ITEM
6.
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.
In
November 2005, the Company, through its wholly-owned subsidiary, DonTech Waste
Services, Inc. (formerly, Dalian Acquisition Corp.), a Delaware corporation
(“DonTech”), acquired 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 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.
|
|
|
·
|
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 appearing elsewhere in this annual
report.
Revenue
|
|
|
Years
Ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Service
fees
|
|
|
3,252,725
|
|
|
2,345,136
|
|
|
Sales
of cupric sulfate
|
|
|
1,193,369
|
|
|
490,564
|
|
|
Sales
of other recycled commodities
|
|
|
1,937,139
|
|
|
2,033,485
|
|
|
Total
|
|
|
6,383,233
|
|
|
4,869,185
|
|
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.
Total
revenue for the year ended December 31, 2006, was $6,383,233, an increase of
$1,514,048 or 31.09% from $4,869,185 for the same period in 2005. The increase
in revenue is attributable to a broadened customer base and increased demand
from existing customers. For example, we received revenue from 496 different
customers in the year ended December 31, 2006 as compared to 389 different
customers in the year ended December 31, 2005.
Service
fee revenue for the year ended December 31, 2006 was $3,252,725 which was 50.96%
of total revenue for such year and an increase of $907,589 or 38.7% over the
$2,345,136 in service fee revenue we generated in the year ended December 31,
2005. Service fee revenue accounted for 48.16% of our total revenue for the
year
ended December 31, 2005. The relative percentages of service fee revenue and
revenue from sales of recycled products vary based on the types of waste our
customers generate. For example, if a customer has waste which can be recycled,
we may charge less for our disposal fees for unrecyclable waste to the same
customer.
Sales
of
recycled products (including cupric sulfate and other recycled commodities)
were
$3,130,508 or 49.04% of total revenue for the year ended December 31, 2006.
Sales of recycled products in 2006 increased by $606,459 over the year ended
December 31, 2005 when such sales were $2,524,049 or 51.84% of our total revenue
for such year. In 2006 we determined to hold all of our production of alloys
in
inventory in anticipation of receiving higher selling prices for such alloys
in
the future and therefore generated no sales. Sales of cupric sulfate increased
by approximately 143.26%, from $490,564 in the year ended December 31, 2005
to
$1,193,369 in the year ended December 31, 2006, while sales of other recycled
products, such as organic solvents, plastic, aluminum and motor oil decreased
by
$96,346 or approximately 4.74% in the year ended December 31, 2006 as compared
to the year ended December 31, 2005.
Costs
of
revenue
|
|
|
Years
Ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cost
of service fees
|
|
|
763,940
|
|
|
664,392
|
|
|
Cost
of cupric sulfate
|
|
|
310,585
|
|
|
171,107
|
|
|
Cost
of other recycled commodities
|
|
|
748,132
|
|
|
753,433
|
|
|
Total
|
|
|
1,822,657
|
|
|
1,588,932
|
|
Costs
of
revenues primarily includes labor expenses (salaries, benefits , insurance
and
other benefits), depreciation, materials, transportation costs, rent, repair
costs and other sundry expenses. Costs of revenue increased $233,725 or 14.71%
from $1,588,932 for the year ended December 31, 2005 to $1,822,657 for the
year
ended December 31, 2006. The increase in costs of revenue is attributable to
the
increase in the number of customers which retained our company for providing
professional services and an increase in the volume of the waste we treat.
Costs
related to providing services increased by $99,548 or 14.98% from $664,392
for
the year ended December 31, 2005 to $763,940 for the year ended December 31,
2006. Costs related to producing recycled waste products (including cupric
sulfate and other recycled commodities) increased by $134,177 or 14.51% from
$924,540 for the year ended December 31, 2005 to $1,058,717 for the year ended
December 31, 2006.
Operating
expenses
Total
operating expenses for the fiscal year ended December 31, 2006 was $2,069,279
which represents an increase of $176,239 or 9.31% from $1,893,040 for the same
period ended December 31, 2005. Labor costs typically account for approximately
50% of operating expenses while transportation expenses, taxes, depreciation
expense and other expenses typically account for approximately 15%, 10%, 5%
and
20%, respectively, of total operating expenses. In the year ended December
31,
2006 as compared to the year ended December 31, 2005 labor costs increased
approximately 96%, transportation expenses increased approximately 41%, taxes
increased by 40% and depreciation expense increased by approximately 51%. We
incurred approximately $650,000 in expenses in the year ended December 31,
2005
relating to the reverse merger in which we acquired Dongtai No such expenses
were incurred in the year ended December 31, 2006.
Other
income
Other
income for the fiscal year ended December 31, 2006 was $206,030, a decrease
of
$358,263 or 63.49% from $564,293 for the same period in 2005. The decrease
was
primarily attributable to a $167,410 decrease from 2005 to 2006 in financial
subsidies paid to the Company by certain government agencies and the fact that
in 2005 we received dividends of $192,674 from a prior subsidiary and we
received no dividends in 2006.
Foreign
Currency Translation
The
foreign currency translation adjustment for the year ended December 31, 2006
was
$269,296 compared to an adjustment of $157,196 for the year ended December
31,
2005. Such a fluctuation was the result of volatility in foreign exchange rates
between the U.S. dollar and the Chinese renminbi during the two fiscal years
ended December 31, 2006 and 2005.
Income
tax
The
Company is not liable for income tax for 2006 as a consequence of a tax
exemption granted to it when Dongtai became a Sino-American joint venture in
2005 in connection with the reverse merger transaction it consummated. The
Company has accrued income tax expenses of $385,382 for 2005. The Company’s
tax-exempt status will continue through the end of 2007. Thereafter, the Company
will only be liable to pay 50% of its income taxes for the next three years
(the
applicable tax rate will be 7.5% in the years 2008-2010 rather than 15% in
such
years). According to the newly adopted Enterprise Income Tax Law of the PRC,
commencing in 2011 the Company will be subject to an enterprise income tax
rate
of 25%.
Net
Income (Loss)
Net
income for the fiscal year ended December 31, 2006 was $2,441,428, an increase
of $947,888 or 63.47% from $1,493,540 for the same period in 2005. Net income
was 38.25% and 30.67% of revenues for the years ended December 31, 2005 and
December 31, 2006, respectively. This increase is primarily attributable to
the
$1,514,048 increase in the Company’s revenues during the fiscal year ended
December 31, 2006 which was partially offset by increases of $233,725 in costs
of revenues and $176,239 in total operating expenses in the year ended December
31, 2006.
