Attached files
| file | filename |
|---|---|
| EX-32.1 - China Industrial Waste Management Inc. | v180840_ex32-1.htm |
| EX-32.2 - China Industrial Waste Management Inc. | v180840_ex32-2.htm |
| EX-31.2 - China Industrial Waste Management Inc. | v180840_ex31-2.htm |
| EX-31.1 - China Industrial Waste Management Inc. | v180840_ex31-1.htm |
| EX-21.1 - China Industrial Waste Management Inc. | v180840_ex21-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
x ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the Fiscal Year Ended December 31,
2009
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or
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¨ TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period from ________________ to
__________________
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Commission
File Number 002-95836-NY
CHINA INDUSTRIAL WASTE
MANAGEMENT, INC.
(Exact
name of registrant as specified in its charter)
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Nevada
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13-3250816
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(State
or other jurisdiction of incorporation or
organization)
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Dalian
Dongtai Industrial Waste Treatment Co.
No.
1 Huaihe West Road, E-T-D-Zone, Dalian, China
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116600
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code 011-86-411-85811229
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes ¨
No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section to file reports pursuant to Section 13 or 15(d) of the Act.
Yes ¨
No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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 þ
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).
Yes ¨
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company:
|
Large
accelerated filer
|
¨
|
Accelerated
filer
|
¨
|
|
Non-accelerated
filer
(Do
not check if smaller reporting company)
|
¨
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Smaller
reporting company
|
þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨
No þ
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
sold, or the average bid and asked prices of such common equity, as of the last
business day of the registrant's most recently completed second fiscal quarter.
$8,125,546.8 as of June 30, 2009.
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date: 15,336,535 shares of common stock are
issued and outstanding as of March 31, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
List
hereunder the following documents if incorporated by reference and the Part of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be
clearly described for identification purposes (e.g., annual report to security
holders for fiscal year ended December 24, 1980).
None.
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISK
This report includes
"forward-looking statements." You can identify these statements by the fact that
they do not relate strictly to historical or current facts. These statements
contain such words as "may," "project," "might," "expect," "believe,"
"anticipate," "intend," "could," "would," "estimate," "continue," or "pursue,"
or the negative or other variations thereof or comparable terminology. In
particular, they include statements relating to, among other things, future
actions, new projects, strategies, future performance, the outcomes of
contingencies and our future financial results. These forward-looking statements
are based on current expectations and projections about future
events.
Investors are cautioned that
forward-looking statements are not guarantees of future performance or results
and involve risks and uncertainties that cannot be predicted or quantified and,
consequently, our actual performance may differ materially from those expressed
or implied by such forward-looking statements. Such risks and uncertainties
include, but are not limited to, the following factors, as well as other factors
described from time to time in our reports filed with the Securities and
Exchange Commission (including the sections entitled "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained therein): the timing and magnitude of technological
advances; the prospects for future acquisitions; the effects of political,
economic and social uncertainties regarding the governmental, economic and
political circumstances in the People’s Republic of China, the possibility that
a current customer could be acquired or otherwise be affected by a future event
that would diminish their waste management requirements; the competition in the
waste management industry and the impact of such competition on pricing,
revenues and margins; uncertainties surrounding budget reductions or changes in
funding priorities of existing government programs and the cost of attracting
and retaining highly skilled personnel; our projected sales, profitability, and
cash flows; our growth strategies; anticipated trends in our industries; our
future financing plans; and our anticipated needs for working
capital.
Forward-looking
statements speak only as of the date on which they are made, and, except to the
extent required by federal securities laws, we undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the date
on which the statement is made or to reflect the occurrence of unanticipated
events. The Private Securities Litigation Reform Act of 1995, which provides a
“safe harbor” for similar statements by certain existing public companies, does
not apply to us because our stock is a “penny stock,” as defined under federal
securities laws.
CONVENTIONS
AND GENERAL MATTERS
The
official currency of the People’s Republic of China is the Chinese “Yuan” or
“Renminbi” (“yuan,” “Renminbi” or “RMB”). For the convenience of the reader,
amounts expressed in this report as RMB have been translated into United States
dollars (“US$” or “$”) at the rate quoted by the Federal Reserve System. The
Renminbi is not freely convertible into foreign currencies and the quotation of
exchange rates does not imply convertibility of Renminbi into U.S. Dollars or
other currencies. All foreign exchange transactions take place either through
the Bank of China or other banks authorized to buy and sell foreign currencies
at the exchange rates quoted by the People's Bank of China. No representation is
made that the Renminbi or U.S. Dollar amounts referred to herein could have been
or could be converted into U.S. Dollars or Renminbi, as the case may be, at the
PBOC Rate or at all.
The
"Company," "we," "us," "our" and similar words refer to China Industrial Waste
Management, Inc, and its direct and indirect, wholly-owned and partially-owned
subsidiaries.
All share
and per share information contained herein has been adjusted to reflect a 1 for
100 reverse stock split which occurred on May 12, 2006.
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Page
No.
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Forward
Looking Statements and Associated Risk
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Conventions
and General Matters
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Part
I
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Item
1.
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Business.
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1
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Item
1A.
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Risk
Factors.
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13
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Item
1B.
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Unresolved
Staff Comments.
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20
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Item
2.
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Properties.
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20
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Item
3.
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Legal
Proceedings.
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21
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Item
4.
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Removed
and Reserved.
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21
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Part
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
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22
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Item
6.
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Selected
Financial Information.
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23
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
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23
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Item
7A.
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Quantitative
and Qualitative Disclosure About Market Risk.
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31
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Item
8.
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Financial
Statements and Supplementary Data
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31
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Item
9.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
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31
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Item
9A.(T)
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Controls
and Procedures.
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31
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Item
9B.
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Other
Information.
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32
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance.
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32
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Item
11.
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Executive
Compensation.
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36
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
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38
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence.
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39
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Item
14.
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Principal
Accountant Fees and Services.
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40
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Part
IV
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Item
15.
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Exhibits,
Financial Statement Schedules.
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41
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ITEM
1. BUSINESS.
Overview
China
Industrial Waste Management, Inc., through its 90%-owned subsidiary Dalian
Dongtai Industrial Waste Treatment Co., Ltd. (“Dalian Dongtai”) and other
indirect subsidiaries, is engaged in the collection, treatment, disposal and
recycling of industrial wastes, municipal sludge and sewage treatment, and
environmental protection engineer services principally in Dalian, China and
surrounding areas in Liaoning Province, China. The Company provides waste
disposal solutions to its more than 770 customers from facilities located in the
Economic and Technology Development Zone, Dalian, PRC. Dalian Dongtai treats,
disposes of and/or recycles many types of industrial wastes. Recycled waste
products are used by customers as raw materials to produce chemical and
metallurgy products. In addition, Dalian Dongtai and its subsidiaries treat or
dispose of industrial waste through incineration, landfill or water treatment;
as well as provide the following to its clients:
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·
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Environmental
protection services,
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·
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Technology
consultation,
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·
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Pollution
treatment services,
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·
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Waste
management design processing
services,
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·
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Waste
disposal solutions,
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·
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Waste
transportation services,
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·
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Onsite
waste management services, and
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·
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Environmental
pollution remediation services.
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·
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Municipal
sludge and seweage treatment
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·
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Sludge
treatment equipment design and manufacturing and technical
support
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The
Company’s operations are conducted primarily in three areas as
follows:
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·
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Industrial
Solid Waste Treatment and Recycling: Dalian
Dongtai was the primary contributor to the Company’s revenue stream.
Dalian Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”) intends to engage
in waste catalyst recycling to produce valuable metals and slag used for
cement. We expect Zhuorui to be operational in 2010. Hunan Hanyang
Environmental Protection Science & Technology Co., Ltd. (“Hunan
Hanyang”) was recently formed to own and operate a hazardous waste
treatment center in Hunan Province,
PRC.
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·
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Municipal
Sludge and Sewage: Dalian Dongtai Organic Waste Treatment Co., Ltd.
(“Dongtai Organic”) processes sludge by anaerobic fermentation to generate
biogas (methane). In 2010, Dongtai Organic received its initial revenues
from sludge treatment fees and sales of biogas (methane). In addition,
since June 2008, Dalian Dongtai Water Recycling Co. Ltd. (“Dongtai Water”)
has processed municipal sewage in the city of Dalian,
PRC.
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·
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Environmental
Protection and Equipment Engineering: Dalian Lipp Environmental
Energy Engineering & Technology Co., Ltd. (“Dalian Lipp”), a joint
venture with German Lipp, designs, manufactures, installs and provides
technical support for Lipp tanks, which are used for sludge treatment in
China.
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1
The
following diagram illustrates the Company’s current organizational
structure:
Industry Background and
Market Opportunities
Rapid
economic growth has resulted in China becoming the third largest economy in the
world. However, in the face of this economic surge, management believes
that economic losses attributable to environmental pollution are causing a 10%
offset to GDP growth in China.
In order
to address the PRC’s environmental issue, in early 2008 the State Environmental
Protection Administration (SEPA) was officially upgraded to become the Ministry
of Environmental Protection of China, reflecting the growing emphasis the PRC
Government places on environmental protection. In recent years a series of new
laws and regulations related to environmental protection have been implemented
in China. In addition, long-term plans for environmental protection have been
made by the government. During the Eleventh Five-year Plan (2006-2010), the PRC
government has established the following three primary environmental protection
goals:
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·
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Reduce
total pollutants by 10%;
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·
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Decrease
energy cost per unit of GDP by 20% (with a longer-term goal to decrease
carbon oxide cost per unit of GDP by 40-45% over 2005 levels by the end of
2020); and
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·
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Decrease
water cost per unit of industrial value by
30%.
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Xie
Zhenhua, Vice-Chairman of National Development and Reform Commission stated that
the energy-saving and environmental protection industry has becoming a new
economic growth point of China and it is estimated that the GDP of the this
sector could reach RMB2800 billion (approximately $410 billion) in 2012.
Currently, there are approximately 30,000 companies engaged in the environmental
protection industry in China, employing a total of approximately 2 million
people. The number could reach RMB4,900 billion (approximately $717 billion) for
the Twelfeth Five-year Plan (2011-2015). During this period, environmental
protection investment and expenses on environmental pollution elimination
facility operation could rise to RMB 3,000 billion (approximately $439 billion)
and RMB 1,000 billion (approximately $146 billion),
respectively.
Management
believes that the environmental protection industry is taking shape in China,
and the industry has become a significant component of the overall economy.
Through the acquisition of operating subsidiaries, Dalian Dongtai has expanded
its operation into Municipal BOT (build-operate-transfer) projects such as
wastewater treatment, municipal sludge treatment, and environmental engineering.
At present, the environmental protection industry in China is rapidly growing,
and we expect that more centralized waste treatment and disposal facilities,
waste water treatment plants and municipal sludge treatment facilities will be
established throughout China. Therefore, management believes that the Company is
addressing a significant potential market and is well-positioned to perform a
pivotal role in the implementation of the PRC’s economic stimulus plan in 2009
and the Eleventh Five-year Plan in the long term.
2
Sources and Components of
Revenues
Our income is currently generated
from revenues from the following activities:
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·
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Industrial
Solid Waste Management. Revenue from industrial solid
waste management has two components, i.e., service fees from waste
treatment and disposal and revenues from sales of recycled commodities
such as cupric sulfate and organic solvent, and sales of valuable
materials.
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·
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Municipal
Sludge and Sewage Treatment. Revenue from municipal sewage treatment
is service fees for sewage
treatment, which
is paid by the local government based on
the amount of wastewater treated by the facility, contributed approximately
$1.02
million to revenues
in 2009.
|
We expect that sludge treatment
equipment design, manufacture and technical support will become a revenue
component in 2010.
The following diagram illustrates the
relative contributions to
revenues of industrial solid waste management and municipal sewage
treatment:
The
following diagram illustrates the relative contributions to revenues of the two
main streams of revenue from 2007 through 2009.
Notes:
(1) cupric sulfate is included in the sales of recycled commodities and it is
segmented because its sales account for more than 10% of total
revenue.
(2)
Represents revenues from sales of recycled commodities other than of cupric
sulfate.
The
following chart illustrates the contributors to 2009 solid waste treatment
fees:
3
In fiscal
2009, we served approximately 777 customers. Our core customers (ten largest
customers) include Cannon Office Machine (Dalian), Toshiba (Dalian), STX
Shipbuilding (Dalian), Yisheng Dahua Petrochemicals Co., Ltd., PetroChina Fushun
Petrochemical, Dalian Pacific Electronic Co., Ltd., Dalian Pacific Multi-layer
PCB Co., Ltd and Bosch (Dalian). Core customers and main customers (the 20
largest customers after core customers) account for 4% of all customers and 59%
of total treatment fees, whereas 96% of all customers only contribute 41% to our
revenues generated from waste treatment fees.
The
current expansion project of Dalian Dongtai, which is one of fifty-five
hazardous waste treatment centers sponsored by the National Development and
Reform Commission, and one of two centers in Liaoning Province, commenced
construction at the end of July 2008. We have completed approximately 50% of
construction of the plant and on-site construction is expected to resume in
mid-April 2010 after the winter break. The Company expects the plant to be
operational in the fourth quarter of 2010. Management believes that with the
operation of the new centralized hazardous waste treatment center, coupled with
continued increase in international companies relocating to Dalian, Dalian
Dongtai is positioned to capitalize on this rapid environmental development in
Liaoning Province. We anticipate that revenues from our waste treatment, sales
of waste recovery and valuable material will experience a recovery from economic
downturn in 2010. We anticipate that revenue generated from waste water
treatment, which is based on waste water volume and paid by the local
government, will grow steadily as the amount of water which needs to be treated
increases in the future. Dongtai Organic is expected to contribute to the
Company’s revenue stream in 2010 through service fees for sludge processing and
sales of biogas (methane gas). Zhuorui, a catalyst recycling project, is
expected to be operational in late 2010 and contribute to revenues in future
periods.
Business
Activities
Industrial Solid Waste
Industrial
solid waste consists of (a) solid waste collection and treatment, (b) sales of
recycled commodities, (c) waste treatment and comprehensive reuse. A description
of each component is as follows:
Solid waste collection and
treatment: Dalian
Dongtai collects solid waste from customers, and charges processing fees based
upon the weight of the collected waste. Dalian Dongtai’s services include waste
collection and transportation, incineration, landfill, water treatment,
packaging, analysis, storage, labor, depreciation of facilities, maintenance,
chemicals, energy, management and taxes.
Sales of recycled commodities -cupric sulfate: Our subsidiary,
Dalian Dongtai, processes recovered products and converts them into cupric
sulfate in a form that is desirable for use by companies engaged in chemical
engineering, agriculture and mining. The sales price for cupric sulfate is
affected by the supply of raw materials, supplyer’s product life span, and
product structure and production status.
Sales of recycled commodities other
than of cupric
sulfate: General waste is
processed to produce valuable materials, which refers to material that can be
reused after sorting or treatment, such as waste metal and waste plastic. Dalian
Dongtai sorts and treats the valuable material contained in industrial waste,
and resells them based upon prevailing market prices. The following chart shows
the volume of valuable materials sold during fiscal year 2008 and
2009.
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Category
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Volume
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2008
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2009
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1
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Plastic
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504
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187
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2
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Waste
oil
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2109
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1367
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3
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Waste
iron
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1297
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1703
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4
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Waste
slag
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1889
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1146
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5
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Waste
circuit board
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292
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130
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6
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Valuable
Metals
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417
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425
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7
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Waste
paper
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45
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77
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8
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Other
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568
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379
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9
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Waste
Drum (big)
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714
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288
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10
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Waste
Drum(small)
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473
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327
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Total
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8308
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6029
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4
Waste catalyst treatment and
comprehensive reuse: Zhuorui was
incorporated in April 2006 and is engaged separation and purification of waste
catalysts treatment and comprehensive utilization of waste catalysts or similar
material.
In March
2009, Zhuorui commenced trial production of its waste catalyst processes. Due to
unfavorable market prices for Zhuorui’s final products, including chemical
compounds containing valuable metals, and imperfections detected during
trial production, the Company determined to suspend trial production in January
2010 in order to effect improvements to the technical flow prior to
market recovery. We expect that the improvement to the technical flow will also
enable Zhuorui to generate aluminum oxide as an additional by-product, and that
the addition of this byproduct will strengthen our revenues and profitability in
a manner that satisfies current emission standards established by
the government.
Dalian is
the national strategic oil storage and refining base. There are two large scale
oil refining companies in Dalian, i.e., West Pacific Petrochemical Company
(with a 10 million ton capacity) and Dalian Petrochemical Corporation (with a 20
million ton capacity). The total amount of waste catalyst produced by the two
companies is approximately 3,000 tons annually. Additionally, other refining
plants in northeast China are reconstructing their facilities to address
high-sulfur content oil. Upon completion of the reconstruction projects, the
annual generation volume of spent catalyst is expected to reach 8,000-10,000
tons.
Waste Treatment Systems: Dalian Dongtai operates
proprietary and non-proprietary systems for industrial solid waste treatment,
disposal and recycling, including:
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·
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Electric
Garbage Dismantling System
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·
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Organic
Solvent Distillation Recycling
System
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·
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Fluorescent
Tube Treatment System
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·
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Organic
Macromolecular Waste Destructive Distillation Cracking
System
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·
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Waste
Etchant Liquor Treatment System
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·
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Comprehensive
Treatment System for Industrial Waste
Water
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·
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Incineration
System for Solid Waste
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·
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Hazardous
Waste Landfill
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·
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Ordinary
Industrial Solid Waste Landfill
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Electric Garbage
Dismantling System: Following classification and
dismantling of photocopier ink cartridges and electric components of certain
household appliances, the system can recover metal and plastics with high
efficiency and limit the amount of unrecyclable residual waste. The system also
includes recycling metals from household electric appliances such as TV picture
tubes, and treating the hazardous residual components such as phosphor and Freon
so that such residual waste is rendered innocuous. The system was built in 1997
and includes a large disintegrator, electronic scale, oven, vacuum cleaner,
decorticator and large goods elevator.
Organic Solvent
Distillation Recycling System:
Dalian Dongtai established the organic solvent distillation
recycling system in 1992. This system includes a raw material storage tank, a
rectifying tower, and a flashing tower. The system is capable of treating
organic solvents including triclene, acetone, ethyl acetate, isopropyl alcohol,
propylene glycol monomethyl ether methyl alcohol, methylbenzene, and
cyclohexanone.
Since
2003 this system has been listed and promoted as a "national key environmental
project" by the State Environmental Protection Administration for three
consecutive years. As a result of employing this system Dalian Dongtai is also
listed as the technology-supporting unit of the "National Technology Achievement
Promotion Project". This system won the second prize for Dalian Technology
Innovations in December 2000. Dalian Dongtai has established strict procedures
for the disposal or treatment of toxic and hazardous chemical waste. No
environmental pollution accident has occurred since the establishment of Dalian
Dongtai. Dalian Dongtai has established relationships with over 40 enterprises
in dealing with their toxic chemical waste.
Fluorescent Tube
Treatment System: Dalian Dongtai has developed a
waste fluorescent tube treatment system. The system is able to safely dispose of
fluorescent lighting tubes which contain harmful substances such as mercury. The
system breaks the tubes under negative pressure, and absorbs and washes the
harmful components such as mercury. The glass fragments and metal residue
resulting from the treatment can then be recycled.
Organic
Macromolecular Waste Destructive Distillation Cracking
System: Canon Dalian Business Machines Co., Ltd.
is an enterprise established in Dalian by Canon (China) Co. Ltd. primarily to
produce laser printer ink cartridges. Treatment of the residual powdered ink in
used cartridges was problematic, so Dalian Dongtai developed a unique waste
powdered ink destructive distillation pyrolysis treatment technique for Canon.
This system can transform the waste powdered ink into fuel with a high calorific
value. The residue can also be used to produce cement. The system was built in
1995 and is composed of destructive distillation cracking oven, heat exchange
device and air storage tank. The system is able to treat powdered ink from
photocopiers and printers, and organic macromolecular materials such as
polystyrene, polypropylene resin, polycarbonate, rubber materials, and oil
sludge.
5
Waste Etchant
Liquor Treatment System: This system includes a
material delivery device, reaction vessels, and press filters. The system can
process etchant containing waste copper element and generate cupric sulfate
through neutralization, acidification, and metathesis.
Industrial Waste
Comprehensive Treatment System: The system
includes a treatment tank, an oil removal tank, a reaction tank, a precipitation
tank, a neutralization tank, an absorption tank, filtering device. It is able to
treat the ablution resulting from removing oil from the surface of metal, and
grinding and cutting fluids resulting from machining.
Solid Waste
Incineration System: The inappropriate handling
of hazardous chemicals can trigger serious environment pollution. Dalian Dongtai
has built an incineration system which includes a two-stage incineration stove,
a residual heat recovery system and a residual gas discharge system which
renders the gas innocuous. The major wastes that can be processed through the
system include: waste organic solvents, waste oil, waste glue liquor, and
combustible solid industrial garbage. The automatic operating system meets PRC
national standards.
Hazardous Waste
Landfill: The landfill has been built in
accordance with PRC national construction standards. It has a double HDPE
impermeable layer lining and percolating water collection system. After
stabilization and solidification, the toxic and hazardous waste to be deposited
in the landfill receives treatment rendering it innocuous. The system is able to
handle a wide variety of waste residue containing heavy metal and incinerate
residues. The project covers an area of 112,350 square feet.
Landfill for
Ordinary Industrial Solid Waste:
The landfill for ordinary industrial solid waste has been built according
to PRC national standards. It is equipped with a single layer anti-seepage
pretreatment system and a collection system of percolating water. The landfill
can process ordinary industrial Class 1 and Class 2 wastes.
Municipal
Sludge and
Municipal Sewage
Treatment:
We
conduct our municipal sludge and municipal sewage treatment operations as BOT
(build operate transfer) projects. In a typical BOT project, the municipal
government will invite candidates to bid on the project. The winner of the bid
is generally the bidder which offers the best combination of price and
construction and operating model for the project. The winning bidder must assume
the responsibility for financing the construction of the BOT project and, in
return, is granted the right to operate the facility for 20-25 years following
completion of construction. In connection with the project, the municipal
government becomes responsible for the payment of service fee to the operator of
the facility.
Dongtai
Organic was incorporated in March 2007 to operate a BOT municipal sludge
treatment and disposal facility in Dalian, PRC for a period of 20 years. In
addition to sludge treatment fees, Dongtai Organic expects to generate revenues
from sales of biogas, a byproduct of the sludge treatment process. At the time
of incorporation, we acquired a 49% interest in Dongtai Organic, and on December
16, 2009, Dalian Dongtai acquired an additional 3% equity interest, thereby
increasing its ownership of Dongtai Organic to 52%. Designed capacity of this
sludge treatment plant is 600 tons/day and it is anticipated to reach its full
capacity within one or two years. In January 2010 Dongtai Organic received its
initial sludge processing fee and made its first sales of biogas (methane
gas).The Company intends to continue to seek acquisition candidates in the
sludge treatment business in other cities of China.
Dongtai
Water was incorporated in July 2006, at which time Dalian Dongtai acquired an
18% equity interest in Dongtai Water. On July 16, 2007 Dalian
Dongtai purchased an additional 62% of the equity of Dongtai
Water. Dongtai Water is a BOT project, designed to process municipal waste
water generated from a portion of Dalian city. The first stage of construction
of the plant has been completed and is operating to specification and design
parameters, with Class A discharging water and a capacity of approximately
30,000 tons/day. This plant has been operating since June 2008.Completion of
construction of the Xiajiahe plant is planned to be executed in three stages.
Phase Two is expected to be completed in 2-3 years and will increase treatment
capacity to 60,000 tons/day. Dongtai Water continues to evaluate necessary
expansion capacity for Phase Three. Dongtai Water also intends to continue its
research and development focused on the reuse of reclaimed water.
Design and Installation of
Environmental Protection Equipment and Renewable Energy
Equipment:
On
October 18, 2007, Dongtai entered into a Contract for Joint Venture Using
Foreign Investment with Roland Lipp, Karin Lipp-Mayer and Minghuan Shan to
establish a joint venture limited liability company in the People’s Republic of
China. The joint venture entity, known as Dalian Lipp Environmental Energy
Engineering & Technology Co., Ltd. (“Dalian Lipp”), intends to target
organic waste treatment and waste water treatment market, and engage in sales of
its proprietary fermentation reactor, sewage tank and post-sale technical
service. The Company plans to pursue localization of equipment design and
manufacturing during 2010. We do not anticipate that Dalian Lipp will generate
revenues from operations until September 2010. Dalian Dongtai owns a 75%
interest in Dalian Lipp.
6
Facilities of Dalian Dongtai and its subsidiaries
:
The
following table describes the capacity of the various facilities used by the
Company, both currently and following the completion of planned
expansion:
To
satisfy a surging demand for industrial solid waste disposal and treatment, in
July 2008 Dalian Dongtai commenced construction of an expansion project
designed to increase capacity of its treatment facility to 114,000 tons annually
– twice that of existing capacity. The total investment for the
expansion project is estimated at about $16 million, 30% of which
(approximately $4,831,625) will be subsidized by the central government. Of this
amount, $1.46 million has been released to the Company and the balance will
be disbursed in accordance with construction progress.
|
|
|
|
Capacity*
|
|||||
|
Nature of Service
|
Type of Facility
|
Description
|
Existing
|
Post-
Expansion
|
||||
|
Incinerator
|
Incineration
Treatment
|
3,300
t/a
|
9,000
t/a
|
|||||
|
Solid
Waste Treatment
|
Landfill
|
Disposal
of Waste by Landfill
|
13,000
t
|
40,000
t
|
||||
|
and
Disposal
|
Effulent
Treatment System
|
Handling
of Various Industrial Effluent
|
18,000
t/a
|
25,000
t/a
|
||||
|
Etchant
Utilization System
|
Generation
of Cupric sulfate from Etchant
|
2,000
t/a
|
—
|
|||||
|
Resource
Recovery
|
Waste
Solvent Recovery System
|
Production
of Industrial-Class Organic Solvent Products with Waste
Solvent
|
1,000
t/a
|
3,000
t/a
|
||||
|
Valuable
Metal Recovery System
|
Yielding
of Valuable Alloy or Metal Oxide Products
|
5,000
t/a
|
10,000t/a
|
|||||
|
Collection
and Sales of
Valuable
Material
|
Waste
Sorting and Filtrating System
|
—
|
10,000
t/a
|
—
|
||||
|
Municipal
Sewage,
Municipal
|
Sewage
Treatment Plant Operation (BOT)
|
Municipal
Sewage Treatment Plant Operation and Management
|
30,000
t/d
|
100,000
t/d
|
||||
|
Sludge
Treatment
|
Municipal
Sludge Treatment Plant Operation (BOT Project)
|
Municipal
Sludge Plant Operation and Management
|
400
t/d
|
600
t/d
|
||||
|
Environmental
Protection
Equipment
Manufacturing
|
|
Manufacturing
and Sales of Lipp Tank
|
|
Sludge
Fermentation-Tank and Auxiliary
Equipment Manufacturing
|
|
—
|
|
—
|
|
*
|
Key:
t = tons; t/d = tons per day; t/a = tons
annually.
|
|
a)
|
Dalian Dongtai Industrial Waste Treatment, Co., Ltd. commenced the construction of its expansion project in July 2008. The total investment for the project was estimated to be US$16 million, 30 percent of which (approximately $4,831,625) is expected to be subsidized by the central government. To date, US$1.46 million has been released to the Company and the balance is expected to be disbursed consistent with construction progress. Upon completion of the project, Dalian Dongtai’s industrial solid waste treatment capacity is anticipated to increase to 114,000 tons per annum, or twice its existing capacity. |
|
b)
|
Dalian Dongtai acquired a 65% interest in Hunan Hanyang on September 18, 2009. Hunan Hanyang has entered into a BOT Agreement with the Bureau of Environmental Protection of Hunan Province, pursuant to which Hunan Hanyang has the right to construct and operate the Hazardous Waste Treatment Center of Changsha City, Hunan Province (the "Center") for 25 years upon completion of construction. The Center is included in the Chinese government's National Construction Planning of Hazardous Waste and Medical Waste Disposal Facilities. The total investment in this project is expected to reach approximately $27 million, $3.1 million of which has been received in the form of a government subsidy, representing the first installment of a total expected government subsidy of $16.1 million. |
|
c)
|
In
accordance with Dongtai Organic's franchise agreement with the local
government, Dongtai
Organic is entitled to process all of the sludge generated from sewage
treatment plants in the urban area of Dalian City. The project generates
revenues from two sources: (i) fees which are based on the volume of
sludge processed and (ii) fees from the sale of biogas (natural gas) to
the Dalian Gas Company. In the first quarter of 2010, Dongtai Organic
received its first payment of $120,000 from the sale of biogas (natural
gas) and its first payment of $185,000 for processing municipal sludge in
Dalian City.
|
|
d)
|
In order to strengthen its influence in the sludge treatment field, on August 31, 2009 and September 1, 2009, Dalian Dongtai acted as a co-organizer of the "Sino-German Workshop in Response to Climate Change Application of Sludge Treatment Technologies and Potential CDM Projects" in Dalian, China. The Workshop was organized by the Ministry of Housing and Urban-Rural Development of the Peoples' Republic of China and the German Federal Environmental Department of Nature Conservation and Nuclear Safety. At the workshop, experts from China and Germany introduced current practices for sludge treatment in both countries as well as further developments in the context of Clean Development Mechanisms. |
7
|
e)
|
Dongtai Organic’s sludge-energy approach was broadcasted during the recent United Nations Climate Change Conference in Copenhagen, Denmark. The Company’s Dalian Sludge Treatment Facility was featured on the China Central Television (CCTV) English Channel on December 20, 2009 as an example of how the clean coastal city of Dalian is helping fulfill the PRC government's pledge to reduce greenhouse gas emissions by treating sludge at our local Dalian Sludge Treatment Facility. |
|
f)
|
In
recognition of his contributions to the economy of Dalian City, a major
seaport and industrial center in Northeast China, the prestigious "Top Ten
People in Dalian's Economy" award was bestowed on Mr. Jinqing Dong, the
Company's founder and Chief Executive Officer, in January 2010. This award
has historically been bestowed on leaders in industry, academia and
politics, and include those who play a key role in Dalian's success as a
city that has grown into an important industrial center. The award was
presented by the city's senior officers in Dalian's Radio and TV
Broadcasting Hall.
|
Market
Industrial solid
waste
Major
sources of industrial waste in the Dalian area include industrial enterprises,
scientific research institutions and university laboratories. Dalian Dongtai
believes that the total amount of waste generated and collected in the greater
Dalian area has grown significantly in recent years - from approximately 11,000
tons in 2001, to approximately 53,980 tons in 2009. Approximately 60% of Dalian
Dongtai’s revenue for the year ended December 31, 2009 were from waste
collection, treatment and disposal services, and the balance of Dalian Dongtai’s
revenue are related to recycling operations.
Dalian
Dongtai acquired a 65% interest in Hunan Hanyang on September 18, 2009.
Hunan Hanyang has entered into a BOT Agreement with the Bureau of Environmental
Protection of Hunan Province, pursuant to which Hunan Hanyang has the right to
construct and operate the Hazardous Waste Treatment Center of Changsha City,
Hunan Province (the "Center") for 25 years upon completion of construction. The
Center is one of fifty-five hazardous waste treatment centers included in the
Chinese government's National Construction Planning of Hazardous Waste and
Medical Waste Disposal Facilities. Hunan Hanyang is also authorized to perform
collection, disposal and treatment of hazardous waste generated from 10 cities
including Changsha, Zhuzhou, Changde, Yiyang, Xiangtan, Yueyang, Zhangjiakou,
Huaihua, Loudi and Xiangxi in northern Hunan Province during the franchising
period. For example, due to the increasing labor cost in coastal cities, more
and more manufacturing companies such as circuit board manufacturers,
automobile-related industries, are moving to inland provinces including Hunan
Province.. There are no existing hazardous waste disposal and treatment
facilities in Hunan Province.
Municipal sludge and sewage
treatment
The
central government has determined to increase the urban sewage treatment rate to
60% by 2010.By that time, sludge generated from sewage treatment plants over the
county is expected to reach 30 million tons per year. Only a few metropolitan
cities such as Beijing, Shanghai and Guangzhou have sludge treatment facilities.
It is anticipated that there will be a surge in treatment demand for sludge and
other degradable wastes in next 10 years. For example, in Liaoning Province
there are currently 42 sewage treatment plants processing 4 million tons of
waste water every day. All sewage treatment plants in Liaoning Province are
expected to generate, in the aggregate, 1 million tons of sludge per year
(approximately 2,800 tons/day). Our treatment plant in Dalian that is operated
by Dongtai Organic is the only sludge treatment plant in Liaoning Province. We
believe that the shortage of sludge treatment facilities in Liaoning Province is
a microcosm of the problem that exists throughout China.
Engineering
Sewage
sludge is an end product of the waste water treatment process. In the face of a
new surge of waste water treatment plant construction triggered by the economic
stimulus plan in 2009, the increasing amount of sewage sludge will pose an
increasing threat to environmental conservation in China. In order to cope with
the issue, the Ministry of Environmental Protection is placing controls on
sludge treatment. The central government has determined to increase the urban
sewage treatment rate to 60% by 2010, when it is expected that all of these
sewage treatment plants will generate approximately 30 million tons of sludge
every year, as a result of which it appears that a significant market for sewage
sludge treatment is taking shape in China. Dalian Lipp, targeting degradable
organic waste treatment market, is positioned to seize opportunities in the
field of sewage sludge treatment, and treatment of organic waste such as kitchen
waste and animal ejection.
8
China has recovered from the global economic downturn and it is generally believed it will maintain the growth rate that was seen prior to 2009. Management is confident that the Company will benefit from the opportunities which are emerging from the construction of infrastructure for environmental pollution control, and will gain further growth based on the balanced business structure.
Customers
Dalian
Dongtai performs solid waste disposal services for more than 770 companies,
including multinational companies (or their PRC affiliates) such as Canon,
Pfizer, Toshiba, Toto, Posco-CFM Coated Steel, Fuji, Wepec, Ryobi, TDK, YKK, and
Panasonic. For the year ended December 31, 2009, Dalian Dongtai’s 10 largest
waste disposal customers accounted for approximately 40% of Dalian Dongtai’s
waste processing revenues. The three largest waste treatment customers during
2009 were Dalian Pacific Multi-layer PCB Co., Ltd., Dalian Pacific Electronics
Co., Ltd. and Yisheng Dahua Petrochemicals Co., Ltd. No customer accounted for
10% or more of Dalian Dongtai’s 2009 revenues for waste treatment.
Dalian
Dongtai’s ten largest customers of recycled commodities (excluding curpric
sulfate) accounted for approximately 66% of Dalian Dongtai’s sales of recycled
commodities in 2009. Dalian Dongtai’s ten largest customers for cupric sulfate
accounted for approximately 95% of Dalian Dongtai’s sales of cupric sulfate in
2008.
The local
PRC government is the sole customer of Dongtai Water and Dongtai Organic.
Dongtai Water became operational in June 2008. Dongtai Organic is expected to
contribute to revenues in 2010.
Technology and Intellectual
Property
Dalian
Dongtai has established the Dongtai Industrial Waste Disposal Technology Center
in conjunction with the Dalian University Institute for Ecoplanning and
Development. The center currently has 22 professional engineers and 9 analysts.
In collaboration with experts from Canada and U.S. - based RPP International
Consulting Company, the Center is focused on research related to eco-planning
theory and policy, professional training, ecological efficiency evaluation and
simulation analysis.
Since its
establishment, Dalian Dongtai has closely cooperated with scientific research
communities and universities, such as Dalian Institute of Chemical
Physics, the Chinese Academy of Sciences (Beijing) Mechanics Institute,
Tsinghua University and Dalian University of Technology. Dongtai also
participated in compiling the National Waste Disposal Criteria along with over
50 international enterprises such as China Electronics Engineering Design
Institute, Intel (China) Co., Ltd., Motorola (China) Co., Ltd, and Dell (China)
Co., Ltd.
In
addition, Dalian Dongtai's research and development team specializes in
environmental engineering, chemical engineering, water supply and drainage
systems, surface treatment, biological engineering, metallurgy, machinery,
electronics, and computer science. The Company provides significant input into
the research of methods of industrial solid waste treatment and comprehensive
waste utilization. Dalian Dongtai’s recognition for its scientific achievements
in business operations includes the following:
|
|
·
|
Dalian
Dongtai was awarded second prize of Dalian Technology Innovation for its
Comprehensive Utilization and Disposal of Waste Organic Solvents system.
The system has been listed as the "National Key Practical Technology
for Environmental Protection" by the Ministry of Science and Technology
and the State Administration of Environmental Protection of the
PRC;
|
|
|
·
|
The
Destructive Distillation Thermal Cracking of Powdered
Ink;
|
|
|
·
|
The
Safety Landfill of Hazardous Waste;
|
|
|
·
|
Pyrolysis
Incineration Stove;
|
|
|
·
|
The
Innocuous Treatment of Cyanide;
|
|
|
·
|
The
Comprehensive Utilization of the Waste Etchant Liquor from PCB
industry;
|
|
|
·
|
The
Comprehensive Utilization and Disposal of Waste Catalyst. This system won
the third prize of Dalian Technology Innovation and has been listed as the
"National Key Practical Technology for Environmental Protection" by the
State Administration of Environmental Protection of the PRC. It was
supported by the Innovation Funds for Small-and-Medium Sized Scientific
and Technological Enterprises of the Ministry of Science and
Technology;
|
|
|
·
|
The
Treatment of PCB Industry's Waste Liquid containing heavy
metal;
|
|
|
·
|
The
Disposal of Medical Refuse;
|
|
|
·
|
The
Disposal of Waste Batteries;
|
9
|
|
·
|
The
Innocuous Treatment of Arsenic
Compound;
|
|
|
·
|
The
Wet Oxidation of High Concentration Organic
Waste;
|
|
|
·
|
The
Disposal of Ordinary Industrial Waste;
and
|
|
|
·
|
The
Comprehensive Utilization and Innocuous Treatment of Electronic
Waste.
|
Dalian
Dongtai has been granted five patents covering waste disposal systems and
techniques by the PRC Patent Office. The following table identifies and
describes those patents:
|
Status
|
Description
|
Patent Number
|
Grant Date
|
Expiry Date
|
||||
|
Granted
|
The
Disposal of Powdered Ink Waste from Copy Machines
|
ZL
01 1 27963.X
|
7/7/04
|
7/20/21
|
||||
|
Granted
|
Consecutive
Destructive Distillation Stove
|
ZL
200420069745.5
|
7/13/05
|
7/9/14
|
||||
|
Granted
|
Plasma
Fusion Pyrolysis Device
|
ZL
200420069742.1
|
7/20/05
|
7/9/14
|
||||
|
Granted
|
The
Disposal of Waste Catalyst
|
ZL
200410021093.2
|
1/17/07
|
1/20/24
|
||||
|
Granted
|
|
Method
and Equipment For High-Efficiency Solid-Liquid Separation Under High
Pressure
|
|
ZL
200610046723.0
|
|
11/12/08
|
|
5/26/26
|
Research and
Development
The
Company considers research and development a key contributing factor to
maintaining competitive edge over its peers. Dalian Dongtai typically spends 5%
of its revenues on research and development activities. Projects which are the
subject of research and development include:
|
|
·
|
Dalian
Dongtai is conducting a joint research with Dalian-Onoda Cement Company
Ltd., a Japan company, on waste processing technology with cement kiln
with the objective of reducing the amount of waste going into land fills
and incinerators by utilizing waste as the raw material for cement
production.
|
|
|
·
|
We
are developing a technology to utilize salt contained in the waste water
through the evaporation and condensation
process.
|
|
|
·
|
We
are developing a process to combine combustible liquid and solid waste to
produce a renewable fuel.
|
|
|
·
|
We
are developing a process to utilize oily sludge generated from refineries
through anhydration.
|
|
|
·
|
Dongtai
Organic is actively seeking opportunities to process other degradable
wastes, such as kitchen waste. A combination of sludge and kitchen waste
can increase the volume of biogas and hence increase Dongtai Organic’s
profitability.
|
For each
of the two years ended December 31, 2009 and 2008 we expended $ 513,631 and
$561,885, respectively, on research and development activities.
Operating
Strategy
Our
business strategy is designed to increase revenues and earnings through
profitable growth and improving returns on invested capital. The components of
our strategy include:
|
|
·
|
Maintaining
commercialization of industrial solid waste treatment as our core business
and maintaining a balanced business structure of the three business lines;
;
|
|
|
·
|
Expansion
into municipal sludge treatment BOT projects with the goal of 30-40% of
our revenues being provided by sludge
treatment;
|
|
|
·
|
Promoting
the installation of sludge treatment tanks in other cities to seize the
market opportunity in the surge of sludge
treatment;
|
|
|
·
|
Managing
our businesses locally with a strong operating focus and emphasis on
customer service;
|
|
|
·
|
Entering
into new geographic markets in China;
and
|
|
|
·
|
Maintaining
our financial capacity and effective administrative systems and controls
to support on-going operations and future growth. We are evaluating growth
in our solid waste treatment operations through opportunities to cooperate
with prominent domestic or overseas partners and attempts to integrate
customer groups (for example, the refinery industry), to realize resource
optimization.
|
|
|
·
|
We
also plan to seek new BOT projects and acquire interests in existing
projects.
|
10
Government
Regulation
The
industrial waste treatment business is still in its nascent stages in China.
There are only a few coastal cities and several major cities in industrialized
regions that have built or even plan to build industrial waste treatment
facilities.
The
industry has high barriers to entry due to the central government's strict
licensing requirements. Both the Ministry of Environment Protection and local
bureaus of environmental protection license and regulate companies engaged in
waste disposal and treatment. The requirements for licensing have become more
stringent and applicants must demonstrate, among other things, that they have a
sufficient operating history and a sufficient number of professional
technicians, as well as compliance with national and local environmental
standards.
The State
has also adopted Measures for the Administration of Permit for Operation of
Dangerous Wastes (“Measures”). The Measures are intended to strengthen
supervision and administration of activities relating to the collection, storage
and disposal of dangerous wastes, and preventing dangerous wastes from polluting
the environment.
Dalian
Dongtai has been awarded an Environmental Protection Facility Operation License
by the Ministry of Environment Protection. In addition, pursuant to the
Measures, Dalian Dongtai has received a Permit for the Operation of Dangerous
Wastes by the provincial Bureau of Environmental Protection. In addition, Dalian
Dongtai’s license provides that it is exclusively responsible for the collection
and processing of industrial waste in Dalian and the surrounding areas of
Liaoning Province.
The
Company believes that it currently complies with all licensing requirements
relating to its business operations. However, there is no assurance that the
central or provincial governments will not adopt new regulations or licensing
requirements that will make it more difficult for Dalian Dongtai to operate in
the environmental protection industry.
Competition
There are
several large companies in China that engage in providing solid waste recycling
services, the recovery and treatment of waste materials, the production and sale
of recycled products, the operation of environmental protection facilities (BOT)
and/or the manufacture of environmental protection equipment. In addition to
Dalian Dongtai, these companies include Shenzhen Dongjiang Environmental Co.,
Ltd., Tianjin Hejia Veolia Environmental Service Co., Ltd., Hangzhou Dadi
Environmental Protection Co., Ltd., and Shanghai Solid Waste Disposal Center.
Dalian Dongtai and Shenzen Dongjiang provide the most extensive array of these
services. Dalian Dongtai believes it is the only company offering a full range
of services in Dalian and Liaoning Province.
Within
Liaoning Province, our principal competitors are Liaoning Zhen Xing, a
state-owned environmental concern, primarily serving Shenyang and the
surrounding area, and Liaoning Muchang Solid Waste Disposal Co., Ltd., a private
solid waste disposal company also serving Shenyang and the surrounding area.
Within Dalian, our principal competitor is Dalian Pingan Environmental
Protection, a smaller-capacity, private enterprise, primarily dealing with
limited categories of hazardous waste.
We
believe that we enjoy a competitive advantage over other companies engaged in
the environmental protection industry, for reasons including:
|
|
·
|
Reputation – Dalian Dongtai has
established itself as the leading environmental protection company in
Liaoning Province, and an industry leader in all of China. Government
officials consult Dalian Dongtai when drafting environmental protection
legislation. Dalian Dongtai’s expanded facility has been included in the
current national centralized hazardous waste disposal facility plan
established by the National Development and Reform
Commission.
|
|
|
·
|
Broad and
Diversified Customer Base – Dalian Dongtai has a
diverse customer base including some 650 companies engaged in private
enterprises, municipal institutions and universities, including Canon,
Pfizer, Toshiba and Panasonic (or their respective PRC affiliates).
Management anticipates that as additional large multinational companies
locate in Liaoning Province, Dalian Dongtai will be their first choice to
provide environmental services. Dalian Dongtai holds both national and
provincial operating permits.
|
|
|
·
|
Long-term
Stable Relationships
– Dalian Dongtai has an 19-year operating history and is committed
to maintaining its customers by providing high quality products and
services. Some of Dalian Dongtai’s customers, including Canon, Goodyear
and Pfizer, or their PRC affiliates, have established strategic
partnership with Dalian Dongtai since it commenced operations in
1991.
|
11
|
|
·
|
Comprehensive
Services –
Dalian Dongtai provides a comprehensive array of services including solid
waste treatment, waste collection and transportation, environmental
protection services, storage to landfill and on-site management. The broad
range of services we offer allows us to customize a package of services to
meet the needs of the large clients that we
service.
|
|
|
·
|
Advanced
Technologies –
Dalian Dongtai designs and develops proprietary processes and
technologies for use in providing its services. It has been awarded four
patents in the PRC covering solid waste disposal and treatment processes,
and two additional patent applications are pending. Dalian Dongtai, in
conjunction with the Dalian University Institute for Eco-planning and
Development, has established and operates the Dongtai Industrial Waste
Disposal Technology Center. Dalian Dongtai also cooperates with experts in
Canada and the United States to conduct research concerning eco-planning
theory and policy, ecological efficiency evaluation and related
activities, with the support of the Dalian University of
Technology.
|
|
|
·
|
Experienced
Management –
Dalian Dongtai’s senior management has extensive experience in
environmental protection. Mr. Dong Jinqing, our Chief Executive Officer,
founded Dalian Dongtai in 1991, and has over 19 years experience in the
field of environmental protection. Dalian Dongtai was one of the first
companies to be granted a permit for the operation of environmental
protection equipment by the State Environmental Protection Administration,
and license to operate hazardous waste treatment and disposal facilities
by the Liaoning Environmental Protection
Bureau.
|
In
addition to the competitive advantages we believe we enjoy, there are barriers
to entering the solid waste and environmental services market,
including:
|
|
·
|
Substantial
capital investment required;
|
|
|
·
|
Retaining
qualified management is difficult;
|
|
|
·
|
Difficulties
in developing a customer base;
|
|
|
·
|
Government
licenses and permits; and
|
|
|
·
|
Advanced
technologies are difficult to
develop.
|
.
Notwithstanding
our competitive advantages and the barriers to entering the marketplace, there
is no assurance that we will remain a competitive force in our industry, or that
we will operate on a profitable basis.
Employees
As of
December 31, 2009 Dalian Dongtai and its subsidiaries employs 446 registered
full-time employees. The following table depicts the allocation of these
employees.
|
Company
|
Senior Management
|
Technicians and
Engineers
|
No. of Employees
|
|||
|
Dalian
Dongtai
|
10
|
24
|
256
|
|||
|
Dongtai
Water
|
2
|
2
|
19
|
|||
|
Dongtai
Organic
|
3
|
4
|
48
|
|||
|
Zhuorui
|
5
|
11
|
95
|
|||
|
Dalian
Lipp
|
1
|
None
|
7
|
|||
|
Yingkou
|
1
|
None
|
2
|
|||
|
Sino-Norway
EEC
|
1
|
None
|
5
|
|||
|
Hunan
Hanyang
|
3
|
None
|
12
|
|||
|
Total
|
|
24
|
|
41
|
|
446
|
The
Company has not experienced any work stoppages and it considers relations with
its employees to be good. The Company anticipates hiring additional employees as
it expands industrial waste treatment and disposal, and initiates new
project.
Company
History
The
Company was originally incorporated as a Delaware corporation in 1987 under the
name of Egan Systems, Inc. In late 1987, the Company acquired ENVYR Corporation
as a wholly owned subsidiary and established its headquarters in Raleigh, North
Carolina. From 1987 to 2003, the Company was primarily engaged in the business
of developing, selling and supporting computer software products, particularly
products related to the COBOL computer language.
12
In
October 2003, the Company acquired a group of 35 mining claims from Goldtech
Mining Corporation, a Washington Corporation. In November, 2003, the Company
acquired the remaining mining claims of Goldtech Mining Corporation. In
connection with the acquisitions, the Company changed its name to Goldtech
Mining Corporation and re-domiciled to the State of Nevada.
Following
these acquisitions, the Company operated 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 and adopted a business
plan to focus exclusively on its mining exploration business. By September 2005,
the Company had ceased active mining operations as a result of its loss of
contractual mining rights in Spain.
In 2005
the Board of Directors of the Company decided to pursue other business
opportunities. In November 2005, the Company acquired a 90% indirect ownership
interest (through a wholly owned Delaware subsidiary known as DonTech Waste
Services Inc., which was originally known as Dalian Acquisition Corp.) in Dalian
Dongtai, in a reverse merger transaction. Dalian Dongtai had been founded on
January 9, 1991 as a limited liability company under the PRC laws, with a total
registered capital of $250,000.
As a
result of the reverse merger, Dalian Dongtai became a joint venture with foreign
investment under the laws of the PRC, with a total registered capital of $2.3
million. The formation of the joint venture was approved by Dalian Industry and
Commerce Bureau, and the term of the joint venture is 12 years. A new
business license was issued to Dalain Dongtai on October 10, 2005, and the
registered capital has been fully paid as of April 2007.
On
September 18, 2008, the Company formed Favour Group Ltd. as a British Virgin
Islands corporation and a wholly-owned subsidiary of China Industrial Waste
Management, Inc. Simultaneously the Company formed Full Treasure Investments
Ltd. as a Hong Kong corporation and wholly-owned subsidiary of Favour Group Ltd.
Favour Group Ltd. and Full Treasure Investments, Ltd. were established to
facilitate the Company’s banking relationships.
In March
2009, Dontech Waste Services Inc. was merged with and into the Company and
Dalian Dongtai became a direct 90%-owned subsidiary of China Industrial Waste
Management, Inc.
ITEM
1A. RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this Annual Report on Form 10-K before deciding to invest in our common
stock.
Risks Related to our
Business
Our
failure to compete effectively may adversely affect our ability to generate
revenue.
We
compete primarily on the basis of our ability to secure contracts with
industrial companies, and local government entities in Dalian, China and
surrounding areas for waste processing and disposal or for the purchase by us of
waste material which we recycle. There can be no assurance that such contracts
will be available to us in new areas as we attempt to expand or that our
competitors will negotiate more favorable arrangements with our current
customers. We expect that we will be required to continue to invest in building
waste treatment and disposal infrastructure. Our competitors may have better
resources and better strategies to raise capital which could have a material
adverse effect on our business, results of operations and financial
condition.
We
rely on our governmental permits rights to operate our business in Dalian, China
and the loss of the permits would have a material adverse impact on our
business.
Only
those companies who have been granted a special operating license issued by the
national and local governments are permitted to engage in the industrial waste
treatment and disposal business in China. Dalian Dongtai's expansion
project has been listed as one of the fifty-five items
of the Hazardous Waste and Medical Waste Treatment Facility
Construction Program approved by State Environmental Protection Administration.
The national and local governments have strict requirements regarding the
technology which must be employed and the qualifications and training of
management of the licensee which must be maintained. Either the national or
local government could determine at any time that we do not meet the strict
requirements of technology or management and revoke our permit to engage in the
industrial waste business in China. The termination of our licenses to operate
would have a material adverse impact on our revenue and business.
13
If
we fail to introduce new services or our existing services are not accepted by
potential customers we may not gain or may lose market share.
Our
continued growth is dependent upon our ability to generate increased revenue
from our existing customers, obtain new customers and raise capital from outside
sources. We believe that in order to continue to capture additional market share
and generate additional revenue, we will have to raise more capital to fund the
construction and installation of additional facilities and to obtain additional
equipment to collect, process and dispose of industrial waste and recycle waste
for our existing and future customers. For example, we anticipate that we will
require approximately RMB40 million (approximately $5.85 million) in order to
fund the balance of construction of an expansion project to upgrade Dalian
Dongtai’s existing waste processing facilities, as well as approximately
additional RMB14 million (approximately $2 million) to satisfy the operational
requirements of Zhuorui. We anticipate that the total funding requirement
(including the foregoing expenditures) that we will be needed to finance the
construction and installation of additional facilities and to obtain additional
equipment for Dalian Dongtai to accommodate a sharp increase in demand for its
waste management services and more stringent regulatory criteria in
environmental management, as well as to strengthen our presence outside of
Dalian, China, through investment and/or acquisition is approximately RMB100
million (approximately $15 million). We anticipate that such funding will be
provided through a variety of sources including bank loans, equity financing and
net cash flow generated from operations.
It is
likely that we will also seek participation in additional BOT projects or form
joint venture projects, although no such projects have been identified by us at
this time. In the future we may be unable to obtain the necessary financing for
our capital requirements on a timely basis and on acceptable terms, and our
failure to do so may adversely affect our financial position, competitive
position, growth and profitability. Our ability to obtain acceptable financing
at any time may depend on a number of factors, including: our financial
condition and results of operations; the condition of the PRC economy and the
industrial waste treatment industry in PRC, and conditions in relevant financial
markets in the United States, PRC and elsewhere in the world.
Our
inability to fund our capital expenditure requirements may adversely affect our
growth and profitability.
Our
continued growth is dependent upon our ability to generate more revenue from our
existing customers, obtain new customers and raise capital from outside sources.
We believe that in order to continue to capture additional market share and
generate additional revenue, we will have to raise more capital to fund the
construction and installation of additional facilities and to obtain additional
equipment to collect, process and dispose of industrial waste and recycle waste
for our existing and future customers. In the future we may be unable to obtain
the necessary financing on a timely basis and on acceptable terms, and our
failure to do so may adversely affect our financial position, competitive
position, growth and profitability. Our ability to obtain acceptable financing
at any time may depend on a number of factors, including: our financial
condition and results of operations, the condition of the PRC economy and the
industrial waste treatment industry in the PRC, and conditions in relevant
financial markets in the United States, the PRC and elsewhere in the
world.
