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EX-32.2 - EXHIBIT 32.2 - China Water Group, Inc.ex32_2apg.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-K

 

(Mark One)                                                                                                                                                                 

 

 

[X]

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2011

 

 

[  ]

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File No.: 000-26175

 

CHINA WATER GROUP, INC. 

 

 

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

88-0409151

(State or Other Jurisdiction of Incorporation

 

(I.R.S. Employer Identification No.)

or Organization)

 

 

 

SUITE 7A01, BAICHENG BUILDING

584 YINGBIN ROAD

DASHI, PANYU DISTRICT

GUANGZHOU, GUANGDONG, CHINA

 

 

(Address of Principal Executive Offices)

 

(86-20) 3479 9768 

 

 

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:  None

 

Securities registered pursuant to Section 12(g) of the Act:  Common Stock, par value $0.001

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes [  ]   No [X]


Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.   Yes [  ]   No [X]

 

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 [  ]   No [X]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (s 229.405) 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. [X]


 



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

 

Large accelerated filer [  ]

Accelerated filer [  ]

Non-accelerated Filer [  ]

Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [  ]   No [X]

 

Aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, March 31, 2011, was $3,599,888. The registrant has no non-voting common stock.

 

As of December 31, 2011, there were 169,133,450 shares of our common stock issued and outstanding.




INDEX TO FORM 10-K ANNUAL REPORT

 

 

 

Page

PART I

 

3

Item 1.

Business

3

Item 1A.

Risk Factors

10

Item 1B.

Unresolved Staff Comments

13

Item 2.

Properties

13

Item 3.

Legal Proceedings

14

Item 4.

Item 4. Mine Safety Disclosures.

14

PART II

 

14

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

14

Item 6.

Selected Financial Data

15

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

15

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

16

Item 8.

Financial Statements and Supplementary Data

16

Item 9.

Changes in and Disagreements with Accountants on Accounting and  Financial Disclosure

16

Item 9A(T)

Controls and Procedures

17

Item 9B

Other Information

20

PART III

 

21

Item 10.

Directors, Executive Officers and Corporate Governance

21

Item 11.

Executive Compensation

21

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

23

Item 13.

Certain Relationships and Related Transactions, and Director Independence

24

Item 14.

Principal Accountant Fees and Services

24

PART IV

 

25

Item 15.

Exhibits and Financial Statement Schedules

25

 

Signatures

27

 

Financial Statements

F-1




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EXPLANATORY NOTE

 

We, China Water Group, Inc., are filing this Annual Report on Form 10-K for the year ended December 31, 2011 during calendar 2012, as a step towards becoming current in our filing obligations under the Securities Exchange Act of 1934. We will endeavor to file additional periodic reports to become current in our filings as expeditiously as the limited size of our staff allows.  Unless otherwise indicated, all references to our company include our wholly and majority owned subsidiaries.

 

All of our sales and nearly all our expenses are denominated in renminbi (“RMB”), the national currency of the People’s Republic of China (the “PRC”). For SEC reporting purposes, the balance sheet items are translated into US dollars using the exchange rate at the respective balance sheet dates. The capital and various reserves are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. All exchange differences are recorded within equity.

 

Statements contained in this Annual Report on Form 10-K, which are not historical facts, are forward-looking statements, as the term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, whether expressed or implied, are subject to risks and uncertainties which can cause actual results to differ materially from those currently anticipated, due to a number of factors, which include, but are not limited to:

 

 

·

Competition within our industry;

 

·

Seasonality of our sales;

 

·

Success of our acquired businesses;

 

·

Our relationships with our major customers;

 

·

The popularity of our products;

 

·

Relationships with suppliers and cost of supplies;

 

·

Financial and economic conditions in Asia, Japan, Europe and the U.S.;

 

·

Anticipated effective tax rates in future years;

 

·

Regulatory requirements affecting our business;

 

·

Currency exchange rate fluctuations;

 

·

Our future financing needs; and

 

·

Our ability to attract additional investment capital on attractive terms.

 

Forward-looking statements also include the assumptions underlying or relating to any of the foregoing or other such statements. When used in this report, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “continue,” and similar expressions are generally intended to identify forward-looking statements.

 

Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements. Readers should carefully review the factors described in the Section of this report entitled “Risk Factors” and other documents we file from time to time with the Securities and Exchange Commission (‘SEC’), including the Quarterly Reports on Form 10-Q to be filed by us in the fiscal year 2011.

 


PART I

 

Item 1. Description of Business.

 

We are a bottled water company based in the PRC. We have also operated various waste water treatment facilities in last five years. Through our majority-owned subsidiaries, we were engaged in the design, construction, implementation and management of industrial and municipal waste water treatment facilities throughout the PRC. We have disposed of those operations on December 30, 2008. Now we are focusing on providing high quality bottled water in China by using 9000-Year Old Glacier Spring Water. Our bottled water has been marketed in many big cities in China such as Shanghai, Beijing, Guangzhou, Chengdu and others.




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We also previously provided turn-key waste water treatment engineering design and contracting. from 2000 through 2008, we completed the following turn-key projects: Yongji Development Zone Wastewater Treatment Plant (Phase 1), Guangdong Nanhai City Jinsha Town Wastewater Treatment Plant, Guangdong Sanshui Baini Wastewater Treatment Plant and Guangzhou Yantang Wastewater Treatment Plant, Tianjin City Meichang Town Wastewater Treatment Plant,Yongji Development Zone Wastewater Treatment Plant (Phase 2), China Environment Industrial Park Wastewater Treatment Plant, Huangzhuang Industrial Park Wastewater Treatment Plant and Tian Jin WuQing No.1 Waste Water Treatment Factory. We have left this business and no longer provide turn-key waste water services.


We previously held a 28.8% and 11.2% of the equity interest in the following two water treatment facilities operated through build, operate and transfer (“BOT”) arrangements with the PRC government: (i) Tian Jin Shi Sheng Water Treatment Company Limited (“TianJin”), which commissioned water treatment in November 2003 and has a daily treatment capacity of approximately 10,000 tons; and (ii) Xin Le Sheng Mei Water Purifying Company Limited (“XinLe”), which also commissioned water treatment in November 2003 and has a daily treatment capacity of 40,000 tons. We have been retained as the manager to manage both TianJing and XinLe. The fees from XinLe and TianJing did not represent a significant portion of our revenue during 2008.

 

We also developed a BOT water treatment facility project in Hai Yang City under our subsidiary Hai Yang City Sheng Shi Environment Protection Company Limited (“HaiYang”) with capacity of 20,000 tons per day. We began construction of this project in April 2004 and completed the project and commenced water treatment in June 2005. We also developed another BOT water treatment facility project in Beijing under our subsidiary Bei Jing Hao Tai Shi Yuan Water Purifying Company Limited (“Beijing HaoTai”) with planned capacity of 20,000 tons per day. We began construction of this project in July 2004 completed approximately 90% till December, 2006. We retained a 90% interest in this facility until we disposed of it in December 2006 for a total consideration of US$1,442,567, and realized a gain of $44,872. In July 2005, we started construction of a BOT water treatment facility project for the Handan Fengfeng Mining Area in the Hebei Province under our subsidiary Han Dan Cheng Sheng Water Affairs Company Limited (“HanDan”) with capacity of 33,000 tons per day. The project was completed in December 2007. The fees from these projects are expected to increase our net sales in the future. We are in the process of discontinuing our waste water engineering operations to concentrate on our bottled water operations and the presentation of our financial statements reflects that these assets relate to our “discontinued division”.

 

Our predecessor in interest, Discovery Investments, Inc. (“Discovery”) was incorporated on September 10, 1996, under the laws of the State of Nevada to engage in any lawful corporate activity. Discovery had been in the development stage and was not active until October 26, 1999.

 

On December 10, 1999, Discovery entered into a Plan and Agreement of Reorganization (the “Plan”) with LLO-Gas, Inc. and John Castellucci. On October 26, 1999, LLO-Gas had acquired certain ARCO facilities and a so-called card lock facility and commenced operations. LLO-Gas was incorporated in July 1998 under the laws of the State of Delaware. On December 20, 1999, there was a closing under the Plan and LLO-Gas, Inc. became a wholly-owned subsidiary of Discovery and there was a change of control of Discovery. Between December 20, 1999 and August 10, 2000, differences of opinion as to matters of fact and as to matters of law had arisen by and between certain of the shareholders of Discovery, who were shareholders prior to the closing, and between Discovery, John Castellucci and LLO-Gas, Inc.


On June 7, 2000, LLO-Gas, Inc. filed a Voluntary Petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, Central District of California, San Fernando Valley Division, case number SV 00-15398-AG. On December 1, 2000, the United States Bankruptcy Court converted the pending matter into a Chapter 7 liquidation. Said Chapter 7 effected LLO-Gas, Inc. and not Discovery.

 

On August 10, 2000, Discovery entered into a Mutual Rescission Agreement and Mutual Release with John Castellucci which provided, inter alia, that Discovery consented and agreed to rescind said Plan with John Castellucci consenting and agreeing to the rescission. The parties mutually agreed to forego all rights and benefits provided to each other thereunder.

 

On August 9, 2001, Discovery filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court, District of Nevada, Case Number BK-S-01-18156-RCJ. On September 24, 2001, the Bankruptcy Court confirmed the Disclosure Statement and Plan of Reorganization submitted by Discovery and Discovery was thereafter released from Bankruptcy.



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On April 29, 2002, Discovery entered into a Plan and Agreement of Reorganization with Bycom Media Inc., an Ontario, Canada corporation (“Bycom”). Pursuant to this agreement, Discovery acquired all the outstanding shares of Bycom for 4,800,000 shares of Common Stock. On October 5, 2002, Bycom became a wholly-owned subsidiary of Discovery and there was a change of control.

 

Bycom was engaged in multimedia applications for internet-based business. Utilizing business search tools and databases, Bycom intended to be able to locate and access global business information for a fee, or was to act as an “out-source provider” of information. Bycom currently is an inactive, wholly owned subsidiary of the Company.

 

On September 4, 2002, Discovery completed a transaction set out in a Plan and Agreement of Reorganization dated June 13, 2002, pursuant to which Discovery acquired all of the outstanding shares of Cavio Corporation, a Washington corporation, (“Cavio”) in exchange for 14 million share of Discovery common stock. Due to poor market conditions and Discovery’s inability to seek adequate financing from third parties to properly finance the operations of Cavio, on December 2, 2002 Discovery’s board of directors approved, subject to receiving the approval of a majority of the shareholders, to unwind the acquisition of Cavio in cancellation of the shares of common stock issued.

 

On December 2, 2002, Discovery unanimously approved the disposition of its interest in Cavio and thereafter received the consent of a majority of the outstanding shares of the company’s common stock. Discovery determined the effective date for the divestiture to be June 30, 2003.

 

For the two years prior to a reverse acquisition in September 2004, we had not generated significant revenues and were considered a development stage company as defined in Statement of Financial Accounting Standards No. 7. We were seeking business opportunities or potential business acquisitions. Pursuant to a securities purchase agreement and plan of reorganization dated September 9, 2004, as amended, between our company, Evergreen Asset Group Limited, an International Business Company organized under the laws of the British Virgin Islands (“Evergreen” or “EGAG”), and the stockholders of Evergreen, we acquired 100% of the issued and outstanding shares of Evergreen’s capital stock. We issued 83,500,000 shares of our common stock in exchange for all the 300 issued and outstanding shares of Evergreen capital stock which had an estimated value of $4.24 million at the time of such issuance, valued based on the fair market value of the net assets of Evergreen. Since the stockholders of Evergreen acquired approximately 83.5% of our outstanding shares and the Evergreen management team and board of directors became the management team and board of directors of our company, according to FASB Statement No. 141 - “ Business Combinations ”, this acquisition has been treated as a recapitalization for accounting purposes, in a manner similar to reverse acquisition accounting. In accounting for this transaction:

 

 

·

Evergreen is deemed to be the purchaser and surviving company for accounting purposes. Accordingly, its net assets are included in the balance sheet at their historical book values and the results of operations of Evergreen have been presented for the comparative prior period;

 

 

·

Control of the net assets and business of our company was acquired effective October 15, 2004. This transaction has been accounted for as a purchase of the assets and liabilities of our company by Evergreen. The historical cost of the net liabilities assumed was $0.00.

 

As a result of the transaction described above we changed our name from Discovery Investments, Inc. to China Evergreen Environmental Corporation.

 

Due to the reverse acquisition mentioned above, EGAG, pursuant to a group reorganization which was completed in July 2004, acquired 90% equity interests in each of XinXingmei, XianYang, HaiYang and BeijingHaoTai for cash consideration of RMB12,601,000 (approximately $1,521,860), RMB18,000,000 (approximately $2,173,913), RMB2,700,000 (approximately $326,087) and RMB1,800,000 (approximately $217,391), respectively, all of which are domestic incorporated companies established in the PRC with limited liability.

