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EX-31.2 - China Water Group, Inc.v177725_ex31-2.htm
EX-32.2 - China Water Group, Inc.v177725_ex32-2.htm
EX-31.1 - China Water Group, Inc.v177725_ex31-1.htm
EX-32.1 - China Water Group, Inc.v177725_ex32-1.htm

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q-A/1

(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2009

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from  —————  to ——————

Commission File Number 000-26175

China Water Group, Inc.

(Exact name of small business issuer as specified in its charter)

Nevada
 
88-0409151
(State or other jurisdiction of
 
(IRS Employer
incorporation or organization)
 
Identification No.)
 
Suite 7A01, Baicheng Building
584 Yingbin Road
Dashi, Panyu District
Guangzhou, Guangdong, China
(Address of principal executive offices)
86-20-3479 9708
(Issuer’s telephone number)

NA
(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ¨ NO x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer.  See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (Check one):

Large Accelerated Filer ¨   Accelerated Filer ¨     Non-Accelerated Filer¨       Smaller Reporting Company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO x

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 139,383,450 shares of common stock, par value $.0001 per share, as of June 8, 2009.

Transitional Small Business Disclosure Format (Check one). YES ¨ NO x

 
 

 

PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.

CHINA WATER GROUP, INC.

CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2009 AND 2008

(UNAUDITED)
 


CHINA WATER GROUP, INC.
Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Table of Contents

   
Page
     
Consolidated Financial Statements
   
     
Report of Independent Registered Public Accounting Firm
 
1
     
Consolidated Balance Sheets
 
2
     
Consolidated Statements of Operations and Comprehensive Income
 
3
     
Consolidated Statements of Cash Flows
 
4
     
Notes to Consolidated Financial Statements
 
5
 


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
China Water Group, Inc.

We have reviewed the accompanying consolidated balance sheet of China Water Group, Inc. and subsidiaries (the “Company”) as of March 31, 2009, and the related consolidated statements of operations and comprehensive income, and cash flows for the three months ended March 31, 2009 and 2008. These consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of China Water Group, Inc. as of December 31, 2008, and the related consolidated statements of income, retained earnings and comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated July 6, 2009, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2008, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
Parsippany, New Jersey
August 10, 2009
(Except for Note 4, 6, 7, 8, 10, 11, 12, 14,
as to which the date is February 15, 2010)
 
1

 
CHINA WATER GROUP, INC.
 
Consolidated Balance Sheets
   
March 31,
   
December 31,
 
    
2009
   
2008
 
    
(Unaudited)
       
    
(Restated)
   
(Restated)
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 40,679     $ 8,579  
Accounts receivable
    23,336       18,172  
Prepayments, deposits and other receivables
    52,673       41,283  
Inventory
    370,804       393,178  
Loans to unrelated party
    645,230       -  
Total current assets
    1,132,722       461,212  
                 
Property, plant and equipment, net
    866,335       874,576  
Construction in progress
    8,258       8,248  
Intangible assets
    135,095       135,649  
Goodwill
    13,115,254       13,106,263  
Assets of discontinued division
    -       10,158,905  
                 
Total assets
  $ 15,257,664     $ 24,744,853  
                 
Liabilities
               
Current liabilities:
               
Warrant liability
  $ 36,610     $ 36,610  
Accounts payable
    193,510       187,033  
Accrued expenses
    1,825,635       1,822,041  
Due to directors
    168,403       251,554  
Due to related companies
    3,189,932       3,169,152  
Due to affiliated companies
    -       1,758,281  
Income tax payable
    172       162  
Total current liabilities
    5,414,262       7,224,833  
                 
Long-term liabilities:
               
Other payables for acquisition of a subsidiary
    5,950,000       5,950,000  
Total long-term liabilities
    5,950,000       5,950,000  
                 
Liabilities of discontinued division
    -       7,386,647  
                 
Total liabilities
    11,364,262       20,561,480  
                 
Equity
               
Stockholders' equity:
               
Preferred stock, $0.001 par value, 50,000,000 authorized shares,
               
no shares issued and outstanding
    -       -  
Common stock, $0.001 par value, 200,000,000 shares authorized;
               
139,383,450 shares issued and outstanding
    139,383       139,383  
Additional paid-in capital
    6,131,532       6,131,532  
Retained earnings
    (3,508,191 )     (3,373,545 )
Accumulated other comprehensive income
    1,130,678       1,286,003  
Total stockholders' equity
    3,893,402       4,183,373  
                 
Noncontrolling interest
    -       -  
                 
Total equity
    3,893,402       4,183,373  
                 
Total liabilities and equity
  $ 15,257,664     $ 24,744,853  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
2


CHINA WATER GROUP, INC.
Consolidated Statements of Operations and Comprehensive Income
(Unaudited)
   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(Restated)
   
(Restated)
 
Revenue
           
Revenue from BOT wastewater treatment services
  $ -     $ -  
Revenue from sales of bottled water
    26,064       47,723  
                 
Total revenue
    26,064       47,723  
                 
Cost of revenue
               
Cost of revenue for BOT wastewater treatment services
    -       -  
Cost of revenue from sale of bottled water
    2,654       8,966  
Depreciation and amortization
    10,413       9,379  
Sales tax
    303       19  
                 
Total cost of revenue
    13,370       18,364  
                 
Gross profit
    12,694       29,359  
                 
Operating expenses
               
Selling and distribution expenses
    (7,297 )     (205,235 )
General and administrative expenses
    (129,685 )     (113,498 )
                 
Total operating expenses
    (136,982 )     (318,733 )
                 
Loss from operations
    (124,288 )     (289,374 )
                 
Other income (expense)
               
Other expense
    (10,188 )     (613 )
Interest expense
    -       (80 )
Penalty for late effectiveness of registration statement
    -       (22,688 )
Gain on financial instruments
    -       518,542  
                 
Total other income
    (10,188 )     495,161  
                 
Income (loss) from continuing operations before income tax
    (134,476 )     205,787  
                 
Provision for income tax
    (170 )     (61 )
                 
Income (loss) from continuing operations
    (134,646 )     205,726  
                 
Noncontrolling interest
    -       -  
                 
Discontinued operations:
               
Income from discontinued operations of Evergreen Asset Group
    -       94,518  
Income tax
    -       (6,626 )
Income from discontinued operations
    -       87,892  
                 
Net income (loss)
    (134,646 )     293,618  
                 
Other comprehensive income (loss)
               
Foreign currency translation adjustment
    (155,325 )     307,189  
                 
Comprehensive income (loss)
  $ (289,971 )   $ 600,807  
                 
Basic earnings per share
  $ (0.00 )   $ 0.00  
Diluted earnings per share
  $ (0.00 )   $ 0.00  
                 
Weighted average number of common shares outstanding
               
Basic and Diluted
    139,383,450       139,383,450  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
3

 
CHINA WATER GROUP, INC.
 