We
may not be able to effectively control and manage our growth.
If our
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. We may face challenges in managing
our industrial waste treatment and disposal business over an expanded
geographical area as well as managing a business offering expanded waste
treatment services. We may also encounter difficulties in integrating acquired
businesses with our own. Such eventualities will increase demands on our
existing management, workforce and facilities. Failure to satisfy such increased
demands could interrupt or adversely affect our operations and cause
administrative inefficiencies.
If
we are unable to successfully complete and integrate new operational locations
in a timely manner, our growth strategy could be adversely
impacted.
An
important element of our growth strategy is expected to be the development of
operational locations outside of Dalian, China. However, integrating businesses
involves a number of specific risks, including the possibility that management
may be distracted from regular business concerns by the need to integrate
operations, unforeseen difficulties in integrating operations and systems,
problems relating to assimilating and retaining the employees of acquired
businesses, accounting issues that arise in connection with acquisitions,
challenges in retaining customers, and potential adverse short-term effects on
operating results. In addition, we may incur debt to finance future operational
locations, and we may issue securities in connection with future operational
locations that may dilute the holdings of our current or future stockholders. If
we are unable to successfully complete and integrate new operational locations
in a timely manner, our business, growth strategy and financial results could be
materially and adversely impacted.
Our
waste treatment operations are risky and we may be subject to civil liabilities
as a result of hazards posed by such operations.
Our
operations are subject to potential hazards incident to the gathering,
processing and storage of industrial waste such as explosions, product spills,
leaks, emissions and fires. These hazards can cause personal injury and loss of
life, severe damage to and destruction of property and equipment, and pollution
or other environmental damage, and may result in curtailment or suspension of
operations at the affected facility. Consequently, we may face civil liabilities
in the ordinary course of our business. At present, we do not carry any
insurance to cover such liabilities in the ordinary course of our business,
except that our employees are insured for injuries occurring at work. Although
we have not faced any civil liabilities historically in the ordinary course of
our waste treatment operations, there is no assurance that we will not face such
liabilities in the future. If such liabilities occur in the future, they may
adversely and materially affect our operations and financial
condition.
14
Our failure to retain the services
of key personnel will affect our operations and results.
Our
success to date has been largely due to the contributions of our executive
officers. The continued success of our business is very much dependent on the
goodwill that they have developed in the industry over the past years. Our
continued success is dependent, to a large extent, on our ability to retain the
services of our executive officers. The loss of any of our executive officers’
services due to resignation, retirement, illness or otherwise without suitable
replacement or the inability to attract and retain qualified personnel would
affect our operations and may reduce our profitability and the return on your
investment. We do not currently maintain key man insurance covering our
executive officers.
We may not be able to protect our
processes, technologies and systems against claims by third
parties.
Although
we have five registered PRC patents and have applied for two other PRC patents
in respect of the processes, technologies and systems we use frequently in our
systems, we have not purchased or applied for any patents other than these as we
are of the view that it may not be cost-effective to do so. For such other
processes, technologies and systems for which we have not applied for or
purchased or been licensed to use patents, we may have no legal recourse to
protect our rights in the event that they are replicated by other parties. If
our competitors are able to replicate our processes, technologies and systems at
lower costs, we may lose our competitive edge and our profitability may be
reduced.
We may face claims for infringement
of third-party intellectual property
rights.
We may
face claims from third parties in respect of the infringement of any
intellectual property rights owned by such third parties. There is no assurance
that third parties will not assert claims to our processes, technologies and
systems. In such an event, we may need to acquire licenses to, or to contest the
validity of, issued or pending patents or claims of third parties. There can be
no assurance that any license acquired under such patents would be made
available to us on acceptable terms, if at all, or that we would prevail in any
such contest. In addition, we would incur substantial costs and spend
substantial amounts of time in defending ourselves in or contesting suits
brought against us for alleged infringement of another party’s patent rights. As
such, our operations and business may be adversely affected by such civil
actions. We rely on trade secrets, technology and know-how. There can be no
assurance that other parties may not obtain knowledge of our trade secrets and
processes, technology and systems. Should these events occur, our business would
be affected and our profitability reduced.
We are reliant on a few major
suppliers.
We are
dependent on our major suppliers for the timely delivery of waste materials. The
waste generated by our customers is the raw material for our waste treatment
business. Therefore, our industrial solid waste treatment business will be
influenced by the volume of waste generated from our clients. Should our major
suppliers fail to deliver such materials on time, and if we are unable to source
these materials from alternative suppliers on a timely basis, our revenue and
profitability could be adversely affected.
We are subject to risks relating to
BOT (Build-Operate-Transfer) projects in which we have started to
invest.
Our 90%
owned subsidiary, Dalian Dongtai, has begun to invest capital in BOT projects
which require high up-front capital expenditures. Our returns from BOT projects
are derived from fees paid by the PRC government and we expect to benefit from
these BOT projects which are designed to generate a steady and recurring source
of income for us over a sustained period of time - typically between 20 and 25
years. However, our BOT projects are exposed to risks such as the occurrence of
natural disasters or the imposition of more stringent government regulations,
which may result in the disruption of our BOT projects and, therefore, the
projected revenue stream that they create. Our investment returns from these BOT
projects may thus be reduced should any of such risks materialize. In addition,
our lack of experience in administering BOT projects may negatively impact our
ability to successfully manage the projects we have undertaken.
We
are subject to risks relating to geographic expansion in other
provinces/cities.
Our 90%
owned subsidiary, Dalian Dongtai, has commenced its geographic expansion to
other provinces/cities. For example, in May 2009, Dalian Dongtai formed Yingkou
Dongtai, which is a 100%subsidiary that operates in the Coastal Industrial Base
(the "Base") of Yingkou City, Liaoning Province. Yingkou Dongtai, is engaged in
the recycling and disposal of industrial waste, the development and production
of recycling products, the design and construction of environmental engineering,
the treatment of environmental pollution, the manufacturing of environmental
protection equipments, and the sales of chemical products (other than hazardous
chemicals). Yingkou Dongtai intends to build and operate waste treatment
facilities gradually, in line with the development of the Base. Currently,
Yingkou Dongtai is building warehouses, and pursuing the collection,
classification, and storage of industrial waste. In addition, on October 10,
2009, Dalian Dongtai consummated the acquisition of a 65% equity interest in
Hunan Hanyang,which has the right to construct and operate the Hazardous Waste
Treatment Center of Changsha City, Hunan Province for 25 years upon completion
of construction. Hunan Hanyang is also authorized to perform collection,
disposal and treatment of hazardous waste generated from 10 cities including
Changsha, Zhuzhou, Changde, Yiyang, Xiangtan, Yueyang, Zhangjiakou, Huaihua,
Loudi and Xiangxi in northern Hunan Province during the franchising
period.
15
Risks Related to Doing
Business in the
PRC
We
face the risk that changes in the policies of the PRC government could have a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.
The PRC’s
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe that
this trend will continue, we cannot assure you that this will be the case. A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports or
sources of supplies, or the expropriation or nationalization of private
enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, we cannot assure you that the government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership, social
or political disruption, or other circumstances affecting the PRC's political,
economic and social life.
Introduction of new laws or changes
to existing laws by the PRC government may adversely affect our
business.
The PRC
legal system is a codified legal system made up of written laws, regulations,
circulars, administrative directives and internal guidelines. Unlike common law
jurisdictions like the U.S., decided cases (which may be taken as reference) do
not form part of the legal structure of the PRC and thus have no binding effect.
Furthermore, in line with its transformation from a centrally-planned economy to
a more free market-oriented economy, the PRC government is still in the process
of developing a comprehensive set of laws and regulations. As the legal system
in the PRC is still evolving, laws and regulations or the interpretation of the
same may be subject to further changes. For example, the PRC government may
impose restrictions on the amount of tariff that may be payable by municipal
governments to waste water treatment service providers like us. Also, more
stringent environmental regulations may also affect our ability to comply with,
or our costs to comply with, such regulations. Such changes, if implemented, may
adversely affect our business operations and may reduce our
profitability.
The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may have a
material and adverse effect on our business.
There are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We and any future subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are sometimes vague and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New laws
and regulations that affect existing and proposed future businesses may also be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our businesses.
A
slowdown or other adverse developments in the PRC economy or other major
economies all over the world may materially and adversely affect our customers,
demand for our services and our business.
We are a
holding company. All of our operations are conducted in the PRC and all of our
revenues are generated from sales in the PRC. Although the PRC economy has grown
significantly in recent years, we cannot assure you that such growth will
continue. Moreover, China enjoys an export-oriented economy and it relies on
external demand. The industrial waste treatment industry in the PRC is
relatively new and growing, but we do not know how sensitive we are to a
slowdown in economic growth or other adverse changes in the PRC economy which
may affect demand for our services. A slowdown in overall economic growth, an
economic downturn or recession or other adverse economic developments in the PRC
or other major economies all over the world may materially reduce the demand for
our services and the recycled materials we sell and materially and adversely
affect our business.
16
Inflation
in the PRC could negatively affect our profitability and growth.
While the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth.
Our
PRC subsidiaries are subject to restrictions on paying dividends and making
other payments to us.
We are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investments in our
subsidiaries in China. As a result of our holding company structure, we rely
primarily on dividend payments from our subsidiaries. However, PRC regulations
currently permit payment of dividends only out of accumulated profits, as
determined in accordance with PRC accounting standards and regulations. Our
subsidiaries in China are also required to set aside a portion of their
after-tax profits according to PRC accounting standards and regulations to fund
certain reserve funds. The PRC government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. Furthermore, if our
subsidiaries in China incur debt on their own in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
payments. If we or our subsidiaries are unable to receive all of the revenues
from our operations through these contractual or dividend arrangements, we may
be unable to pay dividends on our common stock.
Governmental
control of currency conversion may affect the value of your
investment.
The PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC. We
receive substantially all of our revenues in Renminbi, which is currently not a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of the PRC to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
The PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they come
due.
Furthermore,
the conversion of RMB for capital account items, including direct investments
and loans, is subject to PRC government approval. Chinese entities are required
to establish and maintain separate foreign exchange accounts for capital account
items. We cannot be certain Chinese regulatory authorities will not impose more
stringent restrictions on the convertibility of the RMB, especially with respect
to foreign exchange transactions. Accordingly, cash on deposit in banks in the
PRC is not readily deployable by us for purposes outside of China
The
fluctuation of the Renminbi may materially and adversely affect your
investment.
The value
of the Renminbi against the U.S. dollar and other currencies may fluctuate and
is affected by, among other things, changes in the PRC's political and economic
conditions. As we rely entirely on revenues earned in the PRC, any significant
revaluation of the Renminbi may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar could
have a material adverse effect on our business, financial condition and results
of operations. Conversely, if we decide to convert our Renminbi into U.S.
dollars for the purpose of making payments for dividends on our common shares or
for other business purposes and the U.S. dollar appreciates against the
Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be
reduced. In addition, the depreciation of significant U.S. dollar denominated
assets could result in a charge to our income statement and a reduction in the
value of these assets.
On July
21, 2005, the PRC government changed its decade-old policy pegging the value of
the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. In July 2008, the PRC government re-pegged the value of the RMB to
the U.S. dollar. While the international reaction to the RMB revaluation has
generally been positive, there remains significant international pressure on the
PRC government to adopt an even more flexible currency policy, which could
result in a significant appreciation of the RMB against the U.S.
dollar.
17
Recent
PRC State Administration of Foreign Exchange (“SAFE”) Regulations regarding
offshore financing activities by PRC residents, have undertaken continuous
changes which may increase the administrative burden we face and create
regulatory uncertainties that could adversely affect the implementation of our
acquisition strategy, and a failure by our shareholders who are PRC residents to
make any required applications and filings pursuant to such regulations may
prevent us from being able to distribute profits and could expose us and our PRC
resident shareholders to liability under PRC law.
Recent
regulations promulgated by the PRC State Administration of Foreign Exchange, or
SAFE, regarding offshore financing activities by PRC residents have undergone a
number of changes which may increase the administrative burden we face. The
failure by our shareholders who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
In 2005,
SAFE promulgated regulations in the form of public notices, which require
registrations with, and approval from, SAFE on direct or indirect offshore
investment activities by PRC resident individuals. The SAFE regulations require
that if an offshore company directly or indirectly formed by or controlled by
PRC resident individuals, known as “SPC,” intends to acquire a PRC company, such
acquisition will be subject to strict examination by the SAFE. Without
registration, the PRC entity cannot remit any of its profits out of the PRC as
dividends or otherwise.
Because
our principal assets are located outside of the United States and all of our
directors and all our officers reside outside of the United States, it may be
difficult for you to enforce your rights based on U.S. Federal Securities Laws
against us and our officers and directors or to enforce a judgment of a United
States court against us or our officers and directors in the PRC.
All of
our directors and officers reside outside of the United States. In addition, our
operating subsidiary is located in the PRC and substantially all of our assets
are located outside of the United States. It may therefore be difficult for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the U.S. Federal securities laws against us in the
courts of either the U.S. or the PRC and, even if civil judgments are obtained
in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear
if extradition treaties now in effect between the United States and the PRC
would permit effective enforcement against us or our officers and directors of
criminal penalties, under the U.S. Federal securities laws or
otherwise.
We
may face obstacles from the communist system in the PRC.
Foreign
companies conducting operations in PRC face significant political, economic and
legal risks. The Communist regime in the PRC, including a cumbersome
bureaucracy, may hinder Western investment.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
We
have identified material weaknesses relating to our financial statements. While
we have taken steps to remediate our material weaknesses, there is no
assurance that we will not identify additional material weaknesses in the
future.
We have,
in the past, and during the year ended December 31, 2009, identified
material weaknesses relating to our financial statements. While we have taken
steps to remediate our material weaknesses, there is no assurance that
these weaknesses will, in fact, be remedied, or that we will not identify
additional material weaknesses in the future. As disclosed elsewhere in this
report under Item 9(A)(T) – Controls and Procedures, it will be necessary for us
to monitor certain aspects of our internal operations on a continuing basis in
order to provide for effective controls and procedures. There is no assurance
that we will be successful in these efforts.
18
Risks Related to Our Common
Stock
Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other stockholders.
Our
officers, directors and affiliates beneficially own approximately 68.0% of our
common stock. Dong Jinqing, our Chairman, President and Chief Executive Officer,
beneficially owns 9,847,900 shares (approximately 64.5%) of our common stock. As
a result, Mr. Dong is and will continue to be able to influence the outcome of
stockholder votes on various matters, including the election of directors and
extraordinary corporation transactions including business combinations. Mr.
Dong’s interests may differ from other stockholders. Additional information
relating to the beneficial ownership of our securities is contained
elsewhere in this report under “Security Ownership of Certain Beneficial Owners
and Management.”
We
are not likely to pay cash dividends in the foreseeable future.
We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future, but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends or
other payments from our operating subsidiary. In addition, our operating
subsidiary, from time to time, may be subject to restrictions on its ability to
make distributions to us, including as a result of restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
If
our common stock becomes a “Penny Stock” under rules of the
SEC, transactions in our common stock will become cumbersome and may
reduce the value of an investment in our common stock.
The
Securities Exchange Act of 1934, as amended, includes rules relating to “penny
stock” which apply generally to companies whose common stock trades at less than
$5.00 per share, subject to certain limited exemptions. Such rules require,
among other things, that brokers who trade “penny stock” to persons other than
“established customers” complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
“penny stock” because of the requirements of the “penny stock rules” and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited.
We
believe that our common stock is currently covered by an exemption from the
“penny stock” rules based upon, among other things, the net tangible value of
our assets. However, in the event that we no longer qualify under the exemption
and our common stock is considered a “penny stock,” there may develop an adverse
impact on the market, if any, for our securities. In that event investors will
find it more difficult to dispose of our securities, in part, because it may be
more difficult: (a) to obtain accurate quotations, (b) to obtain
coverage for significant news events because major wire services, such as the
Dow Jones News Service, generally do not publish press releases about such
companies, and (c) to obtain needed capital.
The
elimination of monetary liability against our directors, officers and employees
under our certificate of incorporation and the existence of indemnification
rights to our directors, officers and employees may result in substantial
expenditures by our Company and may discourage lawsuits against our directors,
officers and employees.
Our
certificate of incorporation contains provisions which eliminate the liability
of our directors for monetary damages to our Company and stockholders to the
maximum extent permitted under Nevada corporate law. Our By-laws also require us
to indemnify our directors to the maximum extent permitted by Nevada corporate
law. We may also have contractual indemnification obligations under our
agreements with our directors, officers and employees. The foregoing
indemnification obligations could result in our Company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors,
officers and employees, which we may be unable to recoup. These provisions and
resultant costs may also discourage our Company from bringing a lawsuit against
directors, officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our stockholders
against our directors, officers and employees even though such actions, if
successful, might otherwise benefit our Company and
stockholders.
19
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
Not
applicable to smaller reporting companies.
|
ITEM
2.
|
PROPERTIES.
|
The
following table describes improved properties used by the Company in connection
with its businesses operations in the People’s Republic of China:
|
Address
|
Function
|
Area
(square meter)
|
Nature of
Interest
|
|||
|
No.1,
Huaihe West Road, Dalian Development Area
|
Office
building , electronic waste disposal workshop and
warehouse
|
4,074
|
Owned
|
|||
|
No.1-1,
Huaihe West Third Road, Dalian Development Area
|
Warehouse
and workshop
|
1,958
|
Owned
|
|||
|
No.
100, Tieshan West Road, Dalian Development Area
|
Warehouse,
Industrial effluent treatment station
|
1,941
|
Owned
|
|||
|
No.6,
Haiqing Island,
Dalian
Development Area
|
Office
building, and hazardous waste landfill
|
899
|
Owned
|
|||
|
No.
85, Dagu Hill, Dalian Development Area
|
Project
under construction
|
N/A
|
Owned
|
|||
|
Qianguan
Village, Ganjingzi District, Dalian
|
Ordinary
waste landfill
|
N/A
|
Lease
|
|||
|
Room
1509, 1510 & 1709, Rainbow Building, No.23, Renmin Road, Zhongshan
District. Dalian
|
Office
|
566
|
Lease
(1)
|
|||
|
Xiajiahezi
Villiage, Ganjingzi District, Dalia
|
Office
building, sewage and sludge processing plant
|
7,432
|
Owned
|
|||
|
Dalian
Huayuankou Industrial Zone
|
Office
building, and waste catalyst recycling plant
|
22,789
|
Owned
|
|||
|
Yingkou
Coastal Industrial Base
|
Project
under construction
|
N/A
|
Owned
|
|||
|
No.
118, Wanjiali Road, Changsha
|
Offfice
|
95
|
Lease
|
(1) These
properties are owned by Dalian Lida Environmental Engineering Co., Ltd. or
Dalian Bofa Chemical Material Co., Ltd., both of which are related parties, and
their use is provided to the Company without charge.
The
following table describes land used by the Company in connection with its
business operations. The Company acquires land use right by two means, i.e.,
compensatory transfer and government assignment. A Compensatory transfer refers
to situations in which the local Government designates a specified area of State
owned land under stipulated terms and conditions (such as the duration of the
transfer period and the nature of usage of the land) for development and
operation by the transferee of the land use rights, for which the transferee is
required to pay a transfer fee for the right to use the land. In a Government
assignment, the local Government assigns a specified area of State owned land
under stipulated terms and conditions (such as the nature of usage of the land)
for development and operation by the transferee of the land use right, for which
the transferee is not required to pay compensation, and in connection with
which, no transfer period is stipulated. In both compensatory transfers and
government assignments, ownership of the land remains vested in the People’s
Republic of China.
20
|
Address
|
Area
(square
meter)
|
Means of acquisition
|
Starting
Date
|
Expiry
Date
|
Status
|
||||||
|
No.1,
Huaihe West Road, Dalian Development Area
|
8,433
|
Compensatory
transfer
|
01/01/
2003
|
01/01/
2053
|
Mortgaged
|
||||||
|
No.
100, Tieshan West Road, Dalian Development Area
|
6,784
|
Compensatory
transfer
|
01/01/
2003
|
01/01/
2053
|
Mortgaged
|
||||||
|
No.1-1,
Huaihe West Third Road,
Dalian
Development Area
|
1,841
|
Compensatory
transfer
|
04/14/
2003
|
04/13/
2053
|
Mortgaged
|
||||||
|
No.6,
Haiqing Island, Dalian Development Area
|
10,500
|
Government
assignment
|
N/A
|
N/A
|
Unmortgaged
|
||||||
|
No.
85, Dagu Hill,
Dalian
Development Area
|
61,535
|
Compensatory
transfer
|
07/28/
2003
|
07/27/
2053
|
Mortgaged
|
||||||
|
Dalian
Huayuankou Industrial Zone
|
56,397
|
Compensatory
transfer
|
06/06/
2007
|
06/06/
2057
|
Mortgaged
|
||||||
|
Xiajiahezi
Villiage, Ganjingzi District, Dalia
|
31,513
|
Government
assignment
|
N/A
|
N/A
|
Unmortgaged
|
||||||
|
Xiajiahezi
Villiage, Ganjingzi District, Dalia
|
24,740
|
Government
assignment
|
N/A
|
N/A
|
Unmortgaged
|
||||||
|
Yingkou
Coastal Industrial Base
|
25,000
|
Compensatory
transfer
|
03/24/ 2010
|
12/23/
2056
|
Unmortgaged
|
|
ITEM
3.
|
LEGAL
PROCEEDINGS.
|
We are
not currently a party to any legal proceedings. However, from time to time, we
may become party to various lawsuits and legal proceedings which arise in the
ordinary course of business. Litigation is subject to inherent uncertainties,
and an adverse result may be detrimental to our operations, our financial
condition and/or our results of operations.
|
ITEM
4.
|
REMOVED
AND RESERVED.
|
21
PART II
|
ITEM
5.
|
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES.
|
Market for Common Equity and
Related Stockholder Matters.
The
Company's common stock is currently quoted on the Over-the-Counter Bulletin
Board (“OTCBB”) under the trading symbol “CIWT.”
The
following table sets forth the high and low prices of the Company’s common
stock, as reported by Morningstar Financial for each quarter since January 1,
2008. All information has been adjusted to reflect a 1 for 100 share reverse
stock split which occurred on May 12, 2006. The quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission, and may not represent
actual transactions.
|
Quarter Ended
|
High Bid
|
Low Bid
|
||||||
|
March
31, 2008
|
$ | 3.05 | $ | 1.30 | ||||
|
June
30, 2008
|
$ | 6.50 | $ | 1.70 | ||||
|
September
30, 2008
|
$ | 5.00 | $ | 3.00 | ||||
|
December
31, 2008
|
$ | 3.45 | $ | 1.30 | ||||
|
March
31, 2009
|
$ | 1.95 | $ | 1.06 | ||||
|
June
30, 2009
|
$ | 2.30 | $ | 1.31 | ||||
|
September
30, 2009
|
$ | 1.88 | $ | 1.56 | ||||
|
December
31, 2009
|
$ | 2.59 | $ | 1.61 | ||||
As of
March 30, 2010, the last reported sale price of our common stock as reported on
the OTCBB was $2.85 per share. As of March 30, 2010 there were 15,336,535 shares
of our common stock issued and outstanding, and there were approximately 237
holders of record of our outstanding shares.
Dividend
Policy
The
payment of dividends, if any, is to be within the discretion of the Company’s
Board of Directors and will be contingent upon the Company’s revenues and
earnings, capital requirements, financial condition and the ability of Dalian
Dongtai to obtain approval to get monies out of the PRC. The Company presently
intends to retain all earnings, if any, for use in its business operations
and accordingly, the Board of Directors does not anticipate declaring any
dividends in the near future.
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:
Making up
cumulative prior years’ losses, if any; 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; 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 allocations to the discretionary surplus reserve, if
approved in the shareholders’ general meeting.
Additionally,
the PRC’s national currency, the yuan, is not a freely convertible currency.
Effective January 1, 1994, the PRC foreign exchange system underwent fundamental
changes. This reform was stated to be in line with the PRC’s commitment to
establish a socialist market economy and to lay the foundation for making the
yuan convertible in the future. The currency reform is designed to turn the dual
exchange rate system into a unified and managed floating exchange rate
system.
A China
Foreign Exchange Trading Centre was formed in April, 1994 to provide an
interbank foreign exchange trading market whose main function is to facilitate
the matching of long and short term foreign exchange positions of the
state-designated banks, and to provide clearing and settlement services. The
People’s Bank of China publishes the state managed exchange rate daily based on
the daily average rate from the previous day’s inter-bank trading market, after
considering fluctuations in the international foreign exchange markets. Based on
these floating exchange rates, the state-designated banks list their own
exchange rates within permitted margins, and purchase or sell foreign exchange
with their customers.
22
The State
Administration of Foreign Exchange of the PRC (“SAFE”) administers foreign
exchange dealings and requires that they be transacted through designated
financial institutions. All Foreign Investment Enterprises (“FIEs”) may buy and
sell foreign currency from designated financial institutions in connection with
current account transactions, including, but not limited to, profit
repatriation. With respect to foreign exchange needed for capital account
transactions, such as equity investments, all enterprises in the PRC (including
FIEs) are required to seek approval of the SAFE to exchange yuan into foreign
currency. When applying for approval, such enterprises will be subject to review
by the SAFE as to the source and nature of the yuan funds.
There can
be no assurance that the yuan relative to other currencies will not be volatile
or that there will be no devaluation of the yuan against other foreign
currencies, including the U.S. dollar.
|
ITEM
6.
|
SELECTED
FINANCIAL DATA.
|
Not
applicable to smaller reporting companies.
|
ITEM
7.
|
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
|
The
following discussion should be read in conjunction with the audited combined and
consolidated financial statements of the Company and the notes thereto included
in this report. Readers should also carefully review the risks and uncertainties
described elsewhere in this report under “Risk Factors.”
FORWARD-LOOKING
STATEMENTS
This
Annual Report contains forward-looking statements within the meaning of federal
securities laws. These include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as “anticipate,” “expect,” “intend,” “plan,” “believe,” and similar
language. The forward-looking statements are based on the current expectations
of management and are subject to certain risks, uncertainties and
assumptions, including those described elsewhere in this report under “Risk
Factors.” Actual results may differ materially from results anticipated in these
forward-looking statements. We base the forward-looking statements on
information currently available to us, and we assume no obligation to update
them. Investors are also advised to refer to the information in our filings with
the Securities and Exchange Commission, in which we discuss in greater detail
various important factors that could cause actual results to differ from
expected or historic results. It is not possible to foresee or identify all of
the risks and uncertainties that could affect us.