 

In March 2003, GDXS entered into a BOT agreement with Xian Yang City Environment Protection Bureau. The BOT agreement was later transferred to Xian Yang Bai Sheng Water Purifying Company Limited (“XianYang”), after XianYang was incorporated. The construction of the wastewater plant of



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XianYang started in the beginning of 2004. Due to the group reorganization in July 2004, 90% of GDXS’s interest in XianYang was transferred to EGAG. In October 2004, EGAG entered into a tri-party framework agreement with True Global Limited (“TGL”), an independent party and Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) for the disposal of its 90% interest in XianYang to TGL at a total consideration of $13,246,377. A gain on disposal of $5,220,299 was recorded in 2004 for the disposal of our entire 90% attributable interest in XianYang to TGL.The gain represents the difference between the disposal proceeds and our attributable share of net assets of XianYang at the date of disposal.

 

In April 2005, we conducted a private placement of 20 investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit consisted of (a) one 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance. The debentures were due and payable August 1, 2005. The debenture holders, however, extended the payment period to September 30, 2005. We granted the investors limited registration rights for the common shares underlying their debentures and warrants. Westminster Securities Corporation acted as placement agent for this offering on our behalf. All the debenture holders have converted the debentures into 3,703,701 shares of our common stock on October 1, 2005.

  

On September 14, 2005, we closed the private placement sale to accredited investors of units consisting of shares of our common stock and warrants to purchase shares of our common stock for aggregate gross proceeds of $4.83 million. Pursuant to the subscription agreements entered into with the investors, we issued to the investors 161 units at a price of $30,000 per unit. Each unit consisted of 200,000 shares of our common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares of our common stock over a five-year period at an exercise price of $0.20 per share. Pursuant to the terms of the subscription agreements, we granted the investors limited registration rights for all common shares comprising the units, including the common shares issuable on exercise of the warrants.

 

On November 7, 2006, China Evergreen Environmental Corporation changed its name to China Water Group, Inc. to reflect its focus on China’s water treatment and supply needs and on build-operate-transfer(BOT), Transfer-operate-transfer(TOT), and turnkey wastewater treatment facilities in China, at the same time, bottled water is considered.

 

On December 29, 2007, we entered into an Equity Transfer Agreement, pursuant to which we transferred a 58% out of our 90% interest in our subsidiary Guangdong Xinxingmei Water Affairs Co, Ltd. (“GXWA”) to Wenning Pu, a 10% minority sharehoulder of GXWA for RBM7,308,600 (approximately $1,000,000). After the transaction, our ownership of GXWA was reduced from 90% to 32% and Wenning Pu’s ownership of GXWA was increased from 10% to 68%. The proceeds of the sale will be used for our working capital.

 

On December 31, 2007, China Water Group Inc. signed a contract with Fortune Luck Global International Limited to acquire 90 percent of the equity interest of Aba Xinchen Dagu Glacier Spring Co., Limited through its subsidiary Guangzhou Xinchen Water Company. The consideration for the acquisition is $13.45 million dollars, of which $7.5 million will be paid in cash, and the remaining $5.95 million will be paid in our common stock.  As of November 20, 2009, we have paid a total  of $ 7.5 million cash, but hadn’t issued any shares towards the purchase price. Acquiring this asset has allowed us to enter the bottled water business with our own high quality water source.


On December 30, 2008, we entered into an Equity Transfer Agreement, pursuant to which China Water Group Inc transferred 100% interest in Evergreen Asset Group Limited to Whole Treasure Investment Ltd. , a BVI company. The proceeds of the sale will be used for our working capital , mainly to develop the bottled water market and trademark building.

 

On February 26, 2009, Guangzhou Xinchen Water Company established a subsidiary, Chengdu Jiuqiannian Water Company, in the PRC as a wholly-owned limited liability company with registered capital of RMB 500,000 (approximately $73,250).



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On August 24, 2009, Guangzhou Xinchen Water Company established a subsidiary, Beijing Jiuqiannian Trading Company Ltd., in the PRC as a wholly-owned limited liability company with registered capital of RMB 300,000 (approximately $43,971).

 

Our Corporate headquarters is located in Guangzhou, Guangdong, China.

 

Our Business

 

General

 

We are a PRC based bottled water production, sales and marketing company, and had previously been a waste water engineering company before 31 December,2008 ,which through our majority-owned subsidiaries, engaged in the design, construction, implementation and management of industrial and municipal waste water treatment facilities throughout the PRC.  Starting in 2007 we repositioned our business focus to bottled water production, sales and distribution in the PRC.


BOTTLED WATER OPERATIONS

 

In 2007 we entered into an agreement with Fortune Luck Global International Limited to secure a high quality source of natural drinking water from the Dagu Glacier.  During the calendar years 2007 and 2008 we conducted a limited test market of bottled water in Guangzhou. Management was satisfied with the results and intended to expand this business to make it the main business of the Company in the future. At the beginning of 2008, we started developing the  bottled water business. The Company established development and branding strategies for the bottled water business, managed to set up four regional sales centers in the cities of Shanghai, Beijing, Chengdu and Guangzhou, as part of the strategy to promote our products in China’s major cities. The May 12, 2008 earthquake in Sichuan, however, had a severe impact on our marketing efforts, as the earthquake damaged the roads between Aba, where our production is located, and Chengdu. The roads did not reopen until November 2010,,more than two years after the disaster of the earthquake in Sichuang. The public infrastructures are now reestablished and we are increasing our promotional effort so we anticipate that bottled water sales will increase in the future.


The Global Industry for Bottled Water.

 

According to Datamonitor , the global bottled water market reached a value of $61.0 billion in 2006 and was forecasted to have a value of $86.4 billion in 2011, an increase of 41.6%. In 2006, global volume of bottled water was 115.4 billion liters and was expected to be 174.2 billion liters in 2011, an increase of 51.0%. On a consumption per capita basis, United Arab Emirates holds the leading position with 260 liters of bottled water consumption per capita in 2007, followed by Mexico and Italy. The global average consumption per capita is 29 liters, but China consumes only approximately 14 liters of bottled water per capita. If China's consumption per capita grew to the global average of 29 liters, it would represent a 110% increase (or an additional 20 billion liters) in consumption of bottled water. If China's consumption per capita grew to the average consumption per capita of the top 10 countries, it would represent over a 1,000% increase (or an additional 184 billion liters) in consumption of bottled water.

 

The Chinese Bottled Water Industry.


In China, water resources per capita are only 28% of the world average. Compounding the lack of water resources, the State Environment Protection Administration of China estimated in 2007 that tap water in one-half of China's major cities was polluted by industrial chemicals and agriculture fertilizers. A large amount of wastewater is directly discharged into water bodies, and industrial wastewater treatment has not been completely established, resulting in serious water pollution problems. Safe drinking water is a priority in China, and given the lack of wastewater treatment plants, the drinking water issues are not likely to be solved in the near future. China's bottled water industry started to grow as drinking water quality in China began to deteriorate. According to Passport by Euromonitor International 2011, bottled water witnessed 8% volume growth in 2010, to 19.6 billion litres, and have a value of 59 billion RMB, an increase of 9.3%. From 2010 to 2015, a total volume CAGR of 6% is predicted for the forecast period. In 2015, the volume is expected to be 26 billion liters, and have a value of 67 billion RMB.



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Industry Background

 

Bottled Water Markets . Management believes that the bottled water industry in PRC is in the stage of rapid and continuous growth and development. It plays a major role in solving water pollution problems and providing the public with safe and convenient drinking water. Rising concerns amongst consumers regarding health and with increasing promotional activities; the market shows huge potential for players.

 

Our Production Process

 

Raw water flows into water processing workshop through a stainless steel pipe.  After sand filtration, carbon filtration, membrane filtration and ozone sterilizing, the water is placed into containers. Then the water is poured into PET bottles automatically by an aseptic operation.  Then these filled PET products are packed and transported to the market.

 

Competition


We believe our main competitor in top level bottled water business is Evian, a French bottled water company, which entered China more than 15 years ago and occupied the largest share of the Chinese market for branded bottled water. Several other local brands of high level bottled water companies such as 5100, Kunlun Mountains, Parmir, recently entered the market and have relatively small market shares.  We are seeking companies that have access to a high quality water source within China to be acquired that will give us a further competitive advantage in the top level bottled water business .

 

Our Competitive Strengths

 

Key elements of our competitive strengths include:


Capital Resources  The bottled water business requires capital to build a marketing network and brand image in the targeted market. We believe we are capable of obtaining sufficient capital resources to fund our operation of the expanded bottled water business.  We believe that additional capital are available to us on a time to time basis as we disposed of our remaining waste water treatment facilities..

 

High Quality Water Source In 2007, the Company entered into a 50-year exclusive contract to use the Dagu Glacier spring water with the Aba Municipal Government of Sichuan province. According to the contract, during the first 10 years, we have the right to exclude any competitor from the water source. Glacier water is recognized worldwide for the high quality water, rare and precious.


Market network We place great emphasis on high quality bottled water marketing and brand building also concentrate more on technical research and development, and we have been building our bottled water market network in China’s principal cities such as Shanghai, Guangzhou,Hangzhou and Chengdu, and have developed more than 300 distribution channels to sell our 9000-Year Old Glacier Spring Water.  Our water is sold mainly in luxury hotels, restaurants, chain stores and supermarkets, chambers of commerce and beauty parlors.

 

Customers, Sales and Marketing

 

In our bottled water business, the customers include the retail stores and wholesale distributors. We target at such ultimate consumers as middle class and wealthy families, large companies and government offices as these consumers are less sensitive to price and willing to pay a premium for high quality water that is perceived to be safer.

 

One major customer accounted for approximately 12% of the sales for the year ended December 31, 2011. Two major customers accounted for approximately 13% of the sales for the year ended December 31, 2010. The loss of either of these customers could have a material adverse effect on our operations.

 

Quality Control


We have established at the factory a department and laboratory facilities to ensure the high quality of our products. Specific procedures include testing at each stage such as water source, water treatment,



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bottling, packaging, and finished products to ensure our products are meeting all healthy water standards and the expectations of our customers.

 

Cooperative Partners and Suppliers for bottled Water

 

The following table sets forth our major suppliers of equipment and materials in bottled water:

 

Component, Raw Materials

And Equipment

 

Our Major Suppliers

Bottle blowing machine

 

Fogang Guozhu Blowing Equipment Co., Ltd

 

 

 

Racking machine

 

Jiangsu XinMeixin  Water Purifying Equipment Co.,Ltd

 

 

 

Air compressor

 

Nanjing  Hengda  Compressor Co.,Ltd

 

 

 

Packing machinery

 

Jiangsu XinMeichen  Packing Machinery Co.,Ltd

 

 

 

Water treating equipment

 

Zhejiang Deqing  Water Treating Co.,Ltd

 

 

 

Bottle base, top

 

Yibing  PuLaisi Packing  Material Co.,Ltd

Chengdu Pixian Rongxin Plastic Products Co.,Ltd

 

 

 

Carton

 

Chengdu Rongshun Packing Co.,Ltd

 

 

 

Bottle bag, label

 

Guangzhou Huihua Package Printing Co., Ltd

Chengdu Rongfa Non-woven Bag Packaging Factory

 

 Bottled Water

 

We have entered into a 50-year exclusive contract to use the glacier spring water at the Aba area with the  Aba Municipal Government of Sichuan province. According to the contract, during the first 10 years, we have the right to exclude any competitor for the water source. Currently, we have established a bottling facility in the area, primarily for 350 ML and 500 ML bottled water. A 3L facility was completed  the end of 2012.  Our current production capacity is 120 tons per day.  We intend to increase the capacity to 200 tons per day in the future. In addition to Aba, we are in the process of exploring new water sources

 

Intellectual Property

 

We are the only bottled water company in China  that has registered with the State Industrial and Commercial Bureau our “9000-year”, “ Dagu Glacier”, “Dagu” trade marks. And also we have registered the package patent with the State Intellectual Property Office of the PRC: (PRC Patent No. ZL 2006 2 0061617.5 ) applied on July 13, 2006, declared effective on August 22, 2007 with a duration of 10 years from the date of application.

 

Employees

 

As of December 31, 2011, we had 72 employees, of whom 43 were in bottled water operations , of whom 22 were engaged in sales, marketing and services, the other 7,employees  in accounting and administration. We also had no employees in our waste water treatment at the end of 2011. None of our employees is represented by a collective bargaining agreement, and we believe that we have satisfactory relations with our employees.

 

Regulation

 

The PRC’s numerous ongoing water reforms are moving toward a user-pay, market-driven sector. Legislation serves as the basis to regulate and enforce these reforms. The Water Resource Law, amended and put into effect on October 1, 2002, significantly changes water resource management systems, water resource protection, water conservation, and legal responsibilities.



9




The following is a summary of related laws and regulations regarding water, water supply and waste water discharge in the PRC:


Three laws apply to the water sector:


 

1.

The Water Resources Law emphasizes the uniform management of river basins and the macro-management of water distribution and consumption. In addition, the law identifies a water quality management system.

 

 

2.

