10QSB 1 chinaege_10q-033105.txt U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-QSB (Mark One) [x] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2005 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number 000-26175 China Evergreen Environmental Corp. ------------------------------------ (Exact name of small business issuer as specified in its charter) Nevada 88-0409151 ---------------------------- ------------------- (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 5/F, Guowei Building, 73 Xianlie Middle Road Guangzhou, Guangdong, The People's Republic Of China -------------------------------------------------------------------------------- (Address of principal executive offices) 86-20-8732-7909 --------------- (Issuer's telephone number) Not Applicable -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of May 20, 2005, the Company had 99,999,997 shares of its common stock issued and outstanding. Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X] PART 1 - FINANCIAL INFORMATION Page(s) ------- Item 1. Financial Statements Unaudited CombinedBalance Sheets at December 31, 2004 and March 31, 2005...................................F-1 Unaudited Combined Statements of Operations for the three month periods ended March 31, 2005 and 2004.........................F-2 Unaudited Combined Statements of Stockholders' Equity........................F-3 Unaudited Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2005 and 2004.....................F-4 Notes to Unaudited Condensed Consolidated Financial Statements...............F-6 CHINA EVERGREEN ENVIRONMENTAL CORP Unaudited Consolidated Balance Sheets March 31,2005 March 31,2004 US$ US$ Current assets Cash and cash equivalents 27,274 355,907 Accounts receivable 9,417,347 89,131 Prepayment, deposits and other receivables 2,641,524 271,053 Amounts due from related companies 3,206,592 7,332,627 Amounts due from directors 113,511 448,645 Amounts due from an associate 1,749,339 -- Deferred tax assets 190,889 194,465 Total current assets 17,346,476 8,691,828 Non-current assets Infrastructure assets, net 5,026,976 1,669,494 Property, plant and equipment, net 326,730 340,958 Convertible note receivable 1,366,997 -- Deposit paid for acquisition of property, plant and equipment 543,478 -- Interest in an associate 381,151 282,077 Total non-current assets 7,645,332 2,292,529 Total assets 24,991,808 10,984,357 Current liabilities Unsecured loan 205,314 265,700 Accounts payable 9,743,644 2,345,948 Accrued liabilities 1,249,253 2,864,549 Amounts due to directors 601,723 -- Amounts due to related companies 3,789,376 1,210,455 Deposit received for disposal of a subsidiary 350,514 -- Income tax payable 866,810 281,219 Total current liabilities 16,806,634 6,967,871 Minority interests 301,449 444,691 Stockholders' equity Common stock 83,800 3,792,391 Additional paid in capital 3,857,296 Retained earnings / (accumulated deficit) 3,942,629 (220,596) Total stockholders' equity 7,883,725 3,571,795 Total liabilities and stockholders' equity 24,991,808 10,984,357 F-1
CHINA EVERGREEN ENVIRONMENTAL CORP Unaudited Consolidated Statements of Operations Quarter ended March 31, 2005 2004 US$ US$ Revenue (Note 4) 1,880,072 79,786 Cost of revenue 1,303,239 34,250 Gross profit 576,833 45,536 General and administrative expenses 85,346 101,524 Income / (loss) from operations 491,487 (55,988) Other income 2,724 11,215 Share of results in an associate 35,788 -- Interest expense 4,415 4,818 Income / (loss) before income tax 525,584 (49,591) Income tax expense / (credit) 52,389 (6,499) Minority interests 45,188 (4,825) Net income / (loss) 428,007 (38,267) Basic net income / (loss) per share (Note 5) 0.0043 0.00044 F-2 CHINA EVERGREEN ENVIRONMENTAL CORP Unaudited Consolidated Statements of Stockholders' Equity Additional Retain earnings/ Total Capital paid-in- (Accumulated stockholders' US$ capital US$ deficit) US$ equity US$ At January 1,2004 3,792,391 -- (182,329) 3,610,062 Net loss -- -- (38,267) (38,267) At March 31,2004 3,792,391 -- (220,596) 3,571,795 At January 1,2005 83,800 3,857,296 3,514,622 7,455,718 Net income -- -- 428,007 428,007 At March 31,2005 83,800 3,857,296 3,942,629 7,883,725 F-3 CHINA EVERGREEN ENVIRONMENTAL CORP UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOW Quarter Ended March 31, 2005 2004 Cash flows from operating activities: Net income / (loss) 428,007 (38,267) Adjustments to reconcile net income / (loss) to net cash provided by / used in operating activities: Depreciation and amortization 24,312 28,391 Provision for inventories -- 12,558 Decrease in deferred tax assets 9,092 2,930 Increase / (decrease) in minority interests 141,806 (4,824) Share of results in an associate (35,788) -- Changes in operating assets and liabilities: Decrease / (increase) in accounts receivable 45,652 (4,772) Increase / (decrease) in prepayment, deposits and other receivables (1,864,159) 912,301 Increase in accounts payable 988,497 534,938 Increase in accrued liabilities 723,186 1,838,489 Decrease in amounts due to directors (91,640) (740,460) Decrease / (increase) in amounts due from related companies 876,607 (7,078,169) Increase in tax payable 240,561 162,403 Increase in amounts due to related companies -- 299,732 Net cash provided by / (used in) operating activities 1,486,133 (4,074,750) Cash flows from investing activities: Deposit paid for acquisition of property, plant and equipment -- 2,619,566 Acquisition of infrastructure assets (1,742,064) (686,747) (Decrease) / increase in amounts due from an associate (4,564) 3,588,452 Net cash (used in) / provided by investing activities (1,746,628) 5,521,271 Cash flows from financing activities: Repayment of borrowing (48,310) (1,145,170) Net cash used in financing activities (48,310) (1,145,170) Net (decrease) / increase in cash and cash equivalents (308,805) 301,351 Cash and cash equivalents, beginning of period 336,079 54,556 Cash and cash equivalents, end of period 27,274 355,907 F-4
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - BASIS OF PRESENTATION The condensed consolidated financial statements of China Evergreen Environmental Corp. (the "Company") and subsidiaries (the "Group") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Certain information and footnote disclosures normally included in consolidated financial statements prepared in conjunction with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the annual audited financial statements and the notes thereto included in the Company's Form 10-KSB Annual Report, and other reports filed with the SEC. The accompanying unaudited quarterly consolidated financial statements reflect all adjustments of a normal and recurring nature which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Group for the periods presented. The results of operations for these periods are not necessarily comparable to, or indicative of, results of any other quarterly period of or for the fiscal year taken as a whole. Factors that affect the comparability of financial data from year to year and for comparable quarterly periods include non-recurring expenses associated with the Group's costs incurred to reorganize the Group, raise capital, and stock options and awards. Certain financial information that is not required for interim financial reporting purposes has been omitted. NOTE 2 - DESCRIPTION OF BUSINESS Our company was organized as a Nevada corporation on September 10, 1996 under the name Discovery Investments, Inc., and was previously engaged in the business of seeking, investigating and, if such investigation warranted, acquiring an interest in a business opportunity. On October 15, 2004, we were the subject of a reverse acquisition by Evergreen Asset Group Limited, an International Business Company organized under the laws of the British Virgin Islands ("Evergreen"), pursuant to which we have acquired 100% of the outstanding shares of Evergreen capital stock in exchange for a controlling interest in our common stock. Pursuant to a securities purchase agreement dated September 9, 2004, as amended, we issued 83,500,000 shares of our common stock (representing 83.5% of our outstanding capital stock) in exchange for all of the issued and outstanding shares of Evergreen capital stock transferred to us by the Evergreen shareholders at the closing. Following the close of the reverse acquisition, we changed our corporate name from Discovery Investments, Inc. to China Evergreen Environmental Corp. ("CEEC", "we", "us" or the "Company"). As a result of the transactions described above, Evergreen became our wholly owned subsidiary. Evergreen, through its three majority owned subsidiaries, Guangdong Xinxinmei Environmental Protection Co. ("XXM"), Beijing Haotai Shiyuan Water Purification Co. Limited ("BJHT) and Shangdong Haiyang Shenshi Environmental Protection Co. Limited ("HY"), provides waste water turn-key engineering, equipment and chemical trading. Evergreen currently holds 90% of XXM. XXM provides turnkey waste water treatment engineering design and F-5 contracting. XXM also holds 90% and 35% respectively in the equity interest of the following two water treatment facilities operated through build, operate and transfer (BOT) arrangements with the PRC government: (i) Tianjin Shisheng Water Treatment Co., Limited ("TJSH"), which commissioned water treatment in November 2003 and has a daily treatment capacity of approximately 10,000 cubic meter and; (ii) Xinle Shengmei Water Purification Co. Limited ("XL"), which also commissioned water treatment in November 2003 and has a