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.
|
Submission
of Matters to a Vote of Security Holders.
|
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 6.8225 as of December 31,
2008; and at the rate of USD$1.00 = RMB6.8329 as of March 31, 2009 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, its direct wholly-owned subsidiaries DonTech Waste Services,
Inc. (“DonTech”) and Favour Group Ltd. (“Favour”), along with its indirect
wholly-owned subsidiary, Full Treasure Investments Ltd. (“Full Treasure”), and
its indirect majority owned subsidiaries: Dalian Dongtai Industrial Waste
Treatment Co. Ltd. (“Dongtai”); Dongtai Water Recycling Co. Ltd. (“Dongtai
Water”); Dalian Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”); and Dalian
Lipp Environmental Energy Engineering & Technology Co., Ltd.(“Dalian Lipp”).
In March 2009 DonTech merged with and into China Industrial Waste Management,
Inc.
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.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
(Unaudited)
|
|
|
(Audited)
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,741,411
|
|
|
$
|
5,714,001
|
|
|
Trade
accounts receivable, net
|
|
|
2,840,584
|
|
|
|
2,414,257
|
|
|
Other
receivables
|
|
|
81,169
|
|
|
|
105,329
|
|
|
Inventory
|
|
|
2,539,388
|
|
|
|
2,372,214
|
|
|
Advances
to suppliers
|
|
|
695,861
|
|
|
|
550,931
|
|
|
Prepaid
expense
|
|
|
16,830
|
|
|
|
17,589
|
|
|
Total
current assets
|
|
|
8,915,242
|
|
|
|
11,174,321
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
2,749,026
|
|
|
|
2,794,248
|
|
|
Property,
plant and equipment, net
|
|
|
15,700,320
|
|
|
|
15,474,915
|
|
|
Construction
in progress
|
|
|
5,579,412
|
|
|
|
5,738,271
|
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,800,388
|
|
|
|
1,817,427
|
|
|
Deposits
|
|
|
11,848
|
|
|
|
14,798
|
|
|
Related
party receivable
|
|
|
42,285
|
|
|
|
1,256,599
|
|
|
Escrow
account
|
|
|
750,000
|
|
|
|
750,000
|
|
|
Certificate
of deposit
|
|
|
658,578
|
|
|
|
73,287
|
|
|
Other
asset
|
|
|
345,526
|
|
|
|
348,545
|
|
|
TOTAL
ASSETS
|
|
$
|
36,552,626
|
|
|
$
|
39,442,411
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
728,140
|
|
|
$
|
780,458
|
|
|
Short-term
loan
|
|
|
1,463,507
|
|
|
|
3,371,198
|
|
|
Tax
payable
|
|
|
92,995
|
|
|
|
215,240
|
|
|
Advance
from customers
|
|
|
548,301
|
|
|
|
539,013
|
|
|
Deferred
sales
|
|
|
1,072,024
|
|
|
|
972,143
|
|
|
Accrued
expenses
|
|
|
16,576
|
|
|
|
361,111
|
|
|
Construction
projects payable
|
|
|
3,690,930
|
|
|
|
4,742,164
|
|
|
Related
party payable
|
|
|
380,512
|
|
|
|
278,490
|
|
|
Other
payable
|
|
|
212,820
|
|
|
|
211,362
|
|
|
Total
current liabilities
|
|
|
8,205,805
|
|
|
|
11,471,179
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation
|
|
|
510,541
|
|
|
|
502,278
|
|
|
Government
subsidy
|
|
|
1,026,691
|
|
|
|
1,028,257
|
|
|
TOTAL
LIABILITIES
|
|
|
9,743,037
|
|
|
|
13,001,714
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
3,103,708
|
|
|
|
2,823,126
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Preferred
stock: par value $.001; 5,000,000
|
|
|
|
|
|
|
|
|
|
shares
authorized; none issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
Common
stock: par value $.001; 95,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
|
15,262,035
and 13,220,843 shares issued and outstanding at March 31,
2009
|
|
|
|
|
|
|
|
|
|
and
December 31, 2008 respectively
|
|
|
15,262
|
|
|
|
15,262
|
|
|
Additional
paid-in capital
|
|
|
5,644,750
|
|
|
|
5,644,750
|
|
|
Other
comprehensive income
|
|
|
2,402,960
|
|
|
|
2,422,167
|
|
|
Retained
earnings
|
|
|
15,642,909
|
|
|
|
15,535,392
|
|
|
Total
stockholders' equity
|
|
|
23,705,881
|
|
|
|
23,617,571
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
36,552,626
|
|
|
$
|
39,442,411
|
|
|
See
Notes to Consolidated Financial
Statements.
