U. S. Securities and Exchange Commission


Washington, D. C. 20549





FORM 10-Q/A


(Amendment 1)





[X]
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2010[  ]
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For 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.




YesX                  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 ___   Small reporting companyX




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 17, 2010: Common Voting Stock: 14,970,186





EASTERN ENVIRONMENT SOLUTIONS, CORP.


QUARTERLY REPORT ON FORM 10Q/A


FOR THE FISCAL QUARTER ENDED MARCH 31, 2010







TABLE OF CONTENTS


Page NoPart I
Financial InformationItem 1.
Unaudited Financial Statements:Condensed Consolidated Balance Sheet – March 31, 2010 and December 31, 2009
2Condensed Consolidated Statements of Income and Comprehensive Income – for the Three Months Ended March 31, 2010 and 2009
3Condensed Consolidated Statements of Cash Flows – for the Three Months  Ended March 31, 2010 and 2009
4Notes to Condensed Consolidated Financial Statements
5Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23Item 3.
Quantitative and Qualitative Disclosures about Market Risk
26Item 4.
Controls and Procedures
26Part II
Other InformationItem 1.
Legal Proceedings
27Items 1A.
Risk Factors
27Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27Item 3.
Defaults upon Senior Securities
27Item 4.
Reserved
27Item 5.
Other Information
27Item 6.
Exhibits
27Signatures




















EXPLANATORY NOTE





This Form 10-Q/A (“Amendment No.1”) is being filed by Eastern Environmental Solutions Corp. (the “Company”) to amend the Company’s Form 10-Q for the quarter ended March 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on May 17, 2010 (“Initial 10-Q”).  This Amendment No.1 is filed to





●
amend the Company’s unaudited condensed consolidated financial statements for the three months ended March 31, 2010,


●
amend the disclosures in the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations and


●
amend disclosures in “Management’s Report on Internal Controls over Financial Reporting” section under Item 4.


●
add Note 2 to the Unaudited Condensed Consolidated Financial Statements on the impact of the restatement on our financial statements for the three months ended March 31, 2010 and March 31, 2009;


●
modify Note 4, Property and Equipment, to the Unaudited Condensed Consolidated Financial Statements;




These changes were made as a result of a review by the Company of its policies regarding recognition of revenue and expenses associated with waste disposal operations at the landfill it operates in Harbin, China.  The Company’s revised accounting policies and the changes to its historical financial statements that have resulted from implementation of the revised policies are set forth in Note 2 to the Unaudited Condensed Consolidated Financial Statements.





No changes, other than those that followed logically from the changes described above, have been made to the Initial 10-Q.  None of the other information included in the Initial 10-Q has been updated.  For current information regarding Eastern Environment Solutions, Corp., you should refer to the more recent filings made on EDGAR by the Company.





EASTERN ENVIRONMENT SOLUTIONS, CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETSMarch 31,


December 31,2010


2009Restated


RestatedASSETSCurrent assets:Cash and cash equivalents

$
1,298,677


$
428,052Accounts receivable


4,700,006



4,253,203Inventory


52,964



42,650Other receivables


778



440,208Loans to related parties


65,519



42,828Total Current Assets


6,117,944



5,206,941Property and equipment, net of accumulated depreciation of$48,448 and $44,360, respectively


120,115



124,175Landfill development costs, net of amortization of$2,726,623 and $2,423,871, respectively


7,974,147



8,232,899Deferred Tax Assets


19,688



-Total Assets

$
14,231,894


$
13,564,015LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Bank loan payable - current portion

$
966,592


$
966,592Accounts payable


810



810Taxes payable


183,582



174,375Deferred Tax Liability


-



10,631Accrued expenses and other payables


83,049



92,192Total Current Liabilities


1,234,033



1,244,600Long-term liabilities:Bank loan payable - net of current portion


845,768



1,087,416Total Liabilities


2,079,801



2,332,016Commitments and ContingenciesStockholders' EquityCommon stock, $0.0001 par value, 100,000,000 shares authorized;14,970,186 shares issued and outstanding as of March 31, 2010 and December 31, 2009


1,497



1,497Additional paid-in-capital


3,931,852



3,836,165Accumulated other comprehensive income


1,668,213



1,717,131Statutory reserves


655,054



567,721Retained earnings - Unappropriated


5,895,477



5,109,485Total Stockholders' Equity


12,152,093



11,231,999Total Liabilities and Stockholders' Equity

$
14,231,894


$
13,564,015
 
 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
  2
 EASTERN ENVIRONMENT SOLUTIONS, CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOMETHREE MONTHS ENDED MARCH 31,2010


2009Restated


RestatedRevenues-

Landfill

$
1,122,699


$
442,345-

PET bottle sales


465,055



-1,587,754



442,345Cost of Goods Sold-

Landfill


356,730



--

PET bottle sales


95,614



-452,344



-Gross Profit


1,135,410



442,345Selling, General and Administrative Expense


145,918



183,657Income from operations


989,492



258,688Other Income (Expense)Interest income


23,226



7,161Interest expense


-



(58,734
)Other expense


(120
)


-Total other income, net


23,106



(51,573
)Income from Operations before Income Taxes


1,012,598



207,115Provision for Income Taxes


139,273



45,349Net Income


873,325



161,766Other Comprehensive Income -Foreign currency translation loss


(48,918
)


(25,323
)Comprehensive Income

$
824,407


$
136,443Basic & Diluted Income Per ShareBasic

$
0.07


$
0.01Diluted

$
0.06


$
0.01Weighted Average Number of Common Shares OutstandingBasic


11,969,910



11,101,574Diluted


14,970,186



14,970,186





The accompanying notes are an integral part of these unaudited condensed consolidated financial statements


3


EASTERN ENVIRONMENT SOLUTIONS, CORP. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSTHREE MONTHS ENDED MARCH 312010


2009Restated


RestatedCash Flows From Operating Activities:Net income

$
873,325


$
161,766Adjustments to reconcile net income to net cash provided by(used in) operating activities:Depreciation and amortization


304,915



4,075Amortization of stock-based compensation


95,688



95,688Deferred tax expense (benefit)


(30,315
)


7,149Changes in operating assets and liabilities:Accounts receivable


(446,803
)


(438,415
)Inventory


(10,314
)


18,955Accounts payable


-



(77
)Taxes payable


9,208



38,195Accrued expenses and other payables


(9,143
)


(16,348
)Net cash provided by (used in) operating activities


786,560



(129,012
)Cash Flows From Investing Activities:Additions to construction in process


-



(42,256
)Payment of capitalized interests for construction loan


(40,769
)


-Collections on loans to unrelated party


439,430



-Payments on loans to related party


(22,692
)


(526,507
)Collections on loans to related parties


-



226,397Net cash provided by (used in) investing activities


375,969



(342,366
)Cash Flows From Financing ActivitiesRepayment of bank loan payable


(241,648
)


(24,165
)Net cash used in financing activities


(241,648
)


(24,165
)Effect of exchange rate changes on cash and cash equivalents


(50,257
)


(11,604
)Increase (decrease) in Cash and Cash Equivalents


870,625



(507,147
)Cash and Cash Equivalents - Beginning of period


428,052



1,112,487Cash and Cash Equivalents - End of period

$
1,298,677


$
605,340Supplemental Cash Flow Information:Cash paid during the periods:Interest expense

$
40,769


$
59,018Income taxes

$
-


$
-


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
  4
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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 unaudited 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 (“U.S. GAAP”).





NOTE 2. RESTATEMENT





The Company has restated its unaudited condensed consolidated financial statements for the three months ended March 31, 2010 and 2009 for the following reasons:





The Company has determined that revenue should be recognized using three different revenue models.





For revenue associated with waste disposed at the landfill, the Company has determined the appropriate revenue recognition policy to be the greater of the minimum rate per contract or the actual tonnage disposed of during the periods, whichever is greater.  The Company will also disclose separately the actual tonnage disposed each year in order to match the cost of revenue with the actual disposal activities.





As part of the Franchise Agreement, the Company has the right to charge minimum fees per day. During the periods of suspension, June 2007 through November 2009, refer to footnote 14, by the Harbin County Government, the Company only collected the minimum fees.  The Company has determined the minimum fee revenue should be disclosed separately as these fees will result in a different cost of revenue model. The minimum fees were negotiated to reimburse the Company for administrative costs of the business.





The Company records revenue associated with separating the waste and reselling bottles based on the actual tonnage delivered to the bottling customer, times the rate set by the Company, plus the costs of labor.  The amount of waste separated reduces the actual tons disposed in the landfill each period.





The Company has evaluated the cost of revenue separately from the revenue model.  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 for compliance with certain structural requirements.  In order to start the next phase of construction, the prior phase must be completed.  Each earlier phase acts to support the later phases.  The Company has estimated the total costs to fully construct the landfill, however, the revenue generation is for the entire landfill period and the Company believes the cost structure should mirror the same period.





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, even though it will be constructed in four (4) separate phases.  The Company anticipates the total landfill capacity of approximately 7.8 million tons.  The build outs will be 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)


5
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


The total construction will cost approximately $17.235 million.  These costs are for the completion of the three underground phases with minimal costs expected for the 4th phase above ground.  The Company has concluded that each underground phase is used to support the above ground landfill.  Each phase will build upon the prior phase, meaning the next phase cannot commence until the prior phase is constructed and filled with waste.





The landfill costs will be amortized over the period the revenues are earned or more specifically over the total tonnage disposed in the landfill (i.e. over the full four (4) phases).  However, this amount will not equal the tonnage received from the Municipality, which is used to determine the revenue billed each period to the Municipality.  Instead, this amount of tonnage each period will be reduced as a result of separating the bottles for resale.





All costs, including the added labor costs, for separating the waste in order to resell the bottles will be reported as such for each period.





Summary of Restatement:





Previously, the Company disclosed separately amounts pertaining to landfill costs, construction in progress and advances to suppliers.  As a result of further analysis, the Company has determined all of these assets relate to the landfill and therefore should not be stated separately.  The Company has reclassified these amounts into one caption on the unaudited condensed consolidated balance sheets.  Refer to footnote No. 4.





Additionally, the Company reclassified certain cost of revenues as administrative expenses during the landfill suspension period, restated cost of sales to reflect the amortization of landfill development costs based on actual tonnage disposed of in the landfill in proportion to the total anticipated landfill capacity, and expensed previously capitalized interest during the respective periods.





As part of this reclassification, the Company will also comply with its impairment testing in accordance with impairment of long-lived assets as required by professional standards.





The impact of this restatement on the unaudited consolidated financial statements for the three month periods ended March 31, 2010 and 2009 as previously reported is summarized below:




March 31, 2010


December 31, 2009As Previously


As


As Previously


AsReported


Restated


Reported


RestatedTotal Assets

$
16,200,978


$
14,231,894


$
15,309,927


$
13,564,015Landfill Development Costs, net


-



7,974,147



-



8,232,899Fixed Assets, net


6,298,421



120,115



6,319,005



124,175Advances to Suppliers


3,784,613



-



3,783,981



-Statutory Reserves


186,156



655,054



186,156



567,721Retained Earnings

$
8,104,987


$
5,895,477


$
7,019,463


$
5,109,485For the three months ended


For the three months endedMarch 31, 2010


March 31, 2009As Previously


As


As Previously


AsReported


Restated


Reported


RestatedRevenues

$
1,587,754


$
1,587,754


$
442,345


$
442,345Cost of revenue


209,831



452,344



103,218



-Gross profit


1,377,923



1,135,410



339,127



442,345Selling, general and administrative expenses


145,918



145,918



137,631



183,657Operating income


1,232,005



989,492



201,496



258,688Interest expense


-



-



-



59,018Net income

$
1,085,524


$
873,325


$
170,741


$
161,766Comprehensive income

$
1,036,949


$
824,407


$
142,703


$
136,444Income per shareBasic

$
0.08


$
0.07


$
0.01


$
0.01Diluted

$
0.07


$
0.06


$
0.01


$
0.01For the three months ended


For the three months endedMarch 31, 2011


March 31, 2009As Previously


As


As Previously


AsReported


Restated


Reported


RestatedNet cash provided by (used in) operating activities




No Change


$
(69,995
)

$
(129,012
)Net cash provided by investing activities










(388,753
)


(342,366
)Net cash used in financing activities










(24,165
)


(24,165
)Effect of exchange rate changes on cash and cash equivalents










(24,234
)


(11,604
)Decrease in cash and cash equivalents










(507,147
)


(507,147
)Cash and cash equivalents









$
605,340


$
605,340


6
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS







NOTE 3. 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 principal 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.





The unaudited interim condensed consolidated financial statements furnished herein included all adjustments, all of which are of a normal recurring nature, necessary for a fair statement of the results for the interim period presented.  Interim results are not necessarily indicative of the results that maybe expected for a full tear.  The information included in this Form 10-Q/A should be read in conjunction with information included in the Company’s Annual Report on Form 10-K/A (Amendment 2) for the year ended December 31, 2009, filed with the Securities and Exchange Commission on March 15, 2011.





Cash and cash equivalents





For purposes of the statement of cash flow, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.





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. Therefore, no allowance for doubtful accounts was deemed necessary at March 31, 2010 or December 31, 2009.





Inventory





Inventory mainly consists of materials and supplies to be used in the regular day-to-day operations.  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.





All of the Company's assets are located in The People's Republic of China. During the three months ended March 31, 2010, the Company operated in two business segments - landfill segment and plastic bottles sorting and recycling segment.  The Company operated in one business segment for the three months ended March 31, 2009.





7
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Landfill development costs





Landfill Development Costs, which also includes advances to suppliers representing payments made for machinery, supplies and equipment and construction in progress costs related to the construction of the landfill, are stated at cost, net of accumulated amortization.  Amortization is computed on a units of measure basis.  In preparing the condensed consolidated financial statements, the Company determined that it would amortize construction costs, based on actual tonnage, in proportion to the full anticipated capacity of the landfill.  The determination was based on the assessment that it is probable that the Company will continue to utilize the Harbin landfill for the full term of the Build Operate and Transfer (“BOT”) agreement and that, in that period, the landfill is filled to capacity.  The Company determined that the units of measure method of accounting for landfill development costs more accurately reflect 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.  The Company believes this method of accounting more accurately reflects the characteristics of their agreement with HMUAB.





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 balance sheets as of March 31, 2010 and December 31, 2009.  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 2010 and 2011.





Revenue recognition





The Company recognizes revenue in accordance with ASC 360, which states that revenue, should not be recognized until it is realized or realizable and earned.  In general, the Company 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 disposed at the landfill, the Company has determined the appropriate revenue recognition policy to be the greater of the minimum rate or the actual tonnage disposed of during the period, whichever is greater.  The Company also discloses separately the actual tonnage disposed each period in order to match the cost of revenues with the actual disposal activities.  See Note 4 for cost of revenue.





As part of the Franchise Agreement with the Harbin landfill, the Company had the right to charge minimum fees per day and during the periods of suspension by the Harbin County Government.   Minimum fee revenue is disclosed separately as these fees result in a different cost of revenue model. The minimum fees were negotiated to reimburse the administrative costs.





The Company’s revenue is derived primarily from its solid waste disposal operations and bottle recycling operations. For the solid waste disposal operations, the Company recognizes revenue upon the arrival of the solid waste at the landfill. 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.





8
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Income taxes





The Company accounts for income tax under the provisions of Financial Accounting Standard Board (“FASB”) Accounting Standards Codification (“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 income tax reduction period will be from January 1, 2009 to December 31, 2011.





The Company, as a result of restating its prior year financial statements, has recorded deferred tax assets, relating to the timing of expensing landfill development costs using a units of measure method verses a straight line method.  However, the Company has deferred tax assets that relate to its net operating loss in the U. S., which is not covered by the tax holiday.





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 Accounting Standards Codification (“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 than 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 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.








9
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Foreign currency translation





The Company’s 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.





