10-Q 1 easternenvironment10q.htm EASTERN ENVIRONMENT SOLUTIONS, CORP. 10Q 03-31-2011 easternenvironment10q.htm

 
U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-Q

[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
   
[ ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____

Commission File No. 0-31193

EASTERN ENVIRONMENT SOLUTIONS, CORP.
(Name of Registrant in its Charter)
 
                  Nevada                   
           16-1583162          
(State or Other Jurisdiction of
(I.R.S. Employer I.D. No.)
incorporation or organization)
 

Harbin Dongdazhi Street 165, Harbin, P.R. China 150001
(Address of Principal Executive Offices)
 
Issuer's Telephone Number: 86-451-5394-8666

Indicate  by check mark  whether the  Registrant  (1) has filed all reports required to be filed by Sections 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 subjected 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. (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 ___  No   X  

APPLICABLE ONLY TO CORPORATE ISSUERS:  Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date:
 
May 16, 2011:  Common Voting Stock: 14,970,186
 
 
 
 

 
 

 



TABLE OF CONTENTS
     
Page No
Part I
 
Financial Information
 
Item 1.
 
Unaudited Financial Statements :
 
   
Condensed Consolidated Balance Sheet – March 31, 2011 and December 31, 2010
2
   
Condensed Consolidated Statements of Income and Comprehensive Income – for the Three Months Ended March 31, 2011 and 2010
3
   
Condensed Consolidated Statements of Cash Flows – for the Three Months Ended March 31, 2011 and 2010
4
   
Notes to Condensed Consolidated Financial Statements
5
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3
 
Quantitative and Qualitative Disclosures about Market Risk
22
Item 4T
 
Controls and Procedures
22
Part II
 
Other Information
 
Item 1.
 
Legal Proceedings
23
Items 1A.
 
Risk Factors
23
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
23
Item 3.
 
Defaults upon Senior Securities
23
Item 4.
 
Reserved
23
Item 5.
 
Other Information
23
Item 6.
 
Exhibits
23
Signatures
 


 

 
1

 
 
EASTERN ENVIRONMENT SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
   
MARCH 31,
   
DECEMBER 31,
 
   
2011
   
2010
 
ASSETS
Current assets:
           
Cash
  $ 4,331,374     $ 1,886,126  
  Accounts receivable
    4,468,003       5,445,418  
Inventories
    22,795       252,375  
  Other receivables
    1,269       1,259  
  Loan receivable
    4,581,132       4,543,864  
Total Current Assets
    13,404,573       12,129,042  
                 
Property and equipment, net of accumulated depreciation of $66,713 and $60,867, respectively
    108,987       113,404  
                 
Landfill development costs, net of amortization of $4,178,651 and $3,814,935, respectively
    7,417,382       7,627,184  
                 
Deferred tax assets
    155,137       120,719  
                 
Total Assets
  $ 21,086,079     $ 19,990,349  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
                 
Current liabilities:
               
       Bank loan payable - current portion
  $ 845,768     $ 1,087,416  
   Accounts payable
    844       838  
  Taxes payable
    377,312       315,917  
       Accrued expenses and other payables
    101,084       95,291  
Total Current Liabilities
    1,325,009       1,499,462  
                 
 Total Liabilities
    1,325,009       1,499,462  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity
               
                 
  Common stock, $0.0001 par value, 100,000,000 shares authorized; 14,970,186 shares issued and outstanding     1,497       1,497  
  Additional paid-in capital
    4,180,255       4,138,567  
Accumulated other comprehensive income
    2,199,213       2,097,014  
   Statutory reserves
    1,338,011       1,225,381  
Retained earnings - unappropriated
    12,042,095       11,028,428  
Total Stockholders' Equity
    19,761,071       18,490,888  
                 
  Total Liabilities and Stockholders' Equity
  $ 21,086,080     $ 19,990,349  
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements
 
 
2

 
 
EASTERN ENVIRONMENT SOLUTIONS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


   
THREE MONTHS ENDED
 
   
MARCH 31,
 
   
2011
   
2010
 
             
Revenues
           
Landfill disposal fees
  $ 1,233,016     $ 1,122,699  
PET bottle sales
    3,304,608       465,055  
      4,537,624       1,587,754  
Cost of Goods Sold
               
Landfill disposal fees
    407,300       356,730  
PET bottle sales
    2,691,355       95,614  
      3,098,655       452,344  
                 
Gross Profit
    1,438,969       1,135,410  
                 
Selling, General and Administrative Expense
    218,095       145,918  
                 
 Income from operations
    1,220,874       989,492  
                 
Other Income (Expense)
               
  Interest income
    97,626       23,226  
Interest expense
    (24,202 )     -  
 Other income
    -       (120 )
 Total other income, net
    73,424       23,106  
                 
Income from Operations before Income Taxes
    1,294,298       1,012,598  
                 
Provision for Income Taxes
    168,002       139,273  
                 
Net Income
    1,126,296       873,325  
                 
Other Comprehensive Income -
               
Foreign currency translation gain
    102,199       (48,918 )
                 
Comprehensive Income
  $ 1,228,496     $ 824,407  
                 
                 
Basic and Diluted Income Per Share
               
     Basic
  $ 0.09     $ 0.07  
  Diluted
  $ 0.08     $ 0.06  
                 
Weighted Average Number of Common Shares Outstanding
               
     Basic
    12,599,353       11,969,910  
     Diluted
    14,970,186       14,970,186  
 
The accompanying notes are an integral part of these condensed consolidated financial statements

 
3

 
 
EASTERN ENVIRONMENT SOLUTIONS, CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
   
THREE MONTHS ENDED MARCH 31,
 
   
2011
   
2010
 
Cash Flows From Operating Activities:
           
 Net income
  $ 1,126,296     $ 873,325  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    336,224       304,915  
Amortization of stock-based compensation
    41,688       95,688  
Deferred tax benefit
    (34,418 )     (30,315 )
                 
Changes in operating assets and liabilities:
               
    Accounts receivable
    977,415       (446,803 )
    Inventories
    229,580       (10,314 )
    Accounts payable
    6       -  
    Taxes payable
    61,395       9,208  
Accrued expenses and other payables
    5,793       (9,143 )
                 
 Net cash provided by operating activities
    2,743,980       786,561  
                 
Cash Flows From Investing Activities:
               
