Landfill Development Costs

3 Months Ended

Sep. 30, 2011

NOTE 4. LANDFILL DEVELOPMENT COSTS

Landfill development costs consisted of the following:

	September 30, 2011			December 31, 2010

Machinery and equipment	$	1,584,192		$	1,197,396
Landfill project		2,419,629			2,339,725
Construction in progress		3,886,312			3,689,304
Advances to suppliers		4,359,664			4,215,693
Subtotal		12,249,797			11,442,118
Less: accumulated depreciation		(4,994,704	)		(3,814,934	)
Total Landfill development costs, net	$	7,255,093		$	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 Condensed Consolidated Balance Sheets as of September 30, 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 phases in order to comply with certain structural requirements. The first three phases represent construction on three adjacent areas. Each includes primarily below-ground landfill plus an above-ground cap. The fourth phase will be entirely above-ground, and will be constructed atop the areas developed in phases 1 through 3. 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.

The build outs to accommodate the gross estimate are as follows;

	·	Phase 1 totals approximately 2.90 mil tons (37.18% of total tonnage)
	·	Phase 2 totals approximately 1.40 mil tons (17.95% of total tonnage)

	·	Phase 3 totals approximately 1.50 mil tons (19.23% of total tonnage)
	·	Phase 4 totals approximately 2.00 mil tons (25.64% 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.

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 September 30, 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 initial phases with minimal costs expected for the 4th phase above ground.

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. Phase 1 of our Landfill construction is expected to continue into 2014, and we will then commence use of the Phase II portion of the Landfill without interruption. As we reach completion of Phase I, 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.

Landfill amortization expense for the three months ended September 30, 2011 and 2010 was $360,903nd $351,047 respectively. Landfill amortization expense for the nine months ended September 30, 2011and 2010 was $1,031,318 and $943,778, respectively. During the nine months ended September 30, 2011 and 2010, the Company disposed of 413,817 tons of waste and 396,754 tons of waste, respectively, in the landfill.

The following table shows landfill usage during the three and nine month periods ended September 30, 2011 and 2010:

	Three Months Ended September30, 2011			Three Months Ended September 30, 2010			Nine Months Ended September 30, 2011			Nine Months Ended September 30, 2010
Estimated total landfill capacity (tons)		7,800,000			7,800,000			7,800,000			7,800,000
Total cumulative tons disposed in landfill		1,969,436			1,419,389			1,969,436			1,419,389
Percentage of landfill used		25.2	%		18.2	%		25.2	%		18.2	%

Total tons disposed during period		143,031			136,398			413,817			396,754
Percentage of landfill used		1.83	%		1.75	%		5.31	%		5.09	%

Interest expense in the amount of $32,324 was capitalized for the three months ended September 30, 2010, and in the amount of $110,383 was capitalized for the nine months ended September 30, 2010. The capitalized interest is amortized as landfill development costs. No interest expense was capitalized during the nine months ended September 30, 2011 because the Company has completed the Phase 1 construction and has not started the Phase 2 construction.