CIWT China Industrial Waste Management Inc (CE)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington , D.C.   20549

(Mark One)

Form 10-Q

or

                Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [ X ] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [   ] No [  ]

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

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

Yes [ ] No [ X ]

        Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 15,336,535 shares of common stock are issued and outstanding as of August 12, 2010.

TABLE OF CONTENTS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report includes "forward-looking statements." You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements contain such words as "may," "project," "might," "expect," "believe," "anticipate," "intend," "could," "would," "estimate," "continue," or "pursue," or the negative or other variations thereof or comparable terminology. In particular, they include statements relating to, among other things, future actions, new projects, strategies, future performance, the outcomes of contingencies and our future financial results. These forward-looking statements are based on current expectations and projections about future events.

Investors are cautioned that forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties that cannot be predicted or quantified and, consequently, our actual performance may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors, as well as other factors described from time to time in our reports filed with the Securities and Exchange Commission (including the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained therein):

• the timing and magnitude of technological advances;
• the prospects for future acquisitions;
• the effects of political, economic and social uncertainties regarding the governmental, economic and political circumstances in the People’s Republic of China;
• the possibility that a current customer could be acquired or otherwise be affected by a future event that would diminish their waste management requirements;
• the competition in the waste management industry and the impact of such competition on pricing, revenues and margins;
• uncertainties surrounding budget reductions or changes in funding priorities of existing government programs;
• the cost of attracting and retaining highly skilled personnel;
• our projected sales, profitability, and cash flows;
• our growth strategies; anticipated trends in our industries;
• our future financing plans; and
• our anticipated needs for working capital.

Forward-looking statements speak only as of the date on which they are made, and, except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events.

CONVENTIONS AND GENERAL MATTERS

The official currency of the People’s Republic of China is the Chinese “Yuan” or “Renminbi” (“Yuan,” “Renminbi” or “RMB”). For the convenience of the reader, amounts expressed in this report as RMB have been translated into United States dollars (“US$” or “$”) at the rate of USD$1.00 = RMB 6.8259 as of December 31, 2009; and at the rate of USD$1.00 = RMB6.7815 as of June 30, 2010 quoted by the Federal Reserve System. The Renminbi is not freely convertible into foreign currencies and the quotation of exchange rates does not imply convertibility of Renminbi into U.S. Dollars or other currencies. All foreign exchange transactions take place through the Federal Reserve System. No representation is made that the Renminbi or U.S. Dollar amounts referred to herein could have been or could be converted into U.S. Dollars or Renminbi, as the case may be, at the PBOC Rate or at all.

The "Company," "we," "us," "our" and similar words refer to China Industrial Waste Management, Inc, and its direct and indirect, wholly-owned and partially-owned subsidiaries.

All share and per share information contained herein has been adjusted to reflect a 1 for 100 share reverse stock split which occurred on August 12, 2006.

PART 1 - FINANCIAL INFORMATION

Item 1.                 Financial Statements.

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CHINA INDUSTRIAL WASTE MANAGEMENT, INC.

NOTES TO UNAUDITED COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2010 AND 2009

The accompanying unaudited combined and consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and the new scaled disclosure requirements in Article 8 of Regulation S-K of the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The accounts of the Company and all of its subsidiaries are included in the combined and consolidated financial statements. All significant intercompany accounts and transactions have been eliminated in consolidation. The consolidated operating results for the six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, refer to the audited combined and consolidated financial statements and footnotes thereto included in the Company's Form 10-K for the year ended December 31, 2009.

1. Nature of operations

The accompanying unaudited combined and consolidated financial statement are those of China Industrial Waste Management, Inc., a Nevada corporation (the “Company”) incorporated on November 12, 2003, its wholly owned subsidiary, Favour Group Ltd., a British Virgin Islands corporation (“Favour”), along with its indirect wholly and majority owned subsidiaries:

• Full Treasure Investments Ltd. (“Full Treasure”)

• Dalian Dongtai Industrial Waste Treatment Co., Ltd. (“Dalian Dongtai”)

• Dalian Dongtai Water Recycling Co., Ltd. (“Dongtai Water”)

• Dalian Dongtai Organic Waste Treatment Co., Ltd. (“Dongtai Organic”)

• Dalian Zhuorui Resource Recycling Co., Ltd. (“Zhuorui”)

• Dalian Lipp Environmental Energy Engineering & Technology Co., Ltd. (“Dalian Lipp”)

• Yingkou Dongtai Industrial Waste Treatment Co., Ltd. (“Yingkou Dongtai”)

• Hunan Hanyang Environmental Protection Science & Technology Co., Ltd. (“Hunan Hanyang”)

• Sino-Norway Dalian Energy Efficiency Center Co., Ltd. (“Sino-Norway EEC”)

Dalian Dongtai was incorporated on January 9, 1991 in Dalian City, Liaoning Province, the People’s Republic of China (“PRC”), and now is engaged in the collection, treatment, disposal, and recycling of industrial wastes, and sales of recycled products, principally in Dalian and surrounding areas in Liaoning Province. The Company provides waste disposal solutions to its more than 770 customers from facilities located in Dalian Development Area. In addition, the Company provides the following services to its clients:

• Environmental protection services

• Technology consultation

• Pollution treatment services

• Waste management design processing services

• Waste disposal solutions

• Waste transportation services

• Onsite waste management services

• Environmental pollution remediation services

Dongtai Water, which was incorporated in July 2006, is a build-operate-transfer (“BOT”) project, with an operating period of 20 years, established to process municipal sewage generated by Dalian City. Phase I of Dongtai Water, whose designed production capacity is 30,000 tons per day, commenced normal production in June 2008.

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Dongtai Organic was incorporated in March 2007 as a joint venture, in which Dalian Dongtai initially held an equity interest of 49%. In December 2009, Dalian Dongtai acquired 3% equity interest in Dongtai Organic, thereby increasing its ownership of Dongtai Organic to 52%. Dongtai Organic is the first sludge treatment plant in China, with a designed production capacity of 600 tons/day, which adopts anaerobic fermentation technology.

Zhuorui was incorporated in April 2006 and is engaged in plasma arc melting, separation and purification of waste catalysts that generated during oil refinery process, treatment of industrial wastes and comprehensive utilization of waste catalysts or similar material.

Dalian Lipp is a Sino-German joint venture established in December 2007. Dalian Lipp designs, manufactures and installs environmental protection equipment and renewable energy equipment and provides related technical services. The project is based on the Lipp GmbH tank building technique which is dedicated to generating energy by organic waste anaerobic fermentation, industrial effluent treatment and municipal sewage plant.

Yingkou Dongtai, which operates in the Coastal Industrial Base (the “Base”) of Yingkou City, Liaoning Province, was founded in May 2009. Yingkou Dongtai is engaged in the recycling and disposal of industrial waste, and development and production of recycling products. Yingkou Dongtai intends to build and complete waste treatment facilities gradually in line with the development of the Base.

In October 2009, Dalian Dongtai acquired 65% equity interest in Hunan Hanyang. Hunan Hanyang was established in Hunan Province in 2004 and is engaged in the business of treatment and comprehensive utilization of industrial waste. Hunan Hanyang owns a franchise right (BOT) to construct and operate the Hazardous Waste Treatment Center of Changsha City, Hunan Province for 25 years upon completion of construction.

Sino-Norway EEC was incorporated as a joint venture in November 2009. Sino-Norway EEC is engaged in the business of energy efficiency audit and consultation, and is sponsored under the Energy Efficiency Planning Program initiated by Chinese and Norwegian governments.

2. Basis of presentation

The accompanying unaudited combined and consolidated financial statement include the accounts of the parent entity, its direct wholly owned subsidiary, Favour, along with its indirect wholly owned subsidiary, Full Treasure, its 90% indirect owned subsidiary, Dalian Dongtai, its 80% indirect owned subsidiary, Dongtai Water, its 52% indirect owned subsidiary, Dongtai Organic, its 70% indirect owned subsidiary, Zhuorui, its 75% indirect owned subsidiary, Dalian Lipp, its 100% indirect owned subsidiary, Yingkou Dongtai, its 65% indirect owned subsidiary, Hunan Hanyang, and its 60% indirect owned subsidiary, Sino-Norway EEC.

In December 2009, Dalian Dongtai acquired 3% additional equity interest in Dongtai Organic, thereby increasing its ownership of Dongtai Organic to 52%. As a result of equity exchange between entities under common control, the financial statements and financial information presented for prior years during which the entities were under common control, have been retrospectively adjusted to furnish comparative information, adjusted financial statements and financial summaries also include the combined revenues, expenses and cash flows of Dongtai Organic. All material inter-company accounts and transactions have been eliminated in the consolidation.

The accompanying financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”). This basis differs from that used in the statutory accounts of the Company, which were prepared in accordance with the accounting principles and relevant financial regulations applicable to enterprises in PRC. All necessary adjustments have been made to present the financial statements in accordance with US GAAP.

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The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Foreign currency translation

As of June 30, 2010 and 2009, the accounts of the Company were maintained, and the unaudited combined and consolidated financial statements were expressed in Chinese Yuan Renminbi (“RMB”). Such unaudited combined and consolidated financial statements were translated into U.S. dollars (“USD”) in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 830 Foreign Currency Matters with RMB as the functional currency. All assets and liabilities were translated at the exchange rate as of the balance sheet date; stockholders’ equity was translated at the exchange rates prevailing at the time of the transactions; revenues, costs, and expenses were translated at the weighted average exchange rate for the period. The resulting translation adjustments are reported under other comprehensive income in accordance with ASC Topic 220 Comprehensive Income.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and cash on deposit, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less.

Restricted cash

In accordance with ASC Topic 210-10-45-4 Classification of Current Assets, cash which is restricted as to withdrawal is considered a non-current asset. As of June 30, 2010 and December 31, 2009, restricted cash consists of government subsides of $3,129,244 and $96,707, which is to be used exclusively on facility construction and equipment procurement.

Accounts and other receivables

Accounts and other receivables are recorded at net realizable value consisting of the carrying amount less an allowance for uncollectible accounts, as needed.

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Payment terms of sales vary from cash on delivery through a credit term of up to nine to twelve months.

Advances to suppliers

The Company makes advances to certain vendors for purchase of its material or equipment. The advances to suppliers are interest free and unsecured.

Inventory

Inventories are stated at the lower of cost, as determined on a first-in, first-out basis for raw materials and auxiliary materials, and weighted average basis for other categories, or market. Management compares the cost of inventories with the market value, and an allowance is made for writing down the inventories to their market value, if lower.

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Property, plant and equipment

Property, plant and equipment (“PP&E”) are stated at cost, less accumulated depreciation and impairment. Expenditures for maintenance and repairs, which are not considered improvements and do not extend the useful life of PP&E, are expensed as incurred; additions, renewals and betterments are capitalized. When PP&E are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in the statement of operations.

Depreciation is provided to recognize the cost of PP&E in the results of operations. The Company calculates depreciation using the straight-line method with estimated useful life as follows:

Construction in progress consists of construction expenditure, equipment procurement, capitalized interest expense, relevant miscellaneous expenditures, and other costs.

As of June 30, 2010, construction in progress is comprised of three principal components. The first component is the Centralized Hazardous Waste Treatment Center of Dalian City (the “Expansion Project”), which is located in Dagu Hill, Dalian Development Area. The Expansion Project consists of an incineration system that includes an incinerator, its supporting facilities, and warehouses, work plants and office buildings, etc. The second component is the production equipments of Zhuorui, which are still in testing phase, including the plasma furnace, flue gas cleansing system, dust trapper, etc. The third component is the Hazardous Waste Treatment Center of Changsha City, Hunan Province, which is in the phase of preparation for the commencement of construction.

Landfills

Various costs that we incur to make a landfill ready to accept waste are capitalized. These costs generally include expenditures for land, permitting, excavation, liner material and installation and other capital infrastructure costs. The cost basis of our landfill assets also includes estimates of future costs associated with landfill final capping, closure and post-closure activities in accordance with ASC Topic 410 Asset Retirement and Environmental Obligations. Interest accretion on final capping, closure and post-closure liabilities is recorded using the effective interest method and is recorded as accretion expense, which is included our Combined and Consolidated Statements of Operations and Comprehensive Income.