Additions to construction in process
    (94,414 )     -  
Payment of capitalized interest for construction loan
    -       (40,769 )
Payments on loan to related parties
    -       (22,692 )
Collections (payments) on loans receivable
    (37,278 )     439,430  
                 
 Net cash provided by (used in) investing activities
    (131,692 )     375,969  
                 
Cash Flows From Financing Activities
               
Loan repayments to bank
    (241,648 )     (241,648 )
                 
 Net cash used in financing activities
    (241,648 )     (241,648 )
                 
Effect of Exchange Rate Changes on Cash
    74,609       (50,257 )
                 
Increase in Cash
    2,445,248       870,625  
                 
Cash - Beginning of Period
    1,886,126       428,052  
                 
Cash - End of Period
  $ 4,331,374     $ 1,298,677  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Cash was paid for the following:
               
Interest expense
  $ 24,202     $ 40,769  
Income taxes
  $ 276,870     $ -  
                 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements

 
4

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 1. BASIS OF PRESENTATION AND ORGANIZATION
 
Eastern Environment Solutions, Corp. (“the Company” or “EESC”) was incorporated under the laws of the State of Nevada and formerly known as USIP.COM, Inc. (“USIP”).
 
The Company operates its business primarily through its wholly-owned subsidiary Harbin Yifeng Eco-Environment Co., Ltd. (“Harbin Yifeng”), a corporation organized and existing under the laws of the People’s Republic of China (“PRC”). Harbin Yifeng is an environmental engineering company in the PRC that specializes in providing non-hazardous municipal solid waste processing and disposal services in the northeast regions of China.

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”). In the opinion of management, the accompanying condensed balance sheets and related interim statements of income and cash flows include all adjustments, consisting only of normal recurring items, necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America.

Interim results are not necessarily indicative of the results that maybe expected for a full year.  The information included in this Form 10-Q  should be read in conjunction with information included in the Company’s Annual Report on Form 10-K  for the year ended December 31, 2010, filed with the Securities and Exchange Commission on March 30, 2011.
 
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Principles of consolidation
 
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Harbin Yifeng and Harbin Yifeng’s wholly owned subsidiary, Harbin Yifeng Zhiye Management Co., Ltd. (“Yifeng Zhiye”). All significant inter-company transactions and balances have been eliminated in consolidation.

Management estimates
 
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
    
Accounts receivables
 
Accounts receivables are stated at net realizable value. Any allowance for doubtful accounts is established based on the management’s assessment of the recoverability of accounts and other receivables. A considerable amount of judgment is required in assessing the realization of these receivables, including the current credit worthiness of each customer and the related aging analysis. The Company’s receivables are primarily due from the municipal government of Harbin City and are considered by management to be fully collectible. The Company’s receivables from its recycling of bottles and plastic beginning in 2010 are considered fully collectible, under contracts with the recycling companies engaged for the disposal of the material. Therefore, no allowance for doubtful accounts was deemed necessary at March 31, 2011or December 31, 2010.
 

 
5

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 Inventories
 
Inventories consist of (a) materials and supplies to be used in the regular day-to-day operations of the landfill and (b) PET plastics held by the Company or its consignees pending processing and delivery to customers of the consignees. Inventory is valued at the lower of cost or market with cost determined on a first-in first-out basis.

Property and equipment
 
Property and equipment are stated at cost, net of accumulated depreciation and amortization.  Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of 5-10 years.
 
Landfill development costs
 
Landfill development costs, which also include advances to suppliers, represent payments made for labor, machinery, supplies and equipment related to the construction of the landfill. Landfill development costs are stated at cost, net of accumulated amortization. Amortization is computed on a units of measure basis: the Company’s estimate of the total cost of the landfill when complete is multiplied by a fraction, the numerator being the total tonnage disposed during the period and the denominator being the total anticipated capacity of the landfill. The anticipated total cost of the landfill is reviewed quarterly, based on costs incurred to date and updated projections, and is adjusted, as necessary. Conversion of expenses already incurred is based on the reported historical conversion rate; the estimate of future costs is converted based on the conversion rate on the measurement date.

Revenue recognition
 
The Company, in accordance with ASC 360, records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured.
 
For revenue associated with waste disposal at the landfill, the Company recognizes revenue based on tonnage on the date it is disposed into the landfill.  The Company discloses separately the actual tonnage disposed during each period in order to match the cost of revenue with the actual disposal activities.  See: Note 4.

The Company records revenue associated with the resale of bottles and caps based on the contract price that the Company’s consignee is required to pay to the Company upon its resale of the processed plastic.  Revenue is recorded on the date when the consignee ships the processed plastic to its customer, at which time it is contractually obliged to pay the related fee to the Company.

Income taxes
 
The Company accounts for income tax under the provisions of ASC No.740 "Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns.  Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities.  Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Harbin Yifeng was granted the status of wholly foreign-owned entities (“WFOE”) in the fourth quarter of 2006 upon the reverse merger with USIP with a choice of starting the tax holiday immediately or the next calendar year. Harbin Yifeng elected for this tax holiday to commence in January 2007. Its two-year tax exemption period was from January 1, 2007 to December 31, 2008 and the three-year 50% income tax reduction period will be from January 1, 2009 to December 31, 2011.
 
The Company has deferred tax assets that relate to its landfill development amortization and its net operating loss in the U. S., which is not covered by the tax holiday.


 
6

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Concentrations of credit risk
 
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of accounts receivable and other receivables.  The Company does not require collateral or other security to support these receivables.  The Company conducts periodic reviews of its clients' financial condition and customer payment practices to minimize collection risk on accounts receivable.
 
Fair value of financial instruments
 
The Company adopted the provisions of ASC 820, Fair Value Measurements and Disclosures. ASC 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

 
·
Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 
·
Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 
·
Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, other receivables, accounts payable, accrued expenses, taxes payable and notes payable approximate fair value due to the short-term nature of these items. The Company uses the Level 3 method to measure fair value of its bank loan. The carrying amount of the bank loan approximates the fair value based on the Company's expected borrowing rate for debt with similar remaining maturities and comparable risk in market. The Company did not identify any other assets or liabilities that are required to be presented on the consolidated balance sheets at fair value in accordance with ASC 820.