daily treatment capacity of 40,000 cubic meter. XXM is retained as the managers to manage both TJSH and XL. The fees from XL and TJSH did not represent a material portion of our revenue during the first quarter of 2005. NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES IMPAIRMENT OF ASSETS: The Group's policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and anticipated undiscounted future cash flows. An impairment loss is recognized to the extent that the sum of undiscounted estimated future cash flows that is expected to result from the use of the asset, or other measure of fair value, is less than the carrying value. OTHER INVESTMENT: Other investment includes equity investment in a private company and is carried at fair value. Unless there has been a permanent impairment to the value of the investment, the change in fair value is reported as a separate component of other comprehensive income or loss. Permanent impairment to the value of the investment is recognized in the consolidated statements of operations. REVENUE RECOGNITION: Revenue from fixed price long-term contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. Changes in job performance, estimated profitability and final contract settlements may result in revisions to costs and income in the period in which the revisions are determined. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price agreements is of relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. Revenue arising from waste water treatment is recognized based on waste water treated as recorded by meters read during the quarter. INCOME PER SHARE: Basic income per share is computed by dividing the net income for the year by the weighted average number of common shares outstanding during the year. Diluted income per share is computed by dividing the net income for the year by the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares, composed of incremental common shares issuable upon the exercise of stock options, unvested restricted common stock and contingently issuable shares that are probable of being issued, F-6 are included in diluted income per share to the extent such shares are dilutive. In accordance with SFAS 128, "Earnings Per Share", the Company uses income from continuing operations, net of income taxes as the "control number" in determining whether common equivalent shares are dilutive or anti-dilutive in periods where discontinued operations are reported. NOTE 4 - REVENUE Revenue increased 1,075% from $0.16 million in the first quarter of 2004 to $1.88 million in the quarter of 2005. The first quarter of 2005 increase in net sales was primarily for the Company's provision of design, engineering and contracting of the turnkey waste water treatment facility in Le Chang City or Le Chang Project, Guangdong Province, PRC. The percentage of net sales attributable to operating the BOT waste water treatment plants and potable water plants was not significant in the first quarter of 2005. NOTE 5 - BASIC NET INCOME PER SHARE The basic net income per share is calculated using the net income and the weighted average number of shares outstanding during the year. Quarter ended March 31, 2005 2004 Net income / (loss) $ 428,007 $ (38,267) Weighted average number of common shares outstanding 99,999,997 86,970,079 Basic net income / (loss) per share 0.0043 0.00044 NOTE 6 - SUBSEQUENT EVENTS In April 2005, the Company conducted the private placement sale of 20 units, at USD25,000 per unit, for the gross proceeds of USD500,000. Each unit consisted of (a) one 12% convertible debenture in the original principal amount of USD25,000, convertible into shares of the Company's common stock at the rate of the lesser of (i) USD0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by the Company prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of the Company's common stock at an exercise price of USD0.20 per share, expiring ten years from their date of issuance. The debentures are due and payable August 1, 2005. F-7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS FORWARD-LOOKING INFORMATION Much of the discussion in this Item is "forward looking" as that term is used in Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934. Actual operations and results may materially differ from present plans and projections due to changes in economic conditions, new business opportunities, changed business conditions, and other developments. Other factors that could cause results to differ materially are described in our filings with the Securities and Exchange Commission. The following are factors that could cause actual results or events to differ materially from those anticipated, and include, but are not limited to general economic, financial and business conditions, changes