Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended March 31, 2009
OR
¨ TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from
to
Commission
File No. 333-120431
China
Recycling Energy Corporation
(Exact
Name of Registrant as Specified in Its Charter)
Nevada
|
90-0093373
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
|
Suite
909, Tower B
Chang
An International Building
No.
88 Nan Guan Zheng Jie
Xi
An City, Shan Xi Province
China
710068
|
(Address
of Principal Executive Offices, Zip
Code)
|
Registrant’s
Telephone Number, Including Area Code: (011) 86-29-8769-1097
Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 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 subject to such filing
requirements for the past 90 days.
Yes x 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.
Large
accelerated filer ¨ Accelerated
filer ¨ Non-accelerated
filer x Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No x
The
number of shares outstanding of the registrant’s Common Stock, as of March 31,
2009 was 36,425,094.
INDEX
|
|
Page
No.
|
|
|
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
3
|
|
|
|
|
|
Consolidated
Balance Sheet as of March 31, 2009 (Unaudited) and December 31,
2008
|
|
3
|
|
|
|
|
|
Consolidated
Statements of Operations (Unaudited) – Three Months Ended March 31, 2009
and March 31, 2008
|
|
4
|
|
|
|
|
|
Consolidated
Statements of Cash Flows (Unaudited) –Three Months Ended March 31, 2009
and March 31, 2008
|
|
5
|
|
|
|
|
|
Notes
to Consolidated Financial Statements (Unaudited)
|
|
6
|
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
20
|
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
|
|
|
|
PART
II - OTHER INFORMATION
|
|
28
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
28
|
|
|
|
|
Item
1A.
|
Risk
Factors
|
|
28
|
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
28
|
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
|
28
|
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
28
|
|
|
|
|
Item
5.
|
Other
Information
|
|
28
|
|
|
|
|
Item
6.
|
Exhibits
|
|
28
|
PART
I – FINANCIAL INFORMATION
Item 1. Financial
Statements
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
AS OF
MARCH 31,
2009
|
|
|
AS OF
DECEMBER
31, 2008
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
& cash equivalents
|
|
$ |
10,212,758 |
|
|
$ |
7,267,344 |
|
Investment
in sales type leases, net
|
|
|
2,152,977 |
|
|
|
1,970,591 |
|
Interest
receivable on sales type leases
|
|
|
237,033 |
|
|
|
82,406 |
|
Advance
to suppliers
|
|
|
73,156 |
|
|
|
- |
|
Prepaid
expenses
|
|
|
1,049,381 |
|
|
|
3,849,087 |
|
Other
receivables
|
|
|
121,885 |
|
|
|
102,850 |
|
Inventory
|
|
|
13,101,420 |
|
|
|
10,534,633 |
|
Deferred
tax asset
|
|
|
14,032 |
|
|
|
- |
|
Total current
assets
|
|
|
26,962,642 |
|
|
|
23,806,911 |
|
NON-CURRENT
ASSETS
|
|
|
|
|
|
|
|
|
Investment
in sales type leases, net
|
|
|
14,285,747 |
|
|
|
14,837,879 |
|
Advance
for equipment
|
|
|
- |
|
|
|
2,642,889 |
|
Property
and equipment, net
|
|
|
90,026 |
|
|
|
95,359 |
|
Construction
in progress
|
|
|
5,193,171 |
|
|
|
3,731,016 |
|
Intangible
assets, net
|
|
|
3,293 |
|
|
|
3,482 |
|
Total non-current
assets
|
|
|
19,572,237 |
|
|
|
21,310,625 |
|
TOTAL
ASSETS
|
|
$ |
46,534,879 |
|
|
$ |
45,117,536 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,184,716 |
|
|
$ |
1,186,902 |
|
Unearned
revenues
|
|
|
658,289 |
|
|
|
658,415 |
|
Tax
payable
|
|
|
1,058,328 |
|
|
|
2,137,356 |
|
Accrued
liabilities and other payables
|
|
|
3,583,069 |
|
|
|
3,528,527 |
|
Stock
option liability
|
|
|
827,965 |
|
|
|
- |
|
Convertible
notes, net of discount due to beneficial conversion
feature
|
|
|
5,000,000 |
|
|
|
5,000,000 |
|
Total current
liabilities
|
|
|
12,312,367 |
|
|
|
12,511,200 |
|
|
|
|
|
|
|
|
|
|
DEFERRED
TAX LIABILITY
|
|
|
945,761 |
|
|
|
- |
|
ACCRUED
INTEREST ON CONVERTIBLE NOTES
|
|
|
231,507 |
|
|
|
168,494 |
|
CONTINGENCIES
AND COMMITMENTS STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 100,000,000 shares
authorized, 36,425,094 and 36,425,094 shares issued
and outstanding as of March 31, 2009 and December
31, 2008, respectively
|
|
|
36,425 |
|
|
|
36,425 |
|
Additional
paid in capital
|
|
|
30,251,597 |
|
|
|
30,475,360 |
|
Unamortized
compensation expense, net
|
|
|
(1,454,954 |
) |
|
|
- |
|
Statutory
reserve
|
|
|
1,489,719 |
|
|
|
1,319,286 |
|
Accumulated
other comprehensive income
|
|
|
3,552,692 |
|
|
|
3,582,587 |
|
Accumulated
deficit
|
|
|
(846,451 |
) |
|
|
(2,991,995 |
) |
Total Company stockholders’
equity
|
|
|
33,029,028 |
|
|
|
32,421,663 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling
interest
|
|
|
16,216 |
|
|
|
16,179 |
|
Total equity
|
|
|
33,045,244 |
|
|
|
32,437,842 |
|
TOTAL
LIABILITIES AND EQUITY
|
|
$ |
46,534,879 |
|
|
$ |
45,117,536 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHINA RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(UNAUDITED)
|
|
FOR THE THREE MONTHS ENDED
MARCH 31,
|
|
|
|
2009
|
|
|
2008
|
|
Revenue
|
|
|
|
|
|
|
Rental
income
|
|
$ |
4,322,893 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
|
4,322,893 |
|
|
|
- |
|
Cost
of sales
|
|
|
|
|
|
|
|
|
Rental
expense
|
|
|
3,021,673 |
|
|
|
- |
|
Total
cost of sales
|
|
|
3,021,673 |
|
|
|
- |
|
Gross
profit
|
|
|
1,301,220 |
|
|
|
- |
|
Interest
income on sales-type leases
|
|
|
1,198,531 |
|
|
|
564,952 |
|
|
|
|
|
|
|
|
|
|
Total
operating income
|
|
|
2,499,751 |
|
|
|
564,952 |
|
Operating
expenses
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
795,438 |
|
|
|
648,610 |
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
795,438 |
|
|
|
648,610 |
|
|
|
|
|
|
|
|
|
|
Income
(loss) from operations
|
|
|
1,704,313 |
|
|
|
(83,658 |
) |
Non-operating
income (expenses)
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
5,013 |
|
|
|
- |
|
Interest
expense on convertible note
|
|
|
(63,232 |
) |
|
|
(743,278 |
) |
Financial
expense
|
|
|
(2,094 |
) |
|
|
(422 |
) |
Other
income
|
|
|
- |
|
|
|
1,581 |
|
Exchange
loss
|
|
|
- |
|
|
|
(11,189 |
) |
|
|
|
|
|
|
|
|
|
Total
non-operating expenses
|
|
|
(60,313 |
) |
|
|
(753,308 |
) |
|
|
|
|
|
|
|
|
|
Income
(loss) before income tax
|
|
|
1,644,000 |
|
|
|
(836,966 |
) |
Income
tax expense
|
|
|
568,111 |
|
|
|
50,947 |
|
|
|
|
|
|
|
|
|
|
Net
income (loss) from operations
|
|
|
1,075,889 |
|
|
|
(887,913 |
) |
Less:
Net income attributable to noncontrolling interest
|
|
|
40 |
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
1,075,849 |
|
|
|
(887,940 |
) |
Other
comprehensive item
|
|
|
|
|
|
|
|
|
Foreign
currency translation gain (loss)
|
|
|
(29,895 |
) |
|
|
74,725 |
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss)
|
|
$ |
1,045,954 |
|
|
$ |
(813,215 |
) |
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
36,425,094 |
|
|
|
25,015,089 |
|
Diluted
weighted average shares outstanding
|
|
|
46,760,632 |
|
|
|
30,508,410 |
|
|
|
|
|
|
|
|
|
|
Basic
net earnings per share
|
|
$ |
0.03 |
|
|
$ |
(0.04 |
) |
Diluted
net earnings per share
|
|
$ |
0.02 |
|
|
$ |
(0.04 |
) |
* Interest
expense on convertible notes are added back to net income for the computation of
diluted EPS.
* Diluted
weighted average shares outstanding includes estimated shares will be converted
from the Second Note issued on April 29, 2008 with conversion price
contingent upon future net profits.
* Basic
and diluted loss per share is the same due to anti-dilutive feature of the
securities.
The
accompanying notes are an integral part of these consolidated financial
statements.
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
FOR THE THREE MONTHS ENDED
MARCH 31,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
income (loss) including noncontrolling interest
|
|
$ |
1,075,889 |
|
|
$ |
(887,913 |
) |
Adjustments
to reconcile net income (loss) including noncontrolling interest to net
cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,348 |
|
|
|
17 |
|
Amortization
of discount related to conversion feature of convertible
note
|
|
|
- |
|
|
|
623,288 |
|
Stock
option compensation expense
|
|
|
389,376 |
|
|
|
325,155 |
|
Accrued
interest on convertible notes
|
|
|
63,013 |
|
|
|
124,658 |
|
Changes
in deferred tax
|
|
|
931,756 |
|
|
|
- |
|
(Increase)
decrease in current assets:
|
|
|
|
|
|
|
|
|
Interest
receivable on sales type leases
|
|
|
211,913 |
|
|
|
(94,903 |
) |
Advance
to suppliers and prepaid expenses
|
|
|
2,799,495 |
|
|
|
(192,463 |
) |
Other
receivables
|
|
|
(19,053 |
) |
|
|
1,622 |
|
Increase
(decrease) in current liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
(1,960 |
) |
|
|
(69,737 |
) |
Tax
payable
|
|
|
(1,078,653 |
) |
|
|
(125,995 |
) |
Accrued
liabilities and other payables
|
|
|
55,144 |
|
|
|
17,227 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
4,434,268 |
|
|
|
(279,044 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Investment
in sales type leases
|
|
|
- |
|
|
|
282,188 |
|
Acquisition
of property & equipment
|
|
|
(1,843 |
) |
|
|
(80,823 |
) |
Construction
in progress
|
|
|
(1,462,908 |
) |
|
|
(977,299 |
) |
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(1,464,751 |
) |
|
|
(775,934 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayment
to management
|
|
|
- |
|
|
|
(72,826 |
) |
Advance
from shareholder
|
|
|
- |
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
- |
|
|
|
177,174 |
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGE ON CASH & CASH EQUIVALENTS
|
|
|
(24,103 |
) |
|
|
41,065 |
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
|
|
2,945,414 |
|
|
|
(836,739 |
) |
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, BEGINNING OF PERIOD
|
|
|
7,267,344 |
|
|
|
1,634,340 |
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS, END OF PERIOD
|
|
$ |
10,212,758 |
|
|
$ |
797,601 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash flow data:
|
|
|
|
|
|
|
|
|
Income
tax paid
|
|
$ |
732,561 |
|
|
$ |
127,336 |
|
Interest
paid
|
|
$ |
- |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
CHINA
RECYCLING ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH
31, 2009 (UNAUDITED) AND 2008
1. ORGANIZATION
AND DESCRIPTION OF BUSINESS
China
Recycling Energy Corporation (the “Company” or “CREG”) (formerly China Digital
Wireless, Inc.) was incorporated on May 8, 1980, under the laws of the State of
Colorado. On September 6, 2001, the Company re-domiciled its state of
incorporation from Colorado to Nevada. The Company, through its subsidiary,
Shanghai TCH Energy Technology Co., Ltd (“TCH”), sells and leases energy saving
systems and equipment. The businesses of mobile phone distribution and provision
of pager and mobile phone value-added information services were discontinued in
2007. On March 8, 2007, the Company changed its name to “China Recycling Energy
Corporation”.
