the SEC an Information Statement complying with Rule 14F-1 under the Exchange Act that describes a change in a majority of the Registrant’s Board that occurred in connection with the change of control of the Registrant that is described in the Current Report filed with the SEC on November 6, 2009. Upon the execution of the Exchange Agreement, Min Chen was appointed to the Board and ten (10) days following the mailing of such Information Statement to the shareholders of the Registrant, Mr. Davis’s resignation as a director became effective and the remaining seven directors were appointed to the Board (as described in Item 5.02 of the Registrant’s Current Report on Form 8-K filed November 6, 2009).

 

Purchase Agreement

 

Simultaneously with the consummation of the Share Exchange, Marshall Davis entered into a Stock Purchase Agreement with the Registrant pursuant to which Mr. Davis delivered to the Registrant 64,510,540 shares of the Registrant’s Common Stock held by him for cancellation. In consideration for those shares, the Registrant transferred to Mr. Davis of all the issued and outstanding capital stock of MD Mortgage.  At such time, MD Mortgage had no operations and nominal assets.

 

Dividend

 

In 2009, Chenxin and Guanwei paid dividends in the aggregate amount of $5,666,445 to Chen Min, You Jianli, Chen Qijie and Gao Juguang, each of whom are directors of the Registrant. The dividend was declared in 2008, while Min Chen, Jianli You, Qijie Chen and Juguang Gao were shareholders of Guanwei and Chenxin, but the dividend payment was ratified at the annual shareholders meeting and board of directors meeting of Guanwei on March 11, 2009.

 

Accrued Expenses

 

Beginning in 2009, the Company made an oral arrangement with Chenxin International Limited (“Chenxin”), a Hong Kong company and shareholder of the Company controlled by Mr. Rui Wang, a director of the Company, pursuant to which Chenxin agreed to pay certain accrued expenses on behalf of the Company. As of December 31, 2011, Chenxin has paid accrued expenses of $1,468,167. These amounts were related to legal and professional fees which are not payable in Chinese RMB (audit and audit-related expenses, legal fees, fees payable to the Company's transfer agent and EDGAR agent, and fees paid to NASDAQ relating to the Company's listing). These amounts were reflected on the Company’s consolidated balance sheets as outstanding amounts due to a shareholder.

 

This arrangement is not reflected in any written agreement and is typical of PRC business practices in the region where the Company is located.  The arrangement stems from the fact that Mr. Min Chen, the Company’s Chief Executive Officer, President, and Chairman of the Board, and Mr. Wang have a business and personal relationship that dates to the mid-1990s. While in Japan from 1995 to 2000, Mr. Chen and Mr. Wang loaned money to each other, and to each person’s respective businesses, from time to time to cover operating expenses. This relationship was still in effect when Mr. Chen founded the Company’s wholly-owned subsidiary, Fuqing Guanwei Plastic Industry Co. Ltd., in 2005 and when the Company became a publicly listed company in the United States in 2009. At that time, Mr. Chen and Mr. Wang entered into the current arrangement whereby Chenxin would cover on behalf of Guanwei all expenses outside China because, as a Hong Kong company, Chenxin is not subject to the approval of the PRC Office of Currency Control for payments made outside of China to which Chinese companies, including Guanwei, are subject. This arrangement enables the Company to satisfy its obligations in a timely manner.

 

The agreement contemplates that Chenxin shall be paid back all amounts due to it in a lump sum upon the closing of a future financing by the Company. The Company does not pay any interest or other charges on the amounts paid by Chenxin. Chenxin may unilaterally decide to discontinue paying accrued expenses on the Company’s behalf at any time.

 

Director Independence

 

The following non-employee directors of the Registrant are independent pursuant to NASDAQ rules and the rules of the Securities and Exchange Commission:

 

Howard Barth

Rui Wang

Changzhu Wang

Jingshou Qin

 

The following directors are not independent pursuant to Nasdaq rules and the rules of the Securities and Exchange Commission: Min Chen, Qijie Chen, and Juguang Gao.

 

44
 

 

Item 14. Principal Accounting Fees and Services.

 

Our independent accountant is Friedman LLP (“Friedman”).  As reported in the Registrant’s Current Report on Form 8-K filed on February 8, 2012, the Registrant appointed Friedman LLP as its independent accountant effective immediately.  Our previous independent accountant was BDO Limited (“BDO”).  Set forth below are aggregate fees billed by BDO for professional fees rendered for the audit and quarterly reviews of the Registrant’s financial statements included in the Registrant’s Forms 10-K and 10-Q for the fiscal years ended December 31, 2011 and 2010.

 

AUDIT FEES

 

During the years ended December 31, 2011 and 2010, the fees billed and paid to BDO were $203,500 and $168,000, respectively.

 

The fees expected to be billed and paid to Friedman related to the audit for the year ended December 31, 2011 are approximately $85,000.

