UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
(Mark
One)
Form
10-Q
[√]
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
The Quarterly Period Ended March 31,
2010
|
or
[
]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
The Transition Period From __________________ to
__________________________
|
|
Commission
File Number: 2-95836-NY
|
China
Industrial Waste Management, Inc.
|
(Name
of registrant as specified in its
charter)
|
Nevada
|
13-3250816
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
c/o
Dalian Dongtai Industrial Waste Treatment Co.
No.
1 Huaihe West Road, E-T-D Zone, Dalian, China
|
116600
|
(Address
of principal executive offices)
|
(Zip
Code)
|
011-86-411-85811229
|
(Registrant's
telephone number, including area
code)
|
N/A
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ]
No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes
[ ] No [ ]
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 smaller reporting company)
|
[
]
|
Smaller
reporting company
|
[√]
|
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act)
Yes [ ]
No [ X ]
Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of the latest
practicable date: 15,336,535 shares of common stock are issued and outstanding
as of May 12, 2010.
TABLE
OF CONTENTS
|
|
Page
No.
|
PART
I. - FINANCIAL INFORMATION
|
Item
1.
|
Financial
Statements.
|
1
|
Item
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
2
|
Item
3.
|
Quantative
and Qualitative Disclosures About Market Risk.
|
8
|
Item
4T
|
Controls
and Procedures.
|
8
|
|
Item
1.
|
Legal
Proceedings.
|
9
|
Item
1A.
|
Risk
Factors.
|
9
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
9
|
Item
3.
|
Defaults
Upon Senior Securities.
|
9
|
Item
4.
|
[Removed
and Reserved]
|
9
|
Item
5.
|
Other
Information.
|
9
|
Item
6.
|
Exhibits.
|
10
|
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING INFORMATION
This
report includes "forward-looking statements." You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
These statements contain such words as "may," "project," "might," "expect,"
"believe," "anticipate," "intend," "could," "would," "estimate," "continue," or
"pursue," or the negative or other variations thereof or comparable terminology.
In particular, they include statements relating to, among other things, future
actions, new projects, strategies, future performance, the outcomes of
contingencies and our future financial results. These forward-looking statements
are based on current expectations and projections about future
events.
Investors
are cautioned that forward-looking statements are not guarantees of future
performance or results and involve risks and uncertainties that cannot be
predicted or quantified and, consequently, our actual performance may differ
materially from those expressed or implied by such forward-looking statements.
Such risks and uncertainties include, but are not limited to, the following
factors, as well as other factors described from time to time in our reports
filed with the Securities and Exchange Commission (including the sections
entitled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained therein): the timing and
magnitude of technological advances; the prospects for future acquisitions; the
effects of political, economic and social uncertainties regarding the
governmental, economic and political circumstances in the People’s Republic of
China; the possibility that a current customer could be acquired or otherwise be
affected by a future event that would diminish their waste management
requirements; the competition in the waste management industry and the impact of
such competition on pricing, revenues and margins; uncertainties surrounding
budget reductions or changes in funding priorities of existing government
programs; the cost of attracting and retaining highly skilled personnel; our
projected sales, profitability, and cash flows; our growth strategies;
anticipated trends in our industries; our future financing plans; and our
anticipated needs for working capital.
Forward-looking
statements speak only as of the date on which they are made, and, except to the
extent required by federal securities laws, we undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which the statement is made or to reflect the occurrence of unanticipated
events.
CONVENTIONS
AND GENERAL MATTERS
The
official currency of the People’s Republic of China is the Chinese “Yuan” or
“Renminbi” (“yuan,” “Renminbi” or “RMB”). For the convenience of the reader,
amounts expressed in this report as RMB have been translated into United States
dollars (“US$” or “$”) at the rate of USD$1.00 = RMB 6.8259 as of December 31,
2009; and at the rate of USD$1.00 = RMB6.8258 as of March 31, 2010 quoted by the
Federal Reserve System. The Renminbi is not freely convertible into foreign
currencies and the quotation of exchange rates does not imply convertibility of
Renminbi into U.S. Dollars or other currencies. All foreign exchange
transactions take place through the Federal Reserve System. No representation is
made that the Renminbi or U.S. Dollar amounts referred to herein could have been
or could be converted into U.S. Dollars or Renminbi, as the case may be, at the
PBOC Rate or at all.
The
"Company," "we," "us," "our" and similar words refer to China Industrial Waste
Management, Inc, and its direct and indirect, wholly-owned and partially-owned
subsidiaries.
All share
and per share information contained herein has been adjusted to reflect a 1 for
100 share reverse stock split which occurred on May 12, 2006.
PART
1 - FINANCIAL INFORMATION
Item
1. Financial
Statements.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
COMBINED
AND CONSOLIDATED BALANCE
SHEETS
|
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,311,215
|
|
|
$
|
11,419,129
|
|
Notes
receivable
|
|
|
256,462
|
|
|
|
335,780
|
|
Accounts
receivable, net
|
|
|
3,113,248
|
|
|
|
2,021,421
|
|
Construction
reimbursement receivable
|
|
|
106,728
|
|
|
|
846,270
|
|
Other
receivables
|
|
|
61,794
|
|
|
|
91,872
|
|
Inventories
|
|
|
2,392,768
|
|
|
|
2,085,029
|
|
Advances
to suppliers
|
|
|
654,558
|
|
|
|
800,694
|
|
Deferred
expense
|
|
|
19,793
|
|
|
|
14,650
|
|
Total
current assets
|
|
|
16,916,566
|
|
|
|
17,614,845
|
|
|
|
|
|
|
|
|
|
|
Long-term
equity investment
|
|
|
87,903
|
|
|
|
87,900
|
|
Property,
plant and equipment, net
|
|
|
31,894,224
|
|
|
|
32,319,145
|
|
Construction
in progress
|
|
|
9,924,250
|
|
|
|
9,123,927
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,983,332
|
|
|
|
1,994,394
|
|
BOT
franchise right
|
|
|
4,102,083
|
|
|
|
4,102,023
|
|
Certificate
of deposit
|
|
|
293,006
|
|
|
|
293,002
|
|
Restricted
cash
|
|
|
3,104,627
|
|
|
|
96,707
|
|
Other
asset
|
|
|
1,204,761
|
|
|
|
1,074,531
|
|
Deferred
tax asset
|
|
|
385,951
|
|
|
|
377,381
|
|
Related
party receivable
|
|
|
234,405
|
|
|
|
234,401
|
|
TOTAL
ASSETS
|
|
$
|
70,131,108
|
|
|
$
|
67,318,256
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
673,656
|
|
|
$
|
418,435
|
|
Short-term
loan
|
|
|
6,739,137
|
|
|
|
6,739,038
|
|
Tax
payable
|
|
|
398,810
|
|
|
|
200,957
|
|
Advance
from customers
|
|
|
561,392
|
|
|
|
544,125
|
|
Deferred
sales
|
|
|
724,766
|
|
|
|
958,930
|
|
Accrued
expenses
|
|
|
29,488
|
|
|
|
301,531
|
|
Construction
projects payable
|
|
|
3,119,419
|
|
|
|
3,932,297
|
|
Other
payable
|
|
|
116,710
|
|
|
|
235,211
|
|
Long-term
loan-current portion
|
|
|
2,245,158
|
|
|
|
2,245,125
|
|
Related
party payable
|
|
|
380,908
|
|
|
|
380,902
|
|
Total
current liabilities
|
|
|
14,989,444
|
|
|
|
15,956,551
|
|
|
|
|
|
|
|
|
|
|
Long-term
loan
|
|
|
13,194,424
|
|
|
|
13,755,512
|
|
Asset
retirement obligation
|
|
|
619,611
|
|
|
|
610,445
|
|
Government
subsidy
|
|
|
5,533,509
|
|
|
|
2,464,079
|
|
TOTAL
LIABILITIES
|
|
|
34,336,988
|
|
|
|
32,786,587
|
|
|
|
|
|
|
|
|
|
|
EQUITY
|
|
|
|
|
|
|
|
|
Stockholders'
equity of the Company
|
|
|
|
|
|
|
|
|
Preferred
stock: par value $.001; 5,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock: par value $.001; 95,000,000 shares authorized;
15,336,535
and 15,274,035 shares issued and outstanding as of
March
31, 2010 and December 31, 2009, respectively
|
|
|
15,337
|
|
|
|
15,274
|
|
Additional
paid-in capital
|
|
|
7,602,626
|
|
|
|
7,162,867
|
|
Deferred
stock-based compensation
|
|
|
(826,478
|
)
|
|
|
(884,139
|
)
|
Accumulated
other comprehensive income
|
|
|
2,327,824
|
|
|
|
2,326,292
|
|
Retained
earnings
|
|
|
18,099,775
|
|
|
|
17,490,919
|
|
Total
stockholders' equity of the Company
|
|
|
27,219,084
|
|
|
|
26,111,213
|
|
Noncontrolling
interest
|
|
|
8,575,036
|
|
|
|
8,420,456
|
|
TOTAL
EQUITY
|
|
|
35,794,120
|
|
|
|
34,531,669
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND EQUITY
|
|
$
|