The 1984 Water Pollution Prevention and Control Law (WPL) applies to discharges to rivers, lakes, canals, reservoirs, and groundwater. The WPL contains sections pertaining to water quality and discharge standards, pollution prevention, surface water, and groundwater. Amendments in 1996 introduced further controls on river basins, including requirements for cities and towns to establish central sewage treatment plants and to set treatment fees, mass-loading controls, provisions for strengthening the supervision and management of water pollution, and non-point-source pollution controls.

 

 

3.

The Implementation Regulation of Water Pollution Prevention and Control Law was enacted on March 20, 2000. This law regulates the supervision and management of surface and ground water pollution, prevention, and control measures.

 

Bottled water sales For a company to sell bottled water products, the company must obtain a State issued certificate for water source, and meets the State Quality Assurance (“QA”) standard and State requirements of the Food Safety Law and Drinking Natural Mineral Water Standard.  We have obtained the necessary certificates and believe that we meet all standards.

 

Item 1A.  Risk Factors.

 

You should carefully consider the risks described below, which constitute the material risks facing us.  If any of the following risks actually occur, our business could be harmed. You should also refer to the other information about us contained in this Form 10-K, including our financial statements and related notes.

 

Risks Related to Our Business

 

We are dependent on economic conditions in the  PRC’s  as all of our business is conducted in the PRC. All of our business operations are conducted in the PRC and all of our customers are also located in the PRC. We operate our new bottled water business internally in the PRC.  Accordingly, any significant slowdown in the PRC economy may reduce demand for premium bottled water and limit the growth of our operations.


Failure to retain 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 several 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 are subject to foreign exchange risks. Our dominant transactional currency is the Chinese RMB, including the cost of materials which are imported by our suppliers. With costs mainly denominated in RMB, our transactional foreign exchange exposure for the past few years has been insignificant. However, as our suppliers take into account the fluctuations in foreign exchange rates when they price the imported materials which we procure from them, such fluctuations in foreign exchange rates may result in changes in the purchase price of imported materials. Any future significant fluctuations in foreign exchange rates may



10



have a material impact on our financial performance in the event that we are unable to transfer the increased costs to our customers.

 

Since our subsidiaries, operations and significant assets are located in the PRC, shareholders may find it difficult to enforce a U.S. judgment against the assets of our company, our directors and executive officers. Our subsidiaries’ operations and significant assets are located in the PRC. In addition, all of our executive officers and our directors are non-residents of the U.S., and substantially all the assets of these persons are located outside the U.S. As a result, it could be difficult for investors to effect service of process in the U.S., or to enforce a judgment obtained in the U.S. against us or any of these persons.


Our operations could be adversely affected by changes in the political and economic conditions in the PRC. The PRC is our main market and accounted for all of our revenue in 2011.  Therefore, we face risks related to conducting business in the PRC. Changes in the social, economic and political conditions of the PRC may adversely affect our business. Unfavorable changes in government policies, political unrest and economic developments may also have a negative impact on our operations.

 

Since the adoption of the “open door policy” in 1978 and the “socialist market economy” in 1993, the PRC government has been reforming and is expected to continue to reform its economic and political systems. Any changes in the political and economic policies of the PRC government may lead to changes in the laws and regulations or the interpretation of the same, as well as changes in the foreign exchange regulations, taxation and import and export restrictions, which may, in turn, adversely affect our financial performance. While the current policy of the PRC government seems to be one of imposing economic reform policies to encourage foreign investments and greater economic decentralization, there is no assurance that such a policy will continue to prevail in the future.

 

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.

 

We may be subject to foreign exchange controls in the PRC . Our PRC subsidiaries are subject to PRC rules and regulations on currency conversion. In the PRC, the State Administration for Foreign Exchange (“SAFE”) regulates the conversion of the RMB into foreign currencies. Currently, foreign investment enterprises (“FIEs”) are required to apply to SAFE for “Foreign Exchange Registration Certificate for FlEs”. All of our subsidiaries are FIEs. With such registration certifications (which need to be renewed annually), FlEs are allowed to open foreign currency accounts including the “recurrent account” and the “capital account”. Currently, conversion within the scope of the “recurrent account” can be effected without requiring the approval of SAFE. However, conversion of currency in the “capital account” (e.g. for capital items such as direct investments, loans, securities, etc.) still requires the approval of SAFE. Our operations and business may be adversely affected if conversion of currency in the “capital account” is not approved by the SAFE.


We have entered the bottled water business and will be subject to all of the risks of one and only business enterprise.  Based on the results of a limited test marketing effort during calendar 2007 and 2008 we have devoted our efforts to producing and marketing branded bottled water in the PRC. Now this is our one and only business and there are many risks attendant to entering this business such as cost uncertainties, delays in production and acceptance of our product.   If we mismanage our production of branded bottled water or if we are unable to obtain market acceptance of our product at proposed price levels we are likely to fail in this business and this will negatively impact the value of our stock.

 

We may require additional financing.  In order to further develop our business of marketing premium branded bottled water we will require capital resources not currently available to us.  To raise



11



the necessary funds we must obtain debt financing, sell an existing asset or issue additional shares to investors.  We do not have any agreements or commitments to do any of the foregoing.  Nor can we predict when or if funding will be available to us or if it will be available on terms that are beneficial to our current shareholders.

 

Our bottled water business may face increased competition.  We believe that there is a pressing need for a premium, pure, drinkable bottled water in the PRC.  Other companies with greater resources and other advantages over us, such as established distribution networks, may also perceive the need for premium bottled water in the PRC, enter our market and compete with us successfully and cause our results to suffer.

 

The success of our bottled water business is dependent on our preserving a reputation for purity.  Our premium bottled water will only be purchased by consumers if they can trust that it is pure and beneficial.  Accordingly, if we experience any quality control problems, our reputation might be tarnished and our proposed new business could fail.


Chong Liang Pu, our Chairman of the Board, is our controlling stockholder.  Chong Liang Pu, our Chairman of the Board owns 49,635,000 shares or 35.6% of the issued and outstanding shares of our company.  Due to his ownership of shares, Mr. Pu will be able to control the affairs of the Company for the foreseeable future.

 

Risks Related to Our Securities

 

A purchaser of our stock is purchasing penny stock which limits his or her ability to sell the stock. Our shares of common stock are considered penny stock under the Exchange Act. The shares will remain penny stock for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, thus limiting investment liquidity. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in our Company will be subject to rules 15g-1 through 15g-10 of the Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stocks such as ours.

 

We do not intend to pay dividends and there will be less ways in which you can make a gain on any investment in our Company. We have never paid any cash dividends and currently do not intend to pay any dividends for the foreseeable future. To the extent that we require additional funding currently not provided for in our financing plan, our funding sources may likely prohibit the payment of a dividend.

 

Our board of directors is authorized to issue shares of preferred stock, which may have rights and preferences detrimental to the rights of the holders of our common shares.  We are authorized to issue up to 50,000,000 shares of preferred stock, $.001 par value.  To date we have not issued any shares of preferred stock and have no plans to do so.  Our preferred stock may bear such rights and preferences, including dividend and liquidation preferences, as the board of directors may fix and determine from time to time.  Any such preferences may operate to the detriment of the rights of the holders of our common shares.


Our Articles of Incorporation provide for indemnification of officers and directors at our expense and limit their liability which may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors. Our Articles of Incorporation and applicable Nevada law provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on our behalf.  We will also bear the expenses of such litigation or any of our directors, officers, employees, or agents, upon such person's promise to repay us, therefore, if it is ultimately determined that any such person should not have been entitled to indemnification this indemnification policy could result in substantial expenditures by us, which we will be unable to recoup.

 

We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under federal securities laws is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.  In the event that a claim for indemnification against these types of liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, suit or proceeding, is asserted by a director, officer or controlling person in



12



connection with the securities registered in our SB-2, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the question whether indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The legal process relating to this matter if it were to occur is likely to be very costly and may result in us receiving negative publicity, either of which factors is are likely to materially reduce the market and price for our shares, if such a market ever develops.


Under current regulations, Rule 144 is not available to our stockholders for resale of their shares.  Rule 144 was amended in 2008 to provide, among other things, that holders of shares of companies that had ever been a shell company, as we once were, may not utilize Rule 144 for the resale of their stock unless the company is current in its filings under the Securities Exchange Act of 1934, as amended (the “34 Act”). While we are working towards becoming current under the 34 Act, we are not current. No assurance can be given that we will become current. Accordingly, investors in our stock may have less ability to sell their stock until we are current under the 34 Act which may impair our efforts to raise capital.


ITEM 1B.  UNRESOLVED STAFF COMMENTS.


None


Item 2. Description of Property

 

Our principal executive office consists of approximately 400 square meters of office space that we lease and which are located at Suite 7A01, Baicheng Building, 584 Yingbin Road, Dashi, Panyu District, Guangzhou, Guangdong, China. We lease this space pursuant to a four year lease at a rate of approximately $19,000 per year commencing April 1, 2006. Before the expiration date of March 31,2010, we have continued the lease contract till to December 31,2012.

 

Commencing  May 1 , 2010, we leased about 300 square meters of office space for the bottled water marketing development team  at Suite 4D, Yijing Building, NO.119,Guanghzou Dadao Rd, Yuexiu District, Guanghzou City, P.R.China. We lease this space pursuant to a five year lease at a rate of approximately $43,000 per year with yearly increases of approximately 5% per annum during the term of the lease.  The office is located at  Zhujiang New Town, CBD of Guangzhou

 

Our bottled water facilities, other than the office described above, are located at the following locations:

 

Bottled water Facilities

 

Location

 

 

 

Aba Xinchen Dagu Glacier Spring Water Co.,Ltd

 

Zegai Village, Luhua Town, Heishui County, Aba Zang and Qiang Autonomous Region, Sichuan Province, PRC.

 

 

 

Beijing 9000 Year Commercial and Trading Co.,Ltd

 

Rm1109, Building 2, Henji Center, No.18 JianGuoMennei Dajie Street, East District, Beijing, P.R.C.

 

 

 

Chengdu 9000 Year Water Co., Ltd

 

Suite E, Floor 16, Building 2, Ruijin Plaza, No.2,GaoShenqiao, Chengdu City, P.R.C.

 

Each of the above Bottled water facilities consists of bottled water treatment plants, office buildings and staff facilities.



13



Item 3. Legal Proceedings.

 

Neither our company nor any of our properties are currently subject to any pending legal proceedings.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 


PART II

 

Item 5. Market for Common Equity and Related Shareholder Matters.

 

Market Information

 

Our common stock was traded on the OTC Bulletin Board (“OTCBB”) under the symbol “CEEC” until November 13, 2006 when our symbol was changed to “CHWG”.  On April 4, 2007, our symbol was changed to CHWGE and on May 7, 2007 our shares were removed from the OTCBB and listed on the “Pink Sheets” maintained by the National Quotation Bureau under the Symbol “CHWG”. The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported on the OTCBB. We consider our common stock to be thinly traded and that any reported bid or sale prices may not be a true market-based valuation of the common stock.



Quarter Ended

 

High

 

 

Low

 

March 31, 2009

 

$

0.017

 

 

$

0.013

 

June 30, 2009

 

$

0.03

 

 

$

0.03

 

September 28,2009

 

$

0.063

 

 

$

0.05

 

December 31,2009

 

$

0.08

 

 

$

0.06

 

March 29, 2010

 

$

0.065

 

 

$

0.06

 

June 28, 2010

 

$

0.05

 

 

$

0.034

 

September 27,2010

 

$

0.037

 

 

$

0.031

 

December 27,2010

 

$

0.028

 

 

$

0.015

 

March 31,2011

 

$

0.04

 

 

$

0.01

 

June 30, 2011

 

$

0.04

 

 

$

0.00

 

September 30,2011

 

$

0.03

 

 

$

0.01

 

December 31,2011

 

$

0.01

 

 

$

0.00

 

 

Holders

 

As of December 31, 2011, there were 72 record holders of our common stock.  The number of holders does not include the shareholders for whom shares are held in a "nominee" or "street" name.

 

Dividend Policy

 

We have not declared or paid any dividends on our common stock to date.  We anticipate that any future earnings will be retained as working capital and used for business purposes.  Accordingly, it is unlikely that we will declare or pay any such dividends in the foreseeable future.

 

Securities Authorized for Issuance under Equity Compensation Plans

 

None

 

Recent Sales of Unregistered Securities

 

We did not sell any unregistered securities during the year ended December 31, 2011



14



ITEM 6.  SELECTED FINANCIAL DATA.

 

Not applicable


ITEM 7.  MANAGEMENTS DISCUSSION and ANALYSIS of FINANCIAL CONDITIONS and REULTS OF OPERATION.

 

Year ended December 31, 2011 vs. Year ended December 31, 2010.

 

Total Revenues.  Revenues from our bottled water operations increased of approximately 7% from $325,421 in 2010 to $348,078 in 2011. The sales to related parties are $26,850 and $66,625 in 2011 and 2010 respectively. In the year 2009, we were fully engaged in new product sales of bottled water. In order to sell new products, the Company developed extensive sales channels to promote and sell products as we launched our distribution. After the year 2010, the Company reassessed its sales policy and found what it believes proved more suitable channels of distribution for its bottled water and sought higher quality customers who accept our preferred price levels and pay promptly. As a result, the Company has obtained more new areas and customers to increase its sales volume. The increased sales volume mainly resulted in the increased revenues.


Cost of Revenues.  Cost of revenues from our bottled water operations increased from $217,342 in 2010 to $259,393 in 2011. Cost of revenues to related parties is $17,989 and $ 55,953 in 2011 and 2010 respectively. This was primarily due to increased levels of sales .Gross profit from bottled water operations was $88,685 in 2011 as compared to $108,079 in 2010, reflecting the repositioning and expansion of our bottled water operations. Decreased gross margins were mainly due to increased unit costs, increased materials and transportation costs and costs to promotional distribution of products.

 

Operating (General and Administrative) Expenses.  Our General and administrative expenses increased during 2011 to $640,871 as compared to $632,748 in 2010 which reflected the start up costs of our repositioned bottled water operations. The principal components of operating expenses were selling and distribution expenses, administrative salaries and benefits, depreciation and amortization, travel expense, rental expense and other general administration cost. An increase in operating expenses was primarily due to increased salaries to management and increased costs for marketing and distribution efforts.

 

Net income. We had a net loss of $1,126,698 for the year ended 2011, and  net loss of $8,063,880 for the year ended 2010.  The decreased net loss is due to increased sales volumes and an impairment loss of $472,984 and $7,499,608 on goodwill in 2011 and 2010.

 

Liquidity.


General. As of December 31, 2011, we had cash and cash equivalents of $157,955. The following table provides detailed information about our net cash flow for all financial statements periods presented in this report.


 

 

The Year Ended

December 31,

 

 

2011

 

2010

Net cash provided by (used in) operating activities

 

 

(383,991)

 

 

 

 (373,433)

 

Net cash provided by/(used in) investing activities

 

 

1,056,058 

 

 

 

(140,538)

 

Net cash provided by/(used in) financing activities

 

 

(540,947)

 

 

 

506,499 

 

Net cash inflow(outflow)

 

 

134,082 

 

 

 

(6,624)

 

 

Investing activities.Net cash provided by investing activities was $1,056,058 for the year ended December 31, 2011, which is an increase of $1,196,596 from $(140,538) net cash used in investing activities for the same period in 2010. The net inflow from the investing activities was mainly due to disposal of a subsidiary.

 

Financing activities.Net cash used in financing activities was $540,947 for the year ended December 31, 2011, including $2,324,400 proceeds from long-term bank loan and $2,898,163 repayment to related companies.



15


Our future liquidity will be dependent on our ability to obtain financing or our obtaining loans.  None of these events are entirely within our control.  If we do not receive additional cash resources, the scope of our production, marketing and distribution effort for our bottled water will be reduced.

 

Critical Accounting Policies

 

The following is a discussion of those accounting policies that we deem to be “critical”— that is, they are important to the portrayal of our financial condition and results, and they reflect management’s reliance on estimates regarding matters that are inherently uncertain.

 

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

 

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

 

Impairment of assets. Our policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and whether the anticipated undiscounted estimated future cash flows are less than the carrying value.

 

Allowances for accounts receivables. Our provisioning policy for bad and doubtful debt is based on the evaluation of collectability and aging analysis of accounts receivables and on management’s judgment. We do not require collateral or other security to support clients’ receivables. We conduct periodic review of our clients’ financial condition and customer payment practice to minimize collection risk on accounts receivables. This review is based on considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. As of December 31, 2011we had made $746,439 allowance for doubtful debts.

 

Credit Policy. As of December 31, 2011 and 2010, our accounts receivables net were $40,099 and $31,413 respectively. The increase in accounts receivables in 2011 was due to increase in sales of the bottled water ..

 

ITEM 7A.  QUANTITATIVE and QUALITATIVE DISCLOSURES about MARKET RISK.

 

Not applicable.


ITEM 8.  FINANCIAL STATEMENTS and SUPPLEMENTARY DATA.

 

Our financial statements for the years ended December 31, 2010 and 2011, and the reports thereon of Patrizio & Zhao, LLC, respectively are included in this annual report.

 

ITEM 9.  CHANGES in and DISAGREEMENTS with ACCOUNTANTS on ACCOUNTING and FINANCIAL DISCLOSURE.

 

None.



16



ITEM 9A(T).  CONTROLS and PROCEDURES.

 

(a) Evaluation of Disclosure Controls and Procedures


As of the end of the period covered by this report, China Water Group’s management, with the participation of Wenge Fang, our principal executive officer, and Ding Rencai, our principal financial officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based upon that evaluation, Messrs. Fang and Rencai concluded that these disclosure controls and procedures were effective as of the end of the period covered in this report and that they provided reasonable assurance that the goals of the disclosure controls were met.


(b) Management’s Report on Internal Control Over Financial Reporting


The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. In order to evaluate the effectiveness of internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act,     management has conducted an assessment, including testing, using the criteria in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate

 

(c) Changes in Internal Control over Financial Reporting


There was no change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) that occurred during the fourth quarter of our year ended December 31, 2011 that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’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 under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Gain on disposal of XY

 

As previously disclosed in our 2004 10-KSB, including amendments thereto, and comparative figures in our 2005 10-KSB, we recorded a gain on disposal of $2,029,720 in 2004 for the disposal of our 90% attributable interest in Xian Yang Bai Sheng Water Purifying Company Limited (“XY”) to True Global Limited (“TGL”), an independent party, at a consideration of $4,130,435 (RMB34.2 million). The



17



disposal was made pursuant to a tri-party framework agreement between Evergreen Asset Group Limited (“EGAG”), TGL and Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) in which EGAG transferred 90% of its equity interest in XY to TGL while GDXS continued to own 10% of its equity interest in XY. The transaction was consummated on October 26, 2004 and the gain represents the difference between the disposal proceeds and our attributable share of net assets of XY at the date of disposal. In the same year, we also recognized an amount of $9,115,942 for the construction revenue of XY using the percentage-of-completion method, estimated costs and claim recognition for construction contracts. The amount accounted for 97% of our total revenue in 2004.

 

In the previously filed 2004 10-KSB, as amended to date, and comparative figures in our previously filed 2005 10-KSB, the accounting treatment for the construction revenue of XY does not comply with SOP 81-1 or EITF 00-21. As a result, we will file an amendment to the 2004 10-KSB and 2005 10-KSB with adjusted disclosure to record the transaction as part of the gain on the disposal of the XY subsidiary rather than as revenue from construction of wastewater treatment plant. As such our adjusted total revenue for the fiscal year ended December 31, 2004 was $250,571 and the adjusted gain on disposal of interest in a subsidiary - XY was $5,220,299. Due to the same reason, account receivable from TGL amounted to $9,416,039 as of December 31, 2004 will be reclassified to prepayment, deposits and other receivables in our upcoming amendment to the 2004 10-KSB, comparative figures in this amendment to the 2005 10-KSB and comparative figures in the upcoming or recently filed amendments to the June 30, 2005 10-QSB and September 30, 2005 10-QSB.

 

Group reorganization

 

In Note 2(ii) and 2(iii) to the consolidated financial statements contained in the previously filed 2004 10-KSB and 2005 10-KSB and Note 2 to the consolidated financial statements contained in the previously filed March 31, 2005 10-QSB, June 30, 2005 10-QSB, September 30, 2005 10-QSB and March 31, 2006 10-QSB, we disclosed group reorganization transactions. Pursuant to rules promulgated by the SEC, the merger or acquisition of a private operating company into a non-operating public shell corporation with nominal net assets is considered a capital transaction, rather than a business combination. As such, no disclosures are required under FAS 141 because the transactions described were not business combinations. For accounting purposes, the transaction has been treated as a reverse acquisition and a recapitalization, and pro-forma information is not presented. Accordingly, the upcoming amendments  to the 2004 10-KSB, this amendment to the 2005 10-KSB, and the recent or upcoming amendments to the March 31, 2005 10-QSB, June 30, 2005 10-QSB, September 30, 2005 10-QSB and March 31, 2006 10-QSB will not include references to the group reorganization transactions throughout the financial statements. We will also restate the common stock immediately after the recapitalization to $100,000 in the upcoming amended March 31, 2005 10-QSB and have done so in the recent amended June 30, 2005 10-QSB.

 

Reclassification of April warrants

 

In our previously filed 2005 10-KSB, June 30, 2005 10-QSB and March 31, 2006 10-QSB, we recorded as equity the warrants issued as part of the units sold in our April 2005 convertible debt issuance. Under EITF No. 00-19, the fair value of these warrants should be reported as a liability. Pursuant to the Warrant Agreement, because there is currently no effective registration statement covering the shares of common stock underlying these warrants, these warrants are currently subject to a cashless exercise whereby the warrant holders may surrender their warrants to the company in exchange for shares of common stock. The number of shares of common stock into which a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the warrants and the market price of the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that the company could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if the company were unable to obtain shareholder approval to increase the number of authorized shares, the company could be obligated to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, EITF No. 00-19 requires that we record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through our statement of operations. We will continue to report the potential settlement obligation as a liability until such time as the warrants are exercised or expire or we are otherwise able to modify the warrant agreement to remove the provisions which require this treatment. In addition to this restatement of our 2005 10-KSB, we will restate our June 30, 2005 10-QSB and our March 31, 2006 10-QSB to reclassify the April 2005 warrants as a liability.




18



April and September 2005 Private Placements—non-cash financing charges

 

In our June 30, 2005 10-QSB, we did not record any non-cash financing charges and in our September 30, 2005 10-QSB, as amended to date, we did not properly record the non-cash financing charges. Non-cash financing charges represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. We will restate our June 30, 2005 10-QSB and our September 30, 2005 10-QSB to record the non-cash financing charges, which represent the amount by which the fair value of derivative liabilities issued exceeds the amount of proceeds received, as an expense at the date of issuance of the April convertible debenture and the September private placement. As a result of the recording of non-cash financing charges, certain expenses which were previously recorded under general and administrative expenses in our September 30, 2005 10-QSB will be reclassified under non-cash financing charges.

 

April 2005 Private Placements—unrealized gains or losses in financial instruments

 

In our June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, we did not record properly the unrealized gains or losses in financial instruments, which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture. The unrealized gains or losses in financial instruments should have been reported in those filings. We will restate the June 30, 2005 10-QSB and September 30, 2005 10-QSB, as amended to date, to record the unrealized gains or losses in financial instruments which represent the change in fair market value of the financial instruments at each reporting date for the April warrants and the bifurcated conversion feature for the convertible debenture.

 

Interest in associate

 

In our June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, the comparative figures for our interest in associate as of December 31, 2004 were recorded based on an effective percentage of equity attributable to the group of 31.5% instead of a direct interest of 35%. We will restate the comparative figures for our interest in associate as of December 31, 2004 in the June 30, 2005 10-QSB and September 30, 2005 10-QSB to include our interest in associate based on a direct interest of 35%.


Prior Restatements

 

On January 13, 2006, we amended our 2004 10-KSB. Prior to the January 13, 2006 amendment, in our 2004 10-KSB we recorded our interest in associate based on an effective percentage of equity attributable to the group of 31.5% instead of a direct interest of 35%.  In the January 13, 2006 restatement of our 2004 10-KSB, we reported our interest in associate based on a direct interest of 35%. In addition, we have restated the common stock immediately after the recapitalization to $100,000.

 

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

 



19



Steps Undertaken with respect to Material Weaknesses Prior to 2008

 

In connection with the above matters, we have identified material weaknesses in our internal control over financial reporting, which weaknesses we have reported to our auditors. These material weaknesses comprise:

 

 

(a)

insufficient knowledge and experience among our internal accounting personnel regarding the application of US GAAP and SEC requirements;

 

 

(b)

insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and

 

 

(c)

insufficient emphasis by management on compliance with US GAAP requirements.

 

We have communicated with our auditors, Patrizio & Zhao,LLC. and concluded that these deficiencies constituted material weaknesses, as defined by Auditing Standard No. 2, “An Audit of Internal Control Over Financial Reporting Performed in Conjunction with an Audit of Financial Statements,” established by the Public Company Accounting Oversight Board, or PCAOB.

 

In order to address these material weaknesses our senior management is in the process of conducting a thorough review of our US GAAP financial reporting processes and will prepare and implement a US GAAP action plan. This plan will be designed to generally improve our US GAAP reporting processes and to strengthen our control processes and procedures in order to prevent a recurrence of the circumstances that resulted in the need to restate our quarterly financial statements. Our senior management intends to complete its review and implement a US GAAP action plan as soon as practicable. The US GAAP action plan will incorporate, among other matters, the following initiatives

 

 

1.

arrange for our senior management and certain accounting and finance-related personnel to attend training sessions on US GAAP and financial reporting responsibilities and SEC disclosure requirements;

 

 

2.

modify the mandate of our internal audit function to place greater emphasis on the adequacy of, and compliance with, procedures relating to internal controls over US GAAP financial reporting and engage an experience accountant familiar with USGAAP which is not affiliated with ,Patrizio & Zhao,LLC, to assist our accounting department and internal audit function in the preparation of our US GAAP consolidated financial statements;

 

 

3.

recruit an accounting staff member with US GAAP expertise and who is not affiliated with Patrizio & Zhao, LLC; and

 

 

4.

engage an internationally recognized accounting firm, which is not affiliated with ,Patrizio & Zhao, LLC, to provide us with technical advice on US GAAP matters and SEC disclosure requirements on an ongoing basis.