Consolidated Statements of Cash Flows
(Unaudited)
   
Three Months Ended March 31,
 
   
2009
   
2008
 
   
(Restated)
   
(Restated)
 
Cash flows from operating activities
           
Net  income
  $ (134,646 )   $ 293,618  
Adjustments to reconcile net income to net cash provided by (used in)
               
operating activities :
               
Depreciation and amortization
    10,413       9,379  
Gain on financial instruments
    -       (518,542 )
Noncontrolling interest
    -       -  
                 
Changes in operating assets and liabilities :
               
Accounts receivable
    (5,141 )     (20,522 )
Prepayment, deposits and other receivables
    (11,337 )     6,172,240  
Inventory
    22,865       (514,210 )
Current assets of discontinued division
    5,216,856       4,519,371  
Accounts payable
    6,241       186,856  
Accruals and other liabilities
    2,980       442,115  
Current liabilities of discontinued division
    (7,394,868 )     (11,028,127 )
Total adjustments
    (2,151,991 )     (751,440 )
                 
Net cash provided by operating activities
    (2,286,637 )     (457,822 )
                 
Cash flows from  investing activities
               
Due from related companies
    -       39,281  
Loans to unrelated party
    (645,138 )     -  
Non-current assets of discontinued division
    4,953,355       3,207,465  
Acquisition of property, plant and equipment
    (349 )     (861,251 )
Acquisition of intangible assets
    -       (135,231 )
Acquisition of goodwill
    -       (12,935,056 )
                 
Net cash used in investing activities
    4,307,868       (10,684,792 )
                 
Cash flows from financing activities
               
Due to related companies
    16,797       3,245,836  
Due to directors
    (83,455 )     27,243  
Due to affiliated companies
    (1,760,238 )     1,637,729  
Other payables for acquisition of a subsidiary
    -       5,950,000  
                 
Net cash provided by financing activities
    (1,826,896 )     10,860,808  
                 
Effect of foreign currency translation on cash and cash equivalents
    (162,235 )     307,191  
                 
Net increase (decrease) in cash and cash equivalents
    32,100       25,385  
                 
Cash and cash equivalents, beginning of period
    8,579       -  
                 
Cash and cash equivalents, end of period
  $ 40,679     $ 25,385  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
4


CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 1 – Basis Of Presentation

In these notes, the terms “CHWG,” “we,” “us,” and “our” mean China Water Group, Inc. (formerly China Evergreen Environmental Corporation) and subsidiary companies.

The condensed consolidated financial statements of CHWG included herein have been prepared by CHWG, and are unaudited, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with US generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These condensed consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in CHWG's Form 10-K for the year ended December 31, 2008.

The accompanying unaudited quarterly consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of CHWG for the periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other quarterly period or for the fiscal year taken as a whole. Factors that affect the comparability of financial data from year to year and for comparable quarterly periods include non-recurring expenses associated with CHWG's costs incurred to reorganize CHWG, raise capital, and issue stock options and awards. Certain financial information that is not required for interim financial reporting purposes has been omitted.

Note 2 – Organization and Description of Business

We were organized as a Nevada corporation on September 10, 1996 under the name “Discovery Investments, Inc.” and were previously engaged in the business of seeking, investing and, acquiring an interest in various business opportunities.

On October 15, 2004, we were the subject of a reverse acquisition by Evergreen Asset Group Limited, an International Business Company organized under the laws of the British Virgin Islands (“Evergreen”), pursuant to which we acquired 100% of the outstanding shares of Evergreen capital stock in exchange for a controlling interest in our common stock. Pursuant to a securities purchase agreement dated September 9, 2004, as amended, we issued 83,500,000 shares of our common stock (representing 83.5% of our outstanding capital stock) in exchange for all of the issued and outstanding shares of Evergreen capital stock transferred to us by the Evergreen shareholders at the closing (the “Reverse Acquisition”). Following the close of the Reverse Acquisition, we changed our corporate name from “Discovery Investments, Inc.” to “China Evergreen Environmental Corporation.” On November 7, 2006, we changed our name to “China Water Group, Inc.” to reflect our focus on China’s water treatment and supply needs.

As a result of the Reverse Acquisition, Evergreen became our wholly owned subsidiary. Evergreen has three majority owned subsidiaries: Guang Dong Xin Xing Mei Biology Company Limited (“Xinxingmei”), and Hai Yang City Sheng Shi Environment Protection Company Limited (“Haiyang”). Through Xinxingmei and Haiyang, we provide wastewater turn-key engineering, equipment and chemical trading. Evergreen currently holds 90% of Xinxingmei. Xinxingmei provides turn-key wastewater treatment engineering design and contracting. Xinxingmei also holds 90% and 35% respectively in the equity interest of the following two water treatment facilities operated through build, operate and transfer (“BOT”) arrangements with the PRC government: (i) Tian Jin Shi Sheng Water Treatment Company Limited (“Tian Jin”), which commissioned water treatment in November 2003 and has a daily treatment capacity of approximately 10,000 cubic meters and (ii) Xin Le Sheng Mei Water Purifying Company Limited (“Xin Le”), which also commissioned water treatment in November 2003 and has a daily treatment capacity of 40,000 cubic meters. Xinxingmei was retained to manage both Tian Jin and Xin Le.
 
5

 
CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)
 
Note 2 –Organization and Description of Business (continued)

The principal activities of the Group are the research and development of waste water, garbage treatment and aqueous purifying techniques, investment and construction of waste water treatment plant and sales of environment protection related products.

On January 8, 2008, the Chinese government approved the sale of Evergreen’s 58% of the total equity interest in Guang Dong Xin Xing Mei Biology Company Limited (“Xinxingmei”) to Wenming Pu at a total consideration of RMB 7,308,600. After completing the transfer formalities, Evergreen possesses 32% of total equity of Xinxingmei, instead of the previous 90% interest.

On January 23, 2008, the Chinese government approved China Water Group Inc’s. acquisition of 90% equity interest in Guangzhou Xinchen Water Company Limited from Fortune Luck Global International Limited. Guangzhou Xinchen Water Company Limited owns 100% equity interest of Aba Xinchen Dagu Glacier Spring Co., Limited. The acquisition was completed for a consideration of $13.45 million, of which $7.5 million was paid in cash, and the remaining $5.95 million will be paid in the future.

On February 26, 2009, Guangzhou Xinchen Water Company established a subsidiary, Chengdu Jiuqiannian Water Company, in the PRC as a wholly-owned limited liability company with registered capital of $500,000.

Note 3 – Summary of Significant Accounting Policies

Revenue recognition

We recognize revenue using various revenue recognition policies based on the nature of the sale and the terms of the contract.

Revenues from turn-key engineering projects are recognized on the percentage-of-completion method for individual contracts. We follow the guidance of the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, for our accounting policy relating to the use of the percentage-of-completion method, estimated costs and claim recognition for construction contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs to the extent we believe related collection is probable. The use of the percentage-of-completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price agreements is of a relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. From 5% to 10% of the total contract value will be treated as retention monies withheld to ensure performance of the contract during the warranty period of up to 12 months, as stipulated in both long-term and short-term fixed-price contracts.

Revenues arising from wastewater treatment are recognized based on wastewater treated as recorded daily by meters read at rates, in RMB/ton, as prescribed under the BOT agreements in accordance with SEC Staff Accounting Bulletin (“SAB”) Topic 13, Revenue Recognition. We meet the following four criteria for revenue recognition outlined in SAB Topic 13:
 
 
1.
There is sufficient evidence to support that sales arrangements exist;
 
 
2.
The price to the buyer is fixed through signed contracts;
 
 
3.
Meter readings illustrate that delivery of treated wastewater has occurred; and
 
 
4.
Collectibility is reasonably assured through one or more of the following: due diligence prior to contract signing; historical payment practices; or required upfront payments.
 