Liquidity
and Capital Resources
We
believe that our primary sources of liquidity are cash flows from operations
and
existing cash. We intend to use our available funds as working capital and
to
develop our current lines of business. We anticipate that cash flow provided
by
operating activities will provide the necessary funds on a short - and long-term
basis to meet our operating cash requirements.
Cash
and
cash equivalents
The
Company had cash and cash equivalents of $2.94 million at the beginning of
2006
and at December 31 2006, we had approximately $5.7 million cash and cash
equivalents. The Company had cash and cash equivalents of approximately $2.37
million at the beginning of 2005.
Working
Capital
As
of
December 31, 2006, the Company had working capital of $6,044,650 as compared
to
$ 3,498,100 as of December 31, 2005. The increase is attributable to cash
generated from operations.
Cash
flow
from operating activities
Net
cash
provided by operating activities in the year ended December 31, 2006 was
$3,646,546, an increase of $2,135,755 or 141.37% over the $1,510,791 of net
cash
provided by operating activities in the year ended December 31, 2005. The
increase was primarily attributable to a $947,888 increase in net income as
well
the Company obtaining prepayments of fees from certain customers, the effects
of
which were partially offset by the Company making prepayments to certain of
its
suppliers of raw materials.
Cash
flow
from investing activities
Net
cash
used in investing activities was $1,052,042 in the year ended December 31,
2006
as compared to net cash provided by investing activities of $54,841 in the
year
ended December 31, 2005. In 2006 the Company made an equity investment of
$317,400 in BOT projects (no such amounts were invested in 2005) and increased
its purchases of property and equipment by $346,965 over the amount of purchases
made in 2005.
Capital
resources
We
believe that our available funds will provide us with sufficient capital for
our
operations during at least the next twelve months; however, to the extent that
we make acquisitions, we may require additional capital for the acquisition
or
for the operation of the combined companies. We believe that capital will be
available to us through loans from financial institutions or equity or debt
financings. However, we cannot give any assurance that such funding will be
available on terms acceptable to us or at all.
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. These policies 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 collectibles 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
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 sold 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.
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. Reserves are recorded
primarily on a specific identification basis.
Off
Balance Sheet Arrangements
Neither
the Company nor any of its subsidiaries have engaged in any off-balance sheet
transactions since its inception.
ITEM
7.
FINANCIAL
STATEMENTS
CHINA
INDUSTRIAL WASTE MANAGENT, INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
As
of December 31, 2006 and 2005, and for the years then
ended
|
|
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
|
F-2
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
F-3
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Operations and Comprehensive Income
|
|
|
F-4
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity
|
|
|
F-5
|
|
|
|
|
|
|
|
|
Consolidated
Statements of Cash Flows
|
|
|
F-6
|
|
|
|
|
|
|
|
|
Notes
to Consolidated Financial Statements
|
|
|
F-7
|
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(In
U.S. dollars)
|
|
|
|
December
31,
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
Restated
|
|
Restated
|
|
|
ASSETS
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,713,925
|
|
$
|
2,944,179
|
|
|
Trade
accounts receivable, net
|
|
|
151,144
|
|
|
281,761
|
|
|
Other
receivables
|
|
|
35,999
|
|
|
115,417
|
|
|
Inventory
|
|
|
602,944
|
|
|
410,084
|
|
|
Advances
to suppliers
|
|
|
374,046
|
|
|
16,502
|
|
|
Deferred
expense
|
|
|
20,490
|
|
|
22,304
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
6,898,548
|
|
|
3,790,247
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
322,717
|
|
|
-
|
|
|
Property,
plant & equipment
|
|
|
4,189,517
|
|
|
3,584,232
|
|
|
Less:
accumulated depreciation
|
|
|
(1,502,899
|
)
|
|
(1,162,326
|
)
|
|
Net
property, plant and equipment
|
|
|
2,686,618
|
|
|
2,421,906
|
|
|
Construction
in progress
|
|
|
202,974
|
|
|
220,474
|
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,524,319
|
|
|
1,509,159
|
|
|
Related
party receivable
|
|
|
231,793
|
|
|
281,851
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
11,866,969
|
|
$
|
8,223,637
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
92,255
|
|
$
|
108,213
|
|
|
Tax
payable
|
|
|
6,346
|
|
|
-
|
|
|
Deferred
sales
|
|
|
455,548
|
|
|
-
|
|
|
Accrued
expenses
|
|
|
15,768
|
|
|
-
|
|
|
Other
payable
|
|
|
283,981
|
|
|
183,934
|
|
|
Total
current liabilities
|
|
|
853,898
|
|
|
292,147
|
|
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation liability for landfills
|
|
|
381,873
|
|
|
344,691
|
|
|
Total
liabilities
|
|
|
1,235,771
|
|
|
636,838
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
1,083,022
|
|
|
758,680
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock: par value $.001; 5,000,000 shares authorized; 0 and 64,000
shares
issued and outstanding
|
|
|
-
|
|
|
64
|
|
|
Common
stock: par value $.001; 95,000,000 shares authorized; 13,220,843
and
6,740,843 shares, respectively, issued and outstanding
|
|
|
13,221
|
|
|
6,741
|
|
|
Additional
paid-in capital
|
|
|
1,952,634
|
|
|
1,949,717
|
|
|
Other
comprehensive income
|
|
|
381,579
|
|
|
112,283
|
|
|
Retained
earnings
|
|
|
7,200,742
|
|
|
4,759,314
|
|
|
Total
stockholders' equity
|
|
|
9,548,176
|
|
|
6,828,119
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
11,866,969
|
|
$
|
8,223,637
|
|
|
See
notes to Consolidated Financial
Statements.
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
|
|
(In
U.S. dollars)
|
|
|
|
Years
ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
(Restated)
|
|
(Restated)
|
|
|
|
|
|
|
|
|
|
Service
fees
|
|
$
|
3,252,725
|
|
$
|
2,345,136
|
|
|
Sales
of recycled commodities
|
|
|
3,130,508
|
|
|
2,524,049
|
|
|
Operating
revenue
|
|
|
6,383,233
|
|
|
4,869,185
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of service fees
|
|
|
763,940
|
|
|
664,392
|
|
|
Cost
of recycled commodities
|
|
|
1,058,717
|
|
|
924,540
|
|
|
Costs
of revenue (including depreciation)
|
|
|
1,822,657
|
|
|
1,588,932
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
4,560,576
|
|
|
3,280,253
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
599,691
|
|
|
197,355
|
|
|
General
and administrative expenses
|
|
|
1,469,588
|
|
|
1,695,685
|
|
|
Total
operating expenses
|
|
|
2,069,279
|
|
|
1,893,040
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,491,297
|
|
|
1,387,213
|
|
|
|
|
|
|
|
|
|
|
|
Other
income(expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
25,397
|
|
|
26,728
|
|
|
Other
income
|
|
|
206,030
|
|
|
564,293
|
|
|
Other
expense
|
|
|
(11,803
|
)
|
|
(14,764
|
)
|
|
Total
other income (expense)
|
|
|
219,624
|
|
|
576,257
|
|
|
Net
income from continuing operations before minority interest and
income
tax
|
|
|
2,710,921
|
|
|
1,963,470
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
626
|
|
|
385,382
|
|
|
|
|
|
|
|
|
|
|
|
Net
income before minority interest
|
|
|
2,710,295
|
|
|
1,578,088
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
268,867
|
|
|
84,548
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,441,428
|
|
$
|
1,493,540
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
269,296
|
|
|
157,196
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,710,724
|
|
$
|
1,650,736
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
13,181,391
|
|
|
12,949,660
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
$
|
0.19
|
|
$
|
0.12
|
|
|
See
notes to Consolidated Financial
Statements.
