NOTES
TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30,
2007
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-QSB and Item 310 of Regulation S-B. 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 six months ended June 30, 2007 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2007. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's Form 10-KSB for the year ended December 31,
2006.
1.
Nature
of operations
The
unaudited consolidated financial statements are those of China Industrial Waste
Management, Inc., a Nevada corporation incorporated on November 12, 2003 and
formerly known as Goldtech Mining Corporation (the “Company”), its 100%
owned subsidiary, DonTech Waste Services, a Delaware corporation incorporated
in
November 2005 (“DonTech”), and its indirect majority owned subsidiaries, Dalian
Dongtai Industrial Waste Treatment Co. Ltd. (“Dongtai”) and Liaoyang Dongtai
Industrial Waste Treatment Co. Ltd. (“Liaoyang Dongtai”).
Dongtai
was incorporated on January 9, 1991 in the People’s Republic of China (“PRC”).
As of June 30, 2007 Dongtai has three subsidiaries - Liaoyang Dongtai, Dongtai
Water Recycling Company (“Dongtai Water”) and Dongtai Organic Waste Treatment
Company (“Dongtai Organic”), each of which was formed under the laws of the PRC.
Dongtai is located in the Economic and Technology Development Zone, Dalian,
PRC.
Dongtai is engaged in the collection, treatment, disposal and recycling of
industrial waste in China. Dongtai recovers all types of industrial wastes
which
can be used as raw material to produce chemical and metallurgy products. Dongtai
also provides incineration, burial, and water treatment services. Dongtai also
provides service for environment protection, technology consultation, pollution
treatment, and waste managing process design.
Liaoyang
Dongtai was incorporated on March 22, 2006. Dongtai has a 60% interest in this
subsidiary. Liaoyang Dongtai is located in Liaoyang, PRC and is engaged in
the
business of the collection, treatment, disposal and recycling of industrial
wastes.
Dongtai
Water was incorporated in July 2006. As of June 30, 2007 Dongtai had acquired
18% of the equity of such company. On July 16, 2007
Dongtai purchased an additional 62% of the equity of Dongtai
Water. Dongtai Water is a Build-Operate-Transfer (BOT) project, designed to
process polluted water generated by the city of Dalian.
On
March
2, 2007, the Company purchased 49% of the equity of Dongtai Organic, a newly
formed company which is also a BOT project, engaged in municipal sludge
treatment in Dalian. Dongtai Organic will operate for the next 20
years.
2.
Basis
of Presentation
The
accompanying consolidated financial statements include the accounts of China
Industrial Waste Management, Inc., a Nevada corporation, its 100% owned
subsidiary, DonTech Waste Services Inc., a Delaware corporation, its 90%
indirectly owned subsidiary, Dalian Dongtai Industrial Waste Treatment Co.,
Ltd,
a PRC company, and its 60% indirectly owned subsidiary Liaoyang Dongtai
Industrial Waste Treatment Co. Ltd., a PRC company. 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 the PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP.
3.
Summary of Significant Accounting Policies
Economic
and Political Risks
The
Company faces a number of risks and challenges as a result of having primary
operations and markets in the PRC. Changing political climates in the PRC could
have a significant effect on the Company’s business.
Foreign
currency translation
As
of
June 30, 2007 and 2006, the accounts of the Company were maintained, and the
consolidated financial statements were expressed in the 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 the RMB as the functional
currency. According to the Statement, all assets and liabilities were translated
at the exchange rate on the balance sheet date, stockholders’ equity was
translated at the historical rates and the statement of operations items 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.”
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.
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.
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 June 30, 2007 and December 31, 2006
is $21,071 and $20,550, 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. Terms of the sales vary from COD through a credit
term of up to nine to twelve months. Reserves are recorded primarily on a
specific identification basis.