The amortizable basis of a landfill includes (i) amounts previously expended and capitalized; (ii) capitalized landfill final capping, closure and post-closure costs; (iii) projections of future purchase and development costs required to develop the landfill site to its remaining permitted and expansion capacity; and (iv) projected asset retirement costs related to landfill final capping, closure and post-closure activities.

Amortization is recorded on a units-of-consumption basis, applying cost as a rate per ton. The rate per ton is calculated by dividing each component of the amortizable basis of a landfill by the number of tons needed to fill the corresponding asset’s airspace.

Long-term equity investment

As of June 30, 2010 and December 31, 2009, long-term investment is comprised of investment in Xiangtan Luyi Dongtai Industrial Waste Treatment Co., Ltd. (“Xiangtan Dongtai”).

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Xiangtan Dongtai, located in Xiangtan City, Hunan Province, was established on August 5, 2009, and primarily engaged in treatment and disposal of industrial waste, development and sales of recycled products. As of June 30, 2010, Dalian Dongtai owns a 12.5% equity interest in Xiangtan Dongtai, therefore, the Company applies the cost method to account for its investment.

Impairment of long-lived assets

In accordance with ASC Topic 360 “Accounting for the Impairment or Disposal of Long Lived Assets” , property, plant, and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Intangible assets are tested for impairment annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no events or changes in circumstances that necessitated a review of impairment of long lived assets as of June 30, 2010 and December 31, 2009, respectively.

Intangible assets

Intangible assets consist of “rights to use land and build a plant” for 50 years and intellectual property. The intangible assets are amortized using straight – line method. The Company also evaluates intangible assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets, other long-lived assets and, goodwill is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. The following table summarize the material terms of the land use rights:

As of June 30, 2010, net land use rights was $1,986,633, of which $1,727,441 has been pledged as collaterals for the short-term loans from Shanghai Pudong Development Bank.

Noncontrolling interest in unaudited combined and consolidated financial statement

The Company establishes accounting and reporting standards for the noncontrolling (minority) interest in a subsidiary and for the deconsolidation of a subsidiary in accordance with ASC Topic 805 Business Combinations. Noncontrolling interest represents the minority owners’10% equity interest in Dalian Dongtai, 20% equity interest in Dongtai Water, 48% equity interest in Dongtai Organic, 30% equity interest in Zhuorui, 25% equity interest in Dalian Lipp, 35% equity interest in Hunan Hanyang, and 40% equity interest in Sino-Norway EEC.

Revenue recognition

The Company recognizes revenues in accordance with the guidance in the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104. Revenue is recognized when persuasive evidence of an arrangement exists, when the selling price is fixed or determinable, when delivery occurs and when collection is probable.

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Revenues are generated from the fees charged for waste collection, transfer, treatment, disposal and recycling services and the sale of recycled commodities. The fees charged for services are generally defined in service agreements and vary based on contract specific terms such as frequency of service, weight, volume and the general market factors influencing industry’s rates. Recycled commodities are considered delivered at the point when the customers take ownership and assume risk of loss of the commodities.

Deferred sales consist of contracts for which the fees have been collected but revenue has not yet been recognized in accordance with the revenue recognition policy. As of June 30, 2010 and December 31, 2009, deferred sales amounted to $355,682 and $958,930, respectively.

The AICPA Issues Paper recommends that governmental grants be accounted for as follows:

i)       Grants related to revenue, such as certain export subsidies and price control subsidies, should be recognized in the period of the related events.

ii)      Grants to reimburse current expenditures, such as research and development costs, wages, training costs and transportation costs, should be treated as a reduction of current or future related expense, depending on when the related expense is recognized.

iii)    Grants related to developing property, such as timberlands, or mineral reserves, should be recognized over the useful lives of the assets.

Government grants are received at a discretionary amount as determined by the local or central PRC government. The Company follows the guideline of the AICPA Issues Paper in accounting for grants as revenues. In general, government grants for revenues and/or expenses should be recognized in income when the related revenue or expense is recorded. Grants related to property or equipment should be recognized over the useful lives of the related asset. Funds received before the conditions of the grant are met should be recorded as deferred revenue.

Stock-based compensation 

The Company follows the guideline under ASC Topic 718 Compensation-Stock Compensation for all stock based compensation plans, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights. Stock compensation expenses are to be recorded using the fair value method.

Income taxes

The Company follows the guideline under ASC Topic 740 Income Taxes. “Accounting for Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates, applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

The Company is subject to the taxes in the United States at tax rate of approximately 42.7%.  No provision for the US federal income taxes has been made as the Company had no taxable income in this jurisdiction for the reporting periods.

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The Company is subject to the PRC Enterprise Income Tax (“EIT”) at a rate of 25% on its net income. According to PRC EIT Law, any joint venture with foreign investment will get EIT exemption treatment for the first two years and reduced tax rates of 9%, 10% and 11% for the third, fourth and fifth years, respectively. As a foreign investment enterprise, Dalian Dongtai is subject to EIT at 11% for the six months ended June 30, 2010. Furthermore, the Law stipulates that enterprises that engage in municipal sewage and sludge treatment business are eligible for special EIT treatment. According to such rules, Dongtai Water and Dongtai Organic is entitled to a three-year EIT exemption treatment starting whenever it generates the first operation revenue, and additional 50% discount on the normal rate for the next three years. For the six months ended June 30, 2010, Dongtai Water and Dongtai Organic have benefited from the EIT exemption preference.

Statement of cash flows

In accordance with ASC Topic 230 Statement of Cash Flows, cash flows from the Company’s operations are calculated based upon the local currencies. As a result, amounts related to assets and liabilities reported on the statement of cash flows will not necessarily agree with changes in the corresponding balances on the balance sheet.

Basic and diluted net earnings per share

Earnings per share is calculated in accordance with ASC Topic 260 Earnings Per Share. Basic earnings per share is based upon the weighted average number of common shares outstanding. Diluted earnings per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Reclassifications

Certain reclassifications have been made in the 2009 financial statements to conform to the 2010 presentation.