Foreign currency translation

The Company’s reporting currency is the U.S. dollar (“US$”) and its principal country of operations is the PRC. The financial position and results of operations of the Company are determined using the local currency (“RMB”) as the functional currency. The results of operations and the statement of cash flows denominated in foreign currency are translated at the average rate of exchange during the reporting period. Assets and liabilities denominated in foreign currencies at the balance sheet date are translated at the applicable rates of exchange in effect at that date. The equity denominated in the functional currency is translated at the historical rate of exchange at the time of capital contribution. Because cash flows are translated based on the average translation rate, 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. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity as “Accumulated Other Comprehensive Income”.

The value of RMB against US$ and other currencies may fluctuate and is affected by, among other things, changes in China's political and economic conditions, Any significant revaluation of RMB may materially affect the Company's financial condition in terms of US$ reporting.
 

 
7

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock-based compensation
 
The Company records stock based compensation expense pursuant to the United States ASC 718, which establishes the accounting for employee stock-based awards.  Under the above provisions, stock-based compensation is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite employee service period (generally the vesting period of the grant). For the three months ended March 31, 2011 and 2010, $41,688 and $95,688 stock based compensation expenses were recorded in selling, general and administrative expenses.

Earnings and diluted earnings per share

Earnings per share are calculated in accordance with the ASC 260, “Earnings Per Share.” Basic net earnings per share are based upon the weighted average number of common shares outstanding, but excluding shares issued as compensation that have not yet vested. Diluted net earnings per share are based on the assumption that all dilutive convertible shares and stock options were converted or exercised, and that all unvested shares have vested. Dilution is computed by applying the treasury stock method. Under this method, stock-based compensation is assumed to be vested 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.

The following table sets forth the computation of basic and diluted earnings per share for the periods presented:
 
    Three months ended March 31,  
   
2011
   
2010
 
Net income
  $ 1,126,296     $ 873,325  
Shares (denominator):
               
Weighted average common shares outstanding - basic
    12,599,353       11,969,910  
Earnings per share - basic
  $ 0.09     $ 0.07  
Plus: effect of diluted securities - unvested compensation
               
Shares
    2,370,833       3,000,276  
Weighted average common shares outstanding - diluted
    14,970,186       14,970,186  
Earnings per share - diluted
  $ 0.08     $ 0.06  
 
 
8

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 3.  PROPERTY AND EQUIPMENT
  
Property and equipment consisted of the following: 
 
 
March 31, 2011
 
December 31, 2010
 
    $ 175,700     $ 174,271  
Less: accumulated depreciation
    (66,713 )     (60,867 )
Total property and equipment, net
  $ 108,987     $ 113,404  
Property and equipment are stated at cost, net of accumulated depreciation and amortization.  Maintenance and repairs are charged to expense as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of 5-10 years.  Depreciation expense for property and equipment for the three months ended March 31, 2011 and 2010 was $5,322 and $4,088, respectively.  

NOTE 4.   LANDFILL DEVELOPMENT COSTS
 
Landfill development costs consisted of the following:  
 
   
March 31, 2011
   
December 31, 2010
 
Machinery and equipment
  $ 1,207,216     $ 1,197,396  
Landfill
    2,358,915       2,339,725  
Construction in progress
    3,770,089       3,689,304  
Advances to suppliers
    4,259,813       4,215,693  
         Subtotal
    11,596,033       11,442,118  
Less: accumulated depreciation
    (4,178,651 )     (3,814,934 )
Total Landfill development costs, net
  $ 7,417,382     $ 7,627,184  

Landfill development costs represent the capitalized expenses attributable to the construction of the Harbin landfill.  Landfill development costs are amortized using a units of measure method over the contract term, commencing when the landfill was first put into use.  The Company amortizes estimated total landfill development costs (currently estimated at $17.2 million), using the ratio of actual tonnage disposed in the landfill in proportion to the total anticipated capacity of the landfill, based on the Company’s assessment that it is probable that the Company will continue to utilize the Harbin landfill for the full term of the Build-Operate-Transfer (“BOT”) agreement and that, in that period, the landfill will be filled to capacity.  The Company determined that the units of measure method of accounting for landfill development costs more accurately correlates  the cost of building the landfill with the revenue recognized with each ton of waste disposed of in the landfill over the life of the landfill.

Landfill development costs also include advances to suppliers representing payments made for machinery, supplies and equipment related to the construction of the landfill.  The Company made a determination that it would not establish a reserve against the advances to suppliers that are included in landfill development costs on the Consolidated Balance Sheets as of March 31, 2011 and December 31, 2010.  The determination was based on the continuance of operations at the Landfill, and the probability that the advances will be utilized for purchase of construction materials and equipment during the next two years.  The Company also determined that depreciation of equipment over the life of the landfill was appropriate, as the equipment is, for the most part, heavy earth-moving equipment with a useful life approximately equal to the term of the BOT Agreement.  In addition, the BOT Agreement provides that equipment used at the landfill will be surrendered to HMUAB upon termination of the BOT Agreement.
 
The Company has no obligations relating to capping, closure or other post-closure obligations; accordingly no reserve for post-closure activities has been established.
 
The landfill will be constructed over a period of years as one (1) whole unit.  However, the construction will be completed in different stages in order to comply with certain structural requirements.  In order to start the next phase of construction, the prior phase must be completed.  The Company anticipates the total landfill capacity of approximately 7.8 million tons.  That estimate is made on a gross basis, however.  The tonnage actually deposited should exceed the estimate, due to (a) the fact that we reduce the space used by removing recyclables, and (b) the fact that organic material included in the tonnage degrades and uses a reduced space.


 
9

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 4.   LANDFILL DEVELOPMENT COSTS (Continued)

The build outs to accommodate the gross estimate are as follows:
  
 
·
Phase 1 totals approximately 1.60 mil tons (below ground and 20.51% of total tonnage)
 
·
Phase 2 totals approximately 0.67 mil tons (below ground and 8.59% of total tonnage)
 
·
Phase 3 totals approximately 1.00 mil tons (below ground and 12.82% of total tonnage)
 
·
Phase 4 totals approximately 4.53 mil tons (above ground and 58.08% of total tonnage)

Each earlier phase acts to support the later phases, meaning the next phase cannot commence until the prior phase is constructed and filled with waste.  Moreover, the revenue generation is for the entire period of landfill operations.  Since the Company believes the cost structure should mirror the fundamental interrelationship of all four phases, the Company has evaluated the total cost of completing the full construction of the landfill and viewed the landfill as one (1) unit for accounting purposes.

