CIWT China Industrial Waste Management Inc (CE)

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 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 nine months ended September 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”), Dongtai Water Recycling Co. Ltd. (“Dongtai Water”) and Dalian Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”).

Dongtai was incorporated on January 9, 1991 in the People’s Republic of China (“PRC”). As of September 30, 2007 Dongtai has three subsidiaries -Dongtai Water, Zhuorui and Dongtai Organic Waste Treatment Co. Ltd. (“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. In July 14, 2007, Liaoyang Dongtai was dissolved and liquidated.

Dongtai Water was incorporated in July 2006 and  Dongtai  acquired 18% of the equity of such company in such month. On July 16, 2007 Dongtai acquired an additional 62% of the equity of Dongtai Water, which was accounted for as a reorganization of entities under common control. Dongtai Water is a Build-Operate-Transfer (BOT) project, designed to process polluted water generated by the city of Dalian.

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. In August  2007, Dongtai acquired 70% of the equity of Zhuorui from a related company, controlled by Mr. Dong Jinqing, CEO and CFO of the company, at the price of RMB 7 million, which was accounted for as a reorganization of entities under common control.

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. The investment in Dongtai Organic is accounted for using the equity method.

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, its 80% indirectly owned subsidiary, Dongtai Water Recycling Co. Ltd., a PRC company and its 70% indirectly owned subsidiary, Dalian Zhuorui Resource Recycling 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 September 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 September 30, 2007 and December 31, 2006 is $21,364 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:

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:

Long-term investment

Long-term investments are recorded under the equity method. Dongtai Organic is constructing and will operate a sludge treatment and disposal facility in Dalian, PRC, of which the investment is recorded under the equity method.

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. The intangible assets are amotized straight - line over fifty years. 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 September 30, 2007 were $1,557,165. Such assets consist entirely of a right to use land of $1,730,782, less accumulated amortization of $173,617.

Discontinued operations

Due to a lack of progress of Liaoyang Dongtai in developing a local market for its services, the Board of Directors of the company decided to dissolve and liquidate Liaoyang Dongtai in July 2007.

Before termination, Liaoyang Dongtai’s major asset was cash, in the amount of RMB 399,989. Since Liaoyang Dongtai never generated any revenue, there was no tax incurred, and the expenses from its operations were accounted for as sundry expenses.

Dongtai recovered RMB 260,000 (USD $33,934) from the disposal of the investment in Liaoyang Dongtai. Dongtai’s book value in the investment was RMB 300,000 (USD $39,155). Therefore, Dongtai incurred a total loss from the disposal of RMB 40,000 (USD $5,221).

Minority interest

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 September 30, 2007 and December 31, 2006 deferred sales amounted to $607,249 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 nine months ended September 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 be realized.

Local PRC income tax

The Company is subject to the PRC Enterprise Income Tax at a rate of 30% 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.  

During the preparation of the financial statements for three and nine months ended September 30, 2007, the Company became the majority shareholder of Dongtai Water and Zhuorui through additional acquisition of equity of both companies. The acquisitions are considered to be reorganizations of entities under common control according to GAAP. Therefore, as the acquiring entity, the Company has restated its December 31, 2006 balance sheet as though the acquisition had occurred as of January 1, 2006.

The Company has therefore restated its consolidated balance sheet as of December 31, 2006, its consolidated statements of income for the three and nine months ended September 30, 2006 and its consolidated statement of cash flows for the nine months ended September 30, 2006. The effects of the restatements are shown in the following tables.

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 $12,929,928, an increase of $1,310,063.

Stockholders' equity as of December 31, 2006 decreased from $9,782,253, as originally reported, to $9,435,665, a decrease of $346,588. Minority interest in subsidiary increased by $699,405, from $1,086,917 to $1,786,322.

Due to the retroactive restatement of financial information concerning Dongtai Water and Zhuorui, the increase in total assets included a $765,053 increase in cash, a $104,321 increase in other receivables, a $322,717 decrease in investments, a $23,798 increase in net property and equipment, a $140,869 increase in related party receivable, and a $351,635 increase in construction in progress. In addition, total liabilities increased by $472,170, including an $812 increase in accrued expenses, a $63 increase in other payable, a $26 increase in tax payable and a $471,269 increase in related party payable. There was also an increase in minority interest of $703,300 and shareholders' equity decreased by $112,511.

As a result of a change in the Company's policy for accounting for asset retirement obligations pertaining to the Company's landfill as well as the consolidation of Liaoyang Dongtai, the increase in total assets was a result of a $53,227 increase in cash, a $14,790 decrease in other receivables, a $362 increase in inventory, a $38,419 decrease in investments and a $246,724 increase in net property and equipment. The increase in total liabilities included a $358 increase in accrued expenses, a $102,845 increase in other payable and a $381,873 increase in asset retirement obligations. There was also a $3,895 decrease in minority interest, and shareholders' equity decreased by $234,077.

The reasons for the changes in restatement stated above are set forth as follows:

As a result of the restatement, net income for the three months ended September 30, 2006 decreased by $72,303 from $426,093, as originally reported, to $353,790. This is comprised of a $7,039 increase in cost of goods, a $87,791 increase in  General and administrative expenses from retroactive restatement of Dongtai Water and Zhuorui and a $22,527 decrease in minority interest.

As a result of the restatement, net income for the nine months ended September 30, 2006 decreased from $1,650,494, as originally reported, to $1,561,805, a decrease of $88,689. This is comprised of a $25,246 increase in cost of goods, a $87,791 increase in  General and administrative expenses from retroactive restatement of Dongtai Water and Zhuorui and a $24,348 decrease in minority interest.

As a result of the restatement, net cash provided by operating activities for the nine months ended September 30, 2006 decreased by $79,403 from $2,406,225 as originally reported, to $2,326,822; and net cash used in investing activities changed by $1,218,338 from $827,392, as originally reported, to net cash provided by investing activities of $390,946.

Item 2.