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
FOR
YEARS ENDED DECEMBER 31, 2006 AND 2005
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
Other
|
|
|
|
Total
|
|
|
|
|
Preferred
Series A
|
|
Common
Stock
|
|
Paid
in
|
|
Comprehensive
|
|
Retained
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
January 1, 2005
|
|
|
64,000
|
|
$
|
64
|
|
|
6,400,000
|
|
$
|
6,400
|
|
$
|
1,950,058
|
|
$
|
(44,913
|
)
|
$
|
3,990,412
|
|
$
|
5,902,021
|
|
|
Shares
held by Goldtech owners at time of acquisition by Dontech
|
|
|
|
|
|
|
|
|
147,711
|
|
|
148
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
-
|
|
|
Shares
issued to consultants to effect reverse acquisition
|
|
|
|
|
|
|
|
|
193,132
|
|
|
193
|
|
|
(193
|
)
|
|
|
|
|
|
|
|
-
|
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,493,540
|
|
|
1,493,540
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
157,196
|
|
|
|
|
|
157,196
|
|
|
Dividend
paid to Dalian Dongtai owners prior to reverse merger
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(724,638
|
)
|
|
(724,638
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2005
|
|
|
64,000
|
|
|
64
|
|
|
6,740,843
|
|
|
6,741
|
|
|
1,949,717
|
|
|
112,283
|
|
|
4,759,314
|
|
|
6,828,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred shares to common
|
|
|
(64,000
|
)
|
|
(64
|
)
|
|
6,400,000
|
|
|
6,400
|
|
|
(6,336
|
)
|
|
|
|
|
|
|
|
-
|
|
|
S8
shares issued for services
|
|
|
|
|
|
|
|
|
80,000
|
|
|
80
|
|
|
9,253
|
|
|
|
|
|
|
|
|
9,333
|
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,296
|
|
|
|
|
|
269,296
|
|
|
Net
income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,441,428
|
|
|
2,441,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
December 31, 2006
|
|
|
-
|
|
$
|
-
|
|
|
13,220,843
|
|
$
|
13,221
|
|
$
|
1,952,634
|
|
$
|
381,579
|
|
$
|
7,200,742
|
|
$
|
9,548,176
|
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(In
U.S. dollars)
|
|
|
|
Years
Ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
Restated
|
|
Restated
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,441,428
|
|
$
|
1,493,540
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
268,867
|
|
|
84,548
|
|
|
Depreciation
and Amortization
|
|
|
331,539
|
|
|
297,262
|
|
|
Bad
debt allowance
|
|
|
5,146
|
|
|
503
|
|
|
Accretion
expenses
|
|
|
25,226
|
|
|
19,779
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
132,087
|
|
|
(167,788
|
)
|
|
Inventory
|
|
|
(176,167
|
)
|
|
(400,678
|
)
|
|
Other
receivables
|
|
|
81,908
|
|
|
22,120
|
|
|
Advance
to suppliers
|
|
|
(8,883
|
)
|
|
115,872
|
|
|
Prepaid
expense
|
|
|
2,519
|
|
|
(21,978
|
)
|
|
Accounts
payable and other payables
|
|
|
73,083
|
|
|
212,668
|
|
|
Accrued
expense and deferred sales
|
|
|
463,551
|
|
|
-
|
|
|
Tax
payable
|
|
|
6,242
|
|
|
(145,057
|
)
|
|
Net
cash provided by operating activities
|
|
|
3,646,546
|
|
|
1,510,791
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activiies
|
|
|
|
|
|
|
|
|
Investment
in subsidiary
|
|
|
(317,400
|
)
|
|
-
|
|
|
Purchase
of property and equipment
|
|
|
(477,351
|
)
|
|
(130,386
|
)
|
|
Construction
contracts
|
|
|
(317,749
|
)
|
|
(54,335
|
)
|
|
Due
from related party
|
|
|
35,267
|
|
|
71,674
|
|
|
Investment
in subsidiary by minority holder
|
|
|
25,191
|
|
|
-
|
|
|
Proceeds
on sale of equity investments
|
|
|
-
|
|
|
167,888
|
|
|
Net
cash provided by investing activities
|
|
|
(1,052,042
|
)
|
|
54,841
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Dividends
distributed to shareholders
|
|
|
-
|
|
|
(724,638
|
)
|
|
Net
cash used in financing activities
|
|
|
-
|
|
|
(724,638
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
175,242
|
|
|
38,620
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,769,746
|
|
|
879,614
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,944,179
|
|
|
2,064,565
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
5,713,925
|
|
$
|
2,944,179
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
$
|
-
|
|
|
Income
taxes
|
|
|
626
|
|
|
283,651
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Stock
issued for services
|
|
|
80,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to Consolidated Financial
Statements.
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature
of operations
The
audited consolidated financial statements are those of China Industrial Waste
Management, Inc., a Nevada corporation formerly known as Goldtech Mining
Corporation (the “Company”), and its majority owned subsidiaries. When the terms
“the Company,” “we,” “us” or “our” are used in this document, those terms refer
to China Industrial Waste Management, Inc., and its consolidated subsidiaries.
When we use the term “CIWM,” we are referring only to the parent holding
company.
CIWM
is a
holding company which conducts its business through its only wholly-owned
subsidiary, DonTech Waste Services, Inc. (“DonTech”), formerly known as Dalian
Acquisition Corp. DonTech owns 90% of the stock of Dalian Dongtai Industrial
Waste Treatment Co. Ltd. (“Dongtai”), an entity organized under the laws of the
People’s Republic of China (“ PRC”). As of December 31, 2006 Dongtai owned 60%
of the equity in Liaoyang Dongtai Industrial Waste Treatment Co. Ltd. (“Liaoyang
Dongtai”).