Recent accounting pronouncements

Stock Compensation - amendments to clarify that an employee share-based payment award

In April 2010, the FASB issued Accounting Standard Update No. 2010-13 “Stock Compensation” (Topic 718). ASU No.2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity's equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The amendments in this Update should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings. The cumulative-effect adjustment should be calculated for all awards outstanding as of the beginning of the fiscal year in which the amendments are initially applied, as if the amendments had been applied consistently since the inception of the award. The cumulative-effect adjustment should be presented separately. Earlier application is permitted.

Subsequent Events – Amendments to Certain Recognition and Disclosure Requirements

In February 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-9 Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements ("ASU 2010-9"). ASU 2010-9 amends disclosure requirements within Subtopic 855-10. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This change alleviates potential conflicts between Subtopic 855-10 and the SEC's requirements. ASU 2010-9 is effective for interim and annual periods ending after June 15, 2010. The Company does not expect the adoption of ASU 2010-09 to have a material impact on its consolidated results of operations or financial position.

Technical Corrections to Various Topics

In February 2010, the FASB issued ASC Update 2010-08, which contains technical corrections to various Topics within the ASC. Those corrections are effective for interim and annual periods beginning after February 2, 2010. The Company is currently evaluating the potential effects of ASC Update 2010-08.

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Fair Value Measurements and Disclosures – Improving Disclosures About Fair Value Measurements

In February, 2010, the FASB issued FASB ASC Update 2010-06, “Fair Value Measurements and Disclosures – Improving Disclosures About Fair Value Measurements,” ASU Update 2010-06 adds new requirements for disclosures of significant transfers into and out of Levels 1, 2 and 3 of the fair value hierarchy, the reasons for the transfers and the policy for determining when transfers are recognized. ASU 2010-06 also adds new requirements for disclosures about purchases, sales, issuances and settlements on a gross rather than net basis relating to the reconciliation of the beginning and ending balances of Level 3 recurring fair value measurements. It also clarifies the level of disaggregation to require disclosures by “class” rather than by “major category of assets and liabilities” and clarifies that a description of inputs and valuation techniques used to measure fair value is required for both recurring and nonrecurring fair value measurements classified as Level 2 or 3. ASU Update 2010-06 is effective January 1, 2010 except for the requirements to provide the Level 3 activity of purchases, sales, issuances and settlements on a gross basis which are effective January 1, 2011. The adoption of ASU 2010-06 is not expected to have a material impact on the Company’s results of operations or financial position.

Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification

In January 2010, the FASB issued ASU 2010-2 Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification ("ASU 2010-2"). ASU 2010-2 addresses implementation issues related to the changes in ownership provisions in the Consolidation—Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards Codification, originally issued as FASB Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. ASU 2010-2 is effective for the Company starting January 3, 2010. The implementation of this issue did not have a material impact on the Company’s financial position and results of operations.

Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles

In June 2009, the FASB issued Statement No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 168”). SFAS No. 168 will become the single source of authoritative nongovernmental U.S. generally accepted accounting principles (“GAAP”), superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. SFAS No. 168 reorganizes the thousands of GAAP pronouncements into the FASB ASC, which contains roughly 90 accounting topics and displays them using a consistent structure. Also included is relevant Securities and Exchange Commission guidance organized using the same topical structure in separate sections. SFAS No. 168 is effective for financial statements issued for reporting periods that end after September 15, 2009. As the result of SFAS No. 168 the Company’s references to the authoritative accounting literature in these financial statements have been revised to include references to the FASB ASC.

Consolidation of Variable Interest Entities – Amendments to FASB Interpretation No. 46(R) 

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which has been codified as an update to FASB ASC Topic 810 which requires ongoing analyses to determine whether an entity’s variable interest gives it a controlling financial interest in a variable interest entity (“VIE”), making it the primary beneficiary, based on whether the entity (i) has the power to direct activities of the VIE that most significantly impact its economic performance, including whether it has an implicit financial responsibility to ensure the VIE operates as designed, and (ii) has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. Enhanced disclosures regarding an entity’s involvement with variable interest entities are also required under the provisions of FASB ASC 810. These requirements are effective January 1, 2010. The adoption of these requirements did not have a material impact on the Company’s financial statements.

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4 . Notes receivable

As of June 30, 2010 and December 31, 2009, notes receivable, with the balances of $135,663 and $335,780, respectively, represents trade accounts receivable due from various customers where the customers’ banks have guaranteed the payment of the receivables.  This amount is non-interest bearing and is normally paid within three to six months. The Company has the ability to submit request for payment to the customer’s bank earlier than the scheduled payment date, but will incur an interest charge and a processing fee when it submits the early payment request.  

5. Accounts receivable

As of June 30, 2010 and December 31, 2009, the net balances of accounts receivable were $4,850,57 6 and $2,021,421, respectively. The following table shows the aging composition of the balances:

The activity in the allowance for doubtful accounts for accounts receivable for the six months ended June 30, 2010 and for the year ended December 31, 2009 are as follows:

6. Construction reimbursement receivable

Dongtai Organic commenced trial production in March 2009, as the development of plans to bring the integrated anaerobic fermentation system necessary for its intended use. In fiscal year 2009, Dongtai Organic aggregately disposed 42,789 tons of municipal sludge, and recorded a construction reimbursement receivable of $846,270. Payments are to be processed by Dalian Municipal Government per BOT contractual agreement as a reimbursement of current related expense. Therefore, Dongtai Organic accounted the reimbursement as a reduction of current period construction cost. As of June 30, 2010, the remaining balance was approximately $107,426.

7. Inventory

As of June 30, 2010 and December 31, 2009, inventory consists of raw materials and recycled commodities as follows:

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Raw materials are mainly comprised of waste catalyst, which is a scarce resource, collected from oil refineries , chemicals used in the waste treatment and recycling process, and packaging materials.

As of June 30, 2010 and December 31, 2009, the balances of waste catalyst amounted to $425,314 and $422,547, respectively. Because of the impact of the global economic crisis, the prices for the final products that produced from the processing of waste catalyst, including chemical compounds of valuable metals have decreased dramatically since the end of 2008. Management believes that the holding of waste catalyst before the rise of market price complies with shareholder’s interest.

Recycled commodities are mainly comprised of alloys and cupric sulfate that are produced from waste collected, and aluminum and iron products recycled from waste collected, etc.

For the six months ended June 30, 2010 and twelve months ended December 31, 2009 , no allowance for obsolete inventories was recorded by the Company.

8. Property, plant and equipment

Depreciation expenses for the six months ended June 30, 2010 and 2009 were $1,033,799 and $590,263, respectively.

For the six months ended June 30, 2010 and 2009, capitalized interests amounted to $165,583 and $231,056, respectively.

As of June 30, 2010, certain buildings, with the net book value of $4,200,987, have been pledged as the collateral for loans from Shanghai Pudong Development Bank. Certain m achinery and equipments, with the net book value of $14,475,225, have been pledged as the collateral for loans from China Merchants Bank.

9. Other assets

As of June 30, 2010 and December 31, 2009, other asset in the amount of $950,461 and $1,074,531 is primarily comprised of value added tax credit of $937,094 and $1,055,523, respectively. VAT is a turnover tax levied on all units and individuals engaged in the sale of goods, the provision of processing, repair and replacement services (together referred to as "taxable labor services") and the importation of goods to the PRC.

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10. Short-term loan

As of June 30, 2010 and December 31, 2009, the short-term loan balance represents a loan that borrowed from Shanghai Pudong Development Bank.

The following table identifies the material terms of short-term loans:

Total interest expense on short-term loans for the six months ended June 30, 2010 and 2009 amounted to $165,583 and $65,698, respectively.

T he loan is secured by certain properties and land use right of the Company.

11. Long-term loan

As of June 30, 2010 and December 31, 2009, the following table identifies the material terms of the long-term loans:

The interest rates for the two loans that borrowed from China Merchants Bank are determined based on the interest rate of loans above 5 years set by the People’s Bank of China plus 5% and is adjustable every six months. As of June 30, 2010, the benchmark interest rate of loans over 5 years is 5.94%. The BOT franchise right of Dongtai Water and Dongtai Organic, and certain manufacturing machinery of the Company are pledged as collaterals for the two loans. Dalian Lida Environmental Engineering Co., Ltd, which holds 20% equity interest in Dongtai Water, acts as co-guarantor for the loan with the balance of $3,340,891.

On April 20, 2010, the Company entered into a long-term loan agreement with Shanghai Pudong Development Bank. Pursuant to the loan agreement, the principal amounts to RMB 40 million (approximately $5.90 million) and matures on April 27, 2013. As of June 30, 2010, the Company had drawn down the first installment of the loan in the amount of RMB 11 million (approximately $1.62 million). The loan is to be used exclusively for the construction of the Centralized Hazardous Waste Treatment Center of Dalian City.

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The long term loans are scheduled to be repaid on installments. The following table shows the installments schedule:

As of June 30, 2010, the installments amounting to $2,259,825 will be due within one year, and are classified in current liabilities.

12. Government subsidy

As of June 30, 2010 and December 31, 2009, the government subsidy consists of the followings:

In 2009, Dalian Dongtai received a government subsidy from the central government of PRC of RMB10, 000,000 (approximately $1,474,600) to support the construction of the Centralized Hazardous Waste Treatment Center of Dalian City, which is located in Dalian Development Area.

In 2007, Zhuorui received government subsidies of RMB7, 036,000 (approximately $1,037,529), of which RMB6, 000,000 (approximately $884,760) is to be used to purchase production machinery or pay construction expenditures, and the other RMB1, 036,000 (approximately $152,769) is granted as a reimbursement for the acquisition of land use right.

On January 27, 2010, Hunan Hanyang received a government subsidy of RMB21 million (approximately $3,096,660) from the central government of PRC, representing the first installment of a total expected government subsidy of RMB110 million (approximately $16.22 million) as a reimbursement of construction cost in the Hazardous Waste Treatment Center of Changsha City, Hunan Province.

The subsidies are initially recorded as deferred income. Upon the completion and acceptance of the government subsidized projects, subsidies are recognized over the useful lives of the related assets.

13. Settlement expense

In February, 2010, the Company and a consulting firm, which provides business advisory and private placement services to the Company, signed a Settlement and Release Agreement (the “Agreement”) to resolve all remaining issues between them. Pursuant to the Agreement, the consulting firm will receive:

i)      62,500 shares of free-trading, unrestricted common stock of the Company.

ii)    A Placement Agent Warrant (denominated as “Unit Purchase Option”) to purchase up to 5 units at 120% of the offering price of the Unit. The original offering price of a Unit was $60,000 at time of offering. Each unit consists of 29, 412 shares of restricted common stock of the Company, “A” warrants to purchase 14,706 common shares of the Company at an exercise price of $2.50 and “B” warrants to purchase 14,706 common shares of the Company at an exercise price of $3.20.

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As management has determined that the Units are issued in settlement of a dispute between the parties, each Unit is to be valued at its fair value. Utilizing the Black-Scholes option-pricing model resulted in an aggregate fair value of the elements (stock, warrant A and warrant B) of each Unit to be $128,089 ($88,236, $22,016 and $17,837, respectively) or $640,446 for all 5 Units. The following significant assumptions were used in preparing the Black-Scholes calculation assumptions: expected dividend yield 0%; risk-free interest rate of 2.48%; volatility of 89.59% and an expected term of 5 years.

The fair market value of the 62,500 shares of free-trading, unrestricted common stock at issuance date was approximately $159,375. The fair value of 5 Units is $640,446 and the cost of purchase is $360,000. The difference between fair value of all 5 Units and cost of purchase in the amount of $280,446 was charged to expense account during current period. Therefore, the Company recognized a settlement expense of $439,821.

14. Related parties transactions

As of June 30, 2010 and December 31, 2009, the amounts due from (to) related parties were as follows:

Payable to Dongtai Investment consists of unsecured short term loans, amounting to $383,396 (RMB 2.6 million), with interest rate of 6% per annum, repayable on demand.

Receivable from Dalian Lida is an unsecured short term loan of $235,936 (RMB1.6 million) with interest rate of 6% per annum, effective on August 1, 2009, and repayable on demand.

15. Earnings per share

Basic earnings per common share (“EPS”) are calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted EPS is calculated by adjusting the weighted average outstanding shares, assuming conversion of all potentially dilutive securities, such as stock options and warrants, using the treasury stock method.