 

We have fully implemented items 1, 2, and 3, while item 4 remains in the planning stage.

 

Our board of directors discussed the matters disclosed in this filing with the registrant’s independent accountant. On September 25, 2006, we filed a current report on Form 8-K relating to these matters, including a response from our independent account relating to the statements contained therein.

 

Other than those disclosed above, there were no changes in our internal controls over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the fiscal year ended December 31, 2011

 

ITEM 9B.  OTHER INFORMATION.

 

We do not have any information that was required to be reported on Form 8-K during the fourth quarter.

 



20



PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS and CORPORATE GOVERNANCE.

 

Our directors and officers as of April 30, 2011 and November 20 2011 are:

 

Name

 

Age

 

Position

Chong Liang Pu

 

50

 

Chairman of the Board

Wenge Fang

 

41

 

Chief Executive Officer and a Director

Ding Rencai

 

51

 

Chief Financial Officer and a Director

 

Mr. Pu served as our chief executive officer, president and a director since October 2004 until December 2008.  He has resigned as an officer, but continues as Chairman of the Board. Mr. Pu founded Evergreen and has acted as its chairman and president since April 2004. From May 1999 until April 2004, Mr. Pu was the chief executive officer and general manager of Guang Dong Xin Xing Mei Biology Company Limited, a majority-owned subsidiary of Evergreen.


Wenge Fang, age 41.  Prior to joining the Company as director, CEO & President in December 2008 Mr. Fang had been a consultant to the Company since August 2007. Before this Mr. Fang founded Shenzhen Golden Lexicon Investment Consulting Co., Ltd (a business consulting firm) and had acted as its executive director and general manager since April 2002.  In July 1997, Mr. Fang joined MingHua Group a company engaged in the real estate hotel and hi-tech business as secretary of the board of directors. In 1998, he was appointed as vice general manager of the group. In August 2001 he became the director and vice general manager of MingHua International Holding Group (mgha.ob) until his resignation in October 2002.  Mr Fang owned MBA degree from Business School of FuDan University in ShangHai, P.R.China.

 

Ding Rencai, age 51, has been the Chief Financial Officer of the Company since July 1, 2008. From December 2005 to July 2008, Mr. Ding was a senior advisor to the Company and chief financial officer and financial manager of Guangdong Xinxinmei Environmental Protection Company, a majority-owned subsidiary of the Company.He was also the acting CFO of the company from April 30, 2007 until his appointment as Chief Financial Officer in July 2008. He previously served as our Chief Financial Officer from October 16,2004 to December 29,2005. From January 2000 until December 2003, Mr. Ding was a financial manager of Guangzhou Yitao Group Co., Ltd., a real estate development company in the PRC. In 1999, Mr. Ding was the chief financial officer and head of the auditing department of Shenzhen Wei Ang Appliance Development Co., Ltd., a household appliance manufacturer in the PRC.

 

Audit Committee Financial Expert

 

We do not have an audit committee nor do we have a financial expert associated with an audit committee. Our entire board of directors performs the functions of our audit committee.

 

Code of Ethics

 

We have adopted a code of ethics that applies to the principal executive officer and principal financial and accounting officers. A copy of our code of ethics was filed as an exhibit to our annual report on Form 10-KSB for the year ended December 31, 2005. We will provide to any person without charge, upon request, a copy of our code of ethics. Requests may be directed to our principal executive offices at Suite 7A01, Baicheng Building, 584 Yingbin Road, Dashi, Panyu District, Guangzhou, Guangdong, China.


Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our officers, directors and persons who beneficially own more than 10% of a registered class of our equity securities to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (the “SEC”). Officers, directors and greater than 10% beneficial owners are also required by rules promulgated by the SEC to furnish us with copies of all Section 16(a) forms they file.

 



21



All of our officers, directors or 10% shareholders have filed the reports required to be filed under Section 16(a), except for Mr. Peh Chung Lim and Mr. Jia He Li.  These persons have since resigned their positions with the Company.

 

Item 11. Executive Compensation.

 

Compensation of Executive Officers. The following table sets forth certain information relating to the compensation paid by the company to its highest paid executive officers for services rendered during the fiscal years ended December 31, 2011 and 2010.

 

SUMMARY COMPENSATION TABLE


Summary Compensation Table


The following table sets forth certain information regarding our executive compensation:


Name
and
principal
position

 

Year

 

Salary
($)

 

Bonus
($)

 

Stock
awards
($)

 

Option
awards
($)

 

Non-equity
incentive
plan
compensation
($)

 

Change in
pension value
and
nonqualified
deferred
compensation
earnings
($)

 

All other
compensation
($)

 

Total
($)

Chong Liang Pu. Chairman

 

 

2010

 

 

 

16,400

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

16,400

 

 

 

 

2011

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

Wenge Fang, CEO

 

 

2010

 

 

 

44,100

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

44,100

 

 

 

 

2011

 

 

 

45,300

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

45,300

 

Ding Rencai, CFO

 

 

2010

 

 

 

40,000

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

40,000

 

 

 

 

2011

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

 

-0-

 

 

Compensation of Directors. Members of our board of directors do not receive cash compensation for their services as directors, although some Directors are reimbursed for reasonable expenses incurred in attending board or committee meetings. In the future, we may have to consider compensating any outside directors that become members of our board of directors.

 

Employment Agreements

 

We have an annual employment agreements with Mr. Fang which provides for cash compensation in the amount of $45,300 . Mr. Pu and Mr. Ding weren’t paid for their services as Chairman and CFO in 2011.  All officers and directors are reimbursed for reasonable out of pocket expenses. Our employment agreements are renewable on a yearly basis.

 

Termination of Employment

 

There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in the Summary Compensation Table set forth above that would in any way result in payments to any such person because of his or her resignation, retirement or other termination of such person’s employment with us.

 

Employee Benefit Plans

 

None

 



22



Indemnification of Directors and Executive Officers and Limitation of Liability

 

Pursuant to Nevada Law our Certificate of Incorporation provides that no director will have any personal liability to us or to any of our shareholders for monetary damages for breach of fiduciary duty as a director; provided, however, that this exclusion may not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to us or our shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which the director derived an improper personal benefit.

 

ITEM 12.  SECURITY OWNERSHIP of CERTAIN BENEFICIAL OWNERS and MANAGEMENT and RELATED STOCKHOLDER MATTERS.

 

Security Ownership of Certain Beneficial Owners

 

The following table sets forth, as of December 31, 2011, the stock ownership of (i) each of our named executive officers and directors, (ii ) all executive officers and directors as a group, and (iii) each person known by us to be a beneficial owner of 5% or more of our common stock.  No person listed below has any option, warrant or other right to acquire additional securities from us, except as may be otherwise noted.  We believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them except as stated therein.

  

Name (1)

 

Number of Shares of
Common Stock
Beneficially Owned (2)

 

Percentage
Owned

Chong Liang Pu

 

 

49,635,000

 

 

 

35.61

%

Shi Rong Jiang*

 

 

5,101,000

 

 

 

3.75

%

Jia He Li*

 

 

-0-

 

 

 

0

%

Lin Hong Ye*

 

 

-0-

 

 

 

0

%

Peh Chung Lim*

 

 

-0-

 

 

 

0

%

Wenge Fang

 

 

-0-

 

 

 

0

%

Ding Rencai

 

 

-0-

 

 

 

0

%

Gao Yongping*

 

 

10,145,250

 

 

 

7.47

%

Vision Opportunity Fund (3)

 

 

13,600,000

 

 

 

9.53

%

All directors and executive officers as a group (3 persons

 

 

49,635,000

 

 

 

35.61

%

 

* Not currently an officer or director.                                                                                                                        


 

(1)

The addresses of Chong Liang Pu, Shi Rong Jiang, Jia He Li, Lin Hong Ye, Peh Chung Lim and Gao Yongping are Suite 7A01, Baicheng Building, 584 Yingbin Road, Dashi, Panyu District, Guangzhou, Guangdong, China.

 

 

(2)

Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options currently exercisable or exercisable within 60 days of the date of this table, are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.

 

 

(3)

Vision Opportunity Master Fund Ltd. is the beneficial owner of the shares held of record by Vision Opportunity Master Fund Ltd.  The common shares beneficially owned by Vision Opportunity Fund Ltd. include (i) 6,800,000 common shares, and (ii) 6,800,000 common shares issuable upon exercise of outstanding warrants. The address for Vision Opportunity Fund Ltd. is 253 East 77th St., PH-F, New York, NY 10021.

 

Beneficial ownership is determined in accordance with the Rule 13d-3(a) of the Securities Exchange Act of 1934, as amended, and generally includes voting or investment power with respect to securities.  



23



Except as subject to community property laws, where applicable, the person named above has sole voting and investment power with respect to all shares of our common stock shown as beneficially owned by him.


This table is based upon information derived from our stock records. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, we believe that each of the shareholders named in this table has sole or shared voting and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based upon 169,133,450 shares of common stock outstanding as of December 31, 2011.

 

Changes in Control

 

We know of no contractual arrangements which may at a subsequent date result in a change of control in the Company.

 

ITEM 13.  CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS, and DIRECTOR INDEPENDENCE.

 

Certain Relationships and Transactions with Related Persons

 

We have the following related party transactions for the years ended December 31, 2011.


“BJZC” - Bei Jing Zhao Cheng Chuang Zhan Investment Company Limited

“GDXS” - Guang Dong Xin Sheng Environmental Protection Company Limited

“Xinxingmei” - Guang Dong Xin Xingmei Biology Company Limited


We hold the exclusive rights to use MHA biological treatment processes technologies and GM Bio-carriers. Both are the subject of patents owned by our Chairman, Mr. Pu, and we have acquired the exclusive rights pursuant to a license agreement with Mr. Pu.

 

As at December 31, 2011 we lent $101,138 to GDXS and owed BJZC $288,555 on and interest free basis.  These loans are payable on demand.  Mr. Pu, Chairman of the Board holds and equity interest in both BJZC and GDXS.

 

As at December 31, 2011, our subsidiaries Aba and Xinchen owed Xinxingmei $1,847,770 on an interest free demand basis.

 

As at December 31, 2011, we owed Chonglaing Pu, the Chairman of the Board $328,258and lent $1,574 to Tingli Pu, a shareholder,, on an interest free on demand basis.


Director Independence

 

Our current directors are Messrs. Pu, Fang, and Ding.  We are not currently subject to corporate governance standards defining the independence of our directors.  We have not yet adopted an independence standard or policy, although we intend to do so in the future. Accordingly, the Company’s Board currently determines the independence of each Director and nominee for election as a Director.  The Board has determined that none of the Company’s directors currently qualifies as an independent director.

 

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

Audit Fees

 

The aggregate fees billed by the Company’s auditors for professional services rendered in connection with the audit of the Company’s annual financial statements and reviews of the financial statements included in the Company’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal years 2011 and 2010 were $65,000 and $60,000, respectively.



24



Audit Related Fees


None


Tax Fees


None


All Other Fees


None


Pre-Approval Policies and Procedures


The board of directors has not adopted any pre-approval policies and approves all engagements with the Company’s auditors prior to performance of services by them.



PART IV

 

ITEM 15.  EXHIBITS and FINANCIAL STATEMENT SCHEDULES

 

The following exhibits are filed with this report, except those indicated as having previously been filed with the Securities and Exchange Commission and are incorporated by reference to another report, registration statement or form.  As to any shareholder of record requesting a copy of this report, we will furnish any exhibit indicated in the list below as filed with this report upon payment to us of our expenses in furnishing the information.