Dongtai
was incorporated on January 9, 1991. 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.
Another
corporation with the name China Industrial Waste Management, Inc. was
incorporated in the State of Delaware on August 16, 2005. On September 22,
2005,
that corporation acquired 90% of the outstanding shares of Dongtai from its
shareholders in exchange for 1,280,000 shares of the corporation’s common stock,
representing 100% of the issued and outstanding shares of its common stock
at
the date of the acquisition.
The
exchange of shares with Dongtai was accounted for as a reorganization between
entities under common control with China Industrial Waste Management, Inc.
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. Since China Industrial Waste Management Inc. had
minimal assets and liabilities, the combination was essentially a
recapitalization of Dongtai.
On
November 11, 2005, CIWM entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with the Delaware corporation also called China Industrial
Waste Management, Inc. and the shareholders of that company. Pursuant to the
Merger Agreement, which closed on November 11, 2005, China Industrial Waste
Management, Inc. (the Delaware corporation) merged with and into CIWM’s wholly
owned subsidiary, DonTech, and CIWM issued 64,000 shares of its Series A
Convertible Preferred Stock to the former shareholders of the Delaware
corporation. Each share of Series A Convertible Preferred Stock was convertible
into 10,000 shares of common stock and was entitled to 10,000 votes on each
matter submitted to the stockholders. The holders of the Series A Convertible
Preferred Stock contractually agreed not to convert such shares until CIWM
increased its authorized number of shares of common stock.
Pursuant
to the Merger Agreement, after the merger, the Delaware corporation ceased
to
exist and DonTech was the surviving company. The merger of the Delaware
corporation into DonTech was accounted for as a reverse acquisition under the
purchase method of accounting since the shareholders of the Delaware corporation
obtained control of the Company by virtue of the merger. Accordingly, the merger
was recorded as a recapitalization of the Delaware corporation, with the
Delaware corporation being treated as the continuing entity. The financial
statements of the accounting acquiree (CIWM) are not significant.
Therefore, no pro forma financial information is submitted.
On
May
12, 2006, the Company changed its name to “China Industrial Waste Management,
Inc.” and began trading under a new trading symbol (CIWT). In addition, the
Company effected a 1:100 reverse split of its outstanding common shares.
On
May
15, 2006, the Company issued to 10 stockholders an aggregate of 6,400,000
additional shares of the Company's Common Stock as an equitable adjustment
of
the number of shares which the Company had agreed to issue to such persons
pursuant to the Merger Agreement entered into and consummated on November 11,
2005. Since the issuance of additional 6,400,000 shares was caused by the merger
consummated on November 11, 2005, such shares have been assumed to be
outstanding in 2005 in the calculation of EPS.
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. (formerly, Dalian Acquisition Corp.),
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 have been 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
December 31, 2006 and 2005, 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 deposits, 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 December 31, 2006 is
$20,550.
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. 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.
The
Company is in the process of expanding and advancing its facilities, creating
a
need to increase the advanced payment for the purchase of machinery and the
building of a new plant, resulting in an advance to suppliers balance of
$374,046 at December 31, 2006.
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 added to the cost of revenues in 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 December 31
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation liability for landfills
|
|
$
|
381,873
|
|
|
344,691
|
|
Long-term
investment
Long-term
investments are recorded under equity method.
As
of
December 31, 2006, Dongtai has made investment in a company engaged in the
same
industry as Dongtai - Dongtai Water Recycling. The $322,717 equity investment
in
Dongtai Water Recycling has been recorded under equity method.
Dongtai
Water Recycling Company was incorporated on July, 2006. Dongtai acquired 18%
of
the equity in such company. Dongtai Water Recycling is a Build-Operate-Transfer
(BOT) project, designed to process polluted water generated by the city of
Dalian. Though the Company acquired less than 20% equity interest of Dongtai
Water Recycling Company as of December 31, 2006, the other 82% equity interest
of the invested company was held as of December 31, 2006 by Lida Environment
Engineering Company, which is controlled by Mr. Dong Jinqing, CEO and CFO of
the
Company. In accordance with US GAAP, the equity method of accounting for the
acquisition has been applied.
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 and is included in the “(Income)
expense from divestitures, asset impairments and unusual items” line item in our
Consolidated Statement of Operations.
Intangible
assets
Intangible
assets consist of “Rights to use land and build a plant” for fifty years. The
intangible assets are amortized 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 December 31, 2006 were $1,524,319. Such assets consist
entirely of a right to use land of $1,570,621 less accumulated amortization
of
$46,302.
Amortization
expense for the Company’s intangible assets for the year ended December 31, 2006
and 2005 totaled $ 28,383 and $ 29,220, respectively.
Minority
interest
Minority
interest represents the minority owners’ 10% equity interest in Dalian 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 two sources, namely, service fees we charge for
waste collection, transfer, disposal and recycling services and our sale of
recycled commodities.
1.
Recognition of service fees as revenue
Before
waste treatment services are rendered, the Company will enter into agreements
with its customers which explicitly express the scope of the Company’s services,
the types of wastes to be treated, the method of treatment to be applied, the
Company’s fees rates and form of settlement and other rights and obligations of
the parties.
Once
an
agreement with a customer takes effect, the Company conducts the treatment
activities described in the agreement, such as collection and transfer, which
activities are observed and confirmed by the Company’s client. Both parties will
sign a note, acknowledging that the wastes have been delivered to the Company’s
working site for further treatment.
The
fees
charged by the Company for its services are then determined by multiplying
the
fee rate defined in the agreement by the customer confirmed waste amount
delivered to the Company’s plant for treatment. The bill for the services will
be sent to the client, indicating the fees due. After sending out the invoice,
the company will recognize the fees as revenue.
Deferred
sales refer to those for which fees have been collected, but for which the
related treatment and disposal services have not been completely performed.
The
Company uses the fee rate and the amount of waste not treated to calculate
the
deferred sales. At December 31, 2006 deferred sales amounted to
$455,548.
2.
Recognition of revenues from reclaimed products
The
Company also enters into agreements with customers who need reclaimed products
that the Company generates from the waste treatment process. The parties usually
settle the price in the agreement and make adjustments in case the market price
of the reclaimed product fluctuates significantly between contract signing
and
delivery. After the products are delivered to customers, the Company issues
an
invoice to purchasers and identifies all contents and details concerning sales.
The buyer then either can pay the full invoiced amount or promise to make
payment over time. In the latter case, the Company also recognizes upon
invoicing the amount due as revenues of reclaimed product.