 

AUDIT-RELATED FEES

 

The Company's auditors did not bill any additional fees for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements during fiscal 2011 and 2010.

 

TAX FEES

 

The aggregate fees billed by the Company's auditors for professional services for tax compliance, tax advice, and tax planning were $0 for fiscal 2011 and 2010.

 

ALL OTHER FEES

 

The aggregate fees billed by the Company's auditors for all other non-audit services rendered to the Company, such as attending meetings and other miscellaneous financial consulting in fiscal 2011 and 2010 were $0.

 

Policy on Audit Committee Pre-Approval of Audit and Non-Audit Services of Independent Accountant

 

The policy of the Audit Committee is to pre-approve all audit and non-audit services provided by the independent accountants. These services may include audit services, audit-related services, tax fees, and other services. Pre-approval is generally provided for up to one year and any pre-approval is detailed as to the particular service or category of services and is subject to a specific budget. The Audit Committee has delegated pre approval authority to certain committee members when expedition of services is necessary. The independent accountants and management are required to periodically report to the full Audit Committee regarding the extent of services provided by the independent accountants in accordance with this pre-approval delegation, and the fees for the services performed to date.  None of the services described above in this Item 14 were approved in advance by the Audit Committee during the fiscal year ended December 31, 2011.

 

Principal Accountant’s Engagement to Audit

 

The percentage of hours expended on the principal accountant’s engagement to audit the Registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was approximately 75%.

  

45
 

 

PART IV

 

Item 15.  Exhibits.

 

(a) Financial Statements

 

Our financial statements as set forth in the Index to Financial Statements attached hereto commencing on page F-1 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 Fung and Chen Min, dated November 28, 2009  (5)
     
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 Erftstadt to Guanwei  (5)
     
10.5   Form of Employment Contract  (1)
     
10.6   Stock Purchase Agreement, between the Registrant and Marshall Davis, dated November 5, 2009  (1)

 

46
 

 

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   Guanwei Recycling Corp. 2010 Omnibus Long-Term Incentive Plan (4)
     
10.10   Agreement with Fuqing Huanli Plastics Co., Ltd., dated November 1, 2008 (5)
     
10.11   Oral Agreement with Chenxin International Limited, dated 2009 (6)
     
14.1   Code of Business Conduct and Ethics (3)
     
16.1   Letter from Webb & Company, PA, dated December 16, 2009 (3)
     
21.1   List of Subsidiaries of the Registrant (1)
     
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 Definitive Schedule 14A, filed on October 15, 2010.

 

(5)Incorporated by reference to the Registrant’s Annual Report on Form 10-K, filed on March 31, 2011.

 

(6)Incorporated by reference to the Registrant’s Annual Report on Form 10-K/A, filed on December 27, 2011.

 

*Filed herewith.

 

47
 

 

GUANWEI RECYCLING CORP.

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED DECEMBER 31, 2011

 

  Page
   
Report of Independent Registered Public Accounting Firm – Friedman LLP F-2
   
Report of Independent Registered Public Accounting Firm – BDO Limited F-3
   
Consolidated Balance Sheets F-4
   
Consolidated Statements of Income and Comprehensive income F-5
   
Consolidated Statements of Shareholders’ Equity F-6
   
Consolidated Statements of Cash Flows F-7
   
Notes to Consolidated Financial Statements F-8 - F-19
   

F-1
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Directors and Shareholders

Guanwei Recycling Corp.

 

 

We have audited the accompanying consolidated balance sheet of Guanwei Recycling Corp. (the “Company”) as of December 31, 2011, and the related consolidated statements of income and comprehensive income, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Guanwei Recycling Corp. as of December 31, 2011, and the consolidated results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ Friedman LLP

 

New York, New York

March 30, 2012

F-2
 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Shareholders of

Guanwei Recycling Corp.

 

 

We have audited the accompanying consolidated balance sheet of Guanwei Recycling Corp. (the “Company”) as of December 31, 2010, and the related consolidated statement of income and comprehensive income, shareholders’ equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2010, and the results of its operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 

/s/ BDO Limited

 

BDO Limited

Hong Kong, March 31, 2011

 

 

 

 

 

F-3
 

 

GUANWEI RECYCLING CORP.