70,131,108
|
|
|
$
|
67,318,256
|
|
See
Notes to Combined and Consolidated Financial
Statements
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
COMBINED
AND CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
|
(UNAUDITED)
|
|
|
For
the Three Months
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
Service
fees
|
|
$
|
2,944,558
|
|
|
$
|
1,197,699
|
|
Sales
of recycled commodities
|
|
|
1,150,283
|
|
|
|
414,251
|
|
Total
revenues
|
|
|
4,094,841
|
|
|
|
1,611,950
|
|
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
|
|
|
|
|
|
Cost
of service fees
|
|
|
1,028,493
|
|
|
|
470,163
|
|
Cost
of recycled commodities
|
|
|
388,459
|
|
|
|
257,687
|
|
Total
cost of revenues
|
|
|
1,416,952
|
|
|
|
727,850
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
2,677,890
|
|
|
|
884,100
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
151,624
|
|
|
|
177,315
|
|
General
and administrative expenses
|
|
|
968,094
|
|
|
|
525,371
|
|
Total
operating expenses
|
|
|
1,119,718
|
|
|
|
702,686
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,558,172
|
|
|
|
181,414
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
7,167
|
|
|
|
14,675
|
|
Other
expense
|
|
|
(228,323
|
)
|
|
|
(63,841
|
)
|
Settlement
expense
|
|
|
(439,821
|
)
|
|
|
-
|
|
Total
other income (expense)
|
|
|
(660,977
|
)
|
|
|
(49,166
|
)
|
|
|
|
|
|
|
|
|
|
Net
income before tax provision
|
|
|
|
|
|
|
|
|
Tax
provision
|
|
|
133,001
|
|
|
|
45,029
|
|
Net
income
|
|
|
764,194
|
|
|
|
87,220
|
|
Net
income attributable to the noncontrolling interest
|
|
|
155,339
|
|
|
|
(29,784
|
)
|
Net
income attributable to the Company
|
|
$
|
608,855
|
|
|
$
|
117,003
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
1,532
|
|
|
|
(16,302
|
)
|
|
|
|
|
|
|
|
|
|
Comprehensive
income attributable to the Company
|
|
|
610,387
|
|
|
|
100,701
|
|
Comprehensive
income attributable to the noncontrolling interest
|
|
|
155,339
|
|
|
|
(29,784
|
)
|
Comprehensive
income
|
|
$
|
765,726
|
|
|
$
|
70,918
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,327,507
|
|
|
|
15,262,035
|
|
Diluted
|
|
|
16,401,437
|
|
|
|
15,262,035
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
See
Notes to Combined and Consolidated Financial
Statements
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
COMBINED
AND CONSOLIDATED STATEMENTS OF CASH FLOWS
|
(UNAUDITED)
|
|
|
For
the Three Months
Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income attributable to the Company
|
|
$
|
608,855
|
|
|
$
|
117,003
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
Nontrolling
interest
|
|
|
155,339
|
|
|
|
(29,784
|
)
|
Depreciation
|
|
|
526,771
|
|
|
|
264,575
|
|
Amortization
|
|
|
15,837
|
|
|
|
13,334
|
|
Amortization
of deferred stock-based compensation
|
|
|
57,661
|
|
|
|
-
|
|
Bad
debt allowance
|
|
|
35,547
|
|
|
|
-
|
|
Stock
and warrant issued for settlement
|
|
|
439,821
|
|
|
|
-
|
|
Accretion
expenses
|
|
|
9,155
|
|
|
|
9,023
|
|
Government
subsidy recognized as income
|
|
|
(7,167
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Notes
receivable
|
|
|
79,307
|
|
|
|
-
|
|
Accounts
receivable
|
|
|
(1,091,651
|
)
|
|
|
(433,130
|
)
|
Construction
reimbursement receivable
|
|
|
703,933
|
|
|
|
-
|
|
Other
receivables
|
|
|
30,073
|
|
|
|
15,744
|
|
Inventories
|
|
|
(307,645
|
)
|
|
|
(172,530
|
)
|
Advance
to suppliers
|
|
|
146,118
|
|
|
|
(146,727
|
)
|
Deferred
expense
|
|
|
(5,142
|
)
|
|
|
731
|
|
Other
asset
|
|
|
(128,064
|
)
|
|
|
(82,855
|
)
|
Deferred
tax assets
|
|
|
(8,562
|
)
|
|
|
-
|
|
Accounts
payable
|
|
|
255,163
|
|
|
|
(132,754
|
)
|
Tax
payable
|
|
|
197,810
|
|
|
|
(110,180
|
)
|
Advance
from customers
|
|
|
17,256
|
|
|
|
10,104
|
|
Accrued
expense
|
|
|
(390,470
|
)
|
|
|
(334,615
|
)
|
Deferred
income
|
|
|
(234,131
|
)
|
|
|
101,315
|
|
Net
cash provided by (used in) operating activities
|
|
|
1,105,814
|
|
|
|
(910,746
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(101,464
|
)
|
|
|
(98,532
|
)
|
Construction
in progress
|
|
|
(726,790
|
)
|
|
|
(3,022,054
|
)
|
Purchase
of intangible assets
|
|
|
(6,871
|
)
|
|
|
-
|
|
Certificate
of deposit
|
|
|
-
|
|
|
|
(804,564
|
)
|
Net
cash used in investing activities
|
|
|
(835,125
|
)
|
|
|
(3,925,150
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Repayment
of construction project payable
|
|
|
(812,769
|
)
|
|
|
(886,924
|
)
|
Repayment
of short-term loans
|
|
|
-
|
|
|
|
(1,901,697
|
)
|
Proceeds
from long-term loan
|
|
|
-
|
|
|
|
6,202,458
|
|
Repayment
of long-term loans
|
|
|
(561,174
|
)
|
|
|
-
|
|
Proceeds
from related party loan
|
|
|
-
|
|
|
|
102,399
|
|
Net
cash provided by (used in) financing activities
|
|
|
(1,373,943
|
)
|
|
|
3,516,236
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
(4,660
|
)
|
|
|
(3,322
|
)
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(1,107,914
|
)
|
|
|
(1,322,982
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
11,419,129
|
|
|
|
5,710,784
|
|
Cash
and cash equivalents, end of period
|
|
$
|
10,311,215
|
|
|
$
|
4,387,802
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
347,272
|
|
|
$
|
94,545
|
|
Income
taxes
|
|
$
|
87,884
|
|
|
$
|
143,518
|
|
See
Notes to Combined and Consolidated Financial
Statements
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited combined and consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-Q and the new scaled disclosure requirements in Article
8 of Regulation S-K of the SEC. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for annual financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. The accounts of
the Company and all of its subsidiaries are included in the combined and
consolidated financial statements. All significant intercompany accounts and
transactions have been eliminated in consolidation. The consolidated operating
results for the three months ended March 31, 2010 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2010. For
further information, refer to the audited combined and consolidated financial
statements and footnotes thereto included in the Company's Form 10-K for the
year ended December 31, 2009.
1. Nature of
operations
The
accompanying unaudited combined and consolidated financial statement are those
of China Industrial Waste Management, Inc., a Nevada corporation (the “Company”)
incorporated on November 12, 2003, its wholly owned subsidiary, Favour Group
Ltd., a British Virgin Islands corporation (“Favour”), along with its indirect
wholly and majority owned subsidiaries:
• Full
Treasure Investments Ltd. (“Full Treasure”)
• Dalian
Dongtai Industrial Waste Treatment Co., Ltd. (“Dalian Dongtai”)
• Dalian
Dongtai Water Recycling Co., Ltd. (“Dongtai Water”)
• Dalian
Dongtai Organic Waste Treatment Co., Ltd. (“Dongtai Organic”)
• Dalian
Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”)
• Dalian
Lipp Environmental Energy Engineering & Technology Co., Ltd. (“Dalian
Lipp”)
• Yingkou
Dongtai Industrial Waste Treatment Co., Ltd. (“Yingkou Dongtai”)
• Hunan
Hanyang Environmental Protection Science & Technology Co., Ltd. (“Hunan
Hanyang”)
•
Sino-Norway Dalian Energy Efficiency Center Co., Ltd. (“Sino-Norway
EEC”)
Dalian
Dongtai was incorporated on January 9, 1991 in Dalian City, Liaoning Province,
the People’s Republic of China (“PRC”), and now is engaged in the collection,
treatment, disposal, and recycling of industrial wastes, and sales of recycled
products, principally in Dalian and surrounding areas in Liaoning
Province. The Company provides waste disposal solutions to its more than
770 customers from facilities located in Dalian Development Area. In addition,
the Company provides the following services to its clients:
•
Environmental protection services
•
Technology consultation
•
Pollution treatment services
• Waste
management design processing services
• Waste
disposal solutions
• Waste
transportation services
• Onsite
waste management services
•
Environmental pollution remediation services
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Dongtai
Water, which was incorporated in July 2006, is a build-operate-transfer (“BOT”)
project, with an operating period of 20 years, established to process municipal
sewage generated by Dalian City. Phase I of Dongtai Water, whose designed
production capacity is 30,000 tons per day, commenced normal production in June
2008.
Dongtai
Organic was incorporated in March 2007 as a joint venture, in which Dalian
Dongtai initially held an equity interest of 49%. In December 2009, Dalian
Dongtai acquired 3% equity interest in Dongtai Organic, thereby increasing its
ownership of Dongtai Organic to 52%. Dongtai Organic is the first sludge
treatment plant in China, with a designed production capacity of 600 tons/day,
which adopts anaerobic fermentation technology.