6

 
CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)
 
Note 3 – Summary of Significant Accounting Policies (continued)

Revenues from the sale of environment protection-related products and provision of technical services are recognized when goods are delivered or when services are performed. The contractual terms of the purchase agreements or consultancy agreements dictates the recognition of revenues. We recognize revenue in accordance with SAB No. 104. Accordingly, four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) is based on management’s judgments regarding the fixed nature of the selling prices of the products or services delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and our customer jointly determine that the product has been delivered or no refund will be required.

Interim Financial Statements

These interim financial statements should be read in conjunction with the audited financial statements for the years ended December 31, 2008 and 2007, as not all disclosures required by generally accepted accounting principles for annual financial statements are presented. The interim financial statements follow the same accounting policies and methods of computations as the audited financial statements for the years ended December 31, 2008 and 2007.

Foreign Currency

The Company uses the United States dollars (“US Dollar” or “US$” or “$”) for financial reporting purposes. The Company maintains the books and records in its functional currency, Chinese Renminbi (“RMB”), being the primary currency of the economic environment in which its operations are conducted. In general, the Company translates its assets and liabilities into U.S. dollars using the applicable exchange rates prevailing at the balance sheet date, and the statement of income is translated at average exchange rates during the reporting period. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.

The exchange rates used to translate amounts in RMB into U.S. Dollars for the purposes of preparing the condensed consolidated financial statements were as follows:

   
March 31, 2009
 
December 31, 2008
Balance sheet items, except for stockholders’
       
equity items
 
RMB 1: US$0.14650
 
RMB 1: US$0.14670
         
   
March 31, 2009
 
March 31, 2008
Amounts included in the statements of
       
income, and statements of cash flows for the
       
three months ended
 
RMB 1: US$0.14651
 
RMB 1: US$0.13977
         
Stockholders’ equity items
 
Historical rate
 
Historical rate

Impairment of assets

Our policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors we consider in this evaluation include current operating results, trends and anticipated undiscounted future cash flows that we expect to result from the use of the asset, or other measure of fair value, and whether such factors reflect that the value of the asset has been impaired.
 
7

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 3 – Summary of Significant Accounting Policies (continued)

Allowance for doubtful accounts

Our policy for bad debt is based on the evaluation of collectibility, and analysis of accounts receivable aging and on management's judgment. We do not require collateral or other security to support client receivables. We conduct periodic reviews of our clients' financial condition and customer payment practices to minimize collection risk on accounts receivable. This review is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current credit worthiness and the past collection history of each customer. During the first quarter of 2009, we made no allowances for doubtful accounts.

Financial instruments

The carrying amounts of all financial instruments approximate their fair value. The carrying amounts of cash, accounts receivable, related party receivables, unsecured loans, accounts payable and related party payables approximate their fair value due to the short-term nature of these items. The carrying amounts of borrowings approximate their fair value based on our expected borrowing rate for debt with similar remaining maturities and comparable risk.

Earnings per share

Basic earnings per share are computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year. Diluted earnings per share are computed by dividing the net income for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares (which includes incremental common shares issuable upon the exercise of stock options, unvested restricted common stock and shares that may be issued on a contingent basis) are included in diluted income per share to the extent such shares are dilutive. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings Per Share, we use income from continuing operations, net of income taxes, as the “control number” in determining whether common equivalent shares are dilutive or anti-dilutive in periods where discontinued operations are reported.

Recently issued accounting pronouncements

In April 2009, the FASB issued SFAS No. 164, “Not-for-Profit Entities: Mergers and Acquisitions—including an amendment of FASB Statement No. 142” (“SFAS 164”). SFAS 164 establishes principles and requirements for how a not-for-profit entity: (a)determines whether a combination is a merger or an acquisition; (b)applies the carryover method in accounting for a merger; (c)applies the acquisition method in accounting for an acquisition, including determining which of the combining entities is the acquirer; (d)determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of a merger or an acquisition. This Statement is effective for (a)mergers for which the merger date is on or after the beginning of an initial reporting period beginning on or after December 15, 2009; (b)acquisitions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2009.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued or are available to be issued. In accordance with this Statement, an entity should apply the requirements to interim or annual financial periods ending after June 15, 2009.

 
8

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 3 – Summary of Significant Accounting Policies (continued)

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 address (1) practices that have developed since the issuance of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, that are not consistent with the original intent and key requirements of that Statement and (2) concerns of financial statement users that many of the financial assets (and related obligations) that have been derecognized should continue to be reported in the financial statements of transferors. This Statement must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”). SFAS 167 address (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, as a result of the elimination of the qualifying special-purpose entity concept in FASB Statement No. 166, Accounting for Transfers of Financial Assets, and (2) constituent concerns about the application of certain key provisions of Interpretation 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. This Statement shall be effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter.

Reclassification

Certain amounts of December 31, 2008 and March 31, 2008 were reclassified for presentation purposes.

Note 4 – Earnings Per Share

 
(i)
The basic earnings per share are calculated using the net income and the weighted average number of shares outstanding during the year.

   
Three Months Ended March 31,
 
   
2009
   
2008
 
             
Net income
  $ (134,646 )   $ 293,618  
                 
Weighted average number of common shares outstanding
    139,383,450       139,383,450  
                 
Basic earnings per share
  $ (0.00 )   $ 0.00  

 
(ii)
The diluted earnings per share are calculated using the net income and the weighted average number of shares outstanding during the year together with incremental common shares issuable upon the exercise of all warrants issued.

   
Three Months Ended March 31,
 
   
2009
   
2008
 
             
Net income
  $ (134,646 )   $ 293,618  
                 
Weighted average number of common shares outstanding
    139,383,450       139,383,450  
                 
Diluted earnings per share
  $ (0.00 )   $ 0.00  

As the April Warrants and the September Warrants are anti-dilutive, they are being excluded from the calculation of diluted earnings per share.

 
9

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 5 – Inventory

Inventory at March 31, 2009 and December 31, 2008 consisted of the following:

   
March 31,
   
December 31,
 
   
2009
   
2008
 
             
Raw materials
  $ 1,798     $ 1,796  
Packaging supplies
    199,969       198,958  
Finished goods
    169,037       192,424  
                 
Total
  $ 370,804     $ 393,178  

Note 6 – Property, Plant And Equipment, Net

Property, plant and equipment, net at March 31, 2009 and December 31, 2008 consisted of the following:

   
March 31,
   
December 31,
 
   
2009
   
2008
 
             
Office equipment
  $ 11,783     $ 16,858  
Furniture and fixtures
    5,445       -  
Motor vehicles
    59,436       59,362  
Building and structure
    178,914       170,785  
Bottled water production equipment
    657,413       664,492  
                 
Total
    912,991       911,497  
                 
Less : Accumulated depreciation
    (46,656 )     (36,921 )
                 
Property, plant and equipment, net
  $ 866,335     $ 874,576  

Depreciation expenses for the three months ended March 31, 2009 and 2008 were $9,688 and $8,672, respectively.

Note 7 – Intangible Assets

Intangible assets at March 31, 2009 and December 31, 2008 consisted of the following:

   
March 31,
   
December 31,
 
   
2009
   
2008
 
             
Rights to use land
  $ 145,003     $ 144,821  
Less: accumulated amortization
    9,908       9,172  
                 
Total
  $ 135,095     $ 135,649  
                 
 
Amortization expenses for the three months ended March 31, 2009 and 2008 were $725 and $707, respectively.

 
10

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 8 - Goodwill

On January 23, 2008, the Group completed its acquisition of 90% equity interest in Guangzhou Xinchen Water Company Limited from Fortune Luck Global International Limited for a consideration of $13.45 million. Goodwill, which is equal to the excess of cost over the fair value of acquired assets, has been recorded in conjunction with the acquisition. Goodwill is accounted for in accordance with SFAS 142. Under SFAS 142, goodwill is not amortized and is subject to impairment test, at least annually. The test consists of two steps. First, the identification of potential impairment is performed by comparing the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with SFAS No 141, “Business Combinations”. As of March 31, 2009, the Company concluded that there were no impairments of goodwill.

Note 9 - Warrant Liability

The fair values of the warrant liability as of March 31, 2009 and December 31, 2008 were as following:

   
March 31,
   
December 31,
 
   
2009
   
2008
 
             
Warrants issued in April 2005, at fair value
  $ 4,410     $ 4,410  
Warrants issued in September 2005, at fair value
    -       -  
Shares issued in September 2005, accounted for as liability
    32,200       32,200  
                 
Total
  $ 36,610     $ 36,610  

The Group conducted a private placement in April 2005 (“April Private Placement”) of 20 investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a) a 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance (“April Warrants”). As a result of the September 2005 private placement, pursuant to Section 5(d) of the warrant agreement, the exercise price has been adjusted to $0.15 per share on September 14, 2005. The debentures were due and payable August 1, 2005. The debenture holders, however, extended the payment period to September 30, 2005. The debentures were converted into 3,703,701 shares of common stock on October 1, 2005.

The Group used the Black-Scholes model in calculating the fair market value of the April Warrants and allocated $148,531, $74,266 and $185,664 of the $408,461 net proceeds to the Convertible Debenture, the Bifurcated Conversion Feature of the Debenture and the April Warrants, respectively. The differences between the fair value of each of the Convertible Debenture, the Bifurcated Conversion Feature of the Debenture and the April Warrants and the respective allocated amounts are recorded as non-cash financing charges and expensed at the date of issuance. The principal assumptions used in the computation of the April Warrants are: expected term of 10 years; a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.

 
11

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 9 - Warrant Liability (continued)

The Group granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the April Private Placement, in the event that the Group determined to undertake a registration of securities, the Group would include, at the request of the holder of “Registrable Securities”, the Registrable Securities in the registration statement. If the Group did not file a registration statement by the 120th day from the closing of such financing, and the Group shall have received a written request signed by the holders holding the majority of the Registrable Securities, then the Group was obligated to file, at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Group is obligated to keep such registration statement effective until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Group has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision then in effect under the Securities Act. As of March 31, 2009, the Group has not received any written request signed by the holders holding the majority of the Registrable Securities.

Under EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, the fair value of the April Warrants should be reported as a liability. Pursuant to the related warrant agreement, because there is currently no effective registration statement covering the shares of common stock underlying these warrants, these warrants are currently subject to a cashless exercise whereby the warrant holders may surrender their warrants to the company in exchange for shares of common stock. The number of shares of common stock into which a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the warrants and the market price of the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that we could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if we were unable to obtain shareholder approval to increase the number of authorized shares, we could be obligated to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, EITF No. 00-19 requires that we record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through our statement of operations. We will continue to report the potential settlement obligation as a liability until such time as the warrants are exercised or expire or we are otherwise able to modify the warrant agreement to remove the provisions which require this treatment.

The conversion feature of the convertible debenture issued in April did not qualify for the scope of exception from the provisions of SFAS 133 because the convertible debentures are convertible into a variable number of shares. As such, the conversion feature was bifurcated from the convertible debenture and accounted for as a derivative at fair value with changes in fair value recorded in earnings. Upon the conversion of the convertible debentures in October 2005, the convertible debentures were recorded in equity as additional capital.

 
12

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 9 - Warrant Liability (continued)

On September 14, 2005, the Group closed the private placement sale to accredited investors of units consisting of shares of our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of $4.83 million (“September Private Placement”). Pursuant to the subscription agreements entered into with the investors, we issued to the investors 161 units at a price of $30,000 per unit. Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five year period at an exercise price of $0.20 per share. Pursuant to the terms of the subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the warrants. The Group also issued to Westminster Securities Corporation, as partial compensation for their placement agent services 7,728,000 placement agent warrants to purchase one share each of our common shares, a portion of which has been assigned by Westminster Securities Corporation to certain of its officers and employees (the warrants issued in the September Private Placement together with the placement agent warrants are hereinafter referred to as “September Warrants”).

The Group used the Black-Scholes model in calculating the fair market value of the September Warrants and allocated $4,140,535 of the $4,172,735 net proceeds to the September Warrants. The difference between the fair value of the September Warrants and the allocated amount is recorded as non-cash financing charges and expensed of at the date of issuance. The principal assumptions used in the computation of the September Warrants are: expected term of 5 years; a risk-free rate of return of 4.24%; dividend yield of zero percent; and a volatility of 70%.

Under the subscription agreement for the September Private Placement, we agreed to prepare and file with the SEC (and did so file), at our own expense, a registration statement covering the registrable securities related to that placement. We agreed that in the event that the registration statement is not declared effective by the SEC within the earlier of 120 days from the final closing, we would pay to the investors in the September Private Placement liquidated damages in the amount of 2.0% of the purchase price of the registrable securities for each month until the registration statement is declared effective. These liquidated damages began accruing on January 12, 2006. We agreed that if we do not remit payment of these liquidated damages, we will pay the investors in the September Private Placement interest at the rate of 12% per year until the liquidated damages are paid in full. The subscription agreement provides that if a registration statement is not effective at any time after one year following the issuance date of the September Warrants, these liquidated damages obligations will stop accruing. As of September 14, 2006 the liquidated damages obligations stopped accruing. As of March 31, 2009, we have made an accrual of $1,324,735 for registration right liability.

Under paragraphs 12–32 of EITF 00-19, contracts that include any provision that could require net-cash settlements cannot be accounted for as equity. Accordingly, the proceeds of the September Private Placement allocated for par value of the common stock and the September Warrants have been recorded as a liability on the balance sheet. Upon the effectiveness of the registration statement, the amount will be recorded as equity.

Note 10 - Due to Related Companies

At March 31, 2009, the balance due to related companies represents cash borrowed from Beijing Zhao Cheng Chuang Zhan Investment Company Limited (“BJZC”) in which Mr. Pu has equity interests.

All amounts are interest-free, unsecured and repayable on demand.

 
13

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 11 – Discontinued Operations

On December 30, 2008, the Company decided to discontinue the operations of Evergreen Assets Group Limited and put the business for sale. The Company decided to sell this division primarily because the industry of waste water treatment is facing more intense competition. The industry itself requires large investment in capital along with low rates of return over long period. The disposal date was January 31, 2009. Evergreen’s pretax income reported in discontinued operations, for the three months ended March 31, 2008, was $94,518.

Note 12 - Income Taxes

The Company is a Nevada corporation and conducts all of its business through its Chinese subsidiary and its affiliated Chinese operating companies. All business is conducted in PRC. As the U.S. holding company has not recorded any income for the three months ended March 31, 2009 and 2008, there was no provision or benefit for U.S. income tax purpose.

The Company’s Chinese subsidiary and affiliated operating companies based in China are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at a new statutory rate of 25% and were, until January 2008, subject to tax at a statutory rate of 33% (30% state income tax plus 3% local income tax) on income reported in the statutory statements after appropriate tax adjustments.

On March 16, 2007, the National People’s Congress of China approved the Corporate Income Tax Law of the PRC (the New CIT Law), which is effective from January 1, 2008. Under the new law, the corporate income tax rate applicable to all Companies, both domestic and foreign-invested companies, is 25%, replacing the previous applicable tax rate of 33%. For the three months ended March 31, 2009, the income tax provision by the Company was $170.

Note 13 - Employee Welfare Plan

The Company has established an employee welfare plan in accordance with Chinese law and regulations. The Company makes monthly contributions of 12% of all employees' salaries to the employee welfare plan.

Note 14 – Restatement to Reflect Correction of Accounting Errors

We elected to restate our March 31, 2009 financial statement to (1) recognize additional liability relating to acquisition of a subsidiary, Xinchen’s equity interest and (2) segregate the assets and liabilities of Evergreen because of discontinued operations.

On January 23, 2008, the Company acquired 90% equity interest in Xinchen. The acquisition was completed for a consideration of $13.45 million, of which $7.5 million was paid in cash, and the remaining $5.95 million will be paid in the future. We did not record the liability of $5.95 million when the cash of $7.5 million was paid. We have now decided to restate to reflect the change in assets and liabilities. This restatement increases Goodwill and Other payables for acquisition of a subsidiary by $5.95 million, respectively.

On December 30, 2008, the Company decided to discontinue operations of Evergreen Assets Group Limited and put the business for sale.

 
14

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 14 – Restatement to Reflect Correction of Accounting Errors (continued)

The effect of restatement for the quarter ended March 31, 2009 is as follows:

Consolidated Balance Sheets

   
As reported
   
As reported
       
   
originally
   
currently
       
   
at March 31,
   
at March 31,
   
Effect of
 
   
2009
   
2009
   
Change
 
Assets
                 
Current assets:
                 
Cash and cash equivalents
  $ 40,679     $ 40,679     $ -  
Accounts receivable
    23,336       23,336       -  
Prepayments, deposits and other receivables
    52,673       52,673       -  
Inventory
    370,804       370,804       -  
Loans to unrelated party
    645,230       645,230       -  
Total current assets
    1,132,722       1,132,722       -  
                         
Property, plant and equipment, net
    866,335       866,335       -  
Construction in progress
    8,258       8,258       -  
Intangible assets
    135,095       135,095       -  
Goodwill
    7,165,254       13,115,254       5,950,000  
                         
Total assets
  $ 9,307,664     $ 15,257,664     $ 5,950,000  
                         
Liabilities
                       
Current liabilities:
                       
Warrant liability
  $ 36,610     $ 36,610       -  
Accounts payable
    193,510       193,510       -  
Accrued expenses
    1,825,635       1,825,635       -  
Due to directors
    168,403       168,403       -  
Due to related companies
    3,189,932       3,189,932       -  
Income tax payable
    172       172       -  
Total current liabilities
    5,414,262       5,414,262       -  
                         
Long-term liabilities:
                       
Other payables for acquisition of a subsidiary
    -       5,950,000       5,950,000  
Total long-term liabilities
    -       5,950,000       5,950,000  
                         
Total liabilities
    5,414,262       11,364,262       5,950,000  
                         
Equity
                       
Stockholders' equity:
                       
Preferred stock, $0.001 par value, 50,000,000 authorized shares, no shares issued and outstanding
    -       -       -  
Common stock, $0.001 par value, 200,000,000 shares authorized; 139,383,450 shares issued and outstanding
    139,383       139,383       -  
Additional paid-in capital
    2,584,188       6,131,532       3,547,344  
Retained earnings
    1,072,584       (3,508,191 )     (4,580,775 )
Accumulated other comprehensive income
    97,247       1,130,678       1,033,431  
Total stockholders' equity
    3,893,402       3,893,402       -  
                         
Noncontrolling interest
    -       -       -  
                         
Total equity
    3,893,402       3,893,402       -  
                         
Total liabilities and equity
  $ 9,307,664     $ 15,257,664     $ 5,950,000  

 
15

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 14 – Restatement to Reflect Correction of Accounting Errors (continued)

Consolidated Statements of Operations and Comprehensive Income (Loss)

   
As reported
   
As reported
       
   
originally for
   
currently for
       
   
the three months
   
the three months
       
   
ended March 31,
   
ended March 31,
   
Effect of
 
   
2009
   
2009
   
Change
 
Revenue
                 
Revenue from BOT wastewater treatment services
  $ -     $ -     $ -  
Revenue from sales of bottled water
    26,064       26,064       -  
                         
Total revenue
    26,064       26,064       -  
                         
Cost of revenue
                       
Cost of revenue for BOT wastewater treatment services
    -       -       -  
Cost of revenue from sale of bottled water
    2,654       2,654       -  
Depreciation and amortization
    10,413       10,413       -  
Sales tax
    303       303       -  
                         
Total cost of revenue
    13,370       13,370       -  
                         
Gross profit
    12,694       12,694       -  
                         
Operating expenses
                       
Selling and distribution expenses
    (7,297 )     (7,297 )     -  
General and administrative expenses
    (129,685 )     (129,685 )     -  
                         
Total operating expenses
    (136,982 )     (136,982 )     -  
                         
Loss from operations
    (124,288 )     (124,288 )     -  
                         
Other income (expense)
                       
Other expense
    (10,188 )     (10,188 )     -  
Gain on disposal of a subsidiary – Evergreen
    2,775,104       -       (2,775,104 )
                         
Total other income
    2,764,916       (10,188 )     (2,775,104 )
                         
Income before income tax and minority interest
    2,640,628       (134,476 )     (2,775,104 )
                         
Income tax expense
    (170 )     (170 )     -  
                         
Income before minority interest
    2,640,458       (134,646 )     (2,775,104 )
                         
Minority interest
    -       -       -  
                         
Net income
    2,640,458       (134,646 )     (2,775,104 )
                         
Other comprehensive income
                       
Foreign currency translation adjustment
    (1,188,751 )     (155,325 )     1,033,426  
                         
Comprehensive income
  $ 1,451,707     $ (289,971 )   $ (1,741,678 )
                         
Basic earnings per share
  $ 0.02     $ (0.00 )   $ (0.02 )
Diluted earnings per share
  $ 0.02     $ (0.00 )   $ (0.02 )
                         
Weighted average number of common shares outstanding Basic and Diluted
    139,383,450       139,383,450       -  

 
16

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 14 – Restatement to Reflect Correction of Accounting Errors (continued)

Consolidated Statements of Cash Flows

   
As reported
   
As reported
       
   
originally for
   
currently for
       
   
the three months
   
the three months
       
   
ended March 31,
   
ended March 31,
   
Effect of
 
   
2009
   
2009
   
Change
 
Cash flows from operating activities
                 
Net  income
  $ 2,640,458     $ (134,646 )   $ (2,775,104 )
Adjustments to reconcile net income to net cash provided by (used in) operating activities :
                       
Depreciation and amortization
    10,413       10,413       -  
Minority interest
    -       -       -  
                         
Changes in operating assets and liabilities :
                       
Accounts receivable
    (24,750 )     (5,141 )     19,609  
Prepayment, deposits and other receivables
    (48,549 )     (11,337 )     37,212  
Inventory
    22,865       22,865       -  
Current assets of discontinued division
    -       5,216,856       5,216,856  
Accounts payable
    6,241       6,241       -  
Accruals and other liabilities
    40,182       2,980       (37,202 )
Current liabilities of discontinued division
    -       (7,394,868 )     (7,394,868 )
Total adjustments
    6,402       (2,151,991 )     (2,158,393 )
                         
Net cash provided by operating activities
    2,646,860       (2,286,637 )     (4,933,497 )
                         
Cash flows from  investing activities
                       
Due from related companies
    (502,911 )     -       502,911  
Loans to unrelated party
    (2,384,925 )     (645,138 )     1,739,787  
Disposal of interest in a subsidiary – Evergreen
    82,108       -       (82,108 )
Non-current assets of discontinued division
    -       4,953,355       4,953,355  
Acquisition of property, plant and equipment
    (349 )     (349 )     -  
                         
Net cash used in investing activities
    (2,806,077 )     4,307,868       7,113,945  
                         
Cash flows from financing activities
                       
Due to related companies
    255,138       16,797       (238,341 )
Due to directors
    (83,455 )     (83,455 )     -  
Due to affiliated companies
    -       (1,760,238 )     (1,760,238 )
                         
Net cash provided by financing activities
    171,683       (1,826,896 )     (1,998,579 )
                         
Effect of foreign currency translation on cash and cash equivalents
    46       (162,235 )     (162,281 )
                         
Net increase (decrease) in cash and cash equivalents
    12,512       32,100       19,588  
                         
Cash and cash equivalents, beginning of period
    28,167       8,579       (19,588 )
                         
Cash and cash equivalents, end of period
  $ 40,679     $ 40,679     $ -  

 
17

 

CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements
March 31, 2009 and 2008
(Unaudited)

Note 15 - Concentration

Two major customers accounted for approximately 27% of the net revenue for the three months ended March 31, 2009.  The source of revenue from these customers is the sales of bottled water. One major customer, Hai Yang City Zoning and Construction Management Bureau, accounted for approximately 78% of the net revenue for the three months ended March 31, 2008.  The source of revenue from this customer is the BOT-waste water treatment service.

Note 16 - Supplemental Cash Flow Disclosures

The following is the supplemental information relating to the consolidated statements of cash flows:

   
March 31,
   
March 31,
 
   
2009
   
2008
 
             
Cash paid for interest
  $ -     $ 138  
                 
Cash paid for income taxes
  $ 170     $ 6,687  

Note 17 - Subsequent Events

None.

 
18

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

FORWARD-LOOKING INFORMATION

Much of the discussion in this Item is “forward looking” as that term is used in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Actual operations and results may materially differ from present plans and projections due to changes in economic conditions, new business opportunities, changes in business conditions, and other developments. Other factors that could cause results to differ materially are described in our filings with the SEC.

The following are factors that could cause actual results or events to differ materially from those anticipated, and include, but are not limited to general economic, financial and business conditions, changes in and compliance with governmental laws and regulations, including various state and federal environmental regulations, our ability to obtain additional financing from outside investors and/or bank and mezzanine lenders; and our ability to generate sufficient revenues to cover operating losses and position us to achieve positive cash flow.

Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-Q to be accurate as of the date hereof. Changes may occur after that date. We will not update that information except as required by law in the normal course of our public disclosure practices.

Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part I of this Form 10-Q.

RESULTS OF OPERATIONS

Quarter Ended March 31, 2009 vs. Quarter Ended March 31, 2008

Total revenue. We reported total revenue of $26,064 for the three months ended March 31, 2009 as compared to $47,223 for the three months ended March 31, 2008.  . At the end of 2008 we determined to develop new distribution channels for our bottled water.  This will result in what management  believes will prove a short term decline in bottled water sales.  The results for the quarter reflect these new directions as there were no revenues from turn-key engineering projects or from BOT wastewater treatment services.

Cost of revenue. Our total cost of revenue decreased from $18,364 for the three months ended March 31, 2008 to $13,370 for the three months ended March 31, 2009. This was primarily due to our reduced sales of bottled water during the period as we repositioned our distribution efforts..

 
 

 

Gross profit. Gross profit, as a percentage of total revenue for the three months ended March 31, 2009 and 2008, was approximately 48.7% or $12,694 as compared to 61.5% or $29,359.   Decreased gross profits and margins  the Company’s reflect reduced levels of operations as we seek to reposition our bottled water sales model.
 
Operating expenses. Our total operating expenses for the three months ended March 31, 2009 and 2008 were $136,982 and $318,733, respectively. The principal components of operating expenses were selling and distribution expenses, administrative salaries and benefits, depreciation and amortization, traveling expenses, rental expenses and other general administration costs. A decrease in operating expenses for the three months ended March 31, 2009 of $181,751 as compared to the three months ended March 31, 2008 was primarily due to the decreased levels of selling and distribution expense as sales effort was reduced during this period of repositioning of our branded bottled water.

Penalty for late effectiveness of registration statement This amount represents the liquidated damages payment obligation we accrued in connection with the September Private Placement by missing the deadline we agreed to for effectiveness of the registration statement we filed in connection with that financing. Under the subscription agreement for the September Private Placement, we agreed to prepare and file with the SEC (and did so file), at our own expense, a registration statement covering the registrable securities related to that placement. We agreed that in the event that the registration statement is not declared effective by the SEC within the earlier of 120 days from the final closing, we would pay to the investors in the September Private Placement liquidated damages in the amount of 2.0% of the purchase price of the registrable securities for each month until the registration statement is declared effective. These liquidated damages began accruing on January 12, 2006. We agreed that if we do not remit payment of these liquidated damages, we will pay the investors in the September Private Placement interest at the rate of 12% per year until the liquidated damages are paid in full. The subscription agreement provides that if a registration statement is not effective at any time after one year following the issuance date of the September Warrants, these liquidated damages obligations have stopped accruing. As of September 14, 2006 the liquidated damages obligations stopped accruing for a period of time and then other related damages began to accrue. As of March 31, 2006, we had made an accrual of $828,027 for such liquidated damages.

Under paragraphs 12–32 of EITF 00-19, contracts that include any provision that could require net-cash settlements cannot be accounted for as equity. Accordingly, the proceeds of the September Private Placement allocated for par value of the common stock and the September Warrants have been recorded as a liability on the balance sheet. Upon the effectiveness of the registration statement, the amount will be recorded as equity.  In 2007 we began accruing smaller amounts for other penalties which amounted to $22,688 for the first quarter of 2008.  We did not accrue any amounts in the first quarter of 2009.

 
 

 

Unrealized gain on financial instruments. Unrealized gains or losses on financial instruments represent the change in the fair market value of the financial instruments at each reporting date. The unrealized gain on financial instruments for the three months ended March 31, 2008 was $307,189. There was an unrealized loss  on financial instruments of $(155,324)for the three months ended March 31, 2009.

Net  income. We had a net loss of $(134,646)  for the three months ended March 31, 2009, and a net income, after income tax and income from discontinued operations , of $293,618 for the three months ended March 31, 2008.  The decreased net income as compared to the prior period reflects the sale of our BOT waste water treatment services and our having exited the turn-key engineering project aspect of our business as well as the start up expenses related to the reintroduction of our branded bottled water.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity are our cash and cash flow generated from investing. Net cash provided by investing activities during the three months ended March 31, 2009 was $4,307,868.  At the end of the period, our cash and cash equivalents were $40,679.   We plan to secure bank loans to support our future projects.  Our Chairman, the majority shareholder, has also promised to provide additional funds when needed.  However, this promise is not a legally binding commitment.  Furthermore, we do not have any commitments for bank loans. If bank loans are not obtained and our majority shareholder does not provide funding, we could be required to severely curtail our operations.  

APPLICATION OF CRITICAL ACCOUNTING POLICIES

Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies include revenue recognition and impairment of assets.

Revenue recognition. We recognize revenue using various revenue recognition policies based on the nature of the sale and the terms of the contract.

 
 

 

Revenues from turn-key engineering projects are recognized on the percentage-of-completion method for individual contracts. We follow the guidance of the American Institute of Certified Public Accountants (“AICPA”) Statement of Position (“SOP”) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts, for our accounting policy relating to the use of the percentage-of-completion method, estimated costs and claim recognition for construction contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs to the extent we believe related collection is probable. The use of the percentage-of-completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price agreements is of a relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. From 5% to 10% of the total contract value will be treated as retention monies withheld to ensure performance of the contract during the warranty period of up to 12 months, as stipulated in both long term and short term fixed price contracts.

Revenues arising from wastewater treatment are recognized based on wastewater treated as recorded daily by meters read at rates, in RMB/ton, as prescribed under the BOT agreements in accordance with SAB Topic 13, Revenue Recognition. We meet the following four criteria for revenue recognition outlined in SAB Topic 13:

1. There is sufficient evidence to support that sales arrangements exist;

2. The price to the buyer is fixed through signed contracts;

3. Meter readings illustrate that delivery of treated wastewater has occurred; and

4. Collectibility is reasonably assured through one or more of the following: due diligence prior to contract signing; historical payment practices; or required upfront payments.

Revenues from the sale of environment protection-related products and provision of technical services are recognized when goods are delivered or when services are performed. The contractual terms of the purchase agreements or consultancy agreements dictate the recognition of revenues by us. We recognize revenue in accordance with SAB No. 104. Accordingly, four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products or services delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and our customer jointly determine that the product has been delivered or no refund will be required.

 
 

 

Impairment of assets. Our policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in this evaluation include current operating results, trends and anticipated undiscounted estimated future cash flows that are expected to result from the use of the asset, or other measure of fair value, and whether such factors reflect that the value of the asset has been impaired.

Allowances for accounts receivable. Our provisioning policy for bad and doubtful debt is based on the evaluation of collectibility and aging analysis of accounts receivable and on management's judgment. We do no require collateral or other security to support client receivables. We conduct periodic reviews of our clients' financial condition and customer payment practices to minimize collection risks on accounts receivable. This review is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. During the third quarter of 2006, we made no allowances for doubtful debts.

Financial instruments. The carrying amounts of all financial instruments approximate fair value. The carrying amounts of cash, accounts receivable, related party receivables, unsecured loans, accounts payable and related party payables approximate fair value due to the short-term nature of these items. The carrying amounts of borrowings approximate the fair value based on our expected borrowing rate for debt with similar remaining maturities and comparable risk.

Earnings per share. Basic earnings per share are computed by dividing the net income attributable to common stock for the year by the weighted average number of common shares outstanding during the year. Diluted earnings  per share are computed by dividing the net income for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares (which includes incremental common shares issuable upon the exercise of stock options, unvested restricted common stock and shares that may be issued on a contingent basis) are included in diluted earnings per share to the extent such shares are dilutive. In accordance with SFAS 128, Earnings Per Share, we use income from continuing operations, net of income taxes, as the “control number” in determining whether common equivalent shares are dilutive or anti-dilutive in periods where discontinued operations are reported.

Recently issued accounting pronouncements

In December 2007, the FASB issued SFAS No. 141 ®, “Business Combinations” (“SFAS 141®”). SFAS 141® defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control, and requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement. SFAS 141® applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

 
 

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest, and also requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. The requirements of SFAS 160 are effective for our fiscal year beginning January 1, 2009.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

ITEM 3.  QUANTITATIVE and QUALITATIVE DISCLOSURES about MARKET RISK.

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES
 
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

 
 

 
 
Material Weaknesses identified Prior to Fiscal 2008
 
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as this term is defined under the rules of the SEC) as of August 10, 2006. Based on this evaluation, the Companys Chief Executive Officer and Chief Financial Officer and Executive Chairman concluded that, as of August 10, 2006, our disclosure controls and procedures were not effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the US Securities Exchange Act of 1934 as a result of material weaknesses in our internal control over financial reporting described below.
 
In the process of filing our registration statement, we identified certain accounting errors in our reported US GAAP annual results for fiscal 2004 and 2005 and certain quarterly results in 2005 and 2006. As a result, we have restated the amounts and disclosures in those annual financial statements.
 
The financial statements which should no longer be relied upon include:
 
 
(i)
the audited consolidated financial statements contained in our report on Form 10-KSB for the fiscal year ended December 31, 2004 (the “2004 10-KSB”), filed with the SEC on April 15, 2005, Amendment No. 1 to the 2004 10-KSB filed on July 15, 2005, and Amendment No. 2 to the 2004 10-KSB filed on January 13, 2006 ;
 
 
(ii)
the audited consolidated financial statements contained in our report on Form 10-KSB for the fiscal year ended December 31, 2005 (the “2005 10-KSB”), filed with the SEC on April 17, 2006;
 
 
(iii)
the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for the quarterly period ended March 31, 2005 (the “March 31, 2005 10-QSB”), filed with the SEC on May 24, 2005;
 
 
(iv)
the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for the quarterly period ended June 30, 2005 (the “June 30, 2005 10-QSB”), filed with the SEC on August 15, 2005;
 
 
(v)
the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for the quarterly period ended September 30, 2005 (the “ September 30, 2005 10-QSB”), filed with the SEC on November 15, 2005 and Amendment No. 1 to the September 30, 2005 10-QSB filed on January 13, 2006; and
 
 
 

 
 
 
(vi)
the unaudited consolidated financial statements contained in our quarterly report on Form 10-QSB for the quarterly period ended March 31, 2006 (the “March 31, 2006 10-QSB”), filed with the SEC on May 15, 2006.
 
Gain on disposal of XY
 
As previously disclosed in our 2004 10-KSB, including amendments thereto, and comparative figures in our 2005 10-KSB, we recorded a gain on disposal of $2,029,720 in 2004 for the disposal of our 90% attributable interest in Xian Yang Bai Sheng Water Purifying Company Limited (“XY”) to True Global Limited (“TGL”), an independent party, at a consideration of $4,130,435 (RMB34.2 million). The disposal was made pursuant to a tri-party framework agreement between Evergreen Asset Group Limited (“EGAG”), TGL and Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) in which EGAG transferred 90% of its equity interest in XY to TGL while GDXS continued to own 10% of its equity interest in XY. The transaction was consummated on October 26, 2004 and the gain represents the difference between the disposal proceeds and our attributable share of net assets of XY at the date of disposal. In the same year, we also recognized an amount of $9,115,942 for the construction revenue of XY using the percentage-of-completion method, estimated costs and claim recognition for construction contracts. The amount accounted for 97% of our total revenue in 2004.
 
In the previously filed 2004 10-KSB, as amended to date, and comparative figures in our previously filed 2005 10-KSB, the accounting treatment for the construction revenue of XY does not comply with SOP 81-1 or EITF 00-21. As a result, we will file an amendment to the 2004 10-KSB and 2005 10-KSB with adjusted disclosure to record the transaction as part of the gain on the disposal of the XY subsidiary rather than as revenue from construction of wastewater treatment plant. As such our adjusted total revenue for the fiscal year ended December 31, 2004 was $250,571 and the adjusted gain on disposal of interest in a subsidiary - XY was $5,220,299. Due to the same reason, account receivable from TGL amounted to $9,416,039 as of December 31, 2004 will be reclassified to prepayment, deposits and other receivables in our upcoming amendment to the 2004 10-KSB, comparative figures in this amendment to the 2005 10-KSB and comparative figures in the upcoming or recently filed amendments to the June 30, 2005 10-QSB and September 30, 2005 10-QSB.
 
Group reorganization
 
In Note 2(ii) and 2(iii) to the consolidated financial statements contained in the previously filed 2004 10-KSB and 2005 10-KSB and Note 2 to the consolidated financial statements contained in the previously filed March 31, 2005 10-QSB, June 30, 2005 10-QSB, September 30, 2005 10-QSB and March 31, 2006 10-QSB, we disclosed group reorganization transactions. Pursuant to rules promulgated by the SEC, the merger or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered a capital transaction, rather than a business combination. As such, no disclosures are required under FAS 141 because the transactions described were not business combinations. For accounting purposes, the transaction has been treated as a reverse acquisition and a recapitalization, and pro-forma information is not presented. Accordingly, the upcoming amendments  to the 2004 10-KSB, this amendment to the 2005 10-KSB, and the recent or upcoming amendments to the March 31, 2005 10-QSB, June 30, 2005 10-QSB, September 30, 2005 10-QSB and March 31, 2006 10-QSB will not include references to the group reorganization transactions throughout the financial statements. We will also restate the common stock immediately after the recapitalization to $100,000 in the upcoming amended March 31, 2005 10-QSB and have done so in the recent amended June 30, 2005 10-QSB.

 
 

 
 
Reclassification of April warrants
 
In our previously filed 2005 10-KSB, June 30, 2005 10-QSB and March 31, 2006 10-QSB, we recorded as equity the warrants issued as part of the units sold in our April 2005 convertible debt issuance. Under EITF No. 00-19, the fair value of these warrants should be reported as a liability. Pursuant to the Warrant Agreement, because there is currently no effective registration statement covering the shares of common stock underlying these warrants, these warrants are currently subject to a cashless exercise whereby the warrant holders may surrender their warrants to the company in exchange for shares of common stock. The number of shares of common stock into which a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the warrants and the market price of the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that the company could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if the company were unable to obtain shareholder approval to increase the number of authorized shares, the company could be obligated to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, EITF No. 00-19 requires that we record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through our statement of operations. We will continue to report the potential settlement obligation as a liability until such time as the warrants are exercised or expire or we are otherwise able to modify the warrant agreement to remove the provisions which require this treatment. In addition to this restatement of our 2005 10-KSB, we will restate our June 30, 2005 10-QSB and our March 31, 2006 10-QSB to reclassify the April 2005 warrants as a liability.
 
April and September 2005 Private Placements—non-cash financing charges
 
In our June 30, 2005 10-QSB, we did not record any non-cash financing charges and in our September 30, 2005 10-QSB, as amended to date, we did not properly record the non-cash financing charges. Non-cash financing charges represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. We will restate our June 30, 2005 10-QSB and our September 30, 2005 10-QSB to record the non-cash financing charges, which represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. As a result of the recording of non-cash financing charges, certain expenses which were previously recorded under general and administrative expenses in our September 30, 2005 10-QSB will be reclassified under non-cash financing charges.

 
 

 
 
April 2005 Private Placements—unrealized gains or losses in financial instruments
 
In our June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, we did not record properly the unrealized gains or losses in financial instruments, which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture. The unrealized gains or losses in financial instruments should have been reported in those filings. We will restate the June 30, 2005 10-QSB and September 30, 2005 10-QSB, as amended to date, to record the unrealized gains or losses in financial instruments which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture.
 
Interest in associate
 
In our June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, the comparative figures for our interest in associate as of December 31, 2004 were recorded based on an effective percentage of equity attributable to the group of 31.5% instead of a direct interest of 35%. We will restate the comparative figures for our interest in associate as of December 31, 2004 in the June 30, 2005 10-QSB and September 30, 2005 10-QSB to include our interest in associate based on a direct interest of 35%.

Prior Restatements
 
On January 13, 2006, we amended our 2004 10-KSB. Prior to the January 13, 2006 amendment, in our 2004 10-KSB we recorded our interest in associate based on an effective percentage of equity attributable to the group of 31.5% instead of a direct interest of 35%.  In the January 13, 2006 restatement of our 2004 10-KSB, we reported our interest in associate based on a direct interest of 35%. In addition, we have restated the common stock immediately after the recapitalization to $100,000.
 
On January 13, 2006, we amended our September 30, 2005 10-QSB. Prior to the January 13, 2006 amendment, the September 30, 2005 10-QSB classified as equity the proceeds of our April Debenture and September 2005 private placement allocated to the warrants issued in these transactions. For reasons both the April warrants and September warrants should have been classified as a liability. The restated financial statements in the January 13, 2006 amendment of the September 30, 2005 10-QSB reflect this reclassification. In addition, prior to the January 13, 2006 amendment, the September 30, 2005 10-QSB did not originally report the unrealized gains or losses in financial instruments, which represent the change in fair market value of the financial instruments at each reporting date. The unrealized gains or losses in financial instruments should have been reported in the original filing. Accordingly, the January 13, 2006 restatement of the September 30, 2006 10-QSB reported the unrealized gains or losses in financial instruments, which represent the change in fair market value of the financial instruments at each reporting date. The restatement to the unrealized gains or losses in financial instruments, however, required to be further restated (refer discussion above). In addition, we have restated the common stock immediately after the recapitalization to $100,000.

 
 

 
 
Steps Undertaken with respect to Material Weaknesses Prior to 2008
 
In connection with the above matters, we have identified material weaknesses in our internal control over financial reporting, which weaknesses we have reported to our auditors. These material weaknesses comprise:
 
 
(a)
insufficient knowledge and experience among our internal accounting personnel regarding the application of US GAAP and SEC requirements;
 
 
(b)
insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP an