Attached files
file | filename |
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EX-31.1 - China Water Group, Inc. | v168670_ex31-1.htm |
EX-31.2 - China Water Group, Inc. | v168670_ex31-2.htm |
EX-21.1 - China Water Group, Inc. | v168670_ex21-1.htm |
EX-32.2 - China Water Group, Inc. | v168670_ex32-2.htm |
EX-32.1 - China Water Group, Inc. | v168670_ex32-1.htm |
EX-10.11 - China Water Group, Inc. | v168670_ex10-11.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K/A-1
(Mark
One)
x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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For the
fiscal year ended: December 31, 2008
¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
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Commission File No.:
000-26175
CHINA
WATER GROUP, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
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88-0409151
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(State
or Other Jurisdiction of Incorporation
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(I.R.S.
Employer Identification No.)
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or
Organization)
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SUITE
7A01, BAICHENG BUILDING
584
YINGBIN ROAD
DASHI,
PANYU DISTRICT
GUANGZHOU,
GUANGDONG, CHINA
(Address
of Principal Executive Offices)
(86-20)
3479 9768
(Registrant’s
Telephone Number, Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.001
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes o No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes o
No
x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (s 229.405) is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
filer. See the definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer o Accelerated
filer ¨ Non-accelerated
Filer ¨ Smaller
reporting company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
o No x
Aggregate
market value of the voting stock held by non-affiliates of the registrant,
computed by reference to the closing price as of the last business day of the
registrant’s most recently completed second fiscal quarter, June 30, 2008,
was $2,787,669. The registrant has no non-voting common stock.
As of
November 20, 2009, there were 139,383,450 shares of our common stock issued and
outstanding.
INDEX
TO FORM 10-K ANNUAL REPORT
Page
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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22
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Item
1B.
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Unresolved
Staff Comments
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27
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Item
2.
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Properties
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27
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Item
3.
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Legal
Proceedings
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29
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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29
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
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29
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Item
6.
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Selected
Financial Data
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30
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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30
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Item
7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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38
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Item
8.
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Financial
Statements and Supplementary Data
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38
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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38
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Item
9A(T)
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Controls
and Procedures
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38
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Item
9B
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Other
Information
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45
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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46
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Item
11.
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Executive
Compensation
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48
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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49
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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51
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Item
14.
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Principal
Accountant Fees and Services
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52
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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52
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Signatures
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55
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Financial
Statements
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F-1
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2
EXPLANATORY
NOTE
We, China
Water Group, Inc., are filing this Annual Report on Form 10-K for the year ended
December 31, 2008 During calendar 2009, as an initial step to become
current in our filing obligations under the Securities Exchange Act of 1934, as
amended. We will endeavor to file additional periodic reports to become current
in our filings as expeditiously as the limited size of our staff allows. Except
where a date after April 2009 is specifically mentioned, this report is written
as though it had been prepared during the first four months of calendar
2009. We are filing this amendment in response to comments received from the
staff of the Securities and Exchange Commission.
Unless
otherwise indicated, all references to our company include our wholly and
majority owned subsidiaries.
All of
our sales and nearly all our expenses are denominated in renminbi (“RMB”), the
national currency of the People’s Republic of China (the “PRC”). For SEC
reporting purposes, the balance sheet items are translated into US dollars using
the exchange rate at the respective balance sheet dates. The capital and various
reserves are translated at historical exchange rates prevailing at the time of
the transactions while income and expenses items are translated at the average
exchange rate for the period. All exchange differences are recorded within
equity.
Statements
contained in this Annual Report on Form 10-K, which are not historical facts,
are forward-looking statements, as the term is defined in the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, whether
expressed or implied, are subject to risks and uncertainties which can cause
actual results to differ materially from those currently anticipated, due to a
number of factors, which include, but are not limited to:
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·
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Competition
within our industry;
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·
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Seasonality
of our sales;
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·
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Success
of our acquired businesses;
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·
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Our
relationships with our major
customers;
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·
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The
popularity of our products;
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·
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Relationships
with suppliers and cost of
supplies;
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·
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Financial
and economic conditions in Asia, Japan, Europe and the
U.S.;
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·
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Anticipated
effective tax rates in future
years;
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·
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Regulatory
requirements affecting our
business;
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·
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Currency
exchange rate fluctuations;
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·
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Our
future financing needs; and
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·
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Our
ability to attract additional investment capital on attractive
terms.
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Forward-looking
statements also include the assumptions underlying or relating to any of the
foregoing or other such statements. When used in this report, the words “may,”
“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,”
“estimate,” “predict,” “continue,” and similar expressions are generally
intended to identify forward-looking statements.
Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect management’s opinions only as of the date hereof. We undertake no
obligation to revise or publicly release the results of any revision to these
forward-looking statements. Readers should carefully review the factors
described in the Section of this report entitled “Risk Factors” and other
documents we file from time to time with the Securities and Exchange Commission
(‘SEC’), including the Quarterly Reports on Form 10-Q to be filed by us in the
fiscal year 2009.
3
Part
I
Item
1. Description of Business.
We are
a bottled water company based in the PRC. We also continue to operate
various waste water treatment facilities. Through our majority-owned
subsidiaries, we were engaged in the design, construction, implementation and
management of industrial and municipal waste water treatment facilities
throughout the PRC. We are now seeking to dispose of those
operations. We also provide high quality bottled water in China
by using 9000-Year Old Glacier Spring Water. Our bottled water has been
marketed in many big cities in China such as Shanghai, Beijing, Guangzhou,
Chengdu and others.
We also
previously provided turn-key waste water treatment engineering design and
contracting. From 2000 through 2008, we completed the following turn-key
projects: Yongji Development Zone Wastewater Treatment Plant (Phase 1),
Guangdong Nanhai City Jinsha Town Wastewater Treatment Plant, Guangdong Sanshui
Baini Wastewater Treatment Plant and Guangzhou Yantang Wastewater Treatment
Plant, Tianjin City Meichang Town Wastewater Treatment Plant,Yongji Development
Zone Wastewater Treatment Plant (Phase 2), China Environment Industrial Park
Wastewater Treatment Plant, Huangzhuang Industrial Park Wastewater Treatment
Plant and Tian Jin WuQing No.1 Waste Water Treatment Factory. We have left
this business and no longer provide turn-key waste water services.
We hold
28.8%and 11.2%, respectively, of the equity interest in the following two water
treatment facilities operated through build, operate and transfer (“BOT”)
arrangements with the PRC government: (i) Tian Jin Shi Sheng Water
Treatment Company Limited (“TianJin”), which commissioned water treatment in
November 2003 and has a daily treatment capacity of approximately 10,000 tons;
and (ii) Xin Le Sheng Mei Water Purifying Company Limited (“XinLe”), which
also commissioned water treatment in November 2003 and has a daily treatment
capacity of 40,000 tons. We have been retained as the manager to manage both
TianJing and XinLe. The fees from XinLe and TianJing did not represent a
significant portion of our revenue during 2008.
We also
developed a BOT water treatment facility project in Hai Yang City under our
subsidiary Hai Yang City Sheng Shi Environment Protection Company Limited
(“HaiYang”) with capacity of 20,000 tons per day. We began construction of this
project in April 2004 and completed the project and commenced water treatment in
June 2005. We also developed another BOT water treatment facility project in
Beijing under our subsidiary Bei Jing Hao Tai Shi Yuan Water
Purifying Company Limited (“Beijing HaoTai”) with planned capacity of
20,000 tons per day. We began construction of this project in July 2004
completed approximately 90% till December, 2006. We retained a 90% interest in
this facility until we disposed of it in December 2006 for a total consideration
of US$1,442,567, and realized a gain of $44,872. In July 2005, we
started construction of a BOT water treatment facility project for the Handan
Fengfeng Mining Area in the Hebei Province under our subsidiary Han Dan Cheng
Sheng Water Affairs Company Limited (“HanDan”) with capacity of 33,000 tons per
day. The project was completed in December 2007. The fees from these projects
are expected to increase our net sales in the future. We are in the process of
discontinuing our waste water engineering operations to concentrate on our
bottled water operations and the presentation of our financial statements
reflects that these assets relate to our “discontinued
division”.
4
Our
predecessor in interest, Discovery Investments, Inc. (“Discovery”) was
incorporated on September 10, 1996, under the laws of the State of Nevada
to engage in any lawful corporate activity. Discovery had been in the
development stage and was not active until October 26, 1999.
On
December 10, 1999, Discovery entered into a Plan and Agreement of
Reorganization (the “Plan”) with LLO-Gas, Inc. and John Castellucci. On
October 26, 1999, LLO-Gas had acquired certain ARCO facilities and a
so-called card lock facility and commenced operations. LLO-Gas was incorporated
in July 1998 under the laws of the State of Delaware. On December 20, 1999,
there was a closing under the Plan and LLO-Gas, Inc. became a wholly-owned
subsidiary of Discovery and there was a change of control of Discovery. Between
December 20, 1999 and August 10, 2000, differences of opinion as to
matters of fact and as to matters of law had arisen by and between certain of
the shareholders of Discovery, who were shareholders prior to the closing, and
between Discovery, John Castellucci and LLO-Gas, Inc.
On
June 7, 2000, LLO-Gas, Inc. filed a Voluntary Petition under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court, Central District of
California, San Fernando Valley Division, case number SV 00-15398-AG. On
December 1, 2000, the United States Bankruptcy Court converted the pending
matter into a Chapter 7 liquidation. Said Chapter 7 effected LLO-Gas, Inc. and
not Discovery.
On
August 10, 2000, Discovery entered into a Mutual Rescission Agreement and
Mutual Release with John Castellucci which provided, inter alia, that Discovery
consented and agreed to rescind said Plan with John Castellucci consenting and
agreeing to the rescission. The parties mutually agreed to forego all rights and
benefits provided to each other thereunder.
On
August 9, 2001, Discovery filed a voluntary petition under Chapter 11 of
the Bankruptcy Code in the United States Bankruptcy Court, District of Nevada,
Case Number BK-S-01-18156-RCJ. On September 24, 2001, the Bankruptcy Court
confirmed the Disclosure Statement and Plan of Reorganization submitted by
Discovery and Discovery was thereafter released from Bankruptcy.
On
April 29, 2002, Discovery entered into a Plan and Agreement of
Reorganization with Bycom Media Inc., an Ontario, Canada corporation (“Bycom”).
Pursuant to this agreement, Discovery acquired all the outstanding shares of
Bycom for 4,800,000 shares of Common Stock. On October 5, 2002, Bycom
became a wholly-owned subsidiary of Discovery and there was a change of
control.
Bycom was
engaged in multimedia applications for internet-based business. Utilizing
business search tools and databases, Bycom intended to be able to locate and
access global business information for a fee, or was to act as an “out-source
provider” of information. Bycom currently is an inactive, wholly owned
subsidiary of the Company.
On
September 4, 2002, Discovery completed a transaction set out in a Plan and
Agreement of Reorganization dated June 13, 2002, pursuant to which
Discovery acquired all of the outstanding shares of Cavio Corporation, a
Washington corporation, (“Cavio”) in exchange for 14 million share of
Discovery common stock. Due to poor market conditions and Discovery’s inability
to seek adequate financing from third parties to properly finance the operations
of Cavio, on December 2, 2002 Discovery’s board of directors approved,
subject to receiving the approval of a majority of the shareholders, to unwind
the acquisition of Cavio in cancellation of the shares of common stock
issued.
On
December 2, 2002, Discovery unanimously approved the disposition of its
interest in Cavio and thereafter received the consent of a majority of the
outstanding shares of the company’s common stock. Discovery determined the
effective date for the divestiture to be June 30, 2003.
5
For the
two years prior to a reverse acquisition in September 2004, we had not generated
significant revenues and were considered a development stage company as defined
in Statement of Financial Accounting Standards No. 7. We were seeking
business opportunities or potential business acquisitions. Pursuant to a
securities purchase agreement and plan of reorganization dated September 9,
2004, as amended, between our company, Evergreen Asset Group Limited, an
International Business Company organized under the laws of the British
Virgin Islands (“Evergreen” or “EGAG”), and the stockholders of Evergreen, we
acquired 100% of the issued and outstanding shares of Evergreen’s capital stock.
We issued 83,500,000 shares of our common stock in exchange for all the 300
issued and outstanding shares of Evergreen capital stock which had an estimated
value of $4.24 million at the time of such issuance, valued based on the fair
market value of the net assets of Evergreen. Since the stockholders of Evergreen
acquired approximately 83.5% of our outstanding shares and the Evergreen
management team and board of directors became the management team and board of
directors of our company, according to FASB Statement No. 141 -
“ Business Combinations
”, this acquisition has been treated as a recapitalization for accounting
purposes, in a manner similar to reverse acquisition accounting. In accounting
for this transaction:
•
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Evergreen
is deemed to be the purchaser and surviving company for accounting
purposes. Accordingly, its net assets are included in the balance sheet at
their historical book values and the results of operations of Evergreen
have been presented for the comparative prior
period;
|
•
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Control
of the net assets and business of our company was acquired effective
October 15, 2004. This transaction has been accounted for as a
purchase of the assets and liabilities of our company by Evergreen. The
historical cost of the net liabilities assumed was
$0.00.
|
As a
result of the transaction described above we changed our name from Discovery
Investments, Inc. to China Evergreen Environmental Corporation.
Due to
the reverse acquisition mentioned above, EGAG, pursuant to a group
reorganization which was completed in July 2004, acquired 90% equity interests
in each of XinXingmei, XianYang, HaiYang and BeijingHaoTai for cash
consideration of RMB12,601,000 (approximately $1,521,860), RMB18,000,000
(approximately $2,173,913), RMB2,700,000 (approximately $326,087) and
RMB1,800,000 (approximately $217,391), respectively, all of which are domestic
incorporated companies established in the PRC with limited
liability.
In March
2003, GDXS entered into a BOT agreement with Xian Yang City Environment
Protection Bureau. The BOT agreement was later transferred to Xian Yang Bai
Sheng Water Purifying Company Limited (“XianYang”), after XianYang was
incorporated. The construction of the wastewater plant of XianYang started in
the beginning of 2004. Due to the group reorganization in July 2004, 90% of
GDXS’s interest in XianYang was transferred to EGAG. In October 2004, EGAG
entered into a tri-party framework agreement with True Global Limited (“TGL”),
an independent party and Guang Dong Xin Sheng Environmental Protection Company
Limited (“GDXS”) for the disposal of its 90% interest in XianYang to TGL at a
total consideration of $13,246,377. A gain on disposal of $5,220,299 was
recorded in 2004 for the disposal of our entire 90% attributable interest in
XianYang to TGL.The gain represents the difference between the disposal proceeds
and our attributable share of net assets of XianYang at the date of
disposal.
6
In April
2005, we conducted a private placement of 20 investment units, at $25,000 per
unit, for gross proceeds of $500,000. Each unit consisted of (a) one 12%
convertible debenture in the original principal amount of $25,000, convertible
into shares of our common stock at the rate of the lesser of (i) $0.20 per
share or (ii) a 10% discount to the price per share of common stock (or
conversion price per share of common stock) of the next private placement
conducted by us prior to any conversion of the debenture, and (b) 125,000
detachable warrants to purchase one share each of our common stock at an
exercise price of $0.20 per share, expiring ten years from their date of
issuance. The debentures were due and payable August 1, 2005. The debenture
holders, however, extended the payment period to September 30, 2005. We
granted the investors limited registration rights for the common shares
underlying their debentures and warrants. Westminster Securities Corporation
acted as placement agent for this offering on our behalf. All the debenture
holders have converted the debentures into 3,703,701 shares of our common stock
on October 1, 2005.
On
September 14, 2005, we closed the private placement sale to accredited investors
of units consisting of shares of our common stock and warrants to purchase
shares of our common stock for aggregate gross proceeds of $4.83 million.
Pursuant to the subscription agreements entered into with the investors, we
issued to the investors 161 units at a price of $30,000 per unit. Each unit
consisted of 200,000 shares of our common stock, priced at $0.15 per share, and
warrants to purchase 200,000 shares of our common stock over a five-year period
at an exercise price of $0.20 per share. Pursuant to the terms of the
subscription agreements, we granted the investors limited registration rights
for all common shares comprising the units, including the common shares issuable
on exercise of the warrants.
On
November 7, 2006, China Evergreen Environmental Corporation changed its name to
China Water Group, Inc. to reflect its focus on China’s water treatment and
supply needs and on build-operate-transfer(BOT), Transfer-operate-transfer(TOT),
and turnkey wastewater treatment facilities in China, at the same time, bottled
water is considered.
On
December 29, 2007, China Water Group Inc. signed a contract with Fortune Luck
Global International Limited to acquire 90 percent of the equity interest of Aba
Xinchen Dagu Glacier Spring Co., Limited through its subsidiary Guangzhou
Xinchen Water Company. The consideration for the acquisition is $13.45 million
dollars, of which $7.5 million will be paid in cash, and the remaining $5.95
million will be paid in our common stock. As of November
20,2009, we have paid a total of $ 7.5 million cash, but hadn’t
issued any shares towards the purchase price. Acquiring this asset has allowed
us to enter the bottled water business with our own high quality water
source.
On
December 29, 2007, we entered into an Equity Transfer Agreement, pursuant to
which we transferred a 58% out of our 90% interest in our subsidiary Guangdong
Xinxingmei Water Affairs Co, Ltd. (“GXWA”) to Wenning Pu, a 10% minority
sharehoulder of GXWA for RBM7,308,600 (approximately $1,000,000). After the
transaction, our ownership of GXWA was reduced from 90% to 32% and
Wenning Pu’s ownership of GXWA was increased from 10% to 68%. The proceeds of
the sale will be used for our working capital.
On
December 30, 2008, we entered into an Equity Transfer Agreement, pursuant to
which China Water Group Inc transferred 100% interest in Evergreen Asset Group
Limited to Whole Treasure Investment Ltd. , a BVI company.
The proceeds of the sale will be used for our working capital , mainly to
develop the bottled water market and trademark building.
Our
Corporate headquarters is located in Guangzhou, Guangdong,
China
7
Our
Business
General
We are a
PRC based waste water engineering company and are engaged
in repositioning ourselves to be a bottled water production, sales
and marketing company . Through our majority-owned subsidiaries, we have
been engaged in the design, construction, implementation and management of
industrial and municipal waste water treatment facilities throughout the
PRC. Starting 2009 we will reposition our business focus
to bottled water production, sales and distribution in the
PRC.
Our waste
water engineering business was originally established in 1999 by our Chairman,
Mr. Chong Liang Pu, with a focus on developing innovative biochemical
technologies and processes for waste water treatment. We have the exclusive
rights to MHA biological treatment processes technologies (“MHA”) and GM
Bio-carriers. Both are the subject of patents owned by our Chairman,
Mr. Pu, and we have acquired the exclusive rights pursuant to a license
agreement with Mr. Pu. Both technologies were developed to improve the
efficiency and effectiveness of waste water treatment processes and reduce the
initial investment and on-going operating cost of waste water treatment
facilities.
We have
applied biotechnological processes to waste water treatment and have developed
relationships with the PRC environmental authorities at both national and
provincial levels throughout the PRC. Since 2000, we have successfully completed
the design and construction of over 15 waste water facilities across China with
total daily capacity of over 130,000 tons (inclusive of five BOT waste
water treatment facilities with daily capacity of 123,000 tons). Our customers
include municipal governments, food processing and beverage companies and
industrial companies.
As a
result of these achievements, we have been recognized as a “Key Enterprise in
Environmental Industry in the PRC” by the General Bureau of Environmental
Protection of China and are viewed as a “High-Tech Enterprise” by the Bureau of
Science and Technology of Guangzhou, PRC.
BOTTLED
WATER OPERATIONS
In
2007 we
entered into an agreement with Fortune
Luck Global International
Limited to
secure a high quality source of natural drinking water from the Dagu glacier. During
the calendar years 2007 and 2008 we conducted a limited test market of bottled
water in Guangzhou.Management
was satisfied with the results and intends to
expand this business to make it the main business of the Company in the future.
At
the
beginning of 2008, we started
developing the bottled
water business. The
Company established development and branding strategies for the bottled water
business, managed
to set up four regional sales
centers in the cities of Shanghai , Beijing, Chengdu and Guangzhou, as part of
the strategy to promote our products in China’s major
cities. The May 12th earthquake
in Sichuan, however, had a severe impact on our marketing
efforts, as the earthquake damaged the roads between Aba, where our production
is located, and Chengdu. The roads did not reopen until November 2008.
Our agreement with Fortune Luck Global has been filed as an
exhibit to this report.
8
The Global Industry for Bottled
Water.
According
to Datamonitor, the global bottled water market reached a value of $61.0 billion
in 2006 and is forecasted to have a value of $86.4 billion in 2011, an increase
of 41.6%. In 2006, global volume of bottled water was 115.4 billion liters and
is expected to be 174.2 billion liters in 2011, an increase of 51.0%. On a
consumption per capita basis, United Arab Emirates holds the leading position
with 260 liters of bottled water consumption per capita in 2007, followed by
Mexico and Italy. The global average consumption per capita is 29 liters, but
China consumes only approximately 14 liters of bottled water per capita. If
China's consumption per capita grew to the global average of 29 liters, it would
represent a 110% increase (or an additional 20 billion liters) in consumption of
bottled water. If China's consumption per capita grew to the average consumption
per capita of the top 10 countries, it would represent over a 1,000% increase
(or an additional 184 billion liters) in consumption of bottled
water.
The Chinese Bottled Water Industry.
In China,
water resources per capita are only 28% of the world average. Compounding the
lack of water resources, the State Environment Protection Administration of
China estimated in 2007 that tap water in one-half of China's major cities was
polluted by industrial chemicals and agriculture fertilizers. A large amount of
wastewater is directly discharged into water bodies, and industrial wastewater
treatment has not been completely established, resulting in serious water
pollution problems. Safe drinking water is a priority in China, and given the
lack of wastewater treatment plants, the drinking water issues are not likely to
be solved in the near future.China's bottled water industry started to grow as
drinking water quality in China began to deteriorate. The market grew at a
compound rate of around 37% yearly from 1994 to 2005. According to the Beverage
Marketing Corporation, China was the fastest growing consumer of
bottled water in the world with a 17.5% compounded annual growth rate
from 2002 to 2007, double the next fastest growing country, the United States.
Although China was the fastest growing and third largest consumer of bottled
water, it represented less than one-half of the world's per capita average of
liters consumed and only 11% of the per capita average of liters consumed of the
top 20 countries.
Industry
Background
Waste Water Treatment Markets in the
PRC . The waste water treatment business is in a developmental stage in
China. Following decades of rapid industrialization and urbanization resulting
from PRC’s breakneck economic expansion, demands for urban and industrial waste
water treatment are immense. In 2002, total volume of municipal and industrial
waste water produced reached 23 billion and 26 billion tons, respectively,
of which only approximately 25% was treated in some form. The PRC government,
which views environmental issues as a priority policy, has targeted a 90%
treatment ratio by 2030. This targeted growth, combined with a policy of
privatizing all existing government facilities, is resulting in extraordinarily
high levels of expansion in an industry that did not effectively exist until the
1980s.