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,
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,
equipment and construction in progress
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment 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 operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives as follows:
|
Buildings
|
30
Years
|
|
Machinery
|
10
Years
|
|
Vehicles
|
8
Years
|
|
Office
equipment
|
5
Years
|
Construction
in progress consists of the design expenses, architect fee and cost of the
equipment to treat waste.
Landfills
Cost
Basis of Landfill Assets — We capitalize various costs that we incur to make a
landfill ready to accept waste. 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 (“SFAS No. 143”) 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.
Amortization
of Landfill Assets — 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:
|
|
|
As
of
|
|
|
|
|
June
30, 2007
|
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
Long-term
|
|
$
|
405,657
|
|
|
|
381,873
|
|
Long-term
investment
|
Invested
company
|
|
Equity
acquired
|
|
|
Balance
as
of
June 30,
2007
|
|
|
Balance
as of
December
31, 2006
|
|
|
Dongtai
Water
|
|
|
20%
|
|
|
$
|
330,904
|
|
|
$
|
322,717
|
|
|
Dongtai
Organic
|
|
|
49%
|
|
|
|
1,286,849
|
|
|
|
0
|
|
|
Total
|
|
|
|
|
|
|
1,617,753
|
|
|
|
322,717
|
|
Long-term
investments are recorded under the equity method. Although we acquired less
than
20% of the equity of Dongtai Water, the majority of equity of that company
is
controlled indirectly by Mr. Dong Jinqing, the CEO and CFO of the
Company.
Dongtai
Water, is constructing and will operate a municipal sewage treatment facility
in
Dalian, PRC and Dongtai Organic is constructing and will operate a sludge
treatment and disposal facility in Dalian, PRC.
Asset
impairments
We
monitor the carrying value of our long-lived assets for potential impairment
and
test the recoverability of such assets whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Typical indicators that an asset may be impaired include:
•
A
significant decrease in the market price of an asset or asset
group;
•
A
significant adverse change in the extent or manner in which an asset or asset
group is being used or in its physical condition;
•
A
significant adverse change in legal factors or in the business climate that
could affect the value of an asset or asset group, including an adverse action
or assessment by a regulator;
•
An
accumulation of costs significantly in excess of the amount originally expected
for the acquisition or construction of a long-lived asset;
•
Current
period operating or cash flow losses combined with a history of operating or
cash flow losses or a projection or forecast that demonstrates continuing losses
associated with the use of a long-lived asset or asset group; or
•
A
current expectation that, more likely than not, a long-lived asset or asset
group will be sold or otherwise disposed of significantly before the end of
its
previously estimated useful life.
If
any of
these or other indicators occurs, the asset is reviewed to determine whether
there has been an impairment. An impairment loss is recorded as the difference
between the carrying amount and fair value of the asset. If significant events
or changes in circumstances indicate that the carrying value of an asset or
asset group may not be recoverable, we perform a test of recoverability by
comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows. If cash flows cannot be separately and independently
identified for a single asset, we will determine whether an impairment has
occurred for the group of assets for which we can identify the projected cash
flow. If the carrying values are in excess of undiscounted expected future
cash
flows, we measure any impairment by comparing the fair value of the asset or
asset group to its carrying value. Fair value is determined by either an
internally developed discounted projected cash flow analysis of the asset or
asset group or an actual third-party valuation. If the fair value of an asset
or
asset group is determined to be less than the carrying amount of the asset
or
asset group, an impairment in the amount of the difference is recorded in the
period that the impairment indicator occurs.
Intangible
assets
Intangible
assets consist of “Rights to use land and build a plant” for fifty years and
“Rights of use landfill” for twenty years. The methods to amortize intangible
assets are a fifty year 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.
Net
intangible assets on June 30, 2007 were $1,544,835. Such assets consist entirely
of a right to use land of $1,706,987, less accumulated amortization of
$162,152.
Minority
interest
Minority
interest represents the minority owners’ 10% equity interest in Dongtai and 40%
equity interest in Liaoyang Dongtai.