Interest expense in the amount of $40,769 was capitalized for the three months ended March 31, 2010.  The capitalized interest is amortized as landfill development costs.  No interest expense was capitalized during the three months ended March 31, 2011 because the Company has completed the Phase 1 construction and has not started the Phase 2 construction during that period.

The Company reviews its estimate of the total construction cost of the landfill at the end of each quarter.  The estimate, revised if necessary, is then converted from RMB to dollars based on the historical conversion rate for previously capitalized costs and the current conversion rate for estimated future costs.  As of March 31, 2011, the Company estimated that the total construction for the landfill will be $17,235,000, which was consistent with the Company’s estimate as of December 31, 2010.  These costs are for the completion of the three underground phases with minimal costs expected for the 4th phase above ground.
  
Landfill amortization expense for the three months ended March 31, 2011 and 2010 was $330,902 and $300,827, respectively.  During the three months ended March 31, 2011 and 2010, the Company disposed of 134,452 tons of waste and 126,855 tons of waste, respectively, in the landfill.

The following table shows landfill usage during the three month periods ended March 31, 2011 and 2010:
 
   
Three Months Ended
March 31,2011
   
Three Months Ended
March 31, 2010
 
Estimated total landfill capacity (tons)
    7,800,000       7,800,000  
Total cumulative tons disposed in landfill
    1,690,071       1,149,490  
Percentage of landfill used
    21.7 %     14.7 %
                 
Total tons disposed during period
    134,452       126,855  
Percentage of landfill used
    1.7 %     1.6 %


 
10

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 5.   INVENTORIES

Inventories consist of the following:
 
   
March 31, 2011
   
December 31, 2010
 
Material for use in landfill
  $ 22,795     $ 45,203  
Consigned plastics
 
 -
      207,172  
Total
  $ 22,795     $ 252,375  

NOTE 6.   LOAN RECEIVABLE

As of March 31, 2011 and December 31, 2010, the loan to an unrelated party represents a short-term loan the Company lent to Heilongjiang Guoan Real Estate Development Corp (“HGRE”) in November 2010.  The amount of the loan is RMB30 million, secured by real estate of the unrelated party.  The term is one year.  The repayment schedule is divided into two parts.  HGRE will make the first repayment of 15 million RMB on September 30, 2011.  The balance of the loan, 15 million RMB, will be due on November 29, 2011.  The interest rate is 6.372%, higher than the base interest rates of People's Bank of China by 20 basis points. The interest is paid quarterly.  Management intends and expects that the Company will hold the loan until it matures.  Accordingly, due to the short-term nature of the loan, it is being carried on the Company’s books at cost.

NOTE 7.   MAJOR CUSTOMERS

On September 1, 2003, the Company signed an exclusive 17-year agreement with Harbin Municipal Urban Administrative Bureau (“HMUAB”) to dispose of approximately one-third of the city’s solid waste disposal. The contract will expire on August 30, 2020. The revenue from HMUAB accounted for 27%% of the gross revenue for the three months  ended March 31, 2011 and 29% of the gross revenue for the three months ended March 31, 2010.
 
In January 2010, the Company signed a PET bottle processing agreement and a consignment sales agreement with Harbin Dongxin Group (“Dongxin”). In accordance with the agreements, Dongxin shall be responsible for processing, packaging and selling the PET bottles sorted from the landfill or purchased by the Company. The Company shall pay a processing fee to Dongxin in return. Dongxin sells the processed PET bottles at an agreed price.  The Company fixes a minimum resale price, which Harbin Dongxin Group must collect and remit to the Company upon sale of the recycled PET.  Harbin Dongxin Group is entitled to retain any revenue it obtains from the resale in excess of the fixed minimum price.

In March 2010, the Company signed a plastic bottle cap processing and consignment sales agreements with Harbin Bin County Welfare Plastic Products Co., Ltd (“HBC”). In accordance with the agreements, HBC will be responsible for processing the plastic bottle caps sorted from the landfill. The Company will pay a processing fee to HBC in return. The processed plastic granules will be sold by HBC at an agreed price.  The Company fixes a minimum resale price, which HBC must collect and remit to us upon sale of the granules.  HBC is entitled to retain any revenue it obtains from the resale in excess of the fixed minimum price.
 
   The following table presents sales from major customers with individual sales over 10% of total net revenue for the three months ended March 31, 2011 and 2010:

   
Three months ended March 31,
 
   
2011
   
2010
 
   
Sales
   
% of
   
Sales
   
% of
 
 
Total Sales
   
Total Sales
 
HMUAB
  $ 1,233,016       27 %   $ 1,122,699       71 %
Dongxin
    3,090,743       68 %     465,055       29 %
HBC
    213,865       5 %  
 
   
 
 
                                 
Total
  $ 4,537,624       100 %   $ 1,587,754       100.00 %
 
 

 
11

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 7.  MAJOR CUSTOMERS (Continued)

Accounts receivable related to HMUAB, Dongxin and HBC are as follows:
 
   
March 31, 2011
   
December 31, 2010
 
   
Accounts
   
% of Accounts
   
Accounts
   
% of Accounts
 
 
Receivables
   
Receivables
   
Receivables
   
Receivables
 
HMUAB
  $ 1,238,699       28 %   $ 1,246,873       23 %
Dongxin
    3,020,927       67 %     3,930,912       72 %
HBC
    208,377       5 %     267,633       5 %
Total
  $ 4,468,003       100 %   $ 5,445,418       100 %
 
NOTE 8. SEGMENT INFORMATION

The Company identified two operating segments for the three months ended March 31, 2011: landfill operation and plastic bottle sorting and recycling. The landfill operating segment provides non-hazardous municipal solid waste processing and disposal services. The plastic bottle recycling segment sorts the waste plastic bottles from the landfill the Company is operating, outsources the processing function to Dongxin and HBC and sells the processed PET bottles and plastic granules on consignment basis through Dongxin and HBC.  In addition, the Company records as a separate element of revenues the Landfill Minimum Fees, which are the payments made to the Company for landfill services when the minimum daily delivery was not met.
 
All of the Company’s revenue is from customers in the PRC.
 