In order
to promote investment in the waste water treatment industry, the central
government has created incentives such as tax relief and higher throughput fees
which can improve the profitability of certain municipal projects.
Under the
tax regulations in the PRC, companies providing water purification are exempted
from business tax on the collection of waste water treatment fees. The PRC
government also gives tax relief in the form of reduction in or exemption from
value-added tax and income tax to encourage treated water to be reused in
residential, agricultural, commercial and industrial sectors.
The PRC
government introduced a policy in relation to water supply tariff management
methods for the water-resource system which became effective in January 2004.
The new policy prescribes a water tariff approach, comprising of water
production costs, expenses, profit, and tax. Pertinent pricing is expected to be
in accord with local market demand.
9
Before
the 1990s, water tariffs were extremely low, and there were no wastewater
discharge fees. People were more concerned with water quality than with the
price and quantity they used. As citizens now pay closer attention to water
quality, they expect higher prices to accompany water quality improvements.
Therefore, water tariff and wastewater treatment throughput fees, especially in
the cities, are rising to levels that potentially allow our business to operate
profitably.
Fresh Water Markets . Before
2003, the facilities for fresh water supply in the PRC were owned and operated
by the agencies of local governments. As industrial, economic and population
growth and chronic pollution have placed intense demands on the water supply in
China, the fresh water supply has had serious shortages. Similar to the waste
water treatment industry, the PRC government has opened up the fresh water
supply business to private sector and international operators.
Bottled Water Markets . The
bottled water industry in PRC is in the stage of rapid and continuous growth and
development. Globally, according to recently published data from consultancy
firm Beverage Marketing Corporation (BMC), from 2002 to 200 PRC was the fastest
growing country in the world in terms of consumption of bottled water, showing a
compound annual growth rate of 17.5%, doubling the next fastest growing country,
the United States. With the growth in demand and addition of new industry
participants offering new and varied bottled water products, management believes
that the Chinese bottled water industry is posed for significant
growth.
Our
Business Waste Water Related Activities
There are
different types and quantities of pollutants in water due to the environment,
conditions and purpose for which the water is used. Municipal water has organic
matters including nitrogen and phosphorus. The composition of such municipal
wastewater is relatively stable. In contrast, pollutants in water discharged
from industries include organic pollutants, inorganic matters, metal ions and
salt ion. We adopt varying treatment processes for different industrial
wastewater.
We
provided turn-key engineering, equipment and chemical sales for industrial and
municipal waste water treatment facilities in the PRC. We also invest in, manage
and operate our own water treatment facilities through BOT arrangements in the
PRC.
The
following chart describes the waste water treatment process that we
service:
10
Turn-Key Waste Water Engineering.
We provide turn-key waste water treatment engineering services to both
public and private sectors. Our public sector clients include municipal
governments at the city, district and town levels. Our private sector clients
include heavy industries, such as steel, car manufacturing, electronic; light
industries, such as chemical, food and beverage, paper, printing and breweries;
and others, including hospitals and the pharmaceutical industry. The industrial
wastewater qualities differ due to the different industrial products and
manufacturing processes.
These
contracts are awarded either by public tender or by direct contract. A typical
turn-key waste water treatment project can be classified into three phases;
(1) survey and design, (2) construction and equipment installation,
and (3) operation and management services. However, commencing
in 2007, we discontinued initiating new turn-key projects.
From 2000
to 2007, we completed the following turn-key projects: Yongji Development Zone
Wastewater Treatment Plant (Phase 1), Guangdong Nanhai City Jinsha Town
Wastewater Treatment Plant, Guangdong Sanshui Baini Wastewater Treatment Plant
and Guangzhou Yantang Wastewater Treatment Plant, Tianjin City Meichang Town
Wastewater Treatment Plant,Yongji Development Zone Wastewater Treatment Plant
(Phase 2), China Environment Industrial Park Wastewater Treatment Plant
,Huangzhuang Industrial Park Wastewater Treatment Plant and Tian Jin WuQing No.1
Waste Water Treatment Factory.
We
financed our turn-key projects through progressive payments from our customers
as stipulated in the agreements for these projects.
Investment in BOT Waste Water Treatment Facilities.
We also invest in waste water treatment facilities through BOT
arrangements. BOT projects provide us with a stable income source under a
long-term (usually 20-30 year) contract granted by municipal governments to
build and operate waste water plants. BOT project land is typically contributed
by the municipal government with the operator providing investment and daily
management. After the contract period, the project is transferred to the local
government. After we secure a contract for a BOT project from a municipal
government and the financing for such project is in place, we will proceed to
construct the facility. After the completion of construction and testing and
commissioning, we will operate the waste water treatment facility for a period
of 20-25 years as stipulated in the BOT contract.
11
The
following table sets forth the BOT projects which we have
completed:
BOT Projects
|
Cost of
Investment
|
Capacity/
Per Day
|
Operation
Period
|
Date of
commencement of
operation
|
|||||
Waste
water treatment plant of TianJing
|
$ |
1.09
million
|
10,000
tons
|
20
years
|
November
2003
|
||||
Waste
water treatment plant of XinLe
|
$ |
4.11
million
|
40,000
tons
|
22
years
|
October
2003
|
||||
Waste
water treatment plant of HaiYang
|
$ |
3.62
million
|
20,000
tons
|
22
years
|
June
2005
|
||||
Waste
water treatment plant of HanDan
|
$ |
3.53
million
|
33,000
tons
|
22
years
|
December
2007
|
As of
December 31, 2008, the waste water treatment plants of TianJin, XinLe and
HaiYang were operational and have been providing waste water treatment services.
The HanDan waste water treatment plant began to operate during January
2008.
We have
been financing the BOT projects of TianJing, XinLe and HaiYang through capital
injectionsand funds generated from our operations. We will finance the remaining
capital expenditure of HanDan of approximately $2 million through funds
generated from our operations.
Our
Production Process
Waste Water treatment Though the
chemicals used for treating municipal and industrial wastewater qualities are
different due to the different sources of wastewater for municipal wastewater
treatment and different industrial product and manufacturing process for
industrial wastewater treatment, the treatment processes are largely
similar.
During
the wastewater treatment process, the wastewater is first collected by a
pipeline network system and then transported to a sand sedimentation pool. The
wastewater will then go through the MHA waste water treatment process, which is
a natural, chemical-free, biological and mineral-based process that facilitates
the rapid growth of bacteria in order to improve the efficiency of degrading the
micro-organism materials in the wastewater and for more efficient operation and
reduced energy consumption. After the MHA waste water treatment process, the
wastewater is then transported to the sedimentation pool to remove the fine
particles in the wastewater. The wastewater will then be sterilized in the
sterilization pool and be transported to the water outlet.
Bottled
Water Raw water flows into
water processing workshop through the stainless steel pipe, after sand
filtration, carbon filtration, membrane filtration and ozone sterilizing,
the water will be bring into containers. Then the wter will be poured
into PET bottle automatically by aseptic operation. Then these
products will be packed and transported to the market.
Our
Project Management Process
The
following is the flow chart of our project management process for both turn-key
wastewater engineering projects and BOT projects:
12
Market Intelligence . The
starting point for all our projects was market intelligence so that our
management was able to decide which projects they wished to secure for the
benefit of the company. Our marketing personnel were in charge of market
information on potential projects on a regular and ad-hoc basis. Our management
was able to identify and decide on projects which we might potentially bid
for.
Project Tracking . Based on
the information gathered through market intelligence and the subsequent
comprehensive analysis conducted on such information, our
management decided which projects to pursue. We carried
out internal evaluations which consist of three steps: initial evaluation,
revaluation and valuation by professionals. We also engaged external advisors to
carry out external evaluation. We then embarked on determining what
the tender rules and conditions are and the capital requirements and
technologies used for the project. Project tracking allowed us to plan ahead and
make the necessary cost planning.
Tender Process . Once we
decided to proceed to tender for a particular project, we formed a tender
committee comprising marketing personnel and technical personnel, who were
responsible for compiling the tender documents to be submitted for tender within
the stipulated deadline. The tender committee compiled internal costing and
budgetary estimates of labor and material costs based on quotations from the
relevant suppliers and factor in a suitable profit margin in determining our
tender pricing.
Design and Development. After
signing of the contract, we appointed a project team to be responsible for the
execution of the project, including an ad-hoc research and development team to
handle the design and development of that particular project. The research and
development team followed our overall guidelines to analyze, assess and
determine the design and specifications of a system which ensured that all of
our customers’ requirements were met. The design and development process
included collection of information, site survey, key design concept, design
specification, individual design, evaluation, revaluation and issue for
construction. In addition to our own design and development capabilities, we
have also entered into collaboration arrangements with other parties to test our
equipment to ensure its suitability and effectiveness.
Procurement. After the necessary design
and analysis, the specifications of the system were confirmed, and our
procurement department proceeded to purchase all the materials and equipment
required or appoint appropriate sub-contractors to carry out certain parts of
the project.
Construction . The
construction process included sub-contracting and site supervision. During
construction, we sent site representatives to control and supervise the
construction.
13
Assembly and Installation .
We will carried out assembly and installation of equipment and/or system and
coordinate the assembly and installation fully with the construction process to
ensure all equipment and/or system were properly assembled and installed. We
sent technical staff to assist and guide the assembly and
installation.
Testing . After the equipment
and/or system was assembled and installed, we tested the system in accordance
with industrial and national rules and regulations formulated by the relevant
PRC authorities.
Commissioning and Fine-Tuning . For turn-key
projects, should the system pass all tests, we proceeded to hand over the system
to our customers. 5%-10% of the total contract value was be treated as retention
monies during the warranty period of up to 12 months requirement. Our technical
personnel carried out fine-tuning and on-site services. After successful
commissioning of the entire system, the retention monies were paid by our
customers to us after the warranty period of up to 12 months. For BOT projects,
the plant started operation after passing all tests. The technical team
carried out fine-tuning and on-site services. The operation team followed the
operational guidelines and monitor the quality of treated water.
Competition
We
believe our main competitor in waste water treatment business was Beijing
Capital Co., Ltd. (“Beijing Capital”), a subsidiary of Capital Group, which has
identified investment, development, operation and management in the PRC water
industry as its core business. Beijing Capital provides environment management
services. We also competed with many other regional environmental and water
treatment companies. We believe that we compete primarily on the basis of
contract pricing and capital. Though many of our competitors offer similar but
less cost-effective services, they may have greater financial resources and
hence be able to secure contracts with reduced operating margins but more
competitive pricing. However, we believed that as a result of our cost
efficiency through our patented technologies, we were able to offer much more
competitive pricing. In addition, having access to the capital markets in the
United States through our public listing helped us to
differentiate ourselves from our competitors. Another area of competition
came from local protectionism where local governments wish to protect local
environmental businesses. In order for us to overcome this kind of competition,
we relied on our financial and technical resources.
We
believe our main competitor in bottled water business is Evian, a French bottled
water company which entered China more than 10 years ago and occupied the
biggest share of the Chinese market for branded bottled water . Several other
local brands of high level bottled water companies recently entered the
market and have relatively small market shares. We believe that
acquiring a 90% equity interest in a high quality water source within China will
give us a competitive advantage in the bottled water business as we seek to
expand this business.
Our
Competitive Strengths
Key
elements of our competitive strengths include:
Capital Resources On one hand, 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. On the other hand, the
bottled water business requires capital to build a marketing network and brand
image in the targeted market. We believe we are capable of obtaining
sufficient capital resources to fund our operation of an expanded bottled water
business. We also believe that additional capital will be available
to us on a time to time basis as we dispose of our remaining waste water
treatment facilities..
14
We place
great emphasis on high quality bottled water marketing and creating brand
recognition and also concentrate more on technical research and development, and
typically set up research and development teams for specific projects to handle
the design, development and improvement of such projects.
We
are building our bottled water market network in China’s principal
cities such as Beijing, Shanghai, Guangzhou and Chengdu, and have developed more
than 300 distribution channels to sell our 9000-Year Old Glacier Spring Water,
mainly luxury hotels, restaurants, chain stores and supermarkets, chambers of
commerce, beauty parlors and other outlets.
Since this is not our business any
more I would take this out(THAT’S OK) Long-Term Relationships with Academic Institutions.
We have good long-term relationships with Guangdong Province
Environmental Protection Design Institute and North-Eastern Environmental
Protection Design Institute, who provide important technical support in design
and project execution. North-Eastern Environmental Protection Design Institute
will provide technical support in the design of waste water treatment facilities
and preparation for the tendering of projects while Guangdong Province
Environmental Protection Design Institute will evaluate the feasibility and
acceptability of the blue prints of the facilities. Compensation for both
institutions are based on amount of work done.
15
Customers,
Sales and Marketing
Many of
our principal customers in our waste water treatment business were local
governments, food and beverage processing companies and industrial companies
that used our technologies to treat their waste water. In our bottled
water business, the main customers are the retail stores our wholesale
distributors and our ultimate customers are middle class, and wealthy
families, large companies and government offices as they are more
sensitive to and will pay a premium for food and water that is perceived to be
safer.
In 2008,
the Group’s major customer was Hai Yang City Zoning and Construction
Management Bureau, an independent third party, which, accounted for
approximately 79% of the Group’s total revenue of 2008. Revenue from Hai Yang
City Zoning and Construction Management Bureau was for the BOT wastewater
treatment services of Haiyang City Wastewater Treatment Plant.
Research
and Development
Waste Water treatment Our
research and development efforts were directed toward enhancing our existing
technology and products and developing our next generation of technology. We are
no longer engaged in Research and Development with respect to waste water
treatment.
Bottled Water Given high market
demand for bottled water, we have established an R&D department responsible
for expanding product lines and putting in market a series of products to meet
different demands of market segments so as to increase the market
coverage.
Quality
Control
In
connection with our waste water treatment business, our quality control
department was headed by Luo Huizhong, who has more than 15 years of relevant
experience. Mr. Luo has been a chief engineer at several companies, and Vice
general engineer of our company, and he is familiar with resource allocation,
quality control and environmental facility management control. We no
longer have a quality control department for waste water treatment.
Quality Control during production for bottled water
. We have
established at the factory a department
and laboratory facilities to ensure the high quality of our
products. Specific proceedures include testing at each stage such as water
source, water treatment, bottling, packaging, and finished products to ensure
our products are meeting all healthy water standards and the expectations of our
customers.
16
Cooperative
Partners and Suppliers for Waste Water Treatment
We
outsourced the design and construction of our subsystems to a number of
cooperative partners and key suppliers and maintain close relationships with
them. Our cooperative partners include North-Eastern Environmental Protection
Design Institute, Guangdong Province Environmental Protection Design
Institute, and the 20 th Group
of China Railway Company. We have signed cooperative agreements with these
cooperative partners. North-Eastern Environmental Protection Design Institute
provides technical support in the design of waste water treatment facilities and
preparation for the tendering of projects, 20 th Group
of China Railway Company evaluates all documents and information required for
tendering while Guangdong Province Environmental Protection Design Institute
evaluates feasibility and acceptability of the blue prints of the facilities.
Compensation for our cooperative partners were based on amount of work
done.
North-Eastern
Environmental Protection Design Institute was established in 1961 in the city of
Changchun. The institute focuses on design of, research in and provision of
consultancy services for municipal infrastructure construction works including
water supply, waste water treatment, waste treatment, energy supply,
construction of road and bridges, public transport and reforestation of
cities etc. The institute also provides other services in relation to civil
construction works for municipal projects like feasibility studies for projects,
evaluation of projects, project management and project supervision.
The
Guangdong Province Environmental Protection Design Institute was established in
1990. Over the years, the institute has gained experiences in the design,
management, treatment and turn-key engineering of waste water, air pollution,
noise pollution and waste residue. The institute has achieved remarkable results
especially in waste water treatment for the printing and dyeing, electroplating,
brewing, pharmaceutical, chemical and food & beverages
industries.
The 20
th
Group of China Railway is a large-scale construction company in the PRC.
The history of the 20 th Group
of China Railway dated back to the year 1949. The company has enormous
experience in the construction of railway systems in the PRC and related
infrastructure including road construction, water supply, energy supply, waste
water treatment, urban and rural planning, municipal projects etc. The company
is also involved in many large scale construction projects
overseas.
There are
three main types of equipment for our waste water treatment and potable water
projects: (i) electrical equipment which includes various types of sewage
pumps, slush pumps and other water pumps, separators, sludge scrapers, mixers,
air compressors, filters, dehydrators, blow fans, etc; (ii) automated
control systems and electrical parts; and (iii) various test, analysis,
detection and monitoring instruments. All purchases from foreign companies are
made through their authorized dealers/agents in the PRC. We adhere closely to
the principles of total quality management. Our customers, suppliers and
employees are encouraged to provide feedback and suggestions for improvements in
products and services.
The
following table sets forth our major suppliers of equipment and materials in
waste water treatment:
Component, Raw Materials and
Equipment
|
|
Our Major Suppliers
|
Waste
water treatment analytical instruments
|
|
Hach
Company
|
Blow
fan systems
|
|
HV-Turbo
A/S
|
Sewage
pumps, slush pumps, other water pumps and mixers
|
|
Nanjing
Airs Pump Industry Group
|
PLC
automated control systems
|
|
Mitsubishi
Electric
|
Electrical
parts
|
|
Schneider
Electric Low Voltage (Tianjin) Co.
|
Automated
systems
|
|
GuangZhou
SaiDi Automated Engineering
Company
|
17
The
following table sets forth our major suppliers of equipment and materials in
bottled water:
Component, Raw Materials and
Equipment
|
Our Major Suppliers
|
|
Bottle
blowing machine
|
Fogang
Guozhu Blowing Equipment Co., Ltd
|
|
Racking
machine
|
Jiangsu
XinMeixin Water Purifying Equipment Co.,Ltd
|
|
Air
compressor
|
Nanjing Hengda Compressor
Co.,Ltd
|
|
Packing
machinery
|
Jiangsu
XinMeichen Packing Machinery Co.,Ltd
|
|
Water
treating equipment
|
Zhejiang
Deqing Water Treating Co.,Ltd
|
|
Bottle
base, top
|
Yibing PuLaisi Packing Material
Co.,Ltd
|
|
Bottle
bag, label
|
|
Guangzhou
Rongshun Packing Co.,Ltd
|
We have entered into a
50-year exclusive contract to use the glacier spring water at Aba area with Aba
Municipal Government of Sichuan province. According to the contract, during the
first 10 years, we have the right to exclude any competitor for the water
source. Currently, we have established a bottling facility in the area,
primarily for 350 ML and 500 ML bottled water. A 3L facility is under
construction with expected completion in January, 2010. Our current
production capacity is 120 tons per day. We intend to increase the
capacity to 200 tons per day in the future. In addition to Aba, we are in the
process of exploring new water sources.
Intellectual
Property
Waste Water treatment We
seek to protect our intellectual property by way of our license rights to
patents on proprietary features of our advanced bio-chemical treatment
technology and processing systems for waste water treatment and by challenging
third parties that we believe infringe on our licensed patents. We have obtained
the exclusive right to use two patents owned by our Chairman, Mr. Pu, for
our MHA and GM Bio-carriers technologies. We also protect our intellectual
property rights with nondisclosure and confidentiality agreements with
employees, consultants and key customers.
Specifically,
we have registered the following patents with the State Intellectual Property
Office of the PRC:
18
•
|
MHA
biological treatment process technology (PRC Patent No. ZL 01 1 07637.2)
applied on March 14, 2001, declared effective on March 3, 2004
with a duration of 20 years from the date of application;
and
|
•
|
GM
Bio carriers (PRC Patent No. ZL 01 1 07624.0) applied on March 8,
2001, declared effective on September 10, 2003 with a duration of 20
years from the date of application.
|
Bottled
water We are the only bottled water company in
China that has registered with the State Industrial and Commercial
Bureau our “9000-year” trade mark
Employees
As of
December 31, 2008, we had 58 employees, of whom 27 were in bottled water
operations of whom 18 were engaged in sales, marketing and services, the others
in accounting and administration. We also had 31 employees in our waste water
treatment. 5 were engaged in sales, marketing and service, 5 in research,
development and engineering, 10 in finance and administration and
11 in operations. None of our employees is represented by a
collective bargaining agreement, and we believe that we have satisfactory
relations with our employees.
Environmental
Regulation
One of
our core values is protecting the environment in which we operate and the
environment in which our equipment operates. Compliance with laws and
regulations regarding the discharge of materials into the environment, or
otherwise relating to the protection of the environment, has not had any
material effect on our capital expenditures, earnings or competitive position.
We do not anticipate any material capital expenditures for environmental control
facilities in 2009.
Regulation
The PRC’s
numerous ongoing water reforms are moving toward a user-pay, market-driven
sector. Legislation serves as the basis to regulate and enforce these reforms.
The Water Resource Law, amended and put into effect on October 1, 2002,
significantly changes water resource management systems, water resource
protection, water conservation, and legal responsibilities.
Environmental
Laws and Regulations
In the
PRC, environmental laws and regulations are stipulated and implemented through
legislation and through administrative authorities at various levels of
government. Current environmental laws and regulations can be classified into
two categories: environmental management and environmental pollution prevention
and control. All environmental laws and regulations are stipulated on the basis
of the Environmental Protection Law (EPL). EPL, effective in December 1989, sets
the framework for environmental management and pollution control legislation
in the PRC.
Environmental Management Law and
Regulations. The
PRC’s environmental management measures include environmental impact assessment
(EIA), the Three Synchronies Policy, permitting requirements, and reporting
requirements. Each of these is described below:
19
1.
|
Environmental impact
assessment . The 1989 Environmental Impact Assessment Law was
revised in October 2002. These revisions became effective in September
2003 and apply to all construction projects that may negatively impact the
environment. An EIA must be prepared during the project feasibility stage
to assess the project’s environmental impact. EIA approval is necessary to
secure a construction and operating
permit.
|
2.
|
Three Synchronies Policy
. Article 26 of the EPL defines the Three Synchronies Policy as the
installation of pollution prevention and control facilities in a
construction project to be undertaken concurrently with the main
construction phase. The pollution prevention and control facilities are to
be installed and commissioned only after they are inspected and approved
by the Environmental Protection Bureau
(EPB).
|
3.
|
Permitting requirements
. Pollution discharges in the PRC are subject to registration and
permitting requirements. The EPL defines requirements for pollution
discharge registration and permits. Pollution discharges must be
registered with the relevant environmental authority. A pollution
discharge permit is issued after registration. The Management Regulation
on the Registration of Discharged Pollutants, issued by the State
Environmental Protection Administration (SEPA), effective Oct. 1, 1992,
details requirements for pollution discharge registration. At the state
level, the Department of Pollution Control under SEPA implements pollution
discharge registration and permitting policies. Pollution control
departments under local EPBs are in charge of the registration procedures
and issue a pollution discharge
permit.
|
4.
|
Reporting requirements.
According to Article 31 of the EPL, any organization that causes or
has a potential to cause an accident resulting in environmental pollution
must promptly take measures to prevent and control the pollution hazard
and notify the relevant authorities. In addition, enterprises and
institutions that have a greater likelihood to cause severe pollution
accidents must adopt effective pollution prevention
measures.
|
Environmental Pollution Law and
Regulation .