Since
January 2007, the Company has phased out and substantially scaled down most of
its business of mobile phone distribution and provision of pager and mobile
phone value-added information services. In the first and second quarters of
2007, the Company did not engage in any substantial transactions or activity in
connection with these businesses. On May 10, 2007, the Company discontinued the
businesses related to mobile phones and pagers. These businesses are reflected
in continuing operations for all periods presented based on the criteria for
discontinued operations prescribed by Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets (“SFAS 144”).
On
February 1, 2007, the Company’s subsidiary, TCH, entered into two top gas
recovery turbine system (“TRT”) projects, each evidenced by a joint-operation
agreement, with Xi’an Yingfeng Science and Technology Co., Ltd. (“Yingfeng”).
TRT is an electricity generating system that utilizes the exhaust pressure and
heat produced in the blast furnace of a steel mill to generate electricity.
Yingfeng is a joint stock company registered in Xi’an, Shaanxi Province, Peoples
Republic of China (the “PRC”), and engages in designing, installing, and
operating TRT systems and sales of other renewable energy products.
Under the
first joint-operation agreement, TCH and Yingfeng jointly operated a top gas
recovery turbine project (“TRT Project”), which designed, constructed, installed
and operated a TRT system and leased it to Zhangzhi Iron and Steel Holdings Ltd.
(“Zhangzhi”). The total costs contributed by TCH were approximately $1,426,000
(equivalent to Renminbi (“RMB”) 10,690,000). TCH provided capital and various
properties into the TRT Project, including hardware, software, equipment, major
components and devices. The construction of the TRT Project was completed and
put into operation in August 2007. In October 2007, the Company terminated the
joint-operation agreement with Yingfeng. TCH became entitled to the rights,
titles, benefits and interests in the TRT Project and receives monthly rental
payments of approximately $147,000 (equivalent to RMB 1,100,000) from Zhangzhi
for a lease term of thirteen years. At the end of the lease term, TCH will
transfer the rights and titles of the TRT Project to Zhangzhi without
cost.
Under the
second joint-operation agreement, TCH and Yingfeng jointly operated a TRT
Project, which designed, constructed, installed and operated a TRT system and
lease to Xingtai Iron and Steel Company Ltd. (“Xingtai”). TCH provided capital
and various properties into the TRT Project, including hardware, software,
equipment, major components and devices. The total estimated costs of this TRT
Project were approximately $3,900,000 (equivalent to RMB 30,000,000). The
construction of the TRT Project was completed and put into operation
in August 2007. In October 2007, the Company terminated the joint-operation
agreement with Yingfeng. TCH became fully entitled to all the rights, titles,
benefits and interests of the TRT Project and receives monthly rental payments
of approximately $117,000 (equivalent to RMB 900,000) from Xingtai for a lease
term of five years. At the end of the lease term, TCH will transfer all the
rights and titles of the TRT Project to Xingtai without cost.
In
November 2007, TCH signed a cooperative agreement with Shengwei Group for a
Cement Waste Heat Power Generator Project (“CHPG”). TCH will build two sets of
12MW pure low temperature cement waste heat power generator systems for
its two 2500 tons per day cement manufacturing lines in Jin Yang and a
5,000 tons per day cement manufacturing line in Tong
Chuan. Total investment will be approximately $12,593,000 (RMB
93,000,000). At the end of 2008, construction of the Power Generator
Project in Tong Chuan was completed at a total cost of approximately $6,191,000
(RMB 43,000,000) and put into operation. The ownership of the power
generator system belongs to Tong Chuan from the date the system is put into
service. TCH is responsible for the daily maintenance and repair of
the system, and charges Tong Chuan the monthly electricity fee based on the
actual power generated by the system at 0.4116 RMB per KWH for an operating
period of five years with the assurance from Tong Chuan of proper functioning of
5000 tons per day cement manufacturing line and not less than 7440 heat
providing hours per year for the electricity generator
system. Shengwei Group has collateralized the cement manufacturing
line in Tongchuan to guarantee its obligations to provide the minimum
electricity income from the power generator system under the agreement during
the operating period. At the end of the five years operating period, TCH will
have no further obligations under the cooperative agreement.
The
unaudited financial statements included herein have been prepared
by the Company, pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). The information furnished herein reflects all
adjustments (consisting of normal recurring accruals and adjustments) that are,
in the opinion of management, necessary to fairly present the operating results
for the respective periods. Certain information and footnote disclosures
normally present in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been omitted pursuant to such rules and regulations. These financial
statements should be read in conjunction with the audited financial
statements and footnotes included in the Company’s 2008 audited financial
statements included in the Company’s Annual Report on Form 10-K. The
results for the three months ended March 31, 2009 are not necessarily indicative
of the results to be expected for the full year ending December 31,
2009.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of presentation
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“US GAAP”) and pursuant to the rules and regulations of the SEC for quarterly
financial statements.
Basis
of consolidation
The
consolidated financial statements include the accounts of CREG and, its
subsidiaries, Sifang Holdings, TCH, and TCH’s subsidiaries Xi’an TCH Energy Tech
Co., Ltd. (“Xi’an TCH”) and Xingtai Huaxin Energy Tech Co., Ltd. (“Huaxin”), and
Sifang Holding’s subsidiary, Huahong New Energy Technology Co., Ltd.
(“Huahong”). Xi’an TCH, Huaxin and Huahong engage in the same business as TCH.
Substantially all of the Company’s revenues are derived from the operations of
TCH and its subsidiaries, which represent substantially all of the Company’s
consolidated assets and liabilities as of March 31, 2009 and December 31, 2008,
respectively. All significant inter-company accounts and transactions have been
eliminated in consolidation.
Use
of estimates
In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the period reported. Actual
results may differ from these estimates.
Cash
and cash equivalents
Cash and
cash equivalents are carried at cost and represent cash on hand, demand deposits
placed with banks or other financial institutions and all highly liquid
investments with an original maturity of three months or less as of the purchase
date of such investments.
Accounts
receivable and concentration of credit risk
Accounts
receivable are recorded at the invoiced amounts and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. 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. As of March 31, 2009 and
December 31, 2008, the Company had accounts receivable of $0.
An
allowance for doubtful accounts is established and determined based on
management’s assessment of known requirements, aging of receivables, payment
history, the customer’s current credit worthiness and the economic environment.
As of March 31, 2009 and December 31, 2008, the Company had an accounts
receivable allowance of $0.
Financial
instruments that potentially subject the Company to credit risk consist
primarily of accounts receivable, receivable on sales-type leases, accounts
payable, convertible notes and other receivables. The carrying amounts reported
in the balance sheets for the leases and other financial instruments are a
reasonable estimate of fair value because of the short period of their maturity.
The convertible notes rate of interest is equal to the current market
rate of interest.
The
operations of the Company are located in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
Inventory
Inventory
is valued at the lower of cost or market. Cost of work in progress and finished
goods comprises direct material cost, direct production cost and an allocated
portion of production overheads (See Note 5).
Property
and equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method over the estimated lives ranging from 5 to 20 years as
follows:
Building
|
20
years
|
Vehicle
|
2 -
5 years
|
Office
and Other Equipment
|
2 -
5 years
|
Software
|
2 -
3 years
|
Impairment
of long-life assets
In
accordance with SFAS 144, the Company reviews its
long-lived assets, including property, plant and equipment, for impairment
whenever events or changes in circumstances indicate that the carrying amounts
of the assets may not be fully recoverable. If the total of the expected
undiscounted future net cash flows is less than the carrying amount of the
asset, a loss is recognized for the difference between the fair value and
carrying amount of the asset. There has been no impairment as of March 31, 2009
and December 31, 2008.
Sales-type
leasing and related revenue recognition
The
Company leases TRT and CHPG systems to its customers. The Company usually
transfers all benefits, risks and ownership of the TRT or CHPG system to its
customers at the end of each lease term. In one system (CHPG), the
Company transferred the ownership of the power generated system when the system
was put into operation. The Company’s investment in these projects is
recorded as investment in sales-type leases in accordance with SFAS No. 13,
“Accounting for Leases” and its various amendments and interpretations. The
Company manufactures and constructs the TRT and CHPG systems and power
generating system, and finances its customers for the price of the
systems. The sales and cost of goods sold are recognized at the point
of sale or inception of the lease. The investment in sales-type leases consists
of the sum of the total minimum lease payments receivable less unearned interest
income and estimated executory cost. Unearned interest income is amortized to
income over the lease term as to produce a constant periodic rate of return on
the net investment in the lease.
Cost
of sales
Cost of
sales consists primarily of the direct material of the power generating system
and expenses incurred directly for project construction for sales-type leasing;
and rental expenses for two pieces of power generation equipment for the
operating lease.