The measurement of segment income is determined as earnings before income taxes. Segment incomes are reported to the Company’s chief operating decision maker (“CODM”) using the same accounting policies as those used in the preparation of these condensed consolidated financial statements. Items that are not allocated to the Company’s operating segments are comprised primarily of selling, general and administrative expenses, interest income and expenses, other income and expenses and income taxes.
 
The segment information for the reportable segments for the three months ended March 31, 2011 and 2010 and the reconciliation of reportable segment net sales and net income to the consolidated total are as follows:
 
For the Three Months Ended March 31, 2011
                 
   
Landfill
   
PET
   
Consolidated
 
   
Disposal Fees
   
Bottle Fees
   
Total
 
Revenue
  $ 1,233,016     $ 3,304,608     $ 4,537,624  
Cost of revenue
    407,300       2,691,355       3,098,655  
Gross profit
  $ 825,716     $ 613,253     $ 1,438,969  
                         
Selling, General and Administrative Expense
                  $ 218,095  
Income from operations
                  $ 1,220,874  
Other income
                  $ 73,424  
Income before income taxes
                  $ 1,294,298  
 
                       
Provision for income taxes
                  $ 168,002  
Net income
                  $ 1,126,296  


 
12

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 8. SEGMENT INFORMATION (Continued)

For the Three Months Ended March 31, 2010
                 
   
Landfill
Disposal Fees
   
PET
Bottle Fees
   
Consolidated
Total
 
                   
Revenue
  $ 1,122,699     $ 465,055     $ 1,587,754  
Cost of revenue
    356,730       95,614       452,344  
Gross profit
  $ 765,969     $ 369,441     $ 1,135,410  
                         
Selling, General and Administrative Expense
                  $ 145,918  
Income from operations
                  $ 989,492  
                         
Other income
                  $ 23,106  
Income before income taxes
                  $ 1,012,598  
                         
Provision for income taxes
                  $ 139,273  
Net income
                  $ 873,325  
 
  NOTE 9. BANK LOAN PAYABLE

On November 18, 2004, the Company received a long-term loan from Industrial and Commercial Bank of China, Harbin Branch in the amount of $4,832,960, secured by the Company’s building. The loan had a 5-year term, maturing November 15, 2009. Pursuant to the loan agreement, the interest rate for the first year was set at 7.605%. Starting from the second year and thereafter, the rates become adjustable based on the change of the official rates at the time. In addition to paying the quarterly interest, the Company is also required to make $241,648 pre-determined principal repayments every quarter, with the exception of the final two quarters in 2011, when the quarterly payment will be $302,060.
 
               On November 13, 2009, the Company obtained an extension for the above loan. The extended loan has a fixed interest rate at 6.534% per annum and matures on December 25, 2011.  In accordance with the loan extension agreement, the Company will be required to make the regular quarterly repayments as previously agreed.  
 
As of March 31, 2011 and December 31, 2010, the loan payable consists of the following:

   
March 31, 2011
   
December 31, 2010
 
Loan payable
  $ 845,768     $ 1,087,416  
Less: current portion
    845,768       1,087,416  
Loan payable - non-current portion
 
$                     -
    $ -  
 
 
 
13

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10.  INCOME TAXES
 
PRC Tax
 
Two of the Company’s operating subsidiaries, Harbin Yifeng and Yifeng Zhiye, are both registered and operate in Harbin, China. They are governed by the Income Tax Law of the People’s Republic of China concerning private-run enterprises, which are subject to tax at a statutory rate of 25%.  Management anticipates that substantially all of the profits generated by the Company’s subsidiaries will be retained in the PRC and not repatriated, except for transfers to the U.S. to pay administrative expenses of the parent corporation.
 
Upon the acquisition of Harbin Yifeng by the Company, Harbin Yifeng applied to be treated as a Wholly Foreign Owned Enterprise (“WFOE”). In accordance with the relevant income tax laws, the profits of WFOEs are fully exempted from income tax for two years, from the first profit making calendar year of operations after offset of accumulated taxable losses, followed by a 50% income tax reduction for the immediate next three calendar years (“tax holiday”).
 
Harbin Yifeng was granted the status of WFOE in the fourth quarter of 2006 with a choice of starting the tax holiday immediately or the next calendar year. Harbin Yifeng elected for this tax holiday to commence in January 2007. Its two-year tax exemption period was from January 1, 2007 to December 31, 2008 and the three-year income tax reduction period will be from January 1, 2009 to December 31, 2011.
 
The estimated tax savings as a result of tax holidays for the three months ended March 31, 2011 and 2010 amounted to $201,276, and $169,587, respectively. The net effect on earnings per share had the income tax been applied would decrease basic earnings per share for the three months ended March 31, 2011 and 2010 from $0.09 to $0.07 and from $0.07 to $0.06, respectively.

United States Tax

The Company was incorporated in the United States.  It incurred net operating losses for U.S. income tax purposes for the three months ended March 31, 2011 and 2010. Net operating loss carry forwards, including amortization of share-based compensation, for United States income tax purposes amounted to $1,196,357 and $1,154,669 as of March 31, 2011 and December 31,2010, respectively, which may be available to reduce future periods' U. S. taxable income. These carry forwards will expire, if not utilized, beginning in 2028 through 2029. Management believes that the realization of the benefits arising from this loss appear to be uncertain due to Company's limited operating history and continuing losses for United States income tax purposes. Accordingly, the Company has provided a 100% valuation allowance at March 31, 2011 for the temporary difference related to the loss carry-forwards. Management reviews this valuation allowance periodically and makes adjustments as warranted.
 
Deferred tax assets and the related valuation allowance are set forth in the table below.  The deferred tax asset for purposes of Chinese income tax is based on the amortization of landfill development costs.

   
March 31, 2011 
   
December 31, 2010 
 
USA
  $ 406,761     $ 392,587  
China
    155,137       120,719  
Less: Valuation Allowance
    (406,761 )     (392,587 )
Net
  $ 155,137     $ 120,719  


 
14

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 10.  INCOME TAXES (Continued)
 
For the three months ended March 31, 2011 and 2010, the provision for income taxes were as follows:
 
   
March 31, 2011
   
March 31, 2010
 
Current
  $ 201,276     $ 169,587  
Deferred tax benefit
    (33,274 )     (30,314 )
Total
  $ 168,002     $ 139,273  
  
NOTE 11.  STATUTORY RESERVES

EESC’s subsidiaries in China are required to allocate a portion of their after tax profits to the statutory reserve.  Appropriations to the statutory reserve are required to be at least 10% of an enterprise’s after tax retained earnings.  When the surplus reserve account balance is equal to or greater than 50% of the Company’s registered capital, no further allocation to the surplus reserve account is required.  EESC’s combined registered capital is RMB 28 million, which when 50% is converted to U. S. currency, the maximum reserve is approximately $ 2,049,000 at March 31, 2011. 