Environmental pollution prevention and control measures in the PRC apply
to various environmental media, including water, water supply, wastewater
discharge, air emissions, hazardous waste management, noise, and soil and
groundwater. In November 2004, the management rules regarding environmental
pollution prevention facilities operation permit was enacted and it set forth
the requirements for getting a permit and how the facilities must be
operated.
The
following is a summary of environmental pollution laws and regulations regarding
water, water supply and waste water discharge in the PRC:
Three
laws apply to the water sector:
1.
|
The
Water Resources Law emphasizes the uniform management of river basins and
the macro-management of water distribution and consumption. In addition,
the law identifies a water quality management
system.
|
2.
|
The
1984 Water Pollution Prevention and Control Law (WPL) applies to
discharges to rivers, lakes, canals, reservoirs, and groundwater. The WPL
contains sections pertaining to water quality and discharge standards,
pollution prevention, surface water, and groundwater. Amendments in 1996
introduced further controls on river basins, including requirements for
cities and towns to establish central sewage treatment plants and to set
treatment fees, mass-loading controls, provisions for strengthening the
supervision and management of water pollution, and non-point-source
pollution controls.
|
3.
|
The
Implementation Regulation of Water Pollution Prevention and Control Law
was enacted on March 20, 2000. This law regulates the supervision and
management of surface and ground water pollution, prevention, and control
measures.
|
20
Water supply. In urban areas,
water is usually supplied by the municipal water utility companies, which are
responsible for ensuring that water quality complies with the National Drinking
Water Standard (GB5749-85). A groundwater abstraction permit is required if any
company intends to use groundwater directly. In the northern part of the PRC,
however, the use of groundwater is strictly controlled because of significant
water shortages and ground settlement issues. Users must apply to
provincial or higher level administrative committees for a groundwater
abstraction permit.
Wastewater discharge. Two
types of wastewater discharge systems are defined in the PRC: (1) polluted
wastewater discharges (typically industrial and domestic wastewater) and
(2) non-polluted wastewater discharges (for example, storm water). Separate
drainage systems for polluted and non-polluted discharges are required for a
facility in which a municipal sewer system is available.
Bottled
water sales For a company to sell bottled water products, the company must
obtain a State issued certificate for water source, and meets the State QA
standard and State requirements of the Food Safety Law and Drinking Natural
Mineral Water Standard. We have obtained the necessary certificates
and believe that we meet all standards.
Environmental
Enforcement
In the
PRC, methods of enforcing environmental legislation include discharge fees,
surcharge fees, fines, and administrative sanctions. Pollutant discharge
activity is subject to a discharge permit, which must be registered and obtained
before the pollutants are generated.
In major
pollution control areas, such as Shanghai and Beijing, mass-loading targets are
established and allocated to major emission facilities by the local EPB. In some
pilot locations, emission quotas can be traded among facilities.
In areas
with significant pollution problems, such as those impacted by sulfur dioxide
emissions, acid rain, and water quality deterioration, specific discharge
limitations are adopted to prevent further degradation.
There are
specific items within the Constitution of the People’s Republic of China and the
PRC Criminal Law to strengthen the enforcement of environmental legislation by
disciplinary sanction, civil liability, and even criminal liability.
Disciplinary sanctions may come in the form of a warning, a fine, a requirement
to install environmental protection equipment, or a requirement to cease
operations. Criminal liability can also be passed on to the legal representative
of an enterprise if the polluting activity caused severe damage to property,
health, or interests of the state or its citizens. In these cases, the
individual deemed responsible may be prosecuted. Civil liability also exists and
is aimed at activities that may result in civil disputes. Generally, the dispute
may be settled through financial compensation by the facility that caused the
damage.
Currently,
the industry of waste water treatment is facing more intense competition. The
industry itself requires large investment in capital coupled with low rates of
return over long periods. We have determined that we lack the available capital
resources and support to expand our business in waste water treatment.
Management believes it is in the shareholders’ interest to switch our business
line from waste water treatment to bottled water mining, distribution and sales
as there is currently no premium national bottled glacier water brand in the PRC
creating a market opportunity for the Company.
21
Our
transition from a waste water treatment company with a BOT model to a premium
bottled water production, distribution and marketing company will occur over
several years as our BOT operations are disposed of fromtime to time as
opportunities present themselves to us and our capital resources and efforts are
devoted to expanding bottled water operations.
Item
1A. Risk Factors.
You
should carefully consider the risks described below, which constitute the
material risks facing us. If any of the following risks actually
occur, our business could be harmed. You should also refer to the other
information about us contained in this Form 10-K, including our financial
statements and related notes.
Risks
Related to Our Business
We are dependent
on economic
conditions in the PRC’s as
all of our business is conducted in the PRC. All of our business
operations are conducted in the PRC and all of our customers are also located in
the PRC. We operate our new bottled water business internally in the
PRC. Accordingly, any significant slowdown in the PRC economy may
cause the waste water treatment industry to reduce expenditure or delay the
building of new facilities or projects for waste water treatment. This may in
turn lead to a decline in the demand for our BOT products and services, and may
reduce our profitability and the return on your investment. Also, a
general economic slowdown has is currently underway may reduce demand for
premium bottled water and limit the growth of those operations.
Failure to retain
services of key personnel will affect our operations and results . Our
success to date has been largely due to the contributions of our executive
officers. The continued success of our business is very much dependent on the
goodwill that they have developed in the industry over the past several
years.
Our
continued success is dependent, to a large extent, on our ability to retain the
services of our executive officers. The loss of any of our executive officers’
services due to resignation, retirement, illness or otherwise without suitable
replacement or the inability to attract and retain qualified personnel would
affect our operations and may reduce our profitability and the return on your
investment.
We may not be
able to protect our processes,
technologies and systems against claims by other parties. Although we
have two registered 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.
22
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, which we seek to protect, in part, by
confidentiality provisions in contracts with our customers and our employees.
There can be no assurance that these agreements will not be breached, or that we
will have adequate remedies for any breach, or 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 hence, our profitability,
may be reduced.
We may require
additional funding for our future growth. Our future growth will depend,
to a large extent, on our ability to establish our bottled water products
through advertising and to develop a manufacturing and distribution
network which requires a high amount of capital investment. In order
to obtain additional capital to develop these growth opportunities, we may issue
additional shares of our equity securities. If new shares placed to new and/or
existing shareholders are issued, they may be priced at a discount to the then
prevailing market price of our shares, in which case, existing shareholders’
equity interests may be diluted. If we fail to utilize the new equity to
generate a commensurate increase in earnings, our earnings per share will be
diluted, and this could lead to a decline in our share price. Any additional
debt financing may, apart from increasing interest expense, contain restrictive
covenants with respect to dividends, future fund-raising exercises and other
financial and operational matters.
Our customers may
make claims against us and/or terminate our services, in whole or in part,
prematurely should we fail
to implement projects that fully satisfy their requirements and expectations
. Failure to implement projects that fully satisfy the requirements and
expectations of our customers or defective system structure or products as a
result of design or workmanship or due to acts of nature may lead to claims
against us and/or termination of our services, in whole or in part, prematurely.
This may arise from a variety of factors including unsatisfactory design or
implementation, staff turnover, human errors or misinterpretation of and failure
to adhere to regulations and procedures. This may adversely affect our
reputation and may reduce our profitability.
Our Waste Water
Treatment Operations rely
on a few major suppliers . We are dependent on our major suppliers for
the timely delivery of materials and equipment that we require for the waste
water treatment systems we operatel. Should our major suppliers fail
to deliver the materials and equipment on time, and if we are unable to source
these materials and equipment from alternative suppliers on a timely basis, our
operations could be adversely affected. This, in turn, would adversely affect
our reputation if our customers lose confidence in our services and as a result,
reduce our revenue and profitability.
BOT
projects require high
capital commitments . We
have invested capital in BOT projects which require high up-front
capital expenditures. Our returns from BOT projects are derived from fees paid
by the PRC and other governmental customers 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.
23
We rely on
subcontractors for our BOT projects . As we
may, from time to time, subcontract some parts of our projects to
subcontractors, such as engineering, assembly and integration works, we face the
risk of unreliability of work performed by our subcontractors. Should our
subcontractors default on their contractual obligations and work specifications,
our ability to deliver the end product or service to our customers in accordance
with quality and/or timing specifications may, in turn, be compromised.
Furthermore, if we are unable to secure competitive rates from our
subcontractors, our profitability may be reduced.
We are subject to
foreign exchange risks . Our dominant transactional currency is the
Chinese RMB, including the cost of materials which are imported by our
suppliers. With costs mainly denominated in RMB, our transactional foreign
exchange exposure for the past few years has been insignificant. However, as our
suppliers take into account the fluctuations in foreign exchange rates when they
price the imported materials which we procure from them, such fluctuations
in foreign exchange rates may result in changes in the purchase price of
imported materials. Any future significant fluctuations in foreign exchange
rates may have a material impact on our financial performance in the event that
we are unable to transfer the increased costs to our customers.
Since our
subsidiaries, operations and significant assets are located in the PRC,
shareholders may find it difficult to enforce a U.S. judgment against the assets
of our company, our directors and
executive officers . Our subsidiaries’ operations and significant assets
are located in the PRC. In addition, all of our executive officers and our
directors are non-residents of the U.S., and substantially all the assets of
these persons are located outside the U.S. As a result, it could be difficult
for investors to effect service of process in the U.S., or to enforce a judgment
obtained in the U.S. against us or any of these persons.
Our operations
could be adversely affected by changes in the political and
economic conditions in the PRC . The PRC is our main market and accounted
for all of our revenue in 2006. Therefore, we face risks related to conducting
business in the PRC. Changes in the social, economic and political conditions of
the PRC may adversely affect our business. Unfavorable changes in government
policies, political unrest and economic developments may also have a negative
impact on our operations.
Since the
adoption of the “open door policy” in 1978 and the “socialist market economy” in
1993, the PRC government has been reforming and is expected to continue to
reform its economic and political systems. Any changes in the political and
economic policies of the PRC government may lead to changes in the laws and
regulations or the interpretation of the same, as well as changes in the foreign
exchange regulations, taxation and import and export restrictions, which may, in
turn, adversely affect our financial performance. While the current policy of
the PRC government seems to be one of imposing economic reform policies to
encourage foreign investments and greater economic decentralization, there is no
assurance that such a policy will continue to prevail in the
future.
24
Introduction of
new laws or changes to existing laws by the PRC government
may adversely affect our business . The PRC legal system is a codified
legal system made up of written laws, regulations, circulars, administrative
directives and internal guidelines. Unlike common law jurisdictions like the
U.S., decided cases (which may be taken as reference) do not form part of the
legal structure of the PRC and thus have no binding effect. Furthermore, in line
with its transformation from a centrally-planned economy to a more free
market-oriented economy, the PRC government is still in the process of
developing a comprehensive set of laws and regulations. As the legal system in
the PRC is still evolving, laws and regulations or the interpretation of the
same may be subject to further changes. For example, the PRC government may
impose restrictions on the amount of tariff that may be payable by municipal
governments to waste water treatment service providers like us. Also, more
stringent environmental regulations may also affect our ability to comply with,
or our costs to comply with, such regulations. Such changes, if
implemented, may adversely affect our business operations and may reduce our
profitability.
We may be subject
to foreign exchange controls in the PRC . Our PRC subsidiaries are
subject to PRC rules and regulations on currency conversion. In the PRC, the
State Administration for Foreign Exchange (“SAFE”) regulates the conversion of
the RMB into foreign currencies. Currently, foreign investment enterprises
(“FIEs”) are required to apply to SAFE for “Foreign Exchange Registration
Certificate for FlEs”. All of our subsidiaries are FIEs. With such registration
certifications (which need to be renewed annually), FlEs are allowed to open
foreign currency accounts including the “recurrent account” and the “capital
account”. Currently, conversion within the scope of the “recurrent account” can
be effected without requiring the approval of SAFE. However, conversion of
currency in the “capital account” (e.g. for capital items such as direct
investments, loans, securities, etc.) still requires the approval of SAFE. Our
operations and business may be adversely affected if conversion of currency in
the “capital account” is not approved by the SAFE.
We have recently entered the bottled water business and will
be subject to all of the
risks of a new business enterprise. Based on the results of a
limited test marketing effort during calendar 2007 and 2008 we intend to devote
our future efforts to producing and marketing branded bottled water in the
PRC. This is a new line of business for us and there are many risks
attendant to entering a new line of business such as cost uncertainties, delays
in production and acceptance of our product. If we mismanage
our production of branded bottled water or if we are unable to obtain market
acceptance of our product at proposed price levels we are likely to fail in this
business and this will negatively impact the value of our stock.
We may require additional
financing. In order to enter into the business of marketing
premium branded bottled water we will require capital resources not currently
available to us. To raise the necessary funds we must obtain debt
financing, sell an existing asset or issue additional shares to
investors. We do not have any agreements or commitments to do
any of the foregoing. Nor can we predict when or if funding will be
available to us or if it will be available on terms that are beneficial to our
current shareholders.
Our bottled water business may face
increased competition. We believe that there is a pressing
need for a premium pure, drinkable bottled water in the PRC. Other
companies with greater resources and other advantages over us, such as
established distribution networks, may also perceive the need for premium
bottled water in the PRC, enter our market and compete with us successfully and
cause our results to suffer.
The success of our bottled water
business is dependant on out preserving a reputation for
purity. Our premium bottled water will only be purchased by
consumers if they can trust that it is pure and
beneficial. Accordingly, if we experience any quality control
problems, our reputation might be tarnished and our proposed new business could
fail.
25
Chong Liang Pu, our Chairman of the
Board, is our controlling stockholder. Chong Liang Pu, our
Chairman of the Board owns 49,635,000 shares or 35.6% of the issued and
outstanding shares of our company. Due to his ownership of shares,
Mr. Pu will be able to control the affairs of the Company for the foreseeable
future.
Risks
Related to Our Securities
A
purchaser of our stock is purchasing penny stock which limits his or her ability
to sell the stock.
Our
shares of common stock are considered penny stock under the Exchange Act. The
shares will remain penny stock for the foreseeable future. The classification of
penny stock makes it more difficult for a broker-dealer to sell the stock into a
secondary market, thus limiting investment liquidity. Any broker-dealer engaged
by the purchaser for the purpose of selling his or her shares in our Company
will be subject to rules 15g-1 through 15g-10 of the Exchange Act. Rather than
creating a need to comply with those rules, some broker-dealers will refuse to
attempt to sell penny stocks such as ours.
We
do not intend to pay dividends and there will be less ways in which you can make
a gain on any investment in our Company.
We have
never paid any cash dividends and currently do not intend to pay any dividends
for the foreseeable future. To the extent that we require additional funding
currently not provided for in our financing plan, our funding sources may likely
prohibit the payment of a dividend.
Our board of directors is authorized
to issue shares of preferred stock, which may have rights and preferences
detrimental to the rights of the holders of our common
shares.
We are
authorized to issue up to 50,000,000 shares of preferred stock, $.001 par
value. To date we have not issued any shares of preferred stock and
have no plans to do so. Our preferred stock may bear such rights and
preferences, including dividend and liquidation preferences, as the board of
directors may fix and determine from time to time. Any such
preferences may operate to the detriment of the rights of the holders of our
common shares.
Our
Articles of Incorporation provide for indemnification of officers and directors
at our expense and limit their liability which may result in a major cost to us
and hurt the interests of our shareholders because corporate resources may be
expended for the benefit of officers and/or directors.
Our
Articles of Incorporation and applicable Delaware law provide for the
indemnification of our directors, officers, employees, and agents, under certain
circumstances, against attorney's fees and other expenses incurred by them in
any litigation to which they become a party arising from their association with
or activities on our behalf. We will also bear the expenses of such
litigation or any of our directors, officers, employees, or agents, upon such
person's promise to repay us, therefore, if it is ultimately determined
that any such person should not have been entitled to indemnification this
indemnification policy could result in substantial expenditures by us, which we
will be unable to recoup.
26
We have
been advised that, in the opinion of the SEC, indemnification for liabilities
arising under federal securities laws is against public policy as expressed in
the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against these types of liabilities, other
than the payment by us of expenses incurred or paid by a director, officer or
controlling person in the successful defense of any action, suit or proceeding,
is asserted by a director, officer or controlling person in connection with
the securities registered in our SB-2, we will (unless in the opinion of
our counsel, the matter has been settled by controlling precedent) submit to a
court of appropriate jurisdiction, the question whether indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue. The legal process relating to this matter
if it were to occur is likely to be very costly and may result in us receiving
negative publicity, either of which factors is are likely to materially reduce
the market and price for our shares, if such a market ever
develops.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
The
Company has received a letter from the Securities and Exchange Commission Staff
addressing comments to our Form 10-K for the year ended December 31,
2008. This amendment to our Annual Report on Form 10-K and
correspondence we have filed represents the Company’s initial response to those
comments.
Item 2. Description of
Property
Our
principal executive office consists of approximately 400 square meters of office
space that we lease and which are located at Suite 7A01, Baicheng Building, 584
Yingbin Road, Dashi, Panyu District, Guangzhou, Guangdong, China. We lease this
space pursuant to a four year lease at a rate of approximately
$19,000 per year commencing April 1, 2006.
Commencing May
1 , 2009, we leased about 300 square meters of office space for the bottled
water marketing development team at Suite 4D, Yijing Building,
NO.119,Guanghzou Dadao Rd, Yuexiu District, Guanghzou City, P.R.China. We lease
this space pursuant to a five year lease at a rate of approximately $43,000 per
year with yearly increases of approximately 5% per annum during the term of the
lease. The office is located at Zhujiang New Town, CBD of
Guangzhou.
27
Our
remaining BOT facilities are located at the following locations:
BOT Facilities
|
Location
|
|
Waste
water treatment plant of TJ
|
Dinan
Road, Wuqing Development Zone, Tianjin, PRC.
|
|
Waste
water treatment plant of XL
|
South
west of Matoupu Village, Xinle City, Hebei, PRC.
|
|
Waste
water treatment plant of HY
|
Hexi,
Zangjia Village, Yaiyang Touring and Vacationing Area, Haiyang City,
Shandong, PRC.
|
Each of
the above BOT facilities consists of waste water treatment plants, office
buildings and staff facilities.
Our
bottled water facilities, other than the office described above, are located at
the following locations:
Bottled water Facilities
|
Location
|
|
Aba
Xinchen Dagu Glacier Spring Water Co.,Ltd
|
Zegai
Village, Luhua Town, Heishui County, Aba Zang and Qiang Autonomous Region,
Sichuan Province, PRC.
|
|
Beijing
9000 Year Commercial and Trading Co.,Ltd
|
Rm1109,
Building 2, Henji Center, No.18 JianGuoMennei Dajie Street, East District,
Beijing, P.R.C.
|
|
Chengdu
9000 Year Water Co., Ltd
|
|
Suite
E, Floor 16, Building 2, Ruijin Plaza, No.2,GaoShenqiao, Chengdu City,
P.R.C.
|
Each of
the above Bottled water facilities consists of bottled water treatment
plants, office buildings and staff facilities.
28
Item
3. Legal Proceedings.
Neither
our company nor any of our properties are currently subject to any pending legal
proceedings.
Item
4. Submission of Matters to a Vote of Security Holders.
No
matters were submitted to a vote of shareholders during the fourth quarter of
the year
ending December 31, 2008.
PART Ⅲ
Part
II
Item 5.
Market for Common Equity and Related Shareholder Matters.
Market
Information
Our common stock was
traded on the OTC Bulletin Board (“OTCBB”) under the symbol “CEEC” until
November 13, 2006 when our symbol was changed to “CHWG”. On April 4,
2007, our symbol was changed to CHWGE and on May 7, 2007 our shares were removed
from the OTCBB and listed on the “Pink Sheets” maintained by the National
Quotation Bureau under the Symbol “CHWG”. The following table sets forth, for
the periods indicated, the high and low sale prices of our common stock as
reported on the OTCBB. We consider our common stock to be thinly traded and that
any reported bid or
sale prices may not be a true market-based valuation of the common
stock.
Quarter
Ended
|
High
|
Low
|
||||||
March 31,
2007
|
$ | 0.13 | $ | 0.08 | ||||
June
.30, 2007
|
$ | 0.11 | $ | 0.08 | ||||
September.
30, 2007
|
$ | 0.14 | $ | 0.09 | ||||
December.
31, 2007
|
$ | 0.35 | $ | 0.08 | ||||
March.
31, 2008
|
$ | 0.10 | $ | 0.05 | ||||
June
31, 2008
|
$ | 0.039 | $ | 0.033 | ||||
September
30, 2008
|
$ | 0.03 | $ | 0.029 | ||||
December
31, 2008
|
$ | 0.008 | $ | 0.008 | ||||
March
31, 2009
|
$ | 0.017 | $ | 0.013 | ||||
June
30, 2009
|
$ | 0.03 | $ | 0.03 |
29
Holders
As of May 12, 2009, there were 72 record holders of our common
stock. The number of holders does not include the shareholders
for whom shares are held in a "nominee" or "street" name.
Dividend
Policy
We have
not declared or paid any dividends on our common stock to date. We
anticipate that any future earnings will be retained as working capital and used
for business purposes. Accordingly, it is unlikely that we will
declare or pay any such dividends in the foreseeable future.
Securities
Authorized for Issuance under Equity Compensation Plans
None
Recent
Sales of Unregistered Securities
We did
not sell any unregistered securities during the year ended December 31,
2008
ITEM
6. SELECTED FINANCIAL DATA.
Not
applicable
ITEM
7. MANAGEMENT’S DISCUSSION and ANALYSIS of FINANCIAL CONDITIONS and REULTS OF
OPERATION.
Year
ended December 31, 2008 vs. Year ended December 31, 2007.
Revenues Revenues
from our bottled water operations increased from $0 in 2007 to
$207,318 in 2008. The increase is because we did not have bottled
water revenues prior to 2008. In 2007 our revenues were from our
discontinued BOT business. Management anticipates that
all future revenues will be from bottled water operations in future
periods.
30
Cost of
Revenues. Cost of revenues from our bottled water operations
increased from $0 in 2007 to $151,334 in 2008. Costs related to our
BOT business which we are discontinuing, are no longer includd in costs of
revenues. . Gross profit from
battled water operations was $55,984 in 2008 as compared to$0 in 2007,
reflecting our having bottled water operations.
Operating (General and
Administrative) Expenses. Our General
administrative expenses increased during 2008 to
$1,332,124 which reflects the start up costs of our bottled water
operations as compared to $0 in 2007 when we did not have bottled water
operations. Other Income. The
change on Other Income from a loss of ($292,950) in 2007 to a gain of
$991,900 principally due to a gain on derivative instruments of $1,143,355 in
2008 as compared to a loss of ($203,904) in 2007. The main
reason for the increase is the share price of the company sharply shrank during
2007 compared with that of 2008. The calculation is based on the Black Sholes
model. An increase in share results from affiliated companies, from
$156,089 in 2007 to $333,441 in 2008, reflects the increased profitability of
those companies during 2008, which we do not control and can not predict for
future periods.
Comprehensive Loss As a result of
the foregoing factors, especially the Company’s incurring much of the negative
impact of its move from waste water treatment as turn-key engineering or BOT
basis to bottled water production, distribution and sales was incurred in 2008
and the Company’s stock price being relatively stable during 2008, comprehensive
income (loss), which was a loss of $(1,233,768) in 2007 increased to
($2,555,045) in 2008.
Year
ended December 31, 2007 vs. Year ended December 31, 2006.
Revenues Revenues
declined from $4,797,324 in 2006 to $1,554,624 in 2007, a decline of $3,242,700.
$3,222,617 or approximately 99% of this decline of revenues was a decline
of revenues from turn-key engineering projects – an area of its business which
the Company has determined not to continue. Revenues in other areas
remain essentially unchanged.
Cost of Revenues. Cost of
revenues declined from $3,489,370 in 2006 to $1,323,523 in 2007 with virtually
all of the decline being associated with costs associated with turn-key
engineering projects (and sales taxes also associated with turn-key engineering
projects. The Company's other costs of revenue did not change
appreciably.
Gross Profit. Gross
profit was reduced from $1,307,954 in 2006 to $231,101 in 2007 which reflected
the lower level of operations as turn-key engineering projects were phased out
during the year.
Operating
(General and Administrative) Expenses. Our General
administrative expenses increased $1.37 million, or approximately 208%, to $2.03
million for the year ended December 31, 2007 from $0.66 million for the year
ended December 31, 2006. The increase in the amount of general and
administrative expenses was partly attributable to the increase of operating
activities and the necessary preparation to switch our business line
from turn key and BOT waste water treatment to bottled water sales. As a
percentage of net revenues, administrative expenses increased to 130% for the
year ended December 31, 2007 as compared to 13.8 % for the year ended December
31, 2006.
31
Other Income. The
change on Other Income from $3,404,640 in 2006 to $36,250 in 2007 was almost
entirely due to a gain on fair value of derivative instruments of $3,843,520 in
2006 as compared to a loss of $(203,904) in 2007. The main reason for the
decrease is the share price of the company sharply shrank during 2007 compared
with that of 2006. The calculation is based on the Black Sholes
model.
Comprehensive
Income. The foregoing factors nearly balanced out between 2007
and 2006 and our comprehensive loss decreased slightly from $(1,274,001) in 2006
to $(1,106,659) in 2007.
Liquidity.
General. As of December 31,
2008, we had cash and cash equivalents of $8,579. The following table provides
detailed information about our net cash flow for all financial statements
periods presented in this report.
The Year Ended December
31,
|
||||||||
2007
|
2008
|
|||||||
(Dollars
in thousands)
|
||||||||
|
|
|||||||
Net
cash provided by operating activities
|
(2,239 | ) | 5,226 | |||||
Net
cash provided by/(used in) investing activities
|
1,552 | (5,365 | ) | |||||
Net
cash provided by/(used in) financing activities
|
0 | 0 | ||||||
Net
cash inflow/(outflow)
|
0 | 9 |
Operating Activities. Net
cash provided by operating activities was $5,225.599 for the year ended
December 31, 2008, which is an increase of 7,464,128from negative
($2,238,529) net cash provided by operating activities for the same period in
2007. The net outflow from the operating activities was mainly due to paymernts
from related companies and reductions in prepayments, changing from a negative
($6,733,284) to a positive $6,757,349. Much of this
resulted from receipt of payments from local governmental
units.
32
Our
future liquidity will be dependant on our ability to either obtain
financing or proceeds from the sale of our remaining BOT plants to
fund our bottled water operations or our obtaining loans. None of
these events are entirely within our control. If we do not receive
additional cash resources, the scope of our production, marketing and
distribution effort for our bottled water will be reduced.
Critical
Accounting Policies
The
following is a discussion of those accounting policies that we deem to be
“critical” — that is, they are important to the portrayal of our financial
condition and results, and they reflect management’s reliance on estimates
regarding matters that are inherently uncertain.
Revenue recognition. We
recognize revenue using various revenue recognition policies based on the nature
of the sale and the terms of the contract.
Revenues
from turn-key engineering projects are recognized on the percentage of
completion method for individual contracts. We follow the guidance of American
Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP)81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, for our accounting policy relating to the use of the
percentage-of-completion method, estimated costs and claim recognition for
construction contracts. Revenues are recognized in the ratio that costs incurred
bear to total estimated contract costs to the extent we believe related
collection is probable. The use of the percentage of completion method of
revenue recognition requires estimates of percentage of project completion.
Changes in job performance, estimated profitability and final contract
settlements may result in revisions to costs and income in the period in which
the revisions are determined. Provisions for any estimated losses on uncompleted
contracts are made in the period in which such losses are determinable. In
instances when the work performed on fixed price agreements is of relatively
short duration, we use the completed contract method of accounting whereby
revenue is recognized when the work is completed. 5% to 10% of the total
contract value will be treated as retention monies withheld to ensure
performance of contract during the warranty period of up to 12 months as
stipulated in the fixed price contracts, both long term and short
term.
Revenues arising from
waste water treatment are recognized based on waste water treated as
recorded daily by meters read at rates, in RMB/ton, as prescribed under the BOT
agreements in accordance with SEC Staff Accounting Bulletin, (“SAB”) Topic 13
“Revenue Recognition”. We meet the following four criteria for revenue recognition outlined in SAB
Topic 13:
33
1.
|
There
is sufficient evidence to support that sales arrangements
exist;
|
2.
|
The
price to the buyer is fixed through signed
contracts;
|
3.
|
Meter
readings illustrate that delivery of treated waste water has occurred;
and
|
4.
|
Collectability
is reasonably assured through one or more of the following: due diligence
prior to contract signing; historical payment practices; or required
upfront payments.
|
Revenues
from sale of environment protection related products and provision of technical
services are recognized when goods are delivered or as services are performed.
The contractual terms of the purchase agreements or consultancy agreements
dictate the recognition of revenues by us. We recognize revenue in accordance
with Staff Accounting Bulletin No.104. Accordingly, four basic criteria must be
met before revenue can be recognized: (1)persuasive evidence of an arrangement
exists; (2)delivery has occurred; (3)the selling price is fixed and
determinable; and (4)collectibility is reasonably assured.
Determination of criteria (3)and (4)are based on management’s judgments regarding the
fixed nature of the selling prices of the products or services delivered and the
collectibility of those amounts. Provisions for discounts and rebates to
customers, estimated returns and allowances, and other adjustments are provided
for in the same period the related sales are recorded. We defer any revenue for
which the product has not been delivered or is subject to refund until such time
that we and our customer jointly determine that the product has been
delivered or no refund will be required.
Impairment of assets. Our
policy is to periodically review and evaluate whether there has been a permanent
impairment in the value of long-lived assets. Factors considered in the
evaluation include current operating results, trends and whether the anticipated
undiscounted estimated future cash flows are less than the carrying
value.
Allowances
for accounts receivables. Our provisioning policy
for bad and
doubtful debt is based on the evaluation of collectability and aging
analysis of accounts receivables and on management’s judgment. We do not require
collateral or other security to support clients’ receivables. We conduct
periodic review of our clients’ financial condition and customer payment
practice to minimize collection risk on accounts receivables. This review is
based on considerable amount of judgment which is required in assessing the
ultimate realization of these receivables, including the current creditworthiness and
the past collection history of each customer. During the 2004 financial period,
we had not made any allowance for doubtful debts.
34
Credit Policy. As of December 31,
2008 and 2007, our accounts receivables were US $0.09 million and US
$0.52 million, respectively. The decrease in accounts receivables in 2008 was
due to our decision to move away from turn-key engineering projects. There is no
allowance for doubtful amounts for 2007 or 2008
For
turn-key projects, we billed our customers based on the percentage of completion
as set forth in the contract signed with our customers whereas for BOT projects,
we start billing our customers monthly once the wastewater treatment facilities
start operation for the operating period as stipulated in the BOT
agreements.
Financial
Instruments. The Company conducted a private placement in April 2005
(“April Private Placement”) of 20 investment units, at $25,000 per unit, for
gross proceeds of $500,000. Each unit consisted of (a) a 12% convertible
debenture in the original principal amount of $25,000, convertible into shares
of our common stock at the rate of the lesser of (i) $0.20 per share or
(ii) a 10% discount to the price per share of common stock (or conversion
price per share of common stock) of the next private placement conducted by us
prior to any conversion of the debenture, and (b) 125,000 detachable
warrants to purchase one share each of our common stock at an exercise price of
$0.20 per share, expiring ten years from their date of issuance (“April
Warrants”). As a result of the September 2005 private placement, pursuant to
Section 5(d) of the warrant agreement, the exercise price has been adjusted
to $0.15 per share on September 14, 2005. The debentures were due and
payable August 1, 2005. The debenture holders, however, extended the
payment period to September 30, 2005. The debentures were converted into
3,703,701 shares of common stock on October 1, 2005.
The
Company used the Black-Scholes model in calculating the fair market value of the
April Warrants and allocated $148,531, $74,266 and $185,664 of the $408,461 net
proceeds to the Convertible Debenture, the Bifurcated Conversion Feature of the
Debenture and the April Warrants, respectively. The differences between the fair
value of each of the Convertible Debenture, the Bifurcated Conversion Feature of
the Debenture and the April Warrants and the respective allocated amounts are
recorded as non-cash financing charges and expensed of at the date of issuance.
The principal assumptions used in the computation of the April Warrants are:
expected term of 10 years; a risk-free rate of return of 4.24%; dividend yield
of zero percent; and a volatility of 70%.
35
The Company granted to the
holders of the April Warrants certain piggy-back and demand registration
rights. Pursuant to the agreements surrounding the April Private Placement, in
the event that the Company determined to undertake a registration of securities,
the Company would include, at the request of the holder of “Registrable
Securities”, the Registrable Securities in the registration statement. If the
Company did not file a registration statement by the 120th day from the closing
of such financing, and the Company shall have received a written request signed
by the holders holding the majority of the
Registrable Securities, then the Company was obligated to file, at its expense,
a registration statement covering the Registrable Securities. Once such
registration statement has been filed and declared effective, the Company is
obligated to keep such
registration statement effective until the earlier of (i) the date that all
of the Registrable Securities have been sold pursuant to such registration
statement, (ii) all Registrable Securities have been otherwise transferred
to persons who may trade such shares without restriction under the
Securities Act, and the Company has delivered a new certificate or other
evidence of ownership for such securities not bearing a restrictive legend, or
(iii) all Registrable Securities may be sold at any time, without
volume or manner of sale limitations pursuant to Rule 144(k) or any similar
provision then in effect under the Securities Act. As of December 31, 2005,
the Company has not received any written request signed by the holders holding
the majority of the
Registrable Securities.
Under
EITF No. 00-19, the fair value of these warrants should be reported as a
liability. Pursuant to the Warrant Agreement, because there is currently no
effective registration statement covering the shares of common stock underlying
these warrants, these warrants are currently subject to a cashless exercise
whereby the warrant holders may surrender their warrants to the company in
exchange for shares of common stock. The number of shares of common stock into
which a warrant would be exchangeable in such a cashless exercise depends on
both the exercise price of the warrants and the market price of the common
stock, each at or near the time of exercise. Because both of these factors are
variable, it is possible that the company could have insufficient authorized
shares to satisfy a cashless exercise. In this scenario, if the company were
unable to obtain shareholder approval to increase the number of authorized
shares, the company could be obligated to settle such a cashless exercise
with cash rather than by issuing shares of common stock. Further, EITF No. 00-19
requires that we record the potential settlement obligation at each reporting
date using the current estimated fair value of the warrants, with any changes
being recorded through our statement of operations. We will continue to report
the potential settlement obligation as a liability until such time as the
warrants are exercised or expire or we are otherwise able to modify the warrant
agreement to remove the provisions which require this
treatment.
36
The
conversion feature of the convertible debenture issued in April did not qualify
for the scope of exception from the provisions of SFAS 133 because the
convertible debentures are convertible into a variable number of shares. As
such, the conversion feature was bifurcated from the convertible debenture and
accounted for as a derivative at fair value with changes in fair value recorded
in earnings. Upon the conversion of the convertible debentures in October 2005,
the convertible debenture was recorded in equity as additional
capital.
On September 14,
2005, the Company closed the private placement sale to accredited investors of
units consisting of shares of our common stock and warrants to purchase shares
of our common
stock for aggregate gross proceeds of $4.83 million (“September Private
Placement”).
Pursuant to the subscription agreements entered into with the investors, we
issued to the investors 161 units at a price of $30,000 per unit. Each unit
consisted of 200,000 shares of our
common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares
of our common stock over a five year period at an exercise price of $0.20 per
share. Pursuant to the terms of the subscription agreements, we granted the
investors limited registration rights for all common shares comprising the
units, including the common shares issuable on exercise of the warrants. The
Company also issued to Westminster Securities Corporation, as partial
compensation for their placement agent services, 7,728,000 placement agent
warrants to purchase one share each of our common shares, a portion of which has
been assigned by Westminster Securities Corporation to certain of its officers
and employees (the warrants issued in the September Private Placement together with
the placement agent warrants are hereinafter referred to as “September
Warrants”).
The
Company used the Black-Scholes model in calculating the fair market value of the
September Warrants and allocated $4,140,535 of the $4,172,735 net proceeds to
the September Warrants. The difference between the fair value of the September
Warrants and the allocated amount is recorded as non-cash financing charges and
expensed of at the date of issuance. The principal assumptions used in the
computation of the September Warrants are: expected term of 5 years; a risk-free
rate of return of 4.24%; dividend yield of zero percent; and a volatility of
70%.
37
The September Warrants
were issued pursuant to the agreements surrounding the September Private
Placement. The subscription agreement contains a liquidated damages
clause which requires cash penalties equal to two percent (2.0%) of the
purchase price of the registrable securities purchased from the Group and held
by the investors each month (or portion thereof) if the Group’s registration
statement is not filed with the SEC within thirty (30) days of the final
closing, (ii) such registration statement is not declared effective by the
SEC within the earlier of one hundred and twenty (120) days from
the final closing or three (3) business days of clearance by the SEC
to request effectiveness, (iii) such registration statement is not
maintained as effective by the Group for the effectiveness period or as allowed
by 5(k)(ii) below or (iii) the additional registration statement referred
to in Section 5(b) is not filed within thirty (30) days or declared
effective within ninety (90) days as set forth therein. As of
December 31, 2005, the Group has estimated a registration right liability
of $94,981.
Since
the liquidated
damages are payable in cash, under paragraphs 12-32 of EITF 00-19 “Accounting for Derivative
Financial Instruments Indexed to and Potentially Settled in a
Company’s Own Stock”, contracts that include
any provision that could require net-cash settlement cannot be
accounted for as equity. Accordingly, the proceeds of the private placement in
September allocated for par value of the common stock and the September Warrants
have been recorded as a liability on the balance sheet. Upon the effectiveness
of the registration statement, the amount will be recorded as
equity.
ITEM
7A. QUANTITATIVE and QUALITATIVE DISCLOSURES about MARKET
RISK.
Not
applicable.
ITEM
8. FINANCIAL STATEMENTS and SUPPLEMENTARY DATA.
Our
financial statements for the years ended December 31, 2008 and 2007, and the
reports thereon of Patrizio & Zhao, LLC, respectively are included in this
annual report.
ITEM
9. CHANGES in and DISAGREEMENTS with ACCOUNTANTS on ACCOUNTING and
FINANCIAL DISCLOSURE.
None.
ITEM
9A(T). CONTROLS and PROCEDURES.
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we
file or submit under the Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed
by us in the reports that we file under the Exchange Act is accumulated and
communicated to our management, including our principal executive and financial
officers, as appropriate to allow timely decisions regarding required
disclosure.
38
Material
Weaknesses identified Prior to Fiscal 2008
Our Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as this term is defined under the
rules of the SEC) as of August 10, 2006. Based on this evaluation, the
Company’s Chief Executive Officer and Chief Financial Officer and Executive
Chairman concluded that, as of August 10, 2006, our disclosure controls and
procedures were not effective in recording, processing, summarizing and reporting, on a timely
basis, information required to be disclosed by the Company in the reports that
it files or submits under the US Securities Exchange Act of 1934 as a result of
material weaknesses in our internal control over financial reporting
described
below.
In the
process of filing our registration statement, we identified certain accounting
errors in our reported US GAAP annual results for fiscal 2004 and 2005 and
certain quarterly results in 2005 and 2006. As a result, we have restated the
amounts and
disclosures in those annual financial statements.
The
financial statements which should no longer be relied upon include:
(i)
|
the
audited consolidated financial statements contained in our report on Form
10-KSB for the fiscal year ended December 31, 2004 (the “2004 10-KSB”),
filed with the SEC on April 15, 2005, Amendment No. 1 to the 2004 10-KSB
filed on July 15, 2005, and Amendment No. 2 to the 2004 10-KSB filed on
January 13, 2006 ;
|
(ii)
|
the
audited consolidated financial statements contained in our report on Form
10-KSB for the fiscal year ended December 31, 2005 (the “2005 10-KSB”),
filed with the SEC on April 17,
2006;
|
(iii)
|
the
unaudited consolidated financial statements contained in our quarterly
report on Form 10-QSB for the quarterly period ended March 31, 2005 (the
“March 31, 2005 10-QSB”), filed with the SEC on May 24,
2005;
|
(iv)
|
the
unaudited consolidated financial statements contained in our quarterly
report on Form 10-QSB for the quarterly period ended June 30, 2005 (the
“June 30, 2005 10-QSB”), filed with the SEC on August 15,
2005;
|
(v)
|
the
unaudited consolidated financial statements contained in our quarterly
report on Form 10-QSB for the quarterly period ended September 30, 2005
(the “ September 30, 2005 10-QSB”), filed with the SEC on November 15,
2005 and Amendment No. 1 to the September 30, 2005 10-QSB filed on January
13, 2006; and
|
(vi)
|
the
unaudited consolidated financial statements contained in our quarterly
report on Form 10-QSB for the quarterly period ended March 31, 2006 (the
“March 31, 2006 10-QSB”), filed with the SEC on May 15,
2006.
|
39
Gain
on disposal of XY
As
previously disclosed in our 2004 10-KSB, including amendments thereto, and
comparative figures in our 2005 10-KSB, we recorded a gain on disposal
of $2,029,720 in 2004 for the disposal of our 90% attributable interest in Xian
Yang Bai Sheng Water Purifying Company Limited (“XY”) to True Global Limited
(“TGL”), an independent party,
at a consideration of $4,130,435 (RMB34.2 million). The disposal was
made pursuant to a tri-party framework agreement between Evergreen Asset Group
Limited (“EGAG”), TGL and Guang Dong Xin
Sheng Environmental Protection Company Limited (“GDXS”) in which EGAG
transferred 90% of its equity interest in XY to TGL while
GDXS continued to own 10% of its equity interest in XY. The transaction was
consummated on October 26, 2004 and the gain represents the difference between
the disposal proceeds and our attributable share of net assets of XY at the date
of disposal. In the same year, we also recognized an amount of $9,115,942 for
the construction revenue of XY using the percentage-of-completion method,
estimated costs and claim recognition for construction contracts. The amount
accounted for 97% of our total revenue in 2004.
In the
previously filed 2004 10-KSB, as amended to date, and comparative figures in our
previously filed 2005 10-KSB, the accounting treatment for the construction
revenue of XY does not comply with SOP 81-1 or EITF 00-21. As a result, we will
file an amendment to the 2004 10-KSB and 2005 10-KSB with adjusted disclosure to
record the transaction as part of the gain on the disposal of the XY subsidiary
rather than as revenue from construction of wastewater treatment plant. As such
our adjusted total revenue for the fiscal year ended December 31, 2004 was
$250,571 and the adjusted gain on disposal of interest in a subsidiary - XY was
$5,220,299. Due to the same reason, account receivable from TGL amounted to
$9,416,039 as of December 31, 2004 will be reclassified to prepayment, deposits
and other receivables in our upcoming amendment to the 2004 10-KSB, comparative
figures in this amendment to the 2005 10-KSB and comparative figures in the
upcoming or recently filed amendments to the June 30, 2005 10-QSB and September
30, 2005 10-QSB.
40
Group
reorganization
In Note
2(ii) and 2(iii) to the consolidated financial statements contained in the
previously filed 2004 10-KSB and 2005 10-KSB and Note 2 to the consolidated
financial statements contained in the previously filed March 31, 2005 10-QSB,
June 30, 2005 10-QSB, September 30, 2005 10-QSB and March 31, 2006 10-QSB, we
disclosed group reorganization transactions. Pursuant to rules promulgated by
the SEC, the merger or acquisition of a private operating company into a
non-operating public shell corporation with nominal net assets is considered a
capital transaction, rather than a business combination. As such, no disclosures
are required under FAS 141 because the transactions described were not business
combinations. For accounting purposes, the transaction has been treated as a
reverse acquisition and a recapitalization, and pro-forma information is not
presented. Accordingly, the upcoming amendments to the 2004 10-KSB,
this amendment to the 2005 10-KSB, and the recent or upcoming amendments to the
March 31, 2005 10-QSB, June 30, 2005 10-QSB, September 30, 2005 10-QSB and March
31, 2006 10-QSB will not include references to the group reorganization
transactions throughout the financial statements. We will also restate the
common stock immediately after the recapitalization to $100,000 in the upcoming
amended March 31, 2005 10-QSB and have done so in the recent amended June 30,
2005 10-QSB.
Reclassification
of April warrants
In our
previously filed 2005 10-KSB, June 30, 2005 10-QSB and March 31, 2006 10-QSB, we
recorded as equity the warrants issued as part of the units sold in our April
2005 convertible debt issuance. Under EITF No. 00-19, the fair value of these
warrants should be reported as a liability. Pursuant to the Warrant
Agreement, because there is currently no effective registration statement
covering the shares of common stock underlying these warrants, these warrants
are currently subject to a cashless exercise whereby the warrant holders may
surrender their warrants to the company in exchange for shares of common stock.
The number of shares of common stock into which a warrant would be exchangeable
in such a cashless exercise depends on both the exercise price of the warrants
and the market price of the common stock, each at or near the time of exercise.
Because both of these factors are variable, it is possible that the company
could have insufficient authorized shares to satisfy a cashless exercise. In
this scenario, if the company were unable to obtain shareholder approval to
increase the number of authorized shares, the company could be obligated to
settle such a cashless exercise with cash rather than by issuing shares of
common stock. Further, EITF No. 00-19 requires that we record the potential
settlement obligation at each reporting date using the current estimated fair
value of the warrants, with any changes being recorded through our statement of
operations. We will continue to report the potential settlement obligation as a
liability until such time as the warrants are exercised or expire or we are
otherwise able to modify the warrant agreement to remove the provisions which
require this treatment. In addition to this restatement of our 2005 10-KSB, we
will restate our June 30, 2005 10-QSB and our March 31, 2006 10-QSB to
reclassify the April 2005 warrants as a liability.
