U.S.
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
x
ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
Fiscal Year Ended
December
31, 2007
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from ________________ to __________________
Commission
File Number
002-95836-NY
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
(Exact
name of registrant as specified in its charter)
Nevada
|
|
13-3250816
|
(State
or other jurisdiction of incorporation or
organization)
|
|
(IRS. Employer Identification
No.)
|
Dalian
Dongtai Industrial Waste Treatment Co.
No.
1 Huaihe West Road, E-T-D-Zone, Dalian, China
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116600
|
(Address
of principal executive offices)
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|
(Zip
Code)
|
Registrant’s
telephone number, including area code
011-86-411-85811229
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
o
Yes
x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section to file reports pursuant to Section 13 or 15(d) of the Act.
o
Yes
x
No
Note
-
Checking the box above will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
under
those Sections.
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 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.
x
Yes
o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
o
Yes
x
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company:
Large
accelerated filer
|
o
|
Accelerated
filer
|
o
|
Non-accelerated
filer
(Do
not check if smaller reporting company)
|
o
|
Smaller
reporting company
|
x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity
was
sold, or the average bid and asked prices of such common equity, as of the
last
business day of the registrant's most recently completed second fiscal quarter.
$8,186,206 as of June 29, 2007.
Indicate
the number of shares outstanding of each of the registrant's classes of common
stock, as of the latest practicable date. 13,220,843 shares of common stock
are
issued and outstanding as of March 28, 2008.
DOCUMENTS
INCORPORATED BY REFERENCE
List
hereunder the following documents if incorporated by reference and the Part
of
the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b)
or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980).
None.
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISK
This
report includes "forward-looking statements." You can identify these statements
by the fact that they do not relate strictly to historical or current facts.
These statements contain such words as "may," "project," "might," "expect,"
"believe," "anticipate," "intend," "could," "would," "estimate," "continue,"
or
"pursue," or the negative or other variations thereof or comparable terminology.
In particular, they include statements relating to, among other things, future
actions, new projects, strategies, future performance, the outcomes of
contingencies and our future financial results. These forward-looking statements
are based on current expectations and projections about future events.
Investors
are cautioned that forward-looking statements are not guarantees of future
performance or results and involve risks and uncertainties that cannot be
predicted or quantified and, consequently, our actual performance may differ
materially from those expressed or implied by such forward-looking statements.
Such risks and uncertainties include, but are not limited to, the following
factors, as well as other factors described from time to time in our reports
filed with the Securities and Exchange Commission (including the sections
entitled "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contained therein): the timing and
magnitude of technological advances; the prospects for future acquisitions;
the
effects of political, economic and social uncertainties regarding the
governmental, economic and political circumstances in the People’s Republic of
China, the possibility that a current customer could be acquired or otherwise
be
affected by a future event that would diminish their waste management
requirements; the competition in the waste management industry and the impact
of
such competition on pricing, revenues and margins; uncertainties surrounding
budget reductions or changes in funding priorities of existing government
programs and the cost of attracting and retaining highly skilled personnel;
our
projected sales, profitability, and cash flows; our growth strategies;
anticipated trends in our industries; our future financing plans; and our
anticipated needs for working capital.
Forward-looking
statements speak only as of the date on which they are made, and, except to
the
extent required by federal securities laws, we undertake no obligation to update
any forward-looking statement to reflect events or circumstances after the
date
on which the statement is made or to reflect the occurrence of unanticipated
events. The Private Securities Litigation Reform Act of 1995, which provides
a
“safe harbor” for similar statements by certain existing public companies, does
not apply to us because our stock is a “penny stock,” as defined under federal
securities laws.
CONVENTIONS
AND GENERAL MATTERS
The
official currency of the People’s Republic of China is the Chinese “Yuan” or
“Renminbi” (“yuan,” “Renminbi” or “RMB”). For the convenience of the reader,
amounts expressed in this report as RMB have been translated into United States
dollars (“US$” or “$”) at the rate of US$1.00 = RMB7.3046 quoted by The People’s
Bank of China as of December 28, 2007.
The
Renminbi is not freely convertible into foreign currencies and the quotation
of
exchange rates does not imply convertibility of Renminbi into U.S. Dollars
or
other currencies. All foreign exchange transactions take place either through
the Bank of China or other banks authorized to buy and sell foreign currencies
at the exchange rates quoted by the People's Bank of China. No representation
is
made that the Renminbi or U.S. Dollar amounts referred to herein could have
been
or could be converted into U.S. Dollars or Renminbi, as the case may be, at
the
PBOC Rate or at all.
The
"Company," "we," "us," "our" and similar words refer to China Industrial Waste
Management, Inc, its direct, wholly-owned subsidiary DonTech Waste Services,
Inc. (“DonTech”)
and
DonTech’s majority owned subsidiaries, Dalian Dongtai Industrial Waste Treatment
Co. Ltd. (“Dongtai”), Dongtai Water Recycling Co. Ltd. (“Dongtai Water”), Dalian
Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”), Dalian Lipp Environmental
Energy Engineering & Technology Co., Ltd.(“Dalian Lipp”) and
,
prior
to its dissolution in July 2007,
Liaoyang
Dongtai Industrial Waste Treatment Co., Ltd. (“Liaoyang Dongtai”).
The
Company is in the process of dissolving DonTech, which serves as a holding
company for the shares of the Company’s operating subsidiaries.
All
share
and per share information contained herein has been adjusted to reflect a 1
for
100 share reverse stock split which occurred on May 12, 2006.
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Page
No.
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Forward
Looking Statements and Associated Risk
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Conventions
and General Matters
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Part
I
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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14
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Item
1B.
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Unresolved
Staff Comments
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23
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Item
2.
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Properties
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24
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Item
3.
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Legal
Proceedings
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25
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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25
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Part
II
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Item
5.
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Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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26
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Item
6.
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Selected
Financial Information
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29
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Item
7.
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Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
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29
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Item
7A.
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Quantitative
and Qualitative Disclosure About Market Risk
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37
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Item
8.
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Financial
Statements and Supplementary Data
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37
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Item
9.
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Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
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37
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Item
9A.(T)
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Controls
and Procedures
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37
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Item
9B.
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Other
Information
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40
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Part
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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41
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Item
11.
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Executive
Compensation
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43
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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45
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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45
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Item
14.
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Principal
Accountant Fees and Services
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46
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Part
IV
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Item
15.
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Exhibits,
Financial Statement Schedules
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47
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PART
I
ITEM
1.
BUSINESS
Overview
China
Industrial Waste Management, Inc., through its 90%-owned subsidiary Dalian
Dongtai Industrial Waste Treatment Co., Ltd. (“Dongtai”) and other indirect
subsidiaries, is engaged in the collection, treatment, disposal and recycling
of
industrial wastes principally in Dalian, China and surrounding areas in Liaoning
Province, China. The Company provides waste disposal solutions to its more
than 400 customers from facilities located in the Economic and Technology
Development Zone, Dalian, PRC. Dongtai treats, disposes of and/or recycles
many
types of industrial wastes, and recycled waste products are used by customers
as
raw material to produce chemical and metallurgy products. In addition, Dongtai
and its subsidiaries treat or dispose of industrial waste through incineration,
burial or water treatment; as well as provide the following to its
clients:
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·
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environmental
protection services,
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·
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technology
consultation,
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·
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pollution
treatment services,
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·
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waste
management design processing services,
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·
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waste
disposal solutions,
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·
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waste
transportation services,
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·
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onsite
waste management services, and
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·
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environmental
pollution remediation services.
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Industry
Background and Market Opportunities
Rapid
economic growth has resulted in China becoming the fourth largest economy in
the
world, and it is expected that the GDP of China will surpass that of Germany
in
the near future. However, in the face of this economic surge, it is believed
that economic losses attributable to environmental pollution are causing a
10%
offset to GDP growth in China.
The
PRC
state environmental protection administration (“SEPA”) observes that China
suffers from significant environmental issues including:
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A
fragile ecological environment,
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·
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Inadequate
laws and regulations on preserving ecological
environment,
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·
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Inadequate
investment on preserving ecological environment,
and
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·
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Inadequate
technological and information support for preserving ecological
environment.
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SEPA
has
indicated that it will take measure
s
to
strengthen ecological environmental protection in the PRC. According to SEPA,
the worldwide environmental protection investment is approximately $600 billion,
but the investment in China approximates only $24 billion, or approximately
only
4% of the global investment. As a result, China has fallen behind in the
development of its environ
mental
protection industry.
In
the
Eleventh Five-year Plan, the PRC government has established the following three
primary environmental protection goals:
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·
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Reduce
total pollutants by 10%;
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Decrease
energy cost per unit of GDP by 20%;
and
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·
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Decrease
water cost per unit of industrial value added by 30%.
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Assuming
that these objectives are fulfilled, we estimate that the GDP of the
environmental protection industry of China would double. In addition the central
government has, for the first time, included an environmental protection index
in its performance inspection system for local government.
It
is
estimated that the environmental protection industry in China increases by
25%
per year, and management believes that an environmental protection industry
system is taking shape in China, and the industry has become a significant
part
of the state economy. By rough estimate, the industry will experience a 15%-20%
compound rate increase during the Eleventh Five-year Plan, and the total GDP
will reach RMB 880 billion (USD$12 billion) by the year 2010.
In
the
significant environmental and ecological protection market known as the “huge
green cake,” it is anticipated that major roles
will be
undertaken by companies engaged in water treatment, air pollution control,
and
solid waste treatment and disposal. Dongtai also plans to expand operations
into
the water resource and recovery through its acquisition of operating
subsidiaries. At present, the environmental protection industry in China is
still early in its development; and centralized treatment and disposal
facilities have been established in only a small number of coastal cities,
such
as Shenzhen, Shanghai, Hangzhou, Shenyang, Tianjin and Dalian. Therefore,
management believes that the Company is well-positioned to perform a pivotal
role in the implementation of the PRC’s Eleventh Five-year Plan.
Sources
and Components of Revenues
Dongtai
is licensed to conduct its industrial waste collection and disposal business
by
SEPA, which is an agency equivalent to the Environmental Protection Agency
in
the United States. Companies without this license are not permitted to conduct
business related to industrial waste disposal and collection. The grant of
the
license is based upon the professional qualifications of the applicant’s staff
and an evaluation of its management processes. Dongtai is licensed to dispose
of
hazardous waste by the province of Liaoning.
Our
income is comprised of two components, i.e., solid waste treatment and disposal
service fees and sales of valuable waste material and regenerated products.
The
following chart depicts these revenue producing components:
The
following chart illustrates the constituents of fees as relates to 2007 solid
waste treatment fees:
Our
core
10 customers include Cannon Office Machine (Dalian), Toshiba (Dalian), Capstone
Building Material (Dalian) and Konica (Dalian). Core customers and major
customers account for 20% of all customers and 89% of total treatment fees,
whereas 80% of all customers only contribute 11% to our revenues generated
from
waste treatment fees.
When
an
expanded centralized facility for waste treatment and disposal that has been
approved by National Development and Reform Commission is completed, Dongtai’s
capacity for waste treatment and recovery will be significantly improved.
Management believes that as new companies with strong international reputations
relocate to Dalian, Dongtai will be provided with the unique opportunity to
participate in the environmental development of this growing region of China.
We
anticipate that the comprehensive growth rate with regard to waste treatment,
sales of waste recovery and valuable material will exceed 25% in the next five
years.
Business
Activities
Solid
waste collection and treatment:
Dongtai
collects solid waste from customers, and charges processing fees based upon
the
weight of the collected waste. Dongtai’s services include incineration,
landfill, water treatment, transportation, packaging, analysis, storage, labor,
depreciation of facilities, maintenance, chemicals, energy, management and
taxes.
Sales
of recovered products:
Recovered products contain copper sulfate and organic solvent. The production
and sales of alloy are performed by our subsidiary, Dalian Zhuorui Resource
Recycling Company. Zhourui processes the recovered products and converts them
into copper sulfate and organic solvents in a form that is desirable for use
by
companies engaged in chemical engineering, agriculture and mining. To date,
demand for copper sulfate has exceeded the supply. The sales price for copper
sulfate is affected by the supply of raw materials, product life span, product
structure and production status. Organic solvent is generally used in chemical
engineering and in the electronic industry. At present the resources are
scattered and the volume is limited, but potential volume in the coming three
years is expected to reach 3,000 tons per year.
Collection
and sales of valuable material:
Valuable
material refers to material that can be reused after sorting or treatment,
such
as waste metal and waste plastic. This waste stream comes from general
industrial waste. Dongtai sorts and treats the valuable material contained
in
industrial waste, and resells them based upon prevailing market prices. The
following chart shows the valuable materials sold during fiscal
2007:
Category
|
|
Volume
(tons)
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|
Plastic
|
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550
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|
Waste
oil
|
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4,045
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Waste
iron
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1,890
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Valuable
Metals
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395
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Waste
Drum (size variable)
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300,000
units
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Other
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2,430
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Municipal
waste water treatment:
Inadequate
investment has traditionally impeded the progress of environmental protection
efforts in China. Over the long-term, the investment emphasis has been placed
on
industrial waste water treatment. However, more recently, the emphasis has
been
refocused to municipal waste water and solid waste pollution prevention. It
is
estimated that approximately $ 17 billion will be invested in building municipal
waste water treatment facilities in order to realize the objectives of the
Eleventh Five-year Plan.
Dongtai
Water Recycling Co. Ltd (“Dongtai Water”) was incorporated in July 2006, when
Dongtai acquired an 18% equity interest. On July 16, 2007
Dongtai purchased an additional 62% of the equity of Dongtai
Water. Dongtai Water is a Build-Operate-Transfer (BOT) project, designed to
process polluted water generated by the city of Dalian.
In
a
typical BOT project, the municipal governmental will invite candidates to bid
on
the project. The winner of the bid is generally the bidder which offers the
best
combination of price and construction and operating model for the project.
The
winning bidder then becomes eligible to contribute investment in construction
of
the BOT facility and to operate the facility for 20-25 years after construction.
In connection with the project, the municipal government effectively guarantees
revenues to the operator of the facility.
Organic
Waste Treatment:
Environmental protection has become a concern of both the public and the
government in China. It is estimated that currently, the municipal sludge volume
in Dalian is approximately 240 tons per day, and the volume will increase to
590
tons per day by the end of 2010. Dalian has no facility that can handle the
current or expected volume of municipal sludge in the manner required by
environmental standards. In order to address environmental issues triggered
by
municipal sludge, Dalian Government has approved the establishment of Dalian
Dongtai Organic Waste Treatment Company (“Dongtai Organic”).
Dongtai
Organic is the first sludge treatment plant designed and built in the mode
of a
BOT, with a projected term of operation of 20 years. The projected capacity
of
the plant is 28,000 cubic meters of methane per day, along with fermentation
liquid and slag following processing. The project was commenced in April 2007;
and commissioning is now scheduled to be completed in June of 2008. The plant
is
expected to become operational following performance testing and environmental
protection evaluation. Based upon the anticipated sludge volume, the plant
is
expected to operate at full capacity by the end of 2010. As required by
regulation, the government will supply raw material (municipal sludge), and
pay
processing fees to Dongtai Organic. Management believes that there is a
significant market for municipal sludge and other organic waste treatment.
We
expect that Dongtai Organic will enhance technological capacity by introducing
advanced technology and research to seize the opportunity. Dongtai owns a 49%
interest in the Dongtai Organic BOT project.
Waste
catalyst treatment and comprehensive reuse:
Dalian
Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”) was incorporated in April 2006
and is engaged in plasma arc melting, separation and purification of waste
catalysts, treatment of industrial wastes and comprehensive utilization of
waste
catalysts or similar material. In August 2007, Dongtai acquired 70% of the
equity of Zhuorui from a related company controlled by Mr. Dong Jinqing, our
CEO, for a purchase price of RMB 7 million (approximately US$958,300). We
believe that the acquisition of Zhuorui will improve the Company’s capacity as
well as its profitability in treating waste catalyst.
Since
oil
imported from the Middle-East and Russia is of high sulfur content, a catalyst
has to be used in the refining process to remove sulfur, nickel, vanadium and
other impurities. Excess catalysts, containing approximately 20% oil, cobalt,
molybdenum, nickel and vanadium, are considered hazardous waste which must
be
properly controlled, treated and disposed of. At the same time, these heavy
metals are important industrial materials with high recovery value.
Dalian
is
the national strategic oil storage and refining base. There are two large scale
oil refining companies in Dalian, i.e., West Pacific Petrochemical Company
(with
a 10 million ton capacity) and Dalian Petrochemical Corporation (with a 20
million ton capacity). The total amount of spent catalyst produced by the two
companies is approximately 30 million tons. Additionally, other refining plants
in northeast China are reconstructing their facilities to address high-sulfur
content oil. Upon completion of the reconstruction projects, the annual
generation volume of spent catalyst is expected to reach 80-100 million tons.
Design
and installation of environmental protection equipment and renewable energy
equipment:
On
October 18, 2007, Dongtai entered into a Contract for Joint Venture Using
Foreign Investment with Roland Lipp, Karin Lipp-Mayer and Minghuan Shan to
establish a joint venture limited liability company in the People’s Republic of
China. The joint venture entity, to be known as Dalian Lipp Environmental Energy
Engineering & Technology Co., Ltd. (“Dalian Lipp”), expects to conduct
business in the Dalian Economic & Technical Development Zone. The business
of the joint venture will be to design and install environmental protection
equipment and renewable energy equipment and provide other technical
support.
The
agreement provides that the registered capital of Dalian Lipp will be
$1,095,200, of which Dongtai is to contribute $821,400 in return for a 75%
interest, and Roland Lipp, Karin Lipp-Mayer and Minghuan Shan are to contribute
$109,520, $109,520 and $54,760, respectively. All contributions are payable
prior to October 18, 2008, following receipt of a business license covering
Dalian Lipp. The initial members of the Board of Directors of the new company
will be Dong Jinqing (Chairman), Roland Lipp (Vice-Chairman), Tang Lijun, Li
Jun
and Minghuan Shan.
The
following table describes the capacity of the various facilities used by the
Company, both currently and following completion of planned
expansion:
Nature
of Service
|
|
Type
of Facility
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|
Description
|
|
Capacity*
|
|
|
|
|
|
|
Existing
|
|
Post-Expansion
|
Solid
waste treatment and disposal
|
|
Incinerator
|
|
Incineration
Treatment
|
|
3,300
t/a
|
|
9,000
t/a
|
|
|
Landfill
|
|
Disposal
of Waste by Landfill
|
|
13,000
t
|
|
40,000
t
|
|
|
Effulent
Treatment System
|
|
Handling
of Various Industrial Effluent
|
|
18,000
t/a
|
|
25,000
t/a
|
Resource
recovery
|
|
Etchant
Utilization System
|
|
Generation
of Copper Sulfate from Etchant
|
|
2,000
t/a
|
|
——
|
|
|
Waste
Solvent Recovery System
|
|
Production
of Industrial-Class Organic Solvent Products with Waste
Solvent
|
|
1,000
t/a
|
|
3,000
t/a
|
|
|
Valuable
Metal Recovery System
|
|
Yielding
of Valuable Alloy or Metal Oxide Products
|
|
5,000
t/a
|
|
10,000t/a
|
Collection
and Sales of Valuable Material
|
|
Waste
Sorting and Filtrating System
|
|
——
|
|
10,000
t/a
|
|
——
|
Municipal
Sewage, Municipal Sludge Treatment
|
|
Sewage
Treatment Plant Operation (BOT)
|
|
Municipal
Sewage Treatment Plant Operation and Management
|
|
30,000
t/d
|
|
100,000
t/d
|
|
|
Municipal
Sludge Treatment Plant Operation (BOT Project)
|
|
Municipal
Sludge Plant Operation and Management
|
|
400
t/d
|
|
600
t/d
|
Environmental
Protection
Equipment Manufacturing
|
|
Manufacturing
and Sales of Lipp Tank
|
|
Sludge
Fermentation-Tank and Auxiliary Equipment Manufacturing
|
|
——
|
|
——
|
*
Key:
t =
tons; t/d = tons per day; t/a = tons annually.
Waste
Treatment Systems
Dongtai
operates proprietary and non-proprietary systems for waste treatment, disposal
and recycling, including:
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·
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Electric
Garbage Dismantling System
|
|
·
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Organic
Solvent Distillation Recycling System
|
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·
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Fluorescent
Tube Treatment System
|
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·
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Organic
Macromolecular Waste Destructive Distillation Cracking
System
|
|
·
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Treatment
System for Catalyst Containing Valuable
Metals
|
|
·
|
Waste
Etchant Liquor Treatment System
|
|
·
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Comprehensive
Treatment System for Industrial Waste
Water
|
|
·
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Incineration
System for Solid Waste
|
|
·
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Hazardous
Waste Landfill
|
|
·
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Ordinary
Industrial Solid Waste Landfill
|
Electric
Garbage Dismantling System:
After
classification and dismantlement of photocopier ink cartridges and electric
components of certain household appliances, the system can recover metal and
plastic with high value and limit the amount of unrecyclable residual waste.
Dongtai can also recycle metals from household electric appliances, such as
TV
picture tubes and treat the hazardous residual components such as phosphor
and
Freon so that such residual waste is rendered innocuous. The system was built
in
1997 and includes a large disintegrator, electronic scale, oven, vacuum cleaner,
decorticator and large goods elevator.
Organic
Solvent Distillation Recycling System:
Dongtai
established the organic solvent distillation recycling system in 1992. This
system includes a raw material storage tank, rectifying tower, and flashing
tower. The system is capable of treating organic solvents including triclene,
acetone, ethyl acetate, isopropyl alcohol, propylene glycol monomethyl ether
methyl alcohol, methylbenzene, and cyclohexanone.
Since
2003 this system has been listed and promoted as a "national key environmental
project" by the State Environmental Protection Administration for three
consecutive years. As a result of employing this system Dongtai is also listed
as the technology supporting unit of the "National Technology Achievement
Promotion Project". This system also won the second prize of Dalian Technology
Innovations in December 2000.
Dongtai
has established very strict procedures for the disposal or treatment of toxic
and hazardous chemical waste. No environmental pollution accident has occurred
since the establishment of Dongtai. Dongtai has established relationships with
over 40 enterprises in dealing with their toxic chemical waste.
Fluorescent
Tube Treatment System:
Dongtai
has developed a waste fluorescent tube treatment system. The system is able
to
safely dispose of fluorescent lighting tubes which contain harmful substances
such as mercury. The system breaks the tubes under negative pressure, and
absorbs and washes the harmful components such as mercury. The glass fragments
and metal residue resulting from the treatment can then be
recycled.