 

Exhibit Number

Exhibit Description

 

2.1

Securities Purchase Agreement and Plan of Reorganization (1)

 

2.2

Amendment No. 1 to Securities Purchase Agreement and Plan of Reorganization (1)

 

3.3

Certificate of Amended and Restated Articles of Incorporation (3)

 

3.4

Bylaws (4)

 

3.5

Amendments to Bylaws (3)

 

10.1

BOT Investment and Operation Contract for Sewage Treatment Plant between Guangdong Xinsheng Environmental Protection Co., Ltd. and City Administration of Feng Feng Mining Area of Handon City, Hebei Province (5)

 

10.2

Investment Management Contract dated August 14, 2002 between Guangdong Xinxingmei Environmental Protection Science and Technology Investment Co., Ltd. and The People’s Government of Wuqing District, Tianjin City (5)

 

10.3

BOT Investment Contract dated July 4, 2003 between Guandong Xinsheng Environmental Co., Ltd. and People’s Government of Shunyi District, Beijing (5)


10.4

Contract for BOT Project Investment and Operation between Guandong Xinsheng Environmental Co., Ltd. and Shandong Haiyang Planning and Construction Administration (5)

 

10.5

Agreement with Shenzhen Jukeyuan Industry Development Co., Ltd. dated July 28, 2005 (5)

 

10.6

Agreement with Tianjin Wuqing Huangzhuang Industrial Zone dated July 20, 2005 (5)

 



25



10.7

Agreement with Tianjin Wuqing Fuyuan Economic Development Co., Ltd. dated May 28, 2005 (5)

 

10.8

Agreement with Beijing Jinqiao Luyuan Environmental Protection Investment and Development Co., Ltd. dated August 4, 2005 (5)

 

10.9

Agreement with Yongji Economic Development Zone Land Planning and Construction Bureau dated August 6, 2005 (5)

 

10.10

License Agreement with Chong Liang Pu (6)

 

10.11

Equity Assignment Agreement with Fortune Luck Global International Limited, dated December 31, 2007 (10)

 

10.12

Equity Transfer Agreement between the Evergreen Asset Group Ltd., a subsidiary of the Registrant, and Wenning Pu (7)

 

10.13

Employment Agreement with Ding Rencai  (8)

 

10.14

Employment Agreement with Wenge Fang (9)


16

Letter re Change in Certified Registered Public Account (2)

 

21.1

List of Subsidiaries (11)

 

31.1

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

32.1

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(1)

Previously filed as part of the Company’s current report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2004.

(2)

Previously filed as part of the Company’s current report on Form 8-K/A filed with the Securities and Exchange Commission on December 30, 2004.

(3)

Previously filed as part of the Company’s annual report on Form 10-KSB filed with the Securities and Exchange Commission on April 15, 2005.

(4)

Previously filed as part of the Company’s Form 10-SB filed with the Securities and Exchange Commission on May 24, 1999.

(5)

Previously filed as part of Amendment Number 1 to Registration Statement on Form SB-2, filed January 12, 2006, 1933 Act Number : 333-129064.

(6)

Previously filed as Exhibit 10.5 to the Company’s annual report on Form 10-KSB/A filed with the Securities and Exchange Commission on July 15, 2005.

(7)

Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated December 29, 2007

(8)

Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated July 1, 2008.

(9)

Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated December 11, 2008

(10)

Previously filed as exhibit 10.11 to amendment number 1 to form 10-K for the year ended December 31, 2008.

(11)

Filed as exhibit 21.1 to 10K-SB for the year ended December 31, 2006.



26



SIGNATURES

 

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, December 14, 2012

 

CHINA WATER GROUP, INC

 

 

 

By 

/s/ Chongliang Pu

 

Chongliang Pu

 

Chairman of the board

 

(Principal Executive Officer)

 

  

 

 

By

/s/ Wenge Fang

 

Wenge Fang

 

CEO and President

 

(Principal Executive Officer)

 

 

 

By

/s/ Ding Rencai

 

Ding Rencai

 

CFO (Principal Accounting and

Financial 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/ Chong Liang Pu

 

Chairman of the Board

 

Dec. 14, 2012

Chong Liang Pu

 

 

 

 

 

 

 

 

 

/s/ Wenge Fang

 

Director, CEO and President

 

Dec. 14, 2012

Wenge Fang

 

 

 

 

 

 

 

 

 

/s/ Ding Rencai

 

Director and CFO

 

Dec. 14, 2012

Ding Rencai

 

 

 

 

 



27




























CHINA WATER GROUP, INC.


CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER 31, 2011 AND 2010




























28



CHINA WATER GROUP, INC.


 

Consolidated Financial Statements


December 31, 2011 and 2010


Table of Contents


Report of Independent Registered Public Accounting Firm

 

F-1

Consolidated Balance Sheets

 

F-2

Consolidated Statements of Operations

 

F-3

Consolidated Statements of Comprehensive Loss

 

F-4

Consolidated Statements of Changes in Equity

 

F-5

Consolidated Statements of Cash Flows

 

F-6

Notes to Consolidated Financial Statements

 

F-7




29



Patrizio & Zhao, LLC

Certified Public Accountants and Consultants

322 Route 46 West

Parsippany, NJ 07054

Member of Affilica International

Tel:  (973) 882-8810

Fax: (973) 882-0788

Alliance of worldwide accounting firms

www.pzcpa.com



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders

China Water Group, Inc.



We have audited the accompanying consolidated balance sheets of China Water Group, Inc. (the “Company”) as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for the years then ended. These 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of China Water Group, Inc. as of December 31, 2011 and 2010, and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.








Parsippany, New Jersey

December 14, 2012



F-1



CHINA WATER GROUP, INC.


Consolidated Balance Sheets

 

December 31,

December 31,

 

2011

2010

Assets

 

 

Current assets:

 

 

Cash and cash equivalents

$

157,955 

$

23,873 

Accounts receivable, net of allowance for doubtful accounts of $746,439

40,099 

31,413 

and $721,788 as of December 31, 2011 and 2010, respectively

 

 

Inventory

243,404 

245,873 

Receivable for disposal of Evergreen

1,213,600 

Due from related company

101,138 

Other current assets

30,515 

142,364 

Total current assets

573,111 

1,657,123 

 

 

 

Property, plant and equipment, net

988,380 

1,046,381 

Intangible assets, net

216,185 

212,675 

Goodwill

6,167,114 

6,128,051 

    Total assets

$

7,944,790 

$

9,044,230 

 

 

 

Liabilities

 

 

Current liabilities:

 

 

Warrant liability

$

$

36,859 

Accounts payable and accrued expenses

155,954 

163,851 

Due to shareholders

326,683 

282,727 

Due to related companies

288,555 

3,115,298 

Due to affiliated companies

2,110,848 

2,034,407 

Other current liabilities

1,825,385 

1,790,977 

Total current liabilities

4,707,425 

7,424,119 

 

 

 

Long-term liabilities

 

 

Long-term bank loan

2,361,000 

Other payables for acquisition of a subsidiary

                 - 

5,950,000 

Total long-term liabilities

2,361,000 

5,950,000 

    Total liabilities

7,068,425 

13,374,119 

 

 

 

Equity (deficit)

 

 

Stockholders' equity (deficit):

 

 

Preferred stock, $0.001 par value, 50,000,000 shares authorized,

 

 

  no shares issued and outstanding

Common stock, $0.001 par value, 200,000,000 shares authorized;

 

 

  169,133,450 and 139,383,450 shares issued and outstanding at

 

 

  December 31, 2011 and 2010, respectively

169,133 

139,383 

Additional paid-in capital

12,051,782 

6,131,532 

Accumulated deficit

(13,126,728)

(12,049,057)

Accumulated other comprehensive income

2,230,131 

1,831,989 

Total stockholders' equity (deficit)

1,324,318 

(3,946,153)

 

 

 

Noncontrolling interest

(447,953)

(383,736)

Total equity (deficit)

876,365 

(4,329,889)

  Total liabilities and equity

$

7,944,790 

$

9,044,230 




The accompanying notes are an integral part of these consolidated financial statements. F-2



CHINA WATER GROUP, INC.

 

Consolidated Statements of Operations


 

For the Years Ended

December 31,

 

2011

2010

Sales:

 

 

    Third parties

$      321,228

$       258,796

    Related parties

26,850

66,625

Total sales

348,078

325,421

 

 

 

Cost of sales:

 

 

    Third parties

241,404

161,389

    Related parties

17,989

55,953

Total cost of sales

259,393

217,342

 

 

 

Gross profit

88,685

108,079

 

 

 

Operating expenses:

 

 

    Selling and distribution expenses

145,015

133,310

    General and administrative expenses

640,871

632,748

Total operating expenses

785,886

766,058

 

 

 

Loss from operations

(697,201)

(657,979)

 

 

 

Other income (expense):

 

 

    Interest expense, net

(5,980)

(368)

    Gain on financial instruments

36,859

107,016

    Other income (expense)

14,665

(12,521)

    Impairment loss on goodwill

(472,984)

(7,499,608)

Total other expense

(427,440)

(7,405,481)

 

 

 

Loss before income taxes

(1,124,641)

(8,063,460)

 

 

 

Provision for income taxes

        2,057

           420

 

 

 

Net loss

(1,126,698)

(8,063,880)

 

 

 

Less: net loss attributable to noncontrolling interest

     (49,027)

   (59,970)

 

 

 

Net loss attributable to China Water Group, Inc.

$(1,077,671)

$(8,003,910)

 

 

 

Basic loss per share

$          (0.01)

$          (0.06)

Diluted loss per share

$          (0.01)

$          (0.06)

 

 

 

Weighted average number of common shares outstanding

 

 

  Basic

167,095,779

139,383,450

  Diluted

167,095,779

139,383,450




The accompanying notes are an integral part of these consolidated financial statements. F-3



CHINA WATER GROUP, INC.


Consolidated Statements of Comprehensive Loss


 

For the Years Ended

 

December 31,

 

2011

2010

 

 

 

Net loss

$

(1,126,698)

$

(8,063,880)

 

 

 

Other comprehensive income

 

 

Foreign currency translation adjustment

382,952 

351,085 

 

 

 

Total other comprehensive income

382,952 

351,085 

 

 

 

Total comprehensive loss

(743,746)

(7,712,795)

 

 

 

    Less: comprehensive loss

 

 

attributable to the noncontrolling interest

(64,217)

(72,115)


 

 

Comprehensive loss attributable to China Water Group, Inc.

$

(679,529)

$

(7,640,680)





The accompanying notes are an integral part of these consolidated financial statements. F-4



CHINA WATER GROUP, INC.

 

Consolidated Statements of Changes in Equity


 

 

 

 

 

Accumulated

 

 

 

 

 

 

Additional

 

Other

 

 

 

 

Common Stock

Paid in

Accumulated

Comprehensive

Total

Noncontrolling

Total

 

Number

Par Value

Capital

Deficit

Income

CHWG

Interest

Equity (deficit)

 

 

 

 

 

 

 

 

 

Balance as of January 1, 2010

139,383,450

$

139,383

$

6,131,532

$

(4,045,147)

$

1,468,759

$

3,694,527 

$

(311,621)

$

3,382,906 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net loss

-

-

-

(8,003,910)

-

(8,003,910)

(59,970)

(8,063,880)

Other comprehensive income:

 

 

 

 

 

 

 

 

   Foreign currency translation adjustment

-

-

-

363,230

363,230 

(12,145)

351,085 

Comprehensive loss

                    -

               -

               -

                  - 

                   -

(7,640,680)

(72,115)

(7,712,795)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2010

139,383,450

$

139,383

$

6,131,532

$

(12,049,057)

$

1,831,989

$

(3,946,153)

$

(383,736)

$

(4,329,889)

 

 

 

 

 

 

 

 

 

Common stock issued for acquisition of  a

29,750,000

29,750

5,920,250

-

5,950,000 

5,950,000 

subsidiary

 

 

 

 

 

 

 

 

Comprehensive income (loss):

 

 

 

 

 

 

 

 

Net loss

-

-

-

(1,077,671)

-

(1,077,671)

(49,027)

(1,126,698)

Other comprehensive income:

 

 

 

 

 

 

 

 

   Foreign currency translation adjustment

-

-

-

398,142

398,142 

(15,190)

382,952 

Comprehensive loss

                  -

              -

                -

                    - 

                -

(679,529)

(64,217)

(743,746)

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2011

169,133,450

$

  169,133

$

  12,051,782

$

   (13,126,728)

$

       2,230,131

$

1,324,318 

$

    (447,953)

$

        876,365 





The accompanying notes are an integral part of these consolidated financial statements.      F-5



CHINA WATER GROUP, INC.

 

Consolidated Statements of Cash Flows

 

For the Years Ended December 31,

 

2011

2010

  Cash flows from operating activities:

 

 

Net loss

$  (1,126,698)

$  (8,063,880)

Adjustments to reconcile net loss to net cash provided by (used in)

 

 

    operating activities:

 

 

Depreciation and amortization

184,274

150,148

Provision for bad debt

46,173

29,727

Impairment loss on goodwill

472,984

7,499,608

Gain on fair value of financial instruments

(36,859)

(107,016)

Changes in operating assets and liabilities :

 

 

Accounts receivable

(4,958)

120,528

Inventory

11,526

45,612

Other current assets

66,775

33,334

Accounts payable and accrued expenses

(13,835)

(29,905)

Income tax payable

-

(66,432)

Other current liabilities

      16,627

      14,843

Total adjustments

    742,707

    7,690,447

 

 

 

Net cash used in operating activities

(383,991)

(373,433)

 

 

 

Cash flows from investing activities:

 

 

Due from related company

(99,570)

-

Acquisition of property, plant and equipment

(83,773)

(140,316)

Acquisition of intangible assets

(279)

(222)

Disposal of subsidiary – Evergreen, net of cash

  1,239,680

                 -

 

 

 

Net cash provided by (used in) investing activities

1,056,058

(140,538)

 

 

 

Cash flows from financing activities:

 

 

Due to shareholders

32,816

272,879

Due to related companies

(2,898,163)

233,620

Proceeds from long-term bank loan

  2,324,400

                 -

 

 

 

Net cash provided by (used in) financing activities

 (540,947)

  506,499

 

 

 

Effect of foreign currency translation on cash and cash equivalents

         2,962

           848

 

 

 

Net increase (decrease) in cash and cash equivalents

134,082

(6,624)

 

 

 

Cash and cash equivalents - beginning

       23,873

     30,497

 

 

 

Cash and cash equivalents - ending

$   157,955

$    23,873

 

 

 

Supplemental schedule of non-cash activities:

 

 

Issuance of common stock pursuant to conversion of other payables for acquisition of a subsidiary

$  5,950,000

$                -

 

 

 



The accompanying notes are an integral part of these consolidated financial statements. F-6



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements


NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS


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


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


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


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


The principal activities of the Company were the research and development of waste water, garbage treatment and aqueous purifying techniques, investment and construction of waste water treatment plant and sales of environment protection related products. The Company is now engaged in the production, sales and marketing of the bottled water.