41
April
and September 2005 Private Placements—non-cash financing charges
In our
June 30, 2005 10-QSB, we did not record any non-cash financing charges and in
our September 30, 2005 10-QSB, as amended to date, we did not properly record
the non-cash financing charges. Non-cash financing charges represent the amount
by which the fair value of derivative liabilities issued exceeds the amount of
proceeds received, as an expense at the date of issuance of the April
convertible debenture and the September private placement. We will restate our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB to record the non-cash
financing charges, which represent the amount by which the fair value of
derivative liabilities issued exceeds the amount of proceeds received, as an
expense at the date of issuance of the April convertible debenture and the
September private placement. As a result of the recording of non-cash financing
charges, certain expenses which were previously recorded under general and
administrative expenses in our September 30, 2005 10-QSB will be reclassified
under non-cash financing charges.
April
2005 Private Placements—unrealized gains or losses in financial
instruments
In our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, we
did not record properly the unrealized gains or losses in financial instruments,
which represent the change in fair market value of the financial instruments at
each reporting date for the April warrants and the bifurcated conversion feature
for the convertible debenture. The unrealized gains or losses in financial
instruments should have been reported in those filings. We will restate the June
30, 2005 10-QSB and September 30, 2005 10-QSB, as amended to date, to record the
unrealized gains or losses in financial instruments which represent the change
in fair market value of the financial instruments at each reporting date for the
April warrants and the bifurcated conversion feature for the convertible
debenture.
Interest
in associate
In our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, the
comparative figures for our interest in associate as of December 31, 2004 were
recorded based on an effective percentage of equity attributable to the group of
31.5% instead of a direct interest of 35%. We will restate the comparative
figures for our interest in associate as of December 31, 2004 in the June 30,
2005 10-QSB and September 30, 2005 10-QSB to include our interest in associate
based on a direct interest of 35%.
42
Prior
Restatements
On
January 13, 2006, we amended our 2004 10-KSB. Prior to the January 13, 2006
amendment, in our 2004 10-KSB we recorded our interest in associate based on an
effective percentage of equity attributable to the group of 31.5% instead of a
direct interest of 35%. In the January 13, 2006 restatement of our
2004 10-KSB, we reported our interest in associate based on a direct interest of
35%. In addition, we have restated the common stock immediately after the
recapitalization to $100,000.
On
January 13, 2006, we amended our September 30, 2005 10-QSB. Prior to the January
13, 2006 amendment, the September 30, 2005 10-QSB classified as equity the
proceeds of our April Debenture and September 2005 private placement allocated
to the warrants issued in these transactions. For reasons both the April
warrants and September warrants should have been classified as a liability. The
restated financial statements in the January 13, 2006 amendment of the September
30, 2005 10-QSB reflect this reclassification. In addition, prior to the January
13, 2006 amendment, the September 30, 2005 10-QSB did not originally report the
unrealized gains or losses in financial instruments, which represent the change
in fair market value of the financial instruments at each reporting date. The
unrealized gains or losses in financial instruments should have been reported in
the original filing. Accordingly, the January 13, 2006 restatement of the
September 30, 2006 10-QSB reported the unrealized gains or losses in financial
instruments, which represent the change in fair market value of the financial
instruments at each reporting date. The restatement to the unrealized gains or
losses in financial instruments, however, required to be further restated (refer
discussion above). In addition, we have restated the common stock immediately
after the recapitalization to $100,000.
Steps
Undertaken with respect to Material Weaknesses Prior to 2008
In
connection with the above matters, we have identified material weaknesses in our
internal control over financial reporting, which weaknesses we have reported to
our auditors. These material weaknesses comprise:
(a)
|
insufficient
knowledge and experience among our internal accounting personnel regarding
the application of US GAAP and SEC
requirements;
|
(b)
|
insufficient
written policies and procedures for accounting and financial reporting
with respect to the requirements and application of US GAAP and SEC
disclosure requirements; and
|
(c)
|
insufficient
emphasis by management on compliance with US GAAP
requirements.
|
We have communicated with
our auditors,Patrizio & Zhao,LLC.
and concluded
that these deficiencies constituted material weaknesses, as defined by
Auditing Standard No. 2, “An Audit of Internal Control Over Financial Reporting
Performed in Conjunction with an Audit of Financial Statements,” established by
the Public Company Accounting Oversight Board, or PCAOB.
43
In order
to address these material weaknesses our senior management is in the process of
conducting a thorough review of our US GAAP financial reporting processes and
will prepare and implement a US GAAP action plan. This plan will be designed to
generally improve our US GAAP reporting processes and to strengthen our
control processes and procedures in order to prevent a recurrence of the
circumstances that resulted in the need to restate our quarterly financial
statements. Our senior management intends to complete its review and implement a
US GAAP action plan as soon as practicable. The US GAAP action plan will
incorporate, among other matters, the following initiatives:
1.
|
arrange
for our senior management and certain accounting and finance-related
personnel to attend training sessions on US GAAP and financial reporting
responsibilities and SEC disclosure
requirements;
|
2.
|
modify
the mandate of our internal audit function to place greater emphasis on
the adequacy of, and compliance with, procedures relating to internal
controls over US GAAP financial reporting and engage an experience
accountant familiar with USGAAP which is not affiliated with ,Patrizio
& Zhao,LLC, to assist our accounting department and internal audit
function in the preparation of our US GAAP consolidated financial
statements;
|
3.
|
recruit
an accounting staff member with US GAAP expertise and who is not
affiliated with Patrizio
& Zhao, LLC; and
|
4.
|
engage
an internationally recognized accounting firm, which is not affiliated
with ,Patrizio
& Zhao, LLC, to provide us with technical advice on US GAAP matters
and SEC disclosure requirements on an ongoing
basis.
|
Our board of directors
discussed the matters disclosed in this filing with the registrant’s independent accountant.
On September 25, 2006, we filed a current report on Form 8-K relating to
these matters, including a response from our independent account relating to the
statements contained therein.
Other than those disclosed
above, there were no changes in our internal controls over financial
reporting that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting during the fiscal year
ended December 31, 2008
44
Material
Weaknesses as at 2008
(a)
Evaluation of Disclosure Controls and Procedures
As of the
end of the period covered by this report, China Water Group’s management, with
the participation of Wenge Fang, our principal executive officer, and Ding
Rencai, our principal financial officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). In designing and evaluating its disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Based upon that evaluation, Messrs.Fang and Rencai concluded
that these disclosure controls and procedures were effective as of the end of
the period covered in this report.
(b)
Management’s Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. In order to evaluate
the effectiveness of internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, management
has conducted an assessment, including testing, using the criteria in Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s system of internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. Based on
its assessment, management has concluded that the Company’s internal control
over financial reporting was effective as of December 31, 2008. Management’s
report was not subject to attestation by the Company’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Company to provide only management’s report in this
annual report.
(c)
Changes in Internal Control over Financial Reporting
There was
no change in internal control over financial reporting (as defined in Rule
13a-15(f) under the Securities Exchange Act of 1934) that occurred during the
fourth quarter of our year ended December 31, 2008 that has materially affected
or is reasonably likely to materially affect our internal control over financial
reporting.
This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting pursuant to
temporary rules of the Securities and Exchange Commission that permit us to
provide only management’s report in this annual report.
ITEM
9B. OTHER INFORMATION.
We do not
have any information that was required to be reported on Form 8-K during the
fourth quarter.
45
PART
1II
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS and CORPORATE
GOVERNANCE.
Our
directors and officers as of April 30, 2009 and November 20 2009
are:
Name
|
|
Ag e
|
|
Position
|
Chong
Liang Pu
|
|
48
|
|
Chairman
of the Board
|
Wenge
Fang
|
|
39
|
|
Chief
Executive Officer and a Director
|
Ding
Rencai
|
|
49
|
|
Chief
Financial Officer and a
Director
|
Mr. Pu
served as our chief executive officer, president and a director since October
2004 until December 2008. He has resigned as an officer, but
continues as Chariman of the Board. Mr. Pu founded Evergreen and has acted
as its chairman and president since April 2004. From May 1999 until April 2004,
Mr. Pu was the chief executive officer and general manager of Guang Dong
Xin Xing Mei Biology Company Limited, a majority-owned subsidiary of
Evergreen.
Wenge
Fang, age 39. Prior to joining the Company as director,CEO &
President in December 2008 Mr. Fang ha been a consultant to the Company
since August 2007. Before this Mr. Fang founded Shenzhen Golden Lexicon
Investment Consulting Co.,Ltd (a business consulting firm)and had acted as its
executive director and general manager since April 2002. In July
1997, Mr. Fang joined MingHua Group a company engaged in the real estate,hotel
and hi-tech business as secretary of the board of directors. In 1998, he was
appointed as vice general manager of the group. In August 2001 he became the
director and vice general manager of MingHua International Holding
Group(mgha.ob) untill his resignation in October 2002. Mr Fang owned MBA degree
from Business School of FuDan University in ShangHai, P.R.China.
46
Ding
Rencai, age 49, has been the the Chief Financial Officer of the Company since
July 1, 2008. From December 2005 to July 2008, Mr. Ding was a senior advisor to
the Company and chief financial officer and financial manager of Guangdong
Xinxinmei Environmental Protection Company, a majority-owned subsidiary of the
Company.He was also the acting CFO of the company from April 30, 2007 until his
appointment as Chief Financial Officer in July 2008. He previously served as our
Chief Financial Officer from October 16,2004 to December 29,2005. From January
2000 until December 2003, Mr. Ding was a financial manager of Guangzhou Yitao
Group Co., Ltd., a real estate development company in the PRC. In 1999, Mr. Ding
was the chief financial officer and head of the auditing department of Shenzhen
Wei Ang Appliance Development Co., Ltd., a household appliance manufacturer in
the PRC.
Audit
Committee Financial Expert
We do not
have an audit committee nor do we have a financial expert associated with an
audit committee. Our entire board of directors performs the functions of our
audit committee.
Code
of Ethics
We have
adopted a code of ethics that applies to the principal executive officer and
principal financial and accounting officers. A copy of our code of ethics was
filed as an exhibit to our annual report on Form 10-KSB for the year ended
December 31, 2005. We will provide to any person without charge, upon request, a
copy of our code of ethics. Requests may be directed to our principal executive
offices at Suite 7A01, Baicheng Building, 584 Yingbin Road, Dashi, Panyu
District, Guangzhou, Guangdong, China.
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the
Securities Exchange Act of 1934, as amended, requires our officers,
directors and persons who beneficially own more than 10% of a registered class
of our equity securities to file reports of securities ownership and changes in
such ownership with the Securities and Exchange Commission (the
“SEC”). Officers, directors and
greater than 10% beneficial owners are also required by rules promulgated by the
SEC to furnish us with copies of all Section 16(a) forms they file.
All of our officers,
directors or 10% shareholders have filed the reports required to be filed
under Section 16(a), except for Mr. Peh Chung Lim and Mr. Jia H
Li. These persons have since resigned their positions with the
Company.
47
Item 11.
Executive Compensation.
Compensation
of Executive Officers.
The following table sets
forth certain information
relating to the compensation paid by the company to
its highest
paid executive
officersfor services
rendered during the fiscal years ended December 31, 2008 and 2007.
Compensation of
Directors. Members
of our board of directors do not receive cash compensation for their services as
directors, although some Directors are reimbursed for reasonable expenses
incurred in attending board or committee meetings. In the future, we may have to
consider compensating any outside directors that become members of our board of
directors.
Employment
Agreements
We have
annual employment agreements with our Messrs Fang and Ding which provide
for the cash compensation reflected in the summary table. These
agreements are renewable on a yearly basis by us.
Termination
of Employment
There are
no compensatory plans or arrangements, including payments to be received from
the Company, with respect to any person named in the Summary Compensation Table
set forth above that would in any way result in payments to any such person
because of his or her resignation, retirement or other termination of such
person’s employment with us.
Employee
Benefit Plans
None
Indemnification
of Directors and Executive Officers and Limitation of Liability
Pursuant
to Nevada Law our Certificate of Incorporation provides that no director will
have any personal liability to us or to any of our shareholders for monetary
damages for breach of fiduciary duty as a director; provided, however, that this
exclusion may not eliminate or limit the liability of a director (i) for any
breach of the director's duty of loyalty to us or our shareholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, or (iii) for any transaction from which the
director derived an improper personal benefit.
48
ITEM
12. SECURITY OWNERSHIP of CERTAIN BENEFICIAL OWNERS and
MANAGEMENT and RELATED STOCKHOLDER MATTERS.
Security
Ownership of Certain Beneficial Owners
The
following table sets forth, as of November 20, 2009, the stock ownership of (i)
each of our named executive officers and directors, (ii )all executive officers
and directors as a group, and (iii) each person known by us to be a beneficial
owner of 5% or more of our common stock. No person listed below has
any option, warrant or other right to acquire additional securities from us,
except as may be otherwise noted. We believe that all persons named
in the table have sole voting and investment power with respect to all shares of
common stock beneficially owned by them except as stated therein.
Name
(1)
|
Number of Shares of
Common
Stock
Beneficially Owned (2)
|
Percentage
Owned
|
||||||
Chong
Liang Pu
|
49,635,000 | 35.61 | % | |||||
Shi
Rong Jiang*
|
5,101,000 | 3.75 | % | |||||
Jia
He Li*
|
-0- | 0 | % | |||||
Lin
Hong Ye*
|
-0- | 0 | % | |||||
Peh
Chung Lim*
|
-0- | 0 | % | |||||
Wenge
Fang
|
-0- | 0 | % | |||||
Ding
Rencai
|
-0- | 0 | % | |||||
Gao
Yongping
|
10,145,250 | 7.47 | % | |||||
Vision Opportunity Fund
(3)
|
13,600,000 | 9.53 | % | |||||
All
directors and executive officers as a group (3 persons
|
49,635,000 | 35.61 | % |
* Not
currently an oficer or director.
(1)
|
The
addresses of Chong Liang Pu, Shi Rong Jiang, Jia He Li, Lin Hong Ye, Peh
Chung Lim and Gao Yongping are Suite 7A01, Baicheng Building, 584 Yingbin
Road, Dashi, Panyu District, Guangzhou, Guangdong,
China.
|
(2)
|
Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Ordinary shares relating to options currently
exercisable or exercisable within 60 days of the date of this table, are
deemed outstanding for computing the percentage of the person holding such
securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table
above have sole voting and investment power with respect to all shares
shown as beneficially owned by
them.
|
49
(3)
|
Vision
Opportunity Master Fund Ltd. is the beneficial owner of the shares held of
record by Vision Opportunity Master Fund Ltd. The common
shares beneficially owned by Vision Opportunity Fund Ltd. include
(i) 6,800,000 common shares, and (ii) 6,800,000 common shares
issuable upon exercise of outstanding warrants. The address for Vision
Opportunity Fund Ltd. is 253 East 77th
St., PH-F, New York, NY 10021.
Beneficial
ownership is determined in accordance with the Rule 13d-3(a) of the
Securities Exchange Act of 1934, as amended, and generally includes voting
or investment power with respect to securities. Except as
subject to community property laws, where applicable, the person named
above has sole voting and investment power with respect to all shares of
our common stock shown as beneficially owned by
him.
|
This
table is based upon information derived from our stock records. Unless otherwise
indicated in the footnotes to this table and subject to community property laws
where applicable, we believe that each of the shareholders named in this table
has sole or shared voting and investment power with respect to the shares
indicated as beneficially owned. Applicable percentages are based upon 139,383,450 shares
of common stock outstanding as of November 20, 2009.
Summary
Compensation Table
The
following table sets forth certain information regarding our executive
compensation:
Name
and
principal
position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
awards
($)
|
Option
awards
($)
|
Non-equity
incentive
plan
compensation
($)
|
Change in
pension value
and
nonqualified
deferred
compensation
earnings
($)
|
All other
compensation
($)
|
Total
($)
|
|||||||||||||||||||||||||
Chong
Liang
Pu.
Chairman
|
2007
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
2008
|
16,400 | -0- | -0- | -0- | -0- | -0- | -0- | 16,400 | ||||||||||||||||||||||||||
Wenge
Fang, CEO
|
2007
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
2008
|
44,100 | -0- | -0- | -0- | -0- | -0- | -0- | 44,100 | ||||||||||||||||||||||||||
Ding
Rencai, CFO
|
2007
|
-0- | -0- | -0- | -0- | -0- | -0- | -0- | -0- | |||||||||||||||||||||||||
2008
|
40,000 | -0- | -0- | -0- | -0- | -0- | -0- | 40,000 |
50
Changes
in Control
We know
of no contractual arrangements which may at a subsequent date result in a change
of control in the Company.
ITEM
13. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS, and DIRECTOR
INDEPENDENCE.
Certain
Relationships and Transactions with Related Persons
We have
the following related party transactions for the years ended
December 31, 2008 and 2007:
Year ended December 31,
|
||||||||||
Related party
|
Nature of transaction
|
2008
USD
|
2007
USD
|
|||||||
GDXS
|
Deposit
paid for acquisition of subsidiary
|
392,290 | ||||||||
BJZC
|
Purchase
of materials for construction
|
|||||||||
BJZC
|
Deposit
paid for acquisition of property, plant and equipment
|
— | — |
“BJZC” -
Bei Jing Zhao Cheng Chuang Zhan Investment Company Limited
“GDXS” -
Guang Dong Xin Sheng Environmental Protection Company Limited
We hold the exclusive
rights to use MHA biological treatment processes technologies and GM
Bio-carriers. Both are the subject of patents owned by our Chairman,
Mr. Pu, and we have acquired the exclusive rights pursuant to a license
agreement with Mr. Pu.
Director
Independence
Our
current directors are Messrs. Pu, Fang and Ding. We are not currently
subject to corporate governance standards defining the independence of our
directors. We have not yet adopted an independence standard or
policy, although we intend to do so in the future. Accordingly, the Company’s
Board currently determines the independence of each Director and nominee for
election as a Director. The Board has determined that none of the
Company’s directors currently qualifies as an independent
director.
51
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit
Fees
The
aggregate fees billed by the Company’s auditors for professional services
rendered in connection with the audit of the Company’s annual financial
statements and reviews of the financial statements included in the Company’s
Form 10-Q or services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for fiscal years 2008 and
2007 were $55,000 and $55,000, respectively.
Audit
Related Fees
None
Tax
Fees
None
All
Other Fees
None
Pre-Approval
Policies and Procedures
The board
of directors has not adopted any pre-approval policies and approves all
engagements with the Company’s auditors prior to performance of services by
them.
PART
1V
ITEM
15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
The
following exhibits are filed with this report, except those indicated as having
previously been filed with the Securities and Exchange Commission and are
incorporated by reference to another report, registration statement or
form. As to any shareholder of record requesting a copy of this
report, we will furnish any exhibit indicated in the list below as filed with
this report upon payment to us of our expenses in furnishing the
information.
Exhibit
Number Exhibit
Description
2.1
|
Securities
Purchase Agreement and Plan of Reorganization
(1)
|
2.2
|
Amendment
No. 1 to Securities Purchase Agreement and Plan of Reorganization
(1)
|
3.3
|
Certificate
of Amended and Restated Articles of Incorporation
(3)
|
3.4
|
Bylaws
(4)
|
3.5
|
Amendments
to Bylaws (3)
|
52
10.1 BOT
Investment and Operation Contract for Sewage Treatment Plant between Guangdong
Xinsheng Environmental Protection Co., Ltd. and City Administration of Feng Feng
Mining Area of Handon City, Hebei Province (5)
10.2 Investment
Management Contract dated August 14, 2002 between Guangdong Xinxingmei
Environmental Protection Science and Technology Investment Co., Ltd. and The
People’s Government of Wuqing District, Tianjin City (5)
10.3 BOT
Investment Contract dated July 4, 2003 between Guandong Xinsheng
Environmental Co., Ltd. and People’s Government of Shunyi District, Beijing
(5)
10.4 Contract
for BOT Project Investment and Operation between Guandong Xinsheng Environmental
Co., Ltd. and Shandong Haiyang Planning and Construction Administration
(5)
10.5 Agreement
with Shenzhen Jukeyuan Industry Development Co., Ltd. dated July 28,
2005(5)
10.6 Agreement
with Tianjin Wuqing Huangzhuang Industrial Zone dated July 20,
2005(5)
10.7 Agreement
with Tianjin Wuqing Fuyuan Economic Development Co., Ltd. dated May 28,
2005(5)
10.8 Agreement
with Beijing Jinqiao Luyuan Environmental Protection Investment and Development
Co., Ltd. dated August 4, 2005(5)
10.9 Agreement
with Yongji Economic Development Zone Land Planning and Construction Bureau
dated August 6, 2005(5)
10.10 License
Agreement with Chong Liang Pu(6)
10.11
Equity Assignment Agreement forwith Fortune Luck Global International
Limited, dated December 31, 2007
10.12
Equity Transfer Agreement between the Evergreen Asset Group Ltd., a
subsidiary of the Registrant, and Wenning Pu (7)
10.13
Employment Agreement with Ding Rencai (8)
10.14
Employment Agreement with Wenge Fang (9)
16
Letter re Change in Certified Registered
Public Account (2)
21.1 List
of Subsidiaries
31.1 Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification
of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
§1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(1) Previously
filed as part of the Company’s current report on Form 8-K filed with the
Securities and Exchange Commission on October 21, 2004.
53
(2) Previously
filed as part of the Company’s current report on Form 8-K/A filed with the
Securities and Exchange Commission on December 30, 2004.
(3) Previously
filed as part of the Company’s annual report on Form 10-KSB filed with the
Securities and Exchange Commission on April 15, 2005.
(4) Previously
filed as part of the Company’s Form 10-SB filed with the Securities and Exchange
Commission on May 24, 1999.
(5) Previously
filed as part of Amendment Number 1 to Registration Statement on Form SB-2,
filed January 12, 2006, 1933 Act Number : 333-129064.
(6) Previously
filed as Exhibit 10.5 to the Company’s annual report on Form 10-KSB/A filed with
the Securities and Exchange Commission on July 15, 2005.
(7)
Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated
December 27, 2009
(8)
Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated July 1,
2008.
(9)
Previously filed as exhibit 10.1 to Current Report on Form 8-K, dated December
11, 2008
54
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, December 10, 2009
CHINA
WATER GROUP, INC
|
|
By
|
/s/ Chongliang Pu
|
Chongliang
Pu
|
|
Chairman
of the board
|
|
(Principal
Executive Officer)
|
|
By
|
/s/ Wenge Fang
|
Wenge
Fang
|
|
CEO
and President
|
|
(Principal
Executive Officer)
|
|
By
|
/s/ Ding Rencai
|
Ding
Rencai
|
|
CFO
(Principal Accounting and Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
|
Title
|
Date
|
||
/s/
Chong Liang Pu
|
Chairman
of the Board
|
December
10, 2009
|
||
Chong Liang Pu
|
||||
/s/ Wenge Fang
|
Director,
CEO and President
|
December
10, 2009
|
||
Wenge Fang
|
||||
/s/ Ding
Rencai
|
Director
and CFO
|
December
10, 2009
|
||
Ding Rencai
|
55
CHINA
WATER GROUP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2008 AND 2007
CHINA
WATER GROUP, INC.
Consolidated
Financial Statements
December
31, 2008 and 2007
Table
of Contents
Page
|
|
Consolidated
Financial Statements
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
Consolidated
Balance Sheets
|
F-3
|
Consolidated
Statements of Operations and Comprehensive Income (Loss)
|
F-4
|
Consolidated
Statements of Stockholders’ Equity
|
F-5
|
Consolidated
Statements of Cash Flows
|
F-6
|
Notes
to Consolidated Financial Statements
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
China
Water Group, Inc.
We
have audited the accompanying consolidated balance sheets of China Water Group,
Inc. and subsidiaries (the “Company”) as of December 31, 2008 and 2007 and the
related consolidated statements of operations and comprehensive income (loss),
stockholders’ equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to
perform an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of China Water Group, Inc. and subsidiaries as
of December 31, 2008 and 2007, and the consolidated results of their operations
and their consolidated cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
/S/ PATRIZIO & ZHAO, LLC
Parsippany,
New Jersey
July 6,
2009
(Except
for Note 2, 3, 4, 5, 7, 8, 12, 14, 18 and 19 as to which
the date
is November 15, 2009)
F-2
CHINA
WATER GROUP, INC.
Consolidated
Balance Sheets
December 31,
|
December 31,
|
|||||||
2008
|
2007
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 8,579 | $ | - | ||||
Accounts
receivable
|
18,172 | - | ||||||
Prepayments,
deposits and other receivables
|
41,283 | 6,798,632 | ||||||
Inventory
|
393,178 | - | ||||||
Due
from related companies
|
- | 271,691 | ||||||
Total
current assets
|
461,212 | 7,070,323 | ||||||
Property,
plant and equipment, net
|
874,576 | - | ||||||
Construction
in progress
|
8,248 | - | ||||||
Intangible
assets
|
135,649 | - | ||||||
Goodwill
|
13,106,263 | - | ||||||
Assets
of discontinued division
|
10,158,905 | 16,384,834 | ||||||
Total
assets
|
$ | 24,744,853 | $ | 23,455,157 | ||||
Liabilities
|
||||||||
Current
liabilities:
|
||||||||
Warrant
liability
|
$ | 36,610 | $ | 1,179,965 | ||||
Accounts
payable
|
187,033 | - | ||||||
Accrued
expenses
|
1,822,041 | 1,210,060 | ||||||
Due
to directors
|
251,554 | 118,049 | ||||||
Due
to related companies
|
3,169,152 | - | ||||||
Due
to affiliated companies
|
1,758,281 | - | ||||||
Income
tax payable
|
162 | - | ||||||
Total
current liabilities
|
7,224,833 | 2,508,074 | ||||||
Long-term
liabilities:
|
||||||||
Outstanding
obligation for acquisition of a subsidiary
|
5,950,000 | - | ||||||
Total
long-term liabilities
|
5,950,000 | - | ||||||
Liabilities
of discontinued division
|
7,386,647 | 14,208,665 | ||||||
Total
liabilities
|
20,561,480 | 16,716,739 | ||||||
Equity
|
||||||||
Stockholders'
equity:
|
||||||||
Preferred
stock, $0.001 par value, 50,000,000 authorized shares, no shares issued
and outstanding
|
- | - | ||||||
Common
stock, $0.001 par value, 200,000,000 shares authorized;
|
||||||||
139,383,450
shares issued and outstanding at December 31, 2008 and
2007
|
139,383 | 139,383 | ||||||
Additional
paid-in capital
|
6,131,532 | 6,131,532 | ||||||
Retained
earnings (accumulated deficit)
|
(3,373,545 | ) | (670,851 | ) | ||||
Accumulated
other comprehensive income
|
1,286,003 | 1,138,354 | ||||||
Total
stockholders' equity
|
4,183,373 | 6,738,418 | ||||||
Noncontrolling
interest
|
- | - | ||||||
Total
equity
|
4,183,373 | 6,738,418 | ||||||
Total
liabilities and equity
|
$ | 24,744,853 | $ | 23,455,157 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
CHINA
WATER GROUP, INC.
Consolidated
Statements of Operations and Comprehensive Income (Loss)
For the Years Ended December
31,
|
||||||||
2008
|
2007
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Revenue:
|
||||||||
Revenue
from turn-key engineering projects
|
$ | - | $ | - | ||||
Revenue
from BOT wastewater treatment services
|
- | - | ||||||
Revenue
from sales of bottled water
|
207,318 | - | ||||||
Total
revenue
|
207,318 | - | ||||||
Cost
of revenue:
|
||||||||
Cost
of revenue for turn-key engineering projects
|
- | - | ||||||
Cost
of revenue for BOT wastewater treatment services
|
- | - | ||||||
Cost
of revenue from sales of bottled water
|
(113,186 | ) | - | |||||
Depreciation
and amortization
|
(36,347 | ) | - | |||||
Sales
taxes
|
(1,801 | ) | - | |||||
Total
cost of revenue
|
(151,334 | ) | - | |||||
Gross
profit
|
55,984 | - | ||||||
Operating
expenses:
|
||||||||
Selling
and distribution expenses
|
(894,459 | ) | - | |||||
Other
general and administrative expenses
|
(427,665 | ) | - | |||||
Loss
from operations
|
(1,266,140 | ) | - | |||||
Other
income (expenses):
|
||||||||
Interest
expense
|
33 | - | ||||||
Penalty
for late effectiveness of registration statement
|
(91,297 | ) | (89,046 | ) | ||||
Gain
(loss) on fair value of derivative instruments
|
1,143,355 | (203,904 | ) | |||||
Other
income (expense)
|
(60,191 | ) | - | |||||
Total
other income (expenses)
|
991,900 | (292,950 | ) | |||||
Loss
from continuing operations before income tax
|
(274,240 | ) | (292,950 | ) | ||||
Provision
for income tax
|
(509 | ) | - | |||||
Loss
from continuing operations
|
(274,749 | ) | (292,950 | ) | ||||
Noncontrolling
interest
|
- | - | ||||||
Discontinued
operations:
|
||||||||
Loss
from discontinued operations of Evergreen Asset Group
(including
|
||||||||
loss
on disposal of approximately $3,844,000 in 2008)
|
(2,400,298 | ) | (1,627,566 | ) | ||||
Income
tax
|
(27,647 | ) | (217 | ) | ||||
Loss
from discontinued operations
|
(2,427,945 | ) | (1,627,783 | ) | ||||
Net
loss
|
(2,702,694 | ) | (1,920,733 | ) | ||||
Other
comprehensive income
|
||||||||
Foreign
currency translation adjustment
|
147,649 | 686,965 | ||||||
Comprehensive
income (loss)
|
$ | (2,555,045 | ) | $ | (1,233,768 | ) | ||
Basic
earnings (loss) per share
|
$ | (0.02 | ) | $ | (0.01 | ) | ||
Diluted
earnings (loss) per share
|
$ | (0.02 | ) | $ | (0.01 | ) | ||
Weighted
average number of common shares outstanding
|
||||||||
Basic
and Diluted
|
139,383,450 | 139,383,450 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
CHINA
WATER GROUP, INC.
Consolidated
Statements of Stockholders’ Equity
Retained
|
Accumulated
|
|||||||||||||||||||||||
Additional
|
Earnings
|
other
|
Total
|
|||||||||||||||||||||
Common
Stock
|
Paid-in
|
(Accumulated
|
Comprehensive
|
Stockholders’
|
||||||||||||||||||||
Number
|
Par
Value
|
Capital
|
Deficit)
|
Income
|
Equity
|
|||||||||||||||||||
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
(Restated)
|
|||||||||||||||||||
Balance
at January 1, 2007
|
135,903,698 | $ | 135,904 | $ | 4,805,192 | $ | 1,249,882 | $ | 451,389 | $ | 6,642,367 | |||||||||||||
Warrants
exercised for common stock
|
3,479,752 | 3,479 | 1,326,340 | - | - | 1,329,819 | ||||||||||||||||||
Net
loss
|
- | - | - | (1,920,733 | ) | - | (1,920,733 | ) | ||||||||||||||||
Other
comprehensive income
|
- | - | - | - | 686,965 | 686,965 | ||||||||||||||||||
Balance
at December 31, 2007
|
139,383,450 | $ | 139,383 | $ | 6,131,532 | $ | (670,851 | ) | $ | 1,138,354 | $ | 6,738,418 | ||||||||||||
Net
loss
|
- | - | - | (2,702,694 | ) | - | (2,702,694 | ) | ||||||||||||||||
Other
comprehensive income
|
- | - | - | - | 147,649 | 147,649 | ||||||||||||||||||
Balance
at December 31, 2008
|
139,383,450 | $ | 139,383 | $ | 6,131,532 | $ | (3,373,545 | ) | $ | 1,286,003 | $ | 4,183,373 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
CHINA
WATER GROUP, INC.
Consolidated
Statements of Cash Flows
For the Years Ended December
31,
|
||||||||
2008
|
2007
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income (loss)
|
$ | (2,702,694 | ) | $ | (1,920,733 | ) | ||
Adjustments
to reconcile net income (loss) to net cash provided
|
||||||||
by
(used in) operating activities:
|
||||||||
Depreciation
and amortization
|
36,347 | - | ||||||
Gain
on fair value of derivative instruments
|
(1,143,355 | ) | 203,904 | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(18,172 | ) | - | |||||
Prepayments,
deposits and other receivables
|
6,757,349 | (6,733,284 | ) | |||||
Inventory
|
(393,178 | ) | - | |||||
Due
from related companies
|
271,691 | (271,691 | ) | |||||
Due
from affiliated companies
|
- | 2,592,000 | ||||||
Current
assets of discontinued division
|
3,379,515 | 3,669,872 | ||||||
Accounts
payable
|
187,033 | - | ||||||
Accrued
expenses
|
611,981 | 255,227 | ||||||
Due
to directors
|
133,505 | 116,920 | ||||||
Due
to related companies
|
3,169,152 | - | ||||||
Due
to affiliated companies
|
1,758,281 | - | ||||||
Income
tax payable
|
162 | - | ||||||
Current
liabilities of discontinued division
|
(6,822,018 | ) | (150,744 | ) | ||||
Total
adjustments
|
7,928,293 | (317,796 | ) | |||||
Net
cash provided by (used in) operating activities
|
5,225,599 | (2,238,529 | ) | |||||
Cash
flows from investing activities:
|
||||||||
Acquisition
of property, plant and equipment
|
(919,744 | ) | - | |||||
Acquisition
of intangible assets and goodwill
|
(7,291,912 | ) | - | |||||
Non-current
assets of discontinued division
|
2,846,414 | 1,551,564 | ||||||
Net
cash provided by (used in) investing activities
|
(5,365,242 | ) | 1,551,564 | |||||
Effect
of foreign currency translation on cash and cash
equivalents
|
148,222 | 686,965 | ||||||
Net
increase in cash and cash equivalents
|
8,579 | - | ||||||
Cash
and cash equivalents at beginning of year
|
- | - | ||||||
Cash
and cash equivalents at end of year
|
$ | 8,579 | $ | - | ||||
Supplemental
schedule of non-cash activities
|
||||||||
Outstanding
obligation for acquisition of a subsidiary - Xinchen
|
$ | 5,950,000 | $ | - |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-6
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
1 - Change of Company Name
The
Company was incorporated in the State of Nevada on September 10,
1996.
Following
a reverse takeover transaction as detailed in note 2(ii), the Company has ended
its development stage and is now engaging in the provision of the business as
set out in note 3.
On
November 12, 2004, the name of the Company was changed from Discovery Investment
Inc. to China Evergreen Environmental Corp., with all the required filings
submitted to the United States Securities and Exchange Commission.
On
November 7, 2006, the name of the Company was changed from China Evergreen
Environmental Corp. to China Water Group, Inc. (“the Company" and “CHWG”), with
all the required filings submitted to the United States Securities and Exchange
Commission.
Note
2 - Basis of Presentation
(i)
|
The
accompanying consolidated financial statements of CHWG and its
subsidiaries - Evergreen Asset Group Limited (“Evergreen”), Evermaster
Group Limited (“Evermaster”), Everbury Holdings Limited (“Everbury”), Hai
Yang City Sheng Shi Environment Protection Company Limited (“Hai Yang”),
Aba Xinchen Dagu Glacier Spring Co., Limited (“Aba”), and Guangzhou
Xinchen Water Company (“Xinchen”) (the “Group”) have been prepared in
accordance with generally accepted accounting principles in the United
States of America. All significant intercompany transactions and balances
have been eliminated in consolidation. The results of subsidiaries
acquired or disposed during the years are included in the consolidated
statement of operations and comprehensive income (loss) from the effective
date of acquisition or up to the effective date of
disposal.
|
(ii)
|
On
October 15, 2004, CHWG completed a share exchange with the stockholders of
Evergreen which was incorporated in the British Virgin Islands on
April 20, 2004 under the International Business Companies Act,
British Virgin Islands (the “Exchange”). In the Exchange, CHWG acquired
300 shares representing all the issued and outstanding common stock of
Evergreen from the stockholders of Evergreen (the “Shareholders”) in
exchange for the issuance of 83,500,000 shares of common stock of CHWG to
the Shareholders.
|
The
Exchange has been accounted for as a recapitalization of Evergreen whereby the
assets and liabilities and operations of Evergreen become the assets and
liabilities and operations of CHWG with no adjustments to the historical basis
of assets and liabilities of Evergreen and the operations consolidated. The
16,499,997 shares of CHWG outstanding prior to the Exchange are accounted for at
the net book value at the time of the transaction, approximately $148,705. The
accompanying financial statements reflect the recapitalization of the
shareholder’s equity as if the transaction occurred as of the beginning of the
first period presented.
(iii)
|
Disposal
of Subsidiary – Han Dan:
|
On
January 22, 2007, Evermaster signed a contract with Guang Dong Xin Sheng
Environmental Protection Company Limited (“GDXS”) to amend the Articles of Han
Dan Cheng Sheng Water Affairs Company Limited (“Han Dan”), which is jointly
owned by the two signed parties, decreasing its investment in Han Dan from
previous HK$ 17.86 million to HK$ 7.2 million. As a result, the
equity shares Evermaster had in Han Dan decreased from 90% to
34.32%. Evermaster is a wholly owned subsidiary of China Water Group
Inc.
F-7
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
2 - Basis of Presentation (continued)
|
(iv)
|
Disposal
of Subsidiary – Xinxingmei:
|
|
On
January 8, 2008, the Chinese government approved the sale of Evergreen’s
58% of the total equity interest in Guang Dong Xin Xing Mei Biology
Company Limited (“Xinxingmei”) to Wenming Pu at a total consideration of
RMB 7,308,600. After completing the transfer formalities, Evergreen
possesses 32% of total equity of Xinxingmei, instead of the previous 90%
interest.
|
(v)
|
Acquisition
of Subsidiary – Xinchen:
|
|
On
January 23, 2008, the Chinese government approved China Water Group Inc’s.
acquisition of 90% equity interest in Guangzhou Xinchen Water Company
Limited from Fortune Luck Global International Limited. Guangzhou Xinchen
Water Company Limited owns 100% equity interest of Aba Xinchen Dagu
Glacier Spring Co., Limited. The acquisition was completed for a
consideration of $13.45 million, of which $7.5 million was paid in cash,
and the remaining $5.95 million will be paid in the
future.
|
Note
3 - Description of Business
The
principal activities of the Group have been the research and development of
waste water, garbage treatment and aqueous purifying techniques, investment and
construction of waste water treatment plant and sales of environment protection
related products. The Company is now engaged in repositioning themselves to be a
bottled water production, sales and marketing company.
Note
4 - Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting years. Although
management believes that the estimates and assumptions used in preparing the
accompanying consolidated financial statements and related notes are reasonable
in light of known facts and circumstances, actual results could differ from
those estimates.
Significant
estimates include the useful lives of property and equipment, revenue
recognition based on percentage of completion and Black Scholes assumptions to
measure the value of warrants and options. We believe that the estimates,
judgments and assumptions upon which we rely are reasonable based upon
information available to us at the time that these estimates, judgments and
assumptions are made. Actual results could differ from those estimates. Future
estimates and assumptions will be based upon information available to us at the
time of the estimate.
Cash
and Cash Equivalents
Cash
equivalents are highly liquid investments and have maturities of three months or
less at the date of purchase.
F-8
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
4 - Summary of Significant Accounting Policies (continued)
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost less accumulated depreciation and
amortization and impairment loss. Maintenance, repairs and betterments,
including replacement of minor items, are charged to expense; major additions to
physical properties are capitalized. Depreciation and amortization are provided
using the straight-line method over the following estimated useful
lives:-
Office
equipment
|
5
years
|
Furniture
and fixtures
|
5
years
|
Tools
and equipment
|
5
years
|
Motor
vehicles
|
10
years
|
Waste
water treatment plant
|
20
years
|
Construction
in Progress
Construction
in process represents the cost of construction of the waste water treatment
plants under the Build-Operate-Transfer (“BOT”) agreements with the People’s
Republic of China (“PRC”) government. The cost includes development and
construction expenditure incurred and other direct costs attributable to the
development. The construction in progress that was completed during
the year was transferred to property, plant and equipment on a monthly basis,
with monthly completion and inspection reports. No depreciation and amortization
is provided until such time as the relevant assets are completed, ready for use
and transferred to property, plant and equipment.
BOT
agreements for the two waste water treatment plants in PRC include the following
terms:
Subsidiaries
|
Treatment capacity
per day (tons)
|
Term
(years)
|
Total investment as per
BOT agreement
|
|||||||||||||
RMB
|
USD
|
|||||||||||||||
Tian
Jin
|
10,000 |
20
|
9,000,000 | 1,086,957 | ||||||||||||
Hai
Yang
|
20,000 |
22
|
30,000,000 | 3,623,188 |
At
December 31, 2008, waste water treatment plants of Tian Jin and Hai Yang were in
use and depreciation and amortization are provided using the straight-line
method over 20 years commencing on the date the waste water treatment plants
were ready for use.
Long-Lived
Assets
In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company reviews the recoverability of its long-lived
assets on a periodic basis in order to identify business conditions, which may
indicate a possible impairment. The assessment for potential impairment is based
primarily on the Company’s ability to recover the carrying value of its
long-lived assets from expected future undiscounted cash flows. If the total of
the expected future undiscounted cash flows is less than the total carrying
value of the assets, a loss is recognized for the difference between the fair
value (computed based upon the expected future discounted cash flows) and the
carrying value of the assets.
F-9
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
4 - Summary of Significant Accounting Policies (continued)
Allowance
of Doubtful Accounts
The Group
establishes an allowance for doubtful accounts based on management’s assessment
of the collectibility of accounts receivables and other receivables. A
considerable amount of judgment is required in assessing the amount of the
allowance; the Group considers the historical level of credit losses and applies
percentages to aged receivable categories. The Group makes judgments
about the creditworthiness of each customer based on ongoing credit evaluations,
and monitors current economic trends that might impact the level of credit
losses in the future. If the financial condition of the customers
were to deteriorate, resulting in their inability to make payments, a larger
allowance may be required.
Bad debts
are written off when identified. The Group extends unsecured credit
to customers ranging from three to six months in the normal course of
business. The Group does not accrue interest on accounts
receivables.
Historically,
losses from uncollectible accounts have not significantly deviated from the
general allowance estimated by the management and no significant additional bad
debts have been written off directly to the profit and loss.
Affiliated
Company
An
affiliated company is one, not being a subsidiary or a joint venture, in which
the Company is in a position to exercise significant influence, including
participation in financial and operating policy decisions. Details of
affiliated companies are set out in note 7 of the consolidated financial
statements.
Interest
on an affiliated company is accounted for by
the equity method of accounting and is initially recognized at
cost.
Goodwill
on acquisition of an affiliated company represents the excess of the cost of an
acquisition over the fair value of the Group’s share of the net identifiable
assets of the acquired affiliated company at the date of acquisition which is
included in interests in an affiliated company. Goodwill is tested
annually for impairment and carried at cost less accumulated impairment
losses. Gains and losses on the disposal of an entity include the
carrying amount of goodwill relating to the entity sold.
The
Group’s share of its affiliated company’s post-acquisition profits or losses is
recognized in the statement of operations, and its share of post-acquisition
movements in reserves is recognized in reserves. The cumulative
post-acquisition movements are adjusted against the carrying amount of the
investment. When the Group’s share of losses in an affiliated company
equals or exceeds its interest in the affiliated company, including any other
unsecured receivables, the Group does not recognize further losses, unless it
has incurred obligations or made payments on behalf of the affiliated
company.
Unrealized
gains on transactions between the Group and its affiliated company are
eliminated to the extent of the Group’s interest in the affiliated
company. Unrealized losses are also eliminated unless the transaction
provides evidence of an impairment of the asset
transferred. Accounting policies of an affiliated company have been
changed where necessary to ensure consistency with the policies adopted by the
Group.
Research
and Development Costs
Research
and development costs are recognized as an expense in the period in which they
are incurred.
F-10
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
4 - Summary of Significant Accounting Policies (continued)
Concentration
of Credit Risk
Concentration
of credit risk is limited to accounts receivable and is subject to the financial
conditions of a major customer which is stated in note 22 of the consolidated
financial statements. The Group does not require collateral or other security to
support client’s receivables. The Group conducts periodic reviews of its
clients’ financial condition and customer payment practices to minimize
collection risk on accounts receivable.
Financial
Instruments
The
carrying amounts of all financial instruments approximate their fair value. The
carrying amounts of cash, accounts receivable, related parties’ receivable,
unsecured loans, accounts payable and related parties’ payable approximate their
fair value due to the short-term nature of these items. The carrying
amounts of borrowings approximate their fair value based on the Group’s expected
borrowing rate for debt with similar remaining maturities and comparable
risk.
Revenue
Recognition
We
recognize revenue using various revenue recognition policies based on the nature
of the sale and the terms of the contract.
Revenues
from turn-key engineering projects are recognized on the percentage of
completion method for individual contracts. We follow the guidance of American
Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 81-1, Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, for our accounting policy relating to the use of the
percentage-of-completion method, estimated costs and claim recognition for
construction contracts. Revenues are recognized in the ratio that costs incurred
bear to total estimated contract costs to the extent we believe related
collection is probable. The use of the percentage of completion method of
revenue recognition requires estimates of percentage of project completion.
Changes in job performance, estimated profitability and final contract
settlements may result in revisions to costs and income in the period in which
the revisions are determined. Provisions for any estimated losses on uncompleted
contracts are made in the period in which such losses are determinable. In
instances when the work performed on fixed price agreements is of relatively
short duration, we use the completed contract method of accounting whereby
revenue is recognized when the work is completed. 5% to 10% of the total
contract value will be treated as retention monies withheld to ensure
performance of contract during the warranty period of up to 12 months as
stipulated in the fixed price contracts, both long term and short
term.