Costs
of revenue
The
costs
of revenue fall into two categories -costs of service fees charged for services
and costs of revenue from reclaimed products.
The
costs
of service fees refer to the production expenses incurred by the Company’s
departments providing waste disposal services, which include the waste
disassembly department, waste solvent recovery department, industrial waste
water treatment department, waste storage, sorting and burning department,
dangerous waste filling and burying department and common industrial waste
filling and burying department. The costs include the direct labor cost, direct
material and depreciation expenses and other miscellaneous expenses incurred
by
the foregoing departments.
The
Company’s reclaimed products can be divided into main two categories - products
reclaimed by sophisticated production means and at great expense in terms of
labor, energy , depreciation; and products reclaimed by simpler means such
as
manual sorting. For the former, the costs of revenue from reclaimed products
includes the copper sulfate and alloy cost sold, which consist of the purchase
cost of wastes as raw materials, as well as the direct labor cost, depreciation
expenses, and other expenses incurred by the Company. For the latter, the costs
of revenue includes the cost of units recycled and sold, consisting of the
purchase cost of wastes used for recycling.
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 year ended
December 31, 2006 and 2005 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.
4.
Inventory
Our
inventory at December 31 consists of raw materials and recycled commodities
as
follows:
|
|
|
2006
|
|
2005
|
|
|
Raw
materials
|
|
|
221,225
|
|
|
261,092
|
|
|
Recycled
commodities
|
|
|
381,719
|
|
|
148,992
|
|
|
|
|
|
602,944
|
|
|
410,084
|
|
5
.
Property and equipment
Property
and equipment at December 31 consisted of the following:
|
|
|
2006
|
|
2005
|
|
|
Land
and building
|
|
$
|
2,157,521
|
|
|
2,087,122
|
|
|
Machinery
equipment
|
|
|
1,129,566
|
|
|
824,153
|
|
|
Office
equipment
|
|
|
352,346
|
|
|
354,179
|
|
|
Vehicles
|
|
|
550,084
|
|
|
318,778
|
|
|
|
|
|
4,189,517
|
|
|
3,584,232
|
|
|
Less:
Accumulated depreciation
|
|
|
(1,502,899
|
)
|
|
(1,162,326
|
)
|
|
|
|
$
|
2,686,618
|
|
|
2,421,906
|
|
6.
Accumulated Other Comprehensive Income
The
components of accumulated other comprehensive income were as follows:
|
|
|
December
31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cumulative
translation adjustment of foreign currency statements
|
|
$
|
269,296
|
|
$
|
157,196
|
|
7.
Shareholders’ equity
On
November 11, 2005, the Company entered into and consummated an Agreement
and
Plan of Merger (the “Merger Agreement”) with China Industrial Waste Management
Ltd., a Delaware corporation (“Delaware”), the stockholders of Delaware, and
Dalian Acquisition Corp., a Delaware corporation wholly-owned by the Company.
In
the merger, the stockholders of Delaware received 64,000 shares of the Company’s
newly-designated Series A Convertible Preferred Stock (the “Series A Stock”) in
exchange for the outstanding shares of Delaware. Each share of Series A Stock
was convertible into 10,000 shares of Common Stock. Since the Company did
not
have sufficient authorized but unissued shares of Common Stock to effect
a full
conversion of the Series A Stock at the effective time of the merger, the
holders of the Series A Stock have agreed that they would not convert their
shares of Series A Stock until the Company had sufficient available shares
for a
full conversion.
On
March
9, 2006, the Board of Directors of the Company determined that it had made
an
error at a previous meeting held on June 13, 2005 in cancelling certain
outstanding shares of common stock. To correct such error a total 6,983,400
pre-split shares of common stock were reinstated, as a result of which the
total common shares outstanding increased from 7,773,841 pre-split to 14,757,241
pre-split.
On
May
12, 2006, two amendments to the Company's Articles of Incorporation became
effective. The amendments changed the name of the Company to China Industrial
Waste Management, Inc. and effected a 1 for 100 reverse split of the Company's
Common Stock. In the statement of shareholders’ equity, the reverse split has
been treated as it happened at the beginning of 2005.
On
May
15, 2006, the Company issued to 10 stockholders an aggregate of 6,400,000
additional shares of the Company's Common Stock as an equitable adjustment
of
the number of shares which the Company had agreed to issue to such persons
pursuant to the Merger Agreement entered into on November 11, 2005. As this
issuance is part of the 2005 recapitalization transaction, such shares are
deemed to be outstanding from the beginning of 2005.
On
June
8, 2006, we issued an aggregate of 80,000 shares of our Common Stock to two
consultants pursuant to a Consulting Agreement. Management valued the stock
issued at $1.00 per share based on the value of the services to be performed
by
the consultants under consulting agreement rather than the quoted price of
our
common stock during a period with little or no trading activity. The Company
recorded a contra equity for the value of the consulting services to be received
and is amortizing that value as an expense over the five year requisite service
period.
On
August
22, 2006, the Company issued 96,566 shares to Jie Sun and Yunzhong Wu,
respectively, as compensation for their services pursuant to the Merger
Agreement consummated on November 11, 2005. This was accounted for as a cost
of
issuance. Since the issuance was connected with the reverse merger, the
financial effect of the issuance had been reflected in the financial statements
for the fiscal year ended December 31, 2005.
8.
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.
|
9.
Earnings Per Share
Basic
earnings per common share (“EPS”) are calculated by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
EPS is calculated by adjusting the weighted average outstanding shares, assuming
conversion of all potentially dilutive securities, such as stock options and
warrants, using the treasury stock method. The numerators and denominators
used
in the computations of basic and diluted EPS are presented in the following
table:
|
|
|
Years
Ended December 31,
|
|
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
|
|
Income
available to common stockholders
|
|
$
|
2,441,428
|
|
$
|
1,493,540
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income
|
|
$
|
2,441,428
|
|
$
|
1,493,540
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average basic common shares outstanding
|
|
|
13,181,391
|
|
|
12,949,660
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share
|
|
$
|
0.19
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings per share
|
|
$
|
0.19
|
|
$
|
0.12
|
|
As
stated
above, on May 15, 2006, the Company issued to 10 stockholders an aggregate
of
6,400,000 additional shares of the Company's Common Stock as an equitable
adjustment of the number of shares which the Company had agreed to issue to
such
persons pursuant to an Agreement and Plan of Merger entered into on November
11,
2005.
Since
the
issuance of additional 6,400,000 shares was caused by the Merger consummated
on
November 11, 2005, the issuance had been assumed outstanding in 2005 in the
calculation of EPS.
10.
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.
11.