Income
taxes
The
Company utilizes SFAS No. 109, “Accounting for Income Taxes,” which requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been included in the financial statements or
tax returns. Under this method, deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each period end based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
The
Company adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, (“FIN 48”), on January 1, 2007. As a result of the implementation
of FIN 48, the Company made a comprehensive review of its portfolio of tax
positions in accordance with recognition standards established by FIN 48. As a
result of the implementation of FIN 48, the Company recognized no material
adjustments to liabilities or stockholders equity. When tax returns are filed,
it is highly certain that some positions taken would be sustained upon
examination by the taxing authorities, while others are subject to uncertainty
about the merits of the position taken or the amount of the position that would
be ultimately sustained. The benefit of a tax position is recognized in the
financial statements in the period during which, based on all available
evidence, management believes it is more likely than not that the position will
be sustained upon examination, including the resolution of appeals or litigation
processes, if any. Tax positions taken are not offset or aggregated with other
positions. Tax positions that meet the more-likely-than-not recognition
threshold are measured as the largest amount of tax benefit that is more than 50
percent likely of being realized upon settlement with the applicable taxing
authority. The portion of the benefits associated with tax positions taken that
exceeds the amount measured as described above is reflected as a liability for
unrecognized tax benefits in the accompanying balance sheets along with any
associated interest and penalties that would be payable to the taxing
authorities upon examination. Interest associated with unrecognized
tax benefits are classified as interest expense and penalties are classified in
selling, general and administrative expenses in the statements of income. The
adoption of FIN 48 did not have a material impact on the Company’s financial
statements.
Statement
of cash flows
In
accordance with SFAS No. 95, “Statement of Cash Flows,” cash flows from the
Company’s operations are calculated based upon the local currencies. As a
result, amounts related to assets and liabilities reported on the statement of
cash flows may not necessarily agree with changes in the corresponding balances
on the balance sheet.
Fair
Value of Financial Instruments
SFAS No.
107, “Disclosures about Fair Value of Financial Instruments,” requires the
Company to disclose estimated fair values of financial
instruments. The carrying amounts reported in the statements of
financial position for investment in sales-type leases, current assets and
current liabilities qualifying as financial instruments are a reasonable
estimate of fair value.
Stock
Based Compensation
The
Company accounts for its stock-based compensation in accordance with SFAS No.
123R, “Share-Based Payment, an Amendment of FASB Statement No. 123.” The
Company recognizes in the statement of operations the grant-date fair value of
stock options and other equity-based compensation issued to employees and
non-employees.
Basic
and Diluted Earnings per Share
Basic
earnings per share (“EPS”) is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS is computed similar to basic net income per share except
that the denominator is increased to include the number of additional common
shares that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Diluted net earnings
per share is based on the assumption that all dilutive convertible shares and
stock options were converted or exercised. Dilution is computed by applying the
treasury stock method. Under this method, options and warrants are assumed to be
exercised 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 presents a
reconciliation of basic and diluted earnings per share:
|
|
For the Three Months
Ended
March 31, 2009
|
|
|
For the Three
Months
Ended
March 31, 2008
|
|
Net
income (loss) for basic weighted average shares
|
|
$ |
1,075,849 |
|
|
$ |
(887,940 |
) |
Net
income (loss) for diluted weighted average shares *
|
|
|
1,138,862 |
|
|
|
(887,940 |
) |
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic
|
|
|
36,425,094 |
|
|
|
25,015,089 |
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
Convertible
notes
|
|
|
10,335,538
|
* |
|
|
4,217,620 |
|
Options
granted
|
|
|
- |
|
|
|
1,275,701 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - diluted
|
|
|
46,760,632 |
|
|
|
30,508,410 |
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per share – basic
|
|
$ |
0.03 |
|
|
$ |
(0.04 |
) |
Earnings
(loss) per share – diluted *
|
|
$ |
0.02 |
|
|
$ |
(0.04 |
) |
*
Interest expense on convertible note has been added back to net income for the
computation of diluted earnings per share.
* Diluted
weighted average shares outstanding includes estimated shares will be
converted from the Second Note issued on April 29, 2008 with conversion price
contingent upon future net profits.
* Basic
and diluted loss per share is the same due to anti-dilutive feature of the
securities.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial reporting
purposes, RMB were translated into United States dollars (“USD”) as the
reporting currency. Assets and liabilities are translated at the exchange rate
in effect at the balance sheet date. Revenues and expenses are translated at the
average rate of exchange prevailing during the reporting period. 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.” Gains and losses resulting from foreign currency
transactions are included in income. There has been no significant fluctuation
in the exchange rate for the conversion of RMB to USD after the balance sheet
date.
The
Company uses SFAS 130 “Reporting Comprehensive Income.” Comprehensive income is
comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders.
Segment
Reporting
SFAS No.
131, “Disclosures about Segments of an Enterprise and Related Information”
requires use of the “management approach” model for segment reporting. The
management approach model is based on the way a company’s management organizes
segments within the company for making operating decisions and assessing
performance. Reportable segments are based on products and services, geography,
legal structure, management structure, or any other manner in which management
disaggregates a company. SFAS 131 has no effect on the Company’s financial
statements as substantially all of the Company’s operations are conducted in one
industry segment. All of the Company’s assets are located in the
PRC.
Reclassifications
Certain
prior year amounts were reclassified to conform to the manner of presentation in
the current period.
New
Accounting Pronouncements
Employer’s Disclosures about
Postretirement Benefit Plan Assets
In
December 2008, the FASB issued FSP FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP FAS 132(R)-1
applies to an employer that is subject to the disclosure requirements of SFAS
No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other
Postretirement Benefits” (“SFAS 132R”) and amends SFAS 132R to provide guidance
on an employer’s disclosures about plan assets of a defined benefit pension or
other postretirement plan. The disclosures about plan assets required by FSP FAS
132(R)-1 shall be provided for fiscal years ending after December 15, 2009.
Earlier application is permitted. The adoption of FSP FAS 132(R)-1did not have a
material impact on the Company’s financial statements.
Accounting for Defensive
Intangible Assets
In
November 2008, the FASB issued EITF Issue No. 08-7, “Accounting for
Defensive Intangible Assets” (“EITF 08-7”). EITF 08-7 applies to all
acquired intangible assets in situations in which the acquirer does not intend
to actively use the asset but intends to hold the asset to prevent its
competitors from obtaining access to the asset (a defensive intangible
asset). Defensive intangible assets could include assets that the acquirer will
never actively use, as well as assets that will be used by the acquirer during a
transition period when the intention of the acquirer is to discontinue the use
of those assets. EITF 08-7 concluded that a defensive intangible asset
should be accounted for as a separate unit of accounting and should be amortized
over the period that the defensive intangible asset directly or indirectly
contributes to the future cash flows of the entity. EITF 08-7 is effective
prospectively for intangible assets acquired on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier application is not permitted. The adoption of EITF 08-7 did
not have a material impact on the Company’s financial statements.
Accounting for Financial
Guarantee Insurance Contracts
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” Adoption of SFAS
163 did not have a material impact on the Company’s financial
statements.
The Hierarchy of Generally
Accepted Accounting Principles
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy). SFAS 162 adoption did not have an impact on the Company’s
financial statements.
Determination of the Useful
Life of Intangible Assets
In
April 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP
FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”
(“SFAS 142”), and requires additional disclosures. The objective of FSP FAS
142-3 is to improve the consistency between the useful life of a recognized
intangible asset under SFAS 142 and the period of expected cash flows used to
measure the fair value of the asset under SFAS No. 141 (R), “Business
Combinations” (“SFAS 141(R)”), and other accounting principles generally
accepted in the United States. FSP FAS 142-3 applies to all intangible assets,
whether acquired in a business combination or otherwise and shall be effective
for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. The
guidance for determining the useful life of intangible assets shall be applied
prospectively to intangible assets acquired after the effective date. The
disclosure requirements apply prospectively to all intangible assets recognized
as of, and subsequent to, the effective date. Early adoption is prohibited. The
adoption of FSP FAS 142-3 did not have a material impact on the Company’s
financial statements.
Disclosures about Derivative
Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(1) how and why an entity uses derivative instruments, (2) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (3) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or
after November 15, 2008. The adoption of SFAS 161 did not
have a material impact on the Company’s financial statements.
Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51
(“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008. The Company expects SFAS 160 will have an impact on accounting for
business combinations, but the effect is dependent upon acquisitions at that
time. The Company adopted the provisions of SFAS 160 on January 1,
2009.
Business
Combinations
SFAS 141
(Revised 2007), Business
Combinations (SFAS 141(R)), is effective for the Company for business
combinations for which the acquisition date is on or after January 1, 2009. SFAS
141(R) changes how the acquisition method is applied in accordance with SFAS
141. The primary revisions to this Statement require an acquirer in a business
combination to measure assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree at the acquisition date, at their fair
values as of that date, with limited exceptions specified in the Statement. This
Statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
noncontrolling interest in the acquiree, at the full amounts of their fair
values (or other amounts determined in accordance with the Statement). Assets
acquired and liabilities assumed arising from contractual contingencies as of
the acquisition date are to be measured at their acquisition-date fair values,
and assets or liabilities arising from all other contingencies as of the
acquisition date are to be measured at their acquisition-date fair value, only
if it is more likely than not that they meet the definition of an asset or a
liability in FASB Concepts Statement No. 6, Elements of Financial
Statements. This Statement significantly amends other Statements and
authoritative guidance, including FASB Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, and now
requires the capitalization of research and development assets acquired in a
business combination at their acquisition-date fair values, separately from
goodwill. FASB Statement No. 109, Accounting for Income Taxes,
was also amended by this Statement to require the acquirer to recognize changes
in the amount of its deferred tax benefits that are recognizable because of a
business combination either in income from continuing operations in the period
of the combination or directly in contributed capital, depending on the
circumstances. The Company expects SFAS 141R will have a significant impact on
accounting for business combinations, but the effect is dependent upon
acquisitions at that time. The Company adopted the provisions of SFAS 160
on January 1, 2009.
Accounting for Nonrefundable
Advance Payments for Goods or Services Received for use in Future Research and
Development Activities
In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed. EITF 07-03 is effective for fiscal years beginning after
December 15, 2008. The adoption of EITF 07-03 did not have a material
impact on the Company’s financial statements.
3. NET
INVESTMENT IN SALES-TYPE LEASES
Under
sales-type leases, TCH leased TRT systems to Xingtai and Zhangzhi, and CHPG
systems to Tongchuan Shengwei with terms of five years, thirteen years and five
years, respectively. The components of the net investment in sales-type leases
as of March 31, 2009 (unaudited) and December 31, 2008 are as
follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Total
future minimum lease payments receivables
|
|
$ |
39,767,708 |
|
|
$ |
41,431,868 |
|
Less:
unearned interest income
|
|
|
(23,328,984 |
) |
|
|
(24,623,398 |
) |
Net
investment in sales - type leases
|
|
$ |
16,438,724 |
|
|
$ |
16,808,470 |
|
|
|
|
|
|
|
|
|
|
Current
portion
|
|
$ |
2,152,977 |
|
|
$ |
1,970,591 |
|
Noncurrent
portion
|
|
$ |
14,285,747 |
|
|
$ |
14,837,879 |
|
As of
March 31, 2009, the future minimum rentals to be received on non-cancelable
sales type leases are as follows:
Years ending March 31,
|
|
Rentals
|
|
2010
|
|
$ |
6,562,676 |
|
2011
|
|
|
6,445,689 |
|
2012
|
|
|
6,201,456 |
|
2013
|
|
|
4,980,293 |
|
2014
|
|
|
4,184,930 |
|
Thereafter
|
|
|
11,392,664 |
|
|
|
$ |
39,767,708 |
|
4. PREPAID
EXPENSES
Prepaid equipment rent for
operating leases
On April
10, 2008, the Company leased energy recycling power generation equipment under a
one-year, non-cancellable lease for approximately $4,455,000 (RMB 31,000,000).