in and compliance with governmental laws and regulations, including various state and federal environmental regulations, our ability to obtain additional financing from outside investors and/or bank and mezzanine lenders; and our ability to generate sufficient revenues to cover operating losses and position us to achieve positive cash flow. Readers are cautioned not to place undue reliance on the forward-looking statements contained herein, which speak only as of the date hereof. We believe the information contained in this Form 10-QSB to be accurate as of the date hereof. Changes may occur after that date. We will not update that information except as required by law in the normal course of our public disclosure practices. Additionally, the following discussion regarding our financial condition and results of operations should be read in conjunction with the financial statements and related notes contained in Item 1 of Part I of this Form 10-QSB. RESULTS OF OPERATIONS The following table sets forth the items in our consolidated statements of operations for the periods indicated. QUARTER ENDED MARCH 31, 2005 2004 Revenue.................................... $ 1,880,072 79,786 Cost of revenue............................ (1,303,239) (34,250) Gross profit............................... 576,833 45,536 General and administrative................. (85,346) (101,524) -2- Income / (loss) from operations............ 491,487 (55,988) Other income............................... 2,724 11,215 Share of results in an associate........... 35,788 -- Interest expense........................... (4,415) (4,818) Income / (loss)before income tax........... 525,584 (49,591) Income tax expense / (credit).............. (52,389) 6,499 Minority interests......................... (45,188) 4,825 Net income / (loss) ....................... 428,007 (38,267) For the three months ended March 31, 2005 , we achieved sales of $1,880,072. Approximately $1,812,000 or 96.4% of the sales were mainly derived from completion of design, engineering and contracting services of one turnkey engineering waste water project in Le Chang City ("Le Chang Project") in Guangdong, China. And $68,478 or 3.6% of the sales were derived from the Build Operating Transfer (or "BOT") projects from Tianjin Shisheng Water Treatment Co., Limited ("TJSH"), a 90% held subsidiary of our Company's subsidiary Guangdong Xinxinmei Environmental Protection Co. Limited.. REVENUE. Revenue increased 2,256% from $0.08 million in the first quarter of 2004 to $1.88 million in the first quarter of 2005. The first quarter of 2005 increase in net sales was primarily for the Company's completion of design, engineering and contracting of the turnkey waste water treatment plant or Le Chang Project. The fee generated by completing the Le Chang Project accounts for 96.4% of the sales during the first quarter 2005. The percentage of net sales attributable to operating the BOT waste water treatment plants accounts for only 3.6% in the first quarter of 2005. We expect the fees from operating the BOT projects should increase in the following quarters of 2005 following the completion of BOT waster water treatment facilities including Shangdong Haiyang Shenshi Environmental Protection Co. Limited (or "HY") in the second quarter of 2005 and Beijing Haotai Shiyuan Water Purification Co. Limited (or "BJHT") in the third quarter of 2005. GROSS PROFIT. Gross profit increased 1,167% from $45,536 in the first quarter of 2004 to $576,833 in the first quarter of 2005. Gross profit as a percentage of net sales decreased from 57.07% in 2004 to 30.68% in 2005. The increase in gross profit for this period was primarily the result of increase in Company's revenue. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses decreased 16% from $101,524 in the first quarter of 2004 to $85,346 in the first quarter of 2005, and as a percentage of net sales, decreased from 127% to 4.5%. NET INCOME / (LOSS). The company made a net loss of $38,267 in the first quarter if 2004 and a net income of $428,007 in the first quarter of 2005. The increase in net income for the first quarter of 2005 was primarily the result of increase in net sales. -3- LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2005, we had $27,274 in cash and cash equivalents. During the first quarter of 2005, the Company's net cash resources were increased by approximately $1,486,133. For the same period, the Company repay the borrowing $48,310. The Company has an unsecured revolving credit loan of about $205,000 with a Chinese bank which is interest bearing at 6.64% per annum. In April 2005, we conducted the private placement sale of 20 units, at $25,000 per unit, for the gross proceeds of $500,000. Each unit consisted of (a) one 12% convertible