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
(UNAUDITED)
|
|
|
|
For
the Three Months Ended
March
31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
Service
fees
|
|
$
|
1,197,699
|
|
|
$
|
1,819,552
|
|
|
Sales
of cupric sulfate
|
|
|
91,131
|
|
|
|
708,843
|
|
|
Sales
of recycled commodities
|
|
|
323,120
|
|
|
|
601,885
|
|
|
Operating
revenue
|
|
|
1,611,950
|
|
|
|
3,130,280
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
of revenues
|
|
|
|
|
|
|
|
|
|
Cost
of service fees
|
|
|
470,163
|
|
|
|
371,035
|
|
|
Cost
of cupric sulfate
|
|
|
87,976
|
|
|
|
286,526
|
|
|
Cost
of recycled commodities
|
|
|
169,711
|
|
|
|
270,532
|
|
|
Costs
of revenue
|
|
|
727,850
|
|
|
|
928,093
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
884,100
|
|
|
|
2,202,187
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
177,315
|
|
|
|
228,081
|
|
|
General
and administrative expenses
|
|
|
446,722
|
|
|
|
353,846
|
|
|
Total
operating expenses
|
|
|
624,036
|
|
|
|
581,927
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
260,064
|
|
|
|
1,620,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Investment
loss
|
|
|
(40,951
|
)
|
|
|
(9,039
|
)
|
|
Interest
income
|
|
|
1,271
|
|
|
|
6,298
|
|
|
Other
income
|
|
|
47
|
|
|
|
5,880
|
|
|
Other
expense
|
|
|
(63,560
|
)
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total
other income
|
|
|
(103,192
|
)
|
|
|
3,137
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income from continuing operations before minority
|
|
|
|
|
|
|
|
|
|
interest,
income tax provision
|
|
|
156,871
|
|
|
|
1,623,397
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
45,029
|
|
|
|
107,230
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before minority interest
|
|
|
111,842
|
|
|
|
1,516,167
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
4,324
|
|
|
|
140,550
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
107,518
|
|
|
|
1,375,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
(19,207
|
)
|
|
|
589,954
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$
|
88,311
|
|
|
$
|
1,965,571
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
|
|
15,262,035
|
|
|
|
13,755,274
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
$
|
0.01
|
|
|
$
|
0.10
|
|
|
See
Notes to Consolidated Financial
Statements.
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(UNAUDITED)
|
|
|
|
For
the Three Months ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
107,518
|
|
|
$
|
1,375,617
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
4,324
|
|
|
|
140,550
|
|
|
Depreciation
|
|
|
258,611
|
|
|
|
114,404
|
|
|
Amortization
|
|
|
17,039
|
|
|
|
4,148
|
|
|
Bad
debt allowance
|
|
|
-
|
|
|
|
(3,534
|
)
|
|
Accretion
expenses
|
|
|
8,263
|
|
|
|
9,311
|
|
|
Loss
on equity investment
|
|
|
45,222
|
|
|
|
-
|
|
|
Subsidy
received from government
|
|
|
-
|
|
|
|
348,326
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(426,327
|
)
|
|
|
(949,529
|
)
|
|
Inventory
|
|
|
(167,174
|
)
|
|
|
(160,551
|
)
|
|
Other
receivables
|
|
|
24,160
|
|
|
|
(314,010
|
)
|
|
Advance
to suppliers
|
|
|
(144,930
|
)
|
|
|
1,884
|
|
|
Prepaid
expense
|
|
|
759
|
|
|
|
24,734
|
|
|
Deposits
|
|
|
2,950
|
|
|
|
(481,423
|
)
|
|
Other
assets
|
|
|
3,019
|
|
|
|
-
|
|
|
Accrued
expense and deferred sales
|
|
|
(244,654
|
)
|
|
|
33,961
|
|
|
Accounts
payable
|
|
|
(50,860
|
)
|
|
|
637,869
|
|
|
Advance
from customers
|
|
|
9,288
|
|
|
|
-
|
|
|
Tax
payable
|
|
|
(122,245
|
)
|
|
|
40,196
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
(675,037
|
)
|
|
|
821,953
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Investment
in subsidiary
|
|
|
-
|
|
|
|
9,039
|
|
|
Purchase
of property and equipment
|
|
|
(32,456
|
)
|
|
|
(59,015
|
)
|
|
Certificate
of deposit
|
|
|
(585,291
|
)
|
|
|
-
|
|
|
Construction
contracts
|
|
|
-
|
|
|
|
(1,121,648
|
)
|
|
Due
from related party
|
|
|
-
|
|
|
|
11,751
|
|
|
Related
party loan
|
|
|
1,214,314
|
|
|
|
-
|
|
|
Due
to related party
|
|
|
102,022
|
|
|
|
41,799
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
698,589
|
|
|
|
(1,118,074
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Repayment
of construction projects payable
|
|
|
(1,051,234
|
)
|
|
|
-
|
|
|
Proceeds
from short term loans
|
|
|
-
|
|
|
|
1,114,462
|
|
|
Repayment
of short term loans
|
|
|
(1,907,691
|
)
|
|
|
-
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(2,958,925
|
)
|
|
|
1,114,462
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
(37,217
|
)
|
|
|
146,633
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(2,972,590
|
)
|
|
|
964,974
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
$
|
5,714,001
|
|
|
$
|
3,260,307
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,741,411
|
|
|
$
|
4,225,281
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
32,078
|
|
|
$
|
-
|
|
|
Income
taxes
|
|
$
|
143,518
|
|
|
$
|
-
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Contributed
anaerobic fermentation equipment
|
|
$
|
(292,701
|
)
|
|
$
|
-
|
|
|
Transfer
out of construction in progress
|
|
$
|
158,859
|
|
|
$
|
-
|
|
|
Transfer
of construction in progress to property, plant and
equipment
|
|
$
|
(158,859
|
)
|
|
$
|
-
|
|
|
Change
in reporting entity
|
|
$
|
276,253
|
|
|
$
|
-
|
|
|
See
Notes to Consolidated Financial
Statements.
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
2009
The
accompanying unaudited 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 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, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009. For further information, refer
to the audited consolidated financial statements and footnotes thereto included
in the Company's Form 10-K for the year ended December 31, 2008.