Recently issued accounting pronouncements
In
February 2007, the FASB issued FASB No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities ("FASB 159"), which requires companies to
provide additional information that will help investors and other users of
financial statements to more easily understand the effect of the company's
choice to use fair value on its earnings. FASB 159 also requires entities to
display the fair value of those assets and liabilities for which they have
chosen to use fair value on the face of the balance sheet. FASB 159 is effective
for us beginning January 1, 2008. We do not expect FASB 159 to have a material
impact on our future results of operations or financial position.
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. We have not determined whether the adoption of
SFAS No. 157 will have a material impact on our consolidated financial
statements.
In
February, 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments”. SFAS No. 155 amends SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, and SFAS No. 140, “Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities”. SFAS No. 155, permits fair value re-measurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument. This statement is effective for all financial instruments acquired
or issued after the beginning of the Company’s first fiscal year that begins
after September 15, 2006. The Company expects that the Statement will have
no
material impact on its consolidated financial statements.
12.
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”) for landfills 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 and 2005, its consolidated statements of income for years ended December
31, 2006 as well as 2005 and its consolidated statement of cash flows for years
ended December 31, 2006 as well as 2005. 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
|
|
|
|
|
|
|
|
|
Asset
retirement obligation liability for landfills
|
|
|
-
|
|
|
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.
Balance
Sheet
|
|
|
Original
|
|
Restated
|
|
|
|
|
December
31,
|
|
|
ITEMS
|
|
2005
|
|
2005
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
2,944,179
|
|
$
|
2,944,179
|
|
|
Trade
accounts receivable
|
|
|
281,761
|
|
|
281,761
|
|
|
Other
receivables
|
|
|
115,417
|
|
|
115,417
|
|
|
Inventory
|
|
|
410,084
|
|
|
410,084
|
|
|
Advances
to suppliers
|
|
|
16,502
|
|
|
16,502
|
|
|
Prepaid
expenses and other assets
|
|
|
22,304
|
|
|
22,304
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,790,247
|
|
|
3,790,247
|
|
|
|
|
|
|
|
|
|
|
|
Net
property, plant and equipment
|
|
|
2,168,678
|
|
|
2,421,906
|
|
|
Construction
in progress
|
|
|
220,474
|
|
|
220,474
|
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,509,159
|
|
|
1,509,159
|
|
|
Related
party Receivable
|
|
|
281,851
|
|
|
281,851
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
7,970,409
|
|
$
|
8,223,637
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
108,213
|
|
$
|
108,213
|
|
|
Other
payable
|
|
|
183,934
|
|
|
183,934
|
|
|
Total
current liabilities
|
|
|
292,147
|
|
|
292,147
|
|
|
Long-term
debt
|
|
|
|
|
|
|
|
|
Asset
retirement obligation liability for landfills
|
|
|
-
|
|
|
344,691
|
|
|
Minority
interest in subsidiary
|
|
|
767,826
|
|
|
758,680
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Series
A preferred stock $.001 par value; 5,000,000 shares authorized, 64,000
shares issued and outstanding
|
|
|
64
|
|
|
64
|
|
|
Common
stock: par value $.001; 90,000,000 shares authorized; 340,843 shares
issued and outstanding
|
|
|
341
|
|
|
6,741
|
|
|
Additional
paid-in capital
|
|
|
1,956,117
|
|
|
1,949,717
|
|
|
Other
comprehensive income
|
|
|
158,953
|
|
|
112,283
|
|
|
Retained
earnings
|
|
|
4,794,961
|
|
|
4,759,314
|
|
|
Total
stockholders' equity
|
|
|
6,910,436
|
|
|
6,828,119
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
7,970,409
|
|
$
|
8,223,637
|
|
As
a
result of the restatement on the balance sheet, total assets as of December
31,
2005 increased from $7,970,409, as originally reported, to $8,223,637, an
increase of $253,228, the increase in total assets was mostly a result of a
$253,228 increase in net property, plant and equipment resulting from the change
in accounting for ARO liabilities pertaining to the Company’s landfill; total
liabilities as of December 31, 2005 increased from $292,147, as originally
reported, to $636,838, an increase of $344,691, arising from the change in
accounting for ARO liabilities pertaining to the Company’s landfill;
stockholders' equity as of December 31, 2005 decreased from $6,910,436, as
originally reported, to $6,828,119, a decrease of $82,317; and minority interest
in subsidiary decreased by $9,146, from $767,826 to $758,680.
Income
Statements
|
|
|
Original
|
|
Restated
|
|
|
|
|
For Year
Ended December 31,
|
|
|
ITEMS
|
|
2006
|
|
2006
|
|
|
Revenue
|
|
$
|
6,383,233
|
|
$
|
6,383,233
|
|
|
Costs
of revenue (including depreciation)
|
|
|
1,782,397
|
|
|
1,822,657
|
|
|
Gross
profit
|
|
|
4,600,836
|
|
|
4,560,576
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
599,691
|
|
|
599,691
|
|
|
General
and administrative expenses
|
|
|
1,358,038
|
|
|
1,469,588
|
|
|
Total
operating expenses
|
|
|
1,957,729
|
|
|
2,069,279
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
2,643,107
|
|
|
2,491,297
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
25,319
|
|
|
25,397
|
|
|
Other
income
|
|
|
206,031
|
|
|
206,030
|
|
|
Other
expense
|
|
|
(11,803
|
)
|
|
(11,803
|
)
|
|
Total
other income (expense)
|
|
|
219,547
|
|
|
219,624
|
|
|
Net
income before minority interest and income tax
|
|
|
2,862,654
|
|
|
2,710,921
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
626
|
|
|
626
|
|
|
|
|
|
|
|
|
|
|
|
Net
income after income tax
|
|
|
2,862,028
|
|
|
2,710,295
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
319,091
|
|
|
268,867
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,542,937
|
|
$
|
2,441,428
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
319,547
|
|
|
269,296
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
2,862,484
|
|
$
|
2,710,724
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average
shares outstanding
|
|
|
13,181,391
|
|
|
13,181,391
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
|
0.19
|
|
$
|
0.19
|
|
As
a
result of the restatement, net income for years ended December 31, 2006
decreased from $2,542,937, as originally reported, to $2,441,428, a decrease
of
$101,509, comprised of a $40,260 increase in cost of goods, a $111,550 increase
in general and administrative expenses, and a $50,224 decrease in minority
interest.
Income
Statement
|
|
|
Original
|
|
Restated
|
|
|
|
|
For Year
Ended December 31,
|
|
|
ITEMS
|
|
2005
|
|
2005
|
|
|
Revenue
|
|
$
|
4,869,185
|
|
$
|
4,869,185
|
|
|
Costs
of revenue(including depreciation)
|
|
|
1,557,106
|
|
|
1,588,932
|
|
|
Gross
profit
|
|
|
3,312,079
|
|
|
3,280,253
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
197,355
|
|
|
197,355
|
|
|
General
and administrative expenses
|
|
|
1,695,685
|
|
|
1,695,685
|
|
|
Total
operating expenses
|
|
|
1,893,040
|
|
|
1,893,040
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,419,039
|
|
|
1,387,213
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
Investment
income
|
|
|
-
|
|
|
-
|
|
|
Interest
income
|
|
|
26,728
|
|
|
26,728
|
|
|
Other
income
|
|
|
564,293
|
|
|
564,293
|
|
|
Other
expense
|
|
|
(14,764
|
)
|
|
(14,764
|
)
|
|
Total
other income (expense)
|
|
|
576,257
|
|
|
576,257
|
|
|
Net
income before minority interest and income tax
|
|
|
1,995,296
|
|
|
1,963,470
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
385,382
|
|
|
385,382
|
|
|
|
|
|
|
|
|
|
|
|
Net
income after income tax
|
|
|
1,609,914
|
|
|
1,578,088
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
87,731
|
|
|
84,548
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,522,183
|
|
$
|
1,493,540
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
158,953
|
|
|
157,196
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
1,681,136
|
|
$
|
1,650,736
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
|
|
12,949,660
|
|
|
12,949,660
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
$
|
0.12
|
|
$
|
0.12
|
|
As
a
result of the restatement, net income for the year ended December 31, 2005
decreased from $1,522,183, as originally reported, to $1,493,540, a decrease
of
$28,643, comprised of a $31,826 increase in cost of goods and a $3,183 decrease
in minority interest.
Statement
of Cash Flows
|
|
|
Original
|
|
Restated
|
|
|
|
|
For Year
Ended
December
31,
|
|
|
ITEMS
|
|
2006
|
|
2006
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,542,937
|
|
$
|
2,441,428
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
319,091
|
|
|
268,867
|
|
|
Depreciation
and amortization
|
|
|
281,474
|
|
|
331,539
|
|
|
Bad
debt allowance
|
|
|
-
|
|
|
5,146
|
|
|
Accretion
expenses
|
|
|
-
|
|
|
25,226
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(104,070
|
)
|
|
132,087
|
|
|
Inventory
|
|
|
(175,811
|
)
|
|
(176,167
|
)
|
|
Other
receivables
|
|
|
(145,270
|
)
|
|
81,908
|
|
|
Advance
to suppliers
|
|
|
(125,575
|
)
|
|
(8,883
|
)
|
|
Prepaid
expense
|
|
|
48,006
|
|
|
2,519
|
|
|
Accounts
payable and other payables
|
|
|
-
|
|
|
73,083
|
|
|
Deferred
sales
|
|
|
448,043
|
|
|
463,551
|
|
|
Tax
payable
|
|
|
(19,691
|
)
|
|
6,242
|
|
|
Net
cash provided by operating activities
|
|
|
3,446,657
|
|
|
3,646,546
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Investment
in subsidiary
|
|
|
(302,836
|
)
|
|
(317,400
|
)
|
|
Purchase
of property and equipment
|
|
|
(580,224
|
)
|
|
(477,351
|
)
|
|
Construction
contracts
|
|
|
-
|
|
|
(317,749
|
)
|
|
Due
from related party
|
|
|
-
|
|
|
35,267
|
|
|
Investment
in subsidiary by minority holder
|
|
|
-
|
|
|
25,191
|
|
|
Net
cash used in investing activities
|
|
|
(883,060
|
)
|
|
(1,052,042
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
152,922
|
|
|
175,242
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
2,716,519
|
|
|
2,769,746
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,944,179
|
|
|
2,944,179
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
5,660,698
|
|
$
|
5,713,925
|
|
As
a
result of the restatement, net cash provided by operating activities for the
year ended December 31, 2006 decreased by $199,889 from $3,446,657 as originally
reported, to $3,646,546; and net cash used in investing activities decreased
by
$168,982 from $883,060, as originally reported, to $1,052,042.
Statement
of Cash Flows
|
|
|
Original
|
|
Restated
|
|
|
|
|
For Year
Ended
December
31,
|
|
|
ITEMS
|
|
2005
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
1,522,183
|
|
$
|
1,493,540
|
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
87,731
|
|
|
84,548
|
|
|
Depreciation
and amortization
|
|
|
214,200
|
|
|
297,262
|
|
|
Bad
debt allowance
|
|
|
-
|
|
|
503
|
|
|
Accretion
expenses
|
|
|
-
|
|
|
19,779
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(219,655
|
)
|
|
(167,788
|
)
|
|
Inventory
|
|
|
(524,537
|
)
|
|
(400,678
|
)
|
|
Other
receivables
|
|
|
(269,175
|
)
|
|
22,120
|
|
|
Advance
to suppliers
|
|
|
152,699
|
|
|
115,872
|
|
|
Prepaid
expense
|
|
|
(11,509
|
)
|
|
(21,978
|
)
|
|
Accounts
payable and other payables
|
|
|
(277,122
|
)
|
|
212,668
|
|
|
Tax
payable
|
|
|
11,923
|
|
|
(145,057
|
)
|
|
Net
cash provided by operating activities
|
|
|
968,589
|
|
|
1,510,791
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
|
Decrease
in long-term investment
|
|
|
12,391
|
|
|
-
|
|
|
Purchase
of property and equipment
|
|
|
(146,833
|
)
|
|
(130,386
|
)
|
|
Construction
contracts
|
|
|
-
|
|
|
(54,335
|
)
|
|
Due
from related party
|
|
|
-
|
|
|
71,674
|
|
|
Proceeds
on sale of equity investments
|
|
|
-
|
|
|
167,888
|
|
|
Net
cash (used in) provided by investing activities
|
|
|
(134,442
|
)
|
|
54,841
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
|
Dividends
distributed to shareholders
|
|
|
(205,300
|
)
|
|
(724,638
|
)
|
|
Net
cash used in financing activities
|
|
|
(205,300
|
)
|
|
(724,638
|
)
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
(57,053
|
)
|
|
38,620
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
571,794
|
|
|
879,614
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
2,372,385
|
|
|
2,064,565
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
2,944,179
|
|
$
|
2,944,179
|
|
As
a
result of the restatement, net cash provided by operating activities for the
year ended December 31, 2005 increased by $542,202 from $968,589 as originally
reported, to $1,510,791; and net cash used in investing activities decreased
by
$189,283 from $134,442, as originally reported, to a net cash provided by
investing activities $54,841; and net cash used in financing activities
increased by $519,338 from $205,300, as originally reported, to
$724,638.