CONSOLIDATED BALANCE SHEETS

(Expressed in U.S. dollars)

 

   As of December 31, 
   2011   2010 
ASSETS:          
           
Current assets:          
Cash and cash equivalents  $12,432,803   $14,940,236 
Restricted cash   -    2,280,398 
Accounts receivable   4,475,386    9,106 
Inventories   16,858,801    10,721,765 
Prepayments and other current assets   2,104,349    475,195 
Total current assets   35,871,339    28,426,700 
           
Property, plant and equipment, net   8,151,012    4,894,141 
Construction in progress   174,295    - 
Land use right, net   673,762    660,941 
Others   205,437    201,579 
Total Assets  $45,075,845   $34,183,361 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY:          
           
Current liabilities:          
Short term borrowings  $-   $3,716,377 
Accounts payable   8,741,822    8,812,940 
Accrued expenses and other payables   714,072    721,569 
Amount due to shareholder   1,468,167    905,615 
Income tax payable   1,144,516    880,048 
Total current liabilities   12,068,577    15,036,549 
           
Commitments and contingencies          
           
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   28,629,076    15,835,628 
Accumulated other comprehensive income   2,262,681    1,195,673 
Total Shareholders’ equity   33,007,268    19,146,812 
           
Total liabilities and shareholders’ equity  $45,075,845   $34,183,361 

 

The accompanying notes form an integral part of these consolidated financial statements

 

F-4
 

 

GUANWEI RECYCLING CORP.

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

(Expressed in U.S. dollars)

 

   Year Ended December 31, 
   2011   2010 
         
Net Revenue  $63,600,678   $47,534,645 
           
Cost of Revenue   44,111,700    32,179,321 
Gross profit   19,488,978    15,355,324 
           
Operating expenses:          
Selling and marketing expenses   398,513    346,409 
General and administrative expenses   1,903,062    1,568,653 
Income from operations   17,187,403    13,440,262 
           
Other income (expenses):          
Interest income   88,249    28,704 
Interest expense   (29,083)   (85,474)
Income before income taxes   17,246,569    13,383,492 
           
Income taxes   4,453,121    3,456,096 
           
Net income  $12,793,448   $9,927,396 
           
Comprehensive Income:          
           
Net income  $12,793,448   $9,927,396 
           
Other comprehensive income          
- Foreign currency translation adjustments   1,067,008    488,683 
           
Comprehensive income  $13,860,456   $10,416,079 
           
Earnings per share attributable to shareholders of Guanwei Recycling Corp.          
– basic and diluted  $0.64   $0.50 
Weighted average number of shares of common stock used in computing basic and diluted earnings per share   20,000,006    20,000,006 

 

The accompanying notes form an integral part of these consolidated financial statements

 

F-5
 

 

GUANWEI RECYCLING CORP.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Expressed in U.S. dollars)

 

                       Accumulated     
           Additional           Other     
   Common Stock   Paid-in   PRC   Retained   Comprehensive   Total 
   Shares   Amount   Capital   Reserves   Earnings   Income   Equity 
                             
Balance as of December 31, 2009   20,000,006   $20,000   $1,234,133   $805,483   $5,908,232   $706,990   $8,674,838 
Net income   -    -    -    -    9,927,396    -    9,927,396 
Shareholder contribution   -    -    55,895    -    -    -    55,895 
Foreign currency translation adjustments   -    -    -    -    -    488,683    488,683 
Balance as of December 31, 2010   20,000,006   $20,000   $1,290,028   $805,483   $15,835,628   $1,195,673   $19,146,812 
Net income   -    -    -    -    12,793,448    -    12,,793,448 
Foreign currency translation adjustments   -    -    -    -    -    1,067,008    1,067,008 
Balance as of December 31, 2011   20,000,006   $20,000   $1,290,028   $805,483   $28,629,076   $2,262,681   $33,007,268 

 

The accompanying notes form an integral part of these consolidated financial statements

 

F-6
 

 

GUANWEI RECYCLING CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Expressed in U.S. dollars)

 

   Year Ended December 31, 
   2011   2010 
         
Cash flows from operating activities:          
Net income  $12,793,448   $9,927,396 
           
Adjustments to reconcile net income to net cash provided by operating activities          
Depreciation of property, plant and equipment   600,065    438,563 
Amortization of land use right   15,070    14,389 
Loss on disposal of property, plant and equipment   72,174    2,472 
           
Changes in operating assets and liabilities:          
Accounts receivable   (4,395,248)   4,795 
Inventories   (8,370,973)   (3,763,939)
Prepayments and other current assets   (1,586,462)   (36,185)
Other assets   4,648    - 
Accounts payable   2,340,991    13,364 
Accrued expenses and other payables   (35,833)   252,227 
Income tax payable   223,415    391,517 
Net cash provided by operating activities   1,661,295    7,244,599 
           
Cash flows from investing activities:          
Purchase of property, plant and equipment   (3,847,657)   (584,467)
Proceeds from disposal of property, plant and equipment   3,563    5,948 
Net cash used for investing activities   (3,844,094)   (578,519)
           
Cash flows from financing activities:          
Decrease (increase) in restricted cash   2,339,860    (2,266,980)
Advance from shareholder   562,552    620,940 
Proceeds from short-term borrowings   -    3,659,235 
Repayment of short-term borrowings   (3,813,283)   (1,420,767)
Net cash flows (used for) provided by financing activities   (910,871)   592,428 
           
Effect of exchange rate change on cash and cash equivalents   586,237    379,519 
           
Net (decrease) increase in cash and cash equivalents   (2,507,433)   7,638,027 
           
Cash and cash equivalents at the beginning of year   14,940,236    7,302,209 
Cash and cash equivalents at the end of year  $12,432,803   $14,940,236 
           
Supplemental disclosure of cash flow information:          
Interest paid  $29,083   $85,215 
Income taxes paid  $4,229,706   $3,064,578 

 

The accompanying notes form an integral part of these consolidated financial statements

 

F-7
 

 

Guanwei Recycling Corp.