Zhuorui
was incorporated in April 2006 and is engaged in plasma arc melting, separation
and purification of waste catalysts that generated during oil refinery process,
treatment of industrial wastes and comprehensive utilization of waste catalysts
or similar material.
Dalian
Lipp is a Sino-German joint venture established in December 2007. Dalian Lipp
designs, manufactures and installs environmental protection equipment and
renewable energy equipment and provides related technical services. The project
is based on the Lipp GmbH tank building technique which is dedicated to
generating energy by organic waste anaerobic fermentation, industrial effluent
treatment and municipal sewage plant.
Yingkou
Dongtai, which operates in the Coastal Industrial Base (the “Base”) of Yingkou
City, Liaoning Province, was founded in May 2009. Yingkou Dongtai is engaged in
the recycling and disposal of industrial waste, and development and production
of recycling products. Yingkou Dongtai intends to build and complete waste
treatment facilities gradually in line with the development of the
Base.
In
October 2009, Dalian Dongtai acquired 65% equity interest in Hunan Hanyang.
Hunan Hanyang was established in Hunan Province in 2004 and is engaged in the
business of treatment and comprehensive utilization of industrial waste. Hunan
Hanyang owns a franchise right (BOT) to construct and operate the Hazardous
Waste Treatment Center of Changsha City, Hunan Province for 25 years upon
completion of construction.
Sino-Norway
EEC was incorporated as a joint venture in November 2009. Sino-Norway EEC is
engaged in the business of energy efficiency audit and consultation, and is
sponsored under the Energy Efficiency Planning Program initiated by Chinese and
Norwegian governments.
2. Basis of
presentation
The
accompanying unaudited combined and consolidated financial statement include the
accounts of the parent entity, its direct wholly owned subsidiary, Favour, along
with its indirect wholly owned subsidiary, Full Treasure, its 90% indirect owned
subsidiary, Dalian Dongtai, its 80% indirect owned subsidiary, Dongtai Water,
its 52% indirect owned subsidiary, Dongtai Organic, its 70% indirect owned
subsidiary, Zhuorui, its 75% indirect owned subsidiary, Dalian Lipp, its 100%
indirect owned subsidiary, Yingkou Dongtai, its 65% indirect owned subsidiary,
Hunan Hanyang, and its 60% indirect owned subsidiary, Sino-Norway
EEC.
In
December 2009, Dalian Dongtai acquired an additional 3% equity interest in
Dongtai Organic, thereby increasing its ownership of Dongtai Organic to 52%. As
a result of equity exchange between entities under common control, the financial
statements and financial information presented for prior years during which the
entities were under common control, have been retrospectively adjusted to
furnish comparative information, adjusted financial statements and financial
summaries also include
the
combined
revenues, expenses and cash flows of Dongtai Organic
.
All material
inter-company accounts and transactions have been eliminated in the
consolidation.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”). This
basis differs from that used in the statutory accounts of the Company, which
were prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises in PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP.
3. Summary of significant
accounting policies
Use of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign currency
translation
As of
March 31, 2010 and 2009, the accounts of the Company were maintained, and the
unaudited combined and consolidated financial statements were expressed in
Chinese Yuan Renminbi (“RMB”). Such unaudited combined and consolidated
financial statements were translated into U.S. dollars (“USD”) in accordance
with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification (“ASC”) Topic 830 Foreign Currency Matters with RMB as the
functional currency. All assets and liabilities were translated at the exchange
rate as of the balance sheet date; stockholders’ equity was translated at the
exchange rates prevailing at the time of the transactions; revenues, costs, and
expenses were translated at the weighted average exchange rate for the period.
The resulting translation adjustments are reported under other comprehensive
income in accordance with ASC Topic 220 Comprehensive Income.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand and cash on deposit, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Restricted
cash
In
accordance with ASC Topic 210-10-45-4 Classification of Current Assets, cash
which is restricted as to withdrawal is considered a non-current asset. As of
March 31, 2010 and December 31, 2009, restricted cash consists of government
subsides of $3,104,627 and $96,707, which is to be used exclusively on facility
construction and equipment procurement. It also consists of certificate of
deposit of $293,006 and $293,002, respectively.
Accounts and other
receivables
Accounts
and other receivables are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as
needed.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Payment terms of sales vary from cash on delivery
through a credit term of up to nine to twelve months.
Advances to
suppliers
The
Company makes advances to certain vendors for purchase of its material or
equipment. The advances to suppliers are interest free and
unsecured.
Inventory
Inventories
are stated at the lower of cost, as determined on a first-in, first-out basis
for raw materials and auxiliary materials, and weighted average basis for other
categories, or market. Management compares the cost of inventories with the
market value, and an allowance is made for writing down the inventories to their
market value, if lower.
Property, plant and
equipment
Property,
plant and equipment (“PP&E”) are stated at cost, less accumulated
depreciation and impairment. Expenditures for maintenance and repairs, which are
not considered improvements and do not extend the useful life of PP&E, are
expensed as incurred; additions, renewals and betterments are capitalized. When
PP&E are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in the statement of operations.
Depreciation
is provided to recognize the cost of PP&E in the results of operations. The
Company calculates depreciation using the straight-line method with estimated
useful life as follows:
|
Useful
Life
|
Buildings
|
20
Years
|
Machinery
|
10-14
Years
|
Vehicles
|
4
Years
|
Office
equipment
|
3-5
Years
|
Construction
in progress consists of construction expenditure, equipment procurement,
capitalized interest expense, relevant miscellaneous expenditures, and other
costs.
As of
March 31, 2010, construction in progress is comprised of three principal
components. The first component is the Centralized Hazardous Waste Treatment
Center of Dalian City (the “Expansion Project”), which is located in Dagu Hill,
Dalian Development Area. The Expansion Project consists of an incineration
system that includes an incinerator, its supporting facilities, and warehouses,
work plants and office buildings, etc. The second component is the production
equipments of Zhuorui, which are still in testing phase, including the plasma
furnace, flue gas cleansing system, dust trapper, etc. The third component is
the Hazardous Waste Treatment Center of Changsha City, Hunan Province,
which is in the phase of preparation for the commencement of
construction.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Landfills
Various
costs that we incur to make a landfill ready to accept waste are capitalized.
These costs generally include expenditures for land, permitting,
excavation, liner material and installation and other capital infrastructure
costs. The cost basis of our landfill assets also includes estimates of future
costs associated with landfill final capping, closure and post-closure
activities in accordance with ASC Topic 410 Asset Retirement and Environmental
Obligations. Interest accretion on final capping, closure and post-closure
liabilities is recorded using the effective interest method and is recorded as
accretion expense, which is included our Combined and Consolidated Statements of
Operations and Comprehensive Income.
The
amortizable basis of a landfill includes (i) amounts previously expended and
capitalized; (ii) capitalized landfill final capping, closure and post-closure
costs; (iii) projections of future purchase and development costs required to
develop the landfill site to its remaining permitted and expansion capacity; and
(iv) projected asset retirement costs related to landfill final capping, closure
and post-closure activities.
Amortization
is recorded on a units-of-consumption basis, applying cost as a rate per ton.
The rate per ton is calculated by dividing each component of the amortizable
basis of a landfill by the number of tons needed to fill the corresponding
asset’s airspace.
Long-term equity
investment
As of
March 31, 2010 and December 31, 2009, long-term investment is comprised of
investment in Xiangtan Luyi Dongtai Industrial Waste Treatment Co., Ltd.
(“Xiangtan Dongtai”).
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Xiangtan
Dongtai
|
|
$
|
87,902
|
|
|
$
|
87,900
|
|
Xiangtan
Dongtai, located in Xiangtan City, Hunan Province, was established on August 5,
2009, and primarily engaged in treatment and disposal of industrial waste,
development and sales of recycled products. Dalian Dongtai owns a 15% equity
interest in Xiangtan Dongtai, therefore, the Company applies the cost method to
account for its investment.
Impairment of long-lived
assets
In
accordance with ASC Topic 360 “Accounting for the Impairment or Disposal of Long
Lived Assets”, property, plant, and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Intangible assets are tested for impairment
annually. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. There were no events or changes in circumstances that
necessitated a review of impairment of long lived assets as of March 31, 2010
and December 31, 2009, respectively.
Intangible
assets
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Intangible
assets consist of “rights to use land and build a plant” for 50 years and
intellectual property. The intangible assets are amortized using straight – line
method. The Company also evaluates intangible assets for impairment, at least on
an annual basis and whenever events or changes in circumstances indicate that
the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors, including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss. The following table
summarizes the material terms of the land use rights:
Effective
Date
|
Expiration
Date
|
Area
(Square
Meter)
|
Address
|
Status
|
01-01-2003
|
01-01-2053
|
8,433
|
No.1,
Huaihe West Road, Dalian Development Area
|
Mortgaged
|
01-01-2003
|
01-01-2053
|
6,784
|
No.
100, Tieshan West Road, Dalian Development Area
|
Mortgaged
|
04-14-2003
|
04-13-2053
|
1,841
|
No.1-1,
Huaihe West Third Road, Dalian Development Area
|
Mortgaged
|
07-28-2003
|
07-27-2053
|
61,535
|
No.