Organic
Macromolecular Waste Destructive Distillation Cracking System:
Canon
Dalian Business Machines Co. Ltd is an enterprise established in Dalian by
Canon
(China) Co. Ltd. mainly to produce laser printer ink cartridges. The treatment
of the residual powdered ink in used cartridges was problematic, so Dongtai
developed for Canon a unique waste powdered ink destructive distillation
pyrolysis treatment technique. This system can transform the waste powdered
ink
into fuel with a high calorific value. The residue can also be used to produce
cement. The system was built in 1995 and is composed of destructive distillation
cracking oven, heat exchange device and air storage tank. The system is able
to
treat photocopier and printer powdered ink, and organic macromolecular materials
such as polystyrene, polypropylene resin, polycarbonate, rubber materials,
and
oil sludge.
Catalyst
with Valuable Metals Treatment System:
Petroleum refining enterprises produce a large amount of catalyst waste in
production operations. The treatment system for catalysts containing valuable
metals developed by Dongtai allows it to apply plasma technology to the
comprehensive utilization and treatment of such hazardous waste. Through melting
of waste in a plasma oven the system can extract from waste catalysts such
rare
metals as cobalt, nickel, molybdenum, vanadium, etc. The slag can be used as
a
raw material to produce cement. This technology has won the third prize of
National Technology Advancement and is sponsored by the National Technology
Innovation Funds for Small-and-Medium Sized Scientific and Technological
Enterprise.
Waste
Etchant Liquor Treatment System:
This
system includes a material delivery device, reaction vessel, and a filtering
device. The system can process waste copper acid and alkaline etchants and
produce copper sulphate through neutralization, acidification, and
metathesis.
Industrial
Waste Comprehensive Treatment System:
The
system includes a treatment tank, oil removal tank, reaction tank, precipitation
tank, neutralization tank, absorption tank, filtering device and filter press.
It is able to treat the ablution resulting from removing oil from the surface
of
metal, and grinding and cutting fluids resulting from machining.
Solid
Waste Incineration System:
The
inappropriate handling of hazardous chemicals can trigger serious environment
pollution. Dongtai has built an incineration system which includes a two-stage
incineration stove, residual heat recovery system and residual gas discharge
system which renders the gas innocuous. The major waste that can be processed
through the system include: waste organic solvents, waste oil, waste glue
liquor, and combustible solid industrial garbage. The system has met national
standards and is automatically operated.
Hazardous
Waste Landfill:
The
landfill has been built in accordance with PRC national construction standards.
It has a double HDPE impermeable layer lining and percolating water collection
system. After stabilization and solidification, the toxic and hazardous waste
to
be deposited in the landfill receives treatment rendering it innocuous. The
system is able to handle all kinds of waste residue containing heavy metal
and
incinerate residues. The project covers an area of 112,350 square
feet.
Landfill
for Ordinary Industrial Solid Waste:
The
landfill for ordinary industrial solid waste has been built according to PRC
national standards. It is equipped with a single layer anti-seepage pretreatment
system and a collection system of percolating water. The landfill can process
ordinary industrial Class 1 and Class 2 wastes.
Market
and Customers
The
major
sources of industrial waste in the Dalian area are industrial enterprises,
medical units, scientific research institutions and university laboratories.
According to statistics from Dongtai, the amount of waste collected has been
increasing every year. The amount in 2001 was 11,000 tons, 13,226 tons in 2002,
14,594 tons in 2003, and 18,460 tons in 2004, 26,425 tons in 2005 and 36,630
tons in 2006. Management of the Company estimates that the annual growth rate
in
the next ten years will be 20%. Approximately 52% of Dongtai’s revenue in the
year ended December 31, 2007 was for waste collection, treatment and disposal
services, and approximately 48% of such revenues related to recycling
operations.
The
industrial waste treatment business is still new in China. There are only a
few
coastal cities as well as major cities in inland industrialized regions that
have built or plan to build industrial waste treatment facilities. Due to the
strict requirements of professional technology and management required to obtain
necessary licenses to operate an industrial waste treatment and disposal
business, the basic market for the Dongtai’s services is guaranteed to some
degree.
Dongtai
has entered into solid waste disposal contracts with more than 400 companies,
including such multinational companies such as Canon, Pfizer, Toshiba, Toto,
Posco-CFM Coated Steel, Fuji, Wepec, Ryobi, TDK, YKK, and Panasonic. In the
year
ended December 31, 2007, Dongtai’s 10 largest waste disposal customers accounted
for approximately 42% of Dongtai’s waste disposal revenues. The three largest
waste disposal customers during 2007 were Dalian Pacific Multi-layer PCB Co.,
Ltd., Canon Dalian Business Machines Co., Ltd. and PetroChina Dalian
Petrochemical Company Limited. No customer accounted for 10% or more of
Dongtai’s revenues for waste treatment.
Dongtai’s
ten largest suppliers of industrial waste used for recycling (which Dongtai
generally purchases from suppliers and is required to collect and treat and
dispose of waste residue at Dongtai’s sole expense) accounted for approximately
52% of the payments made by Dongtai for waste products in 2007. Canon Dalian
Business Machine Co., Ltd. accounted for approximately 48% of the amount which
Dongtai paid for waste in 2007 as part of its recycling operations.
Dongtai’s
ten largest customers for recycled waste products accounted for approximately
70% of Dongtai’s sales of recycled products in 2007. Shenyang Hongyuan Mining
Company and Hu Guoyuan accounted for approximately 25% and 7%, respectively,
of
Dongtai’s sales of recycled waste products in 2007.
Technology
and Intellectual Property
Dongtai
has established the Dongtai Industrial Waste Disposal Technology Center in
conjunction with the Dalian University Institute for Ecoplanning and
Development. The center currently has 22 professional engineers and 9 analysts.
With cooperation from experts from Canada and the U.S.- based RPP International
Consulting Company, the Center is focusing on research related to ecoplanning
theory and policy, professional training, ecological efficiency evaluation
and
analysis of simulations.
Since
its
establishment, Dongtai has closely cooperated with scientific research academy
and universities, such as Dalian Institute of Chemical Physics, the Chinese
Academy of Sciences (Beijing) Mechanics Institute, Tsinghua University and
Dalian University of Technology. Dongtai also participated in compiling the
National Waste Disposal Criteria along with over 50 international enterprises
such as China Electronics Engineering Design Institute, Intel (China) Co.,
Ltd.,
Motorola (China) Co., Ltd, and Dell (China) Co., Ltd.
In
addition, Dongtai's research and development team specializes in environmental
engineering, chemical engineering, water supply and drainage systems, surface
treatment, biological engineering, metallurgy, machinery, electronics, and
computer science. They provide significant input into the research of methods
of
treatment for industrial solid waste and comprehensive waste utilization.
Dongtai has been recognized for its scientific achievements for business
operations including:
|
·
|
Dongtai
was awarded second prize of Dalian Technology Innovation for its
system
relating to the Comprehensive Utilization and Disposal of Waste Organic
Solvents. The system has been listed as the "National Key Practical
Technology for Environmental Protection" by the Ministry of Science
and
Technology and the State Administration of Environmental Protection
of the
PRC;
|
|
·
|
The
Destructive Distillation Thermal Cracking of Powdered
Ink;
|
|
·
|
The
Safety Landfill of Hazardous Waste;
|
|
·
|
Pyrolysis
Incineration Stove;
|
|
·
|
The
Innocuous Treatment of Cyanide;
|
|
·
|
The
Comprehensive Utilization of the Waste Etchant Liquor from PCB
industry;
|
|
·
|
The
Comprehensive Utilization and Disposal of Waste Catalyst. This system
won
the third prize of Dalian Technology Innovation and has been listed
as the
"National Key Practical Technology for Environmental Protection"
by the
State Administration of Environmental Protection of the PRC. It was
supported by the Innovation Funds for Small-and-Medium Sized Scientific
and Technological Enterprises of the Ministry of Science and
Technology;
|
|
·
|
The
Treatment of PCB Industry's Waste Liquid containing heavy
metal;
|
|
·
|
The
Disposal of Medical Refuse;
|
|
·
|
The
Disposal of Waste Batteries;
|
|
·
|
The
Innocuous Treatment of Arsenic
Compound;
|
|
·
|
The
Wet Oxidation of High Concentration Organic
Waste;
|
|
·
|
The
Disposal of Ordinary Industrial Waste;
and
|
|
·
|
The
Comprehensive Utilization and Innocuous Treatment of Electric
Waste.
|
Dongtai
has been granted four patents covering waste disposal systems and techniques
by
the PRC Patent Office, and two additional patents remain the subject of
applications. The following table identifies those patents and
applications:
Status
|
|
Description
|
|
Patent
Number
|
|
Date
Applied
For
|
|
Grant
Date
|
|
Date
Expires
|
Granted
|
|
The
Disposal of Powdered Ink Waste from Copy Machines
|
|
ZL
01 1 27963.X
|
|
7/20/01
|
|
7/7/04
|
|
7/6/24
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Consecutive
Destructive Distillation Stove
|
|
ZL
200420069745.5
|
|
7/9/04
|
|
7/13/05
|
|
7/12/15
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Plasma
Fusion Pyrolysis Device
|
|
ZL
200420069742.1
|
|
7/9/04
|
|
7/20/05
|
|
7/19/05
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
The
Disposal of Waste Catalyst
|
|
ZL
200410021093.2
|
|
1/20/04
|
|
1/17/07
|
|
1/16/27
|
|
|
|
|
|
|
|
|
|
|
|
Application
Accepted
|
|
Method
and Equipment For High-Efficiency Solid-Liquid Separation Under High
Pressure
|
|
ZL
200610046723.0
|
|
5/26/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
Accepted
|
|
Method
for High-Efficiency Solid-Liquid Separation Under High
Pressure
|
|
ZL200620091047.4
|
|
5/26/06
|
|
|
|
|
Operating
Strengths and Strategy
We
believe that we have a qualified and experienced management team and staff
who
possess strong technical capabilities and who specialize in project management,
project design and research and development in relation to the waste treatment
and disposal industry. Most of our senior management possess degrees or senior
technical qualifications and have strong technical expertise and are
professionally trained.
We
place
great emphasis on technical research and development, and typically set up
research and development teams for specific projects to handle design,
development and improvement. For example, our personnel have made innovations
in
our methods of oil sludge extraction, our waste toner dry distillation system,
our etchant recycling system and in the methods we employ for solid waste
incineration. We also keep monitor recent developments in water treatment
technology through advisors and consultants who are experts in the waste
treatment industry. We believe that our management experience and our strong
technical capabilities provide us with a competitive edge over our competitors.
We
also
believe that our good track record and the goodwill that we have established
in
developing and operating industrial waste treatment systems provide us with
an
advantage over our competitors. Our experience and technical expertise have
contributed to our being awarded various operating certificates by different
environmental institutions, including certifications of
Operation
on Environmental Protection Facilities and Comprehensive Operation on Hazardous
Waste
.
We
believe that these certificates will strengthen our ability to tender for BOT
(Build-Operate-Transfer) projects with the municipal government.
We
also
believe that we are an industry leader in our operation of quality of waste
processing facilities, and following completion of an expansion project of
current facilities, which we anticipate to be completed by the end of 2008,
we
will have ample capacity to handle the significant increases in demand for
our
waste treatment services that we anticipate will occur.
Our
strong, long-term relationships with Dalian University of Technology and
Anshan
Coking and Refractory Engineering Consulting Corporation MCC
provide
important technical support in design and project execution, such as the
production of biogas from sludge. We also believe that we have a good
relationship with the government of the city of Dalian, and that the presence
of
our facilities has contributed to the city of Dalian being able to attract
major
companies. As a result, the local government has awarded us significant
financial aid such as an Innovation Fund of Medium or Small Science and
Technology Enterprise grant.
We
anticipate that by providing flexible and customized quality services, in
accordance with advanced environmental protection standards, we will continue
to
enjoy a high degree of customer satisfaction and loyalty. We maintain close
and
long-term relationships with clients, many of which have been clients since
our
company was founded in 1991.
The
threshold of capital requirements for entering the waste water treatment segment
and the initial capital investment of waste water treatment facilities and
projects, especially BOT projects, is relatively high. Based on our good track
record and relationships with the local Dalian government, we believe we are
capable of obtaining sufficient capital resources to fund our operation of
projects and expansion plan.
One
of
the key factors our potential customers evaluate is financial stability. We
believe our ability to demonstrate consistently strong financial performance
will continue to differentiate our company and provide a competitive advantage
in winning new contracts and renewing existing contracts.
Our
business strategy is aimed at increasing revenue and earnings through profitable
growth and improving returns on invested capital. The components of our strategy
include: (1) placing emphasis on the commercialization of solid waste
treatment; (2) our expansion into municipal sewage and sludge treatment BOT
projects; (3) managing our businesses locally with a strong operations focus
on
customer service; (4) entering into new geographic markets in China; and
(5) maintaining our financial capacity and effective administrative systems
and controls to support on-going operations and future growth. We are evaluating
growth in our solid waste treatment operations through opportunities to
cooperate with prominent domestic or overseas partners and attempt to integrate
customer groups (for example, the refinery industry), to realize resource
optimization. We also plan to seek new BOT projects and acquire interests in
existing projects.
Government
Regulation
The
industrial waste treatment business is still in its nascent stages in China.
There are only a few coastal cities and several major cities in industrialized
regions that have built or even plan to build industrial waste treatment
facilities.
The
industry has high barriers to entry due to the central government's strict
licensing requirements. Both SEPA and local bureaus of environmental protection
license and regulate companies engaged in waste disposal and treatment. The
requirements for licensing have become stringent and applicants must
demonstrate, among other things, that they have a sufficient operating history
and a sufficient number of professional technicians, as well as compliance
with
national and local environmental standards.
The
State
has also adopted Measures for the Administration of Permit for Operation of
Dangerous Wastes (“Measures”). The Measures are intended to strengthen
supervision and administration of activities relating to the collection, storage
and disposal of dangerous wastes, and preventing dangerous wastes from polluting
the environment.
Dongtai
has been awarded an Environmental Protection Facility Operation License by
SEPA.
In addition, pursuant to the Measures, Dongtai has received a Permit for the
Operation of Dangerous Wastes by the local Bureau of Environmental Protection.
The
Company believes that it currently complies with all licensing requirements
relating to its business operations. However, there is no assurance that the
central or local governments will not adopt new regulations or licensing
requirements that will make it more difficult for Dongtai to operate in the
environmental protection industry.
Competition
There
are
several large companies in China that engage in providing solid waste recycling
services, the recovery and treatment of waste materials, the production and
sale
of recycled products, the operation of environmental protection facilities
(BOT)
and/or the manufacture of environmental protection equipment. In addition to
Dongtai, these companies include Shenzen Dongjiang Environmental Co., Ltd.,
Tianjin Hejia Veolia Environmental Service Co., Ltd., Hangzhou Dadi
Environmental Protection Co., Ltd. and Shanghai Solid Waste Disposal Center.
However, only Dongtai and Shenzen Dongjiang provide the full range of these
services, and only Dongtai in Dalian and Liaoning Province.
Within
Liaoning Province, our principal competitors are Liaoning Zhen Xing, a
state-owned environmental concern, primarily serving Shenyang and the
surrounding area, and Liaoning Muchang Solid Waste Disposal Co., Ltd., a private
solid waste disposal company also serving Shenyang and the surrounding area.
Within Dalian, our principal competitor is Dalian Pingan Environmental
Protection, a smaller-capacity, private enterprise, primarily dealing with
hazardous waste.
We
believe that we enjoy a competitive advantage over other companies engaged
in
the environmental protection industry, including:
|
·
|
Reputation
-
Dongtai has established itself as the leading environmental protection
company in Liaoning Province, and an industry leader in all of China.
Government officials have consulted with Dongtai when drafting
environmental protection legislation. Dongtai’s expanded facility has been
included in the current national centralized hazardous waste disposal
facility plan established by the National Development and Reform
Commission.
|
|
·
|
Broad
and Diversified Customer Base
-
Dongtai has a diverse customer base including some 400 companies
engaged
in private enterprises, municipal institutions and universities,
including
Canon, Pfizer, Toshiba and Panasonic. Management anticipates that
as
additional large multinational companies locate in Liaoning Province,
Dongtai will be their natural choice to provide environmental services.
Dongtai holds both national and provincial operating
permits.
|
|
·
|
Long-term
Stable Relationships
-
Dongtai has a 17-year operating history and is committed to maintaining
its customers by providing high quality products and services. Some
of
Dongtai’s customers, including Canon and Pfizer, have continuously engaged
Dongtai’s services since it commenced operations in 1991, and others such
as Goodyear, have used Dongtai’s services for over ten
years.
|
|
·
|
Comprehensive
Services
-
Dongtai provides a comprehensive array of services including solid
waste
treatment, waste collection and transportation, environmental protection
services, storage to landfill and on-site management. The broad range
of
services we offer allows us to customize a package of services to
meet the
needs of the large clients that we
service.
|
|
·
|
Advanced
Technologies
-
Dongtai designs and develops proprietary processes and technologies
for
use in providing its services. It has been awarded four patents in
the PRC
covering solid waste disposal and treatment processes, and two additional
patent applications are pending. Dongtai, in conjunction with the
Dalian
University Institute for Ecoplanning and Development, has established
and
operates the Dongtai Industrial Waste Disposal Technology Center.
Dongtai
also cooperates with experts in Canada and the United States to conduct
research concerning ecoplanning theory and policy, ecological efficiency
evaluation and related activities, with the support of the Dalian
University of Technology.
|
|
·
|
Experienced
Management and Sound Management System
-
Dongtai’s senior management has extensive experience in environmental
protection. Mr. Dong Jinqing, our Chief Executive Officer, founded
Dongtai
in 1991, and has over 17 years experience in the field of environmental
protection. Dongtai was one of the first companies to be granted
a permit
for the operation of environmental protection equipment by the State
Environmental Protection Administration, and license to operate hazardous
waste treatment and disposal facilities by the Liaoning Environmental
Protection Bureau.
|
In
addition to the competitive advantages we believe we enjoy, there are barriers
to entering the solid waste and environmental services market,
including:
|
·
|
Substantial
capital investment required;
|
|
·
|
Retaining
qualified management is difficult;
|
|
·
|
Difficulties
in developing a customer base;
|
|
·
|
The
need for government licenses and permits;
and
|
|
·
|
Advanced
technologies are difficult to develop.
|
.
Notwithstanding
our competitive advantages and the barriers to entering the marketplace, there
is no assurance that we will remain a competitive force in our industry, or
that
we will operate on a profitable basis.
Employees
As
of
December 31, 2007 the Company had 313 full-time employees, of which 55 are
management and supervisory personnel, 18 are technicians and 240 are assembly
line workers.
The
Company has not experienced any work stoppages and it considers relations with
its employees to be good. The Company anticipates hiring additional employees
as
it increases production and collection of waste materials.
Company
History
The
Company was originally incorporated as a Delaware corporation in 1987 under
the
name of Egan Systems, Inc. In late 1987, the Company acquired ENVYR Corporation
as a wholly owned subsidiary and established its headquarters in Raleigh, North
Carolina. From 1987 to 2003, the Company was primarily engaged in the business
of developing, selling and supporting computer software products, particularly
products related to the COBOL computer language.
In
October 2003, the Company acquired a group of 35 mining claims from Goldtech
Mining Corporation, a Washington Corporation. In November, 2003, the Company
acquired the remaining mining claims of Goldtech Mining Corporation. In
connection with the acquisitions, the Company changed its name to Goldtech
Mining Corporation and re-domiciled to the State of Nevada.
Following
these acquisitions, the Company operated in two lines of business: (a) the
exploration and development of potential mining properties, and (b) the
development, marketing and support of computer software products and services.
In September 2004, the Company sold its computer business and adopted a business
plan to focus exclusively on its mining exploration business. By September
2005,
the Company had ceased active mining operations as a result of its loss of
contractual mining rights in Spain.
In
2005
the board of directors of the Company decided to pursue other business
opportunities. In November 2005, the Company acquired a 90% indirect ownership
interest (through a wholly owned Delaware subsidiary of the Company known as
DonTech Waste Services Inc., which was originally known as Dalian Acquisition
Corp.) in Dongtai, in a reverse merger transaction. Dongtai had been founded
on
January 9, 1991 as a limited liability company under the PRC laws, with a total
registered capital of $250,000.
As
a
result of the reverse merger, Dongtai became a joint venture with foreign
investment under the laws of the PRC, with a total registered capital of $2.3
million. The formation of the joint venture was approved by Dalian Industry
and
Commerce Bureau, and the term of the joint venture is 12 years. A new
business license was issued to Dongtai on October 10, 2005, and the registered
capital has been fully paid as of April 2007.
We
are in
the process of dissolving DonTech Waste Services, Inc., at which time Dongtai
will become a direct 90%-owned subsidiary of China Industrial Waste Management,
Inc.
ITEM
1A.
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information contained
in this Annual Report on Form 10-K before deciding to invest in our common
stock.
Risks
Related to our Business
Our
failure to compete effectively may adversely affect our ability to generate
revenue.
We
compete primarily on the basis of our ability to secure contracts with
industrial companies, and local government entities in Dalian, China and
surrounding areas for waste processing and disposal or for the purchase by
us of
waste material which we recycle. There can be no assurance that such contracts
will be available to us in new areas as we attempt to expand or that our
competitors will negotiate more favorable arrangements with our current
customers. We expect that we will be required to continue to invest in building
waste treatment and disposal infrastructure. Our competitors may have better
resources and better strategies to raise capital which could have a material
adverse effect on our business, results of operations and financial
condition.
We
rely on our governmental permits to operate our business
in
Dalian, China and the loss of the permits would have a
material adverse impact on our business.
Only
those companies who have been granted a special operating license issued by
the
national and local governments are permitted to engage in the industrial waste
treatment and disposal business in China. Dongtai's expansion project has
been listed as one of the 31 items of the Hazardous Waste and
Medical Waste Treatment Facility Construction Program approved by State
Environmental Protection Administration. The national and local governments
have
strict requirements regarding the technology which must be employed and the
qualifications and training of management of the licensee which must be
maintained. Either the national or local government could determine at any
time
that we do not meet the strict requirements of technology or management and
revoke our permit to engage in the industrial waste business in China. The
termination of our licenses to operate would have a material adverse impact
on
our revenue and business.
If
we fail to introduce new services or our existing services are not accepted
by
potential customers we may not gain or may lose market
share.
Our
continued growth is dependent upon our ability to generate more revenue from
our
existing customers, obtain new customers and raise capital from outside sources.
We believe that in order to continue to capture additional market share and
generate additional revenue, we will have to raise more capital to fund the
construction and installation of additional facilities and to obtain additional
equipment to collect, process and dispose of industrial waste and recycle waste
for our existing and future customers. For example, our 90% owned subsidiary,
Dongtai, has entered into agreements with respect to the construction of two
BOT
(Build-Operate-Transfer) Projects in Dalian, China - a municipal sewage
treatment facility and a sludge treatment and disposal facility. We estimate
that Dongtai’s aggregate investment in such projects will be 35 million RMB
(approximately $4.6 million) for an 80% interest in Dongtai Water Recycling
Company, which intends to operate a municipal sewage treatment plant, and 63.21
million RMB (approximately $8.31 million) for a 49% interest in Dongtai Organic
Waste Treatment Company, which intends to operate a municipal sludge treatment
and disposal facility. We anticipate that we will also require approximately
120
million RMB (approximately $15.8 million) in order to fund the expansion project
relating to upgrade of Dongtai’s existing waste processing facilities, as well
as approximately 44 million RMB (approximately $5.8 million) to satisfy its
investment needs required by in Dalian Zhuorui Resource Recycling Co., Ltd.,
in
which Dongtai own a 70% interest.
We
anticipate that the total funding include expenditures mentioned above that
we
will require to finance the construction and installation of additional
facilities and to obtain additional equipment for Dongtai to accommodate a
sharp
increase in demand for its waste management services and more stringent
regulatory criteria in environmental management, as well as to strengthen our
presence outside of Dalian, China, through investment and/or acquisition is
approximately 320 million RMB (approximately $42.1 million) . We anticipate
that
such funding will be provided from bank loans, equity financing and internally
generated funds.
It
is
likely that we will invest in additional projects, although no such projects
have been identified by us at this time. In the future we may be unable to
obtain the necessary financing for our capital requirements on a timely basis
and on acceptable terms, and our failure to do so may adversely affect our
financial position, competitive position, growth and profitability. Our ability
to obtain acceptable financing at any time may depend on a number of factors,
including:
|
·
|
our
financial condition and results of
operations;
|
|
·
|
the
condition of the PRC economy and the industrial waste treatment industry
in the PRC, and
|
|
·
|
conditions
in relevant financial markets in the United States, the PRC and elsewhere
in the world.
|
Our
inability to fund our capital expenditure requirements may adversely affect
our
growth and profitability.
Our
continued growth is dependent upon our ability to generate more revenue from our
existing customers, obtain new customers and raise capital from outside sources.
We believe that in order to continue to capture additional market share and
generate additional revenue, we will have to raise more capital to fund the
construction and installation of additional facilities and to obtain additional
equipment to collect, process and dispose of industrial waste and recycle waste
for our existing and future customers. In the future we may be unable to obtain
the necessary financing on a timely basis and on acceptable terms, and our
failure to do so may adversely affect our financial position, competitive
position, growth and profitability. Our ability to obtain acceptable financing
at any time may depend on a number of factors, including:
|
·
|
our
financial condition and results of
operations,
|
|
·
|
the
condition of the PRC economy and the industrial waste treatment industry
in the PRC, and
|
|
·
|
conditions
in relevant financial markets in the United States, the PRC and elsewhere
in the world.
|
We
may not be able to effectively control and manage our
growth.
If
our
business and markets grow and develop, it will be necessary for us to finance
and manage expansion in an orderly fashion. We may face challenges in managing
our industrial waste treatment and disposal business over an expanded
geographical area as well as managing a business offering expanded waste
treatment services. We may also encounter difficulties in integrating acquired
businesses with our own. Such eventualities will increase demands on our
existing management, workforce and facilities. Failure to satisfy such increased
demands could interrupt or adversely affect our operations and cause
administrative inefficiencies.
If
we are unable to successfully complete and integrate new operational locations
in a timely manner, our growth strategy could be adversely
impacted.
An
important element of our growth strategy is expected to be the development
of
operational locations outside of Dalian, China. However, integrating businesses
involves a number of special risks, including the possibility that management
may be distracted from regular business concerns by the need to integrate
operations, unforeseen difficulties in integrating operations and systems,
problems relating to assimilating and retaining the employees of acquired
businesses, accounting issues that arise in connection with acquisitions,
challenges in retaining customers, and potential adverse short-term effects
on
operating results. In addition, we may incur debt to finance future operational
locations, and we may issue securities in connection with future operational
locations that may dilute the holdings of our current or future stockholders.
If
we are unable to successfully complete and integrate new operational locations
in a timely manner, our business, growth strategy and financial results could
be
materially and adversely impacted.
Our
waste treatment operations are risky and we may be subject to civil liabilities
as a result of hazards posed by such operations.
Our
operations are subject to potential hazards incident to the gathering,
processing and storage of industrial waste such as explosions, product spills,
leaks, emissions and fires. These hazards can cause personal injury and loss
of
life, severe damage to and destruction of property and equipment, and pollution
or other environmental damage, and may result in curtailment or suspension
of
operations at the affected facility. Consequently, we may face civil liabilities
in the ordinary course of our business. At present, we do not carry any
insurance to cover such liabilities in the ordinary course of our business,
except that our employees are insured for injuries occurring at work. Although
we have not faced any civil liabilities historically in the ordinary course
of
our waste treatment operations, there is no assurance that we will not face
such
liabilities in the future. If such liabilities occur in the future, they may
adversely and materially affect our operations and financial
condition.
We
do not presently maintain liability insurance which leaves us with exposure
in
the event of loss or damage to our properties or claims filed against
us.
We
currently do not carry any liability or other similar insurance, except for
liability in connection with the operation of motor vehicles. Although we have
never experienced significant liability as a result of any of our operations,
we
cannot assure you that we would not face such liability in the future. We do
not
carry any property insurance to cover our real property, facilities and
equipment, nor do we have other insurance such as business liability or
disruption insurance coverage for our operations in the PRC.
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 years. Our
continued success is dependent, to a large extent, on our ability to retain
the
services of our executive officers. The loss of any of our executive officers’
services due to resignation, retirement, illness or otherwise without suitable
replacement or the inability to attract and retain qualified personnel would
affect our operations and may reduce our profitability and the return on your
investment. We do not currently maintain key man insurance covering our
executive officers.
We
may not be able to protect our processes, technologies and systems against
claims by other parties
.
Although
we have four registered PRC patents and have applied for two other PRC patents
in respect of the processes, technologies and systems we use frequently in
our
systems, we have not purchased or applied for any patents other than these
as we
are of the view that it may not be cost-effective to do so. For such other
processes, technologies and systems for which we have not applied for or
purchased or been licensed to use patents, we may have no legal recourse to
protect our rights in the event that they are replicated by other parties.
If
our competitors are able to replicate our processes, technologies and systems
at
lower costs, we may lose our competitive edge and our profitability may be
reduced.
We
may face claims for infringement of third-party intellectual property
rights
.
We
may
face claims from third parties in respect of the infringement of any
intellectual property rights owned by such third parties. There is no assurance
that third parties will not assert claims to our processes, technologies and
systems. In such an event, we may need to acquire licenses to, or to contest
the
validity of, issued or pending patents or claims of third parties. There can
be
no assurance that any license acquired under such patents would be made
available to us on acceptable terms, if at all, or that we would prevail in
any
such contest. In addition, we would incur substantial costs and spend
substantial amounts of time in defending ourselves in or contesting suits
brought against us for alleged infringement of another party’s patent rights. As
such, our operations and business may be adversely affected by such civil
actions. We rely on trade secrets, technology and know-how. There can be no
assurance that other parties may not obtain knowledge of our trade secrets
and
processes, technology and systems. Should these events occur, our business
would
be affected and our profitability reduced.
We
are reliant on a few major suppliers
.
We
are
dependent on our major suppliers for the timely delivery of waste materials
that
we require for our recycling operations. Should our major suppliers fail to
deliver such materials on time, and if we are unable to source these materials
from alternative suppliers on a timely basis, our revenue and profitability
could be adversely affected.
We
are subject to risks relating to BOT (Build-Operate-Transfer) projects in which
we have started to invest
.
Our
90%
owned subsidiary, Dongtai, has begun to invest capital in BOT projects which
require high up-front capital expenditures. For example, Dongtai has entered
into agreements to invest in Dongtai Water Recycling Company, which is
constructing and will operate a municipal sewage treatment facility in Dalian,
China and Dongtai Organic Waste Treatment Company, which is constructing and
will operate a sludge treatment and disposal facility in Dalian, China. We
estimate that Dongtai’s aggregate investment in such projects will be 21.0
million RMB (approximately $3,968,500), of which 18.48 million RMB
(approximately $2,378,700) had not been funded as of the date of this annual
report). Our returns from BOT projects are derived from fees paid by the PRC
government and such BOT projects are able to generate a steady and recurring
source of income for us over a sustained period of time between 20 and 25 years.
However, our BOT projects are exposed to risks such as the occurrence of natural
disasters or the imposition of more stringent government regulations, which
may
result in the disruption of our BOT projects. Our investment returns from these
BOT projects may thus be reduced should any of such risks materialize. In
addition, our lack of experience in administering BOT projects may negatively
impact our ability to successfully manage the projects we have
undertaken.
Risks
Related to Doing Business in the PRC
We
face the risk that changes in the policies of the PRC government could have
a
significant impact upon the business we may be able to conduct in the PRC and
the profitability of such business.
The
PRC’s
economy is in a transition from a planned economy to a market oriented economy
subject to five-year and annual plans adopted by the government that set
national economic development goals. Policies of the PRC government can have
significant effects on the economic conditions of the PRC. The PRC government
has confirmed that economic development will follow the model of a market
economy. Under this direction, we believe that the PRC will continue to
strengthen its economic and trading relationships with foreign countries and
business development in the PRC will follow market forces. While we believe
that
this trend will continue, we cannot assure you that this will be the case.
A
change in policies by the PRC government could adversely affect our interests
by, among other factors: changes in laws, regulations or the interpretation
thereof, confiscatory taxation, restrictions on currency conversion, imports
or
sources of supplies, or the expropriation or nationalization of private
enterprises. Although the PRC government has been pursuing economic reform
policies for more than two decades, we cannot assure you that the government
will continue to pursue such policies or that such policies may not be
significantly altered, especially in the event of a change in leadership, social
or political disruption, or other circumstances affecting the PRC's political,
economic and social life.
Introduction
of new laws or changes to existing laws by the PRC government may adversely
affect our business
.
The
PRC
legal system is a codified legal system made up of written laws, regulations,
circulars, administrative directives and internal guidelines. Unlike common
law
jurisdictions like the U.S., decided cases (which may be taken as reference)
do
not form part of the legal structure of the PRC and thus have no binding effect.
Furthermore, in line with its transformation from a centrally-planned economy
to
a more free market-oriented economy, the PRC government is still in the process
of developing a comprehensive set of laws and regulations. As the legal system
in the PRC is still evolving, laws and regulations or the interpretation of
the
same may be subject to further changes. For example, the PRC government may
impose restrictions on the amount of tariff that may be payable by municipal
governments to waste water treatment service providers like us. Also, more
stringent environmental regulations may also affect our ability to comply with,
or our costs to comply with, such regulations. Such changes, if implemented,
may
adversely affect our business operations and may reduce our
profitability.
The
PRC laws and regulations governing our current business operations are sometimes
vague and uncertain. Any changes in such PRC laws and regulations may have
a
material and adverse effect on our business.
There
are
substantial uncertainties regarding the interpretation and application of PRC
laws and regulations, including, but not limited to, the laws and regulations
governing our business, or the enforcement and performance of our arrangements
with customers in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. We and any future subsidiaries are
considered foreign persons or foreign funded enterprises under PRC laws, and
as
a result, we are required to comply with PRC laws and regulations. These laws
and regulations are sometimes vague and may be subject to future changes, and
their official interpretation and enforcement may involve substantial
uncertainty. The effectiveness of newly enacted laws, regulations or amendments
may be delayed, resulting in detrimental reliance by foreign investors. New
laws
and regulations that affect existing and proposed future businesses may also
be
applied retroactively. We cannot predict what effect the interpretation of
existing or new PRC laws or regulations may have on our businesses.
A
slowdown or other adverse developments in the PRC economy may materially and
adversely affect our customers, demand for our services and our
business.
We
are a
holding company. All of our operations are conducted in the PRC and all of
our
revenues are generated from sales in the PRC. Although the PRC economy has
grown
significantly in recent years, we cannot assure you that such growth will
continue. The industrial waste treatment industry in the PRC is relatively
new
and growing, but we do not know how sensitive we are to a slowdown in economic
growth or other adverse changes in the PRC economy which may affect demand
for
our services. A slowdown in overall economic growth, an economic downturn or
recession or other adverse economic developments in the PRC may materially
reduce the demand for our services and the recycled materials we sell and
materially and adversely affect our business.
Inflation
in the PRC could negatively affect our profitability and
growth.
While
the
PRC economy has experienced rapid growth, such growth has been uneven among
various sectors of the economy and in different geographical areas of the
country. Rapid economic growth can lead to growth in the money supply and rising
inflation. If prices for our products rise at a rate that is insufficient to
compensate for the rise in the costs of supplies, it may have an adverse effect
on profitability. In order to control inflation in the past, the PRC government
has imposed controls on bank credits, limits on loans for fixed assets and
restrictions on state bank lending. Such an austere policy can lead to a slowing
of economic growth. In October 2004, the People’s Bank of China, the PRC’s
central bank, raised interest rates for the first time in nearly a decade and
indicated in a statement that the measure was prompted by inflationary concerns
in the Chinese economy. Repeated rises in interest rates by the central bank
would likely slow economic activity in China which could, in turn, materially
increase our costs and also reduce demand for our services and recycled
products.
Our
PRC subsidiaries are subject to restrictions on paying dividends and making
other payments to us.
We
are a
holding company incorporated in the State of Nevada and do not have any assets
or conduct any business operations other than our investments in our
subsidiaries in China. As a result of our holding company structure, we rely
primarily on dividend payments from our subsidiaries. However, PRC regulations
currently permit payment of dividends only out of accumulated profits, as
determined in accordance with PRC accounting standards and regulations. Our
subsidiaries in China are also required to set aside a portion of their
after-tax profits according to PRC accounting standards and regulations to
fund
certain reserve funds. The PRC government also imposes controls on the
conversion of RMB into foreign currencies and the remittance of currencies
out
of China. We may experience difficulties in completing the administrative
procedures necessary to obtain and remit foreign currency. Furthermore, if
our
subsidiaries in China incur debt on their own in the future, the instruments
governing the debt may restrict its ability to pay dividends or make other
payments. If we or our subsidiaries are unable to receive all of the revenues
from our operations through these contractual or dividend arrangements, we
may
be unable to pay dividends on our common stock.
Governmental
control of currency conversion may affect the value of your
investment.
The
PRC
government imposes controls on the convertibility of Renminbi into foreign
currencies and, in certain cases, the remittance of currency out of the PRC.
We
receive substantially all of our revenues in Renminbi, which is currently not
a
freely convertible currency. Shortages in the availability of foreign currency
may restrict our ability to remit sufficient foreign currency to pay dividends,
or otherwise satisfy foreign currency dominated obligations. Under existing
PRC
foreign exchange regulations, payments of current account items, including
profit distributions, interest payments and expenditures from the transaction,
can be made in foreign currencies without prior approval from the PRC State
Administration of Foreign Exchange by complying with certain procedural
requirements. However, approval from appropriate governmental authorities is
required where Renminbi is to be converted into foreign currency and remitted
out of the PRC to pay capital expenses such as the repayment of bank loans
denominated in foreign currencies.
The
PRC
government may also at its discretion restrict access in the future to foreign
currencies for current account transactions. If the foreign exchange control
system prevents us from obtaining sufficient foreign currency to satisfy our
currency demands, we may not be able to pay certain of our expenses as they
come
due.
The
fluctuation of the Renminbi may materially and adversely affect your
investment.
The
value
of the Renminbi against the U.S. dollar and other currencies may fluctuate
and
is affected by, among other things, changes in the PRC's political and economic
conditions. As we rely entirely on revenues earned in the PRC, any significant
revaluation of the Renminbi may materially and adversely affect our cash flows,
revenues and financial condition. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities into Renminbi
for our operations, appreciation of the Renminbi against the U.S. dollar could
have a material adverse effect on our business, financial condition and results
of operations. Conversely, if we decide to convert our Renminbi into U.S.
dollars for the purpose of making payments for dividends on our common shares
or
for other business purposes and the U.S. dollar appreciates against the
Renminbi, the U.S. dollar equivalent of the Renminbi we convert would be
reduced. In addition, the depreciation of significant U.S. dollar denominated
assets could result in a charge to our income statement and a reduction in
the
value of these assets.
On
July
21, 2005, the PRC government changed its decade-old policy pegging the value
of
the RMB to the U.S. dollar. Under the new policy, the RMB is permitted to
fluctuate within a narrow and managed band against a basket of certain foreign
currencies. This change in policy has resulted in an approximately 11.8%
appreciation of the RMB against the U.S. dollar. While the international
reaction to the RMB revaluation has generally been positive, there remains
significant international pressure on the PRC government to adopt an even more
flexible currency policy, which could result in a further and more significant
appreciation of the RMB against the U.S. dollar.
Recent
PRC State Administration of Foreign Exchange (“SAFE”) Regulations regarding
offshore financing activities by PRC residents, have undertaken continuous
changes which may increase the administrative burden we face and create
regulatory uncertainties that could adversely affect the implementation of
our
acquisition strategy, and a failure by our shareholders who are PRC residents
to
make any required applications and filings pursuant to such regulations may
prevent us from being able to distribute profits and could expose us and our
PRC
resident shareholders to liability under PRC law.
Recent
regulations promulgated by the PRC State Administration of Foreign Exchange,
or
SAFE, regarding offshore financing activities by PRC residents have undergone
a
number of changes which may increase the administrative burden we face. The
failure by our shareholders who are PRC residents to make any required
applications and filings pursuant to such regulations may prevent us from being
able to distribute profits and could expose us and our PRC resident shareholders
to liability under PRC law.
In
2005,
SAFE promulgated regulations in the form of public notices, which require
registrations with, and approval from, SAFE on direct or indirect offshore
investment activities by PRC resident individuals. The SAFE regulations require
that if an offshore company directly or indirectly formed by or controlled
by
PRC resident individuals, known as “SPC,” intends to acquire a PRC company, such
acquisition will be subject to strict examination by the SAFE. Without
registration, the PRC entity cannot remit any of its profits out of the PRC
as
dividends or otherwise.
Any
recurrence of severe acute respiratory syndrome, or SARS, or another widespread
public health problem, could adversely affect our
operations.
A
renewed
outbreak of SARS or another widespread public health problem in the PRC, where
all of the Company’s revenue is derived, could have an adverse effect on our
operations. Our operations may be impacted by a number of health-related
factors, including quarantines or closures of some of our facilities or offices
that would adversely disrupt our operations.
Any
of
the foregoing events or other unforeseen consequences of public health problems
could adversely affect our operations.
Because
our principal assets are located outside of the United States and all of our
directors and all our officers reside outside of the United States, it may
be
difficult for you to enforce your rights based on U.S. Federal Securities Laws
against us and our officers and directors or to enforce a judgment of a United
States court against us or our officers and directors in the
PRC.
All
of
our directors and officers reside outside of the United States. In addition,
our
operating subsidiary is located in the PRC and substantially all of our assets
are located outside of the United States. It may therefore be difficult for
investors in the United States to enforce their legal rights based on the civil
liability provisions of the U.S. Federal securities laws against us in the
courts of either the U.S. or the PRC and, even if civil judgments are obtained
in U.S. courts, to enforce such judgments in PRC courts. Further, it is unclear
if extradition treaties now in effect between the United States and the PRC
would permit effective enforcement against us or our officers and directors
of
criminal penalties, under the U.S. Federal securities laws or
otherwise.
We
may face obstacles from the communist system in the
PRC.
Foreign
companies conducting operations in PRC face significant political, economic
and
legal risks. The Communist regime in the PRC, including a cumbersome
bureaucracy, may hinder Western investment.
We
may have difficulty establishing adequate management, legal and financial
controls in the PRC.
The
PRC
historically has not adopted a western style of management and financial
reporting concepts and practices, as well as in modern banking, computer and
other control systems. We may have difficulty in hiring and retaining a
sufficient number of qualified employees to work in the PRC. As a result of
these factors, we may experience difficulty in establishing management, legal
and financial controls, collecting financial data and preparing financial
statements, books of account and corporate records and instituting business
practices that meet Western standards.
Risks
Related to Our Common Stock
Our
officers, directors and affiliates control us through their positions and stock
ownership and their interests may differ from other
stockholders.
Our
officers, directors and affiliates beneficially own approximately 79% of our
outstanding common stock of CIWT. Dong Jinqing, our Chairman, President and
Chief Executive Officer, beneficially owns 9,847,900 shares (approximately
75%)
of our outstanding common stock. As a result, Mr. Dong is and will continue
to
be able to influence the outcome of stockholder votes on various matters,
including the election of directors and extraordinary corporation transactions
including business combinations. Mr. Dong’s interests may differ from other
stockholders. Additional information relating to the beneficial ownership of
our
securities is contained elsewhere in this report under “Security Ownership of
Certain Beneficial Owners and Management.”
We
are not likely to pay cash dividends in the foreseeable
future.
We
currently intend to retain any future earnings for use in the operation and
expansion of our business. We do not expect to pay any cash dividends in the
foreseeable future, but will review this policy as circumstances dictate. Should
we decide in the future to do so, as a holding company, our ability to pay
dividends and meet other obligations depends upon the receipt of dividends
or
other payments from our operating subsidiary. In addition, our operating
subsidiary, from time to time, may be subject to restrictions on its ability
to
make distributions to us, including as a result of restrictions on the
conversion of local currency into U.S. dollars or other hard currency and other
regulatory restrictions.
Our
common stock is illiquid and subject to price volatility unrelated to our
operations.
The
market price of our common stock could fluctuate substantially due to a variety
of factors, including market perception of our ability to achieve our planned
growth, quarterly operating results of other companies in the same industry,
trading volume in our common stock, changes in general conditions in the economy
and the financial markets or other developments affecting our competitors or
us.
In addition, the stock market is subject to extreme price and volume
fluctuations. This volatility has had a significant effect on the market price
of securities issued by many companies for reasons unrelated to their operating
performance and could have the same effect on our common stock.
Our
common stock is subject to the “Penny Stock” rules of the SEC, which will make
transactions in our common stock cumbersome and may reduce the value of an
investment in our common stock.
Our
securities are subject to the “penny stock rules” adopted pursuant to
Section 15(g) of the Securities Exchange Act of 1934, as amended. The penny
stock rules apply generally to companies whose common stock trades at less
than
$5.00 per share, subject to certain limited exemptions. Such rules require,
among other things, that brokers who trade “penny stock” to persons other than
“established customers” complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document and quote
information under certain circumstances. Many brokers have decided not to trade
“penny stock” because of the requirements of the “penny stock rules” and, as a
result, the number of broker-dealers willing to act as market makers in such
securities is limited. In the event that we remain subject to the “penny stock
rules” for any significant period, there may develop an adverse impact on the
market, if any, for our securities. Because our securities are subject to the
“penny stock rules,” investors will find it more difficult to dispose of our
securities. Further, it is more difficult: (i) to obtain accurate
quotations, (ii) to obtain coverage for significant news events because
major wire services, such as the Dow Jones News Service, generally do not
publish press releases about such companies, and (iii) to obtain needed
capital.
The
elimination of monetary liability against our directors, officers and employees
under our certificate of incorporation and the existence of indemnification
rights to our directors, officers and employees may result in substantial
expenditures by our Company and may discourage lawsuits against our directors,
officers and employees.
Our
certificate of incorporation contains provisions which eliminate the liability
of our directors for monetary damages to our Company and stockholders to the
maximum extent permitted under Delaware corporate law. Our By-laws also require
us to indemnify our directors to the maximum extent permitted by Delaware
corporate law. We may also have contractual indemnification obligations under
our agreements with our directors, officers and employees. The foregoing
indemnification obligations could result in our Company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors,
officers and employees, which we may be unable to recoup. These provisions
and
resultant costs may also discourage our Company from bringing a lawsuit against
directors, officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our stockholders
against our directors, officers and employees even though such actions, if
successful, might otherwise benefit our Company and stockholders.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS
Not
applicable to smaller reporting companies.
ITEM
2.
PROPERTIES
Dongtai's
principal executive offices are located at No. 1 Huailu West Road, EDT Zone.
Dalian City, China 11660. In addition, Dongtai utilizes the following
properties:
Address
|
|
Function
|
|
Area
(square ft)
|
No.1,
Dakai Huaihe West Road
|
|
Office
building and electric
|
|
90,233
|
|
|
waste
disposal area
|
|
|
|
|
|
|
|
No.27,
Dakai Huaihe West Road
|
|
Processing
workshop of waste
|
|
19,698
|
|
|
|
|
|
No.
100, Dakai Tieshan West Road No. 27
|
|
Processing
workshop of waste catalyst, waste water processing station
|
|
72,588
|
|
|
|
|
|
No.6
District, Haiqing (Outside the Northwest wall of Xitai Oil Refinery
Plant)
|
|
Hazardous
waste safe
landfill
|
|
112,350
|
|
|
|
|
|
Flame-retardant
Plant of Xiaowang
Tuanyuan
Development Zone
|
|
Hazardous
waste incineration field, waste classification and storage
field
|
|
214,000
|
|
|
|
|
|
Qianguan
Village, Ganjinzi District
|
|
Industrial
solid waste
landfill
|
|
107,000
|
|
|
|
|
|
No.
85, Dagu Hill
|
|
Project
under construction
|
|
685,424
|
|
|
|
|
|
1709
Hogyuan Mansion, 23
Renmin
Road, Zhongshan District
|
|
Office
of Chief Executive Officer
|
|
3,003
|
|
|
|
|
|
All
of
the above facilities, except 1709 Hogyuan Mansion (which is owned by the
Company’s Chairman and is currently being provided to the Company free of
charge) are owned by Dongtai and none are subject to a mortgage.
ITEM
3.
LEGAL
PROCEEDINGS
From
time
to time, we may become party to various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as described below,
we are currently not aware of any such legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, financial condition or operating results.
On
September 14, 2006, the Alberta Securities Commission(“ASC”), Canada, citing
Goldtech Mining Corporation, 2006 ABASC 1690, under Securities Act, R. S. A.
2000, c. S-4 (the "Alberta Act"), provided notice to the Company, Glen Lochton
Management Inc., and certain other individuals (collectively, "Respondents")
that a hearing will be held on certain allegations that Respondents breached
subsection 75(1) and 110(1) of the Alberta Act by trading and distributing
securities of the Company in Alberta without registration or a prospectus or
had
appropriate exemption from the prospectus requirement, wherein such failure
was
contrary to the public interest. On October 27, 2006, the hearing was scheduled
for March, 2007. On February 6, 2007 the ASC discontinued without prejudice
the
action against the Company and we understand that the ASC will proceed against
the other Respondents.
On
August
9, 2006, the Company was served with a Summons and Complaint, in an action
filed
in the Superior Court of Washington, Kings County, entitled Don Moroz and Glen
Lochton Management Inc. v. Tolan Furusho, Columbia State Bank, Goldtech Mining
Corporation, a Nevada Corporation, Goldtech Mining Corporation, a Washington
corporation, Tracy Kroeker, Ralph Jordan, Jack Laskin, Nancy Egan, Richard
Smith, and Beverlee Claydon a/k/a Beverlee Kamerling. The plaintiffs claim
to be
victims of a failed "pump and dump" penny stock scheme.
On
October 9, 2007, the Company entered into a settlement agreement with the
plaintiffs under which the settlement consideration was paid by a stockholder
of
the Company, and not by the Company. On October 11, 2007, The Honorable Nicole
MacInnes of Kings County Superior Court signed an Order of Dismissal, with
prejudice, thereby dismissing this lawsuit as against the Company.
On
March
6, 2006, a lawsuit was filed against the Company entitled Tolan S. Furusho
v.
Goldtech Mining Corp., Case No.: 06-A-518343-B, in the District Court, Clark
County, Nevada. The plaintiff claims that he is the sole director of the
Company, alleging that he was improperly removed as a director. On October
9,
2007, the Company entered into settlement agreement and general release of
the
claims wherein all claims of the plaintiff and the Company against each other
were settled and released for the payment of cash and shares of common stock
of
the Company to the plaintiff. A third party and not the Company paid the
settlement consideration.
On
November 5, 2007, The Honorable District Court Judge Elizabeth Gonzalez of
District Court, Clark County, Nevada signed an Order of Dismissal, with
prejudice, thereby dismissing this lawsuit as against the Company.
The
Company is not currently a party to any legal proceedings.
ITEM
4.
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of stockholders during the fourth quarter
of
fiscal 2007.
PART
II
ITEM
5.
MARKET
FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
Market
for Common Equity and Related Stockholder Matters
.
The
Company's common stock is currently quoted on the Over-the-Counter Bulletin
Board (“OTCBB”) under the trading symbol “CIWT.”
On
March
27, 2008, the closing price for the common stock of the Company was $1.85 per
share. The following table sets forth the high and low prices of the Company’s
common stock, as reported by the OTCBB for each quarter since January 1, 2006.
All information has been adjusted to reflect a 1 for 100 share reverse stock
split which occurred on May 12, 2006.
The
quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.
Quarter
Ended
|
|
|
High
Bid
|
|
|
Low
Bid
|
|
March
31, 2006
|
|
$
|
0.18
|
|
$
|
0.05
|
|
June
30, 2006
|
|
$
|
2.50
|
|
$
|
0.07
|
|
September
30, 2006
|
|
$
|
2.60
|
|
$
|
2.50
|
|
December
31, 2006
|
|
$
|
2.60
|
|
$
|
0.51
|
|
|
|
|
|
|
|
|
|
March
31, 2007
|
|
$
|
9,00
|
|
$
|
1.50
|
|
June
30, 2007
|
|
$
|
2.95
|
|
$
|
1.48
|
|
September
30, 2007
|
|
$
|
4.00
|
|
$
|
1.95
|
|
December
31, 2007
|
|
$
|
4.50
|
|
$
|
2.15
|
|
As
of
March 31, 2008, there were 13,220,843 shares of our common stock issued and
outstanding, and there were approximately 232 holders of record of our
outstanding shares.
Recent
Sales of Unregistered Securities; Use of Proceeds from Unregistered
Securities
.
The
Company issued no unregistered securities during the year ended December 31,
2007. However, on February 4, 2008, the Company entered into a Business Advisory
Agreement with Newbridge Securities Corporation. Under the Agreement, which
is
for a term of one year (subject to renewal on mutual agreement of the parties),
Newbridge will provide the Company with business and financial advice and
consulting services, and the Company will pay Newbridge a fee equal to $60,000
(payable at the rate of $5,000 per month). The Company also agreed to issue
Newbridge (a) 200,000 shares of common stock at $.0001 per share and (b)
five-year options to purchase 300,000 shares, 75,000 of which are exercisable
at
$3.50, 75,000 at $4.00, 75,000 at $4.50 and 75,000 at $5.00. The shares are
to
be earned at the rate of 50,000 shares at the time of execution of the
agreement, with an additional 50,000 being earned each 90 days thereafter.
The
Company will record an expense in an amount equal to the fair market value
of
the shares on each date on which the shares are to be issued. The options are
to
be earned in four equal tranches of 75,000 options each (consisting of options
to purchase 18,750 shares at $3.50 per share, options to purchase 18,750 shares
at $4.00 per share, options to purchase 18,750 shares at $4.50 per share and
options to purchase 18,750 shares at $5.00 per share) commencing on execution
of
the Agreement and each 90 days thereafter.
Newbridge
has such knowledge and experience in business and financial matters that it
is
able to evaluate the risks and merits of an investment in the Company and the
certificates evidencing the shares and options issuable to Newbridge will bear
a
legend restricting their transferability absent registration or the existence
of
an available exemption from registration. The securities were issued to
Newbridge in reliance on the exemption from registration under Section 4(2)
of
the Securities Act of 1933, as amended. As of the date of this report, 50,000
shares have been earned and are due to be issued to Newbridge under its
Agreement with the Company; however, such shares have not yet been issued and
are, therefore, not shown as issued and outstanding in this report.
Dividend
Policy
The
payment of dividends, if any, is to be within the discretion of the Company’s
Board of Directors and will be contingent upon the Company’s revenues and
earnings, capital requirements, financial condition and the ability of Dongtai
to obtain approval to get monies out of the PRC. The Company presently intends
to retain all earnings, if any, for use in its business operations and
accordingly, the Board of Directors does not anticipate declaring any dividends
in the near future.
As
stipulated by the Company Law of the PRC as applicable to Chinese companies
with
foreign ownership, net income after taxation can only be distributed as
dividends after appropriation has been made for the following:
|
·
|
Making
up cumulative prior years’ losses, if
any;
|
|
·
|
Allocations
to the “Statutory surplus reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and regulations, until the
fund
amounts to 50% of the Company’s registered
capital;
|
|
·
|
Allocations
of 5 -10% of income after tax, as determined under PRC accounting
rules
and regulations to the Company’s “Statutory common welfare fund”, which is
established for the purpose of providing employee facilities and
other
collective benefits to the Company’s employees;
and
|
|
·
|
Allocations
to the discretionary surplus reserve, if approved in the shareholders’
general meeting.
|
Additionally,
the PRC’s national currency, the yuan, is not a freely convertible currency.
Effective January 1, 1994, the PRC foreign exchange system underwent fundamental
changes. This reform was stated to be in line with the PRC’s commitment to
establish a socialist market economy and to lay the foundation for making the
yuan convertible in the future. The currency reform is designed to turn the
dual
exchange rate system into a unified and managed floating exchange rate
system.
A
China
Foreign Exchange Trading Centre was formed in April, 1994 to provide an
interbank foreign exchange trading market whose main function is to facilitate
the matching of long and short term foreign exchange positions of the
state-designated banks, and to provide clearing and settlement services. The
People’s Bank of China publishes the state managed exchange rate daily based on
the daily average rate from the previous day’s inter-bank trading market, after
considering fluctuations in the international foreign exchange markets. Based
on
these floating exchange rates, the state-designated banks list their own
exchange rates within permitted margins, and purchase or sell foreign exchange
with their customers.
The
State
Administration of Foreign Exchange of the PRC (“SAFE”) administers foreign
exchange dealings and requires that they be transacted through designated
financial institutions. All Foreign Investment Enterprises (“FIEs”) may buy and
sell foreign currency from designated financial institutions in connection
with
current account transactions, including, but not limited to, profit
repatriation. With respect to foreign exchange needed for capital account
transactions, such as equity investments, all enterprises in the PRC (including
FIEs) are required to seek approval of the SAFE to exchange yuan into foreign
currency. When applying for approval, such enterprises will be subject to review
by the SAFE as to the source and nature of the yuan funds.
There
can
be no assurance that the yuan relative to other currencies will not be volatile
or that there will be no devaluation of the yuan against other foreign
currencies, including the U.S. dollar.
Equity
Compensation Plan Information
The
following table gives information about our common stock that may be issued
upon
the exercise of options, warrants and rights under our 2006 Equity Incentive
Plan which is our only equity compensation plan as of December 31,
2007.
Plan
Category
|
|
Number
of Securities to be
issued
upon exercise of
outstanding
options, warrants
and
rights
|
|
Weighted-average
exercise
price
of outstanding options,
warrant
and rights
|
|
Number
of securities
remaining
available for future
issuance
under equity
compensation
plans
(excluding securities
reflected
in column (a))
|
|
Equity
compensation plans
approved
by security
holders
|
|
|
|
|
|
|
|
|
|
|
2006
Equity Incentive Plan
|
|
|
0
|
|
|
N/A
|
|
|
2,500,000
|
|
Equity
compensation plans not approved by security holders
|
|
|
0
|
|
|
N/A
|
|
|
0
|
|
Total
|
|
|
0
|
|
|
N/A
|
|
|
2,500,000
|
|
(a)
Securities
available for future issue increase each year by 10% of our outstanding common
stock at the beginning of each year. The total amount of common stock available
under the plan cannot exceed 10 million shares. Inasmuch as the number of
outstanding shares as of January 1, 2008 was 13,220,843, the number of shares
covered by the 2006 Equity Incentive Plan increased by 1,322,084 shares to
3,822,084 shares.
Transfer
Agent
The
Company’s stock transfer agent is Interwest Transfer Company, Inc., 1981 East
Murray Holladay Road, Suite 100, P.O. Box 17136, Salt Lake City, Utah
84117.
Penny
Stock Regulations
The
Commission has adopted regulations which generally define “penny stock” to be an
equity security that has a market price of less than $5.00 per share. The
Company’s common stock, when and if a trading market develops, may fall within
the definition of penny stock and subject to rules that impose additional sales
practice requirements on broker-dealers who sell such securities to persons
other than established customers and accredited investors (generally those
with
assets in excess of $1,000,000, or annual incomes exceeding $200,000 or
$300,000, together with their spouse).
For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase of such securities and have received
the purchaser’s prior written consent to the transaction. Additionally, for any
transaction, other than exempt transactions, involving a penny stock, the rules
require the delivery, prior to the transaction, of a risk disclosure document
mandated by the Commission relating to the penny stock market. The broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must disclose this
fact and the broker-dealer’s presumed control over the market. Finally, monthly
statements must be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
Consequently, the “penny stock” rules may restrict the ability of broker-dealers
to sell the Company’s common stock and may affect the ability of investors to
sell their Common Stock in the secondary market.
ITEM
6.
SELECTED
FINANCIAL DATA
Not
applicable to smaller reporting companies.
ITEM
7.
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion should be read in conjunction with the audited consolidated
financial statements of the Company and the notes thereto included in this
report. Readers should also carefully review the risks and uncertainties
described elsewhere in this report under “Risk Factors.”
FORWARD-LOOKING
STATEMENTS
This
Annual Report contains forward-looking statements within the meaning of federal
securities laws. These include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as “anticipate,” “expect,” “intend,” “plan,” “will,” “we believe,”
“management believes” and similar language. The forward-looking statements are
based on the current expectations of management and are subject to certain
risks, uncertainties and assumptions, including those described elsewhere in
this report under “Risk Factors.” Actual results may differ materially from
results anticipated in these forward-looking statements. We base the
forward-looking statements on information currently available to us, and we
assume no obligation to update them. Investors are also advised to refer to
the
information in our filings with the Securities and Exchange Commission, in
which
we discuss in greater detail various important factors that could cause actual
results to differ from expected or historic results. It is not possible to
foresee or identify all of the risks and uncertainties that could affect us.
OVERVIEW
Historically,
the Company engaged in two lines of business: (a) the exploration and
development of potential mining properties, and (b) the development, marketing
and support of computer software products and services. In September 2004,
the
Company sold its computer business. Since September 2005, the Company has no
longer been in the mining business due to its loss of all its contractual rights
in certain mining properties in Spain.
In
November 2005, a Delaware corporation known as China Industrial Waste
Management, Inc. (“CIWM Delaware”) acquired 90% of the issued and outstanding
capital stock of Dalian Dongtai Industrial Waste Treatment Co., Ltd. (“Dongtai”)
from the shareholders of Dongtai in a reverse merger transaction in which the
Dongtai shareholders became the owner of all of the issued and outstanding
shares of CIWM Delaware. As a result of the reverse merger, Dongtai became
a
joint venture with foreign investment under the laws of the PRC, with a total
registered and paid-in capital of $2.3 million. The exchange of shares with
the
Dongtai shareholders was accounted for as a reorganization between entities
under common control with CIWM Delaware as the receiving entity, as prescribed
by Appendix D of SFAS 141. The accounts of both entities were combined at their
historical cost basis, resulting in no gain, loss, or goodwill. The combination
was essentially a recapitalization of Dongtai.
On
November 11, 2005, China Industrial Waste Management, Inc., a Nevada corporation
(f/k/a Goldtech Mining Corporation) (“CIWM Nevada”) entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with CIWM Delaware and the
shareholders of CIWM Delaware. Pursuant to the Merger Agreement, which closed
on
November 11, 2005, CIWM Delaware merged with and into CIWM Nevada’s wholly-owned
Delaware subsidiary, DonTech. Pursuant to the Merger Agreement, after the
merger, CIWM Delaware ceased to exist and DonTech was the surviving company
(and
the owner of 90% of the issued and outstanding capital stock of Dongtai). The
merger of CIWM Delaware into DonTech was accounted for as a reverse acquisition
under the purchase method of accounting since the shareholders of CIWM Delaware
obtained control of CIWM Nevada (the Company) by virtue of the merger.
Accordingly, the merger was recorded as a recapitalization of CIWM Delaware,
with DonTech being treated as the continuing entity. CIWM Nevada (the Company)
currently owns all of the issued and outstanding capital stock of DonTech,
which
in turn, owns 90% of the issued and outstanding capital stock of
Dongtai.
Dongtai
is engaged in the collection, treatment, disposal and recycling of industrial
wastes principally in Dalian, China and surrounding areas in Liaoning Province,
China. Dongtai provides waste disposal solutions to its more than 400
customers, including large multinational corporations, from facilities located
in the Economic and Technology Development Zone, Dalian, PRC. Dongtai treats,
disposes of and/or recycles many types of industrial wastes, and recycled waste
products are sold to customers as raw material to produce chemical and
metallurgy products. In addition, Dongtai treats or disposes of industrial
waste
through incineration, burial or water treatment; as well as provides a range
of
environmental protection services to its clients. Dongtai generates revenues
from waste collection and disposal services, as well as from sales of valuable
products and recycled commodities.
In
addition to its waste collection and disposal operations, Dongtai participates
in the operation of the following waste disposal and environmental protection
projects, which are expected to contribute to revenues in future
periods:
|
·
|
Dongtai
Water Recycling Co. Ltd (“Dongtai Water”), a Build-Operate-Transfer (BOT)
project established to process polluted water generated by the City
of
Dalian. Dongtai owns 80% of this project. The total investment in
this
project is approximately RMB 44 million (approximately $6 million).
Construction of the sewage plant has been completed, and the project
is
currently in the stage of
commissioning.
|
|
·
|
Dongtai
Organic Waste Treatment Co. Ltd. (“Dongtai Organic”), which is also a BOT
project, engaged in municipal sludge treatment in Dalian. Dongtai
owns a
49% interest in Dongtai Organic, which is expected to operate for
the next
20 years and provide a municipal sludge treatment capacity of 600
tons per
day. The total investment in the project, which is in the installation
stage, is approximately RMB 130 million (approximately $17.8
million).
|
|
·
|
Dalian
Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”), which is 70% owned by
Dongtai, engages in plasma arc melting, separation and purification
of
waste catalysts, treatment of industrial wastes and comprehensive
utilization of waste catalysts or similar material. RMB 65 million
(approximately $8.9 million). The project is now in the facility
installation stage.
|
|
·
|
Dalian
Lipp Environmental Energy Engineering & Technology Co., Ltd. (“Dalian
Lipp”), is a PRC joint venture owned 75% by Dongtai. Dalian Lipp designs,
manufactures and installs environmental protection equipment and
renewable
energy equipment and provides related technical services. The project
is
based on the Lipp tank building technique, and is dedicated to generating
energy by organic waste anaerobic fermentation, and industrial effluent
treatment and municipal sewage plant.
|
Fiscal
2007 revenues were primarily attributable to fees from waste treatment and
disposal services. We expect to experience continued increases in waste
treatment and disposal services in fiscal 2008 in large part due to continued
growth in Dalian and Liaoyang Province and increasing government environmental
regulation.
In
order
to provide sufficient infrastructure to meet the increasing demand for waste
treatment and disposal, an expansion project is now underway to significantly
increase Dongtai’s capacity for waste treatment and disposal. It is anticipated
that the total investment in this expansion project will be approximately RMB
120 million (approximately $16.4 million). Groundbreaking, incinerator design
and other facilities design for the expansion project have been completed,
and
an environmental impact assessment report has been submitted to and approved
by
the Ministry of Environmental Protection of China.
Our
business strategy is aimed at increasing revenue and earnings through profitable
growth and improving returns on invested capital. The components of our strategy
include: (1) placing emphasis on the commercialization of solid waste
treatment; (2) our expansion into municipal sewage and sludge treatment BOT
projects; (3) managing our businesses locally with a strong operations focus
on
customer service; (4) entering into new geographic markets in China; and
(5) maintaining our financial capacity and effective administrative systems
and controls to support on-going operations and future growth. We are evaluating
growth in our solid waste treatment operations through opportunities to
cooperate with prominent domestic or overseas partners and attempt to integrate
customer groups (for example, the refinery industry), to realize resource
optimization.
We
also
plan to seek new BOT projects and acquire interests in existing projects, as
we
believe
they can provide us with stable revenues and cash inflows. Furthermore, we
believe that a well-operated BOT project will gain attention and social
recognition from the local government and business community, which may, in
turn, provide additional business opportunities in the Dalian metropolitan
area.
CRITICAL
ACCOUNTING POLICIES
We
have
disclosed in Note 3 to our financial statements those accounting policies that
we consider to be significant in determining our results of operations and
our
financial position which are incorporated by reference herein.
The
preparation of financial statements requires us to make estimates and judgments
that affect the reported amounts of assets, liabilities, revenue and expenses.
We evaluate our estimates, including those related to bad debts, inventories
and
warranty obligations, on an ongoing basis. We base our estimates on historical
experience and on various assumptions that we believe to be reasonable under
the
circumstances. These estimates and assumptions affect the reported amounts
of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the periods presented. The actual results
may differ from these estimates under different assumptions or
conditions.
The
significant accounting policies which we believe are the most critical to aid
in
fully understanding and evaluating our reported financial results include the
following:
Revenue
Recognition
Revenue
is recognized when services are rendered to customers when a formal arrangement
exists, the price is fixed or determinable, the delivery is completed, no other
significant obligations of the Company exist and collectability is reasonably
assured. Payments received before all of the relevant criteria for revenue
recognition are satisfied are recorded as deferred sales.
Property,
Plant and Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are required or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations.
Bad
Debts
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit worthiness,
current economic trends and changes in customer payment patterns to evaluate
the
adequacy of these reserves. Terms of the sales vary from COD through a credit
term of up to nine to twelve months. Reserves are recorded primarily on a
specific identification basis.
RESULTS
OF OPERATIONS
The
following discussion should be read in conjunction with the consolidated
financial statements and notes appearing elsewhere in this annual
report.
Revenues
We
generate revenue primarily from two sources, namely, fees charged to customers
for waste collection, transfer, recycling and disposal services and that from
the sale of recycled materials. We consider our collection and disposal
operations and reclamation of reusable substances as our core business.
Total
revenue for the year ended December 31, 2007, was $9,539,507, an increase of
$3,156,274 or 49.45% from $6,383,233 for the same period in 2006. The
increase in revenue is attributable to a broadened customer base and increased
demand from existing customers.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Service
fees
|
|
|
5,004,926
|
|
|
3,252,725
|
|
Sales
of cupric sulfate
|
|
|
1,817,861
|
|
|
1,193,369
|
|
Sales
of other recycled commodities
|
|
|
2,716,720
|
|
|
1,937,139
|
|
Total
|
|
|
9,539,507
|
|
|
6,383,233
|
|
Service
fee revenue for the year ended December 31, 2007 was $5,004,926 which was 52.47%
of total revenue for this year and an increase of $1,752,201 or 53.87% over
the
$3,252,725 in service fee revenue we generated in the year ended December 31,
2006. Service fee accounted for 50.96% of our total revenue for the year ended
December 31, 2006.
Sales
of
recycled products (including cupric sulfate and other recycled commodities)
were
$4,534,581 or 47.53% of total revenue for the year ended December 31, 2007.
Sales of recycled products in 2007 increased by $1,404,073 or 44.85% over the
year ended December 31, 2006. Sales of cupric sulfate increased by $624,492
or
52.33% from $1,193,369 in the year ended December 31, 2006 to $1,817,861 in
the
year ended December 31, 2007. This is attributable to a 208.375 tons increase
in
the sales amount of cupric sulfate as well as the increased unit price. Sales
of
recycled products for the year ended December 31,2007, was $2,716,720 ,an
increase of $779,581 or 40.24% from $1,937,139 in the year ended December
31,2006 as the revenues generated from sales of silicon steel sheet, waste
iron,
waste oil, scrap iron and waste drums increased. However, compared with last
year, revenue from sales of aluminum and plastic decreased.
Cost
of Revenues
Costs
of
revenues primarily include labor expenses (salaries, benefits, insurance and
other benefits), depreciation, materials, transportation costs, rent, repair
costs and other sundry expenses. Costs of revenue increased $954,264 or 52.36%
from $1,822,657 for the year ended December 31, 2006 to $2,776,921 for the
year
ended December 31, 2007.
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Cost
of service fees
|
|
|
1,251,049
|
|
|
763,940
|
|
Cost
of cupric sulfate
|
|
|
537,563
|
|
|
310,585
|
|
Cost
of other recycled commodities
|
|
|
988,309
|
|
|
748,132
|
|
Total
|
|
|
2,776,921
|
|
|
1,822,657
|
|
Costs
related to providing services increased by $487,109 or 63.76% from $763,940
for
the year ended December 31, 2006 to $1,251,049 for the year ended December
31,
2007. Costs related to producing recycled waste products (including cupric
sulfate and other recycled commodities) increased by $467,155 or 44.12% from
$1,058,717 for the year ended December 31, 2006 to $1,525,872 for the year
ended
December 31, 2007.
Operating
Expenses
Total
Operating expenses for the fiscal year ended December 31, 2007 was $3,602,828
which represents an increase of $1,394,478 or 63.15% from $2,208,350 for the
same period ended December 31, 2006. The main cause for the increase is that
in
October 2007, the Company settled certain legal proceedings in consideration
for
the payment to the plaintiff of cash and shares of common stock of the Company.
While the cash and shares were delivered by a third party, in accordance with
US
GAAP, the consideration for the settlement was accounted for as expenses,
amounting to $860,460.
Furthermore,
the increase in operation expenses is attributable to our business expansion
in
2007 as we need more employees and an increase in salary for all staff as a
whole. Simultaneously, we also experienced an increase in labor cost and
depreciation. Also, as a natural consequence of intensified business presence
in
other areas, the expenses incurred in transportation increased
accordingly.
Reimbursed
legal costs
As
disclosed in the Company’s current report on Form 8-K filed on October 15, 2007,
the consideration for the settlement of legal proceedings described under
Operating Expenses was paid by a third party. The consideration, which was
valued at $860,460, has been accounted for as Reimbursed legal
costs.
LIQUIDITY
AND CAPITAL RESOURCES
Liquidity
is the ability of a company to generate funds to support its current and future
operations, satisfy its obligations and otherwise operate on an ongoing basis.
As of December 31, 2007 our working capital was approximately $2.35 million
as compared to approximately $6.43 million as of December 31,
2006.
On
an
on-going basis, we take steps to identify and plan our needs for liquidity
and
capital resources, to fund our planned ongoing construction and day to day
business operations. In addition to working capital to support our routine
activities, we will also require funds for the:
|
·
|
construction
and upgrading of crucial facilities;
|
|
·
|
acquisition
of assets and/or equity ; and
|
We
anticipate that our various projects will require us to invest an aggregate
of
approximately RMB 42 million (approximately $5.8 million). We will fund this
investment through a combination of internally generated funds, bank loans
and
sales of our securities. We currently have no commitments from banks, investors
or any other source of financing. While we anticipate that we will be able
to
secure necessary funding as and when needed, there is no assurance that such
will be the case. If we are unable to secure funding as and when needed, our
projects may be delayed which may, in turn, cause delays in generating revenues
from the affected projects, and may reduce our profitability.
The
following table provides certain selected balance sheet comparisons between
the
years ended December 31, 2007 and December 31, 2006.
(in
000’s, except %)
|
|
December
31,
|
|
Increase/(Decrease)
|
|
Percent
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Working
Capital
|
|
$
|
2,345
|
|
$
|
6,434
|
|
$
|
(4,089
|
)
|
|
(64
|
)%
|
Cash
|
|
|
3,260
|
|
|
6,479
|
|
|
(3,219
|
)
|
|
(50
|
)%
|
Accounts
receivable, net
|
|
|
594
|
|
|
151
|
|
|
443
|
|
|
293
|
%
|
Inventory
|
|
|
1,332
|
|
|
602
|
|
|
730
|
|
|
121
|
%
|
Advances
to suppliers
|
|
|
390
|
|
|
374
|
|
|
16
|
|
|
41
|
%
|
Other
assets
|
|
|
66
|
|
|
154
|
|
|
(88
|
)
|
|
Nm
|
|
Total
current assets
|
|
|
5,642
|
|
|
7,760
|
|
|
(2,118
|
)
|
|
(27
|
)%
|
Long
term assets
|
|
|
14,887
|
|
|
5,169
|
|
|
9,718
|
|
|
188
|
%
|
Total
assets
|
|
$
|
20,529
|
|
|
12,929
|
|
$
|
7,600
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
- short term
|
|
$
|
1,369
|
|
|
—
|
|
$
|
1,369
|
|
|
Nm
|
|
Accounts
payable and accrued expenses
|
|
|
280
|
|
|
92
|
|
|
187
|
|
|
203
|
%
|
Other
payables
|
|
|
343
|
|
|
284
|
|
|
59
|
|
|
21
|
%
|
Deferred
sales
|
|
|
667
|
|
|
456
|
|
|
212
|
|
|
47
|
%
|
Other
current liabilities
|
|
|
638
|
|
|
494
|
|
|
142
|
|
|
29
|
%
|
Total
current liabilities
|
|
|
3,297
|
|
|
1,326
|
|
|
1,971
|
|
|
149
|
%
|
Asset
retirement obligation liability
|
|
|
438
|
|
|
382
|
|
|
56
|
|
|
15
|
%
|
Other
long-term liabilities
|
|
|
621
|
|
|
|
|
|
621
|
|
|
Nm
|
|
Total
liabilities
|
|
$
|
4,356
|
|
$
|
1,608
|
|
$
|
2,748
|
|
|
171
|
%
|
Nm
= Not
meaningful
All
our
cash reserves, approximately $3.26 million as of December 31, 2007,
are in the form of RMB held in bank accounts at financial institutions located
in the PRC. The value of cash on deposit in China at December 31, 2007 has
been translated based on the exchange rate as of December 31, 2007. In
1996, the Chinese government introduced regulations which relaxed restrictions
on the conversion of the RMB; however restrictions still remain, including
but
not limited to restrictions on foreign invested entities. Foreign invested
entities may only buy, sell or remit foreign currencies after providing valid
commercial documents at only those banks authorized to conduct foreign
exchanges. Furthermore, the conversion of RMB for capital account items,
including direct investments and loans, is subject to PRC government approval.
Chinese entities are required to establish and maintain separate foreign
exchange accounts for capital account items. We cannot be certain Chinese
regulatory authorities will not impose more stringent restrictions on the
convertibility of the RMB, especially with respect to foreign exchange
transactions. Accordingly, cash on deposit in banks in the PRC is not readily
deployable by us for purposes outside of China.
Our
working capital decreased approximately $4.09 million to $2.35 million
as of December 31, 2007 from $6.43 as of December 31, 2006. This decrease
in working capital is primarily attributable to decrease of approximately
$3.22 million in cash and cash equivalents, which was helped by increases
in short-term loans (approximately $1.37 million), accounts receivable
(approximately $0.19 million) and deferred sales (approximately $0.21million).
The decease of cash was caused by increasing expenditures on ongoing
construction.
Our
current assets as of December 31, 2007 decreased $2.12 million, or
approximately 27%, from December 31, 2006 and reflects decreases in current
asset items including cash and cash equivalents and other assets. Our current
liabilities increased by approximately $1.97 million, or approximately
149%, as of December 31, 2007 from December 31, 2006; this reflects
increases in Loans, accounts payable, deferred sales, and other payables.
Our
accounts receivables, net of allowances for doubtful accounts, increased
approximately $4.43 million as of December 31, 2007 year over year.
This increase is directly attributed to the increase in sales from treatment
services rendered.
Inventories
increased approximately 121% as of December 31, 2007 from the prior period.
This resulted from an increase in recycled products and raw
materials.
Short-term
loans were acquired for the first time in recent three years to fund day to
day
operations resulting from the expenditure of significant amounts of working
capital related to various construction projects.
Accounts
payable increased significantly, by 203% in 2007, as a direct result of the
overall significant increase in purchases and related operational
activities.
Cash
Flows
|
|
Year
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Net
cash provided by operating activities
|
|
$
|
4,619,605
|
|
$
|
3,436,471
|
|
Net
cash used in investing activities
|
|
$
|
(9,430,109
|
)
|
$
|
(76,134
|
)
|
Cash
flows from financing activities
|
|
$
|
1,315,097
|
|
|
—
|
|
Net
cash provided by operating activities
:
Net
cash provided by operating activities in the year ended December 31, 2007
increased by $1,183,134 or 34.4% over the net cash provided by operating
activities for the year ended December 31, 2006.
The
principal reasons for the increase in 2007 were a $551,272 increase in
accounts receivable, a $484,547 increase in inventory, and a $301,125 decrease
in accrued expense and deferred revenues which were partially offset by a
$1,358,437 increase in net income in 2007, a $129,793 increase in
depreciation, a $128, 852 increase in minority interest, a $596,528 increase
in
Subsidy received from government and a $138,657 decrease in accounts payable
and
other payables.
The
subsidy described in the preceding paragraph, amounting to $596,528 was received
by Dongtai’s controlled subsidiary, Zhuorui, in February 2007 from central and
local government agencies, in order to support the construction of the
facilities dealing with waste catalysts. The money will be kept in Zhuorui
and
need not be paid back.
Net
cash used in investing activities
:
Net
cash
used in investing activities for the year ended December 31, 2007 increased
by
$9,353,975 in the year ended December 31, 2007 as compared to the same period
in
2006.
In
2007,
as a result of Dongtai Water and Zhuorui’s BOT construction activities and
Dongtai’s upgrades of existing facilities and the purchase of property and
equipment, cash outflows increased by $5,990,337 in the year ended December
31,
2007 as compared to the year ended December 31, 2006; the increase by
$2,643,351in the investment in Dongtai Organic also contribute to the cash
used
in investing activities.
The
balance due from related party increased, due to the retroactive restatement
of
Dongtai Water and Zhuorui, by $116,179, combined with a $434,573 decrease of
due
to related party balance, contributed to the decrease in cash outflow in the
year as of December 31, 2007.
Net
cash provided by financing activities
:
Net
cash
provided by financing activities for the year ended December 31, 2007 increased
by $1,315,097 in the year ended December 31, 2007 as compared to the same period
in 2006, which resulted from a $1,315,097 increase in proceeds from
loans.
On
a
continuous basis, we emphasize on the management and forecast of our liquidity
and various capital resources, to fund our planned ongoing construction and
day
to day business operations. On top of the cash needs for working capitals
fueling our routine activities, we also brace for the capital requirements
for:
the construction and upgrading of crucial facilities; acquisitions of assets
and
equities; repaying the loans, all of which are set to strengthen our position
in
the industry in the long run.
Off
Balance Sheet Arrangements
Under
SEC
regulations, we are required to disclose our off-balance sheet arrangements
that
have or are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources
that
are material to investors. An off-balance sheet arrangement means a transaction,
agreement or contractual arrangement to which any entity that is not
consolidated with us is a party, under which we have:
|
·
|
Any
obligation under certain guarantee contracts;
|
|
·
|
Any
retained or contingent interest in assets transferred to an unconsolidated
entity or similar arrangement that serves as credit, liquidity or
market
risk support to that entity for such assets;
|
|
·
|
Any
obligation under a contract that would be accounted for as a derivative
instrument, except that it is both indexed to our stock and classified
in
stockholder’s equity in our statement of financial position;
and
|
|
·
|
Any
obligation arising out of a material variable interest held by us
in an
unconsolidated entity that provides financing, liquidity, market
risk or
credit risk support to us, or engages in leasing, hedging or research
and
development services with us.
|
As
of
December 31, 2007, the Company has no off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable to smaller reporting companies.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements of the Company required by this Item 8 are set forth
beginning on page F-1 immediately following the signature page to this annual
report.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There
have been no disagreements with or changes in the Company’s independent auditors
within the past two fiscal years.
ITEM
9A(T).
CONTROLS
AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
In
connection with the preparation of this annual report on Form 10-K, an
evaluation was carried out by the Company’s management, with the participation
of the Company’s Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange
Act)) as of December 31, 2007. Disclosure controls and procedures are designed
to ensure that information required to be disclosed in reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms and that such
information is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosures.
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.
During
the evaluation of disclosure controls and procedures as of December 31, 2007
conducted during the preparation of the Company’s financial statements to be
included in this Form 10-K, a material weakness in internal controls was
identified. As a result of this material weakness, described more
fully below, the Company’s Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2007, our disclosure controls and procedures
were not completely effective.
Notwithstanding
the existence of this material weakness in internal controls, the Company
believes that the consolidated financial statements in this annual report on
Form 10-K fairly present, in all material respects, our consolidated balance
sheets as of December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders’ equity, and cash flows for the years
ended December 31, 2007, 2006 and 2005 in conformity with accounting principles
generally accepted in the United States ("GAAP").
Management’s
Report on Internal Control Over Financial Reporting
Our
management, under the supervision of our Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP.
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 existing policies or procedures may deteriorate. Further, because of
changes in conditions, effectiveness of internal controls over financial
reporting may vary over time.
Company
management conducted an assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2007. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated
Framework. Based on this assessment, we have determined that we did
not maintain effective internal controls over financial reporting as of December
31, 2007.
A
material weakness is “a deficiency, or a combination of deficiencies (within the
meaning of PCAOB Auditing Standard No. 5), in internal control over financial
reporting, such that there is a reasonable possibility that a material
misstatement of the Company’s annual or interim financial statements will not be
prevented or detected on a timely basis.” Company management has concluded that,
as of December 31, 2007, the following material weakness existed:
|
·
|
We
had an insufficient familiarity with generally accepted accounting
principles in the United States causing us to improperly (a) account
for
landfill-related asset retirement obligations and consolidation of
the
results of operations of a subsidiary company, as a result of which
we
restated our
financial
statements as of December 31, 2006 and for the year then ended, and
as of
March 31, 2007 and for the quarter then ended
and, (b)
record
and reconcile various financial statement entries including accounts
receivable balances (including allowance for doubtful accounts),
other
current assets, construction in progress amounts, customer deposits,
deferred revenues depreciation and amortization expenses, certain
operating expenses and taxes payable, income and interest expense,
a loss
on investment, related party transactions; and subsidizing amounts;
resulting in numerous audit
adjustments.
|
Notwithstanding
the existence of this material weakness in internal controls, we believe that
the consolidated financial statements fairly present, in all material respects,
our consolidated balance sheets as of December 31, 2007 and 2006 and
the related consolidated statements of operations, stockholders’ equity, and
cash flows for the years ended December 31, 2007, 2006 and 2005 in
conformity with GAAP.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Remediation
of Material Weaknesses in Internal Control Over Financial Reporting During
2007
Until
recently, the Company’s founder and Chief Executive Officer also served as our
Chief Financial Officer, and due to his need to devote a substantial portion
of
his time to operational matters was not able to devote sufficient time to the
Company’s financial and accounting matters. In addition, while the Company
engaged the services of an external accounting consultant to assist it with
accounting matters, the Company has concluded that the consultant was not
sufficiently experienced in US GAAP to provide it with meaningful services.
We
believe that a lack of personnel sufficiently familiar with US GAAP was the
primary reason we restated certain of our financial statements and experienced
numerous audit adjustments.
In
order
to remediate the material weakness the Company has taken the following
actions:
|
·
|
Appointed
a full-time Chief Financial Officer which will now
allow the CEO to devote his full-time and attention to the Company’s
operations and permit a CFO with experience in accounting matters to
devote her full time and attention to the functions of Chief Financial
Officer.
|
|
·
|
Added
additional accounting and financial personnel with industry
experience.
|
|
·
|
Commenced
the process by which we will become better informed about US
GAAP.
|
|
·
|
Incorporated
US GAAP into the Company’s internal
controls.
|
|
·
|
Began
the process of sourcing a consultant experienced in accounting principles
generally accepted in the Untied States, including internal controls
over
financial reporting.
|
Changes
in Internal Control over Financial Reporting
We
have
engaged in substantial efforts to improve our internal control over financial
reporting and disclosure controls and procedures related to many areas of our
financial statements and disclosures. Efforts to remediate our internal control
over financial reporting are continuing and are expected to continue throughout
fiscal 2008. There remains a risk that we will fail to identify weaknesses
or
adequately correct any identified weaknesses in our internal control over
financial reporting or to prevent or detect a material misstatement of our
annual or interim financial statements.
ITEM
9B.
OTHER
INFORMATION
None.
PART
III
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION
16(a) OF THE EXCHANGE ACT
|
Officers
and Directors
The
following table sets forth information as of the date of this prospectus with
respect to the directors and executive officers of the Company.
Name
|
|
Position
|
Dong
Jinqing
|
|
Chairman
of the Board, Chief Executive Officer and Director
|
Li
Jun
|
|
Chief
Operating Officer and Director
|
Guo
Xin
|
|
Chief
Financial Officer and Director
|
Zhang
Dazhi
|
|
Corporate
Secretary
|
Mr.
Dong
Jinqing, age 51, was appointed the Company’s Chief Executive Officer, Chief
Financial Officer and Director in November 2005, and continues to serve the
Company as its Chairman of the Board and Chief Executive Officer. Mr. Dong
has
been the President of Dalian Dongtai Industrial Waste Treatment Co., Ltd. since
he founded that company in 1991. Between 1982 and 1991, Mr. Dong worked for
the
Dalian Environmental Science Academy, where he was primarily engaged in research
relating to the disposal of waste gas, waste water and industrial residue and
the evaluation of the environmental effects of industrial projects. Mr. Dong
graduated from Dalian University of Technology in 1982 with a bachelor’s degree
in environmental engineering.
Mr.
Li
Jun, age 46, was appointed the Company’s Chief Operating Officer in March 2008.
He has served on the Company’s board of directors since October 2006. Mr. Li has
also served as the Chief Operating Officer of Dalian Dongtai since 1998. From
1982 to 1993, he was employed by Dalian Vacuum Flask Factory and Dalian Yili
International Chemical Co. Ltd as its Director of Technology and Chief
Production Manager. Mr. Li graduated from Dalian University of Technology in
1982, majoring in environmental engineering.
Ms.
Guo
Xin, age 38, has served as t
he
Company’s Chief Financial Officer and a member of the board of directors since
March 2008. Ms. Guo has served as our Chief Accounting Officer since January
2007, as Chief Accounting Officer for Dalian Dongtai since October 2003 and
as a
manager in Dalian Dongtai’s accounting department from April 2002 to October
2003. Ms. Guo graduated from Beijing University of Commerce in 1992 majoring
in
finance, and received her master's degree in Public Administration from China's
Northeastern University in 2002.
Mr.
Zhang
Dazhi, age 31, has served as the Company’s Corporate Secretary since March 2008.
He has engaged in Investor Relations Management since he joined Dalian Dongtai
in 2004.
Mr.
Zhang
was awarded a Master’s degree in International Banking and Financial Studies
from the University of Southampton (United Kingdom) in 2004.
Family
Relationships
There
are
no family relationships among our directors or officers.
Director
Compensation
We
have
not established standard compensation arrangements for our directors and the
compensation payable to each individual for their service on our Board will
be
determined from time to time by our Board of Directors. Directors did not
receive any compensation for their services as directors during fiscal 2007.
The
following table provides information concerning the compensation of our
directors, for services as members of our Board of Directors for fiscal 2007.
The value attributable to any option awards is computed in accordance with
FAS
123R.
Director
Compensation
Name
(a)
|
|
Fees
earned or paid in cash ($)
(b)
|
|
Stock
awards ($)
(c)
|
|
Option
awards
($)
(d)
|
|
Non-equity
incentive plan compensation ($)
(e)
|
|
Nonqualified
deferred compensation earnings
($)
(f)
|
|
All
other compensation ($)
(g)
|
|
Total
($)
(h)
|
|
Dong
Jinqing
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Li
Jun
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Guo
Xin
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Committees
of the Board
Our
Board
of Directors has not established any committees of the Board, including an
Audit
Committee, a Compensation Committee or a Nominating Committee, or any committee
performing similar functions. The functions of those committees are being
undertaken by the Board of Directors as a whole.
We
do not
have a policy regarding the consideration of any director candidates which
may
be recommended by our shareholders, including the minimum qualifications for
director candidates, nor has our Board of Directors established a process for
identifying and evaluating director nominees. We have not adopted a policy
regarding the handling of any potential recommendation of director candidates
by
our shareholders, including the procedures to be followed. Our Board has not
considered or adopted any of these policies as we have never received a
recommendation from any shareholder for any candidate to serve on our Board
of
Directors. Given our relative size and lack of directors and officers insurance
coverage, we do not anticipate that any of our shareholders will make such
a
recommendation in the near future. While there have been no nominations of
additional directors proposed, in the event such a proposal is made, all members
of our Board will participate in the consideration of director nominees.
Audit
Committee Financial Expert
In
general, an “audit committee financial expert” is an individual member of the
audit committee or Board of Directors who:
|
·
|
understands
generally accepted accounting principles and financial statements,
|
|
·
|
is
able to assess the general application of such principles in connection
with accounting for estimates, accruals and reserves,
|
|
·
|
has
experience preparing, auditing, analyzing or evaluating financial
statements comparable to the breadth and complexity to our financial
statements,
|
|
·
|
understands
internal controls over financial reporting, and
|
|
·
|
understands
audit committee functions.
|
An
“audit
committee financial expert” may acquire the foregoing attributes
through:
|
·
|
education
and experience as a principal financial officer, principal accounting
officer, controller, public accountant, auditor or person serving
similar
functions;
|
|
·
|
experience
actively supervising a principal financial officer, principal accounting
officer, controller, public accountant, auditor or person serving
similar
functions; experience overseeing or assessing the performance of
companies
or public accounts with respect to the preparation, auditing or evaluation
of financial statements; or
|
|
·
|
other
relevant experience.
|
At
the
present time, we believe that Mr. Dong, our CEO and a director, and Ms. Guo
Xin,
our CFO and a director, are capable of analyzing and evaluating our financial
statements and understanding internal controls and procedures for financial
reporting. However, as we do not currently have an audit committee, we do not
currently have an “audit committee financial expert” as that term is defined
under Rule 407(d)(5) of Regulation S-K, and neither Mr. Dong nor Ms. Guo is
"independent" as that term is used in Item 7(d)(3)(iv) of Schedule 14A under
the
Securities Exchange Act of 1934.
Section
16(a) Beneficial Ownership Reporting Compliance
We
are
not currently subject to Section 16(a) of the Securities Exchange Act of 1934,
and, therefore, our directors and executive officers, and persons who own more
than ten percent of our common stock are not required to file with the
Securities and Exchange Commission reports disclosing their initial beneficial
ownership and changes in their beneficial ownership of our common
stock.
Code
of Ethics
A
Code of
Ethics is a written standard designed to deter wrongdoing and to
promote:
|
·
|
honest
and ethical conduct,
|
|
·
|
full,
fair, accurate, timely and understandable disclosure in regulatory
filings
and public statements,
|
|
·
|
compliance
with applicable laws, rules and regulations,
|
|
·
|
the
prompt reporting violation of the code, and
|
|
·
|
accountability
for adherence to the Code of Ethics.
|
We
are in
the process of completing a Code of Ethics, a copy of which will be filed
with
the Securities and Exchange Commission once it has been adopted by the Board
of
Directors.
ITEM
11.
EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by us in each of the last
two completed fiscal years for our principal executive officer, each other
executive officer serving as such whose annual compensation exceeded $100,000
and up to two additional individuals for whom disclosure would have been made
in
this table but for the fact that the individual was not serving as an executive
officer of our company at December 31, 2007. The value attributable to any
option awards is computed in accordance with FAS 123R.
Summary
Compensation Table
Name
and principal position
(a)
|
|
Year
(b)
|
|
Salary
($)
(c)
|
|
Bonus
($)
(d)
|
|
Stock
Awards
($)
(e)
|
|
Option
Awards
($)
(f)
|
|
Non-Equity
Incentive Plan Compensation ($)
(g)
|
|
Nonqualified
Deferred Compensation Earnings ($)
(h)
|
|
All
Other
Compensation
($)
(i)
|
|
Total
($)
(j)
|
|
Dong
Jinqing
CEO
|
|
|
2007
2006
|
|
|
12,934
10,740
|
|
|
60,558
40,305
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
73,492
51,045
|
|
Li
Jun
COO
|
|
|
2007
2006
|
|
|
11,553
10,013
|
|
|
51,615
36,778
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
63,168
46,791
|
|
Liu
Ruiguang
Chief
Engineer
|
|
|
2007
2006
|
|
|
10,455
8,761
|
|
|
31,862
25,417
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
42,317
34,178
|
|
Guo
Xin
Chief
Financial Officer*
|
|
|
2007
2006
|
|
|
8,641
7,051
|
|
|
18,327
16,500
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
26,968
23,551
|
|
Tian
Hongyi
VP-
Dongtai
|
|
|
2007
2006
|
|
|
8,641
7,199
|
|
|
18,327
15,305
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
0
0
|
|
|
29,968
22,504
|
|
*
Ms. Guo
served as Chief Accounting Officer during the periods covered by the
table.
The
executives of the Company and its subsidiaries are eligible to be granted awards
of stock options, stock appreciation rights, restricted stock, performance
shares, cash awards and other stock based awards under our 2006 Equity
Compensation Plan. As of December 31, 2007 no awards had been made to any
officer, director or employee of the Company under such plan.
Employment
Agreements
We
are
not a party to any written employment agreements.
Outstanding
Equity Awards at Fiscal Year End
The
following table provides information concerning unexercised options, stock
that
has not vested and equity incentive plan awards for each named executive officer
outstanding as of December 31, 2007:
|
|
OPTION
AWARDS
|
|
STOCK
AWARDS
|
|
Name
(a)
|
|
Number
of securities underlying unexercised options
(#)
exercisable
(b)
|
|
Number
of securities underlying unexercised options
(#)
unexercisable
(c)
|
|
Equity
incentive plan awards: Number of securities underlying unexercised
unearned options
(#)
(d)
|
|
Option
exercise price
($)
(e)
|
|
Option
expiration date
(f)
|
|
Number
of shares or units of stock that have not vested (#)
(g)
|
|
Market
value of shares or units of stock that have not vested ($)
(h)
|
|
Equity
incentive plan awards: Number of unearned shares, units or other
rights
that have not vested (#)
(i)
|
|
Equity
incentive plan awards: Market or payout value of unearned shares,
units or
other rights that have not vested (#)
(j)
|
|
Dong
Jinqing
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Li
Jun
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Liu
Ruiguang
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Guo
Xin
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Tian
Hongyi
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
As
of
March 31, 2008, there were 13,220,843 shares of our common stock (the only
class
of our voting securities) issued and outstanding. The following table sets
forth
as of March 31, 2008, certain information with respect to the beneficial
ownership of our voting securities by:
|
|
each
person who is known by us to be the beneficial owner of more than
five
percent of our outstanding common stock;
|
|
·
|
each “named executive officer” [as defined in Item
402(a)(3) of Regulation S-K]; and
|
|
·
|
all executive officers and directors as a
group.
|
Unless
otherwise indicated, the business address of each person listed is c/o Dalian
Dongtai Industrial Waste Treatment Co., Ltd., No. 1 Huaihe West Road, E-T-D
Zone, Dalian, China. The percentages in the table have been calculated on the
basis of treating as outstanding for a particular person, all shares of our
common stock outstanding on that date and all shares of our common stock
issuable to that holder in the event of exercise of outstanding options,
warrants, rights or conversion privileges owned by that person at that date
which are exercisable within 60 days of that date. Except as otherwise
indicated, the persons listed below have sole voting and investment power with
respect to all shares of our common stock owned by them, except to the extent
that power may be shared with a spouse.
Name
and Address of Beneficial Owner
|
|
|
Number
of Shares Beneficially Owned
|
|
|
|
Percent
of Class
|
|
Dong
Jinqing
|
|
|
9,847,900
|
(1
|
)
|
|
74.5
|
%
|
Li
Jun
|
|
|
343,900
|
|
|
|
2.6
|
%
|
Liu
Ruiguan
|
|
|
30,000
|
|
|
|
*
|
|
Guo
Xin
|
|
|
222,600
|
|
|
|
1.7
|
%
|
Tian
Hongyi
|
|
|
20,000
|
|
|
|
*
|
|
All
officers and directors as a group (5 persons)
|
|
|
10,464,400
|
(1
|
)
|
|
79.2
|
%
|
(1)
Includes
103,500 shares owned by Dong Su, the son of Mr. Dong.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Dalian
Bofa Chemical Material Company (“Bofa”), a company controlled by
Dong
Jinqing, our Chief Executive Officer and principal
shareholder, sells products that are recycled by Dongtai. Our total sales to
Bofa were $1,819,806 and $1,235,825 for the years ended December 31, 2007 and
2006, respectively. As of December 31, 2007, Bofa was indebted to Dongtai in
the
amount of $384,689 for product sold to Bofa. This amount is payable on or before
December 30, 2008, with interest at the rate of 6% per annum.
Lida
Environment Engineering Company (“Lida”), which is also a company controlled by
Dong Jinqing, our Chief Executive Officer and principal shareholder, provides
equipment used in the construction of facilities by Dongtai Water and Dongtai
Organic. Our total purchase from Lida were $48,724and $ 0 respectively, for
the
years ended December 31, 2007 and 2006.
Dongtai
owns a 49% interest in Dongtai Organic. For the years ended December 31, 2007
and 2006, As of December 31, 2007, Dongtai was indebted to Dongtai Organic
in
the amount of $276,252 resulting from loans made by Dongtai Organic to Dongtai
Water, a BOT project that is 80% owned by the Company. Such amount is payable
on
or before June 12, 2008, without interest.
Dongtai
Investment Inc., a company which is also controlled by Mr. Dong, owns a 30%
equity interest in our subsidiary, Zhuorui. As of December 31, 2007, Zhourui
was
indebted to Dongtai Investment in the amount of $260,110 for loans it made
to
Zhourui. This amount is payable on or before October 14, 2008, with interest
at
the rate of 6% per annum.
Except
for the foregoing, there have not been any transactions, or series of
similar transactions, since the inception of the Company, or any currently
proposed transaction, or series of similar transactions, to which the
Company or any of its subsidiaries was or is to be a party, in which the amount
involved exceeds $120,000 and in which any director or executive officer of
the
Company, nominee for election as a director, any five percent security holder
or
any member of the immediate family of any of the foregoing persons had, or
will
have, a direct or indirect material interest.
ITEM
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Audit
and Non-Audit Fees
|
|
Fiscal
Year Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Audit
Fees
|
|
$
|
92,700
|
|
$
|
52,750
|
|
Audit
Related Fees
|
|
|
None
|
|
|
None
|
|
Tax
Fees
|
|
|
None
|
|
|
None
|
|
All
Other Fees
|
|
|
None
|
|
|
None
|
|
Pre-Approval
of Services by the Independent Auditor
The
Board
of Directors has established policies and procedures for the approval and
pre-approval of audit services and permitted non-audit services. The Board
has
the responsibility to engage and terminate the Company’s independent registered
public accountants, to pre-approve their performance of audit services and
permitted non-audit services and to review with the Company’s independent
registered public accountants their fees and plans for all auditing services.
All services provided by and fees paid to Child, Van Wagoner & Bradshaw,
PLLC in 2007 were pre-approved by the Board of Directors.
PART
IV
ITEM
15.
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
Exhibit
Number
|
|
Description
|
3.1
|
|
Articles
of Incorporation of the Company (f/k/a Goldtech Mining Corporation)
filed
November 12, 2003. Incorporated by reference to Exhibit 3.1 to
the
Company’s Quarterly Report on Form 10-QSB for the quarter ended September
30, 2003 (the “9/30/03 10-QSB”).
|
3.2
|
|
Certificate
of Amendment to Articles of Incorporation filed with the Nevada
Secretary
of State on April 27, 2006. Incorporated by reference to Exhibit
3.2 to
the Company’s Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2006.
|
3.3
|
|
By-laws
of the Company. Incorporated by reference to Exhibit 3.2 to the
Company’s
Quarterly Report on Form 10-QSB for the quarter ended September
30,
2003.
|
10.1
|
|
Agreement
and Plan of Merger, dated November 11, 2005, by and among the Company,
Dalian Acquisition Corp., China Industrial Waste Management Inc.,
and each
of the CIWM Shareholders. Incorporated by reference to Exhibit
10.1 to the
Current Report on Form 8-K filed by the Company on November 17,
2005.
|
10.2
|
|
Contract
for Joint Venture Using Foreign Investment dated October 18, 2007
among
Dalian Dongtai Industrial Waste Treatment Co., Ltd., Ronald Lipp,
Karin
Lipp-Mayer and Minghuan Shan. Incorporated by reference to Exhibit
10.1 to
the Current Report on Form 8-K filed by the Company on October
18,
2007.
|
10.3
|
|
Agreement
dated July 10, 2007 by and between Dalian Lida Environmental Engineering
Co., Ltd. and Dalian Dongtai Industrial Waste Treatment Co.,
Ltd.*
|
10.4
|
|
Agreement
dated August 6, 2007 by and between Dalian Dongtai Investement
Co., Ltd.
and Dalian Dongtai Industrial Waste Treatment Co.,
Ltd.*
|
10.5
|
|
2006
Equity Compensation Plan. Incorporated by reference to the Definitive
Information Statement filed by the Company on March 31,
2006
|
21.1
|
|
List
of Subsidiaries*
|
31.1
|
|
Certification
of Jinqing Dong as the CEO of the Company pursuant to Exchange
Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.*
|
31.2
|
|
Certification
of Guo Xin Dong as the CFO of the Company pursuant to Exchange
Act Rules
13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of
the
Sarbanes-Oxley Act of 2002.*
|
32.1
|
|
Certification
of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section
906 of the Sarbanes-Oxley Act of 2002.*
|
32.2
|
|
Certification
of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section
906 of the Sarbanes-Oxley Act of
2002.*
|
*
Filed
herewith.
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, thereunto duly authorized.
|
|
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
|
|
Dated:
April 4, 2008
|
By:
|
/s/
Dong Jinqing
|
|
Dong
Jinqing
Chief
Executive Officer
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf
of
the Registrant and in the capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
|
|
|
|
|
/s/
Dong Jinqing
|
|
Chairman
of the Board, Chief Executive Officer and Director
|
|
April
4, 2008
|
Dong
Jinqing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Li Jun
|
|
Chief
Operating Officer and Director
|
|
April
4, 2008
|
Li
Jun
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Guo Xin
|
|
Chief
Financial Officer and Director
|
|
April
4, 2008
|
Guo
Xin
|
|
|
|
|
Douglas
W. Child, CPA
Marty
D. Van Wagoner, CPA
J.
Russ Bradshow, CPA
William
R. Denney, CPA
Roger
B. Kennard, CPA
Russell
E. Anderson, CPA
Scott L
Farnes
1284
W. Flint Meadow Dr. #D
Kaysville,
Utah 84037
Telephone
801.927.1337
Facsimilie
801.927.1344
5296
S. Commerce Dr. #300
Salt
Lake City, Utah 84107
Tdmphom
801.281.4700
Facsimile
801.281.4701
Suite
B, 4F
North
Cape Commercial Bldg.
388
king’s Road
North
Point, Hong kong
www.cpaone.net
|
|
Report
of Independent Registered Public Accounting Firm
To
the Board of Directors and Audit Committee
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
Dalian,
People's Republic of China
We
have audited the consolidated balance sheets of CHINA INDUSTRIAL
WASTE
MANAGEMENT, INC. (the Company) as of December 31, 2007 and 2006,
and the
related consolidated statements of operations and comprehensive income,
stockholders' 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
consolidated 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 consolidated 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 consolidated 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 INDUSTRIAL WASTE MANAGEMENT, INC. as of December
31,
2007 and 2006, and the consolidated results of its operations and
its cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Child,
Van Wagoner & Bradshaw, PLLC
Salt
Lake City, Utah
March
19, 2008
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
CONSOLIDATED
BALANCE SHEETS
|
(In
U.S. dollars)
|
|
|
December
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Restated
|
|
ASSETS
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
3,260,307
|
|
$
|
6,478,978
|
|
Trade
accounts receivable, net
|
|
|
594,322
|
|
|
151,144
|
|
Other
receivables
|
|
|
22,453
|
|
|
132,935
|
|
Inventory
|
|
|
1,332,349
|
|
|
602,944
|
|
Advances
to suppliers
|
|
|
390,159
|
|
|
374,046
|
|
Deferred
expense
|
|
|
42,784
|
|
|
20,490
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
5,642,374
|
|
|
7,760,537
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
2,633,354
|
|
|
-
|
|
Property,
plant & equipment
|
|
|
4,697,305
|
|
|
4,215,545
|
|
Less:
accumulated depreciation
|
|
|
(2,055,268
|
)
|
|
(1,505,130
|
)
|
Net
property, plant and equipment
|
|
|
2,642,037
|
|
|
2,710,415
|
|
Construction
in progress
|
|
|
7,410,255
|
|
|
554,608
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,732,074
|
|
|
1,524,319
|
|
Deposits
|
|
|
80,925
|
|
|
5,548
|
|
Related
party receivable
|
|
|
388,796
|
|
|
374,498
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
20,529,815
|
|
$
|
12,929,925
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
279,600
|
|
$
|
92,255
|
|
Short-term
loan
|
|
|
1,369,000
|
|
|
-
|
|
Tax
payable
|
|
|
93,954
|
|
|
6,346
|
|
Deferred
sales
|
|
|
667,389
|
|
|
455,548
|
|
Accrued
expenses
|
|
|
7,236
|
|
|
16,580
|
|
Related
party payable
|
|
|
536,362
|
|
|
471,269
|
|
Other
payable
|
|
|
343,207
|
|
|
284,071
|
|
Total
current liabilities
|
|
|
3,296,748
|
|
|
1,326,069
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation liability
|
|
|
437,619
|
|
|
381,873
|
|
Other
long-term liabilities
|
|
|
620,979
|
|
|
-
|
|
Total
liabilities
|
|
|
4,355,346
|
|
|
1,707,942
|
|
Minority
interest in subsidiary
|
|
|
2,259,595
|
|
|
1,786,323
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
Preferred
stock: par value $.001; 5,000,000 shares authorized; none issued
and
outstanding
|
|
|
-
|
|
|
-
|
|
Common
stock: par value $.001; 95,000,000 shares authorized; 13,220,843
shares
issued and outstanding
|
|
|
13,221
|
|
|
13,221
|
|
Additional
paid-in capital
|
|
|
1,968,634
|
|
|
1,952,634
|
|
Other
comprehensive income
|
|
|
1,153,728
|
|
|
379,721
|
|
Retained
earnings
|
|
|
10,779,291
|
|
|
7,090,084
|
|
Total
stockholders' equity
|
|
|
13,914,874
|
|
|
9,435,660
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
20,529,815
|
|
$
|
12,929,925
|
|
See
notes
to Consolidated Financial Statements.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE
INCOME
|
(In
U.S. dollars)
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Restated
|
|
Service
fees
|
|
$
|
5,004,926
|
|
$
|
3,252,725
|
|
Sales
of recycled commodities
|
|
|
4,534,581
|
|
|
3,130,508
|
|
Operating
revenue
|
|
|
9,539,507
|
|
|
6,383,233
|
|
|
|
|
|
|
|
|
|
Cost
of service fees
|
|
|
1,251,049
|
|
|
763,940
|
|
Cost
of recycled commodities
|
|
|
1,525,872
|
|
|
1,058,717
|
|
Costs
of revenue (including depreciation)
|
|
|
2,776,921
|
|
|
1,822,657
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
6,762,586
|
|
|
4,560,576
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
1,159,069
|
|
|
783,057
|
|
General
and administrative expenses
|
|
|
2,443,759
|
|
|
1,425,293
|
|
Total
operating expenses
|
|
|
3,602,828
|
|
|
2,208,350
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
3,159,758
|
|
|
2,352,226
|
|
|
|
|
|
|
|
|
|
Other
income(expense)
|
|
|
|
|
|
|
|
Investment
income (loss)
|
|
|
(47,923
|
)
|
|
-
|
|
Interest
income
|
|
|
88,499
|
|
|
25,318
|
|
Other
income
|
|
|
15,769
|
|
|
206,031
|
|
Reimbursed
legal costs
|
|
|
860,460
|
|
|
-
|
|
Other
expense
|
|
|
(19,060
|
)
|
|
(11,803
|
)
|
Total
other income (expense)
|
|
|
897,745
|
|
|
219,546
|
|
Net
income from continuing operations before minority interest and
income
tax
|
|
|
4,057,503
|
|
|
2,571,772
|
|
|
|
|
|
|
|
|
|
Income
tax (benefit)
|
|
|
-
|
|
|
626
|
|
Income
from continuing operations
|
|
|
4,057,503
|
|
|
2,571,146
|
|
|
|
|
|
|
|
|
|
Discontinued
operation
|
|
|
|
|
|
|
|
Loss
from operations of discontinued component
|
|
|
(6,465
|
)
|
|
(6,192
|
)
|
Gain
on disposal of discontinued component
|
|
|
1,205
|
|
|
-
|
|
Income
tax benefit
|
|
|
-
|
|
|
-
|
|
Loss
on discontinued operations
|
|
|
(5,260
|
)
|
|
(6,192
|
)
|
|
|
|
|
|
|
|
|
Net
income before minority interest
|
|
|
4,052,243
|
|
|
2,564,954
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
363,036
|
|
|
234,184
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,689,207
|
|
$
|
2,330,770
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
774,007
|
|
|
267,438
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
4,463,214
|
|
$
|
2,598,208
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
13,220,843
|
|
|
13,181,391
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
13,220,843
|
|
|
13,181,391
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
$
|
0.28
|
|
$
|
0.18
|
|
See
notes
to Consolidated Financial Statements.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
(In
U.S. dollars)
|
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
Restated
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
income
|
|
$
|
3,689,207
|
|
$
|
2,330,770
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
363,036
|
|
|
234,184
|
|
Depreciation
|
|
|
428,696
|
|
|
298,903
|
|
Amortization
|
|
|
37,729
|
|
|
34,830
|
|
Bad
debt allowance
|
|
|
3,476
|
|
|
5,146
|
|
Stock
issued for services
|
|
|
16,000
|
|
|
9,333
|
|
Accretion
expenses
|
|
|
28,235
|
|
|
25,226
|
|
Loss
on equity investment
|
|
|
47,923
|
|
|
-
|
|
Loss
on disposal of subsidiary
|
|
|
5,260
|
|
|
-
|
|
Subsidy
received from government
|
|
|
596,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(419,185
|
)
|
|
132,087
|
|
Inventory
|
|
|
(660,714
|
)
|
|
(176,247
|
)
|
Other
receivables
|
|
|
114,945
|
|
|
(17,720
|
)
|
Advance
to suppliers
|
|
|
1,778
|
|
|
14,844
|
|
Prepaid
expense
|
|
|
(20,058
|
)
|
|
2,519
|
|
Deposits
|
|
|
(72,042
|
)
|
|
(1,167
|
)
|
Accounts
payable & other payables
|
|
|
211,828
|
|
|
73,171
|
|
Accrued
expense and deferred sales
|
|
|
163,225
|
|
|
464,350
|
|
Tax
payable
|
|
|
83,738
|
|
|
6,242
|
|
Net
cash provided by operating activities
|
|
|
4,619,605
|
|
|
3,436,471
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activiies
|
|
|
|
|
|
|
|
Investment
in subsidiary
|
|
|
(2,643,351
|
)
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(183,326
|
)
|
|
(502,950
|
)
|
Construction
contracts
|
|
|
(6,677,654
|
)
|
|
(687,317
|
)
|
Proceeds
from related party
|
|
|
11,092
|
|
|
-
|
|
Repayments
to related party
|
|
|
-
|
|
|
(105,087
|
)
|
Due
to related party
|
|
|
28,932
|
|
|
463,505
|
|
Investment
in subsidiary by minority holder
|
|
|
-
|
|
|
755,715
|
|
Proceeds
on sale of subsidiary
|
|
|
34,198
|
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(9,430,109
|
)
|
|
(76,134
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from loans
|
|
|
1,315,097
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
1,315,097
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
276,736
|
|
|
75,942
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
(3,218,671
|
)
|
|
3,436,279
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
6,478,978
|
|
|
3,042,699
|
|
Cash
and cash equivalents, end of period
|
|
$
|
3,260,307
|
|
$
|
6,478,978
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
-
|
|
$
|
-
|
|
Income
taxes
|
|
|
-
|
|
|
-
|
|
Stock
issued for services
|
|
|
-
|
|
|
80,000
|
|
See
notes
to Consolidated Financial Statements.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY
|
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND
2006
|
|
|
Series
A Preferred Stock
|
|
Common
Stock
|
|
Additional
Paid In
|
|
Other
Comprehensive
|
|
Retained
|
|
Total
Stockholders'
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Income
|
|
Earnings
|
|
Equity
|
|
Balance
December 31, 2005
|
|
|
64,000
|
|
|
64
|
|
|
6,740,843
|
|
|
6,741
|
|
|
1,949,717
|
|
|
112,283
|
|
|
4,759,314
|
|
|
6,828,119
|
|
Conversion
of preferred shares to common
|
|
|
(64,000
|
)
|
|
(64
|
)
|
|
6,400,000
|
|
|
6,400
|
|
|
(6,336
|
)
|
|
|
|
|
|
|
|
-
|
|
S8
shares issued for services
|
|
|
|
|
|
|
|
|
80,000
|
|
|
80
|
|
|
9,253
|
|
|
|
|
|
|
|
|
9,333
|
|
Foreign
currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
267,438
|
|
|
|
|
|
267,438
|
|
Net
Income for the year ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,330,770
|
|
|
2,330,770
|
|
Balance
December 31, 2006
|
|
|
-
|
|
|
-
|
|
|
13,220,843
|
|
|
13,221
|
|
|
1,952,634
|
|
|
379,721
|
|
|
7,090,084
|
|
|
9,435,660
|
|
S8
shares issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000
|
|
|
|
|
|
|
|
|
16,000
|
|
Change
in foreign currency translation gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
774,007
|
|
|
|
|
|
774,007
|
|
Net
Income for the year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,689,207
|
|
|
3,689,207
|
|
Balance
December 31, 2007
|
|
|
-
|
|
|
-
|
|
|
13,220,843
|
|
|
13,221
|
|
|
1,968,634
|
|
|
1,153,728
|
|
|
10,779,291
|
|
|
13,914,874
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
1.
Nature of operations
The
consolidated financial statements are those of China Industrial Waste
Management, Inc., a Nevada corporation, formerly known as Goldtech Mining
Corporation (the “Company”), and its majority owned subsidiaries. When the
terms “the company”, ”we”, “us” or “our” are used in this document, those terms
refer to China Industrial Waste Management, Inc., and its consolidated
subsidiaries. When we use the term “CIWM,”, we are referring only to the parent
holding company.
CIWM
is a
holding company which conducts its business through its only wholly-owned
subsidiary, DonTech Waste Services, Inc. (“DonTech”), formerly known as Dalian
Acquisition Corp. DonTech owns 90% of the stock of Dalian Dongtai Industrial
Waste Treatment Co. Ltd. (“Dongtai”), an entity organized under the laws of the
People’s Republic of China (“PRC”). As of December 31, 2007, Dongtai owned 80%
of equity of Dongtai Water Recycling Co. Ltd. (“Dongtai Water”), 75% of the
equity of Dalian Lipp Environmental Energy Engineering & Technology Co.,
Ltd. (“Dalian Lipp”) and 70% of the equity of Dalian Zhuorui Resource Recycling
Co., Ltd. (“Zhuorui”).
Another
corporation with the name China Industrial Waste Management, Inc. was
incorporated in the State of Delaware on August 16, 2005. On September 22,
2005,
that corporation acquired 90% of the outstanding shares of Dongtai from its
shareholders in exchange for 1,280,000 shares of the corporation’s common stock,
representing 100% of the issued and outstanding shares of its common stock
at
the date of the acquisition. The exchange of shares with Dongtai was accounted
for as a reorganization between entities under common control with China
Industrial Waste Management, Inc. as the receiving entity, as prescribed by
Appendix D of SFAS 141. The accounts of both entities were combined at their
historical cost basis, resulting in no gain, loss, or goodwill. Since China
Industrial Waste Management Inc. had minimal assets and liabilities, the
combination was essentially a recapitalization of Dongtai.
On
November 11, 2005, CIWM entered into an Agreement and Plan of Merger (the
“Merger Agreement”) with the Delaware corporation also called China Industrial
Waste Management, Inc. and the shareholders of that company. Pursuant to the
Merger Agreement, which closed on November 11, 2005, China Industrial Waste
Management, Inc. (the Delaware corporation) merged with and into CIWM’s wholly
owned subsidiary, DonTech, and CIWM issued 64,000 shares of its Series A
Convertible Preferred Stock to the former shareholders of the Delaware
corporation. Each share of Series A Convertible Preferred Stock was convertible
into 10,000 shares of common stock and was entitled to 10,000 votes on each
matter submitted to the stockholders. The holders of the Series A Convertible
Preferred Stock contractually agreed not to convert such shares until CIWM
increased its authorized number of shares of common stock.
Pursuant
to the Merger Agreement, after the merger, the Delaware corporation ceased
to
exist and DonTech was the surviving company. The merger of the Delaware
corporation into DonTech was accounted for as a reverse acquisition under the
purchase method of accounting since the shareholders of the Delaware corporation
obtained control of the Company by virtue of the merger. Accordingly, the merger
was recorded as a recapitalization of the Delaware corporation, with the
Delaware corporation being treated as the continuing entity. The financial
statements of the accounting acquiree (CIWM) are not significant. Therefore,
no
pro forma financial information is submitted.
On
May
12, 2006, the Company changed its name to “China Industrial Waste Management,
Inc.” and began trading under a new trading symbol (CIWT). In addition, the
Company effected a 1:100 reverse split of its outstanding common shares.
On
May
15, 2006, the Company issued to 10 stockholders an aggregate of 6,400,000
additional shares of the Company's Common Stock as an equitable adjustment
of
the number of shares which the Company had agreed to issue to such persons
pursuant to the Merger Agreement entered into and consummated on November 11,
2005. Since the issuance of additional 6,400,000 shares was caused by the merger
consummated on November 11, 2005, such shares have been assumed to be
outstanding in 2005 in the calculation of EPS.
Dongtai
was incorporated on January 9, 1991. Dongtai is located in the Economic and
Technology Development Zone, Dalian, PRC. Dongtai is engaged in the collection,
treatment, disposal and recycling of industrial waste in China. Dongtai recovers
all types of industrial wastes which can be used as raw material to produce
chemical and metallurgy products. Dongtai also provides incineration, burial,
and water treatment services. Dongtai also provides service for environment
protection, technology consultation, pollution treatment, and waste managing
process design.
Liaoyang
Dongtai was incorporated on March 22, 2006. Dongtai has a 60% interest in this
subsidiary. Liaoyang Dongtai is located in Liaoyang, PRC and is engaged in
the
business of the collection, treatment, disposal and recycling of industrial
wastes. In July 14, 2007, Liaoyang Dongtai was dissolved and
liquidated.
Dongtai
Water was incorporated in July 2006 and Dongtai acquired 18% of the equity
of
such company in such month. On July 16, 2007 Dongtai acquired an
additional 62% of the equity of Dongtai Water, which was accounted for as a
reorganization of entities under common control. Dongtai Water is a
Build-Operate-Transfer (BOT) project, designed to process polluted water
generated by the city of Dalian.
Zhuorui
was incorporated in April 2006 and is engaged in plasma arc melting, separation
and purification of waste catalysts, treatment of industrial wastes and
comprehensive utilization of waste catalysts or similar material. In August
2007, Dongtai acquired 70% of the equity of Zhuorui from a related company,
controlled by Mr. Dong Jinqing, CEO and CFO of the company, at the price of
RMB7
million (approximately $958,300), which was accounted for as a reorganization
of
entities under common control.
On
March
2, 2007, the Company purchased 49% of the equity of Dongtai Organic, a newly
formed company which is also a BOT project, engaged in municipal sludge
treatment in Dalian. Dongtai Organic will operate for the next 20 years. The
investment in Dongtai Organic is accounted for using the equity
method.
On
December 22, 2007 Dongtai, along with Roland Lipp, Karin Lipp-Mayer
and Minghuan Shan set up a joint venture, named Dalian Lipp Environmental
Energy Engineering&Technology Co., Ltd in the People’s Republic of China,
engaged in designing, manufacturing and installing of environmental protection
equipment and renewable energy equipment and other technical services. Dongtai
owns 75% of equity of the newly formed joint venture.
2.
Basis of Presentation
The
accompanying consolidated financial statements include the accounts of China
Industrial Waste Management, Inc., a Nevada corporation, its 100% owned
subsidiary, DonTech Waste Services Inc., a Delaware corporation, its 90%
indirectly owned subsidiary, Dalian Dongtai Industrial Waste Treatment Co.,
Ltd., a PRC company, its 80% indirectly owned subsidiary, Dongtai Water
Recycling Co. Ltd., a PRC company
ô
its
70%
indirectly owned subsidiary, Dalian Zhuorui Resource Recycling Co., Ltd., a
PRC
company and its 75% indirectly owned subsidiary, Dalian Lipp Enviromental Energy
Engineering & Technology Co., Ltd., a PRC company. All material
inter-company accounts and transactions have been eliminated in the
consolidation.
The
accompanying financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (“US GAAP”). This
basis differs from that used in the statutory accounts of the Company, which
were prepared in accordance with the accounting principles and relevant
financial regulations applicable to enterprises in the PRC. All necessary
adjustments have been made to present the financial statements in accordance
with US GAAP.
3.
Summary of Significant Accounting Policies
Economic
and Political Risks
The
Company faces a number of risks and challenges as a result of having primary
operations and markets in the PRC. Changing political climates in the PRC could
have a significant effect on the Company’s business.
Foreign
currency translation
As
of
December 31, 2007 and 2006, the accounts of the Company were maintained, and
the
consolidated financial statements were expressed in the Chinese Yuan Renminbi
(“RMB”). Such consolidated financial statements were translated into U.S.
dollars (“USD”) in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 52, “Foreign Currency Translation,” with the RMB as the functional
currency. According to the Statement, all assets and liabilities were translated
at the exchange rate on the balance sheet date, stockholders’ equity was
translated at the historical rates and the statement of operations items were
translated at the weighted average exchange rate for the period. The resulting
translation adjustments are reported under other comprehensive income in
accordance with SFAS No. 130, “Reporting Comprehensive Income.”
Use
of
estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash
and cash equivalents
Cash
and
cash equivalents include cash on hand and cash on deposit, certificates of
deposit and all highly liquid debt instruments with original maturities of
three
months or less.
Accounts
and other receivables
Accounts
and other receivables are recorded at net realizable value consisting of the
carrying amount less an allowance for uncollectible accounts, as needed.
Allowance for uncollectible accounts as of December 31, 2007 and December 31,
2006 is $9,776 and $20,550, respectively.
The
Company maintains reserves for potential credit losses on accounts receivable.
Management reviews the composition of accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit-worthiness,
current economic trends and changes in customer payment patterns to evaluate
the
adequacy of these reserves. Terms of the sales vary from COD through a credit
term of up to nine to twelve months. Reserves are recorded primarily on a
specific identification basis.
Advances
to suppliers
The
Company makes advances to certain vendors for purchase of its material or
equipment. The advances to suppliers are interest free and
unsecured.
The
Company as well as its subsidiaries are in the process of expanding and
advancing its facilities, creating a need to increase the advanced payment
for
the purchase of machinery and the building of a new plant, resulting in an
advance to suppliers balance as follows:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
Advance
to suppliers
|
|
$
|
390,159
|
|
$
|
374,046
|
|
Inventory
Inventories
are stated at the lower of cost, as determined on a first-in, first-out basis,
or market. Management compares the cost of inventories with the market value,
and allowance is made for writing down the inventories to their market value,
if
lower.
Property,
equipment and construction in progress
Property
and equipment are stated at cost. Expenditures for maintenance and repairs
are
charged to earnings as incurred; additions, renewals and betterments are
capitalized. When property and equipment are retired or otherwise disposed
of,
the related cost and accumulated depreciation are removed from the respective
accounts, and any gain or loss is included in operations. Depreciation of
property and equipment is provided using the straight-line method for
substantially all assets with estimated lives as follows:
Buildings
|
|
|
30
Years
|
|
Machinery
|
|
|
10
Years
|
|
Vehicles
|
|
|
8
Years
|
|
Office
equipment
|
|
|
5
Years
|
|
Construction
in progress consists of the design expenses, architect fee and cost of the
equipment to treat waste.
Construction
in progress includes capitalized interest of $77,353 as of December
31, 2007.
Landfills
Cost
Basis of Landfill Assets — We capitalize various costs that we incur to make a
landfill ready to accept waste. These costs generally include expenditures
for
land, permitting, excavation, liner material and installation and other
capital infrastructure costs. The cost basis of our landfill assets also
includes estimates of future costs associated with landfill final capping,
closure and post-closure activities in accordance with SFAS No. 143, Accounting
for Asset Retirement Obligations (“SFAS No. 143”) and its
Interpretations.
Interest
accretion on final capping, closure and post-closure liabilities is recorded
using the effective interest method and is recorded as accretion expense, which
is included in our Consolidated Statements of Operations.
Amortization
of Landfill Assets — The amortizable basis of a landfill includes (i) amounts
previously expended and capitalized; (ii) capitalized landfill final capping,
closure and post-closure costs; (iii) projections of future purchase and
development costs required to develop the landfill site to its remaining
permitted and expansion capacity; and (iv) projected asset retirement costs
related to landfill final capping, closure and post-closure
activities.
Amortization
is recorded on a units-of-consumption basis, applying cost as a rate per ton.
The rate per ton is calculated by dividing each component of the amortizable
basis of a landfill by the number of tons needed to fill the corresponding
asset’s airspace.
Liabilities
for landfill and environmental remediation costs are presented in the table
below:
|
|
As
of December 31,
|
|
|
|
2007
|
|
2006
|
|
Asset
retirement obligation liability for landfills
|
|
$
|
437,619
|
|
$
|
381,873
|
|
Long-term
investment
Invested
company
|
|
Equity
acquired
|
|
Balance
as
of
December 31,
2007
|
|
Balance
as of
December
31, 2006
|
|
Dongtai
Organic
|
|
|
49
|
%
|
$
|
2,633,354
|
|
|
0
|
|
Total
|
|
|
|
|
$
|
2,633,354
|
|
|
0
|
|
Long-term
investments are recorded under the equity method. Dongtai Organic is
constructing and will operate a sludge treatment and disposal facility in
Dalian, PRC, of which the investment is recorded under the equity
method.
Asset
impairments
We
monitor the carrying value of our long-lived assets for potential impairment
and
test the recoverability of such assets whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable.
Typical indicators that an asset may be impaired include:
·
|
A
significant decrease in the market price of an asset or asset
group;
|
·
|
A
significant adverse change in the extent or manner in which an
asset or
asset group is being used or in its physical
condition;
|
·
|
A
significant adverse change in legal factors or in the business
climate
that could affect the value of an asset or asset group, including
an
adverse action or assessment by a
regulator;
|
·
|
An accumulation of costs significantly
in
excess of the amount originally expected for the acquisition or
construction of a long-lived asset;
|
·
|
Current period operating or cash
flow losses
combined with a history of operating or cash flow losses or a projection
or forecast that demonstrates continuing losses associated with the
use of
a long-lived asset or asset group; or
|
·
|
A current expectation that, more
likely than
not, a long-lived asset or asset group will be sold or otherwise
disposed
of significantly before the end of its previously estimated useful
life.
|
If
any of
these or other indicators occurs, the asset is reviewed to determine whether
there has been an impairment. An impairment loss is recorded as the difference
between the carrying amount and fair value of the asset. If significant events
or changes in circumstances indicate that the carrying value of an asset or
asset group may not be recoverable, we perform a test of recoverability by
comparing the carrying value of the asset or asset group to its undiscounted
expected future cash flows. If cash flows cannot be separately and independently
identified for a single asset, we will determine whether an impairment has
occurred for the group of assets for which we can identify the projected cash
flow. If the carrying values are in excess of undiscounted expected future
cash
flows, we measure any impairment by comparing the fair value of the asset or
asset group to its carrying value. Fair value is determined by either an
internally developed discounted projected cash flow analysis of the asset or
asset group or an actual third-party valuation. If the fair value of an asset
or
asset group is determined to be less than the carrying amount of the asset
or
asset group, an impairment in the amount of the difference is recorded in the
period that the impairment indicator occurs.
Intangible
assets
Intangible
assets consist of “Rights to use land and build a plant” for fifty years. The
intangible assets are amortized straight-line over fifty years. The Company
also
evaluates intangible assets for impairment, at least on an annual basis and
whenever events or changes in circumstances indicate that the carrying value
may
not be recoverable from its estimated future cash flows. Recoverability of
intangible assets, other long-lived assets and, goodwill is measured by
comparing their net book value to the related projected undiscounted cash flows
from these assets, considering a number of factors, including past operating
results, budgets, economic projections, market trends and product development
cycles. If the net book value of the asset exceeds the related undiscounted
cash
flows, the asset is considered impaired, and a second test is performed to
measure the amount of impairment loss.
Net
intangible assets on December 31, 2007 were $1,732,074. Such assets consist
entirely of a right to use land of $1,921,474, less accumulated amortization
of
$189,400.
Amortization
expense for the Company’s intangible assets for the year ended December 31, 2007
and 2006 totaled $ 37,729 and $ 34,830, respectively.
Discontinued
operations
Due
to a
lack of progress of Liaoyang Dongtai in developing a local market for its
services, the Board of Directors of the company decided to dissolve and
liquidate Liaoyang Dongtai in July 2007.
Before
termination, Liaoyang Dongtai’s major asset was cash, in the amount of RMB
399,989. Since Liaoyang Dongtai never generated any revenue, there was no tax
incurred, and the expenses from its operations were accounted for as sundry
expenses.
Dongtai
recovered RMB 260,000 (USD $34,198) from the disposal of the investment in
Liaoyang Dongtai. Dongtai’s book value in the investment was RMB 300,000 (USD
$39,458). Therefore, Dongtai incurred a total loss from the disposal of RMB
40,000 (USD $5,260).
Minority
interest
Minority
interest represents the minority owners’ 10% equity interest in Dongtai, 20%
equity interest in Dongtai Water, 30% equity interest in Zhuorui and 25% equity
interest in Dalian Lipp.
Fair
value of financial instruments
Statements
of Financial Accounting Standards No. 107, “Disclosures About Fair Value of
Financial Instruments”, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statements of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
Revenue
recognition
The
Company’s revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) 104.
Our
revenues are generated from two sources, namely, service fees we charge for
waste collection, transfer, disposal and recycling services and our sale of
recycled commodities.
1.
Recognition of service fees as revenue
Before
waste treatment services are rendered, the Company will enter into agreements
with its customers which explicitly express the scope of the Company’s services,
the types of wastes to be treated, the method of treatment to be applied, the
Company’s fees rates and form of settlement and other rights and obligations of
the parties.