The statutory reserve fund is non-distributable other than during liquidation and can be used to fund previous years’ losses, if any, and may be utilized for business expansion or converted into share capital by issuing new shares to existing stockholders in proportion to their shareholdings or by increasing the par value of shares currently held by them, provided that the remaining statutory surplus reserve balance after such issue is not less than 25% of the registered capital.
 
If the accumulated balance of the Company’s statutory reserve is not enough to make up for the losses of the Company’s previous year, the current years’ profit shall first be used for making up the losses before the statutory reserve is drawn.  As of March 31, 2011 and 2010 the Company had accumulated after tax profits of $ 1,126,296  and  $873,325, respectively and therefore is required to make accumulative contributions of $112,630 and $87,333, respectively, to the statutory surplus reserve account.
 

 
15

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 NOTE 11.  STATUTORY RESERVES (Continued)

 
 
31-Mar-11
   
31-Mar-10
 
After tax profits
  $ 1,126,296     $ 873,325  
Percentage applied
    10 %     10 %
Addition to Accumulated Statutory Surplus Reserve
  $ 112,630     $ 87,333  
Accumulated Statutory Surplus Reserve
  $ 1,338,011     $ 655,054  
 
 NOTE 12.  DIVIDEND POLICY
 
EESC’s ability to meet its obligations in the United States depends upon the receipt of dividends or other payments from Harbin Yifeng, its operating subsidiary in China.  The payment of dividends by entities organized in China is subject to limitations, procedures and formalities.  In addition, Harbin Yifeng, from time to time, may be subject to restrictions on its ability to make distributions, including as a result of restrictive covenants in loan agreements, restrictions on the conversion of local currency into U.S. dollars or other hard currency and other regulatory restrictions.
 
 NOTE 13.   STOCK-BASED COMPENSATION

In May 2007, the Board of Directors of the Company adopted and approved the 2007 Employee Incentive Stock Option Plan (the “2007 Plan”), which authorized the issuance of up to 2,000,000 shares of common stock under the 2007 Plan. Subject to the terms and provisions of the 2007 Plan, the Board of Directors, at any time and from time to time, may grant shares of stock to eligible persons in such amounts and upon such terms and conditions as the Board of Directors shall determine.
 
The Company granted a total of 2,000,000 shares of its common stock to twenty two employees in 2007 under the 2007 Plan with a weighted average grant price of $0.49 and average vesting period of 3 years.
 
In April 2008, the Board of Directors of the Company adopted and approved the 2008 Employee Incentive Stock Option Plan (the “2008 Plan”), which authorized the issuance of up to 3,000,000 shares of common stock under the 2008 Plan. Subject to the terms and provisions of the 2008 Plan, the Board of Directors, at any time and from time to time, may grant shares of stock to eligible persons in such amounts and upon such terms and conditions as the Board of Directors shall determine.
 
The Company granted a total of 2,950,000 shares of its common stock to consultants and seven employees on April 28, 2008 under the Plan with a weighted average grant price of $0.45 and average vesting period of 10 years.

These restricted stock issuances are accounted for at fair value, based upon the closing stock price at the date of grant.  The corresponding expense is amortized over the vesting period.  A summary of the status of the Company’s non-vested shares as of March 31, 2011, and changes during the three months ended March 31, 2011, is presented below:
 
   
Shares
   
Weighted-Average
Grant Date Fair Value
 
Non-vested at December 31, 2010
    2,426,666     $ 1,197,333  
Granted
    -       -  
Vested
    83,750       41,688  
Forfeited
    -       -  
Non-vested at March 31, 2011
    2,342,916     $ 1,155,645  


 
16

 

EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


NOTE 13.   STOCK-BASED COMPENSATION (Continued)
 
A summary of the status of the Company’s deferred stock compensation under the Plan as of March 31, 2011, and changes for the three months ended March 31, 2011, is presented below:
 
Deferred stock compensation as of December 31, 2010
  $ 1,195,916  
Compensation expenses debited to statement of operations with a credit to additional paid-in capital
    (41,688 )
Deferred stock compensation as of March 31, 2010
  $ 1,154,228  
 
The total remaining unrecognized compensation related to deferred stock issuances will be amortized over the weighted-average remaining requisite service period of eight years.
 
On June 9, 2010, the Company entered into Independent Directors Contracts with two new directors. The Company agreed to pay these directors a total cash fee of $54,000 per annum and to issue to them common stock valued at $60,000 on June 9, 2011, if they remain on the Board on that date.


 
17

 

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Forward-Looking Statements: No Assurances Intended
 
In addition to historical information, this Quarterly Report contains forward-looking statements, which are generally identifiable by use of the words “believes,” “expects,” “intends,” “anticipates,” “plans to,” “estimates,” “projects,” or similar expressions. These forward-looking statements represent Management’s belief as to the future of Eastern Environment Solutions, Corp.  Whether those beliefs become reality will depend on many factors that are not under Management’s control.  Many risks and uncertainties exist that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed in Section 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 entitled “Risk Factors.” Readers are cautioned not to place undue reliance on these forward-looking statements. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements.
 
Results of Operations
 
The agreements we made with Harbin Dongxin Group and Harbin Bin County Welfare Plastic Products Co. in 2010 marked the expansion of our business from waste storage toward the efficient recycling of waste into value-added products.  The use of polyethylene terephthalate (“PET”) by the bottling industry has increased dramatically in the past decade, as has the demand for recycled PET for a variety of industrial purposes, especially as a component of solar-heating installations.  With both supply and demand for PET established, the logic of positioning ourselves as middleman becomes evident.  Since January 2010, we have been removing the PET bottles from waste deposited in the Harbin landfill and delivering the bottles to Harbin Dongxin Group on a consignment basis.  Since April 2010 we have also been purchasing PET bottles from third parties and consigning them to Harbin Dongxin Group.  We pay Harbin Dongxin Group a per-ton fee for processing the bottles into usable PET, and then we consign the resulting PET to Harbin Dongxin Group for resale to industry.  We fix a minimum resale price, which Harbin Dongxin Group must collect and remit to us upon sale of the recycled PET.  Harbin Dongxin Group is entitled to retain any revenue it obtains from the resale in excess of the fixed minimum price.

