As filed
with the Securities and Exchange Commission on December 12, 2008
Registration
No. 333-________
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
(Name of
registrant as specified in its charter)
Nevada
(State or
other jurisdiction of incorporation or organization)
4953
(Primary
Standard Industrial Classification Code Number)
65-1001686
(I.R.S.
Employer Identification Number)
No.
1 Huaihe West Road
E-T-D
Zone, Dalian, China 116600
(411)
85811229
(Address,
including zip code, and telephone number,
including
area code, of registrant's principal executive offices)
Mr.
Dong Jinqing
CEO
and President
China
Industrial Waste Management, Inc.
No.
1 Huaihe West Road
E-T-D
Zone, Dalian, China 116600
(411)
85811229
(Name,
address, including zip code, and telephone number,
including
area code, of agent for service)
with a
copy to:
Steven
I. Weinberger, Esq.
Schneider
Weinberger & Beilly LLP
2200
Corporate Boulevard N.W., Suite 210
Boca
Raton, Florida 33431
Telephone:
(561) 362-9595
Telecopier:
(561) 362-9612
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the
following box:
þ
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering.
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company:
Large accelerated filer
|
¨
|
Accelerated filer
|
¨
|
Non-accelerated filer
|
¨
|
Smaller reporting company
|
þ
|
(Do not check if a smaller reporting company)
|
|
|
|
CALCULATION
OF REGISTRATION FEE
Title of each class of securities to
be
registered
|
|
Dollar amount
to be registered
|
|
|
Proposed
maximum
offering price
per unit
|
|
|
Proposed
maximum
aggregate offering
price
|
|
|
Amount of
registration fee
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, par value $0.001 per share (1)
|
|
|
1,941,192
|
|
|
$
|
1.81
|
|
|
$
|
3,513,578
|
|
|
$
|
137.73
|
|
|
|
|
1,941,192
|
|
|
|
|
|
|
$
|
3,513,578
|
|
|
$
|
137.73
|
|
(1) Represents
shares of outstanding common stock. Registration fee calculated pursuant to Rule
457(c) based upon the average of the closing bid and asked prices for the
registrant’s common stock on December 8, 2008.
To the
extent permitted by Rule 416, this registration statement also covers such
additional number of shares of common stock as may be issuable as a result of
the anti-dilution provisions of the warrants in the event of stock splits, stock
dividends or similar transactions.
The
registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED DECEMBER 12, 2008
PROSPECTUS
China
Industrial Waste Management, Inc.
1,941,192
shares of Common Stock
This prospectus relates to periodic
offers and sales of 1,941,192 shares of our common stock by the selling security
holders.
We will not receive any proceeds from
the sale of the shares by the selling security holders. The shares of
common stock are being offered for sale by the selling security holders at
prices established on the OTC Bulletin Board during the term of this offering.
These prices will fluctuate based on the demand for the shares.
For a
description of the plan of distribution of these shares, please see page 55 of
this prospectus.
Our
common stock is quoted on the OTC Bulletin Board under the symbol "CIWT" On
December 8, 2008 the last reported sale price for our common stock was $1.85 per
share.
Investing in our common stock involves
a high degree of risk. See "Risk Factors" beginning on page 6 of this prospectus
to read about the risks of investing in our common stock.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date
of this prospectus is ______, 2008
ABOUT
THIS PROSPECTUS
You should only rely on the information
contained in this document or to which we have referred you. We have
not authorized anyone to provide you with information that is
different. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to
sell these securities in any jurisdiction where the offer or sale is not
permitted.
CONVENTIONS
AND GENERAL MATTERS
The
official currency of the People’s Republic of China is the Chinese “Yuan” or
“Renminbi” (“Yuan,” “Renminbi” or “RMB”). For the convenience of the reader,
amounts expressed in this report as RMB have been translated into United States
dollars (“USD$” or “$”) at the rate of USD $1.00 = RMB 7.3046 quoted by The
People’s Bank of China (“POBC”) as of December 31, 2007; and at the rate of
USD$1.00 = RMB 6.9989 quoted by OANDA as of September 30, 2008. OANDA is a
Delaware corporation providing internet foreign exchange rates at
www.oanda.com
. OANDA
is also a foreign exchange market maker. 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 PBOC or other banks or other
market makers 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,
OANDA 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.
We
maintain our web site at www.chinaciwt.com. Information on our web site is not a
part of this prospectus.
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.
PROSPECTUS
SUMMARY
About
Us
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:
|
·
|
environmental
protection services,
|
|
·
|
technology
consultation,
|
|
·
|
pollution
treatment services,
|
|
·
|
waste
management design processing
services,
|
|
·
|
waste
disposal solutions,
|
|
·
|
waste
transportation services,
|
|
·
|
onsite
waste management services, and
|
|
·
|
environmental
pollution remediation services.
|
Our principal executive offices are
located at No. 1 Huaihe West Road, E-T-D Zone, Dalian, China 116600
,
and our telephone number is
(411) 85811229. Our fiscal year end is December 31.
Summary
of the Offering
This
prospectus covers the resale of a total of 1,941,192 shares of our common stock
by the selling security holders. Selling security holders may resell their
shares from time-to-time, including through broker-dealers, at prevailing market
prices. We will not receive any proceeds from the resale of our shares by the
selling security holders. To the extent the warrants are exercised other than on
a cashless basis, we will receive the exercise price of the warrants. We will
pay all of the fees and expenses associated with registration of the shares
covered by this prospectus.
Common
Stock
:
Outstanding Prior to this
Offering
:
|
15,262,035
shares of common stock on November 30, 2008.
|
|
|
Common Stock
Reserved
:
|
An
aggregate of 5,229,431 shares of our common stock consisting of (a)
2,629,431 shares issuable on the exercise of common stock purchase
warrants at exercise prices ranging from $2.45 per share to $5.00 per
share with various expiration dates through August 27, 2013, (b) 2,500,000
shares available for issuance under our 2006 Equity Compensation Plan and
(c) 100,000 shares that we are legally obligated to issue but have not as
yet
issued.
|
Common
Stock:
|
|
Outstanding After this
Offering
:
|
15,262,035
shares of common stock, without giving effect to the exercise of any
outstanding warrants or the grant of any awards under our Equity
Compensation Plan.
|
Terms
of the Offering with the Selling Security Holders
Overview
of the 2008 Unit Offering
In
October 2008, we completed the private placement of 66 units of our securities
at an aggregate offering price of $3,960,000 to 16 institutional and accredited
investors in a private placement exempt from registration under the Securities
Act of 1933 in reliance on exemptions provided by Regulation D and Section 4(2)
of that act. Under the subscription agreements with the investors, as amended,
each unit consisted of 29,412 shares of common stock, one Class A warrant to
purchase 14,706 shares of common stock exercisable until September 30, 2011 at
$2.50 per share and one Class B warrant to purchase 14,706 shares of common
stock exercisable until September 30, 2011 at $3.20 per share.
We
agreed to file a registration statement with the Securities and Exchange
Commission covering the shares of common stock included in the units so as to
permit the public resale thereof. This prospectus is part of that
registration statement. We will pay all costs associated with the filing of this
registration statement. In the event the registration statement is
not filed on or before December 13, 2008, or if we fail to diligently pursue
such registration once it is filed, we will be required to pay liquidated
damages in an amount equal to 1% for each 30 days (or such lesser pro rata
amount for any period of less than 30 days) of the purchase price of the units,
but not to exceed in the aggregate 10% of the aggregate purchase price of the
units.
In addition, from one year after the
effective date of the registration statement of which this prospectus is a part,
investors in the private placement will have certain rights to participate in
additional equity offerings that we conduct. Further, in connection with the
subscription agreements with the investors, as amended:
|
·
|
Dong
Jinqing, our president agreed to place 444,444 shares of our common stock
owned by him into escrow pending our results of operations for the fiscal
years ending December 31, 2008 and 2009; at which time the shares will be
disbursed (a) to Mr. Dong to the extent that we meet the financial
performance criteria set forth in the escrow agreement or (b) to the
investors, pro-rata, in the event we do not meet such
criteria,
|
|
·
|
we
agreed to establish a Board of Directors, a majority of whose members will
be “independent” within the meaning of Nasdaq Marketplace Rule
4200(15);
|
|
·
|
we
agreed to engage an accounting consultant to assist us with the
presentation and delivery of financial reports and related information;
and
|
|
·
|
our
executive officers agreed not to sell any of our securities which they own
or may acquire for a period of one year from the effective date of the
registration statement.
|
As
compensation for its services, we paid the placement agent for the offering,
Newbridge Securities Corporation (a broker-dealer and a member of FINRA), a cash
commission of $277,200 and a non-accountable expense allowance of $79,200, and
issued Newbridge or its designees (a) 150,000 shares of common stock, (b)
five-year warrants to purchase 300,000 shares of common stock at exercise prices
ranging from $3.50 to $5.00 per share and (c) three-year warrants to purchase
6.6 units of our securities, at an exercise price of $72,000 per unit, with each
unit consisting of 29,412 shares of common stock and warrants to purchase 29,412
shares of common stock until September 30, 2011 at exercise prices ranging from
$2.50 to $3.20 per share. Newbridge has also entered into an agreement whereby
they have agreed not to seek registration of our equity securities issued or
issuable to them, and to limit their resale of those securities. We also paid
certain legal fees of an investor in the offering, as described in a table
appearing later in this section.
This
prospectus covers the resale of the 1,941,192 shares of common stock issued to
the investors in the private placement. The following tables and other narrative
information provide additional information on this offering.
Fees and Payments Associated
with the Transaction
The table
below sets forth disclosure of the dollar amount of each payment (including the
value of any payments to be made in shares of our common stock) in connection
with the sale of the units that we have made or will make to:
•
each selling security holder,
•
any affiliate of a selling security holder, or
|
•
|
any
person with whom any selling security holder has a contractual
relationship regarding the sale of the
units.
|
The table
does not include compensation to the placement agent in connection with the sale
of the units, and the placement agent is not a selling security holder under
this prospectus.
Selling Security Holder
|
|
Payment Reference
|
|
Date
|
|
Amount
|
|
Counsel
for Ancora Greater China Fund LP
|
|
Legal
fees (1)
|
|
Closing
|
|
$
|
10,000
|
|
Total
|
|
|
|
|
|
$
|
10,000
|
|
1
Ancora Greater China Fund LP was an investor in the offering. The
amount in the table consists of a cash payment of legal fees to the investor’s
counsel.
Net Proceeds from the Sale
of the Units
The table
below sets forth disclosure of the estimated net cash proceeds to us from the
sale of units under the terms of the Subscription Agreement.
Gross
proceeds received
|
|
$
|
3,960,000
|
|
Less
investor’s legal fees
|
|
|
(10,000
|
)
|
Less
placement agent fees
1
|
|
|
(356,400
|
)
|
Less
escrow agent fees
|
|
|
(2,000
|
)
|
Less
Company professional fees and expenses
|
|
|
(30,000
|
)
|
Less
blue sky fees and expenses
|
|
|
(1,000
|
)
|
Net
proceeds to us
|
|
$
|
3,560,600
|
|
|
|
|
|
|
Total
possible payments to selling security holders during first year
2
|
|
$
|
0.00
|
|
1
Does not include the value of any securities issued to the placement agent as
compensation for its services.
2
Assumes no registration rights penalties become payable under the
terms of the Subscription Agreements with the investors.
Possible Profit to the
Selling Security Holders on the Shares of Common Stock Included in the
Units
Under the
terms of the Subscription Agreements we issued the investors a total of
1,941,192 shares of our common stock as a component of the units purchased in
the offering at an offering price of $60,000 per unit. The average of the
closing price of our common stock as reported on the OTC Bulletin Board during
the period from August 21, 2008 through October 14, 2008 when the units were
sold was $2.8934. The following table illustrates the possible profit to the
selling security holders at the closing of the offering based upon the
difference between the purchase price of the units and the fair market value of
our common stock at closing. While the units consisted of shares of our common
stock, Class A warrants and Class B warrants, for the purposes of this table we
have allocated the entire purchase price of the units to the shares of common
stock included in the units and ascribed no value to the warrants included in
the units.
Total Shares Included in the Units
Purchased in the Offering by the
Selling Security Holders
|
|
|
Combined Purchase
Price of the Shares
|
|
|
Combined Market Price
of Shares
|
|
|
Total Possible Discount
to the Market Price on
the Sale Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,941,192
|
|
|
$
|
3,960,000
|
|
|
$
|
5,616,645
|
|
|
$
|
1,656,645
|
|
Possible Profit to the
Selling Security Holders on the Shares of Common Stock Underlying the Warrants
Included in the Units
Under the
terms of the Subscription Agreements with the selling security holders we issued
Class A warrants to purchase a total of 970,596 shares of our common stock at an
exercise price of $2.50 per share and Class B warrants to purchase a total of
970,596 shares of our common stock at an exercise price of $3.20 per share. The
average of the closing price of our common stock as reported on the OTC Bulletin
Board during the period August 21, 2008 through October 14, 2008 when the units
were sold was $2.8934. The following table illustrates the possible discount to
the selling security holders at the closing of the offering of the shares
issuable upon exercise of their warrants, based upon the difference between the
combined market price of the shares underlying the warrants and the combined
exercise prices of the warrants.
Total Possible Shares to be Received
Upon Exercise of the Warrants
1
|
|
|
Combined Market
Price of Shares
Underlying Warrants
|
|
|
Combined Exercise Price
of the Total Number of
Shares Underlying the
Warrants
|
|
|
Total Possible
Discount to the
Market Price on the
Sale Date of the Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,941,192
|
|
|
$
|
5,616,645
|
|
|
$
|
5,532,397
|
|
|
$
|
84,248
|
|
1
Assumes the warrants are exercised at the exercise prices stated above,
and that they are not exercised on a cashless basis.
Comparison of Net Proceeds
to us and Total Possible Profit to Selling Security Holders
The following table compares the net
proceeds of the offering to us with the combined possible profit of the selling
security holders, both in dollars and as a percentage of net
proceeds.
Gross
proceeds received
|
|
$
|
3,960,000
|
|
Less
investor’s legal fees
|
|
|
(10,000
|
)
|
Less
placement agent fees
1
|
|
|
(356,400
|
)
|
Less
escrow agent fees
|
|
|
(2,000
|
)
|
Less
Company professional fees and expenses
|
|
|
(30,000
|
)
|
Less
blue sky fees and expenses
|
|
|
(1,000
|
)
|
Estimated
net proceeds
|
|
$
|
3,560,600
|
|
|
|
|
|
|
Combined
total possible profit of selling security holders
2
|
|
$
|
1,740,893
|
|
|
|
|
|
|
Approximate
percentage of the net proceeds received by us to the combined total
possible profit of selling security holders.
|
|
|
52
|
%
|
1
Includes cash payments but excludes the value of any securities issued to
the placement agent for its services in the offering.
2
Includes a possible profit of $1,656,645 on the shares of our common stock
included in the units and a possible profit of $84,248 on the warrants included
in the units as set forth in the tables appearing earlier in this
section.
Relationship of Outstanding
Shares Before and After the Offering
The table
below sets forth disclosure about our common stock held by the selling security
holders, our affiliates and affiliates of the selling security
holders.
No. of shares outstanding prior to offering
held by persons other than the selling
security holders, our affiliates and
affiliates of the selling security holders
|
|
|
No. of shares registered for resale
by the selling security holders or
affiliates of the selling security
holders in prior registration
statements
|
|
|
No. of shares registered for
resale on behalf of the selling
security holders or affiliates
of the selling security holders
in this prospectus
|
|
|
|
|
|
|
|
|
|
|
2,856,443
|
|
|
|
0
|
|
|
|
1,941,192
|
|
Prior Securities
Transactions with the Selling Security Holders
We have not been a party to any prior
securities transaction with any selling security holder, an affiliate of any
selling security holder, or any person with whom any selling security holder has
a contractual relationship, including any predecessors of any of those persons,
regarding any prior securities transaction.
Short Position
Information
Each of the selling security holders
has advised us that such selling security holder does not have an existing short
position in our common stock.
SELECTED
CONSOLIDATED FINANCIAL DATA
The following summary of our financial
information for the nine months ended September 30, 2008 and 2007 (unaudited)
and the years ended December 31, 2007and 2006 (audited) which have been derived
from, and should be read in conjunction with, our consolidated financial
statements included elsewhere in this prospectus
.
Income
Statement Data:
|
|
Nine Months Ended
September 30,
|
|
|
Fiscal Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Operating
revenues
|
|
$
|
9,906,260
|
|
|
$
|
6,471,818
|
|
|
$
|
9,539,507
|
|
|
$
|
6,383,233
|
|
Gross
profit
|
|
$
|
6,556,160
|
|
|
$
|
4,352,714
|
|
|
$
|
6,762,586
|
|
|
$
|
4,560,576
|
|
Total
operating expenses
|
|
$
|
2,005,683
|
|
|
$
|
1,990,289
|
|
|
$
|
3,602,828
|
|
|
$
|
2,208,350
|
|
Operating
income
|
|
$
|
3,952,591
|
|
|
$
|
2,398,016
|
|
|
$
|
4,052,243
|
|
|
$
|
2,564,954
|
|
Net
income
|
|
$
|
3,568,121
|
|
|
$
|
2,180,020
|
|
|
$
|
3,689,207
|
|
|
$
|
2,330,770
|
|
Foreign
currency translation adjustment
|
|
$
|
948,408
|
|
|
$
|
387,455
|
|
|
$
|
774,007
|
|
|
$
|
267,438
|
|
Comprehensive
income
|
|
$
|
4,516,529
|
|
|
$
|
2,567,475
|
|
|
$
|
4,463,214
|
|
|
$
|
2,598,208
|
|
Balance
Sheet Data:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(audited)
|
|
Working
capital
|
|
$
|
371,631
|
|
|
$
|
1,907,598
|
|
|
$
|
2,345,626
|
|
|
$
|
6,434,468
|
|
Cash
|
|
$
|
5,332,934
|
|
|
$
|
1,289,346
|
|
|
$
|
3,260,307
|
|
|
$
|
6,478,978
|
|
Total
current assets
|
|
$
|
10,091,446
|
|
|
$
|
3,519,961
|
|
|
$
|
5,642,374
|
|
|
$
|
7,760,537
|
|
Total
assets
|
|
$
|
32,096,558
|
|
|
$
|
16,499,345
|
|
|
$
|
20,529,815
|
|
|
$
|
12,929,925
|
|
Total
current liabilities
|
|
$
|
5,719,815
|
|
|
$
|
1,612,363
|
|
|
$
|
3,296,748
|
|
|
$
|
1,326,069
|
|
Total
liabilities
|
|
$
|
7,243,356
|
|
|
$
|
2,435,039
|
|
|
$
|
4,355,346
|
|
|
$
|
1,707,942
|
|
Total
stockholders' equity
|
|
$
|
22,046,429
|
|
|
$
|
12,015,140
|
|
|
$
|
13,914,874
|
|
|
$
|
9,435,660
|
|
RISK
FACTORS
An investment in our common stock
involves a significant degree of risk. You should not invest in our securities
unless you can afford to lose your entire investment. You should consider
carefully the following risk factors and other information in this prospectus
before deciding to invest.
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. 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 55 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 in general, and, in particular, the 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, and our insurance coverage may
not be sufficient to cover our exposure.
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. While we currently maintain liability
insurance to protect against certain of these liabilities, the extent of our
insurance coverage may not be sufficient to cover all possible liabilities.
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.
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. 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 central 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 stockholders 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 stockholders 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 stockholders 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 stockholders
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.
Restrictions
on currency exchange may limit our ability to receive and use our revenues
effectively.
Because
all of our revenues are in the form of RMB, any future restrictions on currency
exchanges may limit our ability to use revenue generated in RMB to fund any
future business activities outside China or to make dividend or other payments
in U.S. dollars. Although the Chinese government introduced regulations in 1996
to allow greater convertibility of the RMB for current account transactions,
significant restrictions still remain, including primarily the restriction that
foreign-invested enterprises may only buy, sell or remit foreign currencies,
after providing valid commercial documents, at those banks authorized to conduct
foreign exchange business. In addition, conversion of RMB for capital account
items, including direct investment and loans, is subject to government approval
in China, and companies are required to open and maintain separate foreign
exchange accounts for capital account items. We cannot be certain that the
Chinese regulatory authorities will not impose more stringent restrictions on
the convertibility of the RMB, especially with respect to foreign exchange
transactions.
A
slowdown in the Chinese economy or an increase in its inflation rate may
adversely impact our revenues.
The
Chinese economy has grown at an approximately 9% rate for more than 25 years,
making it one of the fastest growing major economy in recorded history. In 2007,
China’s economy grew by 11.4%, the fastest pace in 11 years. While China’s
economy has grown, inflation has also recently become a major issue of concern.
In March 2007, China’s central bank, the People’s Bank of China, announced that
the bank reserve ratio would rise half a percentage point to 15.5% in an effort
to reduce inflation soon after Premier Wen Jiabao highlighted inflation as a
major concern for the government. China’s consumer price index growth rate
reached 8.7% year over year in 2008.
We cannot
assure you that growth of the Chinese economy will be steady, that inflation
will be controllable or that any slowdown in the economy or uncontrolled
inflation will not have a negative effect on our business. Several years ago,
the Chinese economy experienced deflation, which may recur in the future. More
recently, the Chinese government announced its intention to continuously use
macroeconomic tools and regulations to slow the rate of growth of the Chinese
economy, the results of which are difficult to predict.
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 69% of our
outstanding common stock of CIWT. Dong Jinqing, our Chairman, President and
Chief Executive Officer, beneficially owns 9,847,900 shares (approximately 65%)
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.
We
have not voluntarily implemented various corporate governance measures, in the
absence of which, stockholders may have more limited protections against
interested director transactions, conflicts of interest and similar
matters.
Recent
Federal legislation, including the Sarbanes-Oxley Act of 2002, has resulted in
the adoption of various corporate governance measures designed to promote the
integrity of the corporate management and the securities markets. Some of these
measures have been adopted in response to legal requirements. Others have been
adopted by companies in response to the requirements of national securities
exchanges, such as the NYSE or the NASDAQ Stock Market, on which their
securities are listed. Among the corporate governance measures that are required
under the rules of national securities exchanges are those that address board of
directors' independence, audit committee oversight, and the adoption of a code
of ethics. While we have adopted a Code of Business Conduct and Ethics, we have
not yet adopted corporate governance measures such as an audit or other
independent committees of our Board of Directors.
We have
entered into agreements with investors in our private offering that require us
to establish a board of directors consisting of a majority of independent
directors; however, we have not yet done so. If we expand our board membership
in future periods to include independent directors, we may seek to establish an
audit and other committees of our Board of Directors. It is possible that if we
were to adopt some or all of these corporate governance measures, stockholders
would benefit from somewhat greater assurances that internal corporate decisions
were being made by disinterested directors and that policies had been
implemented to define responsible conduct. For example, in the absence of audit,
nominating and compensation committees comprised of at least a majority of
independent directors, decisions concerning matters such as compensation
packages are made by our current executive officers in their capacities as
members of the Board of Directors, as is the determination of the persons who
will serve as management’s slate of director nominees. Prospective investors
should bear in mind our current lack of corporate governance measures in
formulating their investment decisions.
We
have material weaknesses in our disclosure controls and procedures and internal
control over financial reporting which have lead to a restatement of certain of
our financial statements; there is a possibility that our financial statements
will contain errors in future periods.
Upon
completion of an evaluation of the effectiveness of the design and operation of
our disclosure controls and procedures as well as management's assessment of the
effectiveness of our internal control over financial reporting at December 31,
2007, as required by Section 404 of the Sarbanes-Oxley Act of 2002, our
management concluded that our internal control over financial reporting was not
completely effective. As a result, our financial statements for the year ended
December 31, 2006 and the quarter ended March 31, 2007 contained errors that
required us to restate those financial statements.
The
material weakness that we identified is that 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.
While we have sought to rectify our material weakness by broadening our
understanding of United States generally accepted accounting principles and by
engaging consultants with a sufficient familiarity with these principles that we
will correctly account for assets and properly record various financial entries
in the future. However, due to the nature of the material weaknesses in our
internal control over financial reporting, there is the possibility that
material misstatements of our annual or interim financial statements could occur
in the future.
To
the extent that our stock trades below $5.00 per share, our stock may be
considered a "penny stock" which can adversely affect its
liquidity.
Our
common stock has from time-to-time traded at less than $5.00 per share, and,
therefore, may be considered a "penny stock" under Securities and Exchange
Commission rules. Trading in “penny stocks” is subject to the requirements of
Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule,
broker/dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements. The broker/dealer must make an individualized written
suitability determination for the purchaser and receive the purchaser's written
consent prior to the transaction.
Securities
and Exchange Commission regulations also require additional disclosure in
connection with any trades involving a "penny stock," including the delivery,
prior to any penny stock transaction, of a disclosure schedule explaining the
penny stock market and its associated risks. These requirements severely limit
the liquidity of securities in the secondary market because few broker or
dealers are likely to undertake these compliance activities. In addition to the
applicability of the penny stock rules, other risks associated with trading in
penny stocks could also be price fluctuations and the lack of a liquid
market.
If
the selling security holders all elect to sell their shares of our common stock
at the same time, the market price of our shares may decrease.
It is possible that the selling
security holders will offer all of the shares for sale. Further, because it is
possible that a significant number of shares could be sold at the same time
hereunder, the sales, or the possibility thereof, may have a depressive effect
on the market price of our common stock.
The
exercise of outstanding warrants will be dilutive to our existing
stockholders.
At
November 30, 2008 we had 15,262,035 shares of our common stock issued and
outstanding and have reserved 2,629,431 shares for issuance upon the exercise of
outstanding warrants to purchase common stock. The exercise of the warrants may
materially adversely affect the market price of our common stock and will have a
dilutive effect on our existing stockholders.
Our
outstanding warrants contain cashless exercise provisions as a result of which
we will not receive any cash proceeds upon their exercise.
Our
outstanding common stock purchase warrants permit the holders to exercise their
warrants by means of a cashless exercise. At any time after the required
effective date of the registration statement the warrants are exercisable on a
cashless basis if on the exercise date the shares of common stock issuable upon
the exercise of the warrants are not covered by an effective registration
statement. This means that the holders, rather than paying the exercise price in
cash, may surrender a number of warrants equal to the exercise price of the
warrants being exercised. The utilization of this cashless exercise feature will
deprive us of additional capital which might otherwise be obtained if the
warrants did not contain a cashless feature.
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.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This prospectus 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 companies, does not apply to us
because our stock is a “penny stock,” as defined under federal securities
laws.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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
December 8, 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 the
quarter ended December 31, 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
|
|
|
|
|
|
|
|
|
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
|
|
March
31, 2008
|
|
$
|
3.05
|
|
|
$
|
1.30
|
|
June
30, 2008
|
|
$
|
6.50
|
|
|
$
|
1.70
|
|
September
30, 2008
|
|
$
|
5.00
|
|
|
$
|
3.00
|
|
As of
November 30, 2008, there were 15,262,035 shares of our common stock issued and
outstanding, and there were approximately 238 holders of record of our
outstanding shares.
Dividend
Policy
The
payment of dividends, if any, is to be within the discretion of the Company’s
Board of Directors and will be contingent upon the Company’s revenues and
earnings, capital requirements, financial condition and the ability of Dongtai
to obtain approval to transfer funds 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 stockholders’
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.
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 RMB Yuan against other foreign
currencies, including the U.S. dollar.
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.
USE
OF PROCEEDS
We will not receive any proceeds upon
the sale of shares of common stock by the selling security holders. Any proceeds
that we receive from the exercise of outstanding warrants, if exercised on a
cash basis, will be used by us for general working capital. The actual
allocation of proceeds realized from the exercise of the warrants will depend
upon the amount and timing of such exercises, our operating revenues and cash
position at such time and our working capital requirements. There can be no
assurances that any of the outstanding warrants will be exercised on a cash
basis, if at all.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF
OPERATIONS
Overview
Historically, we engaged in two lines
of business which included the exploration and development of potential mining
properties, and the development, marketing and support of computer software
products and services. In September 2004, we sold our computer business. Since
September 2005, we have no longer been in the mining business due to the loss of
all of our 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 stockholders of
Dongtai in a reverse merger transaction in which the Dongtai stockholders 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 stockholders
was accounted for as a reorganization between entities under common control with
CIWM Delaware as the receiving entity, as prescribed by 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 stockholders 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 stockholders of CIWM Delaware obtained control of CIWM
Nevada (our 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 (our 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 under
operation.
|
•
|
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 testing
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.
|
Our revenues generated in the first
three quarters of 2008 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 Liaoning Province and increasing market opportunities
created by 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 USD$16.4 million). Groundbreaking, incinerator design and other
facilities design for the expansion project, incinerator workshop construction
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:
|
·
|
placing
emphasis on the commercialization of solid waste
treatment;
|
|
·
|
our
expansion into municipal sewage and sludge treatment BOT
projects;
|
|
·
|
managing
our businesses locally with a strong operations focus on customer
service;
|
|
·
|
entering
into new geographic markets in China;
and
|
|
·
|
maintaining
our financial capacity and effective administrative systems and controls
to support on-going operations and future
growth.
|
We are evaluating growth in our solid
waste treatment operations through opportunities to cooperate with prominent
domestic or overseas partners and 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 our
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
We maintain 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
Three months and nine months
ended September 30, 2008 compared to the three months and nine months ended
September 30, 2007
We generate revenue primarily from two
sources:
• Services
provided to customers for waste collection, transfer, recycling and disposal;
and
• Sale
of recycled materials.
We consider our collection and disposal
operations, and reclamation of recycled materials as our core
business.
Revenues
Our operating revenues for the three
and nine months ended September 30, 2008 were $3,195,121and $9,906,260,
respectively, compared with $2,324,583 and $6,471,818 for the three and nine
months ended September 30, 2007, respectively.
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
|
2007
|
|
2008
|
|
|
2007
|
|
Service
fees
|
|
$
|
1,656,080
|
|
|
$
|
1,227,503
|
|
|
$
|
5,430,145
|
|
|
$
|
2,855,733
|
|
Sales
of cupric sulfate
|
|
|
423,891
|
|
|
|
334,728
|
|
|
|
1,804,481
|
|
|
|
1,382,499
|
|
Sales
of other recycled commodities
|
|
|
1,115,150
|
|
|
|
762,352
|
|
|
|
2,671,634
|
|
|
|
2,233,586
|
|
Total
|
|
$
|
3,195,121
|
|
|
$
|
2,324,583
|
|
|
$
|
9,906,260
|
|
|
$
|
6,471,818
|
|
Total Revenues increased by $3,434,442
or 53 % for the nine months ended September 30, 2008 as compared to the nine
months ended September 30, 2007. Revenues for the three months ended
September 30, 2008 increased by $870,538 or 37 % over the comparable period in
2007. The increases in revenues during the three and nine months ended September
30, 2008 over the comparable periods in 2007 resulted from an increase in the
number of our customers for waste processing services, an increased demand for
our services from existing customers and broadened sales network for our
recycled commodities.
Cost
of Revenues
Our cost of revenues for the three and
nine months ended September 30, 2008 were $1,330,605 and $3,350,100, compared
with $755,659 and $2,119,104 for the three and nine months ended September 30,
2007, respectively.
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
|
2008
|
|
|
2007
|
|
2008
|
|
|
2007
|
|
Cost
of service fees
|
|
$
|
478,550
|
|
|
$
|
391,652
|
|
|
$
|
1,165,466
|
|
|
$
|
862,352
|
|
Cost
of cupric sulfate
|
|
|
212,132
|
|
|
|
94,975
|
|
|
|
737,235
|
|
|
|
388,016
|
|
Cost
of other recycled commodities
|
|
|
639,923
|
|
|
|
269,032
|
|
|
|
1,447,399
|
|
|
|
868,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,330,605
|
|
|
$
|
755,659
|
|
|
$
|
3,350,100
|
|
|
$
|
2,119,104
|
|
The cost of revenue for the nine months
ended September 30, 2008 increased by $1,230,996 or 58% compared to the nine
months ended September 30, 2007 in response to the increase in revenue and the
sharp increase of cost of raw materials.
Selling
Expenses
Total selling expenses for the three
months ended September 30, 2008 decreased by 24 % over such expenses for the
three months ended September 30, 2007 and decreased by 18% for the nine months
ended September 30, 2008 compared with the same period in 2007. The decreases in
selling expenses were principally attributable to improved control over cost and
expenses.
General
and Administrative Expenses
In comparison with the same period in
2007, the general and administrative expenses for the nine months ended
September 30, 2008 increased by 13%, principally as a result of expanded
business and the addition of oversea expenses related to the recent
financing.
Net
Income
Net income for the three months ended
September 30, 2008 increased by $19,596 or 2.4 % to $832,712 from $813,116 for
the three months ended September 30, 2007. Net income for the nine months ended
September 30 2008 increased by $1,388,101 or 63.7% to $3,568,121 from $2,180,020
for the nine months ended September 30, 2007. This increase is primarily
attributable to the increase in both service fees and sales of recycled
commodities (including sales of cupric sulfate), which is generated from our
widened customer base and to the tightened control over cost and
expenses.
Year ended December 31, 2007
as compared to the year ended December 31, 2006
Revenues
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 an increase of 208.375 tons 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 were $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, we settled
certain legal proceedings in consideration for the payment to the plaintiff of
cash and shares of our common stock. 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 our 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.
Revision to Earnings
Guidance
We now anticipate our earnings for the
year ending December 31, 2008 will be $4.5 million versus previously published
guidance of $7.8 million. The revised guidance primarily results from a
combination of:
|
•
|
operating
delays encountered by Zhuorui Resource Recycling Co., Ltd., our indirect
majority-owned subsidiary which intends to engage in the recycling of
waste catalyst to generate valuable metals and slag used in
cement,
|
|
•
|
temporary
disruptions in the operations of some of our customers caused by the
Olympic Games recently held in the PRC,
and
|
|
•
|
the
recent worldwide economic downturn and the significant decreases in the
prices of recycled commodities, in light of which we have determined to
maintain an inventory of recycled commodities rather than sell them at
currently deflated prices.
|
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 September 30, 2008,
we had working capital of $4,371,631, compared to $2,345,626 as of December 31,
2007. 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
• repayment
of debt.
We have financed our operations and met
capital expenditure requirements primarily through cash provided by operating
activities, and bank loans. As of September 30, 2008, our cash and
cash equivalents increased $2,072,627 or 64 % from $3,260,307 to $5,332,934
compared with that of December 31, 2007. This is attributable to
increase in net cash provided by the recent financing activities, and proceeds
from bank loans. Short-term loan for the nine months ended September
30, 2008 was $3,355,166 compared to $1,369,000 at December 31, 2007 due to
additional bank borrowings to accelerate business expansion.
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
|
%
|
Investment
|
|
|
2,790
|
|
|
|
2,633
|
|
|
|
156
|
|
|
|
5.94
|
%
|
Property,
Plat and Equipment
|
|
|
2,681
|
|
|
|
2,642
|
|
|
|
39
|
|
|
|
1.47
|
%
|
Total
assets
|
|
$
|
32,096
|
|
|
|
20,530
|
|
|
|
11,567
|
|
|
|
56.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
1,708
|
|
|
$
|
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
million 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, 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 as compared to the previous 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 year. 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.
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.
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 for these projects. 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.
We intend to use our available funds as
working capital and to expand and develop our current lines of business. We
believe that our available funds will provide us with sufficient capital for at
least the next twelve months; however, to the extent that we make acquisitions,
we may require additional capital for the acquisition or to support the
operations of the combined companies. We cannot provide any assurance that any
required funding will be available on terms favorable to us.
Cash
Flow
|
|
September 30,
2008
|
|
|
September 30,
2007
|
|
Net
cash provided by operating activities
|
|
$
|
1,978,398
|
|
|
$
|
2,256,435
|
|
Net
cash used in investing activities
|
|
$
|
(6,743,680
|
)
|
|
$
|
(7,983,054
|
)
|
Net
cash provided by financing activities
|
|
$
|
5,889,479
|
|
|
$
|
396,246
|
|
|
|
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
|
|
|
|
—
|
|
Operating activities
Net cash provided by operating
activities totaled $1,978,398 for the nine months ended September 30, 2008,
compared to cash provided by operations of $2,256,435 for the nine months ended
September 30, 2007; an decrease of $278,037 or 12 % over the same period in the
previous year.
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 primary reasons for the increase in 2007 are a $596,528 increase
in subsidy received from the government and a $138,657 decrease in accounts
payable and other payables. The subsidy, amounting to $596,528 was received by
Dongtai’s controlled subsidiary, Zhuorui, in February 2007 from local government
agencies, in order to support the construction of the facilities dealing with
waste catalysts.
Investing activities
Net cash used in investing activities
for the nine months ended September 30, 2008 decreased by $1,239,374 or 15.5%
compared to the same period in 2007. This is attributable to the decrease of
spending in long term investment.
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 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.
Financing activities
Net cash provided by financing
activities for the nine months ended September 30, 2008 increased by $5,493,233
compared to the same period in 2007, due to short term borrowing and proceeds
from the private placement.
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.
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
September 30, 2008, 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.
OUR
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:
|
·
|
environmental
protection services,
|
|
·
|
technology
consultation,
|
|
·
|
pollution
treatment services,
|
|
·
|
waste
management design processing
services,
|
|
·
|
waste
disposal solutions,
|
|
·
|
waste
transportation services,
|
|
·
|
onsite
waste management services, and
|
|
·
|
environmental
pollution remediation services.
|
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:
|
·
|
A
fragile ecological environment,
|
|
·
|
Inadequate
laws and regulations on preserving ecological
environment,
|
|
·
|
Inadequate
investment on preserving ecological environment,
and
|
|
·
|
Inadequate
technological and information support for preserving ecological
environment.
|
SEPA has
indicated that it will take measures 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
environmental protection industry.
In the
Eleventh Five-year Plan, the PRC government has established the following three
primary environmental protection goals:
|
·
|
Reduce
total pollutants by 10%;
|
|
·
|
Decrease
energy cost per unit of GDP by 20%;
and
|
|
·
|
Decrease
water cost per unit of industrial value added by
30%.
|
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. Dongtai 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)
|
|
|
|
Plastic
|
|
550
|
|
|
|
Waste
oil
|
|
4,045
|
|
|
|
Waste
iron
|
|
1,890
|
|
|
|
Valuable
Metals
|
|
395
|
|
|
|
Waste
Drum (size variable
)
|
|
300,000
units
|
|
|
|
Other
|
|
2,430
|
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 2009. 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. The
in-kind contributions of the parties other than Dongtai have arrived in the
PRC and are being evaluated for purposes of confirming their
valuation. Dongtai has paid 15% of its contribution, with the
balance to be paid within six months following receipt of a final
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:
|
|
|
|
|
|
Capacity*
|
Nature of Service
|
|
Type of Facility
|
|
Description
|
|
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:
|
·
|
Electric
Garbage Dismantling System
|
|
·
|
Organic
Solvent Distillation Recycling
System
|
|
·
|
Fluorescent
Tube Treatment System
|
|
·
|
Organic
Macromolecular Waste Destructive Distillation Cracking
System
|
|
·
|
Treatment
System for Catalyst Containing Valuable
Metals
|
|
·
|
Waste
Etchant Liquor Treatment System
|
|
·
|
Comprehensive
Treatment System for Industrial Waste
Water
|
|
·
|
Incineration
System for Solid Waste
|
|
·
|
Hazardous
Waste Landfill
|
|
·
|
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
|
|
7/20/21
|
Granted
|
|
Consecutive
Destructive Distillation Stove
|
|
ZL
200420069745.5
|
|
7/9/04
|
|
7/13/05
|
|
7/9/14
|
Granted
|
|
Plasma
Fusion Pyrolysis Device
|
|
ZL
200420069742.1
|
|
7/9/04
|
|
7/20/05
|
|
7/9/14
|
Granted
|
|
The
Disposal of Waste Catalyst
|
|
ZL
200410021093.2
|
|
1/20/04
|
|
1/17/07
|
|
1/20/24
|
Granted
|
|
Method
and Equipment For High-Efficiency Solid-Liquid Separation Under High
Pressure
|
|
ZL
200610046723.0
|
|
5/26/06
|
|
11/12/08
|
|
5/26/26
|
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 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.
Real
Property
Dongtai's
principal executive offices are located at No. 1 Huaihe 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.
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.
MANAGEMENT
Directors
and Executive Officers
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 the Company’s Chief Financial Officer and a member of
the Board of Directors since March 2008. Ms. Guo has served as our Chief
Accounting Officer since January 2007, as Chief Accounting Officer for Dalian
Dongtai since October 2003 and as a manager in Dalian Dongtai’s accounting
department from April 2002 to October 2003. Ms. Guo graduated from Beijing
University of Commerce in 1992 majoring in finance, and received her master's
degree in Public Administration from China's Northeastern University in
2002.
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
Independence
As of the
date of this prospectus, none of our directors is “independent” within the
meaning of any self regulatory organization. However, in connection with our
2008 private placement, we have agreed to establish a Board of Directors a
majority of whose members are independent within the meaning of NASDAQ
Marketplace Rule 4200.
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. 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 SFAS 123R share based
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
|
|
Code
of Ethics
We have
adopted a Code of Business Conduct and Ethics to provide guiding principles to
all of our employees. Our Code of Business Conduct and Ethics does
not cover every issue that may arise, but it sets out basic principles to guide
our employees and provides that all of our employees must conduct themselves
accordingly and seek to avoid even the appearance of improper
behavior. Any employee which violates our Code of Business Conduct
and Ethics will be subject to disciplinary action, up to an including
termination of his or her employment.
Generally,
our Code of Business Conduct and Ethics provides guidelines
regarding:
• compliance
with laws, rules and regulations,
• conflicts
of interest,
• insider
trading,
• corporate
opportunities,
• competition
and fair dealing,
• discrimination
and harassment,
• health
and safety,
• record
keeping,
• confidentiality,
• protection
and proper use of company assets,
• payments
to government personnel,
• waivers
of the Code of Business Conduct and Ethics,
• reporting
any illegal or unethical behavior, and
• compliance
procedures.
In
addition, we have also adopted a Code of Ethics for our Chief Executive Officer
and senior financial officers who are also subject to specific policies
regarding:
• disclosures
made in our filings with the Securities and Exchange Commission,
•
deficiencies
in internal controls or fraud involving management or other employees who have a
significant
role in
our financial reporting, disclosure or internal controls,
• conflicts
of interests, and
•
knowledge
of material violations of securities or other laws, rules or regulations to
which we are subject.
A copy of
our Code of Business Conduct and Ethics has been filed with the Securities and
Exchange Commission as an exhibit to our quarterly report on Form 10-Q for the
quarter ended March 31, 2008.
Committees
of the Board of Directors
Our Board of Directors has not
established an Audit Committee or any other committees of the Board. The
functions of those committees are currently undertaken by the Board of Directors
as a whole.
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 (a)
education and experience as a principal financial officer, principal accounting
officer, controller, public accountant, auditor or person serving similar
functions; (b) 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 (c) other relevant
experience.
At the
present time, we do not have an audit committee and we do not believe that any
of any of our board members qualify as an “audit committee financial expert” as
that term is defined under Rule 407(d)(5) of Regulation S-K.
Stockholder
Recommendations for Director Nominees
We do not currently have a policy
with respect to the consideration of any director candidates which may be
recommended by our stockholders, nor has our Board of Directors established a
process for identifying and evaluating director nominees. To date, we have not
received any such recommendations from stockholders. At the present time, our
entire Board of Directors makes determinations as to who will constitute
management’s slate of director nominees at annual meetings of
stockholders.
Executive
Compensation
Summary Compensation
Table
The
following table summarizes all compensation recorded by us in the last completed
year for
• our
principal executive officer or other individual serving in a similar
capacity,
|
•
|
our
two most highly compensated executive officers other than our principal
executive officer who were serving as executive officers at December 31,
2007 as that term is defined under Rule 3b-7 of the Securities Exchange
Act of 1934, and
|
|
•
|
up
to two additional individuals for whom disclosure would have been required
but for the fact that the individual was not serving as an executive
officer at December 31, 2007.
|
For
definitional purposes, these individuals are sometimes referred to as the "named
executive officers." The value attributable to any option awards in
the following table is computed in accordance with FAS 123R.
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
CFO
|
|
|
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
|
|
Employment Agreements with
our Executive Officers
We
currently have no employment agreements with any of our executive officers, nor
any compensatory plans or arrangements resulting from the resignation,
retirement or any other termination of any of our executive officers, from a
change-in-control, or from a change in any executive officer's responsibilities
following a change-in-control.
We do not
presently have a compensation committee or any independent body to determine the
amount of compensation we pay to our executive officers. Compensation payable to
our executive officers is determined by our Board of Directors, as a group. As a
result, board members voting on the terms of executive compensation may have a
conflict of interest when voting on matters of executive
compensation.
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
optionsexercisable
(#)
(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
|
|
Limitation on
Liability
Under our
articles of incorporation, our directors are not liable for monetary damages for
breach of fiduciary duty, except in connection with:
|
·
|
breach
of the director's duty of loyalty to us or our
stockholders;
|
|
·
|
acts
or omissions not in good faith or which involve intentional misconduct,
fraud or a knowing violation of
law;
|
|
·
|
a
transaction from which our director received an improper benefit;
or
|
|
·
|
an
act or omission for which the liability of a director is expressly
provided under Nevada law.
|
In addition, our bylaws provides that
we must indemnify our officers and directors to the fullest extent permitted by
Nevada law for all expenses incurred in the settlement of any actions against
such persons in connection with their having served as officers or
directors.
Insofar as the limitation of, or
indemnification for, liabilities arising under the Securities Act of 1933 may be
permitted to directors, officers, or persons controlling us pursuant to the
foregoing, or otherwise, we have been advised that, in the opinion of the
Securities and Exchange Commission, such limitation or indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Dalian
Bofa Chemical Material Company (“Bofa”), a company controlled by Dong Jinqing,
our Chief Executive Officer and principal stockholder, 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 stockholder, 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, 2009, 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, 2009, 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.
PRINCIPAL
SHAREHOLDERS
As of November 30, 2008, there were
15,262,035 shares of our common stock (the only class of our voting securities)
issued and outstanding. The following table sets forth as of November 30, 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.
The table
does not give effect to the issuance of up to 5,229,431 shares of our common
stock consisting of (a) 2,629,431 shares issuable on the exercise of common
stock purchase warrants at exercise prices ranging from $2.45 per share to $5.00
per share with various expiration dates through August 27, 2013, (b) 2,500,000
shares available for issuance under our 2006 Equity Compensation Plan and (c)
100,000 shares that we are legally obligated to issue but have not as yet
issued.
Name and Address of Beneficial Owner
|
|
Number of Shares
Beneficially Owned
|
|
|
Percent of
Class
|
|
|
|
|
|
|
|
|
Dong
Jinqing
|
|
|
9,847,900
|
(1)
|
|
|
64.5
|
%
|
Li
Jun
|
|
|
343,900
|
|
|
|
2.3
|
%
|
Liu
Ruiguan
|
|
|
30,000
|
|
|
|
*
|
|
Guo
Xin
|
|
|
222,600
|
|
|
|
1.5
|
%
|
Tian
Hongyi
|
|
|
20,000
|
|
|
|
*
|
|
All
Officers and Directors as a Group (5 persons)
|
|
|
10,464,400
|
(1)
|
|
|
68.6
|
%
|
Ancora
Greater China Fund LP
2000
Auburn Drive, #300
Cleveland,
OH 44122
|
|
|
980,400
|
(2)
|
|
|
6.2
|
%
|
Trillion
Growth China LP
10
th
Floor, Bankers Hall West Tower
888
– 3
rd
Street SW
Calgary,
AB T2P 5C5
|
|
|
941,184
|
(3)
|
|
|
6.0
|
%
|
(1)
|
Includes
103,500 shares owned by Dong Su, the son of Mr.
Dong.
|
(2)
|
Consists
of 490,200 outstanding shares and 490,200 shares issuable upon exercise of
outstanding warrants.
|
(3)
|
Consists
of 470,592 outstanding shares and 470,592 shares issuable upon exercise of
outstanding warrants.
|
Securities
Authorized For Issuance Under Equity Compensation Plans
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.
DESCRIPTION
OF SECURITIES
Our
authorized capital stock consists of 95,000,000 shares of common stock, $0.001
par value per share, and 5,000,000 shares of preferred stock, par value $0.001
per share. As of the date of this prospectus, there were 15,262,035 shares of
common stock and no shares of preferred stock issued and
outstanding.
Common
Stock
Holders of common stock are entitled to
one vote for each share on all matters submitted to a stockholder vote. Holders
of common stock do not have cumulative voting rights. Holders of common stock
are entitled to share in all dividends that the Board of Directors, in its
discretion, declares from legally available funds. In the event of our
liquidation, dissolution or winding up, subject to the preferences of any shares
of preferred stock which may then be authorized and outstanding, each
outstanding share entitles its holder to participate in all assets that remain
after payment of liabilities and after providing for each class of stock, if
any, having preference over the common stock.
Holders of common stock have no
conversion, preemptive or other subscription rights, and there are no redemption
provisions for the common stock. The rights of the holders of common
stock are subject to any rights that may be fixed for holders of preferred
stock, when and if any preferred stock is authorized and issued. All
outstanding shares of common stock are duly authorized, validly issued, fully
paid and non-assessable.
Preferred
Stock
Our
articles of incorporation authorized the issuance of up to 5,000,000 shares of
preferred stock in one or more series with such designations, voting powers, if
any, preferences and relative, participating, optional or other special rights,
and such qualifications, limitations and restrictions, as are determined by
resolution of our Board of Directors. To date, we have not designated any series
of preferred stock and there are not shares of preferred stock issued or
outstanding.
Common
Stock Purchase Warrants
From August 2008 to October 2008, we
issued common stock purchase warrants in connection with our private placement
of units consisting of common stock and warrants. As of the date of this
prospectus, we have issued common stock purchase warrants to investors to
purchase a total of 1,941,192 shares of our common stock. One-half of the
warrants are exercisable at $2.50 per share and the balance at $3.20 per
share.
In addition, in connection with our
Placement Agency Agreement with Newbridge Securities Corporation, we issued (a)
five-year warrants to Newbridge to purchase an aggregate of 300,000 shares of
our common stock at exercise prices ranging from $3.50 to $5.00 per share, and
(b) three-year warrants to purchase 6.6 units of our securities, at an exercise
price of $72,000 per unit, with each unit consisting of 29,412 shares of common
stock, and warrants to purchase 29,412 shares of common stock until September
30, 2011 at exercise prices ranging from $2.50 to $3.20 per share.
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.
SELLING
SECURITY HOLDERS
At November 30, 2008 we had 15,262,035
shares of our common stock issued and outstanding. This prospectus
relates to periodic offers and sales of up to 1,941,192 shares of our common
stock by the selling security holders listed below and their pledgees, donees
and other successors in interest. The following table sets forth:
|
·
|
the name of each selling security
holder,
|
|
·
|
the number of common shares
owned,
|
|
·
|
the number of common shares
offered by this prospectus,
and
|
|
·
|
the number of common shares being
registered for resale by the selling security
holder.
|
Information
on beneficial ownership of securities is based upon a record list of our
stockholders. We may amend or supplement this prospectus from time to
time to update the disclosure set forth in this prospectus. All of
the securities owned by the selling security holders may be offered
hereby. Because the selling security holders may sell some or all of
the securities owned by them, and because there are currently no agreements,
arrangements or understandings with respect to the sale of any of the
securities, no estimate can be given as to the number of securities that will be
held by the selling security holders upon termination of any offering made
hereby. If all the securities offered hereby are sold, the selling
security holders will not own any securities after the
offering.
Name of Selling Security Holder (1)
|
|
Number of
Shares
Owned
|
|
|
Shares to be
offered
|
|
|
Shares to be
owned after
offering
|
|
|
Percentage
to be
owned
after
offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ancora
Growth Fund China LP (2)
|
|
|
980,400
|
|
|
|
490,200
|
|
|
|
490,200
|
|
|
|
3.1
|
%
|
Trillion
Growth China LLP (3)
|
|
|
941,184
|
|
|
|
470,592
|
|
|
|
470,592
|
|
|
|
3.0
|
%
|
Midsouth
Investor Fund LP (4)
|
|
|
392,160
|
|
|
|
196,080
|
|
|
|
196,080
|
|
|
|
1.3
|
%
|
Straus
Partners LP (5)
|
|
|
294,120
|
|
|
|
147,060
|
|
|
|
147,060
|
|
|
|
*
|
|
Chestnut
Ridge Partners LP (6)
|
|
|
245,100
|
|
|
|
122,550
|
|
|
|
122,550
|
|
|
|
*
|
|
Straus-Gept
Partners LP (7)
|
|
|
235,296
|
|
|
|
117,648
|
|
|
|
117,648
|
|
|
|
*
|
|
George
A. Warburton
|
|
|
176,472
|
|
|
|
88,236
|
|
|
|
88,236
|
|
|
|
*
|
|
MMH
Group LLC
|
|
|
98,040
|
|
|
|
49,020
|
|
|
|
49,020
|
|
|
|
*
|
|
Lyman
O. Heidtke (8)
|
|
|
98,040
|
|
|
|
49,020
|
|
|
|
49,020
|
|
|
|
*
|
|
Conine
Capital Corp.
|
|
|
58,824
|
|
|
|
29,412
|
|
|
|
29,412
|
|
|
|
*
|
|
Sharon
Mitchell
|
|
|
58,824
|
|
|
|
29,412
|
|
|
|
29,412
|
|
|
|
*
|
|
Eric
R. Samuelson
|
|
|
58,824
|
|
|
|
29,412
|
|
|
|
29,412
|
|
|
|
*
|
|
Simon
Mawson
|
|
|
58,824
|
|
|
|
29,412
|
|
|
|
29,412
|
|
|
|
*
|
|
Stephen
S. Taylor
|
|
|
39,216
|
|
|
|
19,608
|
|
|
|
19,608
|
|
|
|
*
|
|
Michael
Peter Lee
|
|
|
29,412
|
|
|
|
58,824
|
|
|
|
58,824
|
|
|
|
*
|
|
Thomas
R. Kaplan
|
|
|
29,412
|
|
|
|
14,706
|
|
|
|
14,706
|
|
|
|
*
|
|
Total
|
|
|
3,794,148
|
|
|
|
1,941,192
|
|
|
|
1,941,192
|
|
|
|
|
|
* represents
less than 1%
(1) One-half
of the total number of shares owned by each selling security identified in the
table is evidenced by shares issuable upon the exercise of warrants. The shares
being offered consist of outstanding shares of common stock.
(2) The
managing partner of the selling security holder is John Micklitsch, who makes
decisions as to voting and disposing of the listed shares on behalf of the
selling security holder.
(3) The
general partner of the selling security holder is Corey Mitchell, who makes
decisions as to voting and disposing of the listed shares on behalf of the
selling security holder.
(4) The
general partner of the selling security holder is Lyman O. Heidtke, who makes
decisions as to voting and disposing of the listed shares on behalf of the
selling security holder.
(5) The
managing principal of the selling security holder is Melville Strauss, who makes
decisions as to voting and disposing of the listed shares on behalf of the
selling security holder (see Note 7).
(6) The
managing member of the general partner of the selling security holder is Kenneth
Pasternak, who makes decisions as to voting and disposing of the listed shares
on behalf of the selling security holder (see Note 7).
(7) The
managing principal of the selling security holder is Melville Strauss, who makes
decisions as to voting and disposing of the listed shares on behalf of the
selling security holder (see Note 5).
(8) See
Note 4.
None of the selling security
holders
are
broker-dealers or
affiliates of broker-dealers, other than Ancora Growth Fund China LP, whose
affiliate Ancora Securities, Inc. is a broker-dealer and FINRA member firm.
Ancora Securities, Inc. participated as a selected dealer in the offering of
units and, for its services received a unit purchase warrant to purchase to
purchase 1.7166667 units, each unit consisting of 29,412 shares of common stock
and warrants to purchase 29,412 shares, one-half of which are exercisable at
$2.50 per share and the balance at $3.20 per share. The exercise of the unit
purchase warrant is $72,000 per unit (120% of the unit purchase price to
investors). None of the selling security holders has, or within the past three
years has had, any position, office or other material relationship with us or
any of our predecessors or affiliates, other than as described previously in
this section. Resale of the shares issuable upon exercise of the unit purchase
warrant is not covered by this prospectus.
We have agreed to pay full costs and
expenses, incentives to the issuance, offer, sale and delivery of the shares,
including all fees and expenses in preparing, filing and printing the
registration statement and prospectus and related exhibits, amendments and
supplements thereto and mailing of those items. We will not pay
selling commissions and expenses associated with any sale by the selling
security holders.
PLAN
OF DISTRIBUTION
Each
selling security holder and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of common stock on the OTC Bulletin Board or any other stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. A selling security holder may
use any one or more of the following methods when selling shares:
|
•
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
•
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
•
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
•
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
•
|
privately
negotiated transactions;
|
|
•
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
|
•
|
broker-dealers
may agree with the selling security holders to sell a specified number of
such shares at a stipulated price per
share;
|
|
•
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
•
|
a
combination of any such methods of sale;
or
|
|
•
|
any
other
method permitted pursuant to applicable
law.
|
The
selling security holders may also sell shares under Rule 144 under the
Securities Act of 1933, as amended, if available, rather than under this
prospectus.
Broker-dealers
engaged by the selling security holders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling security holders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance with
FINRA Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with FINRA IM-2440.
In
connection with the sale of the common stock or interests therein, the selling
security holders may enter into hedging transactions with broker-dealers or
other financial institutions, which may in turn engage in short sales of the
common stock in the course of hedging the positions they assume. The selling
security holders may also sell shares of the common stock short and deliver
these securities to close out their short positions, or loan or pledge the
common stock to broker-dealers that in turn may sell these securities. The
selling security holders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling security holders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act of 1933 in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act of 1933. Each selling security
holder has informed us that it does not have any written or oral agreement or
understanding, directly or indirectly, with any person to distribute the common
stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling security
holders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act of 1933.
Because
selling security holders may be deemed to be “underwriters” within the meaning
of the Securities Act of 1933, they will be subject to the prospectus delivery
requirements of the Securities Act of 1933 including Rule 172 thereunder. In
addition, any securities covered by this prospectus which qualify for sale
pursuant to Rule 144 under the Securities Act of 1933 may be sold under Rule 144
rather than under this prospectus. There is no underwriter or coordinating
broker acting in connection with the proposed sale of the resale shares by the
selling security holders.
Under
applicable rules and regulations under the Securities Exchange Act of 1934, any
person engaged in the distribution of the resale shares may not simultaneously
engage in market making activities with respect to the common stock for the
applicable restricted period, as defined in Regulation M, prior to the
commencement of the distribution. In addition, the selling security holders will
be subject to applicable provisions of the Securities Exchange Act of 1934 and
the rules and regulations thereunder, including Regulation M, which may limit
the timing of purchases and sales of shares of the common stock by the selling
security holders or any other person. We will make copies of this prospectus
available to the selling security holders and have informed them of the need to
deliver a copy of this prospectus to each purchaser at or prior to the time of
the sale (including by compliance with Rule 172 under the Securities Act of
1933).
Shares
Eligible For Future Sale
As of the
date of this prospectus we had 15,262,035 shares of common stock issued and
outstanding, of which approximately 13,599,383 shares are "restricted
securities." In general, under Rule 144, as currently in effect, a person, or
person who is not our affiliate or has not been an affiliate during the prior
three months and owns shares that were purchased from us, or any affiliate, at
least six months previously, is entitled to make unlimited public resales of
such shares provided there is current public information available at the time
of the resales. After a one-year holding period a non-affiliate is entitled to
make unlimited public resales of our shares without the requirement that current
public information be available at the time of the resales. A person, or persons
who are affiliates of our company and own shares that were purchased from us, or
any affiliate, at least six months previously is entitled to sell within any
three month period, a number of shares of our common stock that does not exceed
the greater of 1% of the then outstanding shares of our common stock, subject to
manner of sale provisions, notice requirements and the availability of current
public information about us.
Future
sales of restricted common stock under Rule 144 or otherwise or of the shares
which we are registering under this prospectus could negatively impact the
market price of our common stock. We are unable to estimate the
number of shares that may be sold in the future by our existing stockholders or
the effect, if any, that sales of shares by such stockholders will have on the
market price of our common stock prevailing from time to time. Sales
of substantial amounts of our common stock by existing stockholders could
adversely affect prevailing market prices.
LEGAL
MATTERS
The validity of the securities offered
by this prospectus will be passed upon for us by Schneider Weinberger &
Beilly LLP.
EXPERTS
Our financial statements as of and for
the years ended December 31, 2007 and 2006 included in this prospectus have been
audited by Child, Van Wagoner & Bradshaw, PLLC, independent registered
public accounting firm, as indicated in their report with respect thereto, and
have been so included in reliance upon the report of such firm given on their
authority as experts in accounting and auditing.
WHERE
YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and
Exchange Commission the registration statement on Form S-1 under the Securities
Act of 1933 for the common stock offered by this prospectus. This prospectus,
which is a part of the registration statement, does not contain all of the
information in the registration statement and the exhibits filed with it,
portions of which have been omitted as permitted by Securities and Exchange
Commission rules and regulations. For further information concerning us and the
securities offered by this prospectus, we refer to the registration statement
and to the exhibits filed with it. Statements contained in this
prospectus as to the content of any contract or other document referred to are
not necessarily complete. In each instance, we refer you to the copy of the
contracts and/or other documents filed as exhibits to the registration
statement.
We file annual and special reports and
other information with the Securities and Exchange Commission. Certain of our
filings are available over the Internet at the Securities and Exchange
Commission's web site at http://www.sec.gov. You may also read and copy any
document we file with the Securities and Exchange Commission at its public
reference facilities:
Public
Reference Room Office
100 F
Street, N.E.
Room
1580
Washington,
D.C. 20549
You may also obtain copies of the
documents at prescribed rates by writing to the Public Reference Section of the
Securities and Exchange Commission at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549. Callers in the United States can also call 1-202-551-8090 for
further information on the operations of the public reference
facilities.
CHINA INDUSTRIAL WASTE MANAGEMENT,
INC.