1. Nature of
operations
The
accompanying unaudited consolidated financial statements are those of China
Industrial Waste Management, Inc., a Nevada corporation (the “Company”)
incorporated on November 12, 2003, its wholly owned subsidiaries, DonTech Waste
Services Inc., a Delaware corporation (“DonTech”), and Favour Group Ltd., a
British Virgin Islands corporation (“Favour”), along with its indirectly
majority owned subsidiaries:
• Full
Treasure Investments Ltd. (“Full Treasure”)
• Dalian
Dongtai Industrial Waste Treatment Co. Ltd. (“Dongtai”)
• Dalian
Dongtai Water Recycling Co. Ltd. (“Dongtai Water”)
• Dalian
Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”)
• Dalian
Lipp Environmental Energy Engineering & Technology Co., Ltd. (“Dalian
Lipp”)
In March
2009, DonTech was merged with and into the Company.
Dongtai
was incorporated on January 9, 1991 in Dalian, 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 People’s Republic of China (“PRC”). The Company provides
waste disposal solutions to its more than 650 customers from facilities located
in the Economic and Technological Development Zone, Dalian, China. 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.
Dongtai
Water, which was incorporated in July 2006, is a build-operate-transfer project
established to process municipal waste water generated by Dalian
City.
Zhuorui
was incorporated in April 2006 and is engaged in plasma arc melting, separation
and purification of waste catalysts, treatment of industrial wastes and
comprehensive utilization of waste catalysts or similar material. This
subsidiary is now in the stage of trial production.
Dalian
Lipp is a PRC joint venture established on December 22, 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, and is dedicated to
generating energy by organic waste anaerobic fermentation, industrial effluent
treatment and municipal sewage plant.
2. Basis of
Presentation
The
accompanying unaudited consolidated financial statements include the accounts of
the parent entity, its directly wholly owned subsidiaries, DonTech and Favour,
along with its indirectly wholly owned subsidiary, Full Treasure, its 90%
indirectly owned subsidiary Dongtai, its 80% indirectly owned subsidiary Dongtai
Water, its 70% indirectly owned subsidiary Zhuorui, and its 75% indirectly owned
subsidiary Dalian Lipp. All material inter-company accounts and transactions
have been eliminated in the consolidation.
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, 2009 and 2008, the accounts of the Company were maintained, and the
unaudited consolidated financial statements were expressed in Chinese Yuan
Renminbi (“RMB”). Such consolidated financial statements were translated into
U.S. dollars (“USD”) in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 52, “Foreign Currency Translation” with RMB as the
functional currency. According to the Statement, 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 SFAS No. 130,
“Reporting 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 Accounting Review Board (ARB) No. 43, Chapter 3A “Current Assets
and Current Liabilities”, cash which is restricted as to withdrawal is
considered a non-current asset. Restricted cash consists of $750,000, which is
held in a separate escrow account as required by a group of investors, and
$658,578, which is comprised of time deposits as below table shows:
|
Effective
Date
|
|
|
Mature
Date
|
|
Depository
Bank
|
|
Interest
Rate
|
|
|
Principal
|
|
|
|
01-20-2009
|
|
|
|
01-20-2010
|
|
Shanghai
Pudong Development Bank,
Dalian
ETD Zone Sub-branch.
|
|
|
2.25
|
%
|
|
$
|
292,702
|
|
|
|
01-19-2009
|
|
|
|
01-19-2010
|
|
Dalian
ETD Zone Rural Credit Cooperative Union
|
|
|
2.25
|
%
|
|
|
219,526
|
|
|
|
01-19-2009
|
|
|
|
07-19-2009
|
|
Dalian
ETD Zone Rural Credit Cooperative Union
|
|
|
1.98
|
%
|
|
|
73,175
|
|
|
|
01-19-2009
|
|
|
|
07-19-2009
|
|
Guangdong
Development Bank,
Dalian
ETD Zone Branch
|
|
|
1.98
|
%
|
|
|
73,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
658,578
|
|
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.
Allowance for uncollectible accounts as of March 31, 2009 and December 31, 2008
is $12,113 and $12,132, respectively.
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.
Concentration of credit
risks
The
Company is subject to concentrations of credit risk primarily from cash and cash
equivalents. The Company maintains accounts with financial institutions, which
at times exceeds the insured Federal Deposit Insurance Corporation limit of
$250,000. The Company minimizes its credit risks associated with cash by
periodically evaluating the credit quality of its primary financial
institutions.
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 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
Years
|
|
Vehicles
|
5
Years
|
|
Office
equipment
|
5
Years
|
Construction
in progress consists of construction expenditure, equipment procurement,
capitalized interest expense, relevant miscellaneous expenditures, and other
costs.
As of
March 31, 2009, construction in progress contains two principal components; one
is the costs incurred by Dongtai for the newly built incineration system that is
located in Dagu Hill, ETD Zone, Dalian, including designing and building of the
incinerator, construction of its supporting facilities, and miscellaneous fees.
The other component is production equipment, which is still in testing phase,
for Zhuorui, including plasma furnace, flue gas cleansing system, dust trapper,
and other corollary equipment.
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 SFAS No. 143, “Accounting for Asset Retirement
Obligations and its Interpretations”.
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 Consolidated Statements of Operations.
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.
Liabilities
for landfill and environmental remediation costs are presented in the table
below:
|
|
|
March
31,2009
|
|
December
31,2008
|
|
|
|
|
|
|
|
|
|
Long-term
Liability
|
|
$
|
510,541
|
|
|
$
|
502,278
|
|
Long-term
investment
Long-term
investments are recorded under the equity method. Dongtai Organic is
constructing and was organized to operate a municipal sludge treatment and
disposal facility in Dalian, PRC. The Company currently owns 49% of Dongtai
Organic.