OVERVIEW
Business
China
Industrial Waste Management, Inc., which, through its indirect 90% owned
subsidiary, Dalian Dongtai Industrial Waste Treatment Co., Ltd. (“Dalian
Dongtai”), has engaged in industrial solid waste treatment since 1991 and is now
the largest industrial solid waste management enterprise in Northeast China. The
Company’s operations are conducted primarily in three areas:
|
|
·
|
Industrial
Solid Waste Treatment and Recycling: Dalian Dongtai
provides services including the collection, storage, transportation,
disposal and incineration of industrial waste, as well as the landfill of
general and hazardous industrial
waste.
|
|
|
·
|
Municipal
Sewage Water Treatment: Dalian Dongtai’s 80%
subsidiary, Dongtai Water, commenced operations in June 2008 to process
domestic sewage generated from a portion of Dalian
City.
|
|
|
·
|
Municipal
sludge treatment (sludge-to-energy): Dalian Dongtai’s
52%-owned subsidiary,
Dongtai Organic, which became operational in 2009, has implemented a
centralized processing of wastewater sludge derived from all sewage
treatment plants in urban Dalian
City.
|
Business
Model
There
were two sources contributing to the Company’s revenue stream in fiscal 2009,
i.e. a. revenue from industrial solid waste and b. sewage treatment. They
accounted for 91% and 9% respectively of revenues for 2009. It is anticipated
that revenue from sludge processing fees and sales of biogas (methane) will
contribute to revenues in 2010.
23
a)
Industrial Solid Waste
Dalian
Dongtai generates revenues from its receipt of waste management service fees and
sales of recycled commodities. Our diverse customer base includes companies
engaged in the electronic, chemical, petrochemical, mechanical treatment,
pharmacy, shipbuilding and automobile making industries, and industrial solid
wastes include solvent, remnants of chemical, waste catalysts, grinding fluids,
cutting fluids, oily sludge, slag, foundry sand and industrial waste
water.
The
typical waste management contract with a client is renewable every year, and the
service fee charged to the customer is based on the volume of waste produced.
Most of our clients make payments on a monthly basis. In 2009, the Company
received approximately $6 million in solid waste treatment service fees from its
777 customers and processed an aggregate of approximately 53,980 tons of
industrial solid waste. Revenues from sales of recycled commodities reached
$3.63 million in 2009. Sales of cupric sulfate accounted for approximately 34%
of the subtotal of sales from recycled commodities.
b) Sewage
Treatment
Dongtai
Water, which is a BOT (Build-Operate-Transfer) plant with a 20 year franchised
right, commenced operations in June 2008 to process domestic sewage generated
from a portion of Dalian City. The plant’s designed capacity is 30,000 tons/day
and it has reached its full capacity. The payment of sewage treatment fees,
which is based on the volume of waste water processed, is paid by the local
government on monthly basis.
Market
Opportunities
|
a)
|
Industrial
Solid Waste
|
The
volume of solid waste generated is highly correlated with resource utilization
rate, industrial production scale and consumption. Based upon statistics of the
National Bureau of Statistics, China, the annual growth rate in China for
industrial waste generation remains at more than 10%, along with the rapid
growth of GDP. In addition, according to statistics of the Ministry of
Environmental Protection, PRC, for 2008 the production of industrial waste was
1.9 billion tons, including 13.57 million tons of hazardous industrial waste, of
which approximately 6.39 million tons of hazardous waste hadn’t been disposed of
properly.
Source:
National Bureau of Stastics, China
Liaoning
and Hunan Provinces in China, in which the Company operates or intend to operate
its industrial solid waste management business, are in the midst of
industrialization. Liaoning Province is a heavy industry base with a diverse
base of companies engaged in the petrochemical, steel and iron, equipment
engineering, shipbuilding, automobile making and pharmacy industries. In
addition to having similar components of industrial structure, due to economic
development and increasing labor cost in eastern cities, Hunan is attracting
manufacturing plants from coastal provinces to inland provinces. We believe that
strong economic performance will enhance rapid growth of our industrial solid
waste business.
|
b)
|
Municipal
Sludge Treatment
|
Municipal
sludge is generated from municipal sewage treatment plants. While the central
government has determined to increase the urban sewage treatment rate to 60% by
the end of 2010, by that time it is expected that sludge generated from sewage
treatment plants throughout the country will reach an aggregate of 30 million
tons per year. Due to the massive volume of sludge and the severe pollution it
causes in China, sludge treatment has garnered increasing government attention;
however, at this time only a few metropolitan cities such as Beijing, Shanghai
and Guangzhou have established sludge treatment facilities, and these facilities
are not equipped to satisfy the needs for sludge processing in these
cities.
24
Management
anticipates the next ten years will see a surge in demand for sludge and other
degradable waste treatment as a result of shortage in sludge treatment
facilities. For example, in Liaoning Province there are currently 42 sewage
treatment plants processing 4 million tons of waste water every day, and these
sewage treatment plants generate approximately 1 million tons of sludge annually
(per Liaoning Academy
of Environmental Science statistics). Our treatment plant that is
operated by Dongtai Organic in Dalian City is currently the only sludge
treatment facility in Liaoning Province. We believe that the shortage of sludge
treatment facilities in Liaoning Province is a microcosm of the problem that
exists throughout China.
Operating
Strategy
Our
business strategy is designed to increase revenues and earnings through
profitable growth and improving returns on invested capital. The components of
our strategy include:
|
|
·
|
Maintaining
commercialization of industrial solid waste treatment as our core business
and maintaining a balanced business structure of the three business lines;
;
|
|
|
·
|
Expansion
into municipal sludge treatment BOT projects with the goal of 30-40% of
our revenues being provided by sludge
treatment;
|
|
|
·
|
Promoting
the installation of sludge treatment tanks in other cities to seize the
market opportunity in the surge of sludge
treatment;
|
|
|
·
|
Managing
our businesses locally with a strong operating focus and emphasis on
customer service;
|
|
|
·
|
Entering
into new geographic markets in China;
and
|
|
|
·
|
Maintaining
our financial capacity and effective administrative systems and controls
to support on-going operations and future growth. We are evaluating growth
in our solid waste treatment operations through opportunities to cooperate
with prominent domestic or overseas partners and attempts to integrate
customer groups (for example, the refinery industry), to realize resource
optimization.
|
|
|
·
|
We
also plan to seek new BOT projects and acquire interests in existing
projects.
|
Risks
There are
numerous risks and uncertainties that may affect the Company's results of
operations and profit forecasts, including:
|
|
·
|
A
macroeconomic decline may adversely impact on industrial solid waste
management businesses.
|
|
|
·
|
Due
to an imbalanced regulatory infrastructure in different areas of China,
the enforcement of environmental protection laws and inconsistent
environmental protection policies may lower the rate of industrial solid
waste business growth in regions where we have a business
presence.
|
|
|
·
|
A
lack of efficiency on the part of the local government in providing the
necessary approvals for sludge/sewage treatment plants may result in
operational delays and
postponements.
|
|
|
·
|
Our
ability to attract and retain qualified managerial and technical personnel
to enhance the company’s geographic expansion in
future.
|
Other
risks and uncertainties associated with our operations are described elsewhere
in this report under “Risk Factors.”
CRITICAL ACCOUNTING
POLICIES
We have
disclosed in Note 3 to our financial statements those accounting policies that
we consider to be significant in determining our results of operations and our
financial position which are incorporated by reference herein.
The
preparation of financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses.
We evaluate our estimates, including those related to bad debts, inventories and
warranty obligations, on an ongoing basis. We base our estimates on historical
experience and on various assumptions that we believe to be reasonable
under the circumstances. These estimates and assumptions affect the reported
amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the periods presented. The
actual results may differ from these estimates under different assumptions or
conditions.
The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:
25
Revenue
Recognition
Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as deferred sales.
Property, Plant and
Equipment
Property,
plant and equipment (“PP&E”) are stated at cost, less accumulated
depreciation and impairment. Expenditures for maintenance and repairs, which are
not considered improvements and do not extend the useful life of PP&E, are
expensed as incurred; additions, renewals and betterments are capitalized. When
PP&E are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in the statement of operations.
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. Payment terms of sales vary from cash on delivery
through a credit term of up to nine to twelve months.
RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the combined and
consolidated financial statements and notes appearing elsewhere in this annual
report.
Revenues
We
generate revenue primarily from two sources, i.e., fees charged to customers for
waste collection, transfer, recycling and disposal services (including service
fees for waste water treatment), and sales of recycled commodities. We consider
our collection and disposal operations and reclamation of reusable substances as
our core business. Revenues from service fees accounted for 66% and 61% of
revenues in fiscal year 2009 and 2008, respectively.
Total
revenue for the year ended December 31, 2009 was $10,561,470, a decrease of
$2,838,414 or 21.18% from $13,399,884 for the same period in 2008. The
decrease in revenue is mainly attributable to the shrinkage of our customer’s
production and unfavorable market price as a result of the economic
downturn. A majority of our clients are export-oriented companies and they were
heavily affected by the reduced demand from overseas market especially in the
first half of 2009. Although the total volume of industrial solid waste treated
caught up in the second half of 2009 (due in large part to an increase in a
certain type of waste derived from a new customer), the gross profit margin for
this type of waste is less attractive than for other types. As a result, despite
our treatment of a higher volume of waste in 2009, solid waste disposal fees
decreased from 2008 levels. We have seen signals of a strong recovery from
the recession since the third quarter of 2009, as the demand from existing
customers and new customers increased significantly, and we expect this trend to
continue in 2010 and thereafter.
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Service
fees
|
$ | 6,928,840 | $ | 8,182,379 | ||||
|
Sales
of cupric sulfate (1)
|
1,244,441 | 1,806,721 | ||||||
|
Sales
of recycled commodities (2)
|
2,388,189 | 3,410,784 | ||||||
|
Total
|
$ | 10,561,470 | $ | 13,399,884 | ||||
Notes:
(1) cupric sulfate is included in the sales of recycled commodities and it is
segmented because its sales account for more than 10% of total
revenue.
(2)
Represents revenues from sales of recycled commodities other than of cupric
sulfate.
26
Service
fee revenue for the year ended December 31, 2009 was $6,928,840 which accounted
for 65.6% of total revenue for this year, a decrease of $1,253,539 or 15.3% over
the $8,182,379 in service fee revenue we generated in the year ended
December 31, 2008. Service fees accounted for 61.1% of our total revenue for the
year ended December 31, 2008.
Sales of
cupric sulfate for the year ended December 31, 2009 were $1,244,441 or 11.78% of
total revenue while that for the year ended December 31, 2008 was $1,806,721 or
13.48% of total revenue. The decrease in sales of cupric sulfate is
attributable to the unfavorable market price caused by the global economic
recession. The average selling price of cupric sulfate fell 32% in 2009 compared
with that in 2008, which caused the sales decrease.
Sales of
recycled commodities were $2,388,189 or 22.6% of total revenue for the year
ended December 31, 2008. Sales of recycled products in 2009 decreased by
$1,022,595 or 29.98% over the year ended December 31, 2008. Due to a
scaling down in production by our clients, both the volume and selling
price of scrap material decreased sharply. For example, the volume of plastic,
slag and waste oil decreased 62.9%, 39.3% and 35.2%, respectively, in
comparison with those of 2008. Average selling prices for cooper powder ,
aluminum sheet, tin and iron scrap in 2009 decreased by 34%, 34%, 27% and
22%, respectively, in comparison with those in 2008.
Cost of
Revenues
Costs of
revenues primarily include labor expenses (salaries, benefits, insurance and
other benefits), depreciation, materials, transportation costs, rent, repair
costs and other sundry expenses. Costs of revenue increased by $31,055 from
$4,154,644 for the year ended December 31, 2008 to $4,185,699 for the year ended
December 31, 2009.
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cost
of service fees
|
$ | 1,880,763 | $ | 1,547,677 | ||||
|
Cost
of cupric sulfate
|
765,011 | 740,881 | ||||||
|
Cost
of other recycled commodities
|
1,539,925 | 1,866,086 | ||||||
|
Total
|
$ | 4,185,699 | $ | 4,154,644 | ||||
Costs
related to providing services increased by $333,086 from $1,547,677 for the year
ended December 31, 2008 to $1,880,763 for the year ended December 31, 2009.
There are three contributing factors that can be identified, i.e., (1) our
clients seek to offset our waste treatment fees by charging us for some of the
“valuable” waste they generate, (2) increasing transportation costs attributable
to greater expenditures for gasoline and insurance; and (3) maintenance costs
associated with general industrial waste landfill caused by rise in raw
materials and accessory materials.
Costs
related to producing recycled waste products (including cupric sulfate and other
recycled commodities) decreased by $302,031 from $2,606,967 for the year ended
December 31, 2008 to $2,304,936 for the year ended December 31,
2009.
Gross
Profit Margin
The gross
profit margin for the ended December 31, 2009 was 60% whereas that for fiscal
year 2008 was 69%. The primary reason for the 9% drop in the Company’s gross
profit margin is attributable to the decline in recycled commodities.
There are three material factors that impacted the 11.5% drop in
gross profit margin in recycled commodities for the year ended December 31
2009
|
a)
|
Higher
cost to acquire etchant, which is used as raw material to
produce cupric sulfate, compared with that of
2008.
|
|
b)
|
As
a direct consequence of the economic downturn, the selling price of our
products and scrap materials decreased significantly. For example, the
average unit price for cupric sulfate in 2009 decreased 32% compared with
that of 2008. Similarly, market prices for other key recycled commodities,
such as plastic, metal and waste oil also dropped between 20% and
35%.
|
|
c)
|
Due to our clients’ reduced production, the volume
of recycled commodities we generated also decreased. Although the quantity
of each specific type of recycled commodity fluctuated, in the aggregate the volume of recycled commodity
we generated dropped
from 8,308 tons in 2008 to 6,029 tons in 2009, a 27.4%
decrease.
|
27
Operating
Expenses
|
Years Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Selling
expenses
|
$ | 501,080 | $ | 806,438 | ||||
|
General
and administrative expenses
|
4,630,665 | 2,793,120 | ||||||
|
Total
operating expenses
|
$ | 5,131,745 | $ | 3,599,558 | ||||
Total
operating expenses for the year ended December 31, 2009 was $ 5,131,745 which
represents an increase of $1,532,187 from $3,599,588 or a 42.6% increase for the
year ended December 31, 2009. General and administrative expenses (“G&A
expense”) increased by $1,837,545 or 66% for the year ended December 31, 2009 as
compared with that of the year ended December 31, 2008. There are four primary
reasons for the significant increase in G&A expenses: (1) For the year ended
December 31, 2008, R&D expenses in the amount of $552,423 were allocated
into manufacturing expense and selling expense, amounting to $168,117 and
$384,306, respectively. While for the year ended December 31, 2009, Dalian
Dongtai allocates all R&D expense in the amount of $513,632 into G&A
expense.(2) For the year ended December 31, 2009, the Company did not meet the
goal set forth in the Performance Escrow Agreement, and 222,222 shares of the
Company’s common stock held by a major stockholder will be disbursed to the
investors. The fair value of the shares, amounting to $565,050, was recorded
into G&A expense. (3) For the year ended December 31, 2009, the increase of
Zhuorui’s G&A expenses accounted for from depreciation of newly constructed
buildings amounted to $211,509. The construction of buildings was completed
toward the end of 2008.(4) As a result of equity exchange between entities under
common control, the financial statements and financial information presented
also include the combined revenues, expenses and cash flows of Dongtai Organic.
Dongtai Organic’s G&A expense increased by $414,276 for the year ended
December 31, 2009 in compare with the year ended December 31, 2008.
Other
Income
For the
year ended 2009, the Company recognized government grants revenue of
$272,121.
In 2009,
the Company acquired a 65% equity interest in Hunan Hanyang for an aggregate
price of approximately $2.2 million (RMB15 million). The fair value, which
is determined, based on an evaluation performed by an independent third party
appraiser and an internal evaluation performed by the Company’s management, the
management decides that the excess($614,397) was treated as bargain
purchase and was recognized in earnings as a gain attributable to the
Company.
LIQUIDITY AND CAPITAL
RESOURCES
Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
As of December 31, 2009, we had a working capital surplus of $1,658,294 as
compared to deficiency of $377,071 as of December 31, 2008. The improvement
primarily results from cash generated by operating activities, bank borrowings,
and government subsidies.
On an
on-going basis, we take steps to identify and plan our needs for liquidity and
capital resources, to fund our planned ongoing construction and day to day
business operations. In addition to working capital to support our routine
activities, we will also require funds for the construction and upgrading of
crucial facilities, acquisition of assets and/or equity, and repayment of
debt.
We
anticipate that our various projects will require us to invest an aggregate of
approximately RMB 89 million (approximately $13 million) in 2010. We will fund
this investment through a combination of operating activities, bank loans,
government subsidies, and sales of our securities. While we anticipate that we
will be able to secure necessary funding as and when needed, there is no
assurance that such will be the case. If we are unable to secure funding as and
when needed, our projects may be delayed which may, in turn, cause delays in
generating revenues from the affected projects, and may reduce our
profitability.
The
following table provides certain selected balance sheet comparisons between the
years ended December 31, 2009 and December 31, 2008.
28
|
As
of December 31,
|
Increase/(Decrease)
|
Percentage
|
||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Working
Capital
|
1,658,294 | (377,071 | ) | 2,035,364 | (539.78 | %) | ||||||||||
|
Cash
|
11,419,129 | 5,710,784 | 5,708,345 | 99.96 | % | |||||||||||
|
Notes
receivable
|
335,780 | - | 335,780 | - | ||||||||||||
|
Accounts
receivable, net
|
2,021,421 | 2,414,257 | (392,836 | ) | (16.27 | %) | ||||||||||
|
Construction
reimbursement receivable
|
846,270 | - | 846,270 | - | ||||||||||||
|
Other
receivable
|
91,872 | 108,304 | (16,432 | ) | (15 | %) | ||||||||||
|
Inventory
|
2,085,029 | 2,375,938 | (290,909 | ) | (12.24 | %) | ||||||||||
|
Advances
to suppliers
|
800,694 | 550,931 | 249,763 | 45.33 | % | |||||||||||
|
Deferred
expense
|
14,650 | 17,589 | (2,939 | ) | (17 | %) | ||||||||||
|
Total
current assets
|
17,614,845 | 11,177,803 | 6,437,042 | 58 | % | |||||||||||
|
Total
assets
|
67,318,256 | 42,599,573 | 24,718,683 | 58 | % | |||||||||||
|
Accounts
payable
|
418,435 | 780,458 | (362,023 | ) | (46.39 | %) | ||||||||||
|
Short-term
loan
|
6,739,038 | 3,371,198 | 3,367,840 | 99.90 | % | |||||||||||
|
Taxes
payable
|
200,957 | 215,240 | (14,283 | ) | (7 | %) | ||||||||||
|
Advance
from customers
|
544,125 | 539,013 | 5,112 | 1 | % | |||||||||||
|
Deferred
sales
|
958,930 | 972,143 | (13,213 | ) | (1.36 | %) | ||||||||||
|
Accrued
expenses
|
301,531 | 361,111 | (59,580 | ) | (16 | %) | ||||||||||
|
Construction
projects payable
|
3,932,297 | 4,823,973 | (891,676 | ) | (18.48 | %) | ||||||||||
|
Other
payables
|
235,211 | 213,248 | 21,963 | 10.30 | % | |||||||||||
|
Long-term
loan – current portion
|
2,245,125 | - | 2,245,125 | - | ||||||||||||
|
Related
party payable
|
380,902 | 278,490 | 102,412 | 37 | % | |||||||||||
|
Total
current liabilities
|
15,956,551 | 11,554,874 | 4,401,677 | 38 | % | |||||||||||
|
Total
liabilities
|
32,786,587 | 13,231,983 | 19,554,604 | 148 | % | |||||||||||
Current
assets as of December 31, 2009 increased by $6,437,042 or approximately 58%
from that of December 31, 2008, and reflect increases in items including
cash and cash equivalents, notes receivable, and construction reimbursement
receivable, etc. Current liabilities as of December 31, 2009 increased by
$4,401,677 or approximately 38% from that of December 31, 2008. This
reflects increases in short-term loans, and Long-term loan – current
portion.
29
Cash
Flows
|
Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
cash provided by operating activities
|
$ | 2,021,512 | $ | 4,489,505 | ||||
|
Net
cash used in investing activities
|
(17,905,977 | ) | (9,545,103 | ) | ||||
|
Net
cash provided by financing activities
|
20,794,601 | 5,204,533 | ||||||
Net
cash provided by operating activities: Net cash provided
by operating activities for the year ended December 31, 2009 decreased by
$2,467,993 or 55% as compared with that of the year ended December 31,
2008.
The sharp
decrease was mainly attributable to the decrease of operating revenue and net
income. Due to the adverse impacts of the global economic crisis, the operating
revenues for the year ended December 31, 2009 decreased by $2,838,414 or 21% as
compared with that of the year ended December 31, 2008. The net income for the
year ended December 31, 2009 decreased by $3,330,565 or 63% as compared with
that of the year ended December 31, 2008.
Net
cash used in investing activities: Net
cash used in investing activities for the year ended December 31, 2009 increased
by $8,360, 874 as compared with that of the year ended December 31,
2008.
In
September 2009, the Company acquired 65% equity interest in Hunan Hanyang for an
purchase price of RMB15,000,000 (approximately $2,195,968), payable in cash. In
December 2009, the Company purchased additional 3% interest interests in Dongtai
Organic for a purchase price of RMB1, 200,000 (approximately
$175,677).
In August
2009, the Company invested RMB600, 000 (approximately $87,839) into a newly
established company named Xiangtan Luyi Dongtai Industrial Waste Treatment Co.
Ltd., in which the Company owns a 15% equity interest.
In 2009,
the facility constructions of the Company’s expansion project that is also known
as the Centralized Hazardous Waste Treatment Center of Dalian City, the
Hazardous Waste Treatment Center of Changsha City, Hunan Province (the
“Center”), and Dongtai Organic, and Zhuorui’s trial production were carried
out.
As of
December 31, 2009, the construction of the expansion project and the Center, and
Zhuorui’s trial production were still in progress. The construction of Dongtai
Organic was completed.
In 2009,
the Company acquired a land use right that is located in the Coastal Industrial
Base of Yingkou City, Liaoning Province, PRC for a consideration of RMB1,510,000
(approximately $221,061).
Net
cash provided by financing activities: Net cash provided by
financing activities for the year ended December 31, 2009 increased by
$15,590,068 as compared with that of the year ended December 31,
2008.
In 2008,
the Company accomplished three rounds of private placement and $750,000 of the
capital raised was temporarily frozen in an escrow account. The fund was
released in 2009 upon satisfaction of specific terms in the placement
agreement.
In July
2009, the Company received a subsidy from the central government of PRC in the
amount of RMB10, 000,000 (approximately $1,465,008) to support the construction
of the Centralized Hazardous Waste Treatment Center of Dalian City that is
located in Dalian Development Area.
In 2009,
the Company repaid short-term bank loan in the amount of RMB23, 000,000
(approximately $3,367,151), and acquired new short-term bank loans to fund day
to day operating activities in the amount of RMB46,000,000 (approximately
$6,734,302).
In 2009,
the Company acquired long-term banks loans in the amount of RMB110, 000,000
(approximately $16,103,767), which are used in the facility construction of
Dongtai Water and Dongtai Organic. The loans are scheduled to be repaid by
installments. As of December 31, 2009, the first installment in the amount of
RMB781, 250 (approximately $114,373) has been repaid.
30
Off
Balance Sheet Arrangements
As of
December 31, 2009, the Company has no off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
|
Not
applicable to smaller reporting companies.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
financial statements of the Company required by this Item 8 are set forth
beginning on page F-1 immediately following the signature page to this annual
report.
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
|
There
have been no disagreements with or changes in the Company’s independent auditors
within the past two fiscal years that have not been previously
reported.
|
ITEM
9A(T).
|
CONTROLS AND
PROCEDURES.
|
Our
management team, under the supervision and with the participation of our
principal executive officer and our principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures as such term is defined under Rule 13a-15(e) promulgated under
the Securities Exchange Act of 1934, as amended (Exchange Act), as of the last
day of the fiscal period covered by this report, December 31, 2009. The
term disclosure controls and procedures means our 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 is recorded,
processed, summarized and reported, within the time periods specified in the
SEC’s 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 or submit under the Exchange
Act is accumulated and communicated to management, including our principal
executive and principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required
disclosure. Based on this evaluation, our principal executive officer and our
principal financial officer concluded that there is a material weakness in our
disclosure controls and procedures as of December 31, 2009.
Our
principal executive officer and our principal financial officer, are responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rules 13a-15(f).
Management is required to base its assessment of the effectiveness of our
internal control over financial reporting on a suitable, recognized control
framework, such as the framework developed by the Committee of Sponsoring
Organizations (COSO). The COSO framework, published in Internal Control-Integrated
Framework, is known as the COSO Report. Our principal executive officer
and our principal financial officer have chosen the COSO framework on which to
base its assessment. Based on this evaluation, our management concluded that
internal control over financial reporting was not effective as of December 31,
2009.
A
material weakness is “a deficiency, or a combination of deficiencies (within the
meaning of PCAOB Auditing Standard No. 5), in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.” Company management has concluded that,
as of December 31, 2009, the following material weakness existed:
|
|
|
|
·
|
We had an insufficient familiarity with generally accepted accounting principles in the United States (“US GAAP”). | |
|
|
·
|
The
Company was unable to ensure that all information required to be disclosed
in our filings was accumulated and communicated to management to allow
timely decisions regarding required
disclosure.
|
|
|
·
|
The
Company is lacking qualified resources to perform the internal audit
functions properly; and the scope and effectiveness of the Company’s
internal audit function are yet to be
developed.
|
Remediation
Initiative:
|
|
·
|
Externally,
we will continue the process of improving the Company’s internal control
system based on COSO Framework under a consulting firm’s
assistance.
|
|
·
|
Began the process of sourcing a consultant experienced in accounting principles generally accepted in the Untied States, including internal controls over financial reporting. |
|
|
·
|
Internally
we established a central management center to recruit more senior
qualified people in order to improve our internal control
procedures.
|
31
There
were no changes in our internal control over financial reporting that occurred
during the last quarter of 2009 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only Management’s report in this annual report.
LACK
OF SEGREGATION OF DUTIES
Management
is aware that there is a lack of segregation of duties at the Company due to the
small number of employees dealing with general administrative and financial
matters. However, at this time management has determined that considering the
abilities of the employees now involved and the control procedures in place, the
risks associated with such lack of segregation are low and the potential
benefits of adding employees to clearly segregate duties do not justify the
substantial expenses associated with such increases. Management will
periodically reevaluate this situation.
|
ITEM
9B.
|
OTHER
INFORMATION.
|
None.
PART III
|
ITEM
10.
|
DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE
EXCHANGE ACT.
|
Officers and
Directors
The
following table sets forth information as of the date of this report with
respect to the directors and executive officers of the Company.
|
Name
|
Position
|
|
|
Dong
Jinqing
|
Chairman
of the Board, Chief Executive Officer and Director
|
|
|
Li
Jun
|
Chief
Operating Officer and Director
|
|
|
Guo
Xin
|
Chief
Financial Officer and Director
|
|
|
Wong
Heung Ming Henry
|
Director
|
|
|
Francis
Nyon Seng Leong
|
Director
|
|
|
Wu
Chunyou
|
Director
|
|
|
Zhang
Long
|
Director
|
|
|
Zhang
Dazhi
|
Corporate
Secretary
|
Mr. Dong
Jinqing, age 52, was appointed the Company’s Chief Executive Officer, Chief
Financial Officer and Director in November 2005, and continues to serve the
Company as its Chairman of the Board and Chief Executive Officer. Mr. Dong has
been the President of Dalian Dongtai Industrial Waste Treatment Co., Ltd. since
he founded that company in 1991. Between 1982 and 1991, Mr. Dong worked for the
Dalian Environmental Science Academy, where he was primarily engaged in research
relating to the disposal of waste gas, waste water and industrial residue and
the evaluation of the environmental effects of industrial projects. Mr. Dong
graduated from Dalian University of Technology in 1982 with a bachelor’s degree
in environmental engineering.