Stock-based compensation





Stock-based compensation is in accordance with ASC 718 and 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 quarters ended March 31, 2010 and 2009, $95,688 stock based compensation expense for each period was recorded in selling, general and administrative expenses, respectively.





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 31,2010


2009Net income

$
873,325


$
161,766Shares (denominator):Weighted average common shares outstanding - basic


11,969,910



11,101,574Earnings per share - basic

$
0.07


$
0.01Plus: effect of diluted securities - unvested compensation


3,000,276



3,868,612SharesWeighted average common shares outstanding - diluted


14,970,186



14,970,186Earnings per share - diluted

$
0.06


$
0.01








10
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





New accounting pronouncements




In December, 2009, FASB issued ASU No. 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. This Accounting Standards Update amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 167, Amendments to FASB Interpretation No. 46(R). The amendments in this Accounting Standards Update replaced the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which reporting entity has a controlling financial interest in a variable interest entity. The amendments in this Update also require additional disclosures about a reporting entity’s involvement in variable interest entities, which will enhance the information provided to users of financial statements. The Company has determined the adoption of this ASU does not have material impact on its financial statements.





In January 2010, FASB issued ASU No. 2010-06 – Improving Disclosures about Fair Value Measurements. This update provides amendments to Subtopic 820-10 that requires new disclosure as follows: 1) Transfers in and out of Levels 1 and 2.  A reporting entity should disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers.  2)  Activity in Level 3 fair value measurements.  In the reconciliation for fair value measurements using significant unobservable inputs (Level 3), a reporting entity should present separately information about purchases, sales, issuances, and settlements (that is, on a gross basis rather than as one net number). This update provides amendments to Subtopic 820-10 that clarifies existing disclosures as follows: 1) Level of disaggregation. A reporting entity should provide fair value measurement disclosures for each class of assets and liabilities. A class is often a subset of assets or liabilities within a line item in the statement of financial position. A reporting entity needs to use judgment in determining the appropriate classes of assets and liabilities. 2) Disclosures about inputs and valuation techniques. A reporting entity should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Those disclosures are required for fair value measurements that fall in either Level 2 or Level 3. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The Company has determined the adoption of this ASU does not have a material impact on its financial statements.







11
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 4.  LANDFILL DEVELOPMENT COSTS AND PROPERTY AND EQUIPMENT





March 31, 2010


December 31, 2009Property and Equipment

$
168,563


$
168,535Less: accumulated depreciation


(48,448
)


(44,360
)Total property and equipment, net

$
120,115


$
124,175Landfill development costsMachinery and equipment

$
1,100,918


$
1,097,761Landfill


2,316,065



2,129,168Construction in progress


3,499,174



3,645,860Advances to suppliers


3,784,613



3,783,981Subtotal


10,700,770



10,656,770Less: accumulated amortization


(2,726,623
)


(2,423,871
)Total Landfill development costs, net

$
7,974,147


$
8,232,899




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, 2010 and March 31, 2009 was $4,088 and $4,075, respectively.





Landfill development costs represents 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.  In preparing the Consolidated Financial Statements, the Company determined that it would amortize landfill development costs, based on actual tonnage, in proportion to the full anticipated capacity of the landfill.  The determination was based on the assessment that it is probable that the Company will continue to utilize the Harbin landfill for the full term of the BOT agreement and that, in that period, the landfill is filled to capacity.  The Company determined that the units of measure method of accounting for landfill development costs more accurately reflect 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.  The Company has determined this method of accounting more accurately reflects the characteristics of their agreement with HMUAB.  The total construction is expected to cost approximately $17,235,000.





Landfill development costs include advances to suppliers representing payments made for machinery, supplies and equipment related to the construction of the landfill.  The Company determined that it would not establish a reserve against the advances to suppliers that are included in landfill development costs on the balance sheets as of March 31, 2010 and December 31, 2009.  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 2010 and 2011.




12
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 4.   LANDFILL DEVELOPMENT COSTS AND PROPERTY AND EQUIPMENT (Continued)





The Company has no obligations relating to capping, closure or other post-closure obligations; accordingly no reserve for post-closure activities has been established.





Landfill amortization expense for the three months ended March 31, 2010 and 2009 was $300,827 and $0, respectively.  During the three months ended March 31, 2010, the Company disposed of 126,855 tons of waste in the landfill.  During the three months ended March 31, 2009  the Company did not dispose of any waste due to the suspension of operations at the landfill.  Accumulative tonnage from inception is 1,149,490 tons as of March 31, 2010 and 961,702 tons as of March 31, 2009.





Interest expense in the amount of $40,769 was capitalized for the three months ended March 31, 2010 and will be included in landfill development costs.  Interest expense of $59,018 was not capitalized during three months ended March 31, 2009 during the suspension period.  The capitalized interest is amortized as landfill development costs.





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.  The build outs will be 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.





The total construction will cost approximately $17.235,000.  These costs are for the completion of the three underground phases with minimal costs expected for the 4th phase above ground.





The landfill costs will be amortized over the period the revenues are earned or more specifically over the total tonnage disposed in the landfill (i.e. over the full four (4) phases).  However, this amount will not equal the tonnage received from the Municipality, which is used to determine the revenue billed each period to the Municipality.  Instead, this amount of tonnage each period will be reduced as a result of separating the bottles for resale.





NOTE 5.   INVENTORY





Inventory consists of the following:


March 31, 2010

December 31, 2009Raw material

$
19,347


$
36,837Consigned processingmaterials


28,831



-Low-value consumables


4,786



5,813Total

$
52,964


$
42,650
 13
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 6. OTHER RECEIVABLES





Other receivables primarily represents a third-party loan to Harbin Jiayi Import and Export Co., Ltd. (“Jiayi”) from the Company.  The loan was unsecured and bore 5.31% annual interest and was repaid in March 2010.





NOTE 7. RELATED PARTY TRANSACTIONS




Loans to related parties consists the following:




March 31, 2010

December 31, 2009Shibin Jiang

$
4,744


$
4,744Yan Feng


60,775



38,084Total loans to related parties

$
65,519


$
42,828




Ms. Yan Feng is the CEO of the Company and Mr. Shibin Jiang is the operating director of the company.  Both Ms. Feng and Mr. Jiang are shareholders of the Company.  The loans to shareholders are unsecured and interest free.  These loans were repaid in full on August 13, 2010.





NOTE 8. MAJOR CUSTOMER





On September 1, 2003, the Company signed an exclusive 17-year, Build-Operate-Transfer (“BOT”) agreement with Harbin Municipal Urban Administrative Bureau (“HMUAB”) to handle approximately one-third of the city’s solid waste disposal.  The contract will expire on August 30, 2020. The revenue from HMUAB accounted for 100% of the gross revenues for the years ended December 31, 2009 and 2008.





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 by the Company. The Company shall pay a processing fee to Dongxin in return. The Company will fix 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.





The following table presents sales from major customers with individual sales over 10% of total net revenue for the three months ended March 31, 2010 and 2009:




Three months ended March 31,2010


2009Sales


% of

Total Sales


Sales


% of

Total SalesHMUAB

$
1,122,699



71
%

$
442,345



100
%Dongxin


465,055



29
%


-



0
%Total

$
1,587,754



100
%

$
442,345



100
%




14
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 8. MAJOR CUSTOMER (Continued)





Accounts receivable related to HMUAB and Dongxin are as follows:





March 31, 2010


December 31, 2009Accounts

Receivables


% of Accounts

Receivables


Accounts

Receivables


% of Accounts

ReceivablesHMUAB

$
4,450,265



95
%

$
4,253,203



100
%Sales through Dongxin


249,741



5
%


-



0
%Total

$
4,700,006



100
%

$
4,253,203



100
%




NOTE 9. SEGMENT INFORMATION





The Company identified two operating segments for the three months ended March 31, 2010; 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.





All of the Company’s revenues are 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 interest income and expenses, other income and expenses and income taxes.





The segment information for the reportable segments for the three ended March 31, 2010 and 2009 and the reconciliation of reportable segment net sales and net income to the consolidated total are as follows:




15
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS







NOTE 9. SEGMENT INFORMATION (Continued)





For the Three Months Ended March 31, 2010

Landfill

Operation


PET Bottle

Recycling


Landfill

Minimum Fees


Consolidated

TotalNet revenue

$
1,122,699


$
465,055


$
-


$
1,587,754Cost of revenue


356,730



95,614



-



452,344Gross profit


765,969



369,441



-



1,135,410Income from operations














989,492Other income














23,106Income before income taxes














1,012,598Provision for income taxes














139,273Net income













$
873,325For the Three Months Ended March 31, 2009

Landfill

Operation


PET Bottle

Recycling


Landfill

Minimum Fees


Consolidated

TotalNet revenue

$
-


$
-


$
442,345


$
442,345Cost of revenue


-



-



-



-Gross profit


-



-



442,345



442,345Income from operations


-



-



-



258,688Other income














(51,573
)Income before income taxes














207,115Provision for income taxes














45,349Net income













$
161,766








16
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 10. 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, except for the final two quarters wherein our quarterly payment is $302,060.





Upon the suspension of the Company’s landfill operation as discussed in Note 13, the Company renegotiated with the Bank for a temporarily reduced quarterly principal repayment in the amount of RMB 200,000 ($29,278) each quarter, starting in the third quarter of 2007.





The Company recommenced the landfill operation in October 2009 and obtained an extension for the above loan on November 13, 2009. The extended loan has a fixed interest rate of 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. For the three months ended March 31, 2010, the Company repaid $241,648 to the lender.  Interest expense for the three months ended March 31, 2010 amounted to $40,769 and capitalized as construction in progress.  Interest expense of $59,018 was not capitalized during three months ended March 31, 2009 during the suspension period.





As of March 31, 2010 and December 31, 2009, the loan payable consists of the following:


March 31, 2010

December 31, 2009(Unaudited)Loan payable

$
1,812,360


$
2,054,008Less: current portion


966,592



966,592Loan payable - non-current portion

$
845,768


$
1,087,416




Maturities of the long term debt payable;

March 31, 2010By December 25, 2010

$
724,944By December 25, 2011


1,087,416$
1,812,360





17
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 11.  INCOME TAXES






United States Tax




EESC is subject to United States of America tax law. No provision for income taxes in the United States or elsewhere has been made as EESC had no taxable income subject to U.S. taxes for the three months ended March 31, 2010 and 2009.


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 the private-run enterprises, which are subject to tax at a statutory rate of 25%.




Upon the acquisition of Harbin Yifeng by AEEC, Harbin Yifeng has 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 upon the reserve 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 income tax reduction period will be from January 1, 2009 to December 31, 2011.




The estimated tax savings as a result of our tax holidays for the three months ended March 31, 2010 and 2009 amounted to $169,587 and $38,201, 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, 2010 from $0.07 to $0.06, with no change in basic earnings per share for the three months ended March 31, 2009.