At the end of this lease, the Company has the right to renew the lease for
another four-year term at an aggregate price of approximately $10,940,000 (RMB
75,000,000). The lease payment of approximately $4,455,000 was paid in
full.
On the
same day, the Company entered into a lease with a lessee to sublease the above
power generation equipment under a one-year, non-cancellable lease for
approximately $583,000 (RMB 4,000,000) per month with an option to renew. The
lessee will pay a monthly payment of approximately $486,000 (RMB 3,333,000) if
the Company renews the lease of the equipment from the ultimate lessor after one
year.
On May
21, 2008, the Company leased energy recycling power generation equipment from
the same lessor under a one-year, non-cancellable lease for approximately
$6,560,000 (RMB 45,000,000). At the end of the one-year lease term, the Company
has the right to renew the lease for another four-year term at an aggregate
price of approximately $17,500,000 (RMB 120,000,000) with a separate agreement.
The lease payment of approximately $6,560,000 was paid in full.
On the
same day, the Company entered into a lease with the same lessee to sublease the
above power generation equipment under a one-year, non-cancellable lease for
approximately $887,000 (RMB 5,850,000) per month with an option to renew. The
lessee will pay a monthly payment of approximately $729,000 (RMB 5,000,000) if
the Company renews the lease of the equipment from the ultimate lessor after one
year.
Prepaid expenses –
other
Other
prepaid expenses mainly consisted of prepayment for office rental, parking
space, insurance and legal fees. Other prepaid expenses were
approximately $3,600 and $28,000 at March 31, 2009 and December 31, 2008,
respectively.
5. INVENTORY
Inventory
consisted of two equipment systems that will be used for TRT or CHPG projects in
the amount of $13,101,420 and $10,534,633 at March 31, 2009 and December 31,
2008, respectively.
6. ADVANCE
FOR EQUIPMENT
“Advance
for equipment” represented advance payment of approximately $2,640,000 (RMB
18,000,000) to an independent contractor for constructing a power generation
system and purchase of the equipment that will be used for the construction. At
December 31, 2008, this project was terminated; during the first quarter of
2009, the title of the equipment has officially transferred to the Company as
the Company’s inventory.
7. CONSTRUCTION
IN PROGRESS
“Construction
in progress” represented the amount paid to an independent contractor for
constructing two power generation systems for the total amount of approximately
$8,600,000 (RMB 58,500,000). The construction project commenced in March 2008,
and will take about 12 - 15 months to complete. Upon completion, the Company
will sell the power that is generated from this system to predetermined
customers (See Note 18). At March 31, 2009, the construction in
progress $5,193,171, one system had been completed and put into operation, and
the other system was expected to be completed in May 2009.
8. TAX
PAYABLE
“Tax
payable” consisted of the following at March 31, 2009 (unaudited) and December
31, 2008, respectively:
|
|
March 31,
|
|
|
December 31
|
|
|
|
2009
|
|
|
2008
|
|
Income
tax payable
|
|
$ |
943,870 |
|
|
$ |
2,040,433 |
|
Business
tax payable
|
|
|
102,464 |
|
|
|
86,692 |
|
Other
taxes payable
|
|
|
11,994 |
|
|
|
10,231 |
|
|
|
$ |
1,058,328 |
|
|
$ |
2,137,356 |
|
9. ACCRUED
LIABILITIES AND OTHER PAYABLES
“Accrued
liabilities and other payables” consisted of the following at March 31,
2009 (unaudited) and December 31, 2008, respectively:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
Other
payables Employee training, labor union expenditure, social
insurance payable
|
|
$ |
159,485 |
|
|
$ |
125,323 |
|
Consulting
and legal expenses
|
|
|
371,544 |
|
|
|
371,125 |
|
Payable
to Yingfeng
|
|
|
1,676,481 |
|
|
|
1,676,878 |
|
Security
deposit from lessee
|
|
|
1,024,006 |
|
|
|
1,024,252 |
|
Total
other payables
|
|
|
3,231,516 |
|
|
|
3,197,578 |
|
Accrued
payroll and welfare
|
|
|
263,848 |
|
|
|
258,443 |
|
Accrued
maintenance expense
|
|
|
87,705 |
|
|
|
72,506 |
|
Total
|
|
$ |
3,583,069 |
|
|
$ |
3,528,527 |
|
“Consulting
and legal expenses” was the expenses paid by a third party on behalf of the
Company, which will be repaid by the Company. ”Payable to Yingfeng”
represented the cost of obtaining the ownership of two TRT projects that were
previously owned by Yingfeng. “Deposit from lessee” represented deposit received
for leasing out the power generation equipments.
10. NONCONTROLLING
INTEREST
“Noncontrolling
interest” represented a 20% equity interest in Huaxin. Huaxin was incorporated
in November 2, 2007, and engages in a similar business to TCH. Huaxin
only had interest income for the three months ended March 31, 2009 and 2008, a
minority share of the income was $40 and $27 for the three months ended March
31, 2009 and 2008, respectively.
11. DEFERRED
TAX
Deferred
tax asset arose from accrued maintenance cost on two TRT machines that can be
deducted for tax purposes in the future.
Deferred
tax liability represented differences between the tax bases and book bases
income on sales-type leases.
As of
March 31, 2009, deferred tax asset (liability) consisted of the
following:
|
|
March 31,
2009
|
|
|
|
|
|
Deferred
tax asset - current
|
|
$ |
14,032 |
|
Deferred
tax liability - noncurrent
|
|
$ |
(945,761 |
) |
12. INCOME
TAX
Effective
January 1, 2008, the PRC government implemented a new corporate income tax law
with a new maximum corporate income tax rate of 25%. The Company is governed by
the Income Tax Law of the PRC concerning privately-run enterprises, which are
generally subject to tax at a statutory rate of 25% (33% prior to 2008) on
income reported in the statutory financial statements after appropriate tax
adjustments.
The
Company’s subsidiaries generated substantially all of their net income from
their PRC operations. Shanghai TCH’s effective income tax rate for 2009 and 2008
are 20% and 18%, respectively. Xi’an TCH and its subsidiary’s effective income
tax rate for 2009 and 2008 is 25%. Huahong’s effective income tax rate for 2009
is 25%. Shanghai TCH, Xi’an TCH, Xingtai Huaxin, and Huahong file
separate income tax returns.
Shanghai
TCH, as a business in the Development Zone, is subject to a 15% income tax rate.
According to the new income tax law that became effective January 1, 2008, for
those enterprises to which the 15% tax rate was applicable previously, the
applicable rates shall increase over a five-years as follows:
Year
|
|
Tax Rate
|
|
2007
|
|
|
15%
|
|
2008
|
|
|
18%
|
|
2009
|
|
|
20%
|
|
2010
|
|
|
22%
|
|
2011
|
|
|
24%
|
|
2012
|
|
|
25%
|
|
There is
no income tax for companies domiciled in the Cayman Islands. Accordingly, the
Company’s consolidated financial statements do not present any income tax
provisions related to Cayman Islands tax jurisdiction where Sifang Holding is
domiciled.
The
parent company, China Recycling Energy Co., Ltd., is taxed in the U.S. and had a
net operating loss approximately of $1,063,000 at March 31, 2009 in addition to
approximately $1,245,000 in stock option compensation expense and approximately
$1,210,000 in amortization of discount related to the conversion feature the
Company’s of convertible note. Net operating losses can be
carryforward for 20 years. A 100% valuation allowance was established
due to the uncertainty of its realization.
The
following table reconciles the U.S. statutory rates to the Company’s effective
tax rate for the three months ended March 31, 2009 and 2008,
respectively:
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
US
statutory rates
|
|
|
34.00%
|
|
|
|
(34.00)%
|
|
Tax
rate difference
|
|
|
(9.00)%
|
|
|
|
(3.41)%
|
|
Effect
of tax holiday
|
|
|
-
|
|
|
|
(2.37)%
|
|
Effect
of tax on loss on nontaxable jurisdiction
|
|
|
0.04%
|
|
|
|
0.52%
|
|
Valuation
allowance
|
|
|
9.52%
|
|
|
|
45.35%
|
|
Tax
per financial statements
|
|
|
34.56%
|
|
|
|
6.09%
|
|
13. CONVERTIBLE
NOTES PAYABLE
On
November 16, 2007, the Company entered into a Stock and Notes Purchase Agreement
(“Purchase Agreement”) with Carlyle Asia Growth Partners III, L.P. (“CAGP”) and
CAGP III Co. Investment, L.P. (together with CAGP, the “Investors”). Under the
terms of the Purchase Agreement, the Company sold the Investors a 10% Secured
Convertible Promissory Note in the principal amount of $5,000,000 (the “First
Note”). Additionally, the Purchase Agreement provides for two subsequent
transactions to be effected by the Company and the Investors, which include (i)
the issuance by the Company and subscription by the Investors of a total of
4,066,706 shares of common stock of Company, at the price of $1.23 per share for
an aggregate purchase price of approximately $5,000,000, and (ii) the issuance
and sale by the Company to the Investors of a 5% Secured Convertible Promissory
Note in the principal amount of $15,000,000 (the foregoing transactions,
together with sale and purchase of the First Note, are hereinafter referred to
as the “Offering”). The subsequent transactions are contingent upon the
satisfaction of certain conditions specified in the Purchase Agreement,
including entry into specified energy and recycling project contracts and the
purchase of certain energy recycling systems.
The First
Note bore interest at 10% per annum and was due on November 16, 2009.
The principal face amount of the First Note, together with any interest thereon,
convert, at the option of the holders at any time on or prior to maturity, into
shares of the Company’s common stock at an initial conversion price of $1.23 per
share (subject to anti-dilution adjustments). The First Note was subject to
mandatory conversion upon the consummation of the aforementioned issuance and
subscription of shares of the Company’s common stock under the Purchase
Agreement. As more fully described in the First Note, the obligations of the
Company under the First Note ranked senior to all other debt of the
Company.