CONSOLIDATED BALANCE
SHEETS
|
|
September
30,
|
|
December
31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Audited)
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
5,332,934
|
|
$
|
3,260,307
|
|
Trade
accounts receivable, net
|
|
|
2,366,837
|
|
|
594,322
|
|
Other
receivables
|
|
|
237,100
|
|
|
22,453
|
|
Inventory
|
|
|
1,866,807
|
|
|
1,332,349
|
|
Advances
to suppliers
|
|
|
269,533
|
|
|
390,159
|
|
Deferred
expense
|
|
|
18,235
|
|
|
42,784
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
10,091,446
|
|
|
5,642,374
|
|
|
|
|
|
|
|
|
|
Investment
|
|
|
2,789,747
|
|
|
2,633,354
|
|
Property,
plant and equipment
|
|
|
5,227,587
|
|
|
4,697,305
|
|
Less:
accumulated depreciation
|
|
|
(2,546,694
|
)
|
|
(2,055,268
|
)
|
Net
property, plant and equipment
|
|
|
2,680,893
|
|
|
2,642,037
|
|
Construction
in progress
|
|
|
12,791,631
|
|
|
7,410,255
|
|
Land
usage right, net of accumulated amortization
|
|
|
1,703,778
|
|
|
1,732,074
|
|
Deposits
|
|
|
12,246
|
|
|
80,925
|
|
Related
party receivable
|
|
|
978,534
|
|
|
388,796
|
|
Escrow
account
|
|
|
750,000
|
|
|
-
|
|
Other
asset
|
|
|
298,283
|
|
|
-
|
|
TOTAL ASSETS
|
|
$
|
32,096,558
|
|
$
|
20,529,815
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,281,890
|
|
$
|
279,600
|
|
Short-term
loan
|
|
|
3,355,166
|
|
|
1,369,000
|
|
Tax
payable
|
|
|
125,387
|
|
|
93,954
|
|
Deferred
sales
|
|
|
619,681
|
|
|
667,389
|
|
Accrued
expenses
|
|
|
22,694
|
|
|
7,236
|
|
Related
party payable
|
|
|
294,078
|
|
|
536,362
|
|
Other
payable
|
|
|
20,919
|
|
|
343,207
|
|
Total
current liabilities
|
|
|
5,719,815
|
|
|
3,296,748
|
|
|
|
|
|
|
|
|
|
Asset
retirement obligation liability
|
|
|
497,152
|
|
|
437,619
|
|
Other
long-term liabilities
|
|
|
1,026,389
|
|
|
620,979
|
|
TOTAL
LIABILITIES
|
|
|
7,243,356
|
|
|
4,355,346
|
|
|
|
|
|
|
|
|
|
Minority
interest in subsidiary
|
|
|
2,806,773
|
|
|
2,259,595
|
|
|
|
|
|
|
|
|
|
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;
|
|
|
|
|
|
|
|
14,534,175
and 13,220,843 shares issued and outstanding at September 30, 2008
and
|
|
|
|
|
|
|
|
December
31, 2007, respectively
|
|
|
14,534
|
|
|
13,221
|
|
Additional
paid-in capital
|
|
|
5,362,324
|
|
|
1,968,634
|
|
Stock
subscription
|
|
|
220,000
|
|
|
-
|
|
Other
comprehensive income
|
|
|
2,102,158
|
|
|
1,153,728
|
|
Retained
earnings
|
|
|
14,347,413
|
|
|
10,779,291
|
|
TOTAL STOCKHODERS'
EQUITY
|
|
|
22,046,429
|
|
|
13,914,874
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
|
|
$
|
32,096,558
|
|
$
|
20,529,815
|
|
See notes
to Consolidated Financial Statements.
CHINA INDUSTRIAL WASTE MANAGEMENT,
INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(Unaudited)
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
Service
fees
|
|
$
|
1,656,080
|
|
$
|
1,227,503
|
|
$
|
5,430,145
|
|
$
|
2,855,733
|
|
Sales
of cupric sulfate
|
|
|
423,891
|
|
|
334,728
|
|
|
1,804,481
|
|
|
1,382,499
|
|
Sales
of recycled commodities
|
|
|
1,115,150
|
|
|
762,352
|
|
|
2,671,634
|
|
|
2,233,586
|
|
Operating
revenue
|
|
|
3,195,121
|
|
|
2,324,583
|
|
|
9,906,260
|
|
|
6,471,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of service fees
|
|
|
478,550
|
|
|
391,652
|
|
|
1,165,466
|
|
|
862,352
|
|
Cost
of cupric sulfate
|
|
|
212,132
|
|
|
94,975
|
|
|
737,235
|
|
|
388,016
|
|
Cost
of recycled commodities
|
|
|
639,923
|
|
|
269,032
|
|
|
1,447,399
|
|
|
868,736
|
|
Costs
of revenue (including depreciation)
|
|
|
1,330,605
|
|
|
755,659
|
|
|
3,350,100
|
|
|
2,119,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
1,864,516
|
|
|
1,568,924
|
|
|
6,556,160
|
|
|
4,352,714
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling
expenses
|
|
|
233,783
|
|
|
306,492
|
|
|
648,886
|
|
|
788,516
|
|
General
and administrative expenses
|
|
|
439,021
|
|
|
404,766
|
|
|
1,356,797
|
|
|
1,201,773
|
|
Total
operating expenses
|
|
|
672,804
|
|
|
711,258
|
|
|
2,005,683
|
|
|
1,990,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
1,191,712
|
|
|
857,666
|
|
|
4,550,477
|
|
|
2,362,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
loss
|
|
|
(5,494
|
)
|
|
-
|
|
|
(15,946
|
)
|
|
-
|
|
Interest
income
|
|
|
11,441
|
|
|
11,770
|
|
|
17,627
|
|
|
23,659
|
|
Other
income
|
|
|
1,934
|
|
|
13,568
|
|
|
8,388
|
|
|
15,054
|
|
Other
expense
|
|
|
(168,349
|
)
|
|
(3,069
|
)
|
|
(170,010
|
)
|
|
(3,122
|
)
|
Total
other income (expense)
|
|
|
(160,468
|
)
|
|
22,269
|
|
|
(159,941
|
)
|
|
35,591
|
|
Net
income from continuing operations before minority interest and income
tax
|
|
|
1,031,244
|
|
|
879,935
|
|
|
4,390,536
|
|
|
2,398,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
(103,499
|
)
|
|
-
|
|
|
(437,945
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
927,745
|
|
|
879,935
|
|
|
3,952,591
|
|
|
2,398,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operation, net
|
|
|
-
|
|
|
(5,221
|
)
|
|
-
|
|
|
(5,221
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
95,033
|
|
|
61,598
|
|
|
384,470
|
|
|
212,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
832,712
|
|
$
|
813,116
|
|
$
|
3,568,121
|
|
$
|
2,180,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustment
|
|
|
202,900
|
|
|
163,314
|
|
|
948,408
|
|
|
387,455
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income
|
|
$
|
1,035,612
|
|
$
|
976,430
|
|
$
|
4,516,529
|
|
$
|
2,567,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
13,902,510
|
|
|
13,220,843
|
|
|
13,392,040
|
|
|
13,220,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average shares outstanding
|
|
|
13,902,510
|
|
|
13,220,843
|
|
|
13,392,040
|
|
|
13,220,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net earnings per share
|
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.27
|
|
$
|
0.16
|
|
See notes
to Consolidated Financial Statements.
CHINA INDUSTRIAL WASTE MANAGEMENT,
INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(Unaudited)
|
|
For the Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,568,121
|
|
$
|
2,180,020
|
|
Adjustments
to reconcile net income to net cash
|
|
|
|
|
|
|
|
provided
by operating activities:
|
|
|
|
|
|
|
|
Minority
interest
|
|
|
547,178
|
|
|
212,775
|
|
Depreciation
|
|
|
491,426
|
|
|
330,581
|
|
Amortization
|
|
|
28,296
|
|
|
27,069
|
|
Bad
debt allowance
|
|
|
7,782
|
|
|
-
|
|
Stock
issued for services
|
|
|
117,100
|
|
|
12,000
|
|
Accretion
expenses
|
|
|
59,533
|
|
|
21,016
|
|
Loss
on disposal of subsidiary
|
|
|
-
|
|
|
5,221
|
|
Loss
on equity investment
|
|
|
(156,393
|
)
|
|
-
|
|
Value
added tax credit
|
|
|
(298,283
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,780,297
|
)
|
|
(229,964
|
)
|
Inventory
|
|
|
(534,458
|
)
|
|
(613,760
|
)
|
Other
receivables
|
|
|
(214,646
|
)
|
|
(345,230
|
)
|
Advance
to suppliers
|
|
|
120,626
|
|
|
(9,205
|
)
|
Prepaid
expense
|
|
|
-
|
|
|
(18,144
|
)
|
Deposits
|
|
|
68,679
|
|
|
-
|
|
Accrued
expense and deferred sales
|
|
|
(7,701
|
)
|
|
452,817
|
|
Accounts
payable
|
|
|
680,002
|
|
|
264,065
|
|
Tax
payable
|
|
|
31,433
|
|
|
(32,826
|
)
|
Escrow
account
|
|
|
(750,000
|
)
|
|
-
|
|
Net
cash provided by operating activities
|
|
|
1,978,398
|
|
|
2,256,435
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activiies
|
|
|
|
|
|
|
|
Investment
in subsidiary
|
|
|
-
|
|
|
(2,623,370
|
)
|
Purchase
of property and equipment
|
|
|
(530,282
|
)
|
|
(187,172
|
)
|
Construction
contracts
|
|
|
(5,381,376
|
)
|
|
(4,697,512
|
)
|
Due
from related party
|
|
|
(589,738
|
)
|
|
(28,635
|
)
|
Due
to related party
|
|
|
(242,284
|
)
|
|
(480,299
|
)
|
Proceeds
on sale of equity investments
|
|
|
-
|
|
|
33,934
|
|
Net
cash used in investing activities
|
|
|
(6,743,680
|
)
|
|
(7,983,054
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from short term loans
|
|
|
3,433,235
|
|
|
-
|
|
Repayment
of shor term loans
|
|
|
(1,447,069
|
)
|
|
-
|
|
Procceds
from issuance of common stock
|
|
|
3,277,903
|
|
|
-
|
|
Stock
subscription
|
|
|
220,000
|
|
|
-
|
|
Subsidy
received from government
|
|
|
405,410
|
|
|
396,246
|
|
Net
cash provided by financing activities
|
|
|
5,889,479
|
|
|
396,246
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash
|
|
|
948,430
|
|
|
149,741
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
2,072,627
|
|
|
(5,180,632
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
3,260,307
|
|
|
6,478,978
|
|
Cash
and cash equivalents, end of period
|
|
$
|
5,332,934
|
|
$
|
1,298,346
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
163,140
|
|
$
|
-
|
|
Income
taxes
|
|
$
|
-
|
|
$
|
-
|
|
Non-cash
financing activities:
|
|
|
|
|
|
|
|
Common
stock issuance cost
|
|
$
|
113,000
|
|
$
|
-
|
|
See notes
to Consolidated Financial Statements.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
The
accompanying unaudited consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and the new scaled disclosure requirements in Article 8 of Regulation S-K of the
SEC. Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States of
America for annual financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The accounts of the Company and all of its
subsidiaries are included in the consolidated financial statements. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The consolidated operating results for the three and nine months
ended September 30, 2008 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2008. For further information,
refer to the audited consolidated financial statements and footnotes thereto
included in the Company's Form 10-K for the year ended December 31,
2007.
1. Nature of
operations
The
accompanying unaudited consolidated financial statements include China
Industrial Waste Management, Inc., a Nevada corporation (the Company)
incorporated on November 12, 2003, its wholly owned subsidiary, DonTech Waste
Services, a Delaware corporation (DonTech), and its indirect majority owned
subsidiaries:
·
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)
The
Company is engaged in the collection, treatment, disposal, and recycling of
industrial wastes principally in Dalian and surrounding areas in Liaoning
Province, the Peoples Republic of China (PRC). The Company provides waste
disposal solutions to its more than 400 customers from facilities located in the
Economic and Technology Development Zone, Dalian, China. In addition, the
Company provides the following services to its clients:
·
Environmental
protection services,
·
Technology consultation,
·
Pollution treatment services,
·
Waste management design processing services,
·
Waste disposal solutions,
·
Waste transportation services,
·
Onsite waste management services, and
·
Environmental pollution remediation services.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
The
Company is currently participating in the operation of the following waste
disposal and environmental protection projects:
·
Dongtai Water, a build-operate-transfer project established to process
polluted water generated by the city of Dalian. Construction of the sewage plant
has been completed, and the project is currently in the stage of commissioning.
·
Zhuorui engages in the project of plasma arc melting, separation and
purification of waste catalysts, treatment of industrial wastes and
comprehensive utilization of waste catalysts or similar material. The project is
now in the facility installation stage.
·
Dalian Lipp is currently conducting a project based on the Lipp tank
building technique to generate energy by organic waste anaerobic fermentation,
and industrial effluent treatment and municipal sewage plant.
·
Dongtai Organic Waste Treatment
project,
engaged in municipal sludge treatment in Dalian. The project is now in the
installation stage.
2. Basis of
Presentation
The
accompanying consolidated financial statements include the accounts of the
parent entity, its wholly owned subsidiary, DonTech Waste Services Inc, its 90%
owned subsidiary, Dalian Dongtai Industrial Waste Treatment Co., Ltd, its 80%
owned subsidiary, Dongtai Water Recycling Co. Ltd, its 70% owned subsidiary,
Dalian Zhuorui Resource Recycling Co., Ltd, and its 75% owned subsidiary, Dalian
Lipp Enviromental Energy Engineering & Technology Co., Ltd.. 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
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.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Foreign currency
translation
As of
September 30, 2008 and 2007, 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.
Cash and cash
equivalents
Cash and
cash equivalents include cash on hand and cash on deposit, certificates of
deposit and all highly liquid debt instruments with original maturities of three
months or less.
Restricted cash
In
accordance with Accounting Review Board (ARB) No. 43, Chapter 3A Current Assets
and Current Liabilities, cash which is restricted as to withdrawal is considered
a noncurrent asset. Restricted cash consists of $750,000, which the Company
holds in a separate escrow account as required by a group of investors lead by
Ancora Greater China Fund.
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 September 30, 2008 and December 31,
2007 was $7,782 and $9,776, 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.
Concentration of credit
risks
The
Company is subject to concentrations of credit risk primarily from cash and cash
equivalents. The Company maintains accounts with financial institutions, which
at times exceeds the insured Federal Deposit Insurance Corporation limit of
$100,000. The Company minimizes its credit risks associated with cash by
periodically evaluating the credit quality of its primary financial
institutions.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
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.
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 $134,454 and $77,353 as of
September 30, 2008 and December 31, 2007 respectively.
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 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 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.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
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
assets airspace.
Liabilities
for landfill and environmental remediation costs are presented in the table
below:
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
|
|
|
|
Long-term
|
|
$
|
497,152
|
|
|
437,619
|
|
Long-term
investment
Invested
company
|
|
Equity
acquired
|
|
Balance as of
September 30,
2008
|
|
Balance as of
December 31,
2007
|
|
Dongtai
Organic
|
|
|
49
|
%
|
|
2,789,747
|
|
|
2,633,354
|
|
Total
|
|
|
|
|
|
2,789,747
|
|
|
2,633,354
|
|
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.
Impairment of long-lived
assets
In
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), such as property, plant, and equipment, and
purchased intangibles, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Intangible assets are tested for impairment annually.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to estimated undiscounted future cash flows expected
to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
There were no events or changes in circumstances that necessitated a review of
impairment of long lived assets as of September 30, 2008 and 2007,
respectively.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
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 at September 30, 2008 and December 31, 2007 were $1,703,778
and $1,732,074 respectively. Such assets consist entirely of a right to use land
of $1,921,474, less accumulated amortization of $217,696 and $189,400
respectively.
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
SFAS No.
107, Disclosures About Fair Value of Financial Instruments, requires that the
Company discloses 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
Companys revenue recognition policies are in compliance with Staff Accounting
Bulletin (SAB) 104. Our revenues are generated from the fees we charge for waste
collection, transfer, disposal and recycling services and the sale of recycled
commodities. The fees charged for our services are generally defined in our
service agreements and vary based on contract specific terms such as frequency
of service, weight, volume and the general market factors influencing industrys
rates. We generally recognize revenue as services are performed or products are
delivered.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Deferred
sales consist of contracts for which the fees have been collected but revenue
has not yet been recognized in accordance with the revenue recognition policy.
As of September 30, 2008 and December 31, 2007 deferred sales amounted to
$619,681 and $667,389, respectively.
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 three and nine
months ended September 30, 2008 and 2007 were immaterial.
Stock-based
compensation
In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No.123(R), Share-Based Payment, 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, reduced tax rate
for three years at 9%, 10% and 11% for the third, fourth and fifth
year.
Statement of cash
flows
In
accordance with SFAS No. 95, Statement of Cash Flows, cash flows from the
Companys 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.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Basic and diluted net earnings per
share
Earnings
per share is calculated in accordance with 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, Accounting for
Contingencies. 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.
Recent accounting
pronouncements
Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating
Securities
In
June 2008, FASB issued FSP Emerging Issues Task Force (EITF) Issue
No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities. The FSP addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and, therefore, need to be included in the earnings allocation in
computing earnings per share under the two-class method. The FSP affects
entities that accrue dividends on share-based payment awards during the awards
service period when the dividends do not need to be returned if the employees
forfeit the award. This FSP is effective for fiscal years beginning after
December 15, 2008. The Company is currently assessing the impact of FSP
EITF 03-6-1 on its consolidated financial position and results of
operations.
Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an entity's Own Stock
In June
2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an Instrument
(or an Embedded Feature) Is Indexed to an Entity's Own Stock" (EITF 07-5). EITF
07-5 provides that an entity should use a two step approach to evaluate whether
an equity-linked financial instrument (or embedded feature) is indexed to its
own stock, including evaluating the instrument's contingent exercise and
settlement provisions. It also clarifies on the impact of foreign currency
denominated strike prices and market-based employee stock option valuation
instruments on the evaluation. EITF 07-5 is effective for fiscal years beginning
after December 15, 2008. The Company is currently assessing the impact of EITF
07-5 on its consolidated financial position and results of
operations.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion ( Including Partial Cash
Settlement)
In
May 2008, the FASB issued FSP Accounting Principles Board (APB) Opinion
No. 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash upon Conversion (Including Partial Cash Settlement). The FSP
clarifies the accounting for convertible debt instruments that may be settled in
cash (including partial cash settlement) upon conversion. The FSP requires
issuers to account seperately for the liability and equity components of certain
convertible debt instruments in a manner that reflects the issuer's
nonconvertible debt (unsecured debt) borrowing rate when interest cost is
recognized. The FSP requires bifurcation of a component of the debt,
classification of that component in equity and the accretion of the resulting
discount on the debt to be recognized as part of interest expense in our
consolidated statement of operations. The FSP requires retrospective application
to the terms of instruments as they existed for all periods presented. The FSP
is effective for us as of January 1, 2009 and early adoption is not permitted.
The Company is currently evaluating the potential impact of FSP APB 14-1 upon
its consolidated financial statements.
The Hierarchy of Generally Accepted
Accounting Principles
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (FAS No.162). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS No. 162 is effective 60 days following
the SEC's approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles". The implementation of this standard will not
have a material impact on the Company's consolidated financial position and
results of operations.
Determination of the Useful Life of
Intangible Assets
In April
2008, FASB issued FASB Staff Position on Financial Accounting Standard (FSP FAS)
No. 142-3, Determination of the Useful Life of Intangible Assets, which amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of intangible assets under
SFAS No. 142 Goodwill and Other Intangible Assets. The intent of this FSP
is to improve the consistency between the useful life of a recognized intangible
asset under SFAS No. 142 and the period of the expected cash flows used to
measure the fair value of the asset under SFAS No. 141 (revised 2007) Business
Combinations and other U.S. generally accepted accounting
principles. The Company is currently evaluating the potential
impact of FSP FAS No. 142-3 on its consolidated financial
statements.
Disclosure about Derivative
Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161,
Disclosure
about Derivative Instruments and Hedging Activities
,
an
amendment of SFAS No. 133, (SFAS No. 161). This statement requires that
objectives for using derivative instruments be disclosed in terms of underlying
risk and accounting designation. The Company is required to adopt SFAS No. 161
on January 1, 2009. The Company is currently evaluating the potential impact of
SFAS No. 161 on the Companys consolidated financial statements.
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
Delay in Effective
Date
In
February 2008, the FASB issued FSP FAS No. 157-2, Effective Date of FASB
Statement No. 157. This FSP delays the effective date of SFAS No. 157 for
all nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years. The impact of adoption was not material to the
Companys consolidated financial condition or results of operations.
4.
Inventory
Inventory
at September 30, 2008 and December, 31, 2007 consists of raw materials and
recycled commodities as Follow:
|
|
September
30, 2008
|
|
December
31, 2007
|
|
Raw
materials
|
|
$
|
851,245
|
|
$
|
786,427
|
|
Recycled
commodities
|
|
|
1,015,562
|
|
|
545,922
|
|
|
|
$
|
1,866,807
|
|
$
|
1,332,349
|
|
5. Property, plant and
equipment
|
|
September
30, 2008
|
|
December
31, 2007
|
|
Land
and building
|
|
$
|
2,536,429
|
|
$
|
2,305,868
|
|
Machinery
and equipment
|
|
|
1,291,628
|
|
|
1,242,966
|
|
Office
equipment
|
|
|
562,575
|
|
|
375,433
|
|
Vehicles
|
|
|
836,955
|
|
|
773,038
|
|
|
|
|
5,227,587
|
|
|
4,697,305
|
|
Less
accumulated depreciation
|
|
|
(2,546,694
|
)
|
|
(2,055,268
|
)
|
Total
property and equipment, net
|
|
|
2,680,893
|
|
|
2,642,037
|
|
|
|
|
|
|
|
|
|
Construction
in progress
|
|
|
12,791,631
|
|
|
7,410,255
|
|
Total
|
|
$
|
15,472,524
|
|
$
|
10,052,292
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
6. Other
asset
Other
asset in the amount of $298,283 represent for value added tax (VAT)
credit.
VAT is a
turnover tax levied on all units and individuals engaged in the sale of goods,
the provision of processing, repair and replacement services (together referred
to as "taxable labor services") and the importation of goods to the
PRC.
The
standard VAT rate is 17%, and a reduced rate of 13% or even 0% applies to
certain items.
PRC
regulations categorize taxpayers as general VAT taxpayers and small-scale VAT
taxpayers, depending on sales volume and the soundness of their accounting
system. General VAT taxpayer status is not granted automatically but subject to
the approval of the tax authorities.
General
VAT taxpayers with an adequate accounting system are allowed to reduce their VAT
burden by crediting input VAT against Output VAT, which is demonstrated by a
special VAT invoice.
7. Short-term
loan
The
Company entered into multiple one-year loans with accredited lenders. The
interest rate varies from
8.748 %
to 9.720%. As of September 30, 2008, the remaining balance was
$3,355,166.
8. Other long-term
liabilities
Other
long term liabilities include special fund for environmental protection in the
amount of $ 875,261, and obligation to pay for land usage right in the amount of
$ 151,128.
9. Accumulated other
comprehensive income
The
components of accumulated other comprehensive income was as follow:
|
|
September
30,
2008
|
|
December
31,
2007
|
|
Cumulative
translation adjustment of foreign currency statements
|
|
$
|
947,818
|
|
$
|
774,007
|
|
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
10.
Equity
In April
2008, the Company issued 50,000 shares of common stock as compensation for
services to an investment consulting firm. The fair market value of the stock is
approximately $117,000.
In August
2008, the Company issued 51 units, consisting of an aggregate of 1,020,000
shares of common stock, Class A warrants to purchase an aggregate of 510,000
shares of common stock and Class B warrants to purchase an aggregate of 510,000
shares of common stock, to a group of institutional and accredited investors at
an effective price of $3 per share. Total gross proceeds amounted to $2,780,308,
excluding issuance cost of $279,692. Each unit
consists
of (a) 20,000 shares of common stock, (b) one Class A common stock purchase
warrant to purchase 10,000 shares of common stock until September 30, 2011, at
an exercise price of $3.50 per share, and (c) one Class B common stock purchase
warrant to purchase 10,000 shares of common stock until September 30, 2011, at
an exercise price of $4.50 per share.
In
September 2008, the Company issued 9.6665 units, consisting of an aggregate of
193,333 shares of common stock, Class A Warrants to purchase an aggregate of
96,667 shares of common stock and Class B Warrants to purchase an aggregate of
96,667 shares of common stock, to a group of institutional and accredited
investors at an effective price of $3 per share. Total gross proceeds amounted
to $497,595, excluding issuance cost of $82,404.
Each
unit consists of (a) 20,000 shares of common stock, (b) one Class A common stock
purchase warrant to purchase 10,000 shares of common stock until September 30,
2011, at an exercise price of $3.50 per share, and (c) one Class B common stock
purchase warrant to purchase 10,000 shares of common stock until September 30,
2011, at an exercise price of $4.50 per share.
In
September 2008, the Company issued 50,000 shares of common stock as compensation
for services to an investor relationship company. The fair market value of the
stock was approximately $113,000, and recorded as stock issuance
cost.
In
September 2008, the Company received common stock subscription in the amount of
$220,000 for issuing a total of 3.66665 units, consisting of an aggregate of
73,333 shares of common stock, Class A Warrants to purchase an aggregate of
36,667 shares of common stock and Class B Warrants to purchase an aggregate of
36,667 shares of common stock, to a group of institutional and accredited
investors at an effective price of $3 per share.
11. Commitment and
contingency
On August
27, 2008 and September 16, 2008, the Company issued 60.6665 units to a group of
institutional and accredited investors
. In
connection with the sale:
CHINA
INDUSTRIAL WASTE MANAGEMENT, INC.