On March 16, 2007, National People's Congress passed a new corporate income tax law (the “New CIT Law”), which became effective on January 1, 2008. This new corporate income tax unified the corporate income tax rate, cost deductions and tax incentive policies for both domestic and foreign-invested enterprises in China.  Under the new CIT law, the corporate income tax rate applicable to all Companies is 25%, replacing the previous tax rate of 33%. However, companies previously approved for any income tax holiday will not be subject to the new enacted tax rate until the holiday runs out. Accordingly, the applicable corporate income tax rate of our Chinese subsidiaries will incrementally decrease to 12.5% (50% of new applicable rate of 25%) for the three-year income tax reduction period.




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, 2010 and 2009. The net operating loss carry forwards, including amortization of share-based compensation, for United States income tax purposes amounted to $947,955 and $852,267 as of March 31, 2010 and December 31,2009, respectively, which may be available to reduce future periods' 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, 2010 for the temporary difference related to the loss carry-forwards. Management reviews this valuation allowance periodically and makes adjustments as warranted.







18
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 11.  INCOME TAXES (Continued)




Deferred tax assets/(liability) and the related valuation allowance were as follows:




March 31, 2010


December 31, 2009(Restated)


(Restated)USA

$
322,305


$
289,771China


19,688



(10,631
)Less: Valuation Allowance


(322,305
)


(289,771
)Net

$
19,688


$
(10,631
)
  For the three month period ended March 31, 2010 and the year ended December 31, 2009, the corporate income expenses were as follows:
  March 31, 2010


March 31, 2009(Restated)


(Restated)Current

$
169,587


$
38,200Deferred


(30,314
)


7,149Total

$
139,273


$
45,349
  The following table reconciles the U.S. statutory rates to the Company's effective tax rate for the three month period ended March 31, 2010 and the year ended December 31, 2009.
  March 31, 2010


March 31, 2009(Restated)


(Restated)U.S. statutory rates


34.0
%


34.0
%Foreign income not recognized in USA


(34.0
%)


(34.0
%)China statutory income tax rate


25.0
%


25.0
%China income tax exemption


(12.5
%)


(12.5
%)Expenses incurred in USA that are not subject to the PRC income tax


1.3
%


5.87
%Non-deductible expenses


-
%


3.5
%Effective tax rate


13.8
%


21.9
%







19
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS








NOTE 12.  STATUTORY RESERVES





EESC is required to allocate a portion of its 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 EESC’s registered capital, no further allocation to the surplus reserve account is required.




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.  For the three months ended March 31, 2010 and 2009,  the Company had after tax profits of $873,325 and $161,766 and therefore is required to make contributions of $87,333 and $16,177, respectively, to the statutory surplus reserve account.




March 31, 2010


March 31, 2009After tax profits

$
873,325


$
161,766Percentage applied


10
%


10
%Addition to Accumulated Statutory Surplus Reserve

$
87,333


$
16,177Accumulated Statutory Surplus Reserve

$
655,054


$
519,110







NOTE 13.  DIVIDEND POLICY




Pursuant to the PRC enterprise income tax law effective on January 1, 2008, dividends payable by a foreign investment entity to its foreign investors are subject to a withholding tax of up to 20%.  At present, the Chinese tax authority has not issued any guidance on the application of the EIT Law and its implementing rules on non-Chinese enterprises or group enterprise controlled entities.  In practice, the tax authorities typically impose the withholding tax rate of 10%, as prescribed in the implementation regulations; however, there can be no guarantee that this practice will continue as more guidance is provided by relevant government authorities.  As a result, the Company is unable to predict whether payments from EESC will be subject to withholding tax because it is unclear whether EESC will be deemed to be a resident enterprise for Chinese tax purposes.  On the other hand, if EESC is deemed to be a resident enterprise, then EESC will be subject to an enterprise income tax rate on all of its income, including income earned outside of China.  The income tax rate on such worldwide would be 12.5% through 2011.  Thereafter, the enterprise income tax rate will increase to 25%.  EESC does not expect to pay any dividends




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.







20
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14.   STOCKHOLDERS' EQUITY




In the second quarter of 2008, the Company issued a total of 2,950,000 shares of its common stock as compensation to consultants and seven employees for a fair value of $1,327,500, which was recorded in additional paid-in capital.







NOTE 15.   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 in 2008 under the Plan with a weighted average grant price of $0.45 and average vesting period of 10 years.





A summary of the status of the Company’s non-vested shares as of March 31, 2010, and changes during the three months ended March 31, 2010, is presented below:




Non-vested Shares

Shares


Weighted-Average

Grant Date Fair ValueNon-vested at December 31, 2009


3,144,999


$
1,510,138Granted


-



-Vested


217,084



95,687Forfeited


-



-Non-vested at March 31, 2010


2,927,915


$
1,414,451







A summary of the status of the Company’s deferred stock compensation under the Plan as of March 31, 2010, and changes for the three months ended March 31, 2010, is presented below:




Deferred stock compensation as of December 31, 2009

$
1,498,319Compensation expenses debited to statement of operationswith a credit to additional paid-in capital


(95,688
)Deferred stock compensation as of March 31, 2010

$
1,402,631







21
 EASTERN ENVIRONMENT SOLUTIONS, CORP AND SUBSIDIARIES
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. SIGNIFICANT EVENT