Impairment of long-lived
assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets” (SFAS 144), such as property, plant, and equipment, and
purchased intangibles, 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, 2009 and December 31, 2008,
respectively.
Intangible
assets
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.
As of
March 31, 2009 and December 31, 2008, net land usage right was $1,800,388 and
$1,817,427 respectively.
Non-controlling interest in
consolidated financial statements
In
December 2007, the FASB issued SFAS 160, “
Noncontrolling Interests in
Consolidated Financial Statements
,” (“SFAS 160”). This Statement amends
Accounting Research Bulletin 51 (“ARB 51”) to establish accounting and reporting
standards for the noncontrolling (minority) interest in a subsidiary and
for the deconsolidation of a subsidiary. It clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 is effective for the Company beginning January 1, 2009.
Non-controlling
interest represents the minority owners’10% equity interest in Dongtai, 20%
equity interest in Dongtai Water, 30% equity interest in Zhuorui and 25%
equity interest in Dalian Lipp.
Fair value of financial
instruments
SFAS
No.107, “Disclosures About Fair Value of Financial Instruments”, requires that
the Company discloses estimated fair values of financial instruments. The
carrying amounts reported in the statements of financial position for current
assets and current liabilities qualifying as financial instruments are a
reasonable estimate of fair value.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (“SAB”) 104. Our revenues are generated from the fees we charge 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. Revenue is generally recognized as services are rendered or
products are delivered.
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, 2009 and December 31, 2008, deferred sales amounted to
$1,072,024 and $972,143, respectively.
Advertising
costs
The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the period ended
March 31, 2009 and 2008 were immaterial.
Stock-based
compensation
In
December 2004, the Financial Accounting Standard Board (“FASB”) issued SFAS
No.123(R), “Share-Based Payment”, which prescribes accounting and reporting
standards for all stock based compensation plans, including employee stock
options, restricted stock, employee stock purchase plans and stock appreciation
rights. SFAS No. 123(R) requires compensation expense to be recorded using the
fair value method.
Income
taxes
The
Company utilizes SFAS No.109, “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.
Local PRC income
tax
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, Dongtai is subject to EIT at
10% for the period ended March 31, 2009. Furthermore, the Law stipulates that
enterprises that engage in municipal waste water treatment business are eligible
for special EIT treatment. According to such rules, Dongtai Water is entitled to
a three-year EIT exemption treatment starting whenever it receives the first
operation revenue, and another 50% off of the normal rate for the next three
years.
Statement of cash
flows
In
accordance with SFAS No. 95, “Statement of Cash Flows” cash flows from the
Company’s operations is 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 SFAS No. 128, “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 2008 financial statements to conform to
the 2009 presentation.
Recent accounting
pronouncements
On
January 12, 2009, the FASB issued FASB Staff Position EITF 99-20-1,
Amendments to the Impairment
Guidance of EITF Issue No. 99-20
(FSP). FASB FSP 99-20-1 amends the
impairment guidance in FASB EITF Issue No. 99-20,
Recognition of Interest Income and
Impairment on Purchased Beneficial Interests and Beneficial Interests that
Continue to be held by a Transferor in Securitized Financial Assets
. The
intent of the FSP is to reduce complexity and achieve more consistent
determinations as to whether other-than-temporary impairments of available for
sale or held to maturity debt securities have occurred. The FSP is effective for
interim and annual reporting periods ending after December 15, 2008. The
adoption of this FSP did not have an impact on the Company’s consolidated
financial statements.
In April
2009, the FASB issued three Final Staff Positions (“FSPs”) to provide additional
guidance and disclosures regarding fair value measurements and impairments of
securities:
FSP FAS
157-4.
“Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly”
, provides guidance for estimating fair value when the
volume and level of activity for an asset or liability have significantly
decreased. The Company does not expect that FSP FAS 157-4 will have a material
impact on the Company’s consolidated financial statements.
FSP FAS
115-2 and FAS 124-2,
Recognition and Presentation of
Other-Than-Temporary Impairments,
amends the other-than-temporary
impairment guidance for debt securities to make the guidance more operational
and to improve the presentation and disclosure of other-than-temporary
impairments on debt and equity securities in financial statements. The Company
does not expect that FSP FAS 115-2 and FAS 124-2 will have a material impact on
the Company’s consolidated financial statements.
FSP FAS
107-1 and APB 28-1,
Interim
Disclosures about Fair Value of Financial Instruments
, requires
disclosure about fair value of financial instruments for interim reporting
periods of publicly traded companies as well as in annual financial statements.
The Company will review the requirements of FSP FAS 107-1 and comply with its
requirements.
These
three FSPs are effective for interim and annual periods ending after June 15,
2009.
4.