As
collateral for the First Note, the President and a major shareholder of the
Company pledged 9,653,471 shares of the Company’s common stock held by him to
secure the First Note.
The First
Note was considered to have an embedded beneficial conversion feature because
the conversion price was less than the quoted market price at the time of the
issuance. Accordingly, the beneficial conversion feature of $5,000,000 was
recorded separately as unamortized beneficial conversion feature based on the
intrinsic value method. The First Note was recorded in the balance sheet at face
value less the unamortized beneficial conversion feature. The terms for the
First Note were amended on April 29, 2008 and the First Note was repaid in full
on June 25, 2008, as described below.
On April
29, 2008, the Company entered into an Amendment to the Purchase Agreement with
the investors. Under the terms of the Amendment, (i) the Company issued and the
Investor subscribed for 4,066,706 shares of common stock of the Company, at
$1.23 per share for an aggregate purchase price of $5,002,048, as originally
contemplated under the Agreement; (ii) the Investors converted the principal
amount under the First Note (and waived any accrued interest thereon) into
4,065,040 shares of common stock of the Company at the conversion price per
share of $1.23, pursuant to the terms and conditions of the First Note issued
under the Agreement; (iii) the Company issued and sold to the Investors a new 5%
Secured Convertible Promissory Note in the principal amount of $5,000,000 to the
Investors (the “Second Note” and collectively with the First Note, the “Notes”);
and (iv) the Company granted to the Investors an option to purchase a 5% Secured
Convertible Promissory Note in the principal amount of $10,000,000, exercisable
by the Investors at any time within nine (9) months following the date of the
closing of the transactions contemplated by the Amendment (the “Option
Note”).
The
Second Note bears interest at 5% per annum and matures on April 29, 2011. The
principal face amount of the Second Note, together with any interest thereon,
convert, at the option of the holders at any time on or after March 30, 2010 (or
such earlier date if the audited consolidated financial statements of the
Company for the fiscal year ending December 31, 2009 are available prior to
March 30, 2010) and prior to maturity, into shares of the Company’s common stock
at an initial conversion price that is tied to the after-tax net profits of the
Company for the fiscal year ending December 31, 2009, as described in the Second
Note. The Second Note is subject to mandatory conversion upon the listing of the
Company’s common stock on the National Association of Securities Dealers
Automated Quotations main-board, the New York Stock Exchange or the American
Stock Exchange. As more fully described in the Second Note, the obligations of
the Company under the Second Note shall rank senior to all other debt of the
Company.
The
Second Note and the Option Note are both secured by a security interest granted
to the Investors pursuant to the Share Pledge Agreement.
The
Second Note was not considered to have an embedded beneficial conversion feature
because the conversion price and convertible shares are contingent upon future
net profits.
On June
25, 2008, the Company and the Investors entered into a Rescission and
Subscription Agreement to rescind the conversion of the First Note and the
issuance of conversion shares of Common Stock at the Second Closing pursuant to
Amendment to Stock and Notes Purchase Agreement dated on April 29, 2008. The
Company and the Investors rescinded the conversion of the principal amount
($5,000,000) under the First Note into 4,065,040 shares of Common Stock, and the
Investors waived accrued interest on the First Note. Accordingly, the interest
expense which had accrued on the note has been recorded as a decrease on
interest expense for the period. At the Rescission and Subscription Closing, the
Company repaid in full the First Note and issued to the Investors, 4,065,040
shares of Common Stock at the price of $1.23 per share for an aggregate purchase
price of $5,000,000.
14. STOCK-BASED
COMPENSATION PLAN
On
November 13, 2007, the Company approved the 2007 Non-statutory Stock Option
Plan, which was later amended and restated in August 2008 (the “2007
Plan”), and granted stock options with an aggregate amount of 3,000,000 shares
of the stock at $1.23 per share to acquire the Company’s common stock at par
value $0.001 to twenty (20) managerial and non-managerial employees under the
2007 Plan.
The
vesting terms of options granted under the 2007 Plan is subject to the
Non-Statutory Stock Option Agreements for managerial and non-managerial
employees. For managerial employees, no more than 15% of the total stock options
shall vest and become exercisable on the six month anniversary of the grant
date. An additional 15% and 50% of the total stock options shall vest and become
exercisable on the first and second year anniversary of the grant date,
respectively. The remaining 20% of the total stock options shall vest and become
exercisable on the third year anniversary of the grant date. For non-managerial
employees, no more than 30% of the total stock options shall vest and become
exercisable in the first year anniversary of the grant date. An additional 50%
of the total stock options shall vest and become exercisable in the second year
anniversary of the grant date. The remaining 20% of the total stock options
shall vest and become exercisable on the third year anniversary of the grant
date. Each stock option shall become vested and exercisable over a period of no
longer than five years from the grant date.
Based on
the fair value method under SFAS No. 123 (Revised) “Share Based Payment” (“SFAS
123(R)”), the fair value of each stock option granted is estimated on the date
of the grant using the Black-Scholes option pricing model. The Black-Scholes
option pricing model has assumptions for risk free interest rates, dividends,
stock volatility and expected life of an option grant. The risk free interest
rate is based upon market yields for United States Treasury debt securities at a
maturity near the term remaining on the option. Dividend rates are based on the
Company’s dividend history. The stock volatility factor is based on the
historical volatility of the Company’s stock price. The expected life of an
option grant is based on management’s estimate as no options have been exercised
in the Plan to date. The fair value of each option grant to employees is
calculated by the Black-Scholes method and is recognized as compensation expense
over the vesting period of each stock option award. For stock options issued,
the fair value was estimated at the date of grant using the following range of
assumptions:
The
options vest over a period of three years and have a life of 5 years. The fair
value of the options was calculated using the following assumptions, estimated
life of five years, volatility of 100%, risk free interest rate of 3.76%, and
dividend yield of 0%. No estimate of forfeitures was made as the Company has a
short history of granting options.
Effective
June 25, 2008, the Company cancelled all vested shares and accepted optionees’
forfeiture of any unvested shares underlying the currently outstanding
options.
On August
4, 2008, the Company granted stock options to acquire an aggregate amount
of 3,000,000 shares of the Company’s common stock, par value $0.001, at
$0.80 per share to 17 employees under the 2007 Plan. The options vest over a
period of three years and have a life of 5 years. The fair value of the options
was calculated using the following assumptions, estimated life of five years,
volatility of 100%, risk free interest rate of 2.76%, and dividend yield of 0%.
No estimate of forfeitures was made as the Company has a short history of
granting options. The new options were considerer a modification to
the original options under FAS 123R as it was reissued within six months from
the cancellation date, as such, the Company recorded the fair value of the new
options as option liability under variable accounting. During the
three months ended March 31, 2009, the Company recorded $258,102 loss from the
change in fair value of the employee stock options.
The
following table summarizes activity for employees in the Company’s
Plan:
|
|
Number of
Shares
|
|
|
Average
Exercise
Price per Share
|
|
|
Weighed
Average
Remaining
Contractual
Term in Years
|
|
Outstanding
at December 31, 2006
|
|
|
- |
|
|
|
|
|
|
|
Granted
|
|
|
3,000,000 |
|
|
$ |
1.23 |
|
|
|
5.00 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at December 31, 2007
|
|
|
3,000,000 |
|
|
$ |
1.23 |
|
|
|
4.87 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Cancelled
vested shares
|
|
|
450,000 |
|
|
|
1.23 |
|
|
|
- |
|
Forfeited
unvested shares
|
|
|
2,550,000 |
|
|
|
1.23 |
|
|
|
- |
|
Granted
|
|
|
3,000,000 |
|
|
|
0.80 |
|
|
|
5.00 |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at December 31, 2008
|
|
|
3,000,000 |
|
|
$ |
0.80 |
|
|
|
4.59 |
|
Granted
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at March 31, 2009
|
|
|
3,000,000 |
|
|
$ |
0.80 |
|
|
|
4.34 |
|
The
Company recorded $131,274 and $325,155 of compensation expense for employee
stock options during the three months ended March 31, 2009 and 2008,
respectively. There were no options exercised during the first
quarter of 2009.
15. SHAREHOLDERS’
EQUITY
On April
29, 2008, the Company issued and the Investors subscribed for a total of
4,066,706 shares of common stock of the Company, at the price of $1.23 per share
for an aggregate purchase price of $5,002,048 under the Purchase
Agreement.
On June
25, 2008, the Company and the Investors entered into a Rescission and
Subscription Agreement to rescind the conversion of the First Note and the
issuance of conversion shares of Common Stock pursuant to Amendment to Stock and
Notes Purchase Agreement dated on April 29, 2008. The Company and the Investors
rescinded the conversion of the principal amount ($5,000,000) under the First
Note into 4,065,040 shares of Common Stock and repaid the First Note in full. At
the Rescission and Subscription Closing, the Company issued to the Investors,
4,065,040 shares of Common Stock at the price of $1.23 per share for an
aggregate purchase price of $5,000,000.
The
Company issued 3,278,259 shares of its Common Stock to one of the Company’s
shareholders who paid $4,032,258 to the Company during 2008. This purchase was
part of an investment agreement by the shareholder entered into in November 2007
to purchase the shares at $1.23 per share.
16. STATUTORY
RESERVES
Pursuant
to the new corporate law of the PRC effective January 1, 2006, the Company is
now only required to maintain one statutory reserve by appropriating from its
after-tax profit before declaration or payment of dividends. The statutory
reserve represents restricted retained earnings.
Surplus Reserve
Fund
The
Company is required to transfer 10% of its net income, as determined under PRC
accounting rules and regulations, to a statutory surplus reserve fund until such
reserve balance reaches 50% of the Company’s registered capital.
The
surplus 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
shareholders in proportion to their shareholdings or by increasing the par value
of the shares currently held by them, provided that the remaining reserve
balance after such issuance is not less than 25% of the registered
capital.
Common Welfare
Fund
The
common welfare fund is a voluntary fund that the Company can elect to transfer
5% to 10% of its net income to this fund. This fund can only be utilized on
capital items for the collective benefit of the Company’s employees, such as
construction of dormitories, cafeteria facilities, and other staff welfare
facilities. This fund is non-distributable other than upon
liquidation.
17. CONTINGENCIES
The
Company’s operations in the PRC are subject to specific considerations and
significant risks not typically associated with companies in the North America
and Western Europe. These include risks associated with, among others, the
political, economic and legal environments and foreign currency exchange. The
Company’s results may be adversely affected by changes in governmental policies
with respect to laws and regulations, anti-inflationary measures, currency
conversion and remittance abroad, and rates and methods of taxation, among other
things.
The
Company’s sales, purchases and expenses transactions are denominated in RMB and
all of the Company’s assets and liabilities are also denominated in RMB. The RMB
is not freely convertible into foreign currencies under the current law. In
China, foreign exchange transactions are required by law to be transacted only
by authorized financial institutions. Remittances in currencies other than RMB
may require certain supporting documentation in order to affect the
remittance.