32
Mr. Li
Jun, age 48, was appointed the Company’s Chief Operating Officer in March 2008.
He has served on the Company’s Board of Directors since October
2006. Mr. Li has also served as the Chief Operating Officer of Dalian
Dongtai since 1998. From 1982 to 1993, he was employed by Dalian Vacuum Flask
Factory and Dalian Yili International Chemical Co. Ltd as its Director of
Technology and Chief Production Manager. Mr. Li graduated from Dalian University
of Technology in 1982, majoring in environmental engineering.
Ms. Guo
Xin, age 40, has served as the Company’s Chief Financial Officer and a member of
the Board of Directors since March 2008. Ms. Guo has served as our Chief
Accounting Officer since January 2007, as Chief Accounting Officer for Dalian
Dongtai since October 2003 and as a manager in Dalian Dongtai’s accounting
department from April 2002 to October 2003. Ms. Guo graduated from Beijing
University of Commerce in 1992 majoring in finance, and received her master's
degree in Public Administration from China's Northeastern University in
2002.
Wong
Heung Ming Henry (a/k/a Henry Wong), FCCA, FCPA, CIA, age 41, was appointed as a
director of the Company on April 27 2009. Currently, he is also the head of
internal audit of Maoye International Holdings Limited, a Hong Kong listed
company, since Oct 2010. Since September 2007, Mr. Wong has been the
internal auditor for Xinhua Finance Media Ltd. (NASDAQ: XSEL), a company engaged
in advertising and media relations located in Beijing, China. From September
2004 until September 2007, he served as an auditor with
PricewaterhouseCoopers’ Zhong Tian CPAs Ltd.’s division located in Beijing.
From 2002 to 2003, Mr. Wong served as internal audit manager of the Hong Kong
and China Gas Company Limited. From 1993 to 2002, he was employed on the audit
staff of Deloitte & Touche Corporate Finance Limited and Deloitte &
Touche Tohmatsu Hong Kong. Mr. Wong has 17 years of experience in financing,
internal controls and auditing. He was awarded a Master of E-commerce Degree
from Open University of Hong Kong in 2002, and a Bachelor of Arts Degree in
Accounting from the City University of Hong Kong in 1993. Mr. Wong is also a
member of the Association of Chartered Certified Accountants, a member of
the Hong Kong Institute of Certified Public Accountants and a Certified Internal
Auditor.
Francis
Nyon Seng Leong, age 66, was appointed as a director of the Company on April 27,
2009. Since October 2003, Mr. Leong has served as a financial consultant for
Sungai River Inc., an international financial consulting firm located in
Calgary, Alberta, Canada. During his distinguished career in public finance, Mr.
Leong has served at various times as Finance Officer for the City of Calgary,
Alberta, as well as its Controller of Transit Transportation, Waterworks,
Sanitary and Storm Sewers, Assistant Controller of Electric Systems and as its
City Treasurer and General Manager of Finance. Mr. Leong was awarded a Master
of Public Administration Degree from Brigham Young
University, Provo, Utah, in 1975 and a Bachelor of Commerce Degree
from National Chengchi University, Taipei, Taiwan, in 1968. Mr. Leong also
serves as Board Director of Boyuan Construction Group Inc (BOY- TSXV), China
Infrastructure Construction Corporation (CHNC.OB) and Andatee China Marine Fuel
Services Corporation (AMCF.NASD)
Wu
Chunyou, age 65, was appointed as a director of the Company on April 27, 2009.
Mr. Wu has been employed as a Professor of Business Administration at the Dalian
University of Technology since 1992. He also serves as an independent director
and member of the compensation committee of Dalian Thermal Power Company,
Dalian, China. Mr. Wu completed his studies at the Tsinghua University School of
Economics and Management and Dalian University of Technology.
Zhang
Long, age 37, was appointed as a director of the Company on April 27, 2009. From
2005 to 2008, he was employed as an attorney for Beijing Zedu Law
Firm. Since 2008, Mr. Zhang has been the principal of the Zhang Long Law
Firm in Beijing, China. Mr.Zhang received his Bachelor of Law Degree from
Northwest University of Politics and Law, Xian City, China, in
1996.
Mr. Zhang
Dazhi, age 33, has served as the Company’s Corporate Secretary since March 2008.
He has engaged in Investor Relations Management since he joined Dalian Dongtai
in 2004. Mr. Zhang was awarded a Master’s degree in International Banking and
Financial Studies from the University of Southampton (United Kingdom) in
2004.
Directors
will serve until our next annual meeting, or until their successors are duly
elected and qualified. Officers serve at the pleasure of the Board.
Family
Relationship
There are
no family relationships among our directors or officers
Director
Compensation
We use a
combination of cash and stock-based compensation to attract and retain qualified
candidates to serve on our Board of Directors. Directors who also are employees
of our company currently receive no compensation for their service as directors
or as members of board committees. In setting director compensation, we consider
the significant amount of time that directors dedicate to the fulfillment of
their director responsibilities, as well as the competency and skills required
of members of our board.
33
Commencing
in 2009, our non-employee PRC-residing directors were paid $1,250 per
quarter for their services as directors, and our nonPRC-based
director (Mr. Francis Nyon Seng Leong) received $4,500 per quarter for
his services. In consideration for agreeing to serve as a director of the
Company, Mr. Francis received options to purchase an aggregate of 20,000
shares of our common stock under the Company’s 2006 Equity Incentive Plan. The
options are exercisable commencing on June 30, 2009 and terminating at 5:00 pm
Dalian, China time on March 31, 2012, subject to four vesting periods within 12
months period. Each independent director who acts as Chair of the
Audit Committee and Nominating, Governance and Compensation Committee
receives an additional $500 per quarter.
Non-employee
directors are reimbursed for travel, lodging and other reasonable out-of-pocket
expenses incurred in attending meetings of our Board of Directors and for
meetings of any committees of our Board of Directors on which they
serve. The directors’ annual compensation year begins with the annual
election of directors at the annual meeting of shareholders. Periodically, our
Board of Directors reviews our director compensation policies and, from time to
time, makes changes to such policies based on various criteria the board deems
relevant.
The
following table provides information concerning the compensation of our
directors, for services as members of our Board of Directors for fiscal 2009.
The value attributable to any option awards is computed in accordance with FASB
ASC Topic 718 compensation-stock compensation.
Director
Compensation
|
Name
(a)
|
Fees
earned
or
paid in
cash
($)
(b)
|
Stock
awards
($)
(c)
|
Option
awards
($)
(d)
|
Non-equity
incentive
plan
compensation
($)
(e)
|
Nonqualified
deferred
compensation
earnings
($)
(f)
|
All
other
compensation
($)
(g)
|
Total
($)
(h)
|
|||||||||||||||||||||
|
Dong
Jinqing
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
|
Li
Jun
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
|
Guo
Xin
|
0 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
|
Wong
Heung Ming Henry
|
7,000 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
|
Francis
Nyon Seng Leong
|
20,000 | 0 | 11,400 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
|
Wu
Chunyou
|
5,000 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
|
Zhang
Long
|
5,000 | 0 | 0 | 0 | 0 | 0 | 0 | |||||||||||||||||||||
Committees of the
Board
Audit
Committee
Our Board
of Directors established an Audit Committee on May 8, 2009 and appointed Mr.
Wong Heung Ming Henry, Mr. Francis Nyon Seng Leong and Mr. Wu Chunyou as our
Audit Committee members. Mr. Wong Heung Ming Henry was appointed as the Chairman
of our Audit Committee. Each member of the Audit Committee is “independent”
within the meaning of Section 803A(2) of the NYSE Amex Company Rules and Section
10A(m) of the Securities Exchange Act of 1934.
The Board
of Directors has adopted a charter to govern the activities of the Audit
Committee. A copy of our Audit Committee Charter is available on the Company’s
website at www.chinaciwt.com. The purpose of the Audit Committee is to assist
the Board of Directors in fulfilling its oversight responsibilities with respect
to:
|
(i)
|
the
integrity of the Company’s financial
statements,
|
|
(ii)
|
the
Company’s compliance with legal and regulatory
requirements,
|
|
(iii)
|
the
independent auditors’ qualifications and
independence,
|
|
(iv)
|
the
performance of the independent auditors;
and
|
|
(v)
|
such
other duties as may be directed by the
Board.
|
In this
role, the Committee appoints the independent auditors and reviews and approves
the scope of the audit, the financial statements and the independent auditors’
fees.
34
The Audit
Committee exercises the powers of the Board of Directors in connection with our
accounting and financial reporting practices, and provides a channel of
communication between the Board of Directors and independent registered public
accountants.
Nominating, Governance, and
Compensation Committee
Our Board
of Directors established a Nominating, Governance, and Compensation Committee on
June 30 2009 and appointed Mr. Francis Nyon Seng Leong, Mr. Wong Heung Ming
Henry and Mr. Zhang Long as Nominating, Governance, and Compensation Committee
members. Mr. Francis Nyon Seng Leong was appointed as the Chairman of our
Nominating, Governance, and Compensation Committee. Each member of the
Nominating, Governance, and Compensation Committee is “independent” within the
meaning of Section 803A(2) of the NYSE Amex Company Rules and Section 10A(m) of
the Securities Exchange Act of 1934.
The Board
of Directors adopted a Nominating, Governance, and Compensation Committee
Charter to govern the activities of the Nominating, Governance, and Compensation
Committee. A copy of our Nominating, Governance, and Compensation Committee
Charter is available on the Company’s website at www.chinaciwt.com. The
Nominating, Governance, and Compensation Committee identifies and considers
candidates for board membership, oversees and administers our executive
compensation programs and periodically review corporate governance principles as
are approved and adopted by the Board of Directors and recommend that the Board
of Directors adopt such changes as the Committee deems appropriate.
Policy Regarding Shareholder
Recommendations for Directors
Our Board
of Directors has not yet adopted a policy for the consideration of director
nominees that may be recommended by our shareholders. To date, we have not
received any shareholder recommendations for directors. During 2010,.the
Nominating, Governance, and Compensation Committee expects to consider
implementation of a policy relating to stockholder recommended director
nominees.
Audit Committee Financial
Expert
In
general, an “audit committee financial expert” is an individual member of the
audit committee or Board of Directors who:
|
|
·
|
Understands
generally accepted accounting principles and financial
statements,
|
|
|
·
|
Is
able to assess the general application of such principles in connection
with accounting for estimates, accruals and
reserves,
|
|
|
·
|
Has
experience preparing, auditing, analyzing or evaluating financial
statements comparable to the breadth and complexity to our financial
statements,
|
|
|
·
|
Understands
internal controls over financial reporting,
and
|
|
|
·
|
Understands
audit committee functions.
|
An “audit
committee financial expert” may acquire the foregoing attributes
through:
|
|
·
|
Education
and experience as a principal financial officer, principal accounting
officer, controller, public accountant, auditor or person serving similar
functions;
|
|
|
·
|
Experience
actively supervising a principal financial officer, principal accounting
officer, controller, public accountant, auditor or person serving similar
functions; experience overseeing or assessing the performance of companies
or public accounts with respect to the preparation, auditing or evaluation
of financial statements; or
|
|
|
·
|
Other
relevant experience.
|
Our Board
of Directors had determined that our Chairman of the Audit Committee, Mr. Wong
Heung Ming Henry, qualifies as an “audit committee financial expert” as defined
under Rule 407(d)(5) of Regulation S-K.
Section 16(a) Beneficial Ownership
Reporting Compliance
We are
not currently subject to Section 16(a) of the Securities Exchange Act of 1934,
and, therefore, our directors and executive officers, and persons who own more
than ten percent of our common stock are not required to file with the
Securities and Exchange Commission reports disclosing their initial beneficial
ownership and changes in their beneficial ownership of our common
stock.
Code of
Ethics
A Code of
Ethics is a written standard designed to deter wrongdoing and to
promote:
|
|
·
|
Honest
and ethical conduct,
|
35
|
|
·
|
Full,
fair, accurate, timely and understandable disclosure in regulatory filings
and public statements,
|
|
|
·
|
Compliance
with applicable laws, rules and
regulations,
|
|
|
·
|
The
prompt reporting violation of the code,
and
|
|
|
·
|
Accountability
for adherence to the Code of
Ethics.
|
The
Company has adopted a Code of Ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or
controller, or person’s performing similar functions. It was filed as Exhibit 14
to the Quarterly Report on Form 10-Q filed by the Company on May 15, 2008. A
copy of our Code of Ethics is also available on the Company’s website at
www.chinaciwt.com.
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
The
following table summarizes all compensation recorded by us in each of the last
two completed fiscal years for our principal executive officer, each other
executive officer serving as such whose annual compensation exceeded $100,000 as
of December 31, 2009. The value attributable to any option awards is computed in
“ASB ASC Topic 718 compensation-stock
compensation.”
Summary
Compensation Table
|
Name
and
principal
|
Year
|
Salary
|
Bonus
|
Stock
Awards
|
Value
of
Option
Awards
(2)
|
Non-Equity
Incentive
Plan
Compensation
|
Nonqualified
Deferred
Compensation
Earnings
|
All
Other
Compensation
|
Total
|
|||||||||||||||||||||||||
|
position
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
($)
|
||||||||||||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
|||||||||||||||||||||||||
|
Dong
Jinqing
|
2009
|
15,872 | 75,549 | - | 155,200 |
|
- | - | - | 246,621 | ||||||||||||||||||||||||
|
CEO
(1)
|
2008
|
15,175 | 69,088 | - | - | - | - | - | 84,263 | |||||||||||||||||||||||||
|
Li
Jun
|
2009
|
14,006 | 72,914 | - | 97,000 | - | - | - | 183,920 | |||||||||||||||||||||||||
|
COO
|
2008
|
13,525 | 66,911 | - | - | - | - | - | 80,436 | |||||||||||||||||||||||||
|
Guo
Xin
|
2009
|
12,488 | 38,067 | - | 87,300 | - | - | - | 137,855 | |||||||||||||||||||||||||
|
CFO
|
2008
|
12,119 | 30,747 | - | - | - | - | - | 42,866 | |||||||||||||||||||||||||
(1) Mr.
Dong is provided with the use of a car and driver, the value of which is less
than $10,000.
(2) The
amounts in this column represent the compensation cost of stock options awarded
by the Board, except that these amounts do not include any estimate of
forfeitures. The grants for Mr. Dong Jinqing, Mr. Li Jun and Ms. Guo Xin were
awarded on November 9, 2009. The grant date fair value of option awards granted
were determined in accordance with FASB ASC 718(previously SFAS123(R)) and
are recognized as compensation cost over the requisite service period. The
amount recognized for these awards was calculated using the Black Scholes
option-pricing model, with the following assumptions: expected option life of 5
years, expected volatility 59.76%, dividend 0 and risk free rate
2.31%.
Employment
Agreements
We are
not a party to any written employment agreements.
In 2009,
we established an executive compensation program consisting of three primary
components, i.e.,
|
|
·
|
competitive
base pay,
|
|
|
·
|
short
term variable pay (e.g., short term bonus)
and
|
|
|
·
|
long
term variable pay (e.g.,stock option
award).
|
The key
objectives of this program are to attract and retain qualified executives and to
reward prudent business decisions and operational excellence with a focus on
both annual and long-term results that are aligned with stockholder
interests.
The
Nominating, Governance and Compensation Committee considered the leadership and
its resultant effectiveness of our CEO in these key result areas:
|
|
·
|
Business
strategy implementation
|
|
|
·
|
Succession
planning
|
|
|
·
|
Commercial
results, and
|
36
|
|
·
|
Leadership
|
The
Committee also considered a verbal report presented by the CEO regarding the
performance and recommended compensation of his direct reports. The Board of
Directors approved the compensation decisions as recommended.
Base
Pay
In
determining the base salaries of the executive officers in 2009, the Nominating,
Governance and Compensation Committee considered the performance of each
executive, the nature of the executive's responsibilities, the salary levels of
executives at comparable high technology companies, including other
publicly-held advanced materials and advanced technologies companies, and
the Company's general compensation practices.
Short
Term Bonuses
Discretionary
cash bonuses for executive officers are directly tied to achievement of
specified goals of the Company and are a function of the criteria which the
Nominating, Governance and Compensation Committee believes appropriately take
into account the specific areas of responsibility of the particular
officer.
Stock
Options
Commencing
in November 2009, the company also grants stock options to executive officers in
order to provide a long-term incentive which is directly tied to the performance
of the Company's stock. These options provide an incentive to maximize
stockholder value because they reward option holders only if stockholders also
benefit. The exercise price of these stock options is the fair market of the
Common Stock on the date of grant. In general, the options vest in equal
annual installments over a four-year period beginning one year after the date of
grant. Vesting periods are used to retain key employees and to emphasize the
long-term aspect of contribution and performance. In making stock option grants
to executives, including Mr. Dong, in 2009, the Nominating, Governance and
Compensation Committee considered a number of factors, including the performance
of such persons, the Company's performance in 2009, achievement of specific
delineated goals, the responsibilities and the relative position of such persons
within the Company, the compensation of executives in comparable high technology
companies and the number of stock options each such person currently
possesses.
Outstanding
Equity Awards at Fiscal Year End
The
following table provides information concerning unexercised options, stock that
has not vested and equity incentive plan awards for each named executive officer
outstanding as of December 31, 2009:
|
OPTION AWARDS
|
STOCK AWARDS
|
|||||||||||||||||||||||
|
Name
(a)
|
Number of
securities
underlying
unexercised
options
(#)
exercisable(b)
|
Number of
securities
underlying
unexercised
options
(#)
unexercisable
(c)
|
Equity
incentive
plan
awards:
Number of
securities
underlying
unexercised
unearned
options
(#)
(d)
|
Option
exercise
price
($)
(e)
|
Option
expiration
date
(f)
|
Number
of
shares
or units
of stock
that
have
not
vested
(#)
(g)
|
Market
value of
shares or
units of
stock
that have
not
vested
($)
(h)
|
Equity
incentive
plan
awards:
Number
of
unearned
shares,
units or
other
rights
that have
not
vested
(#)
(i)
|
Equity
incentive
plan
awards:
Market
or
payout
value of
unearned
shares,
units or
other
rights
that have
not
vested
(#)
(j)
|
|||||||||||||||
|
Dong
Jinqing
|
None
|
None
|
160,000 | $ | 1.85 |
Nov.9
2013
|
160,000 | $ | 404,800 |
None
|
None
|
|||||||||||||
|
Li
Jun
|
None
|
None
|
100,000 | $ | 1.85 |
Nov.9
2013
|
100,000 | $ | 253,000 |
None
|
None
|
|||||||||||||
|
Guo
Xin
|
None
|
None
|
90,000 | $ | 1.85 |
Nov.9
2013
|
90,000 | $ | 227,700 |
None
|
None
|
|||||||||||||
|
Zhang
Dazhi
|
None
|
None
|
20,000 | $ | 1.85 |
Nov.9
2013
|
20,000 | $ | 50,600 |
None
|
None
|
|||||||||||||
37
ITEM
12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of
March 31, 2010 there were 15,336,535 shares of our common stock (the only class
of our voting securities) issued and outstanding. The following table sets forth
as of March 31, 2010, certain information with respect to the beneficial
ownership of our voting securities by:
|
|
▪
|
Each
person who is known by us to be the beneficial owner of more than five
percent of ouroutstanding common
stock;
|
|
|
▪
|
Each
director;
|
|
|
▪
|
Each
“named executive officer” [as defined in Item 402(a) (3) of Regulation
S-K]; and
|
|
|
▪
|
All
executive officers and directors as a
group.
|
Unless
otherwise indicated, the business address of each person listed is c/o Dalian
Dongtai Industrial Waste Treatment Co., Ltd., No. 1 Huaihe West Road,
E-T-D Zone, Dalian, China. The percentages in the table have been
calculated on the basis of treating as outstanding for a particular person, all
shares of our common stock outstanding on that date and all shares of our common
stock issuable to that holder in the event of exercise of outstanding options,
warrants, rights or conversion privileges owned by that person at that date
which are exercisable within 60 days of that date. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of our common stock owned by them, except to the extent
that power may be shared with a spouse.
The table
does not give effect to the issuance of up to10,583,087 shares of our common
stock consisting of (a) 2,385,312 shares issuable on the exercise of common
stock purchase warrants at exercise prices ranging from $2.45 per share to $5.00
per share with various expiration dates through August 27, 2013 and (b)
8,197,775 shares available for issuance under our 2006 Equity Compensation
Plan, options to purchase 1,000,000 of which have been granted.
|
Name and Address of Beneficial Owner
|
Number of Shares Beneficially Owned
|
Percent of
Class
|
||||||
|
Dong
Jinqing
|
9,847,900 |
(1)
|
64.5 | % | ||||
|
Li
Jun
|
343,900 |
(2)
|
2.2 | % | ||||
|
Guo
Xin
|
222,600 |
(3)
|
1.5 | % | ||||
|
Wong
Heung Ming Henry
|
— | — | ||||||
|
Francis
Nyon Seng Leong
|
20,000 |
(4)
|
* | |||||
|
Wu
Chunyou
|
— | — | ||||||
|
Zhang
Long
|
— | — | ||||||
|
Zhang
Dazhi
|
20,000 |
(5)
|
* | |||||
|
All
Officers and Directors as a Group (6 persons)
|
10,454,400 |
(1)–(5)
|
68.0 | % | ||||
|
Ancora
Greater China Fund LP
2000
Auburn Drive, #300
Cleveland,
OH 44122
|
980,400 |
(6)
|
6.2 | % | ||||
|
Trillion
Growth China LP
10th
Floor, Bankers Hall West Tower
888
– 3rd
Street SW
Calgary,
AB T2P 5C5
|
941,184 |
(7)
|
6.0 | % | ||||
_____________________________________________
* Less
than 1%.
|
(1)
|
Includes
103,500 shares owned by Dong Su, the son of Mr. Dong. Does not include
160,000 shares issuable upon exercise of options that have not yet
vested
|
|
(2)
|
Does
not include 160,000 shares issuable upon exercise of options that have not
yet vested.
|
|
(3)
|
Does
not include 90,000 shares issuable upon exercise of options that have not
yet vested.
|
|
(4)
|
Consists
of 20,000 shares issuable upon exercise of stock
options.
|
|
(5)
|
Does
not include 20,000 shares issuable upon exercise of options that have not
yet vested.
|
38
|
(6)
|
Consists
of 490,200 outstanding shares and 490,200 shares issuable upon exercise of
outstanding warrants.
|
|
(7)
|
Consists
of 470,592 outstanding shares and 470,592 shares issuable upon exercise of
outstanding warrants.
|
Equity Compensation Plan
Information
The
following table gives information about our common stock that may be issued upon
the exercise of options, warrants and rights under our 2006 Equity Incentive
Plan which is our only equity compensation plan as of December 31,
2009.
|
Plan Category
|
Number of Securities to
be
issued upon exercise of
outstanding options,
warrants
and rights
|
Weighted-average
exercise
price of outstanding
options,
warrant and rights
|
Number of securities
remaining available for
future
issuance under equity
compensation
plans (excluding
securities
reflected in column (a)
|
|||||||||
|
Equity
compensation plans approved
by security holders
2006
Equity Incentive Plan
|
1,000,000 | $ | 1.85 | 5,670,372 | ||||||||
|
Equity
compensation plans not approved by security holders
|
0 | N/A | 0 | |||||||||
|
Total
|
1,000,000 | N/A | 5,670,372 | |||||||||
(a)
Securities available for future issue increase each year by 10% of our
outstanding common stock at the beginning of each year. The total amount of
common stock available under the plan cannot exceed 10 million shares. Inasmuch
as the number of outstanding shares as of January 1, 2010 was 15,274,035, the
number of shares covered by the 2006 Equity Incentive Plan increased by
1,527,403 shares to 8,197,775 shares as of such date.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Dalian
Lida Environmental Engineering Company Limited (“Lida”), in which Mr. Dong holds
49% of interest, is engaged in the business of industrial waste water treatment
engineering, waste gas engineering, and turn-key projects. As of December 31,
2009, receivable from Lida is an unsecured short term loan of $234,401 (RMB1.6
million) with interest rate of 6% per annum, effective on August 1, 2009, and
matures on April 30, 2010.
Dalian
Dongtai Investment Company Limited (“Dongtai Investment”), which is controlled
by Mr. Dong, owns a 30% equity interest in our subsidiary, Zhuorui. As of
December 31, 2009, Zhuorui was indebted to Dongtai Investment in the amount of
$380,902 resulting from a 6% annual interest bearing loan, which matured in
March 2010. Due to the inability of Zhuorui to make timely repayment of the
loan, Dongtai Investment has extended the maturity date of the loan until April
30, 2011.
39
Except
for the foregoing, there have not been any transactions, or series of
similar transactions, since the inception of the Company, or any currently
proposed transaction, or series of similar transactions, to which the
Company or any of its subsidiaries was or is to be a party, in which the amount
involved exceeds $120,000 and in which any director or executive officer of the
Company, nominee for election as a director, any five percent security holder or
any member of the immediate family of any of the foregoing persons had, or will
have, a direct or indirect material interest.
Director
Independence
The
Company applies the standards of NYSE Amex LLC (the Exchange”), for determining
the independence of the members of its Board of Directors and Board committees.
Based upon its application of those standards, the Board of Directors has
determined that the following members of the Company’s Board of Directors (and
committee members, as applicable) are independent:
Wong
Heung Ming Henry
Francis
Nyon Seng Leong
Wu
Chunyou
Zhang
Long
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Audit and Non-Audit
Fees
|
Fiscal Year Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Audit Fees
|
$ | 127,500 | $ | 98,000 | ||||
|
Audit Related Fees
|
None
|
None
|
||||||
|
Tax Fees
|
3,000 | 16,350 | ||||||
|
All Other Fees
|
None
|
None
|
||||||
Pre-Approval of Services by
the Independent Auditor
The Board
of Directors has established policies and procedures for the approval and
pre-approval of audit services and permitted non-audit services. The Board has
the responsibility to engage and terminate the Company’s independent registered
public accountants, to pre-approve their performance of audit services and
permitted non-audit services and to review with the Company’s independent
registered public accountants their fees and plans for all auditing services.
All services provided by and fees paid to Jewett, Schwartz, Wolfe &
Associates in 2009 were pre-approved by the Board of Directors.
40
ITEM
15. EXHIBITS, FINANCIAL
STATEMENT SCHEDULES.
|
Exhibit 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
|
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 June 30, 2006.
|
|
|
3.3
|
By-laws
of the Company. Incorporated by reference to Exhibit 3.2 to the Company’s
Quarterly Report on Form 10-QSB for the quarter ended September 30,
2003.
|
|
|
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.
|
|
|
10.2
|
Contract
for Joint Venture Using Foreign Investment dated October 18, 2007 among
Dalian Dongtai Industrial Waste Treatment Co., Ltd., Ronald Lipp, Karin
Lipp-Mayer and Minghuan Shan. Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed by the Company on October 18,
2007.
|
|
|
10.3
|
Agreement
dated July 10, 2007 by and between Dalian Lida Environmental Engineering
Co., Ltd. and Dalian Dongtai Industrial Waste Treatment Co., Ltd.