Inventory
|
|
|
March
31, 2009
|
|
|
December
31, 2008
|
|
|
Raw
materials
|
|
$
|
1,107,853
|
|
|
$
|
1,130,109
|
|
|
Recycled
commodities
|
|
|
1,431,535
|
|
|
|
1,242,105
|
|
|
|
|
$
|
2,539,388
|
|
|
$
|
2,372,214
|
|
5. Property, plant and
equipment
|
|
|
March
31,2009
|
|
|
December
31,2008
|
|
|
Land
and building
|
|
$
|
10,023,789
|
|
|
$
|
9,978,971
|
|
|
Machinery
and equipment
|
|
|
7,328,398
|
|
|
|
6,898,868
|
|
|
Office
equipment
|
|
|
553,228
|
|
|
|
542,174
|
|
|
Vehicles
|
|
|
910,154
|
|
|
|
911,540
|
|
|
|
|
|
18,815,569
|
|
|
|
18,331,553
|
|
|
Less
accumulated depreciation
|
|
|
(3,115,249
|
)
|
|
|
(2,856,638
|
)
|
|
Total
property and equipment, net
|
|
|
15,700,320
|
|
|
|
15,474,915
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
5,579,412
|
|
|
|
5,738,271
|
|
|
Total
|
|
$
|
21,279,732
|
|
|
$
|
21,213,186
|
|
Depreciation
expenses amounted to $258,611 and $114,404 for the period ended March 31, 2009
and 2008, respectively.
6. Short-term
loan
As of
March 31, 2009, the remaining short-term loan balance represents the loan
borrowed from Shanghai Pudong Development Bank, Dalian ETD Zone Sub-branch, with
the amount of approximately $1,463,507 (RMB10, 000,000), interest rate of 8.217%
per annum, and maturity date of April 25th, 2009.
7. Government
subsidies
Government
subsidies, with the amount of $1,026,691 as of March 31, 2009, represents
subsidies that Zhuorui received from local government, as Zhuorui’s business
falls into the industry classifications encouraged by the local government’s
development strategy. The subsidy is to be used exclusively for facility
construction and equipment procurement to fulfill its business operations. The
subsidy is initially recorded as deferred revenue. Upon the completion and
acceptance of the government subsidized project, subsidies are recognized over
the useful lives of the related asset.
8. Accumulated other
comprehensive income
|
|
|
March
31,
2009
|
|
|
December
31,
2008
|
|
|
Cumulative
translation adjustment of foreign currency statements
|
|
$
|
(19,207
|
)
|
|
$
|
1,268,439
|
|
9. Related
parties
|
Related
Parties
|
|
March
31, 2009
|
|
|
|
|
Receivable
|
|
|
Payable
|
|
|
Dongtai
Investment
|
|
$
|
-
|
|
|
$
|
380,512
|
|
|
Dongtai
Organic
|
|
|
27,731
|
|
|
|
-
|
|
|
Dalian
Lida
|
|
|
14,554
|
|
|
|
-
|
|
|
Total
|
|
$
|
42,285
|
|
|
$
|
380,512
|
|
10. Statutory common welfare
fund
As
stipulated by the Company Law of the PRC as applicable to Chinese companies with
foreign ownership, net income after taxation can only be distributed as
dividends after appropriation has been made for the following:
|
a.
|
Making
up cumulative prior years’ losses, if
any
|
|
b.
|
Allocations
to the “Statutory surplus reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and
regulations, until the fund amounts to 50% of the Company’s registered
capital;
|
|
c.
|
Allocations
of 5 -10% of income after tax, as determined under PRC accounting rules
and regulations to the Company’s “Statutory common welfare fund”, which is
established for the purpose of providing employee facilities and other
collective benefits to the Company’s employees;
and
|
|
d.
|
Allocations
to the discretionary surplus reserve, if approved in the shareholders’
general meeting.
|
11. Current vulnerability
due to certain concentrations
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, 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. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversions and remittance abroad, and rates and methods of
taxation, among other things.
12. Change in reporting
entity
In
February 2009, Mr. Roland Lipp, Mrs. Karin Lipp-Mayer, and Mr. Shan Minghuan
(minority shareholders) delivered an anaerobic fermentation equipment
installation machine to Dalian Lipp. The fair value of the equipment was
approximately $292,701 and has been classified as property, plant and equipment
on the balance sheet. The capital contribution was recorded to Dalian Lipp as
additional paid-in capital. Prior to the contribution of property, plant and
equipment by the minority shareholders, Dongtai also contributed cash of
approximately $702,484 to Dalian Lipp, which increased Dongtai investment in
Dalian Lipp.
Subsequent
to the additional paid-in capital contributions by the minority shareholders,
Dongtai experienced a change in its reporting entity and now owns 75% of Dalian
Lipp as of March 31, 2009. Prior to the change in its reporting entity, Dongtai
owned 100% of Dalian Lipp.
The
change in a parent’s ownership interest is accounted for as equity transactions
in accordance with SFAS160. Therefore, no gain or loss has been recognized in
consolidated net income or comprehensive income. The carrying amount of the
noncontrolling interest has been adjusted to reflect the change in its ownership
interest in the subsidiary. The difference between the fair values of the
consideration received and the amount by which the noncontrolling interest is
adjusted has been recognized in equity attributable to the parent.
13. Subsequent
events
On April
22, 2009, the Company issued 9,000 shares of common stock under an agreement
with a consultant to provide the Company with investor relations
services.
On April
25, 2009, Dongtai repaid a loan to Shanghai Pudong Development Bank Dalian
Branch (“SPDB”), with an amount of approximately $1,465,738 (RMB 10,
000,000).
On April
29, 2009, Dongtai entered into a short-term loan program with SPDB. The
principal amount was approximately $3,805,119 (RMB 26,000,000) which matures on
April 27, 2010. A fixed interest rate of 5.841% per annum is applied. The loan
is secured with Dongtai’s buildings and land use rights.
On May 8,
2009, the board of directors established an audit committee consisting of three
directors. Each member of the audit committee is independent within the meaning
of Nasdaq Marketplace Rule 4200(a) (15). The board of directors also adopted an
audit committee charter to govern the activities of the audit
committee.
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
Historically,
the Company engaged in two lines of business: (a) the exploration and
development of potential mining properties, and (b) the development, marketing
and support of computer software products and services. In September 2004, the
Company sold its computer business. Since September 2005, the Company ceased
mining activities due to its loss of all its contractual rights in certain
mining properties in Spain. In November 2005, a Delaware corporation known
as China Industrial Waste Management, Inc. (“CIWM Delaware”) acquired 90% of the
issued and outstanding capital stock of Dalian Dongtai Industrial Waste
Treatment Co., Ltd. (“Dongtai”) from the shareholders of Dongtai in a reverse
merger transaction in which the Dongtai shareholders became the owner of all of
the issued and outstanding shares of CIWM Delaware. As a result of the
reverse merger, Dongtai became a joint venture with foreign investment under the
laws of the PRC, with a total registered and paid-in capital of $2.3 million.
The exchange of shares with the Dongtai shareholders was accounted for as a
reorganization between entities under common control with CIWM Delaware as the
receiving entity, as prescribed by Appendix D of SFAS 141. The accounts of both
entities were combined at their historical cost basis, resulting in no gain,
loss, or goodwill. The combination was essentially a recapitalization of
Dongtai.
On
November 11, 2005, China Industrial Waste Management, Inc., a Nevada corporation
(f/k/a Goldtech Mining Corporation) (“CIWM Nevada”) entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with CIWM Delaware and the
shareholders of CIWM Delaware. Pursuant to the Merger Agreement, which closed on
November 11, 2005, CIWM Delaware merged with and into CIWM Nevada’s wholly-owned
Delaware subsidiary, DonTech. Pursuant to the Merger Agreement, after the
merger, CIWM Delaware ceased to exist and DonTech was the surviving company (and
the owner of 90% of the issued and outstanding capital stock of Dongtai). The
merger of CIWM Delaware into DonTech was accounted for as a reverse acquisition
under the purchase method of accounting since the shareholders of CIWM Delaware
obtained control of CIWM Nevada (the Company) by virtue of the merger.
Accordingly, the merger was recorded as a recapitalization of CIWM Delaware,
with DonTech being treated as the continuing entity. CIWM Nevada (the Company)
currently owns all of the issued and outstanding capital stock of DonTech, which
in turn, owns 90% of the issued and outstanding capital stock of Dongtai. In
March 2009, DonTech merged with and into the Company.
Dongtai
is engaged in the collection, treatment, disposal and recycling of industrial
wastes, principally in Dalian, China and surrounding areas in Liaoning Province,
China. Dongtai provides waste disposal solutions to its more than 650
customers, including large multinational corporations, from facilities located
in the Economic and Technological Development Zone, Dalian, PRC. Dongtai treats,
disposes of and/or recycles many types of industrial wastes, and recycled waste
products are sold to customers as raw materials to produce chemical and
metallurgy products. In addition, Dongtai treats or disposes of industrial waste
through incineration, burial or water treatment; as well as provides a range of
environmental protection services to its clients. Dongtai generates revenues
from waste collection and disposal services, as well as from sales of valuable
products and recycled commodities.
Dongtai
Water Recycling Co. Ltd (“Dongtai Water”), a Build-Operate-Transfer (BOT)
project established to process municipal sewage generated by Dalian City.
Phase One of the project, which is designed with a capacity of 30,000 tons per
day, commenced commercial operationa on June 21, 2008. Dongtai owns 80% of
the equity of this project.
Dalian
Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”), which is 70% owned by Dongtai,
engages in plasma arc melting, separation and purification of waste catalysts,
treatment of industrial wastes and comprehensive utilization of waste catalysts
or similar material. The designed production capacity of the project is 5,000
tons/year. As of March 31, 2009, the project was in the trial production
stage.
Dalian
Lipp Environmental Energy Engineering & Technology Co., Ltd. (“Dalian Lipp”)
is a Sino-German joint venture, of which Dongtai owns a 75% equity interest.
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, and is
dedicated to generating energy by organic waste anaerobic fermentation, and
industrial effluent and municipal sewage treatment.
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 Dongtai’s capacity for waste treatment and disposal. The expansion
project, which is one of the fifty-five hazardous waste treatment centers
sponsored by the National Development and Reform Commission and one of the two
centers in Liaoning Province, commenced construction at the end of July, 2008.
As of the date of this Report, Phase One of the project, which includes
construction of the incineration plant and boiler, has been completed.
Phase
2
,
which includes construction of an office building and a waste solvent recycling
plant, is in process. The Company expects the project to be operational by
September 2009.
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
|
|
|
13,000t
|
|
|
|
40,000t
|
|
|
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
|
|
Our
business strategy is aimed at increasing revenue and earnings through profitable
growth and improving returns on invested capital. The components of our strategy
include: (1) placing emphasis on the commercialization of solid waste
treatment; (2) our expansion into municipal sewage and sludge treatment BOT
projects; (3) managing our businesses locally with a strong operations focus on
customer service; (4) entering into new geographic markets in China; and
(5) 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 attempt to integrate
customer groups (for example, the refinery industry), to realize resource
optimization.
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 consolidated
financial statements and notes appearing elsewhere in this quarterly
report.
Three
Months Ended March 31, 2009 Compared to the Three Months Ended March 31,
2008.
We
generate revenue primarily from two sources, namely, fees charged to customers
for waste collection, transfer, recycling and disposal services and proceeds
from the sale of recycled materials. We consider our collection and disposal
operations and reclamation of reusable substances as our core
business.