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


On January 23, 2008, the Chinese government approved China Water Group Inc’s. acquisition of 90% equity interest in Guangzhou Xinchen Water Company Limited from Fortune Luck Global International Limited. Guangzhou Xinchen Water Company Limited owns 100% equity interest of Aba Xinchen Dagu Glacier Spring Co., Limited. The acquisition was completed for a consideration of $13.45 million, of which $7.5 million was paid in cash, and the remaining $5.95 million will be paid in the future.  The primary reason for the acquisition was to enter into the bottled water industry.  The Company recorded a liability of $5.95 million, which represented the fair value of stock calculated based on US$ 0.2 per share, with reference to contemporaneous prices of the Company’s common stock on the Pink Quote, with total of 29.75 million shares. Approximately $13 million of the purchase price of $13.45 million was assigned to goodwill since the net asset of Aba Xinchen Dagu Glacier Spring Co., Limited. was minimum at the acquisition date (see Note 8).

 

On January 26, 2011, the Company issued 29.75 million shares of its common stock to Fortune Luck Global International Limited to settle the $5.95 million remaining purchase price incurred for the acquisition.


 

F-7



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements


 

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS (CONTINUED)


In January, 2009, the Company sold 100% of the equity interest in Evergreen to Whole Treasure Investment Ltd. at a total consideration of RMB 19,000,000 (approximately $2,784,450). After completing the transfer formalities, the Company no longer holds any share in Evergreen. On October 28, 2011, the Company collected the remaining receivables on disposal of Evergreen.


On February 26, 2009, Guangzhou Xinchen Water Company established a subsidiary, Chengdu Jiuqiannian Water Company, in the PRC as a wholly-owned limited liability company with registered capital of RMB 500,000 (approximately $73,250).


On August 24, 2009, Guangzhou Xinchen Water Company established a subsidiary, Beijing Jiuqiannian Trading Company Ltd., in the PRC as a wholly-owned limited liability company with registered capital of RMB 300,000 (approximately $43,971).


NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Basis of Presentation and Consolidation


The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). The consolidated financial statements include the financial statements of CHWG and its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.


In preparing the accompanying audited consolidated financial statements, the Company evaluated the period from December 31, 2011 through the date the financial statements were issued for material subsequent events requiring recognition or disclosure. No such event was noted.


Use of Estimates


The preparation of consolidated financial statements in conformity with US GAAP requires the Company 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 these consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Accordingly, actual results may differ from these estimates under different assumptions or conditions.


Risk and Uncertainties


The Company's operations are carried out in the PRC. Accordingly, the Company's business, financial condition and results of operations may be influenced by the PRC’s political, economic and legal environments as well as by the general state of the PRC’s economy. The Company's business may be influenced 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.


Revenue Recognition


We recognize revenue using various revenue recognition policies based on the nature of the sale and the terms of the contract. Revenues from sale of bottled water are recognized when goods are delivered. The contractual terms of the purchase agreements dictate the recognition of revenues by us. We recognize revenue in accordance with Staff Accounting Bulletin No. 104, codified in ASC Topic 480. Accordingly, four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products or services delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. We defer any revenue for which the product has not been delivered or is subject to refund until such time that we and our customer jointly determine that the product has been delivered or no refund will be required.



F-8



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Cash and Cash Equivalents


In accordance with ASC 230-10 (formerly SFAS No. 95, “Statement of Cash Flows”), the Company considers all highly liquid investments with an original maturity of three months or less to be “cash equivalents”. Because of the short maturity of these investments, the carrying amounts approximate their fair value.


Accounts Receivable


Accounts receivable are stated at historical cost, net of allowance for doubtful accounts. The Company establishes an allowance for doubtful accounts based on management’s assessment of the collectability of accounts receivables and other receivables. A considerable amount of judgment is required in assessing the amount of the allowance; the Company considers the historical level of credit losses and applies percentages to aged receivable categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.


Bad debts are written off when identified. The Company extends unsecured credit to customers ranging from three to six months in the normal course of business. The Company does not accrue interest on accounts receivables.


Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by the management and no significant additional bad debts have been written off directly to the profit and loss.


The balance of allowance for doubtful accounts amounted to $746,439 and $721,788 as of December 31, 2011 and 2010, respectively.


Inventory


Inventories are stated at the lower of cost, determined on a weighted average basis, or market. Costs of inventories include purchase and related costs incurred in bringing the products to their present location and condition. Market value is determined by reference to selling prices after the balance sheet date or to management’s estimates based on prevailing market conditions. The management will write down the inventories to market value if it is below cost. The management also regularly evaluates the composition of its inventories to identify slow-moving and obsolete inventories to determine if valuation allowance is required.


Cost of Sales


Cost of sales comprises labor and other cost of personnel directly engaged in providing the product, as well as raw materials and amortization expense.


Property, Plant and Equipment


Property, plant and equipment are stated at cost less accumulated depreciation and amortization and impairment loss. Maintenance, repairs and betterments, including replacement of minor items, are charged to expense; major additions to physical properties are capitalized. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives:


 

Estimated Useful Life

Office equipment

5 years

Furniture and fixtures

5 years

Tools and equipment

5 years

Motor vehicles

5 - 10 years

Building

10 - 20 years



F-9



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Long-Lived Assets


In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” codified in ASC Topic 360-10-35, the Company reviews the recoverability of its long-lived assets on a periodic basis in order to identify business conditions, which may indicate a possible impairment. The assessment for potential impairment is based primarily on the Company’s ability to recover the carrying value of its long-lived assets from expected future discounted cash flows. If the total of the expected future discounted cash flows is less than the total carrying value of the assets, a loss is recognized for the difference between the fair value (computed based upon the expected future discounted cash flows) and the carrying value of the assets.


Intangible Assets


Intangible assets are stated at cost. Intangible assets with finite life are amortized over their estimated useful life using straight-line method. Estimated useful life of intangible assets is as follows:


 

Estimated Useful Life

Land use right

50 years


Goodwill


The Company accounts for business acquisitions in accordance with ASC 805-10 (formerly SFAS No. 141 “Business Combinations”), which may result in the recognition of goodwill. Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations accounted for under the purchase method. Goodwill is not subject to amortization but will be subject to periodic evaluation for impairment. Goodwill is stated in the consolidated balance sheet at cost less accumulated impairment loss, if any.


Fair Value Measurement And Financial Instruments


The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”) on January 1, 2009. SFAS 157 has been codified as ASC 820-10, “Fair Value Measurements.” ASC 820-10, among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. ASC 820-10 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820-10 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:


Level 1: Observable inputs such as quoted prices in active markets;


Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and


Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.


The Company’s financial instruments primarily consist of cash and cash equivalents, accounts receivable, other current assets; accounts payable, accrued expenses, short-term bank loans and other current liabilities. As of the balance sheet dates, the estimated fair values of the financial instruments were not materially different from their carrying values as presented due to the short maturities of these instruments and that the interest rates on the borrowings approximate those that would have been available for loans of similar remaining maturity and risk profile at respective year ends.


Income Taxes


The Company utilizes the asset and liability method of accounting for income taxes whereby deferred taxes are determined based on the temporary differences between the financial statements and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.



F-10



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Earnings (Loss) Per Share


Basic earnings (loss) per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed similarly to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued.


Comprehensive Income


The Company has adopted ASC 220 “Reporting Comprehensive Income” which establishes rules for the reporting and display of comprehensive income, its components and accumulated balances. ASC 220 defines comprehensive income to include all changes in equity, including adjustments to minimum pension liabilities, accumulated foreign currency translation, and unrealized gains or losses on available-for-sale marketable securities, except those resulting from investments by owners and distributions to owners.


Foreign Currency Translation and Transactions


The Company has evaluated the determination of its functional currency based on the guidance in ASC Topic, “Foreign Currency Matters,” which provides that an entity’s functional currency is the currency of the primary economic environment in which the entity operates; normally, that is the currency of the environment in which an entity primarily generates and expends cash. On its own, the Company raises financing in the U.S. dollar, pays its own operating expenses primarily in the U.S. dollar, paid dividends to its shareholders of common stock and expects to receive any dividends that may be declared by its subsidiaries in U.S. dollars.


Therefore, it has been determined that the Company’s functional currency is the U.S. dollar based on the expense and financing indicators, in accordance with the guidance in ASC 830-10-85-5.


The Company uses United States dollars (“U.S. Dollar” or “US$” or “$”) for financial reporting purposes. The subsidiaries within the Company maintain their books and records in RenMinBi (“RMB”), the primary currency of the economic environment in which their operations are conducted. Assets and liabilities of the subsidiaries in RMB are translated into U.S. Dollars using the applicable exchange rates prevailing at the balance sheet date. Items on the statements of income and comprehensive income and cash flows are translated at average exchange rates during the reporting period. Equity accounts are translated at historical rates. Adjustments resulting from the translation of the Company’s financial statements are recorded as accumulated other comprehensive income.


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


  

  

December 31, 2011

 

December 31, 2010

Balance sheet items, except for stockholders’ equity items

RMB 1: US$0.15740

 

RMB 1: US$0.15170

  

 

 

 

Amounts included in the statements of operations, comprehensive loss, and statements of cash flows

RMB 1: US$0.15496

 

RMB 1: US$0.14794

  

 

 

 

Stockholders’ equity items

Historical rate

 

Historical rate




F-11



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)


Recent Accounting Pronouncements


In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-12, Comprehensive Income (Topic 220) (“ASU 2011-12”). ASU 2011-12 allows deferral of the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU No. 2011-05. This update is effective at the same time as the amendments in ASU No. 2011-05. The adoption of this ASU will not have a material impact on the Company’s financial statements.


In December 2011, FASB issued ASU No. 2011-11, Balance Sheet (Topic 210) (“ASU 2011-11). ASU 2011-11 provides enhanced disclosures that will enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. The objective of this update is to facilitate comparison of entities that prepare their financial statements on the basis of U.S. generally accepted accounting principles (“GAAP”) with those preparing their financial statements on the basis of International Financial Reporting Standards (“IFRS”). ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The adoption of this ASU will not have a material impact on the Company’s financial statements.


In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”). ASU 2011-05 eliminates the option to report other comprehensive income and its components in the statement of changes in equity. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption of this standard will not change the presentation of its consolidated financial statements.


In May 2011, the FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs,” (“ASU 2011-04”). ASU 2011-04 expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. This guidance will be effective for the Company beginning January 1, 2012. The Company anticipates that the adoption of this standard will not materially affect its consolidated financial statements.


Reclassification


Certain amounts as of December 31, 2010 were reclassified for presentation purposes.


NOTE 3 – INVENTORY


Inventory as of December 31, 2011 and 2010 consisted of the following:


 

December 31,

December 31,

 

2011

2010

 

 

 

Raw materials

$

101,620

$

110,193

Finished goods

141,784

135,680

 

 

 

    Total

$

243,404

$

245,873




F-12



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 4 – DUE FROM RELATED COMPANY


As of December 31, 2011 and 2010, the Company had outstanding loan to a related company of $101,138 and $0, respectively.  The loan is made to Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”), in which Mr. Pu, the Chairman of the Board, has equity interests. All amounts are payable on demand, do not bear interest, and are made in good faith.


NOTE 5 – OTHER CURRENT ASSETS


Other current assets consisted mainly of prepayments to vendors for goods and services. The balance of other current assets as of December 31, 2011 and 2010 was $30,515 and $142,364, respectively.


NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET


Property, plant and equipment, net as of December 31, 2011 and 2010 consists of the following:


 

December 31,

December 31,

 

2011

2010

 

 

 

Office equipment

$      41,382

$      32,521

Furniture and fixtures

4,304

5,654

Motor vehicles

352,317

257,821

Building

   261,885

   263,780

Bottled water production equipment

      868,412

      750,578

Subtotal

1,528,300

1,310,354

    Less: Accumulated depreciation

      548,062

      352,410

 

980,238

957,944

Construction in progress

        8,142

       88,437

Total

$    988,380

$   1,046,381


Depreciation expenses for the year ended December 31, 2011 and 2010 amounted to $179,584 and $145,670, respectively.