Incorporated by reference to Exhibit 10.3 to our Annual Report on Form
10-K filed by the company on April 7, 2008.
|
|
|
10.4
|
Agreement
dated August 6, 2007 by and between Dalian Dongtai Investment Co., Ltd.
and Dalian Dongtai Industrial Waste Treatment Co., Ltd. Incorporated by
reference to Exhibit 10.4 to our Annual Report on Form 10-K filed by the
company on April 7, 2008.
|
|
|
10.5
|
2006
Equity Compensation Plan. Incorporated by reference to the Definitive
Information Statement filed by the Company on March 31,
2006
|
|
|
10.6
|
English
translation of the Share Transfer Agreement by and between Dalian Dongtai
Industrial Waste Treatment Co., Ltd., Hunan Luyi Industrial Development
Co., Ltd. and Song Wenling dated September 18, 2009. Incorporated by
reference to Exhibit 10.1 to our Current Report on Form 8-K filed by the
company on September 21, 2009.
|
|
|
10.7
|
Equity
Transfer Agreement dated December 10, 2009 for acquisition of 3% interest
in Dongtai Organic. Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K filed by the company on March 1,
2010
|
|
|
14
|
Code
of Ethics. Incorporated by reference to Exhibit 14 to the Quarterly Report
on Form 10-Q filed by the Company on May 15, 2008.
|
|
|
21.1
|
List
of Subsidiaries*
|
|
|
31.1
|
Certification
of Jinqing Dong 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 Guo Xin Dong 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
of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.*
|
|
|
32.2
|
Certification
of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of
2002.*
|
* Filed
herewith.
41
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Dated: April 12, 2010
|
||
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
||
|
By:
|
/s/
Dong Jinqing
|
|
|
Dong
Jinqing
Chief
Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
||
|
/s/
Dong Jinqing
|
Chairman
of the Board, Chief Executive Officer and Director
principal
executive officer
|
April
12, 2010
|
||
|
Dong
Jinqing
|
||||
|
/s/
Li Jun
|
Chief
Operating Officer and Director
|
April
12, 2010
|
||
|
Li
Jun
|
||||
|
/s/
Guo Xin
|
Chief
Financial Officer and Director, principal financial and
accounting
officer
|
April
12, 2010
|
||
|
Guo
Xin
|
||||
|
/s/
Wong Heung Ming Henry
|
Director
|
April
12, 2010
|
||
|
Wong
Heung Ming Henry
|
||||
|
/s/
Francis Nyon Seng Leong
|
Director
|
April
12, 2010
|
||
|
Francis
Nyon Seng Leong
|
||||
|
/s/
Wu Chunyou
|
Director
|
April
12, 2010
|
||
|
Wu
Chunyou
|
||||
|
/s/
Zhang Long
|
Director
|
April
12, 2010
|
||
|
Zhang
Long
|
42
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Shareholders of
China
Industrial Waste Management, Inc.
We have
audited the accompanying combined and consolidated balance sheets of China Industrial Waste Management,
Inc. as of December 31, 2009 and 2008 and the related combined and
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the years then ended. These combined and consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of China Industrial Waste Management,
Inc. as of December 31, 2009 and 2008 and the results of
its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
/s/
JEWETT, SCHWARTZ, WOLFE & ASSOCIATES
Hollywood,
Florida
April 10,
2010
F-1
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
COMBINED
AND CONSOLIDATED BALANCE SHEETS
(See
Note 4 of Notes to Combined and Consolidated Financial Statements.)
|
December
31,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 11,419,129 | $ | 5,710,784 | ||||
|
Notes
receivable
|
335,780 | - | ||||||
|
Accounts
receivable, net
|
2,021,421 | 2,414,257 | ||||||
|
Construction
reimbursement receivable
|
846,270 | - | ||||||
|
Other
receivables
|
91,872 | 108,304 | ||||||
|
Inventories
|
2,085,029 | 2,375,938 | ||||||
|
Advances
to suppliers
|
800,694 | 550,931 | ||||||
|
Deferred
expense
|
14,650 | 17,589 | ||||||
|
Total
current assets
|
17,614,845 | 11,177,803 | ||||||
|
Long-term
equity investment
|
87,900 | - | ||||||
|
Property,
plant and equipment, net
|
32,319,145 | 15,500,461 | ||||||
|
Construction
in progress
|
9,123,927 | 12,892,048 | ||||||
|
Land
usage right, net of accumulated amortization
|
1,994,394 | 1,817,427 | ||||||
|
BOT
franchise right
|
4,102,023 | - | ||||||
|
Escrow
account
|
- | 750,000 | ||||||
|
Deposit
|
- | 14,798 | ||||||
|
Certificate
of deposit
|
293,002 | 73,287 | ||||||
|
Restricted
cash
|
96,707 | 25,204 | ||||||
|
Other
asset
|
1,074,531 | 348,545 | ||||||
|
Deferred
tax asset
|
377,381 | - | ||||||
|
Related
party receivable
|
234,401 | - | ||||||
|
TOTAL
ASSETS
|
$ | 67,318,256 | $ | 42,599,573 | ||||
|
LIABILITIES
|
||||||||
|
Current
liabilities
|
||||||||
|
Accounts
payable
|
$ | 418,435 | $ | 780,458 | ||||
|
Short-term
loan
|
6,739,038 | 3,371,198 | ||||||
|
Tax
payable
|
200,957 | 215,240 | ||||||
|
Advance
from customers
|
544,125 | 539,013 | ||||||
|
Deferred
sales
|
958,930 | 972,143 | ||||||
|
Accrued
expenses
|
301,531 | 361,111 | ||||||
|
Construction
projects payable
|
3,932,297 | 4,823,973 | ||||||
|
Other
payable
|
235,211 | 213,248 | ||||||
|
Long-term
loan-current portion
|
2,245,125 | - | ||||||
|
Related
party payable
|
380,902 | 278,490 | ||||||
|
Total
current liabilities
|
15,956,551 | 11,554,874 | ||||||
|
Long-term
loan
|
13,755,512 | - | ||||||
|
Asset
retirement obligation
|
610,445 | 502,278 | ||||||
|
Government
subsidy
|
2,464,079 | 1,174,831 | ||||||
|
TOTAL
LIABILITIES
|
32,786,587 | 13,231,983 | ||||||
|
EQUITY
|
||||||||
|
Stockholders'
equity of the Company
|
||||||||
|
Preferred
stock: par value $.001; 5,000,000 shares authorized; none issued and
outstanding
|
- | - | ||||||
|
Common
stock: par value $.001; 95,000,000 shares authorized; 15,274,035 and
15,262,035 shares issued and outstanding as of December 31, 2009 and 2008
respectively
|
15,274 | 15,262 | ||||||
|
Additional
paid-in capital
|
7,162,867 | 5,644,750 | ||||||
|
Deferred
stock-based compensation
|
(884,139 | ) | - | |||||
|
Accumulated
other comprehensive income
|
2,326,292 | 2,263,076 | ||||||
|
Retained
earnings
|
17,490,919 | 15,531,409 | ||||||
|
Total
stockholders' equity of the Company
|
26,111,213 | 23,454,497 | ||||||
|
Noncontrolling
interest
|
8,420,456 | 5,913,093 | ||||||
|
TOTAL
EQUITY
|
34,531,669 | 29,367,590 | ||||||
|
TOTAL
LIABILITIES AND EQUITY
|
$ | 67,318,256 | $ | 42,599,573 | ||||
See notes
to Combined and Consolidated Financial Statements.
F-2
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
COMBINED
AND CONSOLIDATED STATEMENTS OF INCOME
(See
Note 4 of Notes to Combined and Consolidated Financial Statements)
|
Years
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Revenues
|
||||||||
|
Service
fees
|
$ | 6,928,840 | $ | 8,182,379 | ||||
|
Sales
of cupric sulfate
|
1,244,441 | 1,806,721 | ||||||
|
Sales
of recycled commodities
|
2,388,189 | 3,410,784 | ||||||
|
Total
revenues
|
10,561,470 | 13,399,884 | ||||||
|
Cost
of revenues
|
||||||||
|
Cost
of service fees
|
1,880,763 | 1,547,677 | ||||||
|
Cost
of cupric sulfate
|
765,011 | 740,881 | ||||||
|
Cost
of recycled commodities
|
1,539,925 | 1,866,086 | ||||||
|
Total
cost of revenues
|
4,185,699 | 4,154,644 | ||||||
|
Gross
profit
|
6,375,771 | 9,245,240 | ||||||
|
Operating
expenses
|
||||||||
|
Selling
expenses
|
501,080 | 806,438 | ||||||
|
General
and administrative expenses
|
4,630,665 | 2,793,120 | ||||||
|
Total
operating expenses
|
5,131,745 | 3,599,558 | ||||||
|
Income
from operations
|
1,244,026 | 5,645,682 | ||||||
|
Other
income (expense)
|
||||||||
|
Other
income
|
272,121 | 774,786 | ||||||
|
Other
expense
|
(198,938 | ) | (448,468 | ) | ||||
|
Investment
income (expense)
|
- | - | ||||||
|
Gain
on acquisition
|
614,397 | - | ||||||
|
Total
other income (expense)
|
687,580 | 326,318 | ||||||
|
Net
income before tax provision
|
1,931,606 | 5,972,000 | ||||||
|
Tax
provision
|
49,976 | (659,853 | ) | |||||
|
Net
income
|
1,981,582 | 5,312,147 | ||||||
|
Net
income attributable to the noncontrolling interest
|
(22,072 | ) | (560,029 | ) | ||||
|
Net
income attributable to the Company
|
$ | 1,959,510 | $ | 4,752,118 | ||||
|
Foreign
currency translation adjustment
|
63,216 | 1,109,348 | ||||||
|
Comprehensive
income attributable to the Company
|
2,022,726 | 5,861,466 | ||||||
|
Comprehensive
income attributable to the noncontrolling interest
|
22,072 | 560,029 | ||||||
|
Comprehensive
income
|
$ | 2,044,798 | $ | 6,421,495 | ||||
|
Basic
and diluted weighted average shares outstanding
|
||||||||
|
Basic
|
15,269,062 | 13,755,274 | ||||||
|
Diluted
|
16,255,330 | 13,755,274 | ||||||
|
Basic
and diluted net earnings per share
|
||||||||
|
Basic
|
$ | 0.13 | $ | 0.35 | ||||
|
Diluted
|
$ | 0.12 | $ | 0.35 | ||||
See notes
to Combined and Consolidated Financial Statements.
F-3
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
COMBINED
AND CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2009 AND 2008
(See
Note 4 of Notes to Combined and Consolidated Financial Statements)
|
China
Industrial Waste Management, Inc. Shareholders
|
||||||||||||||||||||||||||||
|
Common
Stock
|
Additional
Paid-in
Capital
|
Deferred Stock
Based
Compensation
|
Accumulated
Other
Comprehensive
Income
|
Retained
Earnings
|
Total
Shareholders' Equity
of
the Company
|
Noncontrolling
Interest
|
Total
|
|||||||||||||||||||||
|
Share
|
Par
Value
|
|||||||||||||||||||||||||||
|
Balance
as of December 31, 2007
|
13,220,843 | $ | 13,221 | $ | 1,968,634 | $ | - | $ | 1,153,728 | $ | 10,779,291 | $ | 13,914,874 | $ | 2,259,595 | $ | 16,174,469 | |||||||||||
|
Shares
issued for services
|
50,000 | 50 | 133,050 | - | - | - | 133,100 | - | 133,100 | |||||||||||||||||||
|
Shares
issued for private placement
|
1,941,192 | 1,941 | 1,857,280 | - | - | - | 1,859,221 | - | 1,859,221 | |||||||||||||||||||
|
Warrants
issued for private placement
|
- | - | 1,174,370 | - | - | - | 1,174,370 | - | 1,174,370 | |||||||||||||||||||
|
Stock
issuance cost
|
50,000 | 50 | 112,950 | - | - | - | 113,000 | - | 113,000 | |||||||||||||||||||
|
Stock
issuance cost-warrants
|
- | - | 398,466 | - | - | - | 398,466 | - | 398,466 | |||||||||||||||||||
|
Noncontrolling
interests in subsidiaries acquired
|
- | - | - | - | - | - | - | 3,093,469 | 3,093,469 | |||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 4,752,118 | 4,752,118 | 560,029 | 5,312,147 | |||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | 1,109,348 | - | 1,109,348 | - | 1,109,348 | |||||||||||||||||||
|
Balance
as of December 31, 2008
|
15,262,035 | $ | 15,262 | $ | 5,644,750 | $ | - | $ | 2,263,076 | $ | 15,531,409 | $ | 23,454,497 | $ | 5,913,093 | $ | 29,367,590 | |||||||||||
|
Shares
issued for services
|
12,000 | 12 | 19,068 | - | - | - | 19,080 | - | 19,080 | |||||||||||||||||||
|
Option
issued for services
|
- | - | 11,419 | - | - | - | 11,419 | - | 11,419 | |||||||||||||||||||
|
Option
issued under equity incentive plan
|
- | - | 922,580 | (922,580 | ) | - | - | - | - | - | ||||||||||||||||||
|
Amortization
of deferred stock-based compensation
|
- | - | 38,441 | - | - | 38,441 | - | 38,441 | ||||||||||||||||||||
|
Share-based
payment by shareholders
|
- | - | 565,050 | - | - | - | 565,050 | - | 565,050 | |||||||||||||||||||
|
Noncontrolling
interests in subsidiaries acquired
|
- | - | - | - | - | - | - | 2,485,291 | 2,485,291 | |||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 1,959,510 | 1,959,510 | 22,072 | 1,981,582 | |||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | 63,216 | - | 63,216 | - | 63,216 | |||||||||||||||||||
|
Balance
as of December 31, 2009
|
15,274,035 | $ | 15,274 | $ | 7,162,867 | $ | (884,139 | ) | $ | 2,326,292 | $ | 17,490,919 | $ | 26,111,213 | $ | 8,420,456 | $ | 34,531,669 | ||||||||||
See notes
to Combined and Consolidated Financial Statements.
F-4
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
COMBINED
AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(See
Note 4 of Notes to Combined and Consolidated Financial Statements)
|
Years
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cash
flows from operating activities:
|
||||||||
|
Net
income attributable to the Company
|
$ | 1,959,510 | $ | 4,752,118 | ||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Nontrolling
interest
|
22,072 | 560,029 | ||||||
|
Depreciation
|
1,041,869 | 650,720 | ||||||
|
Amortization
|
59,133 | 25,578 | ||||||
|
Bad
debt allowance
|
18,929 | 1,635 | ||||||
|
Stock
and options issued for services
|
68,939 | 133,100 | ||||||
|
Share-based
payment
|
565,050 | - | ||||||
|
Accretion
expenses
|
108,341 | 64,659 | ||||||
|
Government
subsidy recognized as income
|
(175,051 | ) | (43,052 | ) | ||||
|
Changes
in operating assets and liabilities:
|
||||||||
|
Notes
receivable
|
(335,544 | ) | - | |||||
|
Accounts
receivable
|
372,429 | (1,821,570 | ) | |||||
|
Other
receivables
|
(16,722 | ) | (69,519 | ) | ||||
|
Inventories
|
94,215 | (1,043,522 | ) | |||||
|
Advance
to suppliers
|
(249,483 | ) | (160,772 | ) | ||||
|
Deferred
expense
|
2,928 | 25,195 | ||||||
|
Deposit
|
- | 66,127 | ||||||
|
Other
asset
|
(717,684 | ) | (348,545 | ) | ||||
|
Deferred
tax assets
|
(377,116 | ) | - | |||||
|
Accounts
payable
|
(361,380 | ) | 378,396 | |||||
|
Tax
payable
|
(14,280 | ) | 121,286 | |||||
|
Advance
from customers
|
5,377 | 539,013 | ||||||
|
Accrued
expense and deferred income
|
(72,077 | ) | 658,629 | |||||
|
Other
payable
|
22,057 | - | ||||||
|
Net
cash provided by operating activities
|
2,021,512 | 4,489,505 | ||||||
|
Cash
flows from investing activiies
|
||||||||
|
Consideration
for acquisition
|
(2,371,646 | ) | - | |||||
|
Investment
in Xiangtan Dongtai
|
(87,839 | ) | - | |||||
|
Investment
in subsidiary
|
- | (185,627 | ) | |||||
|
Purchase
of property and equipment
|
(11,340,864 | ) | (5,288,486 | ) | ||||
|
Construction
in progress
|
(3,406,899 | ) | (4,402,154 | ) | ||||
|
Purchase
of intangible assets
|
(244,895 | ) | - | |||||
|
Repayment
from related party
|
- | 404,450 | ||||||
|
Due
from related party
|
(234,237 | ) | - | |||||
|
Certificate
of deposit
|
(219,597 | ) | (73,286 | ) | ||||
|
Net
cash used in investing activities
|
(17,905,977 | ) | (9,545,103 | ) | ||||
|
Cash
flows from financing activities
|
||||||||
|
Repayment
of construction project payable
|
(806,937 | ) | - | |||||
|
Proceeds
from short-term loans
|
6,734,302 | 3,371,198 | ||||||
|
Repayment
of short-term loans
|
(3,367,151 | ) | (1,369,000 | ) | ||||
|
Proceeds
from long-term loan
|
16,103,767 | - | ||||||
|
Repayment
of long-term loans
|
(114,373 | ) | - | |||||
|
Proceeds
from related party loan
|
102,479 | - | ||||||
|
Cash
released from escrow account
|
750,000 | - | ||||||
|
Subsidy
received from government
|
1,392,514 | 407,278 | ||||||
|
Proceeds
from issuance of common stock, net of offering costs
|
- | 3,545,057 | ||||||
|
Escrow
account
|
- | (750,000 | ) | |||||
|
Net
cash provided by financing activities
|
20,794,601 | 5,204,533 | ||||||
|
Effect
of exchange rate on cash
|
798,209 | 1,333,186 | ||||||
|
Net
increase in cash and cash equivalents
|
5,708,345 | 1,482,121 | ||||||
|
Cash
and cash equivalents, beginning of period
|
5,710,784 | 4,228,663 | ||||||
|
Cash
and cash equivalents, end of period
|
$ | 11,419,129 | $ | 5,710,784 | ||||
|
Supplemental
cash flow information:
|
||||||||
|
Cash
paid during the year for:
|
||||||||
|
Interest
|
$ | 916,491 | $ | 304,684 | ||||
|
Income
taxes
|
$ | 403,871 | $ | 441,170 | ||||
|
Non-cash
investing and financing activities:
|
||||||||
|
Common
stock issuance cost - warrant
|
$ | - | $ | 398,466 | ||||
|
Common
stock issuance cost - stock
|
$ | - | $ | 113,000 | ||||
|
Share-based
payment awarded by major shareholder to investor related to private
placement
|
$ | 565,050 | $ | - | ||||
|
Contributed
anaerobic fermentation equipment
|
$ | 292,796 | $ | - | ||||
|
Transfer
out of construction in progress
|
$ | 7,361,262 | $ | - | ||||
|
Transfer
of construction in progress to property, plant and
equipment
|
$ | 7,361,262 | $ | - | ||||
See notes
to Consolidated Financial Statements.
F-5
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
1. Nature of
operations
The
accompanying combined and consolidated financial statements are those of China
Industrial Waste Management, Inc., a Nevada corporation (the “Company”)
incorporated on November 12, 2003, its wholly owned subsidiaries, DonTech Waste
Services Inc., a Delaware corporation (“DonTech”), and Favour Group Ltd., a
British Virgin Islands corporation (“Favour”), along with its indirect wholly
and majority owned subsidiaries:
• Full
Treasure Investments Ltd. (“Full Treasure”)
• Dalian
Dongtai Industrial Waste Treatment Co., Ltd. (“Dalian Dongtai”)
• Dalian
Dongtai Water Recycling Co., Ltd. (“Dongtai Water”)
• Dalian
Dongtai Organic Waste Treatment Co., Ltd. (“Dongtai Organic”)
• Dalian
Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”)
• Dalian
Lipp Environmental Energy Engineering & Technology Co., Ltd. (“Dalian
Lipp”)
• Yingkou
Dongtai Industrial Waste Treatment Co., Ltd. (“Yingkou Dongtai”)
• Hunan
Hanyang Environmental Protection Science & Technology Co., Ltd. (“Hunan
Hanyang”)
•
Sino-Norway Energy Efficiency Dalian Center Co., Ltd. (“Sino-Norway
EEC”)
In March
2009, DonTech was merged with and into the Company.
Dalian
Dongtai was incorporated on January 9, 1991 in Dalian City, Liaoning Province,
the People’s Republic of China (“PRC”), and now is engaged in the collection,
treatment, disposal, and recycling of industrial wastes, and sales of recycled
products, principally in Dalian and surrounding areas in Liaoning
Province. The Company provides waste disposal solutions to its more than
770 customers from facilities located in Dalian Development Area. In addition,
the Company provides the following services to its clients:
•
Environmental protection services
•
Technology consultation
•
Pollution treatment services
• Waste
management design processing services
• Waste
disposal solutions
• Waste
transportation services
• Onsite
waste management services
•
Environmental pollution remediation services
Dongtai
Water, which was incorporated in July 2006, is a build-operate-transfer (“BOT”)
project established to process municipal sewage generated by Dalian City. Phase
I of Dongtai Water, whose designed production capacity is 30,000 tons per day,
commenced normal production in June 2008.
Dongtai
Organic was incorporated in March 2007 as a joint venture, in which Dalian
Dongtai initially held an equity interest of 49%. In December 2009, Dalian
Dongtai acquired 3% equity interest in Dongtai Organic, thereby increasing its
ownership of Dongtai Organic to 52%. Dongtai Organic is the first sludge
treatment plant in China, with a designed production capacity of 600 tons/day,
which adopts anaerobic fermentation technology. It is designed and built in the
mode of Build-Operate-Transfer (“BOT”), with an operating period of 20
years. See more
details in Note 4 “Business Acquisitions”.
F-6
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Zhuorui
was incorporated in April 2006 and is engaged in plasma arc melting, separation
and purification of waste catalysts that generated during oil refinery process,
treatment of industrial wastes and comprehensive utilization of waste catalysts
or similar material.
Dalian
Lipp is a Sino-German joint venture established in December 2007. Dalian Lipp
designs, manufactures and installs environmental protection equipment and
renewable energy equipment and provides related technical services. The project
is based on the Lipp GmbH tank building technique which is dedicated to
generating energy by organic waste anaerobic fermentation, industrial effluent
treatment and municipal sewage plant.
Yingkou
Dongtai, which operates in the Coastal Industrial Base (the “Base”) of Yingkou
City, Liaoning Province, was founded in May 2009. Yingkou Dongtai is engaged in
the recycling
and disposal of industrial waste, and development and production of recycling
products. Yingkou Dongtai intends to build and complete waste treatment
facilities gradually in line with the development of the Base.
On
October 10, 2009, Dalian Dongtai acquired 65% equity interest in Hunan Hanyang.
Hunan Hanyang was established in Hunan Province in 2004, and is engaged in the
business of treatment and comprehensive utilization of waste. . See more details
in Note 4 “Business Acquisitions”.
In
November 2009, Sino-Norway EEC was incorporated as a joint venture in Dalian.
Sino-Norway EEC is engaged in the business of energy efficiency audit and
consultation, and is sponsored under the Energy Efficiency Planning Program
initiated by Chinese and Norwegian governments.
2. Basis of
presentation
The
accompanying consolidated financial statements include the accounts of the
parent entity, its direct wholly owned subsidiary, Favour, along with its
indirect wholly owned subsidiary, Full Treasure, its 90% indirect owned
subsidiary, Dalian Dongtai, its 80% indirect owned subsidiary, Dongtai Water,
its 70% indirect owned subsidiary, Zhuorui, its 75% indirect owned subsidiary,
Dalian Lipp, its 100% indirect owned subsidiary, Yingkou Dongtai, and its 65%
indirect owned subsidiary, Hunan Hanyang.
In
December 2009, Dalian Dongtai acquired 3% additional equity interest in Dongtai
Organic, thereby increasing its ownership of Dongtai Organic to 52%. As a result
of equity exchange between entities under common control, the financial
statements and financial information presented for prior years during which the
entities were under common control, have been retrospectively adjusted to
furnish comparative information, adjusted financial statements and financial
summaries also include the combined
revenues, expenses and cash flows of Dongtai Organic. All material
inter-company accounts and transactions have been eliminated in the
consolidation.
The
accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”). This
basis differs from that used in the statutory accounts of the Company, which
were prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises in PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP.
F-7
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
3. Summary of significant
accounting policies
Use of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Foreign currency
translation
As of
December 31, 2009 and 2008, the accounts of the Company were maintained, and the
combined and consolidated financial statements were expressed in Chinese Yuan
Renminbi (“RMB”). Such consolidated financial statements were translated into
U.S. dollars (“USD”) in accordance with the Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 830 Foreign
Currency Matters with RMB as the functional currency. All assets and liabilities
were translated at the exchange rate as of the balance sheet date; stockholders’
equity was translated at the exchange rates prevailing at the time of the
transactions; revenues, costs, and expenses were translated at the weighted
average exchange rate for the period. The resulting translation adjustments are
reported under other comprehensive income in accordance with ASC Topic 220
Comprehensive Income.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand and cash on deposit, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Restricted
cash
In
accordance with ASC Topic 210-10-45-4 Classification of Current Assets, cash
which is restricted as to withdrawal is considered a non-current asset. As of
December 31, 2009 and 2008, restricted cash consists of government subsidy of
$96,707 and $25,204, which is to be used exclusively on facility construction
and equipment procurement. It also consists of certificate of deposit of
$293,002 and $73,287, respectively.
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.
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate the
adequacy of these reserves. Payment terms of sales vary from cash on delivery
through a credit term of up to nine to twelve months.
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.
F-8
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Inventory
Inventories
are stated at the lower of cost, as determined on a first-in, first-out basis
for raw materials and auxiliary materials, and weighted average basis for other
categories, or market. Management compares the cost of inventories with the
market value, and an allowance is made for writing down the inventories to their
market value, if lower.
Property, plant and
equipment
Property,
plant and equipment (“PP&E”) are stated at cost, less accumulated
depreciation and impairment. Expenditures for maintenance and repairs, which are
not considered improvements and do not extend the useful life of PP&E, are
expensed as incurred; additions, renewals and betterments are capitalized. When
PP&E are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is
included in the statement of operations.
Depreciation
is provided to recognize the cost of PP&E in the results of operations. The
Company calculates depreciation using the straight-line method with estimated
useful life as follows:
|
Useful Life
|
|
|
Buildings
|
20
Years
|
|
Machinery
|
10-14
Years
|
|
Vehicles
|
4
Years
|
|
Office
equipment
|
3-5
Years
|
Construction
in progress consists of construction expenditure, equipment procurement,
capitalized interest expense, relevant miscellaneous expenditures, and other
costs.
As of
December 31, 2009, construction in progress is comprised of three principal
components. The first component is the Centralized Hazardous Waste Treatment
Center of Dalian City (the “Expansion Project”), which is located in Dagu Hill,
Dalian Development Area. The Expansion Project consists of an incineration
system that includes an incinerator, its supporting facilities, and warehouses,
work plants and office buildings, etc. The second component is the production
equipments of Zhuorui, which are still in testing phase, including the plasma
furnace, flue gas cleansing system, dust trapper,etc. The third component is the
Hazardous Waste Treatment Center of Changsha City, Hunan Province, which is in
the phase of preparation for the commencement of construction.
