Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. Eastern Environment Solutions Corp. (1119721) 10-Q published on Nov 14, 2011 at 1:49 pm
Reporting Period: Sep 29, 2011
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.
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.
In August 2011, the Company signed supplementary agreements with Dongxin and HBC. The agreements were identical to those initially signed, except that the minimum prices to be paid to the Company for PET were increased.
The sale of recovered materials quickly became our leading source of revenue, as we marketed both PET recovered from our Landfill and PET purchased from outside sources. Recently, however, the wholesale market price for recovered PET has increased significantly, sharply reducing the profitability of our resale operations. In the first quarter of 2011 the sale of recovered PET bottles and bottle caps produced 73% of our revenue ($3,304,608), but yielded a gross margin of only 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 reason for the reduction in profitability was a marked increase in the wholesale price of PET available from third party providers. In addition, the value added tax was imposed on sales in 2011 at a rate of 17%, compared to a 3% value added tax on sales in the first quarter of 2010. For this reason, since the beginning of the second quarter of 2011 we have limited our sale of PET to bottles and caps salvaged from our Landfill, and have not purchased any PET from third party providers. The result was that revenue from our PET bottle sales fell to $830,798 in the recent quarter. However, our gross profit on sales of PET in the recent quarter, $614,155, represented a margin of 74% and exceeded gross profit from PET sales in the first quarter of 2011. The high gross profit on PET sales in the recent quarter is attributable to the fact that our only direct cost in obtaining the PET from our landfill is labor. Since we can achieve the same profits with only the bottles in our Landfill as we did when we functioned as a reseller (and with significantly less administrative effort), our plan is to continue at the present level of PET operations until market conditions make an expansion attractive.
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. We have completed the construction expenditures for Phase I and expect to exhaust the capacity of that zone in 2014. In the meantime we will develop the Phase II structure so that we can commence landfill in that zone as soon as the Phase I zone is filled. Based on our current estimate of future usage of the Harbin Landfill, we expect to incur the following capital expenditures to complete Phases II and III of the Landfill project: