Attached files
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EX-31.2 - China Water Group, Inc. | v177725_ex31-2.htm |
EX-32.2 - China Water Group, Inc. | v177725_ex32-2.htm |
EX-31.1 - China Water Group, Inc. | v177725_ex31-1.htm |
EX-32.1 - China Water Group, Inc. | v177725_ex32-1.htm |
U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q-A/1
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended March 31, 2009
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from ————— to ——————
Commission
File Number 000-26175
China
Water Group, Inc.
(Exact
name of small business issuer as specified in its charter)
Nevada
|
88-0409151
|
|
(State
or other jurisdiction of
|
(IRS
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
Suite
7A01, Baicheng Building
584
Yingbin Road
Dashi,
Panyu District
Guangzhou,
Guangdong, China
(Address
of principal executive offices)
86-20-3479
9708
(Issuer’s
telephone number)
NA
(Former
name, former address and former fiscal year, if changed since last
report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. YES ¨ NO
x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company
filer. See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act (Check one):
Large
Accelerated Filer ¨ Accelerated
Filer ¨ Non-Accelerated
Filer¨ Smaller
Reporting Company x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o NO x
State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 139,383,450 shares of common stock, par value
$.0001 per share, as of June 8, 2009.
Transitional
Small Business Disclosure Format (Check one). YES ¨ NO
x
PART
I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS.
CHINA
WATER GROUP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
MARCH
31, 2009 AND 2008
(UNAUDITED)
CHINA
WATER GROUP, INC.
Consolidated
Financial Statements
March
31, 2009 and 2008
(Unaudited)
Table
of Contents
Page
|
||
Consolidated
Financial Statements
|
||
Report
of Independent Registered Public Accounting Firm
|
1
|
|
Consolidated
Balance Sheets
|
2
|
|
Consolidated
Statements of Operations and Comprehensive Income
|
3
|
|
Consolidated
Statements of Cash Flows
|
4
|
|
Notes
to Consolidated Financial Statements
|
5
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
China
Water Group, Inc.
We have
reviewed the accompanying consolidated balance sheet of China Water Group, Inc.
and subsidiaries (the “Company”) as of March 31, 2009, and the related
consolidated statements of operations and comprehensive income, and cash flows
for the three months ended March 31, 2009 and 2008. These consolidated financial
statements are the responsibility of the Company's management.
We
conducted our reviews in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
objective of which is the expression of an opinion regarding the consolidated
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on
our review, we are not aware of any material modifications that should be made
to the accompanying consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have
previously audited, in accordance with auditing standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
China Water Group, Inc. as of December 31, 2008, and the related consolidated
statements of income, retained earnings and comprehensive income, and cash flows
for the year then ended (not presented herein); and in our report dated July 6,
2009, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2008, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Parsippany,
New Jersey
August
10, 2009
(Except
for Note 4, 6, 7, 8, 10, 11, 12, 14,
as to
which the date is February 15, 2010)
1
CHINA
WATER GROUP, INC.
Consolidated
Balance Sheets
March 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
(Unaudited)
|
||||||||
(Restated)
|
(Restated)
|
|||||||
Assets
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 40,679 | $ | 8,579 | ||||
Accounts
receivable
|
23,336 | 18,172 | ||||||
Prepayments,
deposits and other receivables
|
52,673 | 41,283 | ||||||
Inventory
|
370,804 | 393,178 | ||||||
Loans
to unrelated party
|
645,230 | - | ||||||
Total
current assets
|
1,132,722 | 461,212 | ||||||
Property,
plant and equipment, net
|
866,335 | 874,576 | ||||||
Construction
in progress
|
8,258 | 8,248 | ||||||
Intangible
assets
|
135,095 | 135,649 | ||||||
Goodwill
|
13,115,254 | 13,106,263 | ||||||
Assets
of discontinued division
|
- | 10,158,905 | ||||||
Total
assets
|
$ | 15,257,664 | $ | 24,744,853 | ||||
Liabilities
|
||||||||
Current
liabilities:
|
||||||||
Warrant
liability
|
$ | 36,610 | $ | 36,610 | ||||
Accounts
payable
|
193,510 | 187,033 | ||||||
Accrued
expenses
|
1,825,635 | 1,822,041 | ||||||
Due
to directors
|
168,403 | 251,554 | ||||||
Due
to related companies
|
3,189,932 | 3,169,152 | ||||||
Due
to affiliated companies
|
- | 1,758,281 | ||||||
Income
tax payable
|
172 | 162 | ||||||
Total
current liabilities
|
5,414,262 | 7,224,833 | ||||||
Long-term
liabilities:
|
||||||||
Other
payables 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 | ||||||
Total
liabilities
|
11,364,262 | 20,561,480 | ||||||
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
|
6,131,532 | 6,131,532 | ||||||
Retained
earnings
|
(3,508,191 | ) | (3,373,545 | ) | ||||
Accumulated
other comprehensive income
|
1,130,678 | 1,286,003 | ||||||
Total
stockholders' equity
|
3,893,402 | 4,183,373 | ||||||
Noncontrolling
interest
|
- | - | ||||||
Total
equity
|
3,893,402 | 4,183,373 | ||||||
Total
liabilities and equity
|
$ | 15,257,664 | $ | 24,744,853 |
The accompanying notes are an
integral part of these consolidated financial statements.
2
CHINA
WATER GROUP, INC.
Consolidated
Statements of Operations and Comprehensive Income
(Unaudited)
Three Months Ended March 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Revenue
|
||||||||
Revenue
from BOT wastewater treatment services
|
$ | - | $ | - | ||||
Revenue
from sales of bottled water
|
26,064 | 47,723 | ||||||
Total
revenue
|
26,064 | 47,723 | ||||||
Cost
of revenue
|
||||||||
Cost
of revenue for BOT wastewater treatment services
|
- | - | ||||||
Cost
of revenue from sale of bottled water
|
2,654 | 8,966 | ||||||
Depreciation
and amortization
|
10,413 | 9,379 | ||||||
Sales
tax
|
303 | 19 | ||||||
Total
cost of revenue
|
13,370 | 18,364 | ||||||
Gross
profit
|
12,694 | 29,359 | ||||||
Operating
expenses
|
||||||||
Selling
and distribution expenses
|
(7,297 | ) | (205,235 | ) | ||||
General
and administrative expenses
|
(129,685 | ) | (113,498 | ) | ||||
Total
operating expenses
|
(136,982 | ) | (318,733 | ) | ||||
Loss
from operations
|
(124,288 | ) | (289,374 | ) | ||||
Other
income (expense)
|
||||||||
Other
expense
|
(10,188 | ) | (613 | ) | ||||
Interest
expense
|
- | (80 | ) | |||||
Penalty
for late effectiveness of registration statement
|
- | (22,688 | ) | |||||
Gain
on financial instruments
|
- | 518,542 | ||||||
Total
other income
|
(10,188 | ) | 495,161 | |||||
Income
(loss) from continuing operations before income tax
|
(134,476 | ) | 205,787 | |||||
Provision
for income tax
|
(170 | ) | (61 | ) | ||||
Income
(loss) from continuing operations
|
(134,646 | ) | 205,726 | |||||
Noncontrolling
interest
|
- | - | ||||||
Discontinued
operations:
|
||||||||
Income
from discontinued operations of Evergreen Asset Group
|
- | 94,518 | ||||||
Income
tax
|
- | (6,626 | ) | |||||
Income
from discontinued operations
|
- | 87,892 | ||||||
Net
income (loss)
|
(134,646 | ) | 293,618 | |||||
Other
comprehensive income (loss)
|
||||||||
Foreign
currency translation adjustment
|
(155,325 | ) | 307,189 | |||||
Comprehensive
income (loss)
|
$ | (289,971 | ) | $ | 600,807 | |||
Basic
earnings per share
|
$ | (0.00 | ) | $ | 0.00 | |||
Diluted
earnings per share
|
$ | (0.00 | ) | $ | 0.00 | |||
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.
3
CHINA
WATER GROUP, INC.
Consolidated
Statements of Cash Flows
(Unaudited)
Three
Months Ended March 31,
|
||||||||
2009
|
2008
|
|||||||
(Restated)
|
(Restated)
|
|||||||
Cash
flows from operating activities
|
||||||||
Net income
|
$ | (134,646 | ) | $ | 293,618 | |||
Adjustments
to reconcile net income to net cash provided by (used in)
|
||||||||
operating
activities :
|
||||||||
Depreciation
and amortization
|
10,413 | 9,379 | ||||||
Gain
on financial instruments
|
- | (518,542 | ) | |||||
Noncontrolling
interest
|
- | - | ||||||
Changes
in operating assets and liabilities :
|
||||||||
Accounts
receivable
|
(5,141 | ) | (20,522 | ) | ||||
Prepayment,
deposits and other receivables
|
(11,337 | ) | 6,172,240 | |||||
Inventory
|
22,865 | (514,210 | ) | |||||
Current
assets of discontinued division
|
5,216,856 | 4,519,371 | ||||||
Accounts
payable
|
6,241 | 186,856 | ||||||
Accruals
and other liabilities
|
2,980 | 442,115 | ||||||
Current
liabilities of discontinued division
|
(7,394,868 | ) | (11,028,127 | ) | ||||
Total
adjustments
|
(2,151,991 | ) | (751,440 | ) | ||||
Net
cash provided by operating activities
|
(2,286,637 | ) | (457,822 | ) | ||||
Cash
flows from investing activities
|
||||||||
Due
from related companies
|
- | 39,281 | ||||||
Loans
to unrelated party
|
(645,138 | ) | - | |||||
Non-current
assets of discontinued division
|
4,953,355 | 3,207,465 | ||||||
Acquisition
of property, plant and equipment
|
(349 | ) | (861,251 | ) | ||||
Acquisition
of intangible assets
|
- | (135,231 | ) | |||||
Acquisition
of goodwill
|
- | (12,935,056 | ) | |||||
Net
cash used in investing activities
|
4,307,868 | (10,684,792 | ) | |||||
Cash
flows from financing activities
|
||||||||
Due
to related companies
|
16,797 | 3,245,836 | ||||||
Due
to directors
|
(83,455 | ) | 27,243 | |||||
Due
to affiliated companies
|
(1,760,238 | ) | 1,637,729 | |||||
Other
payables for acquisition of a subsidiary
|
- | 5,950,000 | ||||||
Net
cash provided by financing activities
|
(1,826,896 | ) | 10,860,808 | |||||
Effect
of foreign currency translation on cash and cash
equivalents
|
(162,235 | ) | 307,191 | |||||
Net
increase (decrease) in cash and cash equivalents
|
32,100 | 25,385 | ||||||
Cash
and cash equivalents, beginning of period
|
8,579 | - | ||||||
Cash
and cash equivalents, end of period
|
$ | 40,679 | $ | 25,385 |
The accompanying notes are an
integral part of these consolidated financial statements.
4
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note 1 –
Basis
Of
Presentation
In these
notes, the terms “CHWG,” “we,” “us,” and “our” mean China Water Group, Inc.
(formerly China Evergreen Environmental Corporation) and subsidiary
companies.
The
condensed consolidated financial statements of CHWG included herein have been
prepared by CHWG, and are unaudited, pursuant to the rules and regulations of
the Securities and Exchange Commission (the “SEC”). Certain information and
footnote disclosures normally included in consolidated financial statements
prepared in accordance with US generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations. These
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto included in CHWG's Form
10-K for the year ended December 31, 2008.
The
accompanying unaudited quarterly consolidated financial statements reflect all
adjustments of a normal and recurring nature which are, in the opinion of
management, necessary to present fairly the financial position, results of
operations and cash flows of CHWG for the periods presented. The results of
operations for these periods are not necessarily comparable to, or indicative
of, results of any other quarterly period or for the fiscal year taken as a
whole. Factors that affect the comparability of financial data from year to year
and for comparable quarterly periods include non-recurring expenses associated
with CHWG's costs incurred to reorganize CHWG, raise capital, and issue stock
options and awards. Certain financial information that is not required for
interim financial reporting purposes has been omitted.
Note
2 – Organization and Description of Business
We were
organized as a Nevada corporation on September 10, 1996 under the name
“Discovery Investments, Inc.” and were previously engaged in the business of
seeking, investing and, acquiring an interest in various business
opportunities.
On
October 15, 2004, we were the subject of a reverse acquisition by Evergreen
Asset Group Limited, an International Business Company organized under the laws
of the British Virgin Islands (“Evergreen”), pursuant to which we acquired 100%
of the outstanding shares of Evergreen capital stock in exchange for a
controlling interest in our common stock. Pursuant to a securities purchase
agreement dated September 9, 2004, as amended, we issued 83,500,000 shares
of our common stock (representing 83.5% of our outstanding capital stock) in
exchange for all of the issued and outstanding shares of Evergreen capital stock
transferred to us by the Evergreen shareholders at the closing (the “Reverse
Acquisition”). Following the close of the Reverse Acquisition, we changed our
corporate name from “Discovery Investments, Inc.” to “China Evergreen
Environmental Corporation.” On November 7, 2006, we changed our name to
“China Water Group, Inc.” to reflect our focus on China’s water treatment and
supply needs.
As a
result of the Reverse Acquisition, Evergreen became our wholly owned subsidiary.
Evergreen has three majority owned subsidiaries: Guang Dong Xin Xing Mei Biology
Company Limited (“Xinxingmei”), and Hai Yang City Sheng Shi Environment
Protection Company Limited (“Haiyang”). Through Xinxingmei and Haiyang, we
provide wastewater turn-key engineering, equipment and chemical trading.
Evergreen currently holds 90% of Xinxingmei. Xinxingmei provides turn-key
wastewater treatment engineering design and contracting. Xinxingmei also holds
90% and 35% respectively in the equity interest of the following two water
treatment facilities operated through build, operate and transfer (“BOT”)
arrangements with the PRC government: (i) Tian Jin Shi Sheng Water
Treatment Company Limited (“Tian Jin”), which commissioned water treatment in
November 2003 and has a daily treatment capacity of approximately 10,000 cubic
meters and (ii) Xin Le Sheng Mei Water Purifying Company Limited (“Xin
Le”), which also commissioned water treatment in November 2003 and has a daily
treatment capacity of 40,000 cubic meters. Xinxingmei was retained to manage
both Tian Jin and Xin Le.
5
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note 2
–Organization and Description of Business (continued)
The
principal activities of the Group are 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.
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.
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.
On
February 26, 2009, Guangzhou Xinchen Water Company established a subsidiary,
Chengdu Jiuqiannian Water Company, in the PRC as a wholly-owned limited
liability company with registered capital of $500,000.
Note
3 – Summary of Significant Accounting Policies
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 the 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 a relatively
short duration, we use the completed contract method of accounting whereby
revenue is recognized when the work is completed. From 5% to 10% of the total
contract value will be treated as retention monies withheld to ensure
performance of the contract during the warranty period of up to 12 months, as
stipulated in both long-term and short-term fixed-price contracts.
Revenues
arising from wastewater treatment are recognized based on wastewater 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 wastewater 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.
|
6
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
3 – Summary of Significant Accounting Policies (continued)
Revenues
from the sale of environment protection-related products and provision of
technical services are recognized when goods are delivered or when services are
performed. The contractual terms of the purchase agreements or consultancy
agreements dictates the recognition of revenues. We recognize revenue in
accordance with SAB 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) is 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.
Interim
Financial Statements
These
interim financial statements should be read in conjunction with the audited
financial statements for the years ended December 31, 2008 and 2007, as not all
disclosures required by generally accepted accounting principles for annual
financial statements are presented. The interim financial statements follow the
same accounting policies and methods of computations as the audited financial
statements for the years ended December 31, 2008 and 2007.
Foreign
Currency
The
Company uses the United States dollars (“US Dollar” or “US$” or “$”) for
financial reporting purposes. The Company maintains the books and records in its
functional currency, Chinese Renminbi (“RMB”), being the primary currency of the
economic environment in which its operations are conducted. In general, the
Company translates its assets and liabilities into U.S. dollars using the
applicable exchange rates prevailing at the balance sheet date, and the
statement of income is translated at average exchange rates during the reporting
period. Adjustments resulting from the translation of the Company’s financial
statements are recorded as accumulated other comprehensive income.
The
exchange rates used to translate amounts in RMB into U.S. Dollars for the
purposes of preparing the condensed consolidated financial statements were as
follows:
March 31, 2009
|
December 31, 2008
|
|||
Balance
sheet items, except for stockholders’
|
||||
equity
items
|
RMB
1: US$0.14650
|
RMB
1: US$0.14670
|
||
March 31, 2009
|
March 31, 2008
|
|||
Amounts
included in the statements of
|
||||
income,
and statements of cash flows for the
|
||||
three
months ended
|
RMB
1: US$0.14651
|
RMB
1: US$0.13977
|
||
Stockholders’
equity items
|
Historical
rate
|
Historical
rate
|
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 we consider in this
evaluation include current operating results, trends and anticipated
undiscounted future cash flows that we expect to result from the use of the
asset, or other measure of fair value, and whether such factors reflect that the
value of the asset has been impaired.
7
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
3 – Summary of Significant Accounting Policies (continued)
Allowance
for doubtful accounts
Our
policy for bad debt is based on the evaluation of collectibility, and analysis
of accounts receivable aging and on management's judgment. We do not require
collateral or other security to support client receivables. We conduct periodic
reviews of our clients' financial condition and customer payment practices to
minimize collection risk on accounts receivable. This review is based on a
considerable amount of judgment which is required in assessing the ultimate
realization of these receivables, including the current credit worthiness and
the past collection history of each customer. During the first quarter of 2009,
we made no allowances for doubtful accounts.
Financial
instruments
The
carrying amounts of all financial instruments approximate their fair value. The
carrying amounts of cash, accounts receivable, related party receivables,
unsecured loans, accounts payable and related party payables approximate their
fair value due to the short-term nature of these items. The carrying amounts of
borrowings approximate their fair value based on our expected borrowing rate for
debt with similar remaining maturities and comparable risk.
Earnings
per share
Basic
earnings per share are computed by dividing the net income for the year by the
weighted average number of common shares outstanding during the year. Diluted
earnings per share are computed by dividing the net income for the year by the
weighted average number of common and common equivalent shares outstanding
during the year. Common equivalent shares (which includes incremental common
shares issuable upon the exercise of stock options, unvested restricted common
stock and shares that may be issued on a contingent basis) are included in
diluted income per share to the extent such shares are dilutive. In accordance
with Statement of Financial Accounting Standards (“SFAS”) No. 128, Earnings
Per Share, we use income 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 April
2009, the FASB issued SFAS No. 164, “Not-for-Profit Entities: Mergers and
Acquisitions—including an amendment of FASB Statement No. 142” (“SFAS 164”).
SFAS 164 establishes principles and requirements for how a not-for-profit
entity: (a)determines whether a combination is a merger or an acquisition;
(b)applies the carryover method in accounting for a merger; (c)applies the
acquisition method in accounting for an acquisition, including determining which
of the combining entities is the acquirer; (d)determines what information to
disclose to enable users of financial statements to evaluate the nature and
financial effects of a merger or an acquisition. This Statement is effective for
(a)mergers for which the merger date is on or after the beginning of an initial
reporting period beginning on or after December 15, 2009; (b)acquisitions for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2009.
In May
2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”). SFAS
165 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before the financial statements are
issued or are available to be issued. In accordance with this Statement, an
entity should apply the requirements to interim or annual financial periods
ending after June 15, 2009.
8
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
3 – Summary of Significant Accounting Policies (continued)
In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial
Assets—an amendment of FASB Statement No. 140” (“SFAS 166”). SFAS 166 address
(1) practices that have developed since the issuance of FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, that are not consistent with the original intent and key
requirements of that Statement and (2) concerns of financial statement users
that many of the financial assets (and related obligations) that have been
derecognized should continue to be reported in the financial statements of
transferors. This Statement must be applied as of the beginning of each
reporting entity’s first annual reporting period that begins after November 15,
2009, for interim periods within that first annual reporting period and for
interim and annual reporting periods thereafter.
In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (“SFAS 167”). SFAS 167 address (1) the effects on certain provisions of
FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable
Interest Entities, as a result of the elimination of the qualifying
special-purpose entity concept in FASB Statement No. 166, Accounting for
Transfers of Financial Assets, and (2) constituent concerns about the
application of certain key provisions of Interpretation 46(R), including those
in which the accounting and disclosures under the Interpretation do not always
provide timely and useful information about an enterprise’s involvement in a
variable interest entity. This Statement shall be effective as of the beginning
of each reporting entity’s first annual reporting period that begins after
November 15, 2009, for interim periods within that first annual reporting
period, and for interim and annual reporting periods thereafter.
Reclassification
Certain
amounts of December 31, 2008 and March 31, 2008 were reclassified for
presentation purposes.
Note
4 – Earnings Per Share
|
(i)
|
The
basic earnings per share are calculated using the net income and the
weighted average number of shares outstanding during the
year.
|
Three Months Ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | (134,646 | ) | $ | 293,618 | |||
Weighted
average number of common shares outstanding
|
139,383,450 | 139,383,450 | ||||||
Basic
earnings per share
|
$ | (0.00 | ) | $ | 0.00 |
|
(ii)
|
The
diluted earnings per share are calculated using the net income and the
weighted average number of shares outstanding during the year together
with incremental common shares issuable upon the exercise of all warrants
issued.
|
Three Months Ended March 31,
|
||||||||
2009
|
2008
|
|||||||
Net
income
|
$ | (134,646 | ) | $ | 293,618 | |||
Weighted
average number of common shares outstanding
|
139,383,450 | 139,383,450 | ||||||
Diluted
earnings per share
|
$ | (0.00 | ) | $ | 0.00 |
As the
April Warrants and the September Warrants are anti-dilutive, they are being
excluded from the calculation of diluted earnings per share.
9
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
5 – Inventory
Inventory
at March 31, 2009 and December 31, 2008 consisted of the following:
March 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 1,798 | $ | 1,796 | ||||
Packaging
supplies
|
199,969 | 198,958 | ||||||
Finished
goods
|
169,037 | 192,424 | ||||||
Total
|
$ | 370,804 | $ | 393,178 |
Note
6 – Property, Plant And Equipment, Net
Property,
plant and equipment, net at March 31, 2009 and December 31, 2008 consisted of
the following:
March 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Office
equipment
|
$ | 11,783 | $ | 16,858 | ||||
Furniture
and fixtures
|
5,445 | - | ||||||
Motor
vehicles
|
59,436 | 59,362 | ||||||
Building
and structure
|
178,914 | 170,785 | ||||||
Bottled
water production equipment
|
657,413 | 664,492 | ||||||
Total
|
912,991 | 911,497 | ||||||
Less
: Accumulated depreciation
|
(46,656 | ) | (36,921 | ) | ||||
Property,
plant and equipment, net
|
$ | 866,335 | $ | 874,576 |
Depreciation
expenses for the three months ended March 31, 2009 and 2008 were $9,688 and
$8,672, respectively.
Note
7 –
Intangible Assets
Intangible
assets at March 31, 2009 and
December 31, 2008
consisted of the following:
March 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Rights
to use land
|
$ | 145,003 | $ | 144,821 | ||||
Less:
accumulated amortization
|
9,908 | 9,172 | ||||||
Total
|
$ | 135,095 | $ | 135,649 | ||||
Amortization
expenses for the three months ended
March 31, 2009 and 2008
were $725 and $707,
respectively.
10
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
8 - 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 March
31, 2009, the Company concluded that there were no impairments of
goodwill.
Note
9 - Warrant Liability
The fair
values of the warrant liability as of March 31, 2009 and December 31, 2008 were
as following:
March 31,
|
December 31,
|
|||||||
2009
|
2008
|
|||||||
Warrants
issued in April 2005, at fair value
|
$ | 4,410 | $ | 4,410 | ||||
Warrants
issued in September 2005, at fair value
|
- | - | ||||||
Shares
issued in September 2005, accounted for as liability
|
32,200 | 32,200 | ||||||
Total
|
$ | 36,610 | $ | 36,610 |
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%.
11
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
9 - 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 March 31, 2009, 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.
12
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
9 - 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 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%.
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 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 March 31, 2009, 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.
Note
10 - Due to Related Companies
At March 31, 2009, 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.
13
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
11 – 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
disposal date was January 31, 2009. Evergreen’s pretax income reported in
discontinued operations, for the three months ended March 31, 2008, was
$94,518.
Note
12 - Income Taxes
The
Company is a Nevada corporation and conducts all of its business through its
Chinese subsidiary and its affiliated Chinese operating companies. All business
is conducted in PRC. As the U.S. holding company has not recorded any income for
the three months ended March 31, 2009 and 2008, there was no provision or
benefit for U.S. income tax purpose.
The
Company’s Chinese subsidiary and affiliated operating companies based in China
are governed by the Income Tax Law of the PRC concerning the private-run
enterprises, which are generally subject to tax at a new statutory rate of 25%
and were, until January 2008, subject to tax at a statutory rate of 33% (30%
state income tax plus 3% local income tax) on income reported in the statutory
statements after appropriate tax adjustments.
On March
16, 2007, the National People’s Congress of China approved the Corporate Income
Tax Law of the PRC (the New CIT Law), which is effective from January 1, 2008.
Under the new law, the corporate income tax rate applicable to all Companies,
both domestic and foreign-invested companies, is 25%, replacing the previous
applicable tax rate of 33%. For the three months ended March 31, 2009, the
income tax provision by the Company was $170.
Note
13 - Employee Welfare Plan
The
Company has established an employee welfare plan in accordance with Chinese law
and regulations. The Company makes monthly contributions of 12% of all
employees' salaries to the employee welfare plan.
Note
14 – Restatement to Reflect Correction of Accounting Errors
We
elected to restate our March 31, 2009 financial statement to (1) recognize
additional liability relating to acquisition of a subsidiary, Xinchen’s equity
interest and (2) segregate the assets and liabilities of Evergreen because of
discontinued operations.
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.
14
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
14 – Restatement to Reflect Correction of Accounting Errors
(continued)
The
effect of restatement for the quarter ended March 31, 2009 is as
follows:
Consolidated Balance
Sheets
As reported
|
As reported
|
|||||||||||
originally
|
currently
|
|||||||||||
at March 31,
|
at March 31,
|
Effect of
|
||||||||||
2009
|
2009
|
Change
|
||||||||||
Assets
|
||||||||||||
Current
assets:
|
||||||||||||
Cash
and cash equivalents
|
$ | 40,679 | $ | 40,679 | $ | - | ||||||
Accounts
receivable
|
23,336 | 23,336 | - | |||||||||
Prepayments,
deposits and other receivables
|
52,673 | 52,673 | - | |||||||||
Inventory
|
370,804 | 370,804 | - | |||||||||
Loans
to unrelated party
|
645,230 | 645,230 | - | |||||||||
Total
current assets
|
1,132,722 | 1,132,722 | - | |||||||||
Property,
plant and equipment, net
|
866,335 | 866,335 | - | |||||||||
Construction
in progress
|
8,258 | 8,258 | - | |||||||||
Intangible
assets
|
135,095 | 135,095 | - | |||||||||
Goodwill
|
7,165,254 | 13,115,254 | 5,950,000 | |||||||||
Total
assets
|
$ | 9,307,664 | $ | 15,257,664 | $ | 5,950,000 | ||||||
Liabilities
|
||||||||||||
Current
liabilities:
|
||||||||||||
Warrant
liability
|
$ | 36,610 | $ | 36,610 | - | |||||||
Accounts
payable
|
193,510 | 193,510 | - | |||||||||
Accrued
expenses
|
1,825,635 | 1,825,635 | - | |||||||||
Due
to directors
|
168,403 | 168,403 | - | |||||||||
Due
to related companies
|
3,189,932 | 3,189,932 | - | |||||||||
Income
tax payable
|
172 | 172 | - | |||||||||
Total
current liabilities
|
5,414,262 | 5,414,262 | - | |||||||||
Long-term
liabilities:
|
||||||||||||
Other
payables for acquisition of a subsidiary
|
- | 5,950,000 | 5,950,000 | |||||||||
Total
long-term liabilities
|
- | 5,950,000 | 5,950,000 | |||||||||
Total
liabilities
|
5,414,262 | 11,364,262 | 5,950,000 | |||||||||
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
|
2,584,188 | 6,131,532 | 3,547,344 | |||||||||
Retained
earnings
|
1,072,584 | (3,508,191 | ) | (4,580,775 | ) | |||||||
Accumulated
other comprehensive income
|
97,247 | 1,130,678 | 1,033,431 | |||||||||
Total
stockholders' equity
|
3,893,402 | 3,893,402 | - | |||||||||
Noncontrolling
interest
|
- | - | - | |||||||||
Total
equity
|
3,893,402 | 3,893,402 | - | |||||||||
Total
liabilities and equity
|
$ | 9,307,664 | $ | 15,257,664 | $ | 5,950,000 |
15
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
14 – 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 three months
|
the three months
|
|||||||||||
ended March 31,
|
ended March 31,
|
Effect of
|
||||||||||
2009
|
2009
|
Change
|
||||||||||
Revenue
|
||||||||||||
Revenue
from BOT wastewater treatment services
|
$ | - | $ | - | $ | - | ||||||
Revenue
from sales of bottled water
|
26,064 | 26,064 | - | |||||||||
Total
revenue
|
26,064 | 26,064 | - | |||||||||
Cost
of revenue
|
||||||||||||
Cost
of revenue for BOT wastewater treatment services
|
- | - | - | |||||||||
Cost
of revenue from sale of bottled water
|
2,654 | 2,654 | - | |||||||||
Depreciation
and amortization
|
10,413 | 10,413 | - | |||||||||
Sales
tax
|
303 | 303 | - | |||||||||
Total
cost of revenue
|
13,370 | 13,370 | - | |||||||||
Gross
profit
|
12,694 | 12,694 | - | |||||||||
Operating
expenses
|
||||||||||||
Selling
and distribution expenses
|
(7,297 | ) | (7,297 | ) | - | |||||||
General
and administrative expenses
|
(129,685 | ) | (129,685 | ) | - | |||||||
Total
operating expenses
|
(136,982 | ) | (136,982 | ) | - | |||||||
Loss
from operations
|
(124,288 | ) | (124,288 | ) | - | |||||||
Other
income (expense)
|
||||||||||||
Other
expense
|
(10,188 | ) | (10,188 | ) | - | |||||||
Gain
on disposal of a subsidiary – Evergreen
|
2,775,104 | - | (2,775,104 | ) | ||||||||
Total
other income
|
2,764,916 | (10,188 | ) | (2,775,104 | ) | |||||||
Income
before income tax and minority interest
|
2,640,628 | (134,476 | ) | (2,775,104 | ) | |||||||
Income
tax expense
|
(170 | ) | (170 | ) | - | |||||||
Income
before minority interest
|
2,640,458 | (134,646 | ) | (2,775,104 | ) | |||||||
Minority
interest
|
- | - | - | |||||||||
Net
income
|
2,640,458 | (134,646 | ) | (2,775,104 | ) | |||||||
Other
comprehensive income
|
||||||||||||
Foreign
currency translation adjustment
|
(1,188,751 | ) | (155,325 | ) | 1,033,426 | |||||||
Comprehensive
income
|
$ | 1,451,707 | $ | (289,971 | ) | $ | (1,741,678 | ) | ||||
Basic
earnings per share
|
$ | 0.02 | $ | (0.00 | ) | $ | (0.02 | ) | ||||
Diluted
earnings per share
|
$ | 0.02 | $ | (0.00 | ) | $ | (0.02 | ) | ||||
Weighted
average number of common shares outstanding Basic and
Diluted
|
139,383,450 | 139,383,450 | - |
16
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
14 – Restatement to Reflect Correction of Accounting Errors
(continued)
Consolidated Statements of
Cash Flows
As reported
|
As reported
|
|||||||||||
originally for
|
currently for
|
|||||||||||
the three months
|
the three months
|
|||||||||||
ended March 31,
|
ended March 31,
|
Effect of
|
||||||||||
2009
|
2009
|
Change
|
||||||||||
Cash
flows from operating activities
|
||||||||||||
Net income
|
$ | 2,640,458 | $ | (134,646 | ) | $ | (2,775,104 | ) | ||||
Adjustments
to reconcile net income to net cash provided by (used in) operating
activities :
|
||||||||||||
Depreciation
and amortization
|
10,413 | 10,413 | - | |||||||||
Minority
interest
|
- | - | - | |||||||||
Changes
in operating assets and liabilities :
|
||||||||||||
Accounts
receivable
|
(24,750 | ) | (5,141 | ) | 19,609 | |||||||
Prepayment,
deposits and other receivables
|
(48,549 | ) | (11,337 | ) | 37,212 | |||||||
Inventory
|
22,865 | 22,865 | - | |||||||||
Current
assets of discontinued division
|
- | 5,216,856 | 5,216,856 | |||||||||
Accounts
payable
|
6,241 | 6,241 | - | |||||||||
Accruals
and other liabilities
|
40,182 | 2,980 | (37,202 | ) | ||||||||
Current
liabilities of discontinued division
|
- | (7,394,868 | ) | (7,394,868 | ) | |||||||
Total
adjustments
|
6,402 | (2,151,991 | ) | (2,158,393 | ) | |||||||
Net
cash provided by operating activities
|
2,646,860 | (2,286,637 | ) | (4,933,497 | ) | |||||||
Cash
flows from investing activities
|
||||||||||||
Due
from related companies
|
(502,911 | ) | - | 502,911 | ||||||||
Loans
to unrelated party
|
(2,384,925 | ) | (645,138 | ) | 1,739,787 | |||||||
Disposal
of interest in a subsidiary – Evergreen
|
82,108 | - | (82,108 | ) | ||||||||
Non-current
assets of discontinued division
|
- | 4,953,355 | 4,953,355 | |||||||||
Acquisition
of property, plant and equipment
|
(349 | ) | (349 | ) | - | |||||||
Net
cash used in investing activities
|
(2,806,077 | ) | 4,307,868 | 7,113,945 | ||||||||
Cash
flows from financing activities
|
||||||||||||
Due
to related companies
|
255,138 | 16,797 | (238,341 | ) | ||||||||
Due
to directors
|
(83,455 | ) | (83,455 | ) | - | |||||||
Due
to affiliated companies
|
- | (1,760,238 | ) | (1,760,238 | ) | |||||||
Net
cash provided by financing activities
|
171,683 | (1,826,896 | ) | (1,998,579 | ) | |||||||
Effect
of foreign currency translation on cash and cash
equivalents
|
46 | (162,235 | ) | (162,281 | ) | |||||||
Net
increase (decrease) in cash and cash equivalents
|
12,512 | 32,100 | 19,588 | |||||||||
Cash
and cash equivalents, beginning of period
|
28,167 | 8,579 | (19,588 | ) | ||||||||
Cash
and cash equivalents, end of period
|
$ | 40,679 | $ | 40,679 | $ | - |
17
CHINA
WATER GROUP, INC.
Notes
to Consolidated Financial Statements
March
31, 2009 and 2008
(Unaudited)
Note
15 - Concentration
Two major
customers accounted for approximately 27% of the net revenue for the three
months ended March 31, 2009. The source of revenue from these
customers is the sales of bottled water. One major customer, Hai Yang City
Zoning and Construction Management Bureau, accounted for approximately 78% of
the net revenue for the three months ended March 31, 2008. The source
of revenue from this customer is the BOT-waste water treatment
service.
Note
16 - Supplemental
Cash Flow Disclosures
The
following is the supplemental information relating to the consolidated
statements of cash flows:
March 31,
|
March 31,
|
|||||||
2009
|
2008
|
|||||||
Cash
paid for interest
|
$ | - | $ | 138 | ||||
Cash
paid for income taxes
|
$ | 170 | $ | 6,687 |
Note
17 - Subsequent Events
None.
18
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FORWARD-LOOKING
INFORMATION
Much of
the discussion in this Item is “forward looking” as that term is used in Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). Actual operations and
results may materially differ from present plans and projections due to changes
in economic conditions, new business opportunities, changes in business
conditions, and other developments. Other factors that could cause results to
differ materially are described in our filings with the SEC.
The
following are factors that could cause actual results or events to differ
materially from those anticipated, and include, but are not limited to general
economic, financial and business conditions, changes in and compliance with
governmental laws and regulations, including various state and federal
environmental regulations, our ability to obtain additional financing from
outside investors and/or bank and mezzanine lenders; and our ability to generate
sufficient revenues to cover operating losses and position us to achieve
positive cash flow.
Readers
are cautioned not to place undue reliance on the forward-looking statements
contained herein, which speak only as of the date hereof. We believe the
information contained in this Form 10-Q to be accurate as of the date hereof.
Changes may occur after that date. We will not update that information except as
required by law in the normal course of our public disclosure
practices.
Additionally,
the following discussion regarding our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes contained in Item 1 of Part I of this Form 10-Q.
RESULTS
OF OPERATIONS
Quarter
Ended March 31, 2009 vs. Quarter Ended March 31, 2008
Total revenue. We reported
total revenue of $26,064 for the three months ended March 31, 2009 as compared
to $47,223 for the three months ended March 31, 2008. . At the end of
2008 we determined to develop new distribution channels for our bottled
water. This will result in what management believes will
prove a short term decline in bottled water sales. The results for
the quarter reflect these new directions as there were no revenues from turn-key
engineering projects or from BOT wastewater treatment services.
Cost of revenue. Our total
cost of revenue decreased from $18,364 for the three months ended March 31, 2008
to $13,370 for the three months ended March 31, 2009. This was primarily due to
our reduced sales of bottled water during the period as we repositioned our
distribution efforts..
Gross profit. Gross profit, as
a percentage of total revenue for the three months ended March 31, 2009 and
2008, was approximately 48.7% or $12,694 as compared to 61.5% or
$29,359. Decreased gross profits and margins the
Company’s reflect reduced levels of operations as we seek to reposition our
bottled water sales model.
Operating expenses. Our total
operating expenses for the three months ended March 31, 2009 and 2008 were
$136,982 and $318,733, respectively. The principal components of operating
expenses were selling and distribution expenses, administrative salaries and
benefits, depreciation and amortization, traveling expenses, rental expenses and
other general administration costs. A decrease in operating expenses for the
three months ended March 31, 2009 of $181,751 as compared to the three months
ended March 31, 2008 was primarily due to the decreased levels of selling and
distribution expense as sales effort was reduced during this period of
repositioning of our branded bottled water.
Penalty for late effectiveness of
registration statement This amount represents the liquidated damages
payment obligation we accrued in connection with the September Private Placement
by missing the deadline we agreed to for effectiveness of the registration
statement we filed in connection with that financing. 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 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
have stopped accruing. As of September 14, 2006 the liquidated damages
obligations stopped accruing for a period of time and then other related damages
began to accrue. As of March 31, 2006, we had made an accrual of $828,027 for
such liquidated damages.
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. In 2007 we began accruing smaller amounts
for other penalties which amounted to $22,688 for the first quarter of
2008. We did not accrue any amounts in the first quarter of
2009.
Unrealized gain on financial
instruments. Unrealized gains or losses on financial instruments
represent the change in the fair market value of the financial instruments at
each reporting date. The unrealized gain on financial instruments for the three
months ended March 31, 2008 was $307,189. There was an unrealized
loss on financial instruments of $(155,324)for the three months ended
March 31, 2009.
Net income. We had a
net loss of $(134,646) for the three months ended March 31, 2009, and
a net income, after income tax and income from discontinued operations , of
$293,618 for the three months ended March 31, 2008. The decreased net
income as compared to the prior period reflects the sale of our BOT waste water
treatment services and our having exited the turn-key engineering project aspect
of our business as well as the start up expenses related to the reintroduction
of our branded bottled water.
LIQUIDITY
AND CAPITAL RESOURCES
Our
principal sources of liquidity are our cash and cash flow generated from
investing. Net cash provided by investing activities during the three months
ended March 31, 2009 was $4,307,868. At the end of the period, our
cash and cash equivalents were $40,679. We plan to secure bank
loans to support our future projects. Our Chairman, the majority
shareholder, has also promised to provide additional funds when needed. However, this promise is not a legally
binding commitment. Furthermore, we do not have any commitments for
bank loans. If bank loans are not obtained and our majority shareholder does not
provide funding, we could be required to severely curtail our
operations.
APPLICATION
OF CRITICAL ACCOUNTING POLICIES
Our
financial statements and accompanying notes are prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. These estimates and assumptions are affected by management's
application of accounting policies. Critical accounting policies include revenue
recognition and impairment of assets.
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 the 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 a relatively short duration, we use the completed
contract method of accounting whereby revenue is recognized when the work is
completed. From 5% to 10% of the total contract value will be treated as
retention monies withheld to ensure performance of the contract during the
warranty period of up to 12 months, as stipulated in both long term and short
term fixed price contracts.
Revenues
arising from wastewater treatment are recognized based on wastewater treated as
recorded daily by meters read at rates, in RMB/ton, as prescribed under the BOT
agreements in accordance with 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 wastewater 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.
Revenues
from the sale of environment protection-related products and provision of
technical services are recognized when goods are delivered or when 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 SAB 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 this evaluation include current operating results, trends and
anticipated undiscounted estimated future cash flows that are expected to result
from the use of the asset, or other measure of fair value, and whether such
factors reflect that the value of the asset has been impaired.
Allowances
for accounts receivable. Our provisioning policy for bad and doubtful debt is
based on the evaluation of collectibility and aging analysis of accounts
receivable and on management's judgment. We do no require collateral or other
security to support client receivables. We conduct periodic reviews of our
clients' financial condition and customer payment practices to minimize
collection risks on accounts receivable. This review is based on a 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 third quarter of 2006, we made
no allowances for doubtful debts.
Financial
instruments. The carrying amounts of all financial instruments approximate fair
value. The carrying amounts of cash, accounts receivable, related party
receivables, unsecured loans, accounts payable and related party payables
approximate fair value due to the short-term nature of these items. The carrying
amounts of borrowings approximate the fair value based on our expected borrowing
rate for debt with similar remaining maturities and comparable
risk.
Earnings
per share. Basic earnings per share are computed by dividing the net income
attributable to common stock for the year by the weighted average number of
common shares outstanding during the year. Diluted earnings per share
are computed by dividing the net income for the year by the weighted average
number of common and common equivalent shares outstanding during the year.
Common equivalent shares (which includes incremental common shares issuable upon
the exercise of stock options, unvested restricted common stock and shares that
may be issued on a contingent basis) are included in diluted earnings per share
to the extent such shares are dilutive. In accordance with SFAS 128, Earnings
Per Share, we use income 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 ®, “Business Combinations”
(“SFAS 141®”). 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® 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.
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.
Off-Balance
Sheet Arrangements
We do not
have any off-balance sheet arrangements.
ITEM
3. QUANTITATIVE and QUALITATIVE DISCLOSURES about MARKET
RISK.
Not
applicable.
ITEM
4. 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.
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.
|
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.
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.