Landfills
Various
costs that we incur to make a landfill ready to accept waste are capitalized.
These costs generally include expenditures for land, permitting,
excavation, liner material and installation and other capital infrastructure
costs. The cost basis of our landfill assets also includes estimates of future
costs associated with landfill final capping, closure and post-closure
activities in accordance with ASC Topic 410 Asset Retirement and Environmental
Obligations. Interest accretion on final capping, closure and post-closure
liabilities is recorded using the effective interest method and is recorded as
accretion expense, which is included our Combined and Consolidated Statements of
Operations and Comprehensive Income.
F-9
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
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,
|
||||||||
|
2009
|
2008
|
|||||||
|
Long-term
liability
|
$ | 610,445 | $ | 502,278 | ||||
Long-term equity
investment
As of
December 31, 2009, long-term investment is comprised of investment in Xiangtan
Luyi Dongtai Industrial Waste Treatment Co., Ltd. (“Xiangtan
Dongtai”).
|
As of December 31, 2009
|
||||
|
Xiangtan
Dongtai
|
$ | 87,900 | ||
Xiangtan
Dongtai, located in Xiangtan City, Hunan Province, was established on August 5,
2009, and primarily engaged in treatment and disposal of industrial waste,
development and sales of recycled products. Dalian Dongtai owns a 15% equity
interest in Xiangtan Dongtai, therefore, the Company applies the cost method to
account for its investment.
Impairment of long-lived
assets
In
accordance with ASC Topic 360 “Accounting for the Impairment or Disposal of Long
Lived Assets”, property, plant, and equipment are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Intangible assets are tested for impairment
annually. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. There were no events or changes in circumstances that
necessitated a review of impairment of long lived assets as of December 31, 2009
and December 31, 2008, respectively.
F-10
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Intangible
assets
Intangible
assets consist of “rights to use land and build a plant” for 50 years and
intellectual property. The intangible assets are amortized using straight – line
method. The Company also evaluates intangible assets for impairment, at least on
an annual basis and whenever events or changes in circumstances indicate that
the carrying value may not be recoverable from its estimated future cash flows.
Recoverability of intangible assets, other long-lived assets and, goodwill is
measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors, including past
operating results, budgets, economic projections, market trends and product
development cycles. If the net book value of the asset exceeds the related
undiscounted cash flows, the asset is considered impaired, and a second test is
performed to measure the amount of impairment loss.
As of
December 31, 2009, net land usage rights were $1,994,394, of which $1,736,163
has been pledged as collaterals for the short-term loans from Shanghai Pudong
Development Bank.
The
following table identifies the material terms of the land use
rights:
|
Effective
Date
|
Expiration
Date
|
Area
(Square Meter)
|
Address
|
Status
|
||||
|
01-01-2003
|
01-01-2053
|
|
8,433 |
No.1,
Huaihe West Road, Dalian Development Area
|
Mortgaged
|
|||
|
01-01-2003
|
|
01-01-2053
|
6,784 |
No.
100, Tieshan West Road, Dalian Development Area
|
Mortgaged
|
|||
|
04-14-2003
|
04-13-2053
|
1,841 |
No.1-1,
Huaihe West Third Road, Dalian Development Area
|
Mortgaged
|
||||
|
07-28-2003
|
07-27-2053
|
61,535 |
No.
85, Dagu Hill, Dalian Development Area
|
Mortgaged
|
||||
|
06-06-2007
|
06-06-2057
|
56,397 |
Dalian
Huayuankou Economic Zone
|
Mortgaged
|
||||
|
03-24-2010
|
12-23-2056
|
25,000 |
Yingkou
Coastal Industrial Base
|
Unencumbered
|
||||
|
-
|
-
|
10,500 |
Haiqing Island, Dalian Development
Area
|
Unencumbered
|
Noncontrolling interest in
consolidated financial statements
The
Company establishes accounting and reporting standards for the noncontrolling
(minority) interest in a subsidiary and for the deconsolidation of a
subsidiary in accordance with ASC Topic 805 Business Combinations.
Noncontrolling interest represents the minority owners’10% equity interest in
Dalian Dongtai, 20% equity interest in Dongtai Water, 48% equity interest in
Dongtai Organic, 30% equity interest in Zhuorui, 25% equity interest in Dalian
Lipp, 35% equity interest in Hunan Hanyang, and 40% equity interest in
Sino-Norway EEC.
Revenue
recognition
The
Company recognizes revenues in accordance with the guidance in the Securities
and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104.
Revenue is recognized when persuasive evidence of an arrangement exists, when
the selling price is fixed or determinable, when delivery occurs and when
collection is probable.
Revenues
are generated from the fees charged for waste collection, transfer, treatment,
disposal and recycling services and the sale of recycled commodities. The fees
charged for services are generally defined in service agreements and vary based
on contract specific terms such as frequency of service, weight, volume and the
general market factors influencing industry’s rates. Recycled commodities are
considered delivered at the point when the customers take ownership and assume
risk of loss of the commodities.
F-11
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Deferred
sales consist of contracts for which the fees have been collected but revenue
has not yet been recognized in accordance with the revenue recognition policy.
As of December 31, 2009 and 2008, deferred sales amount to $958,930 and
$972,143, respectively.
The AICPA
Issues Paper recommends that governmental grants be accounted for as
follows:
|
i)
|
Grants
related to revenue, such as certain export subsidies and price control
subsidies, should be recognized in the period of the related
events.
|
|
ii)
|
Grants
to reimburse current expenditures, such as research and development costs,
wages, training costs and transportation costs, should be treated as a
reduction of current or future related expense, depending on when the
related expense is recognized.
|
|
iii)
|
Grants
related to developing property, such as timberlands, or mineral reserves,
should be recognized over the useful lives of the
assets.
|
Government
grants are received at a discretionary amount as determined by the local PRC
government. The Company follows the guideline of the AICPA Issues Paper in
accounting for grants as revenues. In general, government grants for revenues
and/or expenses should be recognized in income when the related revenue or
expense is recorded. Grants related to property or equipment should be
recognized over the useful lives of the related asset. Funds received before the
conditions of the grant are met should be recorded as deferred
revenue.
Stock-based
compensation
The
Company follows the guideline under ASC Topic 718 Compensation-Stock
Compensation for
all stock based compensation plans, including employee stock options, restricted
stock, employee stock purchase plans and stock appreciation rights. Stock
compensation expenses are to be recorded using the fair value
method.
Income
taxes
The
Company follows the guideline under ASC Topic 740 Income Taxes. “Accounting for
Income Taxes” which requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each period end based on enacted tax laws and statutory tax
rates, applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
Statement of cash
flows
In
accordance with ASC Topic 230 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.
F-12
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Basic and diluted net
earnings per share
Earnings
per share is calculated in accordance with ASC Topic 260 Earnings Per Share.
Basic earnings per share is based upon the weighted average number of common
shares outstanding. Diluted earnings per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the
period.
Reclassifications
Certain
reclassifications have been made in the 2008 financial statements to conform to
the 2009 presentation.
Recent accounting
pronouncements
Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 260, Earnings per Share
(formerly FASB Staff Position (“FSP”) Emerging Issues Task Force (“EITF”)
03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities). The new guidance clarifies that non-vested share-based
payment awards that entitle their holders to receive nonforfeitable dividends or
dividend equivalents before vesting should be considered participating
securities and included in basic earnings per share. The Company’s adoption of
the new accounting standard did not have a material effect on previously issued
or current earnings per share.
Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 805, Business Combinations
(formerly SFAS No. 141(R), Business Combinations). The
new standard applies to all transactions or other events in which an entity
obtains control of one or more businesses. Additionally, the new standard
requires the acquiring entity in a business combination to recognize all (and
only) the assets acquired and liabilities assumed in the transaction;
establishes the acquisition-date fair value as the measurement date for all
assets acquired and liabilities assumed; and requires the acquirer to disclose
additional information needed to evaluate and understand the nature and
financial effect of the business combination.
Effective
January 1, 2009, the Company adopted a new accounting standard included in
ASC 810, Consolidations
(formerly SFAS 160, Noncontrolling Interests in
Consolidated Financial Statements). The new accounting standard
establishes accounting and reporting standards for the noncontrolling interest
(or minority interests) in a subsidiary and for the deconsolidation of a
subsidiary by requiring all noncontrolling interests in subsidiaries be reported
in the same way, as equity in the consolidated financial statements. As such,
this guidance has eliminated the diversity in accounting for transactions
between an entity and noncontrolling interests by requiring they be treated as
equity transactions. The Company’s adoption of this new accounting standard did
not have a material effect on the Company’s consolidated financial
statements.
In May
2009, the FASB issued ASC 855, Subsequent Events, which
provides guidance on events that occur after the balance sheet date but prior to
the issuance of the financial statements. ASC 855 distinguishes events requiring
recognition in the financial statements and those that may require disclosure in
the financial statements. Furthermore, ASC 855 requires disclosure of the date
through which subsequent events were evaluated. These requirements are effective
for interim and annual periods after June 15, 2009. We adopted these
requirements for the year ended December 31, 2009, and have evaluated subsequent
events through April 10, 2010.
F-13
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
In June
2009, The Company adopted the Financial Accounting Standards Board’s (“FASB”)
Accounting Standards Codification (“ASC”) Topic 105 as the single official
source of authoritative, nongovernmental generally accepted accounting
principles in the United States. On the effective date, all then-existing
non-SEC accounting literature and reporting standards were superseded and deemed
nonauthoritative. The adoption of this pronouncement did not have a material
impact on our consolidated financial statements; however, the ASC affected the
way we reference authoritative guidance in our consolidated financial
statements.
In June
2009, the FASB issued FASB Statement No. 167, "Amendments to FASB Interpretation
No. ("FIN") 46(R)" ("Statement No. 167"), codified in ASC Topic
810-10. Statement No. 167, among other things, requires a qualitative
rather than a quantitative analysis to determine the primary beneficiary of a
variable interest entity ("VIE"), amends FIN 46(R)’s consideration of related
party relationships in the determination of the primary beneficiary of a VIE,
amends certain guidance in FIN 46(R) for determining whether an entity is a VIE,
requires continuous assessments of whether an enterprise is the primary
beneficiary of a VIE, and requires enhanced disclosures about an enterprise’s
involvement with a VIE. Statement No. 167 is effective for annual
reporting periods beginning after November 15, 2009. The adoption of
the provisions of Statement No. 167 is not anticipated to impact the company's
consolidated financial position, results of operations or cash
flows.
In August
2009, the FASB issued ASU 2009-05 which includes amendments to Subtopic 820-10,
“Fair Value Measurements and Disclosures—Overall”. The update provides
clarification that in circumstances, in which a quoted price in an active market
for the identical liability is not available, a reporting entity is required
to measure fair value using one or more of the techniques provided for in
this update. The amendments in this ASU clarify that a reporting entity is not
required to include a separate input or adjustment to other inputs relating to
the existence of a restriction that prevents the transfer of the liability and
also clarifies that both a quoted price in an active market for the
identical liability at the measurement date and the quoted price for the
identical liability when traded as an asset in an active market when no
adjustments to the quoted price of the asset are required are Level 1 fair value
measurements. The guidance provided in this ASU is effective for the first
reporting period, including interim periods, beginning after issuance. The
adoption of this standard did not have a material impact on the Company’s
consolidated financial position and results of operations
In
September 2009, the FASB issued ASU 2009-06, Income Taxes (Topic 740),
”Implementation Guidance on Accounting for Uncertainty in Income Taxes and
Disclosure Amendments for Nonpublic Entities”, which provides implementation
guidance on accounting for uncertainty in income taxes, as well as eliminates
certain disclosure requirements for nonpublic entities. For entities
that are currently applying the standards for accounting for uncertainty in
income taxes, this update shall be effective for interim and annual periods
ending after September 15, 2009. For those entities that have deferred the
application of accounting for uncertainty in income taxes in accordance with
paragraph 740-10-65-1(e), this update shall be effective upon adoption of those
standards. The adoption of this standard is not expected to have an impact on
the Company’s consolidated financial position and
results of operations since this accounting standard update provides only
implementation and disclosure amendments.
F-14
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
In
September 2009, the FASB has published ASU 2009-12, “Fair Value Measurements and
Disclosures (Topic 820) - Investments in Certain Entities That Calculate Net
Asset Value per Share (or Its Equivalent)”. This ASU amends Subtopic 820-10,
“Fair Value Measurements and Disclosures – Overall”, to permit a reporting
entity to measure the fair value of certain investments on the basis of the net
asset value per share of the investment (or its equivalent). This ASU also
requires new disclosures, by major category of investments including the
attributes of investments within the scope of this amendment to the
Codification. The guidance in this update is effective for interim and annual
periods ending after December 15, 2009. Early application is permitted. The
adoption of this standard is not expected to have an impact on the Company’s
consolidated financial position and
results of operations since this accounting standard update provides only
implementation and disclosure amendments.
In
October 2009, the FASB has published ASU 2009-13, “Revenue Recognition (Topic
605)-Multiple Deliverable Revenue Arrangements”, which addresses the accounting
for multiple-deliverable arrangements to enable vendors to account for products
or services (deliverables) separately rather than as a combined unit.
Specifically, this guidance amends the criteria in Subtopic 605-25, “Revenue
Recognition-Multiple-Element Arrangements”, for separating consideration in
multiple-deliverable arrangements. This guidance establishes a selling price
hierarchy for determining the selling price of a deliverable, which is based on:
(a) vendor-specific objective evidence; (b) third-party evidence; or (c)
estimates. This guidance also eliminates the residual method of allocation and
requires that arrangement consideration be allocated at the inception of the
arrangement to all deliverables using the relative selling price method and also
requires expanded disclosures. The guidance in this update is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010. Early adoption is
permitted. The adoption of this standard is not expected to have a material
impact on the Company’s consolidated financial position and results of
operations.
In
January 2010, the FASB issued Accounting Standards Update No. 2010-06
applicable to FASB ASC 820-10, Improving Disclosures about Fair
Value Measurements. The guidance requires entities to disclose
significant transfers in and out of fair value hierarchy levels and the reasons
for the transfers and to present information about purchases, sales, issuances
and settlements separately in the reconciliation of fair value measurements
using significant unobservable inputs (Level 3). Additionally, the guidance
clarifies that a reporting entity should provide fair value measurements for
each class of assets and liabilities and disclose the inputs and valuation
techniques used for fair value measurements using significant other observable
inputs (Level 2) and significant unobservable inputs (Level 3). This guidance is
effective for interim and annual periods beginning after December 15, 2009
except for the disclosures about purchases, sales, issuances and settlements in
the Level 3 reconciliation, which will be effective for interim and annual
periods beginning after December 15, 2010. As this guidance provides only
disclosure requirements, the adoption of this standard will not impact the
Company’s consolidated results of operations, cash flows or financial
positions.
4. Business
acquisitions
(a) Acquisition of 65% equity interest in
Hunan Hanyang
Environmental Protection Science & Technology Co.,
Ltd.
On
September 18, 2009, the Company entered into a Share Transfer Agreement to
acquire 65% equity interest in Hunan Hanyang Environmental Protection
Science & Technology Co., Ltd. (“Hunan Hanyang”), a company formed
under the laws of PRC, for an purchase price of approximately $2.2
million (RMB15 million), payable in cash. On October 10, 2009, the
Company consummated the acquisition of Hunan Hanyang.
F-15
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Hunan
Hanyang engages in the business
of treatment and comprehensive utilization of industrial waste. In 2006,
Hunan Hanyang signed a BOT Agreement with the Bureau of Environmental Protection
of Hunan Province, pursuant to which Hunan Hanyang is entitled to a franchise
right to construct and operate the Hazardous Waste Treatment Center of Changsha
City, Hunan Province ("the Center") for 25 years upon completion of
construction. According to the Feasibility Report of the Center released by the
Bureau of Environmental Protection of Hunan Province ,the estimated construction
cost is approximately US$27.1 million (RMB185 million), and 60% of which,
approximately $16.1 million (RMB110 million), will be subsidized by the central
government of PRC.
The
acquisition of Hunan Hanyang was accounted for using the purchase method in
accordance with the requirements of FASB ASC 805 Business Combinations, formerly
SFAS 141(R). The results of Hunan Hanyang’s operations have been included in the
combined and consolidated financial statements since the acquisition
dates.
The
following table summarizes the net book value and the fair value of the assets
acquired and liabilities assumed at the date of acquisition:
|
Net Book Value
|
Fair Value
|
|||||||
|
Current
assets
|
$ | 255,156 | $ | 255,156 | ||||
|
Property,
plant and equipment, net
|
87,314 | 87,314 | ||||||
|
Construction
in progress
|
203,527 | 203,527 | ||||||
|
BOT
franchise right
|
- | 4,102,023 | ||||||
|
Total
assets
|
545,997 | 4,648,020 | ||||||
|
Total
liabilities
|
321,341 | 321,341 | ||||||
|
Noncontrolling
interest
|
78,630 | 1,514,338 | ||||||
|
Net
assets
|
$ | 146,026 | $ | 2,812,341 | ||||
The BOT
franchise right mentioned above is recognized as intangible asset, and will be
amortized using straight-line method over 25 years upon completion of the
construction.
The management initially measures the
separately recognizable identifiable assets acquired and the liabilities assumed
as of the acquisition date in accordance with the requirements of FASB ASC 805 Business
Combinations. The
identifiable assets are measured at $4,648,020, and the liabilities assumed are
measured at $321,341. The management engages an independent consultant who
determines that the fair value of the 35 percent noncontrolling interest in Hunan
Hanyang is $1,514,338. The amount of Hunan Hanyang's identifiable net assets
($4,326,679, calculated as $4,648,020 - $321,341) exceeds the fair value of the
consideration transferred plus the fair value of the noncontrolling interest in Hunan Hanyang. Therefore,
the management
reviews the procedures it
used to identify and measure the assets acquired and liabilities assumed and to
measure the fair value of both the noncontrolling interest in Hunan Hanyang and
the consideration
transferred. After that review, the management decides that the procedures and
resulting measures were appropriate. Therefore, the excess was treated as bargain
purchase and was recognized in earnings as a gain attributable to the
Company.
The
Company measures the gain on its purchase of the 65 percent interest as
follows:
|
Identifiable
net assets acquired ($4,648,020 - $321,341)
|
$ | 4,326,679 | ||
|
Less:
Fair value of the consideration transferred for 65 percent interest in
acquiree
|
2,198,608 | |||
|
Less:
Fair value of noncontrolling interest in acquiree
|
1,514,338 | |||
|
Plus:
Foreign currency translation adjustment
|
664 | |||
|
Gain
on bargain purchase of 65 percent interest
|
$ | 614,397 |
F-16
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
In the
evaluation performed by an independent third party appraiser, one of the major
assumptions adopted in the valuation report is a $16.1 million government
subsidy, which is assumed to be received gradually in line with the construction
in progress of the Center, and should be received, in the full amount as stated
in the Feasibility Report. The assumption is made by the management based
on the
management experience in valuation of similar assets and liabilities, and
available governmental information released in regard to feasibility reports in
other provinces, and actual government subsidy received upon completion on
similar hazardous waste treatment centers as well.
However,
there are possibilities that the government subsidy could not be received in the
full amount, due to changes in governmental policies with respect to laws and
regulations, and if the final construction cost that appraised by government
authorities is below $27.1 million, then the major assumptions adopted in the
valuation report in regard to the government subsidy received would be less than
the initial estimate of $16.1 million.
In regard
to the subsequent accounting for assets and liabilities arising from
contingencies recognized as of the acquisition date, the Company follows up the
guideline set forth in FASB ASC 805-20-35-3. The company develops a systematic
and rational basis for subsequently measuring and accounting for assets and
liabilities arising from contingencies depending on their
nature.
The
Company continues to report an asset or a liability arising from a contingency
recognized as of the acquisition date at its acquisition-date fair value absent
new information about the possible outcome of the contingency. When new
information is obtained, the Company evaluates that new information and measures
a liability at the higher of its acquisition-date fair value, and measures an
asset at the lower of its acquisition-date fair value or the best estimate of
its future settlement amount.
b) Acquisition of additional 3% equity
interest in Dalian Dongtai Organic Waste
Treatment Co., Ltd.
On
December 16, 2009, under an acquisition agreement, Dalian Dongtai purchased a 3%
interest from Dalian Sandaoke Chemical Inc.(“Sandaoke”) in Dalian Dongtai
Organic Waste Treatment Co., Ltd. (“Dongtai Organic”) for a purchase price of
approximately $175,801 (RMB1, 200,000), thereby increasing its ownership in
Dongtai Organic to 52%.
Dongtai
Organic was formed in March 2007 to operate a Build-Operate-Transfer (“BOT”)
municipal sludge treatment and disposal facility in Dalian, PRC. Prior to
the acquisition, and since March 2, 2007, Dalian Dongtai owned a 49% equity
interest in Dongtai Organic. By design, Dalian Dongtai is only entitled to the
right of receiving benefits and obligated to absorb on Dongtai Organic’s losses
proportionately to its investments. Therefore, the Company accounted for its
investment in Dongtai Organic under the equity method.
Dongtai
Organic was incorporated as a joint venture by Dalian Dongtai , Sandaoke, and
Dalian Lida Environmental Engineering Co., Ltd. (“Lida”), which owns interest of
49%, 15%, and 36% respectively. A major shareholder of the Company owns a 49%
equity interest in Lida. Because common majority ownership exists by a group
affiliated in some other manner, therefore, the Company determine that common
control exist between Dalian Dongtai and Dongtai Organic.
The
Company follows the guideline set forth in FASB ASC 805-50-45-2 and accounted
for the transaction as follows:
|
i)
|
At
the date of equity transfer, the assets and liabilities of Dongtai Organic
are recognized at their carrying
amounts.
|
F-17
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
|
ii)
|
The
consolidated financial statements of the Company include report results of
operations for the period in which the transfer occurs as though the
transfer of net assets or exchange of equity interest had occurred at the
beginning of the period. Results of operations for that period will thus
comprise those of the previously separate entities combined from the
beginning of the period to the date the transfer is completed and those of
the combined operations from that date to the end of the period. By
eliminating the effects of intercompany transactions in determining the
results of operations for the period before the combination, those results
will be on substantially the same basis as the results of operations for
the period after the date of combination. The effect of intercompany
transactions on current assets, current liabilities, revenues, and cost of
sales for periods presented and on retained earnings at the beginning of
the periods presented has been eliminated to the extent
possible.
|
|
iii)
|
The
financial statements and financial information presented for prior years
during which the entities were under common control, have also been
retrospectively adjusted to furnish comparative
information.
|
c) Pro
Forma
The
following unaudited pro forma financial information presents the combined and
consolidated results of operations of the Company as if the acquisition of the
65% equity interest in Hunan Hanyang and the additional 3% equity interest in
Dongtai Organic had occurred as of January 1, 2008. The unaudited pro forma
financial information does not attempt to project the future results of
operations after the acquisition of Hunan Hanyang and Dongtai
Organic.
|
For
the years ended December 31,
|
2009
|
2008
|
||||||
|
Revenues
|
$ | 10,561,470 | $ | 13,399,884 | ||||
|
Cost
of revenues
|
4,185,699 | 4,154,644 | ||||||
|
Gross
profit
|
6,375,771 | 9,245,240 | ||||||
|
Operating
expenses
|
5,390,464 | 3,907,003 | ||||||
|
Income
from operations
|
985,307 | 5,338,237 | ||||||
|
Non-operating
income
|
687,580 | 326,840 | ||||||
|
Income
before taxes
|
1,672,887 | 5,665,077 | ||||||
|
Tax
provision
|
49,976 | (659,853 | ) | |||||
|
Net
income before non-controlling interest
|
1,722,863 | 5,005,224 | ||||||
|
Non-controlling
interest
|
85,297 | (432,656 | ) | |||||
|
Net
income attributable to the Company
|
$ | 1,808,160 | $ | 4,572,568 | ||||
|
Pro
forma basic earnings per share attributable to the Company
|
$ | 0.12 | $ | 0.33 | ||||
|
Pro
forma diluted earnings per share attributable to the
Company
|
$ | 0.11 | $ | 0.33 | ||||
5．Note
receivable
As of
December 31, 2009, notes receivable, with the balance of $335,780, represents
trade accounts receivable due from various customers where the customers’ banks
have guaranteed the payment of the receivables. This amount is
non-interest bearing and is normally paid within three to six
months. The Company has the right to submit request for payment to
the customer’s bank earlier than the scheduled payment date, but will incur an
interest charge and a processing fee when it submits the early payment
request.
F-18
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
6. Accounts
receivable
As of
December 31, 2009, the balance of accounts receivable was $2,021,421. The
following table shows the aging composition of the balance:
|
As of December 31,
|
||||||||
|
Aging
|
2009
|
2008
|
||||||
|
1-3
months
|
$ | 1,098,027 | $ | 1,505,796 | ||||
|
4-6
months
|
450,939 | 437,667 | ||||||
|
7-12
months
|
381,949 | 469,264 | ||||||
|
1-2
years
|
118,875 | 1,909 | ||||||
|
over
2 years
|
2,699 | 11,753 | ||||||
|
Total
|
$ | 2,052,489 | $ | 2,426,389 | ||||
|
Allowance
for doubtful accounts
|
(31,068 | ) | (12,132 | ) | ||||
|
Accounts
receivable, net
|
$ | 2,021,421 | $ | 2,414,257 | ||||
The
activity in the allowance for doubtful accounts for trade accounts receivable
for the year ended December 31, 2009 and 2008 is as follows:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Beginning
allowance for doubtful account
|
$ | 12,132 | $ | 9,776 | ||||
|
Additional
charged to bad debt expense
|
18,929 | 1,635 | ||||||
|
Write-off
charged against the allowance
|
- | - | ||||||
|
Foreign
currency translation adjustment
|
7 | 721 | ||||||
|
Ending
allowance for doubtful accounts
|
$ | 31,068 | $ | 12,132 | ||||
7. Construction
reimbursement receivable
Dongtai
Organic commenced trial production in March 2009, as the development of plans to
bring the integrated anaerobic fermentation system necessary for its intended
use. As of December 31, 2009, Dongtai Organic aggregately disposed 42,789
tons of municipal sludge, and recorded a construction
reimbursement receivable of $846,270. Payments are to be processed by
Dalian Municipal Government per BOT contractual agreement as a reimbursement of
current related expense. Therefore, Dongtai Organic accounted the reimbursement
as a reduction of current period construction cost.
F-19
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
8.
Inventory
Inventory
as of December 31, 2009 and 2008 consists of raw materials and recycled
commodities as follows:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Raw
materials
|
$ | 719,948 | $ | 695,918 | ||||
|
Recycled
commodities
|
1,365,081 | 1,680,020 | ||||||
| $ | 2,085,029 | $ | 2,375,938 | |||||
Raw
materials are mainly comprised of waste catalyst, which is a scarce resource,
collected from oil refineries, chemicals used in the waste treatment and
recycling process, and packaging materials.
As of
December 31, 2009 and 2008, the balances of waste catalyst amounted to $422,547
and $340,225, respectively. Because of the impact of the global economic crisis,
the prices for the final products that produced from the processing of waste
catalyst, including chemical compounds of valuable metals, have decreased
dramatically since the end of 2008. Management believes that the holding of
waste catalyst before the rise of market price complies with shareholder’s
interest.
Recycled
commodities are mainly comprised of alloys and cupric sulfate that are produced
from waste collected, and aluminum and iron products recycled from waste
collected, etc.
For the
years ended December 31, 2009 and 2008, no allowance for obsolete inventories
was recorded by the Company.
9. Property, plant and
equipment
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Buildings
|
$ | 14,761,998 | $ | 9,978,971 | ||||
|
Machinery
and equipment
|
19,510,334 | 6,898,868 | ||||||
|
Office
equipment
|
670,015 | 559,366 | ||||||
|
Vehicles
|
1,281,659 | 926,942 | ||||||
| 36,226,006 | 18,364,147 | |||||||
|
Less
accumulated depreciation
|
(3,904,861 | ) | (2,863,686 | ) | ||||
|
Total
property and equipment, net
|
32,319,145 | 15,500,461 | ||||||
|
Construction
in progress
|
9,123,927 | 12,892,048 | ||||||
|
Total
|
$ | 41,443,072 | $ | 28,392,509 | ||||
Depreciation
expenses for the years ended December 31, 2009 and 2008, was $1,041,869 and
$650,720, respectively.
For the
year ended December 31, 2009, interest expense of $857,514 is
capitalized.
As of
December 31, 2009, certain buildings, with the net book value of $4,299,063,
have been pledged as the collateral for loans from Shanghai Pudong Development
Bank. Certain machinery and equipment, with the net book value of $14,881,444,
have been pledged as the collateral for loans from China Merchants
Bank.
F-20
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
10. Other
assets
Other
assets in the amount of $1,074,531 are primarily comprised of value added tax
credit of $1,055,523. VAT is a turnover tax levied on all units and individuals
engaged in the sale of goods, the provision of processing, repair and
replacement services (together referred to as "taxable labor services") and the
importation of goods to the PRC.
11. Short-term
loan
As of
December 31, 2009, the short-term loan balance represents loans, aggregately
RMB46, 000,000 (approximately $6,739,038, which are all borrowed from Shanghai
Pudong Development Bank. The following table identifies the material terms of
loans:
|
Effective Date
|
Maturity
|
Type
|
Interest Rate
|
Principal
|
||||||||
|
04-27-2009
|
04-27-2010
|
Secured
|
5.841 | % | $ | 3,809,022 | ||||||
|
05-18-2009
|
05-18-2010
|
Secured
|
5.841 | % | 1,465,008 | |||||||
|
06-04-2009
|
06-04-2010
|
Secured
|
5.841 | % | 1,465,008 | |||||||
| $ | 6,739,038 | |||||||||||
The loans
are secured by certain properties and land use right of the
Company.
12. Long-term
loan
As of
December 31, 2009, the long-term loan balance represents loans from China
Merchants Bank. The following table identifies the material terms of the
loans:
|
Effective Date
|
Maturity
|
Type
|
Principal
|
|||||
|
01-08-2009
|
01-07-2017
|
Secured
|
$ | 12,452,570 | ||||
|
08-20-2009
|
08-20-2017
|
Secured
|
3,548,067 | |||||
| $ | 16,000,637 | |||||||
The
interest rates for above loans are determined based on the monthly rate of long
term loans over 5 years set by the People’s Bank of China at closing date plus
5% and is adjustable every 6 months. The BOT franchise right of Dongtai Water
and Dongtai Organic, and certain manufacturing machinery of the Company are
pledged as collaterals for these loans. Dalian Lida , who holds 20% equity
interest in Dongtai Water, also served as co-guarantor for the loan with the
balance of $3,548,067.
The long
term loans are scheduled to be repaid on installments. The following table shows
the installments schedule:
|
Year
|
Amount
|
|||
|
2010
|
$ | 2,245,125 | ||
|
2011
|
2,245,125 | |||
|
2012
|
2,245,125 | |||
|
2013
|
2,245,125 | |||
|
2014
|
2,245,125 | |||
|
Thereafter
|
4,775,012 | |||
|
Total
|
$ | 16,000,637 | ||
F-21
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
As of
December 31, 2009, the installments amounting to $2,245,125 will be due within
one year, and are classified in current liabilities.
13. Government
subsidy
The
government subsidy consists of the followings:
|
As of December 31, 2009
|
||||
|
Dalian
Dongtai
|
$ | 1,465,008 | ||
|
Zhuorui
|
999,071 | |||
| $ | 2,464,079 | |||
On July
23, 2009, Dalian Dongtai received a subsidy from the central government of PRC
of RMB10, 000,000 (approximately $1,465,008) to support the construction of the
Centralized Hazardous Waste Treatment Center of Dalian City (the "Expansion
Project") in Dalian Development Area.
In 2007,
Zhuorui received RMB3, 000,000 (approximately $439,503) and RMB4, 036,000
(approximately $591,277), or an aggregate of RMB7, 036,000 (approximately
$1,030,780), from the central government of the PRC, and the government of
Dalian City, respectively. RMB6, 000,000 (approximately $878,966) of the total
subsidy is to be used to purchase production machinery or pay construction
expenditures, and the other RMB1, 036,000 (approximately $151,768) consists of
the purchase price for the acquisition of land use right.
The
subsidies are initially recorded as deferred income. Upon the completion and
acceptance of the government subsidized projects, subsidies are recognized over
the useful lives of the related assets.
14. Restricted net
assets
The
Company’s ability to pay dividends is primarily dependent on the Company
receiving distributions of funds from its subsidiaries. Relevant PRC statutory
laws and regulations permit payments of dividends by the Company’s PRC
subsidiaries only out of their retained earnings, if any, as determined in
accordance with PRC accounting standards and regulations. The results of
operations reflected in the financial statements prepared in accordance with
U.S. GAAP differ from those reflected in the statutory financial statements of
the Company’s subsidiaries.
In
accordance with the Regulations on Enterprises with Foreign Investment of China
and their articles of association, a foreign invested enterprise established in
the PRC is required to provide certain statutory reserves, namely general
reserve fund, the enterprise expansion fund and staff welfare and bonus fund
which are appropriated from net profit as reported in the enterprise’s PRC
statutory accounts. A foreign invested enterprise is required to allocate at
least 10% of its annual after-tax profit to the general reserve until such
reserve has reached 50% of its respective registered capital based on the
enterprise’s PRC statutory accounts. Appropriations to the enterprise expansion
fund and staff welfare and bonus fund are at the discretion of the board of
directors for all foreign invested enterprises. The aforementioned reserves can
only be used for specific purposes and are not distributable as cash dividends.
Dalian Dongtai is established as a foreign invested enterprise and
therefore is subject to the above mandated restrictions on distributable
profits.
F-22
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Additionally,
in accordance with the Company Law of the PRC, a domestic enterprise is required
to provide statutory common reserve at least 10% of its annual after-tax profit
until such reserve has reached 50% of its respective registered capital based on
the enterprise’s PRC statutory accounts. A domestic enterprise is also required
to provide for discretionary surplus reserve, at the discretion of the board of
directors, from the profits determined in accordance with the enterprise’s PRC
statutory accounts. The aforementioned reserves can only be used for specific
purposes and are not distributable as cash dividends. The Company’s PRC
subsidiaries, except Dalian Dongtai, are established as domestic invested
enterprises and therefore are subject to the above mandated restrictions on
distributable profits.
As a
result of these PRC laws and regulations that require annual appropriations of
10% of after-tax income to be set aside prior to payment of dividends as general
reserve fund, the Company’s PRC subsidiaries are restricted in their ability to
transfer a portion of their net assets to the Company.
As of
December 31, 2009, amounts restricted were US$10,600,000, including paid-in
capital, additional paid-in capital, and statutory reserve funds of the
Company’s PRC subsidiaries as determined pursuant to PRC generally accepted
accounting principles.
15.
Taxation
Value added
tax
Enterprises
or individuals, who sell commodities, engage in repair and maintenance or import
and export goods in the PRC, are subject to a value added tax (“VAT’), in
accordance with Chinese laws. The VAT standard rate is 17% of the gross sales
price. A credit is available whereby VAT paid on the purchases of raw materials
or machinery used in the production process of the Company can be used to offset
the VAT due on sales of products.
As of
December 31, 2009 and 2008, VAT on sales amounts to $18,607 and $0 respectively.
VAT on purchases amounts to $1,055,523 and $337,552, respectively, which are
represented in Other Assets.
Income
Tax
The
Company is subject to the taxes in the United States at tax rate of
approximately 42.7%. No provision for the US federal income taxes has
been made as the Company had no taxable income in this jurisdiction for the
reporting periods.
The
Company is subject to the PRC Enterprise Income Tax (“EIT”) at a rate of 25% on
its net income. According to PRC EIT Law, any joint venture with foreign
investment will get EIT exemption treatment for the first two years and reduced
tax rates of 9%, 10% and 11% for the third, fourth and fifth years,
respectively. As a foreign investment enterprise, Dalian Dongtai is subject to
EIT at 10% for the period ended December 31, 2009. Furthermore, the Law
stipulates that enterprises that engage in municipal sewage and sludge treatment
business are eligible for special EIT treatment. According to such rules,
Dongtai Water and Dongtai Organic is entitled to a three-year EIT exemption
treatment starting whenever it generates the first operation revenue, and
additional 50% discount on the normal rate for the next three years. For the
period ended December 31, 2009, Dongtai Water has benefited from the EIT
exemption preference, and Dongtai Organic will qualify for the EIT exemption in
2010.
F-23
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Deferred
Taxes
The
provision for income taxes consists of taxes on income from operations plus
unrecognized tax benefits from the application of FIN 48 plus changes in
deferred taxes for the periods ended:
|
As of December 31, 2009
|
||||
|
Current
|
$ | 327,141 | ||
|
Deferred
|
(377,116 | ) | ||
|
Total
|
$ | (49,975 | ) | |
The
charges for taxation are based on the results for the year as adjusted for items
which are non-assessable or disallowed. They are calculated using tax rates that
have been enacted or granted at the balance sheet dates.
The
significant components of deferred tax benefits are:
|
Year ended December 31,
2009
|
||||
|
Change
in allowance for doubtful accounts
|
$ | (4,657 | ) | |
|
Change
in deferred sales
|
(105,408 | ) | ||
|
Change
in unrealized gain resulted from inter-company
transactions
|
(267,051 | ) | ||
|
Total
|
$ | (377,116 | ) | |
Deferred
tax assets and deferred tax liabilities reflect the tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purpose. The following
represents the significant components of deferred tax assets:
|
As of December 31, 2009
|
||||
|
Allowance
for doubtful accounts
|
$ | 4,660 | ||
|
Deferred
sales
|
105,482 | |||
|
Unrealized
gain resulted from inter-company transactions
|
267,239 | |||
|
Total
|
$ | 377,381 | ||
16. Other
income
In 2007,
Dongtai Organic received a government subsidy from the local government of
Dalian City with the amount of RMB1, 000,000 (approximately
$146,398). The subsidy is to reimburse the expenses occurred in the research and
development of biogas purification technology. In 2009, the biogas purification
system is completed.
F-24
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
In 2009,
Dongtai Organic received two subsidies from the Environmental Protection Bureau
and Science & Technology Bureau of Dalian, with the amount of RMB100,000
(approximately $14,640) and RMB500,000 (approximately $73,199), respectively.
The subsidies are to reimburse the research and development cost and the
expenditures occurred during the trial production process.
Government
grants towards current expenditures are recorded as revenue when there is
reasonable assurance that we have complied with all conditions necessary to
receive the grants, collectibility is reasonably assured, and as the
expenditures are incurred.
For the
year ended 2009, the Company recognized government grants revenue of
$272,121.
17. General and
administrative expenses
General
and administrative expenses (“G&A expense”) increased by $1,837,545 or 69%
for the year ended December 31, 2009 as compared with that of the year ended
December 31, 2008. The significant increase is primarily contributed to the
following factors:
|
i)
|
For
the year ended December 31, 2009, the Company did not meet the goal set
forth in the Performance Escrow Agreement, and 222,222 shares of the
Company’s common stock held by a major stockholder will be disbursed to
the investors. The fair value of the shares, amounting to $565, 050, was
recorded into G&A expense.
|
|
ii)
|
For
the year ended December 31, 2008, R&D expenses in the amount of
$552,423 were allocated into manufacturing expense and selling expense,
amounting to $168,117 and $384,306, respectively. While for the year ended
December 31, 2009, Dalian Dongtai allocates all R&D expense in the
amount of $513,632 into G&A
expense.
|
|
iii)
|
For
the year ended December 31, 2009, the increase of Zhuorui’s G&A
expenses accounted for from depreciation of newly constructed buildings
amounted to $211,509. The construction of buildings was completed toward
the end of 2008.
|
|
iv)
|
As
a result of equity exchange between entities under common control, the
financial statements and financial information presented also include the combined
revenues, expenses and cash flows of Dongtai Organic. Dongtai
Organic’s G&A expense increased by $414,276 for the year ended
December 31, 2009 in compare with the year ended December 31,
2008.
|
18. Shareholder’s
equity
On April
9, 2008, the Company issued 50,000 shares of common stock as compensation for
services to a consulting firm. The fair market value of the stock was
approximately $133,100.
On
September 27, 2008, the Company issued warrants to purchase 150,000 shares of
our common stock to a placement agent as follows: 37,500 with a strike price of
$3.50 per share; 37,500 with a strike price of $4.00 per share; 37,500 with a
strike price of $4.50 per share; and 37,500 with a strike price of $5.00 per
share. The fair market value of each stock warrant was estimated on the date of
grant using the Black-Scholes option-pricing model in accordance with SFAS
No.123(R) using the following weighted-average assumptions: expected dividend
yield 0%; risk-free interest rate of 4.6%; volatility of 120% and an expected
term of 5 years. The Company recognized a stock issuance cost of
$398,466.
F-25
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
In
October 2008, the Company accomplished a private placement of 66 units,
consisting of a total of 1,941,192 shares of common stock and common stock
purchase warrants to purchase an additional 1,941,192 shares at an aggregate
offering price of $3,960,000 to 16 institutional and accredited investors in a
private placement exempt from registration under the Securities Act of 1933 in
reliance on exemptions provided by Regulation D and Section 4(2) of that act.
The price per unit was $60,000. Under the subscription agreements with the
investors, as amended, each unit consisted of 29,412 shares of common stock, one
Class A warrant to purchase 14,706 shares of common stock exercisable until
September 30, 2011 at $2.50 per share and one Class B warrant to purchase 14,706
shares of common stock exercisable until September 30, 2011 at $3.20 per share.
The Company issued another 50,000 shares of common stock to the placement agent
in connection with the private placement, which was recognized as stock issuance
cost in the amount of $113,000.
In
addition, pursuant to the Performance Escrow Agreement with the investors as
amended, the major stockholder of the Company, Mr. Dong Jinqing has agreed to
place a total of 444,444 shares of the Company’s common stock held by it into
escrow to secure the make good obligations described below on behalf of the
investors. Under the Performance Escrow Agreement, Mr. Dong has agreed that
if:
|
(i)
|
The
Company’s “after tax net income” for the year ended December 31, 2009 is
less than $7.25 million, and the Company’s “cash flow from operations” for
the year ended December 31, 2009 is less than $5.4375 million, in each
case as reported in the Company’s audited financial statements (exclusive
of any charges attributable to this Performance Escrow Agreement), it will
transfer to the investors, on a pro rata basis, for no additional
consideration, 222,222 shares of the Company common stock owned by it;
and
|
|
(ii)
|
The
Company’s “after tax net income” for the year ended December 31, 2008, as
reported in the Company’s audited financial statements, is less than $4.5
million (exclusive of any charges attributable to this Escrow Agreement);
or the Company’s “cash flow from operations” for the year ended December
31, 2008, as reported in the Company’s audited financial statements, is
less than $3.375 million (exclusive of any charges attributable to this
Performance Escrow Agreement); it will transfer to the investors, on a pro
rata basis, for no additional consideration, 222,222 shares of the
Company’s common stock owned by it.
|
Historically,
SEC staff expressed the view that an escrow share arrangement involving the
release of shares to certain shareholders based on performance-related criteria
is presumed to be compensatory, equivalent to a reverse stock split followed by
the grant of a restricted stock award under a performance-based
plan.
However,
in EITF No. D-110 (codified by FASB ASU No. 2010-05) dated June 18, 2009, the
SEC staff has announced that when evaluating whether the presumption of
compensation has been overcome, the substance of the arrangement, including
whether the arrangement was entered into for purposes unrelated to, and not
contingent upon, continued employment, should be considered.
The
Company has evaluated the terms of the Performance Escrow Agreement in
connection with the subscription agreements with the investors based on the SEC
staff’s clarification in EITF No. D-110 (codified by FASB ASU No. 2010-05) and
concluded that because the escrow shares would be released or distributed to the
investor without regard to the continued employment of any officer of the
Company, the arrangement is in substance an inducement to facilitate the private
placement, rather than as compensatory.
F-26
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Therefore,
the Company accounted for the Performance Escrow Agreement according to its
nature, following the guidance provided in FASB ASU No. 2010-05.
The
Company’s “after tax net income” for the year ended December 31, 2008, as
reported in the Company’s audited financial statements, was $4.76 million and
the Company’s “cash flow from operations” for the year ended December 31, 2008,
as reported in the Company’s audited financial statements, was $4.47 million.
Therefore, the Company satisfied the performance goal set forth in above
mentioned Performance Escrow Agreement. As a result, 222,222 shares of the
Company common stock in care of escrow agent were disbursed to the escrowee
accordingly.
For the
year ended December 31, 2009, the Company did not meet the goal set forth in the
Performance Escrow Agreement, and the remaining 222,222 shares of the Company
common stock in care of escrow agent will be disbursed to the investors in the
manner described in Performance Escrow Agreement and the Offering Documents.
Therefore, the fair value of the shares, which will be transferred to the
investor, was recorded as an expense in the Company’s financial statements with
a corresponding credit to additional paid-in capital amounting to
$565,050.
On March
20, 2009, the Company issued non-qualified stock options to purchase 20,000
shares of our common stock to a member of the Board of Directors as compensation
for services with a strike price of $2 per share. The fair market value of the
issued options was estimated on the date of grant using the Black-Scholes
option-pricing model in accordance with ASC Topic 718 Compensation-Stock
Compensation using the following weighted-average assumptions: expected dividend
yield 0%; risk-free interest rate of 1.23%; volatility of 102% and an expected
term of 3 years. The Company recognized an option expense of
$11,419.
On April
30, 2009, the Company issued 9,000 shares of common stock under an agreement
with a consultant to provide the Company with investor relations services. The
fair market value of the stock was approximately $14,400.
On
September 2, 2009, the Company issued 3,000 shares of common stock under an
agreement with a consultant to provide the Company with investor relations
services. The fair market value of the stock was approximately
$4,680.
On
November 6, 2009, the Company granted to certain officers and employees
non-qualified stock options to purchase 1,000,000 shares of restricted common
stock under the 2006 Equity Incentive Plan (the “Plan”). The options granted is
for a 5-year term, commencing on the date of the grant and terminating at 5:00
pm Beijing, China time on the expiration date which is 5 years from the date of
the grant. The vesting period is determined as 1/4 on the 1st anniversary of the
date of grant, 1/4 on the 2nd anniversary of the date of grant, 1/4 on the 3rd
anniversary of the grant and 1/4 on the 4th anniversary of the date of grant.
The exercise price of the options, which was determined as the second day’s
close price after the filing of 10-Q for the period ended September 30, 2009, is
$1.85.
A summary
of all options activity under the Plans is presented below:
F-27
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
|
Options Outstanding
|
||||||||||||
|
Share
Available for
Grant
|
Number of
Shares
Outstanding
|
Weighted
Average
Exercise Price
|
||||||||||
|
Balance
as of December 31, 2007
|
3,822,084 | - | - | |||||||||
|
Additional
shares authorized
|
1,322,084 | - | - | |||||||||
|
Options
granted
|
- | - | - | |||||||||
|
Options
exercised
|
- | - | - | |||||||||
|
Options
forfeited or expired
|
- | - | - | |||||||||
|
Balance
as of December 31, 2008
|
5,144,168 | - | - | |||||||||
|
Additional
shares authorized
|
1,526,204 | - | - | |||||||||
|
Options
granted
|
(1,000,000 | ) | 1,000,000 | $ | 1.85 | |||||||
|
Options
exercised
|
- | - | - | |||||||||
|
Options
forfeited or expired
|
- | - | - | |||||||||
|
Balance
as of December 31, 2009
|
5,670,372 | 1,000,000 | $ | 1.85 | ||||||||
The fair
market value of the granted options was estimated on the date of grant using the
Black-Scholes option-pricing model in accordance with ASC Topic 718
Compensation-Stock Compensation using the following weighted-average
assumptions: expected dividend yield 0%; risk-free interest rate of 2.31%;
volatility of 60% and an expected term of 5 years. The estimated value of the
granted options was approximately $922,580, and will be recognized as
compensation costs over the requisite service period.
As of
December 31, 2009, the total outstanding common shares of the Company reached to
15,274,035.
19. Accumulated other
comprehensive income
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Cumulative
translation adjustment of foreign currency statements
|
$ | 2,326,292 | $ | 2,263,076 | ||||
F-28
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
20. Related parties
transactions
As of
December 31, 2009 and 2008, the amounts due from (to) related parties were as
follows:
|
As of December 31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Due
to Dalian Dongtai Investment Co., Ltd. (“Dongtai
Investment”)
|
$ | (380,902 | ) | $ | (278,490 | ) | ||
|
Due
from Dalian Lida Environmental Engineering Co., Ltd. (“Dalian
Lida”)
|
$ | 234,401 | $ | - | ||||
As of
December 31, 2009, the balance with Dongtai Investment represents unsecured
loans which are detailed as below:
|
Effective Date
|
Maturity
|
Interest Rate
|
Amount
|
||||||||
|
per annum
|
|||||||||||
|
10-15-2007
|
Due
on demand
|
6 | % | $ | 278,352 | ||||||
|
03-06-2009
|
03-06-2010
|
6 | % | 29,300 | |||||||
|
03-23-2009
|
03-23-2010
|
6 | % | 73,250 | |||||||
| $ | 380,902 | ||||||||||
As of
December 31, 2009, receivable from Dalian Lida is an unsecured short term loan
of $234,401 (RMB1.6 million) with interest rate of 6% per annum, effective on
August 1, 2009, and matured on April 30, 2010.
21. 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,
|
||||||||
|
2009
|
2008
|
|||||||
|
Net
income attributable to the Company
|
$ | 1,959,510 | $ | 4,756,101 | ||||
|
Adjustments
for diluted EPS calculation
|
- | - | ||||||
|
Adjusted
net income for calculating EPS-diluted
|
$ | 1,959,510 | $ | 4,756,101 | ||||
|
Weighted
average number of common shares - Basic
|
15,269,062 | 13,755,274 | ||||||
|
Effect
of dilutive securities:
|
||||||||
|
Option
|
15,672 | - | ||||||
|
Warrants
|
970,596 | - | ||||||
|
Weighted
average number of common shares - Diluted
|
16,255,330 | 13,755,274 | ||||||
|
Earnings
per share
|
||||||||
|
Basic
|
$ | 0.13 | $ | 0.35 | ||||
|
Diluted
|
$ | 0.12 | $ | 0.35 | ||||
F-29
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
22. Concentrations and
risks
Credit
risks
The
Company is subject to concentrations of credit risk primarily from cash and cash
equivalents. The Company maintains accounts with financial institutions, which
at times exceeds the insured Federal Deposit Insurance Corporation limit of
$250,000. The Company minimizes its credit risks associated with cash by
periodically evaluating the credit quality of its primary financial
institutions, and, where practicable, by depositing its cash and cash
equivalents among various financial institutions.
PRC
risks
The
Company's operations are carried out in the PRC. Accordingly, the Company's
business, financial condition and results of operations may be adversely
affected by changes in governmental policies with respect to laws and
regulations, anti-inflationary measures, currency conversion and remittance
abroad, and rates and methods of taxation, among other things.
The PRC
government imposes controls on the convertibility of RMB into foreign currencies
and, in certain cases, the remittance of currency out of the
PRC. Under existing PRC foreign exchange regulations, payment of
current account items, including profit distributions, interest payments and
expenditures from the transaction, can be made in foreign currencies without
prior approval from the PRC State Administration of Foreign Exchange by
complying with certain procedural requirements. However, approval
from appropriate governmental authorities is required where RMB is to be
converted into foreign currency and remitted out of the PRC to pay capital
expenses, such as the repayment of bank loans denominated in foreign
currencies. The PRC government may also at its discretion restrict
access in the future to foreign currencies for current account
transactions.
23. Commitment and
Contingency
Capital
commitment
The
Company has purchasing commitments that result from construction contracts and
equipment procurement contracts signed for the development and operation of
Dalian Dongtai's expansion project. As of December 31, 2009, the commitment
information is as follows:
|
As of December 31, 2009
|
||||
|
Construction
|
$ | 2,285,677 | ||
|
Equipment
|
978,204 | |||
|
Total
|
$ | 3,263,881 | ||
F-30
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2009 AND 2008
Zhuorui
In March
2009, Zhuorui commenced trial production of its waste catalyst processes. Due to
unfavorable market prices for Zhuorui’s final products, including chemical
compounds containing valuable metals, and imperfections detected during
trial production, the Company determined to suspend trial production in January
2010 in order to effect improvements to the technical flow prior to
market recovery. We expect that the improvement to the technical flow will also
enable Zhuorui to generate aluminum oxide as an additional by-product, and that
the addition of this byproduct will strengthen our revenues and profitability in
a manner that satisfies current emission standards established by
the government.
The
capital expenditure for Zhuorui’s improvement project is approximately $2.1
million (approximately RMB 14 million), and it is estimated that the project
will require approximately four months for completion. Despite
the advantages anticipated by this proposed technical improvement, we may be
adversely affected by unanticipated events including the need for additional
time and/or capital to complete the project, our efforts to generate aluminum
oxide as an additional by-product are not successful or the expected market
recovery takes more time than anticipated.
24. Subsequent
events
On
January 13, 2010, the Company and a consulting firm, which provides business
advisory and private placement services to the Company, signed a Settlement and
Release Agreement (the “Agreement”) to resolve all remaining issues between
them. Pursuant to the Agreement, the consulting firm will receive:
|
i)
|
62,500
shares of free-trading, unrestricted common stock of the
Company;
|
|
ii)
|
A
Placement Agent Warrant, which must be exercised before September 11,
2011, to purchase up to 5 units at an exercise price of $72,000 per unit.
Each unit consists of 29, 412 shares of restricted common stock of the
Company, “A” warrants to purchase 14,706 common shares of the Company at
an exercise price of $2.50 and “B” warrants to purchase 14,706 common
shares of the Company at an exercise price of
$3.50.
|
On
January 27, 2010, Hunan Hanyang received a government subsidy of approximately
$3.1 million (RMB21 million) from the central government of PRC, representing
the first installment of a total expected government subsidy of approximately
$16.1 million (RMB110 million) as a reimbursement of construction cost in the
Hazardous Waste Treatment Center of Changsha City, Hunan
Province.
F-31