China Environmental (GREY:CNVP)

CHINA ENVIRONMENTAL PROTECTION, INC. AND SUBSIDIARIES

(FORMERLY T.O.D TASTE ON DEMAND INC)

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For the Year Ended
		September 30,
		2010				2009
Revenues
Sales of Installation projects		$	30,172,578			$	24,812,846
Sales of equipment			1,346,061				1,549,499
Total revenues			31,518,639				26,362,345
Costs of Revenues
Cost of installation projects			20,813,623				17,328,028
Cost of equipment			922,615				1,206,943
Total costs of revenues			21,736,238				18,534,971
Gross profit			9,782,401				7,827,374
Operating Expense
Selling Expenses
Payroll and Commission			1,123,360				117,061
Fright out			3,709				81,292
Office expenses			73,691				1,895
Travel and entertainment			-				117,061
Total selling expenses			1,200,760				317,309
General and administrative expenses
Payroll			284,642				203,072
Employee benefit and pension			15,034				16,181
Depreciation and amortization expenses			86,326				74,265
Professional fees and consultancy fees			606,795				8,262
Taxes			50,477				26,355
Office expenses			140,013				57,854
Rental expenses			8,796				8,780
Bad debt expenses			2,388,109				428,632
Research and development expenses			513,095				512,143
Travel and entertainment			75,442				60,459
Total General and Administrative Expenses			4,168,729				1,396,003
Total operating expenses			5,369,489				1,713,312
Income from operations			4,412,912				6,114,062
Non-operating income (expenses):
Interest income			290				555
Interest expenses			(38,126	)			(19,506	)
Gain on bargain purchase			52,016				-
Other income (expenses)			62				-
Total non-operating income (expenses)			14,242				(18,951	)
Income before income taxes			4,427,154				6,095,111
Provision for income taxes
Current income tax expense			1,278,879				449,896
Deferred income tax expense (benefit)			(57,240	)			1,073,882
Total provision for income taxes			1,221,639				1,523,778
Net Income			3,205,515				4,571,333
Less: Net income attributable to noncontrolling interest			(222	)			(11,050	)
Net Loss attributable to
China Environmental Protection, Inc.		$	3,205,293			$	4,560,283
Basic and diluted earnings per share		$	0.19			$	0.28
Weighted average number of shares			16,706,586				16,150,000

In a letter to the Company’s board of directors, dated January 14, 2011 (the “January Letter”), Friedman cited a lack of cooperation by the Company in the conduct of its field review in connection with its audit of the Company’s financial statements for the fiscal year ended September 30, 2010. In the January Letter, Friedman stated that it randomly selected several project sites where the Company had sold and installed waste water treatment equipment to conduct site inspections. On November 20, 2010, representatives of Friedman attempted to make an inspection of the Chongqing Yudong Waste Water Treatment Plant, located in the Banan District of Chonqing, accompanied by the Company’s local sales representative for that region Friedman and the Company Representative were denied access to the Plant.

In the January Letter, Friedman stated that comments made by a security guard at the Plant and by the Company Representative led Friedman to question the accuracy of the sales revenue the Company had recognized for the equipment sale and installation project at the Plant. Following the site tour, Friedman notified the Company’s management of its concerns and requested additional information with respect to the project installation at the Plant. In a letter dated December 23, 2010, Friedman informed the Company that due to unresolved questions concerning certain material contracts and the Company’s revenue recognition practices, it would be unable to complete the audit on schedule. Friedman subsequently issued the January Later, claiming that the totality of the circumstances, including the continued lack of cooperation by the Company, led Friedman to make the conclusions set forth in Section 10A(b)(2)(A) through (C) of the Securities Exchange Act of 1934, as amended. Friedman then resigned as the Company’s independent accounting firm on January 21, 2011.

During the three months ended June 30, 2010, we reported

• Revenues of $15.8 million as compared to $8.24 million for the three months ended June 30, 2009, an increase of $7.58 million, or 92.01%.
  
• Net income of $3,124,408 for the three months ended June 30, 2010, as compared with $1,804,6352 during the three months ended June 30, 2009.

The increase in our revenue was attributable to the following reasons:

• Started from 2009, our company's business has undergone a big transition from traditional equipment sales to focus on the equipment installation projects. This transition has helped us to generate more sales revenue and higher margins.
  
• The market demand in China for high-quality waste water treatment equipment was huge, especially as more and more old waste water treatment plants all over China are undergoing improvement or upgrades, as required by many local governments.
  
• Our rich experience in this industry and well-known brand has helped us to win customer trust, resulting many clients are willing to establish good long-term relationship with us, and referring us to other new clients.
  
• We own several patents which technically helped to increase our voting power in the contract bidding process to successfully acquire customer orders.
  
• We have established good relationship with many local engineering design institutes and their decisions normally play an important role to affect many clients in the project bidding process.
  
• During the three months ended June 30, 2010, we strengthened our marketing efforts targeting several important market areas and several potential clients and eventually successfully obtained these product orders and projects.
  
• During the three months ended June 30, 2010, we improved our after-sales services and dedicated to maintain a long-lasting good relationship with many of our old customers, which also helps us attract new clients through old clients' referral.

GeoTeam® Note:

Even though CNVP has reported three straight quarters of impressive EPS growth, the company may need to tap the equity markets to maintain its growth trajectory.

"Based on our current operating plan, we believe that existing cash and cash equivalents balances, as well as cash forecast by management to be generated by operations will be sufficient to meet our working capital and capital requirements for our current operations.

Based on our current operating plan, we believe that our existing resources, including cash generated from operations as well as the bank loans, will be sufficient to meet our working capital requirement for our current operations. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources."

Also:

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

***Very Important GeoTeam note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

see relevant articles

Our intent over the short-term is to build a check list to assess the risk position of firms in the ChinaHybrid space. For the time being this will consist of the following: (this list is likely to grow substantially):

- Is the company's auditor ranked in the top 100?
- Is the auditor located in the U.S.A? If located in China the PCAOB (Public Company Oversight Board) may be denied access to investigate the practices of the auditing firm. Short sellers have been using this information as a tool to validate their opinions.
- Are the company's internal controls satisfactory?
- Are their any outstanding legal issues?
- Do the company's top ten customers represent less than 10% of revenues?
- Operating cash flow divided by current liabilities is greater than one. The higher the better.

- Cash divided by current liabilities. This is an the most conservative liquidity ratio. The higher the better

- Is the company buying back stock?

 

Criteria	Meets Criteria	Notes
Top 100 Auditor	Yes	Friedman LLP
Auditor Located U.S.A	Yes	New York, NY
Satisfactory Internal Controls	No	As of March 31, 2010, the Company’s Chief Executive Officer and its Chief Financial Officer have concluded that, as of that date, the Company’s controls and procedures were not effective due to some significant deficiencies . We have designed and plan to implement, or in some cases have already implemented specific remediation initiatives.
No Legal issues	Yes	None Found
Customer Concentration	Yes	No single customer accounted for more than 10% of our revenue or project expenditures for the six months ended March 31, 2010 nor for the fiscal year ended September 30, 2009.
Cash Flow Ratio is Greater than 1	Yes	1.35
Cash Ratio is Greater than 1	No	0.53
Buying Back Stock/Insider Buying	No	n/a

GeoTeam® Note:

Please note: On July 6, 2010, the GeoTeam® removed all Chinese stocks that were on GeoBargains and GeoSpecial lists to respective Radar lists as we complete our "quality assessment."

Short term and risk adverse investors should be aware of the quality issues currently present in the ChinaHybrid Space, questioning the validity of what seem like solid fundamental stories. It is beginning to get ugly so be cautious and understand that more pain may have to be endured, as ChinaHybrids are easy prey for short investors. The broad brush that is being applied to theses stocks appears unfair, but we can’t ignore the psychological impact this can have on investors' portfolio decisions. If history is our guide, fear will eventually create an immense opportunity to invest in the companies that prove they can meet quality litmus tests enact shareholder friendly moves. Credibility can also be restored if independent legal/SEC opinions validate accounting practices currently in question. 