On June 13, 2007, the company filed a Form 8-K with the SEC, announcing that in accordance with the PRC National Environment Protection Bureau’s request in relation to landfills and adjustments to their peripheral inhabitants’ well-being, the Harbin municipal government city administrative bureau was carrying out certain adjustments to the original landfill plans of our subsidiary, Harbin Yifeng Eco-environment Co. Ltd. (“Harbin Yifeng”).  Such adjustments resulted in the relocation of some peripheral inhabitants of the landfill and its waste water disposal plant. The costs of such adjustments will be borne by the Harbin municipal government city administrative bureau.  These measures disrupted Harbin Yifeng’s normal operations.  After careful consideration, our Board of Directors decided to temporarily suspend Harbin Yifeng’s operations while the measures were being carried out. However, Harbin Yifeng was still entitled to collect the minimum fixed fees for the Suspension Period as per the “Special Permission Operation Rights Contract”, which Harbin Yifeng had signed with the Harbin municipal government city administrative bureau on September 1, 2003. The bureau was required to compensate and pay Harbin Yifeng a sum equivalent to the fee for disposing 800 tons of waste per day during the Suspension Period.


On November 16, 2009, the Company issued a press release, announced that it has reopened its MSW landfill in Harbin. As notified by the Harbin Municipal Urban Administrative Bureau (HMUAB), the Company recommenced its operations at the landfill on October 30, 2009. Since then, the landfill has been in full production and returned to the level of operations it carried on prior to the landfill suspension in June 2007.




On January 20, 2010, the Company signed a supplementary agreement with HMUAB. According to the supplementary agreement, from January 1, 2010, the waste disposal subsidy was raised from RMB42 yuan per ton as set in the original franchise contract to RMB60 yuan per ton.












22





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, 2009 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.





Restatement of Financial Statements





The Company has restated its unaudited condensed consolidated financial statements for the three months ended March 31, 2010 and 2009 to implement a revision to the Company’s policies regarding recognition of revenue and expenses associated with its landfill operations.  Previously the Company capitalized the costs of development of the landfill as portions of the project were placed into service, and amortized such capitalized costs over the anticipated life of the landfill operations.  The Company has determined that because each phase of landfill construction builds upon the prior phases, a more appropriate recognition policy would amortize the entire anticipated cost of the landfill in proportion to the ratio of total tonnage disposed in the landfill to the anticipated total tonnage to be disposed in the landfill.  The effect of adopting this new policy on the unaudited condensed consolidated financial statements of the Company for the three months ended March 31, 2010 and 2009 is quantified in Note 2 to the Unaudited Condensed Consolidated Financial Statements.  The discussion in this Item has been modified to reflect the results of the restatement.







Results of Operations




The growth of our business was delayed in June 2007, when the Harbin Municipal Urban Administrative Bureau (“HMUAB”), which was our only customer at that time, was mandated by the PRC National Environment Protection Bureau to carry out certain modifications to the development of its landfill for the protection of local residents.  The modifications involved the relocation of some of the neighboring residents, as well as the relocation of our wastewater disposal plant.  The cost of the modifications was borne entirely by the HMUAB.  Nevertheless, while the modifications are ongoing, we suspended our operations at the Landfill, which are currently our only source of revenue.  The suspension was lifted in November 2009, and we have now returned to full operations.  Our unaudited condensed consolidated financial statements for the first three months of 2009, however, reflect the results of suspended operations.





In the first quarter of 2010, our business prospects brightened considerably.  The most significant events that occurred in the quarter were:




·
In January 2010 we executed an agreement with the HMUAB that increased the fee payable to us for waste disposal from 42 RMB per ton to 60 RMB per ton.


·
In February 2010 the HMUAB increased the limits on our operations from 1,200 tons of waste per day to 1,500 tons per day.


·
In January 2010 we took the first major step towards implementing our plan to commercialize the resources available in the waste deposited in the landfill, as we engaged an agent to process and distribute the polyethylene terephthalate (“PET”) bottles that we remove from the landfill.





Our agreement with Harbin Dongxin Group mark the expansion of our business from waste storage toward the efficient recycling of waste into value-added products.  The use of 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.  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.





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Already the sale of recovered PET bottles produced 29% of our revenue ($465,055) in the first quarter of 2010.  With the $1,122,699 contributed by HMUAB reimbursements for our landfill operations, we increased revenue by 259% from $442,345 in the first three months of 2009 to $1,587,754 in the first three months of 2009, during which we accrued only the minimum fee guaranteed by HMUAB in our agreement.  For the future we expect growth to continue.  Having now returned to operations, we will endeavor 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 the overwhelming growth of China’s cities, we expect there to be plentiful market opportunities.





Although our revenues in the first three months of 2009 were achieved without any production on our part, we still realized $103,218 in costs in connection with retaining our core employees on salary, even as we had no revenue producing work for them to perform.  Management determined that eliminating the Company’s employee base during the landfill suspension would make it very difficult to revive that operation when the suspension ended.  These costs were charged to administrative costs.  This decision proved advantageous as 2010 began, as we were able to return promptly to full-scale operation without significant start-up costs or inefficiencies.  During the three months ended March 31, 2010 our cost of goods sold was $452,344.