Revenues
The
Company’s operating revenues for the three months ended March 31, 2009 was
$1,611,950, decreased by $1,518,330 or 49% compared with $3,130,280 for the
three months ended March 31, 2008.
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Service
fees
|
|
$
|
1,197,699
|
|
|
$
|
1,819,552
|
|
|
Sales
of cupric sulfate
|
|
|
91,131
|
|
|
|
708,843
|
|
|
Sales
of recycled commodities
|
|
|
323,120
|
|
|
|
601,885
|
|
|
Operating
revenue
|
|
$
|
1,611,950
|
|
|
$
|
3,130,280
|
|
The
decrease is mainly attributable to the adverse consequences of the global
economic recession and corresponding world financial crisis which severely
impacted the Company’s primary business:
1. Service
fees
Service
fees decreased from $1,819,552 for the three months ended March 31, 2008 to
$1,197,699 for the same period of 2009, a decrease of $621,853, or
34%.
The
export business of China has been significantly affected by the global economic
recession. Dongtai is located in the Dalian Economic & Technological
Development Zone (“ETD Zone”), and most of its customers, which are located in
the same area, pursue export-oriented manufacturing businesses. The recession
has affected them so profoundly that many have been forced to cease operations
or curtail production and reduced their workforce. As a result, the volume of
waste collection sharply decreased in the first quarter of 2009.The daily
average collection volume has decreased from 135 tons in 2008 to the current
level of 79 tons, an almost 50% decrease.
Since its
commencement of normal operations in June 2008, Dongtai Water continues to
function stably. In the first quarter of 2009, Dongtai Water generated an
aggregate of approximately $320,000 of revenue.
2. Sales of recycled
products
As the
market demand shrinks significantly, prices for many raw materials have dropped
dramatically, including Dongtai’s main products, cupric sulfate, aluminum
products and zinc slag. For example, the average price for cupric sulfate in the
first quarter of 2009 was about RMB 8, 000/ton, while the average price for the
most recent 5 years was approximately RMB14, 000/ton, a decrease of
approximately 43%. To optimize on this situation, Dongtai has elected to suspend
sales of certain products. As of the end of March 2009, Dongtai had an aggregate
inventory of approximately 360 tons of cupric sulfates, 240 tons of aluminum
products, and 200 tons of zinc slags. The deferral of sales due to the current
economic situation resulted in a decrease of sales of recycled products from
$1,310,728 for the three months ended March 31, 2008 to $ 414,251 for the same
period of 2009. Dongtai intends to sell these materials with improved margins as
the market for them stabilizes and demand increases.
Cost of
Revenues
The
Company’s cost of revenues for the three months ended March 31, 2009 was
$727,850 compared with $928,093 for the three months ended March 31,
2008.
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Cost
of service fees
|
|
$
|
470,163
|
|
|
$
|
371,035
|
|
|
Cost
of cupric sulfate
|
|
|
87,976
|
|
|
|
286,526
|
|
|
Cost
of recycled commodities
|
|
|
169,711
|
|
|
|
270,532
|
|
|
Costs
of revenue
|
|
$
|
727,850
|
|
|
$
|
928,093
|
|
Cost of
revenues decreased by $200,243 or 22% for the three months ended March 31, 2009
compared to the three months ended March 31, 2008.
Cost of
service fees increased by $99,128, or 27% for the three months ended March 31,
2009 compared to the three months ended March 31, 2008. The decrease primarily
resulted from the cost incurred by Dongtai Water in the amount of approximately
$123,000. In the three months ended March 31, 2008, Dongtai Water had not yet
entered into operation.
Cost of
reclaimed products, including cupric sulfate and other recycled commodities, for
the three months ended March 31, 2009 decreased by $299,371 or 54%, compared
with the same period of 2008. Such decrease is in line with the dramatic
decrease of revenues of reclaimed products.
Foreign Currency
Translation
Foreign
currency translation adjustments for the three months ended March 31, 2009 is a
decrease of $19,207, compared to an increase of $589,954 for the three months
ended March 31, 2008. This fluctuation is attributable to the revaluation of the
Chinese currency against the U.S. dollar.
Net
Income
Net
income for the three months ended March 31, 2009 decreased by $1,268,099, or
92%, to $107,518 from $1,375,617 for the three months ended March 31, 2008. This
decrease is primarily attributable to the significant decrease in
revenue.
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 $426,327 or 18% from $2,414,257 as of December 31, 2008
to $2,840,584 as of March 31, 2009, which is primarily contributed to an
increase of approximately $328,267 due from local government for sewage
treatment service rendered.
Short-term
loan as of March 31 2009 was $1,463,507, whereas the amount as of December 31
2008 was $3,371,198. In the first quarter of 2009, the Company repaid loans in
the amount of approximately $1,907,691(RMB 13,000,000).
As of
March 31, 2009, the Company had cash and cash equivalents of $2,741,411,
compared to $5,714,001 as of December 31, 2008, decreased by $2,972,590 or 52%.
The decrease mainly due to: (1) Repayment of bank loans; (2) Payment for
construction and procurement of equipments for Dongtai Water, Zhuorui, and
Dongtai’s expansion project. (3) Investment in certificate of
deposit.
As of
March 31, 2009, the Company had working capital surplus of $709,437, compared to
a deficit of $296,858 as of December 31, 2008.
Cash
Flow
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Net
cash provided by (used in) operating activities
|
|
$
|
(675,037
|
)
|
|
$
|
821,953
|
|
|
Net
cash provided by (used in) investing activities
|
|
|
698,589
|
|
|
|
(1,118,074
|
)
|
|
Net
cash provided by (used in) financing activities
|
|
|
(2,958,925
|
)
|
|
|
1,114,462
|
|
Net cash
used in operating activities was $675,037 for the three months ended March 31,
2009, compared to net cash provided by operating activities in the amount of
$821,953 for the same period in 2008, which is mainly caused by the sharp
decrease in net income.
The
Company invested approximately $0.6 million cash in certificate of deposit in
the first quarter of 2009. The Company also received a loan payment of
approximately $1,214,314 (RMB 8.4 million) from Dongtai Organic. Net cash
provided by investing activities for the three months ended March 31, 2009 was
$698,589.
Net cash
used in financing activities for the three months ended March 31, 2009 was
$2,958,925 compared to net cash provided by financing activities in the amount
of $1,114,462 in the same period of 2008. The net change is attributable to a
repayment of short term loans in the amount of approximately
$1,907,691.Furthermore, the Company paid approximately $1 million for Dongtai
Water and Zhuorui’s construction projects payable.
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
Under SEC
regulations, we are required to disclose our 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
are material to investors. An off-balance sheet arrangement means a transaction,
agreement or contractual arrangement to which any entity that is not
consolidated with us is a party, under which we have:
·
Any obligation
under certain guarantee contracts;
• Any
retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or market risk
support to that entity for such assets;
• Any
obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to our stock and classified in
stockholder’s equity in our statement of financial position; and
• Any
obligation arising out of a material variable interest held by us in an
unconsolidated entity that provides financing, liquidity, market risk or credit
risk support to us, or engages in leasing, hedging or research and development
services with us.
As of
March 31, 2009, 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.
ZHUORUI’S CURRENT
CONDITION
As of
March 31, 2009, the trial production is continuing. In total, 14 batches of
waste catalyst have been put into production. The main products of the process
are ammonium metavanadate and ammonium molybdate, with by-products consisting of
cobalt and nickel slags. The recovery rate and quality of the main products have
both met the predefined standards. Further optimization of the personnel
configuration and the technical process are expected throughout trial
production. It is expected that Zhuorui could enter the normal production phase
of operations by the end of the second quarter of 2009, and the output of
ammonium metavanadate and ammonium molybdate will be 40 tons/month and 15
tons/month, respectively. As of March 31, 2009, inventory consists of 5.7 tons
of ammonium metavanadate. Ammonium molybdate, cobalt and nickel slags are
combined in the semi-finished state.
As of
March 31, 2009, Shanghai Pudong Development Bank Dalian Branch has completed its
review process relating to Zhuorui’s credit application for RMB 20, 000,000
(US$3,131,851). The bank has approved Zhuorui’s application, and funding is
expected to be available shortly.
The
recent 5-year average prices of ammonium metavanadate, ammonium molybdate, and
cobalt and nickel slag are RMB125,000/ton, 150,000/ton, and 15,000/ton
respectively, while, in comparison, the market prices as of March 31, 2009 are
RMB 85,000/ton, 90,000/ton, and 10,000/ton, almost the lowest level in recent
years. The sharp decrease in the prices is primarily due to the effects of the
global economic recession.
To resist
the significant negative effect caused by the global crisis, and revitalize the
economy, the Chinese Government carried out expansionary fiscal and monetary
policies to increase domestic demand since last year. These actions have
gradually taken effect. Moreover, the Government’s massive stimulus package
includes Non-ferrous Metal Industry Promotion Planning as promulgated on
February 25, 2009. Although the specifics of the Planning have not yet been
promulgated, the industry began to revive due to the positive signal conveyed by
the Government action.
In view
of the pending financing to be made available to Zhuorui to satisfy its
operational needs, and its optimistic outlook for the industry, Zhuorui elected
to suspend purchases and inventory final products for sale as market conditions
improve.
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.
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of March 31,
2009. Based upon that evaluation and subject to the foregoing, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective to accomplish their
objectives.
Our Chief
Executive Officer and Chief Financial Officer do not expect that our disclosure
controls or our internal controls will prevent all error and all
fraud. he design of a control system must reflect the fact that there
are resource constraints and the benefit of controls must be considered relative
to their cost. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that we have
detected all of our control issues and all instances of fraud, if any. The
design of any system of controls also is based partly on certain assumptions
about the likelihood of future events and there can be no assurance that any
design will succeed in achieving our stated goals under all potential future
conditions.
There
have been no changes in our internal control over financial reporting that
occurred during our fiscal quarter ended March 31, 2009, 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.
None.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On April
30 2009, we issued 9,000 shares of our Common Stock under an agreement with a
consultant to provide us with investor relations services.
Item
3. Defaults Upon Senior Securities.
None.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
Item
5. Other Information.
On May 8
2009, the Board of Directors established an Audit Committee consisting of three
directors, Mr. Henry Wong, Mr. Francis Leong and Mr. Wu Chunyou. Each member of
the Audit Committee is “independent” within the meaning of Nasdaq Marketplace
Rule 4200(a) (15). Mr. Wong has been appointed to serve as Chairman of the
Committee. The Board of Directors also adopted an Audit Committee Charter to
govern the activities of the Audit Committee. A copy of the Audit Committee
Charter is filed as an exhibit to this Report.
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
|
|
99.1
|
Charter
of the Audit Committee of the Board of
Directors
|
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 15, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Guo
Xin
|
|
|
|
|
Guo
Xin, Chief Financial Officer
|
|
|
|
|
Date:
May 15, 2009
|
|
|
|
|
|
|