***Very Important GeoTeam® note. We have yet to verify if the Chinese filings for ChinaHybrid stocks we monitor match respective SEC filings. We are in the process of completing this task. Although we are not totally convinced that SAIC filings are an accurate represenation of financial statements the issue is impacting stock prices. Conservative investors may want to limit exposure or buy put options on stocks, that have this availability, as insurance against long positions, until we publish our findings. Odds are we will identify some promising companies that will fail this litmus test.

see relevant articles

China Environmental filed its 2010 second quarter filing yesterday evening. We were pleasantly surprised by the results:

March Quarter	2nd Quarter 2010	2nd  Quarter 2009	Period Change
GAAP Revenue	$14.8 million	$4.2 million	252.4%
GAAP EPS	$0.16	$0.01	1500%
Tax Rate	23.7%	27.0%	12.2%
Fully Diluted Shares	16,598,876	16,150,000	2.8%

Source: See Filing for the period ended March 31, 2010

Other highlights from the filing:

The increase in our revenue was attributable to the following

• In the same period of the prior year, we were focused on equipment sales, rather than on equipment-bundled installation projects which normally have a 5% to 10% higher profit margin than ordinary equipment sales. Starting in 2009, our business has transitioned from traditional equipment sales to a greater emphasis on the equipment installation projects
• The market demand in China for high-quality waste water treatment equipment we believe is growing substantially as more old waste water treatment plants throughout China are undergoing improvement or upgrades, as required by many local governments
• Experience in our industry and well-known brand has helped us obtain new and retain existing clients
• We own several patents which helped to increase our voting power in the contract bidding process to successfully acquire customer orders, because our equipments with such patents enable us to provide higher quality products and comprehensive technical supports to customers than our competitors do.
• We have established good relationships with many local engineering design institutes and their decisions normally play an important role to affect many clients in the project bidding process.

The increase in our net income was primarily attributable to our

• Increased revenue for the three months ended March 31, 2010
• Higher profit margin on the contracted projects versus sales of equipments in prior years, as our business continued to transition.

CNVP's trailing EPS is now $0.61 giving it a P/E of 9.8 on its previous day ask price of $6.00.

We have attempted to contact CNVP management on several occasions, but to no avail. We need to be aware that the company will now have to go up against touger quarters in the second half of its 2011 fiscal year ending september. EPS over the past four quarters has been in a tight range so we are not sure EPS growth will continue into the second half of 2010. We are assuming that the company may be operating at full capacity, necessitating the need for a capital raise despite the following comments in its filing:

"To date, we have financed our operations primarily through cash flows from operations and borrowings from PRC banks. As of March 31, 2010, we had $4,192,190 in working capital. Based on our current operating plan, we believe that our existing resources, including cash generated from operations as well as our bank loans, will be sufficient to meet our working capital requirement for our current operations over the next 12 months. To fully implement our business plan and continue our growth, however, we believe we will require additional capital. We currently have no agreement and/or commitment to obtain any such additional capital."

We will provide an update once we have contacted management.

Disclosure: Long CNVP

CNVP, previously TODT, announced the execution of a reverse split in connection with its reverse merger

Excerpt from February 12, 2010 8K:

Before the closing of the Merger, the Company affected a 4.61896118 for 1 reverse split of the outstanding common stock of the Company, so that after such split but before the issuance of the Merger Consideration there were approximately issued and outstanding 850,000 shares of common stock of the Company.

Apparently on February 12, 2010, the company had only effected the reverse split with respect to shares, but not price.

Yesterday's reverse split confirms our calculated share count of 17,000,000 shares. However, we must adjust the P/E to 25.7 based on its price of about $9.24. Currently, the stock is coded as a GeoBargain. With this new P/E information the decision to maintain the GeoBargain status has become more challenged. Yet, we certainly like the growth rates the company achieved in 2009, as well as its industry. Conservative investors may want to wait for the release of the company's 2010 first quarter financials and EPS figures before making an investment decision. Our several attempts to contact the company have been unsuccessful.

This is a similar situation that we believe to have encountered with Datone (OTC BB:DATI)

The GeoTeam will pay close attention to similar circumstances in the future.**

Hopefully, CNVP's new share price will bring it a step closer to listing on a major exchange.

**With help from an alert investor, we saw it necessary to release this update.

On February 9, 2010, the Company entered into an agreement with Dragon Path International Limited. The merger was closed on February 12, 2010. Pursuant to the terms of the Merger Agreement, the Company acquired all of the outstanding capital stock of Dragon Path through the merger with China Environmental Protection Inc., a Nevada corporation wholly owned by the Company. Dragon Path is a holding company whose only asset, held through a subsidiary, is 100% of the registered capital of Yixing Dragon Path Environment Technology Limited (“Yix, a limited liability company organized under the laws of the People’s Republic of China. Substantially all of Dragon Path's operations are conducted in China through Yixing Dragon Path, and through contractual arrangements with Yixing Dragon Path’s consolidated affiliated entity in China, Jiangsu Zhenyu Environmental Protection Technology Co. Ltd.

Zhenyu Snap Shot: 

Engaged in design, manufacture, and installation of water and waster water treatment equipment for environmental protection purposes, as well as providing high-quality after-sales services.

Post Merger Share Calculation:

• 850,000: Pre reverse merger outstanding shares after a 4.61896118 reverse split  
• 16,150,000: Newly issued shares of Common Stock

GeoTeam® best effort calculation of total post reverse merger outstanding shares assuming full conversions:  17,000,000

We are going out of the limb and coding TODT, a China-based water treatment equipment supplier and project contractor, as a GeoBargain. The company just became public through a reverse merger. Our initial pass indicates that the company reported 2009 EPS of $0.35 up from $0.09 in 2008. Unfortunately, we do not have any quarterly information and have been unsuccessful in our attempts to reach management in China. see merger summary.

However, the company's 8K filing on February 12, 2009, outlining the reverse merger, gives us some hope that strong growth will continue:

• We are a prominent China-based water treatment equipment supplier and project contractor. Holding six national patents and through sixteen years of development, we have relatively strong market share in waste water treatment sector in China and are ranked among top six of Yixing City’s best environmental protection enterprises based on Yixing Municipal Government’s ranking of 2009 outstanding environment protection enterprises (Yizhengfa Document No.[2010]18).
  
• The water treatment industry in China has experienced and is expected to continue to experience rapid growth. China faces severe water shortages and natural water resource pollution due to rapid growth in population, urbanization and industrialization. To address those issues, the Chinese government has enacted environmental standards and invested significantly in water treatment projects to promote sustainable economic growth and to provide its population with affordable, purified water.
  
• During the past 5 years, the market demand trend for waste water treatment equipment in China has been kept steadily increasing, primarily due to increased level of industrialization, urbanization, and awareness of environment protection among general public. According to the relevant data provided by Frost & Sullivan, more than 3,000 waste water treatment plants have been built and put into use in China from 2001 to 2005.
  
• China Environmental Protection Industry Association predicts that sales of waste water treatment equipment will increase from $2.1 billion in 2004 to $3.8 billion in 2010, with compound annual growth rate of 10.1%. In the meantime, revenue generated from waste water treatment related industry will increase from $3 billion in 2004 to $14.6 billion in 2010, with compound annual growth rate of 30.0%. The newly published laws and regulations relating to environment protection in China, as well as general public’s concerns on industrial pollution, have also educated enterprises and general public, enabling them to become aware of the importance and benefits of waste water treatment.

The stock has a meager trailing  P/E of 2.2 and meets 8 out 10 GeoBargain criteria. If we can confirms 30% EPS growth going forward this story could become exciting.

What we don’t yet know is the company’s immediate needs for capital, but here is what we do have on this matter:

To date, we have financed our operations primarily through cash flows from operations and borrowings from banks. As of September 30, 2009, we had $2,103,946 in working capital, as compared to $1,370,047 as of September 30, 2008. Based on our current operating plan, we believe that our existing resources, including cash generated from operations as well as the bank loans, will be sufficient to meet our working capital requirement for our current operations. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources.

We will issue updates as they become available. Please note, the stock is illiquid and has a wide Bid/Ask spread.

To date, we have financed our operations primarily through cash flows from operations and borrowings from banks. As of September 30, 2009, we had $2,103,946 in working capital, as compared to $1,370,047 as of September 30, 2008. Based on our current operating plan, we believe that our existing resources, including cash generated from operations as well as the bank loans, will be sufficient to meet our working capital requirement for our current operations. In order to fully implement our business plan and continue our growth, however, we will require additional capital either from our shareholders or from outside sources.