13.
Related parties
Dalian
Bofa Chemical Material Company (“Bofa”), a company controlled by the Company’s
majority shareholder, sells part of the products recycled by Dongtai, the
subsidiary of the Company. Our total sales to Bofa were $1,235,825 and $668,728
respectively, for the years ended December 31, 2006 and 2005.
14.
Contingent liabilities
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as described below,
we are currently not aware of any such legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, financial condition or operating results.
On
September 14, 2006, the Alberta Securities Commission, Canada, citing Goldtech
Mining Corporation, 2006 ABASC 1690, under Securities Act, R. S. A. 2000, c.
S-4
(the "Alberta Act"), provided notice to the Company, Glen Lochton Management
Inc., and certain other individuals (collectively, "Respondents") that a hearing
will be held on certain allegations that Respondents breached subsection 75(1)
and 110(1) of the Alberta Act by trading and distributing securities of the
Company in Alberta without registration or a prospectus or had appropriate
exemption from the prospectus requirement, wherein such failure was contrary
to
the public interest. On October 27, 2006, the hearing was scheduled for March,
2007. On February 6, 2007 the ASC discontinued without prejudice the action
against the Company and will proceed against the other Respondents.
On
August
9, 2006, the Company was served with a Summons and Complaint, in an action
filed
in the Superior Court of Washington, Kings County, entitled Don Moroz and Glen
Lochton Management Inc., V. Tolan Furusho, Columbia State Bank, Goldtech Mining
Corporation, a Nevada Corporation, Goldtech Mining Corporation, a Washington
corporation, Tracy Kroeker, Ralph Jordan, Jack Laskin, Nancy Egan, Richard
Smith, and Beverlee Claydon AKA Beverlee Kamerling. The plaintiffs claim to
be
victims of a failed "pump and dump" penny stock scheme. The Company believes
that the complaint against the Company is without merit and filed an answer,
affirmative defenses and cross-claims on October 31, 2006. The case is
continuing with discovery. The Company is contesting this case
vigorously.
On
March
6, 2006, a lawsuit was filed against the Company entitled Tolan S. Furusho
V.
Goldtech Mining Corp., Case No.: 06-A-518343-B, in the District Court,
Clark County, Nevada. The plaintiff claims that he is the sole director of
the
Company, alleging that he was improperly removed as a director. The Company
filed an answer and affirmative defenses and believes that the complaint is
without merit. The case is continuing with discovery. The Company is contesting
this case vigorously.
On
October 14, 2004, a small group of shareholders commenced a derivative action
on
behalf of the Company, entitled Steward, Pearce, Vizzard, Furusho and Robertson
v. Kroeker, Jordan, Laskin, Egan, Smith, Bourgoin, Civil Action No. CV04-2130L,
in the United States District Court for the Western District
of Washington alleging conversion and breach of specific
duties against former directors. The Court dismissed the case with prejudice
against all defendants, except defendant Tracy Kroeker and without prejudice
against Ms. Kroeker.
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.
15.
Subsequent events
On
March
2, 2007, the Company purchased for $1,271,077, 49% of the equity of a newly
formed company named Dongtai Organic Waste Treatment Company (“Dongtai
Organic”). Dongtai Organic is a Build-Operate-Transfer (“BOT”) project, engaged
in municipal sludge treatment. Dongtai Organic will operate for the next 20
years. The fees for treating sludge will be paid by the local government at
a
predetermined price on a periodic basis. The investment in Dongtai Organic
will be accounted for using the equity method.
On
July
14, 2007, Liaoyang Dongtai was dissolved and liquidated. Liaoyang Dongtai was
incorporated on March 22, 2006. Dongtai had a 60% interest in this subsidiary.
Liaoyang Dongtai was located in Liaoyang, PRC and was engaged in the business
of
the collection, treatment, disposal and recycling of industrial
wastes.
On
July
16, 2007 Dongtai acquired an additional 62% of the equity of Dongtai
Water, which was accounted for reorganization of entities under common control.
Dongtai Water was incorporated in July 2006 and Dongtai acquired 18% of the
equity of such company in such month. Dongtai Water is a BOTproject,
designed to process polluted water generated by the city of Dalian.
In
August
2007, Dongtai acquired 70% of the equity of Zhuorui from a related company,
controlled by Mr. Dong Jinqing, the Chief Executive Officer and Chief Financial
Officer of the Company, at the price of RMB7 million. The acquisition was
accounted for as a reorganization of entities under common control. 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.
ITEM
13.
EXHIBITS
|
Number
|
|
Description
|
|
|
|
|
|
3.1
|
|
Articles
of
Incorporation of the Company (f/k/a Goldtech Mining Corporation) filed
November 12, 2003. Incorporated by reference to Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-QSB for the quarter ended September
30, 2003 (the “9/30/03 10-QSB”).
|
|
|
|
|
|
3.2
|
|
Articles
of Merger of Egan Systems, Inc. with and into the Company filed with
the
Secretary of State of Nevada. Incorporated by reference to Exhibit
2.2 to
the 9/30/03 10-QSB.
|
|
|
|
|
|
3.3
|
|
Certificate
of Amendment to Articles of Incorporation filed with the Nevada Secretary
of State on April 27, 2006. Incorporated by reference to Exhibit
3.2 to
the Company’s Quarterly report on Form 10-QSB for the quarter ended March
31, 2006.
|
|
|
|
|
|
3.4
|
|
By-laws
of the Company. Incorporated by reference to Exhibit 3.2 to the 9/30/03
10-QSB.
|
|
|
|
|
|
10.1
|
|
Agreement
and Plan of Merger, dated November 11, 2005, by and among the Company,
Dalian Acquisition Corp., China Industrial Waste Management Inc.,
and each
of the CIWM Shareholders. Incorporated by reference to Exhibit 10.1
to the
Current Report on Form 8-K filed by the Company on November 17,
2005.
|
|
|
|
|
|
21.1
|
|
List
of Subsidiaries. Incorporated by reference to Exhibit 21.1 to the
Annual
Report on Form 10-KSB for the fiscal year ended December 31, 2006
filed by
the Company on April 24, 2007.
|
|
|
|
|
|
31.1
|
|
Certification
of Jinqing Dong in his capacity as the CEO of the Company pursuant
to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002*
|
|
|
|
|
|
31.2
|
|
Certification
of Jinqing Dong in his capacity as the CFO of the Company pursuant
to
Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to
Section
302 of the Sarbanes-Oxley Act of 2002*
|
|
|
|
|
|
32.1
|
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002*
|
*
Filed
herewith.