Notes to Consolidated Financial Statements

 

1 Organization, Nature of Business and Basis of Presentation

 

The consolidated financial statements consist of the financial statements of Guanwei Recycling Corp. (the “Registrant”), Hongkong Chenxin International Development Limited (“Chenxin”) and Fuqing Guanwei Plastic Industry Co. Ltd. (“Guanwei”, and together with the Registrant and Chenxin, hereafter referred to as the “Company”).

 

On November 5, 2009, the Registrant (formerly known as MD Holdings Corp.), which was incorporated on December 13, 2006 in the State of Nevada, entered into a Share Exchange Agreement with Fresh Generation Overseas Limited, a British Virgin Islands corporation (“Fresh Generation”) and Chenxin, then a wholly-owned subsidiary of Fresh Generation. Under the Share Exchange Agreement, the Registrant issued 12,000,000 shares of its common stock to Fresh Generation in exchange (the “Share Exchange”) for all of the issued and outstanding capital stock of Chenxin. The closing of the Share Exchange occurred on the same day.

 

Prior to the closing of the Share Exchange, the Registrant effectuated a 3.5 for 1 forward stock split (the “Forward Split”). The number of shares of authorized common stock and the par value did not change as a result of the Forward Split. The record date for determining which shareholders were entitled to receive the Forward Split shares was November 2, 2009. The consummation of the Forward Split did not result in a change in the relative equity position or voting power of the shareholder of the Registrant. The Forward Split resulted in the increase in the number of shares of common stock issued and outstanding to 72,510,141.

 

As a condition to the closing of the Share Exchange, an aggregate of 64,510,140 shares of the Registrant’s common stock held by Marshall Davis, the Registrant’s principal stockholder immediately prior to the closing, were cancelled immediately prior to closing. Prior to the closing of the Share Exchange and the cancellation of shares stated above, the Registrant had a total of 8,000,006 shares of common stock issued and outstanding. As a result of the Share Exchange, Chenxin became the Registrant’s wholly-owned subsidiary and Fresh Generation became the holder of 12,000,000 shares (approximately 60%) of the Registrant’s Common Stock. Upon the closing of this transaction, the Registrant’s primary business operations are those of Chenxin. Shortly after the closing, the Registrant changed its name to Guanwei Recycling Corp.

 

Chenxin was incorporated in Hong Kong on September 29, 2008. Guanwei was 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. The sole shareholder of Fresh Generation is a Canadian resident, who holds Fresh Generation’s shares by a trust on behalf of Chen Min, You Jianli, Chen Qijie and Gao Juguang, each of whom are directors of the Registrant (the “Original Shareholders”).

 

Upon its establishment, Guanwei was owned by the Original Shareholders. Prior to November 22, 2008, Chenxin had minimal assets and no operations. On November 22, 2008, Chenxin entered into an agreement of Plan of Reorganization (the “Plan”) with the Original Shareholders, pursuant to which Chenxin issued 10,000 shares of common stock to the Original Shareholders in exchange of 100% of the registered and fully paid up capital of Guanwei. Upon the completion of this transaction on December 23, 2008, Guanwei became a wholly-owned foreign enterprise (“WOFE”) of Chenxin and this arrangement was approved by the relevant ministries of the PRC government. The ultimate controlling parties of Guanwei are the Original Shareholders both before and after the Plan, and their controls are not transitory. The Plan therefore involved entities or businesses under common control, so merger accounting is considered as an appropriate accounting policy for this type of common control combination.

 

Upon the completion of the transactions on December 23, 2008 and November 5, 2009, the Registrant owned 100% of Chenxin, which owned 100% of Guanwei, the operating entity of the Registrant. For financial reporting purposes, this transaction is classified as a recapitalization of Guanwei and the historical financial statements of Guanwei are reported as the Company’s historical financial statements.

 

The Company is organized as a single business segment and its principal activity is engaged in manufacturing and distribution of low density polyethylene (“LDPE”) and the sales of scrap materials, including plastic.

 

2 Summary of Significant Accounting Policies

 

(a) Basis of Accounting and Principles of Consolidation

 

The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”), and include the financial statements of the Registrant and its wholly-owned subsidiaries.

 

In preparing the consolidated financial statements, all significant inter-company transactions and balances have been eliminated on consolidation.