Selling, general and administrative expenses in the first quarter of 2010 was $145,918 compared with $183,657 in the first quarter of 2009.  In both periods, the majority of our selling, general and administrative expense was attributable to the expensing of stock compensation that we gave to employees and consultants in 2008 as incentives for future services:  Stock compensation expense was $95,688 in both the first quarter of 2010 and the first quarter of 2009.  At March 31, 2010 the remaining $1,402,631 in deferred stock compensation expense 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 $1,012,598 for the three months ended March 31, 2010, compared to a pre-tax income of $207,115 during first three months of 2009.  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 2010, after accruing $139,273 for income taxes, our net income was $873,325, representing $0.07 (diluted $0.06) per share.  Net income in the first quarter of 2009 was $161.757, or $.01 per share (basic and diluted).





During the three months ended March 31, 2009, no disposal took place at the landfill during the suspension period.  During the three months ended March 31, 2010, 126,855 actual tonnage was disposed after the suspension was lifted.  During this same period in 2010, 898 tons of plastic was recycled from the landfill through the Company’s distributors Harbin Dongxin Group and Harbin Bin County Welfare Plastic Products Co., Ltd.





Our business operates entirely in Chinese Renminbi, but we report our results in our SEC filings 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 2010 and 2009, the effect of converting our financial results from RMB to U.S. Dollars was to reduce our accumulated other comprehensive income by $48,918 and $25,323, respectively.





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, except for the final two quarters wherein our quarterly payment is $302,060.





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Our working capital at March 31, 2010 totaled $4,883,911, an increase of $951,571 from our working capital at December 31, 2009.  The increase was mainly attributable to our net income, as the $446,803 increase in our accounts receivable was offset by the repayment in March 2010 of the $440,000 loan we had made to Harbin Jiayi Import and Export Co., Ltd. in 2009.





The largest component of our working capital at March 31, 2010 consisted of $4,450,265 owed to us by HMUAB.  The receivable reached this level during the suspension of operations.  Although under the BOT agreement, payments were due thirty days after each month, during the suspension of Landfill operations between June 2007 and October 2009, HMUAB made few payments.  During 2009, HMUAB made no payments at all during the first ten months.  However, since the Landfill re-opened in November 2009, HMUAB has begun to pay both current accounts and portions of the past due account.  In February 2010 HMUAB also sent us a written acknowledgement of the $4,253,203 that it owed us at December 31, 2009, with a schedule of payments that will satisfy the receivable during 2010:  4 million RMB in the first quarter of 2010, 5 million RMB in the second quarter, 8 million RMB in the third quarter, and the balance of 12.037 million RMB in the fourth quarter.  Accordingly, we do not consider the receivable to be at risk, and have made no provision for doubtful accounts.





After property and equipment – primarily our investment in the Landfill – and accounts receivable, our largest asset category at March 31, 2010 was “advances to suppliers,” totaling $3,784,613, an increase of $632 since December 31, 2009.  These amounts primarily represent payments to contractors for work on Phase I and Phase II of the Landfill.  The asset will be reclassified as “property and equipment” when the related construction projects are completed.




Our operations during the three months ended March 31, 2010 provided $786,560 in net cash.  Net cash from operations was less than net income for the period primarily due to a $446,803 increase in accounts receivable during the quarter.  Accounts receivable increased as a result of the revival of operations at the Landfill, and as a result of the initiation of sales of PET, both of which resulted in sales in the first quarter for which we will collect in the second quarter.  During the first quarter of fiscal year 2009, by comparison, our operations used $(129,012) in cash, as our landfill operations were suspended during that period and HMUAB was accruing but not paying the minimum contractual fee.





During the first three months of 2009, when our operations were suspended, we utilized our cash reserves by making loans to third parties, to achieve better interest rates than were offered by local banks.  We made a loan of $526,511 during that quarter to Harbin Jiayi Import and Export Co., Ltd., which agreed to pay us 5.31% annual interest.  During the same period we collected a loan of $234,518 that we had previously made to Harbin Binjiang Freight Co., Ltd., which was owned by our then-President.  Our investing activities during the first quarter of 2009, used $342,366 in cash.  During the first quarter of 2010, on the other hand, we collected the remaining balance of the loan made a year earlier to Harbin Jiayi Import and Export Co., and so our investing activities provided $375,969 in cash.





The cash provided by investing activities in the first quarter of 2010 was offset in part by $241,648 that we used during the first quarter of 2010 to satisfy our bank loan obligations.  In the first quarter of 2009, the bank had reduced our payment obligations due to the suspension of landfill operations, and we paid only $24,165 on account of our bank loan.  Now that the landfill is operating again, we will incur quarterly payment obligations to the bank of $241,648 plus interest, except for the final two quarters wherein our quarterly payment is $302,060.





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.  In order to complete Phase II and Phase III of the Landfill project within the next six years, it will be necessary that we obtain additional debt or equity financing.  In addition, if we are to achieve critical mass in our industry by developing 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.





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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 4.  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, had 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 among the personnel in the Company’s accounting department in identifying, implementing and interpreting complex accounting pronouncements issued under U.S. Generally Accepted Accounting Principles, which has resulted in certain errors in accounting identified in Note 2 to the Unaudited Condensed Consolidated Financial Statements.





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, such controls and procedures were not effective due to the material weaknesses mentioned above.  Accordingly, the Company has retained a new Chief Financial Officer in November 2010, experienced in U. S. GAAP accounting.





(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 the new Chief Financial Officer, has evaluated any changes in the Company’s internal control over financial reporting that occurred during the period covered by this quarterly 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, 2009.





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 2010.





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




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Rule 13a-14(b) Certifications





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 17, 2010
By: /s/ Feng YanFeng Yan, Chief Executive Officer







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