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER
30, 2008
·
The Company agreed to file a registration statement with the SEC to
permit the investors to resell the common stock included in their units and to
pay the investors liquidated damages at the rate of 1% of the amount of their
investment per month, up to a maximum of 10%, to the extent the registration
statement is not timely filed or diligently pursued,
·
The Company agreed to establish a board of directors, a majority of whose
members will be independent within the meaning of NASDAQ Marketplace Rule
4200(15); and $650,000 from the proceeds is being held in escrow until this
requirement is satisfied,
·
The Company agreed to engage an accounting consultant to assist with the
presentation and delivery of financial reports and related information; and
$100,000 from the proceeds is being held in escrow until this requirement is
satisfied,
·
The Company entered into an agreement with an investor relationship firm
to provide consulting services for a period of one year. Under this agreement,
the Company has agreed to pay a consulting fee equal to $9,000 per month, and
issue 6,000 shares of common stock quarterly, contingent upon the occurrence of
certain events described in the agreement.
12. Subsequent
events
On
October 14, 2008, The Company issued 5.3333 units, consisting of an aggregate of
106,668 shares of common stock, Class A warrants to purchase an aggregate of
53,334 shares of common stock and Class B warrants to purchase an aggregate of
53,334 shares of common stock, to a group of institutional and accredited
investors for gross proceeds of $320,000. Each unit consists of
(a)
20,000 shares of common stock, (b) one Class A common stock purchase warrant to
purchase 10,000 shares of common stock until September 30, 2011, at an exercise
price of $3.50 per share, and (c) one Class B common stock purchase warrant to
purchase 10,000 shares of common stock until September 30, 2011, at an exercise
price of $4.50 per share.
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
kings 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
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
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
Peoples 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 corporations 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 CIWMs 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 Peoples 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
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 Companys 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
assets 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 Companys 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 Dongtais 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. Dongtais 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
Companys 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 Companys services,
the types of wastes to be treated, the method of treatment to be applied, the
Companys 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 Companys client. Both parties will
sign a note, acknowledging that the wastes have been delivered to the Companys
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 Companys 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 Companys
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
Companys 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 Companys 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,
Dongtais 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 Companys
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 Companys registered capital;
|
|
c.
|
Allocations
of 5 -10% of income after tax, as determined under PRC accounting rules
and regulations to the Companys Statutory common welfare fund, which is
established for the purpose of providing employee facilities and other
collective benefits to the Companys 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
Companys operations are carried out in the PRC. Accordingly, the Companys
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 Companys 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
entitys 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 Companys
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 Companys
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 Companys 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.
No
dealer, sales representative or any other person has been authorized to give any
information or to make any representations other than those contained in this
prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the company or any of the
underwriters. This prospectus does not constitute an offer of any
securities other than those to which it relates or an offer to sell, or a
solicitation of any offer to buy, to any person in any jurisdiction where such
an offer or solicitation would be unlawful. Neither the delivery of
this prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that the information set forth herein is correct as of any
time subsequent to the date hereof.
TABLE OF
CONTENTS
Page
|
|
Prospectus
Summary
|
1
|
Selected
Consolidated Financial Data
|
5
|
Risk
Factors
|
6
|
Cautionary
Statements Regarding
|
|
Forward-Looking
Information
|
17
|
Market
for Common Equity and Related
|
|
Stockholder
Matters
|
18
|
Use
of Proceeds
|
20
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
20
|
Our
Business
|
30
|
Management
|
45
|
Certain
Relationships and Related Transactions
|
50
|
Principal
Shareholders
|
51
|
Description
of Securities
|
52
|
Selling
Security Holders
|
53
|
Plan
of Distribution
|
55
|
Legal
Matters
|
57
|
Experts
|
57
|
Where
You Can Find Additional Information
|
57
|
Financial
Statements
|
F-1
|
CHINA
INDUSTRIAL WASTE
MANAGEMENT,
INC.
PROSPECTUS
________________,
2008
1,941,192
Shares of Common Stock
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution.
The
estimated expenses payable by us in connection with the distribution of the
securities being registered are as follows:
SEC
Registration and Filing Fee
|
|
$
|
138
|
|
Legal
Fees and Expenses*
|
|
|
15,000
|
|
Accounting
Fees and Expenses*
|
|
|
7,500
|
|
Financial
Printing*
|
|
|
1,000
|
|
Transfer
Agent Fees*
|
|
|
1,500
|
|
Blue
Sky Fees and Expenses*
|
|
|
—
|
|
Miscellaneous*
|
|
|
4,862
|
|
TOTAL
|
|
$
|
30,000
|
|
*
Estimated
Item
14. Indemnification of Directors and Officers.
As
authorized by the Nevada Revised Statutes, our articles of incorporation provide
that none of our directors shall be personally liable to us or our stockholders
for monetary damages for breach of fiduciary duty as a director, except
liability for:
|
·
|
any
breach of a director's duty of loyalty to our company or our
stockholders;
|
|
·
|
acts
or omissions not in good faith or which involve intentional misconduct or
a knowing violation of law;
|
|
·
|
unlawful
payments of dividends or unlawful stock redemptions or repurchases;
and
|
|
·
|
any
transaction from which a director derived an improper personal
benefit.
|
This
provision limits our rights and the rights of our stockholders to recover
monetary damages against a director for breach of the fiduciary duty of care
except in the situations described above. This provision does not limit our
rights or the rights of any stockholder to seek injunctive relief or
rescission
if a
director breaches his duty of care. These provisions will not alter the
liability of our directors under federal securities laws. Our by-laws require us
to indemnify our directors and officers against, to the fullest extent permitted
by law, liabilities which they may incur under the circumstances described
above.
Our
articles of incorporation further provide for the indemnification of any and all
persons who serve as our directors, officers, employees or agents to the fullest
extent permitted under Nevada law.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers or persons controlling our company pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the act and is therefore unenforceable.
Item
15. Recent Sales of Unregistered Securities.
On February 4, 2008 we entered into a
Business Advisory Agreement with Newbridge Securities Corporation, pursuant to
which Newbridge provides us with advice and consultation services to the extent
described in the agreement. As part of its compensation under the agreement, as
amended, we issued Newbridge 50,000 shares of our common stock. Newbridge has
such knowledge and experience in business and financial matters that it is
capable of evaluating the risks and merits of accepting our securities as
compensation for its services. The certificate evidencing the shares bears a
legend restricting transferability absent registration under the Securities Act
of 1933, as amended or an applicable exemption therefrom. Issuance of the shares
were exempt from the registration requirements of the Securities Act of 1933 by
reason of Section 4(2) thereof as a transaction by an issuer not involving a
public offering.
In
October 2008, we completed the private placement of 66 units of our securities
at an aggregate offering price of $3,960,000 to 16 institutional and accredited
investors in a private placement exempt from registration under the Securities
Act of 1933 in reliance on exemptions provided by Regulation D and Section 4(2)
of that act. Under the subscription agreements with the investors, as amended,
each unit consisted of 29,412 shares of common stock, one Class A warrant to
purchase 14,706 shares of common stock exercisable until September 30, 2011 at
$2.50 per share and one Class B warrant to purchase 14,706 shares of common
stock exercisable until September 30, 2011 at $3.20 per share.
As
compensation for its services, we paid the placement agent for the offering (a
broker-dealer and a member of FINRA), a cash commission of $277,200 and a
non-accountable expense allowance of $79,200, and issued Newbridge or its
designees (a) 150,000 shares of common stock, (b) five-year warrants to purchase
300,000 shares of common stock at exercise prices ranging from $3.50 to $5.00
per share and (c) three-year warrants to purchase 6.6 units of our securities,
at an exercise price of $72,000 per unit, with each unit consisting of 29,412
shares of common stock and warrants to purchase 29,412 shares of common stock
until September 30, 2011 at exercise prices ranging from $2.50 to $3.20 per
share. Newbridge has also entered into an agreement whereby they have agreed not
to seek registration of our equity securities issued or issuable to them, and to
limit their resale of those securities.
Each of the investors represented that
he, she or it was an “accredited investor” within the meaning of Rule 501 of
Regulation D under the Securities Act of 1933, as amended, and that the investor
had such knowledge and experience in business and financial matters that he, she
or it was able to evaluate the risks and merits of an investment in the Company.
In addition, each investor was provided access to business and financial about
the Company and each certificate evidencing securities issued in the transaction
included a legend to the effect that the securities were not registered under
the Securities Act and could not be resold absent registration or the
availability of an applicable exemption therefrom. No general solicitation or
advertising was used in connection with the transaction. The Company filed a
Form D with the Securities and Exchange Commission as required by Regulation D
under the Securities Act. Accordingly, the private placement was exempt from the
registration requirements of the Securities Act by reason of Section 4(2) and
Regulation D thereunder as a transaction by an issuer not involving any public
offering.
Item
16. Exhibits and Financial Statement Schedules.
The
following documents are filed as a part of this registration statement or are
incorporated by reference to previous filings, if so indicated:
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.
|
5
|
|
Opinion
of Schneider Weinberger & Beilly LLP*
|
10.1
|
|
Agreement
and Plan of Merger, dated November 11, 2005, by and among the Company,
Dalian Acquisition Corp., China Industrial Waste Management Inc., and each
of the CIWM Shareholders. [Incorporated by reference to Exhibit 10.1 to
the Current Report on Form 8-K filed by the Company on November 17,
2005.]
|
10.2
|
|
Contract
for Joint Venture Using Foreign Investment dated October 18, 2007 among
Dalian Dongtai Industrial Waste Treatment Co., Ltd., Ronald Lipp, Karin
Lipp-Mayer and Minghuan Shan. [Incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed by the Company on October 18,
2007.]
|
10.3
|
|
Agreement
dated July 10, 2007 by and between Dalian Lida Environmental Engineering
Co., Ltd. and Dalian Dongtai Industrial Waste Treatment Co., Ltd.
[Incorporated by reference to Exhibit 10.3 to the Annual Report on Form
10-K filed by the Company on March 31, 2008.]
|
10.4
|
|
Agreement
dated August 6, 2007 by and between Dalian Dongtai Investment Co., Ltd.
and Dalian Dongtai Industrial Waste Treatment Co., Ltd. [Incorporated by
reference to Exhibit 10.4 to the Annual Report on Form 10-K filed by the
Company on March 31, 2008.]
|
10.5
|
|
2006
Equity Compensation Plan. [Incorporated by reference to the Definitive
Information Statement filed by the Company on March 31,
2006]
|
10.6
|
|
Form
of Subscription Agreement. [Incorporated by reference to Exhibit 10.1 to
the Current Report of Form 8-K filed on September 3,
2008]
|
10.7
|
|
Form
of Common Stock Purchase Warrant. [Incorporated by reference to Exhibit
10.2 to the Current Report of Form 8-K filed on September 3,
2008]
|
10.8
|
|
Placement
Agency Agreement dated August 27, 2008. . [Incorporated by reference to
Exhibit 10.3 to the Current Report of Form 8-K filed on September 3,
2008]
|
21.1
|
|
List
of Subsidiaries. [Incorporated by reference to Exhibit 21.1 to the Annual
Report on Form 10-K filed by the Company on April 7,
2008.]
|
23.1
|
|
Consent
of
Child, Van Wagoner & Bradshaw, PLLC*
|
23.2
|
|
Consent
of Schneider Weinberger & Beilly LLP (included within Exhibit
5)*
|
Item
17. Undertakings.
a. The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To
include any prospectus required by Section 10(a)(3) of the Securities Act of
1933;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the effective
registration statement.
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
2. That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registraznt will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such
issue.
SIGNATURES
Pursuant to the requirements of the
Securities Act of 1933, the registrant has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Dalian, China on December 12, 2008.
|
CHINA INDUSTRIAL WASTE MANAGEMENT, INC.
|
|
|
|
|
By:
|
/s/ Dong Jinqing
|
|
|
Dong
Jinqing
|
|
|
Chief
Executive Officer
|
Pursuant to the requirements of the
Securities Act of 1933, this registration statement has been signed by the
following persons in the capacities and on the dates indicated.
SIGNATURE
|
|
TITLE
|
|
DATE
|
|
|
|
|
|
/s/ Dong Jinqing
|
|
Chairman
of the Board, Chief Executive Officer and Director
|
|
December
12, 2008
|
Dong
Jinqing
|
|
|
|
|
|
|
|
|
|
/s/ Li Jun
|
|
Chief
Operating Officer and Director
|
|
December
12, 2008
|
Li
Jun
|
|
|
|
|
|
|
|
|
|
/s/
Guo Xin
|
|
Chief
Financial Officer and Director
|
|
December
12, 2008
|
Guo
Xin
|
|
|
|
|
|
|
|
|
|
/s/ Zhang Dahzi
|
|
Secretary
|
|
December
12, 2008
|
Zhang
Dahzi
|
|
|
|
|
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