 

F-8
 

 

2 Summary of Significant Accounting Policies – Continued
   
(b) Use of Estimates

 

The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts that are reported in the financial statements and accompanying disclosures. Significant accounting estimates reflected in the Company’s consolidated financial statements include revenue recognition, allowance for doubtful accounts, useful lives of property and equipment, and accrued expenses and other payables. Actual results may be different from the estimates.

 

(c) Foreign Currency Translations and Transactions

 

The Company’s operations in the People’s Republic of China (“PRC”) use the local currency, RMB, as their functional currency, whereas amounts reported in the accompanying 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”. 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 other comprehensive income. The statement of 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 issue of shares and payment of dividends which are translated at historical rates.

 

Assets and liability accounts at December 31, 2011 and 2010 were translated at RMB 6.35 and RMB6.62 to $1.00, respectively. The average translation rates applied to the consolidated statements of income and cash flows for the years ended December 31, 2011 and 2010 were 6.45 and RMB 6.75 to $1.00, respectively.

 

(d) Comprehensive Income

 

The Company has adopted ASC 220 “Comprehensive Income”. ASC 220 establishes standards for reporting and presentation of comprehensive income and its components in a full set of general-purpose financial statements. The Company has chosen to report comprehensive income in the statement of income and comprehensive income.

 

Comprehensive income consists of net income and other gains and losses affecting shareholders’ equity that, under US GAAP, are excluded from net income. For the Company, such item primarily represents foreign currency translation gains and losses. The changes in other comprehensive income of $1,067,008 and $488,683 for the years ended December 31, 2011 and 2010, respectively, are foreign currency translation adjustments.

 

(e) 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.

 

F-9
 

 

2 Summary of Significant Accounting Policies - Continued

 

(f) Income taxes

 

The Company accounts for income and deferred tax under the provision of ASC 740 “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.

 

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 2011 and 2010.

 

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.

 

Income tax returns for the year prior to 2009 are no longer subject to examination by tax authorities.

 

(g) Cash and Cash Equivalents

 

Cash and cash equivalents consist of cash on deposit in banks and on hand, and highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less when purchased. As of December 31, 2011, the Company had uninsured deposits in banks of approximately $12,433,000.

 

(h) Accounts Receivables

 

The Company established a formal credit policy in 2011. Prior to 2011, the customers generally made upfront payments for sales and there was no significant amount of accounts receivable.

 

Trade accounts receivable are stated at the amount the Company expects to collect. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management considers the following factors when determining the collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer payment terms. Past due balances over 90 days and other higher risk amounts are reviewed individually for collectibility. If the financial condition of the Company’s customers were to deteriorate, adversely affecting their ability to make payments, additional allowances would be required. Based on management’s assessment, the Company provides for estimated uncollectible amounts through a charge to earnings and a credit to a valuation allowance. Balances that remain outstanding after the Company has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to accounts receivable. As of December 31, 2011, the Company’s accounts receivable balances were current with no past due accounts.

F-10
 

 

2 Summary of Significant Accounting Policies – Continued

 

(i) Fair Value Disclosures of Financial Instruments

 

The Company adopted guidance issued by the Financial Accounting Standards Board (“FASB”) regarding fair value measurements for financial assets and liabilities and nonfinancial assets and liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). This guidance establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

 

The FASB defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

 

As a basis for considering such assumptions, a three-tier fair value hierarchy prioritizes the inputs utilized in measuring fair value as follows:

 

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

 

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

The carrying amounts reported in the consolidated financial statements for the current assets and current liabilities approximate fair value due to the short term nature of these financial instruments.

 

(j) 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. There was no inventory reserve at December 31, 2011 and 2010.

 

(k) Property, Plant and Equipment and Land Use Right

 

Property, plant and equipment and land use right are stated at cost less accumulated depreciation and amortization. Gains or losses on disposal are reflected in current operations. Major expenditures for betterments and renewals are capitalized. All ordinary repair and maintenance costs are expensed as incurred.

 

Land in the PRC is owned by the PRC government. The government in the PRC, according to PRC law, may sell the right to use the land for a specified period of time. Thus, all of the Company’s land purchases in the PRC are considered to be leasehold land and classified as land use right. They are amortized on a straight-line basis over the respective term of the right to use the land. The period for right to use the land was extended from 30 years to 50 years in 2008 by the PRC government. Depreciation of property, plant and equipment and amortization of land use right are computed using the straight-line method over the assets’ estimated useful lives as follows:

 

F-11
 
2 Summary of Significant Accounting Policies – Continued

 

(k) Property, Plant and Equipment and Land Use Right - Continued

 

 

Land use rights Over 30 years prior to the extension of lease to 50 years and 50 years thereafter
Building 20 years
Leasehold improvements Over terms of the leases or the useful lives, whichever is shorter
Plant and machinery 5 to 10 years
Furniture, fixtures and office equipment 5 years
Motor vehicles 5 years

 

(l) Impairment

 

In accordance with ASC 360-10-35 “Impairment or Disposal of Long-lived Assets”, long-lived assets to be held and used are analyzed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable or that the useful lives of those assets are no longer appropriate.

 

The Company evaluates its 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. The Company assesses 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, the Company has 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 the Company performs the second step of the analysis and compares 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 the Company depreciates or amortizes over the remaining estimate useful life of the asset where appropriate. The Company may incur impairment losses in future periods if factors influencing our estimates change. Historically, the Company has not had an impairment charge on our long-lived assets.

 

(m) Basic and Diluted Earnings Per Share

 

In accordance with ASC 260 “Earnings Per Share”, basic earnings per common share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per common share is computed similarly to basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of December 31, 2011 and 2010, the Company did not have any common stock equivalents, therefore, the basic earnings per share is the same as the diluted earnings per share.

 

(n) 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.

 

(o) Cost of Revenue

 

Cost of revenue includes cost of materials, costs associated with processing test and shipping, wages, and depreciation of manufacturing plant and equipment, overhead and repairs and maintenance costs.

 

F-12
 

 

2 Summary of Significant Accounting Policies – Continued

 

(p) Sales and Marketing Expense

 

Sales and marketing expense consists of salaries, employee benefits, cost of packing materials and travelling, and transportation.

 

(q) General and Administrative Expense

 

General and administrative expense consists of salaries, employee benefits and depreciation of office equipment, amortization of land use right, fees for legal and professional services and office consumables.

 

(r) Reclassification

 

Certain reclassifications have been made to the prior year’s financial statements to conform to the current year’s presentation.

 

(s) Recently Adopted Accounting Standards

 

In May 2011, the FASB issued a new accounting standard update (“ASU”) No. 2011-4, Fair Value Measurements (Topic 820), which amends the fair value measurement guidance and includes some enhanced disclosure requirements. The most significant change in disclosures is an expansion of the information required for Level 3 measurements based on unobservable inputs. The standard is effective for fiscal years beginning after December 15, 2011. The adoption of this standard will not have a material impact on the Company’s consolidated financial statements and disclosures.

 

In June 2011, the FASB issued ASU No. 2011-5, Comprehensive Income (Topic 220) an amendment to an existing accounting standard which requires companies to present net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. In addition, in December 2011, the FASB issued an amendment to an existing accounting standard which defers the requirement to present components of reclassifications of other comprehensive income on the face of the income statement. The Company adopted both standards in the fourth quarter of 2011 and such adoption did not have a material impact on the Company’s consolidated financial statements.

 

3 Revenue

 

   Year ended December 31, 
   2011   2010 
         
Sales of manufactured LDPE  $61,900,588   $46,466,735 
Sales of scrap materials   1,700,090    1,067,910 
   $63,600,678   $47,534,645 

 

4 Income Taxes

 

No provision was made for the United States or Hong Kong profits tax has been made as the Company has no assessable profit for tax purposes during the years.

 

Guanwei Recycling Corporation was organized in the United States and has incurred a tax loss of $545,000 for income tax purposes for the year ended December 31, 2011. As of December 31, 2011, net operating loss carryforwards for United States income taxes purpose was approximately $1,622,000. The net operating loss carryforwards may be available to reduce future years’ taxable income through year 2032. Management believes that the realization of the benefits from these losses appears uncertain due to the Company’s limited operating history and continuing losses for the United States income tax purpose. Accordingly, the Company has provided a 100% valuation allowance on the deferred tax asset to approximately $190,750 and $212,450 for the years ended December 31, 2011 and 2010, respectively. Management reviews the valuation allowance periodically and makes adjustments accordingly.

 

The Company provides for PRC Enterprise Income Tax (“PRC - EIT”) at a rate of 25% for 2011 and 2010, after offsetting losses brought forward, if any, on the basis of its income for financial reporting purposes, adjusting for income and expense items which are not assessable or deductible for PRC-EIT.

 

F-13
 

 

 

 

4 Income Taxes - Continued

 

Income (loss) before provision for income taxes consisted of the following:

 

   Year ended December 31, 
   2011   2010 
         
USA  $(544,568)  $(607,377)
China   17,791,137    13,990,869 
    17,246,569    13,383,492 

 

Provision for income taxes consists of the following:

 

   Year ended December 31, 
   2011   2010 
Current:          
USA   -    - 
China  $4,453,121   $3,456,096 
    4,453,121    3,456,096 
Deferred:          
Net operating loss carryforward in the U.S.   190,750    212,450 
Valuation allowance   (190,750)   (212,450)
Provision for income taxes  $4,453,121   $3,456,096 

 

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

 

   Year ended December 31, 
   2011   2010 
         
Income before income taxes  $17,246,567   $13,383,492 
           
Computed tax at PRC statutory rate of 25%  $4,311,642   $3,345,873 
Non-deductible items   136,142    158,720 
Others   5,337    (48,497)
   $4,453,121   $3,456,096 

 

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 fiscal years ended December 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 considered 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 in 2008 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 of 10% on the earnings prepared under PRC GAAP.

 

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 distributed and undistributed retained earnings of 2008 and thereafter. Should the Company’s subsidiaries distribute all their profits generated after 2007, the aggregate WHT amount will be approximately $2,795,000 as of December 31, 2011 and $1,679,000 as of December 31, 2010. The Company has not provided deferred taxes on unremitted earnings attributable to its international subsidiaries as they are to be reinvested indefinitely. These earnings relate to ongoing operations and are approximately $30 million as of December 31, 2011. Because of the availability of US foreign tax credits, it is not practicable to determine the US income tax liability that would be payable if such earnings were not indefinitely reinvested.

 

F-14
 

 

5 Restricted Cash

 

The Company is required to maintain a certain amount of cash in banks to secure certain short term borrowings. As of December 31, 2011 and 2010, restricted cash to secure these bank borrowings totaled $0 and $2,280,398, respectively. No cash was required to be maintained in banks in 2011 because there were no bank borrowings to secure during 2011.

 

6 Inventories

 

   As of December 31, 
   2011   2010 
         
Raw materials  $15,962,299   $8,772,550 
Work-in-progress   157,581    142,096 
Finished goods   738,921    1,807,119 
   $16,858,801   $10,721,765 

 

7 Prepayments and Other Current Assets

 

   As of December 31, 
   2011   2010 
         
VAT recoverable  $1,221,531   $286,441 
Prepayment and other receivables   882,818    188,754 
   $2,104,349   $475,195 

 

Pursuant to the Provisional Regulations of the PRC on Value Added Tax (“VAT”), and the implementation rules, all entities and individuals that are engaged in sale of goods are generally required to pay a VAT at a rate of 17% of the gross sales proceeds received, less any deductible VAT already paid or borne by the taxpayer. VAT recoverable represents mainly the deductible VAT generated from purchases of imported regenerative plastic materials in excess of the output VAT generated by sales.

 

Prepayment and other receivables as of December 31, 2011 consisted of higher amounts of prepayments to the Company’s logistics company for future custom and VAT taxes.

 

8 Property, Plant and Equipment

 

   As of December 31, 
   2011   2010 
         
Building  $6,647,571   $4,832,601 
Leasehold improvement   838,576    771,287 
Plant and machinery   2,914,418    950,361 
Furniture, fixtures and office equipment   99,088    59,594 
Motor vehicles   42,429    40,697 
    10,542,082    6,654,540 
Less: Accumulated depreciation   (2,391,070)   (1,760,399)
   $8,151,012   $4,894,141 

 

Depreciation expense was $600,065 and $438,563 for the years ended December 31, 2011 and 2010, respectively.

 

A building with a carrying amount as of December 31, 2010 of $3,748,687 was pledged, along with the land use right discussed below, to secure the short-term borrowings. Such pledge was released upon the repayment of the bank borrowings in 2011.

 

F-15
 

 

9 Construction in progress

 

As of December 31, 2011, construction in progress amounted to $174,295 consisting of improvement costs related to an electrical wiring upgrade in the factory building.

 

10 Land Use Right, net

 

   As of December 31, 
   2011   2010 
         
Land use right  $785,177   $753,119 
Less: Accumulated amortization   (111,415)   (92,178)
   $673,762   $660,941 

 

Land use right with a carrying amount of $660,941 as of December 31, 2010 was pledged, along with a building discussed above, to secure the short-term borrowings. Such pledge was released upon the repayment of the bank borrowings in 2011. Amortization expense was $15,070 and $14,389 for the years ended December 31, 2011 and 2010, respectively.

 

In 2008, the land use right period was extended from 30 years to 50 years with the approval from PRC government. The amortization rate has been changed to 50 years since 2008.

 

11 Short Term Borrowings

 

   As of December 31, 
   2011   2010 
         
Fuqing Rural Credit Cooperative Union  $-   $1,464,659 
China Merchants Bank   -    2,251,718 
   $-   $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 with the maturity date on January 18, 2011, and was secured by the Company’s building and land use right. The loan was fully repaid on January 18, 2011.

 

The short term loans from China Merchants Bank as of December 31, 2010 were due in 3 months from their dates of drawing and bore interest at rates ranging from 1.788% to 2.103%. These short term loans were secured by the Company’s restricted cash, which amounted to $2,280,398 as of December 31, 2010. The loan was fully repaid in 2011 and the restricted cash was released.