The terms of our agreement with Harbin Bin County Welfare Plastic Products Co. mimic the agreement with Harbin Dongxin Group.    Since we re-started operations at the Harbin landfill in November 2009, we have been removing plastic bottle caps from the waste deposited there.  In March 2010 we engaged Harbin Bin County Welfare Plastic Products Co. to accept the bottle caps on a consignment basis.  We pay Harbin Bin County Welfare Plastic Products Co. a per-ton fee for grinding the bottle caps into plastic granules, and then we consign the resulting granules to Harbin Bin County Welfare Plastic Products Co. for resale to industry.  We fix a minimum resale price, which Harbin Bin County Welfare Plastic Products Co. must collect and remit to us upon sale of the granules.  Harbin Bin County Welfare Plastic Products Co. is entitled to retain any revenue it obtains from the resale in excess of the fixed minimum price.

 
18

 

The sale of recovered materials has quickly become our leading source of revenue.  In the first quarter of 2011 the sale of recovered PET bottles and bottle caps produced 73% of our revenue ($3,304,608).  With the $1,233,016 contributed by HMUAB reimbursements for our landfill operations, we increased revenue from $1,587,754 in the first three months of 2010 to $4,537,624 in the first three months of 2011.  At March 31, 2011 we had no PET in inventory, as a result of which second quarter PET sales may lag the first quarter.  For the future, however, we expect growth to continue.  We plan to expand our waste processing operations by (a) pursuing strategic acquisitions, (b) developing additional landfills, and (c) implementing additional recycling technologies that will provide additional revenue sources, such as the sale of methane to the electric power industry.  Given China’s continuing growth, we believe there will be numerous market opportunities.

Our landfill operations during the three months ended March 31, 2011 yielded a gross margin of 67% - i.e. $825,716 in gross profit.  The primary component of our cost of landfill sales is amortization of the landfill cost - $336,224 out of total landfill costs of $407,300 in the three months ended March 31, 2011.  We initiated operations at the landfill when only the lowest level of the landfill had been made ready for use.  However, since each level is dependent on the levels below it, we determined that the landfill expense could best be correlated with revenue by amortizing the estimated total landfill development cost, using the ratio of actual tonnage disposed in the landfill to the total anticipated capacity of the landfill.  As of March 31, 2011, our estimate of the total cost of constructing the landfill was $17,235,000.  We determine the quarterly amortization amount by multiplying that estimated total investment by the ratio of the landfill capacity used during the three months ended March 31, 2011 (134,342 tons - i.e. 1.7% of total capacity) to the estimated total capacity (7,800,000 tons).

Our estimate that the total capacity of the landfill will be 7,800,000 tons was made on a gross basis.  Actual usage should exceed that amount.  This occurs, in part, because we are actively removing PET recyclables and may in the future remove other recyclable materials, which releases space for additional deposits.  Additional space is also released as organic material in the waste degrades.  As a result of these factors, the Phase 1 portion of the landfill, which has an estimated capacity of 1.6 million tons, is still in use after 1.69 million tons have been deposited.  When Phase 1 is complete, we will recalculate our estimate of total landfill capacity based on that experience, and, as needed, adjust our amortization schedule.  An increase in our estimate of total landfill capacity will result in a reduction in the amortization rate and the corresponding quarterly landfill amortization expense.

Our PET bottle and cap sales yielded a gross margin of 19% - i.e. $613,253 in gross profit.  This represented a marked reduction from the 41% gross margin we achieve on PET operations in 2010 (79% in the first quarter of 2010).  The primary components of our cost of bottle and cap sales are:
 
 
·
the purchase price for bottles that we purchase from third party providers;
 
·
the salaries we pay labor to extract the plastics from the Landfill; and
 
·
the fees that we pay to have the bottles and caps processed for resale as PET.
 
The reduction in PET bottle and cap gross margin from 2010 to the first quarter of 2011 is primarily attributable to the fact that the greater portion of the PET we sold in 2011 was purchased from third party providers, and market prices have been increasing.  In addition, the value added tax was imposed on sales in the recent quarter at a rate of 17%, compared to a 3% value added tax on sales in the first quarter of 2010.

 
19

 

Overall, our gross margin for the first quarter of 2011 was 32%, as we recorded $1,438,969 in gross profit.  Despite the 185% increase in our revenues, our gross profit increased from March 31, 2010 to March 31, 2011 by only $303,559 - 27% - due to the low margin on our PET bottle and cap sales.
 
Our selling, general and administrative expenses (“SG&A”) continued to be modest relative to revenues:  $218,095 in the three months ended March 31, 2011 (4.8% of revenue), and $145,918 in the three months ended March 31, 2010 (9.1% of revenue).  The increase in SG&A expense was primarily attributable to the fee of $73,039 payable to our ex-CFO and our independent directors for services during the first quarter of 2011.  In both periods, a large component of our SG&A expense was the expensing of stock compensation that we gave to employees and consultants in 2008 as incentives for future services:  $41,688 in the three months ended March 31, 2011 and $95,688 in the three months ended March 31, 2010.  The $1,154,229 in deferred stock compensation expense remaining at March 31, 2011 will be amortized as expenses over the expected terms of service of the employees and consultants who received the shares.

The Company’s revenue less expenses resulted in a pre-tax income of $1,294,298 for the first quarter of 2011, compared to pre-tax income of $1,012,598 during the first quarter of 2010.  As a result of Chinese tax laws that reward foreign investment in China, Yifeng was entitled to exemption from income taxes during 2007 and 2008, followed by a 50% abatement of taxes from 2009 to 2011.  In the first quarter of 2011, after accruing $168,002 for income taxes, our net income was $1,126,296, representing $0.09 (diluted $0.08) per share, compared to net income of $873,325 ($.07 per share; $.06 per share fully diluted) in the first quarter of 2010.