April
and September 2005 Private Placements—non-cash financing charges
In our
June 30, 2005 10-QSB, we did not record any non-cash financing charges and in
our September 30, 2005 10-QSB, as amended to date, we did not properly record
the non-cash financing charges. Non-cash financing charges represent the amount
by which the fair value of derivative liabilities issued exceeds the amount of
proceeds received, as an expense at the date of issuance of the April
convertible debenture and the September private placement. We will restate our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB to record the non-cash
financing charges, which represent the amount by which the fair value of
derivative liabilities issued exceeds the amount of proceeds received, as an
expense at the date of issuance of the April convertible debenture and the
September private placement. As a result of the recording of non-cash financing
charges, certain expenses which were previously recorded under general and
administrative expenses in our September 30, 2005 10-QSB will be reclassified
under non-cash financing charges.
April 2005 Private
Placements—unrealized gains or losses in financial instruments
In our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, we
did not record properly the unrealized gains or losses in financial instruments,
which represent the change in fair market value of the financial instruments at
each reporting date for the April warrants and the bifurcated conversion feature
for the convertible debenture. The unrealized gains or losses in financial
instruments should have been reported in those filings. We will restate the
June 30, 2005 10-QSB and September 30, 2005 10-QSB, as amended to date, to
record the unrealized gains or losses in financial instruments which represent
the change in fair market value of the financial instruments at each reporting
date for the April warrants and the bifurcated conversion feature for the
convertible debenture.
Interest
in associate
In our
June 30, 2005 10-QSB and our September 30, 2005 10-QSB, as amended to date, the
comparative figures for our interest in associate as of December 31, 2004 were
recorded based on an effective percentage of equity attributable to the group of
31.5% instead of a direct interest of 35%. We will restate the comparative
figures for our interest in associate as of December 31, 2004 in the June 30,
2005 10-QSB and September 30, 2005 10-QSB to include our interest in associate
based on a direct interest of 35%.
Prior
Restatements
On
January 13, 2006, we amended our 2004 10-KSB. Prior to the January 13, 2006
amendment, in our 2004 10-KSB we recorded our interest in associate based on an
effective percentage of equity attributable to the group of 31.5% instead of a
direct interest of 35%. In the January 13, 2006 restatement of our
2004 10-KSB, we reported our interest in associate based on a direct interest of
35%. In addition, we have restated the common stock immediately after the
recapitalization to $100,000.
On
January 13, 2006, we amended our September 30, 2005 10-QSB. Prior to the January
13, 2006 amendment, the September 30, 2005 10-QSB classified as equity the
proceeds of our April Debenture and September 2005 private placement allocated
to the warrants issued in these transactions. For reasons both the April
warrants and September warrants should have been classified as a liability. The
restated financial statements in the January 13, 2006 amendment of the September
30, 2005 10-QSB reflect this reclassification. In addition, prior to the January
13, 2006 amendment, the September 30, 2005 10-QSB did not originally report the
unrealized gains or losses in financial instruments, which represent the change
in fair market value of the financial instruments at each reporting date. The
unrealized gains or losses in financial instruments should have been reported in
the original filing. Accordingly, the January 13, 2006 restatement of the
September 30, 2006 10-QSB reported the unrealized gains or losses in financial
instruments, which represent the change in fair market value of the financial
instruments at each reporting date. The restatement to the unrealized gains or
losses in financial instruments, however, required to be further restated (refer
discussion above). In addition, we have restated the common stock immediately
after the recapitalization to $100,000.
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)
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insufficient
knowledge and experience among our internal accounting personnel regarding
the application of US GAAP and SEC
requirements;
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(b)
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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
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(c)
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insufficient
emphasis by management on compliance with US GAAP
requirements.
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We have communicated with
our auditors,Patrizio & Zhao,LLC.
and concluded
that these deficiencies constituted material weaknesses, as defined by
Auditing Standard No. 2, “An Audit of Internal Control Over Financial Reporting
Performed in Conjunction with an Audit of Financial Statements,” established by
the Public Company Accounting Oversight Board, or
PCAOB.
In order
to address these material weaknesses our senior management is in the process of
conducting a thorough review of our US GAAP financial reporting processes and
will prepare and implement a US GAAP action plan. This plan will be designed to
generally improve our US GAAP reporting processes and to strengthen our control
processes and procedures in order to prevent a recurrence of the circumstances
that resulted in the need to restate our quarterly financial statements. Our
senior management intends to complete its review and implement a US GAAP action
plan as soon as practicable. The US GAAP action plan will incorporate, among
other matters, the following initiatives
1.
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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;
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2.
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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;
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3.
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recruit
an accounting staff member with US GAAP expertise and who is not
affiliated with Patrizio
& Zhao, LLC; and
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4.
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engage
an internationally recognized accounting firm, which is not affiliated
with ,Patrizio
& Zhao, LLC, to provide us with technical advice on US GAAP matters
and SEC disclosure requirements on an ongoing basis.
We
have fully implemented items 1, 2, and 3, while item 4 remains in the
planning stage.
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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
first quarter of our 2009 fiscal year.
Material
Weaknesses as at March 31, 2009
(a)
Evaluation of Disclosure Controls and Procedures
As of the
end of the period covered by this report, China Water Group’s management, with
the participation of Wenge Fang, our principal executive officer, and Ding
Rencai, our principal financial officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934). In designing and evaluating its disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible disclosure controls and procedures. The design of any
disclosure controls and procedures also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions. Based upon that evaluation, Messrs.Fang and Rencai concluded
that these disclosure controls and procedures were effective as of the end of
the period covered in this report and that they provided reasonable assurance
that the goals of the disclosure controls were met.
(b)
Management’s Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting for the Company. In order to evaluate
the effectiveness of internal control over financial reporting, as required by
Section 404 of the Sarbanes-Oxley Act, management has conducted an
assessment, including testing, using the criteria in Internal Control - Integrated
Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s system of internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate. Based on
its assessment, management has concluded that the Company’s internal control
over financial reporting was effective as of March 31, 2009. 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
first quarter of our year ended December 31, 2009 that has materially affected
or is reasonably likely to materially affect our internal control over financial
reporting.
This
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.
PART
II. OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
As of the
date of this report, we are not involved in any legal proceedings
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER
INFORMATION
None.
ITEM
6. EXHIBITS
Exhibit
No.
Description
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 pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the Registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
CHINA
WATER GROUP, INC.
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(Registrant)
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Dated:
March 17, 2010
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By:
/s/ Wenge Fang
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Wenge
Fang,
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Chief
Executive Officer
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Dated:
March 17, 2010
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By: /s/
Ding Rencai
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Ding
Rencai,
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Chief
Financial Officer
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