Revenues
arising from waste water treatment are recognized based on waste water treated
as recorded daily by meters read at rates, in RMB/ton, as prescribed under the
BOT agreements in accordance with SEC Staff Accounting Bulletin, ("SAB") Topic
13 “Revenue Recognition”. We meet the following four criteria for revenue
recognition outlined in SAB Topic 13:
|
1.
|
There
is sufficient evidence to support that sales arrangements
exist;
|
|
2.
|
The
price to the buyer is fixed through signed
contracts;
|
|
3.
|
Meter
readings illustrate that delivery of treated waste water has occurred;
and
|
|
4.
|
Collectibility
is reasonably assured through one or more of the following: due diligence
prior to contract signing; historical payment practices; or required
upfront payments.
|
F-11
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
4 - Summary of Significant Accounting Policies (continued)
Revenues
from sale of environment protection related products and bottled water and
provision of technical services are recognized when goods are delivered or as
services are performed. The contractual terms of the purchase agreements or
consultancy agreements dictate the recognition of revenues by us. We recognize
revenue in accordance with Staff Accounting Bulletin No. 104. Accordingly, four
basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management’s judgments
regarding the fixed nature of the selling prices of the products or services
delivered and the collectibility of those amounts. Provisions for discounts and
rebates to customers, estimated returns and allowances, and other adjustments
are provided for in the same period the related sales are recorded. We defer any
revenue for which the product has not been delivered or is subject to refund
until such time that we and our customer jointly determine that the product has
been delivered or no refund will be required.
Cost
of Revenues
Cost of
revenues comprises labor and other cost of personnel directly engaged in
providing the services, subcontracting and attributable overhead costs. Cost of
revenues does not include any allocation of depreciation or amortization
expense.
Segment
Reporting
Management
believes that it has only a single segment consisting of waste water treatment
with related services and support. The information presented in the consolidated
statement of operations reflects the revenues and costs affiliated with this
segment that management uses to make operating decisions and assess
performance.
Income
Taxes
The Group
utilizes the asset and liability method of accounting for income taxes whereby
deferred taxes are determined based on the temporary differences between the
financial statements and tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Foreign
Currency Translation And Transactions
The Group
uses China Renminbi (“RMB”) as the functional currency, which is not freely
convertible into foreign currencies. Transactions denominated in
currencies other than RMB are translated into RMB at the applicable rates of
exchange prevailing at the dates of the transactions, quoted by the People’s
Bank of China (“the PBOC”). Monetary assets and liabilities
denominated in other currencies are translated into RMB at rates of exchange
quoted by the PBOC prevailing at the balance sheet date. Exchange
gains or losses arising from changes in exchange rates subsequent to the
transactions dates for monetary assets and liabilities denominated in other
currencies are included in the determination of net income for the respective
period.
For
financial reporting purposes, RMB has been translated into USD as the reporting
currency. Assets and liabilities are translated at the exchange rate
in effect at period end. Income statement accounts are translated at
the average rate of exchange prevailing during the
period. Translation adjustments arising from the use of different
exchange rates from period to period are included as a component of
stockholders’ equity as “Accumulated other comprehensive income - foreign
currency translation adjustments”. Gains and losses resulting from
foreign currency transactions are included in other income/(loss).
F-12
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
4 - Summary of Significant Accounting Policies (continued)
Comprehensive
Income
The
Company has adopted SFAS No. 130, Reporting Comprehensive Income, which establishes
rules for the
reporting and display of comprehensive income, its components and accumulated
balances. SFAS No. 130 defines comprehensive income to include all changes in
equity, including adjustments to minimum pension liabilities, accumulated
foreign currency translation, and unrealized gains or losses on
available-for-sale marketable securities, except those resulting from
investments by owners and distributions to owners.
Earnings
Per Share
Basic
earnings (loss) per share are computed by dividing the net income (loss) for the
year by the weighted average number of common shares outstanding during the
year. Diluted earnings (loss) per
share are
computed by dividing the net income (loss) for the year by the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares, composed of incremental common shares issuable upon
the exercise of stock options, unvested restricted common stock and contingently
issuable shares that are probable of being issued, are included in diluted
income (loss) per share to the extent such shares are dilutive. In
accordance with SFAS 128, “Earnings Per Share”, the Company uses income (loss)
from continuing operations, net of income taxes as the “control number” in
determining whether common equivalent shares are dilutive or anti-dilutive in
periods where discontinued operations are reported.
Recently
Issued Accounting Pronouncements
In
December 2007, the FASB issued SFAS No. 141(R), “Business
Combinations” (“SFAS 141R”). SFAS 141
defines the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the acquisition date as
the date that the acquirer achieves control, and requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions specified in the Statement. SFAS
141(R)
applies prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS
160 clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. SFAS 160 requires consolidated net income to
be reported at amounts that include the amounts attributable to both the parent
and the noncontrolling interest, and also requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated. The requirements
of SFAS 160 are effective for our fiscal year beginning January 1,
2009.
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.
F-13
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
4 - Summary of Significant Accounting Policies (continued)
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). SFAS 162 is effective 60 days following
the SEC’s approval of the Public Company Accounting Oversight Board amendments
to AU Section 411, The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles.
Reclassification
Of Accounts
Certain
reclassifications have been made to prior-year comparative financial statements
to conform to the current year presentation. These reclassifications had no
effect on previously reported results of operations or financial
position.
Note
5 - Prepayments, Deposits and Other Receivables
Prepayments,
deposits and other receivables at December 31, 2008 and 2007 consisted of the
following:
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Prepayments
|
$ | 41,283 | $ | 7,075,438 | ||||
Deposits
|
- | - | ||||||
Other
receivables (payables)
|
- | (276,806 | ) | |||||
Total
|
$ | 41,283 | $ | 6,798,632 |
Note
6 - Inventory
Inventory
at December 31, 2008 and 2007 consisted of the following:
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Raw
materials
|
$ | 200,754 | $ | - | ||||
Work-in-process
|
- | - | ||||||
Finished
goods
|
192,424 | - | ||||||
Total
|
$ | 393,178 | $ | - |
F-14
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
7 - Goodwill
On January 23, 2008, the
Group completed its acquisition of 90% equity interest
in Guangzhou Xinchen Water Company Limited from Fortune Luck Global
International Limited for a consideration of $13.45 million. Goodwill, which is
equal to the excess of cost over the fair value of acquired assets, has been
recorded in conjunction with the acquisition. Goodwill is accounted for in
accordance with SFAS 142. Under SFAS 142, goodwill is not amortized and is
subject to impairment test, at least annually. The test consists of two steps.
First, the identification of potential impairment is performed by comparing the
fair value of the reporting unit to its carrying amount, including goodwill. If
the fair value of the reporting unit is greater than its carrying amount,
goodwill is not considered impaired. Second, if there is impairment identified
in the first step, an impairment loss is recognized for any excess of the
carrying amount of the reporting unit’s goodwill over the implied fair value of
goodwill. The implied fair value of goodwill is determined by allocating the
fair value of the reporting unit in a manner similar to a purchase price
allocation, in accordance with SFAS No 141, “Business Combinations”. As of
December 31, 2008, the Company concluded that there were no impairments of
goodwill.
Note
8 - Property, Plant and Equipment, Net
Property,
plant and equipment, net, consisted of the following:
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Office
equipment
|
$ | 16,858 | $ | - | ||||
Motor
vehicles
|
59,362 | - | ||||||
Building
and structure
|
170,785 | - | ||||||
Bottled
water production equipment
|
664,492 | - | ||||||
Total
|
911,497 | - | ||||||
Less
: Accumulated depreciation and amortization
|
(36,921 | ) | - | |||||
Property,
plant and equipment, net
|
$ | 874,576 | $ | - |
Depreciation
and amortization expenses for the years ended December
31, 2008 and 2007 amounted to $36,347 and $-0-,
respectively.
Note
9 - Accrued Expenses
Accrued
expenses consisted of the following:
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
PRC
tax
|
$ | 1,219 | $ | - | ||||
Staff
welfare
|
47,562 | - | ||||||
Other
payable
|
116,251 | 55,528 | ||||||
Other
accruals
|
254,059 | - | ||||||
Registration
right liability
|
1,324,735 | 1,154,532 | ||||||
Deferred
revenue
|
78,215 | - | ||||||
Total
|
$ | 1,822,041 | $ | 1,210,060 |
F-15
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
10 - Due to Directors
The
amounts due to directors are interest-free, unsecured and repayable on
demand.
Note
11 - Due to Related Companies
At
December 31, 2008, the balance due to related companies represents cash borrowed
from Beijing
Zhao Cheng Chuang Zhan Investment Company Limited (“BJZC”) in which Mr.
Pu has equity interests.
All
amounts are interest-free, unsecured and repayable on demand.
Note
12 - Due to Affiliated Companies
At
December 31, 2008, the balance due to affiliated companies represents cash
borrowed from Guang
Dong Xin Xing Mei Biology Company Limited (“Xinxingmei”) in which the
Company has equity interests.
All
amounts are interest-free, unsecured and repayable on demand.
Note
13 - Warrant Liability
The fair
values of the warrant liability
as of December 31, 2008 and 2007 are as following:
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Warrants
issued in April 2005, at fair value
|
$ | 4,410 | $ | 154,350 | ||||
Warrants
issued in September 2005, at fair value
|
- | 993,415 | ||||||
Shares
issued in September 2005, accounted for as liability
|
32,200 | 32,200 | ||||||
Total
|
$ | 36,610 | $ | 1,179,965 |
The Group
conducted a private placement in April 2005 (“April Private Placement”) of 20
investment units, at $25,000 per unit, for gross proceeds of $500,000. Each unit
consisted of (a) a 12% convertible debenture in the original principal
amount of $25,000, convertible into shares of our common stock at the rate of
the lesser of (i) $0.20 per share or (ii) a 10% discount to the price
per share of common stock (or conversion price per share of common stock) of the
next private placement conducted by us prior to any conversion of the debenture,
and (b) 125,000 detachable warrants to purchase one share each of our
common stock at an exercise price of $0.20 per share, expiring ten years from
their date of issuance (“April Warrants”). As a result of the
September 2005 private placement, pursuant to Section 5(d) of the warrant
agreement, the exercise price has been adjusted to $0.15 per share on
September 14, 2005. The debentures were due and payable August 1,
2005. The debenture holders, however, extended the payment period to
September 30, 2005. The debentures were converted into 3,703,701 shares of
common stock on October 1, 2005.
The Group
used the Black-Scholes model in calculating the fair market value of the April
Warrants and allocated $148,531, $74,266 and $185,664 of the $408,461 net
proceeds to the Convertible Debenture, the Bifurcated Conversion Feature of the
Debenture and the April Warrants, respectively. The differences between the fair
value of each of the Convertible Debenture, the Bifurcated Conversion Feature of
the Debenture and the April Warrants and the respective allocated amounts are
recorded as non-cash financing charges and expensed at the date of issuance. The
principal assumptions used in the computation of the April Warrants are:
expected term of 10 years; a risk-free rate of return of 4.24%; dividend yield
of zero percent; and a volatility of 70%.
F-16
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
13 - Warrant Liability (continued)
The Group
granted to the holders of the April Warrants certain piggy-back and demand
registration rights. Pursuant to the agreements surrounding the April Private
Placement, in the event that the Group determined to undertake a registration of
securities, the Group would include, at the request of the holder of
“Registrable Securities”, the Registrable Securities in the registration
statement. If the Group did not file a registration statement by the 120th day
from the closing of such financing, and the Group shall have received a written
request signed by the holders holding the majority of the Registrable
Securities, then the Group was obligated to file, at its expense, a registration
statement covering the Registrable Securities. Once such registration statement
has been filed and declared effective, the Group is obligated to keep such
registration statement effective until the earlier of (i) the date that all
of the Registrable Securities have been sold pursuant to such registration
statement, (ii) all Registrable Securities have been otherwise transferred
to persons who may trade such shares without restriction under the Securities
Act, and the Group has delivered a new certificate or other evidence of
ownership for such securities not bearing a restrictive legend, or
(iii) all Registrable Securities may be sold at any time, without volume or
manner of sale limitations pursuant to Rule 144(k) or any similar provision then
in effect under the Securities Act. As of December 31, 2008, the Group has
not received any written request signed by the holders holding the majority of
the Registrable Securities.
Under
EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a
Company’s Own Stock, the fair value of the April Warrants should be reported as
a liability. Pursuant to the related warrant agreement, because there is
currently no effective registration statement covering the shares of common
stock underlying these warrants, these warrants are currently subject to a
cashless exercise whereby the warrant holders may surrender their warrants to
the company in exchange for shares of common stock. The number of shares of
common stock into which a warrant would be exchangeable in such a cashless
exercise depends on both the exercise price of the warrants and the market price
of the common stock, each at or near the time of exercise. Because both of these
factors are variable, it is possible that we could have insufficient authorized
shares to satisfy a cashless exercise. In this scenario, if we were unable to
obtain shareholder approval to increase the number of authorized shares, we
could be obligated to settle such a cashless exercise with cash rather than by
issuing shares of common stock. Further, EITF No. 00-19 requires that we record
the potential settlement obligation at each reporting date using the current
estimated fair value of the warrants, with any changes being recorded through
our statement of operations. We will continue to report the potential settlement
obligation as a liability until such time as the warrants are exercised or
expire or we are otherwise able to modify the warrant agreement to remove the
provisions which require this treatment.
The
conversion feature of the convertible debenture issued in April did not qualify
for the scope of exception from the provisions of SFAS 133 because the
convertible debentures are convertible into a variable number of shares. As
such, the conversion feature was bifurcated from the convertible debenture and
accounted for as a derivative at fair value with changes in fair value recorded
in earnings. Upon the conversion of the convertible debentures in October 2005,
the convertible debentures were recorded in equity as additional
capital.
F-17
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
13 - Warrant Liability (continued)
On
September 14, 2005, the Group closed the private placement sale to
accredited investors of units consisting of shares of our common stock and
warrants to purchase shares of our common stock for aggregate gross proceeds of
$4.83 million (“September Private Placement”). Pursuant to the subscription
agreements entered into with the investors, we issued to the investors 161 units
at a price of $30,000 per unit. Each unit consisted of 200,000 shares of our
common stock, priced at $0.15 per share, and warrants to purchase 200,000 shares
of our common stock over a five year period at an exercise price of $0.20 per
share. Pursuant to the terms of the subscription agreements, we granted the
investors limited registration rights for all common shares comprising the
units, including the common shares issuable on exercise of the warrants. The
Group also issued to Westminster Securities Corporation, as partial compensation
for their placement agent services, 7,728,000 placement agent warrants to
purchase one share each of our common shares, a portion of which has been
assigned by Westminster Securities Corporation to certain of its officers and
employees (the warrants issued in the September Private Placement together with
the placement agent warrants are hereinafter referred to as “September
Warrants”).
The Group
used the Black-Scholes model in calculating the fair market value of the
September Warrants and allocated $4,140,535 of the $4,172,735 net proceeds to
the September Warrants. The difference between the fair value of the September
Warrants and the allocated amount is recorded as non-cash financing charges and
expensed at the date of issuance. The principal assumptions used in the
computation of the September Warrants are: expected term of 5 years; a risk-free
rate of return of 4.24%; dividend yield of zero percent; and a volatility of
70%.
Under the
subscription agreement for the September Private Placement, we agreed to prepare
and file with the SEC (and did so file), at our own expense, a registration
statement covering the registrable securities related to that placement. We
agreed that in the event that the registration statement is not declared
effective by the SEC within the earlier of 120 days from the final closing, we
would pay to the investors in the September Private Placement liquidated damages
in the amount of 2.0% of the purchase price of the registrable securities purchased from the Company
and held by the investor for each month until the registration statement
is declared effective. These liquidated damages began accruing on January 12,
2006.
We agreed
that if we do not remit payment of these liquidated damages, we will pay the
investors in the September Private Placement interest at the rate of
12% per year until the liquidated damages are paid in full. The
subscription agreement provides that if a registration statement is not
effective at any time after one year following the issuance date of the
September Warrants, these liquidated damages obligations will stop accruing. As
of September 14, 2006 the liquidated damages obligations stopped accruing.
As of December
31,
2008, we have made an accrual of $1,324,735 for registration
right liability.
Under
paragraphs 12–32 of EITF 00-19, contracts that include any provision that could
require net-cash settlements cannot be accounted for as equity. Accordingly, the
proceeds of the September Private Placement allocated for par value of the
common stock and the September Warrants have been recorded as a liability on the
balance sheet. Upon the effectiveness of the registration statement, the amount
will be recorded as equity.
During
October 2007, 295,000 April Warrants, 7,200,000 September Private Placement and
1,642,615 placement agent warrants were exercised for 3,479,752 shares of common
stock in total.
F-18
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
14 – Discontinued Operations
On
December 30, 2008, the Company decided to discontinue the operations of
Evergreen Assets Group Limited and put the business for sale. The Company
decided to sell this division primarily because the industry of waste water
treatment is facing more intense competition. The industry itself requires large
investment in capital along with low rates of return over long period. The
expected disposal date is January 31, 2009. Evergreen’s revenue, reported in
discontinued operations, for the years ended December 31, 2008 and 2007, was
$773,258 and $1,554,624, respectively. Evergreen’s pretax income (loss) reported
in discontinued operations, for the years ended December 31, 2008 and 2007, was
$531,097 and $(1,500,457), respectively.
The
assets and liabilities of the discontinued division are presented separately
under the captions “Assets of discontinued division” and “Liabilities of
discontinued division”, respectively, in the accompanying consolidated balance
sheets at December 31, 2008 and 2007, and consist of the following:
December 31,
|
December 31,
|
|||||||
2008
|
2007
|
|||||||
Assets
of discontinued division:
|
||||||||
Prepayments,
deposits and other receivables
|
$ | 33,872 | $ | 1,733,110 | ||||
Due
from related companies
|
272,570 | 1,668,979 | ||||||
Due
from affiliated companies
|
4,795,911 | 3,166,470 | ||||||
Deferred
tax assets, net
|
14,877 | 1,928,186 | ||||||
Property,
plant and equipment, net
|
3,535,512 | 4,752,192 | ||||||
Interests
in affiliated companies
|
1,363,005 | 2,180,947 | ||||||
Other
assets
|
143,158 | 954,950 | ||||||
Total
|
$ | 10,158,905 | $ | 16,384,834 | ||||
Liabilities
of discontinued division:
|
||||||||
Accounts
payable
|
$ | 473,021 | $ | 6,923,872 | ||||
Accrued
expenses
|
161,091 | 1,958,781 | ||||||
Due
to directors
|
494,617 | 1,336,323 | ||||||
Due
to related companies
|
887,648 | 1,853,779 | ||||||
Income
tax payable
|
1,366,799 | 1,794,580 | ||||||
Outstanding
obligation for disposal
|
3,844,000 | - | ||||||
Other
liabilities
|
159,471 | 341,330 | ||||||
Total
|
$ | 7,386,647 | $ | 14,208,665 |
The
operating results of discontinued division are presented separately under the
caption “Discontinued Operations” in the accompanying consolidated statements of
operations and comprehensive income at December 31, 2008 and 2007, and consist
of the following:
For the Years Ended December
31,
|
||||||||
2008
|
2007
|
|||||||
Discontinued
operations:
|
||||||||
Income
(loss) from operations of Evergreen Asset Group
|
$ | 531,097 | $ | (1,500,457 | ) | |||
Gain
(loss) on disposal of a subsidiary’s equity interest –
Xinxingmei and
|
||||||||
Han
Dan
|
912,605 | (127,109 | ) | |||||
Loss
on disposal of Evergreen Asset Group
|
(3,844,000 | ) | - | |||||
Income
tax
|
(27,647 | ) | (217 | ) | ||||
Loss
from discontinued operations
|
$ | (2,427,945 | ) | $ | (1,627,783 | ) |
F-19
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
15 - Earnings (Loss) Per Share
The
Company presents earnings per share (“EPS) on a basic and diluted
basis.
|
(i)
|
The
basic earnings (loss) per share is calculated using the net income (loss)
and the weighted average number of shares outstanding during the
year.
|
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Net
loss
|
$ | (2,702,694 | ) | $ | (1,920,733 | ) | ||
Weighted
average number of common
|
||||||||
shares
outstanding
|
139,383,450 | 139,383,450 | ||||||
Basic
earnings (loss) per share
|
$ | (0.02 | ) | $ | (0.01 | ) |
|
(ii)
|
The
diluted earnings (loss) per share is calculated using the net income
(loss) and the weighted average number of shares outstanding during the
year together with incremental common shares issuable upon exercise of all
warrants issued.
|
Year
ended December 31,
|
||||||||
2008
|
2007
|
|||||||
Net
loss
|
$ | (2,702,694 | ) | $ | (1,920,733 | ) | ||
Diluted
weighted average number of common
|
||||||||
shares
outstanding
|
139,383,450 | 139,383,450 | ||||||
Diluted
earnings (loss) per share
|
$ | (0.02 | ) | $ | (0.01 | ) |
As the
April Warrants and the September Warrants are anti-dilutive, they are being
excluded from the calculation of diluted earnings (loss) per
share.
F-20
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
16 - Pension Plans
As
stipulated by the PRC government regulations, the Group is required to
contribute to PRC insurance companies organized by the PRC government which are
responsible for the payments of pension benefits to retired staff. The monthly
contribution was equal to 12% of the salaries of the existing
staff. The Group has no obligation for the payment of pension
benefits beyond the annual contributions described above.
Contributions
to pension plans for the year ended December 31, 2008 and 2007 amounted to
$18,279 and $12,065, respectively.
Note
17 - Concentration
As of
December 31, 2008, no single customer accounted for more than 10% of the
company’s revenue.
Note
18 – Restatement to Reflect Correction of Accounting Errors
We
elected to restate our 2008 financial statement to (1) recognize the gain on
disposal of a subsidiary, Xinxingmei’s equity interest, (2) recognize additional
liability relating to acquisition of a subsidiary, Xinchen’s equity interest,
and (3) segregate the assets and liabilities of Evergreen because of
discontinued operations.
On January 8, 2008, the
Company sold 58% of the total equity interest in Xinxingmei. However, we
did not recognize the gain on disposal of Xinxingmei. We have now decided to
restate to reflect the change in net income. This restatement increases net income by $912,605 and
EPS by $0.01. As of December 31, 2008, the subsidiary of Xinxingmei was
classified under the discontinued operations of Evergreen.
On
January 23, 2008, the Company acquired 90% equity interest in Xinchen. The
acquisition was completed for a consideration of $13.45 million, of which $7.5
million was paid in cash, and the remaining $5.95 million will be paid in the
future. We did not record the liability of $5.95 million when the cash of $7.5
million was paid. We have now decided to restate to reflect the change in assets
and liabilities. This restatement increases Goodwill and Other
payables for acquisition of a subsidiary by $5.95 million,
respectively.
On December 30, 2008,
the Company decided to discontinue operations of Evergreen Assets Group
Limited and put the business for sale.
F-21
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
18 – Restatement to Reflect Correction of Accounting Errors
(continued)
The
effect of restatement for 2008 is as follows:
Consolidated Balance
Sheets
As reported
|
As reported
|
|||||||||||
originally
|
currently
|
|||||||||||
at December 31,
|
at December 31,
|
Effect of
|
||||||||||
2008
|
2008
|
Change
|
||||||||||
Assets
|
||||||||||||
Current
assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 28,167 | $ | 8,579 | $ | (19,588 | ) | |||||
Accounts
receivable
|
92,411 | 18,172 | (74,239 | ) | ||||||||
Prepayments,
deposits and other receivables
|
75,154 | 41,283 | (33,871 | ) | ||||||||
Inventory
|
393,178 | 393,178 | - | |||||||||
Due
from related companies
|
310,002 | - | (310,002 | ) | ||||||||
Due
from affiliated companies
|
3,000,198 | - | (3,000,198 | ) | ||||||||
Deferred
tax assets, net
|
14,877 | - | (14,877 | ) | ||||||||
Total
current assets
|
3,913,987 | 461,212 | (3,452,775 | ) | ||||||||
Property,
plant and equipment, net
|
4,410,088 | 874,576 | (3,535,512 | ) | ||||||||
Construction
in progress
|
57,579 | 8,248 | (49,331 | ) | ||||||||
Intangible
assets
|
135,649 | 135,649 | - | |||||||||
Goodwill
|
7,156,263 | 13,106,263 | 5,950,000 | |||||||||
Interests
in affiliated companies
|
1,363,005 | - | (1,363,005 | ) | ||||||||
Assets
of discontinued division
|
- | 10,158,905 | 10,158,905 | |||||||||
Total
assets
|
$ | 17,036,571 | $ | 24,744,853 | $ | 7,708,282 | ||||||
Liabilities
|
||||||||||||
Current
liabilities:
|
||||||||||||
Warrant
liability
|
$ | 36,610 | $ | 36,610 | $ | - | ||||||
Accounts
payable
|
660,054 | 187,033 | (473,021 | ) | ||||||||
Accrued
expenses
|
1,983,131 | 1,822,041 | (161,090 | ) | ||||||||
Due
to directors
|
746,172 | 251,554 | (494,618 | ) | ||||||||
Due
to related companies
|
4,056,800 | 3,169,152 | (887,648 | ) | ||||||||
Due
to affiliated companies
|
- | 1,758,281 | 1,758,281 | |||||||||
Income
tax payable
|
1,366,961 | 162 | (1,366,799 | ) | ||||||||
Total
current liabilities
|
8,849,728 | 7,224,833 | (1,624,895 | ) | ||||||||
Long-term
liabilities:
|
||||||||||||
Outstanding
obligation for acquisition of a subsidiary
|
- | 5,950,000 | 5,950,000 | |||||||||
Total
long-term liabilities
|
- | 5,950,000 | 5,950,000 | |||||||||
Liabilities
of discontinued division
|
- | 7,386,647 | 7,386,647 | |||||||||
Total
liabilities
|
8,849,728 | 20,561,480 | 11,711,752 | |||||||||
Equity
|
||||||||||||
Stockholders'
equity:
|
||||||||||||
Preferred
stock, $0.001 par value, 50,000,000 authorized shares,
|
||||||||||||
no
shares issued and outstanding
|
- | - | - | |||||||||
Common
stock, $0.001 par value, 200,000,000 shares authorized;
|
||||||||||||
139,383,450
shares issued and outstanding
|
139,383 | 139,383 | - | |||||||||
Additional
paid-in capital
|
6,361,263 | 6,131,532 | (229,731 | ) | ||||||||
Retained
earnings
|
240,724 | (3,373,545 | ) | (3,614,269 | ) | |||||||
Accumulated
other comprehensive income
|
1,286,003 | 1,286,003 | - | |||||||||
Total
stockholders' equity
|
8,027,373 | 4,183,373 | (3,844,000 | ) | ||||||||
Noncontrolling
interest
|
159,470 | - | (159,470 | ) | ||||||||
Total
equity
|
8,186,843 | 4,183,373 | (4,003,470 | ) | ||||||||
Total
liabilities and equity
|
$ | 17,036,571 | $ | 24,744,853 | $ | 7,708,282 |
F-22
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
18 – Restatement to Reflect Correction of Accounting Errors
(continued)
Consolidated Statements of
Operations and Comprehensive Income (Loss)
As reported
|
As reported
|
|||||||||||
originally for
|
currently for
|
|||||||||||
the year ended
|
the year ended
|
|||||||||||
December 31,
|
December 31,
|
Effect of
|
||||||||||
2008
|
2008
|
Change
|
||||||||||
Revenue:
|
||||||||||||
Revenue
from turn-key engineering projects
|
$ | - | $ | - | $ | - | ||||||
Revenue
from BOT wastewater treatment services
|
773,258 | - | (773,258 | ) | ||||||||
Revenue
from sales of bottled water
|
207,318 | 207,318 | - | |||||||||
Total
revenue
|
980,576 | 207,318 | (773,258 | ) | ||||||||
Cost
of revenue:
|
||||||||||||
Cost
of revenue for turn-key engineering projects
|
- | - | - | |||||||||
Cost
of revenue for BOT wastewater treatment services
|
(245,712 | ) | - | 245,712 | ||||||||
Cost
of revenue from sales of bottled water
|
(113,186 | ) | (113,186 | ) | - | |||||||
Depreciation
and amortization
|
(281,829 | ) | (36,347 | ) | 245,482 | |||||||
Sales
taxes
|
(1,801 | ) | (1,801 | ) | - | |||||||
Total
cost of revenue
|
(642,528 | ) | (151,334 | ) | 491,194 | |||||||
Gross
profit
|
338,048 | 55,984 | (282,064 | ) | ||||||||
Operating
expenses:
|
||||||||||||
Selling
and distribution expenses
|
(894,459 | ) | (894,459 | ) | - | |||||||
Other
general and administrative expenses
|
(492,185 | ) | (427,665 | ) | 64,520 | |||||||
Loss
from operations
|
(1,048,596 | ) | (1,266,140 | ) | (217,544 | ) | ||||||
Other
income (expenses):
|
||||||||||||
Interest
expense
|
(502 | ) | 33 | 535 | ||||||||
Penalty
for late effectiveness of registration statement
|
(91,297 | ) | (91,297 | ) | - | |||||||
Gain
(loss) on fair value of derivative instruments
|
1,143,355 | 1,143,355 | - | |||||||||
Share
of results in affiliated companies – Xin Le and Han Dan
|
333,441 | - | (333,441 | ) | ||||||||
Other
income (expense)
|
(60,191 | ) | (60,191 | ) | - | |||||||
Total
other income (expenses)
|
1,324,806 | 991,900 | (332,906 | ) | ||||||||
Income
(loss) from continuing operations before income tax
|
276,210 | (274,240 | ) | (550,450 | ) | |||||||
Provision
for income tax
|
(28,157 | ) | (509 | ) | 27,648 | |||||||
Income
(loss) from continuing operations
|
248,053 | (274,749 | ) | (522,802 | ) | |||||||
Noncontrolling
interest
|
(19,352 | ) | - | 19,352 | ||||||||
Discontinued
operations:
|
||||||||||||
Income
(loss) from operations of discontinued Evergreen Asset
Group
|
- | (2,400,298 | ) | (2,400,298 | ) | |||||||
Income
tax
|
- | (27,647 | ) | (27,647 | ) | |||||||
Income
(loss) from discontinued operations
|
- | (2,427,945 | ) | (2,427,945 | ) | |||||||
Net
income (loss)
|
228,701 | (2,702,694 | ) | (2,931,395 | ) | |||||||
Other
comprehensive income
|
||||||||||||
Foreign
currency translation adjustment
|
147,649 | 147,649 | - | |||||||||
Comprehensive
income (loss)
|
$ | 376,350 | $ | (2,555,045 | ) | $ | (2,931,395 | ) | ||||
Basic
earnings (loss) per share
|
$ | 0.00 | $ | (0.02 | ) | $ | (0.02 | ) | ||||
Diluted
earnings (loss) per share
|
$ | 0.00 | $ | (0.02 | ) | $ | (0.02 | ) | ||||
Weighted
average number of common shares outstanding
|
||||||||||||
Basic
and Diluted
|
139,383,450 | 139,383,450 | - |
F-23
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
18 – Restatement to Reflect Correction of Accounting Errors
(continued)
Consolidated Statements of
Cash Flows
As reported
|
As reported
|
|||||||||||
originally for
|
currently for
|
|||||||||||
the year ended
|
the year ended
|
|||||||||||
December 31,
|
December 31,
|
Effect of
|
||||||||||
2008
|
2008
|
Change
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income (loss)
|
$ | 228,701 | $ | (2,702,694 | ) | $ | (2,931,395 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash provided
|
||||||||||||
by
(used in) operating activities:
|
||||||||||||
Depreciation
and amortization
|
281,829 | 36,347 | (245,482 | ) | ||||||||
Gain
on fair value of derivative instruments
|
(1,143,355 | ) | (1,143,355 | ) | - | |||||||
Noncontrolling
interest
|
(172,859 | ) | - | 172,859 | ||||||||
Share
of results in affiliated companies - Xinxingmei and Han
Dan
|
(333,441 | ) | - | 333,441 | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
(30,422 | ) | (18,172 | ) | 12,250 | |||||||
Prepayments,
deposits and other receivables
|
6,786,218 | 6,757,349 | (28,869 | ) | ||||||||
Inventory
|
(387,076 | ) | (393,178 | ) | (6,102 | ) | ||||||
Due
from related companies
|
3,490,716 | 271,691 | (3,219,025 | ) | ||||||||
Due
from affiliated companies
|
(4,995,878 | ) | - | 4,995,878 | ||||||||
Current
assets of discontinued division
|
- | 3,379,515 | 3,379,515 | |||||||||
Accounts
payable
|
180,827 | 187,033 | 6,206 | |||||||||
Accrued
expenses
|
419,004 | 611,981 | 192,977 | |||||||||
Due
to directors
|
124,615 | 133,505 | 8,890 | |||||||||
Due
to related companies
|
3,630,646 | 3,169,152 | (461,494 | ) | ||||||||
Due
to affiliated companies
|
- | 1,758,281 | 1,758,281 | |||||||||
Income
tax payable
|
15,927 | 162 | (15,765 | ) | ||||||||
Current
liabilities of discontinued division
|
- | (6,822,018 | ) | (6,822,018 | ) | |||||||
Total
adjustments
|
7,866,751 | 7,928,293 | 61,542 | |||||||||
Net
cash provided by (used in) operating activities
|
8,095,452 | 5,225,599 | (2,869,853 | ) | ||||||||
Cash
flows from investing activities:
|
||||||||||||
Acquisition
of interest in a subsidiary - Xinchen
|
(7,338,979 | ) | - | 7,338,979 | ||||||||
Acquisition
of property, plant and equipment
|
(954,036 | ) | (919,744 | ) | 34,292 | |||||||
Acquisition
of intangible assets and goodwill
|
(133,544 | ) | (7,291,912 | ) | (7,158,368 | ) | ||||||
Non-current
assets of discontinued division
|
- | 2,846,414 | 2,846,414 | |||||||||
Net
cash provided by (used in) investing activities
|
(8,426,559 | ) | (5,365,242 | ) | 3,061,317 | |||||||
Effect
of foreign currency translation on cash and cash
equivalents
|
17,699 | 148,222 | 130,523 | |||||||||
Net
decrease in cash and cash equivalents
|
(313,408 | ) | 8,579 | 321,987 | ||||||||
Cash
and cash equivalents at beginning of year
|
341,575 | - | (341,575 | ) | ||||||||
Cash
and cash equivalents at end of year
|
$ | 28,167 | $ | 8,579 | $ | (19,588 | ) | |||||
Supplemental
schedule of non-cash activities
|
||||||||||||
Outstanding
obligation for acquisition of a subsidiary - Xinchen
|
$ | - | $ | 5,950,000 | $ | 5,950,000 |
F-24
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
18 – Restatement to Reflect Correction of Accounting Errors
(continued)
The
effect of restatement for 2007 is as follows:
Consolidated Balance
Sheets
As reported
|
As reported
|
|||||||||||
originally
|
currently
|
|||||||||||
at December 31,
|
at December 31,
|
Effect of
|
||||||||||
2007
|
2007
|
Change
|
||||||||||
Assets
|
||||||||||||
Current
assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 341,575 | $ | - | $ | (341,575 | ) | |||||
Accounts
receivable
|
518,066 | - | (518,066 | ) | ||||||||
Prepayments,
deposits and other receivables
|
8,531,742 | 6,798,632 | (1,733,110 | ) | ||||||||
Inventory
|
- | - | - | |||||||||
Due
from related companies
|
1,940,670 | 271,691 | (1,668,979 | ) | ||||||||
Due
from affiliated companies
|
3,166,470 | - | (3,166,470 | ) | ||||||||
Deferred
tax assets, net
|
1,928,186 | - | (1,928,186 | ) | ||||||||
Total
current assets
|
16,426,709 | 7,070,323 | (9,356,386 | ) | ||||||||
Property,
plant and equipment, net
|
4,752,192 | - | (4,752,192 | ) | ||||||||
Construction
in progress
|
95,309 | - | (95,309 | ) | ||||||||
Intangible
assets
|
- | - | - | |||||||||
Goodwill
|
- | - | - | |||||||||
Interests
in affiliated companies
|
2,180,947 | - | (2,180,947 | ) | ||||||||
Assets
of discontinued division
|
- | 16,384,834 | 16,384,834 | |||||||||
Total
assets
|
$ | 23,455,157 | $ | 23,455,157 | $ | - | ||||||
Liabilities
|
||||||||||||
Current
liabilities:
|
||||||||||||
Warrant
liability
|
$ | 1,179,965 | $ | 1,179,965 | $ | - | ||||||
Note
payable
|
27,344 | - | (27,344 | ) | ||||||||
Accounts
payable
|
6,923,872 | - | (6,923,872 | ) | ||||||||
Accrued
expenses
|
3,168,841 | 1,210,060 | (1,958,781 | ) | ||||||||
Due
to directors
|
1,454,372 | 118,049 | (1,336,323 | ) | ||||||||
Due
to related companies
|
1,853,779 | - | (1,853,779 | ) | ||||||||
Income
tax payable
|
1,794,580 | - | (1,794,580 | ) | ||||||||
Total
current liabilities
|
16,402,753 | 2,508,074 | (13,894,679 | ) | ||||||||
Long-term
liabilities:
|
||||||||||||
Outstanding
obligation for acquisition of a subsidiary
|
- | - | - | |||||||||
Total
long-term liabilities
|
- | - | - | |||||||||
Liabilities
of discontinued division
|
- | 14,208,665 | 14,208,665 | |||||||||
Total
liabilities
|
16,402,753 | 16,716,739 | 313,986 | |||||||||
Equity
|
||||||||||||
Stockholders'
equity:
|
||||||||||||
Preferred
stock, $0.001 par value, 50,000,000 authorized shares,
|
||||||||||||
no
shares issued and outstanding
|
- | - | - | |||||||||
Common
stock, $0.001 par value, 200,000,000 shares authorized;
|
||||||||||||
139,383,450
shares issued and outstanding
|
139,218 | 139,383 | 165 | |||||||||
Additional
paid-in capital
|
6,131,697 | 6,131,532 | (165 | ) | ||||||||
Retained
earnings
|
(670,851 | ) | (670,851 | ) | - | |||||||
Accumulated
other comprehensive income
|
1,138,354 | 1,138,354 | - | |||||||||
Total
stockholders' equity
|
6,738,418 | 6,738,418 | - | |||||||||
Noncontrolling
interest
|
313,986 | - | (313,986 | ) | ||||||||
Total
equity
|
7,052,404 | 6,738,418 | (313,986 | ) | ||||||||
- | ||||||||||||
Total liabilities and
equity
|
$ | 23,455,157 | $ | 23,455,157 | $ | - |
F-25
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
18 – Restatement to Reflect Correction of Accounting Errors
(continued)
Consolidated Statements of
Operations and Comprehensive Income (Loss)
As reported
|
As reported
|
|||||||||||
originally for
|
currently for
|
|||||||||||
the year ended
|
the year ended
|
|||||||||||
December 31,
|
December 31,
|
Effect of
|
||||||||||
2007
|
2007
|
Change
|
||||||||||
Revenue:
|
||||||||||||
Revenue
from turn-key engineering projects
|
$ | 670,559 | $ | - | $ | (670,559 | ) | |||||
Revenue
from BOT wastewater treatment services
|
878,999 | - | (878,999 | ) | ||||||||
Revenue
from sales of bottled water
|
5,066 | - | (5,066 | ) | ||||||||
Total
revenue
|
1,554,624 | - | (1,554,624 | ) | ||||||||
Cost
of revenue:
|
||||||||||||
Cost
of revenue for turn-key engineering projects
|
(674,187 | ) | - | 674,187 | ||||||||
Cost
of revenue for BOT wastewater treatment services
|
(299,893 | ) | - | 298,893 | ||||||||
Cost
of revenue from sales of bottled water
|
(3,221 | ) | - | 3,221 | ||||||||
Depreciation
and amortization
|
(311,330 | ) | - | 311,330 | ||||||||
Sales
taxes
|
(34,892 | ) | - | 34,892 | ||||||||
Total
cost of revenue
|
(1,323,523 | ) | - | 1,323,523 | ||||||||
Gross
profit
|
231,101 | - | (231,101 | ) | ||||||||
Operating
expenses:
|
||||||||||||
Selling
and distribution expenses
|
(4,249 | ) | - | 4,249 | ||||||||
Other
general and administrative expenses
|
(2,021,673 | ) | - | 2,021,673 | ||||||||
Loss
from operations
|
(1,794,821 | ) | - | 1,794,821 | ||||||||
Other
income (expenses):
|
||||||||||||
Interest
expense
|
(1,138 | ) | - | 1,138 | ||||||||
Penalty
for late effectiveness of registration statement
|
(89,046 | ) | (89,046 | ) | - | |||||||
Gain
(loss) on fair value of derivative instruments
|
(203,904 | ) | (203,904 | ) | - | |||||||
Share
of results in affiliated companies – Xin Le and Han Dan
|
156,089 | - | (156,089 | ) | ||||||||
Other
income (expense)
|
174,249 | - | (174,249 | ) | ||||||||
Total
other income (expenses)
|
36,250 | (292,950 | ) | (329,200 | ) | |||||||
Income
(loss) from continuing operations before income tax
|
(1,758,571 | ) | (292,950 | ) | 1,465,621 | |||||||
Provision
for income tax
|
(217 | ) | - | 217 | ||||||||
Income
(loss) from continuing operations
|
(1,758,788 | ) | (292,950 | ) | 1,465,838 | |||||||
Noncontrolling
interest
|
(34,836 | ) | - | 34,836 | ||||||||
Discontinued
operations:
|
||||||||||||
Income
(loss) from operations of discontinued Evergreen Asset
Group
|
- | (1,627,566 | ) | (1,627,566 | ) | |||||||
Income
tax
|
- | (217 | ) | (217 | ) | |||||||
Income
(loss) from discontinued operations
|
- | (1,627,783 | ) | (1,627,783 | ) | |||||||
Net
income (loss)
|
(1,793,624 | ) | (1,920,733 | ) | (127,109 | ) | ||||||
Other
comprehensive income
|
||||||||||||
Foreign
currency translation adjustment
|
686,965 | 686,965 | - | |||||||||
Comprehensive
income (loss)
|
$ | (1,106,659 | ) | $ | (1,233,768 | ) | $ | (127,109 | ) | |||
Basic
earnings (loss) per share
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | - | ||||
Diluted
earnings (loss) per share
|
$ | (0.01 | ) | $ | (0.01 | ) | $ | - | ||||
Weighted
average number of common shares outstanding
|
||||||||||||
Basic
and Diluted
|
139,217,450 | 139,383,450 | 165,900 |
F-26
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
December
31, 2008 and 2007
Note
18 – Restatement to Reflect Correction of Accounting Errors
(continued)
Consolidated Statements of
Cash Flows
As reported
|
As reported
|
|||||||||||
originally for
|
currently for
|
|||||||||||
the year ended
|
the year ended
|
|||||||||||
December 31,
|
December 31,
|
Effect of
|
||||||||||
2007
|
2007
|
Change
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
income (loss)
|
$ | (1,793,624 | ) | $ | (1,920,733 | ) | $ | (127,109 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided
|
||||||||||||
by
(used in) operating activities:
|
||||||||||||
Depreciation
and amortization
|
311,330 | - | (311,330 | ) | ||||||||
Gain
on fair value of derivative instruments
|
203,904 | 203,904 | - | |||||||||
Provision
for doubtful accounts
|
(4,515,625 | ) | - | 4,515,625 | ||||||||
Deferred
tax assets
|
(9,026 | ) | - | 9,026 | ||||||||
Noncontrolling
interest
|
19,493 | - | (19,493 | ) | ||||||||
Share
of results in affiliated companies - Xinxingmei and Han
Dan
|
(156,089 | ) | - | 156,089 | ||||||||
Changes
in operating assets and liabilities:
|
||||||||||||
Accounts
receivable
|
6,213,634 | - | (6,213,634 | ) | ||||||||
Prepayments,
deposits and other receivables
|
(6,712,181 | ) | (6,733,284 | ) | (21,103 | ) | ||||||
Due
from related companies
|
2,950,586 | (271,691 | ) | (3,222,277 | ) | |||||||
Due
from affiliated companies
|
(162,527 | ) | 2,592,000 | 2,754,527 | ||||||||
Current
assets of discontinued division
|
- | 3,669,872 | 3,669,872 | |||||||||
Accounts
payable
|
(159,954 | ) | - | 159,954 | ||||||||
Accrued
expenses
|
(58,758 | ) | 255,227 | 313,985 | ||||||||
Due
to directors
|
(10,294 | ) | 116,920 | 127,214 | ||||||||
Due
to related companies
|
(45,566 | ) | - | 45,566 | ||||||||
Current
liabilities of discontinued division
|
- | (150,744 | ) | (150,744 | ) | |||||||
Total
adjustments
|
(2,131,073 | ) | (317,796 | ) | 1,813,277 | |||||||
Net
cash provided by (used in) operating activities
|
(3,924,697 | ) | (2,238,529 | ) | 1,686,168 | |||||||
Cash
flows from investing activities:
|
||||||||||||
Disposal
of interest in a subsidiary - Han Dan
|
15,343 | - | (15,343 | ) | ||||||||
Dividend
received from an associated company – Xin Le
|
91,897 | - | (91,897 | ) | ||||||||
Acquisition
of property, plant and equipment
|
(105,307 | ) | - | 105,307 | ||||||||
Non-current
assets of discontinued division
|
- | 1,551,564 | 1,551,564 | |||||||||
Net
cash provided by (used in) investing activities
|
1,933 | 1,551,564 | 1,549,631 | |||||||||
Effect
of foreign currency translation on cash and cash
equivalents
|
119,855 | 686,965 | 567,110 | |||||||||
Net
decrease in cash and cash equivalents
|
(3,802,909 | ) | - | 3,802,909 | ||||||||
Cash
and cash equivalents at beginning of year
|
4,144,484 | - | (4,144,484 | ) | ||||||||
Cash
and cash equivalents at end of year
|
$ | 341,575 | $ | - | $ | (341,575 | ) |
Note
19 - Subsequent Events
In January, 2009, the
Group sold 100% of the equity interest in Evergreen to Whole Treasure Investment
Ltd. at a total consideration of RMB 19,000,000. After completing the transfer
formalities, the Group no longer possesses any share in
Evergreen.
F-27