85, Dagu Hill, Dalian Development Area
|
Mortgaged
|
06-06-2007
|
06-06-2057
|
56,397
|
Dalian
Huayuankou Economic Zone
|
Mortgaged
|
03-24-2010
|
12-23-2056
|
25,000
|
Yingkou
Coastal Industrial Base
|
Unencumbered
|
-
|
-
|
10,500
|
Haiqing
Island, Dalian Development Area
|
Unencumbered
|
As of
March 31, 2010, net land use rights was $1,983,332, of which $1,726,108 has been
pledged as collateral for the short-term loans from Shanghai Pudong Development
Bank.
Noncontrolling interest in
unaudited combined and consolidated financial statement
The
Company establishes accounting and reporting standards for the noncontrolling
(minority) interest in a subsidiary and for the deconsolidation of a
subsidiary in accordance with ASC Topic 805 Business Combinations.
Noncontrolling interest represents the minority owners’10% equity interest in
Dalian Dongtai, 20% equity interest in Dongtai Water, 48% equity interest in
Dongtai Organic, 30% equity interest in Zhuorui, 25% equity interest in Dalian
Lipp, 35% equity interest in Hunan Hanyang, and 40% equity interest in
Sino-Norway EEC.
Revenue
recognition
The
Company recognizes revenues in accordance with the guidance in Securities and
Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104. Revenue
is recognized when persuasive evidence of an arrangement exists, when the
selling price is fixed or determinable, when delivery occurs and when collection
is probable.
Revenues
are generated from the fees charged for waste collection, transfer, treatment,
disposal and recycling services and the sale of recycled commodities. The fees
charged for services are generally defined in service agreements and vary based
on contract specific terms such as frequency of service, weight, volume and the
general market factors influencing industry’s rates. Recycled commodities are
considered delivered at the point when the customers take ownership and assume
risk of loss of the commodities.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Deferred
sales consist of contracts for which the fees have been collected but revenue
has not yet been recognized in accordance with the revenue recognition policy.
As of March 31, 2010 and December 31, 2009, deferred sales amounted to $724,766
and $958,930, respectively.
The AICPA
Issues Paper recommends that governmental grants be accounted for as
follows:
i)
|
Grants
related to revenue, such as certain export subsidies and price control
subsidies, should be recognized in the period of the related
events.
|
ii)
|
Grants
to reimburse current expenditures, such as research and development costs,
wages, training costs and transportation costs, should be treated as a
reduction of current or future related expense, depending on when the
related expense is recognized.
|
iii)
|
Grants
related to developing property, such as timberlands, or mineral reserves,
should be recognized over the useful lives of the
assets.
|
Government
grants are received at a discretionary amount as determined by the local or
central PRC government. The Company follows the guideline of the AICPA Issues
Paper in accounting for grants as revenues. In general, government grants for
revenues and/or expenses should be recognized in income when the related revenue
or expense is recorded. Grants related to property or equipment should be
recognized over the useful lives of the related asset. Funds received before the
conditions of the grant are met should be recorded as deferred
revenue.
Stock-based
compensation
The
Company follows the guideline under ASC Topic 718 Compensation-Stock
Compensation
for
all stock based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. Stock
compensation expenses are to be recorded using the fair value
method.
Income
taxes
The
Company follows the guideline under ASC Topic 740 Income Taxes. “Accounting for
Income Taxes” which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates, applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
The
Company is subject to the taxes in the United States at tax rate of
approximately 42.7%. No provision for the US federal income taxes has
been made as the Company had no taxable income in this jurisdiction for the
reporting periods.
The
Company is subject to the PRC Enterprise Income Tax (“EIT”) at a rate of 25% on
its net income. According to PRC EIT Law, any joint venture with foreign
investment will get EIT exemption treatment for the first two years and reduced
tax rates of 9%, 10% and 11% for the third, fourth and fifth years,
respectively. As a foreign investment enterprise, Dalian Dongtai is subject to
EIT at 11% for the three months ended March 31, 2010. Furthermore, the Law
stipulates that enterprises that engage in municipal sewage and sludge treatment
business are eligible for special EIT treatment. According to such rules,
Dongtai Water and Dongtai Organic is entitled to a three-year EIT exemption
treatment starting whenever it generates the first operation revenue, and
additional 50% discount on the normal rate for the next three years. For the
three months ended March 31, 2010, Dongtai Water and Dongtai Organic have
benefited from the EIT exemption preference.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Statement of cash
flows
In
accordance with ASC Topic 230 Statement of Cash Flows, cash flows from the
Company’s operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows will not necessarily agree with changes in the corresponding balances
on the balance sheet.
Basic and diluted net
earnings per share
Earnings
per share is calculated in accordance with ASC Topic 260 Earnings Per Share.
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
Reclassifications
Certain
reclassifications have been made in the 2009 financial statements to conform to
the 2010 presentation.
Recent accounting
pronouncements
Subsequent
Events – Amendments to Certain Recognition and Disclosure
Requirements
In
February 2010, the Financial Accounting Standards Board (“FASB”) issued ASU
2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and
Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure
requirements within Subtopic 855-10. An entity that is an SEC filer is not
required to disclose the date through which subsequent events have been
evaluated. This change alleviates potential conflicts between Subtopic 855-10
and the SEC's requirements. ASU 2010-9 is effective for interim and annual
periods ending after June 15, 2010. The Company does not expect the
adoption of ASU 2010-09 to have a material impact on its consolidated results of
operations or financial position.
Technical
Corrections to Various Topics
In
February 2010, the FASB issued ASC Update 2010-08, which contains technical
corrections to various Topics within the ASC. Those corrections are effective
for interim and annual periods beginning after February 2, 2010. The Company is
currently evaluating the potential effects of ASC Update 2010-08.
Fair
Value Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements
In
February, 2010, the FASB issued FASB ASC Update 2010-06, “Fair Value
Measurements and Disclosures – Improving Disclosures About Fair Value
Measurements,” ASU Update 2010-06 adds new requirements for disclosures of
significant transfers into and out of Levels 1, 2 and 3 of the fair value
hierarchy, the reasons for the transfers and the policy for determining when
transfers are recognized. ASU 2010-06 also adds new requirements for disclosures
about purchases, sales, issuances and settlements on a gross rather than net
basis relating to the reconciliation of the beginning and ending balances of
Level 3 recurring fair value measurements. It also clarifies the level of
disaggregation to require disclosures by “class” rather than by “major category
of assets and liabilities” and clarifies that a description of inputs and
valuation techniques used to measure fair value is required for both recurring
and nonrecurring fair value measurements classified as Level 2 or 3. ASU
Update 2010-06 is effective January 1, 2010 except for the requirements to
provide the Level 3 activity of purchases, sales, issuances and settlements
on a gross basis which are effective January 1, 2011. The adoption of ASU
2010-06 is not expected to have a material impact on the Company’s results of
operations or financial position.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
Accounting
and Reporting for Decreases in Ownership of a Subsidiary- a Scope
Clarification
In
January 2010, the FASB issued ASU 2010-2 Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU
2010-2"). ASU 2010-2 addresses implementation issues related to the changes in
ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of
the FASB Accounting Standards Codification, originally issued as FASB
Statement No. 160, Noncontrolling Interests in Consolidated Financial
Statements. Subtopic 810-10 establishes the accounting and reporting guidance
for noncontrolling interests and changes in ownership interests of a subsidiary.
An entity is required to deconsolidate a subsidiary when the entity ceases to
have a controlling financial interest in the subsidiary. Upon deconsolidation of
a subsidiary, an entity recognizes a gain or loss on the transaction and
measures any retained investment in the subsidiary at fair value. The gain
or loss includes any gain or loss associated with the difference between
the fair value of the retained investment in the subsidiary and its carrying
amount at the date the subsidiary is deconsolidated. In contrast, an entity is
required to account for a decrease in ownership interest of a subsidiary that
does not result in a change of control of the subsidiary as an equity
transaction. ASU 2010-2 is effective for the Company starting January 3,
2010. The implementation of this issue did not have a material impact on the
Company’s financial position and results of operations.
Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting
Principles
In June
2009, the FASB issued Statement No. 168, “The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles”
(“SFAS No. 168”). SFAS No. 168 will become the single source of authoritative
nongovernmental U.S. generally accepted accounting principles (“GAAP”),
superseding existing FASB, American Institute of Certified Public Accountants
(“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting
literature. SFAS No. 168 reorganizes the thousands of GAAP pronouncements into
the FASB ASC, which contains roughly 90 accounting topics and displays them
using a consistent structure. Also included is relevant Securities and Exchange
Commission guidance organized using the same topical structure in separate
sections. SFAS No. 168 is effective for financial statements issued for
reporting periods that end after September 15, 2009. As the result of SFAS No.
168 the Company’s references to the authoritative accounting literature in these
financial statements have been revised to include references to the FASB
ASC.
Consolidation
of Variable Interest Entities – Amendments to FASB Interpretation No.
46(R)
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)”, which has been codified as an update to FASB ASC Topic 810 which
requires ongoing analyses to determine whether an entity’s variable interest
gives it a controlling financial interest in a variable interest entity (“VIE”),
making it the primary beneficiary, based on whether the entity (i) has the
power to direct activities of the VIE that most significantly impact its
economic performance, including whether it has an implicit financial
responsibility to ensure the VIE operates as designed, and (ii) has the
obligation to absorb losses or the right to receive benefits of the VIE that
could potentially be significant to the VIE. Enhanced disclosures regarding an
entity’s involvement with variable interest entities are also required under the
provisions of FASB ASC 810. These requirements are effective January 1,
2010. The adoption of these requirements did not have a material impact on
the Company’s financial statements.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
4
.