18. COMMITMENTS
Shengwei Cement Pure Low
Temperature Waste Heat Power Generator Project
In
November 2007, the Company signed a cooperative agreement with Shengwei Group
for building two sets of 12MW pure low temp cement waste heat power generator
systems for its two 2,500 tons per day cement manufacturing lines in
Jin Yang and a 5,000 tons per day cement manufacturing line in Tong Chuan. At
the end of 2008, the power generator system in Tong Chuan has completed
construction and was put into operation, while the other system in Jin Yang is
expected to be completed in May 2009 with approximately $8,600,000 (RMB
58millon) in total investment.
Zhonggang Binhai 7-Megawatt
Capacity Electricity Generation Project
In
September, 2008, the Company signed a contract to recycle waste gas and waste
heat for China Zhonggang Binhai Enterprise Ltd. (“Zhonggang Binhai”) in Cangzhou
City, Hebei Province, a world-class nickel-iron manufacturing joint venture
between China Zhonggang Group and Shanghai Baoshan Steel
Group. According to the contract, the Company will install a
7-Megawatt capacity electricity-generation system. It will be an integral part
of the facilities designed to produce 80,000 tons of nickel-iron per year. The
project will generate 7-megawatt capacity electricity and help reduce in excess
of 20,000 tons of carbon dioxide emissions every year. The project has started
cunstruction in March 2009 and will be completed within 11 months with
approximately $ 7.8 million (RMB 55 million) in total investment.
19. SUBSEQUENT
EVENTS
On April
6, 2009, the Company announced it had signed a joint venture (“JV”) agreement
with Erdos Metallurgy Co., Ltd. (“Erdos”), located in Inner Mongolia of China,
to reduce pollution and improve energy efficiency at Erdos
facilities. Pursuant to the agreement, the JV, which will initially
be 80% owned by CREG through Xi’an TCH, its wholly owned subsidiary, will
design, install, test, operate, and monitor 11 energy-recycling systems, which
generate electricity and heat from industrial waste, at 54 iron ore furnaces
owned by Erdos. The JV is expected to reduce Erdos’s dependence on the external
power grid by 10% and lessen the need for coal-fired boilers to generate
heat. The first system (“Phase One”) is expected to be completed and
start power generation by October 2009. Phase One is projected to
generate annual revenue of approximately $2.9 million (RMB 20 million) for the
next 20 years. When completed, the 11 systems are projected to have a combined
capacity of 70 MW with the potential to grow to 120 MW or more and 30 tons of
steam per hour. Together these systems are expected to generate revenue of $38
million (RMB 265 million) per year.
On April
13, 2009, the Company’s wholly owned subsidiary, Xi’an TCH Energy Technology
Co., Ltd., entered into a one-year working capital loan agreement with the
Industrial Bank Co., Ltd.’s Xi’an branch, to borrow $2.9 million (RMB 20
million) at an interest rate of 5.3%. The loan agreement contains standard
representations, warranties and covenants.
On April
20, 2009, the Company entered into a Stock Purchase Agreement with an accredited
private investor. Pursuant to the agreement, CREG issued approximately 2.4
million shares, with a one-year lock-up period not to sell, for an aggregate
purchase price of $2 million, or $0.85 per share.
On April
29, 2009, CREG issued an 8% Secured Convertible Promissory Note in the principal
amount of $3 million to Carlyle Asia Growth Partners and CAGP III Co-Investment
(“Carlyle Asia”). In addition, the Company amended and restated the 5% Secured
Convertible Promissory Note in the principal amount of $5 million previously
issued to Carlyle Asia in April 2008.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Note
Regarding Forward-Looking Statements
This
quarterly report on Form 10-Q and other reports filed by the Company from time
to time with the SEC (collectively the “Filings”) contain or may contain
forward-looking statements and information that are based upon beliefs of, and
information currently available to, Company’s management as well as estimates
and assumptions made by Company’s management. Readers are cautioned not to place
undue reliance on these forward-looking statements, which are only predictions
and speak only as of the date hereof. When used in the filings, the words
“anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or
the negative of these terms and similar expressions as they relate to Company or
Company’s management identify forward-looking statements. Such statements
reflect the current view of Company with respect to future events and are
subject to risks, uncertainties, assumptions, and other factors (including the
in the section “results of operations” below), and any businesses that
Company may acquire. Should one or more of these risks or uncertainties
materialize, or should the underlying assumptions prove incorrect, actual
results may differ significantly from those anticipated, believed, estimated,
expected, intended, or planned.
Although
the Company believes that the expectations reflected in the forward-looking
statements are based on reasonable assumptions, the Company cannot guarantee
future results, levels of activity, performance, or achievements. Except as
required by applicable law, including the securities laws of the United States,
the Company does not intend to update any of the forward-looking
statements to conform these statements to actual results. Readers are urged to
carefully review and consider the various disclosures made throughout the
entirety of this annual report, which attempt to advise interested parties of
the risks and factors that may affect our business, financial condition, results
of operations, and prospects.
Our
financial statements are prepared in US Dollars and in accordance with
accounting principles generally accepted in the United States. See “Foreign
Currency Translation and Comprehensive Income (Loss)” below for information
concerning the exchange rates at which Renminbi (“RMB”) were translated into US
Dollars (“USD”) at various pertinent dates and for pertinent
periods.
OVERVIEW
OF BUSINESS BACKGROUND
China
Recycling Energy Corporation (the “Company” or “CREG”) (formerly China Digital
Wireless, Inc.) was incorporated on May 8, 1980, under the laws of the State of
Colorado. On September 6, 2001, the Company re-domiciled its state of
incorporation from Colorado to Nevada. The Company, through its subsidiary
Shanghai TCH Energy Technology Co., Ltd. (“TCH”), is in the business of selling
and leasing energy saving systems and equipment. The businesses of mobile phone
distribution and provision of pager and mobile phone value-added information
services were discontinued in 2007. On March 8, 2007, the Company changed its
name to “China Recycling Energy Corporation”.
On June
23, 2004, the Company entered into a stock exchange agreement with Sifang
Holdings Co. Ltd. (“Sifang Holdings”) and certain shareholders. Pursuant to the
stock exchange agreement, the Company issued 13,782,636 shares of its common
stock in exchange for a 100% equity interest in Sifang Holdings, making Sifang
Holdings a wholly owned subsidiary of the Company. Sifang Holdings was
established under the laws of the Cayman Islands on February 9, 2004 for the
purpose of holding a 100% equity interest in TCH. TCH was established as a
foreign investment enterprise in Shanghai under the laws of the People’s
Republic of China (the “PRC”) on May 25, 2004. Since January 2007, the Company
has gradually phased out and has now eliminated its business of mobile phone
distribution and provision of pager and mobile phone value-added information
services. In the first and second quarters of 2007, the Company did not engage
in any substantial transactions or activity in connection with these businesses.
On May 10, 2007, the Company discontinued the businesses related to mobile
phones and pagers. These businesses are reflected in continuing operations for
all periods presented based on the criteria for discontinued operations
prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets”.
On
February 1, 2007, the Company’s subsidiary, TCH entered into two TRT Project
joint-operation agreements with Xi’an Yingfeng Science and Technology Co., Ltd.
(“Yingfeng”). Yingfeng is a joint stock company registered in Xi’an, Shaanxi
Province, the PRC, and engages in the business of designing, installing, and
operating TRT systems and sales of other renewable energy products. TRT is an
electricity generating system that utilizes the exhaust pressure and heat
produced in the blast furnace of a steel mill to generate electricity. In
October 2007, the Company terminated both joint-operation agreements with
Yingfeng and became fully entitled to the rights, titles, benefits and interests
in the TRT Projects.
In
November 2007, TCH signed a cooperative agreement with Shengwei Group for a
cement waste heat power generator project. TCH will build two sets of 12MW pure
low temperature cement waste heat power generator systems for its two 2500
tons per day cement manufacturing lines in Jin Yang and a 5,000 tons per
day cement manufacturing line in Tong Chuan. Total investment
will be approximately $12,593,000 (93 million RMB). At the end of
2008, the Power Generator Project in Tong Chuan was completed at a total cost of
approximately $6,191,000 (RMB 43,000,000) and put into operation. The
ownership of the power generator system belongs to Tong Chuan from the date the
system is put into service. TCH is responsible for the daily
maintenance and repair of the system, and charges Tong Chuan the monthly
electricity fee based on the actual power generated by the system at 0.4116 RMB
per KWH for an operating period of five years with the assurance from Tong Chuan
of proper functioning of 5,000 tons per day cement manufacturing line and not
less than 7,440 heat providing hours per year to the electricity generator
system. Shengwei Group has collateralized the cement manufacturing
line in Tongchuan to guarantee its obligations to provide the minimum
electricity income from the power generator system under the agreement during
the operating period. At the end of the five-year operating period, TCH will
have no further obligations under the cooperative agreement.
During
2008, the Company also leased two energy recycling power generation equipment
systems under one-year, non-cancellable leases with the rents paid in full,
which the Company was able to sublease for higher rental income under one-year,
non-cancellable leases.
Starting
in November 2008, the Chinese government announced a series of economic stimulus
plans aimed at bolstering its weakening economy, a sweeping move that could also
help fight the effects of the global slowdown. China will spend an estimated
$586 billion over the next two years – roughly seven percent of its gross
domestic product each year – to construct new railways, subways and airports and
to rebuild communities devastated by an earthquake in the southwest China in May
2008. The economic stimulus package is the largest effort ever undertaken by the
Chinese government. The government said that the stimulus would cover 10 areas,
including low-income housing, electricity, water, rural infrastructure and
projects aiming at environmental protection and technological
innovation.
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
Our
management’s discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us 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 as well as the reported net sales and expenses
during the reporting periods. On an ongoing basis, we evaluate our estimates and
assumptions. We base our estimates on historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.
While our
significant accounting policies are more fully described in Note 2 to our
consolidated financial statements, we believe that the following accounting
policies are the most critical to aid you in fully understanding and evaluating
this management discussion and analysis.
Basis
of presentation
These
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States of America
(“GAAP”) and pursuant to the rules and regulations of the SEC for annual
financial statements.
Basis
of consolidation
The
consolidated financial statements include the accounts of CREG and, its
subsidiaries, Sifang Holdings, TCH, and TCH’s subsidiaries Xi’an TCH Energy Tech
Co., Ltd. (“Xi’an TCH”) and Xingtai Huaxin Energy Tech Co., Ltd. (“Huaxin”), and
Sifang Holding’s subsidiary, Huahong New Energy Technology Co., Ltd.
(“Huahong”). Xi’an TCH, Huaxin and Huahong engage in the same business as TCH.
Substantially all of the Company’s revenues are derived from the operations of
TCH and its subsidiaries, which represent substantially all of the Company’s
consolidated assets and revenues. All significant inter-company accounts and
transactions have been eliminated in consolidation.
Use
of estimates
In
preparing these consolidated financial statements, management makes estimates
and assumptions that affect the reported amounts of assets and liabilities in
the balance sheets and revenues and expenses during the year reported. Actual
results may differ from these estimates.
Accounts
receivable and concentration of credit risk
Accounts
receivable are recorded at the invoiced amounts and do not bear interest. The
Company extends unsecured credit to its customers in the ordinary course of
business but mitigates the associated risks by performing credit checks and
actively pursuing past due accounts. An allowance for doubtful accounts is
established and determined based on managements’ assessment of known
requirements, aging of receivables, payment history, the customer’s current
credit worthiness and the economic environment.
Financial
instruments that potentially subject the Company to credit risk primarily are
accounts receivable, receivable on sales-type leases 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.
The
operations of the Company are located in the PRC. Accordingly, the Company’s
business, financial condition, and results of operations may be influenced by
the political, economic, and legal environments in the PRC, as well as by the
general state of the PRC economy.
Inventory
Inventory
is valued at the lower of cost or market. Cost of work in progress and finished
goods comprises direct material cost, direct production cost and an allocated
portion of production overheads.
Property
and Equipment
Property
and equipment are stated at cost, net of accumulated depreciation. Expenditures
for maintenance and repairs are expensed as incurred; additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method over the estimated lives ranging from 5 to 20 years as
follows:
Building
|
20
years
|
Vehicle
|
2 -
5 years
|
Office
and Other Equipment
|
2 -
5 years
|
Software
|
2 -
3
years
|
Sales-type
leasing and related revenue recognition
The
Company leases TRT and CHPG systems to its customers. The Company transfers all
benefits, risks and ownership of the TRT and CHPG systems to its customers at
the end of each lease term, except for one system in which the Company
transferred the ownership of the power generated system at the time the system
was put into operation. The Company also leases power generating systems to its
customers. The Company’s investment in these projects is recorded as
investment in sales-type leases in accordance with Statement of Financial
Accounting Standards (“SFAS”) No. 13, “Accounting for Leases” and its various
amendments and interpretations. The Company manufactures and constructs the TRT
and CHPG systems and power generation systems, and finances its customers for
the selling price of the systems. The sales and cost of goods sold
are recognized at the point of sale or inception of the lease. The investment in
sales-type leases consists of the sum of the total minimum lease payments
receivable less unearned interest income and estimated executory costs. Unearned
interest income is amortized to income over the lease term as to produce a
constant periodic rate of return on the net investment in the
lease.
Foreign
Currency Translation and Comprehensive Income (Loss)
The
Company’s functional currency is the Renminbi (“RMB”). For financial
reporting purposes, RMB has been translated into United States dollars (“USD”)
as the reporting currency. Assets and liabilities are translated at the exchange
rate in effect at the balance sheet date. Revenues and expenses are translated
at the average rate of exchange prevailing during the reporting period.
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”. Gains and losses resulting from
foreign currency transactions are included in income. There has been no
significant fluctuation in exchange rate for the conversion of RMB to USD after
the balance sheet date.
The
Company uses SFAS 130 “Reporting Comprehensive Income”. Comprehensive income is
comprised of net income and all changes to the statements of stockholders’
equity, except those due to investments by stockholders, changes in paid-in
capital and distributions to stockholders.
NEW
ACCOUNTING PRONOUNCEMENTS
Employer’s Disclosures about
Postretirement Benefit Plan Assets
In
December 2008, the Financial Accounting Standards Board (“FASB”) issued FASB
Staff Position (“FSP”) FAS 132(R)-1, “Employers’ Disclosures about
Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”). FSP
FAS 132(R)-1 applies to an employer that is subject to the disclosure
requirements of SFAS No. 132 (revised 2003), “Employers’ Disclosures
about Pensions and Other Postretirement Benefits” (“SFAS 132R”) and amends
SFAS 132R to provide guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. The
disclosures about plan assets required by FSP FAS 132(R)-1 shall be
provided for fiscal years ending after December 15, 2009. Earlier
application is permitted. The adoption of FSP FAS 132(R)-1did not have a
material impact on the Company’s financial statements.
Accounting for Defensive
Intangible Assets
In
November 2008, the FASB issued Emerging Issues Task Force (“EITF”) Issue
No. 08-7, “Accounting for Defensive Intangible Assets” (“EITF 08-7”).
EITF 08-7 applies to all acquired intangible assets in situations in which
the acquirer does not intend to actively use the asset but intends to hold the
asset to prevent its competitors from obtaining access to the asset (a
defensive intangible asset). Defensive intangible assets could include assets
that the acquirer will never actively use, as well as assets that will be used
by the acquirer during a transition period when the intention of the acquirer is
to discontinue the use of those assets. EITF 08-7 concluded that a
defensive intangible asset should be accounted for as a separate unit of
accounting and should be amortized over the period that the defensive intangible
asset directly or indirectly contributes to the future cash flows of the entity.
EITF 08-7 is effective prospectively for intangible assets acquired on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Earlier application is not permitted. The
adoption of EITF 08-7 did not have a material impact on the Company’s financial
statements.
Accounting for Financial
Guarantee Insurance Contracts
In May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts, an interpretation of FASB Statement No. 60.” The
scope of this Statement is limited to financial guarantee insurance (and
reinsurance) contracts, as described in this Statement, issued by enterprises
included within the scope of Statement 60. Accordingly, this Statement does not
apply to financial guarantee contracts issued by enterprises excluded from the
scope of Statement 60 or to some insurance contracts that seem similar to
financial guarantee insurance contracts issued by insurance enterprises (such as
mortgage guaranty insurance or credit insurance on trade receivables). This
Statement also does not apply to financial guarantee insurance contracts that
are derivative instruments included within the scope of FASB Statement No. 133,
“Accounting for Derivative Instruments and Hedging Activities.” The adoption of
SFAS No. 163 did not have a material impact on the Company’s financial
statements.
The Hierarchy of Generally
Accepted Accounting Principles
In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This Statement identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP in the United States (the GAAP
hierarchy). SFAS 162 adoption did not have an impact on the Company’s
financial statements.
Determination of the Useful
Life of Intangible Assets
In
April 2008, the FASB issued FSP FAS 142-3, “Determination of the Useful
Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”),
and requires additional disclosures. The objective of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS No. 141 (R), “Business Combinations” (“SFAS
141(R)”), and other accounting principles generally accepted in the USA. FSP FAS
142-3 applies to all intangible assets, whether acquired in a business
combination or otherwise and shall be effective for financial statements issued
for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. The guidance for determining the useful life of
intangible assets shall be applied prospectively to intangible assets acquired
after the effective date. The disclosure requirements apply prospectively to all
intangible assets recognized as of, and subsequent to, the effective date. Early
adoption was prohibited. The adoption of FSP FAS 142-3 did not have a material
impact on the Company’s financial statements.
Disclosures about Derivative
Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities an amendment of FASB Statement No. 133.” This
Statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows. SFAS 161 is effective for fiscal
years, and interim periods within those fiscal years, beginning on or
after November 15, 2008. The adoption of SFAS 161 did not
have a material impact on the Company’s financial statements.
Noncontrolling Interests in
Consolidated Financial Statements – An Amendment of ARB No.
51
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB No. 51 (“SFAS
160”). SFAS 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. Specifically, this statement requires the recognition of a
noncontrolling interest (minority interest) as equity in the consolidated
financial statements and separate from the parent’s equity. The amount of net
income attributable to the noncontrolling interest will be included in
consolidated net income on the face of the income statement. SFAS 160 clarifies
that changes in a parent’s ownership interest in a subsidiary that do not result
in deconsolidation are equity transactions if the parent retains its controlling
financial interest. In addition, this statement requires that a parent recognize
a gain or loss in net income when a subsidiary is deconsolidated. Such gain or
loss will be measured using the fair value of the noncontrolling equity
investment on the deconsolidation date. SFAS 160 also includes expanded
disclosure requirements regarding the interests of the parent and its
noncontrolling interest. SFAS 160 is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008. The Company expects SFAS 160 will have an impact on accounting for
business combinations, but the effect is dependent upon acquisitions at that
time. The Company adopted the provisions of SFAS 160 on January 1,
2009.
Business
Combinations
SFAS 141
(Revised 2007), Business Combinations (SFAS 141(R)), is effective for the
Company for business combinations for which the acquisition date is on or after
January 1, 2009. SFAS 141(R) changes how the acquisition method is applied in
accordance with SFAS 141. The primary revisions to this Statement require an
acquirer in a business combination to measure assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, at their fair values as of that date, with limited exceptions specified in
the Statement. This Statement also requires the acquirer in a business
combination achieved in stages to recognize the identifiable assets and
liabilities, as well as the noncontrolling interest in the acquiree, at the full
amounts of their fair values (or other amounts determined in accordance with the
Statement). Assets acquired and liabilities assumed arising from contractual
contingencies as of the acquisition date are to be measured at their
acquisition-date fair values, and assets or liabilities arising from all other
contingencies as of the acquisition date are to be measured at their
acquisition-date fair value, only if it is more likely than not that they meet
the definition of an asset or a liability in FASB Concepts Statement No. 6,
Elements of Financial
Statements. This Statement significantly amends other Statements and
authoritative guidance, including FASB Interpretation No. 4, Applicability of FASB Statement No.
2 to Business Combinations Accounted for by the Purchase Method, and now
requires the capitalization of research and development assets acquired in a
business combination at their acquisition-date fair values, separately from
goodwill. FASB Statement No. 109, Accounting for Income Taxes,
was also amended by this Statement to require the acquirer to recognize changes
in the amount of its deferred tax benefits that are recognizable because of a
business combination either in income from continuing operations in the period
of the combination or directly in contributed capital, depending on the
circumstances. The Company expects SFAS 141R will have a material impact on
accounting for business combinations, but the effect is dependent upon
acquisitions at that time. The Company adopted the provisions of SFAS 141
(R) on January 1, 2009.
Accounting for Nonrefundable
Advance Payments for Goods or Services Received for use in Future Research and
Development Activities
In June
2007, the FASB issued FASB Staff Position No. EITF 07-3, “Accounting for
Nonrefundable Advance Payments for Goods or Services Received for use in Future
Research and Development Activities” (“FSP EITF 07-3”), which addresses whether
nonrefundable advance payments for goods or services that used or rendered for
research and development activities should be expensed when the advance payment
is made or when the research and development activity has been
performed. EITF 07-03 is effective for fiscal years beginning after
December 15, 2008. The adoption of EITF 07-03 did not have a material
impact on the Company’s financial statements.