Once
an
agreement with a customer takes effect, the Company conducts the treatment
activities described in the agreement, such as collection and transfer, which
activities are observed and confirmed by the Company’s client. Both parties will
sign a note, acknowledging that the wastes have been delivered to the Company’s
working site for further treatment.
The
fees
charged by the Company for its services are then determined by multiplying
the
fee rate defined in the agreement by the customer confirmed waste amount
delivered to the Company’s plant for treatment. The bill for the services will
be sent to the client, indicating the fees due. After sending out the invoice,
the company will recognize the fees as revenue.
Deferred
sales refer to those for which fees have been collected, but for which the
related treatment and disposal services have not been completely performed.
The
Company uses the fee rate and the amount of waste not treated to calculate
the
deferred sales. At December 31, 2007 and 2006 deferred sales amounted to
$667,389 and $455,548, respectively.
2.
Recognition of revenues from reclaimed products
The
Company also enters into agreements with customers who need reclaimed products
that the Company generates from the waste treatment process. The parties usually
settle the price in the agreement and make adjustments in case the market price
of the reclaimed product fluctuates significantly between contract signing
and
delivery. After the products are delivered to customers, the Company issues
an
invoice to purchasers and identifies all contents and details concerning sales.
The buyer then either can pay the full invoiced amount or promise to make
payment over time. In the latter case, the Company also recognizes upon
invoicing the amount due as revenues of reclaimed product.
Costs
of revenue
The
costs
of revenue fall into two categories -costs of service fees charged for services
and costs of revenue from reclaimed products.
The
costs
of service fees refer to the production expenses incurred by the Company’s
departments providing waste disposal services, which include the waste
disassembly department, waste solvent recovery department, industrial waste
water treatment department, waste storage, sorting and burning department,
dangerous waste filling and burying department and common industrial waste
filling and burying department. The costs include the direct labor cost, direct
material and depreciation expenses and other miscellaneous expenses incurred
by
the foregoing departments.
The
Company’s reclaimed products can be divided into two main categories - products
reclaimed by sophisticated production means and at great expense in terms of
labor, energy, depreciation; and products reclaimed by simpler means such as
manual sorting. For the former, the costs of revenue from reclaimed products
includes the copper sulfate and alloy cost sold, which consist of the purchase
cost of wastes as raw materials, as well as the direct labor cost, depreciation
expenses, and other expenses incurred by the Company. For the latter, the costs
of revenue includes the cost of units recycled and sold, consisting of the
purchase cost of wastes used for recycling.
Advertising
costs
The
Company expenses the cost of advertising as incurred or, as appropriate, the
first time the advertising takes place. Advertising costs for the year ended
December 31, 2007 and 2006 were immaterial.
Stock-based
compensation
In
December 2004, the FASB issued SFAS No.123(R) which prescribes accounting and
reporting standards for all stock based compensation plans, including employee
stock options, restricted stock, employee stock purchase plans and stock
appreciation rights. SFAS No. 123(R) requires compensation expense to be
recorded using the fair value method.
Income
taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes” which requires the
recognition of deferred tax assets and liabilities for the expected future
tax
consequences of events that have been included in the financial statements
or
tax returns. Under this method, deferred income taxes are recognized for the
tax
consequences in future years of differences between the tax bases of assets
and
liabilities and their financial reporting amounts at each period end based
on
enacted tax laws and statutory tax rates, applicable to the periods in which
the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Local
PRC income tax
The
Company is subject to the PRC Enterprise Income Tax at a rate of 30% on its
net
income. According to a PRC ruling, any joint venture with foreign investment
will get special tax exempt treatment for the first two years, namely 2006
and
2007.
Statement
of cash flows
In
accordance with Statement of Financial Accounting Standards No. 95, “Statement
of Cash Flows,” cash flows from the Company’s operations are calculated based
upon the local currencies. As a result, amounts related to assets and
liabilities reported on the statement of cash flows will not necessarily agree
with changes in the corresponding balances on the balance sheet.
Basic
and diluted net earnings per share
Earnings
per share is calculated in accordance with Statement of Financial Accounting
Standards No. 128 (“SFAS No. 128), “Earnings Per Share”. Basic earnings per
share is based upon the weighted average number of common shares outstanding.
Diluted earnings per share is based on the assumption that all dilutive
convertible shares and stock options were converted or exercised. Dilution
is
computed by applying the treasury stock method. Under this method, options
and
warrants are assumed to be exercised at the beginning of the period (or at
the
time of issuance, if later), and as if funds obtained thereby were used to
purchase common stock at the average market price during the
period.
Contingent
liabilities
We
estimate the amount of potential exposure we may have with respect to claims,
assessments and litigation in accordance with SFAS No. 5. We are party to
pending or threatened legal proceedings covering a wide range of matters in
various jurisdictions. It is not always possible to predict the outcome of
litigation, as it is subject to many uncertainties. Additionally, it is not
always possible for management to make a meaningful estimate of the potential
loss or range of loss associated with such litigation.
Reclassifications
Certain
reclassifications have been made in the 2006 financial statements to conform
with the 2007 presentation.
4.
Inventory
Our
inventory at December 31 consists of raw materials and recycled commodities
as
follows:
|
|
2007
|
|
2006
|
|
Raw
materials
|
|
$
|
786,427
|
|
$
|
221,225
|
|
Recycled
commodities
|
|
|
545,922
|
|
|
381,719
|
|
|
|
$
|
1,332,349
|
|
$
|
602,944
|
|
5.
Property and equipment
Property
and equipment at December 31 consisted of the following:
|
|
2007
|
|
2006
|
|
Land
and building
|
|
$
|
2,305,868
|
|
$
|
2,157,521
|
|
Machinery
equipment
|
|
|
1,242,966
|
|
|
1,129,566
|
|
Office
equipment
|
|
|
375,433
|
|
|
352,346
|
|
Vehicles
|
|
|
773,038
|
|
|
576,112
|
|
|
|
|
4,697,305
|
|
|
4,215,545
|
|
Less:
Accumulated depreciation
|
|
|
(2,055,268
|
)
|
|
(1,505,130
|
)
|
|
|
$
|
2,642,037
|
|
$
|
2,710,415
|
|
6.
Short-term loan
On
September 26, 2007, the Company entered into a one-year, $1,369,000 short-term
loan, with an annual interest rate of 8.748%, which mature in September 2008.
This loan provides us with more working capital to be used for promoting
operations.
7.
Other long-term liabilities
Thanks
to
more attention and investment from Chinese government in environment protection,
Dongtai’s controlled subsidiary, Zhuorui, received $620,979 in total, as
subsidy, from central and local government agencies to support the construction
of the facilities dealing with waste catalysts. The money will be kept in
Zhuorui and need not to be paid back.
8.
Accumulated Other Comprehensive Income
The
components of accumulated other comprehensive income were as follows:
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
Cumulative
translation adjustment of foreign currency statements
|
|
$
|
774,007
|
|
$
|
267,438
|
|
9.
Shareholders’ equity
On
November 11, 2005, the Company entered into and consummated an Agreement and
Plan of Merger (the “Merger Agreement”) with China Industrial Waste Management
Inc. a Delaware corporation (“Delaware”), the stockholders of Delaware, and
Dalian Acquisition Corp., a Delaware corporation wholly-owned by the Company.
In
the merger, the stockholders of Delaware received 64,000 shares of the Company’s
newly-designated Series A Convertible Preferred Stock (the “Series A Stock”) in
exchange for the outstanding shares of Delaware. Each share of Series A Stock
was convertible into 10,000 shares of Common Stock. Since the Company did not
have sufficient authorized but unissued shares of Common Stock to effect a
full
conversion of the Series A Stock at the effective time of the merger, the
holders of the Series A Stock have agreed that they would not convert their
shares of Series A Stock until the Company had sufficient available shares
for a
full conversion.
On
March
9, 2006, the Board of Directors of the Company determined that it had made
an
error at a previous meeting held on June 13, 2005 in cancelling certain
outstanding shares of common stock. To correct such error a total 6,983,400
pre-split shares of common stock were reinstated, as a result of which the
total common shares outstanding increased from 7,773,841 pre-split to 14,757,241
pre-split.
On
May
12, 2006, two amendments to the Company's Articles of Incorporation became
effective. The amendments changed the name of the Company to China Industrial
Waste Management, Inc. and effected a 1 for 100 reverse split of the Company's
Common Stock. In the statement of shareholders’ equity, the reverse split has
been treated as it happened at the beginning of 2005.
On
May
15, 2006, the Company issued to 10 stockholders an aggregate of 6,400,000
additional shares of the Company's Common Stock as an equitable adjustment
of
the number of shares which the Company had agreed to issue to such persons
pursuant to the Merger Agreement entered into on November 11, 2005. As this
issuance is part of the 2005 recapitalization transaction, such shares are
deemed to be outstanding from the beginning of 2005.
On
June
8, 2006, we issued an aggregate of 80,000 shares of our Common Stock to two
consultants pursuant to a Consulting Agreement. Management valued the stock
issued at $1.00 per share based on the value of the services to be performed
by
the consultants under consulting agreement rather than the quoted price of
our
common stock during a period with little or no trading activity. The Company
recorded a contra equity for the value of the consulting services to be received
and is amortizing that value as an expense over the five year requisite service
period.
On
August
22, 2006, the Company issued 96,566 shares to Jie Sun and Yunzhong Wu,
respectively, as compensation for their services pursuant to the Merger
Agreement consummated on November 11, 2005. This was accounted for as a cost
of
issuance. Since the issuance was connected with the reverse merger, the
financial effect of the issuance had been reflected in the financial statements
for the fiscal year ended December 31, 2005.
10.
Statutory Common Welfare Fund
As
stipulated by the Company Law of the PRC as applicable to Chinese companies
with
foreign ownership, net income after taxation can only be distributed as
dividends after appropriation has been made for the following:
|
a.
|
Making
up cumulative prior years’ losses, if any
|
|
|
|
|
b.
|
Allocations
to the “Statutory surplus reserve” of at least 10% of income after tax, as
determined under PRC accounting rules and regulations, until the
fund
amounts to 50% of the Company’s registered capital;
|
|
c.
|
Allocations
of 5 -10% of income after tax, as determined under PRC accounting
rules
and regulations to the Company’s “Statutory common welfare fund”, which is
established for the purpose of providing employee facilities and
other
collective benefits to the Company’s employees; and
|
|
|
|
|
d.
|
Allocations
to the discretionary surplus reserve, if approved in the shareholders’
general meeting.
|
11.
Earnings Per Share
Basic
earnings per common share (“EPS”) are calculated by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
EPS is calculated by adjusting the weighted average outstanding shares, assuming
conversion of all potentially dilutive securities, such as stock options and
warrants, using the treasury stock method. The numerators and denominators
used
in the computations of basic and diluted EPS are presented in the following
table:
|
|
Years
Ended December 31,
|
|
|
|
2007
|
|
2006
|
|
Income
available to common stockholders
|
|
$
|
3,689,207
|
|
$
|
2,330,770
|
|
|
|
|
|
|
|
|
|
Diluted
net income
|
|
$
|
3,689,207
|
|
$
|
2,330,770
|
|
|
|
|
|
|
|
|
|
Weighted
average basic common shares outstanding
|
|
|
13,220,843
|
|
|
13,181,391
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share
|
|
$
|
0.28
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
Diluted
net earnings per share
|
|
$
|
0.28
|
|
$
|
0.18
|
|
As
stated
above, on May 15, 2006, the Company issued to 10 stockholders an aggregate
of
6,400,000 additional shares of the Company's Common Stock as an equitable
adjustment of the number of shares which the Company had agreed to issue to
such
persons pursuant to an Agreement and Plan of Merger entered into on November
11,
2005.
Since
the
issuance of additional 6,400,000 shares was caused by the merger consummated
on
November 11, 2005, the issuance had been assumed outstanding in
2005.
12.
Current vulnerability due to certain concentrations
The
Company’s operations are carried out in the PRC. Accordingly, the Company’s
business, financial condition and results of operations may be influenced by
the
political, economic and legal environments in the PRC and by the general state
of the PRC economy. The Company’s business may be influenced by changes in
governmental policies with respect to laws and regulations, anti-inflationary
measures, currency conversions and remittance abroad, and rates and methods
of
taxation, among other things.
13.
New accounting pronouncement
In
September 2006, the FASB issued SFAS No. 157,
Fair
Value Measurements
,
(“SFAS No. 157”), which defines fair value, establishes a framework
for measuring fair value, and expands disclosures about fair value measurements.
SFAS No. 157 will be effective for the Company beginning
January 1, 2008. We are currently in the process of assessing the
provisions of SFAS No. 157 and determining how this framework for
measuring fair value will affect our current accounting policies and procedures
and our financial statements.
In
February 2007, the FASB issued Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment to FASB
Statement No. 115”. This statement permits companies to choose to measure many
financial instruments and other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This Statement is expected to expand the use of fair value
measurement of accounting for financial instruments. This statement applies
to
all entities, including not for profit. The fair value option established by
this statement permits all entities to measure eligible items at fair value
at
specified election dates. This statement is effective as of the beginning of
an
entity’s first fiscal year that begins after November 15, 2007.The Company is
currently assessing the impact adoption of SFAS No. 159 will have on its
financial statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued FASB
Statements No.141 (revised 2007), “Business Combinations” (“FAS 141(R)”) and No.
160, “Noncontrolling Interests in Consolidated Financial Statements” (“FAS
160”). These standards aim to improve, simplify, and converge internationally
the accounting for business combinations and the reporting of noncontrolling
interests in consolidated financial statements. The provisions of FAS 141 (R)
and FAS 160 are effective for the fiscal year beginning January 1, 2009. We
are
currently evaluating the provisions of FAS 141(R) and FAS 160.
14.
Reimbursed legal costs
As
disclose in the 8K on October 15, 2007, the consideration for the settlement
of
all claims, mentioned above, was the responsibility of some third party, who
afterwards delivered the cash and shares of common stock, which therefore was
accounted for as Reimbursed legal costs.
15.
Business combinations between entities under common
control
During
the year ended December 31, 2007, the Company became the majority shareholder
of
Dongtai Water and Zhuorui through additional acquisition of equity of both
companies at the price of RMB 8.68 million (approximately $1,095,200) and RMB
7
million (approximately $958,300), respectively. The acquisitions are considered
to be reorganizations of entities under common control according to GAAP.
Therefore, as the acquiring entity, the Company has restated its December 31,
2006 balance sheet as though the acquisition had occurred as of January 1,
2006.
The
Company has therefore restated its consolidated balance sheet as of December
31,
2006, its consolidated statements of income for the year ended December 31,
2006
and its consolidated statement of cash flows for the year ended December 31,
2006. The results of the restatement on operations were to decrease net income
for the year ended December 31, 2006 by $110,659. The effects of the business
combinations between entities under common control are as follows:
|
|
|
December
31,2006
|
|
|
|
|
Original
|
|
|
Dongtai
Water
|
|
|
Zhuorui
|
|
|
Restated
|
|
Cash
and cash equivalents
|
|
$
|
5,713,925
|
|
$
|
541,678
|
|
$
|
223,375
|
|
$
|
6,478,978
|
|
Other
current assets
|
|
|
1,184,623
|
|
|
90,830
|
|
|
11,654
|
|
|
1,287,107
|
|
Net
property, plant and equipment
|
|
|
2,686,618
|
|
|
6,178
|
|
|
17,619
|
|
|
2,710,415
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,524,319
|
|
|
|
|
|
|
|
|
1,524,319
|
|
Other
assets
|
|
|
757,484
|
|
|
130,533
|
|
|
41,089
|
|
|
929,106
|
|
Total
assets
|
|
$
|
11,866,969
|
|
$
|
769,219
|
|
$
|
293,737
|
|
$
|
12,929,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
853,898
|
|
|
689
|
|
|
213
|
|
|
854,800
|
|
Other
liabilities
|
|
|
381,873
|
|
|
471,269
|
|
|
356,988
|
|
|
1,210,130
|
|
Minority
interest in subsidiary
|
|
|
1,083,022
|
|
|
346,313
|
|
|
|
|
|
1,429,335
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Common
stock
|
|
|
13,221
|
|
|
|
|
|
|
|
|
13,221
|
|
Additional
paid-in capital
|
|
|
1,952,634
|
|
|
|
|
|
|
|
|
1,952,634
|
|
Other
comprehensive income
|
|
|
381,579
|
|
|
(811
|
)
|
|
(1,047
|
)
|
|
379,721
|
|
Retained
earnings
|
|
|
7,200,742
|
|
|
(48,241
|
)
|
|
(62,417
|
)
|
|
7,090,084
|
|
Total
stockholders' equity
|
|
|
9,548,176
|
|
|
(49,052
|
)
|
|
(63,464
|
)
|
|
9,435,660
|
|
Total
liabilities and stockholders' equity
|
|
$
|
11,866,969
|
|
$
|
769,219
|
|
$
|
293,737
|
|
$
|
12,929,925
|
|
|
|
|
For
the Year ended December 31, 2006
|
|
|
|
|
Original
|
|
|
Dongtai
Water
|
|
|
Zhuorui
|
|
|
Restated
|
|
Operating
revenue
|
|
$
|
6,383,233
|
|
|
|
|
|
|
|
$
|
6,383,233
|
|
Costs
of revenue (including depreciation)
|
|
|
1,822,657
|
|
|
-
|
|
|
-
|
|
|
1,822,657
|
|
Gross
profit
|
|
|
4,560,576
|
|
|
|
|
|
|
|
|
4,560,576
|
|
Operating
expenses
|
|
|
2,069,279
|
|
$
|
60,301
|
|
$
|
84,962
|
|
|
2,214,542
|
|
Income
from operations
|
|
|
2,491,297
|
|
|
(60,301
|
)
|
|
(84,962
|
)
|
|
2,346,034
|
|
Other
income (expense)
|
|
|
219,624
|
|
|
-
|
|
|
(78
|
)
|
|
219,546
|
|
Net
income from continuing operations before minority interest and income
tax
|
|
|
2,710,921
|
|
|
(60,301
|
)
|
|
(85,040
|
)
|
|
2,565,580
|
|
Income
tax (benefit)
|
|
|
626
|
|
|
-
|
|
|
-
|
|
|
626
|
|
Net
income before minority interest
|
|
|
2,710,295
|
|
|
(60,301
|
)
|
|
(85,040
|
)
|
|
2,564,954
|
|
Minority
interest
|
|
|
268,867
|
|
|
(12,060
|
)
|
|
(22,623
|
)
|
|
234,184
|
|
Net
income
|
|
$
|
2,441,428
|
|
$
|
(48,241
|
)
|
$
|
(62,417
|
)
|
$
|
2,330,770
|
|
Foreign
currency translation adjustment
|
|
|
269,296
|
|
|
(811
|
)
|
|
(1,047
|
)
|
|
267,438
|
|
Comprehensive
income
|
|
$
|
2,710,724
|
|
$
|
(49,052
|
)
|
$
|
(63,464
|
)
|
$
|
2,598,208
|
|
16.
Related parties
Related
party receivable
Related
Party
|
|
As
of
December
31, 2007
|
|
Interest
rate
|
|
Repayment
date
|
|
Bofa
|
|
|
384,689
|
|
|
6
|
%
|
|
December
30, 2008
|
|
Tang
Lijun
|
|
|
2,738
|
|
|
-
|
|
|
-
|
|
Yu
Chengbin
|
|
|
1,369
|
|
|
-
|
|
|
-
|
|
Dalian
Bofa Chemical Material Company (“Bofa”), a company controlled by the Company’s
majority shareholder, sells part of the products recycled by Dongtai, the
subsidiary of the Company. Our total sales to Bofa were $ 1,819,806 and $
1,235,825 respectively, for the years ended December 31, 2007 and
2006.
Mr.
Tang
and Mr. Yu are the general managers of Dongtai Water and Zhuirui, respectively,
who borrowed the money to undertake day to day business activities.
Related
party payables
Related
Party
|
|
As
of
December
31, 2007
|
|
Interest
Rate
|
|
Repayment
Date
|
|
Dongtai
Organic Waste
|
|
$
|
276,252
|
|
|
-
|
|
|
June
12, 2008
|
|
Dongtai
Investment Inc.
|
|
$
|
260,110
|
|
|
6
|
%
|
|
October
14, 2008
|
|
Lida
Environment Engineering Company(“Lida”), which is also controlled by the
Company’s majority shareholder, provides equipment used in the construction of
facilities undertaken by Dongtai Water and Dongtai Organic. Our total purchases
from Lida were $ 48,724 and $ 0 for the years ended December 31, 2007 and 2006,
respectively.
Dongtai
Investment Inc., which is under control of the Company’s majority shareholder,
owned 30% equity interest of Zhuorui.
17.
Contingent liabilities
From
time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. Except as described below,
we are currently not aware of any such legal proceedings or claims that we
believe will have, individually or in the aggregate, a material adverse affect
on our business, financial condition or operating results.
On
September 14, 2006, the Alberta Securities Commission, Canada, citing Goldtech
Mining Corporation, 2006 ABASC 1690, under Securities Act, R. S. A. 2000, c.
S-4
(the "Alberta Act"), provided notice to the Company, Glen Lochton Management
Inc., and certain other individuals (collectively, "Respondents") that a hearing
will be held on certain allegations that Respondents breached subsection 75(1)
and 110(1) of the Alberta Act by trading and distributing securities of the
Company in Alberta without registration or a prospectus or had appropriate
exemption from the prospectus requirement, wherein such failure was contrary
to
the public interest. On October 27, 2006, the hearing was scheduled for March,
2007. On February 6, 2007 the ASC dismissed without prejudice the action against
the Company and will proceed against the other Respondents.
On
October 14, 2004, a small group of shareholders commenced a derivative action
on
behalf of the Company, entitled Steward, Pearce, Vizzard, Furusho and Robertson
v. Kroeker, Jordan, Laskin, Egan, Smith, Bourgoin, Civil Action No. CV04-2130L,
in the United States District Court for the Western District
of Washington alleging conversion and breach of specific
duties against former directors. The Court dismissed the case with prejudice
against all defendants, except defendant Tracy Kroeker and without prejudice
against Ms. Kroeker.
We
estimate the amount of potential exposure we may have with respect to claims,
assessments and litigation in accordance with SFAS No. 5. We are party
to pending or threatened legal proceedings covering a wide range of matters
in
various jurisdictions. It is not always possible to predict the outcome of
litigation, as it is subject to many uncertainties. Additionally, it is not
always possible for management to make a
meaningful
estimate of the potential loss or range of loss associated with such
litigation.
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