Our business operates entirely in Chinese Renminbi, but we report our results in U.S. Dollars.  The conversion of our accounts from RMB to Dollars results in translation adjustments.  While our net income is included in the retained earnings on our balance sheet; the translation adjustments are included in a line item on our balance sheet labeled “accumulated other comprehensive income,” since it is more reflective of changes in the relative values of U.S. and Chinese currencies than of the success of our business.  During the first quarter of 2011, the effect of converting our financial results from RMB to U.S. Dollars was to increase our accumulated other comprehensive income by $102,199.  During the first quarter of 2010, the effect of converting our financial results from RMB to U.S. Dollars was to reduce our accumulated other comprehensive income by $48,918.

Liquidity and Capital Resources
 
To date, we have financed our operation and met capital expenditure requirements primarily through bank loans and operating income.  On November 18, 2004, the Company received a long-term loan from Industrial and Commercial Bank of China, Harbin Branch in the amount of $4,832,960, secured by the Company’s building.  The loan was for a 5-year term, maturing November 15, 2009 with interest adjustable based on official rates.  The loan agreement does not include any financial covenants with which the Company must comply.  In November 2009 the Bank extended the due date of the loan to December 25, 2011 and fixed the interest rate at 6.534% per annum.  In addition to paying the quarterly interest, the Company is also required to make $241,648 pre-determined principal repayments every quarter, with exception of the final two quarters wherein the payment will be $302,060.

 
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As the loan from the Industrial and Commercial Bank of China is payable in full at the end of 2011, the Company had no long-term debt service obligations as of March 31, 2011.

Our working capital at March 31, 2011 totaled $12,079,564, an increase of $1,449,984 from our working capital at December 31, 2010.  The increase was mainly attributable to our net income, as our operations during the first quarter of 2011 provided us $2,743,980 in cash.

The largest component of working capital at March 31, 2011 was a loan to unrelated party of $4,581,132.  This loan was made in November 2010 to the Heilongjiang Guoan Real Estate Development Corp., and is secured by a pledge of real estate by an unrelated party.  Half of the principal of the loan is due on September 30, 2011, the remainder on November 29, 2011.  Interest is payable quarterly at 6.372% per annum.  Harbin Yifeng made the loan in order to obtain a better return on its cash reserves than can be obtained from bank deposits in China.  The borrower is a well-established entity, and management does not believe that there is an unreasonable risk of default.
 
The next largest component of our working capital at March 31, 2011 consisted of $4,468,003 in accounts receivable.  This represents a reduction of $977,415 from our accounts receivable at December 31, 2010.  Our receivable from HMUAB was $1,238,699, no portion of which was more than three months old.  Accordingly, we do not consider the receivable to be at risk.  The remainder of our receivables is owed to us by the two companies to which we sell PET bottles and caps.  Our terms of sale to these two companies require payment in ninety days, and each of them has paid on time throughout the period of our relationship.  For these reasons, we have made no provision for doubtful accounts as of March 31, 2011.

Our operations during the first quarter of 2011 provided $2,743,980 in net cash, more than double our net income for the quarter.  This is due to the reduction in our accounts receivable and the sell-through of the PET bottle inventory that we held at December 31, 2010.  During the first quarter of 2010, by comparison, our operations provided $786,561 in cash, which was slightly less than our net income for that quarter.

During the first quarter of 2010, a loan that we had made during the period when our operations were suspended was repaid to us, resulting in a substantial provision of net cash from investing activities.  In the recent quarter our investing activities used $131,692 in cash, most of which was an expenditure for construction activity.

In both the first quarter of 2011 and the first quarter of 2010 we used $241,648 for financing activities, specifically payments on account of our bank loan.  The bank loan will be satisfied in December of this year, unless we refinance it.
 
Our operating subsidiary, Yifeng, has sufficient liquidity to fund its near-term operations and to fund the working capital demands of a modest expansion of its operations.  Based on our current estimate of future usage of the Harbin Landfill, we expect to incur the following capital expenditures to complete Phase II and Phase III of the Landfill project:
 

 
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Additional
Capacity
Incurred to Date
Estimated Additional Cost
to Complete
Estimated
Completion Date
Phase II
670,000 tons
$2.4 million
$1.30 million
2013
Phase III
1,000,000 tons
--
$4.48 million
2016
Total
   
$5.78 million
 

If we are able to maintain our recent level of cash flow from the Harbin Landfill operation, we should be able to fund the completion of Phase II and Phase III from our internal capital resources.  However, if we are to achieve critical mass in our industry by developing or acquiring new landfills, we will require substantial infusions of capital.  We do not know at this time whether we will be able to secure such financing, or on what terms it might be available.

Based upon the financial resources available to Yifeng, management believes that it has sufficient capital and liquidity to sustain operations for at least the next twelve months.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition or results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T.  CONTROLS AND PROCEDURES

(a)           Evaluation of disclosure controls and procedures.
 
The term “disclosure controls and procedures” (defined in SEC Rule 13a-15(e)) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within required time periods. The Company’s management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this quarterly report (the “Evaluation Date”).  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the Evaluation Date, the controls and procedures were not effective.  The weaknesses in the Company’s controls and procedures consisted of a lack of expertise in identifying and addressing complex accounting issued under U.S. Generally Accepted Accounting Principles among the personnel in the Company’s accounting department.

(b)           Changes in internal controls.
 
The term “internal control over financial reporting” (defined in SEC Rule 13a-15(f)) refers to the process of a company that 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. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the fiscal quarter covered by this report, and they have concluded that there was no change to the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


 
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PART II   -   OTHER INFORMATION
 
Item 1.   Legal Proceedings.
 
None.

Item 1A.Risk Factors.
 
There have been no material changes from the risk factors included in the Annual Report on Form 10-K for the year ended December 31, 2010.

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.
 
       (a)   Unregistered Sale of Equity Securities
 
None.
  
   (c)    Repurchase of Equity Securities
 
The Company did not repurchase any shares of its common stock during the 1st quarter of 2011.

Item 3.   Defaults Upon Senior Securities.
 
None.

Item 4.   Reserved.
Item 5.   Other Information.
 
None.
 
Item 6.   Exhibits
 
31.1
Rule 13a-14(a) Certification - CEO
 
31.2
Rule 13a-14(a) Certification - CFO
 
32
Rule 13a-14(b) Certifications
 

 
 
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SIGNATURES

Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the undersigned thereunto duly authorized.

 
EASTERN ENVIRONMENT SOLUTIONS, CORP.
   
Date: May 16, 2011
By: /s/ Feng Yan
 
Feng Yan, Chief Executive Officer
 
 


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