NOTE 7 – INTANGIBLE ASSETS


Intangible assets at December 31, 2011 and 2010 consist of the following:


 

December 31, 2011

December 31, 2010

 

 

 

Rights to use land

$   238,734

$    229,815

Less: accumulated amortization

     22,549

       17,140

 

 

 

    Total

$   216,185

$   212,675


Amortization expense for the years ended December 31, 2011 and 2010 amounted to $4,690, and $4,478, respectively.



F-13



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 8 - GOODWILL


On January 23, 2008, the Company completed its acquisition of 90% equity interest in Guangzhou Xinchen Water Company Limited from Fortune Luck Global International Limited for a consideration of $13.45 million. Goodwill, which is equal to the excess of cost over the fair value of acquired assets, has been recorded in conjunction with the acquisition. Goodwill is accounted for in accordance with ASC 350 (formerly SFAS 142). Under ASC 350, goodwill is not amortized and is subject to impairment test, at least annually, when events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The test of goodwill impairment consists of two steps. First, the identification of potential impairment is performed by comparing the fair value of the reporting unit to its carrying amount, including goodwill. The Company estimates the fair value of the reporting unit using a discounted cash flow (“DCF”) model. Second, if there is impairment identified in the first step, an impairment loss is recognized for any excess of the carrying amount of the reporting unit’s goodwill over the implied fair value of goodwill. The implied fair value of goodwill is determined by allocating the fair value of the reporting unit in a manner similar to a purchase price allocation, in accordance with ASC 450-10 (formerly SFAS No 141(R)), “Business Combinations”. As of December 31, 2011, the Company’s evaluation of goodwill resulted in an impairment loss of $472,984. The following table provides a reconciliation of the beginning and ending carrying amounts of goodwill for the years ended December 31, 2011 and 2010:


 

2011

2010

Goodwill at January 1

$  6,128,051

$ 13,178,494

Goodwill, net of accumulated impairment losses

  6,128,051

13,178,494

Impairment losses during the year

    472,984

   7,499,608

Goodwill, net of impairment losses at December 31

  5,655,067

   5,678,886

Foreign currency exchange adjustment

    512,047

    449,165

Adjusted goodwill at December 31

$ 6,167,114

$ 6,128,051


NOTE 9 - WARRANT LIABILITY


The fair values of the warrant liability as of December 31, 2011 and 2010 were as following:


 

December 31, 2011

December 31, 2010

 

 

 

Warrants issued in April 2005,

 

 

  at fair value

$              -

$       4,659

Shares issued in September 2005,

 

 

  accounted for as liability

                -

       32,200

 

 

 

Total

$              -

$      36,859


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




F-14



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 9 - WARRANT LIABILITY (CONTINUED)


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


The Company granted to the holders of the April Warrants certain piggy-back and demand registration rights. Pursuant to the agreements surrounding the April Private Placement, in the event that the Company determined to undertake a registration of securities, the Company would include, at the request of the holder of “Registrable Securities”, the Registrable Securities in the registration statement. If the Company did not file a registration statement by the 120th day from the closing of such financing, and the Company shall have received a written request signed by the holders holding the majority of the Registrable Securities, then the Company was obligated to file, at its expense, a registration statement covering the Registrable Securities. Once such registration statement has been filed and declared effective, the Company is obligated to keep such registration statement effective until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to such registration statement, (ii) all Registrable Securities have been otherwise transferred to persons who may trade such shares without restriction under the Securities Act, and the Company has delivered a new certificate or other evidence of ownership for such securities not bearing a restrictive legend, or (iii) all Registrable Securities may be sold at any time, without volume or manner of sale limitations pursuant to Rule 144(k) or any similar provision then in effect under the Securities Act. As of December 31, 2011, the Company has not received any written request signed by the holders holding the majority of the Registrable Securities.


Under ASC 815-40-05, Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock, the fair value of the April Warrants should be reported as a liability. Pursuant to the related warrant agreement, because there is currently no effective registration statement covering the shares of common stock underlying these warrants, these warrants are currently subject to a cashless exercise whereby the warrant holders may surrender their warrants to the company in exchange for shares of common stock. The number of shares of common stock into which a warrant would be exchangeable in such a cashless exercise depends on both the exercise price of the warrants and the market price of the common stock, each at or near the time of exercise. Because both of these factors are variable, it is possible that we could have insufficient authorized shares to satisfy a cashless exercise. In this scenario, if we were unable to obtain shareholder approval to increase the number of authorized shares, we could be obligated to settle such a cashless exercise with cash rather than by issuing shares of common stock. Further, ASC 815-40-05 requires that we record the potential settlement obligation at each reporting date using the current estimated fair value of the warrants, with any changes being recorded through our statement of operations. We will continue to report the potential settlement obligation as a liability until such time as the warrants are exercised or expire or we are otherwise able to modify the warrant agreement to remove the provisions which require this treatment.


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




F-15



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 9 - WARRANT LIABILITY (CONTINUED)


Under the subscription agreement for the September Private Placement, we agreed to prepare and file with the SEC (and did so file), at our own expense, a registration statement covering the registrable securities related to that placement. We agreed that in the event that the registration statement is not declared effective by the SEC within the earlier of 120 days from the final closing or three (3) business days of clearance by the Commission to request effectiveness, we would pay to the investors in the September Private Placement liquidated damages in the amount of 2.0% of the purchase price of the registrable securities for each month until the registration statement is declared effective. These liquidated damages began accruing on January 12, 2006. We agreed that if we do not remit payment of these liquidated damages, we will pay the investors in the September Private Placement interest at the rate of 12% per year until the liquidated damages are paid in full. The subscription agreement provides that if a registration statement is not effective at any time after one year following the issuance date of the September Warrants, these liquidated damages obligations will stop accruing. As of September 14, 2006 the liquidated damages obligations stopped accruing. As of December 31, 2011, we have made an accrual of $1,324,735 for registration right liability.


The fair value of the warrants liability as of December 31, 2011 was $0 which was calculated by Binomial Option Pricing Model.


Under ASC 815-40, contracts that include any provision that could require net-cash settlements cannot be accounted for as equity. Accordingly, the proceeds of the September Private Placement allocated for par value of the common stock and the September Warrants have been recorded as a liability on the balance sheet. Upon the effectiveness of the registration statement, the amount will be recorded as equity.


NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES


Accounts payable and accrued expenses consist of the following:


 

December 31, 2011

December 31, 2010

 

 

 

Accounts payable

$    150,437

$    163,851

Accrued expenses

          5,517

                   -

    Total

$    155,954

$    163,851


The carrying value of accounts payable and accrued expenses approximates their fair value due to the short-term nature of these obligations.


NOTE 11 – DUE TO SHAREHOLDERS


As of December 31, 2011 and 2010, the balance due to shareholders was $326,683 and $282,727, respectively. This balance represents financing obtained from Mr. Chongliang Pu, the Chairman of the Board.  All amounts are non-interest-bearing, unsecured and repayable on demand.


NOTE 12 – DUE TO RELATED COMPANIES


As of December 31, 2011 and 2010, the balance due to related companies was $288,555 and $3,115,298, respectively. The balance as of December 31, 2011 represents financing obtained from Beijing Zhao Cheng Chuang Zhan Investment Company Limited (“BJZC”) while the balance as of December 31, 2010 represents financing obtained from Guang Dong Xin Sheng Environmental Protection Company Limited (“GDXS”) and Beijing Zhao Cheng Chuang Zhan Investment Company Limited (“BJZC”). Mr. Pu, the Chairman of the Board, has equity interests in both companies. All amounts are non-interest-bearing, unsecured and repayable on demand.


NOTE 13 – DUE TO AFFILIATED COMPANIES


As of December 31, 2011 and 2010, the balance due to affiliated companies was $2,110,848, and $2,034,407, respectively. This balance represents financing obtained from Guang Dong Xin Xing Mei Biology Company Limited (“Xinxingmei”) and Evergreen Asset Group Limited (“Evergreen”). All amounts are non-interest-bearing, unsecured and repayable on demand.




F-16



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements




NOTE 14 – OTHER CURRENT LIABILITIES


Other current liabilities as of December 31, 2011 and 2010 consist of the following:


 

December 31, 2011

December 31, 2010

City maintenance construction tax and value added tax

$      26,116

$      14,271

Contribution for employee welfare plan

        43,444

        41,220

Customer deposits

     159,809

     126,623

Registration right liability

   1,324,735

   1,324,735

Other payables

   271,281

   284,128

 

 

 

Total

$1,825,385

$1,790,977


NOTE 15 – LONG-TERM BANK LOAN


Long-term bank loan consists of the following:


 

December 31,

December 31,

 

2011

2010

On October 11, 2011, the Company signed a loan agreement with China

 

 

Construction Bank. The loan is to be repaid in full on October 10, 2014.

 

 

The interest rate is a variable rate equal to 15% per annum above the

 

 

floating base interest for loans of the same term promulgated by the

 

 

People’s Bank of China. The average annual interest rate for the year

 

 

ended December 31, 2011 was approximately 7.65%. The loan was

 

 

designated to finance the operation of the Company.

$ 2,361,000

$               -

 

 

 

Total long-term bank loan                                                                   

$ 2,361,000

$               -


NOTE 16 – INCOME TAXES


The Company was incorporated in the State of Nevada and therefore, is not subject to any income tax according to the rules and regulations of the State of Nevada. The Company’s Chinese subsidiaries are governed by the Income Tax Law of the PRC and are subject to statutory income tax rate of 25%. For the years ended December 31, 2011 and 2010, the income tax provision for the Company was $2,057 and $420, respectively.


 

 

For the Years Ended December 31,

 

 

 

2011

 

2010

 

Current

 

 

$      2,057

 

 

$         420

 

Deferred

 

 

                 -

 

 

                 -

 

Total provision for income taxes

 

 

$      2,057

 

 

$         420

 


A reconciliation of the provision for income taxes with amounts determined by applying the statutory income tax rate to income before income taxes is as follows:


 

 

For the Years Ended December 31,

 

 

2011

 

2010

Computed tax @ statutory rate of 25%

 

 

 

 

  $(1,124,641)*25% and $(8,063,460)*25% for

 

 

 

 

  December 31, 2011 and 2010, respectively

 

$  (281,160)

 

$ (2,015,865)

 

 

 

 

 

Non deductible expense

 

13,799

 

          7,431

Current year losses from PRC subsidiaries

 

    123,148

 

      142,809

Current year losses from U.S. parent holding

 

 

 

 

    company not subject to PRC income taxes

 

     146,270

 

   1,866,045

 

 

 

 

 

Total provision for income taxes

 

$        2,057

 

$            420




F-17



CHINA WATER GROUP, INC.

Notes to Consolidated Financial Statements


 


NOTE 17 – LOSS PER SHARE


The Company presents loss per share on a basic and diluted basis. Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding. Diluted loss per share is computed by dividing net loss by the weighted average number of common shares outstanding including the dilutive effect of equity securities. The weighted average number of shares calculated for diluted loss per share excludes the potential common stock that would be exercised under the warrants granted to investors because of their anti-dilutive effect.


 

For the Years Ended December 31,

 

2011

2010

Net loss attributable to CHWG

$

(1,077,671)

$

(8,003,910)

Weighted average common shares

167,095,779 

139,383,450 

  (denominator for basic loss per share)

 

 

Effect of dilutive securities:

                      - 

                      - 

 

 

Weighted average common shares

167,095,779 

139,383,450 

  (denominator for diluted loss per share)

 

 

 

 

Basic loss per share

$

                (0.01)

$

                (0.06)

Diluted loss per share

$

                (0.01)

$

                (0.06)

 

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

 

NOTE 18 – EMPLOYEE WELFARE PLAN


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


NOTE 19 – RISK OF CONCENTRATIONS IN SALES AND PURCHASES


One major customer accounted for approximately 12% for the Company’s sales for the year ended December 31, 2011. Two major customers accounted for approximately 13% of the Company’s sales for the year ended December 31, 2010. Total sales to these customers were $40,628 and $41,725, for the years ended December 31, 2011 and 2010, respectively.


For the year ended December 31, 2011 and 2010, two major vendors accounted for approximately 26% and 67% of the Company’s cost for purchases, respectively. Total purchases from these vendors were $68,052 and $52,860 for the years ended December 31, 2011 and 2010, respectively.


Financial instruments which potentially subject the Company to credit risk consist principally of cash on deposit with financial institutions. Management believes that the financial institutions that hold the Company’s cash and cash equivalents are financially sound and minimal credit risk exists with respect to these investments.


NOTE 20 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION


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


 

For the Years Ended December 31,

 

2011

2010

Cash paid for interest

$        5,980

$               -

  

 

 

Cash paid for income taxes

$        2,057

$         420


NOTE 21 – RELATED PARTY SALES


For the twelve months ended December 31, 2011 and 2010, sales to related parties Chongliang Pu and Guang Dong Xin Sheng Environmental Protection Company Limited accounted for approximately 8% and 20% of the Company’s revenue, respectively. Total sales to related parties were $26,850 and $66,625 for the twelve months ended December 31, 2011 and 2010, respectively.




F-18