Notes
receivable
As of
March 31, 2010 and December 31, 2009, notes receivable, with the balances of
$256,462 and $335,780, respectively, represents trade accounts receivable due
from various customers where the customers’ banks have guaranteed the payment of
the receivables. This amount is non-interest bearing and is normally
paid within three to six months. The Company has the ability to submit request
for payment to the customer’s bank earlier than the scheduled payment date, but
will incur an interest charge and a processing fee when it submits the early
payment request.
5. Accounts
receivable
As of
March 31, 2010 and December 31, 2009, the net balances of accounts receivable
were $3,113,248 and $2,021,421, respectively. The following table shows the
aging composition of the balances:
Aging
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
1-3
months
|
|
$
|
1,925,299
|
|
|
$
|
1,098,027
|
|
4-6
months
|
|
|
429,546
|
|
|
|
450,939
|
|
7-12
months
|
|
|
570,271
|
|
|
|
381,949
|
|
1-2
years
|
|
|
243,017
|
|
|
|
118,875
|
|
over
2 years
|
|
|
11,737
|
|
|
|
2,699
|
|
Total
|
|
$
|
3,179,871
|
|
|
$
|
2,052,489
|
|
Allowance
for doubtful accounts
|
|
|
(66,623
|
)
|
|
|
(31,068
|
)
|
Accounts
receivable, net
|
|
$
|
3,113,248
|
|
|
$
|
2,021,421
|
|
The
activity in the allowance for doubtful accounts for accounts receivable for the
three months ended March 31, 2010 is as follows:
|
|
For
the Three
Months
Ended
March
31, 2010
|
|
Beginning
allowance for doubtful account
|
|
$
|
31,068
|
|
Additional
charged to bad debt expense
|
|
|
35,547
|
|
Write-off
charged against the allowance
|
|
|
-
|
|
Foreign
currency translation adjustment
|
|
|
8
|
|
Ending
allowance for doubtful accounts
|
|
$
|
66,623
|
|
6. Construction
reimbursement receivable
Dongtai
Organic commenced trial production in March 2009, as the development of plans to
bring the integrated anaerobic fermentation system necessary for its intended
use. In fiscal year 2009, Dongtai Organic aggregately disposed of 42,789
tons of municipal sl
udge, and recorded a
construction reimbursement receivable of $846,270. Payments are to be
processed by Dalian Municipal Government per BOT contractual agreement as a
reimbursement of current related expense. Therefore, Dongtai Organic accounted
the reimbursement as a reduction of current period construction cost. As of
March 31, 2010, the remaining balance was approximately
$106,729.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
7.
Inventory
As of
March 31, 2010 and December 31, 2009, inventory consists of raw materials and
recycled commodities as follows:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Raw
materials
|
|
$
|
984,159
|
|
|
$
|
719,948
|
|
Recycled
commodities
|
|
|
1,408,609
|
|
|
|
1,365,081
|
|
|
|
$
|
2,392,768
|
|
|
$
|
2,085,029
|
|
Raw
materials are mainly comprised of waste catalyst, which is a scarce resource,
collected from oil refineries, chemicals used in the waste treatment and
recycling process, and packaging materials.
As of
March 31, 2010 and December 31, 2009, the balances of waste catalyst amounted
to $422,553 and $422,547, respectively. Because of the impact of the
global economic crisis, the prices for the final products that produced from the
processing of waste catalyst, including chemical compounds of valuable metals
have decreased dramatically since the end of 2008. Management believes that the
holding of waste catalyst before the rise of market price complies with
shareholder’s interest.
Recycled
commodities are mainly comprised of alloys and cupric sulfate that are produced
from waste collected, and aluminum and iron products recycled from waste
collected, etc.
For
the three months ended March 31, 2010, no allowance for obsolete
inventories was recorded by the Company.
8. Property, plant and
equipment
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Buildings
|
|
$
|
14,762,215
|
|
|
$
|
14,761,998
|
|
Machinery
and equipment
|
|
|
19,510,620
|
|
|
|
19,510,334
|
|
Office
equipment
|
|
|
678,604
|
|
|
|
670,015
|
|
Vehicles
|
|
|
1,374,583
|
|
|
|
1,281,659
|
|
|
|
|
36,326,022
|
|
|
|
36,226,006
|
|
Less:
accumulated depreciation
|
|
|
(4,431,798
|
)
|
|
|
(3,904,861
|
)
|
Property,
plant and equipment, net
|
|
|
31,894,224
|
|
|
|
32,319,145
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
9,924,250
|
|
|
|
9,123,927
|
|
Total
|
|
$
|
41,818,474
|
|
|
$
|
41,443,072
|
|
Depreciation
expenses for the three months ended March 31, 2010 and 2009 were $526,771 and $
$264,575, respectively.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
For the
three months ended March 31, 2010 and 2009, capitalized interests amounted to
$98,384 and $94,545, respectively.
As of
March 31, 2010, certain buildings, with the net book value of $4,236,424, have
been pledged as the collateral for loans from Shanghai Pudong Development Bank.
Certain machinery and equipments, with the net book value of $14,632,195, have
been pledged as the collateral for loans from China Merchants Bank.
9. Other
assets
As of
March 31, 2010, other asset in the amount of $1,204,761 is primarily comprised
of value added tax credit of $1,183,629. VAT is a turnover tax levied on all
units and individuals engaged in the sale of goods, the provision of processing,
repair and replacement services (together referred to as "taxable labor
services") and the importation of goods to the PRC.
10. Short-term
loan
As of
March 31, 2010, the short-term loan balance represents loans, aggregately RMB46,
000,000 (approximately $6,739,137), which are all borrowed from Shanghai Pudong
Development Bank. The following table identifies the material terms of
loans:
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Effective
Date
|
|
|
Maturity
|
|
Type
|
|
Interest
Rate
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
04-27-2009
|
|
|
|
04-27-2010
|
|
Secured
|
|
|
5.841%
|
|
|
$
|
3
,809,077
|
|
|
$
|
3,809,022
|
|
|
05-18-2009
|
|
|
|
05-18-2010
|
|
Secured
|
|
|
5.841%
|
|
|
|
1,465,030
|
|
|
|
1,465,008
|
|
|
06-04-2009
|
|
|
|
06-04-2010
|
|
Secured
|
|
|
5.841%
|
|
|
|
1,465,030
|
|
|
|
1,465,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,739,137
|
|
|
$
|
6,739,038
|
|
Total
interest expense on short-term loans for the three months ended March 31, 2010
and 2009 amounted to $347,272 and $94,545, respectively. And the loans are
secured by certain properties and land use right of the Company.
11. Long-term
loan
As of
March 31, 2010 and December 31, 2009, the long-term loan balances represent
loans from China Merchants Bank. The following table identifies the material
terms of the loans:
|
|
|
|
|
|
|
Principal
|
|
|
|
|
|
|
|
|
March
31, 2010
|
|
|
December
31, 2009
|
|
Effective
Date
|
|
|
Maturity
|
|
Type
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
01-08-2009
|
|
|
|
01-07-2017
|
|
Secured
|
|
$
|
12,005,919
|
|
|
$
|
12,452,570
|
|
|
08-20-2009
|
|
|
|
08-20-2017
|
|
Secured
|
|
|
3,433,663
|
|
|
|
3,548,067
|
|
|
|
|
|
|
|
|
|
|
$
|
15,439,582
|
|
|
$
|
16,000,637
|
|
The
interest rates for above loans are determined based on the monthly
rate of loans above 5 years set by the People’s Bank of China at closing date
plus 5% and is adjustable every six months.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The long
term loans are scheduled to be repaid on installments. The following table shows
the installments schedule:
Year
|
|
Amount
|
|
2010
|
|
$
|
1,683,869
|
|
2011
|
|
|
2,245,158
|
|
2012
|
|
|
2,245,158
|
|
2013
|
|
|
2,245,158
|
|
2014
|
|
|
2,245,158
|
|
Thereafter
|
|
|
4,775,081
|
|
Total
|
|
$
|
15,439,582
|
|
As of
March 31, 2010, the installments amounting to $2,245,158 will be due within one
year, and are classified in current liabilities. The BOT franchise right of
Dongtai Water and Dongtai Organic, and certain manufacturing machinery of the
Company are pledged as collaterals for the above loans. Dalian Lida
Environmental Engineering Co., Ltd, which holds 20% equity interest in Dongtai
Water, acts as co-guarantor for the loan with the balance of
$3,433,663.
12. Government
subsidy
As of
March 31, 2010 and December 31, 2009, the government subsidy consists of
the followings:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Dalian
Dongtai
|
|
$
|
1,465,030
|
|
|
$
|
1,465,008
|
|
Zhuorui
|
|
|
991,917
|
|
|
|
999,071
|
|
Hunan
Hanyang
|
|
|
3,076,562
|
|
|
|
-
|
|
|
|
$
|
5,533,509
|
|
|
$
|
2,464,079
|
|
In 2009,
Dalian Dongtai received a government subsidy from the central government of PRC
of RMB10, 000,000 (approximately $1,465,030) to support the construction of the
Centralized Hazardous Waste Treatment Center of Dalian City, which is located in
Dalian Development Area.
In 2007,
Zhuorui received government subsidies of RMB7, 036,000 (approximately
$1,030,795), of which RMB6, 000,000 (approximately $879,018) is to be used to
purchase production machinery or pay construction expenditures, and the other
RMB1, 036,000 (approximately $151,777) is granted as a reimbursement for the
acquisition of land use right.