RESULTS
OF OPERATIONS
Comparison
of Three Months Ended March 31, 2009 and March 31, 2008
The
following table sets forth the results of our operations for the periods
indicated as a percentage of net sales:
|
|
2009
|
|
|
2008
|
|
Three Months Ended
March 31
|
|
$
|
|
|
% of Sales
|
|
|
$
|
|
|
% of Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$ |
4,322,893 |
|
|
|
100 |
% |
|
$ |
— |
|
|
|
— |
|
Sales
of Products
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Rental
income
|
|
|
4,322,893 |
|
|
|
100 |
% |
|
|
— |
|
|
|
— |
|
Cost
of sales
|
|
|
(3,021,673 |
) |
|
|
70 |
% |
|
|
— |
|
|
|
— |
|
Cost
of products
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Rental
expense
|
|
|
(3,021,673 |
) |
|
|
70 |
% |
|
|
— |
|
|
|
— |
|
Gross
profit
|
|
|
1,301,220 |
|
|
|
30 |
% |
|
|
— |
|
|
|
— |
|
Interest
income on sales-type lease
|
|
|
1,198,531 |
|
|
|
28 |
% |
|
|
564,952 |
|
|
|
— |
|
Total
operating income
|
|
|
2,499,751 |
|
|
|
58 |
% |
|
|
564,952 |
|
|
|
— |
|
Total
Operating expenses
|
|
|
(795,438 |
) |
|
|
18 |
% |
|
|
(648,610 |
) |
|
|
— |
|
Income
(loss) from operation
|
|
|
1,704,313 |
|
|
|
39 |
% |
|
|
(83,658 |
) |
|
|
— |
|
Total
non-operating income (expenses)
|
|
|
(60,313 |
) |
|
|
(1.4 |
)% |
|
|
(753,308 |
) |
|
|
— |
|
Income
(loss) before income tax
|
|
|
1,644,000 |
|
|
|
38 |
% |
|
|
(836,966 |
) |
|
|
— |
|
Income
tax expense
|
|
|
568,111 |
|
|
|
13 |
% |
|
|
50,947 |
|
|
|
— |
|
Net
income attributable to noncontrolling interest
|
|
|
(40 |
) |
|
|
— |
|
|
|
(27 |
) |
|
|
— |
|
Net
income (loss)
|
|
$ |
1,075,849 |
|
|
|
25 |
% |
|
$ |
(887,940 |
) |
|
|
— |
|
SALES. Net sales for the
first quarter of 2009 were approximately $4.32 million while our net sales for
the first quarter of 2008 were $0, an increase in revenues of approximately
$4.32 million. The increase was due to commencement of leasing two energy
recycling power generation equipment systems under one-year, non-cancellable
leases with the rents paid by the Company in full to generate a rental income
since the second quarter of 2008. We recorded rental income of approximately
$4.32 million from leasing our two power generating systems in the first quarter
of 2009, and there were no sales or leasing activities in the first quarter of
2008. We also sold one energy saving system (CHPG system) through sales-type
leasing at the end of 2008, in addition to two TRT systems that were sold under
sales-type leases in 2007. Sales and cost of sales are recorded at the time of
leases; the interest income from the sales-type leasing is our other major
revenue source in addition to sales revenue.
COST OF SALES. Cost of sales
for the first quarter of 2009 was approximately $3.02 million while our cost of
sales for the same period in 2008 was $0, an increase of approximately $3.02
million. Our cost of sales consisted of the cost of the operating lease as we
leased two power generating systems under one-year, non-cancellable leases with
options to renew at a favorable price during 2008, which we subleased for higher
monthly rental income under a one-year, non-cancellable lease.
GROSS PROFIT. Gross profit
was approximately $1.30 million for the first quarter of 2009 as compared to $0
for the same period in 2008, representing a gross margin of approximately 30%
and 0% for the first quarter of 2009 and 2008, respectively. The gross profit
was mainly due to the commencement of our operating lease business in connection
with leasing out two energy recycling power generation equipment systems since
April of 2008.
OPERATING INCOME. Operating
income was approximately $2.50 million for the first quarter of 2009 while our
operating income for the same period in 2008 was approximately $0.56 million, an
increase of approximately $1.93 million. The growth in operating income was
mainly due to the increase in interest income from selling and leasing our
energy saving systems through sales-type leasing, and (ii) commencing our
operating lease business since the second quarter of 2008. Interest income on
sales-type leasing for the first quarter of 2009 was approximately $1.20
million, an approximately $0.63 million increase from approximately $0.56
million for the same period in 2008, this increase was mainly due to increased
interest income on a CHPG system that was put into operation at the end of
2008. During the first quarter of 2009, the interest income for our
two TRT systems was approximately $560,000 and the interest income for the CHPG
system was approximately $638,000.
OPERATING EXPENSES. Operating
expenses consisted of selling, general and administrative expenses totaling
approximately $0.80 million for the first quarter of 2009 as compared to
approximately $0.65 million for the same period in 2008, an increase of
approximately $146,828 or 23%. This increase was mainly due to variable fair
value of compensation expenses for stock options to employees and a proportional
increase in payroll, marketing and maintenance expenses due to our
responsibility for the daily maintenance and repair of the CHPG
system.
NET INCOME. Our net income
for the first quarter of 2009 was approximately $1.08 million as compared to an
approximately $0.89 million net loss for the same period in 2008, an increase of
approximately $1.96 million. This increase in net income was mainly due to the
rental income commenced since the second quarter of 2008 and additional interest
income from sales-type leasing of the new CHPG system.
LIQUIDITY
AND CAPITAL RESOURCES
Comparison
of Three Months Ended March 31, 2009 and March 31, 2008
As of
March 31, 2009, the Company had cash and cash equivalents of $10,212,758. At
March 31, 2009, other current assets were approximately $16.75 million and
current liabilities were approximately $12.31 million. Working
capital amounted to $14.65 million at March 31, 2009. The ratio of current
assets to current liabilities was 2.19:1 at the three months ended March 31,
2009.
The
following is a summary of cash provided by or used in each of the indicated
types of activities during three months ended March 31, 2009 and
2008:
|
|
2009
|
|
|
2008
|
|
Cash
provided by (used in):
|
|
|
|
|
|
|
Operating
Activities
|
|
$ |
4,434,268 |
|
|
$ |
(279,044 |
) |
Investing
Activities
|
|
|
(1,464,751 |
) |
|
|
(775,934 |
) |
Financing
Activities
|
|
|
- |
|
|
|
177,174 |
|
Net cash
flow provided by operating activities was approximately $4.43 million
during the first quarter of 2009, as compared to approximately $0.28 million
used in the same period of 2008. The increase in net cash inflow was mainly due
to the increase in net income as well as decrease in our advances to suppliers
and prepaid expenses.
Net cash
flow used in investing activities was approximately $1.46 million in the first
quarter of 2009, as compared to approximately $0.78 million used in the same
period of 2008. The increase of net cash flow used in investing activities was
mainly due to payment for construction in progress of approximately $1.46
million for a power generating system. The construction project commenced in
March 2008, and is expected to be completed in May 2009. We will use the BOT
(build, operate, transfer) model to build and operate a system and charge the
user of this system monthly electricity fees based on the actual power generated
by the systems.
Net cash
flow provided by financing activities was $0 for the quarter ended March 31,
2009 as compared to net cash provided by financing activities of $0.18 million
for the same period in 2008. There were no financing activities during the first
quarter of 2009 while we had a short term advance from shareholders during the
first quarter of 2008.
We
believe we have sufficient cash to continue our current business through March,
2010 due to stable interest revenue and rental income from our operating
activities as well as more than $14.65 million in working capital at the end of
March 31, 2009. As of March 31, 2009, we have three sale-type leases, two TRT
systems and one CHPG system, and 2 operational leases, currently generating net
cash flow. We believe we have sufficient cash resources to cover our anticipated
capital expenditures in 2009.
We do not
believe that inflation has had a significant negative impact on our results of
operations during 2009.
Off-Balance
Sheet Arrangements
We have
not entered into any other financial guarantees or other commitments to
guarantee the payment obligations of any third parties. We have not entered into
any derivative contracts that are indexed to our shares and classified as
stockholder’s equity or that are not reflected in our consolidated financial
statements. Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as credit, liquidity
or market risk support to such entity. We do not have any variable interest in
any unconsolidated entity that provides financing, liquidity, market risk or
credit support to us or engages in leasing, hedging or research and development
services with us.
Contractual
Obligations
Convertible Notes
Payable
On April
29, 2008, we issued and sold to the Investors a 5% Secured Convertible
Promissory Note in the principal amount of $5,000,000. The terms for
the Note were amended and restated on April 29, 2009.
This note
bears interest at 5% per annum and matures on April 29, 2011. The principal face
amount of the note, together with any interest thereon, convert, at the option
of the holders at any time on or after March 30, 2010 (or such earlier date if
the audited consolidated financial statements of the Company for the fiscal year
ending December 31, 2009 are available prior to March 30, 2010) and prior to
maturity, into shares of the Company’s common stock at an initial conversion
price that is tied to the after-tax net profits of the Company for the fiscal
year ending December 31, 2009. The obligation of the Company under
this note is ranked senior to all other debt of the Company. The note is secured
by a security interest granted to the Investors pursuant to a share pledge
agreement. The note is not considered to have an embedded beneficial conversion
feature because the conversion price and convertible shares are contingent upon
future net profits.
PART
II - OTHER INFORMATION
Item 1. Legal
Proceedings
The
Company is not currently involved in any material pending legal
proceedings.
Item 1A. Risk
Factors
Not
applicable.
Item 2. Unregistered
Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults
Upon Senior Securities
None.
Item 4. Submission
of Matters to a Vote of Security Holders
None.
Item 5. Other
Information
None.
Item 6. Exhibits
Exhibit
Number
|
|
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a).*
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a).*
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.*
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.*
|
|
|
|
* Filed
herewith.
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.
|
CHINA
RECYCLING ENERGY CORPORATION
|
Date:
May 14, 2009
|
|
/s/
Guohua Ku
|
|
|
Guohua
Ku
Chairman
of the Board and Chief Executive
Officer
|
Date:
May 14, 2009
|
|
/s/
Xinyu Peng
|
|
|
Xinyu
Peng
Chief
Financial Officer and
Secretary
|
EXHIBIT
INDEX
Exhibit
Number
|
|
Description
|
|
|
|
31.1
|
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a).*
|
|
|
|
31.2
|
|
Certification
of Chief Financial Officer pursuant to Rule 13a-14(a).*
|
|
|
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.*
|
|
|
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.*
|
|
|
|
* Filed
herewith.