Fair
value of financial instruments
Statements
of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
Financial Instruments, requires that the Company disclose 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,
disposal and recycling services and the sale of recycled commodities. The fees
charged for our services are generally defined in our 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. We generally
recognize revenue as services are performed 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 June 30, 2007 and December 31, 2006 deferred sales amounted to
$467,105 and $455,548, 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 six months
ended June 30, 2007 and 2006 were immaterial.
Stock-based
compensation
In
December 2004, the FASB issued SFAS No.123(R) 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 realized.
Local
PRC
income tax
The
Company is subject to the PRC Enterprise Income Tax at a rate of 30% percent
on
its net income. According to a PRC ruling, any joint venture with foreign
investment will get special tax exempt treatment for the first two
years.
Statement
of cash flows
In
accordance with Statement of Financial Accounting Standards No. 95, “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 Statement of Financial Accounting
Standards No. 128 (“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.
Contingent
liabilities
We
estimate the amount of potential exposure we may have with respect to claims,
assessments and litigation in accordance with SFAS No. 5. We are party to
pending or threatened legal proceedings covering a wide range of matters in
various jurisdictions. It is not always possible to predict the outcome of
litigation, as it is subject to many uncertainties. Additionally, it is not
always possible for management to make a meaningful estimate of the potential
loss or range of loss associated with such litigation.
4.
New
accounting pronouncement
SFAS No. 157 —
Fair Value Measurements
In
September 2006, the FASB issued SFAS No. 157,
Fair Value
Measurements
, (“SFAS No. 157”), which defines fair value,
establishes a framework for measuring fair value, and expands disclosures about
fair value measurements. SFAS No. 157 will be effective for the
Company beginning January 1, 2008. We are currently in the process of
assessing the provisions of SFAS No. 157 and determining how this
framework for measuring fair value will affect our current accounting policies
and procedures and our financial statements.
5.
Restatements
During
the preparation of the financial statements for three and six months ended
June
30, 2007, the Company received a comment letter from the Office of the Chief
Accountant of the Division of Corporation Finance of Securities and Exchange
Commission regarding certain disclosures in the Company’s previously filed
periodic reports. The Company determined that its asset retirement obligations
(“ARO”) had not been properly accounted for and also that
its subsidiary, Liaoyang Dongtai, had not been consolidated while
preparing the Company’s consolidated financial statements in accordance with
GAAP contained in such reports. The Company has therefore restated
its consolidated balance sheet as of December 31, 2006, its consolidated
statements of income for the three and six months ended June 30, 2006 and its
consolidated statement of cash flows for the six months ended June 30, 2006.
The
effects of the restatements are shown in the following tables.
Balance
Sheet
|
|
|
Original
|
|
|
Restated
|
|
|
|
|
December
31,
|
|
|
|
|
2006
|
|
|
2006
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,660,698
|
|
|
$
|
5,713,925
|
|
|
Trade
accounts receivable
|
|
|
151,144
|
|
|
|
151,144
|
|
|
Other
receivables
|
|
|
50,789
|
|
|
|
35,999
|
|
|
Inventory
|
|
|
602,582
|
|
|
|
602,944
|
|
|
Advances
to suppliers
|
|
|
374,046
|
|
|
|
374,046
|
|
|
Deferred
expense
|
|
|
20,490
|
|
|
|
20,490
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
6,859,749
|
|
|
|
6,898,548
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
361,136
|
|
|
|
322,717
|
|
|
Property,
plant & equipment
|
|
|
3,927,234
|
|
|
|
4,189,517
|
|
|
Less:
Accumulated depreciation
|
|
|
(1,487,340
|
)
|
|
|
(1,502,899
|
)
|
|
Net
property, plant and equipment
|
|
|
2,439,894
|
|
|
|
2,686,618
|
|
|
Construction
in progress
|
|
|
202,974
|
|
|
|
202,974
|
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,524,319
|
|
|
|
1,524,319
|
|
|
Related
party Receivable
|
|
|
231,793
|
|
|
|
231,793
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,619,865
|
|
|
$
|
11,866,969
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
92,255
|
|
|
$
|
92,255
|
|
|
Tax
payable
|
|
|
6,346
|
|
|
|
6,346
|
|
|
Deferred
Sales
|
|
|
455,548
|
|
|
|
455,548
|
|
|
Accrued
expenses
|
|
|
15,410
|
|
|
|
15,768
|
|
|
Other
payable
|
|
|
181,136
|
|
|
|
283,981
|
|
|
Total
current liabilities
|
|
|
750,695
|
|
|
|
853,898
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
|
|
|
|
|
|
|
ARO
liability
|
|
|
-
|
|
|
|
381,873
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
750,695
|
|
|
|
1,235,771
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
1,086,917
|
|
|
|
1,083,022
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
Common
stock
|
|
|
13,221
|
|
|
|
13,221
|
|
|
Additional
paid-in capital
|
|
|
1,952,634
|
|
|
|
1,952,634
|
|
|
Other
comprehensive income
|
|
|
478,500
|
|
|
|
381,579
|
|
|
Retained
earnings
|
|
|
7,337,898
|
|
|
|
7,200,742
|
|
|
Total
stockholders' equity
|
|
|
9,782,253
|
|
|
|
9,548,176
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
11,619,865
|
|
|
$
|
11,866,969
|
|
As
a
result of the restatement of the consolidated balance sheet as of December
31,
2006, total assets as of December 31, 2006 increased from $11,619,865, as
originally reported, to $11,866,969, an increase of $247,104. The increase
in
total assets was mostly a result of a $246,724 increase in net property, plant
and equipment resulting from the change in accounting for ARO liabilities
pertaining to the Company’s landfill. Stockholders' equity as of December 31,
2006 decreased from $9,782,253, as originally reported, to $9,548,176, a
decrease of $234,077. Minority interest in subsidiary decreased by $3,895,
from
$1,086,917 to $1,083,022.
Income
Statements
|
|
|
Original
|
|
|
Restated
|
|
|
|
|
For Three
Months Ended June 30,
|
|
|
|
|
2006
|
|
|
2006
|
|
|
Revenue
|
|
$
|
1,485,653
|
|
|
$
|
1,485,653
|
|
|
Costs
of revenue (including depreciation)
|
|
|
521,620
|
|
|
|
537,717
|
|
|
Gross
profit
|
|
|
964,033
|
|
|
|
947,936
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
76,601
|
|
|
|
76,601
|
|
|
General
and administrative expenses
|
|
|
290,327
|
|
|
|
290,327
|
|
|
Total
operating expenses
|
|
|
366,928
|
|
|
|
366,928
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
597,105
|
|
|
|
581,008
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
57,389
|
|
|
|
57,389
|
|
|
Other
expense
|
|
|
(1,416
|
)
|
|
|
(1,416
|
)
|
|
Total
other income (expense)
|
|
|
55,973
|
|
|
|
55,973
|
|
|
Net
income before minority interest and income tax
|
|
|
653,078
|
|
|
|
636,981
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income after income tax
|
|
|
653,078
|
|
|
|
636,981
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
64,174
|
|
|
|
62,564
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
588,904
|
|
|
$
|
574,417
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
19,258
|
|
|
|
19,353
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
608,162
|
|
|
$
|
593,770
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average
shares outstanding
|
|
|
12,948,151
|
|
|
|
12,948,151
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
|
0.04
|
|
|
$
|
0.04
|
|
As
a
result of the restatement, net income for the three months ended June 30, 2006
decreased by $14,487 from $588,904, as originally reported, to $574,417,
comprised of a $16,097 increase in cost of goods and a $1,610 decrease in
minority interest.
|
|
|
Original
|
|
|
Restated
|
|
|
|
|
For Six
Months Ended June 30,
|
|
|
|
|
2006
|
|
|
2006
|
|
|
Revenue
|
|
$
|
3,037,090
|
|
|
$
|
3,037,090
|
|
|
Costs
of revenue (including depreciation)
|
|
|
960,398
|
|
|
|
978,605
|
|
|
Gross
profit
|
|
|
2,076,692
|
|
|
|
2,058,485
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
230,080
|
|
|
|
230,080
|
|
|
General
and administrative expenses
|
|
|
543,364
|
|
|
|
543,364
|
|
|
Total
operating expenses
|
|
|
773,444
|
|
|
|
773,444
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,303,248
|
|
|
|
1,285,041
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
57,389
|
|
|
|
57,389
|
|
|
Other
expense
|
|
|
(1,451
|
)
|
|
|
(1,451
|
)
|
|
Total
other income (expense)
|
|
|
55,938
|
|
|
|
55,938
|
|
|
Net
income before minority interest and income tax
|
|
|
1,359,186
|
|
|
|
1,340,979
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income after income tax
|
|
|
1,359,186
|
|
|
|
1,340,979
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
134,785
|
|
|
|
132,964
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,224,401
|
|
|
$
|
1,208,015
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
101,084
|
|
|
|
101,195
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
1,325,485
|
|
|
$
|
1,309,210
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average
shares outstanding
|
|
|
12,947,709
|
|
|
|
12,947,709
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
|
0.09
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
As
a
result of the restatement, net income for the six months ended June 30, 2006
decreased from $1,224,401, as originally reported, to $1,208,015, a decrease
of
$16,386, comprised of a $18,207 increase in cost of goods and a $1,821 decrease
in minority interest.
Statement
of Cash Flows
|
|
|
Original
|
|
|
Restated
|
|
|
|
|
For Six
Months Ended June 30,
|
|
|
|
|
2006
|
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,224,401
|
|
|
$
|
1,208,015
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
134,785
|
|
|
|
132,964
|
|
|
Depreciation
|
|
|
142,536
|
|
|
|
162,280
|
|
|
Amortization
|
|
|
17,890
|
|
|
|
17,212
|
|
|
Accretion
expenses
|
|
|
-
|
|
|
|
12,491
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(108,698
|
)
|
|
|
(106,083
|
)
|
|
Inventory
|
|
|
(24,033
|
)
|
|
|
(19,753
|
)
|
|
Other
receivables
|
|
|
4,278
|
|
|
|
81,090
|
|
|
Advance
to suppliers
|
|
|
(148,136
|
)
|
|
|
(285
|
)
|
|
Prepaid
expense
|
|
|
(16,421
|
)
|
|
|
500
|
|
|
Accrued
expense
|
|
|
-
|
|
|
|
70,909
|
|
|
Accounts
payable & other payables
|
|
|
60,735
|
|
|
|
(78,445
|
)
|
|
Tax
payable
|
|
|
-
|
|
|
|
24,998
|
|
|
Net
cash provided by operating activities
|
|
|
1,287,337
|
|
|
|
1,505,893
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
|
Equity
investment
|
|
|
-
|
|
|
|
(35,233
|
)
|
|
Purchase
of property and equipment
|
|
|
(430,962
|
)
|
|
|
(175,552
|
)
|
|
Construction
contracts
|
|
|
-
|
|
|
|
(343,238
|
)
|
|
Net
cash used in investing activities
|
|
|
(430,962
|
)
|
|
|
(554,023
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
23,598
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
101,084
|
|
|
|
31,853
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
981,057
|
|
|
|
983,723
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,944,179
|
|
|
|
2,944,179
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
3,927,902
|
|
|
$
|
3,927,902
|
|
As
a
result of the restatement, net cash provided by operating activities for the
six
months ended June 30, 2006 increased by $218,566 from $1,287,337 as originally
reported, to $1,505,893; and net cash used in investing activities increased
by
$123,061 from $430,962, as originally reported, to $554,023.
Item
2. Management’s
Discussion and Analysis or Plan of Operation
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 has no
longer been in the mining business due to its loss of all its contractual rights
in certain mining properties in Spain.
The
Company, through its wholly-owned subsidiary, DonTech Waste Services Inc.
(formerly, Dalian Acquisition Corp.), a Delaware corporation (“DonTech”), holds
90% of the capital stock of Dalian Dongtai Industrial Waste Treatment Co.,
Ltd.,
a corporation located in Dalian, the People’s Republic of China, or PRC
(“Dongtai”). As a result of the acquisition, the Company is now engaged in the
waste management business, and Dongtai currently represents the primary
operations and business of the Company.
Dongtai
was one of the first companies specializing in the centralized treatment of
industrial waste in the PRC. Dongtai is engaged in the collection, treatment,
disposal and recycle of all types of industrial wastes. It provides a wide
range
of waste treatment services to diversified customers. Dongtai uses industrial
waste as a raw material to produce chemical and metallurgy products or
incinerates, buries, or treats the waste.
Dongtai
also provides waste disposal solutions, waste transportation services, realty
management services and environmental pollution remediation services to its
clients.
On
March
22, 2006, Dongtai and two other shareholders formed a subsidiary, Liaoyang
Dongtai Industrial Waste Treatment Co., Ltd. (“Liaoyang Dongtai”) in the PRC, in
which Dongtai holds a 60% ownership interest. Liaoyang Dongtai is also engaged
in the collection, treatment, disposal and recycling of industrial waste. It
is
located in Liaoyang, where there is a concentration of large-scale chemical
industrial enterprises. Industrial wastes generated by these enterprises are
on
the increase and have not, in our opinion, been properly been disposed. We
believe that this presents a good business opportunity for the Company to meet
this need.
On
March 31, 2006, the Company filed with the Securities and Exchange Commission
a
definitive information statement on Schedule 14C in which it notified
stockholders of its intention to make the following changes:
|
·
|
to
change the name of the Company to China Industrial Waste Management,
Inc. and apply for a new trading symbol of
CIWT.OB.
|
|
·
|
to
authorize the Board of Directors to effect a one-for-one hundred
(1:100)
reverse stock split of the outstanding shares of Common Stock (the
"Reverse Split").
|
|
·
|
to
approve the Company's 2006 Equity Incentive
Plan.
|
The
name
change and the reverse stock split became effective on May 12,
2006.
RESULTS
OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and notes appear elsewhere in this quarterly
report.
Six
Months and Three Months Ended June 30, 2007 Compared to the Six Months and
Three
Months Ended June 30, 2006
We
generate revenue primarily from two sources, namely, fees charged to customers
for waste collection, transfer, recycling and disposal services and that 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 and six months ended June 30,
2007 were $2,464,263 and $4,147,235, respectively, compared with $1,485,653
and
$3,037,090 for the three and six months ended June 30, 2006,
respectively.
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
|
June
30,
|
|
|
|
June
30,
|
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2006
|
|
|
Service
fees
|
|
|
1,031,021
|
|
|
|
676,835
|
|
|
|
1,868,084
|
|
|
|
1,717,993
|
|
|
Sales
of cupric sulfate
|
|
|
561,859
|
|
|
|
178,917
|
|
|
|
950,192
|
|
|
|
471,376
|
|
|
Sales
of other recycled commodities
|
|
|
871,383
|
|
|
|
629,901
|
|
|
|
1,328,959
|
|
|
|
847,721
|
|
|
Total
|
|
|
2,464,263
|
|
|
|
1,485,653
|
|
|
|
4,147,235
|
|
|
|
3,037,090
|
|
The
increase in revenues in both the three and six months ended June 30,
2007 compared to the same period in 2006, is primarily attributable to a 72.8%
increase in sales of recycled products compared with the same period in 2006,
which included a 101.6% increase in sales of cupric sulfate as a result of
both
higher unit prices and greater volume and a 64.3% increase in sales of other
recycled products.
Revenues
from service fees increased by 8.7% for the six months ended June 30, 2007
as compared to the six months ended June 30, 2006. Revenues from
service fees for the three months ended June 30, 2007 increased by $354,186
or
52.3% over the comparable period in 2006.
The
increases in revenues from service fees during the three and six months
ended June 30, 2007 over the comparable periods in 2006 resulted from an
increase in the number of our customers for waste processing services and
increased demand for our services from existing customers. However,
for the six months ended June 30, 2007, a 19.6 % decline
of $204,094 in service fees in the three months ended March 31, 2007,
compared with the same period in 2006 partially offset the strong increase
in
service fees in the second quarter of 2007 compared with the
same period in 2006.
Cost
of
Revenues.
The
Company’s cost of revenues for the three and six months ended June 30, 2007
were $853,677 and $1,363,445, respectively, compared with $537,717 and $978,605
for the three and six months ended June 30, 2006,
respectively.
|
|
|
|
Three
Months Ended
|
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
|
June
30,
|
|
|
|
|
2007
|
|
|
|
2006
|
|
|
|
2007
|
|
|
|
2006
|
|
|
Cost
of service fees
|
|
|
354,530
|
|
|
|
266,591
|
|
|
|
583,148
|
|
|
|
445,356
|
|
|
Cost
of cupric sulfate
|
|
|
168,454
|
|
|
|
41,290
|
|
|
|
265,751
|
|
|
|
154,052
|
|
|
Cost
of other recycled commodities
|
|
|
330,693
|
|
|
|
229,
836
|
|
|
|
514,546
|
|
|
|
379,197
|
|
|
Total
|
|
|
853,677
|
|
|
|
537,717
|
|
|
|
1,363,445
|
|
|
|
978,605
|
|
The
cost
of service fees increased by $137,792 or 30.9% for the six months ended June
30,
2007 compared to the six months ended June 30, 2006 and by $87,939 or 33.0%
for
the three months ended June 30, 2007 compared to the three months ended June
30,
2006 as the Company paid more in salaries to additional staff hired to
accommodate the rapid expansion of our business. Likewise, the Company had
to
procure more vehicles to service increased demand which triggered an increase
in
depreciation, expenditures on reparations and other expenses relating to
shipping. Meanwhile, the Company also leased more facilities to conduct its
growing operations.
The
cost
of reclaimed products
(which
includes cost of cupric sulfate and cost of other recycled
commodities)
for both the three and six months ended June 30,
2007 increased by
84.1%
and
46.3%, respectively,
compared with the same periods in 2006. Such
increase is attributable to a sharp increase in the price of raw
materials.
Selling
Expenses.
Total
selling expenses for the six months ended June 30, 2007 increased by 109.5%
over
such expenses for the six months ended June 30, 2006 and rose by 263% for the
three months ended June 30, 2007 compared with the same period in 2006. The
increases in selling expenses were principally attributable to increased sales
related tax accruals relating to our increased revenue and also
increased depreciation expense and freight charges due to the increase in our
depreciable assets and the expansion of our business.
General
and Administrative Expenses.
In
comparison with the same period in 2006, the general and administrative expenses
for the three and six months ended June 30, 2007 increased by 99.7% and 46.7%,
respectively, principally as a result of an increase in bonuses and salaries
paid to our employees. Payroll increased by 57.7% compared with the six months
ended June 30, 2006 whereas depreciation increased by 42.9% caused by the
increase in other fixed assets.
The
increase in general and administrative expenses for the three months ended
June
30, 2007 compared to the three months ended June 30, 2006 was due to
accrued bonuses for our employees being recorded on June 30,
2007.