On
January 27, 2010, Hunan Hanyang received a government subsidy of RMB21 million
(approximately $3,076,562) from the central government of PRC, representing the
first installment of a total expected government subsidy of RMB110 million
(approximately $16.1 million) as a reimbursement of construction cost in the
Hazardous Waste Treatment Center of Changsha City, Hunan Province.
The
subsidies are initially recorded as deferred income. Upon the completion and
acceptance of the government subsidized projects, subsidies are recognized over
the useful lives of the related assets.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
13. Settlement
expense
In
February 2010, the Company and a consulting firm, which provides business
advisory and private placement services to the Company, signed a Settlement and
Release Agreement (the “Agreement”) to resolve all remaining issues between
them. Pursuant to the Agreement, the consulting firm received:
i)
|
62,500
shares of common stock of the
Company.
|
ii)
|
A
Placement Agent Warrant (denominated as “Unit Purchase Option”) to
purchase up to 5 Units at 120% of the offering price of the Unit. The
original offering price of a Unit was $60,000 at time of offering. Each
Unit consists of 29, 412 shares of restricted common stock of the Company,
“A” warrants to purchase 14,706 common shares of the Company at an
exercise price of $2.50 and “B” warrants to purchase 14,706 common shares
of the Company at an exercise price of
$3.20.
|
As
management has determined that the Units are issued in settlement of a dispute
between the parties, each Unit is to be valued at its fair value. Utilizing the
Black-Scholes option-pricing model resulted in an aggregate fair value of the
elements (stock, warrant A and warrant B) of each Unit to be $128,089 ($88,236,
$22,016 and $17,837, respectively) or $640,446 for all 5 Units. The following
significant assumptions were used in preparing the Black-Scholes calculation
assumptions: expected dividend yield 0%; risk-free interest rate of 2.48%;
volatility of 89.59% and an expected term of 5 years.
The fair
market value of the 62,500 shares of common stock at issuance date was
approximately $159,375. The fair value of 5 Units is $640,446 and the cost of
purchase is $360,000. The difference between fair value of all 5 Units and cost
of purchase in the amount of $280,446 was charged to expense account during the
current period. Therefore, the Company recognized a settlement expense of
$439,821.
14. Related parties
transactions
As of
March 31, 2010 and December 31, 2009, the amounts due from (to) related parties
were as follows:
|
|
March
31,
2010
|
|
|
December
31,
2009
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
Due
to Dalian Dongtai Investment Co., Ltd. (“Dongtai
Investment”)
|
|
$
|
(380,908
|
)
|
|
$
|
(380,902
|
)
|
Due
from Dalian Lida Environmental Engineering Co., Ltd. (“Dalian
Lida”)
|
|
$
|
234,405
|
|
|
$
|
234,401
|
|
As of
March 31, 2010, the balance with Dongtai Investment represents unsecured loans
which are detailed as below:
Effective
Date
|
|
Maturity
|
|
Interest
Rate
|
|
|
Amount
|
|
|
|
|
|
per
annum
|
|
|
|
|
|
10-15-2007
|
|
on
demand
|
|
|
6%
|
|
|
$
|
278,356
|
|
|
03-06-2009
|
|
on
demand
|
|
|
6%
|
|
|
|
29,301
|
|
|
03-23-2009
|
|
on
demand
|
|
|
6%
|
|
|
|
73,251
|
|
|
|
|
|
|
|
|
|
|
$
|
380,908
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
As of
March 31, 2010, receivable from Dalian Lida is an unsecured short term loan of
$234,405 (RMB1.6 million) with interest rate of 6% per annum, effective on
August 1, 2009, and matured on April 30, 2010.
15. Earnings per
share
Basic
earnings per common share (“EPS”) are calculated by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
EPS is calculated by adjusting the weighted average outstanding shares, assuming
conversion of all potentially dilutive securities, such as stock options and
warrants, using the treasury stock method.
The
following table demonstrates the calculations for earnings per share for the
three months ended March 31, 2010 and 2009:
|
|
2010
|
|
|
2009
|
|
Net
income attributable to the Company
|
|
$
|
608,855
|
|
|
$
|
117,003
|
|
Adjustments
for diluted EPS calculation
|
|
|
-
|
|
|
|
-
|
|
Adjusted
net income for calculating EPS-diluted
|
|
$
|
608,855
|
|
|
$
|
117,003
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common shares - Basic
|
|
|
15,327,507
|
|
|
|
15,262,035
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Option
|
|
|
20,000
|
|
|
|
-
|
|
Warrants
|
|
|
1,053,930
|
|
|
|
-
|
|
Weighted
average number of common shares - Diluted
|
|
|
16,401,437
|
|
|
|
15,262,035
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.01
|
|
16. Commitment and
Contingency
Capital
commitment
The
Company has purchasing commitments that result from construction contracts and
equipment procurement contracts signed for the development of the Centralized
Hazardous Waste Treatment Center of Dalian City. As of March 31, 2010, the
commitment information is as follows:
Construction
|
|
$
|
2,389,581
|
|
Equipment
|
|
|
978,218
|
|
Total
|
|
$
|
3,367,799
|
|
Zhuorui
In March
2009, Zhuorui commenced trial production. Due to the unfavorable market prices
for Zhuorui’s final products, including chemical compounds of valuable metals,
and imperfections detected in the trial production, the Company decided to
suspend the trial production in January 2010 to make improvement on the
technical flow prior to market recovery. With the improvement on the technical
flow, Zhuorui can generate an additional by-product, which strengthens its
profitability and qualifies upgraded emission standards.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
The
capital expenditure for the improvement is approximately $2.1 million
(approximately RMB 14 million), and it is estimated that a four-month period is
necessary to accomplish this improvement. Despite the advantages brought by
this proposed technical improvement, there are possibilities of losses
caused by unexpected events, take for example, it costs additional time or
fund to accomplish the improvement, the attempt to generate additional
by-product fails or the depressing market conditions last longer than our
expectation.
17. Subsequent
events
The
Company has evaluated all subsequent events through May 10, 2010, the date these
financial statements were issued, and determined that there were no subsequent
events or transactions that required recognition or disclosure in the financial
statements.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING
INFORMATION - Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") includes forward-looking statements. All
statements, other than statements of historical facts, included in this MD&A
regarding the Company's financial position, business strategy and plans and
objectives of management of the Company for future operations are
forward-looking statements. These forward-looking statements rely on a number of
assumptions concerning future events and are subject to a number of
uncertainties and other factors, many of which are outside of the Company's
control that could cause actual results to materially differ from such
statements. While the Company believes that the assumptions concerning future
events are reasonable, it cautions that there are inherent difficulties in
predicting certain important factors, especially the timing and magnitude of
technological advances; the prospects for future acquisitions; the possibility
that a current customer could be acquired or otherwise be affected by a future
event that would diminish their waste management requirements; the competition
in the waste management industry and the impact of such competition on pricing,
revenues and margins; uncertainties surrounding budget reductions or changes in
funding priorities of existing government programs and the cost of attracting
and retaining highly skilled personnel.
OVERVIEW
Business
China
Industrial Waste Management, Inc., which, through its indirect 90% owned
subsidiary, Dalian Dongtai Industrial Waste Treatment Co., Ltd. (“Dalian
Dongtai”), has engaged in industrial solid waste treatment since 1991, is now
the largest industrial solid waste management enterprise in Northeast China. The
Company’s operations are conducted primarily in three areas:
·
|
Industrial
Solid Waste Treatment and Recycling
:
Dalian Dongtai
provides services including the collection, storage, transportation,
disposal and incineration of industrial waste, as well as the landfill of
general and hazardous industrial
waste.
|
·
|
Municipal
Sewage Water Treatment
:
Dalian Dongtai’s 80%
subsidiary, Dalian Dongtai Water Recycling Co. Ltd. (“Dongtai Water”),
commenced operations in June 2008 to process domestic sewage generated
from a portion of Dalian City.
|
·
|
Municipal
sludge treatment (sludge-to-energy)
:
Dalian Dongtai’s
52%-owned
subsidiary, Dalian
Dongtai Organic Waste Treatment Co. Ltd. (“Dongtai Organic”), which became
operational in 2009, has implemented a centralized processing of
wastewater sludge derived from all sewage treatment plants in urban Dalian
City.
|
Business
Model
The
Company’s operations are conducted primarily in three areas that contributing to
the Company’s revenue stream in the fist quarter of 2010, i.e. (a) revenue from
industrial solid waste (b) sludge treatment which consists of sludge treatment
fees and sales of biogas (methane) and (c) sewage treatment. They accounted for
67.56%, 8% and 24.4% respectively of revenues for the first quarter of
2010.
(a)
Industrial Solid Waste
Dalian
Dongtai generates revenues from its receipt of waste management service fees and
sales of recycled commodities. Our diverse customer base includes companies
engaged in the electronic, chemical, petrochemical, mechanical treatment,
pharmacy, shipbuilding and automobile-making industries, and industrial solid
wastes include solvent, remnants of chemical, waste catalysts, grinding fluids,
cutting fluids, oily sludge, slag, foundry sand and industrial waste
water.
The
typical waste management contract with a client is renewable every year, and the
service fee charged to the customer is based on the volume of waste produced.