The following table demonstrates the calculations for earnings per share for the six months ended June 30, 2010 and 2009:

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16. Commitment and Contingency

Capital commitment

The Company has purchasing commitments that result from construction contracts and equipment procurement contracts signed for the development of the Centralized Hazardous Waste Treatment Center of Dalian City. As of June 30, 2010 , the commitment information is as follows:

Zhuorui

In March 2009, Zhuorui commenced trial production. Due to the unfavorable market prices for Zhuorui’s final products, including chemical compounds of valuable metals, and imperfections detected in the trial production, the Company decided to suspend the trial production in January 2010 to make improvement on the technical flow prior to market recovery. With the improvement on the technical flow, Zhuorui can generate an additional by-product, which strengthens its profitability and qualifies upgraded emission standards.

The capital expenditure for the improvement is approximately $2.1 million (approximately RMB 14 million), and it is estimated that a four-month period is necessary to accomplish this improvement. As of August 10, Zhuorui has spent approximately $670,000(approximately RMB 4.6 million) on heat exchanger; de-sulfate system, dust collector and sewage disposal system. Other equipments are under preparation and it is anticipated that contractors will start on-site installation in late August. Zhuorui expects a pilot by the end of September 2010.

Despite the advantages brought by this proposed technical improvement, there are possibilities of losses caused by unexpected events, take for example, it costs additional time or fund to accomplish the improvement, the attempt to generate additional by-product fails or the depressing market conditions last longer than our expectation.

17. Subsequent events

On July 1, 2010, Dalian Dongtai received a government subsidy of approximately $0.74 million (RMB 5 million) from the central government of PRC, as a reimbursement of construction cost to the Centralized Hazardous Waste Treatment Center of Dalian City, Liaoning Province.

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• Industrial Solid Waste Treatment and Recycling : Dalian Dongtai provides services including the collection, storage, transportation, disposal and incineration of industrial waste, as well as the landfill of general and hazardous industrial waste.
• Municipal Sewage Water Treatment : Dalian Dongtai’s 80% subsidiary, Dalian Dongtai Water Recycling Co. Ltd. (“Dongtai Water”), commenced operations in June 2008 to process domestic sewage generated from a portion of Dalian City.
• Municipal sludge treatment (sludge-to-energy) : Dalian Dongtai’s 52%-owned subsidiary, Dalian Dongtai Organic Waste Treatment Co. Ltd. (“Dongtai Organic”), which became operational in 2009, has implemented the centralized processing of wastewater sludge derived from all sewage treatment plants in urban Dalian City.

(b) Sludge Treatment

Dongtai Organic operates the first BOT plant in the PRC to implement centralized wastewater sludge processing. During the project’s 20-year franchised period, this sludge-to-energy plant is expected to dispose of the sludge derived from all sewage treatment plants located in urban Dalian City. This plant has a designed capacity of 600 tons/day and is expected to generate approximately 11,000 cubic meters of methane each day once it reaches its full capacity. The project has generated revenues since January 2010 from service fees paid by the local government and from sales of biogas (methane) to Dalian Gas Company, which it uses as a partial supply for cooking fuel in Dalian City. Dongtai Organic’s revenues from both sludge processing fees and sales of biogas are calculated on a volume basis. The payment of sludge processing fees is the responsibility of the local government and is payable every quarter while payment for sales of biogas (methane) is made on a monthly basis. Dongtai Organic received approximately $1.16 million from service fees and approximately $0.83 million from sales of biogas (methane) in the first half of 2010.

(c) Sewage Treatment

Dongtai Water, which is a BOT (Build-Operate-Transfer) plant with a 20 year franchised right, commenced operations in June 2008 to process domestic sewage generated from a portion of Dalian City. The plant’s designed capacity is 30,000 tons/day and it currently operating at full capacity. The payment of sewage treatment fees, which is based on the volume of waste water processed, is paid by the local government on quarterly basis. Dongtai Water received approximately $0.58 million from service fees in the first half of 2010.

Recent Developments

(a) In order to provide sufficient infrastructure to meet the increasing demand for waste treatment and disposal, an expansion project is now underway to significantly increase Dalian Dongtai’s capacity for waste treatment and disposal. The expansion project, which is one of fifty-five hazardous waste treatment centers sponsored by the National Development and Reform Commission and one of two such centers in Liaoning Province, commenced construction at the end of July 2009. The Company has completed 70% of the construction and expects the project to be operational in the fourth quarter of 2010.

 Further information about the expansion of the facility is as follows: 

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(b) In accordance with Dongtai Organic's agreement with the local government, Dongtai Organic is entitled to process all of the sludge generated from sewage treatment plants in the urban area of Dalian City.  Management anticipates that Dalian Organic’s facility will reach its full capacity within one or two years following completion of sewage treatment plants in Dalian City. The 20 year franchise period will not commence until the volume of sludge delivered by local government has reached 70% of the plant’s full capacity, which is 600 tons/day.

Operating Strategy

Our business strategy is designed to increase revenues and earnings through profitable growth and improving returns on invested capital. The components of our strategy include:

• Maintaining commercialization of industrial solid waste treatment as our core business and maintaining a balanced business structure of the three business lines; ;
• Expansion into municipal sludge treatment BOT projects with the goal of 30-40% of our revenues being provided by sludge treatment;
• Promoting the installation of sludge treatment tanks in other cities to seize the market opportunity in the surge of sludge treatment;
• Managing our businesses locally with a strong operating focus and emphasis on customer service;
• Expanding into new geographic markets in China; and
• Maintaining our financial capacity and effective administrative systems and controls to support on-going operations and future growth. We are evaluating growth in our solid waste treatment operations through opportunities to cooperate with prominent domestic or overseas partners and attempts to integrate customer groups (for example, the refinery industry), to realize resource optimization.

We also plan to seek new BOT projects and acquire interests in existing projects, as we believe they can provide us with stable revenues and cash inflows. Furthermore, we believe that a well-operated BOT project will gain attention and social recognition from the local government and business community, which may, in turn, provide additional business opportunities in the Dalian metropolitan area.

CRITICAL ACCOUNTING POLICIES

We have disclosed in Note 3 to our financial statements those accounting policies that we consider to be significant in determining our results of operations and our financial position which are incorporated by reference herein.

The preparation of financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. We evaluate our estimates, including those related to bad debts, inventories and warranty obligations, on an ongoing basis. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. The actual results may differ from these estimates under different assumptions or conditions.

The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

Revenue is recognized when services are rendered to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as deferred sales.

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Property, Plant and Equipment

Property, plant and equipment (“PP&E”) are stated at cost, less accumulated depreciation and impairment. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When PP&E are required or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in the statement of operations.

Bad Debts   

The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Terms of the sales vary from cash on delivery through a credit term of up to twelve months.

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this quarterly report.

Three and Six Months Ended June 30, 2010 Compared to the Three and Six Months Ended June 30, 2009.

Revenues

Our revenue can be divided into two categories, i.e., fees charged to customers for waste collection, transfer, recycling and disposal services (including service fees for sewage and sludge treatment), and sales of recycled commodities (including sales of methane). We consider our collection and disposal operations and reclamation of reusable substances as our core business. Revenues from service fees accounted for 65.5% and 67% of revenues in the three months ended June 30, 2010 and 2009, respectively.

The Company’s operating revenues for the three and six months ended June 30, 2010 were $4,924,580 and $9,019,421, compared with $2,452,995 and $4,064,946 for the three and six months ended June 30, 2009, respectively.

The Company’s total revenues for the three months ended June 30, 2010 was $4,924,580, an increase of $2,471,585 or 100.8%, over revenues of $2,452,995 for the three months ended June 30, 2009. Total revenues for the six months ended June 30, 2010 was $9,019,421, which represents an increase of $4,954,475 or 121.88%, over revenues of $4,064,946 for the six months ended June 30, 2009.

Notes:

(1)  Consists of service fees generated from industrial solid waste treatment, sewage treatment and sludge treatment.

(2)  Cupric sulfate, which is included in the sales of recycled commodities, was segmented previously because its sales account for more than 10% of total revenue.

(3)  Sales of biogas (methane), which is a new revenue source provided by Dongtai Organic, is included in sales of recycled commodities.

The increase in revenues is mainly attributable to:

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(a) The rally in the overall industrial solid waste business. Service fees generated from industrial solid waste treatment increased from $1,387,847 in the second quarter of 2009 to $2,393,946 in the same period in 2010, a net increase of $1,006,099 or 72. 5 %.  In addition, sales of recycled commodities (excluding sales of methane) increased from $810,247 to $1,28 1 , 919 . This increase is a natural consequence of a recovering production scale of our clients who suffered from the adverse impact of the global economic recession and corresponding world financial crisis which severely impacted the Company’s primary business. We expect this trend to continue for the balance of 2010.

(b) The additional revenue generated by Dongtai Organic from municipal sludge treatment, as well as sales of Biogas (methane), a byproduct derived from sludge fermentation.

1. Service fees

Service fees increased from $1,642,748 for the three months ended June 30, 2009 to $3,226,923 for the same period of 2010, an increase of $1,584,175, or 96.43%. The increase is attributable to (a) the $1,006,098 or 72.5% increase in service fees generated from industrial solid waste treatment business and (b) the addition of $57 7 , 813 generated from sludge treatment fee, which accounts for 17.9% of service fees in total. Service fees for the six months ended June 30, 2010 were $6,171,481, an increase of $3,331,034 or 117.3% from $2,840,447 over service fees of $2,840,447 for the six months ended June 30, 2009.

Since its commencement of operations in late 2009, Dongtai Organic continues to function stably. In the first half of 2010, Dongtai Organic generated $1,992,449 in sludge treatment fees and sales of methane. Dongtai Organic was not operating during the same period in 2009.

2. Sales of recycled commodities

As China’s economy appears to be recovering from the global rescission, prices for many raw materials have been continuously increasing, including for Dalian Dongtai’s main products, cupric sulfate and other types of recycled commodities, such as iron, plastic and nonferrous metal. For example, the average price for cupric sulfate in the second quarter of 2010 was about $1,700/ton, while the average price for the same period of 2009 was approximately $1,160/ton, an increase of approximately 46.55%. Many of our customers have returned to their pre-recession production levels. As a natural consequence of our customers’ recovery, the amount of recycled commodities collected from our clients increased as well. To optimize on this situation, Dalian Dongtai has increased the sales volume of recycled commodities, including commodities that had been inventoried during 2009 due to the low sales prices. Dalian Dongtai generated $1,28 1 , 919 and $2,018,698 for three months and six months end of June 30 2010 from sales of recycled commodities (excluding sales of methane) which increased by $477,033 or 58.9% and $799,561 or 65.3%, respectively, from $810,247 and $1,224,498 for the same quarters in 2009.

In the first half of 2010, Dongtai Organic generated $829,242 in revenue from sales of biogas (methane), a by-product, whereas there was no such revenue in the first half of 2009.

Cost of Revenues

The Company’s cost of revenues for the three and six months ended June 30, 2010 were $1 ， 871,896 and $3,288,847, compared with $878,238 and $1,606,088 for the three and six months ended June 30, 2009, respectively.   

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Notes:

(1)  Consists of service fees generated from industrial solid waste treatment, sewage treatment and sludge treatment.

(2)  Cupric sulfate, which is included in the sales of recycled commodities, was segmented previously because its sales account for more than 10% of total revenue.

(3)  Sales of biogas (methane), which is a new revenue source provided by Dongtai Organic, is included in sales of recycled commodities.
 

1. Cost of service fees

Cost of service fees increased by $857,665, or 231.4%, and $1,415,995 or 168.4% for the three months and six months ended June 30, 2010 compared to those for three months and six months ended June 30, 2009. The increase is attributable to the reason that approximately $85,000 manufacturing expenses of Dongtai were allocated into R&D expenses which caused lower cost of service fees in the second quarter of 2009. While for the second quarter ended June 30 2010, Dalian Dongtai allocated that item to manufacturing expenses.

2. Cost of sales of recycled commodities

Cost of recycled products (including cupric sulfate and other recycled commodities) for the three months and six months ended June 30, 2010 increased by $135,993 or 26.8% and $ 266,765 or 34.86% respectively compared with the same periods of 2009.

Gross Profit Margin

The gross profit margin for the three months and six months ended June 30 2010 was 62% and 64% whereas that for the same period in 2009 was 64% and 60.49%.  

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations and met capital expenditure requirements primarily through cash provided by operating activities, trade credit and bank loans.

Short-term loan as of June 30, 2010 was $2,949,200, whereas the corresponding amount as of December 31, 2009 was $6,739,038. The Company paid off short-term loans due in the amount of approximately $6,739,433 (RMB46, 000,000), and obtained another short-term loan in the amount of approximately $2,930,188 (RMB20, 000,000).

Long-term loan as of June 30, 2010, including current portion, was $16,597,545, whereas the corresponding amount as of December 31, 2009 was $16,000,637.  The Company paid off long-term loans due in the amount of approximately $1,129,912 (RMB7, 662,500), and obtained another long-term loan in the amount of approximately $1,474,600 (RMB10, 000,000).

As of June 30, 2010, the Company had cash and cash equivalents of $ 4,830,344 compared to $11,419,129 as of December 31, 2009, a decrease of $6,588,785 or 57.7%. The decrease is mainly due to (a) Repayment of short-term loans, and (b) Capital expenditure for facility construction and equipment procurement.

As of June 30, 2010, the Company had a working capital surplus of $2,948,606, compared to a surplus of $1,658,294 as of December 31, 2009.

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Cash Flow

Net cash provided by operating activities was $940,718 for the six months ended June 30, 2010, compared to net cash used in operating activities in the amount of $971,870 for the same period in 2009. The improvement is mainly attributable to the recovery of solid waste treatment business, and the cash inflows generated from sludge treatment business since the beginning of 2010.

Net cash used in investing activities for the six months ended June 30, 2010 was $3,221,610, compared to net cash used in investing activities in the amount of $6,431,762 for the same period of 2009. For the six months ended June 30, 2009, cash was invested for both Dalian Dongtai’s expansion project and Dongtai Organic’s facility construction, while cash was only used in Dalian Dongtai’s expansion project for the same period in 2010.

Net cash used in financing activities for the six months ended June 30, 2010 was $4,337,516, compared to net cash provided by financing activities in the amount of $14, 454,433 for the same period of 2009. For the six months ended June 30, 2009, the Company raised long-term and short-term loans of approximately $18,200,978 to facilitate the construction of Dongtai Organic and Dalian Dongtai’s expansion project. While in 2010, we paid off the short term loan due in the amount of $6,739,433and long term loan in the amount of $1,122,628. In compare with the same period in 2009, the net cash obtained from financing activities was significantly reduced.

We intend to use our available funds as working capital and to expand and develop our current lines of business. We believe that our available funds will provide us with sufficient capital for at least the next twelve months; however, to the extent that we make acquisitions, we may require additional capital for the acquisition or to support the operations of the combined companies. We cannot provide any assurance that any required funding will be available on terms acceptable to us.

OFF-BALANCE SHEET ARRANGEMENTS

As of June 30, 2010, the Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Item 3.          Quantitative and Qualitative Disclosures About Market Risk

Not Applicable

Item 4T.       Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, or the "Exchange Act") that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

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During the evaluation of disclosure controls and procedures as of December 31, 2009 conducted during the preparation of the Company’s financial statements included in its annual report on Form 10-K, a material weakness in internal controls was identified.  As a result of this material weakness the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2009 our disclosure controls and procedures were not effective.

A material weakness is “a deficiency, or a combination of deficiencies (within the meaning of PCAOB Auditing Standard No. 5), in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.” The Company’s management concluded that, as of December 31, 2009, the following material weakness existed:

• We had an insufficient familiarity with generally accepted accounting principles in the United States (“US GAAP”)
• The Company was unable to ensure that all information required to be disclosed in our filings was accumulated and communicated to management to allow timely decisions regarding required disclosure.
• The Company lacks qualified resources to perform the internal audit functions properly; and the scope and effectiveness of the Company’s internal audit function are yet to be developed.

Since January 2, 2010 we have engaged in substantial efforts to improve our internal control over financial reporting and disclosure controls and procedures related to many areas of our financial statements and disclosures. In order to remediate the material weakness identified as of December 31, 2009, during the first quarter of 2010 we have:

• Commenced the process by which we will become better informed about US GAAP
• Engaged an accountant with experience in the industry and continue our search for additional accounting and financial personnel with industry experience.

Notwithstanding the remedial actions we have undertaken since December 31, 2009, because of the scope of the material weakness that existed at December 31, 2009, our management has concluded that our disclosure controls and procedures at June 30, 2010 were not effective. Our efforts to remediate our disclosure controls and procedures and internal control over financial reporting are continuing and are expected to continue throughout fiscal 2010. Until such time, however, as our efforts to remediate this weakness, there remains a risk that we will fail to identify weaknesses or adequately correct any identified weaknesses in our disclosure controls and procedures and internal control over financial reporting, both as they relate to the material weakness identified at December 31, 2009 and to other possible areas.

Notwithstanding the existence of this material weakness in disclosure controls and procedures and internal control over financial reporting at June 30, 2010, we believe that the consolidated financial statements included elsewhere in this report fairly present, in all material respects, our consolidated balance sheets as of June 30, 2010 and 2009 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the quarters ended June 30, 2010 and 2009 in conformity with US GAAP.

There have been no changes in our internal control over financial reporting that occurred during our fiscal quarter ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

LACK OF SEGREGATION OF DUTIES

Management is aware that there is a lack of segregation of duties at the Company due to the small number of employees dealing with general administrative and financial matters. However, at this time management has decided that considering the abilities of the employees now involved and the control procedures in place, the risks associated with such lack of segregation are low and the potential benefits of adding employees to clearly segregate duties do not justify the substantial expenses associated with such increases. Management will periodically reevaluate this situation.

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PART II - OTHER INFORMATION

Item 1.               Legal Proceedings.

None.

Item 1A.            Risk Factors.

Not required.

Item 2.               Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.               Defaults Upon Senior Securities.

None.

Item 4.               (Removed and Reserved)

Item 5.               Other Information.

None.

Item 6.               Exhibits.

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CHINA INDUSTRIAL WASTE MANAGEMENT, INC.