debenture in the original principal amount of $25,000, convertible into shares of our common stock at the rate of the lesser of (i) $0.20 per share or (ii) a 10% discount to the price per share of common stock (or conversion price per share of common stock) of the next private placement conducted by us prior to any conversion of the debenture, and (b) 125,000 detachable warrants to purchase one share each of our common stock at an exercise price of $0.20 per share, expiring ten years from their date of issuance. The debentures are due and payable August 1, 2005. Based on the Company's 2005 forecasted business plan, the Company will require to raise long-term capital to fund its BOT projects and proposed acquisition of a waster water facility and a potable water facility in Qiyuan, Henan. We anticipate raising capital from outside investors coupled with bank or mezzanine lenders to fund the Company's expansion plan. As of the date of this report, we have not entered into any negotiations with any third parties to provide such capital. We anticipate that our current financing strategy of private debt and equity offerings will meet our anticipated objectives and business operations for the next 12 months. We continue to evaluate opportunities for corporate development. Subject to our ability to obtain adequate financing at the applicable time, we may enter into definitive agreements on one or more of those opportunities. APPLICATION OF CRITICAL ACCOUNTING POLICIES Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates and assumptions are affected by management's application of accounting policies. Critical accounting policies include revenue recognition, impairment of assets and accounting for allowance of accounts receivable. REVENUE RECOGNITION. -- Revenue from fixed price long-term turnkey engineering contracts is recognized on the percentage of completion method for individual contracts. Revenues are recognized in the ratio that costs incurred bear to total estimated contract costs. The use of the percentage of completion method of revenue recognition requires estimates of percentage of project completion. -4- Changes in job performance, estimated losses on uncompleted contracts are made in the period in which such losses are determinable. In instances when the work performed on fixed price turnkey engineering contracts is of relatively short duration, we use the completed contract method of accounting whereby revenue is recognized when the work is completed. Revenue arising from waste water treatment is recognized based on waste water treated as recorded by meters read during the year. IMPAIRMENT OF ASSETS. The Group's policy is to periodically review and evaluate whether there has been a permanent impairment in the value of long-lived assets. Factors considered in the evaluation include current operating results, trends and anticipated undiscounted estimated future cash flows that is expected to result from the use of the asset, or other measure of fair value, is less than the carrying value. ALLOWANCES FOR ACCOUNTS RECEIVABLES. The Group's provisioning policy for bad and doubtful debt is based on the evaluation of collectability and aging analysis of accounts receivables and on management's judgment. The Group does no require collateral or other security to support client's receivables. The Group conducts periodic review of its clients' financial condition and customer payment practice to minimize collection risk on accounts receivables. This review is based on a considerable amount of judgment which is required in assessing the ultimate realization of these receivables, including the current creditworthiness and the past collection history of each customer. During the first quarter of 2005 financial period, the Group had not made any allowance for doubtful debts. OFF-BALANCE SHEET ARRANGEMENTS We do not have any off-balance sheet arrangements. ITEM 3. CONTROLS AND PROCEDURES Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. -5- As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There was no change in our internal controls, which are included within disclosure controls and procedures, during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls. -6- PART II - OTHER INFORMATION Item 6. Exhibits. (a) Index to Exhibits ----------------- Exhibit 31.1 Section 302 Certification Exhibit 32.1 Section 906 Certification -7- SIGNATURES In accordance with the requirements of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. China Evergreen Environmental Corp. (Registrant) Dated: May 23, 2005 By: /s/ Chong Liang Pu ------------------------------- Chong Liang Pu, Chief Executive Officer Dated: May 23, 2005 By: /s/ Ren Cai Ding ------------------------------- Ren Cai Ding, Chief Financial Officer -8-