Most of our clients make payments on a monthly basis. In the first quarter of
2010, the Company received approximately $ 2.94 million in solid waste treatment
service fees from its customers. Revenues from sales of recycled
commodities reached $1.15 million in the first quarter of 2010.
(b)
Sludge Treatment
Dongtai
Organic operates the first BOT (Build-Operate-Transfer) plant in the PRC to
implement centralized wastewater sludge processing. During the project’s 20-year
franchised period, this sludge-to-energy plant is expected to dispose of the
sludge derived from all sewage treatment plants located in urban Dalian City.
This plant has a designed capacity of 600 tons/day and is expected to generate
approximately 11,000 cubic meters of methane each day once it reaches its full
capacity. The project has generated revenues since January 2010 from service
fees paid by the local government and from sales of biogas (methane) to Dalian
Gas Company, which it uses as a partial supply for cooking fuel in Dalian City.
Both of the revenues streams of Dongtai Organic are calculated on a volume
basis. The payment of sludge processing fees is the responsibility of the local
government and is payable every quarter while payment for sales of biogas
(methane) is made on a monthly basis.
(c)
Sewage Treatment
Dongtai
Water, which is a BOT plant with a 20 year franchised right,
commenced operations in June 2008 to process domestic sewage generated from a
portion of Dalian City. The plant’s designed capacity is 30,000 tons/day and it
has reached its full capacity. The payment of sewage treatment fees, which is
based on the volume of waste water processed, is paid by the local government on
quarterly basis.
Recent
Developments
(a) In
order to provide sufficient infrastructure to meet the increasing demand for
waste treatment and disposal, an expansion project is now underway to
significantly increase Dalian Dongtai’s capacity for waste treatment and
disposal. The expansion project, which is one of fifty-five hazardous waste
treatment centers sponsored by the National Development and Reform Commission
and one of two such centers in Liaoning Province, commenced construction at the
end of July 2009. The Company expects the project to be operational in the
fourth quarter of 2010.
Further
information about the expansion of the facility is as
follows:
|
|
|
|
Capacity
|
|
Facility
|
|
Description
|
|
Existing
|
|
|
After expansion
|
|
Incinerator
|
|
Incineration
System for Solid Waste
|
|
|
3,300
t/y
|
|
|
|
9,000
t/y
|
|
Hazardous
Waste Landfill
|
|
Hazardous
Waste Safe Landfill
|
|
|
13,000
|
t
|
|
|
40,000
|
t
|
Industrial
Effluent Treatment System
|
|
Industrial
Sewage Treatment
|
|
|
18,000
t/y
|
|
|
|
25,000
t/y
|
|
Organic
Solvent Recycling System
|
|
Industrial
Organic Solvent Product
|
|
|
1,000
t/y
|
|
|
|
3,000
t/y
|
|
(b) In
accordance with Dongtai Organic's franchise agreement with the local government,
Dongtai Organic is entitled to process all of the sludge generated from sewage
treatment plants in the urban area of Dalian City. There are several
sewage treatment plants in Dalian under construction. Management anticipates
that Dalian Organic’s facility will reach its full capacity within one or two
years following completion of sewage treatment plants in Dalian
city.
Operating
Strategy
Our
business strategy is designed to increase revenues and earnings through
profitable growth and improving returns on invested capital. The components of
our strategy include:
·
|
Maintaining
commercialization of industrial solid waste treatment as our core business
and maintaining a balanced business structure of the three business
lines;
|
·
|
Expansion
into municipal sludge treatment BOT projects with the goal of 30-40% of
our revenues being provided by sludge
treatment;
|
·
|
Promoting
the installation of sludge treatment tanks in other cities to seize the
market opportunity in the surge of sludge
treatment;
|
·
|
Managing
our businesses locally with a strong operating focus and emphasis on
customer service;
|
·
|
Expanding
into new geographic markets in
China;
|
·
|
Maintaining
our financial capacity and effective administrative systems and controls
to support on-going operations and future growth. We are evaluating growth
in our solid waste treatment operations through opportunities to cooperate
with prominent domestic or overseas partners and attempts to integrate
customer groups (for example, the refinery industry), to realize resource
optimization; and
|
·
|
We
also plan to seek new BOT projects and acquire interests in existing
projects.
|
We also
plan to seek new BOT projects and acquire interests in existing projects, as we
believe they can provide us with stable revenues and cash inflows. Furthermore,
we believe that a well-operated BOT project will gain attention and social
recognition from the local government and business community, which may, in
turn, provide additional business opportunities in the Dalian metropolitan
area.
CRITICAL ACCOUNTING
POLICIES
We have
disclosed in Note 3 to our financial statements those accounting policies that
we consider to be significant in determining our results of operations and our
financial position which are incorporated by reference herein.
The
preparation of financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses.
We evaluate our estimates, including those related to bad debts, inventories and
warranty obligations, on an ongoing basis. We base our estimates on historical
experience and on various assumptions that we believe to be reasonable under the
circumstances. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the periods presented. The actual results
may differ from these estimates under different assumptions or
conditions.
The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:
Revenue
Recognition
Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as deferred sales.
Property, Plant and
Equipment
Property,
plant and equipment (“PP&E”) are stated at cost, less accumulated
depreciation and impairment. Expenditures for maintenance and repairs are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When PP&E are required or otherwise disposed of, the related
cost and accumulated depreciation are removed from the respective accounts, and
any gain or loss is included in the statement of operations.
Bad
Debts
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Terms of the sales vary from cash on delivery
through a credit term of up to nine to twelve months.
RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the combined and
consolidated financial statements and notes appearing elsewhere in this
quarterly report.
Three
Months Ended March 31, 2010 Compared to the Three Months Ended March 31,
2009.
Revenues
We
generate revenue primarily from two sources, i.e., fees charged to customers for
waste collection, transfer, recycling and disposal services (including service
fees for sewage and sludge treatment), and sales of recycled commodities
(including sales of methane). We consider our collection and disposal operations
and reclamation of reusable substances as our core business. Revenues from
service fees accounted for 71.9% and 74.3% of revenues in the three months ended
March 31, 2010 and 2009, respectively.
The
Company’s total revenues for the three months ended March 31, 2010 was
$4,094,841, an increase of $2,482,891 or 154.03%, over revenues of $1,611,950
for the three months ended March 31, 2009.
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Service
fees(1)
|
|
$
|
2,944,558
|
|
|
$
|
1,197,699
|
|
Sales
of recycled commodities (2)(3)
|
|
|
1,150,283
|
|
|
|
414,251
|
|
Total
|
|
$
|
4,094,841
|
|
|
$
|
1,611,950
|
|
Notes:
(1)
Consists of service fees generated from industrial solid waste treatment, sewage
treatment and sludge treatment.
(2)
Cupric sulfate, which is included in the sales of recycled commodities, was
segmented previously because its sales account for more than 10% of total
revenue.
(3) Sales
of biogas (methane), which is a new component byproduct derived by Dongtai
Organic, is included in sales of recycled commodities.
The
increase is mainly attributable to:
(a) The
rally in the overall industrial solid waste business. Service fees from
industrial solid waste treatment represent a n increase of $1,160,289, from
$869,581 to $2,029,870, or 133.4% increase, in the first quarter of 2010. In
addition, sales of recycled commodities (excluding sales of methane) increased
from $414,251 to $736,779. This increase is a natural consequence of a
recovering production scale of our clients who suffered from the adverse impact
of the global economic recession and corresponding world financial crisis which
severely impacted the Company’s primary business. We expect this trend to
continue for the balance of 2010.
(b) The
additional revenue derived by Dongtai Organic, a 52%-owned subsidiary that
generates revenues from municipal sludge treatment, as well as from
sales of its by-product (methane).
1. Service
fees
Service
fees increased from $1,197,699 for the three months ended March 31, 2009 to
$2,944,558 for the same period of 2010, an increase of $1,746,859, or 145.85%.
The increase is attributable to (a) the $1,160,289 or 133.4% increase in service
fees generated from industrial solid waste treatment business and (b) the
addition of $585,394 generated from sludge treatment fees, which
accounts for 19.9% of service fees in total.
Since its
commencement of operations in late 2009, Dongtai Organic continues to function
stably. In the first quarter of 2010, Dongtai Organic generated $998,898 in
sludge treatment fees and sales of methane.
2. Sales of recycled
commodities
As
China’s economy appears to be recovering from the global rescission, prices for
many raw materials have been increasing gradually, including for Dalian
Dongtai’s main products, cupric sulfate, iron, plastic and nonferrous metal For
example, the average price for cupric sulfate in the first quarter of 2010 was
about $1,750/ton, while the average price for the same period of 2009 was
approximately $1,080/ton, an increase of approximately 61.4%. To optimize on
this situation, Dalian Dongtai has selectively sold some of the recycled
commodities, including commodities that had been inventoried during 2009 due to
the low sales prices. As of the end of March 2010, Dalian Dongtai had generated
$736,779 from sales of recycled commodities (excluding sales of methane) which
increased by $322,528 or 77.8% from $414,251 for the same quarter in
2009.
In the
first quarter of 2010, Dongtai Organic generated $413,504 in revenue from the
sales of biogas (methane), a by-product, whereas there was no such revenue in
the first quarter of 2009.
Cost of
Revenues
The
Company’s cost of revenues for the three months ended March 31, 2010 was
$1,416,952 compared with $727,850 for the three months ended March 31,
2009.
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Cost
of service fees (1)
|
|
$
|
1,028,493
|
|
|
$
|
470,163
|
|
Cost
of recycled commodities (2)(3)
|
|
|
388,459
|
|
|
|
257,687
|
|
Total
|
|
$
|
1,416,952
|
|
|
$
|
727,850
|
|
Notes:
(1)
Consists of service fees generated from industrial solid waste treatment, sewage
treatment and sludge treatment.
(2)
Cupric sulfate, which is included in the sales of recycled commodities, was
segmented previously because its sales account for more than 10% of total
revenue.
(3) Sales
of biogas (methane), which is a new component byproduct derived by Dongtai
Organic, is included in sales of recycled commodities.
Total
cost of revenues increased by $689,102 or 94.68% for the three months ended
March 31, 2010 compared to the three months ended March 31, 2009.
1. Cost of service
fees
Cost of
service fees increased by $558,330, or 118.75% for the three months ended March
31, 2010 compared to the three months ended March 31, 2009.
The
increase includes the cost incurred by Dongtai Organic in the amount of
approximately $506,740. In the three months ended March 31, 2009, Dongtai
Organic had not yet commenced operations.
2. Cost of sales of recycled
commodities
Cost of
recycled products (including cupric sulfate and other recycled commodities) for
the three months ended March 31, 2010 increased by $130,772 or 50.75%, compared
with the same period of 2009.
Gross Profit
Margin
The gross
profit margin for the three months ended March 31 2010 was 65.4% whereas that
for the same period in 2009 was 54.85%. The primary reason for the 10.55%
improvement in the Company’s gross profit margin is attributable to the
recovery of recycled commodities (especially cupric sulfate).
LIQUIDITY AND CAPITAL
RESOURCES
We have
financed our operations and met capital expenditure requirements primarily
through cash provided by operating activities, trade credit and bank
loans.
Accounts
receivable increased by $1,091,827 or 54% from $2,021,421 as of December 31,
2009 to $3,113,248
as of
March 31, 2010. This primarily contributed to (a) approximately
$
562,303 for
sludge treatment service rendered and sales of methane (b) in crease in revenue
from industrial solid waste treatment.
Short-term
loan as of March 31, 2010 was $6,739,137, whereas the corresponding amount as of
December 31 2009 was $6,739,038.
As of
March 31, 2010, the Company had cash and cash equivalents of $10,311,215
compared to $11,419,129
as of
December 31, 2009, a decrease of $1,107,914 or 9.7%. The decrease is
mainly due to: (a) Repayment of bank loans and (b) Payment for construction
and procurement of equipments for Hunan Hanyang and Dalian Dongtai’s
expansion project.
As of
March 31, 2010, the Company had a working capital surplus of $1,927,122,
compared to a surplus of $1,658,294
as
of December 31, 2009.
Cash
Flow
|
|
Three
Months Ended March 31,
|
|
|
|
2010
|
|
|
2009
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
1,105,
814
|
|
|
$
|
(910,74
6
|
)
|
Net
cash used in investing activities
|
|
|
(835,125
|
)
|
|
|
(3,925,150
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(1,373,943
|
)
|
|
|
3,516,236
|
|
Net cash
provided by operating activities was $
1,105,
814
for the three months ended March 31, 2010, compared to net cash
used in operating activities in the amount of $
910,74
6
for the same period in 2009. The improvement is mainly attributable to the
recovery of business.
Net cash
used in investing activities for the three months ended March 31, 2010 was
$835,125, compared to net cash used in investing activities in the amount of
$3,925,150 in the same period of 2009.
Net cash
used in financing activities for the three months ended March 31, 2010 was
$1,373,943 compared to net cash provided by financing activities in the amount
of $3,516,236 in the same period of 2009 due to the payment of long-term loan
principal and construction expenditures payable in the first quarter of
2010.
We intend
to use our available funds as working capital and to expand and develop our
current lines of business. We believe that our available funds will provide us
with sufficient capital for at least the next twelve months; however, to the
extent that we make acquisitions, we may require additional capital for the
acquisition or to support the operations of the combined companies. We cannot
provide any assurance that any required funding will be available on terms
acceptable to us.
OFF-BALANCE SHEET
ARRANGEMENTS
As of
March 31, 2010, the Company has no off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Item
3.
Quantitative and Qualitative
Disclosures About Market Risk
Not
Applicable
Item
4T.
Controls and
Procedures
We maintain disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act
of 1934, or the "Exchange Act") that are designed to ensure that information
required to be disclosed in Exchange Act reports is recorded, processed,
summarized, and reported within the time periods specified in the rules and
forms of the SEC and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. Any controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
During
the evaluation of disclosure controls and procedures as of December 31, 2009
conducted during the preparation of the Company’s financial statements included
in its annual report on Form 10-K, a material weakness in internal controls was
identified. As a result of this material weakness the Company’s Chief
Executive Officer and Chief Financial Officer concluded that, as of December 31,
2009 our disclosure controls and procedures were not effective.
A
material weakness is “a deficiency, or a combination of deficiencies (within the
meaning of PCAOB Auditing Standard No. 5), 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.” The Company’s management
concluded that, as of December 31, 2009, the following material weakness
existed:
·
|
We
had an insufficient familiarity with generally accepted accounting
principles in the United States (“US
GAAP”)
|
·
|
The
Company was unable to ensure that all information required to be disclosed
in our filings was accumulated and communicated to management to allow
timely decisions regarding required
disclosure.
|
·
|
The
Company lacks qualified resources to perform the internal audit functions
properly; and the scope and effectiveness of the Company’s internal audit
function are yet to be developed.
|
Since
January 2, 2010 we have engaged in substantial efforts to improve our internal
control over financial reporting and disclosure controls and procedures related
to many areas of our financial statements and disclosures. In order to remediate
the material weakness identified as of December 31, 2009, during the first
quarter of 2010 we have:
·
|
Commenced
the process by which we will become better informed about US
GAAP.
|
·
|
Began
the process of seeking additional accounting and financial personnel with
industry experience.
|
Notwithstanding
the remedial actions we have undertaken since December 31, 2009, because of the
scope of the material weakness that existed at December 31, 2009, our management
has concluded that our disclosure controls and procedures at March 31, 2010 were
not effective. Our efforts to remediate our disclosure controls and procedures
and internal control over financial reporting are continuing and are expected to
continue throughout fiscal 2010. Until such time, however, as our efforts to
remediate this weakness, there remains a risk that we will fail to identify
weaknesses or adequately correct any identified weaknesses in our disclosure
controls and procedures and internal control over financial reporting, both as
they relate to the material weakness identified at December 31, 2009 and to
other possible areas.
Notwithstanding
the existence of this material weakness in disclosure controls and procedures
and internal control over financial reporting at March 31, 2010, we believe that
the consolidated financial statements included elsewhere in this report fairly
present, in all material respects, our consolidated balance sheets as of March
31, 2010 and 2009 and the related consolidated statements of
operations, stockholders’ equity, and cash flows for the quarters ended
March 31, 2010 and 2009 in conformity with US GAAP.
There
have been no changes in our internal control over financial reporting that
occurred during our fiscal quarter ended March 31, 2010, that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
LACK OF SEGREGATION OF DUTIES
Management
is aware that there is a lack of segregation of duties at the Company due to the
small number of employees dealing with general administrative and financial
matters. However, at this time management has decided that considering the
abilities of the employees now involved and the control procedures in place, the
risks associated with such lack of segregation are low and the potential
benefits of adding employees to clearly segregate duties do not justify the
substantial expenses associated with such increases. Management will
periodically reevaluate this situation.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings.
None.
Item
1A. Risk Factors.
Not
Applicable.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds.
On
February 8, 2010, the Company entered into a Settlement and Release Agreement
(the “Agreement”) to resolve all remaining issues between the Company and a
consultant. Pursuant to the Agreement, the consulting firm and/or its designees
were issued (a) 62,500 shares of common stock of the Company and warrants to
purchase, on or before September 11, 2011, up to 5 units at an exercise price of
$72,000 per unit. Each unit consists of 29,412 shares of restricted common stock
of the Company, “A” warrants to purchase 14,706 common shares of the Company at
an exercise price of $2.50 per share and “B” warrants to purchase 14,706 common
shares of the Company at an exercise price of $3.20 per share.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. [Removed and Reserved]
Item
5. Other Information.
None.
Item
6. Exhibits.
No.
|
|
Description
|
31.1
|
|
Rule
13a-14(a)/ 15d-14(a) Certification of Chief Executive
Officer
|
31.2
|
|
Rule
13a-14(a)/ 15d-14(a) Certification of principal financial and accounting
officer
|
32.1
|
|
Section
1350 Certification of Chief Executive Officer
|
32.2
|
|
Section
1350 Certification of Chief Financial
Officer
|
Pursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
CHINA INDUSTRIAL WASTE
MANAGEMENT, INC.
|
|
By:
/s/ Dong Jinqing
|
Dong
Jinqing, Chief Executive Officer
|
Date:
May 12,
2010
|
By:
/s/ Guo Xin
|
Guo
Xin, Chief Financial Officer
|
Date:
May 12, 2010
|
China Industrial Waste M... (CE) (USOTC:CIWT)
過去 株価チャート
から 6 2024 まで 7 2024
China Industrial Waste M... (CE) (USOTC:CIWT)
過去 株価チャート
から 7 2023 まで 7 2024