 

12 Accrued Expenses and Other Payables

 

   As of December 31, 
   2011   2010 
         
Deposits from customers  $-   $36,039 
Accrued payroll   296,000    336,601 
Accrued expenses   418,072    348,929 
   $714,072   $721,569 

 

F-16
 

 

13 Shareholders’ Contribution

 

In the fiscal year 2010, the net balance of $55,895 due to the ex-shareholders for expenses incurred prior to the Share Exchange was waived and recorded as capital contribution in the consolidated statements of shareholders’ equity.

 

14 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 additional contribution to the statutory surplus reserve fund during the fiscal years 2011 and 2010.

 

Statutory Public Welfare Fund

 

Pursuant to applicable PRC laws and regulations as applicable to PRC domestic-owned enterprise, Guanwei, the Company’s subsidiary in the PRC, is required to allocate certain amount of its net income to the statutory public welfare fund determined by the company. 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.

 

15 Distribution of Profits

 

The Registrant is a holding company incorporated in the United States and its cash flow depends on dividends from its PRC operating subsidiary. In order for the Registrant to distribute any dividends to its shareholders, it will rely on dividends distributed by its PRC operating subsidiary. 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, the Registrant’s PRC operating company is required, where applicable, to allocate a portion of its net profit to PRC statutory reserves before distributing dividends, including at least 10% of their 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 the Registrant’s PRC operating company 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 December 31, 2011 and 2010 amounted to $2,044,119.

 

Assuming the Registrant’s PRC operating subsidiary distributes dividends to the Registrant, dividends will be paid on common stock only at the discretion of the Board and will be contingent upon the Registrant’s 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. It presently intend to retain all earnings, if any, for use in its business operations and accordingly, the Board does not anticipate declaring any cash dividends for the foreseeable future.

 

16 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 basic 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 years ended December 31, 2011 and 2010, the aggregate contributions of the Company to the pension plan were approximately $141,000 and $92,000, respectively.

 

F-17
 

 

17 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 December 31, 2011 and 2010, the Company had cash deposits of $12.4 million and $14.9 million, respectively, which was deposited 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

 

During the years ended December 31, 2011 and 2010, there were 4 and 5 suppliers who individually accounted for 10% or more of our total purchases, which account for 77% and 86% of the Company’s total purchases, respectively.

 

The Company did not have any customer concentration. No one customer was responsible for more than 10% of the Company’s revenue in fiscal year 2011 and 2010. Sales to our five largest customers accounted for approximately 17% and 14% of our net sales during the years ended December 31, 2011 and 2010, respectively. One customer accounted for 12% of the Company’s accounts receivable as of December 31, 2011.

 

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 years ended December 31, 2011 and 2010, the Company obtained an import quota of 64,000 tons and 24,000 tons, respectively, of regenerative plastic materials for each respective year (See Note 19).

 

  (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 years ended December 31, 2011 and 2010, 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” (See Note 19). Pursuant to the agreement dated November 1, 2008, Guanwei has been permitted use of the 35,000 tons per year import quota granted to Huanli at no cost for 10 years through October 31, 2018. 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.

 

F-18
 

 

18 Fair Value Disclosures of Financial Instruments

 

The Company has estimated the fair value amounts of its financial instruments using the available market information and valuation methodologies considered to be appropriate and has determined that the book value of the Company’s current assets and current liabilities as of December 31, 2011 and 2010 approximate fair value.

 

 

19 Related Party Transaction and Balance

 

During the years ended December 31, 2011 and 2010, the Company utilized the import quota of a related party, Huan Li, for importing regenerative plastic materials at no consideration. Huan Li is considered to be a related party since Chen Min, an officer, director and shareholder of Guanwei and an officer and director of the Registrant, is also the Chief Executive Officer, Chairman of Board of Directors and legal representative of Huan Li. Huan Li is an inactive entity and has no operations.

 

Chenxin International Limited, a shareholder of the Registrant, paid accrued expenses of $562,552 and $553,125 on behalf of the Registrant during the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the amount related to legal and professional fees paid by Chenxin on behalf of the Registrant were $1,468,167 and $905,615, respectively.

 

F-19
 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) 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: March 30, 2012 By: /s/ Min Chen
    Min Chen
    Chief Executive Officer, Chairman of the Board, President
    (Principal Executive Officer)
     
Date: March 30, 2012 By: /s/ Feng Yang
    Feng Yang
    Chief Financial Officer, Secretary, Treasurer
    (Principal Financial and Accounting Officer)
     
Date: March 30, 2012 By: /s/ Qijie Chen
    Qijie Chen
    Director
     
Date: March 30, 2012 By: /s/ Juguang Gao
    Juguang Gao
    Director
     
Date: March 30, 2012 By: /s/ Changzhu Wang
    Changzhu Wang
    Director
     
Date: March 30, 2012 By: /s/ Rui Wang
    Rui Wang
    Director
     
Date: March 30, 2012 By: /s/ Howard Barth
    Howard Barth
    Director
     
Date: March 30, 2012 By: /s/ Jingshou Qin
    Jingshou Qin
    Director